Vol. 78 Wednesday, 

No. 20 January 30, 2013 

Part II 

Bureau of Consumer Financial Protection 

12 CFR Part 1026 

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

Lending Act (Regulation Z); Final Rule 


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6408 Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 

BUREAU OF CONSUMER FINANCIAL 

PROTECTION 

12 CFR Part 1026 

[CFPB–2011–0008; CFPB–2012–0022] 

RIN 3170–AA17 

Ability-to-Repay and Qualified 

Mortgage Standards Under the Truth in 

Lending Act (Regulation Z) 

AGENCY: Bureau of Consumer Financial 

Protection. 

ACTION: Final rule; official 

interpretations. 

SUMMARY: The Bureau of Consumer 

Financial Protection (Bureau) is 

amending Regulation Z, which 

implements the Truth in Lending Act 

(TILA). Regulation Z currently prohibits 

a creditor from making a higher-priced 

mortgage loan without regard to the 

consumer’s ability to repay the loan. 

The final rule implements sections 1411 

and 1412 of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act 

(Dodd-Frank Act), which generally 

require 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 final rule 

also implements section 1414 of the 

Dodd-Frank Act, which limits 

prepayment penalties. Finally, the final 

rule requires creditors to retain evidence 

of compliance with the rule for three 

years after a covered loan is 

consummated. 

DATES: The rule is effective January 10, 

2014. 

FOR FURTHER INFORMATION CONTACT: 

Joseph Devlin, Gregory Evans, David 

Friend, Jennifer 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 the Final Rule 

The Consumer Financial Protection 

Bureau (Bureau) is issuing a final rule 

to implement laws requiring mortgage 

lenders to consider consumers’ ability to 

repay home loans before extending them 

credit. The rule will take effect on 

January 10, 2014. 

The Bureau is also releasing a 

proposal to seek comment on whether to 

adjust the final rule for certain 

community-based lenders, housing 

stabilization programs, certain 

refinancing programs of the Federal 

National Mortgage Association (Fannie 

Mae) or the Federal Home Loan 

Mortgage Corporation (Freddie Mac) 

(collectively, the GSEs) and Federal 

agencies, and small portfolio creditors. 

The Bureau expects to finalize the 

concurrent proposal this spring so that 

affected creditors can prepare for the 

January 2014 effective date. 

Background 

During the years preceding the 

mortgage crisis, too many mortgages 

were made to consumers without regard 

to the consumer’s ability to repay the 

loans. Loose underwriting practices by 

some creditors—including failure to 

verify the consumer’s income or debts 

and qualifying consumers for mortgages 

based on ‘‘teaser’’ interest rates that 

would cause monthly payments to jump 

to unaffordable levels after the first few 

years—contributed to a mortgage crisis 

that led to the nation’s most serious 

recession since the Great Depression. 

In response to this crisis, in 2008 the 

Federal Reserve Board (Board) adopted 

a rule under the Truth in Lending Act 

which prohibits creditors from making 

‘‘higher-price mortgage loans’’ without 

assessing consumers’ ability to repay the 

loans. Under the Board’s rule, a creditor 

is presumed to have complied with the 

ability-to-repay requirements if the 

creditor follows certain specified 

underwriting practices. This rule has 

been in effect since October 2009. 

In the 2010 Dodd-Frank Wall Street 

Reform and Consumer Protection Act, 

Congress required that for residential 

mortgages, creditors must make 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. Congress also 

established a presumption of 

compliance for a certain category of 

mortgages, called ‘‘qualified mortgages.’’ 

These provisions are similar, but not 

identical to, the Board’s 2008 rule and 

cover the entire mortgage market rather 

than simply higher-priced mortgages. 

The Board proposed a rule to implement 

the new statutory requirements before 

authority passed to the Bureau to 

finalize the rule. 

Summary of Final Rule 

The final rule contains the following 

key elements: 

Ability-to-Repay Determinations. The 

final rule describes certain minimum 

requirements for creditors making 

ability-to-repay determinations, but 

does not dictate that they follow 

particular underwriting models. At a 

minimum, creditors generally must 

consider 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, 

alimony, and child support; (7) the 

monthly debt-to-income ratio or 

residual income; and (8) credit history. 

Creditors must generally use reasonably 

reliable third-party records to verify the 

information they use to evaluate the 

factors. 

The rule provides guidance as to the 

application of these factors under the 

statute. For example, monthly payments 

must generally be calculated by 

assuming that the loan is repaid in 

substantially equal monthly payments 

during its term. For adjustable-rate 

mortgages, the monthly payment must 

be calculated using the fully indexed 

rate or an introductory rate, whichever 

is higher. Special payment calculation 

rules apply for loans with balloon 

payments, interest-only payments, or 

negative amortization. 

The final rule also provides special 

rules to encourage creditors to refinance 

‘‘non-standard mortgages’’—which 

include various types of mortgages 

which can lead to payment shock that 

can result in default—into ‘‘standard 

mortgages’’ with fixed rates for at least 

five years that reduce consumers’ 

monthly payments. 

Presumption for Qualified Mortgages. 

The Dodd-Frank Act provides that 

‘‘qualified mortgages’’ are entitled to a 

presumption that the creditor making 

the loan satisfied the ability-to-repay 

requirements. However, the Act did not 

specify whether the presumption of 

compliance is conclusive (i.e., creates a 

safe harbor) or is rebuttable. The final 

rule provides a safe harbor for loans that 

satisfy the definition of a qualified 

mortgage and are not ‘‘higher-priced,’’ 

as generally defined by the Board’s 2008 

rule. The final rule provides a rebuttable 

presumption for higher-priced mortgage 

loans, as described further below. 

The line the Bureau is drawing is one 

that has long been recognized as a rule 

of thumb to separate prime loans from 

subprime loans. Indeed, under the 

existing regulations that were adopted 

by the Board in 2008, only higher-priced 

mortgage loans are subject to an abilityto-repay requirement and a rebuttable 

presumption of compliance if creditors 

follow certain requirements. The new 

rule strengthens the requirements 

needed to qualify for a rebuttable 

presumption for subprime loans and 


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Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 6409 

defines with more particularity the 

grounds for rebutting the presumption. 

Specifically, the final rule provides that 

consumers may show a violation with 

regard to a subprime qualified mortgage 

by showing that, at the time the loan 

was originated, the consumer’s income 

and debt obligations left insufficient 

residual income or assets to meet living 

expenses. The analysis would consider 

the consumer’s monthly payments on 

the loan, loan-related obligations, and 

any simultaneous loans of which the 

creditor was aware, as well as any 

recurring, material living expenses of 

which the creditor was aware. Guidance 

accompanying the rule notes that the 

longer the period of time that the 

consumer has demonstrated actual 

ability to repay the loan by making 

timely payments, without modification 

or accommodation, after consummation 

or, for an adjustable-rate mortgage, after 

recast, the less likely the consumer will 

be able to rebut the presumption based 

on insufficient residual income. 

With respect to prime loans—which 

are not currently covered by the Board’s 

ability-to-repay rule—the final rule 

applies the new ability-to-repay 

requirements but creates a strong 

presumption for those prime loans that 

constitute qualified mortgages. Thus, if 

a prime loan satisfies the qualified 

mortgage criteria described below, it 

will be conclusively presumed that the 

creditor made a good faith and 

reasonable determination of the 

consumer’s ability to repay. 

General Requirements for Qualified 

Mortgages. The Dodd-Frank Act sets 

certain product-feature prerequisites 

and affordability underwriting 

requirements for qualified mortgages 

and vests discretion in the Bureau to 

decide whether additional underwriting 

or other requirements should apply. The 

final rule implements the statutory 

criteria, which generally prohibit loans 

with negative amortization, interestonly payments, balloon payments, or 

terms exceeding 30 years from being 

qualified mortgages. So-called ‘‘no-doc’’ 

loans where the creditor does not verify 

income or assets also cannot be 

qualified mortgages. Finally, a loan 

generally cannot be a qualified mortgage 

if the points and fees paid by the 

consumer exceed three percent of the 

total loan amount, although certain 

‘‘bona fide discount points’’ are 

excluded for prime loans. The rule 

provides guidance on the calculation of 

points and fees and thresholds for 

smaller loans. 

The final rule also establishes general 

underwriting criteria for qualified 

mortgages. Most importantly, the 

general rule requires that monthly 

payments be calculated based on the 

highest payment that will apply in the 

first five years of the loan and that the 

consumer have a total (or ‘‘back-end’’) 

debt-to-income ratio that is less than or 

equal to 43 percent. The appendix to the 

rule details the calculation of debt-toincome for these purposes, drawing 

upon Federal Housing Administration 

guidelines for such calculations. The 

Bureau believes that these criteria will 

protect consumers by ensuring that 

creditors use a set of underwriting 

requirements that generally safeguard 

affordability. At the same time, these 

criteria provide bright lines for creditors 

who want to make qualified mortgages. 

The Bureau also believes that there 

are many instances in which individual 

consumers can afford a debt-to-income 

ratio above 43 percent based on their 

particular circumstances, but that such 

loans are better evaluated on an 

individual basis under the ability-torepay criteria rather than with a blanket 

presumption. In light of the fragile state 

of the mortgage market as a result of the 

recent mortgage crisis, however, the 

Bureau is concerned that creditors may 

initially be reluctant to make loans that 

are not qualified mortgages, even though 

they are responsibly underwritten. The 

final rule therefore provides for a 

second, temporary category of qualified 

mortgages that have more flexible 

underwriting requirements so long as 

they satisfy the general product feature 

prerequisites for a qualified mortgage 

and also satisfy the underwriting 

requirements of, and are therefore 

eligible to be purchased, guaranteed or 

insured by either (1) the GSEs while 

they operate under Federal 

conservatorship or receivership; or (2) 

the U.S. Department of Housing and 

Urban Development, Department of 

Veterans Affairs, or Department of 

Agriculture or Rural Housing Service. 

This temporary provision will phase out 

over time as the various Federal 

agencies issue their own qualified 

mortgage rules and if GSE 

conservatorship ends, and in any event 

after seven years. 

Rural Balloon-Payment Qualified 

Mortgages. The final rule also 

implements a special provision in the 

Dodd-Frank Act that would treat certain 

balloon-payment mortgages as qualified 

mortgages if they are originated and 

held in portfolio by small creditors 

operating predominantly in rural or 

underserved areas. This provision is 

designed to assure credit availability in 

rural areas, where some creditors may 

only offer balloon-payment mortgages. 

Loans are only eligible if they have a 

term of at least five years, a fixedinterest rate, and meet certain basic 

underwriting standards; debt-to-income 

ratios must be considered but are not 

subject to the 43 percent general 

requirement. 

Creditors are only eligible to make 

rural balloon-payment qualified 

mortgages if they originate at least 50 

percent of their first-lien mortgages in 

counties that are rural or underserved, 

have less than $2 billion in assets, and 

(along with their affiliates) originate no 

more than 500 first-lien mortgages per 

year. The Bureau will designate a list of 

‘‘rural’’ and ‘‘underserved’’ counties 

each year, and has defined coverage 

more broadly than originally had been 

proposed. Creditors must generally hold 

the loans on their portfolios for three 

years in order to maintain their 

‘‘qualified mortgage’’ status. 

Other Final Rule Provisions. The final 

rule also implements Dodd-Frank Act 

provisions that generally prohibit 

prepayment penalties except for certain 

fixed-rate, qualified mortgages where 

the penalties satisfy certain restrictions 

and the creditor has offered the 

consumer an alternative loan without 

such penalties. To match with certain 

statutory changes, the final rule also 

lengthens to three years the time 

creditors must retain records that 

evidence compliance with the ability-torepay and prepayment penalty 

provisions and prohibits evasion of the 

rule by structuring a closed-end 

extension of credit that does not meet 

the definition of open-end credit as an 

open-end plan. 

Summary of Concurrent Proposal 

The concurrent proposal seeks 

comment on whether the general abilityto-repay and qualified mortgage rule 

should be modified to address potential 

adverse consequences on certain 

narrowly-defined categories of lending 

programs. Because those measures were 

not proposed by the Board originally, 

the Bureau believes additional public 

input would be helpful. Specifically, the 

proposal seeks comment on whether it 

would be appropriate to exempt 

designated non-profit lenders, 

homeownership stabilization programs, 

and certain Federal agency and GSE 

refinancing programs from the abilityto-repay requirements because they are 

subject to their own specialized 

underwriting criteria. 

The proposal also seeks comment on 

whether to create a new category of 

qualified mortgages, similar to the one 

for rural balloon-payment mortgages, for 

loans without balloon-payment features 

that are originated and held on portfolio 

by small creditors. The new category 

would not be limited to lenders that 

operate predominantly in rural or 


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6410 Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 

1Fed. Reserve Sys., Flow of Funds Accounts of 

the United States, at 67 tbl.L.10 (2012), available at 

http://www.federalreserve.gov/releases/z1/Current/ 

z1.pdf (as of the end of the third quarter of 2012). 

2See Thomas F. Siems, Branding the Great 

Recession, Fin. Insights (Fed. Reserve Bank of Dall.) 

May 13, 2012, at 3, available at http:// 

www.dallasfed.org/assets/documents/banking/firm/ 

fi/fi1201.pdf (stating that the [great recession] ‘‘was 

the longest and deepest economic contraction, as 

measured by the drop in real GDP, since the Great 

Depression.’’). 

3See U.S. Dep’t of Hous. & Urban Dev., An 

Analysis of Mortgage Refinancing, 2001–2003, at 2 

(2004) (‘‘An Analysis of Mortgage Refinancing, 

2001–2003’’), available at www.huduser.org/ 

Publications/pdf/MortgageRefinance03.pdf; 

Souphala Chomsisengphet & Anthony PenningtonCross, The Evolution of the Subprime Mortgage 

Market, 88 Fed. Res. Bank of St. Louis Rev. 31, 48 

(2006), available at http://research.stlouisfed.org/ 

publications/review/article/5019. 

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

Crisis Inquiry Report: Final Report of the National 

Commission on the Causes of the Financial and 

Economic Crisis in the United States 156 (Official 

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

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

5An Analysis of Mortgage Refinancing, 2001– 

2003, at 1. 

6FCIC Report at 88. These products included 

most notably 2/28 and 3/27 hybrid adjustable rate 

mortgages (ARMs) and option ARM products. Id. at 

106. A hybrid ARM is an adjustable rate mortgage 

loan that has a low fixed introductory rate for a 

certain period of time. An option ARM is an 

adjustable rate mortgage loan that has a scheduled 

loan payment that may result in negative 

amortization for a certain period of time, but that 

expressly permits specified larger payments in the 

contract or servicing documents, such as an 

interest-only payment or a fully amortizing 

payment. For these loans, the scheduled negatively 

amortizing payment was typically described in 

marketing and servicing materials as the ‘‘optional 

payment.’’ These products were often marketed to 

subprime customers. 

7For example, 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, Fed. Reserve 

Bd. (July 20, 2011), available at http:// 

www.federalreserve.gov/newsevents/press/ 

enforcement/20110720a.htm. 

8 Inside Mortg. Fin., Mortgage Originations by 

Product, in 1. The 2011 Mortgage Market Statistical 

Annual 20 (2011). 

9FCIC Report at 215–217. 

10CoreLogic’s TrueStandings Servicing (reflects 

first-lien mortgage loans) (data service accessible 

only through paid subscription). 

11 Id. 

underserved areas, but would use the 

same general size thresholds and other 

criteria as the rural balloon-payment 

rules. The proposal also seeks comment 

on whether to increase the threshold 

separating safe harbor and rebuttable 

presumption qualified mortgages for 

both rural balloon-payment qualified 

mortgages and the new small portfolio 

qualified mortgages, in light of the fact 

that small creditors often have higher 

costs of funds than larger creditors. 

Specifically, the Bureau is proposing a 

threshold of 3.5 percentage points above 

APOR for first-lien loans. 

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 loosening of underwriting 

standards. See 73 FR 44524 (July 30, 

2008). The following discussion 

provides background information, 

including a brief summary of the 

legislative and regulatory responses to 

the foregoing concerns, which 

culminated in the enactment of the 

Dodd-Frank Act on July 21, 2010, the 

Board’s May 11, 2011, proposed rule to 

implement certain amendments to TILA 

made by the Dodd-Frank Act, and now 

the Bureau’s issuance of this final rule 

to implement sections 1411, 1412, and 

1414 of that act. 

A. The Mortgage Market 

Overview of the Market and the 

Mortgage Crisis 

The mortgage market is the single 

largest market for consumer financial 

products and services in the United 

States, with approximately $9.9 trillion 

in mortgage loans outstanding.1 During 

the last decade, the market went 

through an unprecedented cycle of 

expansion and contraction that was 

fueled in part by the securitization of 

mortgages and creation of increasingly 

sophisticated derivative products. So 

many other parts of the American 

financial system were drawn into 

mortgage-related activities that, when 

the housing market collapsed in 2008, it 

sparked the most severe recession in the 

United States since the Great 

Depression.2

The expansion in this market is 

commonly attributed to both particular 

economic conditions (including an era 

of low interest rates and rising housing 

prices) and to changes within the 

industry. Interest rates dropped 

significantly—by more than 20 

percent—from 2000 through 2003.3

Housing prices increased dramatically— 

about 152 percent—between 1997 and 

2006.4 Driven by the decrease in interest 

rates and the increase in housing prices, 

the volume of refinancings increased 

rapidly, from about 2.5 million loans in 

2000 to more than 15 million in 2003.5

In the mid-2000s, the market 

experienced a steady deterioration of 

credit standards in mortgage lending, 

with evidence that loans were made 

solely against collateral, or even against 

expected increases in the value of 

collateral, and without consideration of 

ability to repay. This deterioration of 

credit standards was particularly 

evidenced by the growth of ‘‘subprime’’ 

and ‘‘Alt-A’’ products, which consumers 

were often unable to repay.6 Subprime 

products were sold primarily to 

consumers with poor or no credit 

history, although there is evidence that 

some consumers who would have 

qualified for ‘‘prime’’ loans were steered 

into subprime loans as well.7 The AltA category of loans permitted 

consumers to take out mortgage loans 

while providing little or no 

documentation of income or other 

evidence of repayment ability. Because 

these loans involved additional risk, 

they were typically more expensive to 

consumers than ‘‘prime’’ mortgages, 

although many of them had very low 

introductory interest rates. In 2003, 

subprime and Alt-A origination volume 

was about $400 billion; in 2006, it had 

reached $830 billion.8

So long as housing prices were 

continuing to increase, it was relatively 

easy for consumers to refinance their 

existing loans into more affordable 

products to avoid interest rate resets and 

other adjustments. When housing prices 

began to decline in 2005, however, 

refinancing became more difficult and 

delinquency rates on subprime and AltA products increased dramatically.9

More and more consumers, especially 

those with subprime and Alt-A loans, 

were unable or unwilling to make their 

mortgage payments. An early sign of the 

mortgage crisis was an upswing in early 

payment defaults—generally defined as 

borrowers being 60 or more days 

delinquent within the first year. Prior to 

2006, 1.1 percent of mortgages would 

end up 60 or more days delinquent 

within the first two years.10 Taking a 

more expansive definition of early 

payment default to include 60 days 

delinquent within the first two years, 

this figure was double the historic 

average during 2006, 2007 and 2008.11

In 2006, 2007, and 2008, 2.3 percent, 2.1 

percent, and 2.3 percent of mortgages 

ended up 60 or more days delinquent 

within the first two years, respectively. 

By the summer of 2006, 1.5 percent of 

loans less than a year old were in 


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12 Id. 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.’’). 

13 Id. 

14 Id. at 217. 

15 Id. at 124. 

16The U.S. Housing Market: Current Conditions 

and Policy Considerations, at 3 (Fed. Reserve Bd., 

White Paper, 2012), available at http:// 

www.federalreserve.gov/publications/other-reports/ 

files/housing-white-paper-20120104.pdf. 

17Lender Processing Servs., PowerPoint 

Presentation, LPS Mortgage Monitor: May 2012 

Mortgage Performance Observations, Data as of 

April 2012 Month End, 3, 11 (May 2012), available 

at http://www.lpsvcs.com/ 

LPSCorporateInformation/CommunicationCenter/ 

DataReports/Pages/Mortgage-Monitor.aspx. 

18The Housing and Economic Recovery Act of 

2008 (HERA), which created the Federal Housing 

Finance Agency (FHFA), granted the Director of 

FHFA discretionary authority to appoint FHFA 

conservator or receiver of the Enterprises ‘‘for the 

purpose of reorganizing, rehabilitating, or winding 

up the affairs of a regulated entity.’’ Housing and 

Economic Recovery Act of 2008, section 1367 (a)(2), 

amending the Federal Housing Enterprises 

Financial Safety and Soundness Act of 1992, 12 

U.S.C. 4617(a)(2). On September 6, 2008, FHFA 

exercised that authority, placing the Federal 

National Mortgage Association (Fannie Mae) and 

the Federal Home Loan Mortgage Corporation 

(Freddie Mac) into conservatorships. The two GSEs 

have since received more than $180 billion in 

support from the Treasury Department. Through the 

second quarter of 2012, Fannie Mae has drawn 

$116.1 billion and Freddie Mac has drawn $71.3 

billion, for an aggregate draw of $187.5 billion from 

the Treasury Department. Fed. Hous. Fin. Agency, 

Conservator’s Report on the Enterprises’ Financial 

Performance, at 17 (Second Quarter 2012), available 

at http://www.fhfa.gov/webfiles/24549/ 

ConservatorsReport2Q2012.pdf. 

19The Making Home Affordable Program (MHA) 

is the umbrella program for Treasury’s homeowner 

assistance and foreclosure mitigation efforts. The 

main MHA components are the Home Affordable 

Modification Program (HAMP), a Treasury program 

that uses TARP funds to provide incentives for 

mortgage servicers to modify eligible first-lien 

mortgages, and two initiatives at the GSEs that use 

non-TARP funds. Incentive payments for 

modifications to loans owned or guaranteed by the 

GSEs are paid by the GSEs, not TARP. Treasury 

over time expanded MHA to include sub-programs 

designed to overcome obstacles to sustainable 

HAMP modifications. Treasury also allocated TARP 

funds to support two additional housing support 

efforts: An FHA refinancing program and TARP 

funding for 19 state housing finance agencies, 

called the Housing Finance Agency Hardest Hit 

Fund. In the first half of 2012, Treasury extended 

the application period for HAMP by a year to 

December 31, 2013, and opened HAMP to nonowner-occupied rental properties and to consumers 

with a wider range of debt-to-income ratios under 

‘‘HAMP Tier 2.’’ 

20The Home Affordable Refinance Program 

(HARP) is designed to help eligible homeowners 

refinance their mortgage. HARP is designed for 

those homeowners who are current on their 

mortgage payments but have been unable to get 

traditional refinancing because the value of their 

homes has declined. For a mortgage to be 

considered for a HARP refinance, it must be owned 

or guaranteed by the GSEs. HARP ends on 

December 31, 2013. 

21Moody’s Analytics, Credit Forecast 2012 (2012) 

(‘‘Credit Forecast 2012’’), available at http:// 

www.economy.com/default.asp (reflects first-lien 

mortgage loans) (data service accessibly only 

through paid subscription). 

default, and this figure peaked at 2.5 

percent in late 2007, well above the 1.0 

percent peak in the 2000 recession.12

First payment defaults—mortgages 

taken out by consumers who never 

made a single payment—exceeded 1.5 

percent of loans in early 2007.13 In 

addition, 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 more than 40 percent in 2010.14

The impact of this level of 

delinquencies was severe on creditors 

who held loans on their books and on 

private investors who purchased loans 

directly or through securitized vehicles. 

Prior to and during the bubble, the 

evolution of the securitization of 

mortgages attracted increasing 

involvement from financial institutions 

that were not directly involved in the 

extension of credit to consumers and 

from investors worldwide. 

Securitization of mortgages allows 

originating creditors to sell off their 

loans (and reinvest the funds earned in 

making new ones) to investors who 

want an income stream over time. 

Securitization had been pioneered by 

what are now called governmentsponsored enterprises (GSEs), including 

the Federal National Mortgage 

Association (Fannie Mae) and the 

Federal Home Loan Mortgage 

Corporation (Freddie Mac). But by the 

early 2000s, large numbers of private 

financial institutions were deeply 

involved in creating increasingly 

complex mortgage-related investment 

vehicles through securities and 

derivative products. The private 

securitization-backed subprime and AltA mortgage market ground to a halt in 

2007 in the face of the rising 

delinquencies on subprime and Alt-A 

products.15

Six years later, the United States 

continues to grapple with the fallout. 

The fall in housing prices is estimated 

to have resulted in about $7 trillion in 

household wealth losses.16 In addition, 

distressed homeownership and 

foreclosure rates remain at 

unprecedented levels.17

Response and Government Programs 

In light of these conditions, the 

Federal government began providing 

support to the mortgage markets in 2008 

and continues to do so at extraordinary 

levels today. The Housing and 

Economic Recovery Act of 2008, which 

became effective on October 1, 2008, 

provided both new safeguards and 

increased regulation for Fannie Mae and 

Freddie Mac, as well as provisions to 

assist troubled borrowers and to the 

hardest hit communities. Fannie Mae 

and Freddie Mac, which supported the 

mainstream mortgage market, 

experienced heavy losses and were 

placed in conservatorship by the 

Federal government in 2008 to support 

the collapsing mortgage market.18

Because private investors have 

withdrawn from the mortgage 

securitization market and there are no 

other effective secondary market 

mechanisms in place, the GSEs’ 

continued operations help ensure that 

the secondary mortgage market 

continues to function and to assist 

consumers in obtaining new mortgages 

or refinancing existing mortgages. The 

Troubled Asset Relief Program (TARP), 

created to implement programs to 

stabilize the financial system during the 

financial crisis, was authorized through 

the Emergency Economic Stabilization 

Act of 2008 (EESA), as amended by the 

American Recovery and Reinvestment 

Act of 2009, and includes programs to 

help struggling homeowners avoid 

foreclosure.19 Since 2008, several other 

Federal government efforts have 

endeavored to keep the country’s 

housing finance system functioning, 

including the Treasury Department’s 

and the Federal Reserve System’s 

mortgage-backed securities (MBS) 

purchase programs to help keep interest 

rates low and the Federal Housing 

Administration’s (FHA’s) increased 

market presence. As a result, mortgage 

credit has remained available, albeit 

with more restrictive underwriting 

terms that limit or preclude some 

consumers’ access to credit. These same 

government agencies together with the 

GSEs and other market participants 

have also undertaken a series of efforts 

to help families avoid foreclosure 

through loan-modification programs, 

loan-refinance programs and foreclosure 

alternatives.20

Size and Volume of the Current 

Mortgage Origination Market 

Even with the economic downturn 

and tightening of credit standards, 

approximately $1.28 trillion in mortgage 

loans were originated in 2011.21 In 

exchange for an extension of mortgage 

credit, consumers promise to make 

regular mortgage payments and provide 

their home or real property as collateral. 

The overwhelming majority of 

homebuyers continue to use mortgage 

loans to finance at least some of the 


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22 Inside Mortg. Fin., New Homes Sold by 

Financing, in 1 The 2012 Mortgage Market 

Statistical Annual 12 (2012). 

23Credit Forecast 2012. 

24 Inside Mortg. Fin., Mortgage Originations by 

Product, in The 2012 Mortgage Market Statistical 

Annual 17 (2012). 

25 Id. These percentages are based on the dollar 

amount of the loans. 

26Credit Forecast (2012) (reflects open-end and 

closed-end home equity loans). 

27Fed. Hous. Fin. Agency, A Strategic Plan for 

Enterprise Conservatorships: The Next Chapter in a 

Story that Needs an Ending, at 14 (2012) (‘‘FHFA 

Report’’), available at http://www.fhfa.gov/webfiles/ 

23344/StrategicPlanConservatorshipsFINAL.pdf. 

28FHFA Report at 8–9. Secondary market 

issuance remains heavily reliant upon the explicitly 

government guaranteed securities of FNMA, 

FHLMC, and GNMA. Through the first three 

quarters of 2012, approximately $1.2 trillion of the 

$1.33 trillion in mortgage originations have been 

securitized, less than $10 billion of the $1.2 trillion 

were non-agency mortgage backed securities. Inside 

Mortgage Finance (Nov. 2, 2012), at 4. 

29FICO is a type of credit score that makes up a 

substantial portion of the credit report that lenders 

use to assess an applicant’s credit risk and whether 

to extend a loan 

30CoreLogic, TrueStandings Servicing Database, 

available at http://www.truestandings.com (data 

reflects first-lien mortgage loans) (data service 

accessible only through paid subscription). 

According to CoreLogic’s TrueStandings Servicing, 

FICO reports that in 2011, approximately 38 percent 

of consumers receiving first-lien mortgage credit 

had a FICO score of 750 or greater. 

31 Id. 

32 Id. 

33A conforming mortgage is one that is eligible 

for purchase or credit guarantee by Fannie Mae or 

Freddie Mac. 

34Fed. Reserve Bd., Senior Loan Officer Opinion 

Survey on Bank Lending Practices, available at 

http://www.federalreserve.gov/boarddocs/ 

SnLoanSurvey/default.htm. 

35Federal Reserve Board staff calculations based 

on the Federal Reserve Bank of New York 

Consumer Credit Panel. The 10th percentile of 

credit scores on mortgage originations rose from 585 

in 2006 to 635 at the end of 2011. 

36FHA insures mortgages on single family and 

multifamily homes including manufactured homes 

and hospitals. It is the largest insurer of mortgages 

in the world, insuring over 34 million properties 

since its inception in 1934. 

purchase price of their property. In 

2011, 93 percent of all home purchases 

were financed with a mortgage credit 

transaction.22

Consumers may obtain mortgage 

credit to purchase a home, to refinance 

an existing mortgage, to access home 

equity, or to finance home 

improvement. Purchase loans and 

refinancings together produced 6.3 

million new first-lien mortgage loan 

originations in 2011.23 The proportion 

of loans that are for purchases as 

opposed to refinances varies with the 

interest rate environment and other 

market factors. In 2011, 65 percent of 

the market was refinance transactions 

and 35 percent was purchase loans, by 

volume.24 Historically the distribution 

has been more even. In 2000, refinances 

accounted for 44 percent of the market 

while purchase loans comprised 56 

percent; in 2005, the two products were 

split evenly.25

With a home equity transaction, a 

homeowner uses his or her equity as 

collateral to secure consumer credit. 

The credit proceeds can be used, for 

example, to pay for home 

improvements. Home equity credit 

transactions and home equity lines of 

credit resulted in an additional 1.3 

million mortgage loan originations in 

2011.26

The market for higher-priced 

mortgage loans remains significant. Data 

reported under the Home Mortgage 

Disclosure Act (HMDA) show that in 

2011 approximately 332,000 

transactions, including subordinate 

liens, were reportable as higher-priced 

mortgage loans. Of these transactions, 

refinancings accounted for 

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

percent of the overall higher-priced 

mortgage loan market involved first-lien 

transactions. The median first-lien 

higher-priced mortgage loan was for 

$81,000, while the interquartile range 

(quarter of the transactions are below, 

quarter of the transactions are above) 

was $47,000 to $142,000. 

GSE-eligible loans, together with the 

other federally insured or guaranteed 

loans, cover the majority of the current 

mortgage market. Since entering 

conservatorship in September 2008, the 

GSEs have bought or guaranteed roughly 

three of every four mortgages originated 

in the country. Mortgages guaranteed by 

FHA make up most of the rest.27

Outside of the securitization available 

through the Government National 

Mortgage Association (Ginnie Mae) for 

loans primarily backed by FHA, there 

are very few alternatives in place today 

to assume the secondary market 

functions served by the GSEs.28

Continued Fragility of the Mortgage 

Market 

The current mortgage market is 

especially fragile as a result of the recent 

mortgage crisis. Tight credit remains an 

important factor in the contraction in 

mortgage lending seen over the past few 

years. Mortgage loan terms and credit 

standards have tightened most for 

consumers with lower credit scores and 

with less money available for a down 

payment. According to CoreLogic’s 

TrueStandings Servicing, a proprietary 

data service that covers about two-thirds 

of the mortgage market, average 

underwriting standards have tightened 

considerably since 2007. Through the 

first nine months of 2012, for consumers 

that have received closed-end first-lien 

mortgages, the weighted average FICO 29

score was 750, the loan-to-value (LTV) 

ratio was 78 percent, and the debt-toincome (DTI) ratio was 34.5 percent.30

In comparison, in the peak of the 

housing bubble in 2007, the weighted 

average FICO score was 706, the LTV 

was 80 percent, and the DTI was 39.8 

percent.31

In this tight credit environment, the 

data suggest that creditors are not 

willing to take significant risks. In terms 

of the distribution of origination 

characteristics, for 90 percent of all the 

Fannie Mae and Freddie Mac mortgage 

loans originated in 2011, consumers had 

a FICO score over 700 and a DTI less 

than 44 percent.32 According to the 

Federal Reserve’s Senior Loan Officer 

Opinion Survey on Bank Lending 

Practices, in April 2012 nearly 60 

percent of creditors reported that they 

would be much less likely, relative to 

2006, to originate a conforming homepurchase mortgage 33 to a consumer 

with a 10 percent down payment and a 

credit score of 620—a traditional marker 

for those consumers with weaker credit 

histories.34 The Federal Reserve Board 

calculates that the share of mortgage 

borrowers with credit scores below 620 

has fallen from about 17 percent of 

consumers at the end of 2006 to about 

5 percent more recently.35 Creditors also 

appear to have pulled back on offering 

these consumers loans insured by the 

FHA, which provides mortgage 

insurance on loans made by FHAapproved creditors throughout the 

United States and its territories and is 

especially structured to help promote 

affordability.36

The Bureau is acutely aware of the 

high levels of anxiety in the mortgage 

market today. These concerns include 

the continued slow pace of recovery, the 

confluence of multiple major regulatory 

and capital initiatives, and the 

compliance burdens of the various 

Dodd-Frank Act rulemakings (including 

uncertainty on what constitutes a 

qualified residential mortgage (QRM), 

which, as discussed below, relates to the 

Dodd-Frank Act’s credit risk retention 

requirements and mortgage 

securitizations). These concerns are 

causing discussion about whether 

creditors will consider exiting the 

business. The Bureau acknowledges that 

it will likely take some time for the 

mortgage market to stabilize and that 

creditors will need to adjust their 

operations to account for several major 

regulatory and capital regimes. 

B. TILA and Regulation Z 

In 1968, Congress enacted the Truth 

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


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Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 6413 

37HOEPA amended TILA by adding new sections 

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

38HOEPA defines a class of ‘‘high-cost 

mortgages,’’ which are generally closed-end homeequity loans (excluding home-purchase loans) with 

annual percentage rates (APRs) or total points and 

fees exceeding prescribed thresholds. Mortgages 

covered by the HOEPA amendments have been 

referred to as ‘‘HOEPA loans,’’ ‘‘Section 32 loans,’’ 

or ‘‘high-cost mortgages.’’ 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 final rule uses 

the term ‘‘high-cost mortgages’’ to refer to mortgages 

covered by the HOEPA amendments. 

39The Dodd-Frank Act adjusted the baseline for 

the APR comparison, lowered the points and fees 

threshold, and added a prepayment trigger. 

40As discussed above, with the enactment of the 

Dodd-Frank Act, general rulemaking authority for 

TILA, including HOEPA, transferred from the Board 

to the Bureau on July 21, 2011. 

41Subsequently renumbered as sections 1026.31, 

1026.32, and 1026.33 of Regulation Z. As discussed 

above, pursuant to the Dodd-Frank Act and TILA, 

as amended, the Bureau published for public 

comment an interim final rule establishing a new 

Regulation Z, 12 CFR part 1026, implementing 

TILA (except with respect to persons excluded from 

the Bureau’s rulemaking authority by section 1029 

of the Dodd-Frank Act). 76 FR 79768 (Dec. 22, 

2011). The Bureau’s Regulation Z took effect on 

December 30, 2011. 

42Subsequently renumbered as section 

1026.32(e)(1) of Regulation Z. 

43Along with the Board, the other Federal 

banking agencies included the Office of the 

Comptroller of the Currency (OCC), the Federal 

Deposit Insurance Corporation (FDIC), Office of 

Thrift Supervision (OTS), and the National Credit 

Union Administration (NCUA). 

et seq., based on findings that the 

informed use of credit resulting from 

consumers’ awareness of the cost of 

credit would enhance economic 

stability and competition among 

consumer credit providers. 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. TILA 

requires additional disclosures for loans 

secured by consumers’ homes and 

permits consumers to rescind certain 

transactions secured by their principal 

dwellings when the required disclosures 

are not provided. 15 U.S.C. 1635, 1637a. 

Section 105(a) of TILA directs the 

Bureau (formerly directed the Board of 

Governors of the Federal Reserve 

System) 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 thereof, or 

prevent circumvention or evasion 

therewith. See 15 U.S.C. 1604(a). 

General rulemaking authority for 

TILA transferred to the Bureau in July 

2011, other than for certain motor 

vehicle dealers in accordance with the 

Dodd-Frank Act section 1029, 12 U.S.C. 

5519. Pursuant to the Dodd-Frank Act 

and TILA, as amended, the Bureau 

published for public comment an 

interim final rule establishing a new 

Regulation Z, 12 CFR part 1026, 

implementing TILA (except with respect 

to persons excluded from the Bureau’s 

rulemaking authority by section 1029 of 

the Dodd-Frank Act). 76 FR 79768 (Dec. 

22, 2011). This rule did not impose any 

new substantive obligations but did 

make technical and conforming changes 

to reflect the transfer of authority and 

certain other changes made by the 

Dodd-Frank Act. The Bureau’s 

Regulation Z took effect on December 

30, 2011. The Official Staff 

Interpretations interpret the 

requirements of the regulation and 

provides guidance to creditors in 

applying the rules to specific 

transactions. See 12 CFR part 1026, 

Supp. I. 

C. The Home Ownership and Equity 

Protection Act (HOEPA) and HOEPA 

Rules 

In response to evidence of abusive 

practices in the home-equity lending 

market, in 1994 Congress amended 

TILA by enacting the Home Ownership 

and Equity Protection Act (HOEPA) as 

part of the Riegle Community 

Development and Regulatory 

Improvement Act of 1994. Public Law 

103–325, 108 Stat. 2160. HOEPA was 

enacted as an amendment to TILA to 

address abusive practices in refinancing 

and home-equity mortgage loans with 

high interest rates or high fees.37 Loans 

that meet HOEPA’s high-cost triggers are 

subject to special disclosure 

requirements and restrictions on loan 

terms, and consumers with high-cost 

mortgages have enhanced remedies for 

violations of the law.38

The statute applied generally to 

closed-end mortgage credit, but 

excluded purchase money mortgage 

loans and reverse mortgages. Coverage 

was triggered where a loan’s annual 

percentage rate (APR) exceeded 

comparable Treasury securities by 

specified thresholds for particular loan 

types, or where points and fees 

exceeded eight percent of the total loan 

amount or a dollar threshold.39

For high-cost loans meeting either of 

those thresholds, HOEPA required 

creditors to provide special pre-closing 

disclosures, restricted prepayment 

penalties and certain other loan terms, 

and regulated various creditor practices, 

such as extending credit without regard 

to a consumer’s ability to repay the loan. 

HOEPA also provided a mechanism for 

consumers to rescind covered loans that 

included certain prohibited terms and to 

obtain higher damages than are allowed 

for other types of TILA violations. 

Finally, HOEPA amended TILA section 

131, 15 

U.S.C. 1641, to provide that 

purchasers of high-cost loans generally 

are subject to all claims and defenses 

against the original creditor with respect 

to the mortgage, including a creditor’s 

failure to make an ability-to-repay 

determination before making the loan. 

HOEPA created special substantive 

protections for high-cost mortgages, 

such as 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, 

HOEPA expanded the Board’s 

rulemaking authority, among other 

things, to prohibit acts or practices the 

Board found to be unfair and deceptive 

in connection with mortgage loans.40

In 1995, the Board implemented the 

HOEPA amendments at §§ 226.31, 

226.32, and 226.33 41 of Regulation Z. 

See 60 FR 15463 (Mar. 24, 1995). In 

particular, § 226.32(e)(1) 42 implemented 

TILA section 129(h)’s ability-to-repay 

requirements to prohibit a creditor from 

engaging in a pattern or practice of 

extending a high-cost mortgage based on 

the consumer’s collateral without regard 

to the consumer’s repayment ability, 

including the consumer’s current 

income, current obligations, and 

employment status. 

In 2001, the Board published 

additional significant changes to expand 

both HOEPA’s protections to more loans 

by revising the annual percentage rate 

(APR) threshold for first-lien mortgage 

loans, expanded the definition of points 

and fees to include the cost of optional 

credit insurance and debt cancellation 

premiums, and enhanced the 

restrictions associated with high-cost 

loans. 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. 


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6414 Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 

44The 2006 Nontraditional Mortgage Guidance 

and the 2007 Subprime Mortgage Statement will 

hereinafter be referred to collectively as the 

‘‘Interagency Supervisory Guidance.’’ 

45Under 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). 

46E.g., Progress in Administration and Other 

Efforts to Coordinate and Enhance Mortgage 

Foreclosure Prevention: Hearing before the H. 

Comm. on Fin. Servs., 110th Cong. (2007); 

Legislative Proposals on Reforming Mortgage 

Practices: Hearing before the H. Comm. on Fin. 

Servs., 110th Cong. (2007); Legislative and 

Regulatory Options for Minimizing and Mitigating 

Mortgage Foreclosures: Hearing before the H. 

Comm. on Fin. Servs., 110th Cong. (2007); Ending 

Mortgage Abuse: Safeguarding Homebuyers: 

Hearing before the S. Subcomm. on Hous., Transp., 

and Cmty. Dev. of the S. Comm. on Banking, Hous., 

and Urban Affairs, 110th Cong. (2007); Improving 

Federal Consumer Protection in Financial Services: 

Hearing before the H. Comm. on Fin. Servs., 110th 

Cong. (2007); The Role of the Secondary Market in 

Subprime Mortgage Lending: Hearing before the 

Subcomm. on Fin. Insts. and Consumer Credit of 

the H. Comm. on Fin. Servs., 110th Cong. (2007); 

Possible Responses to Rising Mortgage Foreclosures: 

Hearing before the H. Comm. on Fin. Servs., 110th 

Cong. (2007); Subprime Mortgage Market Turmoil: 

Examining the Role of Securitization: Hearing 

before the Subcomm. on Secs., Ins., and Inv. of the 

S. Comm. on Banking, Hous., and Urban Affairs, 

110th Cong. (2007); Subprime and Predatory 

Lending: New Regulatory Guidance, Current Market 

Conditions, and Effects on Regulated Financial 

Institutions: Hearing before the Subcomm. on Fin. 

Insts. and Consumer Credit of the H. Comm. on Fin. 

Servs., 110th Cong. (2007); Mortgage Market 

Turmoil: Causes and Consequences, Hearing before 

the S. Comm. on Banking, Hous., and Urban 

Affairs, 110th Cong. (2007); Preserving the 

American Dream: Predatory Lending Practices and 

Home Foreclosures, Hearing before the S. Comm. on 

Banking, Hous., and Urban Affairs, 110th Cong. 

(2007). 

D. 2006 and 2007 Interagency 

Supervisory Guidance 

In December 2005, the Federal 

banking agencies 43 responded to 

concerns about the rapid growth of 

nontraditional mortgages in the 

previous two years by proposing 

supervisory guidance. Nontraditional 

mortgages are mortgages that allow the 

consumer to defer repayment of 

principal and sometimes interest. The 

guidance advised institutions of the 

need to reduce ‘‘risk layering’’ with 

respect to these products, such as by 

failing to document income or lending 

nearly the full appraised value of the 

home. The final guidance issued in 

September 2006 specifically advised 

creditors that layering risks in 

nontraditional mortgage loans to 

consumers receiving subprime credit 

may significantly increase risks to 

consumers as well as institutions. See 

Interagency Guidance on Nontraditional 

Mortgage Product Risks, 71 FR 58609 

(Oct. 4, 2006) (2006 Nontraditional 

Mortgage Guidance). 

The Federal banking agencies 

addressed concerns about the subprime 

market in March 2007 with proposed 

supervisory guidance addressing the 

heightened risks to consumers and 

institutions of adjustable-rate mortgages 

with two- or three-year ‘‘teaser’’ interest 

rates followed by substantial increases 

in the rate and payment. The guidance, 

finalized in June of 2007, set out the 

standards institutions should follow to 

ensure consumers in the subprime 

market obtain loans they can afford to 

repay. Among other steps, the guidance 

advised creditors: (1) To use the fully 

indexed rate and fully-amortizing 

payment when qualifying consumers for 

loans with adjustable rates and 

potentially non-amortizing payments; 

(2) to limit stated income and reduced 

documentation loans to cases where 

mitigating factors clearly minimize the 

need for full documentation of income; 

and (3) to provide that prepayment 

penalty clauses expire a reasonable 

period before reset, typically at least 60 

days. See Statement on Subprime 

Mortgage Lending, 72 FR 37569 (July 10, 

2007) (2007 Subprime Mortgage 

Statement).44 The Conference of State 

Bank Supervisors (CSBS) and the 

American Association of Residential 

Mortgage Regulators (AARMR) issued 

parallel statements for state supervisors 

to use with state-supervised entities, 

and many states adopted the statements. 

E. 2008 HOEPA Final Rule 

After the Board finalized the 2001 

HOEPA rules, new consumer protection 

issues arose in the mortgage market. In 

2006 and 2007, the Board held a series 

of national hearings on consumer 

protection issues in the mortgage 

market. During those hearings, 

consumer advocates and government 

officials expressed a number of 

concerns, and urged the Board 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 (July 30, 

2008). The Board was also urged to 

adopt additional regulations under 

HOEPA, because, unlike the Interagency 

Supervisory Guidance, the regulations 

would apply to all creditors and would 

be enforceable by consumers through 

civil actions. As discussed above, in 

1995 the Board implemented TILA 

section 129(h)’s ability-to-repay 

requirements for high-cost mortgage 

loans. In 2008, the Board exercised its 

authority under HOEPA to extend 

certain consumer protections 

concerning a consumer’s ability to repay 

and prepayment penalties to a new 

category of ‘‘higher-priced mortgage 

loans’’ (HPMLs) 45 with APRs that are 

lower than those prescribed for highcost loans but that nevertheless exceed 

the average prime offer rate by 

prescribed amounts. This new category 

of loans was designed to include 

subprime credit. Specifically, the Board 

exercised its authority to revise 

HOEPA’s restrictions on high-cost loans 

based on a conclusion that the revisions 

were necessary to prevent unfair and 

deceptive acts or practices in 

connection with mortgage loans. 73 FR 

44522 (July 30, 2008) (2008 HOEPA 

Final Rule). 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. 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 2008 

HOEPA Final Rule provides a 

presumption of compliance with the 

higher-priced mortgage ability-to-repay 

requirements if the creditor follows 

certain procedures regarding 

underwriting the loan payment, 

assessing the debt-to-income ratio or 

residual income, and limiting the 

features of the loan, in addition to 

following certain procedures mandated 

for all creditors. See § 1026.34(a)(4)(iii) 

and (iv). However, the 2008 HOEPA 

Final Rule makes clear that even if the 

creditor follows the required and 

optional criteria, the creditor has merely 

obtained a presumption of compliance 

with the repayment ability requirement. 

The consumer can still rebut or 

overcome that presumption by showing 

that, despite following the required and 

optional procedures, the creditor 

nonetheless disregarded the consumer’s 

ability the loan. 

F. The Dodd-Frank Act 

In 2007, Congress held numerous 

hearings focused on rising subprime 

foreclosure rates and the extent to 

which lending practices contributed to 

them.46 Consumer advocates testified 


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Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 6415 

47Sections 1011 and 1021 of the Dodd-Frank Act, 

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

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

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

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

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

excludes from this transfer of authority, subject to 

certain exceptions, any rulemaking authority over a 

motor vehicle dealer that is predominantly engaged 

in the sale and servicing of motor vehicles, the 

leasing and servicing of motor vehicles, or both. 12 

U.S.C. 5519. 

48Sections 1024 through 1026 of the Dodd-Frank 

Act, codified at 12 U.S.C. 5514 through 5516. 

49Although S. Rept. No. 111–176 contains 

general legislative history concerning the DoddFrank 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. Rept. No. 110–441 for H.R. 3915 

(2007), and H. Rept. No. 111–194 for H.R. 1728 

(2009). 

50Under the Dodd-Frank Act, HOEPA protections 

would be triggered where: (1) A loan’s annual 

percentage rate (APR) exceeds the average prime 

offer rate by 6.5 percentage points for most first-lien 

mortgages and 8.5 percentage points for subordinate 

lien mortgages; (2) a loan’s points and fees exceed 

5 percent of the total transaction amount, or a 

higher threshold for loans below $20,000; or (3) the 

creditor may charge a prepayment penalty more 

than 36 months after loan consummation or account 

opening, or penalties that exceed more than 2 

percent of the amount prepaid. 

that certain lending terms or practices 

contributed to the foreclosures, 

including a failure to consider the 

consumer’s ability to repay, low- or nodocumentation loans, hybrid adjustablerate 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. 

In December 2009, the House passed 

the Wall Street Reform and Consumer 

Protection Act of 2009, its version of 

comprehensive financial reform 

legislation, which included an abilityto-repay and qualified mortgage 

provision. H.R. 4173, 111th Cong. 

(2009). In May 2010, the Senate passed 

its own version of ability-to-repay 

requirements in its own version of 

comprehensive financial reform 

legislation, called the Restoring 

American Financial Stability Act of 

2010. S. 3217, 111th Cong. (2010). After 

conference committee negotiations, the 

Dodd-Frank Act was passed by both 

houses of Congress and 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, generally 

consolidated the rulemaking authority 

for Federal consumer financial laws, 

including TILA and RESPA, in the 

Bureau.47 Congress also provided the 

Bureau, among other things, with 

supervision authority for Federal 

consumer financial laws over certain 

entities, including insured depository 

institutions and credit unions with total 

assets over $10 billion and their 

affiliates, and mortgage-related nondepository financial services 

providers.48 In addition, Congress 

provided the Bureau with authority, 

subject to certain limitations, to enforce 

the Federal consumer financial laws, 

including the 18 enumerated consumer 

laws. Title X of the Dodd-Frank Act, and 

rules thereunder. The Bureau can bring 

civil actions in court and administrative 

enforcement proceedings to obtain 

remedies such as civil penalties and 

cease-and-desist orders. 

