```

[Federal Register Volume 78, Number 20 (Wednesday, January 30, 2013)]
[Proposed Rules]
[Pages 6621-6672]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-00739]

[[Page 6621]]

Vol. 78

Wednesday,

No. 20

January 30, 2013

Part III

Bureau of Consumer Financial Protection

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12 CFR Part 1026

Ability To Repay Standards Under the Truth in Lending Act (Regulation 
Z); Proposed Rule

Federal Register / Vol. 78 , No. 20 / Wednesday, January 30, 2013 / 
Proposed Rules

[[Page 6622]]

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BUREAU OF CONSUMER FINANCIAL PROTECTION

12 CFR Part 1026

[Docket No. CFPB-2013-0002]
RIN 3170-AA34

Ability To Repay Standards Under the Truth in Lending Act 
(Regulation Z)

AGENCY: Bureau of Consumer Financial Protection.

ACTION: Proposed rule with request for public comment.

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SUMMARY: The Bureau of Consumer Financial Protection (Bureau) is 
proposing to amend Regulation Z, which implements the Truth in Lending 
Act (TILA). This proposal is related to a final rule published 
elsewhere in today's Federal Register. That final rule implements 
sections 1411, 1412, and 1414 of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (Dodd-Frank Act), which creates new TILA 
section 129C. Among other things, the Dodd-Frank Act requires creditors 
to make a reasonable, good faith determination of a consumer's ability 
to repay any consumer credit transaction secured by a dwelling 
(excluding an open-end credit plan, timeshare plan, reverse mortgage, 
or temporary loan) and establishes certain protections from liability 
under this requirement for ``qualified mortgages.'' The Bureau is 
proposing certain amendments to the final rule implementing these 
requirements, including exemptions for certain nonprofit creditors and 
certain homeownership stabilization programs and an additional 
definition of a qualified mortgage for certain loans made and held in 
portfolio by small creditors. The Bureau is also seeking feedback on 
whether additional clarification is needed regarding the inclusion of 
loan originator compensation in the points and fees calculation.

DATES: Comments must be received on or before February 25, 2013, except 
that comments on the Paperwork Reduction Act analysis in part VIII of 
this Federal Register notice must be received on or before March 1, 
2013.

ADDRESSES: You may submit comments, identified by Docket No. CFPB-2013-
0002 or RIN 3170-AA34, by any of the following methods:
     Electronic: http://www.regulations.gov. Follow the 
instructions for submitting comments.
     Mail/Hand Delivery/Courier: Monica Jackson, Office of the 
Executive Secretary, Consumer Financial Protection Bureau, 1700 G 
Street NW., Washington, DC 20552.
    Instructions: All submissions should include the agency name and 
docket number or Regulatory Information Number (RIN) for this 
rulemaking. Because paper mail in the Washington, DC area and at the 
Bureau is subject to delay, commenters are encouraged to submit 
comments electronically. In general, all comments received will be 
posted without change to http://www.regulations.gov. In addition, 
comments will be available for public inspection and copying at 1700 G 
Street NW., Washington, DC 20552, on official business days between the 
hours of 10 a.m. and 5 p.m. Eastern Time. You can make an appointment 
to inspect the documents by telephoning (202) 435-7275.
    All comments, including attachments and other supporting materials, 
will become part of the public record and subject to public disclosure. 
Sensitive personal information, such as account numbers or Social 
Security numbers, should not be included. Comments will not be edited 
to remove any identifying or contact information.

FOR FURTHER INFORMATION CONTACT: Jennifer B. Kozma, Eamonn K. Moran, or 
Priscilla Walton-Fein, Counsels; Thomas J. Kearney or Mark Morelli, 
Senior Counsels; or Stephen Shin, Managing Counsel, Office of 
Regulations, at (202) 435-7700.

SUPPLEMENTARY INFORMATION: 

I. Summary of Proposed Rule

    As discussed in detail under part II below, sections 1411, 1412, 
and 1414 of the Dodd-Frank Act created new TILA section 129C, which 
establishes, among other things, new ability-to-repay requirements. The 
Bureau is adopting final rules implementing these ability-to-repay 
requirements in a rule published elsewhere in today's Federal Register 
(the Bureau's 2013 ATR Final Rule). The Bureau believes that several 
exemptions and modifications to the ability-to-repay requirements may 
be appropriate. The Bureau is also proposing two alternative comments 
intended to clarify the calculation of points and fees in a transaction 
involving loan originator compensation. Accordingly, the Bureau 
solicits feedback regarding these exemptions and modifications.

A. Proposed Exemption for Credit Extended Pursuant to a Community-
Focused Lending Program

    The Bureau is proposing to exempt an extension of credit made 
pursuant to a program administered by a housing finance agency (HFA) 
from the ability-to-repay requirements. The Bureau believes that this 
exemption may be necessary to preserve access to credit for low- to 
moderate-income (LMI) consumers. The Bureau is concerned that the 
ability-to-repay requirements may undermine the underwriting 
requirements of these programs. For example, the ability-to-repay 
provisions may require consideration of underwriting factors that are 
not required under HFA programs, such as the consumer's credit history. 
The Bureau is also concerned that the ability-to-repay requirements may 
affect the ability of HFAs to offer extensions of credit customized to 
meet the needs of LMI consumers while promoting long-term housing 
stability. Furthermore, the Bureau is concerned that the costs of 
implementing and complying with the ability-to-repay requirements would 
result in a severe curtailment of the credit offered under these 
programs. The proposed exemption related to HFAs is discussed in more 
detail below in the section-by-section analysis of Sec.  
1026.43(a)(3)(iv).
    The Bureau is also proposing to exempt an extension of credit made 
by certain types of nonprofit creditors from the ability-to-repay 
requirements. Creditors designated by the U.S. Department of the 
Treasury as Community Development Financial Institutions and creditors 
designated by the U.S. Department of Housing and Urban Development as 
either a Community Housing Development Organization or a Downpayment 
Assistance Provider of Secondary Financing are included in this 
proposed exemption. The proposal also exempts creditors designated as 
nonprofit organizations under section 501(c)(3) of the Internal Revenue 
Code, provided that the extension of credit is to a consumer with 
income that does not exceed the qualifying limit for moderate income 
families as established pursuant to section 8 of the United States 
Housing Act of 1937, that during the calendar year preceding receipt of 
the consumer's application the creditor extended credit no more than 
100 times, and only to consumers with income that did not exceed the 
above qualifying limit, and that the creditor determines, in accordance 
with written procedures, that the consumer has a reasonable ability to 
repay the extension of credit. The Bureau is concerned that nonprofit 
creditors may not have the resources to implement and comply with the 
ability-to-repay requirements, and may be forced to cease or severely 
limit extending credit to LMI consumers,

[[Page 6623]]

which would result in the denial of responsible, affordable mortgage 
credit. However, to prevent circumvention of TILA, the Bureau believes 
that this exemption should be limited to the nonprofit creditors 
identified above. The proposed exemption related to these nonprofit 
creditors is discussed in more detail below in the section-by-section 
analysis of Sec.  1026.43(a)(3)(v).

B. Proposed Exemption for Credit Extended Pursuant to a Homeownership 
Stabilization and Foreclosure Prevention Program, Federal Agency 
Refinancing Program, or GSE Refinancing Program

    The Bureau is proposing to exempt an extension of credit made 
pursuant to an Emergency Economic Stabilization Act (EESA) program, 
such as extensions of credit made pursuant to a State Hardest Hit Fund 
(HHF) program, from the ability-to-repay requirements. The Bureau 
believes that this exemption may be necessary to preserve access to 
credit. The Bureau is concerned that requiring credit extended pursuant 
to these programs to comply with the ability-to-repay provisions may 
unnecessarily interfere with these programs' unique underwriting 
requirements, which would make it more difficult for many consumers to 
qualify for assistance and increase the cost of credit for those who 
do, thereby impacting the availability of credit for these at-risk 
consumers. Further, the Bureau is concerned that creditors may elect 
not to participate in these programs, rather than investing resources 
complying with the requirements of both homeownership stabilization 
programs and the ability-to-repay requirements, which would frustrate 
efforts to ameliorate the effects of the financial crisis and disrupt 
the financial market for consumers at risk of foreclosure or default, 
thereby harming those in need of the assistance provided under these 
programs. The proposed exemption related to these emergency programs is 
discussed in more detail below in the section-by-section analysis of 
Sec.  1026.43(a)(3)(vi).
    The Bureau is proposing to exempt from the ability-to-repay 
requirements a refinancing that is eligible to be insured, guaranteed, 
or made pursuant to a program administered by the Federal Housing 
Administration, U.S. Department of Veterans Affairs, or the U.S. 
Department of Agriculture. The proposed exemption is available only 
until the Federal agency administering the program under which the 
extension of credit is eligible to be insured, guaranteed, or made 
prescribes rules pursuant to section 129C(a)(5) or 129C(b)(3)(B)(ii) of 
TILA. The Bureau believes that this exemption is necessary to preserve 
access to credit. The Federal agencies described above have not yet 
prescribed rules related to the ability-to-repay requirements for 
refinances, pursuant to TILA section 129C(a)(5), or the definition of 
qualified mortgage, pursuant to TILA section 129C(b)(3)(B)(ii). The 
Bureau is concerned that the ability-to-repay provisions would 
unnecessarily interfere with requirements of these Federal agency 
refinance programs, which would make it more difficult for many 
consumers to qualify for these programs and increase the cost of credit 
for those who do, thereby constraining the availability of responsible, 
affordable credit for consumers. The proposed exemption related to 
these Federal agencies is discussed in more detail below in the 
section-by-section analysis of Sec.  1026.43(a)(3)(vii).
    The Bureau is proposing to exempt an extension of credit that is a 
refinancing that is eligible to be purchased or guaranteed by the 
Federal National Mortgage Association (Fannie Mae) or the Federal Home 
Loan Mortgage Corporation (Freddie Mac) (collectively, the GSEs) from 
the ability-to-repay requirements. This proposed exemption only applies 
if:
     The refinancing is made pursuant to an eligible targeted 
refinancing program, as defined under regulations promulgated by the 
Federal Housing Finance Agency;
     Such entities are operating under the conservatorship or 
receivership of the Federal Housing Finance Agency on the date the 
refinancing is consummated;
     The existing obligation satisfied and replaced by the 
refinancing is owned by Fannie Mae or Freddie Mac;
     The existing obligation satisfied and replaced by the 
refinancing was not consummated on or after January 10, 2014; and
     The refinancing is not consummated on or after January 10, 
2021.

The Bureau is concerned that the ability-to-repay requirements may add 
unnecessary additional costs and may cause needless delays for 
distressed consumers whose current mortgage obligations are owned by 
Fannie Mae or Freddie Mac and who seek refinancings pursuant to these 
eligible targeted refinancing programs. The proposed exemption related 
to these GSE refinancing programs is discussed in more detail below in 
the section-by-section analysis of Sec.  1026.43(a)(3)(viii).

C. Loans Held in Portfolio by Small Creditors

    The 2013 ATR Final Rule defines three categories of qualified 
mortgages. Qualified mortgages are provided either a conclusive or 
rebuttable presumption of compliance with the requirement that 
creditors make a reasonable, good faith determination of a consumer's 
ability to repay before originating a mortgage loan. The Bureau is 
proposing to define a new, fourth category of qualified mortgages.
    The proposed new category would include certain loans originated by 
small creditors \1\ that:
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    \1\ The $2 billion threshold reflects the purposes of the 
proposed category and the structure of the mortgage lending 
industry. The Bureau's choice of $2 billion in assets as a threshold 
for purposes of TILA section 129C does not imply that a threshold of 
that type or of that magnitude would be an appropriate way to 
distinguish small firms for other purposes or in other industries.
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     Have total assets of $2 billion or less at the end of the 
previous calendar year; and
     Together with all affiliates, originated 500 or fewer 
first-lien covered transactions during the previous calendar year.
    The proposed new category would include only loans held in 
portfolio by these creditors. Therefore, if a creditor agreed prior to 
consummation to sell a loan, that loan would not be a qualified 
mortgage under the proposed definition. Such loans often are described 
as being subject to a ``forward commitment.'' The rule would provide an 
exception that would allow forward commitments to sell to a creditor 
that also meets the limits on asset size and number of first-lien 
covered transactions. To prevent evasion, a loan in the proposed new 
category would lose its status as a qualified mortgage if it is held in 
portfolio for less than three years after consummation, with certain 
exceptions.
    The loan also would have to conform to all of the requirements 
under the general definition of a qualified mortgage except the 43 
percent limit on monthly debt-to-income ratio. In other words, the loan 
could not have:
     Negative-amortization, interest-only, or balloon-payment 
features;
     A term longer than 30 years; and
     Points and fees greater than 3 percent of the total loan 
amount (or, for smaller loans, the amount specified in the regulation).

When underwriting the loan the creditor would have to:
     Consider and verify the consumer's income and assets; and
     Base the underwriting on a monthly payment calculated 
using the maximum interest rate that may apply during the

[[Page 6624]]

first five years of the loan and that is fully amortizing.

The creditor also would have to consider the consumer's debt-to-income 
ratio or residual income and verify the underlying information. In 
contrast, the general definition of a qualified mortgage requires 
creditors to calculate debt-to-income ratio according to the 
instructions in appendix Q to the rule and prohibits debt-to-income 
ratios above 43 percent. In other words, under the proposed additional 
definition, a creditor would not have to use the instructions in 
appendix Q to calculate debt-to-income ratio, and a loan with a 
consumer debt-to-income ratio higher than 43 percent could be a 
qualified mortgage if all other criteria are met.
    The Bureau also is proposing to allow small creditors to charge a 
higher annual percentage rate for first-lien qualified mortgages in the 
proposed new category and still benefit from a conclusive presumption 
of compliance or ``safe harbor.'' Qualified mortgages can have 
different levels of protection from liability depending on their annual 
percentage rate. Under the existing rules, first-lien qualified 
mortgages with an annual percentage rate less than or equal to the 
average prime offer rate plus 1.5 percentage points and subordinate-
lien qualified mortgages with an annual percentage rate less than or 
equal to the average prime offer rate plus 3.5 percentage points are 
within the safe harbor. A qualified mortgage with an annual percentage 
rate above those thresholds is presumed to comply with the ability-to-
repay rules, but a consumer could rebut that presumption under certain 
circumstances. A qualified mortgage in the proposed new category would 
be conclusively presumed to comply if the annual percentage rate is 
equal to or less than the average prime offer rate plus 3.5 percentage 
points for both first-lien and subordinate-lien loans.
    The Bureau is proposing these changes because it believes they may 
be necessary to preserve access to responsible, affordable mortgage 
credit for some consumers. Small creditors are a significant source of 
loans that, for various reasons, do not qualify for government 
guarantee and insurance programs and cannot be sold for securitization. 
Larger creditors often are unwilling to make these loans because they 
involve consumers or properties with unique features that make them 
difficult to assess using larger creditors' underwriting standards or 
because larger creditors are unwilling to hold the loans in portfolio. 
Small creditors often are willing and able to consider these consumers 
and properties individually and to hold the loans on their balance 
sheets. Small creditors also may be the predominant source of credit in 
many rural areas where large creditors do not operate.
    Small creditors may be particularly well suited to make mortgage 
loans that are responsible and affordable because their small size, 
relationship-based lending model, and ties to their communities enable 
them to make more accurate assessments of consumers' ability to repay 
than larger creditors. Small creditors also have strong incentives to 
carefully consider whether a consumer will be able to repay a portfolio 
loan at least in part because the small creditor retains the risk of 
default.
    Small creditors often charge higher interest rates and fees for 
legitimate business reasons. For example, small creditors often pay 
more for the funds they lend and may charge more to compensate for the 
interest rate and other risks associated with holding a loan in 
portfolio.
    Many small creditors have expressed concerns about the litigation 
risk associated with the requirement to make a reasonable and good 
faith determination of consumers' ability to pay based on verified and 
documented information. Indeed, small creditors assert that they will 
not continue to make mortgage loans unless they are protected from 
liability for violations of the ability-to-repay rules by a conclusive 
presumption of compliance or ``safe harbor.'' The Bureau therefore 
believes that creating a new category of qualified mortgages that would 
include small creditor portfolio loans and raising the annual 
percentage rate threshold for the safe harbor to accommodate small 
creditors' higher costs may be necessary to preserve some consumers' 
access to mortgage credit and also would ensure that the mortgage 
credit is provided in a responsible, affordable way.
    The Bureau is soliciting comment on both the proposed approach to 
small creditor portfolio loans generally and on the specific criteria 
proposed. The proposed amendments related to small creditor portfolio 
loans are discussed in more detail below in the section-by-section 
analysis of Sec.  1026.43(b)(4) and (e)(5).

D. Higher-Priced Covered Transaction Threshold for Balloon-Payment 
Qualified Mortgages

    The Bureau also is proposing to allow small creditors operating 
predominantly in rural or underserved areas to offer first-lien balloon 
loans with a higher annual percentage rate and still benefit from a 
conclusive presumption of compliance with the ability-to-repay rules or 
``safe harbor.'' The Bureau believes this change may be necessary to 
preserve access to responsible, affordable mortgage credit in rural and 
underserved areas.
    Consumers in rural and underserved areas may be able to obtain a 
mortgage loan only from small creditors because larger creditors often 
do not lend in those areas. Small creditors operating predominantly in 
rural and underserved areas assert that they cannot offer mortgage 
loans unless they are allowed to make balloon loans that are protected 
from liability for violations of the ability-to-repay rules by a safe 
harbor.
    The Bureau's current rule provides that certain balloon loans made 
by small creditors operating predominantly in rural or underserved 
areas are qualified mortgages. However, qualified mortgages can have 
different levels of protection from liability depending on their annual 
percentage rate. Under the existing rules, first-lien qualified 
mortgages with an annual percentage rate less than or equal to the 
average prime offer rate plus 1.5 percentage points and subordinate-
lien qualified mortgages with an annual percentage rate less than or 
equal to the average prime offer rate plus 3.5 percentage points are 
within the safe harbor. Qualified mortgages with annual percentage 
rates above these thresholds are presumed to comply with the ability-
to-repay rules, but a consumer can rebut that presumption under certain 
circumstances.
    Small creditors often charge higher interest rates and fees for 
legitimate business reasons, such as to cover their higher costs and to 
compensate for interest rate and other risks associated with holding a 
loan in portfolio. Therefore, the Bureau is concerned that many 
balloon-payment qualified mortgages will have annual percentage rates 
that are too high to qualify for the safe harbor. Because small 
creditors operating in rural and underserved areas insist that they are 
unwilling to make mortgage loans outside of the safe harbor because of 
litigation risk, this could limit access to credit for some consumers.
    The Bureau is soliciting comment on adjusting the annual percentage 
rate threshold for balloon-payment qualified mortgages generally and on 
the specific threshold proposed. The proposed amendment is discussed in 
more detail below in the section-by-section analysis of Sec.  
1026.43(b)(4).

[[Page 6625]]

II. Background

    For over 20 years, consumer advocates, legislators, and regulators 
have raised concerns about creditors originating mortgage loans without 
regard to the consumer's ability to repay the loan. Beginning in about 
2006, these concerns were heightened as mortgage delinquencies and 
foreclosure rates increased dramatically, caused in part by the gradual 
deterioration in underwriting standards. See 73 FR 44524 (Jul. 30, 
2008). The following is presented as background information, including 
a brief summary of the legislative and regulatory responses to this 
issue, which culminated in the enactment of the Dodd-Frank Act on July 
21, 2010, the Board of Governors of the Federal Reserve System's (the 
Board) issuance of a proposed rule on May 11, 2011 to implement certain 
amendments to TILA made by the Dodd-Frank Act, the Bureau's issuance of 
the final rule to implement sections 1411, 1412, and 1414 of the Dodd-
Frank Act, and this proposal to provide certain exemptions from and 
amendments to the ability-to-repay requirements. For additional 
detailed background regarding the issues addressed in this proposal, 
see the discussion in part II of the Bureau's final rule, published 
elsewhere in today's Federal Register.

A. TILA and Regulation Z

    In 1968, Congress enacted 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 promote the informed use of 
consumer credit by requiring disclosures about its costs and terms. See 
15 U.S.C. 1601(a). TILA requires additional disclosures for loans 
secured by consumers' homes and permits consumers to rescind certain 
transactions secured by their principal dwellings. See 15 U.S.C. 1635, 
1637a. Section 105(a) of TILA directs the Bureau (formerly the Board) 
\2\ to prescribe regulations to carry out TILA's purposes, and 
specifically authorizes the Bureau, among other things, to issue 
regulations that contain such additional requirements, classifications, 
differentiations, or other provisions, or that provide for such 
adjustments and exceptions for all or any class of transactions, that 
in the Bureau's judgment are necessary or proper to effectuate the 
purposes of TILA, facilitate compliance with TILA, or prevent 
circumvention or evasion therewith. See 15 U.S.C. 1604(a). TILA is 
implemented by the Bureau's Regulation Z, 12 CFR part 1026. Commentary 
provided in the Official Interpretations supplement to Regulation Z 
interprets the requirements of the regulation and provides guidance to 
creditors in applying the rules to specific transactions. See 12 CFR 
part 1026, Supp. I.
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    \2\ General rulemaking authority for TILA transferred to the 
Bureau in July 2011, other than for certain motor vehicle dealers in 
accordance with Dodd-Frank Act section 1029, 12 U.S.C. 5519. 
Pursuant to that transferred rulemaking authority, the Bureau issued 
its own Regulation Z, 12 CFR part 1026, which substantially 
parallels the Board's Regulation Z, 12 CFR part 226. See 76 FR 79767 
(Dec. 22, 2011).
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B. Ability-to-Repay Requirements Prior to the Dodd-Frank Act

    In response to evidence of abusive practices in the home-equity 
lending market, Congress amended TILA by enacting the Home Ownership 
and Equity Protection Act (HOEPA) in 1994. Public Law 103-325, 108 
Stat. 2160. HOEPA created special substantive protections for ``high-
cost mortgage loans,'' \3\ including prohibiting a creditor from 
engaging in a pattern or practice of extending a high-cost mortgage to 
a consumer based on the consumer's collateral without regard to the 
consumer's repayment ability, including the consumer's current and 
expected income, current obligations, and employment. TILA section 
129(h); 15 U.S.C. 1639(h). In addition to the disclosures and 
limitations specified in the statute, TILA section 129, as added by 
HOEPA, expanded the Board's rulemaking authority by authorizing the 
Board to prohibit acts or practices the Board found to be unfair and 
deceptive in connection with mortgage loans.\4\
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    \3\ HOEPA defines a class of ``high-cost mortgages,'' which are 
generally consumer credit transactions secured by the consumers' 
principal dwellings (originally excluding home-purchase loans and 
open-end lines of credit, although the Dodd-Frank Act amended HOEPA 
to cover such transactions) with annual percentage rates or total 
points and fees exceeding prescribed thresholds. Mortgages covered 
by the HOEPA amendments have been referred to as ``HOEPA loans,'' 
``section 32 loans,'' ``high-cost mortgages,'' or ``high-cost 
mortgage loans.'' The Dodd-Frank Act now refers to these loans as 
``high-cost mortgages.'' See Dodd-Frank Act section 1431; TILA 
section 103(aa). For simplicity and consistency, this proposed rule 
uses the term ``high-cost mortgages'' to refer to mortgage loans 
covered by the HOEPA provisions.
    \4\ Originally 15 U.S.C. 1639(l)(2)(A), subsequently recodified 
by the Dodd-Frank Act as 15 U.S.C. 1639(p)(2)(A).
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    In 1995, the Board implemented the HOEPA amendments at Sec. Sec.  
226.31, 226.32, and 226.33 of Regulation Z. See 60 FR 15463 (Mar. 24, 
1995). In particular, Sec.  226.32(e)(1) implemented TILA section 
129(h) to prohibit a creditor from extending a high-cost mortgage based 
on the consumer's collateral if, considering the consumer's current and 
expected income, current obligations, and employment status, the 
consumer would be unable to make the scheduled payments. In 2001, the 
Board amended these regulations to expand HOEPA's protections to more 
loans by revising the annual percentage rate (APR) threshold and the 
points and fees definition. See 66 FR 65604 (Dec. 20, 2001). In 
addition, the ability-to-repay provisions in the regulation were 
revised to provide for a presumption of a violation of the rule if the 
creditor engages in a pattern or practice of making high-cost mortgages 
without verifying and documenting the consumer's repayment ability.
    After the Board finalized the 2001 HOEPA rules, new consumer 
protection issues arose in the mortgage market. During a series of 
national hearings held by the Board in 2006 and 2007, consumer 
advocates and government officials expressed a number of concerns and 
urged the Board to use HOEPA to prohibit or restrict certain 
underwriting practices, such as ``stated income'' or ``low 
documentation'' loans, and certain product features, such as prepayment 
penalties. See 73 FR 44527 (Jul. 30, 2008). In response to these 
hearings, in July of 2008, the Board adopted final rules adding new 
protections under HOEPA. See 73 FR 44522 (Jul. 30, 2008) (the Board's 
2008 HOEPA Final Rule). The Board's 2008 HOEPA Final Rule defined a new 
class of ``higher-priced mortgage loans'' (HPMLs) \5\ with APRs that 
are lower than those prescribed for HOEPA loans but that nevertheless 
exceed the average prime offer rate by prescribed amounts. This new 
category of loans was designed to include subprime credit. Among other 
things, the Board's 2008 HOEPA Final Rule revised the ability-to-repay 
requirements for high-cost mortgages

[[Page 6626]]

and extended these requirements to higher-priced mortgage loans.\6\
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    \5\ Under the Board's 2008 HOEPA Final Rule, a higher-priced 
mortgage loan is a consumer credit transaction secured by the 
consumer's principal dwelling with an APR that exceeds the average 
prime offer rate (APOR) for a comparable transaction, as of the date 
the interest rate is set, by 1.5 or more percentage points for loans 
secured by a first lien on the dwelling, or by 3.5 or more 
percentage points for loans secured by a subordinate lien on the 
dwelling. The definition of a ``higher-priced mortgage loan'' 
includes practically all ``high-cost mortgages'' because the latter 
transactions are determined by higher loan pricing threshold tests. 
See 12 CFR 226.35(a)(1), since codified in parallel by the Bureau at 
12 CFR 1026.35(a)(1).
    \6\ Originally adopted as 12 CFR 226.34(a)(4), 226.35(b)(2), 
since recodified as 12 CFR 1026.34(a)(4), 1026.35(b)(1).
---------------------------------------------------------------------------

    Significantly, the Board's 2008 HOEPA Final Rule prohibited 
individual high-cost mortgage loans or higher-priced mortgage loans 
from being extended based on the collateral without regard to repayment 
ability, rather than simply prohibiting a pattern or practice of making 
extensions based on the collateral without regard to ability to 
repay.\7\ The Board exercised its authority under TILA section 
129(l)(2) \8\ to revise HOEPA's restrictions based on a conclusion that 
the revisions were necessary to prevent unfair and deceptive acts or 
practices in connection with mortgage loans. See 73 FR 44545 (July 30, 
2008). In particular, the Board concluded that a prohibition on making 
individual loans without regard for repayment ability was necessary to 
ensure a remedy for consumers who are given unaffordable loans and to 
deter irresponsible lending, which injures individual consumers. The 
Board determined that imposing the burden to prove ``pattern or 
practice'' on an individual consumer would leave many consumers with a 
lesser remedy, such as those provided under some State laws, or without 
any remedy, for loans made without regard to repayment ability. The 
Board further determined that removing this burden would not only 
improve remedies for individual consumers, it would also increase 
deterrence of irresponsible lending.
---------------------------------------------------------------------------

    \7\ Specifically, the rule prohibits a creditor from extending a 
higher-priced mortgage loan based on the collateral and without 
regard to the consumer's repayment ability, and prohibits a creditor 
from relying on income or assets to assess repayment ability unless 
the creditor verifies such amounts using third party documents that 
provide reasonably reliable evidence of the consumer's income and 
assets. For further information, see the Bureau's 2012 HOEPA 
Proposal, 77 FR 49090 (Aug. 15, 2012).
    \8\ Subsequently renumbered by the Dodd-Frank Act as TILA 
section 129(p)(2).
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C. The Dodd-Frank Act

    In 2007, Congress held hearings focused on the extent to which 
lending practices contributed to rising subprime foreclosure rates. 
Consumer advocates testified that certain lending terms or practices 
contributed to the foreclosures, including a failure to consider the 
consumer's ability to repay, low- or no-documentation loans, hybrid 
adjustable-rate mortgages, and prepayment penalties. Industry 
representatives, on the other hand, testified that adopting substantive 
restrictions on subprime loan terms would risk reducing access to 
credit for some consumers. In response to these hearings, the House of 
Representatives passed the Mortgage Reform and Anti-Predatory Lending 
Act, both in 2007 and again in 2009. H.R. 3915, 110th Cong. (2007); 
H.R. 1728, 111th Cong. (2009). Both bills would have amended TILA to 
provide consumer protections for mortgages, including ability-to-repay 
requirements, but neither bill was passed by the Senate. Instead, both 
houses shifted their focus to enacting comprehensive financial reform 
legislation, and the Senate passed its own version of ability-to-repay 
requirements as part of that effort, called the Restoring American 
Financial Stability Act of 2010. S. 3217, 111th Cong. (2010).
    After several months of additional debate and negotiations, the 
Dodd-Frank Act was signed into law on July 21, 2010. Public Law 111-
203, 124 Stat. 1376 (2010). In the Dodd-Frank Act, Congress established 
the Bureau and, under sections 1061 and 1100A, consolidated the 
rulemaking authority for many consumer financial protection statutes, 
including the two primary Federal consumer protection statutes 
governing mortgage credit, TILA and the Real Estate Settlement 
Procedures Act (RESPA), in the Bureau.\9\ Congress also provided the 
Bureau with supervision authority for certain consumer financial 
protection statutes over certain entities, including insured depository 
institutions with total assets over $10 billion and their affiliates, 
and all mortgage-related non-depository financial service 
providers.\10\
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    \9\ Sections 1011 and 1021 of the Dodd-Frank Act, in title X, 
the ``Consumer Financial Protection Act,'' Public Law 111-203, 
sections 1001-1100H, codified at 12 U.S.C. 5491, 5511. The Consumer 
Financial Protection Act is substantially codified at 12 U.S.C. 
5481-5603. Section 1029 of the Dodd-Frank Act excludes from this 
transfer of authority, subject to certain exceptions, any rulemaking 
authority over a motor vehicle dealer that is predominantly engaged 
in the sale and servicing of motor vehicles, the leasing and 
servicing of motor vehicles, or both. 12 U.S.C. 5519.
    \10\ Sections 1024 through 1026 of the Dodd-Frank Act, codified 
at 12 U.S.C. 5514 through 5516.
---------------------------------------------------------------------------

    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. Title XIV of the Dodd-
Frank Act, titled the Mortgage Reform and Anti-Predatory Lending Act, 
contains several new regulations designed to prevent the mortgage 
lending practices that harmed consumers and contributed to the 
financial crisis.\11\ Sections 1411, 1412, and 1414 of the Dodd-Frank 
Act created new TILA section 129C, which establishes, among other 
things, new ability-to-repay requirements and new limits on prepayment 
penalties. Section 1402 of the Dodd-Frank Act states that Congress 
created new TILA section 129C upon a finding that ``economic 
stabilization would be enhanced by the protection, limitation, and 
regulation of the terms of residential mortgage credit and the 
practices related to such credit, while ensuring that responsible, 
affordable mortgage credit remains available to consumers.'' TILA 
section 129B(a)(1), 15 U.S.C. 1639b(a)(1). Section 1402 of the Dodd-
Frank Act further states that the purpose of TILA section 129C is to 
``assure that consumers are offered and receive residential mortgage 
loans on terms that reasonably reflect their ability to repay the 
loans.'' TILA section 129B(a)(2), 15 U.S.C. 1639b(a)(2).
---------------------------------------------------------------------------

    \11\ Although S. Rpt. No. 111-176 contains general legislative 
history concerning the Dodd-Frank Act and the Senate ability-to-
repay provisions, it does not address the House Mortgage Reform and 
Anti-Predatory Lending Act. Separate legislative history for the 
predecessor House bills is available in H. Rpt. No. 110-441 for H.R. 
3915 (2007), and H. Rpt. No. 111-194 for H.R. 1728 (2009).
---------------------------------------------------------------------------

    Specifically, TILA section 129C:
     Expands coverage of the ability-to-repay requirements to 
any consumer credit transaction secured by a dwelling, except an open-
end credit plan, credit secured by an interest in a timeshare plan, 
reverse mortgage, or temporary loan.
     Prohibits a creditor from making a mortgage loan unless 
the creditor makes a reasonable and good faith determination, based on 
verified and documented information, that the consumer has a reasonable 
ability to repay the loan according to its terms, and all applicable 
taxes, insurance, and assessments.
     Provides a presumption of compliance with the ability-to-
repay requirements if the mortgage loan is a ``qualified mortgage,'' 
which does not contain certain risky features and limits points and 
fees on the loan.
    The statutory ability-to-repay standards reflect Congress's belief 
that certain lending practices (such as low- or no-documentation loans) 
and terms (such as hybrid adjustable-rate mortgages and loans with 
negative amortization) led to consumers having mortgages they could not 
afford, resulting in high default and foreclosure rates. Accordingly, 
new TILA section 129C prohibits a creditor from making a residential 
mortgage loan unless the creditor makes a reasonable and good faith 
determination, based on verified and documented information, that the 
consumer has a reasonable ability to repay the loan according to its 
terms.

[[Page 6627]]

    To provide more certainty to creditors while protecting consumers 
from unaffordable loans, the Dodd-Frank Act provides a presumption of 
compliance with the ability-to-repay requirements for certain 
``qualified mortgages.'' Qualified mortgages are prohibited from 
containing certain features that Congress considered to increase risks 
to consumers and must comply with certain limits on points and fees. 
The Act states that a creditor or assignee may presume that a loan has 
met the repayment ability requirement if the loan is a qualified 
mortgage, but does not address whether the presumption is conclusive 
or, if it can be rebutted, on what grounds it may be challenged.
    The Dodd-Frank Act creates special remedies for violations of TILA 
section 129C. As amended by section 1416 of the Dodd-Frank Act, TILA 
section 130(a) provides that a consumer who brings a timely action 
against a creditor for a violation of TILA section 129C(a) (the 
ability-to-repay requirements) may be able to recover special statutory 
damages equal to the sum of all finance charges and fees paid by the 
consumer, unless the creditor demonstrates that the failure to comply 
is not material. 15 U.S.C. 1640(a). This recovery is in addition to 
actual damages; statutory damages in an individual action or class 
action, up to a prescribed threshold; and court costs and attorney fees 
that would be available for violations of other TILA provisions. In 
addition, the statute of limitations for an action for a violation of 
TILA section 129C is three years from the date of the occurrence of the 
violation (as compared to one year for most other TILA violations). 
TILA section 130(e), 15 U.S.C. 1640(e). Moreover, as amended by section 
1413 of the Dodd-Frank Act, TILA section 130(k) provides that when a 
creditor or an assignee initiates a foreclosure action, a consumer may 
assert a violation of TILA section 129C(a) ``as a matter of defense by 
recoupment or setoff.'' 15 U.S.C. 1640(k). There is no time limit on 
the use of this defense, nor is there any requirement that the 
violation be apparent to the assignee on the face of the documents 
obtained from the creditor. However, the amount of special statutory 
damages that may be recovered in recoupment or setoff is limited to no 
more than three years of finance charges and fees.
    In addition to the foregoing ability-to-repay provisions, the Dodd-
Frank Act established other new standards concerning a wide range of 
mortgage lending practices, including compensation of mortgage loan 
originators,\12\ Federal mortgage loan disclosures \13\ and mortgage 
loan servicing.\14\ Those and other Dodd-Frank Act provisions are the 
subjects of other rulemakings by the Bureau. For additional information 
on these rulemakings, see part III of the Bureau's 2013 ATR Final Rule.
---------------------------------------------------------------------------

    \12\ Sections 1402 through 1405 of the Dodd-Frank Act, codified 
at 15 U.S.C. 1639b.
    \13\ Section 1032(f) of the Dodd-Frank Act, codified at 12 
U.S.C. 5532(f).
    \14\ Sections 1418, 1420, 1463, and 1464 of the Dodd-Frank Act, 
codified at 12 U.S.C. 2605; 15 U.S.C. 1638, 1638a, 1639f, and 1639g.
---------------------------------------------------------------------------

D. The Board's Proposed and the Bureau's Final Rules

    In 2011, the Board published for public comment a proposed rule 
amending Regulation Z to implement the foregoing ability-to-repay 
amendments to TILA made by the Dodd-Frank Act. See 76 FR 27390 (May 11, 
2011) (Board's 2011 ATR Proposal or Board's proposal). Consistent with 
the Dodd-Frank Act, the Board's proposal applied the ability-to-repay 
requirements to any consumer credit transaction secured by a dwelling 
(including vacation homes and home equity loans), except an open-end 
credit plan, extension of credit secured by a consumer's interest in a 
timeshare plan, reverse mortgage, or temporary loan with a term of 12 
months or less.
    The Board's proposal provided four options for complying with the 
ability-to-repay requirement. First, the proposal would have allowed a 
creditor to meet the general ability-to-repay standard by originating a 
mortgage loan for which the creditor considered and verified eight 
underwriting factors in determining repayment ability, and the mortgage 
payment calculation is based on the fully indexed rate.\15\ Second, the 
proposal would have allowed a creditor to meet the general ability-to-
repay standard by refinancing a ``non-standard mortgage'' into a 
``standard mortgage.'' \16\ Under this option, the proposal would not 
have required the creditor to verify the consumer's income or assets. 
Third, the proposal would have allowed a creditor to meet the general 
ability-to-repay standard by originating a ``qualified mortgage,'' 
which provides special protection from liability for creditors. Because 
the Board determined that it was unclear whether that protection is 
intended to be a safe harbor or a rebuttable presumption of compliance 
with the repayment ability requirement, the Board proposed two 
alternative definitions of a ``qualified mortgage.'' \17\ Finally, the 
proposal would have allowed a small creditor operating predominantly in 
rural or underserved areas to originate a balloon-payment qualified 
mortgage if the loan term is five years or more, and the payment 
calculation is based on the scheduled periodic payments, excluding the 
balloon payment.\18\ The Board's proposal also would have implemented 
the Dodd-Frank Act's limits on prepayment penalties, lengthened the 
time creditors must retain evidence of compliance with the ability-to-
repay and prepayment penalty provisions, and prohibited evasion of the 
rule by structuring a closed-end extension of credit as an open-end 
plan.
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    \15\ The eight proposed factors were: (1) Current or reasonably 
expected income or assets; (2) current employment status; (3) the 
monthly payment on the mortgage; (4) the monthly payment on any 
simultaneous loan; (5) the monthly payment for mortgage-related 
obligations; (6) current debt obligations; (7) the monthly debt-to-
income ratio, or residual income; and (8) credit history.
    \16\ The alternative is based on a Dodd-Frank Act provision that 
is meant to provide flexibility for certain refinancings, which are 
no- or low-documentation transactions designed to move consumers out 
of risky mortgage loans and into more stable mortgage loan products, 
what the proposal defined as mortgage loans that, among other 
things, do not contain negative amortization, interest-only 
payments, or balloon payments, and have limited points and fees.
    \17\ The Board's proposed first alternative would have operated 
as a legal safe harbor and defined a ``qualified mortgage'' as a 
mortgage for which: (a) The loan does not contain negative 
amortization, interest-only payments, or balloon payments, or a loan 
term exceeding 30 years; (b) the total points and fees do not exceed 
3 percent of the total loan amount; (c) the consumer's income or 
assets are verified and documented; and (d) the underwriting of the 
mortgage is based on the maximum interest rate in the first five 
years, uses a payment schedule that fully amortizes the loan over 
the loan term, and takes into account any mortgage-related 
obligations. The Board's proposed second alternative would have 
provided a rebuttable presumption of compliance and defined a 
``qualified mortgage'' as including the criteria listed above in the 
first alternative as well as the following additional underwriting 
requirements from the ability-to-repay standard: the consumer's 
employment status, the monthly payment for any simultaneous loan, 
the consumer's current debt obligations, the total debt-to-income 
ratio or residual income, and the consumer's credit history.
    \18\ As the Board's proposal noted, this standard is evidently 
meant to accommodate community banks that originate balloon loans to 
hedge against interest rate risk.
---------------------------------------------------------------------------

    As discussed above, the Bureau inherited rulemaking authority under 
TILA from the Board in July 2011, including the authority to finalize 
the Board's 2011 ATR Proposal. See sections 1061 and 1100A of the Dodd-
Frank Act. The Bureau's 2013 ATR Final Rule implemented the ability-to-
repay requirements. Consistent with TILA section 129C, the Bureau's 
2013 ATR Final Rule adopted Sec.  1026.43(a), which applies the 
ability-to-repay requirements to any consumer credit transaction 
secured by a dwelling, except an open-end credit plan,

[[Page 6628]]

timeshare plan, reverse mortgage, or temporary loan.
    As adopted, Sec.  1026.43(c) provides that a creditor is prohibited 
from making a covered mortgage loan unless the creditor makes a 
reasonable and good faith determination, based on verified and 
documented information, that the consumer will have a reasonable 
ability to repay the loan, including any mortgage-related obligations 
(such as property taxes and mortgage insurance). Section 1026.43(c) 
describes certain requirements for making ability-to-repay 
determinations, but does not provide comprehensive underwriting 
standards to which creditors must adhere. At a minimum, however, the 
creditor must consider and verify eight underwriting factors: (1) 
Current or reasonably expected income or assets; (2) current employment 
status; (3) the monthly payment on the covered transaction; (4) the 
monthly payment on any simultaneous loan; (5) the monthly payment for 
mortgage-related obligations; (6) current debt obligations; (7) the 
monthly debt-to-income ratio or residual income; and (8) credit 
history.
    Section 1026.43(c)(3) generally requires the creditor to verify the 
information relied on in determining a consumer's repayment ability 
using reasonably reliable third-party records, with special rules for 
verifying a consumer's income or assets. Section 1026.43(c)(5)(i) 
requires the creditor to calculate the monthly mortgage payment based 
on the greater of the fully indexed rate or any introductory rate, 
assuming monthly, fully amortizing payments that are substantially 
equal. Section 1026.43(c)(5)(ii) provides special payment calculation 
rules for loans with balloon payments, interest-only loans, and 
negative amortization loans.
    Section 1026.43(d) provides special rules for complying with the 
ability-to-repay requirements for a creditor refinancing a ``non-
standard mortgage'' into a ``standard mortgage.'' This provision is 
based on TILA section 129C(a)(6)(E), which contains special rules for 
the refinancing of a ``hybrid loan'' into a ``standard loan.'' The 
purpose of this provision is to provide flexibility for creditors to 
refinance a consumer out of a risky mortgage into a more stable one 
without undertaking a full underwriting process. Under Sec.  
1026.43(d), a non-standard mortgage is defined as an adjustable-rate 
mortgage with an introductory fixed interest rate for a period of one 
year or longer, an interest-only loan, or a negative amortization loan. 
Under this option, a creditor refinancing a non-standard mortgage into 
a standard mortgage does not have to consider the eight specific 
underwriting criteria listed under Sec.  1026.43(c), if certain 
conditions are met.
    Section 1026.43(e) specifies requirements for originating 
``qualified mortgages,'' as well as standards for when the presumption 
of compliance with ability-to-repay requirements can be rebutted. 
Section 1026.43(e)(1)(i) provides a safe harbor under the ability-to-
repay requirements for loans that satisfy the definition of a qualified 
mortgage and are not higher-priced covered transactions (i.e., the APR 
does not exceed the Average Prime Offer Rate (APOR) \19\ plus 1.5 
percentage points for first-lien loans or 3.5 percentage points for 
subordinate-lien loans). Section 1026.43(e)(1)(ii) provides a 
rebuttable presumption for qualified mortgage loans that are higher-
priced covered transactions (i.e., the APR exceeds APOR plus 1.5 
percent for first lien or 3.5 percent for subordinate lien). Section 
1026.43 also provides three options for creditors to originate a 
qualified mortgage:
---------------------------------------------------------------------------

    \19\ TILA section 129C(b)(2)(B) defines the Average Prime Offer 
Rate as ``the average prime offer rate for a comparable transaction 
as of the date on which the interest rate for the transaction is 
set, as published by the Bureau.'' 15 U.S.C. 1639c(b)(2)B).
---------------------------------------------------------------------------

    Qualified mortgage--general. Under the general definition for 
qualified mortgages in Sec.  1026.43(e)(2), a creditor must satisfy the 
statutory criteria restricting certain product features and points and 
fees on the loan, consider and verify certain underwriting requirements 
that are part of the general ability-to-repay standard, and confirm 
that the consumer has a total (or ``back-end'') debt-to-income ratio 
that is less than or equal to 43 percent. To determine whether the 
consumer meets the specific debt-to-income ratio requirement, the 
creditor must calculate the consumer's monthly debt-to-income ratio in 
accordance with appendix Q. A loan that satisfies these criteria and is 
not a higher-priced covered transaction receives a legal safe harbor 
from the ability-to-repay requirements. A loan that satisfies these 
criteria and is a higher-priced covered transaction receives a 
rebuttable presumption of compliance with the ability-to-repay 
requirements.
    Qualified mortgage--special rules. The second option for 
originating a qualified mortgage provides a temporary alternative to 
the general definition in Sec.  1026.43(e)(2). This option is intended 
to avoid unnecessarily disrupting the mortgage market at a time when it 
is especially fragile, as a result of the recent mortgage crisis. 
Section 1026.43(e)(4) provides that a loan is a qualified mortgage if 
it meets the statutory limitations on product features and points and 
fees, satisfies certain other requirements, and is eligible for 
purchase, guarantee, or insurance by one of the following entities:
     Fannie Mae or Freddie Mac, while operating under the 
conservatorship or receivership of the Federal Housing Finance Agency 
pursuant to section 1367 of the Federal Housing Enterprises Financial 
Safety and Soundness Act of 1992;
     Any limited-life regulatory entity succeeding the charter 
of either Fannie Mae or Freddie Mac pursuant to section 1367(i) of the 
Federal Housing Enterprises Financial Safety and Soundness Act of 1992;
     The U.S. Department of Housing and Urban Development under 
the National Housing Act (FHA);
     The U.S. Department of Veterans Affairs (VA);
     The U.S. Department of Agriculture (USDA); or
     The U.S. Department of Agriculture Rural Housing Service 
(RHS).
    With respect to GSE-eligible loans, this temporary provision 
expires when conservatorship of the GSEs ends. With respect to each 
other category of loan, this provision expires on the effective date of 
a rule issued by each respective Federal agency pursuant to its 
authority under TILA section 129C(b)(3)(ii) to define a qualified 
mortgage. In any event, this temporary provision expires no later than 
January 10, 2021.
    Qualified mortgage--balloon-payment loans by certain creditors. The 
third option for originating qualified mortgages is included under 
Sec.  1026.43(f), which provides that a small creditor operating 
predominantly in rural or underserved areas can originate a balloon-
payment qualified mortgage. The Dodd-Frank Act generally prohibits 
balloon-payment mortgages from being qualified mortgages. However, the 
statute creates a limited exception, with special underwriting rules, 
for loans made by a creditor that: (1) Operates predominantly in rural 
or underserved areas; (2) together with affiliates, has total annual 
residential mortgage loan originations that do not exceed a limit set 
by the Bureau; and (3) retains the balloon loans in portfolio. The 
purpose of this definition is to preserve credit availability in rural 
or underserved areas by assuring that small creditors offering loans 
that cannot be sold on the secondary market, and therefore must be 
placed on the creditor's balance sheet, are able to use a balloon-
payment structure as a means of controlling interest rate risk.

[[Page 6629]]

    Section 1026.43(f)(1)(vi) limits eligibility to creditors that 
originated 500 or fewer covered transactions in the preceding calendar 
year and that have assets of no more than $2 billion (to be adjusted 
annually). In addition, to originate a balloon-payment qualified 
mortgage more than 50 percent of a creditor's total first-lien covered 
transactions must have been secured by properties in counties that are 
``rural'' or ``underserved,'' as designated by the Bureau. A county is 
``rural'' if, during a calendar year, it is located in neither a 
metropolitan statistical area nor a micropolitan statistical area 
adjacent to a metropolitan statistical area, as those terms are defined 
by the U.S. Office of Management and Budget. A county is 
``underserved'' if no more than two creditors extend covered 
transactions five or more times in that county during a calendar year. 
Also, during the preceding and current calendar years, the creditor 
must not have sold or assigned legal title to any balloon-payment 
qualified mortgage originated pursuant to this provision. Balloon loans 
by such creditors are eligible for qualified mortgage status if they 
meet the statutory limitations on product features and points and fees, 
and if the creditor follows certain other requirements that are part of 
the general ability-to-repay standard.
    The Bureau's 2013 ATR Final Rule contains two additional 
requirements relevant to this proposal. Section 1026.43(g) implements 
the Dodd-Frank Act limits on prepayment penalties. Section 1026.43(h) 
prohibits a creditor from structuring a closed-end extension of credit 
as an open-end plan to evade the ability-to-repay requirements.

III. The Mortgage Loan Market Overview

    For a complete discussion of the mortgage market, the financial 
crisis that precipitated the Dodd-Frank Act, and more recent efforts at 
stabilization, see part II of the Bureau's 2013 ATR Final Rule. The 
mortgage market is the single largest market for consumer financial 
products and services in the United States. In 2008 this market 
collapsed, greatly diminishing the wealth of millions of American 
consumers and sending the economy into a severe recession. A primary 
cause of the collapse was the steady deterioration of credit standards 
in mortgage lending. Evidence demonstrates that many mortgage loans 
were made solely against collateral and without consideration of 
ability to repay, particularly in the markets for ``subprime'' and 
``Alt-A'' products, which more than doubled from $400 billion in 
originations in 2003 to $830 billion in originations in 2006.\20\ 
Subprime products were sold primarily to consumers with poor or no 
credit history, while Alt-A loans were sold primarily to consumers who 
provided little or no documentation of income or other evidence of 
repayment ability.\21\
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    \20\ Inside Mortg. Fin., The 2011 Mortgage Market Statistical 
Annual (2011).
    \21\ There is evidence that some consumers who would have 
qualified for ``prime'' loans were steered into subprime loans as 
well. The Federal Reserve Board on July 18, 2011 issued a consent 
cease and desist order and assessed an $85 million civil money 
penalty against Wells Fargo & Company of San Francisco, a registered 
bank holding company, and Wells Fargo Financial, Inc., of Des 
Moines. The order addresses allegations that Wells Fargo Financial 
employees steered potential prime-eligible consumers into more 
costly subprime loans and separately falsified income information in 
mortgage applications. In addition to the civil money penalty, the 
order requires that Wells Fargo compensate affected consumers. See 
Press Release, Federal Reserve Board (July 20, 2011), available at 
http://www.federalreserve.gov/newsevents/press/enforcement/20110720a.htm.
---------------------------------------------------------------------------

    Because subprime and Alt-A loans involved additional risk, they 
were typically more expensive to consumers than ``prime'' mortgage 
loans, although many of them had very low introductory interest rates. 
While housing prices continued to increase, it was relatively easy for 
consumers to refinance their existing loans into more affordable 
products to avoid interest rate resets and other adjustments. When 
housing prices began to decline in 2005, however, refinancing became 
more difficult and delinquency rates on subprime and Alt-A products 
increased dramatically.\22\ By the summer of 2006, 1.5 percent of loans 
less than a year old were in default, and this figure peaked at 2.5 
percent in late 2007.\23\ As the economy worsened, the rates of serious 
delinquency (90 or more days past due or in foreclosure) for the 
subprime and Alt-A products began a steep increase from approximately 
10 percent in 2006, to 20 percent in 2007, to over 40 percent in 
2010.\24\
---------------------------------------------------------------------------

    \22\ U.S. Fin. Crisis Inquiry Comm'n, The Financial Crisis 
Inquiry Report: Final Report of the National Commission on the 
Causes of the Financial and Economic Crisis in the United States at 
215-217 (Official Gov't ed. 2011) (FCIC Report), available at http://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf.
    \23\ FCIC Report at 215. CoreLogic Chief Economist Mark Fleming 
told the FCIC that the early payment default rate ``certainly 
correlates with the increase in the Alt-A and subprime shares and 
the turn of the housing market and the sensitivity of those loan 
products.'' Id.
    \24\ FCIC Report at 217.
---------------------------------------------------------------------------

    Although the mortgage market is recovering, consumers today 
continue to feel the effects of the financial crisis.

A. Community-Focused Lending Programs

    While governmental and nonprofit programs have always been an 
important source of assistance for low- to moderate-income (LMI) 
consumers, these programs have taken on even greater significance in 
light of current tight mortgage credit standards and Federal 
initiatives to stabilize the housing market. There are a variety of 
programs designed to assist LMI consumers with access to homeownership. 
These programs are generally offered through a nonprofit entity, local 
government, or a housing finance agency (HFA). These programs play a 
significant role in the housing sector of the economy.
Types of Financial Assistance Available
    Community-focused lending programs typically provide LMI consumers 
with assistance ranging from housing counseling services to full 
mortgage loan financing. Some programs offer financial assistance 
through land trust programs, in which the consumer leases the real 
property and takes ownership of only the improvements. Many 
organizations provide ``downpayment assistance'' in connection with 
mortgage loan financing. This can be a gift, grant, or loan to the 
consumer to assist with the consumer's down payment, or to pay for some 
of the closing costs. These programs often rely on subsidies from 
Federal government funds (such as through the HUD HOME program), local 
government funds, foundations, or employer funding.\25\
---------------------------------------------------------------------------

    \25\ Abigail Pound, Challenges and Changes in Community-Based 
Lending for Homeownership, NeighborWorks America, Joint Center for 
Housing Studies of Harvard University (February 2011), available at 
http://www.jchs.harvard.edu/sites/jchs.harvard.edu/files/w11-2_pound.pdf.
---------------------------------------------------------------------------

    Some programs offer first-lien mortgage loans designed to meet the 
needs of LMI consumers. These first-lien mortgage loans may have a 
discounted interest rate, limited origination fees, or permit high 
loan-to-value ratios. Many programs offer subordinate financing. 
Subordinate-financing options may be simple, such as a relatively 
inexpensive subordinate-lien loan to pay for closing costs. Other 
methods of subordinate financing may be complex. For example, one HFA 
program offers a 30-year, fixed-rate, subordinate-lien mortgage loan 
through partner creditors, with interest-only payments for the first 11 
years of the loan's term, and which also provides the LMI consumer with 
an interest subsidy, resulting in a graduated monthly payment between 
the fifth and eleventh

[[Page 6630]]

year of the loan; an additional 30-year deferred, 0 percent 
subordinate-lien mortgage loan is extended by the HFA equal to the 
amount of the subsidy.\26\ Some of the loans offered by these programs, 
whether first-lien or subordinate-financing, are structured as hybrid 
grant products that commonly will be forgiven.
---------------------------------------------------------------------------

    \26\ See http://www.mhp.net/homeownership/homebuyer/soft_second_works.php, describing the SoftSecond program offered by the 
Massachusetts Housing Partnership.
---------------------------------------------------------------------------

Housing Finance Agencies
    For over 50 years, HFAs have provided LMI consumers with 
opportunities for affordable homeownership.\27\ HFAs are quasi-
governmental entities, chartered by either a State or a municipality, 
that engage in diverse housing financing activities for the promotion 
of affordable housing. Some HFAs are chartered to promote affordable 
housing goals across an entire state, while others' jurisdiction 
extends to only particular cities or counties.\28\ These agencies are 
generally funded through tax-exempt bonds.\29\ HFAs issue these tax-
exempt bonds, also known as Mortgage Revenue Bonds, and use the 
proceeds of the bond sale to finance affordable mortgage loans to LMI 
consumers. As of June, 2012, the 51 State HFAs (SHFAs) had $107 billion 
in outstanding tax-free municipal debt available. These Mortgage 
Revenue Bonds funded approximately 100,000 first-time homeowners per 
year. HFAs may also receive funding through Federal programs, such as 
HUD's HOME Investment Partnerships Program, which is the largest 
Federal block grant for affordable housing.\30\
---------------------------------------------------------------------------

    \27\ The first State housing finance agency was established in 
New York in 1960. See New York State Housing Finance Agency Act, 
1960 Laws of New York, 183rd Session, Chap. 671.
    \28\ For example, the Louisiana Housing Corporation administers 
affordable housing programs across all of Louisiana, while The 
Finance Authority of New Orleans administers programs only in 
Orleans Parish. See www.lhfa.state.la.us and 
www.financeauthority.org.
    \29\ Bonds issued by SHFAs are tax-exempt if the proceeds are 
used to provide assistance to first-time or LMI-homebuyers. See 26 
U.S.C. 143.
    \30\ See www.hud.gov/homeprogram.
---------------------------------------------------------------------------

    HFAs employ several methods of promoting affordable homeownership. 
These agencies may partner with local governments to develop and 
implement long-term community-development strategies. For example, HFAs 
may provide tax credits to companies that build or rehabilitate 
affordable housing.\31\ These agencies may also administer affordable 
housing trust funds or other State programs to facilitate the 
affordable housing development.\32\ Many HFAs also provide education or 
training courses to first-time or LMI consumers.
---------------------------------------------------------------------------

    \31\ The Tax Reform Act of 1986, Public Law 99-514, 100 Stat. 
2085 (1986), included the Low-Income Housing Tax Credit Program. 
Under this program, the IRS provides tax credits to SHFAs. SHFAs may 
transfer these tax credits to developers of affordable housing. 
Developers then sell these credits to fund the development program. 
See http://portal.hud.gov/hudportal/HUD?src=/program_offices/comm_planning/affordablehousing/training/web/lihtc/basics.
    \32\ The Massachusetts Affordable Housing Trust Fund provides 
funds to governmental subdivisions, nonprofit organizations, and 
other entities seeking to provide for the development of affordable 
housing. See www.masshousing.com. New York State's Mitchell-Lama 
program provides subsidies such as property tax exemptions to 
affordable housing developers. See http://www.nyshcr.org/Programs/mitchell-lama/.
---------------------------------------------------------------------------

    HFAs also provide financial assistance directly to consumers. 
Typically, HFAs offer the first-lien mortgage loan, subordinate 
financing, and downpayment assistance programs described above. HFAs 
may also establish pooled loss reserves to self-insure mortgage loans 
originated pursuant to the program, thereby permitting LMI consumers to 
avoid private mortgage insurance. In 2010, HFAs provided about $10 
billion in affordable financing.\33\ In 2010, 89 percent of SHFAs 
provided down payment assistance loan or grant assistance and 57 
percent of SHFAs provided assistance in conjunction with FHA or USDA 
programs.\34\ However, HFAs generally do not provide direct financing 
to LMI consumers. HFAs partner with creditors, such as local banks, 
that extend credit pursuant to the HFA's program guidelines.
---------------------------------------------------------------------------

    \33\ National Council of State Housing Agencies, State HFA 
Factbook (2010), p. 33.
    \34\ Id. at 21-22, 35-36.
---------------------------------------------------------------------------

Private Organizations
    While entities such as HFAs develop and finance affordable housing 
programs, these mortgage loans are generally extended by private 
organizations. These organizations often are structured as nonprofit 
501(c)(3) organizations. Under Internal Revenue Code section 501(c)(3), 
the designation is for nonprofit, tax-exempt, charitable organizations 
not operated for the benefit of private interests.\35\ Under Federal 
tax law, 501(c)(3) organizations are restricted from lobbying 
activities, while 501(c)(4) organizations, which must exist to promote 
social welfare, may engage in political campaigning and lobbying.\36\ 
Most organizations that provide support to LMI consumers are structured 
as 501(c)(3) organizations. However, some organizations are structured 
as nonprofit 501(c)(4) organizations.
---------------------------------------------------------------------------

    \35\ See http://www.irs.gov/Charities-&-Non-Profits/Charitable-
Organizations/Exemption-Requirements--Section-501(c)(3)-
Organizations.
    \36\ See http://www.irs.gov/Charities-&-Non-Profits/Other-Non-Profits/Social-Welfare-Organizations.
---------------------------------------------------------------------------

    Various Federal programs establish eligibility requirements and 
provide ongoing monitoring of specific types of creditors that receive 
Federal grants and other support. For example, Community Development 
Financial Institutions (CDFIs) are approved by the U.S. Department of 
the Treasury (Treasury Department) to receive monetary awards from the 
Treasury Department's CDFI Fund, which was established to promote 
capital development and growth in underserved communities. Promoting 
homeownership and providing safe lending alternatives are among the 
Fund's main goals. The Treasury Department created the CDFI designation 
to identify and support small-scale creditors that are committed to 
community-focused lending, but have difficulty raising the capital 
needed to provide affordable housing services.\37\ CDFIs may operate on 
a for-profit or nonprofit basis, provided the CDFI has a primary 
mission of promoting community development.\38\ These programs are also 
subject to other eligibility requirements.\39\ As of July 2012 there 
were 999 such organizations in the U.S., 62 percent of which are 
classified as Community Development (CD) Loan Funds, 22 percent as CD 
Credit Unions, while the rest are CD Banks, Thrifts, or CD Venture 
Capital Funds.\40\
---------------------------------------------------------------------------

    \37\ See 68 FR 5704 (Feb. 4, 2003).
    \38\ See 12 CFR 1805.201(b).
    \39\ Id. Treasury Department eligibility requirements for CDFIs 
stipulate that an approved organization must: Be a legal entity at 
the time of certification application; have a primary mission of 
promoting community development; be a financing entity; primarily 
serve one or more target markets; provide development services in 
conjunction with its financing activities; maintain accountability 
to its defined target market; and be a non-government entity and not 
be under control of any government entity (Tribal governments 
excluded).
    \40\ See http://www.cdfifund.gov/docs/certification/cdfi/CDFI 
List_07-31-12.xls.
---------------------------------------------------------------------------

    The U.S. Department of Housing and Urban Development (HUD) may 
designate nonprofits engaging in affordable housing activities as 
Downpayment Assistance through Secondary Financing Providers 
(DAPs).\41\ HUD established this designation as part of an effort to 
promote nonprofit involvement in affordable housing programs.\42\ HUD-

[[Page 6631]]

approved nonprofits may participate in FHA single-family programs that 
allow them to purchase homes at a discount, finance FHA-insured 
mortgages with the same terms and conditions as owner-occupants, or be 
able to finance secondary loans for consumers obtaining FHA-insured 
mortgages. A DAP must be approved by HUD if it is a nonprofit or 
nonprofit instrumentality of government that provides downpayment 
assistance as a lien in conjunction with an FHA first mortgage; 
government entity DAPs and gift programs do not require approval.\43\ 
As of November 2012 HUD lists 233 nonprofit agencies and nonprofit 
instrumentalities of government in the U.S. that are authorized to 
provide secondary financing.\44\ HUD performs field reviews and 
requires annual reports of participating nonprofit agencies. 
Additionally, HUD's quality control plan requires periodic review for 
deficient policies and procedures and corrective actions. These 
approval and subsequent review procedures are intended to ensure that 
DAPs operate in compliance with HUD requirements and remain financially 
viable.\45\ However, HUD recognizes that these nonprofits have limited 
resources and gives consideration to DAP viability when crafting 
regulations.\46\
---------------------------------------------------------------------------

    \41\ See 24 CFR 200.194.
    \42\ ``Nonprofit organizations are important participants in 
HUD's efforts to further affordable housing opportunities for low- 
and moderate-income persons through the FHA single family programs. 
FHA's single family regulations recognize a special role for 
nonprofit organizations in conjunction with the * * * provision of 
secondary financing.'' See 67 FR 39238 (June 6, 2002).
    \43\ See http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/np/sfhdap01.
    \44\ See https://entp.hud.gov/idapp/html/f17npdata.cfm.
    \45\ ``It is vital that the Department periodically and 
uniformly assess the management and financial ability of 
participating nonprofit agencies to ensure they are not 
overextending their capabilities and increasing HUD's risk of loss 
as a mortgage insurance provider.'' 65 FR 9285, 9286 (Feb. 24, 
2000).
    \46\ ``HUD continues to strongly encourage the participation of 
nonprofit organizations, including community and faith-based 
organizations, in its programs. This proposed rule is not designed 
to place particular burdens on participation by nonprofit 
organizations. Rather, the proposed rule is designed to ensure that 
nonprofit organizations have the capacity, experience, and interest 
to participate in HUD's housing programs.'' 69 FR 7324, 7325 (Feb. 
13, 2004).
---------------------------------------------------------------------------

    Creditors may also be certified by HUD as Community Housing 
Development Organizations (CHDOs) in connection with HUD's HOME 
Investment Partnership Program, which provides grants to fund a wide 
range of activities that promote affordable homeownership.\47\ HUD 
Participating Jurisdictions confer CHDO certification only on 
community-focused nonprofits that are both dedicated to furthering a 
community's affordable housing goals and capable of complying with the 
requirements of the HOME Program.\48\ Creditors designated as CHDOs are 
eligible to receive special CHDO set-aside funds from HUD's HOME 
program to fund local homebuyer assistance programs.\49\ Applicants 
seeking CHDO status must meet rigorous requirements. For example, a 
CHDO must be designated as a nonprofit under section 501(c)(3) or 
(c)(4) of the Internal Revenue Code, adhere to strict standards of 
financial accountability, have among its purposes the provision of 
decent and affordable housing for LMI consumers, maintain 
accountability to the community, and have a proven record of capably 
and effectively serving low-income communities.\50\ After the CHDO 
designation is obtained, CHDO creditors must operate under the 
supervision of a Participating Jurisdiction and in accordance with the 
requirements of the HUD HOME Program.\51\ HUD conducts annual 
performance reviews to determine whether funds have been used in 
accordance with program requirements.\52\ While HUD continues to 
support affordable housing programs involving CHDOs, current market 
conditions have affected CHDO viability.\53\
---------------------------------------------------------------------------

    \47\ See http://portal.hud.gov/hudportal/HUD?src=/program_offices/comm_planning/affordablehousing/programs/home.
    \48\ ``The Department believes that there was specific statutory 
intent to create an entitlement for community based nonprofit 
organizations who would own, sponsor or develop HOME assisted 
housing. While partnerships with State and local government are 
critical to the development of affordable housing, these 
organizations are viewed as private, independent organizations 
separate and apart from State or local governments. One of the major 
objectives of the Department's technical assistance program is to 
increase the number of capable, successful CHDOs able and willing to 
use the CHDO set-aside [fund].'' 61 FR 48736, 48737 (Sept. 16, 
1996).
    \49\ See 24 CFR 92.300 et. seq.
    \50\ See 24 CFR 92.2.
    \51\ For example, no more than 5 percent of a Participating 
Jurisdiction's fiscal year HOME allocation may be used for CHDO 
operating expenses. 24 CFR 92.208(a).
    \52\ See 24 CFR 92.550 et. seq.
    \53\ ``[Participating jurisdictions] have encountered new 
challenges in administering their programs and in managing their 
growing portfolios of older HOME projects. These challenges include 
reduced availability of states or local funding sources, reduced 
private lending, changes in housing property standards, and energy 
codes and reductions in states and local government workforces 
throughout the Nation. These challenges have been magnified by 
current housing and credit market conditions.'' 76 FR 78343, 78345 
(Dec. 16, 2011).
---------------------------------------------------------------------------

    Nonprofit creditors may engage in community-focused lending without 
obtaining one of the designations described above. Such nonprofits 
often rely on HFA or Federal programs for funding, lending guidelines, 
and other support. However, some nonprofits offer credit to LMI 
consumers independent of these State or Federal programs. For example, 
nonprofits may make mortgage loans in connection with a GSE affordable 
housing program. The Federal Home Loan Bank (FHLB) System, Fannie Mae 
(FNMA), and Freddie Mac (FHLMC) offer several programs to support 
affordable housing by facilitating mortgage financing for LMI 
consumers. For example, the FHLB Affordable Housing Program provides 
grants to member banks to fund programs that assist with closing costs 
or down payments, buy down principal amounts or interest rates, 
refinance an existing loan, or assist with rehabilitation or 
construction costs.\54\ Fannie Mae and Freddie Mac also offer two 
programs focused on community-focused lending.\55\
---------------------------------------------------------------------------

    \54\ The Federal Home Loan Bank of Des Moines provides funds for 
member bank programs related to rural homeownership, urban first-
time homebuyers, and Native American homeownership. See http://www.fhlbdm.com/community-investment/down-payment-assistance-programs/. The Federal Home Loan Bank of Chicago provides funds for 
member bank programs related to down payment and closing cost 
assistance or eligible rehabilitation costs for the purchase of a 
home. See http://ci.fhlbc.com/Grant_Pgms/DPP.shtml.
    \55\ FNMA offers first-lien mortgage loans through the My 
Community Mortgage program and subordinate-lien loans through the 
Community Seconds program. FHLMC offers both first- and subordinate-
lien mortgage loans through the Home Possible program.
---------------------------------------------------------------------------

    Other options exist for nonprofits seeking to develop and fund 
community-focused lending programs. For example, a nonprofit may 
originate mortgage loans to LMI consumers and subsequently sell the 
loans to a bank, credit union, or other investor as part of a Community 
Reinvestment Act partnership program.\56\ Other nonprofits may operate 
a limited affordable housing assistance fund, funded entirely by 
private donations, under which LMI consumers may obtain subordinate 
financing. Nonprofits such as these often rely on the underwriting 
performed by the creditor for the first-lien mortgage loan, which is 
often a bank or credit union, to process, underwrite, and approve the 
LMI consumer's application. In addition, some nonprofits are self-
supporting and offer full financing to LMI consumers. These nonprofits 
often establish lending programs with unique guidelines, such as 
requirements that LMI consumers devote a minimum number of hours 
towards the construction of affordable housing.
---------------------------------------------------------------------------

    \56\ Under the Community Reinvestment Act (12 U.S.C. 2901), 
depository institutions may meet community reinvestment goals by 
directly originating or purchasing mortgage loans provided to LMI 
consumers. See 12 CFR 228.22.

---------------------------------------------------------------------------

[[Page 6632]]

B. Homeownership Stabilization and Foreclosure Prevention Programs

    During the early stages of the financial crisis the mortgage market 
significantly tightened mortgage loan underwriting requirements in 
response to uncertainty over the magnitude of potential losses due to 
delinquencies, defaults, and foreclosures.\57\ This restriction in 
credit availability coincided with increasing unemployment, falling 
home values, and the onset of subprime ARM resets. As a result, many 
subprime ARM consumers could not afford their mortgage payments and 
were not able to obtain refinancings. This led to increases in 
delinquencies and foreclosures, which prompted further tightening of 
underwriting standards. Other subprime ARM consumers were able to 
remain current, but were not able to refinance because of a decrease in 
their loan-to-value ratio or an increase in their debt-to-income 
ratio.\58\ However, these consumers devoted most of their disposable 
income to mortgage payments, thereby lowering overall consumer demand 
and further weakening the national economy.\59\
---------------------------------------------------------------------------

    \57\ A 2011 OCC survey shows that 56 percent of banks tightened 
residential real estate underwriting requirements between 2007 and 
2008, and 73 percent tightened underwriting requirements between 
2008 and 2009. See Office of the Comptroller of the Currency, Survey 
of Credit Underwriting Practices 2011, p. 11.
    \58\ ``[W]ith house prices becoming flat or declining in many 
parts of the country during 2007, it has become increasingly 
difficult for many subprime ARM borrowers to refinance. While many 
such borrowers remain current on their loans or are still able to 
refinance at market rates or into FHA products, an increasing number 
have either fallen behind on their existing payments or face the 
prospect of falling behind when rates reset and they are unable to 
refinance.'' Accelerating Loan Modifications, Improving Foreclosure 
Prevention and Enhancing Enforcement, 110th Cong. (Dec. 6, 2007) 
(testimony of John C. Dugan, Comptroller, Office of the Comptroller 
of the Currency).
    \59\ By the third quarter of 2007, the ratio of mortgage-related 
financial obligations (which is comprised of mortgage debt, 
homeowners' insurance, and property tax) to disposable personal 
income reached an all-time high of 11.3 percent. See http://www.federalreserve.gov/releases/housedebt/.
---------------------------------------------------------------------------

    Policymakers became concerned that the losses incurred from 
foreclosures on subprime mortgage loans would destabilize the entire 
mortgage market.\60\ There was a particular concern that the 
uncertainty surrounding exposure to these losses would lead to a fear-
induced downward economic spiral.\61\ As the crisis worsened, industry 
stakeholders attempted to stop this self-reinforcing cycle through a 
series of measures intended to stabilize homeownership and prevent 
foreclosure. Beginning in late 2008, the Federal government, Federal 
agencies, and GSEs implemented programs designed to facilitate 
refinancings and loan modifications.
---------------------------------------------------------------------------

    \60\ ``[A]nalysts are concerned that mortgage foreclosures will 
climb significantly higher and, along with falling housing prices, 
overwhelm the ability of mortgage markets to restructure or 
refinance loans for creditworthy borrowers.'' Congressional Budget 
Office, Options for Responding to Short-Term Economic Weakness, p. 
21 (January 2008).
    \61\ ``[A] breakdown of mortgage markets could put the economy 
on a self-reinforcing downward spiral of less lending, weaker 
economic activity, lower house prices, more foreclosures, even less 
lending, and so on, either causing or significantly worsening a 
recession.'' Id. p. 21-22.
---------------------------------------------------------------------------

    The Troubled Asset Relief Program. The U.S. government enacted and 
implemented several programs intended to promote economic recovery by 
stabilizing homeownership and preventing foreclosure. The Emergency 
Economic Stabilization Act of 2008,\62\ as amended by the American 
Recovery and Reinvestment Act of 2009,\63\ authorizes the Treasury 
Department to ``use loan guarantees and credit enhancements to 
facilitate loan modifications to prevent avoidable foreclosures.'' \64\ 
Pursuant to this authority, the Treasury Department established the 
Troubled Asset Relief Program (TARP), under which two programs were 
created to provide financial assistance directly to homeowners in 
danger of losing their homes: the Making Home Affordable (MHA) program 
and the Hardest Hit Fund (HHF) program. The MHA program is operated by 
the Treasury Department and seeks to provide Federally directed 
assistance to consumers who are at risk of default, foreclosure, or 
were otherwise harmed by the financial crisis.\65\ The HHF program 
provides funds to certain SHFAs in States where the Treasury Department 
has determined that locally-directed stabilization programs are 
required.\66\
---------------------------------------------------------------------------

    \62\ 12 U.S.C. 5201 et. seq.; Pub. L. 110-343 (Oct. 3, 2008).
    \63\ See Sec. 7002 of Public Law 111-5 (January 6, 2009).
    \64\ 12 U.S.C. 5219(a)(1).
    \65\ See www.makinghomeaffordable.gov.
    \66\ See http://www.treasury.gov/initiatives/financial-stability/TARP-Programs/housing/hhf/Pages/default.aspx.
---------------------------------------------------------------------------

    MHA began with the introduction of the Home Affordable Modification 
Program (HAMP) in March 2009.\67\ HAMP, which is intended to assist 
employed homeowners by replacing the consumer's current mortgage loan 
with a more affordable mortgage loan, was immediately successful; 
nearly 500,000 trial modifications were begun during the first six 
months of the program.\68\ MHA offerings expanded with the creation of 
the Second Lien Modification Program in August 2009 and the Home 
Affordable Foreclosure Alternatives Program in November 2009.\69\ The 
Treasury Department subsequently modified these programs several times 
in response to the changing needs of distressed consumers and the 
mortgage market.\70\
---------------------------------------------------------------------------

    \67\ See Press Release, Treasury Department, Relief for 
Responsible Homeowners (March 4, 2009), available at: http://www.treasury.gov/press-center/press-releases/Pages/200934145912322.aspx.
    \68\ See Troubled Asset Relief Program (TARP) Monthly Report to 
Congress--September 2009.
    \69\ See United States Department of the Treasury Office of 
Financial Stability, ``Troubled Asset Relief Program: Two Year 
Retrospective'' (October 2010).
    \70\ See e.g., Supplemental Directive 10-02 (March 24, 2010), 
modifying HAMP, Supplemental Directive 11-07 (July 25, 2011), 
expanding eligibility for the Home Affordable Unemployment Program, 
and Supplemental Directive 12-02 (March 9, 2012), expanding HAMP 
eligibility.
---------------------------------------------------------------------------

    MHA programs are currently scheduled to expire on December 31, 
2013, although there is continuing debate about whether to extend 
them.\71\ As of December 2012, ten programs have been established under 
MHA. The Treasury Department operates five MHA programs.\72\ The 
remaining five MHA programs are operated in conjunction with FHA, VA, 
or USDA programs.\73\ Many consumers facing default or foreclosure have 
received assistance under these programs. For example, from the 
beginning of the HAMP program to October 2012, over 1.1 million 
permanent HAMP modifications have been completed, saving distressed 
consumers an estimated $16.2 billion.\74\
---------------------------------------------------------------------------

    \71\ Press Release, Treasury Department, Expanding Our Efforts 
to Help More Homeowners and Strengthen Hard-hit Communities (Jan. 
27, 2012), available at http://www.treasury.gov/connect/blog/Pages/Expanding-our-efforts-to-help-more-homeowners-and-strengthen-hard-hit-communities.aspx.
    \72\ In addition to HAMP, the Second Lien Modification Program, 
and the Home Affordable Foreclosure Alternatives Program, the 
Treasury Department also operates the Principal Reduction 
Alternative Program and the Home Affordable Unemployment Program.
    \73\ These programs are the FHA Home Affordable Modification 
Program, USDA Special Loan Servicing, Veterans Affairs Home 
Affordable Modification, FHA Second Lien Modification Program, and 
the FHA Short Refinance Program.
    \74\ See October 2012 Making Home Affordable Report.
---------------------------------------------------------------------------

    In March 2010 the Treasury Department established the HHF program 
to enable the States most affected by the financial crisis to develop 
innovative assistance programs.\75\ Nineteen programs have been 
established under the HHF fund, which is currently scheduled to expire 
on December 31, 2017. These programs

[[Page 6633]]

provide assistance to homeowners in the District of Columbia and the 18 
states most affected by the economic crisis.\76\ The HHF provides funds 
directly to HFAs in these States, which are used to create foreclosure-
avoidance programs. As of November 2012, $1.7 billion has been 
allocated to support the 57 programs established to assist distressed 
consumers in these localities.\77\ In California alone, nearly 17,000 
consumers have received over $166 million in assistance since the 
beginning of the program.\78\
---------------------------------------------------------------------------

    \75\ See Hardest Hit Fund Program Guidelines Round 1, available 
at: http://www.treasury.gov/initiatives/financial-stability/TARP-
Programs/housing/Documents/HFA_Proposal_Guidelines__-1st_
Rd.pdf.
    \76\ The HHF provides funds to SHFAs located in Alabama, 
Arizona, California, Florida, Georgia, Illinois, Indiana, Kentucky, 
Michigan, Mississippi, Nevada, New Jersey, North Carolina, Ohio, 
Oregon, Rhode Island, South Carolina, Tennessee, and Washington, DC.
    \77\ See Troubled Asset Relief Program (TARP) Monthly Report to 
Congress--November 2012.
    \78\ See Keep Your Home California 2012 Fourth Quarterly Report.
---------------------------------------------------------------------------

    As with the MHA programs discussed above, these HHF programs have 
evolved over time. The Treasury Department originally encouraged SHFAs 
to establish programs for mortgage modifications, principal 
forbearance, short sales, principal reduction for consumers with high 
loan-to-value ratios, unemployment assistance, and second-lien mortgage 
loan reduction or modification.\79\ No SHFAs were able to establish all 
of these programs in the early stages of the HHF. However, through 2011 
and 2012 State HHF programs were significantly modified and 
expanded.\80\ The 19 SHFAs continue to modify these programs to develop 
more effective and efficient methods of providing assistance to at-risk 
consumers. For example, in September 2012 the Nevada HHF program was 
amended for the tenth time.\81\
---------------------------------------------------------------------------

    \79\ See Hardest Hit Fund Program Guidelines Round 1, available 
at: http://www.treasury.gov/initiatives/financial-stability/TARP-
Programs/housing/Documents/HFA_Proposal_Guidelines__-1st_
Rd.pdf.
    \80\ From 2011-2012, the program agreements between the 19 SHFAs 
and the Treasury Department were modified 55 times. See http://www.treasury.gov/initiatives/financial-stability/TARP-Programs/housing/hhf/Pages/Archival-information.aspx.
    \81\ See Tenth Amendment to Commitment to Purchase Financial 
Instrument and HFA Participation Agreement, available at http://www.treasury.gov/initiatives/financial-stability/TARP-Programs/housing/Pages/Program-Documents.aspx.
---------------------------------------------------------------------------

    Federal agency programs. In response to the financial crisis, the 
FHA, the VA, and the USDA expanded existing programs and implemented 
new programs intended to facilitate refinancings for consumers at risk 
of delinquency or default. Some of these programs operate in 
conjunction with the Treasury Department's MHA program, while others 
are run solely by the particular Federal agency. In 2008 Congress 
expanded access to refinancings under the VA's Interest Rate Reduction 
Refinancing Loan program by raising the maximum loan-to-value ratio to 
100 percent and increasing the maximum loan amount of loans eligible to 
be guaranteed under the program.\82\ In February 2009 HUD increased the 
maximum loan amount for FHA-insured mortgages.\83\ This change expanded 
access to refinancings available under the FHA's Streamline Refinance 
Program.\84\ Several months later, the FHA created the Short Refinance 
Option program to assist consumers with non-FHA mortgage loans.\85\ 
This program, which operates in conjunction with TARP, permits 
underwater consumers to refinance if the current creditor agrees to 
write down 10 percent of the outstanding principal balance. Similarly, 
in August 2010 the Rural Housing Service of the USDA (RHS) adopted 
rules intended to facilitate loan modifications for consumers 
struggling to make payments on USDA Guaranteed Loans.\86\ The USDA 
subsequently created the Single Family Housing Guaranteed Rural 
Refinance Pilot Program, which was intended to refinance USDA borrowers 
into more stable and affordable mortgage loans.\87\
---------------------------------------------------------------------------

    \82\ See Sec. 504 of the Veterans' Benefits Improvement Act of 
2008, Public Law 110-389 (Oct. 10, 2008).
    \83\ See HUD Mortgagee Letter 2009-07. Section 1202(b) of the 
American Recovery and Reinvestment Act of 2009, Pub. L. 111-5 
(January 6, 2009), authorized the Secretary of Housing and Urban 
Development to increase the loan limit.
    \84\ The FHA Streamline Refinance Program contains reduced 
underwriting requirements for consumers with FHA mortgage loans 
seeking to refinance into a new FHA mortgage loan with a reduced 
interest rate. The FHA has offered streamline refinances for over 
thirty years. See HUD Mortgagee Letter 1982-23.
    \85\ See HUD Mortgagee Letter 2010-23.
    \86\ See 75 FR 52429 (Aug. 26, 2010).
    \87\ See Rural Dev. Admin. Notice No. 4615 (1980-D) (Feb. 1, 
2012).
---------------------------------------------------------------------------

    These efforts have enabled many consumers to receive refinancings 
under these programs. In 2011, the FHA accounted for 5.6 percent of the 
mortgage refinance market, with originations totaling $59 billion.\88\ 
However, the number of consumers receiving assistance under these 
programs varies. For example, between April 2009 and December 2011, the 
FHA started 5.6 million mortgage loan modifications.\89\ During a 
similar time period, nearly 997,000 FHA Streamline Refinances were 
consummated.\90\ In contrast, between February 2010 and September 2012, 
only 1,772 mortgage loans were refinanced under the Short Refinance 
Option program.\91\ Efforts continue to develop and enhance these 
programs to assist distressed homeowners while improving the 
performance of existing mortgage loans owned, insured, or guaranteed by 
these agencies.
---------------------------------------------------------------------------

    \88\ This number represents FHA's market share by dollar volume. 
By number of originations, the FHA controlled 6.5 percent of the 
refinance market, with 312,385 refinances originated. See FHA-
Insured Single-Family Mortgage Originations and Market Share Report 
2012--Q2, available at http://portal.hud.gov/hudportal/documents/huddoc?id=fhamktq2_2012.pdf.