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 

contains a modified version of the 

Mortgage Reform and Anti-Predatory 

Lending Act.49 The Dodd-Frank Act 

requires the Bureau to propose 

consolidation of the major federal 

mortgage disclosures, imposes new 

requirements and limitations to address 

a wide range of consumer mortgage 

issues, and imposes credit risk retention 

requirements in connection with 

mortgage securitization. 

Through the Dodd-Frank Act, 

Congress expanded HOEPA to apply to 

more types of mortgage transactions, 

including purchase money mortgage 

loans and home-equity lines of credit. 

Congress also amended HOEPA’s 

existing high-cost triggers, added a 

prepayment penalty trigger, and 

expanded the protections associated 

with high-cost mortgages.50

In addition, 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). 

Specifically, TILA section 129C: 

• Expands coverage of the ability-torepay 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 does 

not exceed certain thresholds for points 

and fees on the loan and which meets 

such other criteria as the Bureau may 

prescribe. 

• Prohibits prepayment penalties 

unless the mortgage is a fixed-rate 

qualified mortgage that is not a higherpriced mortgage loan, and the amount 

and duration of the prepayment penalty 

are limited. 

The statutory ability-to-repay 

standards reflect Congress’s belief that 

certain lending practices (such as lowor no-documentation loans or 

underwriting loans without regard to 

principal repayment) led to consumers 

having mortgages they could not afford, 

resulting in high default and foreclosure 

rates. Accordingly, new TILA section 

129C generally 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. 

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.’’ TILA 

section 129C(b)(1) states that a creditor 


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51Sections 1402 through 1405 of the Dodd-Frank 

Act, codified at 15 U.S.C. 1639b. 

52Section 1032(f) of the Dodd-Frank Act, codified 

at 12 U.S.C. 5532(f). 

53Sections 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. 

54As noted in the legislative history of section 

15G of the Securities Exchange Act of 1934, 

‘‘[w]hen securitizers retain a material amount of 

risk, they have ‘skin in the game,’ aligning their 

economic interest with those of investors in assetbacked securities.’’ See S. Rept. 176, 111th Cong., 

at 129 (2010). 

or assignee may presume that a loan has 

met the repayment ability requirement if 

the loan is a qualified mortgage. 

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 Dodd-Frank Act creates special 

remedies for violations of TILA section 

129C. As amended by section 1416 of 

the Dodd-Frank Act, TILA 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. TILA section 130(a). 

This recovery is in addition to: (1) 

Actual damages; (2) statutory damages 

in an individual action or class action, 

up to a prescribed threshold; and (3) 

court costs and attorney fees that would 

be available for violations of other TILA 

provisions. In addition, the statute of 

limitations 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, except for actions 

brought under section 129 or 129B, or 

actions brought by a State attorney 

general to enforce a violation of section 

129, 129B, 129C, 129D, 129E, 129F, 

129G, or 129H, which may be brought 

not later than 3 years after the date on 

which the violation occurs, and private 

education loans under 15 U.S.C. 

1650(a), which may be brought not later 

than one year from the due date of first 

regular payment of principal). TILA 

section 130(e). Moreover, as amended 

by section 1413 of the Dodd-Frank Act, 

TILA provides that when a creditor, or 

an assignee, other holder or their agent 

initiates a foreclosure action, a 

consumer may assert a violation of TILA 

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

by recoupment or setoff.’’ TILA section 

130(k). There is no time limit on the use 

of this defense and the amount of 

recoupment or setoff is limited, with 

respect to the special statutory damages, 

to no more than three years of finance 

charges and fees. For high-cost loans an 

assignee generally continues to be 

subject to all claims and defenses, not 

only in foreclosure, with respect to that 

mortgage that the consumer could assert 

against the creditor of the mortgage, 

unless the assignee demonstrates, by a 

preponderance of evidence, that a 

reasonable person exercising ordinary 

due diligence, could not determine that 

the mortgage was a high-cost mortgage. 

TILA section 131(d). 

In addition to the foregoing ability-torepay provisions, the Dodd-Frank Act 

established other new standards 

concerning a wide range of mortgage 

lending practices, including 

compensation of mortgage originators,51

Federal mortgage disclosures,52 and 

mortgage servicing.53 Those and other 

Dodd-Frank Act provisions are the 

subjects of other rulemakings by the 

Bureau. For additional information on 

those other rulemakings, see the 

discussion below in part III.C. 

G. Qualified Residential Mortgage 

Rulemaking 

Section 15G of the Securities 

Exchange Act of 1934, added by section 

941(b) of the Dodd-Frank Act, generally 

requires the securitizer of asset-backed 

securities (ABS) to retain not less than 

five percent of the credit risk of the 

assets collateralizing the ABS. 15 U.S.C. 

78o–11. The Dodd-Frank Act’s credit 

risk retention requirements are aimed at 

addressing weaknesses and failures in 

the securitization process and the 

securitization markets.54 By requiring 

that the securitizer retain a portion of 

the credit risk of the assets being 

securitized, the Dodd-Frank Act 

provides securitizers an incentive to 

monitor and ensure the quality of the 

assets underlying a securitization 

transaction. Six Federal agencies (not 

including the Bureau) are tasked with 

implementing this requirement. Those 

agencies are the Board, Office of the 

Comptroller of the Currency (OCC), 

Federal Deposit Insurance Corporation 

(FDIC), Securities and Exchange 

Commission (SEC), Federal Housing 

Finance Agency (FHFA), and 

Department of Housing and Urban 

Development (HUD) (collectively, the 

QRM agencies). 

Section 15G of the Securities 

Exchange Act of 1934 provides that the 

credit risk retention requirements shall 

not apply to an issuance of ABS if all 

of the assets that collateralize the ABS 

are ‘‘qualified residential mortgages’’ 

(QRMs). See 15 U.S.C. 78o– 

11(c)(1)(C)(iii), (4)(A) and (B). Section 

15G requires the QRM agencies to 

jointly define what constitutes a QRM, 

taking into consideration underwriting 

and product features that historical loan 

performance data indicate result in a 

lower risk of default. See 15 U.S.C. 78o– 

11(e)(4). Notably, section 15G also 

provides that the definition of a QRM 

shall be ‘‘no broader than’’ the 

definition of a ‘‘qualified mortgage,’’ as 

the term is defined under TILA section 

129C(b)(2), as amended by the DoddFrank Act, and regulations adopted 

thereunder. 15 U.S.C. 78o–11(e)(4)(C). 

On April 29, 2011, the QRM agencies 

issued joint proposed risk retention 

rules, including a proposed QRM 

definition (2011 QRM Proposed Rule). 

See 76 FR 24090 (Apr. 29, 2011). The 

proposed rule has not been finalized. 

Among other requirements, the 2011 

QRM Proposed Rule incorporates the 

qualified mortgage restrictions on 

negative amortization, interest-only, and 

balloon payments, limits points and fees 

to three percent of the loan amount, and 

prohibits prepayment penalties. The 

proposed rule also establishes 

underwriting standards designed to 

ensure that QRMs have high credit 

quality, including: 

• A maximum ‘‘front-end’’ monthly 

debt-to-income ratio (which looks at 

only the consumer’s mortgage payment 

relative to income, but not at other 

debts) of 28 percent; 

• A maximum ‘‘back-end’’ monthly 

debt-to-income ratio (which includes all 

of the consumer’s debt, not just the 

mortgage payment) of 36 percent; 

• A maximum loan-to-value (LTV) 

ratio of 80 percent in the case of a 

purchase transaction (with a lesser 

combined LTV permitted for refinance 

transactions); 

• A 20 percent down payment 

requirement in the case of a purchase 

transaction; and 

• Credit history verification and 

documentation requirements. 

The proposed rule also includes 

appraisal requirements, restrictions on 

the assumability of the mortgage, and 

requires the creditor to commit to 

certain servicing policies and 

procedures regarding loss mitigation. 

See 76 FR at 24166–67. 

To provide clarity on the definitions, 

calculations, and verification 

requirements for the QRM standards, 

the 2011 QRM Proposed Rule 

incorporates certain definitions and key 

terms established by HUD and required 

to be used by creditors originating FHAinsured residential mortgages. See 76 FR 

at 24119. Specifically, the 2011 QRM 

Proposed Rule incorporates the 

definitions and standards set out in the 

HUD Handbook 4155.1 (New Version), 


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55See U.S. Dep’t of Hous. & Urban Dev., Housing 

Handbook 4155.1, Mortgage Credit Analysis for 

Mortgage Insurance (rev. Mar. 2011) (‘‘HUD 

Handbook 4155.1’’), available at http:// 

portal.hud.gov/hudportal/HUD?src=/ 

program_offices/administration/hudclips/ 

handbooks/hsgh/4155.1. 

56See S. Rept. 176, 111th Cong., at 129 (2010). 

57The eight factors are: (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. 

58This alternative is based on a Dodd-Frank Act 

provision that is meant to provide flexibility for 

certain streamlined refinancings, which are no- or 

low-documentation transactions designed to 

refinance a consumer quickly under certain 

circumstances, when such refinancings would 

move consumers out of risky mortgages and into 

more stable mortgage 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. TILA section 129C(a)(6)(E); 15 

U.S.C. 1639c(a)(6)(E). 

59The Board’s proposed first alternative would 

have operated as a legal safe harbor and define 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 considering and verifying 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. 

60This alternative is based on statutory provision. 

TILA section 129C(b)(2)(E); 15 U.S.C. 1639c. As the 

Board’s proposal noted, this standard is evidently 

meant to accommodate community banks that 

originate balloon-payment mortgages in lieu of 

adjustable-rate mortgages to hedge against interest 

rate risk. 

Mortgage Credit Analysis for Mortgage 

Insurance, as in effect on December 31, 

2010, for determining and verifying the 

consumer’s funds and the consumer’s 

monthly housing debt, total monthly 

debt, and monthly gross income.55

The qualified mortgage and QRM 

definitions are distinct and relate to 

different parts of the Dodd-Frank Act 

with different purposes, but both are 

designed to address problems that had 

arisen in the mortgage origination 

process. The qualified mortgage 

standard provides creditors with a 

presumption of compliance with the 

requirement in TILA section 129C(a) to 

assess a consumer’s ability to repay a 

residential mortgage loan. The purpose 

of these provisions is to ensure that 

consumers are offered and receive 

residential mortgage loans on terms that 

reasonably reflect their ability to repay 

the loans. See TILA section 129B(a)(2). 

The Dodd-Frank Act’s credit risk 

retention requirements are intended to 

address problems in the securitization 

markets and in mortgage markets by 

requiring that securitizers, as a general 

matter, retain an economic interest in 

the credit risk of the assets they 

securitize. The QRM credit risk 

retention requirement was meant to 

incentivize creditors to make more 

responsible loans because they will 

need to keep some skin in the game.56

Nevertheless, as discussed above, the 

Dodd-Frank Act requires that the QRM 

definition be ‘‘no broader than’’ the 

qualified mortgage definition. Therefore, 

in issuing the 2011 QRM Proposed Rule, 

the QRM agencies sought to incorporate 

the statutory qualified mortgage 

standards, in addition to other 

requirements, into the QRM definition. 

76 FR at 24118. This approach was 

designed to minimize the potential for 

conflicts between the QRM standards in 

the proposed rule and the qualified 

mortgage definition that the Bureau 

would ultimately adopt in a final rule. 

In the 2011 QRM Proposed Rule, the 

QRM agencies stated their expectation 

to monitor the rules adopted by the 

Bureau under TILA to define a qualified 

mortgage and to review those rules to 

ensure that the definition of QRM in the 

final rule is ‘‘no broader’’ than the 

definition of a qualified mortgage and to 

appropriately implement the DoddFrank Act’s credit risk retention 

requirement. See 76 FR at 24118. In 

preparing this final rule, the Bureau has 

consulted regularly with the QRM 

agencies to coordinate the qualified 

mortgage and qualified residential 

mortgage definitions. However, while 

the Bureau’s qualified mortgage 

definition will set the outer boundary of 

a QRM, the QRM agencies have 

discretion under the Dodd-Frank Act to 

define QRMs in a way that is stricter 

than the qualified mortgage definition. 

III. Summary of the Rulemaking 

Process 

A. The Board’s Proposal 

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) (2011 ATR Proposal, the 

Board’s proposal or the proposal). 

Consistent with the Dodd-Frank Act, the 

Board’s proposal applied the ability-torepay requirements to any consumer 

credit transaction secured by a dwelling 

(including vacation home loans 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 abilityto-repay requirement, including by 

making a ‘‘qualified mortgage.’’ First, 

the proposal would have allowed a 

creditor to meet the general ability-torepay standard by originating a covered 

mortgage loan for which the creditor 

considered and verified eight 

underwriting factors in determining 

repayment ability, and, for adjustable 

rate loans, the mortgage payment 

calculation is based on the fully indexed 

rate.57 Second, the proposal would have 

allowed a creditor to refinance a ‘‘nonstandard mortgage’’ into a ‘‘standard 

mortgage.’’ 58 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 originate 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.59 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.60 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 that does not meet the definition 

of an open-end plan. As discussed 

above, rulemaking authority under TILA 

generally transferred from the Board to 

the Bureau in July 2011, including the 

authority under Dodd-Frank Act section 

1412 to prescribe regulations to carry 

out the purposes of the qualified 

mortgage rules. 12 U.S.C. 5512; 12 

U.S.C. 5581; 15 U.S.C. 1639c. As 

discussed above, TILA section 105(a) 

directs the Bureau to prescribe 

regulations to carry out the purposes of 


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61 76 FR 11598 (Mar. 2, 2011). 

62 77 FR 49090 (Aug. 15,2012). 

63 77 FR 57200 (Sept. 17, 2012) (RESPA); 77 FR 

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

64 77 FR 55272 (Sept. 7, 2012). 

TILA. Except with respect to the 

substantive restrictions on high-cost 

mortgages provided in TILA section 

129, TILA section 105(a) authorizes the 

Bureau to prescribe regulations that may 

contain additional requirements, 

classifications, differentiations, or other 

provisions, and may provide for such 

adjustments and exceptions for all or 

any class of transactions that the Bureau 

determines are necessary or proper to 

effectuate the purposes of TILA, to 

prevent circumvention or evasion 

thereof, or to facilitate compliance 

therewith. 

B. Comments and Post-Proposal 

Outreach 

The Board received numerous 

comments on the proposal, including 

comments regarding the criteria for a 

‘‘qualified mortgage’’ and whether a 

qualified mortgage provides a safe 

harbor or a presumption of compliance 

with the repayment ability 

requirements. As noted above, in 

response to the proposed rule, the Board 

received approximately 1,800 letters 

from commenters, including members of 

Congress, creditors, consumer groups, 

trade associations, mortgage and real 

estate market participants, and 

individual consumers. As of July 21, 

2011, the Dodd-Frank Act generally 

transferred the Board’s rulemaking 

authority for TILA, among other Federal 

consumer financial laws, to the Bureau. 

Accordingly, all comment letters on the 

proposed rule were also transferred to 

the Bureau. Materials submitted were 

filed in the record and are publicly 

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

Through various comment letters and 

the Bureau’s own collection of data, the 

Bureau received additional information 

and new data pertaining to the proposed 

rule. Accordingly, in May 2012, the 

Bureau reopened the comment period in 

order to solicit further comment on data 

and new information, including data 

that may assist the Bureau in defining 

loans with characteristics that make it 

appropriate to presume that the creditor 

complied with the ability-to-repay 

requirements or assist the Bureau in 

assessing the benefits and costs to 

consumers, including access to credit, 

and covered persons, as well as the 

market share covered by, alternative 

definitions of a ‘‘qualified mortgage.’’ 

The Bureau received approximately 160 

comments in response to the reopened 

comment period from a variety of 

commenters, including creditors, 

consumer groups, trade associations, 

mortgage and real estate market 

participants, individuals, small entities, 

the SBA’s Office of Advocacy, and FHA. 

As discussed in more detail below, the 

Bureau has considered these comments 

in adopting this final rule. 

C. Other Rulemakings 

In addition to this final rule, the 

Bureau is adopting several other final 

rules and issuing one proposal, all 

relating to mortgage credit to implement 

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

final rule jointly with other Federal 

agencies to implement requirements for 

mortgage appraisals in title XIV. Each of 

the final rules follows a proposal issued 

in 2011 by the Board or in 2012 by the 

Bureau alone or jointly with other 

Federal agencies. Collectively, these 

proposed and final rules are referred to 

as the Title XIV Rulemakings. 

• Ability to Repay: Simultaneously 

with this final rule (the 2013 ATR Final 

Rule), the Bureau is issuing a proposal 

to amend certain provisions of the final 

rule, including by the addition of 

exemptions for certain nonprofit 

creditors and certain homeownership 

stabilization programs and a definition 

of a ‘‘qualified mortgage’’ for certain 

loans made and held in portfolio by 

small creditors (the 2013 ATR 

Concurrent Proposal). The Bureau 

expects to act on the 2013 ATR 

Concurrent Proposal on an expedited 

basis, so that any exceptions or 

adjustments can take effect 

simultaneously with this final rule. 

• Escrows: The Bureau is finalizing a 

rule, following a March 2011 proposal 

issued by the Board (the Board’s 2011 

Escrows Proposal),61 to implement 

certain provisions of the Dodd-Frank 

Act expanding on existing rules that 

require escrow accounts to be 

established for higher-priced mortgage 

loans and creating an exemption for 

certain loans held by creditors operating 

predominantly in rural or underserved 

areas, pursuant to TILA section 129D as 

established by Dodd-Frank Act sections 

1461. 15 U.S.C. 1639d. The Bureau’s 

final rule is referred to as the 2013 

Escrows Final Rule. 

• HOEPA: Following its July 2012 

proposal (the 2012 HOEPA Proposal),62

the Bureau is issuing a final rule to 

implement Dodd-Frank Act 

requirements expanding protections for 

‘‘high-cost mortgages’’ under the 

Homeownership and Equity Protection 

Act (HOEPA), pursuant to TILA sections 

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

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

Bureau also is finalizing rules to 

implement certain title XIV 

requirements concerning 

homeownership counseling, including a 

requirement that creditors provide lists 

of homeownership counselors to 

applicants for federally related mortgage 

loans, pursuant to RESPA section 5(c), 

as amended by Dodd-Frank Act section 

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

final rule is referred to as the 2013 

HOEPA Final Rule. 

• Servicing: Following its August 

2012 proposals (the 2012 RESPA 

Servicing Proposal and 2012 TILA 

Servicing Proposal),63 the Bureau is 

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

information requests, and payment 

crediting, as well as requirements for 

mortgage loan periodic statements and 

adjustable-rate mortgage reset 

disclosures, pursuant to section 6 of 

RESPA and sections 128, 128A, 129F, 

and 129G of TILA, as amended or 

established by Dodd-Frank Act sections 

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

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

1639g. The Bureau also is finalizing 

rules on early intervention for troubled 

and delinquent consumers, and loss 

mitigation procedures, pursuant to the 

Bureau’s authority under section 6 of 

RESPA, as amended by Dodd-Frank Act 

section 1463, to establish obligations for 

mortgage servicers that it finds to be 

appropriate to carry out the consumer 

protection purposes of RESPA, and its 

authority under section 19(a) of RESPA 

to prescribe rules necessary to achieve 

the purposes of RESPA. The Bureau’s 

final rule under RESPA with respect to 

mortgage servicing also establishes 

requirements for general servicing 

standards policies and procedures and 

continuity of contact pursuant to its 

authority under section 19(a) of RESPA. 

The Bureau’s final rules are referred to 

as the 2013 RESPA Servicing Final Rule 

and the 2013 TILA Servicing Final Rule, 

respectively. 

• Loan Originator Compensation: 

Following its August 2012 proposal (the 

2012 Loan Originator Proposal),64 the 

Bureau is issuing a final rule to 

implement provisions of the DoddFrank Act requiring certain creditors 

and loan originators to meet certain 

duties of care, including qualification 

requirements; requiring the 

establishment of certain compliance 

procedures by depository institutions; 

prohibiting loan originators, creditors, 

and the affiliates of both from receiving 

compensation in various forms 

(including based on the terms of the 

transaction) and from sources other than 


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65Specifically, the Board of Governors of the 

Federal Reserve System, the Office of the 

Comptroller of the Currency, the Federal Deposit 

Insurance Corporation, the National Credit Union 

Administration, and the Federal Housing Finance 

Agency. 

66 77 FR 54722 (Sept. 5, 2012). 

67 77 FR 50390 (Aug. 21, 2012). 

68 77 FR 51116 (Aug. 23, 2012). 

69 77 FR 70105 (Nov. 23, 2012). 

70Of the several final rules being adopted under 

the Title XIV Rulemakings, six entail amendments 

to Regulation Z, with the only exceptions being the 

2013 RESPA Servicing Final Rule (Regulation X) 

and the 2013 ECOA Appraisals Final Rule 

(Regulation B); the 2013 HOEPA Final Rule also 

amends Regulation X, in addition to Regulation Z. 

The six Regulation Z final rules involve numerous 

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

parallel provisions. Thus, adopting some of those 

amendments without also adopting certain other, 

closely related provisions would create significant 

technical issues, e.g., new provisions containing 

cross-references to other provisions that do not yet 

exist, which could undermine the ability of 

creditors and other parties subject to the rules to 

understand their obligations and implement 

appropriate systems changes in an integrated and 

efficient manner. 

the consumer, with specified 

exceptions; and establishing restrictions 

on mandatory arbitration and financing 

of single premium credit insurance, 

pursuant to TILA sections 129B and 

129C as established by Dodd-Frank Act 

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

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

rule is referred to as the 2013 Loan 

Originator Final Rule. 

• Appraisals: The Bureau, jointly 

with other Federal agencies,65 is issuing 

a final rule implementing Dodd-Frank 

Act requirements concerning appraisals 

for higher-risk mortgages, pursuant to 

TILA section 129H as established by 

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

1639h. This rule follows the agencies’ 

August 2012 joint proposal (the 2012 

Interagency Appraisals Proposal).66 The 

agencies’ joint final rule is referred to as 

the 2013 Interagency Appraisals Final 

Rule. In addition, following its August 

2012 proposal (the 2012 ECOA 

Appraisals Proposal),67 the Bureau is 

issuing a final rule to implement 

provisions of the Dodd-Frank Act 

requiring that creditors provide 

applicants with a free copy of written 

appraisals and valuations developed in 

connection with applications for loans 

secured by a first lien on a dwelling, 

pursuant to section 701(e) of the Equal 

Credit Opportunity Act (ECOA) as 

amended by Dodd-Frank Act section 

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

final rule is referred to as the 2013 

ECOA Appraisals Final Rule. 

The Bureau is not at this time 

finalizing proposals concerning various 

disclosure requirements that were 

added by title XIV of the Dodd-Frank 

Act, integration of mortgage disclosures 

under TILA and RESPA, or a simpler, 

more inclusive definition of the finance 

charge for purposes of disclosures for 

closed-end mortgage transactions under 

Regulation Z. The Bureau expects to 

finalize these proposals and to consider 

whether to adjust regulatory thresholds 

under the Title XIV Rulemakings in 

connection with any change in the 

calculation of the finance charge later in 

2013, after it has completed quantitative 

testing, and any additional qualitative 

testing deemed appropriate, of the forms 

that it proposed in July 2012 to combine 

TILA mortgage disclosures with the 

good faith estimate (RESPA GFE) and 

settlement statement (RESPA settlement 

statement) required under the Real 

Estate Settlement Procedures Act, 

pursuant to Dodd-Frank Act section 

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

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

respectively (the 2012 TILA–RESPA 

Proposal).68 Accordingly, the Bureau 

already has issued a final rule delaying 

implementation of various affected title 

XIV disclosure provisions.69 The 

Bureau’s approaches to coordinating the 

implementation of the Title XIV 

Rulemakings and to the finance charge 

proposal are discussed in turn below. 

Coordinated Implementation of Title 

XIV Rulemakings 

As noted in all of its foregoing 

proposals, the Bureau regards each of 

the Title XIV Rulemakings as affecting 

aspects of the mortgage industry and its 

regulations. Accordingly, as noted in its 

proposals, the Bureau is coordinating 

carefully the Title XIV Rulemakings, 

particularly with respect to their 

effective dates. The Dodd-Frank Act 

requirements to be implemented by the 

Title XIV Rulemakings generally will 

take effect on January 21, 2013, unless 

final rules implementing those 

requirements are issued on or before 

that date and provide for a different 

effective date. See Dodd-Frank Act 

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

addition, some of the Title XIV 

Rulemakings are to take effect no later 

than one year after they are issued. Id. 

The comments on the appropriate 

effective date for this final rule are 

discussed in detail below in part VI of 

this notice. In general, however, 

consumer advocates requested that the 

Bureau put the protections in the Title 

XIV Rulemakings into effect as soon as 

practicable. In contrast, the Bureau 

received some industry comments 

indicating that implementing so many 

new requirements at the same time 

would create a significant cumulative 

burden for creditors. In addition, many 

commenters also acknowledged the 

advantages of implementing multiple 

revisions to the regulations in a 

coordinated fashion.70 Thus, a tension 

exists between coordinating the 

adoption of the Title XIV Rulemakings 

and facilitating industry’s 

implementation of such a large set of 

new requirements. Some have suggested 

that the Bureau resolve this tension by 

adopting a sequenced implementation, 

while others have requested that the 

Bureau simply provide a longer 

implementation period for all of the 

final rules. 

The Bureau recognizes that many of 

the new provisions will require 

creditors to make changes to automated 

systems and, further, that most 

administrators of large systems are 

reluctant to make too many changes to 

their systems at once. At the same time, 

however, the Bureau notes that the 

Dodd-Frank Act established virtually all 

of these changes to institutions’ 

compliance responsibilities, and 

contemplated that they be implemented 

in a relatively short period of time. And, 

as already noted, the extent of 

interaction among many of the Title XIV 

Rulemakings necessitates that many of 

their provisions take effect together. 

Finally, notwithstanding commenters’ 

expressed concerns for cumulative 

burden, the Bureau expects that 

creditors actually may realize some 

efficiencies from adapting their systems 

for compliance with multiple new, 

closely related requirements at once, 

especially if given sufficient overall 

time to do so. 

Accordingly, the Bureau is requiring 

that, as a general matter, creditors and 

other affected persons begin complying 

with the final rules on January 10, 2014. 

As noted above, section 1400(c) of the 

Dodd-Frank Act requires that some 

provisions of the Title XIV Rulemakings 

take effect no later than one year after 

the Bureau issues them. Accordingly, 

the Bureau is establishing January 10, 

2014, one year after issuance of this 

final rule and the Bureau’s 2013 

Escrows and HOEPA Final Rules (i.e., 

the earliest of the title XIV final rules), 

as the baseline effective date for most of 

the Title XIV Rulemakings. The Bureau 

believes that, on balance, this approach 

will facilitate the implementation of the 

rules’ overlapping provisions, while 

also affording creditors sufficient time 

to implement the more complex or 

resource-intensive new requirements. 

The Bureau has identified certain 

rulemakings or selected aspects thereof, 

however, that do not present significant 

implementation burdens for industry. 

Accordingly, the Bureau is setting 


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71These notices extended the comment period on 

the more inclusive finance charge and 

corresponding regulatory threshold adjustments 

under the 2012 TILA–RESPA and HOEPA 

Proposals. It did not change any other aspect of 

either proposal. 

72 12 U.S.C. 5581(a)(1). 

73 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). 

earlier effective dates for those final 

rules or certain aspects thereof, as 

applicable. Those effective dates are set 

forth and explained in the Federal 

Registers notices for those final rules. 

More Inclusive Finance Charge Proposal 

As noted above, the Bureau proposed 

in the 2012 TILA–RESPA Proposal to 

make the definition of finance charge 

more inclusive, thus rendering the 

finance charge and annual percentage 

rate a more useful tool for consumers to 

compare the cost of credit across 

different alternatives. 77 FR 51116, 

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

definition would include additional 

costs that are not currently counted, it 

would cause the finance charges and 

APRs on many affected transactions to 

increase. This in turn could cause more 

such transactions to become subject to 

various compliance regimes under 

Regulation Z. Specifically, the finance 

charge is central to the calculation of a 

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

in turn has been (and remains) a 

coverage threshold for the special 

protections afforded ‘‘high-cost 

mortgages’’ under HOEPA. Points and 

fees also will be subject to a 3-percent 

limit for purposes of determining 

whether a transaction is a ‘‘qualified 

mortgage’’ under this final rule. 

Meanwhile, the APR serves as a 

coverage threshold for HOEPA 

protections as well as for certain 

protections afforded ‘‘higher-priced 

mortgage loans’’ under § 1026.35, 

including the mandatory escrow 

account requirements being amended by 

the 2013 Escrows Final Rule. Finally, 

because the 2013 Interagency Appraisals 

Final Rule uses the same APR-based 

coverage test as is used for identifying 

higher-priced mortgage loans, the APR 

affects that rulemaking as well. Thus, 

the proposed more inclusive finance 

charge would have had the indirect 

effect of increasing coverage under 

HOEPA and the escrow and appraisal 

requirements for higher-priced mortgage 

loans, as well as decreasing the number 

of transactions that may be qualified 

mortgages—even holding actual loan 

terms constant—simply because of the 

increase in calculated finance charges, 

and consequently APRs, for closed-end 

mortgage transactions generally. 

As noted above, these expanded 

coverage consequences were not the 

intent of the more inclusive finance 

charge proposal. Accordingly, as 

discussed more extensively in the 

Escrows Proposal, the HOEPA Proposal, 

the ATR Proposal, and the Interagency 

Appraisals Proposal, the Board and 

subsequently the Bureau (and other 

agencies) sought comment on certain 

adjustments to the affected regulatory 

thresholds to counteract this 

unintended effect. First, the Board and 

then the Bureau proposed to adopt a 

‘‘transaction coverage rate’’ for use as 

the metric to determine coverage of 

these regimes in place of the APR. The 

transaction coverage rate would have 

been calculated solely for coverage 

determination purposes and would not 

have been disclosed to consumers, who 

still would have received only a 

disclosure of the expanded APR. The 

transaction coverage rate calculation 

would exclude from the prepaid finance 

charge all costs otherwise included for 

purposes of the APR calculation except 

charges retained by the creditor, any 

mortgage broker, or any affiliate of 

either. Similarly, the Board and Bureau 

proposed to reverse the effects of the 

more inclusive finance charge on the 

calculation of points and fees; the points 

and fees figure is calculated only as a 

HOEPA and qualified mortgage coverage 

metric and is not disclosed to 

consumers. The Bureau also sought 

comment on other potential mitigation 

measures, such as adjusting the numeric 

thresholds for particular compliance 

regimes to account for the general shift 

in affected transactions’ APRs. 

The Bureau’s 2012 TILA–RESPA 

Proposal sought comment on whether to 

finalize the more inclusive finance 

charge proposal in conjunction with the 

Title XIV Rulemakings or with the rest 

of the TILA–RESPA Proposal 

concerning the integration of mortgage 

disclosure forms. 77 FR 51116, 51125 

(Aug. 23, 2012). Upon additional 

consideration and review of comments 

received, the Bureau decided to defer a 

decision whether to adopt the more 

inclusive finance charge proposal and 

any related adjustments to regulatory 

thresholds until it later finalizes the 

TILA–RESPA Proposal. 77 FR 54843 

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

2012).71 Accordingly, this final rule and 

the 2013 Escrows, HOEPA, and 

Interagency Appraisals Final Rules all 

are deferring any action on their 

respective proposed adjustments to 

regulatory thresholds. 

IV. Legal Authority 

The final rule was issued on January 

10, 2013, in accordance with 12 CFR 

1074.1. The Bureau issued this final rule 

pursuant to its authority under TILA 

and the Dodd-Frank Act. See TILA 

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

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

‘‘consumer financial protection 

functions’’ previously vested in certain 

other Federal agencies, including the 

Board. 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.’’ 72

TILA is defined as a Federal consumer 

financial law.73 Accordingly, the Bureau 

has authority to issue regulations 

pursuant to TILA. 

A. TILA Ability-to-Repay and Qualified 

Mortgage Provisions 

As discussed above, the Dodd-Frank 

Act amended TILA to generally prohibit 

a creditor from making a residential 

mortgage loan without a reasonable and 

good faith determination that, at the 

time the loan is consummated, the 

consumer has a reasonable ability to 

repay the loan, along with taxes, 

insurance, and assessments. TILA 

section 129C(a), 15 U.S.C. 1639c(a). 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, and 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 three 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 


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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)].’’ 

The Dodd-Frank Act also provides the 

Bureau with authority to prescribe 

regulations that revise, add to, or 

subtract from the criteria that define a 

qualified mortgage upon a finding that 

such regulations are necessary or proper 

to ensure that responsible, affordable 

mortgage credit remains available to 

consumers in a manner consistent with 

the purposes of the ability-to-repay 

requirements; or are necessary and 

appropriate to effectuate the purposes of 

the ability-to-repay requirements, to 

prevent circumvention or evasion 

thereof, or to facilitate compliance with 

TILA sections 129B and 129C. TILA 

section 129C(b)(3)(B)(i), 15 U.S.C. 

1639c(b)(3)(B)(i). In addition, TILA 

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

Bureau with authority to prescribe 

regulations to carry out the purposes of 

the qualified mortgage provisions, such 

as 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). 

The Dodd-Frank Act provides the 

Bureau with other specific grants of 

rulewriting authority with respect to the 

ability-to-repay and qualified mortgage 

provisions. With respect to the abilityto-repay provisions, TILA section 

129C(a)(6)(D)(i) through (iii) provides 

that when calculating the payment 

obligation that will be used to determine 

whether the consumer can repay a 

covered transaction, the creditor must 

use a fully amortizing payment schedule 

and assume that: (1) The loan proceeds 

are fully disbursed on the date the loan 

is consummated; (2) the loan is repaid 

in substantially equal, monthly 

amortizing payments for principal and 

interest over the entire term of the loan 

with no balloon payment; and (3) the 

interest rate over the entire term of the 

loan is a fixed rate equal to the fully 

indexed rate at the time of the loan 

closing, without considering the 

introductory rate. 15 U.S.C. 

1639c(a)(6)(D)(i) through (iii). However, 

TILA section 129C(a)(6)(D) authorizes 

the Bureau to prescribe regulations for 

calculating the payment obligation for 

loans that require more rapid repayment 

(including balloon payments), and 

which have an annual percentage rate 

that does not exceed a certain rate 

threshold. 15 U.S.C. 1639c(a)(6)(D). 

With respect to the qualified mortgage 

provisions, the Dodd-Frank Act contains 

several specific grants of rulewriting 

authority. First, as described above, for 

purposes of defining ‘‘qualified 

mortgage,’’ TILA section 

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

with authority to establish guidelines or 

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

ability to 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 final rule also relies on other 

rulemaking and exception authorities 

specifically granted to the Bureau by 

TILA and the Dodd-Frank Act, 

including the authorities discussed 

below. 

TILA 

TILA section 105(a). As amended by 

the Dodd-Frank Act, TILA section 

105(a), 15 U.S.C. 1604(a), directs the 

Bureau to prescribe regulations to carry 

out the purposes of TILA, and provides 

that such regulations may contain 

additional requirements, classifications, 

differentiations, or other provisions, and 

may provide for such adjustments and 

exceptions for all or any class of 

transactions that the Bureau judges are 

necessary or proper to effectuate the 

purposes of TILA, to prevent 

circumvention or evasion thereof, or to 

facilitate compliance therewith. A 

purpose of TILA is ‘‘to assure a 

meaningful disclosure of credit terms so 

that the consumer will be able to 

compare more readily the various credit 

terms available to him and avoid the 

uninformed use of credit.’’ TILA section 

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

purpose is informed by Congress’s 

finding that ‘‘economic stabilization 

would be enhanced and the competition 

among the various financial institutions 

and other firms engaged in the 

extension of consumer credit would be 

strengthened by the informed use of 

credit[.]’’ TILA section 102(a). Thus, 

strengthened competition among 

financial institutions is a goal of TILA, 

achieved through the effectuation of 

TILA’s purposes. 

Historically, TILA section 105(a) has 

served as a broad source of authority for 

rules that promote the informed use of 

credit through required disclosures and 

substantive regulation of certain 

practices. However, Dodd-Frank Act 

section 1100A clarified the Bureau’s 

section 105(a) authority by amending 

that section to provide express authority 

to prescribe regulations that contain 

‘‘additional requirements’’ that the 

Bureau finds are necessary or proper to 

effectuate the purposes of TILA, to 

prevent circumvention or evasion 

thereof, or to facilitate compliance 

therewith. This amendment clarified the 

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 high-cost mortgages 

under HOEPA 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 substantive 

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). 

TILA, as amended by the Dodd-Frank 

Act, states that it is the purpose of the 

ability-to-repay requirements of TILA 


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74This section-by-section analysis discusses the 

Board’s proposal by reference to the Board’s 

Regulation Z, 12 CFR part 226, which the Board 

proposed to amend, and discusses the Bureau’s 

final rule by reference to the Bureau’s Regulation 

Z, 12 CFR part 1026, which this final rule amends. 

section 129C 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). The Bureau 

interprets this addition as a new 

purpose of TILA. Therefore, the Bureau 

believes that its authority under TILA 

section 105(a) to make exceptions, 

adjustments, and additional provisions, 

among other things, that the Bureau 

finds are necessary or proper to 

effectuate the purposes of TILA, to 

prevent circumvention or evasion 

thereof, or to facilitate compliance 

therewith applies with respect to the 

purpose of section 129C as well as the 

purpose described in section TILA 

section 129B(a)(2). 

The purpose of TILA section 129C is 

informed by the findings articulated in 

section 129B(a) 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 and 

affordable mortgage credit remains 

available to consumers. 

As discussed in the section-by-section 

analysis below, the Bureau is issuing 

regulations to carry out TILA’s 

purposes, including such additional 

requirements, adjustments, and 

exceptions as, in the Bureau’s judgment, 

are necessary and proper to carry out 

the purposes of TILA, prevent 

circumvention or evasion thereof, or to 

facilitate compliance therewith. In 

developing these aspects of the final 

rule pursuant to its authority under 

TILA section 105(a), the Bureau has 

considered the purposes of TILA, 

including the purposes of TILA section 

129C, and the findings of TILA, 

including strengthening competition 

among financial institutions and 

promoting economic stabilization, and 

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

that economic stabilization would be 

enhanced by the protection, limitation, 

and regulation of the terms of 

residential mortgage credit and the 

practices related to such credit, while 

ensuring that responsible, affordable 

mortgage credit remains available to 

consumers. The Bureau believes that 

ensuring that mortgage credit is offered 

and received on terms consumers can 

afford ensures the availability of 

responsible, affordable mortgage credit. 

TILA section 129B(e). Dodd-Frank Act 

section 1405(a) amended TILA to add 

new section 129B(e), 15 U.S.C. 

1639B(e). That section authorizes the 

Bureau to prohibit or condition terms, 

acts, or practices relating to residential 

mortgage loans that the Bureau finds to 

be abusive, unfair, deceptive, predatory, 

necessary or proper to ensure that 

responsible, affordable mortgage credit 

remains available to consumers in a 

manner consistent with the purposes of 

TILA section 129C, necessary or proper 

to effectuate the purposes of sections 

129B and 129C, to prevent 

circumvention or evasion thereof, or to 

facilitate compliance with such 

sections, or are not in the interest of the 

consumer. In developing rules under 

TILA section 129B(e), the Bureau has 

considered whether the rules are in the 

interest of the consumer, as required by 

the statute. As discussed in the sectionby-section analysis below, the Bureau is 

issuing portions of this rule pursuant to 

its authority under TILA section 

129B(e). 

The Dodd-Frank Act 

Dodd-Frank Act section 1022(b). 

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

Act authorizes the Bureau to prescribe 

rules ‘‘as may be necessary or 

appropriate to enable the Bureau to 

administer and carry out the purposes 

and objectives of the Federal consumer 

financial laws, and to prevent evasions 

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

title X of the Dodd-Frank Act are 

Federal consumer financial laws. 

Accordingly, the Bureau is exercising its 

authority under Dodd-Frank Act section 

1022(b) to prescribe rules that carry out 

the purposes and objectives of TILA and 

title X and prevent evasion of those 

laws. 

V. Section-by-Section Analysis 

Section 1026.25 Record Retention 

25(a) General Rule 

Section 1416 of the Dodd-Frank Act 

revised TILA section 130(e) to extend 

the statute of limitations for civil 

liability for a violation of TILA section 

129C, as well as sections 129 and 129B, 

to three years after the date a violation 

occurs. Existing § 1026.25(a) requires 

that creditors retain evidence of 

compliance with Regulation Z for two 

years after disclosures must be made or 

action must be taken. Accordingly, the 

Board proposed to revise § 226.25(a) 74

to require that creditors retain records 

that show compliance with proposed 

§ 226.43, which would implement TILA 

section 129C, for at least three years 

after consummation. The Board did not 

propose to alter the regulation’s existing 

clarification that administrative 

agencies responsible for enforcing 

Regulation Z may require creditors 

under the agency’s jurisdiction to retain 

records for a longer period, if necessary 

to carry out the agency’s enforcement 

responsibilities under TILA section 108, 

15 U.S.C. 1607. Under TILA section 

130(e), as amended by Dodd-Frank, the 

statute of limitations for civil liability 

for a violation of other sections of TILA 

remains one year after the date a 

violation occurs, except for private 

education loans under 15 U.S.C. 

1650(a), actions brought under section 

129 or 129B, or actions brought by a 

State attorney general to enforce a 

violation of section 129, 129B, 129C, 

129D, 129E, 129F, 129G, or 129H. 15 

U.S.C. 1640(e). Moreover, as amended 

by section 1413 of the Dodd-Frank Act, 

TILA provides that when a creditor, an 

assignee, other holder or their agent 

initiates a foreclosure action, a 

consumer may assert a violation of TILA 

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

by recoupment or setoff.’’ TILA section 

130(k). There is no time limit on the use 

of this defense. 

As discussed below, the Bureau is 

adopting minor modifications to 

§ 1026.25(a) and adding in new 

§ 1026.25(c) to reflect section 1416 of 

the Dodd-Frank Act, in § 1026.25(c)(3) 

as well as other exceptional record 

retention requirements related to 

mortgage loans. 

25(c) Records Related to Certain 

Requirements for Mortgage Loans 

The Bureau is adopting the revision 

proposed in § 226.25(a) to require a 

creditor to retain records demonstrating 

compliance with § 1026.43 consistent 

with the extended statute of limitations 

for violations of that section, though the 

Bureau is adopting this requirement in 

§ 1026.25(c)(3) to provide additional 

clarity. As the 2012 TILA–RESPA 

Proposal proposed new § 1026.25(c)(1) 

and the 2012 Loan Originator Proposal 

proposed new § 1026.25(c)(2), the 

Bureau concludes that adding new 

§ 1026.25(c)(3) eases compliance burden 

by placing all record retention 

requirements that are related to 

mortgage loans and which differ from 

the general record retention in one 

section, § 1026.25(c). Likewise, the 

Bureau is amending § 1026.25(a) to 

reflect that certain record retention 

requirements, such as records related to 

minimum standards for transactions 

secured by a dwelling, are governed by 

§ 1026.43(c). 

Commenters did not provide the 

Bureau with significant, specific 

feedback with respect to proposed 

§ 226.25(a), although industry 


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75The 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 

§ 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). This proposal generally references TILA 

section 103(aa) to refer to the pre-Dodd-Frank 

provision, which is in effect until the Dodd-Frank 

Act’s amendments take effect, and TILA section 

103(bb) to refer to the provision as amended. 

commenters generally expressed 

concern with respect to the compliance 

burden of the 2011 ATR Proposal. 

Increasing the period a creditor must 

retain records from two to three years 

may impose some marginal increase in 

the creditor’s compliance burden in the 

form of incremental cost of storage. 

However, the Bureau believes that even 

absent the rule, responsible creditors 

will likely elect to retain records of 

compliance with § 1026.43 for a period 

of time well beyond three years, given 

that the statute allows consumers to 

bring a defensive claim for recoupment 

or setoff in the event that a creditor or 

assignee initiates foreclosure 

proceedings. Indeed, at least one 

commenter noted this tension and 

requested that the Bureau provide 

further regulatory instruction, although 

the Bureau does not deem it necessary 

to mandate recordkeeping burdens 

beyond what is required by section 1416 

of the Dodd-Frank Act. Furthermore, the 

record-keeping burden imposed by the 

rule is tailored only to show compliance 

with § 1026.43, and the Bureau believes 

is justified to protect the interests of 

both creditors and consumers in the 

event that an affirmative claim is 

brought during the first three years after 

consummation. 

The Bureau believes that calculating 

the record retention period under 

§ 1026.43 from loan consummation 

facilitates compliance by establishing a 

single, clear start to the period, even 

though a creditor will take action (e.g., 

underwriting the covered transaction 

and offering a consumer the option of a 

covered transaction without a 

prepayment penalty) over several days 

or weeks prior to consummation. The 

Bureau is thus adopting the timeframe 

as proposed to reduce compliance 

burden. 

Existing comment 25(a)–2 clarifies 

that, in general, a creditor need retain 

only enough information to reconstruct 

the required disclosures or other 

records. The Board proposed, and the 

Bureau is adopting, amendments to 

comment 25(a)–2 and a new comment 

25(c)(3)–1 to clarify that, if a creditor 

must verify and document information 

used in underwriting a transaction 

subject to § 1026.43, the creditor must 

retain evidence sufficient to 

demonstrate having done so, in 

compliance with § 1026.25(a) and 

§ 1026.25(c)(3). In an effort to reduce 

compliance burden, comment 25(c)(3)– 

1 also clarifies that creditors need not 

retain actual paper copies of the 

documentation used to underwrite a 

transaction but that creditors must be 

able to reproduce those records 

accurately. 

The Board proposed comment 25(a)– 

7 to provide guidance on retaining 

records evidencing compliance with the 

requirement to offer a consumer an 

alternative covered transaction without 

a prepayment penalty, as discussed 

below in the section-by-section analysis 

of § 1026.43(g)(3) through (5). The 

Bureau believes the requirement to offer 

a transaction without a prepayment 

penalty under TILA section 129C(c)(4) 

is intended to ensure that consumers 

who choose an alternative covered 

transaction with a prepayment penalty 

do so voluntarily. The Bureau further 

believes it is unnecessary, and contrary 

to the Bureau’s efforts to streamline its 

regulations, facilitate regulatory 

compliance, and minimize compliance 

burden, for a creditor to document 

compliance with the requirement to 

offer an alternative covered transaction 

without a prepayment penalty when a 

consumer does not choose a transaction 

with a prepayment penalty or if the 

covered transaction is not 

consummated. Accordingly, the Bureau 

is adopting as proposed comment 25(a)– 

7 as comment 25(c)(3)–2, to clarify that 

a creditor must retain records that 

document compliance with that 

requirement if a transaction subject to 

§ 1026.43 is consummated with a 

prepayment penalty, but need not retain 

such records if a covered transaction is 

consummated without a prepayment 

penalty or a covered transaction is not 

consummated. See § 1026.43(g)(6). 

The Board proposed comment 25(a)– 

7 also to provide specific guidance on 

retaining records evidencing 

compliance with the requirement to 

offer a consumer an alternative covered 

transaction without a prepayment 

penalty when a creditor offers a 

transaction through a mortgage broker. 

As discussed in detail below in the 

section-by-section analysis of 

§ 1026.43(g)(4), the Board proposed that 

if the creditor offers a covered 

transaction with a prepayment penalty 

through a mortgage broker, the creditor 

must present the mortgage broker an 

alternative covered transaction without 

a prepayment penalty. Also, the creditor 

must provide, by agreement, for the 

mortgage broker to present to the 

consumer that transaction or an 

alternative covered transaction without 

a prepayment penalty offered by another 

creditor that has a lower interest rate or 

a lower total dollar amount of 

origination points or fees and discount 

points than the creditor’s presented 

alternative covered transaction. The 

Bureau did not receive significant 

comment on this clarification, and is 

adopting the comment largely as 

proposed, renumbered as comment 

25(c)(3)–2. Comment 25(c)(3)–2 also 

clarifies that, to demonstrate 

compliance with § 1026.43(g)(4), the 

creditor must retain a record of (1) the 

alternative covered transaction without 

a prepayment penalty presented to the 

mortgage broker pursuant to 

§ 1026.43(g)(4)(i), such as a rate sheet, 

and (2) the agreement with the mortgage 

broker required by § 1026.34(g)(4)(ii). 

Section 1026.32 Requirements for 

High-Cost Mortgages 

32(b) Definitions 

32(b)(1) 

Points and Fees—General 

Section 1412 of the Dodd-Frank Act 

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

which defines a ‘‘qualified mortgage’’ as 

a loan for which, among other things, 

the total ‘‘points and fees’’ do not 

exceed 3 percent of the total loan 

amount. The limits on points and fees 

for qualified mortgages are implemented 

in new § 1026.43(e)(3). 

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

defines ‘‘points and fees’’ for qualified 

mortgages to have the same meaning as 

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

as section 103(bb)(4)), which defines 

‘‘points and fees’’ for the purpose of 

determining whether a transaction 

qualifies as a high-cost mortgage under 

HOEPA.75 TILA section 103(aa)(4) is 

implemented in current § 1026.32(b)(1). 

Accordingly, the Board proposed in 

§ 226.43(b)(9) that, for a qualified 

mortgage, ‘‘points and fees’’ has the 

same meaning as in § 226.32(b)(1). 

The Board also proposed in the 2011 

ATR Proposal to amend § 226.32(b)(1) to 

implement revisions to the definition of 

‘‘points and fees’’ under section 1431 of 

the Dodd-Frank Act. Among other 

things, the Dodd-Frank Act excluded 

certain private mortgage insurance 

premiums from, and added loan 

originator compensation and 

prepayment penalties to, the definition 

of ‘‘points and fees’’ that had previously 


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6424 Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 

applied to high-cost mortgage loans 

under HOEPA. In the Bureau’s 2012 

HOEPA Proposal, the Bureau 

republished the Board’s proposed 

revisions to § 226.32(b)(1), with only 

minor changes, in renumbered 

§ 1026.32(b)(1). 

The Bureau noted in its 2012 HOEPA 

Proposal that it was particularly 

interested in receiving comments 

concerning any newly-proposed 

language and the application of the 

definition in the high-cost mortgage 

context. The Bureau received numerous 

comments from both industry and 

consumer advocacy groups, the majority 

of which were neither specific to newlyproposed language nor to the 

application of the definition to high-cost 

mortgages. These comments largely 

reiterated comments that the Board and 

the Bureau had received in the ATR 

rulemaking docket. The Bureau is 

addressing comments received in 

response to 2012 HOEPA Proposal in 

the 2013 HOEPA Final Rule. Similarly, 

comments received in response to the 

Board’s 2011 ATR Proposal are 

discussed in this final rule. The Bureau 

is carefully coordinating the 2013 

HOEPA and ATR Final Rules to ensure 

a consistent and cohesive regulatory 

framework. The Bureau is now 

finalizing § 1026.32(b)(1), (b)(3), 

(b)(4)(i), (b)(5), and (b)(6)(i) in this rule 

in response to the comments received 

on both proposals. The Bureau is 

finalizing § 1026.32(b)(2), (b)(4)(ii), and 

(b)(6)(ii) in the 2013 HOEPA Final Rule. 