    \89\ See Hearing on FY13 Federal Housing Administration's Budget 
Request, 112th Cong. (Mar. 8, 2012) (testimony of Carol Galante, 
Acting Assistant Secretary for Housing/Federal Housing 
Administration Commissioner for the U.S. Department of Housing and 
Urban Development).
    \90\ A total of 996,871 mortgage loans were endorsed under the 
FHA Streamline Refinance program from Fiscal Year 2009 through 2012. 
See FHA Outlook Reports for Fiscal Years 2009, 2010, 2011, and 2012, 
available at http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/rmra/oe/rpts/ooe/olmenu.
    \91\ See Office of the Special Inspector General for the 
Troubled Asset Relief Program, Quarterly Report to Congress, p. 64 
(Oct. 25, 2012).
---------------------------------------------------------------------------

    HARP and other GSE refinancing programs. After the GSEs were placed 
into conservatorship in late 2008, the Federal Housing Finance Agency 
(FHFA) took immediate steps to reduce GSE losses by mitigating 
foreclosures.\92\ In November 2008 FHFA and the GSEs, in coordination 
with the Treasury Department and other stakeholders, announced the 
Streamlined Modification Program, which was intended to help delinquent 
consumers avoid foreclosure by affordably restructuring mortgage 
payments.\93\ This program was the precursor to the Home Affordable 
Refinance Program (HARP) that was announced in March 2009.\94\ The HARP 
program was originally set to expire in June 2010 and limited to 
consumers with a loan-to-value ratio that did not exceed 105 percent. 
However, HARP was modified over time to account for the deteriorating 
mortgage market. In July 2010 the maximum loan-to-value ratio was 
increased from 105 percent to 125 percent.\95\ Nine months

[[Page 6634]]

later FHFA extended the HARP expiration date by one year, to June 30, 
2011.\96\
---------------------------------------------------------------------------

    \92\ See Press Release, FHFA, Statement of FHFA Director James 
B. Lockhart (September 7, 2008), available at: http://www.fhfa.gov/webfiles/23/FHFAStatement9708final.pdf.
    \93\ See Press Release, FHFA, FHFA Announces Implementation 
Plans for Streamlined Loan Modification Program, (Dec. 18, 2008), 
available at http://www.fhfa.gov/webfiles/267/SMPimplementation121808.pdf.
    \94\ See Press Release, Treasury Department, Relief for 
Responsible Homeowners (March 4, 2009), available at: http://www.treasury.gov/press-center/press-releases/Pages/200934145912322.aspx.
    \95\ See Press Release, FHFA, FHFA Authorized Fannie Mae and 
Freddie Mac to Expand Home Affordable Refinance Program to 125 
Percent Loan-to-Value (July 1, 2009), available at: http://www.fhfa.gov/webfiles/13495/125_LTV_release_and_fact_sheet_7_01_09%5B1%5D.pdf.
    \96\ See Press Release, FHFA, FHFA Extends Refinance Program By 
One Year (March 1, 2010), available at: http://www.fhfa.gov/webfiles/15466/HARPEXTENDED3110%5B1%5D.pdf.
---------------------------------------------------------------------------

    Many of the nearly five million eligible consumers were expected to 
receive refinancings under HARP.\97\ However, by mid-2011 fewer than 
one million consumers had received HARP refinances. Fannie Mae, Freddie 
Mac, and FHFA responded by significantly altering the HARP program.\98\ 
Perhaps most significantly, the maximum loan-to-value ratio was 
removed, facilitating refinances for all underwater consumers who 
otherwise fit HARP's criteria. These changes were immediately 
successful. More HARP refinances were completed during the first six 
months of 2012 than in all of 2011.\99\ These changes were especially 
effective in assisting consumers with high loan-to-value ratios. In 
September 2012, consumers with loan-to-value ratios in excess of 125 
percent received 26 percent of all HARP refinances.\100\
---------------------------------------------------------------------------

    \97\ See Treasury Department Press Release supra note 94.
    \98\ See Press Release, FHFA, FHFA, Fannie Mae and Freddie Mac 
Announce HARP Changes to Reach More Borrowers (Oct. 24, 2011), 
available at: http://www.fhfa.gov/webfiles/22721/HARP_release_102411_Final.pdf.
    \99\ See Federal Housing Finance Agency Refinance Report (June 
2012).
    \100\ See Federal Housing Finance Agency Refinance Report 
(September 2012).
---------------------------------------------------------------------------

    The GSEs have implemented other streamline refinance programs 
intended to facilitate the refinancing of existing GSE consumers into 
more affordable mortgage loans. These programs are available for 
consumers who are not eligible for a refinancing under HARP. For 
example, a consumer with a loan-to-value ratio of less than 80 percent 
is eligible for a streamline refinancing through Fannie Mae's Refi Plus 
program or Freddie Mac's Relief Refinance program. These programs 
comprise a significant share of GSE refinancing activity. From January 
through September 2012, 45 percent of GSE streamline refinances were 
non-HARP refinances.\101\ FHFA and the GSEs remain committed to 
continue modifying these programs to enhance access to refinancing 
credit for distressed consumers.\102\
---------------------------------------------------------------------------

    \101\ Id.
    \102\ ``Today, we continue to meet with lenders to ensure HARP 
is helping underwater borrowers refinance at today's historical low 
interest rates. As we continue to gain insight from the program we 
will make additional operational adjustments as needed to enhance 
access to this program.'' Edward J. DeMarco, Acting Director Federal 
Housing Finance Agency, Remarks at the American Mortgage Conference 
(Sept. 10, 2012), available at http://www.fhfa.gov/webfiles/24365/2012DeMarcoNCSpeechFinal.pdf.
---------------------------------------------------------------------------

C. The Mortgage Loan Market for Small Portfolio Creditors

    Securitization fundamentally altered mortgage lending practices. 
Traditionally, underwriting standards were determined at the branch or 
local bank level. These practices heavily emphasized the relationship 
between the bank and the consumer.\103\ Starting in the mid-1990s, much 
of the mortgage market began to move toward standardized underwriting 
practices based on quantifiable and verifiable data points, such as a 
consumer's credit score.\104\ The shift toward standardized, electronic 
underwriting lowered costs for creditors and consumers, thereby 
increasing access to mortgage credit. Standardized loan-level data made 
it easier to analyze individual loans for compliance with underwriting 
requirements, which facilitated the expansion of private mortgage 
securitizations. This shift from portfolio-focused to securitization-
focused mortgage lending also altered the traditional risk calculations 
undertaken by creditors, as creditors no longer retained the risks 
associated with poorly underwritten loans.\105\ Additionally, in 
another departure from the traditional mortgage lending model, these 
creditors increasingly relied on the fees earned by originating and 
selling mortgage loans, as opposed to the interest revenue derived from 
the loan itself.
---------------------------------------------------------------------------

    \103\ ``[C]ommunity banks tend to base credit decisions on local 
knowledge and nonstandard data obtained through long-term 
relationships and are less likely to rely on the models-based 
underwriting used by larger banks.'' Federal Deposit Insurance 
Corporation, FDIC Community Banking Study, p. 1-1 (December 2012) 
(FDIC Community Banking Study).
    \104\ See FCIC Report at 72.
    \105\ See FCIC Report at 89.
---------------------------------------------------------------------------

    Small community creditor access to the secondary mortgage market 
was limited. Many small creditors originated ``non-conforming'' loans 
which could not be purchased by the GSEs. Also, many community 
creditors chose to retain the relationship model of underwriting, 
rather than fully adopting standardized data models popular with larger 
banks. Retaining these traditional business methods had important 
consequences during the subprime crisis. While large lending 
institutions generally depended on the secondary market for liquidity, 
small community banks and credit unions generally remained reliant on 
interest income derived from mortgage loans held in portfolio. As a 
result, community creditors were less affected by the contraction in 
the secondary mortgage market during the financial crisis.\106\ For 
example, the percentage of mortgage-backed securities in relation to 
the total assets of credit unions actually declined by more than 1.5 
percent as subprime lending expanded.\107\
---------------------------------------------------------------------------

    \106\ Between 2005 and 2008, while loan originations at banks 
with assets in excess of $10 billion fell by 51 percent, loan 
originations at banks with assets between $1 and $10 billion 
declined by 31 percent, and loan originations at banks with less 
than $1 billion in assets declined by only 10 percent. See Federal 
Reserve Bank of Kansas City, Financial Industry Perspectives 
(December 2009).
    \107\ In December 2003, the ratio of mortgage-backed securities 
to total assets at credit unions was 4.67 percent. By December 2006, 
this ratio had decreased to 3.21 percent. See Accelerating Loan 
Modifications, Improving Foreclosure Prevention and Enhancing 
Enforcement, 110th Cong. (Dec. 6, 2007) (testimony of Gigi Hyland, 
Board Member of the National Credit Union Administration).
---------------------------------------------------------------------------

    The magnitude of portfolio lending within this market remains an 
important influence on the underwriting practices of community banks 
and credit unions. These institutions generally rely on long-term 
relationships with a small group of consumers. Therefore, the 
reputation of these community banks and credit unions is largely 
dependent on serving their community in ways that cause no harm. 
Furthermore, by retaining mortgage loans in portfolio community 
creditors also retain the risk of delinquency or default on those 
loans. Thus, community creditors have an added incentive to engage in 
thorough underwriting to protect their balance sheet as well as their 
reputation. To minimize portfolio performance risk, small community 
creditors have developed underwriting standards that are different than 
those employed by larger institutions. Small creditors generally engage 
in ``relationship banking,'' in which underwriting decisions rely on 
qualitative information gained from personal relationships between 
creditors and consumers.\108\ This qualitative information, often 
referred to as ``soft'' information, focuses on subjective factors such 
as consumer character and reliability, which ``may be difficult to 
quantify, verify, and communicate

[[Page 6635]]

through the normal transmission channels of a banking organisation.'' 
\109\ Evidence suggests that underwriting based on such ``soft'' 
information yields loan portfolios that perform better than those 
underwritten according to ``hard'' information, such as credit score 
and consumer income levels.\110\ For example, one recent study found 
that delinquency and default rates were significantly lower for 
consumers receiving mortgage loans from institutions relying on soft 
information for underwriting decisions.\111\ This is consistent with 
market-wide data demonstrating that mortgage loan delinquency and 
charge-off rates are significantly lower at smaller banks than larger 
ones.\112\ Current data also suggests that that these relationship-
based lending practices lead to more accurate underwriting decisions 
during cycles of both lending expansion and contraction.\113\
---------------------------------------------------------------------------

    \108\ ``Many customers * * * value the intimate knowledge their 
banker has of their business and/or total relationship and prefer 
dealing consistently with the same individuals whom they do not have 
to frequently reeducate about their own unique financial and 
business situations. Such customers are consequently willing to pay 
relatively more for such service. Relationship lending thus provides 
a niche for community institutions that many large banks find less 
attractive or are less capable of providing.'' See Federal Reserve 
Bank of Atlanta, On the Uniqueness of Community Banks (October 
2005).
    \109\ See Allen N. Berger and Gregory F. Udell, Small Business 
Credit Availability and Relationship Lending: The Importance of Bank 
Organisational Structure, Economic Journal (2002).
    \110\ ``Moreover, a comparison of loss rates on individual loan 
categories suggests that community banks may also do a better job of 
underwriting loans than noncommunity institutions (see Table 4.4).'' 
FDIC Community Banking Study, p. 4-6. See also Sumit Agarwal, Brent 
W. Ambrose, Souphala Chomsisengphet, and Chunlin Liu, The Role of 
Soft Information in a Dynamic Contract Setting: Evidence from the 
Home Equity Market, 43 Journal of Money, Credit and Banking 633, 649 
(Oct. 2011) (analyzing home equity lending, the authors ``find that 
the lender's use of soft information can successfully reduce the 
risks associated with ex post credit losses.'').
    \111\ ``In particular, we find evidence that selection and soft 
information prior to purchase are significantly associated with 
reduced delinquency and default. And, in line with relationship 
lending, we find that this effect is most pronounced for borrowers 
with compromised credit (credit scores below 660), who likely 
benefit the most from soft information in the lending relationship. 
This suggests that for higher risk borrowers, relationship with a 
bank may be about more than the mortgage transaction.'' O. Emre 
Ergungor and Stephanie Moulton, Beyond the Transaction: Depository 
Institutions and Reduced Mortgage Default for Low-Income Homebuyers, 
Federal Reserve Bank of Cleveland Working Paper 11-15 (August 2011).
    \112\ Federal Reserve Board, Charge-Off and Delinquency Rates on 
Loans and Leases at Commercial Banks (Nov. 2012), available at http://www.federalreserve.gov/releases/chargeoff/default.htm. These data 
show that residential real estate charge-offs were higher at large 
banks than small ones for 12 of the previous 87 quarters, dating to 
the start of the small bank survey in 1991. For example, in the 
fourth quarter of 2009 large banks had a 3.16 percent charge-off 
rate, while the rate at small banks was 1.2 percent. Delinquency 
rates demonstrate a similar effect.
    \113\ ``In two retail loan categories--residential real estate 
loans and loans to individuals--community banks consistently 
reported lower average loss rates from 1991 through 2011, the period 
for which these data are available.'' FDIC Community Banking Study, 
p. 4-6.
---------------------------------------------------------------------------

    Although the number of community banks has declined in recent 
years, these institutions remain an important source of nonconforming 
credit in areas commonly considered ``rural'' or ``underserved.'' In 
2011, community banks held over 50 percent of all deposits in 
micropolitan areas and over 70 percent of all deposits held in rural 
areas.\114\ Similarly, in 2011, there were more than 600 counties where 
community banks operated offices but where no noncommunity bank offices 
were present, and more than 600 additional counties where community 
banks operated offices but where fewer than three noncommunity bank 
offices were present.\115\ These counties have a combined population of 
more than 16 million people and include both rural and metropolitan 
areas.\116\ It is important to note that the cost of credit offered by 
these community institutions is generally higher than the cost of 
similar products offered by larger institutions. One reason for this 
increased expense stems from the nature of relationship-based 
underwriting decisions. Such qualitative evaluations of 
creditworthiness tend to take more time, and therefore are more 
expensive, than underwriting decisions based on standardized points of 
data.\117\ Also, the cost of funds for community banks tends to be 
higher than the cost for larger institutions.\118\
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    \114\ FDIC Community Banking Study, p. 3-6.
    \115\ FDIC Community Banking Study, p. 3-5.
    \116\ Id.
    \117\ FCIC Report at 72.
    \118\ FDIC Community Banking Study, p. 4-5.
---------------------------------------------------------------------------

IV. Legal Authority

    The Bureau is issuing this proposed rule pursuant to its authority 
under TILA and the Dodd-Frank Act. See 15 U.S.C. 1604(a), 12 U.S.C. 
5511(a) and (b), 5512(b)(1) and (2). 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.'' \119\ TILA is defined as a 
Federal consumer financial law.\120\ Accordingly, the Bureau has 
authority to issue regulations pursuant to TILA.
---------------------------------------------------------------------------

    \119\ 12 U.S.C. 5581(a)(1).
    \120\ 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).
---------------------------------------------------------------------------

A. TILA Ability-to-Repay and Qualified Mortgage Provisions

    As discussed above, the Dodd-Frank Act amended TILA to provide 
that, in accordance with regulations prescribed by the Bureau, no 
creditor may make a residential mortgage loan unless the creditor makes 
a reasonable and good faith determination based on verified and 
documented information that, at the time the loan is consummated, the 
consumer has a reasonable ability to repay the loan, according to its 
terms, and all applicable taxes, insurance (including mortgage 
guarantee insurance), and assessments. TILA section 129C(a)(1); 15 
U.S.C. 1639c(a)(1). As described below in part IV.B, the Bureau has 
authority to prescribe regulations to carry out the purposes of TILA 
pursuant to TILA section 105(a). 15 U.S.C. 1604(a). In particular, it 
is the purpose of TILA section 129C, as amended by the Dodd-Frank Act, 
to assure that consumers are offered and receive residential mortgage 
loans on terms that reasonably reflect their ability to repay the loans 
and that are understandable and not unfair, deceptive, or abusive. TILA 
section 129B(a)(2); 15 U.S.C. 1639b(a)(2).
    The Dodd-Frank Act also provides creditors originating ``qualified 
mortgages'' special protection from liability under the ability-to-
repay requirements. TILA section 129C(b), 15 U.S.C. 1639c(b). TILA 
generally defines a ``qualified mortgage'' as a residential mortgage 
loan for which: The loan does not contain negative amortization, 
interest-only payments, or balloon payments; the term does not exceed 
30 years; the points and fees generally do not exceed 3 percent of the 
loan amount; the income or assets are considered and verified; and the 
underwriting is based on the maximum rate during the first five years, 
uses a payment schedule that fully amortizes the loan over the loan 
term, and takes into account all mortgage-related obligations. TILA 
section 129C(b)(2), 15 U.S.C. 1639c(b)(2). In addition, to constitute a 
qualified mortgage a loan must meet ``any guidelines or regulations 
established by the Bureau relating to ratios of total monthly debt to 
monthly income or alternative measures of ability to pay regular 
expenses after payment of total monthly debt, taking into account the 
income levels of the borrower and such other factors as the Bureau may 
determine are relevant and consistent with the purposes described in 
[TILA section 129C(b)(3)(B)(i)].''

[[Page 6636]]

    TILA also provides the Bureau with authority to prescribe 
regulations that revise, add to, or subtract from the criteria that 
define a qualified mortgage upon a finding that such regulations are 
necessary or proper to ensure that responsible, affordable mortgage 
credit remains available to consumers in a manner consistent with the 
purposes of the ability-to-repay requirements; or are necessary and 
appropriate to effectuate the purposes of the ability-to-repay 
requirements, to prevent circumvention or evasion thereof, or to 
facilitate compliance with TILA sections 129B and 129C. TILA section 
129C(b)(3)(B)(i), 15 U.S.C. 1639c(b)(3)(B)(i). In addition, TILA 
section 129C(b)(3)(A) provides the Bureau with authority to prescribe 
regulations to carry out the purposes of the qualified mortgage 
provisions, namely, to ensure that responsible, affordable mortgage 
credit remains available to consumers in a manner consistent with the 
purposes of TILA section 129C. TILA section 129C(b)(3)(A), 15 U.S.C. 
1939c(b)(3)(A). As discussed in the section-by-section analysis below, 
the Bureau is issuing certain provisions of this rule pursuant to its 
authority under TILA section 129C(b)(3)(B)(i).
    With respect to the qualified mortgage provisions, the Dodd-Frank 
Act contains several specific grants of regulatory authority. First, 
for purposes of defining ``qualified mortgage,'' TILA section 
129C(b)(2)(A)(vi) provides the Bureau with authority to establish 
guidelines or regulations relating to monthly debt-to-income ratios or 
alternative measures of ability to pay. Second, TILA section 
129C(b)(2)(D) provides that the Bureau shall prescribe rules adjusting 
the qualified mortgage points and fees limits described above to permit 
creditors that extend smaller loans to meet the requirements of the 
qualified mortgage provisions. 15 U.S.C. 1639c(b)(2)(D)(ii). In 
prescribing such rules, the Bureau must consider their potential impact 
on rural areas and other areas where home values are lower. Id. Third, 
TILA section 129C(b)(2)(E) provides the Bureau with authority to 
include in the definition of ``qualified mortgage'' loans with balloon 
payment features, if those loans meet certain underwriting criteria and 
are originated by creditors that operate predominantly in rural or 
underserved areas, have total annual residential mortgage originations 
that do not exceed a limit set by the Bureau, and meet any asset size 
threshold and any other criteria as the Bureau may establish, 
consistent with the purposes of TILA. 15 U.S.C. 1639c(b)(2)(E). As 
discussed in the section-by-section analysis below, the Bureau is 
issuing certain provisions of this rule pursuant to its authority under 
TILA sections 129C(a)(6)(D), (b)(2)(A)(vi), (b)(2)(D), and (b)(2)(E).

B. Other Rulemaking and Exception Authorities

    This proposed rule also relies on the rulemaking and exception 
authorities specifically granted to the Bureau by TILA and the Dodd-
Frank Act, including the authorities discussed below.\121\
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    \121\ As discussed in the introductory material to part IV 
above, prior to the Dodd-Frank Act, rulemaking authority over TILA 
was vested in the Board. The Dodd-Frank Act transferred rulemaking 
authority for TILA to the Bureau, effective July 21, 2011. See Dodd-
Frank Act sections 1061, 1098, and 1100A. Thus, the Bureau proposes 
these amendments pursuant to its authorities in section 1061 of the 
Dodd-Frank Act.
---------------------------------------------------------------------------

TILA
    TILA section 105(a). As amended by the Dodd-Frank Act, TILA section 
105(a), 15 U.S.C. 1604(a), directs the Bureau to prescribe regulations 
to carry out the purposes of TILA, and provides that such regulations 
may contain additional requirements, classifications, differentiations, 
or other provisions, and may provide for such adjustments and 
exceptions for all or any class of transactions, that the Bureau judges 
are necessary or proper to effectuate the purposes of TILA, to prevent 
circumvention or evasion thereof, or to facilitate compliance 
therewith. A purpose of TILA is ``to assure a meaningful disclosure of 
credit terms so that the consumer will be able to compare more readily 
the various credit terms available to him and avoid the uninformed use 
of credit.'' TILA section 102(a), 15 U.S.C. 1601(a). This stated 
purpose is tied to Congress's finding that ``economic stabilization 
would be enhanced and the competition among the various financial 
institutions and other firms engaged in the extension of consumer 
credit would be strengthened by the informed use of credit[.]'' TILA 
section 102(a). Thus, strengthened competition among financial 
institutions is a goal of TILA, achieved through the effectuation of 
TILA's purposes.
    As amended by section 1402 of the Dodd-Frank Act, section 
129B(a)(2) of TILA provides that the purpose of section 129C of TILA is 
``to assure that consumers are offered and receive residential mortgage 
loans on terms that reasonably reflect their ability to repay the 
loans.'' This stated purpose is tied to Congress's finding that 
``economic stabilization would be enhanced by the protection, 
limitation, and regulation of the terms of residential mortgage credit 
and the practices related to such credit, while ensuring that 
responsible, affordable mortgage credit remains available to 
consumers.'' Thus, ensuring that responsible, affordable mortgage 
credit remains available to consumers is a goal of TILA, achieved 
through the effectuation of TILA's purposes.
    Historically, TILA section 105(a) has served as a broad source of 
authority for rules that promote the informed use of credit through 
required disclosures and substantive regulation of certain practices. 
However, Dodd-Frank Act section 1100A clarified the Bureau's section 
105(a) authority by amending that section to provide express authority 
to prescribe regulations that contain ``additional requirements'' that 
the Bureau finds are necessary or proper to effectuate the purposes of 
TILA, to prevent circumvention or evasion thereof, or to facilitate 
compliance. This amendment clarified the authority to exercise TILA 
section 105(a) to prescribe requirements beyond those specifically 
listed in the statute that meet the standards outlined in section 
105(a). The Dodd-Frank Act also clarified the Bureau's rulemaking 
authority over certain high-cost mortgages pursuant to section 105(a). 
As amended by the Dodd-Frank Act, TILA section 105(a) authority to make 
adjustments and exceptions to the requirements of TILA applies to all 
transactions subject to TILA, except with respect to the provisions of 
TILA section 129, 15 U.S.C. 1639, that apply to the high-cost mortgages 
defined in TILA section 103(bb), 15 U.S.C. 1602(bb).
    As discussed in the section-by-section analysis below, the Bureau 
is proposing regulations to carry out TILA's purposes, including such 
additional requirements, adjustments, and exceptions as, in the 
Bureau's judgment, are necessary and proper to carry out the purposes 
of TILA, prevent circumvention or evasion thereof, or to facilitate 
compliance. In developing these aspects of the proposed rule pursuant 
to its authority under TILA section 105(a), the Bureau has considered 
the purposes of TILA, including ensuring that consumers are offered and 
receive residential mortgage loans on terms that reasonably reflect 
their ability to repay the loans, ensuring meaningful disclosures, 
facilitating consumers' ability to compare credit terms, and helping 
consumers avoid the uninformed use of credit, and the purposes of TILA, 
including regulating the terms of residential mortgage credit and the 
practices related to such credit to ensure that responsible, affordable

[[Page 6637]]

mortgage credit remains available to consumers, strengthening 
competition among financial institutions, and promoting economic 
stabilization.
    TILA section 105(f). Section 105(f) of TILA, 15 U.S.C. 1604(f), 
authorizes the Bureau to exempt from all or part of TILA any class of 
transactions if the Bureau determines that TILA coverage does not 
provide a meaningful benefit to consumers in the form of useful 
information or protection. In exercising this authority, the Bureau 
must consider the factors identified in section 105(f) of TILA and 
publish its rationale at the time it proposes an exemption for public 
comment. Specifically, the Bureau must consider:
    (a) The amount of the loan and whether the disclosures, right of 
rescission, and other provisions provide a benefit to the consumers who 
are parties to such transactions, as determined by the Bureau;
    (b) The extent to which the requirements of this subchapter 
complicate, hinder, or make more expensive the credit process for the 
class of transactions;
    (c) The status of the borrower, including--
    (1) Any related financial arrangements of the borrower, as 
determined by the Bureau;
    (2) The financial sophistication of the borrower relative to the 
type of transaction; and
    (3) The importance to the borrower of the credit, related 
supporting property, and coverage under this subchapter, as determined 
by the Bureau;
    (d) Whether the loan is secured by the principal residence of the 
consumer; and
    (e) Whether the goal of consumer protection would be undermined by 
such an exemption.
    As discussed in the section-by-section analysis below, the Bureau 
is proposing to exempt certain transactions from the requirements of 
TILA pursuant to its authority under TILA section 105(f). In developing 
this proposal under TILA section 105(f), the Bureau has considered the 
relevant factors and determined that the proposed exemptions may be 
appropriate.
The Dodd-Frank Act
    Dodd-Frank Act section 1022(b). Section 1022(b)(1) of the Dodd-
Frank Act authorizes the Bureau to prescribe rules ``as may be 
necessary or appropriate to enable the Bureau to administer and carry 
out the purposes and objectives of the Federal consumer financial laws, 
and to prevent evasions thereof[.]'' 12 U.S.C. 5512(b)(1). Section 
1022(b)(1) of the Dodd-Frank Act authorizes the Bureau to prescribe 
rules ``as may be necessary or appropriate to enable the Bureau to 
administer and carry out the purposes and objectives of the Federal 
consumer financial laws, and to prevent evasions thereof.'' 12 U.S.C. 
5512(b)(1). TILA and title X of the Dodd-Frank Act are Federal consumer 
financial laws. Accordingly, the Bureau is exercising its authority 
under Dodd-Frank Act section 1022(b) to prescribe rules that carry out 
the purposes and objectives of TILA and title X and prevent evasion of 
those laws.

V. Section-by-Section Analysis

Section 1026.32 Requirements for High-Cost Mortgages

32(b) Definitions
32(b)(1)
32(b)(1)(ii)
Background
    TILA section 129C(b)(2)(A)(vii), as added by Section 1412 of the 
Dodd-Frank Act, defines a ``qualified mortgage'' as a loan for which, 
among other things, the total ``points and fees'' payable in connection 
with the transaction generally do not exceed 3 percent of the total 
loan amount. Section 1431(a) of the Dodd-Frank Act amended HOEPA's 
points and fees coverage test to provide in TILA section 
103(bb)(1)(A)(ii) that a mortgage is a high-cost mortgage if the total 
points and fees payable in connection with the transaction exceed 5 
percent of the total loan amount (for transactions of $20,000 or more), 
or the lesser of 8 percent of the total loan amount or $1,000 (for 
transactions of less than $20,000). The Bureau finalized the Dodd-Frank 
Act's amendments to TILA concerning points and fees limits for 
qualified mortgages and high-cost mortgages in the 2013 ATR and 2013 
HOEPA Final Rules, respectively.
    Those rulemakings also adopted the Dodd-Frank Act's amendments to 
TILA concerning the exclusion of certain bona fide third-party charges 
and up to two bona fide discount points from the points and fees 
calculation for both qualified mortgages and high-cost mortgages. With 
respect to bona fide discount points in particular, TILA sections 
129C(b)(2)(C)(ii)(I) and 103(dd)(1) provide for the exclusion of up to 
and including two bona fide discount points from points and fees for 
qualified mortgages and high-cost mortgages, respectively, but only if 
the interest rate for the transaction before the discount does not 
exceed by more than one percentage point the average prime offer rate, 
as defined in Sec.  1026.35(a)(2). Similarly, TILA sections 
129C(b)(2)(C)(ii)(II) and 103(dd)(2) provide for the exclusion of up to 
and including one bona fide discount point from points and fees, but 
only if the interest rate for the transaction before the discount does 
not exceed the average prime offer rate by more than two percentage 
points.\122\ The Bureau's 2013 ATR and HOEPA Final Rules implemented 
the bona fide discount point exclusions from points and fees in Sec.  
1026.32(b)(1)(i)(E) and (F) (closed-end credit) and (b)(2)(i)(E) and 
(F) (open-end credit), respectively.
---------------------------------------------------------------------------

    \122\ The 2013 ATR and HOEPA Final Rules also adopted the 
special calculation, prescribed under TILA for high-cost mortgages, 
for completing the bona fide discount point calculation for loans 
secured by personal property.
---------------------------------------------------------------------------

    TILA section 129C(b)(2)(C) defines ``points and fees'' for 
qualified mortgages and high-cost mortgages to have the same meaning, 
as set forth in TILA section 103(aa)(4) (renumbered as section 
103(bb)(4)).\123\ Points and fees for the high-cost mortgage threshold 
are defined in Sec.  1026.32(b)(1) (closed-end credit) and (2) (open-
end credit), and Sec.  1026.43(b)(9) provides that, for a qualified 
mortgage, ``points and fees'' has the same meaning as in Sec.  
1026.32(b)(1).
---------------------------------------------------------------------------

    \123\ The Dodd-Frank Act renumbered existing TILA section 
103(aa), which contains the definition of ``points and fees,'' for 
the high-cost mortgage points and fees threshold, as section 
103(bb). See Sec.  1100A(1)(A) of the Dodd-Frank Act. However, in 
defining points and fees for the qualified mortgage points and fees 
limits, TILA section 129C(b)(2)(C) refers to TILA section 103(aa)(4) 
rather than TILA section 103(bb)(4). To give meaning to this 
provision, the Bureau concludes that the reference to TILA section 
in 103(aa)(4) in TILA section 129C(b)(2)(C) is mistaken and 
therefore interprets TILA section 129C(b)(2)(C) as referring to the 
points and fees definition in renumbered TILA section 103(bb)(4).
---------------------------------------------------------------------------

    Section 1431 of the Dodd-Frank Act amended TILA to require that 
``all compensation paid directly or indirectly by a consumer or 
creditor to a mortgage originator from any source, including a mortgage 
originator that is also the creditor in a table-funded transaction,'' 
be included in points and fees. TILA section 103(bb)(4)(B) (emphases 
added). Prior to the amendment, HOEPA had provided that only 
compensation paid by a consumer to a mortgage broker at or before 
closing should count toward the points and fees threshold. Under 
amended TILA section 103(bb)(4)(B), however, compensation paid to 
anyone that qualifies as a ``mortgage originator'' is to be included in 
points and fees.\124\

[[Page 6638]]

Thus, in addition to compensation paid to mortgage brokerage firms, 
points and fees also includes compensation paid to other mortgage 
originators, including employees of a creditor (i.e., loan officers) or 
of a brokerage firm (i.e., individual brokers). In addition, the Dodd-
Frank Act removed the phrase ``payable at or before closing'' from the 
high-cost mortgage points and fees test and did not apply the ``payable 
at or before closing'' limitation to the points and fees cap for 
qualified mortgages. See TILA sections 103(bb)(1)(A)(ii) and 
129C(b)(2)(A)(vii) and (C).
---------------------------------------------------------------------------

    \124\ ``Mortgage originator'' is generally defined to include 
``any person who, for direct or indirect compensation or gain, or in 
the expectation of direct or indirect compensation or gain--(i) 
takes a residential mortgage loan application; (ii) assists a 
consumer in obtaining or applying to obtain a residential mortgage 
loan; or (iii) offers or negotiates terms of a residential mortgage 
loan.'' TILA section 103(cc)(2)(A). The statute excludes certain 
persons from the definition, including a person who performs purely 
administrative or clerical tasks; an employee of a retailer of 
manufactured homes who does not take a residential mortgage 
application or offer or negotiate terms of a residential mortgage 
loan; and, subject to certain conditions, real estate brokers, 
sellers who finance three or fewer properties in a 12-month period, 
and servicers. TILA section 103(cc)(2)(C) through (F).
---------------------------------------------------------------------------

    The Bureau's 2013 ATR Final Rule amended Sec.  1026.32(b)(1) to 
implement revisions to the definition of ``points and fees'' under 
section 1431 of the Dodd-Frank Act, both for the purposes of HOEPA and 
qualified mortgages. Among other things, the Dodd-Frank Act added loan 
originator compensation to the definition of ``points and fees'' that 
had previously applied to high-cost mortgages under HOEPA. Section 1431 
of the Dodd-Frank Act also amended TILA to provide that open-end credit 
plans (i.e., HELOCs) are covered by HOEPA. The Bureau's 2013 HOEPA 
Final Rule thus separately amended Sec.  1026.32(b)(2) to provide for 
the inclusion of loan originator compensation in points and fees for 
HELOCs, to the same extent as such compensation is required to be 
counted for closed-end credit transactions. Under Sec.  
1026.32(b)(1)(ii) (for closed-end credit) and Sec.  1026.32(b)(2)(ii) 
(for open-end credit), all compensation paid directly or indirectly by 
a consumer or creditor to a loan originator, as defined in Sec.  
1026.36(a)(1), that can be attributed to that transaction at the time 
the interest rate is set, is required to be included in points and 
fees. The commentary to Sec.  1026.32(b)(1)(ii) as adopted in the 2013 
ATR Final Rule provides details for applying this requirement for 
closed-end credit transactions (e.g., by clarifying when compensation 
must be known to be counted). The commentary to Sec.  1026.32(b)(2)(ii) 
as adopted in the 2013 HOEPA Final Rule cross-references the commentary 
adopted in Sec.  1026.32(b)(1)(ii) for interpretive guidance.
Discussion
    In response to the Board's 2011 ATR Proposal and the Bureau's 2012 
HOEPA Proposal, the Bureau received feedback regarding the inclusion of 
loan originator compensation in the qualified mortgage and high-cost 
mortgage points and fees calculation. In the context of both 
rulemakings, several industry commenters argued that including loan 
originator compensation in points and fees would result in ``double-
counting'' because creditors often compensate loan originators with 
funds collected from consumers at consummation. The commenters argued 
that money collected in up-front charges to consumers should not be 
counted a second time toward the points and fees thresholds if it is 
passed on to a loan originator. In outreach, consumer advocates urged 
the Bureau not to assume that up-front consumer payments to creditors 
are applied to loan originator compensation, particularly in the 
wholesale channel where consumers can pay mortgage brokers directly.
    The Bureau's 2013 ATR and HOEPA Final Rules implemented as written 
the statutory provision including loan originator compensation in 
points and fees. As the Bureau noted, the underlying statutory 
provisions as amended by the Dodd-Frank Act do not express any 
limitation on the requirement to count loan originator compensation 
toward the points and fees test. Rather, the literal language of TILA 
section 103(bb)(4) as amended by the Dodd-Frank Act defines points and 
fees to include all items included in the finance charge (except 
interest rate), all compensation paid directly or indirectly by a 
consumer or creditor to a loan originator, ``and'' various other 
enumerated items. Both the use of ``and'' and the reference to ``all'' 
compensation paid ``directly or indirectly'' and ``from any source'' 
suggest that compensation should be counted as it flows downstream from 
one party to another so that it is counted each time that it reaches a 
loan originator, whatever the previous source.
    The Bureau believes the statute would be read to require that loan 
originator compensation be treated as additive to the other elements of 
points and fees. The Bureau did not believe that an automatic literal 
reading of the statute in all cases would be in the best interest of 
either consumers or industry, but it did not believe that it yet had 
sufficient information with which to choose definitively between the 
additive approach provided for in the statutory language and other 
potential methods of accounting for payments in all circumstances, 
given multiple practical and complex policy considerations involved. 
Accordingly, the Bureau decided to finalize the rule without a 
qualifying interpretation on this issue and to include in this proposal 
several comments to clarify interpretation of the statute as it applies 
to particular payment streams between particular parties. The Bureau is 
also seeking comment on whether additional guidance regarding treatment 
of loan originator compensation under the points and fees thresholds 
would be useful to facilitate compliance, as described further below.
    In approaching the interpretive issue, the Bureau is cognizant of 
the broader purposes of the statute. As discussed in the 2013 ATR Final 
Rule, the Dodd-Frank Act contains a number of provisions that focus on 
loan originator compensation and regulation, in apparent response to 
concerns that industry compensation practices contributed to the 
mortgage market crisis by creating strong incentives for brokers and 
retail loan officers to steer consumers into higher-priced loans. 
Specifically, loan originators were often paid a commission by 
creditors that increased with the interest rate on a transaction. These 
commissions were funded by creditors through the increased revenue 
received by the creditor as a result of the higher rate paid by the 
consumer and were closely tied to the price the creditor expected to 
receive for the loan on the secondary market as a result of that higher 
rate.\125\ In addition, many mortgage brokers charged consumers up-
front fees to cover some of their costs at the same time that they 
accepted backend payments from creditors out of the rate. This may have 
contributed to consumer confusion about where the brokers' loyalties 
lay.
---------------------------------------------------------------------------

    \125\ For more detailed discussions, see the Bureau's 2012 
proposed rule regarding loan originator compensation at 77 FR 55272, 
55276, 55290 (Sept. 7, 2012) (2012 Loan Originator Proposal) and the 
final rule issued by the Board in 2010 at 75 FR 58509, 5815-16, 
58519-20 (Sept. 24, 2010) (2010 Loan Originator Final Rule).
---------------------------------------------------------------------------

    Although other provisions of the Dodd-Frank Act prohibit specific 
compensation practices that created particularly strong incentives for 
loan originators to ``upcharge'' consumers on a loan-by-loan basis and 
particular confusion about loan originators' loyalties, the Bureau 
believes that the inclusion of loan originator compensation in points 
and fees has

[[Page 6639]]

distinct purposes. In addition to discouraging more generalized rent-
seeking and excessive loan originator compensation, the Bureau believes 
that Congress may have been focused on particular risks to consumers. 
Thus, with respect to qualified mortgages, including loan originator 
compensation in points and fees helps to ensure that, in cases in which 
high up-front compensation might otherwise cause the creditor and/or 
loan originator to be less concerned about long-term sustainability, 
the creditor is not able to invoke a presumption of compliance if 
challenged to demonstrate that it made a reasonable and good faith 
determination of the consumer's ability to repay the loan. Similarly in 
HOEPA, the threshold triggers additional consumer protections, such as 
enhanced disclosures and housing counseling, for the loans with the 
highest up-front pricing.
    The Bureau believes that a strict additive rule that would 
automatically require that loan originator compensation be counted 
against the points and fees thresholds even if it is already counted 
against the thresholds for another reason under the statute would not 
serve the broader purposes of the statute. For instance, the Bureau 
does not believe that it is necessary or appropriate to count the same 
payment between a consumer and a mortgage broker firm twice, simply 
because it is both part of the finance charge and loan originator 
compensation. Similarly, the Bureau does not believe that where a 
payment from either a consumer or a creditor to a mortgage broker is 
counted toward points and fees, it is necessary or appropriate to count 
separately funds that the broker then passes on to its individual 
employees. In each case, any costs and risks to the consumer from high 
loan originator compensation are adequately captured by counting the 
funds a single time against the points and fees cap; thus, the Bureau 
does not believe the purposes of the statute would be served by 
counting some or all of the funds a second time, and is concerned that 
doing so could have negative impacts on the price and availability of 
credit.
    Determining the appropriate accounting method is significantly more 
complicated, however, when a consumer pays some up-front charges to the 
creditor and the creditor pays loan originator compensation to either 
its own employee or to a mortgage broker firm. As described in the 2013 
ATR Final Rule, a creditor can fund compensation to a loan originator 
(or a creditor's own loan officer) two different ways. First, as 
discussed above, the payment could be funded by origination charges 
paid by the consumer. Second, the payment could be funded through the 
interest rate, in which case the creditor forwards funds to the loan 
originator at consummation which the creditor recovers through profit 
realized on the subsequent sale of the mortgage or, for portfolio 
loans, through payments by the consumer over time. Because money is 
fungible, tracking how a creditor spends money it collects in up-front 
charges versus amounts collected through the rate to cover both loan 
originator compensation and its other overhead expenses would be 
extraordinarily complex and cumbersome. To facilitate compliance, the 
Bureau believes it is appropriate and necessary to adopt one or more 
generalized rules regarding the accounting of various payments, but did 
not have sufficient information to make those choices in the 2013 ATR 
Final Rule.
    The potential downstream effects of different accounting methods 
are significant. Under the additive approach where no offsetting of 
consumer payments against creditor-paid loan originator compensation is 
allowed, some loans might be precluded from being qualified mortgages 
given the other charges that are included in points and fees, such as 
fees paid to affiliates for settlement services. In other cases, 
creditors whose combined loan originator compensation and up-front 
charges would otherwise exceed the points and fees limits would have 
strong incentives to cap their up-front charges for other overhead 
expenses under the threshold and instead recover those expenses by 
increasing interest rates to generate higher gains on sale. This would 
adversely affect consumers who prefer a lower interest rate and higher 
up-front costs and, at the margins, could result in some consumers 
being unable to qualify for credit. Additionally, to the extent 
creditors responded to a ``no offsetting'' rule by increasing interest 
rates, this could increase the number of qualified mortgages that 
receive a rebuttable rather than conclusive presumption of compliance.
    One alternative would be to allow all consumer payments to offset 
creditor-paid loan originator compensation. However, a ``full 
offsetting'' approach would allow creditors to offset much higher 
levels of up-front points and fees against expenses paid through rate 
before the heightened consumer protections required by the Dodd-Frank 
Act would apply. For example, a consumer could pay 3 percentage points 
in originating charges and be charged an interest rate sufficient to 
generate a 3 percent loan originator commission, and the loan could 
still fall within the 3 percent cap for qualified mortgages even though 
the up-front payments may be so high as to cause the creditor to be 
undemanding in underwriting the loan. The consumer could be charged 5 
percent in originating charges and an interest rate sufficient to 
generate a five percentage loan originator commission and still stay 
under the HOEPA points and fees trigger, thereby denying consumers the 
special protections afforded to loans with high up-front costs. In 
markets that are less competitive, this would create an opportunity for 
creditors or brokerage firms to take advantage of their market power to 
harm consumers. Particularly under HOEPA, this may raise tensions with 
Congress's apparent intent. Other alternatives might use a hybrid 
approach depending on the type of expense, type of loan, or other 
factors, but would involve more compliance complexity.
    In light of these complexities, the Bureau has proposed three 
comments (one with two alternative versions) to specify accounting 
methods where loan originator compensation could otherwise be counted 
twice under the statutory scheme. As discussed below, the Bureau 
believes that, consistent with TILA section 105(a), these comments 
would facilitate compliance by clarifying the requirements of Sec.  
1026.32(b)(1)(ii). The Bureau is proposing comment 32(b)(1)(ii)-5.i to 
provide that a payment from a consumer to a mortgage broker need not be 
counted toward points and fees twice because it is both part of the 
finance charge under Sec.  1026.32(b)(1)(i) and loan originator 
compensation under Sec.  1026.32(b)(1)(ii). Similarly, proposed comment 
32(b)(1)(ii)-5.ii would clarify that Sec.  1026.32(b)(1)(ii) does not 
require a creditor to include payments by a mortgage broker to its 
individual loan originator employee in the calculation of points and 
fees. For example, assume a consumer pays a $3,000 fee to a mortgage 
broker, and the mortgage broker pays a $1,500 commission to its 
individual loan originator employee for that transaction. The $3,000 
mortgage broker fee is included in points and fees, but the $1,500 
commission is not included in points and fees because it has already 
been included in points and fees as part of the $3,000 mortgage broker 
fee. As discussed above, the Bureau believes that this clarification 
may ensure that any costs to the consumer from loan originator 
compensation are adequately captured by counting the funds a single 
time

[[Page 6640]]

against the points and fees cap. The Bureau seeks comment regarding 
these proposed comments.
    Finally, the Bureau is seeking comment on two alternative versions 
of proposed comment 32(b)(1)(ii)-5.iii. The first would explicitly 
preclude offsetting, in accordance with the statute's additive 
language, by specifying that Sec.  1026.32(b)(1)(ii) requires a 
creditor to include compensation paid by a consumer or creditor to a 
loan originator in the calculation of points and fees in addition to 
any fees or charges paid by the consumer to the creditor. This proposed 
comment also contains an illustrative example which applies to both 
retail and wholesale transactions. For example, assume that a consumer 
pays to the creditor a $3,000 origination fee and that the creditor 
pays to its loan officer employee $1,500 in compensation attributed to 
the transaction. Assume further that the consumer pays no other charges 
to the creditor that are included in points and fees under Sec.  
1026.32(b)(1)(i) and the loan officer receives no other compensation 
that is included in points and fees under Sec.  1026.32(b)(1)(ii). For 
purposes of calculating points and fees, the $3,000 origination fee is 
included in points and fees under Sec.  1026.32(b)(1)(i) and the $1,500 
in loan officer compensation is included in points and fees under Sec.  
1026.32(b)(1)(ii), equaling $4,500 in total points and fees, provided 
that no other points and fees are paid or compensation received.
    The second alternative would allow all consumer payments of up-
front fees and points to offset creditor payments to the loan 
originator. Specifically, it would provide that Sec.  1026.32(b)(1)(ii) 
requires a creditor to reduce the amount of loan originator 
compensation included in the points and fees calculation under Sec.  
1026.32(b)(1)(ii) by any amount paid by the consumer to the creditor 
and included in the points and fees calculation under Sec.  
1026.32(b)(1)(i). This proposed comment also contains an illustrative 
example which applies to both retail and wholesale transactions. For 
example, assume that a consumer pays to the creditor a $3,000 
origination fee and that the creditor pays to the loan originator 
$1,500 in compensation attributed to the transaction. Assume further 
that the consumer pays no other charges to the creditor that are 
included in points and fees under Sec.  1026.32(b)(1)(i) and the loan 
originator receives no other compensation that is included in points 
and fees under Sec.  1026.32(b)(1)(ii). For purposes of calculating 
points and fees, the $3,000 origination fee is included in points and 
fees under Sec.  1026.32(b)(1)(i), but the $1,500 in loan originator 
compensation need not be included in points and fees. If, however, the 
consumer pays to the creditor a $1,000 origination fee and the creditor 
pays to the loan originator $1,500 in compensation, then the $1,000 
origination fee is included in points and fees under Sec.  
1026.32(b)(1)(i), and $500 of the loan originator compensation is 
included in points and fees under Sec.  1026.32(b)(1)(ii), equaling 
$1,500 in total points and fees, provided that no other points and fees 
are paid or compensation received. This example illustrates the 
requirements of Sec.  1026.32(b)(1)(ii) for both retail and wholesale 
transactions.
    The Bureau solicits feedback regarding all aspects of both 
alternatives. In addition, the Bureau specifically requests feedback 
regarding whether there are differences in various types of loans, 
consumers, loan origination channels, or market segments which would 
justify applying different interpretations regarding offsetting to such 
categories. For example, are the risks to consumers from applying 
either the first or the second interpretation greater in the subprime 
market (i.e., with respect to higher-priced mortgages) than in the 
prime market? If so, should the Bureau use its authority under TILA to 
adopt different interpretations or regulatory approaches for these 
different markets or in adopting either approach in general? The Bureau 
also seeks feedback as to whether, if it were to adopt the first 
alternative in some or all instances, the creditor should be permitted 
to reduce the loan originator compensation by the full amount of points 
and fees included in finance charges or whether the reduction should be 
limited to that portion of points and fees denominated as general 
origination charges, rather than specific fees that are passed through 
to affiliates.
    Furthermore, the Bureau seeks comment on the implications of each 
alternative on protecting consumers pursuant to the ability-to-repay 
requirements, qualified mortgage provisions, and the high-cost mortgage 
provisions of HOEPA. The Bureau also seeks comment on the likely market 
reactions and impacts on the pricing of and access to credit of each 
alternative, particularly as to how such reactions might affect 
interest rate levels, the safe harbor and rebuttable presumption 
afforded to particular qualified mortgages, and application of the 
separate rate threshold for high-cost mortgages under HOEPA and whether 
adjustment to the final rule would be appropriate. The Bureau further 
seeks comment on the implications of both of the above proposed 
alternatives in light of the fact that both the qualified mortgage and 
HOEPA provisions allow certain ``bona fide discount points'' and bona 
fide third party charges to be excluded from the calculation of points 
and fees, but do not do so for affiliate charges.
    As discussed above, the Bureau adopted in the 2013 HOEPA Final Rule 
a requirement that creditors include compensation paid to originators 
of open-end credit plans in points and fees, to the same extent that 
such compensation is required to be included for closed-end credit 
transactions. The Bureau did not receive comments in response to the 
2012 HOEPA Proposal indicating that additional or different guidance 
would be needed to calculate loan originator compensation in the open-
end credit context. The Bureau believes that it would be useful to 
provide the public with an additional opportunity to comment. Thus, the 
Bureau solicits input on what guidance, if any, beyond that provided 
for closed-end credit transactions, would be helpful for creditors in 
calculating loan originator compensation in the open-end credit 
context.
    Finally, the Bureau seeks comment on whether additional guidance or 
regulatory approaches regarding the final rule on inclusion of loan 
originator compensation in points and fees would be useful to protect 
consumers and facilitate compliance. In particular, the Bureau seeks 
comment on whether it would be helpful to provide for additional 
adjustment of the rules or additional commentary to clarify any 
overlaps in definitions between the points and fees provisions in the 
ability-to-repay and HOEPA rulemakings and the provisions that the 
Bureau is separately finalizing in connection with the Bureau's 2012 
Loan Originator Proposal. For example, the Bureau seeks comment on 
whether additional guidance would be useful with regard to treatment of 
compensation by persons who are ``loan originators'' but are not 
employed by a creditor or mortgage broker, given that the loan 
originator compensation rulemaking is implementing provisions of the 
Dodd-Frank Act that specify when employees of retailers of manufactured 
homes, servicers, and other parties are loan originators for Dodd-Frank 
Act purposes.

[[Page 6641]]

Section 1026.35 Prohibited Acts or Practices in Connection With Higher-
Priced Mortgage Loans

35(b) Escrow Accounts
35(b)(2) Exemptions
    Section 1026.35(b)(2)(iii) provides that an escrow account need not 
be established in connection with a mortgage if the creditor operates 
predominantly in rural or underserved areas, originates 500 or fewer 
first-lien mortgages per year, and has total assets less than $2 
billion (adjusted annually for inflation). As discussed below in the 
section-by-section analysis of Sec.  1026.43(e)(5), the Bureau believes 
that it may be important to preserve consistency among Sec.  
1026.35(b)(2) and Sec.  1026.43(e)(5) and (f). The Bureau is not 
proposing specific amendments to Sec.  1026.35(b)(2) because Sec.  
1026.43(e)(5) as proposed is consistent with existing Sec.  
1026.35(b)(2). However, if Sec.  1026.43(e)(5) is adopted with 
significant changes, the Bureau will consider and may adopt parallel 
amendments to Sec.  1026.35(b)(2) and Sec.  1026.43(f) in its final 
rule.
    The Bureau solicits comment on the advantages and disadvantages of 
maintaining consistency between Sec.  1026.35(b)(2) and Sec.  
1026.43(e)(5) and (f) generally and on whether the Bureau should make 
conforming changes to Sec.  1026.35(b)(2) if necessary to maintain 
consistency with specific provisions of Sec.  1026.43(e)(5).

Section 1026.43 Minimum Standards for Transactions Secured by a 
Dwelling

43(a) Scope
43(a)(3)
Applicability of the Ability-to-Repay Requirements
    Section 129C(a)(1) of TILA, as added by section 1411 of the Dodd-
Frank Act, states that, in accordance with regulations prescribed by 
the Bureau, no creditor may make a residential mortgage loan unless the 
creditor makes a reasonable and good faith determination based on 
verified and documented information that, at the time the loan is 
consummated, the consumer has a reasonable ability to repay the loan, 
according to its terms, and all applicable taxes, insurance (including 
mortgage guarantee insurance), and assessments. TILA section 
129C(a)(6)(E) provides certain special rules to govern determinations 
of consumers' ability to repay where a ``hybrid'' loan is being 
refinanced by the same creditor into a ``standard'' product in 
anticipation of a significant risk of default after a reset in rates. 
The statute otherwise applies the same general ability-to-repay 
standards to all residential mortgage loans.
    Section 1401 of the Dodd-Frank Act adds new TILA section 
103(cc)(5), which defines ``residential mortgage loan'' to mean, with 
some exceptions, any consumer credit transaction secured by a mortgage, 
deed of trust, or other equivalent consensual security interest on ``a 
dwelling or on residential real property that includes a dwelling.'' 
TILA section 103(v) defines ``dwelling'' to mean a residential 
structure or mobile home which contains one- to four-family housing 
units, or individual units of condominiums or cooperatives. Thus, a 
``residential mortgage loan'' generally includes all mortgage loans, 
except mortgage loans secured by a structure with more than four 
residential units. However, TILA section 103(cc)(5) specifically 
excludes from the term ``residential mortgage loan'' an open-end credit 
plan or an extension of credit secured by an interest in a timeshare 
plan, for purposes of the ability-to-repay requirements under TILA 
section 129C as well as provisions concerning prepayment penalties and 
other restrictions. In addition, TILA section 129C(a)(8) exempts 
reverse mortgages and temporary or ``bridge'' loans with a term of 12 
months or less from the ability-to-repay requirements.\126\ Thus, taken 
together, the ability-to-repay requirements of TILA section 129C(a) 
apply to all closed-end mortgage loans secured by a one- to four-unit 
dwelling, except loans secured by a consumer's interest in a timeshare 
plan, reverse mortgages, or temporary or ``bridge'' loans with a term 
of 12 months or less.
---------------------------------------------------------------------------

    \126\ In addition, section 129C(i) of TILA also exempts credit 
secured by a consumer's interest in a timeshare from the ability-to-
repay requirements.
---------------------------------------------------------------------------

    The Board's 2011 ATR Proposal included language to implement these 
statutory exemptions and solicited comment on whether any additional 
exemptions were appropriate and consistent with the authority under 
TILA section 129C(b)(3)(B)(i) to modify the provisions related to the 
definition of qualified mortgage.\127\ However, the Board did not 
propose any specific additional exemptions. The Bureau's 2013 ATR Final 
Rule adopted Sec.  1026.43 to implement the provisions of section 129C 
of TILA concerning consideration of consumers' ability to repay, 
limitations on prepayment penalties, and anti-evasion restrictions. The 
final rule's provisions on scope are substantially similar to the 
statute, with modifications to conform to the usage of Regulation Z. 
Section 1026.43(a) provides that Sec.  1026.43 applies to any consumer 
credit transaction that is secured by a dwelling, as defined in Sec.  
1026.2(a)(19), other than: (1) A home equity line of credit subject to 
Sec.  1026.40; or (2) a mortgage transaction secured by a consumer's 
interest in a timeshare plan, as defined in 11 U.S.C. 101(53(D)). 
Further, Sec.  1026.43(a)(3)(i) and (ii) provides that a reverse 
mortgage subject to Sec.  1026.33, or a temporary or ``bridge'' loan 
with a term of 12 months or less, such as a loan to finance the 
purchase of a new dwelling where the consumer plans to sell a current 
dwelling within 12 months or a loan to finance the initial construction 
of a dwelling, are exempt from the ability-to-repay requirements in 
Sec.  1026.43(c) through (f).\128\ Section 1026.43(a)(3)(iii) contains 
a related exemption for the construction phase of a construction-to-
permanent loan.
---------------------------------------------------------------------------

    \127\ See 76 FR 27390, 27448, 27456.
    \128\ Section 1026.43(c) contains the ability-to-repay 
requirements, Sec.  1026.43(d) contains special ability-to-repay 
requirements for certain types of refinancings, Sec.  1026.43(e) 
contains the qualified mortgage provisions, and Sec.  1026.43(f) 
sets forth the provisions regarding balloon payment qualified 
mortgage loans made by certain creditors. Reverse mortgage loans and 
temporary or ``bridge'' loans with a term of 12 months or less 
remain subject to the prepayment penalty provisions in Sec.  
1026.43(g) and the anti-evasion provisions in Sec.  1026.43(h).
---------------------------------------------------------------------------

Concerns Raised in Response to the Board's 2011 ATR Proposal

    In the response to the Board's requests for feedback, many 
commenters requested exemptions from, or modifications to, the ability-
to-repay requirements. Several commenters identified two categories of 
credit that are of particular concern to the Bureau: community-focused 
lending programs and programs intended to stabilize homeownership and 
prevent foreclosure.
    Community-focused lending programs. One industry commenter 
requested that credit extended pursuant to a community-focused lending 
program be excluded from the ability-to-repay requirements. This 
commenter explained that creditors participating in these programs do 
so to benefit the community as a whole and knowingly assume any 
additional risks inherent in such lending. Another industry commenter 
requested broad flexibility for community-focused lending programs, 
noting that mortgage loans financed by State housing finance agencies 
(SHFAs) had lower long-term delinquency and foreclosure rates than 
mortgage loans financed by non-SHFA creditors. Other commenters 
requested a variety of accommodations for community-focused lending 
programs,

[[Page 6642]]

ranging from a request to provide loans originated by SHFAs with 
qualified mortgage status to a request that the Bureau explicitly adopt 
the underwriting standards of SHFAs in the ability-to-repay standards. 
Both industry and consumer advocate commenters argued that community-
focused lending programs provide low- to moderate-income (LMI) 
consumers with responsible and affordable mortgage credit.
    Homeownership stabilization and foreclosure prevention programs. 
Many commenters requested that the Bureau accommodate programs designed 
to stabilize homeownership or mitigate the risks of foreclosure in the 
2013 ATR Final Rule. One industry commenter argued that programs 
developed in response to the financial crisis, such as the Home 
Affordable Refinance Program, should be exempt from the ability-to-
repay requirements. This commenter noted that a complete exemption was 
necessary because many of these programs' requirements conflicted with 
the proposed ability-to-repay requirements. Additional analysis 
conducted by the Bureau confirmed arguments made by commenters that 
programs such as these contain complex and comprehensive underwriting 
requirements.
    The Bureau's proposal. This feedback prompted the Bureau to analyze 
the effects of the ability-to-repay requirements on community-focused 
lending programs and homeownership stabilization and foreclosure 
prevention programs. As explained further below, the Bureau believes 
that several narrowly tailored exemptions from the ability-to-repay 
requirements may be warranted. Specifically, the Bureau is concerned 
that the ability-to-repay requirements could have significant 
unintended consequences on certain community-focused lending programs 
designed to assist LMI consumers to access mortgage credit and certain 
housing stabilization and foreclosure assistance programs designed to 
assist consumers who have been harmed by the aftermath of the financial 
crisis. Because these programs already have carefully calibrated 
underwriting standards and are generally subject to significant 
government monitoring, the Bureau is concerned that overlaying an 
additional set of underwriting requirements and private liabilities 
could divert resources and reduce the effectiveness and availability of 
such programs. Accordingly, to preserve access to credit and promote 
stabilization of the housing market, the Bureau is therefore proposing 
to exempt loans made by certain community-focused creditors and under 
certain housing stabilization programs from the ability-to-repay 
requirements, rather than simply designating these extensions of credit 
as qualified mortgages. However, given the unique underwriting 
characteristics of these extensions of credit and the importance of 
ensuring access to mortgage credit for consumers seeking assistance 
under these programs, the Bureau believes it is important to seek 
additional public comment in crafting these exemptions.
    As detailed below the proposed exemptions are narrowly targeted to 
apply only to certain types of creditors and extensions of credit. For 
example, the exemptions proposed below do not apply to credit extended 
in connection with a proprietary community-lending or foreclosure 
prevention program. The Bureau recognizes that such proprietary 
programs are a critical component of efforts to support housing 
affordability and homeownership stabilization. However, the Bureau 
believes that creditors offering these proprietary programs have the 
resources and flexibility to incorporate the ability-to-repay 
requirements into the programs' existing underwriting requirements. In 
contrast, the Bureau believes that, for certain extensions of credit, 
creditors do not have the resources or flexibility to implement the 
ability-to-repay requirements. The exemptions proposed below are 
intended to address these narrow circumstances to prevent consumers 
from being harmed by unintended consequences caused by application of 
the ability-to-repay requirements.
    As detailed below under each specific proposed provision, the 
Bureau seeks comment on every aspect of this approach. In particular, 
the Bureau seeks comment on the premise that the ability-to-repay 
requirements could impose significant implementation and compliance 
burdens on the designated creditors and programs even if credit 
extended by the designated creditors or under the designated programs 
were granted some protection from liability as qualified mortgages. The 
Bureau also seeks comment on whether the creditors and programs 
identified have sufficiently rigorous underwriting standards and 
monitoring processes to protect the interests of consumers in the 
absence of TILA's ability-to-repay requirements. The Bureau solicits 
feedback specifically regarding the particular requirements of these 
creditors and these programs, how these requirements account for a 
consumer's ability to repay, and whether these requirements duplicate 
or render unnecessary the ability-to-repay provisions of Sec.  
1026.43(c) through (f). The Bureau also requests data related to the 
delinquency, default, and foreclosure rates of consumers participating 
in these programs. Finally, the Bureau requests feedback regarding 
whether such an exemption could harm consumers, such as by denying 
consumers the ability to pursue claims arising under violations of 
Sec.  1026.43(c) through (f) against creditors extending credit in 
connection with these programs. Should the Bureau determine that a full 
exemption is not warranted, the Bureau seeks detailed comment on what 
modifications to the general ability-to-repay standards are warranted, 
or whether qualified mortgage status should be granted instead and, if 
so, under what conditions. The Bureau also solicits feedback on any 
alternative approaches that would preserve the availability of credit 
under HFA programs while ensuring that consumers receive mortgage loans 
that reasonably reflect consumers' ability to repay. Finally, the 
Bureau seeks comment on whether any exemptions or qualified mortgage 
status should be extended to additional programs or creditors, and, if 
so, under what conditions.
43(a)(3)(iv)
    As discussed above, neither TILA nor Regulation Z provide an 
exemption to the ability-to-repay requirements for credit extended 
pursuant to a program administered by a housing finance agency (HFA). 
HFAs are supported by taxpayers, often through tax-exempt bonds but 
occasionally through direct government funding, and conduct diverse 
housing finance activities. For example, an HFA may extend credit 
directly to LMI consumers, insure or purchase mortgage loans originated 
by private creditors in accordance with the requirements of an HFA 
program, or provide other assistance to LMI consumers, such as mortgage 
loan payment subsidies or assistance with the up-front costs of a 
mortgage loan. HFAs are quasi-governmental, nonprofit, entities, 
chartered by either a State or a municipality, that promote affordable 
housing and community development. To achieve these goals, HFA 
underwriting requirements are tailored to the credit characteristics of 
LMI consumers. Credit offered in connection with these programs is 
similarly customized to the meet the unique needs of these consumers 
while ensuring the ongoing financial stability of the HFA. As HFAs 
extend credit to promote long-term housing stability, rather than for 
profit, HFAs generally extend credit after performing a

[[Page 6643]]

complex and lengthy analysis of a consumer's ability to repay which, 
given the unique underwriting characteristics of LMI consumers, often 
gives significant weight to nontraditional underwriting elements, 
extenuating circumstances, and other subjective factors that are 
indicative of responsible homeownership.
    The Bureau is concerned that the ability-to-repay requirements may 
undermine the underwriting requirements of these programs. For example, 
the ability-to-repay provisions may require consideration of 
underwriting factors that are not required under HFA programs, such as 
the consumer's credit history. The Bureau is also concerned that the 
ability-to-repay requirements may affect the ability of HFAs to offer 
extensions of credit customized to meet the needs of LMI consumers 
while promoting long-term housing stability. For example, the Bureau is 
aware of several HFA programs offering mortgage loans that defer the 
repayment of principal until the consumer sells the home or refinances 
the mortgage, unless the consumer maintains the home as the consumer's 
principal residence for 30 years, in which case the deferred principal 
balance is forgiven. This mortgage loan would not be eligible for 
qualified mortgage status under Sec.  1026.43(e) because it provides 
for deferred repayment of principal. Thus, a creditor extending such a 
mortgage loan is required to comply with the ability-to-repay 
requirements of Sec.  1026.43(c).
    Based on these considerations, the Bureau believes that it may be 
appropriate to exempt credit extended pursuant to an HFA program from 
the ability-to-repay requirements. In addition to the issues addressed 
above, the Bureau is especially concerned that the costs of 
implementing and complying with the requirements of Sec.  1026.43(c) 
through (f) would endanger the viability and effectiveness of these 
programs. Nonprofit, taxpayer-supported HFAs may not have sufficient 
resources to implement and comply with the ability-to-repay 
requirements. Some HFAs may respond to the burden by severely 
curtailing the credit offered under these programs. Others may divert 
resources from lending to compliance, which may also result in the 
denial of mortgage credit to low- to moderate-income consumers. Private 
creditors offering credit in connection with HFA programs may determine 
that complying with both the ability-to-repay requirements and the 
specialized HFA program requirements is too burdensome, which also may 
result in the denial of mortgage credit to LMI consumers. These private 
creditors may also determine that the potential liability risk involved 
with applying the ability-to-repay requirements to the unique 
characteristics of HFA consumers is too great, thereby reducing the 
availability of mortgage credit. Further, these programs may employ 
underwriting requirements that are uniquely tailored to meet the needs 
of low- to moderate-income consumers, such that applying the more 
generalized statutory ability-to-repay requirements would be 
unnecessarily burdensome and provide no net benefit to consumers. 
Accordingly, the Bureau is proposing Sec.  1026.43(a)(3)(iv), which 
provides that an extension of credit made pursuant to a program 
administered by a housing finance agency, as defined under 24 CFR 
266.5, is exempt from Sec.  1026.43(c) through (f).
    Section 1026.43(a)(3)(iv) is proposed pursuant to the Bureau's 
authority under section 105(a) and (f) of TILA. Pursuant to section 
105(a) of TILA, the Bureau believes that this exemption is necessary 
and proper to effectuate the purposes of TILA. This exemption would 
ensure that consumers are offered and receive residential mortgage 
loans on terms that reasonably reflect their ability to repay. The 
Bureau believes that mortgage loans originated in connection with 
programs administered by State housing finance agencies sufficiently 
account for a consumer's ability to repay, and the exemption ensures 
that consumers are able to receive assistance under these programs. 
Furthermore, without the exemption the Bureau believes that consumers 
in this demographic would be denied access to the responsible, 
affordable credit offered under these programs, which is contrary to 
the purposes of TILA.
    The Bureau has considered the factors in TILA section 105(f) and 
believes that, for the reasons discussed above, an exemption is 
appropriate under that provision. Specifically, the Bureau believes 
that the proposed exemption is appropriate for all affected consumers, 
regardless of their other financial arrangements and financial 
sophistication and the importance of the loan to them. Similarly, the 
Bureau believes that the proposed exemption is appropriate for all 
affected loans, regardless of the amount of the loan and whether the 
loan is secured by the principal residence of the consumer. 
Furthermore, the Bureau believes that, on balance, the proposed 
exemption will simplify the credit process without undermining the goal 
of consumer protection or denying important benefits to consumers. 
Based on these considerations and the analysis discussed elsewhere in 
this proposal, the Bureau believes that the proposed exemptions are 
appropriate. The Bureau recognizes that its exemption and exception 
authorities apply to a class of transactions, and proposes to apply 
these authorities to the loans covered under the proposal of the 
entities proposed for potential exemption.
43(a)(v)
    As discussed above, neither TILA nor Regulation Z provide an 
exemption to the ability-to-repay requirements for nonprofit creditors. 
Feedback provided in response to solicitations for comment in the 
Board's 2011 ATR Proposal alerted the Bureau to the possibility that 
many charitable organizations that provide credit to low- to moderate-
income consumers would be negatively affected by the requirements of 
Sec.  1026.43(c) through (f). The Bureau is concerned that the ability-
to-repay requirements may result in consumers being denied access to 
the affordable mortgage credit offered by many of these charitable 
organizations. The costs of implementing and complying with the 
requirements of Sec.  1026.43(c) through (f) may be significantly more 
burdensome on creditors that are charitable organizations than other 
creditors. These nonprofit creditors may not have the resources to 
implement and comply with the ability-to-repay requirements, and may 
cease or severely limit extending credit to low- to moderate-income 
consumers, which would result in the denial of responsible, affordable 
mortgage credit.
Credit Extended by CDFIs, CHDOs, and DAPs
    The Bureau has identified several types of creditors that focus on 
extending credit to these consumers. Nonprofit creditors seeking 
designation as a Community Development Financial Institutions (CDFIs) 
by the Treasury Department must undergo a thorough screening process to 
obtain this designation and then must engage in community-focused 
lending to maintain the designation. Creditors designated as 
Downpayment Assistance through Secondary Financing Providers (DAPs) or 
Community Housing Development Organizations (CHDOs) must meet similar 
requirements imposed by the U.S. Department of Housing and Urban 
Development (HUD). The Bureau is concerned that the ability-to-repay 
requirements will negatively affect these creditors, while providing 
little additional protection to consumers.

[[Page 6644]]

    Accordingly, the Bureau proposes Sec.  1026.43(a)(3)(v), which 
provides that an extension of credit made by one of the four types of 
creditors specified in proposed Sec.  1026.43(a)(3)(v)(A) through (D) 
is exempt from Sec.  1026.43(c) through (f). Proposed Sec.  
1026.43(a)(3)(v)(A) exempts an extension of credit made by a creditor 
designated as a Community Development Financial Institution, as defined 
under 12 CFR 1805.104(h). Proposed Sec.  1026.43(a)(3)(v)(B) exempts an 
extension of credit made by a creditor designated as a Downpayment 
Assistance Provider operating in accordance with regulations prescribed 
by the U.S. Department of Housing and Urban Development applicable to 
such persons. Proposed Sec.  1026.43(a)(3)(v)(C) exempts an extension 
of credit made by a creditor designated as a Community Housing 
Development Organization, as defined under 24 CFR 92.2, operating in 
accordance with regulations prescribed by the U.S. Department of 
Housing and Urban Development applicable to such persons. Research 
conducted by the Bureau suggests that these organizations only extend 
credit after determining that an applicant has the ability to repay the 
loan, as part of these organizations' broader purpose of extending 
credit to promote community development. Furthermore, the Bureau 
believes that the requirements imposed in connection with obtaining and 
maintaining the designations identified in proposed Sec.  
1026.43(a)(3)(v)(A) through (C) may be sufficient to ensure that such 
creditors provide consumers with responsible and affordable credit, and 
that unscrupulous or irresponsible creditors would not be able to use 
these designations to evade the requirements of TILA, extend credit 
without regard to the consumer's ability to repay, or otherwise harm 
consumers. However, the Bureau requests feedback regarding this 
exemption and the analysis that supports it.
Credit Extended by Other Nonprofits
    The Bureau believes that charitable organizations other than those 
addressed above also may be negatively affected by the ability-to-repay 
requirements, which may impair the availability of mortgage credit for 
low- to moderate-income consumers. However, the Bureau is concerned 
that an exemption for all charitable organizations would allow 
irresponsible creditors to harm consumers. For example, IRS regulations 
regarding nonprofit status do not incorporate consumer financial 
protection regulations, such as the ability-to-repay requirements. 
Thus, a creditor could operate in accordance with applicable IRS 
regulations while extending credit without regard to a consumer's 
ability to repay, therefore causing the harm that the ability-to-repay 
requirements are intended to prevent. The Bureau is also concerned that 
an exemption for all charitable organizations would allow unscrupulous 
creditors to intentionally circumvent TILA's ability-to-repay 
requirements and harm consumers. For example, IRS regulations require 
nonprofit organizations to file annual financial reports by the 15th 
day of the 5th month after the end of the organization's fiscal 
year.\129\ Thus, an unscrupulous creditor could operate a for-profit 
lending operation, in violation of IRS requirements, and extend credit 
without determining a consumer's ability to repay for 17 months before 
filing the required financial report, which would lead to the loss of 
the creditor's nonprofit designation. Therefore, the Bureau believes 
that an exemption for charitable organizations may be appropriate, if 
the exemption is limited to those charitable organizations that focus 
on low- to moderate-income consumers and will be disproportionately 
affected by the costs associated with the ability-to-repay 
requirements. These nonprofit creditors may not have the resources to 
implement and comply with the ability-to-repay requirements, and may 
cease or severely limit extending credit to LMI consumers, which would 
result in the denial of mortgage credit. Accordingly, proposed Sec.  
1026.43(a)(3)(v)(D) exempts an extension of credit made by a creditor 
with a tax exemption ruling or determination letter from the Internal 
Revenue Service under section 501(c)(3) of the Internal Revenue Code of 
1986 (26 CFR 1.501(c)(3)-1), provided that certain other limitations 
apply.
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    \129\ 26 CFR 1.6033-6(f).
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    Specifically, the exemption is available only if the creditor 
extended credit secured by a dwelling no more than 100 times in the 
calendar year preceding receipt of the consumer's application. The 
Bureau believes that this limit of 100 transactions per year may be 
appropriate because nonprofit creditors that extend credit secured by a 
dwelling fewer than 100 times a year do not have the resources to 
implement and monitor compliance with the ability-to-repay 
requirements. In addition, small creditors such as these may devote 
more time to determining whether a consumer has the ability to repay a 
mortgage loan than a creditor that extends credit more than 100 times a 
year. However, the Bureau solicits feedback on whether this condition 
is appropriate, on the costs of implementing and complying with the 
ability-to-repay requirements that will be incurred by creditors that 
extend credit secured by a dwelling more than 100 times a year, the 
extent to which this proposed condition would affect access to 
responsible, affordable credit, and whether the limit of 100 
transactions per year should be increased or decreased.
    The exemption in proposed Sec.  1026.43(a)(3)(v)(D) is further 
conditioned on the creditor, in the calendar year preceding receipt of 
the consumer's application, extending credit secured by a dwelling only 
to consumers with income that did not exceed the qualifying limit for 
moderate-income families, as established pursuant to section 8 of the 
United States Housing Act of 1937 and amended from time to time by the 
U.S. Department of Housing and Urban Development. Also, the proposed 
exemption is available only if the extension of credit is to a consumer 
with income that does not exceed this qualifying limit.
    The Bureau solicits feedback on whether this exemption, and the 
conditions under which the exemption applies, are appropriate. The 
Bureau also specifically requests comment regarding the costs that 
nonprofit creditors will incur in connection with the ability-to-repay 
requirements, the extent to which these additional costs will affect 
the ability of nonprofit creditors to extend credit to low- to 
moderate-income consumers, and whether consumers could be harmed by 
providing an exemption to the ability-to-repay requirements to the 
creditors described above.
    The proposed exemption under Sec.  1026.43(a)(3)(v)(D) is limited 
to creditors designated as nonprofits under the Internal Revenue Code 
of 1986, and is not available for creditors operating on a for-profit 
basis. The Bureau believes that this distinction may be appropriate and 
necessary. It may be appropriate because of the difference in lending 
practices between nonprofit and other creditors. For-profit creditors 
price and extend credit based on several considerations, including the 
assumption that certain consumers will default and must be foreclosed 
upon. In contrast, the nonprofit creditors identified in Sec.  
1026.43(a)(3)(v)(D) appear to elevate long-term community stability 
over the creditor's economic considerations. Thus, these nonprofits 
appear to have a stronger incentive to determine that an LMI consumer 
has the ability to repay a mortgage loan than for-profit creditors. 
Furthermore, this distinction may be necessary to preserve

[[Page 6645]]

access to responsible and affordable credit. This proposed exemption is 
premised on the belief that the additional costs imposed by the 
ability-to-repay requirements will force certain nonprofit creditors to 
cease extending credit, or substantially limit credit activities, 
thereby harming low- to moderate-income consumers. By definition, for-
profit creditors derive more revenue from mortgage lending activity 
than nonprofit creditors, and therefore presumably have the resources 
to comply with the ability-to-repay requirements. Thus, expanding the 
proposed exemption to apply to for-profit creditors may not be 
necessary to preserve access to responsible, affordable credit. 
However, the Bureau solicits comment regarding this analysis.
    This proposed exemption applies to creditors designated as 
nonprofits under section 501(c)(3), but not 501(c)(4), of the Internal 
Revenue Code of 1986. The Bureau recognizes that these creditors also 
may be affected by the ability-to-repay requirements. However, the 
Bureau believes that this distinction may be appropriate. As explained 
above, the Bureau's proposed exemption is premised on the belief that 
the additional costs imposed by the ability-to-repay requirements will 
force certain nonprofit creditors to cease extending credit, or 
substantially limit credit activities, thereby harming low- to 
moderate-income consumers.
    IRS regulations permit 501(c)(4) nonprofits to engage in lobbying 
and certain political activities. Nonprofit creditors with the 
resources to engage in lobbying or other political activities are 
presumably more likely to have the resources to comply with the 
ability-to-repay requirements. Furthermore, tax-exempt status under 
section 501(c)(3) requires a rigorous application to the government and 
a formal determination by the Internal Revenue Service that an 
organization is ``exclusively'' charitable.\130\ Tax-exempt status 
under other provisions of section 501(c), by contrast, can be merely 
self-proclaimed, without any formal determination by the 
government.\131\ The heightened scrutiny placed on wholly charitable 
organizations by the IRS would help ensure that scrupulous and 
responsible creditors that seek to provide responsible and affordable 
credit qualify for the exemption.
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    \130\ 26 U.S.C. 501(c)(3), 508(a); 26 CFR 1.508-1.
    \131\ Id. See, e.g., U.S. Gov't Accountability Office, GAO-07-
563, Thousands of Organizations Exempt from Federal Income Tax Owe 
Nearly $1 Billion in Payroll and Other Taxes (2007) 5-6.
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    However, the Bureau solicits comment regarding whether the proposed 
exemption should be extended to creditors designated as nonprofits 
under section 501(c)(4) of the Internal Revenue Code of 1986. In 
addition, the Bureau requests financial reports and mortgage lending 
activity data supporting the argument that the marginal cost of 
implementing and complying with the ability-to-repay requirements would 
cause 501(c)(4) nonprofit creditors to cease, or severely limit, 
extending credit to low- to moderate-income consumers.
    Proposed comment 43(a)(3)(v)(D)-1 clarifies that an extension of 
credit is exempt from the requirements of Sec.  1026.43(c) through (f) 
if the credit is extended by a creditor described in Sec.  
1026.43(a)(3)(v)(D), provided the conditions specified in Sec.  
1026.43(a)(3)(v)(D)(1), (2), and (3) are satisfied. The conditions 
specified in Sec.  1026.43(a)(3)(v)(D)(1) and (2) are determined 
according to activity that occurred in the calendar year preceding the 
calendar year in which the consumer's application was received. Section 
1026.43(a)(3)(v)(D)(2) provides that during the preceding calendar 
year, the entity must have extended credit only to consumers with 
income that did not exceed the qualifying limit then in effect for 
moderate-income families, as specified in regulations prescribed by the 
U.S. Department of Housing and Urban Development pursuant to section 8 
of the United States Housing Act of 1937. For example, a creditor has 
satisfied the requirements of Sec.  1026.43(a)(3)(v)(D)(2) if the 
creditor demonstrates that the creditor extended credit only to 
consumers with income that did not exceed the qualifying limit in 
effect on the dates the creditor received each consumer's individual 
application. The condition specified in Sec.  1026.43(a)(3)(v)(D)(3), 
which relates to the current extension of credit, provides that the 
extension of credit must be to a consumer with income that does not 
exceed the qualifying limit specified in Sec.  1026.43(a)(3)(v)(D)(2) 
in effect on the date the creditor received the consumer's application. 
For example, assume that a creditor with a tax exemption ruling under 
section 501(c)(3) of the Internal Revenue Code of 1986 has satisfied 
the conditions identified in Sec.  1026.43(a)(3)(v)(D)(1) and (2). If, 
on May 21, 2014, the creditor in this example extends credit secured by 
a dwelling to a consumer whose application reflected income in excess 
of the qualifying limit identified in Sec.  1026.43(a)(3)(v)(D)(2), the 
creditor has not satisfied the condition in Sec.  
1026.43(a)(3)(v)(D)(3) and this extension of credit is not exempt from 
the requirements of Sec.  1026.43(c) through (f).
Legal Authority
    Section 1026.43(a)(3)(v) is proposed pursuant to the Bureau's 
authority under section 105(a) and (f) of TILA. Pursuant to section 
105(a) of TILA, the Bureau believes that this exemption is necessary 
and proper to effectuate the purposes of TILA. By ensuring the 
viability of the low- to moderate-income mortgage market, this 
exemption would ensure that consumers are offered and receive 
residential mortgage loans on terms that reasonably reflect their 
ability to repay. Without the exemption the Bureau believes that low- 
to moderate-income consumers would be denied access to the responsible 
and affordable credit offered by these creditors, which is contrary to 
the purposes of TILA. This exemption is consistent with the goals of 
TILA section 129C by ensuring that consumers are able to obtain 
responsible, affordable credit from the nonprofit creditors discussed 
above.
    The Bureau has considered the factors in TILA section 105(f) and 
believes that, for the reasons discussed above, an exemption is 
appropriate under that provision. Specifically, the Bureau believes 
that the proposed exemption is appropriate for all affected consumers, 
regardless of their other financial arrangements and financial 
sophistication and the importance of the loan to them. Similarly, the 
Bureau believes that the proposed exemption is appropriate for all 
affected loans, regardless of the amount of the loan and whether the 
loan is secured by the principal residence of the consumer. 
Furthermore, the Bureau believes that, on balance, the proposed 
exemption will simplify the credit process without undermining the goal 
of consumer protection or denying important benefits to consumers. 
Based on these considerations and the analysis discussed elsewhere in 
this proposal, the Bureau believes that the proposed exemptions are 
appropriate. The Bureau recognizes that its exemption and exception 
authorities apply to a class of transactions, and proposes to apply 
these authorities to the loans covered under the proposal of the 
entities proposed for potential exemption.
43(a)(3)(vi)
Background
    Several commenters requested that the Bureau modify the ability-to-
repay requirements to accommodate extensions of credit made pursuant to 
a

[[Page 6646]]

homeownership stabilization or foreclosure prevention program from the 
ability-to-repay requirements. The Bureau is concerned that the 
ability-to-repay requirements are not sufficiently flexible, or may be 
unduly burdensome, with respect to extensions of credit made pursuant 
to these programs, which are intended to assist consumers at risk of 
default, foreclosure, or who were otherwise harmed by the financial 
crisis. Generally, consumers are able to obtain new extensions of 
credit, refinancings of existing mortgage loans, or loan modification 
agreements in connection with these programs. As a threshold matter, 
determining the applicability of these programs to the ability-to-repay 
requirements implicates the refinancing provisions under Sec.  1026.20 
of Regulation Z as well as the payment shock refinancing provisions 
under TILA section 129C(a)(6)(E), as implemented by Sec.  1026.43(d).
    Refinancings generally. Regulation Z contains several provisions 
regarding when a transaction is considered a ``refinancing,'' and 
therefore subject to the requirements of TILA. Section 1026.20(a) 
currently provides that ``a refinancing occurs when an existing 
obligation that was subject to this subpart is satisfied and replaced 
by a new obligation undertaken by the same consumer. A refinancing is a 
new transaction requiring new disclosures to the consumer.'' Comment 
20(a)-1, which clarifies this general definition, provides that a 
refinancing is a new transaction requiring a complete new set of 
disclosures. Whether a refinancing has occurred is determined by 
reference to whether the original obligation has been satisfied or 
extinguished and replaced by a new obligation, based on the parties' 
contract and applicable law. Comment 20(a)-1 further explains that the 
refinancing may involve the consolidation of several existing 
obligations, disbursement of new money to the consumer or on the 
consumer's behalf, or the rescheduling of payments under an existing 
obligation. In any form, the new obligation must completely replace the 
prior one. However, changes in the terms of an existing obligation, 
such as the deferral of individual installments, will not constitute a 
refinancing unless accomplished by the cancellation of that obligation 
and the substitution of a new obligation. Furthermore, a substitution 
of agreements that meets the refinancing definition will require new 
disclosures, even if the substitution does not substantially alter the 
prior credit terms. Comment 20(a)-5 explains that Sec.  1026.20(a) 
applies only to refinancings undertaken by the original creditor or a 
holder or servicer of the original obligation. A ``refinancing'' by any 
other person is a new transaction under the regulation, not a 
refinancing under Sec.  1026.20(a).