Existing § 1026.32(b)(1) defines 

‘‘points and fees’’ by listing included 

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

(iv). As discussed below, the Board 

proposed revisions to § 226.32(b)(1)(i) 

through (iv) and proposed to add new 

§ 226.32(b)(1)(v) and (vi). In the 2012 

HOEPA Proposal, the Bureau proposed 

to add the phrase ‘‘in connection with 

a closed-end mortgage loan’’ to 

§ 1026.32(b)(1) to clarify that its 

definition of ‘‘points and fees’’ would 

have applied only for closed-end 

mortgages. The Bureau also proposed to 

define ‘‘points and fees’’ in 

§ 1026.32(b)(3) for purposes of defining 

which open-end credit plans qualify as 

‘‘high-cost mortgages’’ under HOEPA. 

However, that section is not relevant to 

this rulemaking because the ability-torepay requirement in TILA section 129C 

does not apply to open-end credit. 

Accordingly, the Bureau is adopting 

§ 1026.32(b)(1) with the clarification 

that its definition of ‘‘points and fees’’ 

is ‘‘in connection with a closed-end 

mortgage loan.’’ 

Payable at or before consummation. 

In the 2011 ATR Proposal, the Board 

noted that the Dodd-Frank Act removed 

the phrase ‘‘payable at or before 

closing’’ from the high-cost mortgage 

points and fees test in TILA section 

103(aa)(1)(B). See TILA section 

103(bb)(1)(A)(ii). Prior to the DoddFrank Act, fees and charges were 

included in points and fees for the highcost mortgage points and fees test only 

if they were payable at or before closing. 

The phrase ‘‘payable at or before 

closing’’ is also not in TILA’s provisions 

on the points and fees cap for qualified 

mortgages. See TILA section 

129C(b)(2)(A)(vii), (b)(2)(C). Thus, the 

Board stated that, with a few exceptions, 

the statute provides that any charge that 

falls within the ‘‘points and fees’’ 

definition must be counted toward the 

limits on points and fees for both highcost mortgages and qualified mortgages, 

even if it is payable after loan closing. 

The Board noted that the exceptions are 

mortgage insurance premiums and 

charges for credit insurance and debt 

cancellation and suspension coverage. 

The statute expressly states that these 

premiums and charges are included in 

points and fees only if payable at or 

before closing. See TILA section 

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

and TILA section 103(bb)(4)(D) (for 

credit insurance and debt cancellation 

and suspension coverage). 

The Board expressed concern that 

some fees that occur after closing, such 

as fees to modify a loan, might be 

deemed to be points and fees. If so, the 

Board cautioned that calculating the 

points and fees to determine whether a 

transaction is a qualified mortgage may 

be difficult because the amount of future 

fees (e.g., loan modification fees) cannot 

be known prior to closing. The Board 

noted that creditors might be exposed to 

excessive litigation risk if consumers 

were able at any point during the life of 

a mortgage to argue that the points and 

fees for the loan exceed the qualified 

mortgage limits due to fees imposed 

after loan closing. The Board expressed 

concern that creditors therefore might 

be discouraged from making qualified 

mortgages, which would undermine 

Congress’s goal of increasing incentives 

for creditors to make more stable, 

affordable loans. The Board requested 

comment on whether any other types of 

fees should be included in points and 

fees only if they are ‘‘payable at or 

before closing.’’ 

Several industry commenters stated 

that charges paid after closing should 

not be included in points and fees and 

requested that the Bureau clarify 

whether such charges are included. For 

example, some industry commenters 

sought confirmation that charges for a 

subsequent loan modification would not 

be included in points and fees. More 

generally, industry commenters argued 

that they would have difficulty 

calculating charges that would be paid 

after closing and that including such 

charges in points and fees would create 

uncertainty and litigation risk. In 

response to the Bureau’s 2012 HOEPA 

Proposal, one consumer advocate noted 

that there are inconsistent and 

confusing standards for when charges 

must be payable to be included in 

points and fees. This commenter 

recommended that the Bureau adopt a 

‘‘known at or before closing’’ standard, 

arguing that this standard would clarify 

that financed points are included, 

would prevent creditors from evading 

the points and fees test by requiring 

consumers to pay charges after 

consummation, and would provide 

certainty to creditors that must know 

the amount of points and fees at or 

before closing. 

The Bureau appreciates that creditors 

need certainty in calculating points and 

fees so they can ensure that they are 

originating qualified mortgages (or are 

not exceeding the points and fees 

thresholds for high-cost mortgages). The 

Dodd-Frank Act provides that for the 

points and fees tests for both qualified 

mortgages and high-cost mortgages, only 

charges ‘‘payable in connection with’’ 

the transaction are included in points 

and fees. See TILA sections 

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

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

mortgages). The Bureau interprets this 

‘‘in connection with’’ requirement as 

limiting the universe of charges that 

need to be included in points and fees. 

To clarify when charges or fees are ‘‘in 

connection with’’ a transaction, the 

Bureau is specifying in § 1026.32(b)(1) 

that fees or charges are included in 

points and fees only if they are ‘‘known 

at or before consummation.’’ 

The Bureau is also adding new 

comment 32(b)(1)–1, which provides 

examples of fees and charges that are 

and are not known at or before 

consummation. The comment explains 

that charges for a subsequent loan 

modification generally would not be 

included in points and fees because, at 

consummation, the creditor would not 

know whether a consumer would seek 

to modify the loan and therefore would 

not know whether charges in 

connection with a modification would 

ever be imposed. Indeed, loan 

modification fees likely would not be 

included in the finance charge under 

§ 1026.4, as they would not be charges 

imposed by creditor as an incident to or 

a condition of the extension of credit. 

Thus, this clarification is consistent 

with the definition of the finance 

charge. Comment 32(b)(1)–1 also 


sroberts on DSK5SPTVN1PROD with 
Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 6425 

76Proposed comment 32(b)(1)(i)–1 contained a 

typographical error. It stated that ‘‘[i]tems excluded 

from the finance charge under other provisions of 

§ 226.4 are not excluded in the total ‘‘points and 

fees’’ under § 226.32(b)(1)(i), but may be included 

in ‘‘points and fees’’ under § 226.32(b)(1)(ii) through 

§ 226.32(b)(1)(vi).’’ (emphasis added). It should 

have read that such items ‘‘are not included in the 

total ‘‘points and fees’’ under § 226.32(b)(1)(i), but 

may be included in ‘‘points and fees’’ under 

§ 226.32(b)(1)(ii) through § 226.32(b)(1)(vi).’’ 

clarifies that the maximum prepayment 

penalties that may be charged or 

collected under the terms of a mortgage 

loan are included in points and fees 

under § 1026.32(b)(1)(v). In addition, 

comment 32(b)(1)–1 notes that, under 

§ 1026.32(b)(1)(i)(C)(1) and (iv), 

premiums or other charges for private 

mortgage insurance and credit insurance 

payable after consummation are not 

included in points and fees. This means 

that such charges may be included in 

points and fees only if they are payable 

at or before consummation. Thus, even 

if the amounts of such premiums or 

other charges are known at or before 

consummation, they are included in 

points and fees only if they are payable 

at or before consummation. 

32(b)(1)(i) 

Points and Fees—Included in the 

Finance Charge 

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

that ‘‘points and fees’’ includes all items 

included in the finance charge, except 

interest or the time-price differential. 

This provision is implemented in 

current § 1026.32(b)(1)(i). Section 1431 

of the Dodd-Frank Act added TILA 

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

from points and fees certain types and 

amounts of mortgage insurance 

premiums. 

The Board proposed to revise 

§ 226.32(b)(1)(i) to implement these 

provisions. The Board proposed to move 

the exclusion of interest or the timeprice differential to new 

§ 226.32(b)(1)(i)(A). The Board also 

proposed to add § 226.32(b)(1)(i)(B) to 

implement the new exclusion for certain 

mortgage insurance. In § 226.32(b)(1)(i), 

the Board proposed to revise the phrase 

‘‘all items required to be disclosed 

under § 226.4(a) and 226.4(b)’’ to read 

‘‘all items considered to be a finance 

charge under § 226.4(a) and 226.4(b)’’ 

because § 226.4 does not itself require 

disclosure of the finance charge. 

One industry commenter argued that 

the definition of points and fees was 

overbroad because it included all items 

considered to be a finance charge. The 

commenter asserted that several items 

that are included in the finance charge 

under § 1026.4(b) are vague or 

inapplicable in the context of mortgage 

transactions or duplicate items 

specifically addressed in other 

provisions. Several industry 

commenters also requested clarification 

about whether certain types of fees and 

charges are included in points and fees. 

At least two commenters asked that the 

Bureau clarify that closing agent costs 

are not included in points and fees. 

The Bureau is adopting renumbered 

§ 1026.32(b)(1)(i) and (i)(A) substantially 

as proposed, with certain clarifications 

in the commentary and in other parts of 

the rule as discussed below to address 

commenters’ requests for clarification. 

For consistency with the language in 

§ 1026.4, the Bureau is revising 

§ 1026.32(b)(1)(i) to refer to ‘‘items 

included in the finance charge’’ rather 

than ‘‘items considered to be a finance 

charge.’’ 

As noted above, several commenters 

requested clarification regarding 

whether certain types of charges would 

be included in points and fees. With 

respect to closing agent charges, 

§ 1026.4(a)(2) provides a specific rule 

for when such charges must be included 

in the finance charge. If they are not 

included in the finance charge, they 

would not be included in points and 

fees. Moreover, as discussed below and 

in new comment 32(b)(1)(i)(D)–1, 

certain closing agent charges may also 

be excluded from points and fees as 

bona fide third-party charges that are 

not retained by the creditor, loan 

originator, or an affiliate of either. 

The Board also proposed to revise 

comment 32(b)(1)(i)–1, which states that 

§ 226.32(b)(1)(i) includes in the total 

‘‘points and fees’’ items defined as 

finance charges under § 226.4(a) and 

226.4(b). The comment explains that 

items excluded from the finance charge 

under other provisions of § 226.4 are not 

included in the total ‘‘points and fees’’ 

under § 226.32(b)(1)(i), but may be 

included in ‘‘points and fees’’ under 

§ 226.32(b)(1)(ii) and (iii). The Board 

proposed to revise this comment to state 

that items excluded from the finance 

charge under other provisions of § 226.4 

may be included in ‘‘points and fees’’ 

under § 226.32(b)(1)(ii) through (vi).76

The proposed revision was intended to 

reflect the additional items added to the 

definition of ‘‘points and fees’’ by the 

Dodd-Frank Act and corrected the 

previous omission of § 226.32(b)(1)(iv). 

See proposed § 226.32(b)(1)(v) and (vi). 

The proposed comment also would 

have added an example of how this rule 

would operate. Under that example, a 

fee imposed by the creditor for an 

appraisal performed by an employee of 

the creditor meets the general definition 

of ‘‘finance charge’’ under § 226.4(a) as 

‘‘any charge payable directly or 

indirectly by the consumer and imposed 

directly or indirectly by the creditor as 

an incident to or a condition of the 

extension of credit.’’ However, 

§ 226.4(c)(7) expressly provides that 

appraisal fees are not finance charges. 

Therefore, under the general rule in 

proposed § 226.32(b)(1)(i) providing that 

finance charges must be counted as 

points and fees, a fee imposed by the 

creditor for an appraisal performed by 

an employee of the creditor would not 

have been counted in points and fees. 

Proposed § 226.32(b)(1)(iii), however, 

would have expressly included in 

points and fees items listed in 

§ 226.4(c)(7) (including appraisal fees) if 

the creditor receives compensation in 

connection with the charge. A creditor 

would receive compensation for an 

appraisal performed by its own 

employee. Thus, the appraisal fee in this 

example would have been included in 

the calculation of points and fees. 

The Bureau did not receive 

substantial comment on this proposed 

guidance. The Bureau is adopting 

comment 32(b)(1)(i)–1, with certain 

revisions for clarity. As revised, 

comment 32(b)(1)(i)–1 explains that 

certain items that may be included in 

the finance charge under 

§ 1026.32(b)(1)(i) are excluded under 

§ 1026.32(b)(1)(i)(A) through (F). 

Mortgage Insurance 

Under existing § 1026.32(b)(1)(i), 

mortgage insurance premiums are 

included in the finance charge and 

therefore are included in points and fees 

if payable at or before closing. As noted 

above, the Board proposed new 

§ 226.32(b)(1)(i)(B) to implement TILA 

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

that points and fees shall exclude 

certain charges for mortgage insurance 

premiums. Specifically, the statute 

excludes: (1) Any premium charged for 

insurance provided by an agency of the 

Federal Government or an agency of a 

State; (2) any amount that is not in 

excess of the amount payable under 

policies in effect at the time of 

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

the National Housing Act, provided that 

the premium, charge, or fee is required 

to be refundable on a pro-rated basis 

and the refund is automatically issued 

upon notification of the satisfaction of 

the underlying mortgage loan; and (3) 

any premium paid by the consumer 

after closing. 

The Board noted that the exclusions 

for certain premiums could plausibly be 

interpreted to apply to the definition of 

points and fees solely for purposes of 

high-cost mortgages and not for 

qualified mortgages. TILA section 


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6426 Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 

129C(b)(2)(C)(i) cross-references TILA 

section 103(aa)(4) (renumbered as 

103(bb)(4)) for the definition of ‘‘points 

and fees,’’ but the provision on mortgage 

insurance appears in TILA section 

103(bb)(1)(C) and not in section 

103(bb)(4). The Board also noted that 

certain provisions in the Dodd-Frank 

Act’s high-cost mortgage section 

regarding points and fees are repeated in 

the qualified mortgage section on points 

and fees. For example, both the highcost mortgage provisions and the 

qualified mortgage provisions expressly 

exclude from points and fees ‘‘bona fide 

third party charges not retained by the 

mortgage originator, creditor, or an 

affiliate of the creditor or mortgage 

originator.’’ TILA sections 

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

mortgages), 129C(b)(2)(C)(i) (for 

qualified mortgages). The mortgage 

insurance provision, however, does not 

separately appear in the qualified 

mortgage section. 

Nonetheless, the Board concluded 

that the better interpretation of the 

statute is that the mortgage insurance 

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

applies to the meaning of points and 

fees for both high-cost mortgages and 

qualified mortgages. The Board noted 

that the statute’s structure reasonably 

supports this view: by its plain 

language, the mortgage insurance 

provision prescribes how points and 

fees should be computed ‘‘for purposes 

of paragraph (4),’’ i.e., for purposes of 

TILA section 103(bb)(4). The mortgage 

insurance provision contains no caveat 

limiting its application solely to the 

points and fees calculation for high-cost 

mortgages. Thus, the Board determined 

that the cross-reference in the qualified 

mortgage provisions to TILA section 

103(bb)(4) should be read to include 

provisions that expressly prescribe how 

points and fees should be calculated 

under TILA section 103(bb)(4), 

wherever located. 

The Board noted that its proposal to 

apply the mortgage insurance provision 

to the meaning of points and fees for 

both high-cost mortgages and qualified 

mortgages is also supported by the 

Board’s authority under TILA section 

105(a) to make adjustments to facilitate 

compliance with TILA. The Board also 

cited its authority under TILA section 

129B(e) to condition terms, acts or 

practices relating to residential mortgage 

loans that the Board finds necessary or 

proper to effectuate the purposes of 

TILA. The purposes of TILA include 

‘‘assur[ing] that consumers are offered 

and receive residential mortgage loan on 

terms that reasonably reflect their ability 

to repay the loans.’’ TILA section 

129B(a)(2). 

The Board also expressed concern 

about the increased risk of confusion 

and compliance error if points and fees 

were to have two separate meanings in 

TILA—one for determining whether a 

loan is a high-cost mortgage and another 

for determining whether a loan is a 

qualified mortgage. The Board stated 

that the proposal is intended to facilitate 

compliance by applying the mortgage 

insurance provision to the meaning of 

points and fees for both high-cost 

mortgages and qualified mortgages. 

In addition, the Board expressed 

concern that market distortions could 

result due to different treatment of 

mortgage insurance in calculating points 

and fees for high-cost mortgages and 

qualified mortgages. ‘‘Points and fees’’ 

for both high-cost mortgages and 

qualified mortgages generally excludes 

‘‘bona fide third party charges not 

retained by the mortgage originator, 

creditor, or an affiliate of the creditor or 

mortgage originator.’’ TILA sections 

103(bb)(1)(A)(ii), 129C(b)(2)(C)(i). Under 

this general provision standing alone, 

premiums for up-front private mortgage 

insurance would be excluded from 

points and fees. However, as noted, the 

statute’s specific provision on mortgage 

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

imposes certain limitations on the 

amount and conditions under which upfront premiums for private mortgage 

insurance are excluded from points and 

fees. Applying the mortgage insurance 

provision to the definition of points and 

fees only for high-cost mortgages would 

mean that any premium amount for upfront private mortgage insurance could 

be charged on qualified mortgages; in 

most cases, none of that amount would 

be subject to the cap on points and fees 

for qualified mortgages because it would 

be excluded as a ‘‘bona fide third party 

fee’’ that is not retained by the creditor, 

loan originator, or an affiliate of either. 

The Board noted that, as a result, 

consumers who obtain qualified 

mortgages could be vulnerable to paying 

excessive up-front private mortgage 

insurance costs. The Board concluded 

that this outcome would undercut 

Congress’s clear intent to ensure that 

qualified mortgages are products with 

limited fees and more safe features. 

For the reasons noted by the Board, 

the Bureau interprets the mortgage 

insurance provision in TILA section 

103(bb)(1)(C) as applying to the meaning 

of points and fees for both high-cost 

mortgages and qualified mortgages. The 

Bureau is also adopting this approach 

pursuant to its authority under TILA 

sections 105(a) and 129C(b)(3)(B)(i). 

Applying the mortgage insurance 

provision to the meaning of points and 

fees for qualified mortgages is necessary 

and proper to effectuate the purposes of, 

and facilitate compliance with the 

purposes of, the ability-to-repay 

requirements in TILA section 129C. 

Similarly, the Bureau finds that it is 

necessary and proper to use its authority 

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

revise, add to, or subtract from the 

criteria that define a qualified mortgage. 

As noted above, construing the mortgage 

insurance provision as applying to 

qualified mortgages will reduce the 

likelihood that consumers who obtain 

qualified mortgages will pay excessive 

private mortgage insurance premiums, 

and therefore will help ensure that 

responsible, affordable credit remains 

available to consumers in a manner 

consistent with the purposes of TILA 

section 129C. 

Proposed § 226.32(b)(1)(i)(B) tracked 

the substance of the statute with one 

exception. The Board interpreted the 

statute as excluding from points and 

fees not only up-front mortgage 

insurance premiums under government 

programs but also charges for mortgage 

guaranties under government programs. 

The Board noted that it was proposing 

the exclusion from points and fees of 

both mortgage insurance premiums and 

guaranty fees under government 

programs pursuant to its authority 

under TILA section 105(a) to make 

adjustments to facilitate compliance 

with TILA and its purposes and to 

effectuate the purposes of TILA. The 

Board also found that the exclusion is 

further supported by the Board’s 

authority under TILA section 129B(e) to 

condition terms, acts or practices 

relating to residential mortgage loans 

that the Board finds necessary or proper 

to effectuate the purposes of TILA. The 

purposes of TILA include ‘‘assur[ing] 

that consumers are offered and receive 

residential mortgage loan on terms that 

reasonably reflect their ability to repay 

the loans.’’ TILA section 129B(a)(2). 

The Board noted that both the U.S. 

Department of Veterans Affairs (VA) and 

the U.S. Department of Agriculture 

(USDA) expressed concerns that, if upfront charges for guaranties provided by 

those agencies and State agencies were 

included in points and fees, their loans 

might exceed high-cost thresholds and 

exceed the cap for qualified mortgages, 

thereby disrupting these programs and 

jeopardizing an important source of 

credit for many consumers. The Board 

requested comment on its proposal to 

exclude up-front charges for any 

guaranty under a Federal or State 

government program, as well as any upfront mortgage insurance premiums 

under government programs. 

Several industry commenters argued 

that premiums for private mortgage 


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insurance should be excluded 

altogether, even if the premiums do not 

satisfy the statutory standard for 

exclusion. These commenters noted that 

private mortgage insurance provides 

substantial benefits, allowing consumers 

who cannot afford a down payment an 

alternative for obtaining credit. Another 

commenter noted that the refundability 

requirement of the rule would make 

private mortgage insurance more 

expensive. 

One industry commenter asserted that 

the language in proposed 

§ 226.32(b)(1)(i)(B)(2) was inconsistent 

with the statutory language and the 

example in the commentary. The 

commenter suggested that a literal 

reading of proposed 

§ 226.32(b)(1)(i)(B)(2) would require 

exclusion of the entire premium if it 

exceeded the FHA insurance premium, 

rather than merely exclusion of that 

portion of the premium in excess of the 

FHA premium. Another industry 

commenter maintained that the term 

‘‘upfront’’ is vague and that the Bureau 

instead should use the phrase ‘‘payable 

at or before closing.’’ 

The Bureau is adopting proposed 

§ 226.32(b)(1)(i)(B) as reunumbered 

§ 1026.32(b)(1)(i)(B) with no substantive 

changes but with revisions for clarity. 

The Bureau is dividing proposed 

§ 226.32(b)(1)(i)(B) into two parts. The 

first part, § 1026.32(b)(1)(i)(B), addresses 

insurance premiums and guaranty 

charges under government programs. 

The second part, § 1026.32(b)(1)(i)(C), 

addresses premiums for private 

mortgage insurance. 

Consistent with the Board’s proposal, 

§ 1026.32(b)(1)(i)(B) excludes from 

points and fees charges for mortgage 

guaranties under government programs, 

as well as premiums for mortgage 

insurance under government programs. 

The Bureau concurs with the Board’s 

interpretation that, in addition to 

mortgage insurance premiums under 

government programs, the statute also 

excludes from points and fees charges 

for mortgage guaranties under 

government programs. Like the Board, 

the Bureau believes that this conclusion 

is further supported by TILA sections 

105(a) and 129C(b)(3)(B)(i) and that it is 

necessary and proper to invoke this 

authority. The exclusion from points 

and fees of charges for mortgage 

guaranties under government programs 

is necessary and proper to effectuate the 

purposes of TILA. The Bureau is 

concerned that including such charges 

in points and fees could cause loans 

offered through government programs to 

exceed high-cost mortgage thresholds 

and qualified mortgage points and fees 

limits, potentially disrupting an 

important source of affordable financing 

for many consumers. This exclusion 

helps ensure that loans do not 

unnecessarily exceed the points and 

fees limits for qualified mortgages, 

which is consistent with the purpose, 

stated in TILA section 129B(a)(2), of 

assuring that consumers are offered and 

receive residential mortgage loans on 

terms that reasonably reflect their ability 

to repay the loans and with the purpose 

stated in TILA section 129C(b)(3)(B)(i) 

of ensuring that responsible, affordable 

mortgage credit remains available to 

consumers in a manner consistent with 

the purposes of TILA section 129C. 

Proposed comment 32(b)(1)(i)–2 

provided an example of a mortgage 

insurance premium that is not counted 

in points and fees because the loan was 

insured by the FHA. The Bureau is 

renumbering this comment as 

32(b)(1)(i)(B)–1 and revising it to add an 

additional example to clarify that 

mortgage guaranty fees under 

government programs, such as VA and 

USDA funding fees, are excluded from 

points and fees. The Bureau is also 

deleting the reference to ‘‘up-front’’ 

premiums and charges. Under the 

statute, premiums for mortgage 

insurance or guaranty fees in connection 

with a Federal or State government 

program are excluded from points and 

fees whenever paid. The statutory 

provision excluding premiums or 

charges paid after consummation 

applies only to private mortgage 

insurance. 

The Bureau is addressing exclusions 

for private mortgage insurance in 

§ 1026.32(b)(1)(i)(C). For private 

mortgage insurance premiums payable 

after consummation, 

§ 1026.32(b)(1)(i)(C)(1) provides that the 

entire amount of the premium is 

excluded from points and fees. For 

private mortgage insurance premiums 

payable at or before consummation, 

§ 1026.32(b)(1)(i)(C)(1) provides that the 

portion of the premium not in excess of 

the amount payable under policies in 

effect at the time of origination under 

section 203(c)(2)(A) of the National 

Housing Act is excluded from points 

and fees, provided that the premium is 

required to be refundable on a pro-rated 

basis and the refund is automatically 

issued upon notification of the 

satisfaction of the underlying mortgage 

loan. 

As noted by one commenter, the 

language in proposed § 226.32(b)(1)(i)(B) 

could be read to conflict with the statute 

and the commentary because it 

suggested that, if a private mortgage 

insurance premium payable at or before 

consummation exceeded the FHA 

insurance premium, then the entire 

private mortgage insurance premium 

would be included in points and fees. 

The Bureau is clarifying in 

§ 1026.32(b)(1)(i)(C)(2) that only the 

portion of the private mortgage 

insurance premium that exceeds the 

FHA premium must be included in 

points and fees. With respect to the 

comments requesting that all private 

mortgage insurance premiums be 

excluded from points and fees, the 

Bureau notes that TILA section 

103(bb)(1)(C) prescribes specific and 

detailed conditions for excluding 

private mortgage insurance premiums. 

Under these circumstances, the Bureau 

does not believe it would be appropriate 

to exercise its exception authority to 

reverse Congress’s decision. 

Proposed comment 32(b)(1)(i)–3 

explained that private mortgage 

insurance premiums payable at or 

before consummation need not be 

included in points and fees to the extent 

that the premium does not exceed the 

amount payable under policies in effect 

at the time of origination under section 

203(c)(2)(A) of the National Housing Act 

and the premiums are required to be 

refunded on a pro-rated basis and the 

refund is automatically issued upon 

notification of satisfaction of the 

underlying mortgage loan. Proposed 

comment 32(b)(1)(i)–3 also provided an 

example of this exclusion. Proposed 

comment 32(b)(1)(i)–4 explained that 

private mortgage insurance premiums 

that do not qualify for an exclusion 

must be included in points and fees 

whether paid at or before 

consummation, in cash or financed, 

whether optional or required, and 

whether the amount represents the 

entire premium or an initial payment. 

The Bureau did not receive 

substantial comments on these proposed 

interpretations. The Bureau is adopting 

comments 32(b)(1)(i)–3, and –4 with 

certain revisions for clarity and 

renumbered as comments 32(b)(1)(i)(C)– 

1 and –2. Comment 32(b)(1)(i)(C)–1.i is 

revised to specify that private mortgage 

insurance premiums paid after 

consummation are excluded from points 

and fees. The Bureau also adopts 

clarifying changes that specify that 

creditors originating conventional 

loans—even such loans that are not 

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

their principal balance is too high)— 

should look to the permissible up-front 

premium amount for FHA loans, as 

implemented by applicable regulations 

and other written authorities issued by 

the FHA (such as Mortgagee Letters). 

For example, pursuant to HUD’s 

Mortgagee Letter 12–4 (published March 

6, 2012), the allowable up-front FHA 

premium for single-family homes is 1.75 


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77See Department of Housing and Urban 

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

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

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

78The exclusions differ in only one respect. To 

exclude two or one bona fide discount points from 

the points and fees test for determining whether a 

loan is a high-cost mortgage, TILA section 

103(dd)(1)(B) and (C) specified that the interest rate 

for personal property loans before the discount 

must be within 1 or 2 percentage points, 

respectively, of the average rate on a loan in 

connection with which insurance is provided under 

title I of the National Housing Act. TILA section 

129C(b)(2)(C), which prescribes conditions for 

excluding bona fide discount points from points 

and fees for qualified mortgages, does not contain 

analogous provisions. 

percent of the base loan amount.77

Finally, the Bureau clarifies that only 

the portion of the single or up-front PMI 

premium in excess of the allowable 

FHA premium (i.e., rather than any 

monthly premium or portion thereof) 

must be included in points and fees. 

Comments 32(b)(1)(i)(C)–1 and –2 also 

have both been revised for clarity and 

consistency. For example, the comments 

as adopted refer to premiums ‘‘payable 

at or before consummation’’ rather than 

‘‘up-front’’ premiums and to 

‘‘consummation’’ rather than ‘‘closing.’’ 

The Bureau notes that the statute refers 

to ‘‘closing’’ rather than 

‘‘consummation.’’ However, for 

consistency with the terminology in 

Regulation Z, the Bureau is using the 

term ‘‘consummation.’’ 

Bona Fide Third-Party Charges and 

Bona Fide Discount Points 

The Dodd-Frank Act amended TILA 

to add nearly identical provisions 

excluding certain bona fide third-party 

charges and bona fide discount points 

from the calculation of points and fees 

for both qualified mortgages and highcost mortgages.78 Specifically, section 

1412 of the Dodd-Frank Act added new 

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

excludes certain bona fide third-party 

charges and bona fide discount points 

from the calculation of points and fees 

for the qualified mortgage points and 

fees threshold. Similarly, section 1431 

of the Dodd-Frank Act amended TILA 

section 103(bb)(1)(A)(ii) and added 

TILA section 103(dd) to provide for 

nearly identical exclusions in 

calculating points and fees for the highcost mortgage threshold. 

In the 2011 ATR Proposal, the Board 

proposed to implement in 

§ 226.43(e)(3)(ii)(A) through (C) the 

exclusion of certain bona fide thirdparty charges and bona fide discount 

points only for the calculation of points 

and fees for the qualified mortgage 

points and fees threshold. In the 2012 

HOEPA Proposal, the Bureau proposed 

to implement these exclusions in 

proposed § 1026.32(b)(5) for the points 

and fees threshold for high-cost 

mortgages. The Bureau noted that 

proposed § 1026.32(b)(5) was generally 

consistent with the Board’s proposed 

§ 226.43(e)(3)(ii)(A) through (C). 

The Bureau believes that it is 

appropriate to consolidate these 

exclusions in a single provision. The 

Bureau is now finalizing both rules, and 

the exclusions are nearly identical for 

both the qualified mortgage and highcost mortgage contexts. Moreover, under 

the Board’s ATR Proposal, the points 

and fees calculation for the qualified 

mortgage points and fees threshold 

already would have cross-referenced the 

definition of points and fees for highcost mortgages in § 226.32(b)(1). Given 

that the points and fees calculations for 

both the qualified mortgage and highcost mortgage points and fees thresholds 

will use the same points and fees 

definition in § 1026.32(b)(1), the Bureau 

believes it is unnecessary to implement 

nearly identical exclusions from points 

and fees in separate provisions for 

qualified mortgages and high-cost 

mortgages. Accordingly, the Bureau is 

consolidating the exclusions for certain 

bona fide third-party charges and bona 

fide discount points for both qualified 

mortgages and high-cost mortgages in 

new § 1026.32(b)(1)(i)(D) through (F). In 

addition, the definition of ‘‘bona fide 

discount points’’ for the purposes of 

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

2011 ATR Proposal would have 

implemented in § 226.43(e)(3)(iv), is 

instead being implemented in 

§ 1026.32(b)(3). 

Bona fide third-party charges. TILA 

Section 129C(b)(2)(C)(i) excludes from 

points and fees ‘‘bona fide third party 

charges not retained by the mortgage 

originator, creditor, or an affiliate of the 

creditor or mortgage originator.’’ 

Tracking the statute, proposed 

§ 226.43(e)(3)(ii)(A) would have 

excluded from ‘‘points and fees’’ for 

qualified mortgages any bona fide third 

party charge not retained by the 

creditor, loan originator, or an affiliate 

of either. Proposed § 226.43(e)(3)(iii) 

would have specified that the term 

‘‘loan originator’’ has the same meaning 

as in § 226.36(a)(1). 

Proposed § 226.43(e)(3)(ii)(A) would 

also have implemented TILA section 

103(bb)(1)(C), which requires that 

premiums for private mortgage 

insurance be included in ‘‘points and 

fees’’ as defined in TILA section 

103(bb)(4) under certain circumstances. 

Applying general rules of statutory 

construction, the Board concluded that 

the more specific provision on private 

mortgage insurance supersedes the more 

general provision permitting any bona 

fide third party charge not retained by 

the creditor, mortgage originator, or an 

affiliate of either to be excluded from 

‘‘points and fees.’’ Thus, proposed 

§ 226.43(e)(3)(ii)(A) would have 

excluded from points and fees any bona 

fide third party charge not retained by 

the creditor, loan originator, or an 

affiliate of either unless the charges 

were premiums for private mortgage 

insurance that were included in points 

and fees under § 226.32(b)(1)(i)(B). 

The Board noted that, in setting the 

purchase price for specific loans, Fannie 

Mae and Freddie Mac make loan-level 

price adjustments (LLPAs) to 

compensate offset added risks, such as 

a high LTV or low credit score, among 

many other risk factors. Creditors may, 

but are not required to, increase the 

interest rate charged to the consumer so 

as to offset the impact of the LLPAs or 

increase the costs to the consumer in the 

form of points to offset the lost revenue 

resulting from the LLPAs. The Board 

noted that, during outreach, some 

creditors argued that these points 

should not be counted in points and 

fees for qualified mortgages under the 

exclusion for ‘‘bona fide third party 

charges not retained by the loan 

originator, creditor, or an affiliate of 

either’’ in TILA section 129C(b)(2)(C). 

The Board acknowledged creditors’ 

concerns about exceeding the qualified 

mortgage points and fees thresholds due 

to LLPAs required by the GSEs. 

However, the Board questioned whether 

an exemption for LLPAs would be 

consistent with congressional intent in 

limiting points and fees for qualified 

mortgages. The Board noted that points 

charged to meet GSE risk-based price 

adjustment requirements are arguably 

no different than other points charged 

on loans sold to any secondary market 

purchaser to compensate that purchaser 

for added loan-level risks. Congress 

clearly contemplated that discount 

points generally should be included in 

points and fees for qualified mortgages. 

The Board noted that an exclusion for 

points charged by creditors in response 

to secondary market LLPAs also would 

raise questions about the appropriate 

treatment of points charged by creditors 

to offset loan-level risks on mortgage 

loans that they hold in portfolio. The 

Board reasoned that, under normal 

circumstances, these points are retained 

by the creditor, so it would not be 

appropriate to exclude them from points 

and fees under the ‘‘bona fide third 

party charge’’ exclusion. However, the 

Board cautioned that requiring that 

these points be included in points and 

fees, when similar charges on loans sold 

into the secondary market are excluded, 

may create undesirable market 


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Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 6429 

imbalances between loans sold to the 

secondary market and loans held in 

portfolio. 

The Board also noted that creditors 

may offset risks on their portfolio loans 

(or on loans sold into the secondary 

market) by charging a higher rate rather 

than additional points and fees; 

however, the Board recognized the 

limits of this approach to loan-level risk 

mitigation due to concerns such as 

exceeding high-cost mortgage rate 

thresholds. Nonetheless, the Board 

noted that in practice, an exclusion from 

the qualified mortgage points and fees 

calculation for all points charged to 

offset loan-level risks may create 

compliance and enforcement 

difficulties. The Board questioned 

whether meaningful distinctions 

between points charged to offset loanlevel risks and other points and fees 

charged on a loan could be made clearly 

and consistently. In addition, the Board 

observed that such an exclusion could 

be overbroad and inconsistent with 

Congress’s intent that points generally 

be counted toward the points and fees 

threshold for qualified mortgages. 

The Board requested comment on 

whether and on what basis the final rule 

should exclude from points and fees for 

qualified mortgages points charged to 

meet risk-based price adjustment 

requirements of secondary market 

purchasers and points charged to offset 

loan-level risks on mortgages held in 

portfolio. 

Consumer advocates did not comment 

on this issue. Many industry 

commenters argued that LLPAs should 

be excluded from points and fees as 

bona fide third party charges. The GSE 

commenters agreed that LLPAs should 

be excluded as bona fide third party 

charges, noting that they are not 

retained by the creditor. One GSE 

commenter noted that LLPAs are set 

fees that are transparent and accessible 

via the GSEs’ Web sites. Some industry 

commenters contended that including 

LLPAs in points and fees would cause 

many loans to exceed the points and 

fees cap for qualified mortgages. Other 

industry commenters argued that 

requiring LLPAs to be included in 

points and fees would force creditors to 

recover the costs through increases in 

the interest rate. One of the GSE 

commenters acknowledged the concern 

that creditors holding loans in portfolio 

could be at a disadvantage if LLPAs 

were excluded from points and fees and 

suggested that the Bureau consider 

allowing such creditors to exclude 

published loan level risk adjustment 

fees. 

One industry commenter urged the 

Bureau to coordinate with the agencies 

responsible for finalizing the 2011 QRM 

Proposed Rule to avoid unintended 

consequences. The 2011 ARM Proposed 

Rule, if adopted, would require, in 

certain circumstances, that sponsors of 

MBS create premium capture cash 

reserve accounts to limit sponsors’ 

ability to monetize the excess spread 

between the proceeds from the sale of 

the interests and the par value of those 

interests. See 76 FR 24113. The 

commenter stated that this would result 

in any premium in the price of a 

securitization backed by residential 

mortgage loans being placed in a firstloss position in the securitization. The 

commenter argued that this would make 

premium loans too expensive to 

originate and that creditors would not 

be able to recover LLPAs through 

interest rate adjustments. The 

commenter maintained that if the 

LLPAs were included in the calculation 

for the qualified mortgage points and 

fees limit, creditors would also be 

severely constrained in recovering 

LLPAs through points. The commenter 

argued that LLPAs therefore should be 

excluded from the points and fees 

calculation for qualified mortgages. 

The Bureau is adopting 

§ 226.43(e)(3)(ii)(A), with certain 

revisions, as renumbered 

§ 1026.32(b)(1)(i)(D). As revised, 

§ 1026.32(b)(1)(i)(D) provides that a 

bona fide third party charge not retained 

by the creditor, loan originator, or an 

affiliate of either the general is excluded 

from points and fees unless the charge 

is required to be included under 

§ 1026.32(b)(1)(i)(C) (for mortgage 

insurance premiums), (iii) (for real 

estate related fees), or (iv) (for credit 

insurance premiums). As noted above, 

the Board proposed that the specific 

provision regarding mortgage insurance, 

TILA section 103(bb)(1)(C), should 

govern the exclusion of private mortgage 

insurance premiums of points and fees, 

rather than TILA section 129C(b)(2)(C), 

which provides generally for the 

exclusion of certain bona fide thirdparty charges. The Bureau likewise 

believes that the specific statutory 

provisions regarding real estate related 

fees and credit insurance premiums in 

TILA section 103(bb)(4)(C) and (D) 

should govern whether these charges are 

included in points and fees rather than 

the more general provisions regarding 

exclusion of bona fide third-party 

charges, TILA sections 103(bb)(1)(A)(ii) 

(for high-cost mortgages) or 

129C(b)(2)(C) (for qualified mortgages). 

Thus, § 1026.32(b)(1)(i)(D) provides that 

the general exclusion for bona fide 

third-party charges applies unless the 

charges are required to be included 

under § 1026.32(b)(1)(i)(C), (iii), or (iv). 

The Bureau acknowledges that TILA 

sections 103(bb)(1)(A)(ii) and 

129C(b)(2)(C) could plausibly be read to 

provide for a two-step calculation of 

points and fees: first, the creditor would 

calculate points and fees as defined in 

TILA section 103(bb)(4); and, second, 

the creditor would exclude all bona fide 

third-party charges not retained by the 

mortgage originator, creditor, or an 

affiliate of either, as provided in TILA 

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

mortgages) and 129C(b)(2)(C) (for 

qualified mortgages). Under this 

reading, charges for, e.g., private 

mortgage insurance could initially, in 

step one, be included in points and fees 

but then, in step two, be excluded as 

bona fide third-party charges under 

TILA sections 103(bb)(1)(A)(ii) or 

129C(b)(2)(C). 

To give meaning to the specific 

statutory provisions regarding mortgage 

insurance, real estate related fees, and 

credit insurance, the Bureau believes 

that the better reading is that these 

specific provisions should govern 

whether such charges are included in 

points and fees, rather than the general 

provisions excluding certain bona fide 

third-party charges. For example, 

Congress added TILA section 

103(bb)(1)(C), which prescribes certain 

conditions under which private 

mortgage insurance premiums would be 

included in points and fees. The Bureau 

believes that the purpose of this 

provision is to help ensure that 

consumers with a qualified mortgage are 

not charged excessive private mortgage 

insurance premiums. If such premiums 

could be excluded as bona fide thirdparty charges under TILA sections 

103(bb)(1)(A)(ii) or 129C(b)(2)(C), then 

the purpose of this provision would be 

undermined. In further support of its 

interpretation, the Bureau is invoking its 

authority under TILA section 105(a) to 

make such adjustments and exceptions 

as are necessary and proper to effectuate 

the purposes of TILA, including that 

consumers are offered and receive 

residential mortgage loans on terms that 

reasonably reflect their ability to repay 

the loans. Similarly, the Bureau finds 

that it is necessary, proper and 

appropriate to use its authority under 

TILA section 129C(b)(3)(B)(i) to revise 

and subtract from the statutory 

language. This use of authority ensures 

that responsible, affordable mortgage 

credit remains available to consumers in 

a manner consistent with the purpose of 

TILA section 129C, referenced above, as 

well as effectuating that purpose. 

As noted above, several industry 

commenters argued that points charged 


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6430 Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 

by creditors to offset LLPAs should be 

excluded from points and fees under 

§ 1026.32(b)(1)(i)(D). In setting the 

purchase price for loans, the GSEs 

impose LLPAs to offset certain credit 

risks, and creditors may but are not 

required to recoup the revenue lost as a 

result of the LLPAs by increasing the 

costs to consumers in the form of points. 

The Bureau believes that the manner in 

which creditors respond to LLPAs is 

better viewed as a fundamental 

component of how the pricing of a 

mortgage loan is determined rather than 

as a third party charge. As the Board 

noted, allowing creditors to exclude 

points charged to offset LLPAs could 

create market imbalances between loans 

sold on the secondary market and loans 

held in portfolio. While such 

imbalances could be addressed by 

excluding risk adjustment fees more 

broadly, including fees charged by 

creditors for loans held in portfolio, the 

Bureau agrees with the Board that this 

could create compliance and 

enforcement difficulties. Thus, the 

Bureau concludes that points charged to 

offset LLPAs may not be excluded from 

points and fees under 

§ 1026.32(b)(1)(i)(D). To the extent that 

creditors offer consumers the 

opportunity to pay points to lower the 

interest rate that the creditor would 

otherwise charge to recover the lost 

revenue from the LLPAs, such points 

may, if they satisfy the requirements of 

§ 1026.32(b)(1)(i)(E) or (F), be excluded 

from points and fees as bona fide 

discount points. 

As noted above, one commenter 

expressed concern that if the 

requirements for premium capture cash 

reserve accounts proposed in the 2011 

QRM Proposed Rule were adopted, 

creditors would have difficulty in 

recovering the costs of LLPAs through 

rate and that, because of the points and 

fees limits for qualified mortgages, 

creditors would also have trouble 

recovering the costs of LLPAs through 

up-front charges to consumers. The 

Bureau notes that, as proposed, the 

premium capture cash reserve account 

requirement would not apply to 

securities sponsored by the GSEs and 

would not apply to securities comprised 

solely of QRMs. See 76 FR 24112, 

24120. Thus, it is not clear, that even if 

it were adopted, the requirement would 

have as substantial an impact as 

suggested by the commenter. In any 

event, the requirement has merely been 

proposed, not finalized. The Bureau will 

continue to coordinate with the agencies 

responsible for finalizing the 2011 QRM 

Proposed Rule to consider the combined 

effects of that rule and the instant rule. 

The Board proposed comment 

43(e)(3)(ii)–1 to clarify the meaning in 

proposed § 226.43(e)(3)(ii)(A) of 

‘‘retained by’’ the loan originator, 

creditor, or an affiliate of either. 

Proposed comment 43(e)(3)(ii)–1 

provided that if a creditor charges a 

consumer $400 for an appraisal 

conducted by a third party not affiliated 

with the creditor, pays the third party 

appraiser $300 for the appraisal, and 

retains $100, the creditor may exclude 

$300 of this fee from ‘‘points and fees’’ 

but must count the $100 it retains in 

‘‘points and fees.’’ 

As noted above, several commenters 

expressed confusion about the 

relationship between proposed 

§ 226.43(e)(3)(ii)(A), which would have 

excluded bona fide third party charges 

not retained by the loan originator, 

creditor, or an affiliate of either, and 

proposed § 226.32(b)(1)(iii), which 

would have excluded certain real estate 

related charges if they are reasonable, if 

the creditor receives no direct or 

indirect compensation in connection 

with the charges, and the charges are 

not paid to an affiliate of the creditor. 

As explained above, the Bureau 

interprets the more specific provision 

governing the inclusion in points and 

fees of real estate related charges 

(implemented in § 1026.32(b)(1)(iii)) as 

taking precedence over the more general 

exclusion for bona fide third party 

charges in renumbered 

§ 1026.32(b)(1)(i)(D). Accordingly, the 

Bureau does not believe that the 

example in proposed comment 

43(e)(3)(ii)–1 is appropriate for 

illustrating the exclusion for bona fide 

third party charges because the subject 

of the example, appraisals, is 

specifically addressed in 

§ 1026.32(b)(1)(iii). 

The Bureau therefore is revising 

renumbered comment 32(b)(1)(i)(D)–1 

by using a settlement agent charge to 

illustrate the exclusion for bona fide 

third party charges. By altering this 

example to address closing agent 

charges, the Bureau is also responding 

to requests from commenters that the 

Bureau provide more guidance on 

whether closing agent charges are 

included in points and fees. As noted 

above, proposed § 226.43(e)(3)(iii) 

would have specified that the term 

‘‘loan originator,’’ as used in proposed 

§ 226.43(e)(3)(ii)(A), has the same 

meaning as in § 226.36(a)(1). The 

Bureau is moving the cross-reference to 

the definition of ‘‘loan originator’’ in 

§ 226.36(a)(1) to comment 32(b)(1)(i)(D)– 

1. 

The Board proposed comment 

43(e)(3)(ii)–2 to explain that, under 

§ 226.32(b)(1)(i)(B), creditors would 

have to include in ‘‘points and fees’’ 

premiums or charges payable at or 

before consummation for any private 

guaranty or insurance protecting the 

creditor against the consumer’s default 

or other credit loss to the extent that the 

premium or charge exceeds the amount 

payable under policies in effect at the 

time of origination under section 

203(c)(2)(A) of the National Housing Act 

(12 U.S.C. 1709(c)(2)(A)). The proposed 

comment also would have explained 

that these premiums or charges would 

be included if the premiums or charges 

were not required to be refundable on a 

pro-rated basis, or the refund is not 

automatically issued upon notification 

of the satisfaction of the underlying 

mortgage loan. The comment would 

have clarified that, under these 

circumstances, even if the premiums 

and charges were not retained by the 

creditor, loan originator, or an affiliate 

of either, they would be included in the 

‘‘points and fees’’ calculation for 

qualified mortgages. The comment also 

would have cross-referenced proposed 

comments 32(b)(1)(i)–3 and –4 for 

further discussion of including private 

mortgage insurance premiums in the 

points and fees calculation. 

The Bureau is adopting proposed 

comment 43(e)(3)(ii)–2 substantially as 

proposed, renumbered as comment 

32(b)(i)(D)–2. In addition, the Bureau 

also is adopting new comments 

32(b)(i)(D)–3 and –4 to explain that the 

exclusion of bona fide third party 

charges under § 1026.32(b)(1)(i)(D) does 

not apply to real estate-related charges 

and credit insurance premiums. The 

inclusion of these items in points and 

fees is specifically addressed in 

§ 1026.32(b)(iii) and (iv), respectively. 

Bona fide discount points. TILA 

section 129C(b)(2)(C)(ii) excludes up to 

two bona fide discount points from 

points and fees under certain 

circumstances. Specifically, it excludes 

up to two bona fide discount points if 

the interest rate before the discount does 

not exceed the average prime offer rate 

by more than two percentage points. 

Alternatively, it excludes up to one 

discount point if the interest rate before 

the discount does not exceed the 

average prime offer rate by more than 

one percentage point. The Board 

proposed to implement this provision in 

proposed § 226.43(e)(3)(ii)(B) and (C). 

Proposed § 226.43(e)(3)(ii)(B) would 

have permitted a creditor to exclude 

from points and fees for a qualified 

mortgage up to two bona fide discount 

points paid by the consumer in 

connection with the covered 

transaction, provided that: (1) The 

interest rate before the rate is 

discounted does not exceed the average 


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prime offer rate, as defined in 

§ 226.45(a)(2)(ii), by more than one 

percent; and (2) the average prime offer 

rate used for purposes of paragraph 

43(e)(3)(ii)(B)(1) is the same average 

prime offer rate that applies to a 

comparable transaction as of the date 

the discounted interest rate for the 

covered transaction is set. 

Proposed § 226.43(e)(3)(ii)(C) would 

have permitted a creditor to exclude 

from points and fees for a qualified 

mortgage up to one bona fide discount 

point paid by the consumer in 

connection with the covered 

transaction, provided that: (1) The 

interest rate before the discount does 

not exceed the average prime offer rate, 

as defined in § 226.45(a)(2)(ii), by more 

than two percent; (2) the average prime 

offer rate used for purposes of 

§ 226.43(e)(3)(ii)(C)(1) is the same 

average prime offer rate that applies to 

a comparable transaction as of the date 

the discounted interest rate for the 

covered transaction is set; and (3) two 

bona fide discount points have not been 

excluded under § 226.43(e)(3)(ii)(B). 

Several industry commenters argued 

that creditors should be permitted to 

exclude from points and fees more than 

two discount points. Some industry 

commenters maintained that creditors 

should be permitted to exclude as many 

discount points as consumers choose to 

pay. Another commenter contended that 

creditors should be able to exclude as 

many as three discount points. 

A few industry commenters requested 

eliminating the requirement that, for the 

discount points to be bona fide, the 

interest rate before the discount must be 

within one or two percentage points of 

the average prime offer rate. One 

industry commenter argued that this 

requirement is too inflexible. Several 

commenters recommended that this 

requirement be adjusted for jumbo loans 

and for second homes. Another 

commenter claimed that this 

requirement would limit the options for 

consumers paying higher interest rates 

and that these are the consumers for 

whom it would be most beneficial to 

pay down their interest rates. 