    There are five types of transactions, identified in Sec.  
1026.20(a)(1) through (5), that are not considered refinances, three of 
which are relevant for purposes of these proposed exemptions. First, 
Sec.  1026.20(a)(1) provides that a renewal of a single payment 
obligation with no change in the original terms shall not be treated as 
a refinancing. Comment 20(a)(1)-1 clarifies that this exception applies 
both to obligations with a single payment of principal and interest and 
to obligations with periodic payments of interest and a final payment 
of principal. In determining whether a new obligation replacing an old 
one is a renewal of the original terms or a refinancing, the creditor 
may consider it a renewal even if: (1) Accrued unpaid interest is added 
to the principal balance; (2) changes are made in the terms of renewal 
resulting from the factors listed in Sec.  1026.17(c)(3); \132\ and (3) 
the principal at renewal is reduced by a curtailment of the obligation.
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    \132\ Section 1026.17(c)(3) provides that the creditor may 
disregard the effects of the following in making calculations and 
disclosures: (i) That payments must be collected in whole cents; 
(ii) that dates of scheduled payments and advances may be changed 
because the scheduled date is not a business day; (iii) that months 
have different numbers of days; and (iv) the occurrence of leap 
year.
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    Second, Sec.  1026.20(a)(2) provides that a reduction in the APR 
with a corresponding change in the payment schedule shall not be 
considered a refinancing. Comment 20(a)(2)-1 explains that ``a 
reduction in the annual percentage rate with a corresponding change in 
the payment schedule is not a refinancing. If the annual percentage 
rate is subsequently increased (even though it remains below its 
original level) and the increase is effected in such a way that the old 
obligation is satisfied and replaced, new disclosures must then be 
made.'' Comment 20(a)(2)-2 further clarifies that a corresponding 
change in the payment schedule to implement a lower APR would be a 
shortening of the maturity, or a reduction in the payment amount or the 
number of payments of an obligation. Additionally, the exemption in 
Sec.  1026.20(a)(2) does not apply if the maturity is lengthened, or if 
the payment amount or number of payments is increased beyond that 
remaining on the existing transaction.
    Third, Sec.  1026.20(a)(4) provides that a change in the payment 
schedule or a change in collateral requirements as a result of the 
consumer's default or delinquency, unless the rate is increased, or the 
new amount financed exceeds the unpaid balance plus earned finance 
charge and premiums for continuation of insurance of the types 
described in Sec.  1026.4(d) shall not be considered a refinancing. 
Comment 20(a)(4)-1, which refers to the agreements described in Sec.  
1026.20(a)(4) as ``workout agreements,'' explains that a workout 
agreement is not a refinancing unless the APR is increased or 
additional credit is advanced beyond amounts already accrued plus 
insurance premiums.
    TILA section 129C(a)(6)(E). As discussed further in the Bureau's 
2013 ATR Final Rule, two provisions of section 1411 of the Dodd-Frank 
Act address refinancing of existing mortgage loans under the ability-
to-repay requirements. As amended by the Dodd-Frank Act, TILA section 
129C(a)(5) provides that Federal agencies may create an exemption from 
the income and verification requirements for certain streamlined 
refinancings of loans made, guaranteed, or insured by various federal 
agencies. 15 U.S.C. 1639(a)(5). In addition, TILA section 129C(a)(6)(E) 
provides special ability-to-repay requirements to encourage 
applications to refinance existing ``hybrid loans'' into ``standard 
loans'' with the same creditor, where the consumer has not been 
delinquent on any payments on the existing loan and the monthly 
payments would be reduced under the refinanced loan. 15 U.S.C. 
1639c(a)(6)(E). The statute allows creditors to give special weight to 
the mortgagor's good standing and to whether the refinancing would 
prevent a likely default after the interest rate on the existing loan 
resets, as well as other potentially favorable treatment to the 
consumer. However, it does not expressly exempt applications for such 
``payment shock refinancings'' from TILA's general ability-to-repay 
requirements.
    The Bureau implemented TILA section 129C(a)(6)(E) in Sec.  
1026.43(d). Although the Bureau used its authority to interpret and 
implement TILA to modify the payment shock refinancing provisions, 
Sec.  1026.43(d) still applies to only a narrow category of 
refinancings. Specifically, Sec.  1026.43(d) applies only if:
     The refinancing is conducted in response to an application 
to refinance a non-standard mortgage into a standard mortgage;
     The creditor for the standard mortgage is the current 
holder of the existing non-standard mortgage or the

[[Page 6647]]

servicer acting on behalf of the current holder;
     The creditor receives the consumer's written application 
for the standard mortgage before the non-standard mortgage is recast;
     The creditor considers whether the standard mortgage 
likely will prevent a default by the consumer on the non-standard 
mortgage once the loan is recast;
     The creditor determines that the monthly payment for the 
standard mortgage is materially lower than the monthly payment for the 
non-standard mortgage, as calculated under Sec.  1026.43(d)(5);
     The consumer has made no more than one payment more than 
30 days late on the non-standard mortgage during the 12 months 
immediately preceding the application for refinancing;
     The consumer has made no payments more than 30 days late 
during the six months immediately preceding the creditor's receipt of 
the consumer's written application for the standard mortgage; and
     If the non-standard mortgage was consummated on or after 
January 10, 2014, the non-standard mortgage was made in accordance with 
Sec.  1026.43(c) or (e), as applicable.
    With the exception of the last requirement, which the Bureau added 
using discretionary authority to prevent potential evasion of the 
statutory scheme, all of these requirements are based on statutory 
text. The definition of ``standard mortgage'' also constrains 
application of the provision; while it does not require that the non-
standard loan be replaced by a qualified mortgage, it does incorporate 
some of the product feature protections from the qualified mortgage 
framework.\133\ Thus, while Sec.  1026.43(d) may facilitate 
refinancings for some consumers at risk of default, Sec.  1026.43(d) 
would not apply to many extensions of credit made in connection with 
homeownership stabilization or foreclosure prevention programs. These 
extensions of credit remain subject to the ability-to-repay 
requirements.
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    \133\ Specifically, Sec.  1026.43(d)(1)(ii) also defines 
``standard mortgage'' as an extension of credit subject to the 
ability-to-repay requirements: (1) that provides for regular 
periodic payments that do not cause the principal balance to 
increase, allow the consumer to defer repayment of principal, or 
result in a balloon payment, as defined in Sec.  1026.18(s)(5)(i); 
(2) for which the total points and fees payable in connection with 
the transaction do not exceed the amounts specified for qualified 
mortgages in Sec.  1026.43(e)(3); (3) for which the term does not 
exceed 40 years; (4) for which the interest rate is fixed for at 
least the first five years after the date on which the first regular 
periodic payment will be due; and (5) for which the proceeds from 
the loan are used solely to pay off the outstanding principal 
balance on the non-standard mortgage, or to pay closing or 
settlement charges required to be disclosed under the Real Estate 
Settlement Procedures Act, 12 U.S.C. 2601 et seq.
---------------------------------------------------------------------------

    Concerns raised in response to the Board's 2011 ATR Proposal. In 
response to the Board's request for feedback, many commenters requested 
that the Bureau accommodate programs designed to stabilize 
homeownership or mitigate the risks of foreclosure in the 2013 ATR 
Final Rule. One industry commenter argued that programs developed in 
response to the financial crisis, such as the Home Affordable Refinance 
Program, should be exempt from the ability-to-repay requirements. This 
commenter noted that a complete exemption was necessary because many of 
these programs' requirements conflicted with the proposed ability-to-
repay requirements.
Discussion
    Prompted by the feedback provided, the Bureau has conducted a 
thorough review of homeownership stabilization programs under sections 
101 and 109 of the Emergency Economic Stabilization Act of 2008 (12 
U.S.C. 5211, 5219) (EESA), such as the Making Home Affordable program 
administered by the Treasury Department. Based on this analysis, the 
Bureau believes it may be appropriate to exempt any extension of credit 
under these programs from the ability-to-repay requirements.
    At the outset the Bureau notes that some of the activities 
conducted under these EESA programs (as well as a wide variety of 
proprietary loan modification programs by private creditors) would not 
trigger ability-to-repay requirements because such transactions involve 
modifications of existing loans by the holder or servicer of the 
original loan obligation rather than a new extension of credit through 
a refinancing. As discussed above, Regulation Z distinguishes between 
refinancing of an existing credit obligation by a creditor that is not 
the holder or servicer of the existing obligation, which trigger 
generally TILA's requirements, and refinancings by the existing holder 
or servicer, which trigger TILA's requirements under certain 
circumstances. Specifically, with regard to activities by the holder or 
servicer of the existing obligation, Sec.  1026.20(a) and related 
commentary state that a refinancing that triggers TILA disclosures only 
occurs where there is a new extension of credit that entirely replaces 
an existing obligation with a new obligation undertaken by the same 
consumer. As discussed above, the regulation and commentary distinguish 
lesser modifications that do not completely extinguish the original 
obligation and further provide various exceptions stating that certain 
activities by the holder or servicer of the original obligation do not 
constitute refinancings that trigger disclosure requirements even if 
the activities involve replacement of the original obligation. The list 
of such exceptions includes certain credit renewals (including those 
with principal reductions), reductions in APR with corresponding 
changes in the payment schedule, and certain ``workout agreements'' in 
response to a consumer's default or delinquency.
    Although many activities conducted under these EESA programs do not 
implicate TILA, the Bureau is concerned that the ability-to-repay 
requirements may deter creditors from participating in these programs. 
The Bureau is concerned that where refinancings and other new 
extensions of credit are involved, application of the ability-to-repay 
requirements and liabilities in addition to existing EESA program 
requirements could significantly chill creditor participation. The 
requirements of these programs appear to be comprehensive and tailored 
to the specific needs of consumers who are at risk of default or 
foreclosure. The Bureau also is concerned that requiring credit 
extended pursuant to these programs to comply with the ability-to-repay 
provisions may unnecessarily interfere with these unique underwriting 
requirements, which would make it more difficult for many consumers to 
qualify for assistance and increase the cost of credit for those who 
do, thereby impacting the availability of credit for these at-risk 
consumers. Further, participation in the programs is entirely 
voluntary, and already involves substantial compliance burdens in order 
to satisfy Federal requirements. If those burdens are exacerbated by 
the addition of the ability-to-repay requirements, the Bureau is 
concerned that creditors may elect not to participate in these 
programs, rather than investing resources complying with the 
requirements of both homeownership stabilization programs and the 
ability-to-repay provisions. A response such as this would frustrate 
efforts to ameliorate the effects of the financial crisis and disrupt 
the financial market for consumers at risk of foreclosure or default, 
thereby harming those in need of the assistance provided under these 
programs.
    Due to these factors, the Bureau has considered whether it would be 
practical to address potential chilling effects with only a narrow 
exemption from or modification to the ability-to-repay requirements. An 
exemption from

[[Page 6648]]

only the requirement to consider the consumer's debt-to-income ratio 
under Sec.  1026.43(c)(2)(7), or a modification to the refinancing 
provisions in Sec.  1026.43(d), for instance, may address only 
partially the inconsistencies between the requirements of these 
programs and the ability-to-repay requirements. Also, if redundancies 
or inconsistencies such as these exist, the ability-to-repay 
requirements may not provide additional, meaningful protection to 
consumers.
    Accordingly, proposed Sec.  1026.43(a)(3)(vi) provides that an 
extension of credit made pursuant to a program authorized by sections 
101 and 109 of the Emergency Economic Stabilization Act of 2008 (12 
U.S.C. 5211; 5219) is exempt from Sec.  1026.43(c) through (f). 
Although this proposed exemption may help consumers who are at risk of 
default or foreclosure and are likely to need responsible and 
affordable credit, the Bureau wishes to obtain additional information 
regarding whether consumers seeking assistance under these Federal 
programs may need the protection afforded by the ability-to-repay 
requirements. Therefore, in addition to soliciting general feedback 
regarding whether this proposed exemption is appropriate, the Bureau 
solicits feedback regarding whether applicability of the ability-to-
repay requirements would constrict the availability of credit offered 
under these programs, whether consumers have suffered financial loss or 
other harm by creditors participating in these programs, and the extent 
to which the requirements of these Federal programs account for a 
consumer's ability to repay.
    Proposed comment 43(a)(3)(vi)-1 explains that creditors need not 
determine whether an activity under EESA constitutes a loan 
modification or workout, a refinancing that is subject to new 
disclosures under Sec.  1026.20(a), or an independent extension of new 
credit that would trigger TILA requirements in any event. Under any of 
these scenarios, Sec.  1026.43(c) through (f) would not apply. In this 
respect, the exemption proposed under Sec.  1026.43(a)(3)(vi) is 
broader than the proposed exemptions for other housing stabilization 
programs. Creditors participating in the other housing stabilization 
programs identified in proposed Sec.  1026.43(a)(3)(vii) and (viii) 
would not be subject to ability-to-repay requirements when providing 
loan modifications and workouts, and would be exempt when conducting 
refinancings under Sec.  1026.20(a) as the holder or servicer of the 
original obligation. However, independent refinancings as third-party 
creditors would be subject to ability-to-repay requirements under the 
narrower exemptions provided for housing stabilization programs offered 
by the Federal Housing Administration, Department of Veterans Affairs, 
Department of Agriculture, or Fannie Mae or Freddie Mac while they are 
under conservatorship.
    Section 1026.43(a)(3)(vi) is proposed pursuant to the Bureau's 
authority under section 105(a) and (f) of TILA. Pursuant to section 
105(a) of TILA, the Bureau finds that this exemption is necessary and 
proper to effectuate the purposes of TILA. This exemption would ensure 
that consumers are offered and receive residential mortgage loans on 
terms that reasonably reflect their ability to repay. In the Bureau's 
judgment extensions of credit made pursuant to a program authorized by 
sections 101 and 109 of the Emergency Economic Stabilization Act of 
2008 sufficiently account for a consumer's ability to repay, and the 
exemption ensures that consumers are able to receive assistance under 
these programs. Furthermore, without the exemption the Bureau believes 
that consumers at risk of default or foreclosure would be denied access 
to the responsible, affordable credit offered under these programs, 
which is contrary to the purposes of TILA.
    The Bureau has considered the factors in TILA section 105(f) and 
believes that, for the reasons discussed above, an exemption is 
appropriate under that provision. Specifically, the Bureau believes 
that the proposed exemption is appropriate for all affected consumers, 
regardless of their other financial arrangements and financial 
sophistication and the importance of the loan to them. Similarly, the 
Bureau believes that the proposed exemption is appropriate for all 
affected loans, regardless of the amount of the loan and whether the 
loan is secured by the principal residence of the consumer. 
Furthermore, the Bureau believes that, on balance, the proposed 
exemption will simplify the credit process without undermining the goal 
of consumer protection or denying important benefits to consumers. 
Based on these considerations and the analysis discussed elsewhere in 
this proposal, the Bureau believes that the proposed exemptions are 
appropriate. The Bureau recognizes that its exemption and exception 
authorities apply to a class of transactions, and proposes to apply 
these authorities to the loans covered under the proposal of the 
entities proposed for potential exemption.
43(a)(3)(vii)
    As discussed under Sec.  1026.43(a)(3)(vi) above, a transaction is 
subject to the ability-to-repay requirements if, pursuant to the 
definition of refinancing under Sec.  1026.20(a), the existing 
obligation is satisfied and replaced by the new obligation, provided 
that the transaction is not otherwise exempt under Sec.  1026.20(a)(1) 
through (5).
    Section 129C(a)(5) of TILA, as added by section 1411 of the Dodd-
Frank Act, provides that the Department of Housing and Urban 
Development, the Department of Veterans Affairs, the Department of 
Agriculture, and the Rural Housing Service may modify certain ability-
to-repay requirements, with respect to certain loans made, guaranteed, 
or insured by such agencies. These agencies may exempt refinancings 
from the income verification requirements in TILA section 129C(a)(4) 
provided that the conditions identified in TILA section 129C(a)(5)(A) 
through (G) are met. Specifically, the consumer must not be 30 days or 
more past due on the prior existing residential mortgage loan, the 
refinancing may not increase the principal balance outstanding on the 
prior existing residential mortgage loan, except to the extent of fees 
and charges allowed by the department or agency making, guaranteeing, 
or insuring the refinancing, and the total points and fees (as defined 
in TILA section 103(aa)(4), other than bona fide third party charges 
not retained by the mortgage originator, creditor, or an affiliate of 
either) payable in connection with the refinancing do not exceed 3 
percent of the total new loan amount. Further, the interest rate on the 
refinancing must be lower than the interest rate of the original loan, 
unless the consumer is replacing an adjustable-rate loan with a fixed-
rate loan, under guidelines that the department or agency shall 
establish for loans they make, guarantee, or issue. The refinancing 
must also be subject to a payment schedule that will fully amortize the 
refinancing and does not result in a balloon payment, as defined in 
TILA section 129C(b)(2)(A)(ii), in accordance with the regulations 
prescribed by the department or agency making, guaranteeing, or 
insuring the refinancing. The final condition provides that both the 
residential mortgage loan being replaced and the new refinancing must 
satisfy all requirements of the department or agency making, 
guaranteeing, or insuring the refinancing.
    The Board solicited feedback in its 2011 ATR Proposal regarding the 
impact

[[Page 6649]]

of certain proposed provisions related to refinancings. The Board 
requested comment regarding whether exemptions from the ability-to-
repay requirements, other than those proposed, were appropriate.\134\ 
The Board specifically solicited comment on whether there were any 
appropriate exemptions consistent with the Board's authority in TILA 
section 129C(b)(3)(B)(i).\135\ Several commenters argued that the 
ability-to-repay requirements adopted by the Bureau should account for 
the requirements of Federal agency programs. Some commenters stated 
that Federal agency loans, such as loans made under a program 
administered by the U.S. Department of Housing and Urban Development, 
should be exempt from several of the ability-to-repay requirements.
---------------------------------------------------------------------------

    \134\ 76 FR 27390, 27448.
    \135\ 76 FR 27390, 27456.
---------------------------------------------------------------------------

    The Federal agencies described above have not yet prescribed rules 
related to the ability-to-repay requirements for refinances, pursuant 
to TILA section 129C(a)(5), or the definition of qualified mortgage, 
pursuant to TILA section 129C(b)(3)(B)(ii). An exemption to the 
ability-to-repay requirements may be necessary until these Federal 
agencies have prescribed such rules. Without such an exemption, the 
Bureau is concerned that the ability-to-repay provisions would 
unnecessarily interfere with requirements of these Federal agency 
refinance programs, which would make it more difficult for many 
consumers to qualify for these programs and increase the cost of credit 
for those who do, thereby constraining the availability of responsible, 
affordable credit for consumers.
    Accordingly, the Bureau is proposing Sec.  1026.43(a)(3)(vii), 
which provides that an extension of credit that is a refinancing, as 
defined under Sec.  1026.20(a) but without regard for whether the 
creditor is the creditor, holder, or servicer of the original 
obligation, that is eligible to be insured, guaranteed, or made 
pursuant to a program administered by the Federal Housing 
Administration, U.S. Department of Veterans Affairs, or the U.S. 
Department of Agriculture is exempt from Sec.  1026.43(c) through (f), 
provided that the agency administering the program under which the 
extension of credit is eligible to be insured, guaranteed, or made has 
not prescribed rules pursuant to section 129C(a)(5) or 
129C(b)(3)(B)(ii) of TILA. The Bureau solicits comment regarding 
whether this exemption is appropriate, whether there are any additional 
conditions that should be required, whether the ability-to-repay 
requirements would negatively affect the availability of credit offered 
under Federal agency programs, and whether consumers could be harmed by 
exempting these extensions of credit from the ability-to-repay 
requirements.
    As explained above, TILA section 129C(a)(5) permits the Department 
of Housing and Urban Development, the Department of Veterans Affairs, 
the Department of Agriculture, and the Rural Housing Service to exempt 
certain refinancings from the income verification requirements in TILA 
section 129C(a)(4) provided that the conditions identified in TILA 
section 129C(a)(5)(A) through (G) are met. For the reasons discussed in 
this section the Bureau believes that this temporary exemption may be 
necessary to preserve access to affordable and responsible credit by 
maintaining the status quo in the Federal agency refinancing market 
until the Federal agencies exercise the authority granted under TILA 
section 129C(a)(5) or issue rules implementing TILA section 
129C(b)(3)(B)(ii). The temporary nature of this exemption ensures that 
these Federal agencies retain their discretionary authority under TILA 
section 129C(a)(5).
    Proposed comment 43(a)(3)(vii)-1 clarifies that the requirements of 
Sec.  1026.43(c) through (f) do not apply to an extension of credit 
that is a refinancing, as defined by Sec.  1026.20(a) but without 
regard for whether the creditor is the creditor, holder, or servicer of 
the original obligation, that is eligible to be insured, guaranteed, or 
made pursuant to programs administered by the Federal agencies 
identified in Sec.  1026.43(a)(3)(vii), provided that rules issued by 
such agencies pursuant to TILA section 129C(a)(5) or 129C(b)(3)(B)(ii) 
have not become effective on or before the date the refinancing is 
consummated. This proposed comment also provides three illustrative 
examples. The first example clarifies that, if a consumer applies for a 
refinancing that is eligible to be insured, guaranteed, or made 
pursuant to a program administered by the U.S. Department of Veterans 
Affairs, and the U.S. Department of Veterans Affairs has issued rules 
pursuant to section 129C(a)(5) or 129C(b)(3)(B)(ii) of TILA that have 
become effective, the exemption in Sec.  1026.43(a)(3)(vii) does not 
apply because those rules will separately govern the status of U.S. 
Department of Veterans Affairs loans.
    The second illustrative example in proposed comment 43(a)(3)(vii)-1 
rests on two assumptions: first, that a consumer applies for a 
refinancing of a subordinate-lien mortgage loan that is eligible to be 
insured, guaranteed, or made pursuant to a program administered by the 
U.S. Department of Veterans Affairs and the U.S. Department of Veterans 
Affairs has issued rules pursuant to TILA section 129C(b)(3)(B)(ii) or 
129C(a)(5) that have become effective; second, that such effective 
rules apply to refinancings of first-lien mortgage loans, but not 
subordinate-lien mortgage loans. Based on these assumptions the 
exemption in Sec.  1026.43(a)(3)(vii) does not apply, regardless of the 
status of the particular loans under the rules issued, because the U.S. 
Department of Veterans Affairs has issued rules pursuant to TILA 
section 129C(b)(3)(B)(ii) or 129C(a)(5) that have become effective. The 
exemption does not apply even if the applicability of such Federal 
agency rules is determined based on program type instead of loan type. 
Thus, the exemption in Sec.  1026.43(a)(3)(vii) does not apply even if 
the U.S. Department of Veterans Affairs rules do not apply to the 
particular U.S. Department of Veterans Affairs program under which the 
refinancing is eligible to be insured, guaranteed, or made.
    The third illustrative example under proposed comment 
43(a)(3)(vii)-1 is also predicated on two assumptions: First, that a 
consumer applies for a refinancing that is eligible to be insured, 
guaranteed, or made pursuant to a program administered by the Federal 
Housing Administration and the Federal Housing Administration has 
issued rules pursuant to TILA section 129C(b)(3)(B)(ii) or 129C(a)(5) 
that have become effective; second, that the refinancing for which the 
consumer applies is also eligible to be insured, guaranteed, or made 
pursuant to a program administered by the U.S. Department of 
Agriculture, but the U.S. Department of Agriculture has not issued 
rules pursuant to TILA section 129C(b)(3)(B)(ii) or 129C(a)(5), or the 
U.S. Department of Agriculture has issued rules implementing TILA 
section 129C(b)(3)(B)(ii) or 129C(a)(5) that have not yet taken effect 
at the time the refinancing is consummated. Based on these assumptions 
the exemption applies to that refinancing because the refinancing is 
eligible to be insured, guaranteed, or made pursuant to a program 
administered by a Federal agency identified in Sec.  
1026.43(a)(3)(vii), and such Federal agency has not issued rules 
pursuant to section 129C(b)(3)(B)(ii) or 129C(a)(5) of TILA that have 
become effective.
    Section 1026.43(a)(3)(vii) is proposed pursuant to the Bureau's 
authority under section 105(a) and (f) of TILA. Pursuant to section 
105(a) of TILA, the Bureau finds that this exemption is

[[Page 6650]]

necessary and proper to effectuate the purposes of TILA. This exemption 
would ensure that consumers are offered and receive residential 
mortgage loans on terms that reasonably reflect their ability to repay. 
In the Bureau's judgment refinancings made pursuant to the Federal 
agency refinancing programs discussed above sufficiently account for a 
consumer's ability to repay, and the exemption ensures that consumers 
are able to obtain refinancing credit under these programs. 
Furthermore, without the exemption the Bureau believes that consumers 
seeking Federal agency refinancings would be denied access to the 
responsible, affordable credit offered under these programs, which is 
contrary to the purposes of TILA.
    The Bureau has considered the factors in TILA section 105(f) and 
believes that, for the reasons discussed above, an exemption is 
appropriate under that provision. Specifically, the Bureau believes 
that the proposed exemption is appropriate for all affected consumers, 
regardless of their other financial arrangements and financial 
sophistication and the importance of the loan to them. Similarly, the 
Bureau believes that the proposed exemption is appropriate for all 
affected loans, regardless of the amount of the loan and whether the 
loan is secured by the principal residence of the consumer. 
Furthermore, the Bureau believes that, on balance, the proposed 
exemption will simplify the credit process without undermining the goal 
of consumer protection or denying important benefits to consumers. 
Based on these considerations and the analysis discussed elsewhere in 
this proposal, the Bureau believes that the proposed exemptions are 
appropriate. The Bureau recognizes that its exemption and exception 
authorities apply to a class of transactions, and proposes to apply 
these authorities to the loans covered under the proposal of the 
entities proposed for potential exemption.
43(a)(3)(viii)
    As discussed under Sec.  1026.43(a) above, Sec.  1026.43(c), which 
implements section 129C(a)(1) of TILA, requires a creditor to make a 
reasonable and good faith determination based on verified and 
documented information that, at the time the mortgage loan is 
consummated, the consumer has a reasonable ability to repay the loan 
according to its terms, including all applicable taxes, insurance 
(including mortgage guarantee insurance), and assessments. Section 
1026.43(a)(1) through (3), which implements TILA sections 103(cc)(5) 
and 129C(a)(8), applies these ability-to-repay requirements to all 
closed-end mortgage loans secured by a one- to four-unit dwelling, 
except loans secured by a consumer's interest in a timeshare plan, 
reverse mortgages, temporary or ``bridge'' loans with a term of 12 
months or less, and the construction phrase of a construction-to-
permanent loan. As discussed under Sec.  1026.43(a)(3)(vi) above, a 
transaction is subject to the ability-to-repay requirements if, 
pursuant to the definition of refinancing under Sec.  1026.20(a), the 
existing obligation is satisfied and replaced by the new obligation, 
provided that the transaction is not otherwise exempt under Sec.  
1026.20(a)(1) through (5).
    The Board did not include an exemption related to refinancing 
programs administered by Fannie Mae or Freddie Mac in its 2011 ATR 
Proposal. However, the Board solicited feedback regarding the impact of 
certain proposed provisions related to refinancings. The Board 
requested comment regarding whether exemptions from the ability-to-
repay requirements, other than those proposed, were appropriate.\136\ 
The Board specifically solicited comment on whether there were any 
appropriate exemptions consistent with the Board's authority in TILA 
section 129C(b)(3)(B)(i).\137\ In response, industry commenters, 
industry trade organization commenters, GSE commenters, and consumer 
advocate commenters argued that the ability-to-repay requirements 
should accommodate loans held by Fannie Mae and Freddie Mac while in 
conservatorship.
---------------------------------------------------------------------------

    \136\ 76 FR 27390, 27448.
    \137\ 76 FR 27390, 27456.
---------------------------------------------------------------------------

    As with the Federal homeownership stabilization and Federal agency 
refinance programs discussed above, the Bureau is concerned that 
application of the ability-to-repay requirements may constrict certain 
types of credit, thereby harming certain consumers. The risk of 
impairing credit availability is of particular concern with respect to 
programs offered by Fannie Mae and Freddie Mac intended to provide 
affordable refinancings to consumers harmed by the financial crisis. As 
discussed in part III above, programs such as HARP enable consumers 
with high loan-to-value ratios to obtain affordable refinancings. The 
GSEs implemented these programs while under the conservatorship of 
FHFA, which has defined these programs as ``eligible targeted 
refinancing programs.'' \138\ These programs are intended to assist 
consumers with loan-to-value ratios that are high enough to make 
obtaining a refinancing difficult, if not impossible. Programs such as 
HARP employ underwriting requirements tailored to the unique 
characteristics of these consumers. The GSEs have modified these 
programs over time to increase the number of distressed consumers 
eligible for an affordable refinancing. As the GSEs have expanded 
access to these programs, FHFA has ensured that these programs require 
careful underwriting. These carefully calibrated underwriting 
requirements promote GSE stability by ensuring that consumers who 
receive these refinancings are able to repay the loan.
---------------------------------------------------------------------------

    \138\ See, e.g., 12 CFR 1291.1; 74 FR 38514, 38516 (Aug. 4, 
2009).
---------------------------------------------------------------------------

    Given the complexity of underwriting requirements for programs such 
as HARP, the Bureau is concerned that the ability-to-repay requirements 
may add unnecessary additional costs and may cause needless delays for 
consumers who seek refinancings pursuant to an eligible targeted 
refinancing program offered by one of these entities. While HARP, which 
is the most well-known eligible targeted refinancing program, is 
scheduled to expire prior to the effective date of the Bureau's 2013 
ATR Final Rule, FHFA may decide to extend this program, or design a 
similar program intended to preserve credit for distressed homeowners. 
Furthermore, the risk of harm to consumers may be insignificant while 
these entities remain in conservatorship. The current GSE underwriting 
requirements for targeted eligible refinancing programs appear to 
sufficiently account for the consumer's ability to repay the mortgage 
loan, and FHFA supervision may be sufficient to ensure that consumers 
are extended only affordable and responsible refinancings by these 
entities.
    Accordingly, the Bureau is proposing Sec.  1026.43(a)(3)(viii), 
which provides that an extension of credit that is a refinancing, as 
defined under Sec.  1026.20(a) but without regard for whether the 
creditor is the creditor, holder, or servicer of the original 
obligation, that is eligible for purchase or guarantee by Fannie Mae or 
Freddie Mac is exempt from Sec.  1026.43(c) through (f), provided that 
the refinancing is made pursuant to an eligible targeted refinancing 
program, as defined under 12 CFR 1291.1, that such entities are 
operating under the conservatorship or receivership of the Federal 
Housing Finance Agency pursuant to section 1367 of the Federal Housing 
Enterprises Financial Safety and Soundness Act of 1992 (12 U.S.C. 
4617(i)) on the date the refinancing is consummated, that the existing 
obligation satisfied and replaced by the refinancing is owned by Fannie 
Mae or Freddie Mac, that the existing obligation

[[Page 6651]]

satisfied and replaced by the refinancing was not consummated on or 
after January 10, 2014, and that the refinancing was not consummated on 
or after January 10, 2021. Although this proposed exemption may be 
appropriate, the Bureau is concerned that unscrupulous creditors may 
use the exemption to engage in loan-flipping or other harmful 
practices. Therefore, the Bureau believes that this exemption should be 
limited to transactions where the existing obligation satisfied and 
replaced by the refinancing was not consummated on or after January 10, 
2014, the effective date of the Bureau's 2013 ATR Final Rule. The 
Bureau requests feedback on whether this exemption is appropriate, 
whether this exemption will ensure access to responsible and affordable 
refinancing credit, and whether consumers could be harmed by this 
exemption.
    The proposed exemption refers to eligible targeted refinancing 
programs, as defined pursuant to regulations prescribed by FHFA. As 
discussed above, the Bureau believes that FHFA oversight is important 
to ensure that distressed consumers receive refinancing credit extended 
in a responsible manner. Further, the Bureau believes that referring to 
FHFA regulations will ensure that any modifications to the definition 
will be made after notice and comment, thereby affording the public and 
the Bureau the opportunity to address potential changes. However, the 
Bureau requests comment regarding whether it would be more appropriate 
to refer to another public method of identifying these programs, and, 
if so, what method of public identification would be appropriate. The 
Bureau also solicits feedback regarding whether reference to a notice 
published by FHFA pursuant to 12 CFR 1253.3 or 1253.4 would facilitate 
compliance more effectively than the proposed reference to 12 CFR 
1291.1.
    Proposed comment 43(a)(3)(viii)-1 explains that Sec.  
1026.43(a)(3)(viii) provides an exemption from the requirements of 
Sec.  1026.43(c) through (f) for certain extensions of credit that are 
considered refinancings, as defined in Sec.  1026.20(a) but without 
regard for whether the creditor is the creditor, holder, or servicer of 
the original obligation, that are eligible for purchase or guarantee by 
Fannie Mae or Freddie Mac. The comment further explains that the 
exemption provided by Sec.  1026.43(a)(3)(viii) is available only while 
these entities remain in conservatorship. For example, if Fannie Mae 
remains in conservatorship, but Freddie Mac exits conservatorship, the 
exemption continues to apply to refinancings that are eligible for 
purchase by Fannie Mae, provided the other conditions specified in 
Sec.  1026.43(a)(3)(viii) are met. Further, as noted above, the 
exemption is available only if the existing obligation that will be 
satisfied and replaced by the refinancing was consummated prior to 
January 10, 2014. For example, if a consumer applies for an extension 
of credit that is a refinancing, as defined by Sec.  1026.20(a), that 
is eligible to be purchased by Fannie Mae or Freddie Mac, but the 
consumer's current mortgage loan was consummated on or after January 
10, 2014, the exemption provided by Sec.  1026.43(a)(3)(viii) does not 
apply.
    Section 1026.43(a)(3)(viii) is proposed pursuant to the Bureau's 
authority under section 105(a) and (f) of TILA. Pursuant to section 
105(a) of TILA, the Bureau finds that this exemption is necessary and 
proper to effectuate the purposes of TILA. This exemption would ensure 
that consumers are offered and receive residential mortgage loans on 
terms that reasonably reflect their ability to repay. In the Bureau's 
judgment the exemption ensures that consumers are able to obtain credit 
under refinancing programs administered by Fannie Mae and Freddie Mac. 
Furthermore, without the exemption the Bureau believes that consumers 
seeking a refinancing would be denied access to the responsible, 
affordable credit offered by these entities, which is contrary to the 
purposes of TILA.
    The Bureau has considered the factors in TILA section 105(f) and 
believes that, for the reasons discussed above, an exemption is 
appropriate under that provision. Specifically, the Bureau believes 
that the proposed exemption is appropriate for all affected consumers, 
regardless of their other financial arrangements and financial 
sophistication and the importance of the loan to them. Similarly, the 
Bureau believes that the proposed exemption is appropriate for all 
affected loans, regardless of the amount of the loan and whether the 
loan is secured by the principal residence of the consumer. 
Furthermore, the Bureau believes that, on balance, the proposed 
exemption will simplify the credit process without undermining the goal 
of consumer protection or denying important benefits to consumers. 
Based on these considerations and the analysis discussed elsewhere in 
this proposal, the Bureau believes that the proposed exemptions are 
appropriate. The Bureau recognizes that its exemption and exception 
authorities apply to a class of transactions, and proposes to apply 
these authorities to the loans covered under the proposal of the 
entities proposed for potential exemption.

43(b) Definitions

43(b)(4)
Background
    TILA section 129C(a)(1) through (4) and the Bureau's rules 
thereunder, Sec.  1026.43(c), prohibit a creditor from making a 
residential mortgage loan unless the creditor makes a reasonable, good 
faith determination, based on verified and documented information, that 
the consumer has a reasonable ability to repay the loan. TILA section 
129C(b) provides a safe harbor or rebuttable presumption of compliance 
with regard to these ability-to-repay requirements if a loan is a 
qualified mortgage. In general, a loan with a balloon payment cannot be 
a qualified mortgage. However, TILA section 129C(b)(2)(E) provides that 
certain balloon loans originated and held in portfolio by small 
creditors operating predominantly in rural or underserved areas can be 
qualified mortgages. Creditors may view qualified mortgage status as 
important at least in part because TILA section 130(a) and (k) provides 
that, if a creditor fails to comply with the ability-to-repay 
requirements, a consumer may be able to recover special statutory 
damages equal to the sum of all finance charges and fees paid within 
the first three years after consummation and may be able to assert the 
creditor's failure to comply to obtain recoupment or setoff in a 
foreclosure action even after the statute of limitations for 
affirmative claims has passed. TILA section 129C(b)(3)(B)(i) authorizes 
the Bureau to prescribe regulations that revise, add to, or subtract 
from the criteria that define a qualified mortgage upon a finding that 
such regulations are, among other things, necessary or proper to ensure 
that responsible, affordable credit remains available to consumers in a 
manner consistent with the purposes of TILA section 129C.
    Section 1026.43(e) and (f) defines three categories of qualified 
mortgages. First, Sec.  1026.43(e)(2) provides a general definition of 
a qualified mortgage. Second, Sec.  1026.43(e)(4) provides that certain 
loans that are eligible to be purchased, guaranteed, or insured by 
certain governmental entities or Fannie Mae or Freddie Mac while 
operating under conservatorship are qualified mortgages. Section 
1026.43(e)(4) expires after seven years and may expire sooner with 
respect to some loans if other governmental entities exercise their

[[Page 6652]]

rulemaking authority under TILA section 129C. Third, Sec.  1026.43(f) 
provides that certain balloon loans are qualified mortgages if they are 
made by a small creditor that:
     Had total assets less than $2 billion (adjusted for 
inflation) as of the end of the preceding calendar year;
     Together with all affiliates, extended 500 or fewer first-
lien covered transactions during the preceding calendar year; and
     Extended more than 50 percent of its total covered 
transactions secured by properties that are in rural or underserved 
areas during the preceding calendar year.

Section 1026.43(f) includes only loans held in portfolio by these small 
creditors. Therefore, it includes only loans that were not subject, at 
consummation, to a commitment to be acquired by any other person. In 
addition, to prevent evasion, Sec.  1026.43(f) includes only loans that 
are held in portfolio by the originating creditor for at least three 
years, subject to certain exceptions.
    Section 1026.43(e)(1) provides that a qualified mortgage, 
regardless of which regulatory definition it falls under, may be 
subject to one of two different levels of protection from liability 
based on whether or not it is a higher-priced covered transaction as 
defined in Sec.  1026.43(b)(4). Under Sec.  1026.43(e)(1)(i), a 
qualified mortgage that is not a higher-priced covered transaction is 
subject to a conclusive presumption of compliance, or safe harbor. In 
contrast, under Sec.  1026.43(e)(1)(ii) a qualified mortgage that is a 
higher-priced covered transaction is subject to a rebuttable 
presumption of compliance.
    Section 1026.43(b)(4) defines a higher-priced covered transaction 
to mean a transaction within the scope of Sec.  1026.43 with an annual 
percentage rate that exceeds the average prime offer rate for a 
comparable transaction as of the date the interest rate is set by 1.5 
or more percentage points for a first-lien covered transaction or by 
3.5 or more percentage points for a subordinate-lien covered 
transaction. These thresholds generally conform to the thresholds for 
``higher-priced mortgage loans'' under Sec.  1026.35.

The Bureau's Proposal Regarding Small Creditor Portfolio Loans

    As discussed in the section-by-section analysis of Sec.  
1026.43(e)(5) below, the Bureau is proposing to create an additional 
category of qualified mortgages that would include certain loans 
originated and held in portfolio by small creditors. The Bureau 
proposes to amend Sec.  1026.43(b)(4) to provide that a first-lien loan 
that is a qualified mortgage under proposed Sec.  1026.43(e)(5) would 
be a higher-priced covered transaction if the annual percentage rate 
exceeds the average prime offer rate for a comparable transaction by 
3.5 or more percentage points. This would have the effect of extending 
the qualified mortgage safe harbor to first-lien qualified mortgages 
made and held in portfolio by certain small creditors, as described in 
proposed Sec.  1026.43(e)(5), that have an annual percentage rate 
between 1.5 and 3.5 percentage points higher than the average prime 
offer rate. Without the proposed change to Sec.  1026.43(b)(4), these 
loans would be considered higher-priced covered transactions and would 
fall under the rebuttable presumption of compliance described in Sec.  
1026.43(e)(1)(ii).
    The Bureau believes that the proposed change may be warranted to 
preserve access to credit for some consumers. As discussed above in 
part III, the Bureau understands that small creditors are a significant 
source of loans that do not conform to the requirements for government 
guarantee and insurance programs or purchase by entities such as Fannie 
Mae and Freddie Mac. The Bureau understands that larger creditors may 
be unwilling to make at least some of these loans because the consumers 
or properties involved do not conform to the standardized underwriting 
criteria used by larger creditors or are illiquid because they are non-
conforming and therefore entail greater risk. For similar reasons, the 
Bureau understands that larger creditors may be unwilling to purchase 
such loans. Small creditors often are willing to evaluate the merits of 
unique consumers and properties using flexible underwriting criteria 
and make highly individualized underwriting decisions. Small creditors 
often hold these loans on their balance sheets, retaining the 
associated credit, liquidity, and other risks.
    The Bureau also understands that small creditors are a significant 
source of credit in rural areas. As discussed above in part III, small 
creditors are significantly more likely than larger creditors to 
operate offices in rural areas, and there are hundreds of counties 
nationwide where the only creditors are small creditors and hundreds 
more where larger creditors have only a limited presence.
    The Bureau also understands that small creditors may charge 
consumers higher interest rates and fees than larger creditors for 
several legitimate business reasons. As discussed above in part III, 
small creditors may pay more for funds than larger creditors. Small 
creditors generally rely heavily on deposits to fund lending activities 
and therefore pay more in expenses per dollar of revenue as interest 
rates fall and the spread between loan yields and deposit costs narrow. 
Small creditors also may rely more on interest income than larger 
creditors, as larger creditors obtain higher percentages of their 
income from noninterest sources such as trading, investment banking, 
and fiduciary services.
    In addition, small creditors may find it more difficult to limit 
their exposure to interest rate risk than larger creditors and 
therefore may charge higher rates to compensate for that exposure. 
Similarly, any individual loan poses a proportionally more significant 
credit risk to a smaller creditor than to a larger creditor, and small 
creditors may charge higher rates or fees to compensate for that risk. 
Consumers obtaining loans that cannot readily be sold into the 
securitization markets also may pay higher interest rates and fees to 
compensate for the risk associated with the illiquidity of such loans.
    Small creditors have repeatedly asserted to the Bureau and to other 
regulators that they are unable or unwilling to assume the risk of 
litigation associated with the ability-to-repay requirements and 
therefore are unwilling to make loans outside the scope of the 
qualified mortgage safe harbor. The Bureau does not believe that the 
regulatory requirement to make a reasonable and good faith 
determination based on verified and documented evidence that a consumer 
has a reasonable ability to repay would entail significant litigation 
risk for small creditors. As discussed in part III above, small 
creditors as a group have consistently experienced lower credit losses 
for residential mortgage loans than larger creditors. The Bureau 
believes this is strong evidence that small creditors have historically 
engaged in responsible mortgage underwriting that includes considered 
determinations of consumers' ability to repay, at least in part because 
they bear the risk of default associated with loans held in their 
portfolios. The Bureau also believes that because many small creditors 
use a lending model based on maintaining ongoing relationships with 
their customers and have specialized knowledge of the community in 
which they operate, they therefore may have a more comprehensive 
understanding of their customers' financial circumstances and may be 
better able to assess ability to repay than larger creditors. In 
addition, the Bureau believes that small creditors operating in limited 
geographical areas may face significant

[[Page 6653]]

risk of harm to their reputation within their community if they make 
loans that consumers cannot repay.
    However, the Bureau acknowledges that small creditors may be 
particularly burdened by the time, effort, and cost of ability-to-repay 
litigation and that it may be particularly difficult for small 
creditors to absorb the cost of adverse judgments. The Bureau therefore 
believes that small creditors may have a particular need for the 
protection from liability the qualified mortgage safe harbor provides.
    The Bureau notes that the Board's proposed Sec.  1026.43 did not 
include special provisions for portfolio loans made by small creditors 
and the Board's proposal did not address such an accommodation. 
However, several commenters on the Board's proposal urged the Bureau to 
adopt less stringent regulatory requirements for small creditors or for 
loans held in portfolio by small creditors. For example, at least two 
commenters on the Board's proposal, a credit union and a state trade 
group for small banks, urged the Bureau to exempt small portfolio 
creditors from the ability to repay and qualified mortgage rule. Two 
other trade group commenters urged the Bureau to adopt less stringent 
regulatory requirements for small creditors than for larger creditors 
at least in part because mortgage loans made by small creditors often 
are held in portfolio and therefore historically have been 
conservatively underwritten. A number of other commenters expressed 
concerns that the availability of portfolio mortgage loans from small 
creditors would be severely limited because the proposed exception for 
rural balloon loans was too restrictive. In addition, small creditors' 
concerns about compliance with the ability-to-repay rule and their 
perceived litigation risk have been repeatedly expressed to the Bureau 
by their trade associations and prudential regulators.
    The existing qualified mortgage safe harbor applies only to loans 
for which the annual percentage rate is less than 1.5 percentage points 
above the average prime offer rate for comparable transactions. For the 
reasons stated above, the Bureau believes that many loans made by small 
creditors would exceed the current annual percentage rate threshold. 
The Bureau therefore is concerned that small creditors may reduce the 
number of mortgage loans they make or cease making mortgage loans 
altogether if subjected to the current ability-to-repay and qualified 
mortgage rules. The availability of mortgage credit for some consumers 
therefore could be limited. The Bureau believes that raising the 
interest rate threshold as proposed will preserve access to 
responsible, affordable credit for consumers that are unable to obtain 
less costly loans from other creditors because they do not qualify for 
conforming loans or because they live in rural or underserved areas.
    Accordingly, the Bureau is proposing to use its authority under 
TILA sections 105(a) and 129C(b)(3)(B)(i) to permit certain small 
creditors to make first-lien portfolio loans at a higher annual 
percentage rate and still benefit from the qualified mortgage safe 
harbor. For the reasons stated above, the Bureau believes the proposed 
amendments are consistent with the purposes of TILA generally and TILA 
section 129C specifically. The Bureau solicits comment regarding 
whether the proposed amendment to Sec.  1026.43(b)(4) is needed to 
preserve access to responsible, affordable mortgage credit and 
regarding any adverse effects the proposed amendment would have on 
consumers. The Bureau also solicits comment on the proposed 3.5 
percentage point threshold and whether another threshold would be more 
appropriate. Finally, the Bureau solicits comment on whether, in order 
to preserve access to mortgage credit, the Bureau also should raise the 
threshold for subordinate-lien covered transactions that are qualified 
mortgages under Sec.  1026.43(e)(5), and, if so, what threshold would 
be appropriate for those loans.
    As discussed above, the Bureau is aware that certain small 
creditors originate balloon loans to hedge against interest rate risk. 
These small creditors usually offer consumers refinancings before the 
balloon payment becomes due. The Bureau believes that most small 
creditors that follow this practice will be eligible for either the 
balloon loan qualified mortgage provision in Sec.  1026.43(f) or the 
small creditor portfolio exemption in proposed Sec.  1026.43(e)(5). 
However, the Bureau solicits feedback regarding whether there are small 
creditors that would not be covered by these provisions. If such small 
creditors exist, the Bureau requests feedback regarding whether these 
creditors need additional time, beyond the January 10, 2014 effective 
date of the Bureau's 2013 ATR Final Rule, to comply with the ability-
to-repay requirements, or if such creditors require any additional 
accommodations, modifications, or exemptions.
The Bureau's Proposal Regarding Balloon Loans
    The Bureau also is proposing to amend the definition of higher-
priced covered transaction in Sec.  1026.43(b)(4) with respect to 
qualified mortgages that are balloon loans originated and held in 
portfolio by small creditors operating predominantly in rural or 
underserved areas as described in Sec.  1026.43(f). The Board proposes 
to amend Sec.  1026.43(b)(4) to provide that a first-lien loan that is 
a qualified mortgage under Sec.  1026.43(f) is a higher-priced covered 
transaction if the annual percentage rate exceeds the average prime 
offer rate for a comparable transaction by 3.5 or more percentage 
points. This would have the effect of extending the qualified mortgage 
safe harbor described in Sec.  1026.43(e)(1)(i) to first-lien balloon 
loans made and held in portfolio by small creditors operating 
predominantly in rural or underserved areas, as described in Sec.  
1026.43(f), that have an annual percentage rate between 1.5 and 3.5 
percentage points above the average prime offer rate. Without the 
proposed change to Sec.  1026.43(b)(4), these loans would be considered 
higher-priced covered transactions and would fall under the rebuttable 
presumption of compliance described in Sec.  1026.43(e)(1)(ii).
    The Bureau believes that the proposed change may be necessary to 
preserve access to responsible, affordable mortgage credit for 
consumers in rural and underserved areas. As discussed in part III 
above, the Bureau understands that larger creditors often are not 
present in rural and underserved areas and that the only sources of 
mortgage credit available to consumers in these areas therefore may be 
small creditors. The Bureau also understands that many of the small 
creditors lending in these areas depend on balloon payment features to 
limit their interest rate risk. These creditors rely on the fact that 
consumers will be forced to refinance before the balloon payment 
becomes due, giving the creditor an opportunity to impose a higher 
interest rate if, for example, market interest rates have risen.
    These small creditors have repeatedly asserted to the Bureau and 
other regulators that they will not continue to extend mortgage credit 
unless they can make balloon loans that are covered by the qualified 
mortgage safe harbor. Section 1026.43(f), which implements TILA section 
129C(b)(2)(E), provides that certain balloon loans made and held in 
portfolio by small creditors operating predominantly in rural or 
underserved areas are qualified mortgages. However, the Bureau believes 
that many of these qualified mortgages will have annual percentage 
rates higher than the safe harbor threshold.

[[Page 6654]]

    As discussed above with regard to the Bureau's proposal regarding 
small creditor portfolio loans and in part III, small creditors, 
including small creditors operating in rural and underserved areas, may 
charge consumers higher interest rates and fees for several legitimate 
business reasons. Small creditors may pay more for funds than larger 
creditors. Small creditors generally rely heavily on deposits to fund 
lending activities and therefore pay more in expenses per dollar of 
revenue as interest rates fall and the spread between loan yields and 
deposit costs narrow. Small creditors also may rely more on interest 
income than larger creditors, as larger creditors obtain a higher 
percentage of their income from noninterest sources such as trading, 
investment banking, and fiduciary services.
    In addition, small creditors may find it more difficult to limit 
their exposure to interest rate risk than larger creditors and 
therefore may charge higher rates to compensate for that exposure. 
Similarly, any individual loan poses a proportionally more significant 
credit risk to a smaller creditor than to a larger creditor, and small 
creditors may charge higher rates or fees to compensate for that risk. 
Consumers obtaining loans that cannot readily be sold into the 
securitization markets may also pay higher interest rates and fees to 
compensate for the risk associated with the illiquidity of such loans.
    As also discussed above, the Bureau does not believe that small 
creditors, including those operating in rural and underserved areas, 
face significant litigation risk from the ability-to-repay 
requirements. Small creditors as a group have consistently experienced 
lower credit losses for residential mortgages than larger creditors. 
The Bureau believes this is strong evidence that small creditors have 
historically engaged in responsible mortgage underwriting that includes 
considered determinations of consumers' ability to repay, at least in 
part because they bear the risk of default associated with loans held 
in their portfolios. The Bureau also believes that because many small 
creditors use a lending model based on maintaining ongoing 
relationships with their customers and have specialized knowledge of 
the communities in which they operate, they therefore may have a more 
comprehensive understanding of their customers' financial circumstances 
and may be better able to assess ability to repay than larger 
creditors. In addition, the Bureau believes that small creditors 
operating in limited geographical areas may face significant risk of 
harm to their reputation within their community if they make loans that 
consumers cannot repay.
    However, the Bureau acknowledges that small creditors may be 
particularly burdened by the time, effort, and cost of ability-to-repay 
litigation and that it may be particularly difficult for small 
creditors to absorb the cost of adverse judgments. The Bureau therefore 
believes that small creditors may have a particular need for the 
protection from liability the qualified mortgage safe harbor provides.
    The existing qualified mortgage safe harbor applies to first-lien 
loans only if the annual percentage rate is less than 1.5 percentage 
points above the average prime offer rate for comparable transactions. 
The Bureau believes that many balloon loans made by small creditors 
operating in rural and underserved areas will exceed that threshold. 
The Bureau therefore is concerned that, unless Sec.  1026.43(b)(4) is 
amended, small creditors operating in rural and underserved areas may 
reduce the number of mortgage loans they make or stop making mortgage 
loans altogether, further limiting the availability of mortgage credit 
in rural and underserved areas.
    Accordingly, the Bureau therefore believes that it may be necessary 
to use its authority under TILA sections 105(a) and 129C(b)(3)(B)(i) to 
amend Sec.  1026.43(b)(4) as proposed in order to ensure that Sec.  
1026.43(f) has the desired effect of preserving access to responsible, 
affordable mortgage credit in rural and underserved areas. For the 
reasons stated above, the Bureau believes the proposed amendments are 
consistent with the purposes of TILA generally and TILA section 129C in 
particular. Providing for qualified mortgages on this basis would 
ensure that consumers are offered and receive residential mortgage 
loans on terms that reasonably reflect their ability to repay and that 
responsible affordable mortgage credit remains available to consumers 
in a manner consistent with the purposes of the ability-to-repay 
requirements.
    The Bureau is proposing this amendment rather than finalizing it as 
part of the 2013 ATR Final Rule in order to solicit comment on the 
following issues, among others. The Bureau solicits comment regarding 
whether the proposed amendment to Sec.  1026.43(b)(4) is needed to 
preserve access to responsible, affordable mortgage credit in rural and 
underserved areas and regarding any adverse effects the proposed 
amendment would have on consumers in these or other areas. The Bureau 
also solicits comment on the 3.5 percentage point threshold and whether 
another threshold would be more appropriate. Finally, the Bureau 
solicits comment on whether, in order to preserve access to mortgage 
credit in rural and underserved areas, the Bureau also should raise the 
threshold for subordinate-lien covered transactions that are qualified 
mortgages under Sec.  1026.43(f), and, if so, what threshold would be 
appropriate.

43(e) Qualified Mortgages

43(e)(1) Safe Harbor and Presumption of Compliance
    TILA section 129C(a)(1) through (4) and the Bureau's rules 
thereunder, Sec.  1026.43(c), generally prohibit a creditor from making 
a residential mortgage loan unless the creditor makes a reasonable, 
good faith determination that the consumer has a reasonable ability to 
repay the loan. TILA section 129C(b) and the Bureau's rules thereunder, 
Sec.  1026.43(e), provide a safe harbor or rebuttable presumption of 
compliance with regard to these ability-to-repay requirements if a loan 
is a qualified mortgage.
    As described above, Sec.  1026.43(e)(1)(i) provides that a creditor 
or assignee of a qualified mortgage that is not a higher-priced covered 
transaction, as defined in Sec.  1026.43(b)(4), complies with the 
repayment ability requirements. In contrast, Sec.  1026.43(e)(1)(ii) 
provides that a creditor or assignee of a qualified mortgage that is a 
higher-priced covered transaction is presumed to comply with the 
repayment ability requirements, but that presumption can be rebutted by 
a consumer under certain circumstances. Section 1026.43(e)(2), (e)(4), 
and (f) establishes standards for three categories of qualified 
mortgages, as discussed further below.
    The Bureau proposes to make conforming changes to Sec.  
1026.43(e)(1) to include references to a new category of qualified 
mortgages defined by proposed Sec.  1026.43(e)(5). Section 
1026.43(e)(5) qualified mortgages would be covered by the safe harbor 
described in Sec.  1026.43(e)(1)(i) if they are not higher-priced 
covered transactions and would be subject to the rebuttable presumption 
of compliance described in Sec.  1026.43(e)(1)(ii) if they are higher-
priced covered transactions. However, the Bureau is proposing to apply 
a different definition of higher-priced covered transaction to first-
lien qualified mortgages defined under Sec.  1026.43(e)(5). The 
section-by-section analysis of Sec.  1026.43(b)(4), above, describes 
the proposed alternate definition of higher-priced covered 
transactions. The section-by-section analysis of proposed Sec.  
1026.43(e)(5),

[[Page 6655]]

below, describes the proposed new category of qualified mortgages.
43(e)(2) Qualified Mortgage Defined--General
    The Bureau proposes to make a conforming amendment to Sec.  
1026.43(e)(2) to include a reference to Sec.  1026.43(e)(5), as 
described in the section-by-section analysis of proposed Sec.  
1026.43(e)(5), below.
43(e)(5) Qualified Mortgage Defined--Small Creditor Portfolio Loans
Background
    TILA section 129C(a)(1) through (4) and the Bureau's rules 
thereunder, Sec.  1026.43(c), prohibit a creditor from making a 
residential mortgage loan unless the creditor makes a reasonable, good 
faith determination, based on verified and documented information, that 
the consumer has a reasonable ability to repay the loan. TILA section 
129C(b) provides that a creditor or assignee may presume that a loan 
has met the ability-to-repay requirements if a loan is a qualified 
mortgage. Creditors may view qualified mortgage status as important at 
least in part because TILA section 130 provides that, if a creditor 
fails to comply with the ability-to-repay requirements, a consumer may 
be able to recover special statutory damages equal to the sum of all 
finance charges and fees paid within the first three years after 
consummation and may be able to assert the creditor's failure to comply 
to obtain recoupment or setoff in a foreclosure action even after the 
statute of limitations on affirmative claims has expired. TILA section 
129C(b)(2)(A)(vi) authorizes, but does not require, the Bureau to 
establish limits on debt-to-income ratio or other measures of a 
consumer's ability to pay regular expenses after making payments on 
mortgage and other debts. TILA section 129C(b)(3)(B)(i) authorizes the 
Bureau to revise, add to, or subtract from the criteria that define a 
qualified mortgage upon a finding that such regulations are, among 
other things, necessary or proper to ensure that responsible, 
affordable credit remains available to consumers in a manner consistent 
with the purposes of TILA section 129C or necessary and appropriate to 
effectuate the purposes of TILA sections 129B and 129C.
    Section 1026.43(e) and (f) defines three categories of qualified 
mortgages. First, Sec.  1026.43(e)(2) prescribes the general definition 
of a qualified mortgage. Under Sec.  1026.43(e)(2), a covered 
transaction is a qualified mortgage if: it does not include negative 
amortization, interest-only, or balloon features; it has a term not in 
excess of 30 years; it complies with the limits on points and fees 
detailed in Sec.  1026.43(e)(3); the underwriter calculated the 
required payments in a specified way; the creditor considered and 
verified certain factors related to the consumer's ability to repay; 
and the consumer's monthly debt-to-income ratio, calculated according 
to instructions in appendix Q, does not exceed 43 percent. Second, 
Sec.  1026.43(e)(4) provides that certain loans that are eligible to be 
purchased, guaranteed, or insured by certain governmental entities or 
Fannie Mae or Freddie Mac while operating under conservatorship are 
qualified mortgages. Section 1026.43(e)(4) expires seven years after 
its effective date and may expire earlier with respect to certain loans 
if other government entities exercise their rulemaking authority under 
TILA section 129C or if the GSEs exit conservatorship. Third, Sec.  
1026.43(f) provides that certain loans with a balloon payment made by 
small creditors operating predominantly in rural or underserved areas 
are qualified mortgages.
The Bureau's Proposal
    Proposed Sec.  1026.43(e)(5) would define a fourth category of 
qualified mortgages which would include loans originated and held in 
portfolio by certain small creditors. This additional category of 
qualified mortgages would be similar in several respects to Sec.  
1026.43(f), which provides that certain balloon loans made by small 
creditors operating predominantly in rural or underserved areas are 
qualified mortgages. As under Sec.  1026.43(f), the additional category 
would include loans originated by small creditors, as defined by asset-
size and transaction thresholds, and held in portfolio by those 
creditors. However, proposed Sec.  1026.43(e)(5) would not be limited 
to small creditors operating predominantly in rural or underserved 
areas and would not include loans that have a balloon payment.
    Specifically, the new category would include certain loans 
originated by creditors that:
     Have total assets that do not exceed $2 billion as of the 
end of the preceding calendar year (adjusted annually for inflation); 
and
     Together with all affiliates, extended 500 or fewer first-
lien covered transactions during the preceding calendar year.
    The proposed additional category would include only loans held in 
portfolio by these creditors. Therefore, proposed Sec.  1026.43(e)(5) 
would provide that a loan must not be subject at consummation to a 
commitment to be acquired by any person other than a person that also 
meets the above asset-size and number of transactions criteria. Section 
1026.43(e)(5) also would provide that a loan would lose its qualified 
mortgage status under Sec.  1026.43(e)(5) if it is sold, assigned, or 
otherwise transferred, subject to exceptions for transfers that are 
made three or more years after consummation, to another qualifying 
institution, as required by a supervisory action, or pursuant to a 
merger or acquisition.
    The loan also would have to conform to all of the requirements 
under the Sec.  1026.43(e)(2) general definition of a qualified 
mortgage except with regard to monthly debt-to-income ratio. In other 
words, the loan could not have:
     Negative amortization, interest-only, or balloon payment 
features;
     A term longer than 30 years; and
     Points and fees greater than 3 percent of the total loan 
amount (or, for smaller loans, a specified amount).
    When underwriting the loan the creditor would have to take into 
account the monthly payment for any mortgage-related obligations, and:
     Use the maximum interest rate that may apply during the 
first five years and periodic payments of principal and interest that 
will repay the full principal; and
     Consider and verify the consumer's current and reasonably 
expected income or assets other than the value of the property securing 
the loan.
    The creditor also would be required to consider the consumer's 
debt-to-income ratio or residual income and to verify the underlying 
information generally in accordance with Sec.  1026.43(c). In contrast, 
the general definition of a qualified mortgage in Sec.  1026.43(e)(2) 
requires a creditor to calculate the consumer's debt-to-income ratio 
according to instructions in appendix Q and specifies that the 
consumer's debt-to-income ratio must be 43 percent or less.
    As with all qualified mortgages, a qualified mortgage under Sec.  
1026.43(e)(5) would receive either a rebuttable or conclusive 
presumption of compliance with the ability-to-repay requirements in 
Sec.  1026.43(c), depending on the annual percentage rate. However, as 
described above in the section-by-section analysis of Sec.  
1026.43(b)(4), the Bureau is proposing an alternate definition of 
higher-priced covered transaction that would apply to first-lien 
covered transactions that are qualified mortgages under proposed Sec.  
1026.43(e)(5). Amended as proposed, Sec.  1026.43(b)(4) would provide 
that a first-lien covered transaction that is a qualified mortgage 
under proposed

[[Page 6656]]

Sec.  1026.43(e)(5) is a higher-priced covered transaction if the 
annual percentage rate exceeds the average prime offer rate for a 
comparable transaction by 3.5 or more percentage points. This would 
have the effect of extending the qualified mortgage safe harbor 
described in Sec.  1026.43(e)(1)(i) to first-lien qualified mortgages 
defined under proposed Sec.  1026.43(e)(5) even if those loans have 
annual percentage rates between 1.5 and 3.5 percentage points higher 
than the average prime offer rate. Without the proposed amendment to 
Sec.  1026.43(b)(4), such loans would be covered by the rebuttable 
presumption of compliance described in Sec.  1026.43(e)(1)(ii). This 
proposal and the Bureau's rationale for it are discussed in more detail 
in the section-by-section analysis of Sec.  1026.43(b)(4), above.
    The Bureau believes the proposed change is necessary to preserve 
access to responsible, affordable credit for some consumers. As 
discussed above in part III and the section-by-section analysis of 
Sec.  1026.43(b)(4), the Bureau understands that small creditors are a 
significant source of non-conforming mortgage credit. The Bureau 
believes that many of these loans would not be made by larger creditors 
because the consumers or properties involved are not readily assessed 
using the standardized underwriting criteria used by larger creditors 
or because larger creditors are unwilling to make loans that cannot be 
sold to the securitization markets. The Bureau therefore believes that 
access to mortgage credit for some consumers could be restricted if 
small creditors stopped making non-conforming loans.
    The Bureau believes that such an impact could be particularly 
significant in rural areas, where the Bureau understands that small 
creditors are a significant source of credit. Small creditors are 
significantly more likely than larger creditors to operate offices in 
rural areas, and there are hundreds of counties nationwide where the 
only creditors are small creditors and hundreds more where larger 
creditors have only a limited presence.
    The Bureau believes that, as discussed above, small creditors' 
lower credit losses for residential mortgage loans are evidence that 
small creditors are particularly well suited to originating 
responsible, affordable mortgage credit. The Bureau believes small 
creditors may be better able to assess ability to repay because they 
are more likely to base underwriting decisions on local knowledge and 
nonstandard data and less likely to rely on standardized underwriting 
criteria. Because many small creditors use a lending model based on 
maintaining ongoing relationships with their customers, they may have a 
more comprehensive understanding of their customer's financial 
circumstances. Small creditors' lending activities often are limited to 
a single community, allowing the creditor to have an in-depth 
understanding of the economic and other circumstances of that 
community. In addition, because small creditors often consider a 
smaller volume of applications for mortgage credit, small creditors may 
be more willing to consider the unique facts and circumstances 
attendant to each consumer and property and senior personnel are more 
likely to be able to bring their judgment to bear regarding individual 
underwriting decisions.
    Small creditors have particularly strong incentives to make careful 
assessments of a consumer's ability to repay because small creditors 
bear the risk of default associated with loans held in portfolio and 
because each loan represents a proportionally greater risk to a small 
creditor than to a larger one. In addition, small creditors operating 
in limited geographical areas may face significant risk of harm to 
their reputation within their community if they make loans that 
consumers cannot repay.
    The Bureau does not believe that small creditors face significant 
litigation risk from the ability-to-repay requirements. For the reasons 
stated above, the Bureau believes that small creditors as a group 
generally are better positioned to assess ability to repay than larger 
creditors, have particularly strong incentives to accurately assess 
ability to repay independent of the threat of ability-to-repay 
litigation, and historically have been very successful at accurately 
assessing ability to repay, as demonstrated by their comparatively low 
credit losses. In addition, the Bureau believes that because many small 
creditors use a lending model based on maintaining ongoing 
relationships with their customers, those customers may be more likely 
to pursue alternatives to litigation in the event that difficulties 
with a loan arise. The Bureau therefore believes that it is unlikely 
that small creditors will face significant liability for claims of 
noncompliance filed by their customers or will be significantly 
disadvantaged by recoupment and setoff claims in foreclosure actions.
    However, the Bureau understands that, because of their size, small 
creditors may be particularly challenged by both the burden and cost of 
litigation, including litigation regarding ability-to-repay 
determinations. The Bureau therefore gives credence to small creditors' 
assertions that they are unable or unwilling to assume the risk of 
litigation associated with the ability-to-repay requirements and 
therefore are unwilling to make loans outside the scope of the 
qualified mortgage safe harbor.
    The Bureau therefore is proposing to extend the protections of the 
qualified mortgage safe harbor to small creditor portfolio loans. The 
Bureau believes that the proposed rule is necessary to preserve access 
to responsible, affordable mortgage credit for some consumers.
    The Bureau is proposing to extend qualified mortgage status only to 
portfolio loans made by small creditors, rather than all portfolio 
loans, because, as discussed above, the Bureau believes that small 
creditors are a unique and important source of non-conforming mortgage 
credit and mortgage credit in rural areas for which there is no readily 
available replacement, that small creditors may be particularly 
burdened by the litigation risk associated with the ability-to-repay 
rules and are particularly likely to reduce or cease mortgage lending 
if subjected to these rules without accommodation, and that small 
creditors have both strong incentives and particular ability to make 
these loans in a way that ensures that consumers are able to repay that 
may not be present for larger creditors.
    The proposed definition would include portfolio loans made by 
creditors that have assets of $2 billion or less and, together with all 
affiliates, originate 500 or fewer first-lien mortgages each year. The 
Bureau is proposing these specific thresholds because they are 
consistent with the Sec.  1026.43(f) qualified mortgage definition, 
which includes certain balloon loans made and held in portfolio by 
small creditors operating predominantly in rural or underserved areas, 
and with thresholds used in the Bureau's 2013 Escrows Final Rule. The 
Bureau believes it is important to maintain consistent criteria, 
particularly between Sec.  1026.43(e)(5) and (f), for several reasons. 
First, the Bureau believes the rationale for proposed Sec.  
1026.43(e)(5) is similar to the rationale for Sec.  1026.43(f) and the 
relevant thresholds in Sec.  1026.35(b). The Bureau therefore believes 
that its stated rationale for these criteria in those contexts also 
applies in the context of proposed Sec.  1026.43(e)(5). Similarly, the 
Bureau also believes that if there is a convincing rationale for 
establishing these criteria in Sec.  1026.43(e)(5), that rationale may 
apply to adjusting the other sections as well. Second, the

[[Page 6657]]

Bureau believes that inconsistencies between the two qualified mortgage 
sections could create an undesirable regulatory advantage for balloon 
loans. The Bureau is particularly concerned with avoiding 
inconsistencies between the two definitions that would create 
regulatory incentives to make balloon loans where a creditor has the 
capability of making other mortgages that better protect consumers' 
interests. Third, the Bureau believes that maintaining consistent 
criteria between the three provisions will minimize compliance burdens 
by minimizing the number of metrics that must be tracked in order to 
determine creditors' eligibility. However, the Bureau also acknowledges 
that there may be disadvantages to using the same thresholds in Sec.  
1026.43(e)(5) in the absence of further limitations such as the 
requirement that creditors operate predominantly in rural or 
underserved areas in order to originate balloon-payment qualified 
mortgages or invoke the exception to the escrows rule. The Bureau is 
soliciting comment on these issues.
    The proposed definition would include only loans originated and 
held in portfolio. First, the definition would include only loans that 
are originated without a forward commitment other than a commitment to 
sell to another institution that is eligible to originate qualified 
mortgages under Sec.  1026.43(e)(5). Second, the rule would provide 
that a loan generally loses its qualified mortgage status under Sec.  
1026.43(e)(5) if it is sold, assigned, or otherwise transferred, 
except: if it is transferred three years or more after consummation; if 
it is transferred to a creditor that also meets the asset-size and 
number of transaction criteria; if it is transferred pursuant to a 
supervisory action or by a conservator, receiver, or bankruptcy 
trustee; or if it is transferred as part of a merger or acquisition of 
the creditor.
    The Bureau believes the discipline imposed when small creditors 
make loans that they will hold in their portfolio is important to 
protect consumers' interests and to prevent evasion. The Bureau is 
proposing that these loans generally must be held in portfolio for 
three years in order to retain their status as a qualified mortgage to 
conform to the statute of limitations for affirmative claims for 
violations of the ability-to-repay rules. If a small creditor holds a 
qualified mortgage in portfolio for three years, it retains all of the 
litigation risk for potential violations of the ability-to-repay rules 
except in the event of a subsequent foreclosure.
    The Bureau acknowledges that limitations on the ability of a 
creditor to sell loans in its portfolio may limit the creditor's 
ability to manage its regulatory capital levels by adjusting the value 
of its assets, may affect the creditor's ability to manage interest 
rate risk by preventing sales of seasoned loans, and may present other 
safety and soundness concerns. The Bureau has consulted with prudential 
regulators on these issues and believes the proposed exceptions address 
these concerns without sacrificing the consumer protection provided by 
the portfolio requirement. For these reasons, the Bureau is adopting 
parallel exceptions in the 2013 ATR Final Rule in Sec.  1026.43(f), 
which describes requirements for balloon-payment qualified mortgages. 
However, the Bureau is soliciting comment on whether the proposed 
exceptions are appropriate and on whether other exceptions should be 
provided, either in addition to or in lieu of those proposed.
    Qualified mortgages under Sec.  1026.43(e)(5) would differ from 
qualified mortgages under the Sec.  1026.43(e)(2) general definition in 
two key respects. First, the Bureau is proposing to raise the annual 
percentage rate threshold for the qualified mortgage safe harbor for 
qualified mortgages under Sec.  1026.43(e)(5), as described above in 
the section-by-section analysis of Sec.  1026.43(b)(4). Second, the 
Bureau is proposing to require creditors to consider the consumer's 
debt-to-income ratio or residual income and to verify the underlying 
information generally in accordance with Sec.  1026.43(c). In contrast, 
the general definition of a qualified mortgage in Sec.  1026.43(e)(2) 
requires a creditor to calculate the consumer's debt-to-income ratio 
according to appendix Q and specifies that the consumer's debt-to-
income ratio must be 43 percent or less.
    The Bureau believes that consideration of debt-to-income ratio or 
residual income is fundamental to any determination of ability to 
repay. A consumer is able to repay a loan if he or she has sufficient 
funds to pay his or her other obligations and expenses and still make 
the payments required by the terms of the loan. Arithmetically 
comparing the funds to which a consumer has recourse with the amount of 
those funds the consumer has already committed to spend or is 
committing to spend in the future is necessary to determine whether 
sufficient funds exist.
    However, for the same reasons that the Bureau declined to impose a 
specific 43-percent threshold for balloon-payment qualified mortgages 
under Sec.  1026.43(f), the Bureau does not believe it is necessary to 
impose a specific debt-to-income or residual income threshold for this 
category of qualified mortgages. As discussed above, the Bureau 
believes that small creditors may be particularly able to make highly 
individualized determinations of ability to repay that take into 
consideration the unique characteristics and financial circumstances of 
a particular consumer. While the Bureau believes that many creditors 
can make mortgage loans with consumer debt-to-income ratios above 43 
percent that consumers are able to repay, the Bureau also believes that 
portfolio loans made by small creditors are particularly likely to be 
made responsibly and to be affordable for the consumer even if such 
loans exceed the 43 percent threshold. The Bureau therefore believes 
that it is appropriate to presume compliance even above the 43 percent 
threshold for small creditors who meet the criteria set forth in Sec.  
1026.43(e)(5). The Bureau believes that the discipline imposed when 
small creditors make loans that they will hold in their portfolio is 
sufficient to protect consumers' interests in this regard. Because the 
Bureau is not proposing a specific limit on consumer debt-to-income 
ratio, the Bureau does not believe it is necessary to require creditors 
to calculate debt-to-income ratio in accordance with a particular 
standard such as that set forth in appendix Q. The Bureau is proposing 
to make this change to the rule pursuant to its authority under TILA 
section 129C(b)(2)(vi) to establish guidelines or regulations for debt-
to-income ratio with which qualified mortgages must comply.
    The Bureau is proposing ten comments to clarify the requirements 
described in proposed Sec.  1026.43(e)(5). Proposed comment 43(e)(5)-1 
would provide additional guidance regarding the requirement to comply 
with the general definition of a qualified mortgage under Sec.  
1026.43(e)(2). The proposed comment would restate the regulatory 
requirement that a covered transaction must satisfy the requirements of 
the Sec.  1026.43(e)(2) general definition of qualified mortgage, 
except with regard to debt-to-income ratio, to be a qualified mortgage 
under Sec.  1026.43(e)(5). As an example, the proposed comment would 
explain that a qualified mortgage under Sec.  1026.43(e)(5) may not 
have a loan term in excess of 30 years because longer terms are 
prohibited for qualified mortgages under Sec.  1026.43(e)(2)(ii). As 
another example, the proposed comment would explain that a qualified

[[Page 6658]]

mortgage under Sec.  1026.43(e)(5) may not result in a balloon payment 
because Sec.  1026.43(e)(2)(i)(C) provides that qualified mortgages may 
not have balloon payments except as provided under Sec.  1026.43(f). 
Finally, the proposed comment would clarify that a covered transaction 
may be a qualified mortgage under Sec.  1026.43(e)(5) even though the 
consumer's monthly debt-to-income ratio exceeds 43 percent, Sec.  
1026.43(e)(2)(vi) notwithstanding.
    Proposed comment 43(e)(5)-2 would clarify that Sec.  1026.43(e)(5) 
does not prescribe a specific monthly debt-to-income ratio with which 
creditors must comply. Instead, creditors must consider a consumer's 
debt-to-income ratio or residual income calculated generally in 
accordance with Sec.  1026.43(c)(7) and verify the information used to 
calculate the debt-to-income ratio or residual income in accordance 
with Sec.  1026.43(c)(3) and (4). The proposed comment would explain 
that Sec.  1026.43(c)(7) refers creditors to Sec.  1026.43(c)(5) for 
instructions on calculating the payment on the covered transaction and 
that Sec.  1026.43(c)(5) requires creditors to calculate the payment 
differently than Sec.  1026.43(e)(2)(iv). The proposed comment would 
clarify that, for purposes of the qualified mortgage definition in 
Sec.  1026.43(e)(5), creditors must base their calculation of the 
consumer's debt-to-income ratio or residual income on the payment on 
the covered transaction calculated according to Sec.  1026.43(e)(2)(iv) 
instead of according to Sec.  1026.43(c)(5). Finally, the proposed 
comment would clarify that creditors are not required to calculate the 
consumer's monthly debt-to-income ratio in accordance with appendix Q 
as is required under the general definition of qualified mortgages by 
Sec.  1026.43(e)(2)(vi).
    Proposed comment 43(e)(5)-3 would note that the term ``forward 
commitment'' is sometimes used to describe a situation where a creditor 
originates a mortgage loan that will be transferred or sold to a 
purchaser pursuant to an agreement that has been entered into at or 
before the time the transaction is consummated. The proposed comment 
would clarify that a mortgage that will be acquired by a purchaser 
pursuant to a forward commitment does not satisfy the requirements of 
Sec.  1026.43(e)(5), whether the forward commitment provides for the 
purchase and sale of the specific transaction or for the purchase and 
sale of transactions with certain prescribed criteria that the 
transaction meets. However, the proposed comment also would clarify 
that a forward commitment to another person that also meets the 
requirements of Sec.  1026.43(e)(5)(i)(D) is permitted. The proposed 
comment would give the following example: Assume a creditor that is 
eligible to make qualified mortgages under Sec.  1026.43(e)(5) makes a 
mortgage. If that mortgage meets the purchase criteria of an investor 
with which the creditor has an agreement to sell such loans after 
consummation, then the loan does not meet the definition of a qualified 
mortgage under Sec.  1026.43(e)(5). However, if the investor meets the 
requirements of Sec.  1026.43(e)(5)(i)(D), the mortgage will be a 
qualified mortgage if all other applicable criteria also are satisfied.
    Proposed comment 43(e)(5)-4 would reiterate that, to be eligible to 
make qualified mortgages under Sec.  1026.43(e)(5), a creditor must 
satisfy the requirements of Sec.  1026.35(b)(2)(iii)(B) and (C). For 
ease of reference, the comment would state that Sec.  
1026.35(b)(2)(iii)(B) requires that, during the preceding calendar 
year, the creditor and its affiliates together originated 500 or fewer 
first-lien covered transactions and that Sec.  1026.35(b)(2)(iii)(C) 
requires that, as of the end of the preceding calendar year, the 
creditor had total assets of less than $2 billion, adjusted annually 
for inflation.
    Proposed comment 43(e)(5)-5 would clarify that creditors generally 
must hold a loan in portfolio to maintain the transaction's status as a 
qualified mortgage under Sec.  1026.43(e)(5), subject to four 
exceptions. The proposed comment would clarify that, unless one of 
these exceptions applies, a loan is no longer a qualified mortgage 
under Sec.  1026.43(e)(5) once legal title to the debt obligation is 
sold, assigned, or otherwise transferred to another person. 
Accordingly, unless one of the exceptions applies, the transferee could 
not benefit from the presumption of compliance for qualified mortgages 
under Sec.  1026.43(e)(1) unless the loan also met the requirements of 
another qualified mortgage definition. Proposed comment 43(e)(5)-6 
would clarify that Sec.  1026.43(e)(5)(ii) applies not only to an 
initial sale, assignment, or other transfer by the originating creditor 
but to subsequent sales, assignments, and other transfers as well. The 
proposed comment would give the following example: Assume Creditor A 
originates a qualified mortgage under Sec.  1026.43(e)(5). Six months 
after consummation, Creditor A sells the qualified mortgage to Creditor 
B pursuant to Sec.  1026.43(e)(5)(ii)(B) and the loan retains its 
qualified mortgage status because Creditor B complies with the limits 
on asset size and number of transactions. If Creditor B sells the 
qualified mortgage, it will lose its qualified mortgage status under 
Sec.  1026.43(e)(5) unless the sale qualifies for one of the Sec.  
1026.43(e)(5)(ii) exceptions for sales three or more years after 
consummation, to another qualifying institution, as required by 
supervisory action, or pursuant to a merger or acquisition.
    Proposed comment 43(e)(5)-7 would clarify that, under Sec.  
1026.43(e)(5)(ii)(A), if a qualified mortgage under Sec.  1026.43(e)(5) 
is sold, assigned, or otherwise transferred three years or more after 
consummation, the loan retains its status as a qualified mortgage under 
Sec.  1026.43(e)(5) following the transfer. The proposed comment would 
clarify that this is true even if the transferee is not itself eligible 
to originate qualified mortgages under Sec.  1026.43(e)(5). The 
proposed comment would clarify that, once three or more years after 
consummation have passed, the qualified mortgage will continue to be a 
qualified mortgage throughout its life, and a transferee, and any 
subsequent transferees, may invoke the presumption of compliance for 
qualified mortgages under Sec.  1026.43(e)(1).
    Proposed comment 43(e)(5)-8 would clarify that, under Sec.  
1026.43(e)(5)(ii)(B), a qualified mortgage under Sec.  1026.43(e)(5) 
may be sold, assigned, or otherwise transferred at any time to another 
creditor that meets the requirements of Sec.  1026.43(e)(5)(v). The 
proposed comment would note that section Sec.  1026.43(e)(5)(v) 
requires that a creditor, during the preceding calendar year, 
originated 500 or fewer first-lien covered transactions and had total 
assets less than $2 billion (adjusted for inflation) at the end of the 
preceding calendar year. The proposed comment would clarify that a 
qualified mortgage under Sec.  1026.43(e)(5) that is transferred to a 
creditor that meets these criteria would retain its qualified mortgage 
status even if it is transferred less than three years after 
consummation.
    Proposed comment 43(e)(5)-9 would clarify that Sec.  
1026.43(e)(5)(ii)(C) facilitates sales that are deemed necessary by 
supervisory agencies to revive troubled creditors and resolve failed 
creditors. The proposed comment would note that this section provides 
that a qualified mortgage under Sec.  1026.43(e)(5) retains its 
qualified mortgage status if it is sold, assigned, or otherwise 
transferred to: another person pursuant to a capital restoration plan 
or other action under 12 U.S.C. 1831o; the actions or instructions of 
any person acting as conservator, receiver or bankruptcy trustee; an 
order of a State

[[Page 6659]]

or Federal government agency with jurisdiction to examine the creditor 
pursuant to State or Federal law; or an agreement between the creditor 
and such an agency. The proposed comment would clarify that a qualified 
mortgage under Sec.  1026.43(e)(5) that is sold, assigned, or otherwise 
transferred under these circumstances retains its qualified mortgage 
status regardless of how long after consummation it is sold and 
regardless of the size or other characteristics of the transferee. The 
proposed comment also would clarify that Sec.  1026.43(e)(5)(ii)(C) 
does not apply to transfers done to comply with a generally applicable 
regulation with future effect designed to implement, interpret, or 
prescribe law or policy in the absence of a specific order by or a 
specific agreement with a governmental agency described in Sec.  
1026.43(e)(5)(ii)(C) mandating the sale of one or more qualified 
mortgages under Sec.  1026.43(e)(5) held by the creditor, or one of the 
other circumstances listed in Sec.  1026.43(e)(5)(ii)(C). As an 
example, the proposed comment would explain that a qualified mortgage 
under Sec.  1026.43(e)(5) that is sold pursuant to a capital 
restoration plan under 12 U.S.C. 1831o would retain its status as a 
qualified mortgage following the sale. However, if the creditor simply 
chose to sell the same qualified mortgage as one way to comply with 
general regulatory capital requirements in the absence of supervisory 
action or agreement, the mortgage would lose its status as a qualified 
mortgage following the sale unless it qualifies under another 
definition of qualified mortgage.