Several commenters argued that the 

effect of these two limitations for 

excluding discount points from points 

and fees—the limit on the number of 

discount points that could be excluded 

and the requirement that the prediscount rate be within one or two 

points of the average prime offer rate— 

would have a negative impact on 

consumers. They maintained that these 

limitations would prevent consumers 

from choosing their optimal 

combination of interest rate and points 

for their financial circumstances. 

One commenter noted that proposed 

§ 226.43(e)(3)(ii)(B) and (C) would 

require that, for the discount points or 

point to be excluded from points and 

fees, the interest rate before the discount 

must not exceed the average prime offer 

rate by more than one or two ‘‘percent,’’ 

respectively. The commenter 

recommended that, for clarity and 

consistency with the statute, the 

requirement should instead require that 

the interest rate before the discount be 

within one or two ‘‘percentage points’’ 

of the average prime offer rate. 

The Bureau is adopting proposed 

§ 226.43(e)(3)(ii)(B) and (C), renumbered 

as § 1026.32(b)(1)(i)(E) and (F), with 

certain revisions. As suggested by a 

commenter, the Bureau is revising both 

§ 1026.32(b)(1)(i)(E)(1) and (F)(1) to 

require that, to exclude the discount 

points or point, the interest rate must be 

within one or two ‘‘percentage points’’ 

(rather than ‘‘percent’’) of the average 

prime offer rate. This formulation is 

clearer and consistent with the statutory 

language. The Bureau is also adding 

§ 1026.32(b)(1)(i)(E)(2) and (F)(2) to 

implement TILA section 103(dd)(1)(B) 

and (C), which specify that, to exclude 

discount points from points and fees for 

purposes of determining whether a loan 

is a high-cost mortgage, the interest rate 

for personal property loans before the 

discount must be within one or two 

percentage points, respectively, of the 

average rate on a loan in connection 

with which insurance is provided under 

title I of the National Housing Act. This 

provision does not apply to the points 

and fees limit for qualified mortgages, 

regardless of whether a loan is a highcost mortgage. The provision is 

included in the final rule for 

completeness. Finally, in 

§ 1026.32(b)(1)(i)(F), the Bureau is 

clarifying that bona fide discount points 

cannot be excluded under 

§ 1026.32(b)(1)(i)(F) if any bona fide 

discount points already have been 

excluded under § 1026.32(b)(1)(i)(E). 

As noted above, several commenters 

urged the Bureau to alter or eliminate 

the limitations on how many discount 

points may be excluded and the 

requirement that the pre-discount 

interest rate must be within one or two 

points of the average prime offer rate. A 

few industry commenters also requested 

that the Bureau adjust the limitation on 

the pre-discount interest rate 

specifically for jumbo loans and loans 

for vacation homes. These commenters 

noted that interest rates for such loans 

otherwise would often be too high to 

qualify for the exclusion for bona fide 

discount points. The Bureau recognizes 

that these limitations may circumscribe 

the ability of consumers to purchase 

discount points to lower their interest 

rates. Nevertheless, the Bureau does not 

believe it would be appropriate to 

exercise its exception authority. 

Congress apparently concluded that 

there was a greater probability of 

consumer injury when consumers 

purchased more than two discount 

points or when the consumers were 

using discount points to buy down 

higher interest rates. The Bureau also 

notes that, in other sections of the DoddFrank Act, Congress prescribed different 

thresholds above the average prime offer 

rate for jumbo loans. See TILA sections 

129C(c)(1)(B) (prepayment penalties) 

and 129H(f)(2) (appraisals). Congress 

did not do so in the provision regarding 

exclusion of bona fide discount points. 

The Bureau is adding new comment 

32(b)(1)(i)(E)–2 to note that the term 

‘‘bona fide discount point’’ is defined in 

§ 1026.32(b)(3). To streamline the rule, 

the Bureau is moving into new comment 

32(b)(1)(i)(E)–2 the explanation that the 

average prime offer rate used for 

purposes of for both § 1026.32(b)(1)(i)(E) 

and (F) is the average prime offer rate 

that applies to a comparable transaction 

as of the date the discounted interest 

rate for the covered transaction is set. 

The Board proposed comment 

43(e)(3)(ii)–5 to clarify that the average 

prime offer rate table indicates how to 

identify the comparable transaction. The 

Bureau is adding the language from 

proposed comment 43(e)(3)(ii)–5 to new 

comment 32(b)(1)(i)(E)–2, with a 

revision to the cross-reference for the 

comment addressing ‘‘comparable 

transaction.’’ 

Proposed comment 43(e)(3)(ii)–3 

would have included an example to 

illustrate the rule permitting exclusion 

of two bona fide discount points. The 

example would have assumed a covered 

transaction that is a first-lien, purchase 

money home mortgage with a fixed 

interest rate and a 30-year term. It 

would also have assumed that the 

consumer locks in an interest rate of 6 

percent on May 1, 2011, that was 

discounted from a rate of 6.5 percent 

because the consumer paid two 

discount points. Finally, assume that 

the average prime offer rate as of May 

1, 2011 for first-lien, purchase money 

home mortgages with a fixed interest 

rate and a 30-year term is 5.5 percent. 

In this example, the creditor would have 

been able to exclude two discount 

points from the ‘‘points and fees’’ 

calculation because the rate from which 

the discounted rate was derived 

exceeded the average prime offer rate for 

a comparable transaction as of the date 

the rate on the covered transaction was 

set by only 1 percent. 


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79Some commenters use the term ‘‘yield spread 

premium’’ to refer to any payment from a creditor 

to a mortgage broker that is funded by increasing 

the interest rate that would otherwise be charged to 

the consumer in the absence of that payment. These 

commenters generally assume that any payment to 

the brokerage firm by the creditor is funded out of 

the interest rate, reasoning that had the consumer 

paid the brokerage firm directly, the creditor would 

have had lower expenses and would have been able 

to charge a lower rate. Other commenters use the 

term ‘‘yield spread premium’’ more narrowly to 

refer only to a payment from a creditor to a 

mortgage broker that is based on the interest rate, 

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

if the consumer agrees to a higher interest rate. To 

avoid confusion, the Bureau is limiting its use of 

the term and is instead more specifically describing 

the payment at issue. 

80Currently, the points and fees threshold for 

determining whether a loan is a high-cost mortgage 

is the greater of 8 percent of the total loan amount 

or $400 (adjusted for inflation). Section 1431 of the 

Dodd-Frank Act lowered the points and fees 

threshold for determining whether a loan is a highcost mortgage to 5 percent of the total transaction 

amount for loans of $20,000 or more and to the 

lesser of 8 percent of the total transaction amount 

or $1,000 for loans less than $20,000. 

81 ‘‘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(dd)(2). The statute excludes certain persons 

from the definition, including a person who 

performs purely administrative or clerical tasks; an 

employee of a retailer of manufactured homes who 

does not take a residential mortgage application or 

offer or negotiate terms of a residential mortgage 

loan; and, subject to certain conditions, real estate 

brokers, sellers who finance three or fewer 

properties in a 12-month period, and servicers. 

TILA section 103(dd)(2)(C) through (F). 

82For more detailed discussions, see the Bureau’s 

2012 Loan Originator Proposal and the final rule 

issued by the Board in 2010. 77 FR 55272, 55276, 

55290 (Sept. 7, 2012); 75 FR 58509, 5815–16, 

58519–20 (Sept. 24, 2010) (2010 Loan Originator 

Final Rule). 

The Bureau is adopting proposed 

comment 43(e)(3)(ii)–3 substantially as 

proposed but renumbered as comment 

32(b)(1)(i)(E)–3. The Bureau is also 

adding new comment 32(b)(1)(i)(F)–1 to 

explain that comments 32(b)(1)(i)(E)–1 

and –2 provide guidance concerning the 

definitions of ‘‘bona fide discount 

point’’ and ‘‘average prime offer rate,’’ 

respectively. 

Proposed comment 43(e)(3)(ii)–4 

would have provided an example to 

illustrate the rule permitting exclusion 

of one bona fide discount point. The 

example assumed a covered transaction 

that is a first-lien, purchase money 

home mortgage with a fixed interest rate 

and a 30-year term. The example also 

would have assumed that the consumer 

locks in an interest rate of 6 percent on 

May 1, 2011, that was discounted from 

a rate of 7 percent because the consumer 

paid four discount points. Finally, the 

example would have assumed that the 

average prime offer rate as of May 1, 

2011, for first-lien, purchase money 

home mortgages with a fixed interest 

rate and a 30-year term is 5 percent. 

In this example, the creditor would 

have been able to exclude one discount 

point from the ‘‘points and fees’’ 

calculation because the rate from which 

the discounted rate was derived (7 

percent) exceeded the average prime 

offer rate for a comparable transaction as 

of the date the rate on the covered 

transaction was set (5 percent) by only 

2 percent. The Bureau is adopting 

proposed comment 43(e)(3)(ii)–4 

substantially as proposed but 

renumbered as comment 32(b)(1)(i)(F)– 

2. 

32(b)(1)(ii) 

When HOEPA was enacted in 1994, it 

required that ‘‘all compensation paid to 

mortgage brokers’’ be counted toward 

the threshold for points and fees that 

triggers special consumer protections 

under the statute. Specifically, TILA 

section 103(aa)(4) provided that charges 

are included in points and fees only if 

they are payable at or before 

consummation and did not expressly 

address whether ‘‘backend’’ payments 

from creditors to mortgage brokers 

funded out of the interest rate 

(commonly referred to as yield spread 

premiums) are included in points and 

fees.79 This requirement is implemented 

in existing § 1026.32(b)(1)(ii), which 

requires that all compensation paid by 

consumers directly to mortgage brokers 

be included in points and fees, but does 

not address compensation paid by 

creditors to mortgage brokers or 

compensation paid by any company to 

individual employees (such as loan 

officers who are employed by a creditor 

or mortgage broker). 

The Dodd-Frank Act substantially 

expanded the scope of compensation 

included in points and fees for both the 

high-cost mortgage threshold in HOEPA 

and the qualified mortgage points and 

fees limits.80 Section 1431 of the DoddFrank Act amended TILA to require that 

‘‘all compensation paid directly or 

indirectly by a consumer or creditor to 

a mortgage originator from any source, 

including a mortgage originator that is 

also the creditor in a table-funded 

transaction,’’ be included in points and 

fees. TILA section 103(bb)(4)(B) 

(emphasis added). Under amended 

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

compensation paid to anyone that 

qualifies as a ‘‘mortgage originator’’ is to 

be included in points and fees.81 Thus, 

in addition to compensation paid to 

mortgage brokerage firms and individual 

brokers, points and fees also includes 

compensation paid to other mortgage 

originators, including employees of a 

creditor (i.e., loan officers). In addition, 

as noted above, the Dodd-Frank Act 

removed the phrase ‘‘payable at or 

before closing’’ from the high-cost 

mortgage points and fees test and did 

not apply the ‘‘payable at or before 

closing’’ limitation to the points and 

fees cap for qualified mortgages. See 

TILA sections 103(bb)(1)(A)(ii) and 

129C(b)(2)(A)(vii), (b)(2)(C). Thus, the 

statute appears to contemplate that even 

compensation paid to mortgage brokers 

and other loan originators after 

consummation should be counted 

toward the points and fees thresholds. 

This change is one of several 

provisions in the Dodd-Frank Act that 

focus on loan originator compensation 

and regulation, in apparent response to 

concerns that industry compensation 

practices contributed to the mortgage 

market crisis by creating strong 

incentives for brokers and retail loan 

officers to steer consumers into higherpriced loans. Specifically, loan 

originators were often paid a 

commission by creditors that increased 

with the interest rate on a transaction. 

These commissions were funded by 

creditors through the increased revenue 

received by the creditor as a result of the 

higher rate paid by the consumer and 

were closely tied to the price the 

creditor expected to receive for the loan 

on the secondary market as a result of 

that higher rate.82 In addition, many 

mortgage brokers charged consumers 

up-front fees to cover some of their costs 

at the same time that they accepted 

backend payments from creditors out of 

the rate. This may have contributed to 

consumer confusion about where the 

brokers’ loyalties lay. 

The Dodd-Frank Act took a number of 

steps to address loan originator 

compensation issues, including: (1) 

Adopting requirements that loan 

originators be ‘‘qualified’’ as defined by 

Bureau regulations; (2) generally 

prohibiting compensation based on rate 

and other terms (except for loan 

amount) and prohibiting a loan 

originator from receiving compensation 

from both consumers and other parties 

in a single transaction; (3) requiring the 

promulgation of additional rules to 

prohibit steering consumers to less 

advantageous transactions; (4) requiring 

the disclosure of loan originator 

compensation; and (5) restricting loan 

originator compensation under HOEPA 

and the qualified mortgage provisions 

by including such compensation within 

the points and fees calculations. See 

TILA sections 103(bb)(4)(A)(ii), (B); 


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128(a)(18); 129B(b), (c); 

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

The Board proposed revisions to 

§ 226.32(b)(1)(ii) to implement the 

inclusion of more forms of loan 

originator compensation into the points 

and fees thresholds. Those proposed 

revisions tracked the statutory language, 

with two exceptions. First, proposed 

§ 226.32(b)(1)(ii) did not include the 

phrase ‘‘from any source.’’ The Board 

noted that the statute covers 

compensation paid ‘‘directly or 

indirectly’’ to the loan originator, and 

concluded that it would be redundant to 

cover compensation ‘‘from any source.’’ 

Second, for consistency with Regulation 

Z, the proposal used the term ‘‘loan 

originator’’ as defined in § 226.36(a)(1), 

rather than the term ‘‘mortgage 

originator’’ that appears in section 1401 

of the Dodd-Frank Act. See TILA section 

103(cc)(2). The Board explained that it 

interpreted the definitions of mortgage 

originator under the statute and loan 

originator under existing Regulation Z 

to be generally consistent, with one 

exception that the Board concluded was 

not relevant for purposes of the points 

and fees thresholds. Specifically, the 

statutory definition refers to ‘‘any 

person who represents to the public, 

through advertising or other means of 

communicating or providing 

information (including the use of 

business cards, stationery, brochures, 

signs, rate lists, or other promotional 

items), that such person can or will 

provide’’ the services listed in the 

definition (such as offering or 

negotiating loan terms), while the 

existing Regulation Z definition does 

not include persons solely on this basis. 

The Board concluded that it was not 

necessary to add this element of the 

definition to implement the points and 

fees calculations anyway, reasoning that 

the calculation of points and fees is 

concerned only with loan originators 

that receive compensation for 

performing defined origination 

functions in connection with a 

consummated loan. The Board noted 

that a person who merely represents to 

the public that such person can offer or 

negotiate mortgage terms for a consumer 

has not yet received compensation for 

that function, so there is no 

compensation to include in the 

calculation of points and fees for a 

particular transaction. 

In the proposed commentary, the 

Board explained what compensation 

would and would not have been 

included in points and fees under 

proposed § 226.32(b)(1)(ii). The Board 

proposed to revise existing comment 

32(b)(1)(ii)–1 to clarify that 

compensation paid by either a consumer 

or a creditor to a loan originator, as 

defined in § 1026.36(a)(1), would be 

included in points and fees. Proposed 

comment 32(b)(1)(ii)–1 also stated that 

loan originator compensation already 

included in points and fees because it 

is included in the finance charge under 

§ 226.32(b)(1)(i) would not be counted 

again under § 226.32(b)(1)(ii). 

Proposed comment 32(b)(1)(ii)–2.i 

stated that, in determining points and 

fees, loan originator compensation 

includes the dollar value of 

compensation paid to a loan originator 

for a specific transaction, such as a 

bonus, commission, yield spread 

premium, award of merchandise, 

services, trips, or similar prizes, or 

hourly pay for the actual number of 

hours worked on a particular 

transaction. Proposed comment 

32(b)(1)(ii)–2.ii clarified that loan 

originator compensation excludes 

compensation that cannot be attributed 

to a transaction at the time of 

origination, including, for example, the 

base salary of a loan originator that is 

also the employee of the creditor, or 

compensation based on the performance 

of the loan originator’s loans or on the 

overall quality of a loan originator’s loan 

files. Proposed comment 32(b)(1)(ii)–2.i 

also explained that compensation paid 

to a loan originator for a covered 

transaction must be included in the 

points and fees calculation for that 

transaction whenever paid, whether at 

or before closing or any time after 

closing, as long as the compensation 

amount can be determined at the time 

of closing. In addition, proposed 

comment 32(b)(1)(ii)–2.i provided three 

examples of compensation paid to a 

loan originator that would have been 

included in the points and fees 

calculation. 

Proposed comment 32(b)(1)(ii)–3 

stated that loan originator compensation 

includes amounts the loan originator 

retains and is not dependent on the 

label or name of any fee imposed in 

connection with the transaction. 

Proposed comment 32(b)(1)(ii)–3 offered 

an example of a loan originator 

imposing and retaining a ‘‘processing 

fee’’ and stated that such a fee is loan 

originator compensation, regardless of 

whether the loan originator expends the 

fee to process the consumer’s 

application or uses it for other expenses, 

such as overhead. 

The Board requested comment on the 

types of loan originator compensation 

that must be included in points and 

fees. The Board also sought comment on 

the appropriateness of specific examples 

given in the commentary. 

Many industry commenters objected 

to the basic concept of including loan 

originator compensation in points and 

fees, urging the Bureau to use its 

exception authority to exclude loan 

originator compensation from points 

and fees altogether. Several industry 

commenters contended that other 

statutory provisions and rules, 

including the Secure and Fair 

Enforcement for Mortgage Licensing Act 

of 2008 (SAFE Act), the Board’s 2010 

Loan Originator Final Rule, and certain 

Dodd-Frank Act provisions (including 

those proposed to be implemented in 

the Bureau’s 2012 Loan Originator 

Proposal), adequately regulate loan 

originator compensation and prohibit or 

restrict problematic loan originator 

compensation practices. Accordingly, 

they argued it is therefore unnecessary 

to include loan originator compensation 

in points and fees. 

Many industry commenters also 

asserted that the amount of 

compensation paid to loan originators 

has little or no bearing on a consumer’s 

ability to repay a mortgage, and thus 

that including loan originator 

compensation in points and fees under 

this rulemaking is unnecessary. They 

further asserted that including loan 

originator compensation in points and 

fees would greatly increase compliance 

burdens on creditors, discourage 

creditors from making qualified 

mortgages, and ultimately reduce access 

to credit and increase the cost of credit. 

Several industry commenters argued 

that, if the Bureau does not exclude all 

loan originator compensation from 

points and fees, then the Bureau should 

at least exclude compensation paid to 

individual loan originators (i.e., loan 

officers who are employed by creditors 

or mortgage brokerage firms). They 

argued that compensation paid to 

individual loan originators is already 

included in the cost of the loan, either 

in the interest rate or in origination fees. 

They maintained that including 

compensation paid to individual loan 

originators in points and fees would 

therefore constitute double counting. 

Several industry commenters also 

claimed that they would face significant 

challenges in determining the amount of 

compensation for individual loan 

originators. They noted that creditors 

need clear, objective standards for 

determining whether loans satisfy the 

qualified mortgage standard, and that 

the complexity of apportioning 

compensation to individual loans at the 

time of each closing to determine the 

amount of loan originator compensation 

to count toward the points and fees cap 

would create uncertainty. They also 

noted that having to track individual 

loan originators’ compensation and 

allocate that compensation to individual 


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6434 Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 

loans would create additional 

compliance burdens, particularly for 

compensation paid after closing. Several 

industry commenters also stated that 

estimating loan originator compensation 

in table-funded transactions would 

prove difficult because the funding 

assignee may not know the amount paid 

by the table-funded creditor to the 

individual loan originator. 

Several industry commenters also 

asserted that including compensation 

paid to individual loan originators 

would lead to anomalous results: 

Otherwise identical loans could have 

significant differences in points and fees 

depending on the timing of the mortgage 

loan or the identity of the loan officer. 

They noted, for example, that a loan that 

qualifies a loan officer for a substantial 

bonus because it enables a loan officer 

to satisfy a long-term (e.g., annual) 

origination-volume target or a loan that 

is originated by a high-performing loan 

officer could have substantially higher 

loan originator compensation, and thus 

substantially higher points and fees, 

than an otherwise identical loan. 

Because the consumers would not be 

paying higher fees or interest rates 

because of such circumstances, the 

commenters argued that the result 

would not further the goals of the 

statute. 

Some industry commenters made a 

separate argument that the proposed 

method for including loan originator 

compensation in points and fees would 

create an unfair playing field for 

mortgage brokers. These commenters 

noted that, since a brokerage firm can be 

paid by only one source under the 

Board’s 2010 Loan Originator Final Rule 

and related provisions of the DoddFrank Act, a payment by a creditor to a 

mortgage broker must cover both the 

broker’s overhead costs and the cost of 

compensating the individual that 

worked on the transaction. The 

creditor’s entire payment to the 

mortgage broker is loan originator 

compensation that is included in points 

and fees, so that loan originator 

compensation in a wholesale 

transaction includes both the 

compensation received from the creditor 

to cover the overhead costs of the 

mortgage broker and the compensation 

that the broker passes through to the 

individual employee who worked on 

the transaction. By contrast, in a loan 

obtained directly from a creditor, the 

creditor would have to include in points 

and fees the compensation paid to the 

loan officer, but could choose to recover 

its overhead costs through the interest 

rate rather than an up-front charge that 

would count toward the points and fees 

thresholds. One industry commenter 

provided examples illustrating that, as a 

result of this difference, loans obtained 

through a mortgage broker could have 

interest rates and fees identical to those 

in a loan obtained directly through a 

creditor but could have significantly 

higher loan originator compensation 

included in points and fees. Thus, 

particularly for smaller loan amounts, 

commenters expressed concern that it 

would be difficult for loans originated 

through mortgage brokers to remain 

under the points and fees limits for 

qualified mortgages. 

A nonprofit loan originator 

commenter also argued that including 

loan originator compensation in points 

and fees could undercut programs that 

help low and moderate income 

consumers obtain affordable mortgages. 

This commenter noted that it relies on 

payments from creditors to help it 

provide services to consumers and that 

counting such payments as loan 

originator compensation and including 

them in points and fees could 

jeopardize its programs. The commenter 

requested that this problem be 

addressed by excluding nonprofit 

organizations from the definition of loan 

originator or by excluding payments by 

creditors to nonprofit organizations 

from points and fees. 

Consumer advocates approved of 

including loan originator compensation 

in points and fees, regardless of when 

and by whom the compensation is paid. 

They asserted that including loan 

originator compensation would promote 

more consistent treatment by ensuring 

that all payments that loan originators 

receive count toward the points and fees 

thresholds, regardless of whether the 

payment is made by the consumer or the 

creditor and whether it is paid through 

the rate or through up-front fees. They 

maintained that the provision was 

intended to help prevent consumers 

from paying excessive amounts for loan 

origination services. More specifically, 

some consumer advocates argued that 

the Dodd-Frank Act provision requiring 

inclusion of loan originator 

compensation in points and fees is an 

important part of a multi-pronged 

approach to address widespread 

steering of consumers into more 

expensive mortgage transactions, and in 

particular, to address the role of 

commissions funded through the 

interest rate in such steering. The 

consumer advocates noted that separate 

prohibitions on compensation based on 

terms and on a loan originator’s 

receiving compensation from both the 

consumer and another party do not limit 

the amount of compensation a loan 

originator can receive or prevent a loan 

originator from inducing consumers to 

agree to above-market interest rates. 

They expressed concern that, 

particularly in the subprime market, 

loan originators could specialize in 

originating transactions with abovemarket interest rates, with the 

expectation they could arrange to 

receive above-market compensation for 

all of their transactions. Consumer 

advocates argued that counting all 

methods of loan originator 

compensation toward the points and 

fees thresholds was intended to deter 

such conduct. 

Consumer advocates also pointed out 

that in the wholesale context, the 

consumer has the option of paying the 

brokerage firm directly for its services. 

Such payments have always been 

included within the calculation of 

points and fees for HOEPA purposes. 

The advocates argued that when a 

consumer elects not to make the upfront payment but instead elects to fund 

the same amount of money for the 

brokerage through an increased rate, 

there is no justification for treating the 

money received by the brokerage as a 

result of the consumer’s decision any 

differently. 

The Bureau has carefully considered 

the comments received in light of the 

concerns about various issues with 

regard to loan originator compensation 

practices, the general concerns about the 

impacts of the ability-to-repay/qualified 

mortgage rule and revised HOEPA 

thresholds on a market in which access 

to mortgage credit is already extremely 

tight, differences between the retail and 

wholesale origination channels, and 

practical considerations regarding both 

the burdens of day-to-day 

implementation and the opportunities 

for evasion by parties who wish to 

engage in rent-seeking. As discussed 

further below, the Bureau is concerned 

about implementation burdens and 

anomalies created by the requirement to 

include loan originator compensation in 

points and fees, the impacts that it 

could have on pricing and access to 

credit, and the risks that rent-seekers 

will continue to find ways to evade the 

statutory scheme. Nevertheless, the 

Bureau believes that, in light of the 

historical record and of Congress’s 

evident concern with loan originator 

compensation practices, it would not be 

appropriate to waive the statutory 

requirement that loan originator 

compensation be included in points and 

fees. The Bureau has, however, worked 

to craft the rule that implements 

Congress’s judgment in a way that is 

practicable and that reduces potential 

negative impacts of the statutory 

requirement, as discussed below. The 

Bureau is also seeking comment in the 


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83See 2012 Loan Originator Proposal, 77 FR 

55283–88. 

concurrent proposal being published 

elsewhere in today’s Federal Register 

on whether additional measures would 

better protect consumers and reduce 

implementation burdens and 

unintended consequences. 

Accordingly, the Bureau in adopting 

§ 1026.32(b)(1)(ii) has generally tracked 

the statutory language and the Board’s 

proposal in the regulation text, but has 

expanded the commentary to provide 

more detailed guidance to clarify what 

compensation must be included in 

points and fees. The Dodd-Frank Act 

requires inclusion in points and fees of 

‘‘all compensation paid directly or 

indirectly by a consumer or creditor to 

a mortgage originator from any source, 

including a mortgage originator that is 

also the creditor in a table-funded 

transaction.’’ See TILA section 

103(bb)(4)(B). Consistent with the 

Board’s proposal, revised 

§ 1026.32(b)(ii) does not include the 

phrase ‘‘from any source.’’ The Bureau 

agrees that the phrase is unnecessary 

because the provision expressly covers 

compensation paid ‘‘directly or 

indirectly’’ to the loan originator. Like 

the Board’s proposal, the final rule also 

uses the term ‘‘loan originator’’ as 

defined in § 1026.36(a)(1), not the term 

‘‘mortgage originator’’ under section 

1401 of the Dodd-Frank Act. See TILA 

section 103(cc)(2). The Bureau agrees 

that the definitions are consistent in 

relevant respects and notes that it is in 

the process of amending the regulatory 

definition to harmonize it even more 

closely with the Dodd-Frank Act 

definition of ‘‘mortgage originator.’’ 83

Accordingly, the Bureau believes use of 

consistent terminology in Regulation Z 

will facilitate compliance. Finally, as 

revised, § 1026.32(b)(1)(ii) also does not 

include the language in proposed 

§ 226.32(b)(1)(ii) that specified that the 

provision also applies to a loan 

originator that is the creditor in a tablefunded transaction. The Bureau has 

concluded that that clarification is 

unnecessary because a creditor in a 

table-funded transaction is already 

included in the definition of loan 

originator in § 1026.36(a)(1). To clarify 

what compensation must be included in 

points and fees, revised 

§ 1026.32(b)(1)(ii) specifies that 

compensation must be included if it can 

be attributed to the particular 

transaction at the time the interest rate 

is set. These limitations are discussed in 

more detail below. 

In adopting the general rule, the 

Bureau carefully considered arguments 

by industry commenters that loan 

originator compensation should not be 

included in points and fees because 

other statutory provisions and rules 

already regulate loan originator 

compensation, because loan originator 

compensation is already included in the 

costs of mortgage loans, and because 

including loan originator compensation 

in points and fees would push many 

loans over the 3 percent cap on points 

and fees for qualified mortgages (or even 

over the points and fees limits for 

determining whether a loan is a highcost mortgage under HOEPA), which 

would increase costs and impair access 

to credit. 

The Bureau views the fact that other 

provisions within the Dodd-Frank Act 

address other aspects of loan originator 

compensation and activity as evidence 

of the high priority that Congress placed 

on regulating such compensation. The 

other provisions pointed to by the 

commenters address specific 

compensation practices that created 

particularly strong incentives for loan 

originators to ‘‘upcharge’’ consumers on 

a loan-by-loan basis and particular 

confusion about loan originators’ 

loyalties. The Bureau believes that the 

inclusion of loan originator 

compensation in points and fees has 

distinct purposes. In addition to 

discouraging more generalized rentseeking and excessive loan originator 

compensation, the Bureau believes that 

Congress may have been focused on 

particular risks to consumers. Thus, 

with respect to qualified mortgages, 

including loan originator compensation 

in points and fees helps to ensure that, 

in cases in which high up-front 

compensation might otherwise cause 

the creditor and/or loan originator to be 

less concerned about long-term 

sustainability, the creditor is not able to 

invoke a presumption of compliance if 

challenged to demonstrate that it made 

a reasonable and good faith 

determination of the consumer’s ability 

to repay the loan. Similarly in HOEPA, 

the threshold triggers additional 

consumer protections, such as enhanced 

disclosures and housing counseling, for 

the loans with the highest up-front 

pricing. 

The Bureau recognizes that the 

method that Congress chose to 

effectuate these goals does not ensure 

entirely consistent results as to whether 

a loan is a qualified mortgage or a highcost transaction. For instance, loans that 

are identical to consumers in terms of 

up-front costs and interest rate may 

nevertheless have different points and 

fees based on the identity of the loan 

originator who handled the transaction 

for the consumer, since different 

individual loan originators in a retail 

environment or different brokerage 

firms in a wholesale environment may 

earn different commissions from the 

creditor without that translating in 

differences in costs to the consumer. In 

addition, there are anomalies 

introduced by the fact that ‘‘loan 

originator’’ is defined to include 

mortgage broker firms and individual 

employees hired by either brokers or 

creditors, but not creditors themselves. 

As a result, counting the total 

compensation paid to a mortgage broker 

firm will capture both the firm’s 

overhead costs and the compensation 

that the firm passes on to its individual 

loan officer. By contrast, in a retail 

transaction, the creditor would have to 

include in points and fees the 

compensation that it paid to its loan 

officer, but would continue to have the 

option of recovering its overhead costs 

through the interest rate, instead of an 

up-front charge, to avoid counting them 

toward the points and fees thresholds. 

Indeed, the Bureau expects that the new 

requirement may prompt creditors to 

shift certain other expenses into rate to 

stay under the thresholds. 

Nevertheless, to the extent there are 

anomalies from including loan 

originator compensation in points and 

fees, these anomalies appear to be the 

result of deliberate policy choices by 

Congress to expand the historical 

definition of points and fees to include 

all methods of loan originator 

compensation, whether derived from 

up-front charges or from the rate, 

without attempting to capture all 

overhead expenses by creditors or the 

gain on sale that the creditor can realize 

upon closing a mortgage. The Bureau 

agrees that counting loan originator 

compensation that is structured through 

rate toward the points and fees 

thresholds could cause some loans not 

to be classified as qualified mortgages 

and to trigger HOEPA protections, 

compared to existing treatment under 

HOEPA and its implementing 

regulation. However, the Bureau views 

this to be exactly the result that 

Congress intended. 

In light of the express statutory 

language and Congress’s evident 

concern with increasing consumer 

protections in connection with high 

levels of loan originator compensation, 

the Bureau does not believe that it is 

appropriate to use its exception or 

adjustment authority in TILA section 

105(a) or in TILA section 

129C(b)(3)(B)(i) to exclude loan 

originator compensation entirely from 

points and fees for qualified mortgages 

and HOEPA. As discussed below, 

however, the Bureau is attempting to 

implement the points and fees 


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6436 Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 

requirements with as much sensitivity 

as practicable to potential impacts on 

the pricing of and availability of credit, 

anomalies and unintended 

consequences, and compliance burdens. 

The Bureau also carefully considered 

comments urging it to exclude 

compensation paid to individual loan 

originators from points and fees, but 

ultimately concluded that such a result 

would be inconsistent with the plain 

language of the statute and could 

exacerbate the potential inconsistent 

effects of the rule on different mortgage 

origination channels. As noted above, 

many industry commenters argued that, 

even if loan originator compensation 

were not excluded altogether, at least 

compensation paid to individual loan 

originators should be excluded from 

points and fees. Under this approach, 

only payments to mortgage brokers 

would be included in points and fees. 

The commenters contended that it 

would be difficult to track 

compensation paid to individual loan 

originators, particularly when that 

compensation may be paid after 

consummation of the loan and that it 

would create substantial compliance 

problems. They also argued that 

including compensation paid to 

individual loan originators in points 

and fees would create anomalies, in 

which identical transactions from the 

consumer’s perspective (i.e., the same 

interest rate and up-front costs) could 

nevertheless have different points and 

fees because of loan originator 

compensation. 

As explained above, the Bureau does 

not believe it is appropriate to use its 

exception authority to exclude loan 

originator compensation from points 

and fees, and even using that exception 

authority more narrowly to exclude 

compensation paid to individual loan 

originators could undermine Congress’s 

apparent goal of providing stronger 

consumer protections in cases of high 

loan originator compensation. Although 

earlier versions of legislation focused 

specifically on compensation to 

‘‘mortgage brokers,’’ which is consistent 

with existing HOEPA, the Dodd-Frank 

Act refers to compensation to ‘‘mortgage 

originators,’’ a term that is defined in 

detail elsewhere in the statute to 

include individual loan officers 

employed by both creditors and brokers, 

in addition to the brokers themselves. 

To the extent that Congress believed 

that high levels of loan originator 

compensation evidenced additional risk 

to consumers, excluding individual loan 

originators from consideration appears 

inconsistent with this policy judgment. 

Moreover, the Bureau notes that using 

exception authority to exclude 

compensation paid to individual loan 

originators would exacerbate the 

differential treatment between the retail 

and wholesale channels concerning 

overhead costs. As noted above, 

compensation paid by the consumer or 

creditor to the mortgage broker 

necessarily will include amounts for 

both the mortgage broker’s overhead and 

profit and for the compensation the 

mortgage broker passes on to its loan 

officer. Excluding individual loan 

officer compensation on the retail side, 

however, would effectively exempt 

creditors from counting any loan 

originator compensation at all toward 

points and fees. Thus, for transactions 

that would be identical from the 

consumer’s perspective in terms of 

interest rate and up-front costs, the 

wholesale transaction could have 

significantly higher points and fees 

(because the entire payment from the 

creditor to the mortgage broker would 

be captured in points and fees), while 

the retail transaction might include no 

loan origination compensation at all in 

points and fees. Such a result would put 

brokerage firms at a disadvantage in 

their ability to originate qualified 

mortgages and put them at significantly 

greater risk of originating HOEPA loans. 

This in turn could constrict the supply 

of loan originators and the origination 

channels available to consumers to their 

detriment. 

The Bureau recognizes that including 

compensation paid to individual loan 

originators, such as loan officers, with 

respect to individual transactions may 

impose additional burdens. For 

example, creditors will have to track 

employee compensation for purposes of 

complying with the rule, and the 

calculation of points and fees will be 

more complicated. However, the Bureau 

notes that creditors and brokers already 

have to monitor compensation more 

carefully as a result of the 2010 Loan 

Originator Final Rule and the related 

Dodd-Frank Act restrictions on 

compensation based on terms and on 

dual compensation. The Bureau also 

believes that these concerns can be 

reduced by providing clear guidance on 

issues such as what types of 

compensation are covered, when 

compensation is determined, and how 

to avoid ‘‘double-counting’’ payments 

that are already included in points and 

fees calculations. The Bureau has 

therefore revised the Board’s proposed 

regulation and commentary to provide 

more detailed guidance, and is seeking 

comment in the proposal published 

elsewhere in the Federal Register today 

on additional guidance and potential 

implementation issues among other 

matters. 

As noted above, the Bureau is revising 

§ 1026.32(b)(1)(ii) to clarify that 

compensation must be counted toward 

the points and fees thresholds if it can 

be attributed to the particular 

transaction at the time the interest rate 

is set. The Bureau is also revising 

comment 32(b)(1)(ii)–1 to explain in 

general terms when compensation 

qualifies as loan originator 

compensation that must be included in 

points and fees. In particular, 

compensation paid by a consumer or 

creditor to a loan originator is included 

in the calculation of points and fees, 

provided that such compensation can be 

attributed to that particular transaction 

at the time the interest rate is set. The 

Bureau also incorporates part of 

proposed comment 32(b)(1)(ii)–3 into 

revised comment 32(b)(1)(ii)–1, 

explaining that loan originator 

compensation includes amounts the 

loan originator retains, and is not 

dependent on the label or name of any 

fee imposed in connection with the 

transaction. However, revised comment 

32(b)(1)(ii)–1 does not include the 

example from proposed comment 

32(b)(1)(ii)–3, which stated that, if a 

loan originator imposes a processing fee 

and retains the fee, the fee is loan 

originator compensation under 

§ 1026.32(b)(1)(ii) whether the originator 

expends the fee to process the 

consumer’s application or uses it for 

other expenses, such as overhead. That 

example may be confusing in this 

context because a processing fee paid to 

a loan originator likely would be a 

finance charge under § 1026.4 and 

would therefore already be included in 

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

Revised comment 32(b)(1)(ii)–2.i 

explains that compensation, such as a 

bonus, commission, or an award of 

merchandise, services, trips or similar 

prizes, must be included only if it can 

be attributed to a particular transaction. 

The requirement that compensation is 

included in points and fees only if it can 

be attributed to a particular transaction 

is consistent with the statutory 

language. The Dodd-Frank Act provides 

that, for the points and fees tests for 

both qualified mortgages and high-cost 

mortgages, only charges that are ‘‘in 

connection with’’ the transaction are 

included in points and fees. See TILA 

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

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

(qualified mortgages). Limiting loan 

originator compensation to 

compensation that is attributable to the 

transaction implements the statutory 

requirement that points and fees are ‘‘in 

connection’’ with the transaction. This 


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Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 6437 

84 In contrast, the existing restrictions on 

particular loan originator compensation structures 

in § 1026.36 apply to all compensation such as 

salaries, hourly wages, and contingent bonuses 

because those restrictions apply only at the time 

such compensation is paid, and therefore they can 

be applied with certainty. Moreover, those rules 

also provide for different treatment of compensation 

that is not ‘‘specific to, and paid solely in 

connection with, the transaction,’’ where such a 

distinction is necessary for reasons of practical 

application of the rule. See comment 36(d)(2)–1 

(prohibition of loan originator receiving 

compensation directly from consumer and also 

from any other person does not prohibit consumer 

payments where loan originator also receives salary 

or hourly wage). 

limitation also makes the rule more 

workable. Compensation is included in 

points and fees only if it can be 

attributed to a specific transaction to 

facilitate compliance with the rule and 

avoid over-burdening creditors with 

complex calculations to determine, for 

example, the portion of a loan officer’s 

salary that should be counted in points 

and fees.84 For clarity, the Bureau has 

moved the discussion of the timing of 

loan originator compensation into new 

comment 32(b)(1)(ii)–3, and has added 

additional examples to 32(b)(1)(ii)–4, to 

illustrate the types and amount of 

compensation that should be included 

in points and fees. 

Revised comment 32(b)(1)(ii)–2.ii 

explains that loan originator 

compensation excludes compensation 

that cannot be attributed to a particular 

transaction at the time the interest rate 

is set, including, for example, 

compensation based on the long-term 

performance of the loan originator’s 

loans or on the overall quality of the 

loan originator’s loan files. The base 

salary of a loan originator is also 

excluded, although additional 

compensation that is attributable to a 

particular transaction must be included 

in points and fees. The Bureau has 

decided to seek further comment in the 

concurrent proposal regarding treatment 

of hourly wages for the actual number 

of hours worked on a particular 

transaction. The Board’s proposal would 

have included hourly pay for the actual 

number of hours worked on a particular 

transaction in loan originator 

compensation for purposes of the points 

and fees thresholds, and the Bureau 

agrees that such wages are attributable 

to the particular transaction. However, 

the Bureau is unclear as to whether 

industry actually tracks compensation 

this way in light of the administrative 

burdens. Moreover, while the general 

rule provides for calculation of loan 

originator compensation at the time the 

interest rate is set for the reasons 

discussed above, the actual hours of 

hours worked on a transaction would 

not be known at that time. The Bureau 

is therefore seeking comment on issues 

relating to hourly wages, including 

whether to require estimates of the 

hours to be worked between rate set and 

consummation. 

New comment 32(b)(1)(ii)–3 explains 

that loan originator compensation must 

be included in the points and fees 

calculation for a transaction whenever 

the compensation is paid, whether 

before, at or after closing, as long as that 

compensation amount can be attributed 

to the particular transaction at the time 

the interest rate is set. Some industry 

commenters expressed concern that it 

would be difficult to determine the 

amount of compensation that would be 

paid after consummation and that 

creditors might have to recalculate loan 

originator compensation (and thus 

points and fees) after underwriting if, 

for example, a loan officer became 

eligible for higher compensation 

because other transactions had been 

consummated. The Bureau appreciates 

that industry participants need certainty 

at the time of underwriting as to 

whether transactions will exceed the 

points and fees limits for qualified 

mortgages (and for high-cost mortgages). 

To address this concern, the comment 

32(b)(1)(ii)–3 explains that loan 

originator compensation should be 

calculated at the time the interest rate is 

set. The Bureau believes that the date 

the interest rate is set is an appropriate 

standard for calculating loan originator 

compensation. It would allow creditors 

to be able to calculate points and fees 

with sufficient certainty so that they 

know early in the process whether a 

transaction will be a qualified mortgage 

or a high-cost mortgage. 

As noted above, several industry 

commenters argued that including loan 

originator compensation in points and 

fees would result in double counting. 

They stated that creditors often will 

recover loan originator compensation 

costs through origination charges, and 

these charges are already included in 

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

However, the underlying statutory 

provisions as amended by the DoddFrank Act do not express any limitation 

on its requirement to count loan 

originator compensation toward the 

points and fees test. Rather, the literal 

language of TILA section 103(bb)(4) as 

amended by the Dodd-Frank Act defines 

points and fees to include all items 

included in the finance charge (except 

interest rate), all compensation paid 

directly or indirectly by a consumer or 

creditor to a loan originator, ‘‘and’’ 

various other enumerated items. The 

use of ‘‘and’’ and the references to ‘‘all’’ 

compensation paid ‘‘directly or 

indirectly’’ and ‘‘from any source’’ 

suggest that compensation should be 

counted as it flows downstream from 

one party to another so that it is counted 

each time that it reaches a loan 

originator, whatever the previous 

source. 

The Bureau believes the statute would 

be read to require that loan originator 

compensation be treated as additive to 

the other elements of points and fees. 

The Bureau believes that an automatic 

literal reading of the statute in all cases, 

however, would not be in the best 

interest of either consumers or industry. 

For instance, the Bureau does not 

believe that it is necessary or 

appropriate to count the same payment 

made by a consumer to a mortgage 

broker firm twice, simply because it is 

both part of the finance charge and loan 

originator compensation. Similarly, the 

Bureau does not believe that, where a 

payment from either a consumer or a 

creditor to a mortgage broker is counted 

toward points and fees, it is necessary 

or appropriate to count separately funds 

that the broker then passes on to its 

individual employees. In each case, any 

costs and risks to the consumer from 

high loan originator compensation are 

adequately captured by counting the 

funds a single time against the points 

and fees cap; thus, the Bureau does not 

believe the purposes of the statute 

would be served by counting some or all 

of the funds a second time, and is 

concerned that doing so could have 

negative impacts on the price and 

availability of credit. 

Determining the appropriate 

accounting rule is significantly more 

complicated, however, in situations in 

which a consumer pays some up-front 

charges to the creditor and the creditor 

pays loan originator compensation to 

either its own employee or to a mortgage 

broker firm. Because money is fungible, 

tracking how a creditor spends money it 

collects in up-front charges versus 

amounts collected through the rate to 

cover both loan originator compensation 

and its other overhead expenses would 

be extraordinarily complex and 

cumbersome. To facilitate compliance, 

the Bureau believes it is appropriate and 

necessary to adopt one or more 

generalized rules regarding the 

accounting of various payments. 

However, the Bureau does not believe it 

yet has sufficient information with 

which to choose definitively between 

the additive approach provided for in 

the statutory language and other 

potential methods of accounting for 

payments in light of the multiple 

practical and complex policy 

considerations involved. 

The potential downstream effects of 

different accounting methods are 


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6438 Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 

significant. Under the additive approach 

where no offsetting consumer payments 

against creditor-paid loan originator 

compensation is allowed, 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 creditorpaid loan originator compensation. 

However, a ‘‘full offsetting’’ approach 

would allow creditors to offset much 

higher levels of up-front points and fees 

against expenses paid through rate 

before the heightened consumer 

protections required by the Dodd-Frank 

Act would apply. Particularly under 

HOEPA, this may raise tensions with 

Congress’s apparent intent. Other 

alternatives might use a hybrid 

approach depending on the type of 

expense, type of loan, or other factors, 

but would involve more compliance 

complexity. 

In light of the complex 

considerations, the Bureau believes it is 

necessary to seek additional notice and 

comment. The Bureau therefore is 

finalizing this rule without qualifying 

the statutory result and is proposing two 

alternative comments in the concurrent 

proposal, one of which would explicitly 

preclude offsetting, and the other of 

which would allow full offsetting of any 

consumer-paid charges against creditorpaid loan originator compensation. The 

Bureau is also proposing comments to 

clarify treatment of compensation paid 

by consumers to mortgage brokers and 

by mortgage brokers to their individual 

employees. The Bureau is seeking 

comment on all aspects of this issue, 

including the market impacts and 

whether adjustments to the final rule 

would be appropriate. In addition, the 

Bureau is seeking comment on whether 

it would be helpful to provide for 

additional adjustment of the rules or 

additional commentary to clarify any 

overlaps in definitions between the 

points and fees provisions in this 

rulemaking and the HOEPA rulemaking 

and the provisions that the Bureau is 

separately finalizing in connection with 

the Bureau’s 2012 Loan Originator 

Compensation Proposal. 

Finally, comment 32(b)(1)(ii)–4 

includes revised versions of examples in 

proposed comment 32(b)(1)(ii)–2, as 

well as additional examples to provide 

additional guidance regarding what 

compensation qualifies as loan 

originator compensation that must be 

included in points and fees. These 

examples illustrate when compensation 

can be attributed to a particular 

transaction at the time the interest rate 

is set. New comment 32(b)(1)(ii)–5 adds 

an example explaining how salary is 

treated for purposes of loan originator 

compensation for calculating points and 

fees. 

32(b)(1)(iii) 

TILA section 103(aa)(4)(C) provides 

that points and fees include certain real 

estate-related charges listed in TILA 

section 106(e) and is implemented in 

§ 1026.32(b)(1)(iii). The Dodd-Frank Act 

did not amend TILA section 

103(aa)(4)(C) (but did renumber it as 

section 103(bb)(4)(C)). Although the 

Board indicated in the Supplementary 

Information that it was not proposing 

any changes, proposed § 226.32(b)(1)(iii) 

would have added the phrase ‘‘payable 

at or before closing of the mortgage’’ 

loan and would have separated the 

elements into three new paragraphs (A) 

through (C). Thus, proposed 

§ 226.32(b)(1)(iii) would have included 

in points and fees ‘‘all items listed in 

§ 226.4(c)(7) (other than amounts held 

for future payment of taxes) payable at 

or before closing of the mortgage loan, 

unless: (A) The charge is reasonable; (B) 

the creditor receives no direct or 

indirect compensation in connection 

with the charge; and (C) the charge is 

not paid to an affiliate of the creditor.’’ 

The Board noted that the statute did not 

exclude these charges if they were 

payable after closing and questioned 

whether such a limitation was necessary 

because these charges could reasonably 

be viewed as charges that by definition 

are payable only at or before closing. As 

noted in the section-by-section analysis 

of § 1026.32(b)(1), the Board requested 

comment on whether there are any other 

types of fees that should be included in 

points and fees only if they are payable 

at or before closing. 

The Board noted that during outreach 

creditors had raised concerns about 

including in points and fees real-estate 

related fees paid to an affiliate of the 

creditor, such as an affiliated title 

company. Although these fees always 

have been included in points and fees 

for high-cost loans, creditors using 

affiliated title companies were 

concerned they would have difficulty 

meeting the lower threshold for points 

and fees for qualified mortgages. The 

Board, however, did not propose to 

exempt fees paid to creditor-affiliated 

settlement service providers, noting that 

Congress appeared to have rejected 

excluding such fees from points and 

fees. 

Industry commenters criticized the 

Board’s proposed treatment of fees paid 

to affiliates as overbroad. Industry 

commenters argued that a creditor’s 

affiliation with a service provider, such 

as a title insurance agency, does not 

have any impact on the consumer’s 

ability to repay a loan. They maintained 

that studies over the past two decades 

have shown that title services provided 

by affiliated businesses are competitive 

in cost compared to services provided 

by unaffiliated businesses. They 

contended that the rule should instead 

focus solely on whether the fee is bona 

fide. 

These commenters also argued that 

the largest real estate-related charge, 

title insurance fees, are often either 

mandated by State law or required to be 

filed with the relevant state authority 

and do not vary. Regardless of whether 

the State sets the rate or requires that 

the rate be filed, these commenters 

argued that there are so few insurers 

that rates tend to be nearly identical 

among providers. 

These commenters also argued that 

including fees to affiliates would 

negatively affect consumers. They 

claimed that the inclusion of fees paid 

to affiliates would cause loans that 

would otherwise be qualified mortgages 

to exceed the points and fees cap, 

resulting in more expense to the 

creditor, which would be passed 

through to consumers in the form of 

higher interest rates or fees, or in more 

denials of credit. They also claimed that 

the proposal would harm consumers by 

reducing competition among settlement 

service providers and by eliminating 

operational efficiencies. One industry 

trade association reported that some of 

its members with affiliates would 

discontinue offering mortgages, which 

would reduce competition among 

creditors, especially for creditors 

offering smaller loans, since these loans 

would be most affected by the points 

and fees cap. They claimed that treating 

affiliated and unaffiliated providers 

differently would incentivize creditors 

to use unaffiliated third-party service 

providers to stay within the qualified 

mortgage points and fees cap. 

Several industry commenters noted 

that RESPA permits affiliated business 

arrangements and provides protections 


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for consumers, including a prohibition 

against requiring that consumers use 

affiliates, a requirement to disclose 

affiliation to consumers, and a 

limitation that compensation include 

only return on ownership interest. 

These commenters argued that charges 

paid to affiliates should be excluded 

from points and fees as long the RESPA 

requirements are satisfied. Several 

industry commenters objected to the 

requirement that charges be 

‘‘reasonable’’ to be excluded from points 

and fees. They argued that the 

requirement was vague and that it 

would be difficult for a creditor to judge 

whether a third-party charge met the 

standard. Several commenters also 

argued that the Dodd-Frank Act 

provision permitting exclusion of 

certain bona fide third-party charges 

should apply rather than the three-part 

test for items listed in § 1026.4(c)(7). See 

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

Two consumer advocates commented 

on this aspect of the proposal. They 

supported including in points and fees 

all fees paid to any settlement service 

provider affiliated with the creditor. 

The Bureau is adopting 

§ 226.32(b)(1)(iii) as proposed but 

renumbered as § 1026.32(b)(1)(iii). TILA 

section 103(bb)(4) specifically mandates 

that fees paid to and retained by 

affiliates of the creditor be included in 

points and fees. The Bureau 

acknowledges that including fees paid 

to affiliates in points and fees could 

make it more difficult for creditors using 

affiliated service providers to stay under 

the points and fees cap for qualified 

mortgages and that, as a result, creditors 

could be disincented from using 

affiliated service providers. This is 

especially true with respect to affiliated 

title insurers because of the cost of title 

insurance. On the other hand, despite 

RESPA’s regulation of fees charged by 

affiliates, concerns have nonetheless 

been raised that fees paid to an affiliate 

pose greater risks to the consumer, since 

affiliates of a creditor may not have to 

compete in the market with other 

providers of a service and thus may 

charge higher prices that get passed on 

to the consumer. The Bureau believes 

that Congress weighed these competing 

considerations and made a deliberate 

decision not to exclude fees paid to 

affiliates. This approach is further 

reflected throughout title XIV, which 

repeatedly amended TILA to treat fees 

paid to affiliates as the equivalent to 

fees paid to a creditor or loan originator. 

See, e.g., Dodd-Frank Act sections 1403, 

1411, 1412, 1414, and 1431. For 

example, as noted above, TILA section 

129C(b)(2)(C)(i), as added by section 

1412 of the Dodd-Frank Act, provides 

that for purposes of the qualified 

mortgage points and fees test, bona fide 

third-party charges are excluded other 

than charges ‘‘retained by * * * an 

affiliate of the creditor or mortgage 

originator.’’ Similarly, TILA section 

129B(c)(2)(B)(ii), added by section 1403 

of the Dodd-Frank Act, restricts the 

payment of points and fees but permits 

the payment of bona fide third-party 

charges unless those charges are 

‘‘retained by * * * an affiliate of the 

creditor or originator.’’ In light of these 

considerations, the Bureau does not 

believe there is sufficient justification to 

use its exception authority in this 

instance as the Bureau cannot find, 

given Congress’s clear determination, 

that excluding affiliate fees from the 

calculation of points and fees is 

necessary or proper to effectuate the 

purposes of TILA, to prevent 

circumvention or evasion thereof, or to 

facilitate compliance therewith. 

As noted above, some commenters 

objected to the requirement that charges 

be ‘‘reasonable.’’ The Bureau notes that 

a ‘‘reasonable’’ requirement has been in 

place for many years before the DoddFrank Act. TILA section 103(aa)(4)(C) 

specifically provides that charges listed 

in TILA section 106(e) are included in 

points and fees for high-cost mortgages 

unless, among other things, the charge 

is reasonable. This requirement is 

implemented in existing 

§ 1026.32(b)(1)(iii). Similarly, a charge 

may be excluded from the finance 

charge under § 1026.4(c)(7) only if it is 

reasonable. In the absence of any 

evidence that this requirement has been 

unworkable, the Bureau declines to alter 

it. The fact that a transaction for such 

services is conducted at arms-length 

ordinarily should be sufficient to make 

the charge reasonable. The 

reasonableness requirement is not 

intended to invite an inquiry into 

whether a particular appraiser or title 

insurance company is imposing 

excessive charges. 

Some commenters also maintained 

that the provision permitting exclusion 

of certain bona fide third-party charges 

should apply rather than the three-part 

test for items listed in § 1026.4(c)(7). See 

TILA section 129C(b)(2)(C)(i). As 

discussed in more detail in the sectionby-section analysis of 

§ 1026.32(b)(1)(i)(D), the Bureau 

concludes that § 1026.32(b)(1)(iii), 

which specifically addresses exclusion 

of items listed in § 1026.4(c)(7), takes 

precedence over the more general 

exclusion in § 1026.32(b)(1)(i)(D). 

The Board’s proposed comment 

32(b)(1)(iii)–1 was substantially the 

same as existing comment 32(b)(1)(ii)–2. 

It would have provided an example of 

the inclusion or exclusion of real-estate 

related charges. The Bureau did not 

receive substantial comment on the 

proposed comment. The Bureau is 

therefore adopting comment 

32(b)(1)(ii)–1 substantially as proposed, 

with revisions for clarity. 

32(b)(1)(iv) 

As amended by section 1431 of the 

Dodd-Frank Act, TILA section 

103(bb)(4)(D) includes in points and 

fees premiums for various forms of 

credit insurance and charges for debt 

cancellation or suspension coverage. 

The Board proposed § 226.32(b)(1)(iv) to 

implement this provision. The Board 

also proposed to revise comment 

32(b)(1)(iv)–1 to reflect the revised 

statutory language and to add new 

comment 32(b)(1)(iv)–2 to clarify that 

‘‘credit property insurance’’ includes 

insurance against loss or damage to 

personal property such as a houseboat 

or manufactured home. 

Several commenters argued that 

proposed § 226.32(b)(1)(iv) did not 

accurately implement the provision in 

Dodd-Frank Act section 1431 that 

specifies that ‘‘insurance premiums or 

debt cancellation or suspension fees 

calculated and paid in full on a monthly 

basis shall not be considered financed 

by the creditor.’’ They argued that 

comment 32(b)(1)(iv)–1 should be 

revised so that it expressly excludes 

monthly premiums for credit insurance 

from points and fees, including such 

premiums payable in the first month. At 

least one industry commenter also 

argued that voluntary credit insurance 

premiums should not be included in 

points and fees. Consumer advocates 

supported inclusion of credit insurance 

premiums in points and fees, noting that 

these services can add significant costs 

to mortgages. 

The Bureau is adopting 

§ 226.32(b)(1)(iv) substantially as 

proposed, with revisions for clarity, as 

renumbered § 1026.32(b)(1)(iv). As 

revised, § 1026.32(b)(1)(iv) states that 

premiums or other charges for ‘‘any 

other life, accident, health, or loss-ofincome insurance’’ are included in 

points and fees only if the insurance is 

for the benefit of the creditor. The 

Bureau is also adopting proposed 

comments 32(b)(1)(iv)–1 and –2 

substantially as proposed, with 

revisions for clarity and consistency 

with terminology in Regulation Z. The 

Bureau is also adopting new comment 

32(b)(1)(iv)–3 to clarify that premiums 

or other charges for ‘‘any other life, 

accident, health, or loss-of-income 

insurance’’ are included in points and 

fees only if the creditor is a beneficiary 

of the insurance. 


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6440 Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 

As noted above, several commenters 

argued that premiums paid monthly, 

including the first such premium, 

should not be included in points and 

fees. The statute requires that premiums 

‘‘payable at or before closing’’ be 

included in points and fees; it provides 

only that premiums ‘‘calculated and 

paid in full on a monthly basis shall not 

be considered financed by the creditor.’’ 

TILA section 103(bb)(4)(D). Thus, if the 

first premium is payable at or before 

closing, that payment is included in 

points and fees even though the 

subsequent monthly payments are not. 

Another commenter argued that 

voluntary credit insurance premiums 

should be excluded from points and 

fees. However, under the current rule, 

voluntary credit insurance premiums 

are included in points and fees. In light 

of the fact that the Dodd-Frank Act 

expanded the types of credit insurance 

that must be included in points and 

fees, the Bureau does not believe it 

would be appropriate to reconsider 

whether voluntary credit insurance 

premiums should be included in points 

and fees. 

32(b)(1)(v) 

As added by the Dodd-Frank Act, new 

TILA section 103(bb)(4)(E) includes in 

points and fees ‘‘the maximum 

prepayment penalties which may be 

charged or collected under the terms of 

the credit transaction.’’ The Board’s 

proposed § 226.32(b)(1)(v) closely 

tracked the statutory language, but it 

cross-referenced proposed 

§ 226.43(b)(10) for the definition of 

‘‘prepayment penalty.’’ 

Few commenters addressed this 

provision. One industry commenter 

argued that the maximum prepayment 

penalty should not be included in 

points and fees because a prepayment 

that triggers the penalty may never 

occur and thus the fee may never be 

assessed. 

The Bureau is adopting 

§ 226.32(b)(1)(v) substantially as 

proposed but renumbered as 

§ 1026.32(b)(1)(v), with a revision to its 

definitional cross-reference. As revised, 

§ 1026.32(b)(1)(v) refers to the definition 

of prepayment penalty in 

§ 1026.32(b)(6)(i). With respect to the 

comment arguing that prepayment 

penalties should not be included in 

points and fees, the statute requires 

inclusion in points and fees of the 

maximum prepayment penalties that 

‘‘may be charged or collected.’’ Thus, 

under the statutory language, the 

imposition of the charge need not be 

certain for the prepayment penalty to be 

included in points and fees. In this 

provision (and other provisions added 

by the Dodd-Frank Act, such as TILA 

section 129C(c)), Congress sought to 

limit and deter the use of prepayment 

penalties, and the Bureau does not 

believe that it would be appropriate to 

exercise its exception authority in a 

manner that could undermine that goal. 

32(b)(1)(vi) 

New TILA section 103(bb)(4)(F) 

requires that points and fees include 

‘‘all prepayment fees or penalties that 

are incurred by the consumer if the loan 

refinances a previous loan made or 

currently held by the same creditor or 

an affiliate of the creditor.’’ The Board’s 

proposed § 226.32(b)(1)(vi) would have 

implemented this provision by 

including in points and fees the total 

prepayment penalty, as defined in 

§ 226.43(b)(10), incurred by the 

consumer if the mortgage loan is 

refinanced by the current holder of the 

existing mortgage loan, a servicer acting 

on behalf of the current holder, or an 

affiliate of either. The Board stated its 

belief that this provision is intended in 

part to curtail the practice of ‘‘loan 

flipping,’’ which involves a creditor 

refinancing an existing loan for financial 

gain resulting from prepayment 

penalties and other fees that a consumer 

must pay to refinance the loan— 

regardless of whether the refinancing is 

beneficial to the consumer. The Board 

noted that it departed from the statutory 

language to use the phrases ‘‘current 

holder of the existing mortgage loan’’ 

and ‘‘servicer acting on behalf of the 

current holder’’ in proposed 

§ 226.32(b)(1)(vi) because, as a practical 

matter, these are the entities that would 

refinance the loan and directly or 

indirectly gain from associated 

prepayment penalties. 

Few commenters addressed this 

provision. Two consumer groups 

expressed support for including these 

prepayment penalties in points and fees, 

arguing that many consumers were 

victimized by loan flipping and the 

resulting fees and charges. 

The Bureau is adopting 

§ 226.32(b)(1)(vi) substantially as 

proposed but renumbered as 

§ 1026.32(b)(1)(vi). In addition to 

revising for clarity, the Bureau has also 

revised § 1026.32(b)(1)(vi) to refer to the 

definition of prepayment penalty in 

§ 1026.32(b)(6)(i). Like the Board, the 

Bureau believes that it is appropriate for 

§ 1026.32(b)(1)(vi) to apply to the 

current holder of the existing mortgage 

loan, the servicer acting on behalf of the 

current holder, or an affiliate of either. 

These are the entities that would 

refinance the loan and gain from the 

prepayment penalties on the previous 

loan. Accordingly, the Bureau is 

invoking its exception and adjustment 

authority under TILA sections 105(a) 

and 129C(b)(3)(B)(i). The Bureau 

believes that adjusting the statutory 

language to more precisely target the 

entities that would benefit from 

refinancing loans with prepayment 

penalties will more effectively deter 

loan flipping to collect prepayment 

penalties and help preserve consumers’ 

access to safe, affordable credit. It also 

will lessen the compliance burden on 

other entities that lack the incentive for 

loan flipping, such as a creditor that 

originated the existing loan but no 

longer holds the loan. For these reasons, 

the Bureau believes that use of its 

exception and adjustment authority is 

necessary and proper under TILA 

section 105(a) to effectuate the purposes 

of TILA and to facilitate compliance 

with TILA and its purposes, including 

the purpose of assuring that consumers 

are offered and receive residential 

mortgage loans on terms that reasonably 

reflect their ability to repay the loans. 

Similarly, the Bureau finds that it is 

necessary, proper, and appropriate to 

use its authority under TILA section 

129C(b)(3)(B)(i) to revise and subtract 

from statutory language. This use of 

authority ensures that responsible, 

affordable mortgage credit remains 

available to consumers in a manner 

consistent with and effectuates the 

purpose of TILA section 129C, 

referenced above, and facilitates 

compliance with section 129C of TILA. 

32(b)(2) 

Proposed Provisions Not Adopted 

As noted in the section-by-section 

analysis of § 1026.32(b)(1)(ii) above, 

section 1431(c) of the Dodd-Frank Act 

amended TILA to require that all 

compensation paid directly or indirectly 

by a consumer or a creditor to a 

‘‘mortgage originator’’ be included in 

points and fees for high-cost mortgages 

and qualified mortgages. As also noted 

above, the Board’s 2011 ATR Proposal 

proposed to implement this statutory 

change in proposed § 226.32(b)(1)(ii) 

using the term ‘‘loan originator,’’ as 

defined in existing § 1026.36(a)(1), 

rather than the statutory term ‘‘mortgage 

originator.’’ In turn, the Board proposed 

new § 226.32(b)(2) to exclude from 

points and fees compensation paid to 

certain categories of persons specifically 

excluded from the definition of 

‘‘mortgage originator’’ in amended TILA 

section 103, namely employees of a 

retailer of manufactured homes under 

certain circumstances, certain real estate 

brokers, and servicers. 

The Bureau is not adopting proposed 

§ 226.32(b)(2). The Bureau is amending 


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the definition of ‘‘loan originator’’ 

§ 1026.36(a)(1) and the associated 

commentary to incorporate the statutory 

exclusion of these persons from the 

definition. Accordingly, to the extent 

these persons are excluded from the 

definition of loan originator 

compensation, their compensation is 

not loan originator compensation that 

must be counted in points and fees, and 

the exclusions in proposed 

§ 226.32(b)(2) are no longer necessary. 

Instead, in the 2013 HOEPA Final 

Rule, the Bureau is finalizing the 

definition of points and fees for HELOCs 

in § 1026.32(b)(2). Current 

§ 1026.32(b)(2), which contains the 

definition of ‘‘affiliate,’’ is being 

renumbered as § 1026.32(b)(5). 

32(b)(3) Bona Fide Discount Point 

32(b)(3)(i) Closed-End Credit 

The Dodd-Frank Act defines the term 

‘‘bona fide discount points’’ as used in 

§ 1026.32(b)(1)(i)(E) and (F), which, as 

discussed above, permit exclusion of 

‘‘bona fide discount points’’ from points 

and fees for qualified mortgages. TILA 

section 129C(b)(2)(C)(iii) defines the 

term ‘‘bona fide discount points’’ as 

‘‘loan discount points which are 

knowingly paid by the consumer for the 

purpose of reducing, and which in fact 

result in a bona fide reduction of, the 

interest rate or time-price differential 

applicable to the mortgage.’’ TILA 

section 129C(b)(2)(C)(iv) limits the types 

of discount points that may be excluded 

from ‘‘points and fees’’ to those for 

which ‘‘the amount of the interest rate 

reduction purchased is reasonably 

consistent with established industry 

norms and practices for secondary 

market transactions.’’ 

Proposed § 226.43(e)(3)(iv) would 

have implemented these provisions by 

defining the term ‘‘bona fide discount 

point’’ as ‘‘any percent of the loan 

amount’’ paid by the consumer that 

reduces the interest rate or time-price 

differential applicable to the mortgage 

loan by an amount based on a 

calculation that: (1) Is consistent with 

established industry practices for 

determining the amount of reduction in 

the interest rate or time-price 

differential appropriate for the amount 

of discount points paid by the 

consumer; and (2) accounts for the 

amount of compensation that the 

creditor can reasonably expect to 

receive from secondary market investors 

in return for the mortgage loan. 

The Board’s proposal would have 

required that the creditor be able to 

show a relationship between the amount 

of interest rate reduction purchased by 

a discount point and the value of the 

transaction in the secondary market. 

The Board observed that, based on 

outreach with representatives of 

creditors and GSEs, the value of a rate 

reduction in a particular mortgage 

transaction on the secondary market is 

based on many complex factors, which 

interact in a variety of complex ways. 

The Board noted that these factors may 

include, among others: 

• The product type, such as whether 

the loan is a fixed-rate or adjustable-rate 

mortgage, or has a 30-year term or a 15- 

year term. 

• How much the MBS market is 

willing to pay for a loan at that interest 

rate and the liquidity of an MBS with 

loans at that rate. 

• How much the secondary market is 

willing to pay for excess interest on the 

loan that is available for capitalization 

outside of the MBS market. 

• The amount of the guaranty fee 

required to be paid by the creditor to the 

investor. 

The Board indicated that it was 

offering a flexible proposal because of 

its concern that a more prescriptive 

interpretation would be operationally 

unworkable for most creditors and 

would lead to excessive legal and 

regulatory risk. In addition, the Board 

also noted that, due to the variation in 

inputs described above, a more 

prescriptive rule likely would require 

continual updating, creating additional 

compliance burden and potential 

confusion. 

The Board also noted a concern that 

small creditors such as community 

banks that often hold loans in portfolio 

rather than sell them on the secondary 

market may have difficulty complying 

with this requirement. The Board 

therefore requested comment on 

whether it would be appropriate to 

provide any exemptions from the 

requirement that the interest rate 

reduction purchased by a ‘‘bona fide 

discount point’’ be tied to secondary 

market factors. 

Many industry commenters criticized 

the second prong of the Board’s 

proposal, which would have required 

that the interest rate reduction account 

for the amount of compensation that the 

creditor can reasonably expect to 

receive from secondary market investors 

in return for the mortgage loan. Several 

industry commenters argued that this 

test would be complex and difficult to 

apply and that, if challenged, it would 

be difficult for creditors to prove that 

the calculation was done properly. Two 

industry commenters noted that 

creditors do not always sell or plan to 

sell loans in the secondary market at the 

time of origination and so would not 

know what compensation they would 

receive on the secondary market. 

Several industry commenters 

emphasized that the secondary market 

test would be impracticable for creditors 

holding loans in portfolio. Consumer 

groups did not comment on this issue. 

As noted above, the Bureau is 

consolidating the exclusions for certain 

bona fide third-party charges and bona 

fide discount points in 

§ 1026.32(b)(1)(i)(D) through (F). As a 

result, the Bureau is adopting proposed 

§ 226.43(e)(3)(iv), with the revision 

discussed below, as renumbered 

§ 1026.32(b)(3)(i). In the 2013 HOEPA 

Final Rule, the Bureau is adopting a 

definition of bona fide discount point 

for open-end credit in 

§ 1026.32(b)(3)(ii). 

After carefully considering the 

comments, the Bureau is modifying the 

definition of ‘‘bona fide discount point.’’ 

Specifically, the Bureau believes it 

would be difficult, if not impossible, for 

many creditors to account for the 

secondary market compensation in 

calculating interest rate reductions. This 

is particularly true for loans held in 

portfolio. Therefore, the Board is 

removing from § 1026.32(b)(3)(i) the 

requirement that interest rate reductions 

take into account secondary market 

compensation. Instead, as revised, 

§ 1026.32(b)(3)(i) requires only that the 

calculation of the interest rate reduction 

be consistent with established industry 

practices for determining the amount of 

reduction in the interest rate or timeprice differential appropriate for the 

amount of discount points paid by the 

consumer. 

The Bureau finds that removing the 

secondary market component of the 

‘‘bona fide’’ discount point definition is 

necessary and proper under TILA 

section 105(a) to effectuate the purposes 

of and facilitate compliance with TILA. 

Similarly, the Bureau finds that it is 

necessary and proper to use its authority 

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

revise and subtract from the criteria that 

define a qualified mortgage by removing 

the secondary market component from 

the bona fide discount point definition. 

It will provide creditors sufficient 

flexibility to demonstrate that they are 

in compliance with the requirement 

that, to be excluded from points and 

fees, discount points must be bona fide. 

In clarifying the definition, it also will 

facilitate the use of bona fide discount 

points by consumers to help create the 

appropriate combination of points and 

rate for their financial situation, thereby 

helping ensure that consumers are 

offered and receive residential mortgage 

loan on terms that reasonably reflect 

their ability to repay the loans and that 

responsible, affordable mortgage credit 


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6442 Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 

85Specifically, under the alternative approach, 

prepaid finance charges would not be deducted 

from the principal loan amount. Only financed 

points and fees would be deducted. 

remains available to consumers in a 

manner consistent with the purposes of 

TILA as provided in TILA section 129C. 

To provide some guidance on how 

creditors may comply with this 

requirement, the Bureau is adding new 

comment 32(b)(3)(i)–1. This comment 

explains how creditors can comply with 

‘‘established industry practices’’ for 

calculating interest rate reductions. 

Specifically, comment 32(b)(3)(i)–1 

notes that one way creditors can satisfy 

this requirement is by complying with 

established industry norms and 

practices for secondary mortgage market 

transactions. Comment 32(b)(3)(i)–1 

then provides two examples. First a 

creditor may rely on pricing in the tobe-announced (TBA) market for MBS to 

establish that the interest rate reduction 

is consistent with the compensation that 

the creditor could reasonably expect to 

receive in the secondary market. 

Second, a creditor could comply with 

established industry practices, such as 

guidelines from Fannie Mae or Freddie 

Mac that prescribe when an interest rate 

reduction from a discount point is 

considered bona fide. However, because 

these examples from the secondary 

market are merely illustrations of how a 

creditor could comply with the 

‘‘established industry practices’’ 

requirement for bona fide interest rate 

reduction, creditors, and in particular 

creditors that retain loans in portfolio, 

will have flexibility to use other 

approaches for complying with this 

requirement. 

32(b)(4) Total Loan Amount 

32(b)(4)(i) Closed-End Credit 

As added by section 1412 of the 

Dodd-Frank Act, TILA section 

129C(b)(2)(A)(vii) defines a ‘‘qualified 

mortgage’’ as a mortgage for which, 

among other things, ‘‘the total points 

and fees * * * payable in connection 

with the loan do not exceed 3 percent 

of the total loan amount.’’ For purposes 

of implementing the qualified mortgage 

provisions, the Board proposed to retain 

existing comment 32(a)(1)(ii)–1 

explaining the meaning of the term 

‘‘total loan amount,’’ with certain minor 

revisions discussed below, while also 

seeking comment on an alternative 

approach. 

The proposal would have revised the 

‘‘total loan amount’’ calculation under 

current comment 32(a)(1)(ii)–1 to 

account for charges added to TILA’s 

definition of points and fees by the 

Dodd-Frank Act. Under Regulation Z for 

purposes of applying the existing points 

and fees trigger for high-cost loans, the 

‘‘total loan amount’’ is calculated as the 

amount of credit extended to or on 

behalf of the consumer, minus any 

financed points and fees. Specifically, 

under current comment 32(a)(1)(ii)–1, 

the ‘‘total loan amount’’ is calculated by 

‘‘taking the amount financed, as 

determined according to § 1026.18(b), 

and deducting any cost listed in 

§ 1026.32(b)(1)(iii) and 

§ 1026.32(b)(1)(iv) that is both included 

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

and financed by the creditor.’’ Section 

1026.32(b)(1)(iii) and (b)(1)(iv) pertain 

to ‘‘real estate-related fees’’ listed in 

§ 1026.4(c)(7) and premiums or other 

charges for credit insurance or debt 

cancellation coverage, respectively. 

The Board proposed to revise this 

comment to cross-reference additional 

financed points and fees described in 

proposed § 226.32(b)(1)(vi) as well. This 

addition would have required a creditor 

also to deduct from the amount financed 

any prepayment penalties that are 

incurred by the consumer if the 

mortgage loan refinances a previous 

loan made or currently held by the 

creditor refinancing the loan or an 

affiliate of the creditor—to the extent 

that the prepayment penalties are 

financed by the creditor. As a result, the 

3 percent limit on points and fees for 

qualified mortgages would have been 

based on the amount of credit extended 

to the consumer without taking into 

account any financed points and fees. 

The Board’s proposal also would have 

revised one of the commentary’s 

examples of the ‘‘total loan amount’’ 

calculation. Specifically, the Board 

proposed to revise the example of a 

$500 single premium for optional 

‘‘credit life insurance’’ used in comment 

32(b)(1)(i)–1.iv to be a $500 single 

premium for optional ‘‘credit 

unemployment insurance.’’ The Board 

stated that this change was proposed 

because, under the Dodd-Frank Act, 

single-premium credit insurance— 

including credit life insurance—is 

prohibited in covered transactions 

except for certain limited types of credit 

unemployment insurance. See TILA 

section 129C(d). The Board requested 

comment on the proposed revisions to 

the comment explaining how to 

calculate the ‘‘total loan amount,’’ 

including whether additional guidance 

is needed. 

The Board also requested comment on 

whether to streamline the calculation to 

ensure that the ‘‘total loan amount’’ 

would include all credit extended other 

than financed points and fees. 

Specifically, the Board solicited 

comment on whether to revise the 

calculation of ‘‘total loan amount’’ to be 

the ‘‘principal loan amount’’ (as defined 

in § 226.18(b) and accompanying 

commentary), minus charges that are 

points and fees under § 226.32(b)(1) and 

are financed by the creditor. The Board 

explained that the purpose of using the 

‘‘principal loan amount’’ instead of the 

‘‘amount financed’’ would be to 

streamline the calculation to facilitate 

compliance and to ensure that no 

charges other than financed points and 

fees are excluded from the ‘‘total loan 

amount.’’ 85 In general, the revised 

calculation would have yielded a larger 

‘‘total loan amount’’ to which the 

percentage points and fees thresholds 

would have to be applied than would 

the proposed (and existing) ‘‘total loan 

amount’’ calculation, because only 

financed points and fees and no other 

financed amounts would be excluded. 

Thus, creditors in some cases would be 

able to charge more points and fees on 

the same loan under the alternative 

outlined by the Board than under either 

the proposed or existing rule. 

In the 2012 HOEPA Proposal, the 

Bureau proposed the following for 

organizational purposes: (1) To move 

the existing definition of ‘‘total loan 

amount’’ for closed-end mortgage loans 

from comment 32(a)(1)(ii)–1 to proposed 

§ 1026.32(b)(6)(i); and (2) to move the 

examples showing how to calculate the 

total loan amount for closed-end 

mortgage loans from existing comment 

32(a)(1)(ii)–1 to proposed comment 

32(b)(6)(i)–1. The Bureau proposed to 

specify that the calculation applies to 

closed-end mortgage loans because the 

Bureau also proposed to define ‘‘total 

loan amount’’ separately for open-end 

credit plans. The Bureau also proposed 

to amend the definition of ‘‘total loan 

amount’’ in a manner similar to the 

Board’s alternative proposal described 

above. The Bureau indicated this 

proposed revision would streamline the 

total loan amount calculation to 

facilitate compliance and would be 

sensible in light of the more inclusive 

definition of the finance charge 

proposed in the Bureau’s 2012 TILA– 

RESPA Integration Proposal. 

Few commenters addressed the 

Board’s proposal regarding total loan 

amount. Several industry commenters 

recommended that the alternative 

method of calculating total loan amount 

be used because it would be easier to 

calculate. At least two industry 

commenters recommended that, for 

simplicity, the amount recited in the 

note be used for calculating the 

permitted points and fees. 

After reviewing the comments, the 

Bureau is following the 2012 HOEPA 


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86Also, TILA section 128(a)(12) requires that the 

transaction-specific disclosures state that the 

consumer should refer to the appropriate contract 

document for information regarding certain loan 

terms or features, including ‘‘prepayment * * * 

penalties.’’ 15 U.S.C. 1638(a)(12). In addition, TILA 

section 129(c) limits the circumstances in which a 

high-cost mortgage may include a ‘‘prepayment 

penalty.’’ 15 U.S.C. 1639(c). 

Proposal and moving the definition of 

total loan amount into the text of the 

rule in § 1026.32(b)(4)(i). In 2013 

HOEPA Final Rule, the Bureau is 

adopting a definition of total loan 

amount for open-end credit in 

§ 1026.32(b)(4)(ii). The examples 

showing how to calculate the total loan 

amount are moved to comment 

32(b)(4)(i)–1. However, the Bureau has 

concluded that, at this point, the current 

approach to calculating the total loan 

amount should remain in place. 

Creditors are familiar with the method 

from using it for HOEPA points and fees 

calculations. Moreover, as noted above, 

the Bureau is deferring action on the 

more inclusive definition of the finance 

charge proposed in the Bureau’s 2012 

TILA–RESPA Integration Proposal. If 

the Bureau expands the definition of the 

finance charge, the Bureau will at the 

same time consider the effect on 

coverage thresholds that rely on the 

finance charge or the APR. 

32(b)(5) 

The final rule renumbers existing 

§ 1026.32(b)(2) defining the term 

‘‘affiliate’’ as § 1026.32(b)(5) for 

organizational purposes. 

32(b)(6) Prepayment Penalty 

The Dodd-Frank Act’s Amendments to 

TILA Relating to Prepayment Penalties 

Sections 1431 and 1432 of the DoddFrank Act (relating to high-cost 

mortgages) and section 1414 of the 

Dodd-Frank Act (relating to qualified 

mortgages) amended TILA to restrict 

and, in many cases, prohibit a creditor 

from imposing prepayment penalties in 

dwelling-secured credit transactions. 

The Dodd-Frank Act restricted 

prepayment penalties in three main 

ways. 

First, as the Board discussed in its 

2011 ATR Proposal, the Dodd-Frank Act 

added new TILA section 129C(c)(1) 

relating to qualified mortgages, which 

generally provides that a covered 

transaction (i.e., in general, a closedend, dwelling-secured credit 

transaction) may include a prepayment 

penalty only if it; (1) Is a qualified 

mortgage, to be defined by the Board, (2) 

has an APR that cannot increase after 

consummation, and (3) is not a higherpriced mortgage loan. The Board 

proposed to implement TILA section 

129C(c)(1) in § 226.43(g)(1) and to 

define the term prepayment penalty in 

§ 226.43(b)(10). Under new TILA section 

129C(c)(3), moreover, even loans that 

meet the statutorily prescribed criteria 

(i.e., fixed-rate, non-higher-priced 

qualified mortgages) are capped in the 

amount of prepayment penalties that 

may be charged, starting at three percent 

in the first year after consummation and 

decreasing annually by increments of 

one percentage point thereafter so that 

no penalties may be charged after the 

third year. The Board proposed to 

implement TILA section 129C(c)(3) in 

§ 226.43(g)(2). 

Second, section 1431(a) of the DoddFrank Act amended TILA section 

103(bb)(1)(A)(iii) to provide that a credit 

transaction is a high-cost mortgage if the 

credit transaction documents permit the 

creditor to charge or collect prepayment 

fees or penalties more than 36 months 

after the transaction closing or if such 

fees or penalties exceed, in the 

aggregate, more than two percent of the 

amount prepaid. Moreover, under 

amended TILA section 129(c)(1), highcost mortgages are prohibited from 

having a prepayment penalty. 

Accordingly, any prepayment penalty in 

excess of two percent of the amount 

prepaid on any closed end mortgage 

would both trigger and violate the rule’s 

high-cost mortgage provisions. The 

Bureau’s 2012 HOEPA Proposal 

proposed to implement these 

requirements with several minor 

clarifications in § 1026.32(a)(1)(iii). See 

77 FR 49090, 49150 (Aug. 15, 2012). 

Third, both qualified mortgages and 

most closed-end mortgage loans and 

open-end credit plans secured by a 

consumer’s principal dwelling are 

subject to additional limitations on 

prepayment penalties through the 

inclusion of prepayment penalties in the 

definition of points and fees for 

qualified mortgages and high-cost 

mortgages. See the section-by-section 

analysis of proposed § 226.32(b)(1)(v) 

and (vi); 77 FR 49090, 49109–10 (Aug. 

15, 2012). 

Taken together, the Dodd-Frank Act’s 

amendments to TILA relating to 

prepayment penalties mean that most 

closed-end, dwelling-secured 

transactions: (1) May provide for a 

prepayment penalty only if the 

transaction is a fixed-rate, qualified 

mortgage that is neither high-cost nor 

higher-priced under §§ 1026.32 and 

1026.35; (2) may not, even if permitted 

to provide for a prepayment penalty, 

charge the penalty more than three years 

following consummation or in an 

amount that exceeds two percent of the 

amount prepaid; and (3) may be 

required to limit any penalty even 

further to comply with the points and 

fees limitations for qualified mortgages 

or to stay below the points and fees 

trigger for high-cost mortgages. 

In the interest of lowering compliance 

burden and to provide additional clarity 

for creditors, the Bureau has elected to 

define prepayment penalty in a 

consistent manner for purposes of all of 

the Dodd-Frank Act’s amendments. This 

definition is located in § 1026.32(b)(6). 

New § 1026.43(b)(10) cross-references 

this prepayment definition to provide 

consistency. 

TILA establishes certain disclosure 

requirements for transactions for which 

a penalty is imposed upon prepayment, 

but TILA does not define the term 

‘‘prepayment penalty.’’ The Dodd-Frank 

Act also does not define the term. TILA 

section 128(a)(11) requires that the 

transaction-specific disclosures for 

closed-end consumer credit transactions 

disclose a ‘‘penalty’’ imposed upon 

prepayment in full of a closed-end 

transaction, without using the term 

‘‘prepayment penalty.’’ 15 U.S.C. 

1638(a)(11).86 Comment 18(k)(1)–1 

clarifies that a ‘‘penalty’’ imposed upon 

prepayment in full is a charge assessed 

solely because of the prepayment of an 

obligation and includes, for example, 

‘‘interest’’ charges for any period after 

prepayment in full is made and a 

minimum finance charge. 

The Board’s 2011 ATR Proposal 

proposed to implement the Dodd-Frank 

Act’s prepayment penalty-related 

amendments to TILA for qualified 

mortgages by defining ‘‘prepayment 

penalty’’ for most closed-end, dwellingsecured transactions in new 

§ 226.43(b)(10), and by cross-referencing 

proposed § 226.43(b)(10) in the 

proposed joint definition of points and 

fees for qualified and high-cost 

mortgages in § 226.32(b)(1)(v) and (vi). 

The definition of prepayment penalty 

proposed in the Board’s 2011 ATR 

Proposal differed from the Board’s prior 

proposals and existing guidance in the 

following respects: (1) Proposed 

§ 226.43(b)(10) defined prepayment 

penalty with reference to a payment of 

‘‘all or part of’’ the principal in a 

transaction covered by the provision, 

while § 1026.18(k) and associated 

commentary and the Board’s 2009 

Closed-End Proposal and 2010 Mortgage 

Proposal referred to payment ‘‘in full;’’ 

(2) the examples provided omitted 

reference to a minimum finance charge 

and loan guarantee fees; and (3) 

proposed § 226.43(b)(10) did not 

incorporate, and the Board’s 2011 ATR 

Proposal did not otherwise address, the 

language in § 1026.18(k)(2) and 

associated commentary regarding 


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disclosure of a rebate of a precomputed 

finance charge, or the language in 

§ 1026.32(b)(6) and associated 

commentary concerning prepayment 

penalties for high-cost mortgages. 

The Board proposal generally 

received support from industry 

commenters and consumer advocates 

for accurately implementing section 

129C(c) by using a plain language 

definition of prepayment penalty. Many 

commenters, particularly consumer 

groups, supported a rule that eliminates 

or tightly restricts the availability of 

prepayment penalties. Some industry 

commenters, however, cautioned the 

Bureau against implementing an 

overbroad definition of prepayment 

penalty, citing primarily a concern over 

consumers’ access to credit. At least one 

commenter argued that a prepayment 

penalty ban should be more narrowly 

focused on the subprime loan market, 

noting that the proposal affected 

prepayment penalties on a wider variety 

of products. Other industry commenters 

expressed a concern about the Board’s 

approach to the monthly interest accrual 

amortization method, as discussed in 

more detail below as part of the 

discussion of comment 32(b)(6)–1. 

The Bureau adopts the definition of 

prepayment penalty under 

§ 1026.32(b)(6) largely as proposed by 

the Board in order to create a clear 

application of the term prepayment 

penalty that is consistent with the 

definitions proposed in the Bureau’s 

2012 TILA–RESPA Proposal (which 

itself draws from the definition adopted 

in the Bureau’s 2013 HOEPA Final 

Rule). However, the Bureau adds to 

§ 1026.32(b)(6) an explicit exclusion 

from the definition of prepayment 

penalty for a waived bona fide thirdparty charge that the creditor imposes if 

the consumer, sooner than 36 months 

after consummation, pays all of a 

covered transaction’s principal before 

the date on which the principal is due. 

This addition is discussed in detail 

below. Consistent with TILA section 

129(c)(1), existing § 1026.32(d)(6), and 

the Board’s proposed § 226.43(b)(10) for 

qualified mortgages, § 1026.32(b)(6)(i) 

provides that, for a closed-end mortgage 

loan, a ‘‘prepayment penalty’’ means a 

charge imposed for paying all or part of 

the transaction’s principal before the 

date on which the principal is due, 

though the Bureau has added a carveout from this definition to accommodate 

the repayment of certain conditionally 

waived closing costs when the 

consumer prepays in full. The Bureau 

adopts this definition of prepayment 

penalty under § 1026.32(b)(6), rather 

than under § 1026.43(b)(10), to facilitate 

compliance for creditors across 

rulemakings. The definition of 

‘‘prepayment penalty’’ under 

§ 1026.32(b)(6) thus will apply to 

prepayment penalty restrictions, as 

applied under § 1026.43(g). Section 

1026.32(b)(6) also contains requirements 

and guidance related to the Bureau’s 

2013 HOEPA Final Rule, such as a 

definition of prepayment penalty that 

applies to open-end credit. 

The Board’s 2011 ATR Proposal 

included as an example of a prepayment 

penalty a fee that the creditor waives 

unless the consumer prepays the 

covered transaction. Some industry 

commenters contended that such 

conditional fee waivers should be 

excluded from the definition of 

prepayment penalties. The commenters 

argued that creditors imposed 

conditional fee waivers not to increase 

profit, but to ensure compensation for 

fixed costs associated with originating 

the loan. At least one commenter 

directed the Bureau to a 1996 National 

Credit Union Administration opinion 

letter that concluded that a conditional 

waiver of closing costs by a credit union 

was a benefit to the consumer. Other 

comments characterized the conditional 

fee waiver as a ‘‘reimbursement,’’ rather 

than compensation. 

The Bureau finds such comments 

persuasive, particularly with respect to 

a situation in which the creditor waives 

a bona fide third-party charge (or 

charges) on condition that the consumer 

reimburse the creditor for the cost of 

that charge if the consumer prepays the 

loan. In such situations, the Bureau 

recognizes that the creditor receives no 

profit from imposing or collecting such 

charges and the Bureau believes that 

treating such charges as a prepayment 

penalty might very well have the effect 

of reducing consumer choice without 

providing any commensurate consumer 

benefit. In an effort to provide a sensible 

way to permit a creditor to protect itself 

from losing money paid at closing to 

third parties on the consumer’s behalf, 

prior to such time as the creditor can 

otherwise recoup such costs through the 

interest rate on the mortgage loan, while 

balancing consumer protection interests, 

the Bureau has concluded that such fees 

should be permissible for a limited time 

after consummation. The Bureau thus 

adopts § 1032(b)(6)(i) to clarify that the 

term prepayment penalty does not 

include a waived bona fide third-party 

charge imposed by the creditor if the 

consumer pays all of a covered 

transaction’s principal before the date 

on which the principal is due sooner 

than 36 months after consummation. 

The Bureau concludes that limiting the 

duration of the possible charge to 36 

months after consummation is 

consistent with TILA 129C(c)(3)(D), 

which prohibits any prepayment 

penalty three years after loan 

consummation, while accommodating 

the concerns discussed above. 

Moreover, § 1032(b)(6)(i) excludes from 

the definition of prepayment penalty 

only those charges that a creditor 

imposes to recoup waived bona-fide 

third party charges in such cases where 

the consumer prepays in full. Thus, for 

example, if one month after loan 

consummation, the consumer prepays 

$100 of principal earlier than it is due, 

where the total principal is $100,000, 

then any fee that the creditor imposes 

for such prepayment is a prepayment 

penalty under § 1032(b)(6)(i) and such a 

fee is restricted in accordance with 

§ 1026.43(g). 

The Bureau believes that 

§ 1026.32(b)(6) accurately implements 

TILA section 129C(c), which 

significantly limits the applicability and 

duration of prepayment penalties. Some 

commenters argued that restrictions on 

prepayment penalties should be more 

narrowly focused on specific products 

or consumers, because not all 

consumers need protection from the 

pitfalls of prepayment penalties. The 

Bureau agrees that prepayment penalties 

are not always harmful to consumers 

and that, in some cases, allowing a 

creditor to charge a prepayment penalty 

may lead to increased consumer choice 

and access to credit. Congress 

recognized this balance by allowing a 

creditor to charge a prepayment penalty 

only in certain circumstances, such as 

requiring the loan to be a qualified 

mortgage, under TILA section 

129C(c)(1)(A), and by limiting a creditor 

to charging a prepayment penalty to no 

more than three years following 

consummation, under TILA section 

129C(c)(3)(D). Section 1026.32(b)(6) 

remains faithful to that balance, with 

the Bureau’s minor clarification with 

respect to waived bona fide third party 

charges, as described above. 

The Board’s 2011 ATR Proposal 

included several other examples of a 

prepayment penalty under proposed 

§ 226.43(b)(10)(i). For clarity, the Bureau 

incorporates these examples as 

comment 32(b)(6)–1.i and ii, and the 

Bureau is adding comment 32(b)(6)–1.iii 

and iv to provide additional clarity. 

Likewise, the Bureau is largely adopting 

the Board’s proposed § 226.43(b)(10)(ii), 

an example of what is not a prepayment 

penalty, as comment 32(b)(6)–3.i, as 

well as adding comment 32(b)(6)–3.ii. 

Comment 32(b)(6)–1.i through iv gives 

the following examples of prepayment 

penalties: (1) A charge determined by 

treating the loan balance as outstanding 

for a period of time after prepayment in 


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full and applying the interest rate to 

such ‘‘balance,’’ even if the charge 

results from interest accrual 

amortization used for other payments in 

the transaction under the terms of the 

loan contract; (2) a fee, such as an 

origination or other loan closing cost, 

that is waived by the creditor on the 

condition that the consumer does not 

prepay the loan; (3) a minimum finance 

charge in a simple interest transaction; 

and (4) computing a refund of unearned 

interest by a method that is less 

favorable to the consumer than the 

actuarial method, as defined by section 

933(d) of the Housing and Community 

Development Act of 1992, 15 U.S.C. 

1615(d). 

Post-payoff interest charges. The 

Board proposal included as an example 

of a prepayment penalty in proposed 

§ 226.43(b)(10)(i)(A) a charge 

determined by the creditor or servicer 

treating the loan balance as outstanding 

for a period of time after prepayment in 

full. Some industry commenters 

expressed reservations about treating 

this monthly interest accrual 

amortization method as a prepayment 

penalty, arguing that such a rule might 

cause higher resale prices in the 

secondary mortgage market to account 

for cash flow uncertainty. Other 

commenters noted that this calculation 

method is currently used by FHA to 

compute interest on its loans (including 

loans currently in Ginnie Mae pools), or 

that such charges were not customarily 

considered a prepayment penalty. Some 

commenters expressed concern that the 

rule would disrupt FHA lending. 

After careful consideration of the 

comments received, the Bureau 

concludes that going forward (e.g., for 

loans a creditor originates after the 

effective date), it is appropriate to 

designate higher interest charges for 

consumers based on accrual methods 

that treat a loan balance as outstanding 

for a period of time after prepayment in 

full as prepayment penalties under 

§ 1026.32(b)(6) and comment 32(b)(6)– 

1.i. In such instances, the consumer 

submits a payment before it is due, but 

the creditor nonetheless charges interest 

on the portion of the principal that the 

creditor has already received. The 

Bureau believes that charging a 

consumer interest after the consumer 

has repaid the principal is the 

functional equivalent of a prepayment 

penalty. Comment 32(b)(6)–1.i further 

clarifies that ‘‘interest accrual 

amortization’’ refers to the method by 

which the amount of interest due for 

each period (e.g., month) in a 

transaction’s term is determined and 

notes, for example, that ‘‘monthly 

interest accrual amortization’’ treats 

each payment as made on the 

scheduled, monthly due date even if it 

is actually paid early or late (until the 

expiration of any grace period). The 

proposed comment also provides an 

example where a prepayment penalty of 

$1,000 is imposed because a full 

month’s interest of $3,000 is charged 

even though only $2,000 in interest was 

earned in the month during which the 

consumer prepaid. 

With respect to FHA practices relating 

to monthly interest accrual 

amortization, the Bureau has consulted 

extensively with HUD in issuing this 

final rule as well as the 2013 HOEPA 

Final Rule. Based on these 

consultations, the Bureau understands 

that HUD must engage in rulemaking to 

end its practice of imposing interest 

charges on consumers for the balance of 

the month in which consumers prepay 

in full. The Bureau further understands 

that HUD requires approximately 24 

months to complete its rulemaking 

process. Accordingly, in recognition of 

the important role that FHA-insured 

credit plays in the current mortgage 

market and to facilitate FHA creditors’ 

ability to comply with this aspect of the 

2013 ATR and HOEPA Final Rules, the 

Bureau is using its authority under TILA 

section 105(a) to provide for optional 

compliance until January 15, 2015 with 

§ 1026.32(b)(6)(i) and the official 

interpretation of that provision in 

comment 32(b)(6)–1.i regarding monthly 

interest accrual amortization. 

Specifically, § 1026.32(b)(6)(i) provides 

that interest charged consistent with the 

monthly interest accrual amortization 

method is not a prepayment penalty for 

FHA loans consummated before January 

21, 2015. FHA loans consummated on 

or after January 21, 2015 must comply 

with all aspects of the final rule. The 

Bureau is making this adjustment 

pursuant to its authority under TILA 

section 105(a), which provides that the 

Bureau’s regulations may contain such 

additional requirements, classifications, 

differentiations, or other provisions, and 

may provide for such adjustments and 

exceptions for all or any class of 

transactions as in the Bureau’s judgment 

are necessary or proper to effectuate the 

purposes of TILA, prevent 

circumvention or evasion thereof, or 

facilitate compliance therewith. 15 

U.S.C. 1604(a). The purposes of TILA 

include the purposes that apply to 129C, 

to assure that consumers are offered and 

receive residential mortgage loans on 

terms that reasonably reflect their ability 

to repay the loan. See 15 U.S.C. 

1639b(a)(2). The Bureau believes it is 

necessary and proper to make this 

adjustment to ensure that consumers 

receive loans on affordable terms and to 

facilitate compliance with TILA and its 

purposes while mitigating the risk of 

disruption to the market. For purposes 

of this rulemaking, the Bureau 

specifically notes that the inclusion of 

interest charged consistent with the 

monthly interest accrual amortization 

method in the definition of prepayment 

penalty for purposes of determining 

whether a transaction is in compliance 

with the requirements of § 1026.43(g) 

applies only to transactions 

consummated on or after January 10, 

2014; for FHA loans, compliance with 

this aspect of the definition of 

prepayment penalties is optional for 

transactions consummated prior to 

January 21, 2015. 

With regard to general concerns that 

loans subject to these interest accrual 

methods may be subject to higher prices 

on the secondary market, the Bureau is 

confident that the secondary market will 

be able to price the increased risk of 

prepayment, if any, that may occur as a 

result of the limits that will apply to 

monthly interest accrual amortizationrelated prepayment penalties. The 

secondary market already does so for 

various other types of prepayment risk 

on investor pools, such as the risk of 

refinancing or sale of the property. 

Comment 32(b)(6)–1.ii further 

explains the 36 month carve-out for a 

waived bona fide third-party charge 

imposed by the creditor if the consumer 

pays all of a covered transaction’s 

principal before the date on which the 

principal is due sooner than 36 months 

after consummation, as included in 

§ 1026.32(b)(6)(i). The comment 

explains that if a creditor waives $3,000 

in closing costs to cover bona fide third 

party charges but the terms of the loan 

agreement provide that the creditor may 

recoup $4,500, in part to recoup waived 

charges, then only $3,000 that the 

creditor may impose to cover the 

waived bona fide third party charges is 

considered not to be a prepayment 

penalty, while any additional $1,500 

charge for prepayment is a prepayment 

penalty and subject to the restrictions 

under § 1026.43(g). This comment also 

demonstrates that the only amount 

excepted from the definition of 

prepayment penalty under 

§ 1026.32(b)(6)(i) is the actual amount 

that the creditor pays to a third party for 

a waived, bona fide charge. 

Minimum finance charges; unearned 

interest refunds. Although longstanding 

Regulation Z commentary has listed a 

minimum finance charge in a simple 

interest transaction as an example of a 

prepayment penalty, the Board 

proposed to omit that example from 

proposed § 226.43(b)(10) because the 


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87Two TILA subsections designated 103(cc) exist 

due to a discrepancy in the instructions given by 

the Dodd-Frank Act. See Dodd-Frank Act sections 

1100A and 1401. 

Board reasoned that such a charge 

typically is imposed with open-end, 

rather than closed-end, transactions. 

The Bureau did not receive substantial 

comment on this omission, but the 

Bureau has elected to continue using 

this example in comment 32(b)(6)–1.iii 

for consistency. Likewise, the Board did 

not propose to include the example of 

computing a refund of unearned interest 

by a method that is less favorable to the 

consumer than the actuarial method, but 

the Bureau is nonetheless using this 

example in comment 32(b)(6)–1.iv 

because similar language is found in 

longstanding Regulation Z commentary. 

Examples of fees that are not 

prepayment penalties. The Board 

included in proposed § 226.43(b)(10)(ii) 

an example of a fee not considered a 

prepayment penalty. For the sake of 

clarity, the Bureau is moving this 

example into comment 32(b)(6)–2.i, 

rather than keep the example in the text 

of the regulation. The Bureau also is 

adding a second example in comment 

32(b)(6)–2.ii. 