    Proposed comment 43(e)(5)-10 would clarify that a qualified 
mortgage under Sec.  1026.43(e)(5) retains its qualified mortgage 
status if a creditor merges with, is acquired by, or acquires another 
person regardless of whether the creditor or its successor is eligible 
to originate new qualified mortgages under Sec.  1026.43(e)(5) after 
the merger or acquisition. However, the proposed comment also would 
clarify that the creditor or its successor can originate new qualified 
mortgages under Sec.  1026.43(e)(5) after the merger or acquisition 
only if the creditor or its successor complies with all of the 
requirements of Sec.  1026.43(e)(5) at that time. The proposed comment 
would provide the following example: Assume a creditor that originates 
250 covered transactions each year and originates qualified mortgages 
under Sec.  1026.43(e)(5) is acquired by a larger creditor that 
originates 10,000 covered transactions each year. Following the 
acquisition, the small creditor would no longer be able to originate 
Sec.  1026.43(e)(5) qualified mortgages because, together with its 
affiliates, it would originate more than 500 covered transactions each 
year. However, the Sec.  1026.43(e)(5) qualified mortgages originated 
by the small creditor before the acquisition would retain their 
qualified mortgage status.
    For the reasons stated above, the Bureau believes that the proposed 
amendments are authorized by TILA sections 105(a) and 129C(b)(3)(B)(i) 
because they are necessary to ensure that responsible, affordable 
mortgage credit remains available to consumers and because they are 
consistent with the purposes of TILA generally and TILA section 129C, 
regarding repayment ability, specifically.
    The Bureau solicits comment on the proposed approach to small 
creditor portfolio loans generally and also on several specific issues. 
First, the Bureau solicits comment on whether non-conforming mortgage 
credit is likely to be unavailable under the current rule and whether 
amending the rule as proposed would ensure that such credit is made 
available in a responsible, affordable way.
    Second, the Bureau solicits comment on the following issues 
relating to the criteria describing small creditors: Whether the Bureau 
should adopt criteria consistent with those used in Sec.  1026.35(b) 
and in the Sec.  1026.43(f) definition of qualified mortgages which 
applies to certain balloon loans made by small creditors operating 
predominantly in rural and underserved areas; whether the proposed $2 
billion asset threshold is appropriate and whether the threshold should 
be higher or lower; and whether to include a limitation on the number 
of first-lien covered transactions extended by the creditor and its 
affiliates and, if so, whether the proposed 500 transaction limit is 
appropriate.
    Third, the Bureau solicits comment regarding the requirement that 
loans be held in portfolio generally, including whether the proposed 
exemptions are appropriate and whether other criteria, guidance, or 
exemptions should be included regarding the requirement to hold loans 
in portfolio, either in lieu of or in addition to those included in the 
proposal.
    Fourth, the Bureau solicits comment on the loan feature and 
underwriting requirements with which qualified mortgages under proposed 
Sec.  1026.43(e)(5) would have to comply. The Bureau solicits comment 
on whether qualified mortgages under proposed Sec.  1026.43(e)(5) 
should be exempt from additional provisions of Sec.  1026.43(e)(2) and 
or should be subject to any other loan feature or underwriting 
requirements, either in lieu of or in addition to those proposed. In 
particular, the Bureau solicits comment on whether these qualified 
mortgages should be exempt from the requirement to consider debt-to-
income ratio calculated according to appendix Q and the prohibition on 
debt-to-income ratios in excess of 43 percent and whether other 
requirements related to debt-to-income ratio or residual income should 
be provided, either in lieu of or in addition to those proposed.
    Finally, the Bureau solicits comment on the following issue. The 
proposal would provide different legal status to loans with identical 
terms because the creditor is small and intends to hold the loan in 
portfolio. As discussed above, the Bureau believes that the size of and 
relationship lending model employed by small creditors may provide 
significant assurances that the mortgage credit they extend will be 
responsible and affordable. However, to the extent that consumers may 
have a choice of creditors, some of whom are not small, it is not clear 
that consumers shopping for mortgage loans would be aware that their 
choice of creditor could significantly impact their legal rights. The 
Bureau solicits comment on the extent and significance of this risk 
generally. Specifically, the Bureau solicits comment on whether 
consumers who obtain small creditor portfolio loans likely could have 
obtained credit from other sources and on the extent to which a 
consumer who obtains a portfolio loan from a small creditor would be 
disadvantaged by the inability to make an affirmative claim of 
noncompliance with the ability-to-repay rules or to assert 
noncompliance in a foreclosure action.
43(f) Balloon-Payment Qualified Mortgages Made by Certain Creditors
    Section 1026.43(f) provides that certain balloon loans made and 
held in portfolio by certain small creditors are qualified mortgages. 
As discussed above in the section-by-section analysis of Sec.  
1026.43(e)(5), the Bureau believes that it may be important to preserve 
consistency among Sec.  1026.43(e)(5) and (f) and Sec.  1026.35(b)(2). 
The Bureau is not proposing specific amendments to Sec.  1026.43(f) 
because Sec.  1026.43(e)(5) as proposed is consistent with existing 
Sec.  1026.43(f). However, if Sec.  1026.43(e)(5) is adopted with 
significant changes, the Bureau will consider and may adopt parallel 
amendments to Sec.  1026.43(f) in its final rule.

[[Page 6660]]

    The Bureau solicits comment on the advantages and disadvantages of 
maintaining consistency between Sec.  1026.35(b)(2) and Sec.  
1026.43(e)(5) and (f) generally and on whether the Bureau should make 
conforming changes to Sec.  1026.43(f) if necessary to maintain 
consistency with specific provisions of Sec.  1026.43(e)(5).

43(g) Prepayment Penalties

    The Bureau proposes to make a conforming amendment to Sec.  
1026.43(g) to include a reference to Sec.  1026.43(e)(5), as described 
in the section-by-section analysis of proposed Sec.  1026.43(e)(5), 
above.

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

    In developing the final rule, the Bureau has considered potential 
benefits, costs, and impacts.\139\ In addition, the Bureau has 
consulted, or offered to consult with, the prudential regulators, SEC, 
HUD, FHFA, the Federal Trade Commission, and the Department of the 
Treasury, including regarding consistency with any prudential, market, 
or systemic objectives administered by such agencies. The Bureau also 
held discussions with or solicited feedback from the United States 
Department of Agriculture, Rural Housing Service, the Federal Housing 
Administration, and the Department of Veterans Affairs regarding the 
potential impacts of the final rule on those entities' loan programs.
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    \139\ Specifically, section 1022(b)(2)(A) of the Dodd-Frank Act 
calls for the Bureau to consider the potential benefits and costs of 
a regulation to consumers and covered persons, including the 
potential reduction of access by consumers to consumer financial 
products or services; the impact on depository institutions and 
credit unions with $10 billion or less in total assets as described 
in section 1026 of the Dodd-Frank Act; and the impact on consumers 
in rural areas.
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    This proposal is related to a final rule published elsewhere in 
today's Federal Register (2013 ATR Final Rule). The 2013 ATR Final Rule 
implements sections 1411, 1412, and 1414 of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (the Dodd-Frank Act), which creates 
new TILA section 129C. Among other things, the Dodd-Frank Act requires 
creditors to make a reasonable, good faith determination of a 
consumer's ability to repay any consumer credit transaction secured by 
a dwelling (excluding an open-end credit plan, timeshare plan, reverse 
mortgage, or temporary loan) and establishes certain protections from 
liability under this requirement for ``qualified mortgages.''
    The Bureau is proposing certain amendments to the final rule 
implementing these requirements, including exemptions for certain 
nonprofit creditors and certain homeownership stabilization programs 
and an additional definition of a qualified mortgage for certain loans 
made and held in portfolio by small creditors. The Bureau is also 
seeking feedback on whether additional clarification is needed 
regarding the inclusion of loan originator compensation in the points 
and fees calculation.
    The proposed exemptions for certain nonprofit creditors and certain 
homeownership stabilization programs include exemptions for various 
extensions of credit from the ability-to-repay requirements. These 
exemptions include: extensions of credit made pursuant to programs 
administered by HFA; extensions of credit made by certain types of 
nonprofit creditors including creditors designated by the Treasury 
Department as Community Development Financial Institutions and 
creditors designated by the Department of Housing and Urban Development 
as either a Community Housing Development Organization or a Downpayment 
Assistance Provider of Secondary Financing; extensions of credit by 
certain creditors designated as nonprofit organizations under section 
501(c)(3) of the Internal Revenue Code that provide credit to LMI 
borrowers; extensions of credit made pursuant to an Emergency Economic 
Stabilization Act program, such as extensions of credit made pursuant 
to a State HHF program; refinancings that are eligible to be insured, 
guaranteed, or made pursuant to a program administered by the Federal 
Housing Administration, U.S. Department of Veterans Affairs, or the 
U.S. Department of Agriculture for a limited period of time; and 
certain refinancings eligible to be purchased or guaranteed by Fannie 
Mae or Freddie Mac pursuant to an eligible targeted refinancing 
program.
    The proposed additional definition of a qualified mortgage includes 
certain loans originated by creditors that have total assets of $2 
billion or less at the end of the previous calendar year; and that, 
together with all affiliates, originated 500 or fewer first-lien 
covered transactions during the previous calendar year. Loans held in 
portfolio by these creditors that conform to all of the requirements 
under the general definition of a qualified mortgage except the 43 
percent limit on monthly debt-to-income ratio, and that meet the 
documentation and verification requirements for qualified mortgages 
under the general standard, would be considered qualified mortgages. 
Qualified mortgages under this proposed definition would be provided 
either a conclusive or rebuttable presumption of compliance with the 
requirement that creditors make a reasonable, good faith determination 
of a consumer's ability to repay before originating a mortgage loan.
    The Bureau also is proposing to allow small creditors to charge a 
higher annual percentage rate for first-lien qualified mortgages in the 
proposed new category and still benefit from a conclusive presumption 
of compliance or ``safe harbor.'' Under the existing rules, first-lien 
qualified mortgages with an annual percentage rate less than or equal 
to the average prime offer rate plus 1.5 percentage points and 
subordinate-lien qualified mortgages with an annual percentage rate 
less than or equal to the average prime offer rate plus 3.5 percentage 
points are within the safe harbor. A qualified mortgage in the proposed 
new category would be conclusively presumed to comply if the annual 
percentage rate is equal to or less than the average prime offer rate 
plus 3.5 percentage points for both first-lien and subordinate-lien 
loans.
    The Bureau also is proposing to allow small creditors operating 
predominantly in rural or underserved areas to offer first-lien balloon 
loans with a higher annual percentage rate and still benefit from a 
conclusive presumption of compliance with the ability-to-repay rules or 
``safe harbor.'' The Bureau's current rule provides that certain 
balloon loans made by small creditors operating predominantly in rural 
or underserved areas are qualified mortgages. Under the existing rules, 
first-lien qualified mortgages with an annual percentage rate less than 
or equal to the average prime offer rate plus 1.5 percentage points and 
subordinate-lien qualified mortgages with an annual percentage rate 
less than or equal to the average prime offer rate plus 3.5 percentage 
points are within the safe harbor. Qualified mortgages with annual 
percentage rates above these thresholds are presumed to comply with the 
ability-to-repay rules, but a consumer could rebut that presumption 
under certain circumstances.
    The proposal also provides two alternative comments regarding the 
provisions of the 2013 ATR Final Rule regarding the inclusion of loan 
originator compensation in the

[[Page 6661]]

calculation of points and fees.\140\ The analysis generally examines 
the benefits, costs and impacts of the proposed provisions against the 
baseline of the January 2013 ATR Rule published elsewhere in today's 
Federal Register. This baseline focuses the discussion of benefits, 
costs and impacts on the incremental effect of this rulemaking on the 
mortgage market.
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    \140\ Section 1022 requires consideration of benefits and costs 
of Bureau rules issued under the Federal consumer financial laws to 
consumers and covered persons. Here, the Bureau discusses the 
benefits and costs of commentary provisions to better inform the 
public and its rulemaking. The Bureau reserves discretion in the 
case of each rule whether to discuss benefits and costs of such 
commentary provisions.
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    The analysis in this section relies on data that the Bureau have 
obtained, outreach to industry and other members of the public, and the 
record established by the Board and Bureau during the development of 
the 2013 ATR Final Rule. However, the Bureau notes that for some 
analyses, there are limited data available with which to quantify the 
potential costs, benefits, and impacts of the proposal. Still, general 
economic principles together with the limited data that are available 
provide insight into the benefits, costs, and impacts and where 
relevant, the analysis provides a qualitative discussion of the 
benefits, costs, and impacts of the final rule.
    The Bureau will further consider the benefits, costs and impacts of 
the proposed provisions and asks interested parties to provide general 
information, data, and research results on potential effects on the 
mortgage loans affected by the proposed exemptions and extensions of 
qualified mortgage status, the current underwriting practices of 
entities covered by these provisions and other information that may 
inform the analysis of the benefits, costs, and impacts of these 
proposals.

A. Potential Benefits and Costs to Consumers and Covered Persons

1. Exemptions From Ability-to-Repay Requirements
    As described in the Section 1022 Analysis of the 2013 ATR rule 
published elsewhere in today's Federal Register, there are a number of 
situations where lenders may engage in lending with too little regard 
for the borrower's ability to repay. The 2013 Final ATR Rule is 
designed to minimize such activity by ensuring proper documentation and 
verification related to extensions of credit and by requiring 
consideration of a number of factors including the consumer's debt-to-
income ratio and credit history. Lenders who fail to follow these 
requirements, or who extend credit without a ``reasonable and good 
faith determination'' of the borrower's ability to repay, are subject 
to liability. The proposed exemptions from the ability-to-repay 
requirements are designed to eliminate these requirements and thereby 
to limit lenders' costs and protect credit availability in carefully 
defined circumstances, namely programs that have been developed to 
serve consumers and that assess repayment ability in ways that do not 
necessarily comport with the requirements of the Act and the final 
rule.
    As described earlier, mortgage lending by community-focused lending 
programs, State housing finance agencies, and not-for profit 
organizations varies widely in the form of financing, the products 
offered and the precise nature of underwriting. In particular, the 
Bureau understands that many of these lenders do not use documentation 
and verification procedures closely aligned with the requirements of 
the 2013 ATR rule or consider all of the underwriting factors specified 
in the rule. The benefits of the proposed rule derive from eliminating 
the costs of imposing these requirements on these particular extensions 
of credits and assuring that credit remains available through these 
programs without regard to the rule's underwriting factors. Access to 
credit may be a specific concern for the populations generally served 
by these lenders and programs.
    As explained in the 2013 ATR Final Rule, in general, consumers and 
others could be harmed by this action as it removes particular consumer 
protections and could allow some deleterious lending to occur. However, 
in all of the cases discussed above, the Bureau believes, subject to 
public comment, that the community-focused mission of the creditor 
organizations and the close interaction between lenders and borrowers 
should mitigate any potential harms to borrowers and any costs from the 
rule.
    Data regarding the exact scope of lending through these channels 
are limited as are data regarding the performance of these loans. There 
are 51 State Housing Finance Agencies and approximately 1,000 CDFIs, 62 
percent of which are classified as Community Development (CD) Loan 
Funds, 22 percent as CD Credit Unions, while the rest are CD Banks, 
Thrifts, or CD Venture Capital Funds.\141\ There are 233 nonprofit 
agencies and nonprofit instrumentalities of government in the U.S. that 
are authorized to provide secondary financing,\142\ 267 creditors 
certified by HUD as Community Housing Development Organizations (CHDOs) 
in connection with HUD's HOME Investment Partnership Program,\143\ and 
231 organizations certified as Downpayment Assistance through Secondary 
Financing Providers.\144\ A comprehensive list of these institutions is 
not available; however the Bureau believes that there may be 
substantial overlap among these institutions. The Bureau seeks 
information on the quantity and types of credit extended by each of 
these types of organizations.
---------------------------------------------------------------------------

    \141\ See http://www.cdfifund.gov/docs/certification/cdfi/CDFI 
List-07-31-12.xls.
    \142\ See https://entp.hud.gov/idapp/html/f17npdata.cfm.
    \143\ Includes 2011 data for institutions with CHDO reservations 
and CHDO loans without a rental tenure type. See http://www.hud.gov/offices/cpd/affordablehousing/reports/open/.
    \144\ Includes data for institutions shown to offer secondary 
financing at https://entp.hud.gov/idapp/html/f17npdata.cfm.
---------------------------------------------------------------------------

    The number or volume of loans made by these institutions is 
limited. There is some data suggesting that SHFA bonds funded 
approximately 67,000 loans in 2010 with a value of just over $8 
billion. Data regarding CDFIs indicate that these institutions funded 
just under $4 billion in loans, however data on the type of housing 
supported is unavailable. Lending at CHDOs totaled $64 million in 2011 
with just under 500 loans.
    The exemption in the proposed rule for certain streamlined 
refinance programs offers benefits to consumers, creditors and others 
to the extent that any impediments to refinancings are removed. Some 
streamlined refinance programs are aimed at efficiently extending 
mortgage credit to enable current borrowers to obtain more affordable 
mortgages. Many of these borrowers cannot afford their mortgage 
payments and/or are underwater and unable to obtain refinancing. 
Programs that help with refinances can aid these borrowers, their 
communities and the broader recovery. To the extent that these 
refinance programs have documentation and underwriting requirements 
that do not align with the requirements of the 2013 ATR Final Rule, 
compliance with that rule could harm lending activity; the exemptions 
in the proposed rule should remove any possible impediments. The 
limitation of the exemption to government or GSE sponsored streamlined 
refinance programs limits the risk to borrowers from removal of some of 
the protections in the final rule.
    Programs established under MHA impacted by the proposed rule appear 
to

[[Page 6662]]

have made roughly 67,000 loans between October 2011 and 2012; \145\ 
volume was similar under the HHF program initiated by Treasury.\146\ 
Available data indicate that roughly 312,000 loans were made in 2011 
under targeted refinance programs at FHA (similar data for VA and USDA 
loans are not available).\147\ There were just over 400,000 loans 
issued under HARP in 2011 and the Bureau understands that volume has 
risen considerably in 2012.\148\ The Bureau intends to seek detailed 
information on each of the government programs including loan volumes, 
characteristics and performance.
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    \145\ Includes loans made under Second Lien Modification Program 
(2MP) Activity and HAMP Principal Reduction Alternative. See October 
2012 Making Home Affordable Report.
    \146\ Figures reflect differences in outstanding loans across 
all states from 2011Q3 to 2012Q3 for most states, or latest yearly 
figures where these were not available. See http://www.treasury.gov/initiatives/financial-stability/TARP-Programs/housing/Pages/Program-Documents.aspx.
    \147\ http://portal.hud.gov/hudportal/documents/huddoc?id=fhamktq2_2012.pdf.
    \148\ http://www.fhfa.gov/webfiles/24596/Aug-12%20Refi%20Report.pdf.
---------------------------------------------------------------------------

2. Extension of qualified mortgage status
    The benefits to covered persons from extending qualified mortgage 
status to certain loans made by smaller creditors and held on portfolio 
also derive from limiting the potential costs of these loans. By 
granting creditors that qualify under the proposed qualified mortgage 
category a conclusive or rebuttable presumption of compliance with the 
ability-to-repay provisions, the proposal would limit the legal 
liability of these creditors and most expected litigation costs. These 
creditors may also benefit from a reduction in some documentation and 
verification costs as explained in the 2013 ATR Final rule. These cost 
reductions in turn could enhance the willingness of such creditors to 
make these loans or reduce the amount the creditors would otherwise 
charge for these loans.\149\ The costs to consumers of the proposed 
rule derive from the related reduction in consumer protection for the 
borrower as borrowers at these institutions will have less recourse in 
the instances where the creditor did, in fact, offer the mortgage 
without reaching a `reasonable and good faith' belief in the borrower's 
ability-to-repay. There is also the potential for the broader costs 
that can result from additional lending made without adequate 
consideration of the borrower's ability to repay as discussed in the 
Section 1022 analysis of the 2013 Final ATR rule.
---------------------------------------------------------------------------

    \149\ To the extent that the cost advantage is material, this 
provision could give some smaller institutions a slight advantage 
over lenders not eligible to make qualified mortgages using this 
definition.
---------------------------------------------------------------------------

    Given the lower default and delinquency rates at these smaller 
community focused institutions, the avoided costs related to liability 
and litigation are likely small. However, the lower default and 
delinquency rates at these institutions, the relationship lending that 
they engage in, and restrictions on reselling the loans on the 
secondary market, together imply that the risk of consumer harm (and 
therefore the costs of this proposal) and also very small.\150\ The 
impacts of this proposal are generally expected to be limited.
---------------------------------------------------------------------------

    \150\ The possibility that small creditors qualifying for this 
exemption can make certain mortgages as qualified mortgages, while 
their larger competitors can only make these loans subject to the 
ability-to-pay provisions, may allow them to offer these loans at 
lower rates. However, as discussed in the 2013 ATR Final Rule 
published elsewhere in today's Federal Register, any effects on 
pricing are likely to be small.
---------------------------------------------------------------------------

    Based on data from 2011, roughly 9,200 institutions with 
approximately 450,000 loans on portfolio are likely to be effected by 
this provision.\151\ Based on the Bureau's estimates, on average, 16.7 
percent of portfolio loans at these institutions are estimated to have 
a DTI ratio above 43%. For the subset of these loans that also do not 
contain any of the prohibited features for qualified mortgages, the 
proposed rule removes the ability-to-repay liability and grants the 
creditor a conclusive or rebuttable presumption of compliance. The 
Bureau is unable to estimate the percentage of these loans that would 
not qualify for the temporary expansion of the qualified mortgage 
definition in the final rule.
---------------------------------------------------------------------------

    \151\ 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 loan counts for those 
depository institutions that do not report these data either under 
HMDA or on the NCUA call report. The Bureau has projected 
originations of higher-priced mortgage loans for depositories that 
do not report HMDA in a similar fashion. These projections use 
Poisson regressions that estimate loan volumes as a function of an 
institution's total assets, employment, mortgage holdings and 
geographic presence. Neither HMDA nor the Call Report data have loan 
level estimates of the DTI. To estimate these figures, the Bureau 
has matched the HMDA data to data on the HLP dataset provided by the 
FHFA. This allows estimation of coefficients in a probit model to 
predict DTI using loan amount, income and other variables. This 
model is then used to estimate DTI for loans in HMDA.
---------------------------------------------------------------------------

    Similar tradeoffs are involved in the proposal to raise the 
threshold from 1.5 percentage points above APOR to 3.5 percentage 
points above APOR for first lien mortgages originated and held by these 
institutions and for the qualified balloon mortgages made by 
institutions predominantly operating in rural or underserved areas. For 
loans in this APR band, including those with a DTI ratio below 43 that 
are already qualified mortgages and those with a DTI ratio above 43 
percent that would be defined as qualified mortgages under this 
proposal, the presumption of compliance with the ability-to-repay 
requirements would be strengthened. The Bureau estimates that roughly 
8-10 percent of portfolio loans at these institutions are likely to be 
affected by this change. Strengthening the presumption of compliance 
for these loans will benefit consumers and/or covered persons to the 
extent doing so improves credit access or reduces costs. Strengthening 
the presumption will have a cost to consumers to the extent consumers 
who are unable to afford their mortgage and would otherwise be able to 
make out a claim and recover their losses would be unable to do so.
3. Proposed Comments Regarding Points and Fees Calculation
    As discussed in detail above, the proposal provides two alternative 
comments of the provisions in the rule regarding the treatment of 
compensation paid to a mortgage originator in the calculation of points 
and fees. One would explicitly preclude offsetting, while the other 
would allow creditors to offset the amount of loan originator 
compensation by the amount of finance charges paid by the consumer. The 
Bureau is also seeking comment on whether other alternatives might be 
preferable to the ``no offsetting'' result. The Bureau has also 
proposed a separate clarification, explaining that mortgage brokers 
need not double-count payments to loan originator employees when 
determining points and fees.
    In general, offsetting across the various sources of compensation 
will lower the total amount of points and fees relative to calculations 
without such offsetting. As a result, keeping all other provisions of a 
given loan fixed, calculations involving offsetting will result in a 
greater number of loans eligible to be qualified mortgages and less 
likely to be above the points and fees triggers under HOEPA. The extent 
to which this occurs, and the extent to which lenders may adjust 
pricing and compensation practices in response to these provisions will 
determine the net effect. At present, the Bureau has limited 
standardized and representative data regarding the total points and 
fees and mortgage originator compensation.
    In general, for most prime loans, the Bureau believes that 
variations in these

[[Page 6663]]

calculations will not have major impacts: Current industry pricing 
practices and the exemption for bona fide discount points suggest that 
fewer of these loans will be constrained by the points and fees limits. 
For loans with higher APRs, where the exemption for bona-fide discount 
points is reduced or eliminated, the method for calculation of points 
and fees could limit qualified mortgage status for certain loans. Other 
loans that will still be qualified mortgages, but where the borrower 
pays for these charges through a higher interest rate may lose the 
presumption of compliance and instead have only the rebuttable 
presumption. Any impacts are most likely greater for lenders with 
affiliated companies where more charges must be included in the points 
and fees calculations.

B. Potential Specific Impacts of the Final Rule

1. Potential Impact on Consumer Access to Consumer Financial Products 
or Services
    The Bureau does not anticipate that the proposed rule would reduce 
consumers' access to credit. As discussed above, the Bureau believes 
that the proposed rule would in fact enhance certain consumers' access 
to mortgage credit as compared to the January ATR final rule because it 
would facilitate lending under various programs and under the new 
qualified mortgage definition.
2. Depository Institutions and Credit Unions With $10 Billion or Less 
in Total Assets, As Described in Section 1026
    Depository institutions and credit unions with $10 billion or less 
in total assets as described in Section 1026 would see differential 
impacts from the proposed rule. The depository institutions and credit 
unions that are CDFIs, and are therefore covered under the proposed 
exemption from the ability-to-repay requirements and the institutions 
covered by new definition of qualified mortgages for small creditor 
portfolio loans contained in the proposal are all, by definition, in 
this group and are therefore uniquely impacted by the rule. The 
provisions for streamlined refinance apply to all creditors who can 
utilize those programs and therefor these will not have any specific 
impact.
3. Impact of the Provisions on Consumers in Rural Areas
    The proposed rule would have some differential impacts on consumers 
in rural areas. In these areas, a greater fraction of loans are made by 
smaller institutions and carried on portfolio and therefore the small 
creditor portfolio exemption would be likely to have greater impacts. 
The Bureau understands that mortgage loans in these areas and by these 
institutions are less standardized and often cannot be sold into the 
secondary market. As a result, interest rates may be slightly higher on 
average and therefore, a bigger portion of the transactions will be 
affected by the rule and, therefore, rural consumers will derive 
greater benefit from the proposed provisions than non-rural consumers.
    The Bureau requests commenters to submit data and to provide 
suggestions for additional nationally representative data to assess the 
issues discussed above and other potential benefits, costs, and impacts 
of the proposed rule. The Bureau also seeks information or data on the 
potential impact of the proposed rule on depository institutions and 
credit unions with total assets of $10 billion or less as described in 
Dodd-Frank Act section 1026 as compared to depository institutions and 
credit unions with assets that exceed this threshold and their 
affiliates. Further, the Bureau seeks information or data on the 
proposed rule's potential impact on consumers in rural areas as 
compared to consumers in urban areas.

VII. Regulatory Flexibility Act Analysis

A. Overview

    The Regulatory Flexibility Act (RFA) generally requires an agency 
to conduct an initial regulatory flexibility analysis (IRFA) and a 
final regulatory flexibility analysis (FRFA) of any rule subject to 
notice-and-comment rulemaking requirements.\152\ These analyses must 
``describe the impact of the proposed rule on small entities.'' \153\ 
An IRFA or FRFA is not required if the agency certifies that the rule 
will not have a significant economic impact on a substantial number of 
small entities.\154\ 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.\155\
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    \152\ 5 U.S.C. 601 et. seq.
    \153\ 5 U.S.C. 603(a). For purposes of assessing the impacts of 
the proposed rule on small entities, ``small entities'' is defined 
in the RFA to include small businesses, small not-for-profit 
organizations, and small government jurisdictions. 5 U.S.C. 601(6). 
A ``small business'' is determined by application of Small Business 
Administration regulations and reference to the North American 
Industry Classification System (NAICS) classifications and size 
standards. 5 U.S.C. 601(3). A ``small organization'' is any ``not-
for-profit enterprise which is independently owned and operated and 
is not dominant in its field.'' 5 U.S.C. 601(4). A ``small 
governmental jurisdiction'' is the government of a city, county, 
town, township, village, school district, or special district with a 
population of less than 50,000. 5 U.S.C. 601(5).
    \154\ 5 U.S.C. 605(b).
    \155\ 5 U.S.C. 609.
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    An IRFA is not required for this proposal because it would not have 
a significant economic impact on a substantial number of small 
entities.
    The analysis below evaluates the potential economic impact of the 
proposed rule on small entities as defined by the RFA. The analysis 
generally examines the regulatory impact of the provisions of the 
proposed rule and additional proposed modifications against the 
baseline of the final rule published elsewhere in today's Federal 
Register.

B. Number and Classes of Affected Entities

    The proposed rule will apply to all creditors that extend closed-
end credit secured by real property or a dwelling. All small entities 
that extend these loans are potentially subject to at least some 
aspects of the proposal. This proposal may impact small businesses, 
small nonprofit organizations, and small government jurisdictions. A 
``small business'' is determined by application of SBA regulations and 
reference to the North American Industry Classification System (NAICS) 
classifications and size standards.\156\ Under such standards, 
depository institutions with $175 million or less in assets are 
considered small; other financial businesses are considered small if 
such entities have average annual receipts (i.e., annual revenues) that 
do not exceed $7 million. Thus, commercial banks, savings institutions, 
and credit unions with $175 million or less in assets are small 
businesses, while other creditors extending credit secured by real 
property or a dwelling are small businesses if average annual receipts 
do not exceed $7 million.
---------------------------------------------------------------------------

    \156\ 5 U.S.C. 601(3). The current SBA size standards are 
located on the SBA's Web site at http://www.sba.gov/content/table-small-business-size-standards.
---------------------------------------------------------------------------

    The Bureau can identify through data under the Home Mortgage 
Disclosure Act, Reports of Condition and Income (Call Reports), and 
data from the National Mortgage Licensing System (NMLS) the approximate 
numbers of small depository institutions that will be subject to the 
final rue. Origination data is available for entities that report in 
HMDA, NMLS or the credit union call reports; for other entities, the 
Bureau has estimated their origination activities using statistical 
projection methods.

[[Page 6664]]

    The following table provides the Bureau's estimate of the number 
and types of entities to which the rule will apply:
[GRAPHIC] [TIFF OMITTED] TP30JA13.006

    It is difficult to determine the number of small nonprofits that 
would be subject to the proposed regulation. Nonprofits do not 
generally file Call Reports or HMDA reports. As explained in part II 
above, as of November 2012 there are 233 nonprofit agencies and 
nonprofit instrumentalities of government in the U.S. that are 
authorized by HUD to provide secondary financing,\157\ 267 institutions 
designated as Community Housing Development Organizations that provided 
credit in 2011, and 231 institutions designated as Downpayment 
Assistance through Secondary Financing Providers. A comprehensive list 
of these institutions is not available; however the Bureau believes 
that there may be substantial overlap among these institutions and that 
most of these institutions would qualify as small entities.
---------------------------------------------------------------------------

    \157\ See https://entp.hud.gov/idapp/html/f17npdata.cfm.
---------------------------------------------------------------------------

    Also, as of July 2012 there were 999 organizations designated by 
the Treasury Department as CDFIs, 356 of which are depository 
institutions counted above. Among the remaining, some are nonprofits 
and most likely small.\158\
---------------------------------------------------------------------------

    \158\ See http://www.cdfifund.gov/docs/certification/cdfi/CDFI 
List-07-31-12.xls.
---------------------------------------------------------------------------

C. Impact of Exemption for Certain Community-Focused Lending Programs

    The proposed provisions related to community-focused lending 
programs discussed above all provide exemptions from the ability-to-
repay requirements. Measured against the baseline of the burdens 
imposed by the Bureau's 2013 ATR Final Rule, the Bureau believes that 
these proposed provisions impose either no or insignificant additional 
burdens on small entities. The Bureau believes that these proposed 
provisions will reduce the burdens associated with implementation 
costs, additional underwriting costs, and compliance costs stemming 
from the ability-to-repay requirements.
    Proposed 1026.43(a)(3)(iii) provides that an extension of credit 
made pursuant to a program administered by a housing finance agency, as 
defined by 24 CFR 266.5, is exempt from the requirements of Sec.  
1026.43(c) through (f). This provision would remove the burden to small 
government jurisdictions, and small entities extending credit pursuant 
to programs administered by these housing finance agencies, of having 
to modify the underwriting practices associated with these programs to 
implement the ability-to-repay requirements. This provision would also 
remove the burden to small entities of having to develop and maintain 
policies and procedures to monitor compliance with the ability-to-repay 
requirements.
    The proposal provides that an extension of credit made by a 
creditor designated as a Community Development Financial Institution, a 
Downpayment Assistance through Secondary Financing Provider, and a 
Community Housing Development Organization are exempt from the ability-
to-repay requirements. This provision would remove the burden to small 
entities of having to implement the ability-to-repay requirements. This 
provision would also remove the burden to small entities of having to 
develop and maintain policies and procedures to monitor compliance with 
the ability-to-repay requirements.
    Regulatory burdens may be associated with obtaining and maintaining 
one of the designations required to qualify for the exemption. However, 
this decision is voluntary and the Bureau presumes that a small entity 
would not do so unless the burden reduction resulting from the 
exemption outweighed the additional burden imposed by obtaining and 
maintaining the designation. Thus, additional burdens would still be 
part of an overall burden reduction.
    The proposal provides that an entity with a tax exemption ruling or 
determination letter from the Internal Revenue Service under section 
501(c)(3) of the Internal Revenue Code of 1986 is exempt from the 
ability-to-repay

[[Page 6665]]

requirements, provided that: During the calendar year preceding receipt 
of the consumer's application, the entity extended credit secured by a 
dwelling no more than 100 times; during the calendar year preceding 
receipt of the consumer's application, the entity extended credit 
secured by a dwelling only to consumers with income that did not exceed 
the qualifying limit for moderate income families as established 
pursuant to section 8 of the United States Housing Act of 1937; the 
extension of credit is to a consumer with income that does not exceed 
this qualifying limit; and that the creditor determines, in accordance 
with written procedures, that the consumer has a reasonable ability to 
repay the extension of credit.
    For eligible entities, this provision would remove the burden of 
complying with the ability-to-repay requirements. This provision would 
also remove the burden to small entities of having to develop and 
maintain policies and procedures to monitor compliance with the 
ability-to-repay requirements in the 2013 ATR Final Rule. While small 
creditors would be required to maintain documentation of their own 
procedures regarding the determination of a consumer's ability to 
repay, the Bureau believes that such small nonprofits already have 
written policies and procedures.

D. Impact of Exemption for Certain Homeownership Stabilization, 
Foreclosure Prevention, and Refinancing Programs

    The proposed provisions related to certain homeownership 
stabilization, foreclosure prevention, and refinancing programs 
discussed above all provide exemptions from the ability-to-repay 
requirements. Measured against the baseline of the burdens imposed by 
the Bureau's 2013 Final Rule, the Bureau believes that these proposed 
provisions impose either no or insignificant additional burdens on 
small entities. The Bureau believes that these proposed provisions will 
reduce the burdens associated with implementation costs, additional 
underwriting costs, and compliance costs stemming from the ability-to-
repay requirements.
    The proposal provides that an extension of credit made pursuant to 
a program authorized by sections 101 and 109 of the Emergency Economic 
Stabilization Act of 2008 is exempt from the ability-to-repay 
requirements. This provision would remove the burden to small entities 
of having to modify the underwriting practices associated with these 
programs to implement the ability-to-repay requirements. This provision 
would also remove the burden to small entities of having to develop and 
maintain policies and procedures to monitor compliance with these 
ability-to-repay requirements.
    The proposal provides that an extension of credit that is a 
refinancing that is eligible to be insured, guaranteed, or made 
pursuant to a program administered by the Federal Housing 
Administration, U.S. Department of Veterans Affairs, or the U.S. 
Department of Agriculture is exempt from the ability-to-repay 
requirements, provided that the agency administering the program under 
which the extension of credit is eligible to be insured, guaranteed, or 
made has not prescribed rules pursuant to section 129C(a)(5) or 
129C(b)(3)(B)(ii) of TILA. This provision would remove the burden to 
small entities of having to modify the underwriting practices currently 
used for Federal agency refinance programs to implement the ability-to-
repay requirements. This provision would also remove the burden to 
small entities of having to develop and maintain policies and 
procedures to monitor compliance with these ability-to-repay 
requirements, with respect to extensions of credit exempt from these 
requirements pursuant to this proposed provision. Pursuant to the 
proposal, small entities need determine only whether regulations 
applicable to refinancings prescribed by the relevant Federal agency 
have taken effect. Prior to that point in time, small entities are 
relieved of any burden imposed by the ability-to-repay requirements 
with respect to refinancings eligible to be insured, guaranteed, or 
made pursuant to a Federal agency program.
    The proposal covers certain refinancings eligible to be purchased 
or guaranteed by Fannie Mae or Freddie Mac pursuant to an eligible 
targeted refinancing program. This provision would remove the burden to 
small entities of having to modify the underwriting practices currently 
used for GSE refinance programs to implement the ability-to-repay 
requirements. This provision would also remove the burden to small 
entities of having to develop and maintain policies and procedures to 
monitor compliance with the ability-to-repay requirements, with respect 
to extensions of credit exempt from these requirements pursuant to this 
proposed provision. Further, by exempting creditors extending credit 
pursuant to one of these programs, the proposal removes any economic 
burdens associated with ability-to-repay litigation risk.
    The proposed provision may add an additional burden on small 
entities by requiring a determination of whether Fannie Mae or Freddie 
Mac owns the existing obligation to determine if the proposed provision 
applies. However, in refinancings creditors generally must determine 
ownership of the existing obligation prior to consummation to determine 
the accurate amount of the outstanding obligation. Thus, the Bureau 
believes that the proposed provision will shift this determination to 
an earlier point in the refinancing process, and will likely not create 
a new burden on small entities. A small entity may choose not to make 
use of the proposed provision in the event that such burden outweighed 
the benefit. The Bureau requests feedback regarding whether this 
provision will create new or additional burdens on small entities.

E. Small Creditor Qualified Mortgages Retained in Portfolio

    The proposal creates a new category of qualified mortgage for 
certain mortgage loans made and retained by certain small creditors. 
The proposed new category would apply to creditors that, at the end of 
the prior calendar year: (1) Had total assets of less than $2 billion; 
and (2) together with the creditor's affiliates, originated no more 
than 500 first-lien covered transactions. Each of these loans must have 
complied with the general requirements applicable to qualified 
mortgages under Sec.  1026.43(e)(2), except for the 43 percent debt-to-
income ratio limitation in Sec.  1026.43(e)(2)(vi). The $2 billion 
asset threshold in the proposed definition would be adjusted annually 
based on the year-to-year change in the average of the Consumer Price 
Index for Urban Wage Earners and Clerical Workers, not seasonally 
adjusted.
    This proposal would reduce burden on small creditors by removing 
the 43 percent debt-to-income limitation for qualified mortgages. The 
increase in the threshold from APOR plus 1.5 percentage points to APOR 
plus 3.5 percentage points would reduce burden for the loans at these 
institutions between these rates as these loans would now qualify for a 
conclusive, rather than a rebuttable presumption.
    At the small creditors identified, 16.7 percent of mortgage loans 
on portfolio are estimated to have a debt to income ratios above 43 
percent. For these loans, the proposal grants creditors a presumption 
of compliance with the ability-to-repay requirements; rough estimates 
indicate that three quarters of these will gain a conclusive 
presumption and the remaining loans will gain the rebuttable 
presumption.
    It is difficult to estimate the reduction in potential future 
liability costs

[[Page 6666]]

associated with the changes. However, the Bureau notes that lending 
practices at smaller institutions are reportedly based on a more 
personal relationship based model and historically, delinquency rates 
on mortgages at smaller institutions are lower than the average in the 
industry. As such, the expected litigation costs from the ability-to-
repay provisions of the 2013 ATR Final Rule, and therefore the reduced 
burden from this proposal, should be small. Small creditors will 
benefit most from the increased certainty regarding the lower frequency 
of litigation.
    The Bureau acknowledges that possibility that this proposal may 
increase small creditor burden by requiring such creditors to maintain 
records relating to eligibility for the exemption, but the Bureau 
believes that these costs are negligible, as creditor asset size and 
origination activity are data that all banks are likely to maintain for 
routine supervisory purposes. Thus, the Bureau believes that the burden 
reduction stemming from a reduction in liability costs would outweigh 
any potential recordkeeping costs, resulting in overall burden 
reduction. Small entities for which such cost reductions are outweighed 
by additional record keeping costs may choose not to utilize the 
proposed exemption.

F. Proposed Clarification Regarding Inclusion of Loan Originator 
Compensation in the Points and Fees Calculation

    As discussed in detail above, the Dodd-Frank Act requires creditors 
to include all compensation paid directly or indirectly by a consumer 
or creditor to a mortgage originator from any source, including a 
mortgage originator that is also the creditor in a table-funded 
transaction, in the calculation of points and fees. The statute does 
not express any limitation on this requirement, and thus, the Bureau 
believes it would be read to require that loan originator compensation 
be treated as additive to up-front charges paid by the consumer and the 
other elements of points and fees. The Bureau was concerned that this 
may not be the optimal outcome, but did not believe that it had 
sufficient information with which to determine definitively that an 
alternative approach was warranted.
    The proposal provides two alternative comments on the rule.\159\ 
One would explicitly preclude offsetting, while the other would allow 
creditors to offset the amount of loan originator compensation by the 
amount of finance charges paid by the consumer. The Bureau is also 
seeking comment on whether other alternatives might be appropriate. The 
Bureau has also proposed a separate comment, explaining that mortgage 
brokers need not double-count payments to loan originator employees 
when determining points and fees.
---------------------------------------------------------------------------

    \159\ These proposed commentary provisions do not circumscribe 
conduct, and therefore do not in themselves present cognizable 
impacts for purposes of the Regulatory Flexibility Act. 
Nevertheless, the Bureau has considered such impacts on small 
entities as part of this particular rulemaking in order to better 
inform the public and its rulemaking.