Comment 32(b)(6)–2.i explains that 

fees imposed for preparing and 

providing documents when a loan is 

paid in full are not prepayment 

penalties when such fees are imposed 

whether or not the loan is prepaid or the 

consumer terminates the plan prior to 

the end of its term. Commenters did not 

provide substantial feedback on this 

example, which the Bureau has 

reworded slightly from the Board 

proposal to provide conformity and 

clarity. 

The Board proposed omitting text 

from preexisting commentary on 

Regulation Z stating that a prepayment 

penalty did not include loan guarantee 

fees, noting that loan guarantee fees are 

not charges imposed for paying all or 

part of a loan’s principal before the date 

on which the principal is due. The 

Bureau did not receive substantial 

comment on this omission. While the 

Bureau agrees with the Board’s analysis, 

the Bureau nonetheless elects to include 

this example in comment 43(b)(6)–2.ii 

to clarify that loan guarantee fees 

continue to fall outside the definition of 

a prepayment penalty. Moreover, 

including this example of a fee that is 

not a prepayment penalty is consistent 

with the Bureau’s efforts to streamline 

definitions and ease regulatory burden. 

Construction-to-permanent financing. 

Some industry commenters advocated 

that, for construction-to-permanent 

loans, the Bureau should exclude from 

the definition of prepayment penalty 

charges levied by a creditor if a 

consumer does not convert the 

construction loan into a permanent loan 

with the same creditor within a 

specified time period. The Bureau 

believes that the concern expressed by 

these commenters that the cost of credit 

for these construction-to-permanent 

loans would increase if such charges 

were treated as prepayment penalties is 

misplaced primarily because in many 

cases, such charges are not, in fact, a 

prepayment penalty. A prepayment 

penalty is ‘‘a charge imposed for paying 

all or part of a covered transaction’s 

principal before the date on which the 

principal is due.’’ First, the case where 

the creditor charges the consumer a fee 

for failing to convert a loan within a 

specified period after completing the 

repayment of a construction loan as 

scheduled is not a prepayment penalty; 

the fee is not assessed for an early 

payment of principal, but rather for the 

consumer’s failure to take an action 

upon scheduled repayment of principal. 

Second, the case where a consumer does 

convert the construction loan to a 

permanent loan in a timely manner, but 

incurs a fee for converting the loan with 

another creditor, is also likely not 

prepayment penalty. While such cases 

depend highly on contractual wording, 

in the example above, the consumer is 

charged a fee not for his early payment 

of principal, but rather for his use of 

another creditor. Third, the case where 

the creditor charges the consumer a fee 

for converting the construction loan to 

a permanent loan earlier than specified 

by agreement, even with the same 

creditor, likely is a prepayment penalty. 

While this example is not the same as 

the hypothetical described by most 

commenters, who expressed concern if 

a consumer does not convert the 

construction loan into a permanent loan 

with the same creditor within a 

specified time period, this is an example 

of a prepayment penalty, as the creditor 

has imposed a charge for paying all or 

part of a covered transaction’s principal 

before the date on which the principal 

was due. As the above examples 

demonstrate, whether a construction-topermanent loan contains a prepayment 

penalty is fact-specific, and the Bureau 

has decided that adding a comment 

specifically addressing such loans 

would not be instructive. The Bureau 

sees no policy reason to generally 

exclude fees specific to construction-topermanent loan from the definition of 

prepayment penalty and its statutory 

limits. The Bureau was not presented 

with any evidence that the risks 

inherent in construction-to-permanent 

loans could not be priced by creditors 

through alternative means, such as the 

examples described above, via interest 

rate, or charging closing costs. The 

Bureau also notes that, because of the 

scope of the rule, described in the 

section-by-section analysis of 

§ 1026.43(a), as well as the prepayment 

penalty restrictions, described in the 

section-by-section analysis of 

§ 1026.43(g), construction-to-permanent 

loans cannot be qualified mortgages, 

and thus under § 1026.43(g)(1)(ii)(B) 

cannot include a prepayment penalty. 

Construction-to-permanent loans are 

discussed in more detail in the sectionby-section analysis of § 1026.43(a). 

Open-end credit. The Bureau is 

concurrently adopting comments 

32(b)(6)–3 and –4 to clarify its approach 

to prepayment penalties with respect to 

open-end credit. As the Board’s 2011 

ATR Proposal did not address open-end 

credit plans, the Bureau is not clarifying 

prepayment penalties with respect to 

open-end credit plans in this final rule. 

Instead, guidance is provided in 

comments 32(b)(6)–3 and –4, which the 

Bureau is adopting in the concurrent 

2013 HOEPA Final Rule. 

Section 1026.43 Minimum Standards for 

Transactions Secured by a Dwelling 

43(a) Scope 

Sections 1411, 1412 and 1414 of the 

Dodd-Frank Act add new TILA section 

129C, which requires creditors to 

determine a consumer’s ability to repay 

a ‘‘residential mortgage loan’’ and 

establishes new rules and prohibitions 

on prepayment penalties. Section 1401 

of the Dodd-Frank Act adds new TILA 

section 103(cc),87 which defines 

‘‘residential mortgage loan’’ to mean, 

with some exceptions, any consumer 

credit transaction secured by a 

mortgage, deed of trust, or other 

equivalent consensual security interest 

on ‘‘a dwelling or on residential real 

property that includes a dwelling.’’ 

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

to mean a residential structure or mobile 

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

units of condominiums or cooperatives. 

Thus, a ‘‘residential mortgage loan’’ is a 

dwelling-secured consumer credit 

transaction, regardless of whether the 

consumer credit transaction involves a 

home purchase, refinancing, home 

equity loan, first lien or subordinate 

lien, and regardless of whether the 

dwelling is a principal residence, 

second home, vacation home (other than 

a timeshare residence), a one- to fourunit residence, condominium, 

cooperative, mobile home, or 

manufactured home. 


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88 12 CFR 1026.3(a). 

89The Regulation Z section on HELOCs has been 

relocated and is now at 12 CFR 1026.40. 

However, the Dodd-Frank Act 

specifically excludes from the term 

‘‘residential mortgage loan’’ an openend credit plan or an extension of credit 

secured by an interest in a timeshare 

plan, for purposes of the repayment 

ability and prepayment penalty 

provisions under TILA section 129C, 

among other provisions. See TILA 

section 103(cc)(5); see also TILA section 

129C(i) (providing that timeshare 

transactions are not subject to TILA 

section 129C). Further, the repayment 

ability provisions of TILA section 

129C(a) do not apply to reverse 

mortgages or temporary or ‘‘bridge’’ 

loans with a term of 12 months or less, 

including a loan to purchase a new 

dwelling where the consumer plans to 

sell another dwelling within 12 months. 

See TILA section 129C(a)(8). The 

repayment ability provisions of TILA 

section 129C(a) also do not apply to 

consumer credit transactions secured by 

vacant land. See TILA section 103(cc)(5) 

and 129C(a)(1). 

TILA Section 103(cc) defines 

‘‘residential mortgage loan’’ to mean a 

consumer credit transaction secured by 

a mortgage or equivalent consensual 

security interest ‘‘on a dwelling or on 

residential real property that includes a 

dwelling.’’ Under TILA and Regulation 

Z, the term ‘‘dwelling’’ means a 

residential structure with one to four 

units, whether or not the structure is 

attached to real property, and includes 

a condominium or cooperative unit, 

mobile home, and trailer, if used as a 

residence. See 15 U.S.C. 1602(v), 

§ 1026.2(a)(19). To facilitate compliance 

by using consistent terminology 

throughout Regulation Z, the proposal 

used the term ‘‘dwelling,’’ as defined in 

§ 1026.2(a)(19), and not the phrase 

‘‘residential real property that includes 

a dwelling.’’ Proposed comment 43(a)– 

2 clarified that, for purposes of 

proposed § 226.43, the term ‘‘dwelling’’ 

would include any real property to 

which the residential structure is 

attached that also secures the covered 

transaction. 

Proposed § 226.43(a) generally 

defined the scope of the ability-to-repay 

provisions to include any consumer 

credit transaction that is secured by a 

dwelling, other than home equity lines 

of credit, mortgage transactions secured 

by an interest in a timeshare plan, or for 

certain provisions reverse mortgages or 

temporary loans with a term of 12 

months or less. Proposed comment 

43(a)–1 clarified that proposed § 226.43 

would not apply to an extension of 

credit primarily for a business, 

commercial, or agricultural purpose and 

cross-referenced the existing guidance 

on determining the primary purpose of 

an extension of credit in commentary on 

§ 1026.3. 

Numerous commenters requested 

additional exemptions from coverage 

beyond the statutory exemptions listed 

at proposed § 226.43(a)(1) through (3). 

The Bureau received requests for 

exemptions from the rule for sellerfinanced transactions, loans secured by 

non-primary residences, community 

development loans, downpayment 

assistance loans, loans eligible for 

purchase by GSEs, and housing 

stabilization refinances. The requested 

exemptions related to community 

development loans, downpayment 

assistance loans, and housing 

stabilization refinances are not being 

included in this final rule, but are 

addressed in the Bureau’s proposed rule 

regarding amendments to the ability-torepay requirements, published 

elsewhere in today’s Federal Register. 

The requested exemptions that are not 

being included in the rule and are not 

being addressed in today’s concurrent 

proposal are discussed immediately 

below. 

The Bureau received numerous letters 

from individuals concerned that the rule 

would cover individual home sellers 

who finance the buyer’s purchase, either 

through a loan or an installment sale. 

However, because the definition of 

‘‘creditor’’ for mortgages generally 

covers only persons who extend credit 

secured by a dwelling more than five 

times in a calendar year, the 

overwhelming majority of individual 

seller-financed transactions will not be 

covered by the rule. Those creditors 

who self-finance six or more 

transactions in a calendar year, whether 

through loans or installment sales, will 

need to comply with the ability-to-repay 

provisions of § 1026.43, just as they 

must comply with other relevant 

provisions of Regulation Z. 

An association of State bank 

regulators suggested that the scope of 

the ability-to-repay requirements be 

limited to owner-occupied primary 

residences, stating that ability to repay 

on vacation homes and investment 

properties should be left to an 

institution’s business judgment. The 

Bureau believes it is not appropriate or 

necessary to exercise its exception 

authority to change the scope of the 

provision in this way for several 

reasons. First, as discussed in proposed 

comment 43(a)–1, loans that have a 

business purpose 88 are not covered by 

TILA, and so would not be covered by 

the ability-to-repay provisions as 

proposed and adopted. Investment 

purpose loans are considered to be 

business purpose loans. Second, 

vacation home loans are consumer 

credit transactions that can have marked 

effects on a consumer’s finances. If a 

consumer is unable to repay a mortgage 

on a vacation home, the consumer will 

likely suffer severe financial 

consequences and the spillover effects 

on property values and other consumers 

in the affected area can be substantial as 

well. Third, the Bureau understands 

that default rates on vacation homes are 

generally higher than those on primary 

residences, and an exemption could 

increase this disparity. 

For the reasons discussed below, the 

general scope provision and the 

statutory exemptions in § 1026.43(a)(1) 

through (3)(ii) are adopted substantially 

as proposed, with minor changes as 

discussed in the relevant sections 

below, and the addition of 

§ 1026.43(a)(3)(iii) to provide an 

exemption for the construction phase of 

a construction-to-permanent loan. 

The general scope provision at 

§ 1026.43(a) now includes language 

making clear that real property attached 

to a dwelling will be considered a part 

of the dwelling for purposes of 

compliance with § 1026.43. Although as 

discussed above similar language was 

included in the official commentary in 

the proposed rule, the Bureau believes 

this important legal requirement should 

be part of the regulatory text. 

Comment 43(a)–1 now includes a 

reference to § 1026.20(a), which 

describes different types of changes to 

an existing loan that will not be treated 

as refinancings, to make clear that 

creditors may rely on that section in 

determining whether or not § 1026.43 

will apply to a particular change to an 

existing loan. 

43(a)(1) 

The Board’s proposal included an 

exemption from the scope of section 

226.43 for ‘‘[a] home equity line of 

credit subject to § 226.5b,’’ 89 which 

implemented the exclusion of HELOCs 

from coverage in the statutory definition 

of ‘‘residential mortgage loan.’’ DoddFrank Act section 1401. The Bureau 

received two comments asking that the 

HELOC exemption be reconsidered. The 

commenters stated that HELOCs had 

contributed to the crisis in the mortgage 

market and that failure to include them 

in the ability-to-repay rule’s coverage 

would likely lead to more consumer 

abuse and systemic problems. 

The Bureau notes that Congress 

specifically exempted open-end lines of 

credit from the ability-to-repay 


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90See Fed. Reserve Bank of N.Y., Quarterly 

Report on Household Debt and Credit, at 9 (Nov. 

2012), available at http://www.newyorkfed.org/ 

research/national_economy/householdcredit/ 

DistrictReport_Q32012.pdf. 

91Comments were received regarding the possible 

description of a reverse mortgage qualified 

mortgage, and they are discussed below. These 

commenters did not discuss or question the general 

exemption from the ability-to-repay rule. 

requirements, even though the DoddFrank Act extends other consumer 

protections to such loans, including the 

requirements for high-cost mortgages 

under HOEPA. The Bureau also notes 

that home equity lines of credit have 

consistently had lower delinquency 

rates than other forms of consumer 

credit.90 Furthermore, the requirements 

contained in the Dodd-Frank Act with 

respect to assessing a consumer’s ability 

to repay a residential mortgage, and the 

regulations the Bureau is adopting 

thereunder, were crafted to apply to the 

underwriting of closed-end loans and 

are not necessarily transferrable to 

underwriting for an open-end line of 

credit secured by real estate. In light of 

these considerations, the Bureau does 

not believe there is sufficient 

justification to find it necessary or 

proper to use its adjustment and 

exception authority to expand the 

ability-to-repay provisions to HELOCs at 

this time. However, as discussed in 

detail below, the Bureau is adopting the 

Board’s proposal to require creditors to 

consider and verify contemporaneous 

HELOCs in addition to other types of 

simultaneous loans for the purpose of 

complying with the ability-to-repay 

provisions. See the section-by-section 

analysis of § 1026.43(b)(12) below. In 

addition, the final rule includes the 

Board’s proposed anti-evasion 

provision, which forbids the structuring 

of credit that does not meet the 

definition of open-end credit as an 

open-end plan in order to evade the 

requirements of this rule. See 

§ 1026.43(h). Accordingly, 

§ 1026.43(a)(1) is adopted as proposed, 

with the embedded citation updated. 

However, the Bureau intends to monitor 

the HELOC exemption through its 

supervision function and may revisit the 

issue as part of its broader review of the 

ability-to-repay rule under section 

1022(d) of the Dodd-Frank Act, which 

requires the Bureau to publish an 

assessment of a significant rule or order 

not later than five years after its 

effective date. 

43(a)(2) 

The Bureau did not receive comments 

on the statutory timeshare exemption 

included in proposed § 226.43(a)(2). 

Accordingly, the Bureau is adopting 

§ 1026.43(a)(2) as proposed. 

43(a)(3) 

43(a)(3)(i) 

Proposed § 226.43(a)(3)(i) created an 

exemption from the ability-to-repay 

requirements in § 226.43(c) through (f) 

for reverse mortgages, as provided in the 

statute. The Bureau did not receive 

comments on this exemption.91

Accordingly, the Bureau is adopting 

§ 1026.43(a)(3)(i) as proposed. 

43(a)(3)(ii) 

Proposed § 226.43(a)(3)(ii) provided 

an exemption from the ability-to-repay 

requirements in § 226.43(c) through (f) 

for ‘‘[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.’’ 

Furthermore, proposed comment 43(a)– 

3 provided that, ‘‘[w]here a temporary or 

bridge loan is renewable, the loan term 

does not include any additional period 

of time that could result from a renewal 

provision.’’ The Board solicited 

comment on whether a decision to treat 

renewals in this manner would lead to 

evasion of the rule. The statute includes 

the one-year exemption implemented in 

the proposed rule but does not 

specifically address renewals. TILA 

section 129C(a)(8), 15 U.S.C. 

1639c(a)(8). 

Generally, commenters did not 

specifically address the proposal’s 

request for comment on renewals of 

short-term financing; however, one 

industry commenter stated that the 

statutory one-year limitation would 

interfere with construction loans, which 

often require more than a year to 

complete. The Bureau understands that 

construction loans often go beyond a 

single year. Although the comment did 

not specify that disregarding potential 

renewals would alleviate this concern, 

the Bureau believes that disregarding 

renewals would facilitate compliance 

and prevent unwarranted restrictions on 

access to construction loans. 

Commenters did not respond to the 

Board’s query about whether or not 

disregarding renewals of transactions 

with one-year terms would lead to 

evasion of the rule. Upon further 

analysis, the Bureau believes that this 

concern does not warrant changing the 

proposed commentary. However, the 

Bureau intends to monitor the issue 

through its supervision function and to 

revisit the issue as part of its broader 

review of the ability-to-repay rule under 

section 1022(d) of the Dodd-Frank Act, 

which requires the Bureau to conduct 

an assessment of significant rules five 

years after they are adopted. 

One industry trade association 

commented on the wording of the 

temporary financing exemption, 

suggesting that the inclusion of the two 

examples, bridge loans and construction 

loans, would create uncertainty as to 

whether the exemption would apply to 

temporary financing of other types. 

However, the Bureau believes further 

clarification is not required because the 

exemption applies to any temporary 

loan with a term of 12 months or less, 

and the examples are merely 

illustrative. The Bureau is aware of and 

provides clarifying examples of certain 

common loan products that are 

temporary or ‘‘bridge’’ loans. The 

commenter did not note other common 

types of temporary loan products. The 

Bureau further believes that the rule 

permits other types of temporary 

financing as long as the loan satisfies 

the requirements of the exemption. 

Accordingly, § 1026.43(a)(3)(ii) and 

associated commentary are adopted 

substantially as proposed. 

43(a)(3)(iii) 

The Bureau also received comments 

requesting clarification on how the 

temporary financing exemption would 

apply to construction-to-permanent 

loans, i.e., construction financing that 

will be permanently financed by the 

same creditor. Typically, such loans 

have a short construction period, during 

which payments are made of interest 

only, followed by a fully amortizing 

permanent period, often an additional 

30 years. Because of this hybrid form, 

the loans do not appear to qualify for 

the temporary financing exemption, nor 

would they be qualified mortgages 

because of the interest-only period and 

the fact that the entire loan term will 

often slightly exceed 30 years. However, 

such loans may have significant 

consumer benefits because they avoid 

the inconvenience and expense of a 

second closing, and also avoid the risk 

that permanent financing will be 

unavailable when the construction loan 

is due. 

The Bureau notes that existing 

§ 1026.17(c)(6)(ii) provides that 

construction-to-permanent loans may be 

disclosed as either a single transaction 

or as multiple transactions at the 

creditor’s option. Consistent with that 

provision, the Bureau is using its 

adjustment and exception authority to 

allow the construction phase of a 

construction-to-permanent loan to be 


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exempt from the ability-to-repay 

requirements as a temporary loan; 

however, the permanent phase of the 

loan is subject to § 1026.43. Because the 

permanent phase is subject to § 1026.43, 

it may be a qualified mortgage if it 

satisfies the appropriate requirements. 

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. The 

main purpose of section 129C is 

articulated in section 129B(a)(2)—‘‘to 

assure that consumers are offered and 

receive residential mortgage loans on 

terms that reasonably reflect their ability 

to repay the loans and that are not 

unfair, deceptive or abusive.’’ Creditors’ 

ability to continue originating 

construction-to-permanent loans in a 

cost effective manner will help to 

ensure that consumers are offered and 

receive loans on terms that reasonably 

reflect their ability to repay. The 

construction-to-permanent product 

avoids the possibility of a consumer 

being unable to repay a construction 

loan, because the permanent financing 

is already part of the contract. Without 

the ability to treat the permanent 

financing as a qualified mortgage, and 

the construction phase as exempt, it is 

not clear how many creditors would 

continue to offer such loans, especially 

in the short term. In addition, 

consumers will benefit from the 

potentially lower costs associated with 

qualified mortgages. In addition to 

effectuating the purpose of ensuring 

ability to repay, this exemption will 

greatly facilitate compliance for 

creditors providing this product. 

Proposed comment 43(a)(3)–1 

provided that, where a temporary or 

‘‘bridge’’ loan is renewable, the loan 

term does not include any additional 

period of time that could result from a 

renewal provision. The Bureau is 

adding comment 43(a)(3)–2 to make 

clear that if a construction-to-permanent 

loan is treated as multiple transactions 

in regard to compliance with the abilityto-repay requirements, and the initial 

one-year construction phase is 

renewable, the loan term of the 

construction phase does not include any 

additional period of time that could 

result from a renewal of that 

construction phase that is one year or 

less in duration. Comment 43(a)(3)–2 

also makes clear that if the construction 

phase of a construction-to-permanent 

loan is treated as exempt, the permanent 

financing phase may be a qualified 

mortgage if it meets the appropriate 

requirements. 

Accordingly, § 1026.43(a)(3)(iii) and 

comment 43(a)(3)–2 are added to this 

final rule. 

43(b) Definitions 

43(b)(1) 

The definition of ‘‘covered 

transaction’’ restates the scope of the 

rule, discussed above, which 

implements the statutory term 

‘‘residential mortgage loan’’ defined at 

TILA § 103(cc)(5). The Bureau did not 

receive any comments specifically on 

this provision and is adopting it as 

proposed in § 1026.43(b)(1). For clarity, 

the Bureau has added comment 

43(b)(1)–1 explaining that the term 

‘‘covered transaction’’ restates the scope 

of the rule as described in § 1026.43(a). 

43(b)(2) 

TILA section 129C(a)(3) requires that 

‘‘[a] creditor shall determine the ability 

of the consumer to repay using a 

payment schedule that fully amortizes 

the loan over the term of the loan.’’ In 

implementing this provision, the 

proposed rule defined a ‘‘fully 

amortizing payment’’ as ‘‘a periodic 

payment of principal and interest that 

will fully repay the loan amount over 

the loan term.’’ The term ‘‘fully 

amortizing payment’’ is used in the 

general ‘‘payment calculation’’ 

provision in § 1026.43(c)(5)(i)(B), which 

requires the use of ‘‘[m]onthly, fully 

amortizing payments that are 

substantially equal.’’ The Bureau has 

determined that the definition of ‘‘fully 

amortizing payment’’ enables accurate 

implementation of the payment 

calculation process envisioned by the 

statute, and no comments focused on or 

questioned this definition. Accordingly, 

§ 1026.43(b)(2) is adopted as proposed. 

43(b)(3) 

TILA section 129C(a)(6)(D) provides 

that, for purposes of making the 

repayment ability determination 

required under TILA section 129C(a), 

the creditor must calculate the monthly 

payment on the mortgage obligation 

based on several assumptions, including 

that the monthly payment be calculated 

using the fully indexed rate at the time 

of loan closing, without considering the 

introductory rate. See TILA section 

129C(a)(6)(D)(iii). TILA section 

129C(a)(7) defines the term ‘‘fully 

indexed rate’’ as ‘‘the index rate 

prevailing on a residential mortgage 

loan at the time the loan is made plus 

the margin that will apply after the 

expiration of any introductory interest 

rates.’’ 

The term ‘‘fully indexed rate’’ 

appeared in proposed § 226.43(c)(5), 

which implemented TILA section 

129C(a)(6)(D)(iii) and provided the 

payment calculation rules for covered 

transactions. The term also appeared in 

proposed § 226.43(d)(5), which 

provided special rules for creditors that 

refinance a consumer from a nonstandard mortgage to a standard 

mortgage. 

Proposed § 226.43(b)(3) defined the 

term ‘‘fully indexed rate’’ as ‘‘the 

interest rate calculated using the index 

or formula at the time of consummation 

and the maximum margin that can 

apply at any time during the loan term.’’ 

This proposed definition was consistent 

with the statutory language of TILA 

sections 129C(a)(6)(D)(iii) and 

129C(a)(7), but revised certain text to 

provide clarity. First, for consistency 

with current Regulation Z and to 

facilitate compliance, the proposal 

replaced the phrases ‘‘at the time of the 

loan closing’’ in TILA section 

129C(a)(6)(D)(iii) and ‘‘at the time the 

loan is made’’ in TILA section 

129C(a)(7) with the phrase ‘‘at the time 

of consummation’’ for purposes of 

identifying the fully indexed rate. The 

Board interpreted these statutory 

phrases to have the same meaning as the 

phrase ‘‘at the time of consummation.’’ 

See current § 1026.2(a)(7), defining the 

term ‘‘consummation’’ for purposes of 

Regulation Z requirements as ‘‘the time 

that a consumer becomes contractually 

obligated on a credit transaction.’’ 

In requiring that the fully indexed rate 

be determined using the specified index 

at consummation, the Board was 

concerned that the possible existence of 

loans that use more than one index 

could complicate this determination. 

Given the increasing relevance of 

market indices, the Board solicited 

comment on whether loan products 

currently exist that base the interest rate 

on a specific index at consummation, 

but then base subsequent rate 

adjustments on a different index, and 

whether further guidance addressing 

how to calculate the fully indexed rate 

for such loan products would be 

needed. 

The proposed rule interpreted the 

statutory reference to the margin that 

will apply ‘‘after the expiration of any 

introductory interest rates’’ as a 

reference to the maximum margin that 

can apply ‘‘at any time during the loan 

term.’’ The Bureau agrees with this 

interpretation, because the statutory use 


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6450 Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 

92Previous to the passage of the Dodd-Frank Act, 

the annual percentage rate used for this 

determination was calculated the same way as for 

the rest of the Truth in Lending Act, pursuant to 

§ 1026.14. 

93See 2010 MDIA Interim Final Rule, 75 FR 

58470, 58484 (Sept. 24, 2010) (defines fully indexed 

rate as ‘‘the interest rate calculated using the index 

value and margin’’); see also 75 FR 81836 (Dec. 29, 

2010) (revising the MDIA Interim Final Rule). 

of the plural ‘‘rates’’ modified by the allinclusive term ‘‘any’’ clearly indicates 

not only that something more than the 

initial introductory rate is meant, but 

that ‘‘any’’ preliminary rate should be 

disregarded. In addition, the statutory 

term itself, ‘‘fully indexed rate,’’ appears 

to require such a reading. Referencing 

the entire loan term as the relevant 

period of time during which the creditor 

must identify the maximum margin that 

can occur under the loan makes the 

phrase ‘‘after the expiration of any 

introductory interest rates’’ unnecessary 

and allows for simplicity and 

consistency with new TILA section 

103(bb), the high cost mortgage 

provision. 

Because the proposal required that the 

creditor use the ‘‘maximum’’ margin 

that can apply when determining the 

fully indexed rate, the creditor would be 

required to take into account the largest 

margin that could apply under the terms 

of the legal obligation. The approach of 

using the maximum margin that can 

apply at any time during the loan term 

is consistent with the statutory language 

contained in TILA section 103(bb), as 

amended by section 1431 of the DoddFrank Act, which defines a high-cost 

mortgage. This statutory provision 

provides that, for purposes of the 

definition of a ‘‘high-cost mortgage’’ 

under HOEPA, for a mortgage with an 

interest rate that varies solely in 

accordance with an index, the annual 

percentage rate must be based on ‘‘the 

interest rate determined by adding the 

index rate in effect on the date of 

consummation of the transaction to the 

maximum margin permitted at any time 

during the loan agreement.’’ 92

Furthermore, although the Board was 

not aware of any current loan products 

that possess more than one margin that 

may apply over the loan term, the Board 

proposed this clarification to address 

the possibility that creditors may create 

products that permit different margins 

to take effect at different points 

throughout the loan term. The proposal 

solicited comment on this approach. 

The proposed definition of ‘‘fully 

indexed rate’’ was also generally 

consistent with the definition of ‘‘fully 

indexed rate’’ as used in the MDIA 

Interim Final Rule,93 and with the 

Federal banking agencies’ use of the 

term ‘‘fully indexed rate’’ in the 2006 

Nontraditional Mortgage Guidance and 

2007 Subprime Mortgage Statement. 

Proposed comment 43(b)(3)–1 noted 

that in some adjustable-rate 

transactions, creditors may set an initial 

interest rate that is not determined by 

the index or formula used to make later 

interest rate adjustments. This proposed 

comment explained that this initial rate 

charged to consumers will sometimes be 

lower than the rate would be if it were 

calculated using the index or formula at 

consummation (i.e., a ‘‘discounted 

rate’’); in some cases, this initial rate 

may be higher (i.e., a ‘‘premium rate’’). 

The proposed comment clarified that 

when determining the fully indexed rate 

where the initial interest rate is not 

determined using the index or formula 

for subsequent interest rate adjustments, 

the creditor must use the interest rate 

that would have applied had the 

creditor used such index or formula 

plus margin at the time of 

consummation. The proposed comment 

further clarified that this means, in 

determining the fully indexed rate, the 

creditor must not take into account any 

discounted or premium rate. (In 

addition, to facilitate compliance, this 

comment directed creditors to 

commentary that addresses payment 

calculations based on the greater of the 

fully indexed rate or ‘‘premium rate’’ for 

purposes of the repayment ability 

determination under proposed 

§ 226.43(c)). See final rule 

§ 1026.43(c)(5)(i)(A) and comment 

43(c)(5)(i)–2.) 

Proposed comment 43(b)(3)–1 differed 

from guidance on disclosure 

requirements in current comment 

17(c)(1)–10.i, which provides that in 

cases where the initial interest rate is 

not calculated using the index or 

formula for later rate adjustments, the 

creditor should disclose a composite 

annual percentage rate that reflects both 

the initial rate and the fully indexed 

rate. The Board believed the different 

approach taken in proposed comment 

43(b)(3)–1 was required by the statutory 

language and was appropriate in the 

present case where the purpose of the 

statute is to determine whether the 

consumer can repay the loan according 

to its terms, including any potential 

increases in required payments. TILA 

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

Proposed comment 43(b)(3)–2 further 

clarified that if the contract provides for 

a delay in the implementation of 

changes in an index value or formula, 

the creditor need not use the index or 

formula in effect at consummation, and 

provides an illustrative example. This 

proposed comment was consistent with 

current guidance in Regulation Z 

regarding the use of the index value at 

the time of consummation where the 

contract provides for a delay. See 

comments 17(c)(1)–10.i and 

18(s)(2)(iii)(C)–1, which address the 

fully indexed rate for purposes of 

disclosure requirements. 

Proposed comment 43(b)(3)–3 

explained that the creditor must 

determine the fully indexed rate 

without taking into account any 

periodic interest rate adjustment caps 

that may limit how quickly the fully 

indexed rate may be reached at any time 

during the loan term under the terms of 

the legal obligation. As the proposal 

noted, the guidance contained in 

proposed comment 43(b)(3)–3 differed 

from guidance contained in current 

comment 17(c)(1)–10.iii, which states 

that, when disclosing the annual 

percentage rate, creditors should give 

effect to periodic interest rate 

adjustment caps. 

Nonetheless, the Board believed the 

approach in proposed comment 

43(b)(3)–3 was consistent with, and 

required by, the statutory language that 

states that the fully indexed rate must be 

determined without considering any 

introductory rate and by using the 

margin that will apply after expiration 

of any introductory interest rates. See 

TILA section 129C(a)(6)(D)(iii) and (7). 

In addition, the Board noted that the 

proposed definition of fully indexed 

rate, and its use in the proposed 

payment calculation rules, was designed 

to assess whether the consumer has the 

ability to repay the loan according to its 

terms. TILA section 129B(a)(2), 15 U.S.C 

1639b(a)(2). This purpose differs from 

the principal purpose of disclosure 

requirements, which is to help ensure 

that consumers avoid the uninformed 

use of credit. TILA section 102(a), 15 

U.S.C. 1601(a). Furthermore, the 

guidance contained in proposed 

comment 43(b)(3)–3 was consistent with 

the Federal banking agencies’ use of the 

term fully indexed rate in the 2006 

Nontraditional Mortgage Guidance and 

2007 Subprime Mortgage Statement. 

Proposed comment 43(b)(3)–4 

clarified that when determining the 

fully indexed rate, a creditor may 

choose, in its sole discretion, to take 

into account the lifetime maximum 

interest rate provided under the terms of 

the legal obligation. This comment 

explained, however, that where the 

creditor chooses to use the lifetime 

maximum interest rate, and the loan 

agreement provides a range for the 

maximum interest rate, the creditor 

must use the highest rate in that range 

as the maximum interest rate. In 

allowing creditors to use the lifetime 

maximum interest rate provided under 


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94 73 FR 44522 (July 30, 2008). 

the terms of the obligation, the Board 

was apparently interested in simplifying 

compliance and benefiting consumers 

by encouraging reasonable lifetime 

interest rate caps. In doing so, the Board 

was apparently reading its proposed 

definition of fully indexed rate to allow 

the maximum margin that can apply at 

any time during the loan term to refer 

to the maximum margin as determined 

at consummation. In other words, when 

the index value is determined at 

consummation, the maximum margin 

that can apply at any time during the 

loan term will be the difference between 

the lifetime interest rate cap and that 

index value. Consequently, adding the 

index value at consummation to that 

maximum margin, as required by the 

fully indexed rate definition, will yield 

the lifetime interest rate cap as the fully 

indexed rate. 

Commenters generally did not focus 

specifically on the definition of ‘‘fully 

indexed rate’’ and associated 

commentary proposed by the Board, or 

provide examples of loans with more 

than one index or more than one 

margin. An organization representing 

state bank regulators supported the use 

of the maximum margin that can apply 

at any time during the loan term, 

suggesting that it would prevent 

evasion. (Some commenter groups did 

urge the Bureau to use its adjustment 

authority to require creditors to use a 

rate higher than the fully indexed rate 

in assessing a consumer’s ability to 

repay; these comments are discussed 

below in the section-by-section analysis 

of § 1026.43(c)(5)(i)). The Bureau is 

adopting the rule and commentary 

largely as proposed, with some 

modifications for clarity. Specifically, 

the Bureau decided to include language 

in the definition that will make clear 

that the index used in determining the 

fully indexed rate is the index that will 

apply after the loan is recast, so that any 

index that might be used earlier in 

determining an initial or intermediate 

rate would not be used. This new 

language is included for clarification 

only, and does not change the intended 

meaning of the proposed definition. 

In the proposed rule, the Board noted 

that the statutory construct of the 

payment calculation rules, and the 

requirement to calculate payments 

based on the fully indexed rate, apply 

to all loans that are subject to the 

ability-to-repay provisions, including 

loans that do not base the interest rate 

on an index and therefore, do not have 

a fully indexed rate. Specifically, the 

statute states that ‘‘[f]or purposes of 

making any determination under this 

subsection, a creditor shall calculate the 

monthly payment amount for principal 

and interest on any residential mortgage 

loan by assuming’’ several factors, 

including the fully indexed rate, as 

defined in the statute (emphasis added). 

See TILA section 129C(a)(6)(D). The 

statutory definition of ‘‘residential 

mortgage loan’’ includes loans with 

variable-rate features that are not based 

on an index or formula, such as steprate mortgages. See TILA section 

103(cc); see also proposed § 226.43(a), 

which addressed the proposal’s scope, 

and proposed § 226.43(b)(1), which 

defined ‘‘covered transaction.’’ 

However, because step-rate mortgages 

do not have a fully indexed rate, it was 

unclear what interest rate the creditor 

should assume when calculating 

payment amounts for the purpose of 

determining the consumer’s ability to 

repay the covered transaction. 

As discussed above, the proposal 

interpreted the statutory requirement to 

use the ‘‘margin that can apply at any 

time after the expiration of any 

introductory interest rates’’ to mean that 

the creditor must use the ‘‘maximum 

margin that can apply at any time 

during the loan term’’ when 

determining the fully indexed rate. 

Accordingly, consistent with this 

approach, the proposal clarified in 

proposed comment 43(b)(3)–5 that 

where there is no fully indexed rate 

because the interest rate offered in the 

loan is not based on, and does not vary 

with, an index or formula, the creditor 

must use the maximum interest rate that 

may apply at any time during the loan 

term. Proposed comment 43(b)(3)–5 

provided illustrative examples of how to 

determine the maximum interest rate for 

a step-rate and a fixed-rate mortgage. 

The Board believed this approach was 

appropriate because the purpose of 

TILA section 129C is to require creditors 

to assess whether the consumer can 

repay the loan according to its terms, 

including any potential increases in 

required payments. TILA section 

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

Requiring creditors to use the maximum 

interest rate would help to ensure that 

consumers could repay their loans. 

However, the Board was also concerned 

that by requiring creditors to use the 

maximum interest rate in a step-rate 

mortgage, the monthly payments used to 

determine the consumer’s repayment 

ability might be overstated and 

potentially restrict credit availability. 

Therefore, the Board solicited comment 

on this approach, and whether authority 

under TILA sections 105(a) and 129B(e) 

should be used to provide an exception 

for step-rate mortgages, possibly 

requiring creditors to use the maximum 

interest rate that occurs in only the first 

5 or 10 years, or some other appropriate 

time horizon. 

The Bureau received few comments 

on the use of the maximum interest rate 

that may apply at any time during the 

loan term for step-rate mortgages. A 

consumer group and a regulatory reform 

group stated that this method was better 

and more protective of consumers than 

using a seven- or ten-year horizon. An 

organization representing state bank 

regulators suggested that the Bureau use 

a five-year horizon, provided that the 

loan has limits on later rate increases. 

An industry trade association suggested 

that the maximum rate only be applied 

to the balance remaining when that 

maximum rate is reached. 

The Bureau believes that the 

proposal’s method of using the 

maximum interest rate that may apply at 

any time during the loan term for steprate mortgages is appropriate. This 

approach most closely approximates the 

statutorily required fully indexed rate 

because it employs the highest rate 

ascertainable at consummation, as does 

the fully indexed rate, and it applies 

that rate to the entire original principal 

of the loan, as the calculation in 

§ 1026.43(c)(5)(i) does with the fully 

indexed rate. In addition, this method 

most effectively ensures the consumer’s 

ability to repay the loan. 

For the reasons stated above, 

§ 1026.43(b)(3) is adopted substantially 

as proposed, with the clarification 

discussed above specifying that the 

index used in determining the fully 

indexed rate is the index that will apply 

after the loan is recast. Issues regarding 

the use of the fully indexed rate in the 

payment calculations required by 

§ 1026.43(c)(5) are discussed in the 

section-by-section analysis of that 

section below. 

43(b)(4) 

The Dodd-Frank Act added TILA 

section 129C(a)(6)(D)(ii)(II), which 

provides that a creditor making a 

balloon-payment loan with an APR at or 

above certain thresholds must 

determine ability to repay ‘‘using the 

contract’s repayment schedule.’’ The 

thresholds required by the statute are 

1.5 or more percentage points above the 

average prime offer rate (APOR) for a 

comparable transaction for a first lien, 

and 3.5 or more percentage points above 

APOR for a subordinate lien. These 

thresholds are the same as those used in 

the Board’s 2008 HOEPA Final Rule 94

to designate a new category of ‘‘higherpriced mortgage loans’’ (HPMLs), which 

was amended by the Board’s 2011 

Jumbo Loans Escrows Final Rule to 


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95See 76 FR 11319 (Mar. 2, 2011). 

96See 73 FR 44537 (July 30, 2008) 

97 Id. 

include a separate threshold for jumbo 

loans for purposes of certain escrows 

requirements.95 Implementing these 

thresholds for use with the payment 

underwriting determination for balloonpayment mortgages, the proposed rule 

defined a ‘‘higher-priced covered 

transaction’’ as one in which the annual 

percentage rate (APR) ‘‘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 a first-lien covered 

transaction, or by 3.5 or more 

percentage points for a subordinate-lien 

covered transaction.’’ As explained 

further below and provided for in the 

statute, the designation of certain 

covered transactions as higher-priced 

affects the ability-to-repay 

determination for balloon-payment 

mortgages, and requires that those 

higher-priced transactions be analyzed 

using the loan contract’s full repayment 

schedule, including the balloon 

payment. § 1026.43(c)(5)(ii)(A)(2). 

Proposed comment 43(b)(4)–1 

provided guidance on the term ‘‘average 

prime offer rate.’’ Proposed comment 

43(b)(4)–2 stated that the table of 

average prime offer rates published by 

the Board would indicate how to 

identify the comparable transaction for 

a higher-priced covered transaction. 

Proposed comment 43(b)(4)–3 clarified 

that a transaction’s annual percentage 

rate is compared to the average prime 

offer rate as of the date the transaction’s 

interest rate is set (or ‘‘locked’’) before 

consummation. This proposed comment 

also explained that sometimes a creditor 

sets the interest rate initially and then 

resets it at a different level before 

consummation, and clarified that in 

these cases, the creditor should use the 

last date the interest rate is set before 

consummation. 

The Board explained in its proposed 

rule that it believed the ability-to-repay 

requirements for higher-priced balloonpayment loans was meant to apply to 

the subprime market, but that use of the 

annual percentage rate could lead to 

prime loans being exposed to this test. 

For this reason, the Board was 

concerned that the statutory formula for 

a higher-priced covered transaction 

might be over-inclusive. Accordingly, 

the Board solicited comment on 

whether the ‘‘transaction coverage rate’’ 

(TCR) should be used for this 

determination, instead of the annual 

percentage rate. 76 FR 27412. The TCR 

had previously been proposed in 

conjunction with a more inclusive 

version of the APR, in order to avoid 

having the more inclusive, hence 

higher, APRs trigger certain 

requirements unnecessarily. The TCR 

includes fewer charges, and the Board’s 

2011 Escrows Proposal proposed to use 

it in the threshold test for determining 

application of those requirements. 76 FR 

11598, 11626–11627 (Mar. 2, 2011). 

The only comment substantively 

discussing the possible substitution of 

the TCR for the APR was strongly 

opposed to the idea, stating that it 

would create unnecessary compliance 

difficulty and costs. The Bureau has 

determined that possible transition to a 

TCR standard will implicate several 

rules and is not appropriate at the 

present time. However, the issue will be 

considered further as part of the 

Bureau’s TILA/RESPA rulemaking. See 

77 FR 51116, 51126 (Aug. 23, 2012). 

The Board also solicited comment on 

whether or not to provide a higher 

threshold for jumbo balloon-payment 

mortgages or for balloon-payment 

mortgages secured by a residence that is 

not the consumer’s principal dwelling, 

e.g., a vacation home. 76 FR 27412. The 

Board requested this information due to 

its belief that higher interest rates 

charged for these loans might render 

them unavailable without the 

adjustment. The margin above APOR 

suggested for first-lien jumbo balloonpayment mortgages was 2.5 percentage 

points. 

Two industry commenters supported 

the higher threshold for jumbo loans, 

arguing that the current thresholds 

would interfere with credit accessibility. 

One of these commenters also stated 

that the higher threshold should be 

available for all balloon-payment 

mortgages. No commenters discussed 

the non-principal-dwelling threshold. 

Many other commenters objected 

strongly to the statutory requirement, 

implemented in the proposed rule, that 

the balloon payment be considered in 

applying the ability-to-repay 

requirements to higher-priced covered 

transaction balloon-payment mortgages. 

These industry commenters felt that the 

percentage point thresholds were too 

low, and that many loans currently 

being made would become unavailable. 

They did not, however, submit 

sufficient data to help the Bureau assess 

these claims. Other commenters, 

including several consumer protection 

advocacy organizations, argued that the 

higher-priced rule would be helpful in 

ensuring consumers’ ability to repay 

their loans. 

The Bureau has evaluated the 

proposed definition of ‘‘higher-priced 

covered transaction’’ not only in 

relation to its use in the payment 

determination for balloon-payment 

mortgages, but also in the light of its 

application in other provisions of the 

final rule. For example, as discussed 

below, the final rule varies the strength 

of the presumption of compliance for 

qualified mortgages. A qualified 

mortgage designated as a higher-priced 

covered transaction will be presumed to 

comply with the ability-to repayprovision at § 1026.43(c)(1), but will not 

qualify for the safe harbor provision. See 

§ 1026.43(e)(1)(ii) and (i). 

Specifically, the Bureau has 

considered whether to adopt a different 

threshold to define high price mortgage 

loans for jumbo loans than for other 

loans. The Bureau notes that the Board 

expressly addressed this issue in its 

2008 HOEPA Final Rule and concluded 

not to do so. The Board explained that 

although prime jumbo loans have 

always had somewhat higher rates than 

prime conforming loans, the spread has 

been quite volatile.96 The Board 

concluded that it was sounder to err on 

the side of being over-inclusive than to 

set a higher threshold for jumbo loans 

and potentially fail to include subprime 

jumbo loans.97 The Bureau is persuaded 

by the Board’s reasoning. 

The Bureau recognizes that in the 

Dodd-Frank Act Congress, in requiring 

creditors to establish escrows accounts 

for certain transactions and in requiring 

appraisals for certain transactions based 

upon the interest rate of the 

transactions, did establish a separate 

threshold for jumbo loans. The Bureau 

is implementing that separate threshold 

in its 2013 Escrows Final Rule which is 

being issued contemporaneously with 

this final rule. However, the Bureau also 

notes that in the ability-to-repay 

provision of the Dodd-Frank Act, 

Congress mandated underwriting rules 

for balloon-payment mortgages which 

vary based upon the pricing of the loan, 

and in doing so Congress followed the 

thresholds adopted by the Board in its 

2008 HOEPA Final Rule and did not 

add a separate threshold for jumbo 

loans. The fact that the Act uses the 

Board’s criteria in the ability to repay 

context lends further support to the 

Bureau’s decision to use those criteria as 

well in defining higher-priced loans 

under the final rule. 

Accordingly, the Bureau is not 

providing for a higher threshold for 

jumbo or non-principal dwelling 

balloon-payment mortgages at this time. 

In regard to the possibility of a higher 

threshold for non-principal dwellings 

such as vacation homes, the Bureau 

understands that such products have 

historically been considered to be at 

higher risk of default than loans on 


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98 Dodd-Frank Act section 1411(a)(2), TILA 

section 129C(a)(6)(D)(i). 

principal dwellings. Therefore, any 

difference in rates is likely driven by the 

repayment risk associated with the 

product, and a rule meant to ensure a 

consumer’s ability to repay the loan 

should not provide an exemption under 

these circumstances. And further, the 

Bureau did not receive and is not aware 

of any data supporting such an 

exemption. 

The Bureau does not believe that 

these decisions regarding jumbo and 

non-principal-dwelling balloonpayment mortgages are likely to create 

any credit accessibility problems. In this 

final rule at § 1026.43(f), the Bureau is 

adopting a much wider area in which 

institutions that provide credit in rural 

or underserved areas may originate 

qualified mortgages that are balloonpayment loans than did the proposed 

rule. Because these are the areas in 

which balloon-payment loans are 

considered necessary to preserve access 

to credit, and higher-priced balloonpayment mortgages in these areas can 

meet the criteria for a qualified mortgage 

and thus will not have to include the 

balloon payment in the ability-to-repay 

evaluation, access to necessary balloonpayment mortgages will not be reduced. 

Accordingly, § 1026.43(b)(4) is 

adopted as proposed. The associated 

commentary is amended with revisions 

to update information and citations. 

43(b)(5) 

The proposed rule defined ‘‘loan 

amount’’ as ‘‘the principal amount the 

consumer will borrow as reflected in the 

promissory note or loan contract.’’ This 

definition implemented the statutory 

language requiring that the monthly 

payment be calculated assuming that 

‘‘the loan proceeds are fully disbursed 

on the date of consummation of the 

loan.’’ Dodd-Frank Act section 

1411(a)(2), TILA section 

129C(a)(6)(D)(i). The term ‘‘loan 

amount’’ was used in the proposed 

definition of ‘‘fully amortizing 

payment’’ in § 226.43(b)(2), which was 

then used in the general ‘‘payment 

calculation’’ at § 226.43(c)(5)(i)(B). The 

payment calculation required the use of 

payments that pay off the loan amount 

over the actual term of the loan. 

The statute further requires that 

creditors assume that the loan amount is 

‘‘fully disbursed on the date of 

consummation of the loan.’’ See TILA 

Section 129C(a)(6)(D)(i). The Board 

recognized that some loans do not 

disburse the entire loan amount to the 

consumer at consummation, but may, 

for example, provide for multiple 

disbursements up to an amount stated 

in the loan agreement. See current 

§ 1026.17(c)(6), discussing multipleadvance loans and comment 17(c)(6)–2 

and –3. In these cases, the loan amount, 

as reflected in the promissory note or 

loan contract, does not accurately reflect 

the amount disbursed at consummation. 

Thus, to reflect the statutory 

requirement that the creditor assume the 

loan amount is fully disbursed at 

consummation, the Board clarified that 

creditors must use the entire loan 

amount as reflected in the loan contract 

or promissory note, even where the loan 

amount is not fully disbursed at 

consummation. Proposed comment 

43(b)(5)–1 provided an illustrative 

example and stated that generally, 

creditors should rely on § 1026.17(c)(6) 

and associated commentary regarding 

treatment of multiple-advance and 

construction loans that would be 

covered by the ability-to-repay 

requirements (i.e., loans with a term 

greater than 12 months). See 

§ 1026.43(a)(3) discussing scope of 

coverage and term length. 

The Board specifically solicited 

comment on whether further guidance 

was needed regarding determination of 

the loan amount for loans with multiple 

disbursements. The Bureau did not 

receive comments on the definition of 

‘‘loan amount’’ or its application to 

loans with multiple disbursements. The 

Bureau believes that the loan amount for 

multiple disbursement loans that are 

covered transactions must be 

determined assuming that ‘‘the loan 

proceeds are fully disbursed on the date 

of consummation of the loan’’ 98 as 

required by the statute and the rule, and 

explained in comment 43(b)(5)–1. 

Accordingly, the Bureau is adopting 

§ 1026.43(b)(5) and associated 

commentary as proposed. 

43(b)(6) 

The interchangeable phrases ‘‘loan 

term’’ and ‘‘term of the loan’’ appear in 

the ability-to-repay and qualified 

mortgage provisions of TILA, with no 

definition. See TILA section 129C(c)(3), 

129C(a)(6)(D)(ii), 129C(b)(2)(A)(iv) and 

(v); 15 U.S.C. 1639c(c)(3), 

1639c(a)(6)(D)(ii), 1639c(b)(2)(A)(iv) and 

(v). The proposed rule defined ‘‘loan 

term’’ as ‘‘the period of time to repay the 

obligation in full.’’ Proposed comment 

43(b)(6)–1 clarified that the loan term is 

the period of time it takes to repay the 

loan amount in full, and provided an 

example. The term is used in 

§ 1026.43(b)(2), the ‘‘fully amortizing 

payment’’ definition, which is then used 

in § 1026.43(c)(5)(i), the payment 

calculation general rule. It is also used 

in the qualified mortgage payment 

calculation at § 1026.43(e)(2)(iv). The 

Bureau did not receive any comments 

on this definition, and considers it to be 

an accurate and appropriate 

implementation of the statutory 

language. Accordingly, proposed 

§ 1026.43(b)(6) is adopted as proposed. 

43(b)(7) 

The definition of ‘‘maximum loan 

amount’’ and the calculation for which 

it is used implement the requirements 

regarding negative amortization loans in 

new TILA section 129C(a)(6)(C) and (D). 

The statute requires that a creditor ‘‘take 

into consideration any balance increase 

that may accrue from any negative 

amortization provision.’’ 

The ‘‘maximum loan amount’’ is 

defined in the proposed rule as 

including the loan balance and any 

amount that will be added to the 

balance as a result of negative 

amortization assuming the consumer 

makes only minimum payments and the 

maximum interest rate is reached at the 

earliest possible time. The ‘‘maximum 

loan amount’’ is used to determine a 

consumer’s ability to repay for negative 

amortization loans under 

§ 1026.43(c)(5)(ii)(C) by taking into 

account any loan balance increase that 

may occur as a result of negative 

amortization. The term ‘‘maximum loan 

amount’’ is also used for negative 

amortization loans in the ‘‘refinancing 

of non-standard mortgages’’ provision, 

at § 1026.43(d)(5)(i)(C)(3). The proposed 

rule included commentary on how to 

calculate the maximum loan amount, 

with examples. See comment 43(b)(7)– 

1 through –3. 

The Bureau did not receive any 

comments on this definition and 

considers it to be an accurate and 

appropriate implementation of the 

statute. Accordingly, § 1026.43(b)(7) and 

associated commentary are adopted as 

proposed. 

43(b)(8) 

TILA section 129C(a)(1) and (3), as 

added by section 1411 of the DoddFrank Act, requires creditors to consider 

and verify mortgage-related obligations 

as part of the ability-to-repay 

determination ‘‘according to [the loan’s] 

terms, and all applicable taxes, 

insurance (including mortgage 

guarantee insurance), and assessments.’’ 

TILA section 129C(a)(2) provides that 

consumers must have ‘‘a reasonable 

ability to repay the combined payments 

of all loans on the same dwelling 

according to the terms of those loans 

and all applicable taxes, insurance 

(including mortgage guarantee 

insurance), and assessments.’’ Although 

the Dodd-Frank Act did not establish or 


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6454 Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 

define a single, collective term, the 

foregoing requirements recite ongoing 

obligations that are substantially similar 

to the definition of ‘‘mortgage-related 

obligation’’ used elsewhere in 

Regulation Z. Section 1026.34(a)(4)(i), 

which was added by the 2008 HOEPA 

Final Rule, defines mortgage-related 

obligations as expected property taxes, 

premiums for mortgage-related 

insurance required by the creditor as set 

forth in the relevant escrow provisions 

of Regulation Z, and similar expenses. 

Comment 34(a)(4)(i)–1 clarifies that, for 

purposes of § 1026.34(a)(4)(i), similar 

expenses include homeowners 

association dues and condominium or 

cooperative fees. Section 

1026.35(b)(3)(i), which addresses 

escrows, states that ‘‘premiums for 

mortgage-related insurance required by 

the creditor, [include] insurance against 

loss of or damage to property, or against 

liability arising out of the ownership or 

use of the property, or insurance 

protecting the creditor against the 

consumer’s default or other credit loss.’’ 

Under the Board’s proposed 

§ 226.43(b)(8), ‘‘mortgage-related 

obligations’’ was defined to mean 

property taxes; mortgage related 

insurance premiums required by the 

creditor as set forth in proposed 

§ 226.45(b)(1); homeowners association, 

condominium, and cooperative fees; 

ground rent or leasehold payments; and 

special assessments. The Board’s 

proposed definition was substantially 

similar to the definition under 

§ 1026.34(a)(4)(i), with three 

clarifications. First, the proposed 

definition of mortgage-related 

obligations would have included a 

reference to ground rent or leasehold 

payments, which are payments made to 

the real property owner or leaseholder 

for use of the real property. Second, the 

proposed definition would have 

included a reference to ‘‘special 

assessments.’’ Proposed comment 

43(b)(8)–1 would have clarified that 

special assessments include, for 

example, assessments that are imposed 

on the consumer at or before 

consummation, such as a one-time 

homeowners association fee that will 

not be paid by the consumer in full at 

or before consummation. Third, 

mortgage-related obligations would have 

referenced proposed § 226.45(b)(1), 

where the Board proposed to recodify 

the existing escrow requirement for 

higher-priced mortgage loans, to include 

mortgage-related insurance premiums 

required by the creditor, such as 

insurance against loss of or damage to 

property, or against liability arising out 

of the ownership or use of the property, 

or insurance protecting the creditor 

against the consumer’s default or other 

credit loss. The Board solicited 

comment on how to address any issues 

that may arise in connection with 

homeowners association transfer fees 

and costs associated with loans for 

energy efficient improvements. 

Proposed comment 43(b)(8)–1 would 

have clarified further that mortgagerelated obligations include mortgagerelated insurance premiums only if 

required by the creditor. This comment 

would have explained that the creditor 

need not include premiums for 

mortgage-related insurance that the 

creditor does not require, such as 

earthquake insurance or credit 

insurance, or fees for optional debt 

suspension and debt cancellation 

agreements. To facilitate compliance, 

this comment would have referred to 

commentary associated with proposed 

§ 226.43(c)(2)(v), which sets forth the 

requirement to take into account any 

mortgage-related obligations for 

purposes of the repayment ability 

determination required under proposed 

§ 226.43(c). 

Industry commenters and consumer 

advocates generally supported the 

Board’s proposed definition of 

mortgage-related obligations. One 

industry commenter opposed including 

community transfer fees, which are 

deed-based fees imposed upon the 

transfer of the property. This commenter 

was concerned that subjecting these fees 

to Federal law might affect existing 

contracts, deeds, and covenants related 

to these fees, which are subject to State 

and local regulation, as well as common 

law regarding the transfer of real 

property. The commenter also asked 

that special assessments not fall under 

the definition of mortgage-related 

obligations. The commenter 

recommended that, if special 

assessments are included, creditors be 

required to consider only current 

special assessments, not future special 

assessments. The commenter noted that, 

while common assessments should be 

included in the definition of mortgagerelated obligations, the Bureau should 

provide guidance to creditors on the 

substance of questionnaires seeking 

information from third parties about 

mortgage-related obligations. 

Certain consumer advocates suggested 

that voluntary insurance premiums be 

included in the definition of mortgagerelated obligations. One consumer 

advocate explained that premiums such 

as these are technically voluntary, but 

many consumers believe them to be 

required, or have difficulty cancelling 

them if they choose to cancel them. 

Community advocates and several 

industry commenters also 

recommended that homeowners 

association dues, and similar charges, be 

included in the definition of mortgagerelated obligations. They argued that 

such a requirement would further 

transparency in the mortgage loan 

origination process and would help 

ensure that consumers receive only 

credit they can reasonably expect to 

repay. 

For the reasons discussed below, the 

Bureau concludes that property taxes, 

certain insurance premiums required by 

the creditor, obligations to community 

governance associations, such as 

cooperative, condominium, and 

homeowners associations, ground rent, 

and lease payments should be included 

in the definition of mortgage-related 

obligations. These obligations are 

incurred in connection with the 

mortgage loan transaction but are in 

addition to the obligation to repay 

principal and interest. Thus, the cost of 

these obligations should be considered 

with the obligation to repay principal 

and interest for purposes of determining 

a consumer’s ability to repay. Further, 

the Bureau believes that the word 

‘assessments’ in TILA section 129C is 

most appropriately interpreted to refer 

to all obligations imposed on consumers 

in connection with ownership of the 

dwelling or real property, such as 

ground rent, lease payments, and, as 

discussed in detail below, obligations to 

community governance associations, 

whether denominated as association 

dues, special assessments, or otherwise. 

While the provision adopted by the 

Bureau is substantially similar to the 

provision proposed, the Bureau was 

persuaded by the comment letters that 

additional clarity and guidance is 

required. The Bureau is especially 

sensitive to the fact that many of the 

loans that will be subject to the abilityto-repay rules may be made by small 

institutions, which are often unable to 

devote substantial resources to analysis 

of regulatory compliance. 

To address the concerns and feedback 

raised in the comment letters, the 

Bureau has revised § 1026.43(b)(8) and 

related commentary in two ways. First, 

the language of § 1026.43(b)(8) is being 

modified to add additional clarity. As 

adopted, § 1026.43(b)(8) refers to 

premiums and similar charges identified 

in § 1026.4(b)(5), (7), (8), or (10), if 

required by the creditor, instead of the 

proposed language, which referred to 

‘‘mortgage-related insurance.’’ Second, 

the commentary is being significantly 

expanded to provide additional 

clarification and guidance. 

As adopted, § 1026.43(b)(8) defines 

‘‘mortgage-related obligations’’ to mean 


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property taxes; premiums and similar 

charges identified in § 1026.4(b)(5), (7), 

(8), or (10) that are required by the 

creditor; fees and special assessments 

imposed by a condominium, 

cooperative, or homeowners association; 

ground rent; and leasehold payments. 

As proposed, comment 43(b)(8)–1 

discussed all components of the 

proposed definition. To provide further 

clarity, the final rule splits the content 

of proposed comment 43(b)(8)–1 into 

four separate comments, each of which 

provides additional guidance. As 

adopted by the Bureau, comment 

43(b)(8)–1 contains general guidance 

and a cross-reference to 

§ 1026.43(c)(2)(v), which contains the 

requirement to take into account any 

mortgage-related obligations for 

purposes of determining a consumer’s 

ability to repay. 

The multitude of requests for 

additional guidance and clarification 

suggests that additional clarification of 

the meaning of ‘‘property tax’’ is 

needed. Comment 43(b)(8)–2 further 

clarifies that § 1026.43(b)(8) includes 

obligations that are functionally 

equivalent to property taxes, even if 

such obligations follow a different 

naming convention. For example, 

governments may establish independent 

districts with the authority to impose 

recurring levies on properties within the 

district to fund a special purpose, such 

as a local development bond district, 

water district, or other public purpose. 

These recurring levies may have a 

variety of names, such as taxes, 

assessments, or surcharges. Comment 

43(b)(8)–2 clarifies that obligations such 

as these are property taxes based on the 

character of the obligation, as opposed 

to the name of the obligation, and 

therefore are mortgage-related 

obligations. 

Most comments supported the 

inclusion of insurance premiums in the 

ability-to-repay determination. 

However, the Bureau believes that some 

modifications to the proposed 

‘‘mortgage-related insurance premium’’ 

language are appropriate. The Bureau is 

persuaded that additional clarification 

and guidance is important, and the 

Bureau is especially sensitive to 

concerns related to regulatory 

complexity. The Bureau has determined 

that the proposed language should be 

clarified by revising the text to refer to 

the current definition of finance charge 

under § 1026.4. The components of the 

finance charge are long-standing parts of 

Regulation Z. Explicitly referring to 

existing language should facilitate 

compliance. Therefore, § 1026.43(b)(8) 

defines mortgage-related obligations to 

include all premiums or other charges 

related to protection against a 

consumer’s default, credit loss, 

collateral loss, or similar loss as 

identified in § 1026.4(b)(5), (7), (8), or 

(10) except, as explained above, those 

premiums or charges that that are not 

required by the creditor. Comment 

43(b)(8)–3 also contains illustrative 

examples of this definition. For 

example, if Federal law requires flood 

insurance to be obtained in connection 

with the mortgage loan, the flood 

insurance premium is a mortgagerelated obligation for purposes of 

§ 1026.43(b)(8). 

Several commenters stated that 

insurance premiums and similar charges 

should be included in the determination 

even if the creditor does not require 

them in connection with the loan 

transaction. The Bureau has carefully 

considered these arguments, but has 

determined that insurance premiums 

and similar charges should not be 

considered mortgage-related obligations 

if such premiums and charges are not 

required by the creditor and instead 

have been voluntarily purchased by the 

consumer. The Bureau acknowledges 

that obligations such as these are 

usually paid from a consumer’s monthly 

income and, in a sense, affect a 

consumer’s ability to repay. But the 

consumer is free to cancel recurring 

obligations such as these at any time, 

provided they are truly voluntary. Thus, 

they are not ‘‘obligations’’ in the sense 

required by section 129C(a)(3) of TILA. 

The Bureau shares the concern raised by 

several commenters that unscrupulous 

creditors may mislead consumers into 

believing that these charges are not 

optional or cannot be cancelled. 

However, the Bureau does not believe 

that altering the ability-to-repay 

calculation for all is the appropriate 

method for combatting the harmful 

actions of a few. The Bureau believes 

that the better course of action is to 

exclude such premiums and charges 

from the definition of mortgage-related 

obligations only if they are truly 

voluntary, and is confident that 

violations of this requirement will be 

apparent in specific cases from the facts. 

Also, in the scenarios described by 

commenters where consumers are 

misled into believing that such charges 

are required, the premium or charge 

would not be voluntary for purposes of 

the definition of finance charge under 

§ 1026.4(d), and would therefore be a 

mortgage-related obligation for the 

purposes of § 1026.43(b)(8). Therefore, 

comment 43(b)(8)–3 clarifies that 

insurance premiums and similar charges 

identified in § 1026.4(b)(5), (7), (8), or 

(10) that are not required by the creditor 

and that the consumer purchases 

voluntarily are not mortgage-related 

obligations for purposes of 

§ 1026.43(b)(8). For example, if a 

creditor does not require earthquake 

insurance to be obtained in connection 

with the mortgage loan, but the 

consumer voluntarily chooses to 

purchase such insurance, the 

earthquake insurance premium is not a 

mortgage-related obligation for purposes 

of § 1026.43(b)(8). Or, if a creditor 

requires a minimum amount of coverage 

for homeowners’ insurance and the 

consumer voluntarily chooses to 

purchase a more comprehensive amount 

of coverage, the portion of the premium 

allocated to the minimum coverage is a 

mortgage-related obligation for the 

purposes of § 1026.43(b)(8), while the 

portion of the premium allocated to the 

more comprehensive coverage 

voluntarily purchased by the consumer 

is not a mortgage-related obligation for 

the purposes of § 1026.43(b)(8). 

However, if the consumer purchases 

non-required insurance or similar 

coverage at consummation without 

having requested the specific nonrequired insurance or similar coverage 

and without having agreed to the 

premium or charge for the specific nonrequired insurance or similar coverage 

prior to consummation, the premium or 

charge is not voluntary for purposes of 

§ 1026.43(b)(8) and is a mortgage-related 

obligation. 

Several commenters supported the 

inclusion of mortgage insurance in the 

definition of mortgage-related 

obligations. The Bureau also has 

received several informal requests for 

guidance regarding the meaning of the 

term ‘‘mortgage insurance’’ in the 

context of certain disclosures required 

by Regulation Z. The Bureau has 

decided to clarify this issue with respect 

to the requirements of § 1026.43. Thus, 

comment 43(b)(8)–4 clarifies that 

§ 1026.43(b)(8) includes all premiums or 

similar charges for coverage protecting 

the creditor against the consumer’s 

default or other credit loss in the 

determination of mortgage-related 

obligations, whether denominated as 

mortgage insurance, guarantee 

insurance, or otherwise, as determined 

according to applicable State or Federal 

law. For example, monthly ‘‘private 

mortgage insurance’’ payments paid to a 

non-governmental entity, annual 

‘‘guarantee fee’’ payments required by a 

Federal housing program, and a 

quarterly ‘‘mortgage insurance’’ 

payment paid to a State agency 

administering a housing program are all 

mortgage-related obligations for 

purposes of § 1026.43(b)(8). Comment 


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99See Comm. on Fin. Servs., Report on H.R. 1728, 

Mortgage Reform and Anti-Predatory Lending Act, 

H. Rept. 94, 111th Cong., at 52 (2009). 

43(b)(8)–4 also clarifies that 

§ 1026.43(b)(8) includes these charges in 

the definition of mortgage-related 

obligations if the creditor requires the 

consumer to pay them, even if the 

consumer is not legally obligated to pay 

the charges under the terms of the 

insurance program. Comment 43(b)(8)–4 

also contains several other illustrative 

examples. 

Several comment letters stressed the 

importance of including homeowners 

association dues and similar obligations 

in the determination of ability to repay. 

These letters noted that, during the 

subprime crisis, the failure to account 

for these obligations led to many 

consumers qualifying for mortgage loans 

that they could not actually afford. The 

Bureau agrees with these assessments. 

Recurring financial obligations payable 

to community governance associations, 

such as homeowners association dues, 

should be taken into consideration in 

determining whether a consumer has 

the ability to repay the obligation. While 

several comment letters identified 

practical problems with including 

obligations such as these in the 

calculation, these issues stemmed from 

difficulties that may arise in calculating, 

estimating, or verifying these 

obligations, rather than whether the 

obligations should be included in the 

ability-to-repay calculation. Based on 

this feedback, § 1026.43(b)(8) includes 

obligations to a homeowners 

association, condominium association, 

or condominium association in the 

determination of mortgage-related 

obligations. The Bureau has addressed 

the concerns related to difficulties in 

calculating, estimating, or verifying 

such obligations in the commentary to 

§ 1026.43(c)(2)(v) and (c)(3). 

One comment letter focused 

extensively on community transfer fees, 

which are deed-based fees imposed 

upon the transfer of the property. The 

Bureau recognizes that this topic is 

complex and is often the subject of 

special requirements imposed at the 

State and local level. However, the 

Bureau does not believe that the 

requirements of § 1026.43 implicate 

these complex issues. The narrow 

question is whether such obligations 

should be considered mortgage-related 

obligations for purposes of determining 

the consumer’s ability to repay. The 

Bureau agrees with the argument, 

advanced by several commenters, that 

the entirety of the consumer’s ongoing 

obligations should be included in the 

determination. A responsible 

determination of the consumer’s ability 

to repay requires an accounting of such 

obligations, whether the purpose of the 

obligation is to satisfy the payment of a 

community transfer fee or traditional 

homeowners association dues. As with 

other obligations owed to 

condominium, cooperative, or 

homeowners associations discussed 

above, the Bureau believes that the 

practical problems with these 

obligations relate to when such 

obligations should be included in the 

determination of the consumer’s ability 

to repay, rather than whether the 

obligations should be considered 

mortgage-related obligations. Therefore, 

the Bureau has addressed the concerns 

related to these obligations in the 

commentary to § 1026.43(c)(2)(v) and 

(c)(3). 

In response to the request for feedback 

in the 2011 ATR Proposal, several 

commenters addressed the proposed 

treatment of special assessments. Unlike 

community transfer fees, which are 

generally identified in the deed or 

master community plan, creditors may 

encounter difficulty determining 

whether special assessments exist. 

However, as with similar charges 

discussed above, these concerns relate 

to determining the consumer’s monthly 

payment for mortgage-related 

obligations, rather than whether these 

charges should be considered mortgagerelated obligations. Special assessments 

may be significant and may affect the 

consumer’s ability to repay a mortgage 

loan. Thus, the Bureau has concluded 

that special assessments should be 

included in the definition of mortgagerelated obligations under § 1026.43(b)(8) 

and has addressed the concerns raised 

by commenters related to calculating, 

estimating, or verifying these obligations 

in the commentary to § 1026.43(c)(2)(v) 

and (c)(3). 

New comment 43(b)(8)–5 explains 

that § 1026.43(b)(8) includes in the 

evaluation of mortgage-related 

obligations premiums and similar 

charges identified in § 1026.4(b)(5), (7), 

(8), or (10) that are required by the 

creditor. These premiums and similar 

charges are mortgage-related obligations 

regardless of whether the premium or 

similar charge is excluded from the 

finance charge pursuant to § 1026.4(d). 

For example, a premium for insurance 

against loss or damage to the property 

written in connection with the credit 

transaction is a premium identified in 

§ 1026.4(b)(8). If this premium is 

required by the creditor, the premium is 

a mortgage-related obligation pursuant 

to § 1026.43(b)(8), regardless of whether 

the premium is excluded from the 

finance charge pursuant to 

§ 1026.4(d)(2). Commenters did not 

request this guidance specifically, but 

the Bureau believes that this comment 

is needed to provide additional clarity. 

43(b)(9) 

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

defines ‘‘points and fees’’ for a qualified 

mortgage to have the same meaning as 

in TILA section 103(bb)(4), which 

defines points and fees for the purpose 

of determining whether a transaction 

exceeds the HOEPA points and fees 

threshold. Proposed § 226.43(b)(9) 

would have provided that ‘‘points and 

fees’’ has the same meaning as in 

§ 226.32(b)(1). The Bureau adopts this 

provision as renumbered 

§ 1026.43(b)(9). 

43(b)(10) 

Sections 1414, 1431, and 1432 of the 

Dodd-Frank Act amended TILA to 

restrict, and in many cases, prohibit a 

creditor from imposing prepayment 

penalties in dwelling-secured credit 

transactions. TILA does not, however, 

define the term ‘‘prepayment penalty.’’ 

In an effort to address comprehensively 

prepayment penalties in a fashion that 

eases compliance burden, as discussed 

above, the Bureau is defining 

prepayment penalty in § 1026.43(b)(10) 

by cross-referencing § 1026.32(b)(6). For 

a full discussion of the Bureau’s 

approach to defining prepayment 

penalties, see § 1026.32(b)(6), its 

commentary, and the section-by-section 

analysis of those provisions above. 

43(b)(11) 

TILA in several instances uses the 

term ‘‘reset’’ to refer to the time at 

which the terms of a mortgage loan are 

adjusted, usually resulting in higher 

required payments. For example, TILA 

section 129C(a)(6)(E)(ii) states that a 

creditor that refinances a loan may, 

under certain conditions, ‘‘consider if 

the extension of new credit would 

prevent a likely default should the 

original mortgage reset and give such 

concerns a higher priority as an 

acceptable underwriting practice.’’ 15 

U.S.C. 1639c(a)(6)(E)(ii). The legislative 

history further indicates that, for 

adjustable-rate mortgages with low, 

fixed introductory rates, Congress 

understood the term ‘‘reset’’ to mean the 

time at which low introductory rates 

convert to indexed rates, resulting in 

‘‘significantly higher monthly payments 

for homeowners.’’ 99

Outreach conducted prior to issuance 

of the proposed rule indicated that the 

term ‘‘recast’’ is typically used in 

reference to the time at which fully 

amortizing payments are required for 

interest-only and negative amortization 

loans and that the term ‘‘reset’’ is more 


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100 ‘‘The term ‘‘adjustable-rate mortgage’’ means a 

transaction secured by real property or a dwelling 

for which the annual percentage rate may increase 

after consummation.’’ 12 CFR 1026.18(s)(7)(i). 

101 ‘‘The term ‘‘interest-only’’ means that, under 

the terms of the legal obligation, one or more of the 

periodic payments may be applied solely to accrued 

interest and not to loan principal; an ‘‘interest-only 

loan’’ is a loan that permits interest-only 

payments.’’ 12 CFR 1026.18(s)(7)(iv). 

102 ‘‘[T]he term ‘‘negative amortization’’ means 

payment of periodic payments that will result in an 

increase in the principal balance under the terms 

of the legal obligation; the term ‘‘negative 

amortization loan’’ means a loan, other than a 

reverse mortgage subject to section 1026.33, that 

provides for a minimum periodic payment that 

covers only a portion of the accrued interest, 

resulting in negative amortization.’’ 12 CFR 

1026.18(s)(7)(v). 

103The Board’s § 226.5b was recodified in the 

Bureau’s Regulation Z as § 1026.40. 

frequently used to indicate the time at 

which adjustable-rate mortgages with an 

introductory fixed rate convert to a 

variable rate. For simplicity and clarity, 

however, the Board proposed to use the 

term ‘‘recast’’ to cover the conversion to 

generally less favorable terms and 

higher payments not only for interestonly loans and negative amortization 

loans, but also for adjustable-rate 

mortgages. 

Proposed § 226.43(b)(11) defined the 

term ‘‘recast,’’ which was used in two 

provisions of proposed § 226.43: (1) 

Proposed § 226.43(c)(5)(ii) regarding 

certain required payment calculations 

that creditors must consider in 

determining a consumer’s ability to 

repay a covered transaction; and (2) 

proposed § 226.43(d) regarding payment 

calculations required for refinancings 

that are exempt from the ability-to-repay 

requirements in § 226.43(c). 

Specifically, proposed § 226.43(b)(11) 

defined the term ‘‘recast’’ as follows: (1) 

For an adjustable-rate mortgage, as 

defined in § 1026.18(s)(7)(i),100 the 

expiration of the period during which 

payments based on the introductory 

interest rate are permitted under the 

terms of the legal obligation; (2) for an 

interest-only loan, as defined in 

§ 1026.18(s)(7)(iv),101 the expiration of 

the period during which interest-only 

payments are permitted under the terms 

of the legal obligation; and (3) for a 

negative amortization loan, as defined 

in § 1026.18(s)(7)(v),102 the expiration of 

the period during which negatively 

amortizing payments are permitted 

under the terms of the legal obligation. 

Proposed comment 43(b)(11)–1 

explained that the date on which the 

‘‘recast’’ occurs is the due date of the 

last monthly payment based on the 

introductory fixed rate, the last interestonly payment, or the last negatively 

amortizing payment, as applicable. 

Proposed comment 43(b)(11)–1 also 

provided an illustration showing how to 

determine the date of the recast. 

Commenters did not focus specifically 

on the definition of ‘‘recast,’’ except that 

an association of State bank regulators 

agreed with the benefit of using a single 

term for the shift to higher payments for 

adjustable-rate, interest-only, and 

negative amortization loans. 

The Bureau considers the proposed 

provision to be an accurate and 

appropriate implementation of the 

statute. Accordingly, the Bureau is 

adopting proposed § 226.43(b)(11) as 

proposed, in renumbered 

§ 1026.43(b)(11). 

43(b)(12) 

New TILA section 129C(a)(2) provides 

that ‘‘if a creditor knows, or has reason 

to know, that 1 or more residential 

mortgage loans secured by the same 

dwelling will be made to the same 

consumer,’’ that creditor must make the 

ability-to-repay determination for ‘‘the 

combined payments of all loans on the 

same dwelling according to the terms of 

those loans and all applicable taxes, 

insurance (including mortgage 

guarantee insurance), and assessments.’’ 

This section, entitled ‘‘multiple loans,’’ 

follows the basic ability-to-repay 

requirements for a single loan, in new 

TILA section 129C(a)(1). 

The proposed rule implemented the 

main requirement of the ‘‘multiple 

loans’’ provision by mandating in 

proposed § 226.43(c)(2)(iv) that a 

creditor, in making its ability-to-repay 

determination on the primary loan, take 

into account the payments on any 

‘‘simultaneous loan’’ about which the 

creditor knows or has reason to know. 

‘‘Simultaneous loan’’ was defined in 

proposed § 226.43(b)(12) as ‘‘another 

covered transaction or home equity line 

of credit subject to § 226.5b 103 that will 

be secured by the same dwelling and 

made to the same consumer at or before 

consummation of the covered 

transaction.’’ Thus, although the statute 

referred only to closed-end ‘‘residential 

mortgage loans,’’ the Board proposed to 

expand the requirement to include 

consideration of simultaneous HELOCs. 

The proposed definition did not include 

pre-existing mortgage obligations, which 

would be considered as ‘‘current debt 

obligations’’ under § 1026.43(c)(2)(vi). 

The Board chose to include HELOCs 

in the definition of ‘‘simultaneous loan’’ 

because it believed that new TILA 

section 129C(a)(2) was meant to help 

ensure that creditors account for the 

increased risk of consumer delinquency 

or default on the covered transaction 

where more than one loan secured by 

the same dwelling is originated 

concurrently. The Board believed that 

this increased risk would be present 

whether the other mortgage obligation 

was a closed-end credit obligation or a 

HELOC. For these reasons, and several 

others explained in detail below, the 

Board proposed to use its exception and 

adjustment authority under TILA 

section 105(a) to include HELOCs 

within the scope of new TILA section 

129C(a)(2). 76 FR 27417–27418. Because 

one of the main reasons for including 

HELOCs was the likelihood of a 

consumer drawing on the credit line to 

provide the down payment in a 

purchase transaction, the Board 

solicited comment on whether this 

exception should be limited to purchase 

transactions. 

TILA section 105(a), as amended by 

section 1100A of the Dodd-Frank Act, 

authorized the Board, and now the 

Bureau, to prescribe regulations to carry 

out the purposes of TILA and 

Regulation Z, to prevent circumvention 

or evasion, or to facilitate compliance. 

15 U.S.C. 1604(a). The inclusion of 

HELOCs was further supported by the 

Board’s authority under TILA section 

129B(e) to condition terms, acts or 

practices relating to residential mortgage 

loans that the Board found necessary or 

proper to effectuate the purposes of 

TILA. 15 U.S.C. 1639b(e). One purpose 

of the statute is set forth in TILA section 

129B(a)(2), which states that ‘‘[i]t is the 

purpose[] of * * * [S]ection 129C to 

assure that consumers are offered and 

receive residential mortgage loans on 

terms that reasonably reflect their ability 

to repay the loans.’’ 15 U.S.C. 1639b. 

For the reasons stated below, the Board 

believed that requiring creditors to 

consider simultaneous loans that are 

HELOCs for purposes of TILA section 

129C(a)(2) would help to ensure that 

consumers are offered, and receive, 

loans on terms that reasonably reflect 

their ability to repay. 

First, the Board proposed in 

§ 226.43(c)(2)(vi) that the creditor must 

consider current debt obligations in 

determining a consumer’s ability to 

repay a covered transaction. Consistent 

with current § 1026.34(a)(4), proposed 

§ 226.43(c)(2)(vi) would not have 

distinguished between pre-existing 

closed-end and open-end mortgage 

obligations. The Board believed 

consistency required that it take the 

same approach when determining how 

to consider mortgage obligations that 

come into existence concurrently with a 

first-lien loan as would be taken for preexisting mortgage obligations, whether 

the first-lien is a purchase or nonpurchase transaction (i.e., refinancing). 

Including HELOCs in the proposed 

definition of ‘‘simultaneous loan’’ for 

purposes of TILA section 129C(a)(2) was 


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104See 2006 Nontraditional Mortgage Guidance, 

71 FR 58609, 58614 (Oct. 4, 2006). 

105 Kristopher Gerardi et al., Making Sense of the 

Subprime Crisis, Brookings Papers on Econ. 

Activity (Fall 2008), at 40 tbl.3. 

106The Board conducted independent analysis 

using data obtained from the FRBNY Consumer 

Credit Panel to determine the proportion of 

piggyback HELOCs taken out in the same month as 

the first-lien loan that have a draw at the time of 

origination. Data used was extracted from credit 

record data in years 2003 through 2010. See 

Donghoon Lee and Wilbert van der Klaauw, An 

Introduction to the FRBNY Consumer Credit Panel 

(Fed. Reserve Bd. Of N.Y.C., Staff Rept. No. 479, 

2010), available at http://data.newyorkfed.org/ 

research/staff_reports/sr479.pdf (providing further 

description of the database). 

also considered generally consistent 

with current comment 34(a)(4)–3, and 

the 2006 Nontraditional Mortgage 

Guidance regarding simultaneous 

second-lien loans.104

Second, data indicate that where a 

subordinate loan is originated 

concurrently with a first-lien loan to 

provide some or all of the down 

payment (i.e., a ‘‘piggyback loan’’), the 

default rate on the first-lien loan 

increases significantly, and in direct 

correlation to increasing combined loanto-value ratios.105 The data does not 

distinguish between ‘‘piggyback loans’’ 

that are closed-end or open-end credit 

transactions, or between purchase and 

non-purchase transactions. However, 

empirical evidence demonstrates that 

approximately 60 percent of consumers 

who open a HELOC concurrently with 

a first-lien loan borrow against the line 

of credit at the time of origination,106

suggesting that in many cases the 

HELOC may be used to provide some, 

or all, of the down payment on the firstlien loan. 

The Board recognized that consumers 

have varied reasons for originating a 

HELOC concurrently with the first-lien 

loan, for example, to reduce overall 

closing costs or for the convenience of 

having access to an available credit line 

in the future. However, the Board 

believed concerns relating to HELOCs 

originated concurrently for savings or 

convenience, and not to provide 

payment towards the first-lien home 

purchase loan, might be mitigated by 

the Board’s proposal to require that a 

creditor consider the periodic payment 

on the simultaneous loan based on the 

actual amount drawn from the credit 

line by the consumer. See proposed 

§ 226.43(c)(6)(ii), discussing payment 

calculation requirements for 

simultaneous loans that are HELOCs. 

Still, the Board recognized that in the 

case of a non-purchase transaction (e.g., 

a refinancing) a simultaneous loan that 

is a HELOC might be unlikely to be 

originated and drawn upon to provide 

payment towards the first-lien loan, 

except perhaps towards closing costs. 

Thus, the Board solicited comment on 

whether it should narrow the 

requirement to consider simultaneous 

loans that are HELOCs to apply only to 

purchase transactions. 

Third, in developing this proposal 

Board staff conducted outreach with a 

variety of participants that consistently 

expressed the view that second-lien 

loans significantly impact a consumer’s 

performance on the first-lien loan, and 

that many second-lien loans are 

HELOCs. One industry participant 

explained that the vast majority of 

‘‘piggyback loans’’ it originated were 

HELOCs that were fully drawn at the 

time of origination and used to assist in 

the first-lien purchase transaction. 

Another outreach participant stated that 

HELOCs make up approximately 90 

percent of its simultaneous loan bookof-business. Industry outreach 

participants generally indicated that it is 

a currently accepted underwriting 

practice to include HELOCs in the 

repayment ability assessment on the 

first-lien loan, and generally confirmed 

that the majority of simultaneous liens 

considered during the underwriting 

process are HELOCs. For these reasons, 

the Board proposed to use its authority 

under TILA sections 105(a) and 129B(e) 

to broaden the scope of TILA section 

129C(a)(2), and accordingly proposed to 

define the term ‘‘simultaneous loan’’ to 

include HELOCs. 

Proposed comment 43(b)(12)–1 

clarified that the definition of 

‘‘simultaneous loan’’ includes any loan 

that meets the definition, whether made 

by the same creditor or a third-party 

creditor, and provides an illustrative 

example of this principle. 

Proposed comment 43(b)(12)–2 

further clarified the meaning of the term 

‘‘same consumer,’’ and explained that 

for purposes of the definition of 

‘‘simultaneous loan,’’ the term ‘‘same 

consumer’’ would include any 

consumer, as that term is defined in 

§ 1026.2(a)(11), that enters into a loan 

that is a covered transaction and also 

enters into another loan (e.g., a secondlien covered transaction or HELOC) 

secured by the same dwelling. This 

comment further explained that where 

two or more consumers enter into a 

legal obligation that is a covered 

transaction, but only one of them enters 

into another loan secured by the same 

dwelling, the ‘‘same consumer’’ 

includes the person that has entered 

into both legal obligations. The Board 

believed this comment would reflect 

statutory intent to include any loan that 

could impact the consumer’s ability to 

repay the covered transaction according 

to its terms (i.e., to require the creditor 

to consider the combined payment 

obligations of the consumer(s) obligated 

to repay the covered transaction). See 

TILA § 129C(a)(2). 

Both industry and consumer advocate 

commenters overwhelmingly supported 

inclusion of HELOCs as simultaneous 

loans, with only one industry 

commenter objecting. The objecting 

commenter stated that there was no 

persuasive policy argument for 

deviating from the statute, but did not 

provide any reason to believe that 

concurrent HELOCs are less relevant to 

an assessment of a consumer’s ability to 

repay than concurrent closed-end 

second liens. As explained in the 

proposed rule, most industry 

participants are already considering 

HELOCs in the underwriting of seniorlien loans on the same property. 76 FR 

27418. 

For the reasons set forth by the Board 

and discussed above, the Bureau has 

determined that inclusion of HELOCs in 

the definition of simultaneous loans is 

an appropriate use of its TILA authority 

to make adjustments and additional 

requirements. 

TILA section 105(a), as amended by 

section 1100A of the Dodd-Frank Act, 

authorizes the Bureau to prescribe 

regulations that may contain such 

additional requirements, classifications, 

differentiations, or other provisions, and 

may provide for such adjustments and 

exceptions for all or any class of 

transactions, as in the judgment of the 

Bureau are necessary or proper to 

effectuate the purposes of TILA, to 

prevent circumvention or evasion of 

TILA, or to facilitate compliance with 

TILA. 15 U.S.C. 1604(a). The Bureau 

finds that the inclusion of HELOCs is 

necessary and proper to effectuate the 

purposes of TILA. The inclusion of 

HELOCs is further supported by the 

Bureau’s authority under TILA section 

129B(e) to condition terms, acts or 

practices relating to residential mortgage 

loans that the Bureau finds necessary or 

proper to effectuate the purposes of 

TILA. 15 U.S.C. 1639b(e). TILA section 

129B(a)(2) states that ‘‘[i]t is the 

purpose[] of * * * [S]ection 129C to 

assure that consumers are offered and 

receive residential mortgage loans on 

terms that reasonably reflect their ability 

to repay the loans.’’ 15 U.S.C. 1639b. 

Inclusion of HELOCs as simultaneous 

loans will help to carry out this purpose 

of TILA by helping to ensure that 

consumers receive loans on affordable 

terms, as further explained above. 

Accordingly, the Bureau is adopting 

§ 1026.43(b)(12) and associated 

commentary as proposed, with 

clarifying edits to ensure that 

simultaneous loans scheduled after 


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consummation will be considered in 

determining ability to repay. 

43(b)(13) 

TILA section 129C(a)(1) requires that 

a creditor determine a consumer’s 

repayment ability using ‘‘verified and 

documented information,’’ and TILA 

section 129C(a)(4) specifically requires 

the creditor to verify a consumer’s 

income or assets relied on to determine 

repayment ability using a consumer’s 

tax return or ‘‘third-party documents’’ 

that provide reasonably reliable 

evidence of the consumer’s income or 

assets, as discussed in detail below in 

the section-by-section analysis of 

§ 1026.43(c)(3) and (4). The Board 

proposed to define the term ‘‘third-party 

record’’ to mean: (1) A document or 

other record prepared or reviewed by a 

person other than the consumer, the 

creditor, any mortgage broker, as 

defined in § 1026.36(a)(2), or any agent 

of the creditor or mortgage broker; (2) a 

copy of a tax return filed with the 

Internal Revenue Service or a state 

taxing authority; (3) a record the 

creditor maintains for an account of the 

consumer held by the creditor; or (4) if 

the consumer is an employee of the 

creditor or the mortgage broker, a 

document or other record regarding the 

consumer’s employment status or 

income. The Board explained that, in 

general, a creditor should refer to 

reasonably reliable records prepared by 

or reviewed by a third party to verify 

repayment ability under TILA section 

129C(a), a principle consistent with 

verification requirements previously 

outlined under the Board’s 2008 HOEPA 

Final Rule. See § 1026.34(a)(4)(ii). 

Commenters generally supported the 

Board’s broad definition of a third-party 

record as a reasonable definition that 

allows a creditor to use a wide variety 

of documents and sources, while 

ensuring that the consumer does not 

remain the sole source of information. 

Some consumer advocates, however, 

cautioned the Bureau against relying 

upon tax records to provide a basis for 

verifying income history, pursuant to 

amended TILA section 129C(a)(4)(A), to 

avoid penalizing consumers who may 

not have access to accurate tax records. 

The Bureau does not address comments 

with respect to consumers who may not 

maintain accurate tax records because 

the definition provided in 

1026.43(b)(13) of third-party record 

merely ensures that a creditor may use 

any of a wide variety of documents, 

including tax records, as a method of 

income verification without mandating 

their use. Rather than rely solely on tax 

records, for example, a creditor might 

look to other third-party records for 

verification purposes, including the 

creditor’s records regarding a 

consumer’s savings account held by the 

creditor, which qualifies as a third-party 

record under § 1026.43(b)(13)(iii), or 

employment records for a consumer 

employed by the creditor, which 

qualifies as a third-party record under 

§ 1026.43(b)(13)(iv). 

The Board proposed comment 

43(b)(13)–1 to clarify that third-party 

records would include records 

transmitted or viewed electronically, for 

example, a credit report prepared by a 

consumer reporting agency and 

transmitted or viewed electronically. 

The Bureau did not receive significant 

feedback on the proposed comment and 

is adopting the comment largely as 

proposed. The Bureau is clarifying that 

an electronic third-party record should 

be transmitted electronically, such as 

via email or if the creditor is able to 

click on a secure hyperlink to access a 

consumer’s credit report. The Bureau is 

making this slight clarification to 

convey that mere viewing of a record, 

without the ability to capture or 

maintain the record, would likely be 

problematic with respect to record 

retention under § 1026.25(a) and (c). 

While it seems unlikely that an 

electronic record could be viewed 

without being transmitted as well, the 

Bureau is making this alteration to avoid 

any confusion. 

The Bureau is adopting the remaining 

comments to 43(b)(13) largely as 

proposed by the Board. These comments 

did not elicit significant public 

feedback. Comment 43(b)(13)–1 assures 

creditors that a third-party record may 

be transmitted electronically. Comment 

43(b)(13)–2 explains that a third-party 

record includes a form a creditor 

provides to a third party for providing 

information, even if the creditor 

completes parts of the form unrelated to 

the information sought. Thus, for 

example, a creditor may send a 

Webform, or mail a paper form, created 

by the creditor, to a consumer’s current 

employer, on which the employer could 

check a box that indicates that the 

consumer works for the employer. The 

creditor may even elect to fill in the 

creditor’s name, or other portions of the 

form, so long as those portions are 

unrelated to the information that the 

creditor seeks to verify, such as income 

or employment status. 

Comment 43(b)(13)(i)–1 clarifies that 

a third-party record includes a 

document or other record prepared by 

the consumer, the creditor, the mortgage 

broker, or an agent of the creditor or 

mortgage broker, if the record is 

reviewed by a third party. For example, 

a profit-and-loss statement prepared by 

a self-employed consumer and reviewed 

by a third-party accountant is a thirdparty record under § 1026.43(b)(13)(i). 

The Bureau is including comment 

43(b)(13)(i)–1 to explain how some firstparty records, e.g., documents originally 

prepared by the consumer, may become 

third-party records by virtue of an 

appropriate, disinterested third-party’s 

review or audit. It is the third party 

review, the Bureau believes, that 

provides reasonably reliable evidence of 

the underlying information in the 

document, just as if the document were 

originally prepared by the third party. 

Moreover, this clarification allows the 

creditor to consult a wider variety of 

documents in its determination of a 

consumer’s ability to repay. Creditors 

should be cautioned not to assume, 

however, that merely because a 

document is a third-party record as 

defined by § 1026.43(b)(13), and the 

creditor uses the information provided 

by that document to make a 

determination as to whether the 

consumer will have a reasonable ability 

to repay the loan according to its terms, 

that the creditor has satisfied the 

requirements of this rule. The creditor 

also must make a reasonable and good 

faith determination at or before 

consummation that the consumer will 

have a reasonable ability, at the time of 

consummation, to repay the loan 

according to its terms. For a full 

discussion of the Bureau’s approach to 

this determination, see § 1026.43(c)(1), 

its commentary, and the section-bysection analysis of those provisions 

below. 

Finally, comment 43(b)(13)(iii)–1 

clarifies that a third-party record 

includes a record that the creditor 

maintains for the consumer’s account. 

Such examples might include records of 

a checking account, savings account, 

and retirement account that the 

consumer holds, or has held, with the 

creditor. Comment 43(b)(13)(iii)–1 also 

provides the example of a creditor’s 

records for an account related to a 

consumer’s outstanding obligations to 

the creditor, such as the creditor’s 

records for a first-lien mortgage to a 

consumer who applies for a 

subordinate-lien home equity loan. This 

comment helps assure industry that 

such records are a legitimate basis for 

determining a consumer’s ability to 

repay, and/or for verifying income and 

assets because it is unlikely to be in a 

creditor’s interest to falsify such records 

for purposes of satisfying 

§ 1026.43(b)(13), as falsifying records 

would violate the good faith 

requirement of § 1026.43(c)(1). In 

addition, this comment should help 


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assure creditors that the rule does not 

inhibit a creditor’s ability to ‘‘cross-sell’’ 

products to consumers, by avoiding 

placing the creditor at a disadvantage 

with respect to verifying a consumer’s 

information by virtue of the creditor’s 

existing relationship with the consumer. 

43(c) Repayment Ability 

As enacted by the Dodd-Frank Act, 

TILA section 129C(a)(1) provides that 

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, and 

assessments. TILA section 129C(a)(2) 

extends the same requirement to a 

combination of multiple residential 

mortgage loans secured by the same 

dwelling where the creditor knows or 

has reason to know that such loans will 

be made to the same consumer. TILA 

sections 129C(a)(3) and (a)(4) specify 

factors that must be considered in 

determining a consumer’s ability to 

repay and verification requirements for 

income and assets considered as part of 

that determination. Proposed § 226.43(c) 

would have implemented TILA section 

129C(a)(1) through (4) in a manner 

substantially similar to the statute. 

Proposed § 226.43(c)(1) would have 

implemented the requirement in TILA 

section 129C(a)(1) that creditors make a 

reasonable and good faith determination 

that a consumer will have a reasonable 

ability to repay the loan according to its 

terms. Proposed § 226.43(c)(2) would 

have required creditors to consider the 

following factors in making a 

determination of repayment ability, as 

required by TILA section 129C(a)(1) 

through (3): the consumer’s current or 

reasonably expected income or assets 

(other than the property that secures the 

loan); the consumer’s employment 

status, if the creditor relies on 

employment income; the consumer’s 

monthly payment on the loan; the 

consumer’s monthly payment on any 

simultaneous loan that the creditor 

knows or has reason to know will be 

made; the consumer’s monthly payment 

for mortgage-related obligations; the 

consumer’s current debt obligations; 

and the consumer’s monthly debt-toincome ratio or residual income. 

Proposed § 226.43(c)(3) would have 

required that creditors verify the 

information they use in making an 

ability-to-repay determination using 

third-party records, as required by TILA 

section 129C(a)(1). Proposed 

§ 226.43(c)(4) would have specified 

methods for verifying income and assets 

as required by TILA section 129C(a)(1) 

and (4). Proposed § 226.43(c)(5) and (6) 

would have specified how to calculate 

the monthly mortgage and simultaneous 

loan payments required to be 

considered under proposed 

§ 226.43(c)(2). Proposed § 226.43(c)(7) 

would have specified how to calculate 

the monthly debt-to-income ratio or 

monthly residual income required to be 

considered under proposed 

§ 226.43(c)(2). As discussed in detail 

below, the Bureau is adopting 

§ 1026.43(c) substantially as proposed, 

with various modifications and 

clarifications. 

Proposed comment 43(c)–1 would 

have indicated that creditors may look 

to widely accepted governmental or 

nongovernmental underwriting 

standards, such as the handbook on 

Mortgagee Credit Analysis for Mortgage 

Insurance on One- to Four-Unit 

Mortgage Loans issued by FHA, to 

evaluate a consumer’s ability to repay. 

The proposed comment would have 

stated that creditors may look to such 

standards in determining, for example, 

whether to classify particular inflows, 

obligations, or property as ‘‘income,’’ 

‘‘debt,’’ or ‘‘assets’’; factors to consider 

in evaluating the income of a selfemployed or seasonally employed 

consumer; or factors to consider in 

evaluating the credit history of a 

consumer who has obtained few or no 

extensions of traditional ‘‘credit’’ as 

defined in § 1026.2(a)(14). In the 

Supplemental Information regarding 

proposed comment 43(c)–1, the Board 

stated that the proposed rule and 

commentary were intended to provide 

flexibility in underwriting standards so 

that creditors could adapt their 

underwriting processes to a consumer’s 

particular circumstances. The Board 

stated its belief that such flexibility is 

necessary because the rule covers such 

a wide variety of consumers and 

mortgage products. 

Commenters generally supported 

giving creditors significant flexibility to 

develop and apply their own 

underwriting standards. However, 

commenters had concerns regarding the 

specific approach taken in proposed 

comment 43(c)–1. Commenters raised a 

number of questions about what kinds 

of underwriting standards might be 

considered widely accepted, such as 

whether a creditor’s proprietary 

underwriting standards could ever be 

considered widely accepted. 

Commenters also were uncertain 

whether the proposed comment 

required creditors to adopt particular 

governmental underwriting standards in 

their entirety and requested clarification 

on that point. At least one commenter, 

an industry trade group, noted that 

FHA-insured loans constitute a small 

percentage of the mortgage market and 

questioned whether FHA underwriting 

standards therefore are widely accepted. 

This commenter also questioned 

whether it is appropriate to encourage 

creditors to apply FHA underwriting 

standards other than with respect to 

FHA-insured loans, as FHA programs 

are generally designed to make mortgage 

credit available in circumstances where 

private creditors are unwilling to extend 

such credit without a government 

guarantee. Finally, consumer group 

commenters asserted that underwriting 

standards do not accurately determine 

ability to repay merely because they are 

widely accepted and pointed to the 

widespread proliferation of lax 

underwriting standards that predated 

the recent financial crisis. 

The Bureau believes that the Board 

did not intend to require creditors to use 

any particular governmental 

underwriting standards, including FHA 

standards, in their entirety or to prohibit 

creditors from using proprietary 

underwriting standards. The Bureau 

also does not believe that the Board 

intended to endorse lax underwriting 

standards on the basis that those 

standards may be prevalent in the 

mortgage market at a particular time. 

The Bureau therefore is adopting two 

new comments to provide greater clarity 

regarding the role of underwriting 

standards in ability-to-repay 

determinations and is not adopting 

proposed comment 43(c)–1. 

The Bureau is concerned based on the 

comments received that referring 

creditors to widely accepted 

governmental and nongovernmental 

underwriting standards could lead to 

undesirable misinterpretations and 

confusion. The discussion of widely 

accepted standards in proposed 

comment 43(c)–1 could be 

misinterpreted to suggest that the 

underwriting standards of any single 

market participant with a large market 

share are widely accepted and therefore 

to be emulated. The widely accepted 

standard also could be misinterpreted to 

indicate that proprietary underwriting 

standards cannot yield reasonable, good 

faith determinations of a consumer’s 

ability to repay because they are unique 

to a particular creditor and not 

employed throughout the mortgage 

market. Similarly, the widely accepted 

standard could be misinterpreted to 

encourage a creditor that lends in a 

limited geographic area or in a 

particular market niche to apply widely 

accepted underwriting standards that 


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are inappropriate for that particular 

creditor’s loans. 