---------------------------------------------------------------------------

    Measured against the baseline of the statutory requirements, these 
proposed alternatives either reduce or have no effect on the burden on 
small creditors. As discussed above and in the section-by-section 
analysis, the Bureau believes the statute would be read to require loan 
originator compensation to be treated as additive to the other elements 
of points and fees. This places a burden on small creditors, since it 
makes it more likely that mortgage loans will not be eligible for a 
presumption of compliance as qualified mortgages under the ability-to-
repay rules and will be classified as high-cost mortgages for purposes 
of HOEPA. One of the alternatives that the Bureau has proposed would 
simply state this result expressly. The other reduces the burden on 
small creditors imposed by the statue by providing small creditors with 
greater pricing flexibility. The second proposed comment, addressing 
double-counting of employee compensation, also would reduce burden on 
small entities regardless of what standard the Bureau adopts in 
connection with the first proposed comment.

G. Conclusion

    Each element of this proposal results in an economic burden 
reduction for these small entities. The proposed exemptions for 
nonprofit creditors would lessen any economic impact resulting from the 
ability-to-repay requirements. The proposed exemptions for 
homeownership stabilization, foreclosure prevention, and refinancing 
programs would also soften any economic impact on small entities 
extending credit pursuant to those programs. The proposed new category 
of qualified mortgage would make it easier for small entities to 
originate qualified mortgages. While all of these proposed exemptions 
may entail additional recordkeeping costs, the Bureau believes that 
these costs are minimal and outweighed by the cost reductions resulting 
from the proposal. Small entities for which such cost reductions are 
outweighed by additional record keeping costs may choose not to utilize 
the proposed exemptions.
Certification
    Accordingly, the undersigned certifies that this proposal would not 
have a significant economic impact on a substantial number of small 
entities. The Bureau requests comment on the analysis above and 
requests any relevant data.

VIII. Paperwork Reduction Act

    Certain provisions of this notice of proposed rulemaking contain 
``collection of information'' requirements within the meaning of the 
Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.) (Paperwork 
Reduction Act or PRA). The collection of information contained in this 
proposed rule, and identified as such, has been submitted to the Office 
of Management and Budget (OMB) for review under section 3507(d) of the 
PRA. Notwithstanding any other provision of law, under the PRA, the 
Bureau may not conduct or sponsor, and a person is not required to 
respond to, this information collection unless the information 
collection displays a currently valid control number.
    This proposed rule would amend 12 CFR part 1026 (Regulation Z), 
which implements the Truth in Lending Act (TILA). Regulation Z 
currently contains collections of information approved by OMB. The 
Bureau's OMB control number for Regulation Z is 3170-0015. As described 
below, the proposed rule would amend the collections of information 
currently in Regulation Z.

A. Overview

    This proposal is related to a final rule published elsewhere in 
today's Federal Register. That final rule implements sections 1411, 
1412, and 1414 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (the Dodd-Frank Act), which creates new TILA section 
129C. Among other things, the Dodd-Frank Act requires creditors to make 
a reasonable, good faith determination of a consumer's ability to repay 
any consumer credit transaction secured by a dwelling (excluding an 
open-end credit plan, timeshare plan, reverse mortgage, or temporary 
loan) and establishes certain protections from liability under this 
requirement for ``qualified mortgages.''
    The Bureau is proposing certain amendments to the final rule 
implementing these ability-to-repay requirements, including exemptions 
for certain nonprofit creditors and certain homeownership stabilization 
programs and an additional definition of a

[[Page 6667]]

qualified mortgage for certain loans made and held in portfolio by 
small creditors that have total assets less than $2 billion at the end 
of the previous calendar year; and, together with all affiliates, 
originated 500 or fewer first-lien covered transactions during the 
previous calendar year. The Bureau also is proposing to allow small 
creditors to charge a higher annual percentage rate for first-lien 
qualified mortgages in the proposed new category and still benefit from 
a conclusive presumption of compliance or ``safe harbor,'' and to allow 
small creditors operating predominantly in rural or underserved areas 
to offer first-lien balloon loans with a higher annual percentage rate 
and still benefit from a conclusive presumption of compliance with the 
ability-to-repay rules or ``safe harbor.''
    The information collection in the proposed rule is required to 
provide benefits for consumers and would be mandatory. See 15 U.S.C. 
1601 et seq.; 12 U.S.C. 2601 et seq. Because the Bureau does not 
collect any information under the final rule, no issue of 
confidentiality arises. The likely respondents would be depository 
institutions (i.e., commercial banks, savings institutions and credit 
unions) and non-depository institutions (i.e., mortgage companies or 
other non-bank lenders) subject to Regulation Z.\160\
---------------------------------------------------------------------------

    \160\ For purposes of this PRA analysis, references to 
``creditors'' or ``lenders'' shall be deemed to refer collectively 
to commercial banks, savings institutions, credit unions, and 
mortgage companies (i.e., non-depository lenders), unless otherwise 
stated. Moreover, reference to ``respondents'' shall generally mean 
all categories of entities identified in the sentence to which this 
footnote is appended, except as otherwise stated or if the context 
indicates otherwise.
---------------------------------------------------------------------------

    Under the proposal, the Bureau generally accounts for the paperwork 
burden associated with Regulation Z for the following respondents 
pursuant to its administrative enforcement authority: insured 
depository institutions with more than $10 billion in total assets, 
their depository institution affiliates, and certain nondepository 
lenders. The Bureau and the FTC generally both have enforcement 
authority over non-depository institutions for Regulation Z. 
Accordingly, the Bureau has allocated to itself half of the estimated 
burden to non-depository institutions. Other Federal agencies are 
responsible for estimating and reporting to OMB the total paperwork 
burden for the institutions for which they have administrative 
enforcement authority. They may, but are not required to, use the 
Bureau's burden estimation methodology.
    Using the Bureau's burden estimation methodology, there is no 
change to the total estimated burden under Regulation Z as a result of 
the proposed rule.

B. Information Collection Requirements

1. Ability-To-Repay Verification and Documentation Requirements
    As discussed above, the final rule published elsewhere in today's 
Federal Register contains specific criteria that a creditor must 
consider in assessing a consumer's repayment ability while different 
verification requirements apply to qualified mortgages. As described in 
the relevant sections of the final rule, the Bureau does not believe 
that the verification and documentation requirements of the proposed 
rule result in additional ongoing costs for most covered persons. 
However, for some creditors, notably the community-focused lending 
programs, State housing finance agencies, and not-for profit 
organizations exempted in the proposed rule, lending can vary widely, 
in the form of financing, the products offered and the precise nature 
of underwriting. These processes may not involve the more traditional 
products covered by the qualified mortgage definition nor do these 
lenders use documentation and verification procedures closely aligned 
with the requirements of the 2013 ATR rule.
    For these lenders, the proposed rule should eliminate any costs 
from imposing these requirements on these particular extensions of 
credits. The Bureau estimates one-time and ongoing costs to respondents 
of complying with the proposed rule as follows.
    One-time costs. The Bureau estimates that covered persons will 
incur one-time costs associated with reviewing the relevant sections of 
the Federal Register and training relevant employees. In general, the 
Bureau estimates these costs to include, for each covered person, the 
costs for one attorney and one compliance officer to read and review 
the sections of the proposed rule that describe the verification and 
documentation requirements for loans in addition to the costs for each 
loan officer or other loan originator to receive training concerning 
the requirements. However, the Bureau believes that respondents will 
review the relevant sections of this proposal along with the 2013 ATR 
Final Rule to best understand any new regulatory requirements and their 
coverage. As such, there is no additional one-time burden attributed to 
the proposed rule.
    Ongoing costs. The exemption of the covered institutions should 
reduce any burden related to these provisions. However, in the final 
rule, the Bureau did not attribute any paperwork burden to these 
provisions on the assumption that the verification and documentation 
requirements of the final rule will not result in additional ongoing 
costs for most covered persons. As such, it would be inappropriate to 
credit any reduction in burden to the proposed rule.

C. Summary of Burden Hours

    As noted, the Bureau does not believe the proposed rule results in 
any changes in the burdens under Regulation Z associated with 
information collections for Bureau respondents under the PRA.

D. Comments

    The Bureau has a continuing interest in the public's opinions of 
our collections of information. Comments are specifically requested 
concerning: (i) Whether the proposed collections of information are 
necessary for the proper performance of the functions of the Bureau, 
including whether the information will have practical utility; (ii) the 
accuracy of the estimated burden associated with the proposed 
collections of information; (iii) how to enhance the quality, utility, 
and clarity of the information to be collected; and (iv) how to 
minimize the burden of complying with the proposed collections of 
information, including the application of automated collection 
techniques or other forms of information technology. Comments regarding 
the burden estimate, or any other aspect of this collection of 
information, including suggestions for reducing the burden, should be 
sent to: The Office of Management and Budget (OMB), Attention: Desk 
Officer for the Consumer Financial Protection Bureau, Office of 
Information and Regulatory Affairs, Washington, DC, 20503, or by the 
internet to submissions@omb.eop.gov, With copies to the Bureau at the 
Consumer Financial Protection Bureau (Attention: PRA Office), 1700 G 
Street NW., Washington, DC, 20552, or by the internet to CFPB_Public_PRA@cfpb.gov.

List of Subjects in 12 CFR Part 1026

    Advertising, Consumer protection, Mortgages, Reporting and 
recordkeeping requirements, Truth in Lending.

Text of Proposed Revisions

    Certain conventions have been used to highlight the proposed 
revisions. New language is shown inside [rtrif]bold-faced 
arrows[ltrif], while language that would be deleted is shown inside 
[bold-faced brackets].

[[Page 6668]]

Authority and Issuance

    For the reasons set forth above, the Bureau of Consumer Financial 
Protection proposes to amend Regulation Z, 12 CFR part 1026, as set 
forth below:

PART 1026--TRUTH IN LENDING (REGULATION Z)

0
1. The authority citation for part 1026 continues to read as follows:

    Authority:  12 U.S.C. 2601, 2603-2605, 2607, 2609, 2617, 5511, 
5512, 5532, 5581; 15 U.S.C. 1601 et seq.

Subpart E--Special Rules for Certain Home Mortgage Transactions

0
2. Section 1026.43, as added elsewhere in this issue of the Federal 
Register, is amended by revising paragraphs (a)(3)(ii) and (iii), 
adding new paragraphs (a)(3)(iv) through (viii), revising paragraphs 
(b)(4), (e)(1), (e)(2), and (g)(1)(ii)(B), and adding new paragraph 
(e)(5), to read as follows:

Sec.  1026.43  Minimum standards for transactions secured by a 
dwelling.

    (a) * * *
    (3) * * *
    (ii) A temporary or ``bridge'' loan with a term of 12 months or 
less, such as a loan to finance the purchase of a new dwelling where 
the consumer plans to sell a current dwelling within 12 months or a 
loan to finance the initial construction of a dwelling; [or]
    (iii) A construction phase of 12 months or less of a construction-
to-permanent loan[rtrif];[ltrif] [lsqbb].[rsqbb]
    [rtrif](iv) An extension of credit made pursuant to a program 
administered by a Housing Finance Agency, as defined under 24 CFR 
266.5;
    (v) An extension of credit made by:
    (A) A creditor designated as a Community Development Financial 
Institution, as defined under 12 CFR 1805.104(h);
    (B) A creditor designated as a Downpayment Assistance through 
Secondary Financing Provider, pursuant to 24 CFR 200.194(a), operating 
in accordance with regulations prescribed by the U.S. Department of 
Housing and Urban Development applicable to such persons;
    (C) A creditor designated as a Community Housing Development 
Organization, as defined under 24 CFR 92.2, operating in accordance 
with regulations prescribed by the U.S. Department of Housing and Urban 
Development applicable to such persons; or
    (D) A creditor with a tax exemption ruling or determination letter 
from the Internal Revenue Service under section 501(c)(3) of the 
Internal Revenue Code of 1986 (26 CFR 1.501(c)(3)-1), provided that:
    (1) During the calendar year preceding receipt of the consumer's 
application, the entity extended credit secured by a dwelling no more 
than 100 times;
    (2) During the calendar year preceding receipt of the consumer's 
application, the entity extended credit secured by a dwelling only to 
consumers with income that did not exceed the qualifying limit for 
moderate income families as established pursuant to section 8 of the 
United States Housing Act of 1937 and amended from time to time by the 
U.S. Department of Housing and Urban Development;
    (3) The extension of credit is to a consumer with income that does 
not exceed the qualifying limit specified in paragraph (a)(3)(v)(D)(2) 
of this section; and
    (4) The creditor determines, in accordance with written procedures, 
that the consumer has a reasonable ability to repay the extension of 
credit.
    (vi) An extension of credit made pursuant to a program authorized 
by sections 101 and 109 of the Emergency Economic Stabilization Act of 
2008 (12 U.S.C. 5211; 5219);
    (vii) An extension of credit that is a refinancing, as defined 
under Sec.  1026.20(a) but without regard for whether the creditor is 
the creditor, holder, or servicer of the original obligation, that is 
eligible to be insured, guaranteed, or made pursuant to a program 
administered by the Federal Housing Administration, U.S. Department of 
Veterans Affairs, or the U.S. Department of Agriculture, provided that 
the agency administering the program under which the extension of 
credit is eligible to be insured, guaranteed, or made has not 
prescribed rules pursuant to section 129C(a)(5) or 129C(b)(3)(B)(ii) of 
TILA; or
    (viii) An extension of credit that is a refinancing, as defined 
under Sec.  1026.20(a) but without regard for whether the creditor is 
the creditor, holder, or servicer of the original obligation, that is 
eligible to be purchased or guaranteed by the Federal National Mortgage 
Association or the Federal Home Loan Mortgage Corporation, provided 
that:
    (A) The refinancing is made pursuant to an eligible targeted 
refinancing program, as defined under 12 CFR 1291.1;
    (B) Such entities are operating under the conservatorship or 
receivership of the Federal Housing Finance Agency pursuant to section 
1367 of the Federal Housing Enterprises Financial Safety and Soundness 
Act of 1992 (12 U.S.C. 4617(i)) on the date the refinancing is 
consummated;
    (C) The existing obligation satisfied and replaced by the 
refinancing is owned by the Federal National Mortgage Association or 
the Federal Home Loan Mortgage Corporation;
    (D) The existing obligation satisfied and replaced by the 
refinancing was not consummated on or after January 10, 2014; and
    (E) The refinancing is not consummated on or after January 10, 
2021.[ltrif]
    (b) * * *
    (4) Higher-priced covered transaction means a covered transaction 
with an annual percentage rate that exceeds the average prime offer 
rate for a comparable transaction as of the date the interest rate is 
set by 1.5 or more percentage points for a first-lien covered 
transaction[rtrif], other than a qualified mortgage under paragraph 
(e)(5) or (f) of this section; by 3.5 or more percentage points for a 
first-lien covered transaction that is a qualified mortgage under 
paragraph (e)(5) or (f) of this section;[ltrif] or by 3.5 or more 
percentage points for a subordinate-lien covered transaction.
* * * * *
    (e) Qualified mortgages. (1) Safe harbor and presumption of 
compliance. (i) Safe harbor for loans that are not higher-priced 
covered transactions. A creditor or assignee of a qualified mortgage, 
as defined in paragraphs (e)(2), (e)(4), [rtrif](e)(5),[ltrif] or (f) 
of this section, that is not a higher-priced covered transaction, as 
defined in paragraph (b)(4) of this section, complies with the 
repayment ability requirements of paragraph (c) of this section.
    (ii) Presumption of compliance for higher-priced covered 
transactions. (A) A creditor or assignee of a qualified mortgage, as 
defined in paragraph (e)(2), (e)(4), [rtrif](e)(5),[ltrif] or (f) of 
this section, that is a higher-priced covered transaction, as defined 
in paragraph (b)(4) of this section, is presumed to comply with the 
repayment ability requirements of paragraph (c) of this section.
    (B) To rebut the presumption of compliance described in paragraph 
(e)(1)(ii)(A) of this section, it must be proven that, despite meeting 
the prerequisites of paragraph (e)(2), (e)(4), [rtrif](e)(5),[ltrif] or 
(f) of this section, the creditor did not make a reasonable and good 
faith determination of the consumer's repayment ability at the time of 
consummation, by showing that the consumer's income, debt

[[Page 6669]]

obligations, alimony, child support, and the consumer's monthly payment 
(including mortgage-related obligations) on the covered transaction and 
on any simultaneous loans of which the creditor was aware at 
consummation would leave the consumer with insufficient residual income 
or assets other than the value of the dwelling (including any real 
property attached to the dwelling) that secures the loan with which to 
meet living expenses, including any recurring and material non-debt 
obligations of which the creditor was aware at the time of 
consummation.
    (2) Qualified mortgage defined--general. Except as provided in 
paragraph (e)(4)[rtrif], (e)(5),[ltrif] or (f) of this section, a 
qualified mortgage is a covered transaction:
* * * * *
    [rtrif](5) Qualified mortgage defined--small creditor portfolio 
loans. (i) Notwithstanding paragraph (e)(2) of this section, a 
qualified mortgage is a covered transaction:
    (A) That satisfies the requirements of paragraph (e)(2) of this 
section other than the requirements of paragraph (e)(2)(vi) and without 
regard to the standards in appendix Q to this part;
    (B) For which the creditor considers at or before consummation the 
consumer's monthly debt-to-income ratio or residual income and verifies 
the debt obligations and income used to determine that ratio in 
accordance with paragraph (c)(7) of this section, except that the 
calculation of the payment on the covered transaction for purposes of 
determining the consumer's total monthly debt obligations in paragraph 
(c)(7)(i)(A) shall be determined in accordance with paragraph 
(e)(2)(iv) of this section instead of paragraph (c)(5) of this section;
    (C) That is not subject, at consummation, to a commitment to be 
acquired by another person, other than a person that satisfies the 
requirements of paragraph (e)(5)(i)(D) of this section; and
    (D) For which the creditor satisfies the requirements stated in 
Sec.  1026.35(b)(2)(iii)(B) and (C).
    (ii) A qualified mortgage extended pursuant to paragraph (e)(5)(i) 
of this section immediately loses its status as a qualified mortgage 
under paragraph (e)(5)(i) if legal title to the qualified mortgage is 
sold, assigned, or otherwise transferred to another person except when:
    (A) The qualified mortgage is sold, assigned, or otherwise 
transferred to another person three years or more after consummation of 
the qualified mortgage;
    (B) The qualified mortgage is sold, assigned, or otherwise 
transferred to a creditor that satisfies the requirements of paragraph 
(e)(5)(i)(D) of this section;
    (C) The qualified mortgage is sold, assigned, or otherwise 
transferred to another person pursuant to a capital restoration plan or 
other action under 12 U.S.C. 1831o, actions or instructions of any 
person acting as conservator, receiver, or bankruptcy trustee, an order 
of a State or Federal government agency with jurisdiction to examine 
the creditor pursuant to State or Federal law, or an agreement between 
the creditor and such an agency; or
    (D) The qualified mortgage is sold, assigned, or otherwise 
transferred pursuant to a merger of the creditor with another person or 
acquisition of the creditor by another person or of another person by 
the creditor.[ltrif]
* * * * *
    (g) * * *
    (1) * * *
    (ii) * * *
    (B) Is a qualified mortgage under paragraph (e)(2), (e)(4), 
[rtrif](e)(5),[ltrif] or (f) of this section; and
* * * * *
0
3. In Supplement I to Part 1026--Official Interpretations:
    A. Under Section 1026.32--Requirements for High-Cost Mortgages:
    i. Under 32(b) Definitions:
    a. Under Paragraph 32(b)(1)(ii), as amended elsewhere in this issue 
of the Federal Register, paragraph 5 under that heading is added.
    B. Under Section 1026.43--Minimum Standards for Transactions 
Secured by a Dwelling, as added elsewhere in this issue of the Federal 
Register:
    i. Under 43(a) Scope:
    a. The heading Paragraph 43(a)(3)(v)(D) and paragraph 1 under that 
heading are added.
    b. The heading Paragraph 43(a)(3)(vi) and paragraph 1 under that 
heading are added.
    c. The heading Paragraph 43(a)(3)(vii) and paragraph 1 under that 
heading are added.
    d. The heading Paragraph 43(a)(3)(viii) and paragraph 1 under that 
heading are added.
    ii. Under 43(e) Qualified Mortgages:
    a. The heading Paragraph 43(e)(5) and paragraphs 1 through 10 under 
that heading are added.

Supplement I to Part 1026--Official Interpretations

* * * * *

Subpart E--Special Rules for Certain Home Mortgage Transactions

* * * * *

Section 1026.32--Requirements for High-Cost Mortgages

* * * * *
    32(b) Definitions.
    Paragraph 32(b)(1).
    Paragraph 32(b)(1)(ii).
* * * * *
    [rtrif]5. Loan originator compensation--calculating loan originator 
compensation in connection with other charges or payments included in 
the finance charge or made to loan originators. i. Consumer payments to 
mortgage brokers. Mortgage broker fees already included in the points 
and fees calculation under Sec.  1026.32(b)(1)(i) need not be counted 
again under Sec.  1026.32(b)(1)(ii). For example, assume a mortgage 
broker charges a consumer a $3,000 fee for a transaction. The $3,000 
mortgage broker fee is included in the finance charge under Sec.  
1026.4(a)(3). Because the $3,000 mortgage broker fee is already 
included in points and fees under Sec.  1026.32(b)(1)(i), it is not 
counted again under Sec.  1026.32(b)(1)(ii).
    ii. Payments by a mortgage broker to its individual loan originator 
employee. Compensation paid by a mortgage broker to its individual loan 
originator employee is not included in points and fees under Sec.  
1026.32(b)(1)(ii). For example, assume a consumer pays a $3,000 fee to 
a mortgage broker, and the mortgage broker pays a $1,500 commission to 
its individual loan originator employee for that transaction. The 
$3,000 mortgage broker fee is included in points and fees, but the 
$1,500 commission is not included in points and fees because it has 
already been included in points and fees as part of the $3,000 mortgage 
broker fee.

Alternative 1

    iii. Creditor's origination fees. Section 1026.32(b)(1)(ii) 
requires a creditor to include compensation paid by a consumer or 
creditor to a loan originator in the calculation of points and fees in 
addition to any fees or charges paid by the consumer to the creditor 
included in points and fees under Sec.  1026.32(b)(1)(i). For example, 
assume that a consumer pays to the creditor a $3,000 origination fee 
and that the creditor pays to its loan officer employee $1,500 in 
compensation attributed to the transaction. Assume further that the 
consumer pays no other charges to the creditor that are included in 
points and fees under Sec.  1026.32(b)(1)(i) and the loan officer 
receives no other compensation that is included in points and fees 
under Sec.  1026.32(b)(1)(ii). For purposes of calculating points and 
fees, the $3,000 origination fee is included in points and fees under 
Sec.  1026.32(b)(1)(i)

[[Page 6670]]

and the $1,500 in loan officer compensation is included in points and 
fees under Sec.  1026.32(b)(1)(ii), equaling $4,500 in total points and 
fees, provided that no other points and fees are paid or compensation 
received.

Alternative 2

    iii. Creditor's origination fees. Section 1026.32(b)(1)(ii) 
requires a creditor to reduce the amount of loan originator 
compensation included in the points and fees calculation under Sec.  
1026.32(b)(1)(ii) by any amount included in the points and fees 
calculation under Sec.  1026.32(b)(1)(i). For example, assume that a 
consumer pays to the creditor a $3,000 origination fee and that the 
creditor pays to the loan originator $1,500 in compensation attributed 
to the transaction. Assume further that the consumer pays no other 
charges to the creditor that are included in points and fees under 
Sec.  1026.32(b)(1)(i) and the loan originator receives no other 
compensation that is included in points and fees under Sec.  
1026.32(b)(1)(ii). For purposes of calculating points and fees, the 
$3,000 origination fee is included in points and fees under Sec.  
1026.32(b)(1)(i), but the $1,500 in loan originator compensation need 
not be included in points and fees. If, however, the consumer pays to 
the creditor a $1,000 origination fee and the creditor pays to the loan 
originator $1,500 in compensation, then the $1,000 origination fee is 
included in points and fees under Sec.  1026.32(b)(1)(i), and $500 of 
the loan originator compensation is included in points and fees under 
Sec.  1026.32(b)(1)(ii), equaling $1,500 in total points and fees, 
provided that no other points and fees are paid or compensation 
received. This example illustrates the requirements of Sec.  
1026.32(b)(1)(ii) for both retail and wholesale transactions.[ltrif]
* * * * *

Section 1026.43--Minimum Standards for Transactions Secured by a 
Dwelling 43(a) Scope

* * * * *
    [rtrif]Paragraph 43(a)(3)(v)(D).
    1. General. An extension of credit is exempt from the requirements 
of Sec.  1026.43(c) through (f) if the credit is extended by a creditor 
described in Sec.  1026.43(a)(3)(v)(D), provided the conditions 
specified in that section are satisfied. The conditions specified in 
Sec.  1026.43(a)(3)(v)(D)(1) and (2) are determined according to 
activity that occurred in the calendar year preceding the calendar year 
in which the consumer's application was received. Section 
1026.43(a)(3)(v)(D)(2) provides that, during the preceding calendar 
year, the creditor must have extended credit only to consumers with 
income that did not exceed the qualifying limit then in effect for 
moderate income families, as specified in regulations prescribed by the 
U.S. Department of Housing and Urban Development pursuant to section 8 
of the United States Housing Act of 1937. For example, a creditor has 
satisfied the requirement in Sec.  1026.43(a)(3)(v)(D)(2) if the 
creditor extended credit only to consumers with incomes that did not 
exceed the qualifying limit in effect on the dates the creditor 
received each consumer's individual application. The condition 
specified in Sec.  1026.43(a)(3)(v)(D)(3), which relates to the current 
extension of credit, provides that the extension of credit must be to a 
consumer with income that does not exceed the qualifying limit 
specified in Sec.  1026.43(a)(3)(v)(D)(2) in effect on the date the 
creditor received the consumer's application. For example, assume that 
a creditor with a tax exemption ruling under section 501(c)(3) of the 
Internal Revenue Code of 1986 has satisfied the conditions identified 
in Sec.  1026.43(a)(3)(v)(D)(1) and (2). If, on May 21, 2014, the 
creditor in this example extends credit secured by a dwelling to a 
consumer whose application reflected income in excess of the qualifying 
limit identified in Sec.  1026.43(a)(3)(v)(D)(2) in effect on the date 
the creditor received that consumer's application, the creditor has not 
satisfied the condition in Sec.  1026.43(a)(3)(v)(D)(3) and this 
extension of credit is not exempt from the requirements of Sec.  
1026.43(c) through (f).
    Paragraph 43(a)(3)(vi).
    1. General. The requirements of Sec.  1026.43(c) through (f) do not 
apply to a mortgage loan modification made in connection with a program 
authorized by sections 101 and 109 of the Emergency Economic 
Stabilization Act of 2008. If a creditor is underwriting an extension 
of credit that is a refinancing, as defined by Sec.  1026.20(a), that 
will be made pursuant to a program authorized by sections 101 and 109 
of the Emergency Economic Stabilization Act of 2008, the creditor also 
need not comply with Sec.  1026.43(c) through (f). A creditor need not 
determine whether the mortgage loan modification is considered a 
refinancing under Sec.  1026.20(a) for purposes of determining 
applicability of Sec.  1026.43; if the transaction is made in 
connection with these programs, the requirements of Sec.  1026.43(c) 
through (f) do not apply. In addition, if a creditor underwrites a new 
extension of credit, such as a subordinate-lien mortgage loan, that 
will be made pursuant to a program authorized by sections 101 and 109 
of the Emergency Economic Stabilization Act of 2008, the creditor need 
not comply with the requirements of Sec.  1026.43(c) through (f).
    Paragraph 43(a)(3)(vii).
    1. General. The requirements of Sec.  1026.43(c) through (f) do not 
apply to an extension of credit that is a refinancing, as defined by 
Sec.  1026.20(a) but without regard for whether the creditor is the 
creditor, holder, or servicer of the original obligation, that is 
eligible to be insured, guaranteed, or made pursuant to programs 
administered by the Federal agencies identified in Sec.  
1026.43(a)(3)(vii), provided that rules issued by such agencies 
pursuant to section 129C(b)(3)(B)(ii) or 129C(a)(5) of TILA have not 
become effective on or before the date the refinancing is consummated. 
For example:
    i. Assume that a consumer applies for a refinancing that is 
eligible to be insured, guaranteed, or made pursuant to a program 
administered by the U.S. Department of Veterans Affairs. If the U.S. 
Department of Veterans Affairs has issued rules pursuant to TILA 
section 129C(b)(3)(B)(ii) or 129C(a)(5) that have become effective, the 
exemption in Sec.  1026.43(a)(3)(vii) does not apply because those 
rules will separately govern the status of U.S. Department of Veterans 
Affairs loans.
    ii. Assume that a consumer applies for a refinancing of a 
subordinate-lien mortgage loan that is eligible to be insured, 
guaranteed, or made pursuant to a program administered by the U.S. 
Department of Veterans Affairs and the U.S. Department of Veterans 
Affairs has issued rules pursuant to TILA section 129C(b)(3)(B)(ii) or 
129C(a)(5) that have become effective. Assume further that such 
effective rules apply to refinancings of first-lien mortgage loans, but 
not subordinate-lien mortgage loans. The exemption in Sec.  
1026.43(a)(3)(vii) does not apply, regardless of the status of the 
particular loans under the rules issued, because the U.S. Department of 
Veterans Affairs has issued rules pursuant to TILA section 
129C(b)(3)(B)(ii) or 129C(a)(5) that have become effective. The 
exemption does not apply even if the applicability of such Federal 
agency rules is determined based on program type instead of loan type. 
Thus, the exemption in Sec.  1026.43(a)(3)(vii) does not apply even if 
the U.S. Department of Veterans Affairs rules do not apply to the 
particular U.S. Department of Veterans Affairs program under which the 
refinancing is eligible to be insured, guaranteed, or made.

[[Page 6671]]

    iii. Assume that a consumer applies for a refinancing that is 
eligible to be insured, guaranteed, or made pursuant to a program 
administered by the Federal Housing Administration and the Federal 
Housing Administration has issued rules pursuant to TILA section 
129C(b)(3)(B)(ii) or 129C(a)(5) that have become effective. Assume 
further that the refinancing for which the consumer applies is also 
eligible to be insured, guaranteed, or made pursuant to a program 
administered by the U.S. Department of Agriculture, but the U.S. 
Department of Agriculture has not issued rules pursuant to TILA section 
129C(b)(3)(B)(ii) or 129C(a)(5), or the U.S. Department of Agriculture 
has issued rules implementing TILA section 129C(b)(3)(B)(ii) or 
129C(a)(5) that have not yet taken effect at the time the refinancing 
is consummated. The exemption applies to that refinancing because the 
refinancing is eligible to be to be insured, guaranteed, or made 
pursuant to a pursuant to program administered by a Federal agency 
identified in Sec.  1026.43(a)(3)(vii), and such Federal agency has not 
issued rules pursuant to section 129C(b)(3)(B)(ii) or 129C(a)(5) of 
TILA that have become effective.
    Paragraph 43(a)(3)(viii).
    1. General. Section 1026.43(a)(3)(viii) provides an exemption from 
the requirements of Sec.  1026.43(c) through (f) for certain extensions 
of credit that are considered refinancings, as defined in Sec.  
1026.20(a) but without regard for whether the creditor is the creditor, 
holder, or servicer of the original obligation, that are eligible for 
purchase or guarantee by Fannie Mae or Freddie Mac. The exemption 
provided by Sec.  1026.43(a)(3)(viii) is available only while these 
entities remain in conservatorship. For example, if Fannie Mae remains 
in conservatorship, but Freddie Mac exits conservatorship, the 
exemption continues to apply to refinancings that are eligible for 
purchase by Fannie Mae, provided the other conditions specified in 
Sec.  1026.43(a)(3)(viii) are met. Further, the exemption is available 
only if the existing obligation that will be satisfied and replaced by 
the refinancing was consummated prior to January 10, 2014. For example, 
if a consumer applies for an extension of credit that is a refinancing, 
as defined by Sec.  1026.20(a), that is eligible to be purchased by 
Fannie Mae or Freddie Mac, but the consumer's current mortgage loan was 
consummated on or after January 10, 2014, the exemption provided by 
Sec.  1026.43(a)(3)(viii) does not apply.[ltrif]
* * * * *
    43(e) Qualified mortgages.
* * * * *
    [rtrif]Paragraph 43(e)(5).
    1. Satisfaction of qualified mortgage requirements. For a covered 
transaction to be a qualified mortgage under Sec.  1026.43(e)(5), the 
mortgage must satisfy the requirements for a qualified mortgage under 
Sec.  1026.43(e)(2), other than the requirements regarding debt-to-
income ratio. For example, a qualified mortgage under Sec.  
1026.43(e)(5) may not have a loan term in excess of 30 years because 
longer terms are prohibited for qualified mortgages under Sec.  
1026.43(e)(2)(ii). Similarly, a qualified mortgage under Sec.  
1026.43(e)(5) may not result in a balloon payment because Sec.  
1026.43(e)(2)(i)(C) provides that qualified mortgages may not have 
balloon payments except as provided under Sec.  1026.43(f). However, a 
covered transaction need not comply with Sec.  1026.43(e)(2)(vi), which 
prohibits consumer monthly debt-to-income ratios in excess of 43 
percent. A covered transaction therefore can be a qualified mortgage 
under Sec.  1026.43(e)(5) even though the consumer's monthly debt-to-
income ratio is greater than 43 percent.
    2. Debt-to-income ratio or residual income. Section 1026.43(e)(5) 
does not prescribe a specific monthly debt-to-income ratio with which 
creditors must comply. Instead, creditors must consider a consumer's 
debt-to-income ratio or residual income calculated generally in 
accordance with Sec.  1026.43(c)(7) and verify the information used to 
calculate the debt-to-income ratio or residual income in accordance 
with Sec.  1026.43(c)(3) and (4). However, Sec.  1026.43(c)(7) refers 
creditors to Sec.  1026.43(c)(5) for instructions on calculating the 
payment on the covered transaction. Section 1026.43(c)(5) requires 
creditors to calculate the payment differently than Sec.  
1026.43(e)(2)(iv). For purposes of the qualified mortgage definition in 
Sec.  1026.43(e)(5), creditors must base their calculation of the 
consumer's debt-to-income ratio or residual income on the payment on 
the covered transaction calculated according to Sec.  1026.43(e)(2)(iv) 
instead of according to Sec.  1026.43(c)(5). Creditors are not required 
to calculate the consumer's monthly debt-to-income ratio in accordance 
with appendix Q to this part as is required under the general 
definition of qualified mortgages by Sec.  1026.43(e)(2)(vi).
    3. Forward commitments. A creditor may make a mortgage loan that 
will be transferred or sold to a purchaser pursuant to an agreement 
that has been entered into at or before the time the transaction is 
consummated. Such an agreement is sometimes known as a ``forward 
commitment.'' A mortgage that will be acquired by a purchaser pursuant 
to a forward commitment does not satisfy the requirements of Sec.  
1026.43(e)(5), whether the forward commitment provides for the purchase 
and sale of the specific transaction or for the purchase and sale of 
transactions with certain prescribed criteria that the transaction 
meets. However, a forward commitment to another person that also meets 
the requirements of Sec.  1026.43(e)(5)(i)(D) is permitted. For 
example: assume a creditor that is eligible to make qualified mortgages 
under Sec.  1026.43(e)(5) makes a mortgage. If that mortgage meets the 
purchase criteria of an investor with which the creditor has an 
agreement to sell loans after consummation, then the loan does not meet 
the definition of a qualified mortgage under Sec.  1026.43(e)(5). 
However, if the investor meets the requirements of Sec.  
1026.43(e)(5)(i)(D), the mortgage will be a qualified mortgage if all 
other applicable criteria also are satisfied.
    4. Creditor qualifications. To be eligible to make qualified 
mortgages under Sec.  1026.43(e)(5), a creditor must satisfy the 
requirements stated in Sec.  1026.35(b)(2)(iii)(B) and (C). Section 
1026.35(b)(2)(iii)(B) requires that, during the preceding calendar 
year, the creditor and its affiliates together originated 500 or fewer 
first-lien covered transactions. Section 1026.35(b)(2)(iii)(C) requires 
that, as of the end of the preceding calendar year, the creditor had 
total assets of less than $2 billion, adjusted annually by the Bureau 
for inflation.
    5. Requirement to hold in portfolio. Creditors generally must hold 
a loan in portfolio to maintain the transaction's status as a qualified 
mortgage under Sec.  1026.43(e)(5), subject to four exceptions. Unless 
one of these exceptions applies, a loan is no longer a qualified 
mortgage under Sec.  1026.43(e)(5) once legal title to the debt 
obligation is sold, assigned, or otherwise transferred to another 
person. Accordingly, unless one of the exceptions applies, the 
transferee could not benefit from the presumption of compliance for 
qualified mortgages under Sec.  1026.43(e)(1) unless the loan also met 
the requirements of another qualified mortgage definition.
    6. Application to subsequent transferees. The exceptions contained 
in Sec.  1026.43(e)(5)(ii) apply not only to an initial sale, 
assignment, or other transfer by the originating creditor but to 
subsequent sales, assignments, and other transfers as well. For 
example,

[[Page 6672]]

assume Creditor A originates a qualified mortgage under Sec.  
1026.43(e)(5). Six months after consummation, Creditor A sells the 
qualified mortgage to Creditor B pursuant to Sec.  1026.43(e)(5)(ii)(B) 
and the loan retains its qualified mortgage status because Creditor B 
complies with the limits on asset size and number of transactions. If 
Creditor B sells the qualified mortgage, it will lose its qualified 
mortgage status under Sec.  1026.43(e)(5) unless the sale qualifies for 
one of the Sec.  1026.43(e)(5)(ii) exceptions for sales three or more 
years after consummation, to another qualifying institution, as 
required by supervisory action, or pursuant to a merger or acquisition.
    7. Transfer three years after consummation. Under Sec.  
1026.43(e)(5)(ii)(A), if a qualified mortgage under Sec.  1026.43(e)(5) 
is sold, assigned, or otherwise transferred three years or more after 
consummation, the loan retains its status as a qualified mortgage under 
Sec.  1026.43(e)(5) following the transfer. The transferee need not be 
eligible to originate qualified mortgages under Sec.  1026.43(e)(5). 
The loan will continue to be a qualified mortgage throughout its life, 
and the transferee, and any subsequent transferees, may invoke the 
presumption of compliance for qualified mortgages under Sec.  
1026.43(e)(1).
    8. Transfer to another qualifying creditor. Under Sec.  
1026.43(e)(5)(ii)(B), a qualified mortgage under Sec.  1026.43(e)(5) 
may be sold, assigned, or otherwise transferred at any time to another 
creditor that meets the requirements of Sec.  1026.43(e)(5)(v). That 
section requires that a creditor, during the preceding calendar year, 
together with all affiliates, 500 or fewer first-lien covered 
transactions and had total assets less than $2 billion (as adjusted for 
inflation) at the end of the preceding calendar year. A qualified 
mortgage under Sec.  1026.43(e)(5) transferred to a creditor that meets 
these criteria would retain its qualified mortgage status even if it is 
transferred less than three years after consummation.
    9. Supervisory sales. Section 1026.43(e)(5)(ii)(C) facilitates 
sales that are deemed necessary by supervisory agencies to revive 
troubled creditors and resolve failed creditors. A qualified mortgage 
under Sec.  1026.43(e)(5) retains its qualified mortgage status if it 
is sold, assigned, or otherwise transferred to another person pursuant 
to: a capital restoration plan or other action under 12 U.S.C. 1831o; 
the actions or instructions of any person acting as conservator, 
receiver or bankruptcy trustee; an order of a State or Federal 
government agency with jurisdiction to examine the creditor pursuant to 
State or Federal law; or an agreement between the creditor and such an 
agency. A qualified mortgage under Sec.  1026.43(e)(5) that is sold, 
assigned, or otherwise transferred under these circumstances retains 
its qualified mortgage status regardless of how long after consummation 
it is sold and regardless of the size or other characteristics of the 
transferee. Section 1026.43(e)(5)(ii)(C) does not apply to transfers 
done to comply with a generally applicable regulation with future 
effect designed to implement, interpret, or prescribe law or policy in 
the absence of a specific order by or a specific agreement with a 
governmental agency described in Sec.  1026.43(e)(5)(ii)(C) directing 
the sale of one or more qualified mortgages under Sec.  1026.43(e)(5) 
held by the creditor or one of the other circumstances listed in Sec.  
1026.43(e)(5)(ii)(C). For example, a qualified mortgage under Sec.  
1026.43(e)(5) that is sold pursuant to a capital restoration plan under 
12 U.S.C. 1831o would retain its status as a qualified mortgage 
following the sale. However, if the creditor simply chose to sell the 
same qualified mortgage as one way to comply with general regulatory 
capital requirements in the absence of supervisory action or agreement 
it would lose its status as a qualified mortgage following the sale 
unless it qualifies under another definition of qualified mortgage.
    10. Mergers and acquisitions. A qualified mortgage under Sec.  
1026.43(e)(5) retains its qualified mortgage status if a creditor 
merges with, is acquired by, or acquires another person regardless of 
whether the creditor or its successor is eligible to originate new 
qualified mortgages under Sec.  1026.43(e)(5) after the merger or 
acquisition. However, the creditor or its successor can originate new 
qualified mortgages under Sec.  1026.43(e)(5) only if it complies with 
all of the requirements of Sec.  1026.43(e)(5) after the merger or 
acquisition. For example, assume a creditor that originates 250 covered 
transactions each year and originates qualified mortgages under Sec.  
1026.43(e)(5) is acquired by a larger creditor that originates 10,000 
covered transactions each year. Following the acquisition, the small 
creditor would no longer be able to originate Sec.  1026.43(e)(5) 
qualified mortgages because, together with its affiliates, it would 
originate more than 500 covered transactions each year. However, the 
Sec.  1026.43(e)(5) qualified mortgages originated by the small 
creditor before the acquisition would retain their qualified mortgage 
status. [ltrif]

    Dated: January 10, 2013.
Richard Cordray,
Director, Bureau of Consumer Financial Protection.
[FR Doc. 2013-00739 Filed 1-16-13; 11:15 am]
BILLING CODE 4810-AM-P
```