The Bureau also is concerned that 

evaluating underwriting standards 

based on whether they are widely 

accepted could have other undesirable 

consequences. In a market bubble or 

economic crisis, many creditors may 

change their underwriting standards in 

similar ways, leading to widely 

accepted underwriting standards 

becoming unreasonably lax or 

unreasonably tight. A regulatory 

directive to use underwriting standards 

that are widely accepted could 

exacerbate those effects. Also, referring 

creditors to widely accepted 

governmental and nongovernmental 

underwriting standards could hinder 

creditors’ ability to respond to changing 

market and economic conditions and 

stifle market growth and positive 

innovation. 

Finally, the Bureau is concerned that 

focusing on whether underwriting 

standards are widely accepted could 

distract creditors from focusing on their 

obligation under TILA section 129C and 

§ 1026.43(c) to make ability-to-repay 

determinations that are reasonable and 

in good faith. The Bureau believes that 

a creditor’s underwriting standards are 

an important factor in making 

reasonable and good faith ability-torepay determinations. However, how 

those standards are applied to the 

individual facts and circumstances of a 

particular extension of credit is equally 

or more important. 

In light of these issues, the Bureau is 

not adopting proposed comment 43(c)– 

1. Instead, the Bureau is adopting two 

new comments, comment 43(c)(1)–1 and 

comment 43(c)(2)–1. New comment 

43(c)(1)–1 clarifies that creditors are 

permitted to develop and apply their 

own underwriting standards as long as 

those standards lead to ability-to-repay 

determinations that are reasonable and 

in good faith. New comment 43(c)(2)–1 

clarifies that creditors are permitted to 

use their own definitions and other 

technical underwriting criteria and 

notes that underwriting guidelines 

issued by governmental entities such as 

the FHA are a source to which creditors 

may refer for guidance on definitions 

and technical underwriting criteria. 

These comments are discussed below in 

the section-by-section of § 1026.43(c)(1) 

and (2). 

43(c)(1) General Requirement 

Proposed § 226.43(c)(1) would have 

implemented TILA section 129C(a)(1) 

by providing that a creditor shall not 

make a loan that is a covered transaction 

unless the creditor makes a reasonable 

and good faith determination at or 

before consummation that the consumer 

will have a reasonable ability, at the 

time of consummation, to repay the loan 

according to its terms, including any 

mortgage-related obligations. 

Commenters generally agreed that 

creditors should not make loans to 

consumers unable to repay them and 

supported the requirement to consider 

ability to repay. Accordingly, 

§ 1026.43(c)(1) is adopted substantially 

as proposed, with two technical and 

conforming changes. 

As adopted, § 1026.43(c)(1) requires 

creditors to make a reasonable and good 

faith determination at or before 

consummation that the consumer will 

have a reasonable ability to repay the 

loan according to its terms. Section 

1026.43(c)(1) as adopted omits the 

reference in the proposed rule to 

determining that a consumer has a 

reasonable ability ‘‘at the time of 

consummation’’ to repay the loan 

according to its terms. The Bureau 

believes this phrase is potentially 

misleading and does not accurately 

reflect the intent of either the Board or 

the Bureau. Mortgage loans are not 

required to be repaid at the time of 

consummation; instead, they are 

required to be repaid over months or 

years after consummation. Creditors are 

required to make a predictive judgment 

at the time of consummation that a 

consumer is likely to have the ability to 

repay a loan in the future. The Bureau 

believes that the rule more clearly 

reflects this requirement without the 

reference to ability ‘‘at the time of 

consummation’’ to repay the loan. The 

creditor’s determination will necessarily 

be based on the consumer’s 

circumstances at or before 

consummation and evidence, if any, 

that those circumstances are likely to 

change in the future. Section 

1026.43(c)(1) as adopted also omits the 

reference in the proposed rule to 

mortgage-related obligations. The 

Bureau believes this reference is 

unnecessary because § 1026.43(c)(2) 

requires creditors to consider 

consumers’ monthly payments for 

mortgage-related obligations and could 

create confusion because § 1026.43(c)(1) 

does not include references to other 

factors creditors must consider under 

§ 1026.43(c)(2). 

As noted above, the Bureau is 

adopting new comment 43(c)(1)–1, 

which provides guidance regarding, 

among other things, how the 

requirement to make a reasonable and 

good faith determination of ability to 

repay relates to a creditor’s 

underwriting standards. New comment 

43(c)(1)–1 replaces in part and responds 

to comments regarding proposed 

comment 43(c)–1, discussed above. 

New comment 43(c)(1)–1 emphasizes 

that creditors are to be evaluated on 

whether they make a reasonable and 

good faith determination that a 

consumer will have a reasonable ability 

to repay as required by § 1026.43(c)(1). 

The comment acknowledges that 

§ 1026.43(c) and the accompanying 

commentary describe certain 

requirements for making ability-to-repay 

determinations, but do not provide 

comprehensive underwriting standards 

to which creditors must adhere. As an 

example, new comment 43(c)(1)–1 notes 

that the rule and commentary do not 

specify how much income is needed to 

support a particular level of debt or how 

to weigh credit history against other 

factors. 

The Bureau believes that a variety of 

underwriting standards can yield 

reasonable, good faith ability-to-repay 

determinations. New comment 43(c)(1)– 

1 explains that, so long as creditors 

consider the factors set forth in 

§ 1026.43(c)(2) according to the 

requirements of § 1026.43(c), creditors 

are permitted to develop and apply their 

own proprietary underwriting standards 

and to make changes to those standards 

over time in response to empirical 

information and changing economic and 

other conditions. The Bureau believes 

this flexibility is necessary given the 

wide range of creditors, consumers, and 

mortgage products to which this rule 

applies. The Bureau also believes that 

there are no indicators in the statutory 

text or legislative history of the DoddFrank Act that Congress intended to 

replace proprietary underwriting 

standards with underwriting standards 

dictated by governmental or 

government-sponsored entities as part of 

the ability-to-repay requirements. The 

Bureau therefore believes that 

preserving this flexibility here is 

consistent with Congressional intent. 

The comment emphasizes that whether 

a particular ability-to-repay 

determination is reasonable and in good 

faith will depend not only on the 

underwriting standards adopted by the 

creditor, but on the facts and 

circumstances of an individual 

extension of credit and how the 

creditor’s underwriting standards were 

applied to those facts and 

circumstances. The comment also states 

that a consumer’s statement or 

attestation that the consumer has the 

ability to repay the loan is not indicative 

of whether the creditor’s determination 

was reasonable and in good faith. 

Concerns have been raised that 

creditors and others will have difficulty 

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to-repay determination is reasonable 

and in good faith. Although the statute 

and the rule specifies certain factors that 

a creditor must consider in making such 

a determination, the Bureau does not 

believe that there is any litmus test that 

can be prescribed to determine whether 

a creditor, in considering those factors, 

arrived at a belief in the consumer’s 

ability to repay which was both 

objectively reasonable and in subjective 

good faith. Nevertheless, new comment 

43(c)(1)–1 lists considerations that may 

be relevant to whether a creditor who 

considered and verified the required 

factors in accordance with the rule 

arrived at an ability-to-repay 

determination that was reasonable and 

in good faith. The comment states that 

the following may be evidence that a 

creditor’s ability-to-repay determination 

was reasonable and in good faith: (1) 

The consumer demonstrated actual 

ability to repay the loan by making 

timely payments, without modification 

or accommodation, for a significant 

period of time after consummation or, 

for an adjustable-rate, interest-only, or 

negative-amortization mortgage, for a 

significant period of time after recast; (2) 

the creditor used underwriting 

standards that have historically resulted 

in comparatively low rates of 

delinquency and default during adverse 

economic conditions; or (3) the creditor 

used underwriting standards based on 

empirically derived, demonstrably and 

statistically sound models. 

In contrast, new comment 43(c)(1)–1 

states that the following may be 

evidence that a creditor’s ability-torepay determination was not reasonable 

or in good faith: (1) The consumer 

defaulted on the loan a short time after 

consummation or, for an adjustable-rate, 

interest-only, or negative-amortization 

mortgage, a short time after recast; (2) 

the creditor used underwriting 

standards that have historically resulted 

in comparatively high levels of 

delinquency and default during adverse 

economic conditions; (3) the creditor 

applied underwriting standards 

inconsistently or used underwriting 

standards different from those used for 

similar loans without reasonable 

justification; (4) the creditor disregarded 

evidence that the underwriting 

standards it used are not effective at 

determining consumers’ repayment 

ability; (5) the creditor consciously 

disregarded evidence that the consumer 

may have insufficient residual income 

to cover other recurring obligations and 

expenses, taking into account the 

consumer’s assets other than the 

property securing the covered 

transaction, after paying his or her 

monthly payments for the covered 

transaction, any simultaneous loan, 

mortgage-related obligations and any 

current debt obligations; or (6) the 

creditor disregarded evidence that the 

consumer would have the ability to 

repay only if the consumer subsequently 

refinanced the loan or sold the property 

securing the loan. 

New comment 43(c)(1)–1 states the 

Bureau’s belief that all of these 

considerations may be relevant to 

whether a creditor’s ability-to-repay 

determination was reasonable and in 

good faith. However, the comment also 

clarifies that these considerations are 

not requirements or prohibitions with 

which creditors must comply, nor are 

they elements of a claim that a 

consumer must prove to establish a 

violation of the ability-to-repay 

requirements. As an example, the 

comment clarifies that creditors are not 

required to validate their underwriting 

criteria using mathematical models. 

New comment 43(c)(1)–1 also clarifies 

that these considerations are not 

absolute in their application; instead 

they exist on a continuum and may 

apply to varying degrees. As an 

example, the comment states that the 

longer a consumer successfully makes 

timely payments after consummation or 

recast the less likely it is that the 

creditor’s determination of ability to 

repay was unreasonable or not in good 

faith. 

Finally, new comment 43(c)(1)–1 

clarifies that each of these 

considerations must be viewed in the 

context of all facts and circumstances 

relevant to a particular extension of 

credit. As an example, the comment 

states that in some cases inconsistent 

application of underwriting standards 

may indicate that a creditor is 

manipulating those standards to 

approve a loan despite a consumer’s 

inability to repay. The creditor’s abilityto-repay determination therefore may be 

unreasonable or in bad faith. However, 

in other cases inconsistently applied 

underwriting standards may be the 

result of, for example, inadequate 

training and may nonetheless yield a 

reasonable and good faith ability-torepay determination in a particular case. 

Similarly, the comment states that 

although an early payment default on a 

mortgage will often be persuasive 

evidence that the creditor did not have 

a reasonable and good faith belief in the 

consumer’s ability to repay (and such 

evidence may even be sufficient to 

establish a prima facie case of an abilityto-repay violation), a particular abilityto-repay determination may be 

reasonable and in good faith even 

though the consumer defaulted shortly 

after consummation if, for example, the 

consumer experienced a sudden and 

unexpected loss of income. In contrast, 

the comment states that an ability-torepay determination may be 

unreasonable or not in good faith even 

though the consumer made timely 

payments for a significant period of time 

if, for example, the consumer was able 

to make those payments only by 

foregoing necessities such as food and 

heat. 

The Board proposed comment 

43(c)(1)–1 to clarify that a change in a 

consumer’s circumstances after 

consummation of a loan, such as a 

significant reduction in income due to 

a job loss or a significant obligation 

arising from a major medical expense, 

that cannot reasonably be anticipated 

from the consumer’s application or the 

records used to determine repayment 

ability, is not relevant to determining a 

creditor’s compliance with the rule. The 

proposed comment would have further 

clarified that, if the application or 

records considered by the creditor at or 

before consummation indicate that there 

will be a change in the consumer’s 

repayment ability after consummation, 

such as if a consumer’s application 

states that the consumer plans to retire 

within 12 months without obtaining 

new employment or that the consumer 

will transition from full-time to parttime employment, the creditor must 

consider that information. Commenters 

generally supported proposed comment 

43(c)(1)–1. Proposed comment 43(c)(1)– 

1 is adopted substantially as proposed 

and redesignated as comment 43(c)(1)– 

2. 

The Board also proposed comment 

43(c)(1)–2 to clarify that § 226.43(c)(1) 

does not require or permit the creditor 

to make inquiries or verifications 

prohibited by Regulation B, 12 CFR part 

1002. Commenters generally supported 

proposed comment 43(c)(1)–2. Proposed 

comment 43(c)(1)–2 is adopted 

substantially as proposed and 

redesignated as comment 43(c)(1)–3. 

43(c)(2) Basis for Determination 

As discussed above, TILA section 

129C(a)(1) generally requires a creditor 

to make a reasonable and good faith 

determination that a consumer has a 

reasonable ability to repay a loan and all 

applicable taxes, insurance, and 

assessments. TILA section 129C(a)(2) 

requires a creditor to include in that 

determination the cost of any other 

residential mortgage loans made to the 

same consumer and secured by the same 

dwelling. TILA section 129C(a)(3) 

enumerates several factors a creditor 

must consider in determining a 

consumer’s ability to repay: credit 


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history; current income; expected 

income; current obligations; debt-toincome ratio or residual income; 

employment status; and other financial 

resources other than equity in the 

property securing the loan. 

Proposed § 226.43(c)(2) would have 

implemented the requirements under 

these sections of TILA that a creditor 

consider specified factors as part of a 

determination of a consumer’s ability to 

repay. Proposed § 226.43(c)(2) would 

have required creditors to consider the 

following factors in making a 

determination of repayment ability, as 

required by TILA section 129C(a)(1) 

through (3): the consumer’s current or 

reasonably expected income or assets, 

other than the dwelling that secures the 

loan; the consumer’s employment 

status, if the creditor relies on 

employment income; the consumer’s 

monthly payment on the loan; the 

consumer’s monthly payment on any 

simultaneous loan that the creditor 

knows or has reason to know will be 

made; the consumer’s monthly payment 

for mortgage-related obligations; the 

consumer’s current debt obligations; the 

consumer’s monthly debt-to-income 

ratio or residual income; and the 

consumer’s credit history. As discussed 

in detail below, the Bureau is adopting 

§ 1026.43(c)(2) substantially as 

proposed, with technical and 

conforming changes. 

As indicated above, the Bureau also is 

adopting new comment 43(c)(2)–1. New 

comment 43(c)(2)–1 provides guidance 

regarding definitional and other 

technical underwriting issues related to 

the factors enumerated in 

§ 1026.43(c)(2). New comment 43(c)(2)– 

1 replaces in part and responds to 

comments received regarding proposed 

comment 43(c)–1, as discussed above. 

New comment 43(c)(2)–1 notes that 

§ 1026.43(c)(2) sets forth factors 

creditors must consider when making 

the ability-to-repay determination 

required under § 1026.43(c)(1) and the 

accompanying commentary provides 

guidance regarding these factors. New 

comment 43(c)(2)–1 also notes that 

creditors must conform to these 

requirements and may rely on guidance 

provided in the commentary. New 

comment 43(c)(2)–1 also acknowledges 

that the rule and commentary do not 

provide comprehensive guidance on 

definitions and other technical 

underwriting criteria necessary for 

evaluating these factors in practice. The 

comment clarifies that, so long as a 

creditor complies with the provisions of 

§ 1026.43(c), the creditor is permitted to 

use its own definitions and other 

technical underwriting criteria. 

New comment 43(c)(2)–1 further 

provides that a creditor may, but is not 

required to, look to guidance issued by 

entities such as the FHA, VA, USDA, or 

Fannie Mae or Freddie Mac while 

operating under the conservatorship of 

the Federal Housing Finance 

Administration. New comment 43(c)(2)– 

1 gives several examples of instances 

where a creditor could refer to such 

guidance, such as: classifying particular 

inflows, obligations, and property as 

‘‘income,’’ ‘‘debt,’’ or ‘‘assets’’; 

determining what information to use 

when evaluating the income of a selfemployed or seasonally employed 

consumer; or determining what 

information to use when evaluating the 

credit history of a consumer who has 

few or no extensions of traditional 

credit. The comment emphasizes that 

these examples are illustrative, and 

creditors are not required to conform to 

guidance issued by these or other such 

entities. The Bureau is aware that many 

creditors have, for example, existing 

underwriting definitions of ‘‘income’’ 

and ‘‘debt.’’ Creditors are not required to 

modify their existing definitions and 

other technical underwriting criteria to 

conform to guidance issued by such 

entities, and creditors’ existing 

definitions and other technical 

underwriting criteria are not 

noncompliant merely because they 

differ from those used in such guidance. 

Finally, new comment 43(c)(2)–1 

emphasizes that a creditor must ensure 

that its underwriting criteria, as applied 

to the facts and circumstances of a 

particular extension of credit, result in 

a reasonable, good faith determination 

of a consumer’s ability to repay. As an 

example, new comment 43(c)(2)–1 states 

that a definition used in underwriting 

that is reasonable in isolation may lead 

to ability-to-repay determinations that 

are unreasonable or not in good faith 

when considered in the context of a 

creditor’s underwriting standards or 

when adopted or applied in bad faith. 

Similarly, an ability-to-repay 

determination is not unreasonable or in 

bad faith merely because the 

underwriting criteria used included a 

definition that was by itself 

unreasonable. 

43(c)(2)(i) 

TILA section 129C(a)(3) provides that, 

in making the repayment ability 

determination, a creditor must consider, 

among other factors, a consumer’s 

current income, reasonably expected 

income, and ‘‘financial resources’’ other 

than the consumer’s equity in the 

dwelling or real property that secures 

loan repayment. Furthermore, under 

TILA section 129C(a)(9), a creditor may 

consider the seasonality or irregularity 

of a consumer’s income in determining 

repayment ability. The Board’s proposal 

generally mirrored TILA section 

129C(a)(3), but differed in two respects. 

First, proposed § 226.43(c)(2)(i) used 

the term ‘‘assets’’ rather than ‘‘financial 

resources,’’ to conform with terminology 

used in other provisions under TILA 

section 129C(a) and Regulation Z. See, 

e.g., TILA section 129C(a)(4) (requiring 

that creditors consider a consumer’s 

assets in determining repayment 

ability); § 1026.51(a) (requiring 

consideration of a consumer’s assets in 

determining a consumer’s ability to pay 

a credit extension under a credit card 

account). The Board explained that the 

terms ‘‘financial resources’’ and ‘‘assets’’ 

are synonymous as used in TILA section 

129C(a), and elected to use the term 

‘‘assets’’ throughout the proposal for 

consistency. The Bureau is adopting this 

interpretation as well, as part of its 

effort to streamline regulations and 

reduce compliance burden, and uses the 

term ‘‘assets’’ throughout Regulation Z. 

Second, the Board’s proposal 

provided that a creditor may not look to 

the value of the dwelling that secures 

the covered transaction, instead of 

providing that a creditor may not look 

to the consumer’s equity in the 

dwelling, as provided in TILA section 

129C(a). The Bureau received comments 

expressing concern that the Board had 

proposed dispensing with the term 

‘‘equity.’’ These comments protested 

that the Board had assumed that 

congressional concern was over the 

foreclosure value of the home, rather 

than protecting all homeowners, 

including those who may have low 

home values. The commenters’ concerns 

are likely misplaced, however, as the 

Board’s language provides, if anything, 

broader protection for homeowners. 

TILA section 129C(a)(3) is intended to 

address the risk that a creditor will 

consider the amount that could be 

obtained through a foreclosure sale of 

the dwelling, which may exceed the 

amount of the consumer’s equity in the 

dwelling. For example, the rule 

addresses the situation in which, several 

years after consummation, the value of 

a consumer’s home has decreased 

significantly. The rule prohibits a 

creditor from considering, at or before 

consummation, any value associated 

with this home, even in the event that 

the ‘‘underwater’’ home is sold at 

foreclosure. The rule thus avoids the 

situation in which the creditor might 

assume that rising home values might 

make up the difference should the 

consumer be unable to make full 

mortgage payments, and therefore the 

rule is more protective of consumers 


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107The Bureau has proposed revising comment 

34(a)(4)(ii)–2, though not in a manner that would 

affect the ‘‘reasonably expected income’’ aspect of 

the comment. See 77 FR 49090, 49153 (Aug. 15, 

2012). The Bureau is concurrently finalizing the 

2012 HOEPA Proposal. 

because the rule forbids the creditor 

from considering any value associated 

with the dwelling whether the 

consumer’s equity stake in the dwelling 

is large or small. 

The Bureau is adopting the Board’s 

proposal, providing that a creditor may 

not look to the value of the dwelling 

that secures the covered transaction, 

instead of providing that a creditor may 

not look to the consumer’s equity in the 

dwelling, as provided in TILA section 

129C(a). The Bureau is making this 

adjustment pursuant to its authority 

under TILA section 105(a), which 

provides that the Bureau’s regulations 

may contain such additional 

requirements, classifications, 

differentiations, or other provisions, and 

may provide for such adjustments and 

exceptions for all or any class of 

transactions as in the Bureau’s judgment 

are necessary or proper to effectuate the 

purposes of TILA, prevent 

circumvention or evasion thereof, or 

facilitate compliance therewith. 15 

U.S.C. 1604(a). The purposes of TILA 

include the purposes that apply to 129C, 

to assure that consumers are offered and 

receive residential mortgage loans on 

terms that reasonably reflect their ability 

to repay the loan. See 15 U.S.C. 

1639b(a)(2). As further explained above, 

the Bureau believes it is necessary and 

proper to make this adjustment to 

ensure that consumers receive loans on 

affordable terms and to facilitate 

compliance with TILA and its purposes. 

The Board proposed comment 

43(c)(2)(i)–1 to clarify that a creditor 

may base a determination of repayment 

ability on current or reasonably 

expected income from employment or 

other sources, assets other than the 

dwelling that secures the covered 

transaction, or both. The Bureau did not 

receive significant comment on the 

proposal and has adopted the Board’s 

proposed comment. In congruence with 

the Bureau’s adoption of the phrase 

‘‘value of the dwelling’’ in 

§ 1026.43(c)(2)(i), instead of the 

consumer’s equity in the dwelling, as 

originally provided in TILA section 

129C(a), comment 43(c)(2)(i)–1 likewise 

notes that the creditor may not consider 

the dwelling that secures the transaction 

as an asset in any respect. This 

comment is also consistent with 

comment 43(a)–2, which further 

clarifies that the term ‘‘dwelling’’ 

includes the value of the real property 

to which the dwelling is attached, if the 

real property also secures the covered 

transaction. Comment 43(c)(2)(i)–1 also 

provides examples of types of income 

the creditor may consider, including 

salary, wages, self-employment income, 

military or reserve duty income, tips, 

commissions, and retirement benefits; 

and examples of assets the creditor may 

consider, including funds in a savings 

or checking account, amounts vested in 

a retirement account, stocks, and bonds. 

The Bureau did not receive significant 

comment on the proposal and has 

adopted the Board’s proposed comment. 

The Bureau notes that there may be 

assets other than those listed in 

comment 43(c)(2)(i)–1 that a creditor 

may consider; the Bureau does not 

intend for the list to be exhaustive, but 

merely illustrative. 

The Board proposed comment 

43(c)(2)(i)–2 to explain that, if a creditor 

bases its determination of repayment 

ability entirely or in part on a 

consumer’s income, the creditor need 

consider only the income necessary to 

support a determination that the 

consumer can repay the covered 

transaction. The Bureau did not receive 

significant comment and has adopted 

the Board’s comment largely as 

proposed. This comment clarifies that a 

creditor need not document and verify 

every aspect of the consumer’s income, 

merely enough income to support the 

creditor’s good faith determination. For 

example, if a consumer earns income 

from a full-time job and a part-time job 

and the creditor reasonably determines 

that the consumer’s income from the 

full-time job is sufficient to repay the 

covered transaction, the creditor need 

not consider the consumer’s income 

from the part-time job. Comment 

43(c)(2)(i)–2 also cross-references 

comment 43(c)(4)–1 for clarity. 

The Board proposed comment 

43(c)(2)(i)–3 to clarify that the creditor 

may rely on the consumer’s reasonably 

expected income either in addition to or 

instead of current income. This 

comment is similar to existing comment 

34(a)(4)(ii)–2, which describes a similar 

income test for high-cost mortgages 

under § 1026.34(a)(4).107 This 

consistency should serve to reduce 

compliance burden for creditors. The 

Bureau did not receive significant 

comment on the proposal and is 

adopting the Board’s comment as 

proposed. Comment 43(c)(2)(i)–3 further 

explains that, if a creditor relies on 

expected income, the expectation that 

the income will be available for 

repayment must be reasonable and 

verified with third-party records that 

provide reasonably reliable evidence of 

the consumer’s expected income. 

Comment 43(c)(2)(i)–3 also gives 

examples of reasonably expected 

income, such as expected bonuses 

verified with documents demonstrating 

past bonuses or expected salary from a 

job verified with a written statement 

from an employer stating a specified 

salary. As the Board has previously 

stated, in some cases a covered 

transaction may have a likely payment 

increase that would not be affordable at 

the consumer’s income at the time of 

consummation. A creditor may be able 

to verify a reasonable expectation of an 

increase in the consumer’s income that 

will make the higher payment affordable 

to the consumer. See 73 FR 44522, 

44544 (July 30, 2008). 

TILA section 129C(a)(9) provides that 

a creditor may consider the seasonality 

or irregularity of a consumer’s income 

in determining repayment ability. 

Accordingly, the Board proposed 

comment 43(c)(2)(i)–4 to clarify that a 

creditor reasonably may determine that 

a consumer can make periodic loan 

payments even if the consumer’s 

income, such as self-employment or 

agricultural employment income, is 

seasonal or irregular. The Bureau 

received little comment on this 

proposal, although at least one 

consumer advocate expressed concern 

that creditors might interpret the rule to 

allow for a creditor to differentiate 

among types of income. Specifically, the 

commenter expressed concern that some 

creditors might differentiate types of 

income, for example salaried income as 

opposed to disability payments, and 

that these creditors might require the 

consumer to produce a letter stating that 

the disability income was guaranteed for 

a specified period. The Bureau 

understands these concerns, and 

cautions creditors not to overlook the 

requirements imposed by the Equal 

Credit Opportunity Act, implemented 

by the Bureau under Regulation B. See 

15 U.S.C. 1601 et seq.; 12 CFR 1002.1 

et seq. For example, 12 CFR 1002.6(b)(2) 

prohibits a creditor from taking into 

account whether an applicant’s income 

derives from any public assistance 

program. The distinction here is that 

43(c)(2)(i)–4 permits the creditor to 

consider the regularity of the 

consumer’s income, but such 

consideration must be based on the 

consumer’s income history, not based 

on the source of the income, as both a 

consumer’s wages or a consumer’s 

receipt of public assistance may or may 

not be irregular. The Bureau is adopting 

this comment largely as proposed, as the 

concerns discussed above are largely 

covered by Regulation B. Comment 

43(c)(2)(i)–4 states that, for example, if 

the creditor determines that the income 


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108The Talent Amendment is contained in the 

John Warner National Defense Authorization Act. 

See Public Law 109–364, 120 Stat. 2083, 2266 

(2006); 72 FR 50580, 5088 (Aug. 31, 2007) 

(discussing the DoD database in a final rule 

implementing the Talent Amendment). Currently, 

the DoD database is available at https:// 

www.dmdc.osd.mil/appj/mla/. 

a consumer receives a few months each 

year from, for example, selling crops or 

from agricultural employment is 

sufficient to make monthly loan 

payments when divided equally across 

12 months, then the creditor reasonably 

may determine that the consumer can 

repay the loan, even though the 

consumer may not receive income 

during certain months. 

Finally, the Bureau is adding new 

comment 43(c)(2)(i)–5 to further clarify, 

in the case of joint applicants, the 

consumer’s current or reasonably 

expected income or assets basis of the 

creditor’s ability-to-repay 

determination. This comment is similar 

in approach to the Board’s proposed 

comment 43(c)(4)–2, discussed below, 

however, proposed comment 43(c)(4)–2 

discussed the verification of income in 

the case of joint applicants. The Bureau 

is adding comment 43(c)(2)(i)–5 to 

clarify the creditor’s basis for making an 

ability-to-repay determination for joint 

applicants. Comment 43(c)(2)(i)–5 

explains that when two or more 

consumers apply for an extension of 

credit as joint obligors with primary 

liability on an obligation, § 1026.43(c)(i) 

does not require the creditor to consider 

income or assets that are not needed to 

support the creditor’s repayment ability 

determination. Thus, the comment 

explains that if the income or assets of 

one applicant are sufficient to support 

the creditor’s repayment ability 

determination, then the creditor is not 

required to consider the income or 

assets of the other applicant. 

43(c)(2)(ii) 

TILA section 129C(a)(3) requires that 

a creditor consider a consumer’s 

employment status in determining the 

consumer’s repayment ability, among 

other requirements. The Board proposal 

implemented this requirement in 

proposed § 226.43(c)(2)(ii) and clarified 

that a creditor need consider a 

consumer’s employment status only if 

the creditor relies on income from the 

consumer’s employment in determining 

repayment ability. The Bureau did not 

receive significant comment on the 

Board’s proposal and is adopting 

§ 1026.43(c)(2)(ii) as proposed. The 

Bureau sees no purpose in requiring a 

creditor to consider a consumer’s 

employment status in the case where 

the creditor need not consider the 

income from that employment in the 

creditor’s reasonable and good faith 

determination that the consumer will 

have a reasonable ability to repay the 

loan according to its terms. 

The Board proposed, and the Bureau 

is adopting, comment 43(c)(2)(ii)–1 to 

illustrate this point further. The 

comment states, for example, that if a 

creditor relies wholly on a consumer’s 

investment income to determine the 

consumer’s repayment ability, the 

creditor need not consider or verify the 

consumer’s employment status. The 

proposed comment further clarifies that 

employment may be full-time, part-time, 

seasonal, irregular, military, or selfemployment. Comment 43(c)(2)(ii)–1 is 

similar to comment 34(a)(4)–6, which 

discusses income, assets, and 

employment in determining repayment 

ability for high-cost mortgages. 

In its proposal, the Board explained 

that a creditor generally must verify 

information relied on to determine 

repayment ability using reasonably 

reliable third-party records, but may 

verify employment status orally as long 

as the creditor prepares a record of the 

oral information. The Board proposed 

comment 43(c)(2)(ii)–2 to add that a 

creditor also may verify the employment 

status of military personnel using the 

electronic database maintained by the 

Department of Defense (DoD) to 

facilitate identification of consumers 

covered by credit protections provided 

pursuant to 10 U.S.C. 987, also known 

as the ‘‘Talent Amendment.’’ 108 The 

Board solicited comment on whether 

creditors needed additional flexibility in 

verifying the employment status of 

military personnel, such as by verifying 

the employment status of a member of 

the military using a Leave and Earnings 

Statement. As this proposed comment 

was designed to provide clarification for 

creditors with respect to verifying a 

consumer’s employment, this proposed 

comment is discussed in the section-bysection analysis of § 1026.43(c)(3) 

below. 

43(c)(2)(iii) 

Proposed § 226.43(c)(2)(iii) 

implemented the requirements under 

new TILA section 129C(a)(1) and (3), in 

part, by requiring that the creditor 

consider the consumer’s monthly 

payment on the covered transaction, 

calculated in accordance with proposed 

§ 226.43(c)(5), for purposes of 

determining the consumer’s repayment 

ability. Proposed comment 43(c)(2)(iii)– 

1 clarified the regulatory language and 

made clear that mortgage-related 

obligations must also be considered. 

The Bureau did not receive comments 

on this provision. Accordingly, the 

Bureau is adopting § 1026.43(c)(2)(iii) as 

proposed. Comment 43(c)(2)(iii)–1 has 

been edited to remove the reference to 

mortgage-related obligations as 

potentially confusing. The monthly 

payment for mortgage-related 

obligations must be considered under 

§ 1026.43(c)(2)(v). 

43(c)(2)(iv) 

Proposed § 226.43(c)(2)(iv) 

implemented the requirements under 

new TILA section 129C(a)(2), in part, by 

requiring that the creditor consider ‘‘the 

consumer’s monthly payment on any 

simultaneous loan that the creditor 

knows or has reason to know will be 

made, calculated in accordance with’’ 

proposed § 226.43(c)(6), for purposes of 

determining the consumer’s repayment 

ability. As explained above in the 

section-by-section analysis of 

§ 1026.43(b)(12), ‘‘simultaneous loan’’ is 

defined, in the proposed and final rules, 

to include HELOCs. 

Proposed comment 43(c)(2)(iv)–1 

clarified that for purposes of the 

repayment ability determination, a 

simultaneous loan includes any covered 

transaction or HELOC that will be made 

to the same consumer at or before 

consummation of the covered 

transaction and secured by the same 

dwelling that secures the covered 

transaction. This comment explained 

that a HELOC that is a simultaneous 

loan that the creditor knows or has 

reason to know about must be 

considered in determining a consumer’s 

ability to repay the covered transaction, 

even though the HELOC is not a covered 

transaction subject to § 1026.43. 

Proposed comment 43(c)(2)(iv)–3 

clarified the scope of timing and the 

meaning of the phrase ‘‘at or before 

consummation’’ with respect to 

simultaneous loans that the creditor 

must consider for purposes of proposed 

§ 226.43(c)(2)(iv). Proposed comment 

43(c)(2)(iv)–4 provided guidance on the 

verification of simultaneous loans. 

The Bureau received several industry 

comments on the requirement, in the 

regulation and the statute, that the 

creditor consider any simultaneous loan 

it ‘‘knows or has reason to know’’ will 

be made. The commenters felt that the 

standard was vague, and that it would 

be difficult for a creditor to understand 

when it ‘‘has reason to know’’ a 

simultaneous loan will be made. 

The Board provided guidance on the 

‘‘knows or has reason to know’’ 

standard in proposed comment 

43(c)(2)(iv)–2. This comment provided 

that, in regard to ‘‘piggyback’’ secondlien loans, the creditor complies with 

the standard if it follows policies and 

procedures that are designed to 


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determine whether at or before 

consummation that the same consumer 

has applied for another credit 

transaction secured by the same 

dwelling. The proposed comment 

provided an example in which the 

requested loan amount is less than the 

home purchase price, indicating that 

there is a down payment coming from 

a different funding source. The 

creditor’s policies and procedures must 

require the consumer to state the source 

of the down payment, which must be 

verified. If the creditor determines that 

the source of the down payment is 

another extension of credit that will be 

made to the same consumer and secured 

by the same dwelling, the creditor 

knows or has reason to know of the 

simultaneous loan. Alternatively, if the 

creditor has verified information that 

the down payment source is the 

consumer’s existing assets, the creditor 

would be under no further obligation to 

determine whether a simultaneous loan 

will be extended at or before 

consummation. 

The Bureau believes that comment 

43(c)(2)(iv)–2 provides clear guidance 

on the ‘‘knows or has reason to know’’ 

standard, with the addition of language 

clarifying that the creditor is not 

obligated to investigate beyond 

reasonable underwriting policies and 

procedures to determine whether a 

simultaneous loan will be extended at 

or before consummation of the covered 

transaction. 

The Bureau considers the provision to 

be an accurate and appropriate 

implementation of the statute. Proposed 

§ 226.43(c)(2)(iv) and associated 

commentary are adopted substantially 

as proposed, in renumbered 

§ 1026.43(c)(2)(iv), with the addition of 

the language discussed above to 

comment 43(c)(2)(iv)–2 and other minor 

clarifying changes. Comment 

43(c)(2)(iv)–3 now includes language 

making clear that if the consummation 

of the loan transaction is extended past 

the traditional closing, any 

simultaneous loan originated after that 

traditional closing may still be 

interpreted as having occurred ‘‘at’’ 

consummation. In addition, as 

discussed below, comment 43(c)(2)(iv)– 

4, Verification of simultaneous loans, 

has been grouped with other verification 

comments, in comment 43(c)(3)–4. 

43(c)(2)(v) 

As discussed above, TILA section 

129C(a)(1) and (3) requires creditors to 

consider and verify mortgage-related 

obligations as part of the ability-to-repay 

determination ‘‘according to [the loan’s] 

terms, and all applicable taxes, 

insurance (including mortgage 

guarantee insurance), and assessments.’’ 

Section 1026.34(a)(4), which was added 

by the 2008 HOEPA Final Rule, also 

requires creditors to consider mortgagerelated obligations in assessing 

repayment ability. See the section-bysection analysis of § 1026.43(b)(8) for a 

discussion of the Bureau’s interpretation 

of ‘‘mortgage-related obligations’’ and 

the definition adopted in the final rule. 

The Board proposed to require 

creditors to consider the consumer’s 

monthly payment for mortgage-related 

obligations as part of the repayment 

ability determination. Proposed 

comment 43(c)(2)(v)–1 explained that 

mortgage-related obligations must be 

included in the creditor’s determination 

of repayment ability regardless of 

whether the amounts are included in 

the monthly payment or whether there 

is an escrow account established. 

Proposed comment 43(c)(2)(v)–2 

clarified that, in considering mortgagerelated obligations that are not paid 

monthly, the creditor may look to 

widely accepted governmental or nongovernmental standards to determine 

the pro rata monthly payment amount. 

The Board solicited comment on 

operational difficulties creditors may 

encounter when complying with this 

monthly requirement, and whether 

additional guidance was necessary. 

Proposed comment 43(c)(2)(v)–3 

explained that estimates of mortgagerelated obligations should be based 

upon information known to the creditor 

at the time the creditor underwrites the 

mortgage obligation. This comment 

explained that information is known if 

it is ‘‘reasonably available’’ to the 

creditor at the time of underwriting the 

loan, and cross-referenced current 

comment 17(c)(2)(i)–1 for guidance 

regarding ‘‘reasonably available.’’ 

Proposed comment 43(c)(2)(v)–3 further 

clarified that, for purposes of 

determining repayment ability under 

proposed § 226.43(c), the creditor would 

not need to project potential changes. 

Proposed comment 43(c)(2)(v)–4 

stated that creditors must make the 

repayment ability determination 

required under proposed § 226.43(c) 

based on information verified from 

reasonably reliable records. This 

comment explained that guidance 

regarding verification of mortgagerelated obligations could be found in 

proposed comments 43(c)(3)–1 and –2, 

which discuss verification using thirdparty records. 

The Board solicited comment on any 

special concerns regarding the 

requirement to document certain 

mortgage-related obligations, for 

example, ground rent or leasehold 

payments, or special assessments. The 

Board also solicited comment on 

whether it should provide that the 

HUD–1 or –1A or a successor form 

could serve as verification of mortgagerelated obligations reflected by the form, 

where a legal obligation exists to 

complete the form accurately. 

Industry commenters and consumer 

advocates generally supported including 

consideration and verification of 

mortgage-related obligations in the 

ability-to-repay determination. Several 

industry commenters asked that the 

Bureau provide creditors more 

flexibility in considering and verifying 

mortgage-related obligations. They 

suggested that a reasonable and good 

faith determination be deemed 

sufficient, rather than use of all 

underwriting standards in any 

particular government or nongovernment handbook. Community 

banks asserted that flexible standards 

were necessary to meet their customers’ 

needs. Some consumer advocates 

suggested that creditors be permitted to 

draw on only widely accepted standards 

that have been validated by experience 

or sanctioned by a government agency. 

Some industry commenters asked for 

more guidance on how to calculate pro 

rata monthly payment amounts and 

estimated property taxes. One industry 

commenter asked that creditors be 

permitted to use pro rata monthly 

payment amounts for special 

assessments, not quarterly or yearly 

amounts. The commenter requested that 

estimates of common assessments be 

permitted. This commenter also 

recommended that creditors be 

permitted to verify the amount of 

common assessments with information 

provided by the consumer. One 

commenter noted that verification using 

HUD–1 forms should be permitted 

because there is a legal obligation to 

complete the HUD–1 accurately. 

The Bureau is adopting the rule as 

proposed. For the reasons discussed 

below, the Bureau concludes that a 

creditor should consider the consumer’s 

monthly payment for mortgage-related 

obligations in determining the 

consumer’s ability to repay, pursuant to 

§ 1026.43(c)(1). As commenters 

confirmed, obligations related to the 

mortgage may affect the consumer’s 

ability to satisfy the obligation to make 

recurring payments of principal and 

interest. The Bureau also agrees with the 

argument raised by many commenters 

that the failure to account consistently 

for these obligations during the 

subprime crisis harmed many 

consumers. Thus, the Bureau has 

determined that it is appropriate to 

adopt § 1026.43(c)(2)(v) as proposed. 

However, the Bureau believes that 


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additional guidance will facilitate 

compliance. As explained below, the 

Bureau has expanded on the proposed 

commentary language to provide 

additional clarity and illustrative 

examples. 

The final version of comment 

43(c)(2)(v)–1 is substantially similar to 

the language as proposed. As discussed 

under § 1026.43(b)(8) above, the Bureau 

is revising the language related to 

insurance premiums to provide 

additional clarity. The modifications to 

the language in proposed comment 

43(c)(2)(v)–1 conform to the language 

adopted under § 1026.43(b)(8) and the 

related commentary. Furthermore, the 

final version of comment 43(c)(2)(v)-1 

contains additional explanation 

regarding the determination of the 

consumer’s monthly payment, and 

provides additional illustrative 

examples to clarify further the 

requirements of § 1026.43(c)(2)(v). For 

example, assume that a consumer will 

be required to pay mortgage insurance 

premiums, as defined by § 1026.43(b)(8), 

on a monthly, annual, or other basis 

after consummation. Section 

1026.43(c)(2)(v) includes these recurring 

mortgage insurance payments in the 

evaluation of the consumer’s monthly 

payment for mortgage-related 

obligations. However, if the consumer 

will incur a one-time fee or charge for 

mortgage insurance or similar purposes, 

such as an up-front mortgage insurance 

premium imposed at consummation, 

§ 1026.43(c)(2)(v) does not include this 

up-front mortgage insurance premium 

in the evaluation of the consumer’s 

monthly payment for mortgage-related 

obligations. 

As discussed under § 1026.43(b)(8) 

above, several commenters discussed 

the importance of including 

homeowners association dues and 

similar obligations in the determination 

of ability to repay. These commenters 

argued, and the Bureau agrees, that 

recurring financial obligations payable 

to community governance associations, 

such as homeowners association dues, 

should be taken into consideration in 

determining whether a consumer has 

the ability to repay the obligation. The 

Bureau recognizes the practical 

problems that may arise with including 

obligations such as these in the 

evaluation of the consumer’s monthly 

payment for mortgage-related 

obligations. Commenters identified 

issues stemming from difficulties which 

may arise in calculating, estimating, and 

verifying these obligations. Based on 

this feedback, the Bureau has 

determined that additional clarification 

is necessary. As adopted, comment 

43(c)(2)(v)–2 clarifies that creditors need 

not include payments to community 

governance associations if such 

obligations are fully satisfied at or 

before consummation by the consumer. 

This comment further clarifies that 

§ 1026.43(c)(2)(v) does not require the 

creditor to include these payments in 

the evaluation of the consumer’s 

monthly payment for mortgage-related 

obligations if the consumer does not pay 

the fee directly at or before 

consummation, and instead finances the 

obligation. In these cases, the financed 

obligation will be included in the loan 

amount, and is therefore already 

included in the determination of ability 

to repay pursuant to § 1026.43(c)(2)(iii). 

However, if the consumer incurs the 

obligation and will satisfy the obligation 

with recurring payments after 

consummation, regardless of whether 

the obligation is escrowed, 

§ 1026.43(c)(2)(v) requires the creditor 

to include the obligation in the 

evaluation of the consumer’s monthly 

payment for mortgage-related 

obligations. The Bureau has also 

addressed the concerns raised by 

commenters related to calculating, 

estimating, and verifying these 

obligations in comments 43(c)(2)(v)–4 

and –5 and 43(c)(3)–5, respectively. 

As discussed under § 1026.43(b)(8) 

above, one comment letter focused 

extensively on community transfer fees. 

The Bureau agrees with the argument, 

advanced by several commenters, that 

the entirety of the consumer’s ongoing 

obligations should be included in the 

determination. A responsible 

determination of the consumer’s ability 

to repay requires an accounting of such 

obligations, whether the purpose of the 

obligation is to satisfy the payment of a 

community transfer fee or traditional 

homeowners association dues. An 

obligation that is not paid in full at or 

before consummation must be paid after 

consummation, which may affect the 

consumer’s ability to repay ongoing 

obligations. Thus, comment 43(c)(2)(v)– 

2 clarifies that community transfer fees 

are included in the determination of the 

consumer’s monthly payment for 

mortgage-related obligations if such fees 

are paid on a recurring basis after 

consummation. Additionally, the 

Bureau believes that a creditor is not 

required to include community transfer 

fees that are imposed on the seller, as 

many community transfer fees are, in 

the ability-to-repay calculation. 

In response to the request for feedback 

in the proposed rule, several 

commenters addressed the proposed 

treatment of special assessments. Unlike 

community transfer fees, which are 

generally identified in the deed or 

master community plan, creditors may 

encounter difficulty determining 

whether special assessments exist. 

Special assessments are often imposed 

in response to some urgent or 

unexpected need. Consequently, neither 

the creditor nor the community 

governance association may be able to 

predict the frequency and magnitude of 

special assessments. However, this 

difficulty does not exist for special 

assessments that are known at the time 

of underwriting. Known special 

assessments, which the buyer must pay 

and which may be significant, may 

affect the consumer’s ability to repay the 

obligation. Thus, comment 43(c)(2)(v)–3 

clarifies that the creditor must include 

special assessments in the evaluation of 

the consumer’s monthly payment for 

mortgage-related obligations if such fees 

are paid by the consumer on a recurring 

basis after consummation, regardless of 

whether an escrow is established for 

these fees. For example, if a 

homeowners association imposes a 

special assessment that the consumer 

will have to pay in full at or before 

consummation, § 1026.43(c)(2)(v) does 

not include the special assessment in 

the evaluation of the consumer’s 

monthly payment for mortgage-related 

obligations. Section 1026.43(c)(2)(v) 

does not require a creditor to include 

special assessments in the evaluation of 

the consumer’s monthly payment for 

mortgage-related obligations if the 

special assessments are imposed as a 

one-time charge. For example, if a 

homeowners association imposes a 

special assessment that the consumer 

will have to satisfy in one payment, 

§ 1026.43(c)(2)(v) does not include this 

one-time special assessment in the 

evaluation of the consumer’s monthly 

payment for mortgage-related 

obligations. However, if the consumer 

will pay the special assessment on a 

recurring basis after consummation, 

regardless of whether the consumer’s 

payments for the special assessment are 

escrowed, § 1026.43(c)(2)(v) requires the 

creditor to include this recurring special 

assessment in the evaluation of the 

consumer’s monthly payment for 

mortgage-related obligations. Comment 

43(c)(2)(v)–3 also includes several other 

examples illustrating this requirement. 

The Bureau agrees that clear and 

detailed guidance regarding determining 

pro rata monthly payments of mortgagerelated obligations should be provided. 

However, the Bureau believes that it is 

important to strike a balance between 

providing clear guidance and providing 

creditors with the flexibility to serve the 

evolving mortgage market. The 

comments identified significant 

concerns with the use of ‘‘widely 


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accepted governmental and nongovernmental standards’’ for purposes 

of determining the pro rata monthly 

payment amount for mortgage-related 

obligations. While commenters 

generally stated that ‘‘widely accepted 

governmental standards’’ was an 

appropriate standard, others commented 

that ‘‘non-governmental standards’’ may 

not be sufficiently clear. The Bureau 

believes that ‘‘governmental standards’’ 

could be relied on to perform pro rata 

calculations of monthly mortgage 

related obligations because such 

standards provide detailed and 

comprehensive guidance and are 

frequently revised to adapt to the needs 

of the evolving residential finance 

market. However, the comments noted 

that ‘‘non-governmental standards’’ is 

not sufficiently descriptive to illustrate 

clearly how to calculate pro rata 

monthly payments. Additionally, the 

Bureau believes that clear guidance is 

also needed to address the possibility 

that a particular government program 

may not specifically describe how to 

calculate pro rata monthly payment 

amounts for mortgage-related 

obligations. Thus, the Bureau believes 

that it is appropriate to revise and 

further develop the concept of ‘‘widely 

accepted governmental and nongovernmental standards.’’ 

Based on this feedback, the Bureau 

has revised and expanded the comment 

clarifying how to calculate pro rata 

monthly mortgage obligations. As 

adopted, comment 43(c)(2)(v)–4 

provides that, if the mortgage loan is 

originated pursuant to a governmental 

program, the creditor may determine the 

pro rata monthly amount of the 

mortgage-related obligation in 

accordance with the specific 

requirements of that program. If the 

mortgage loan is originated pursuant to 

a government program that does not 

contain specific standards for 

determining the pro rata monthly 

amount of the mortgage-related 

obligation, or if the mortgage loan is not 

originated pursuant to a government 

program, the creditor complies with 

§ 1026.43(c)(2)(v) by dividing the total 

amount of a particular non-monthly 

mortgage-related obligation by no more 

than the number of months from the 

month that the non-monthly mortgagerelated obligation last was due prior to 

consummation until the month that the 

non-monthly mortgage-related 

obligation next will be due after 

consummation. Comment 43(c)(2)(v)–4 

also includes several examples which 

illustrate the conversion of non-monthly 

obligations into monthly, pro rata 

payments. For example, assume that a 

consumer applies for a mortgage loan on 

February 1st. Assume further that the 

subject property is located in a 

jurisdiction where property taxes are 

paid in arrears annually on the first day 

of October. The creditor complies with 

§ 1026.43(c)(2)(v) by determining the 

annual property tax amount owed in the 

prior October, dividing the amount by 

12, and using the resulting amount as 

the pro rata monthly property tax 

payment amount for the determination 

of the consumer’s monthly payment for 

mortgage-related obligations. The 

creditor complies even if the consumer 

will likely owe more in the next year 

than the amount owed the prior October 

because the jurisdiction normally 

increases the property tax rate annually, 

provided that the creditor does not have 

knowledge of an increase in the 

property tax rate at the time of 

underwriting. 

The Bureau is adopting comment 

43(c)(2)(v)–5 in a form that is 

substantially similar to the version 

proposed. One industry commenter was 

especially concerned about estimating 

costs for community governance 

organizations, such as cooperative, 

condominium, or homeowners 

associations. This commenter noted 

that, because of industry concerns about 

TILA liability, many community 

governance organizations refuse to 

provide estimates of association 

expenses absent agreements disclaiming 

association liability. This commenter 

expressed concern that the ability-torepay requirements would make 

community governance organizations 

less likely to provide estimates of 

association expenses, which would 

result in mortgage loan processing 

delays. The Bureau does not believe that 

the ability-to-repay requirements will 

lead to difficulties in exchanging 

information between creditors and 

associations because the ability-to-repay 

requirements generally apply only to 

creditors, as defined under 

§ 1026.2(a)(17). However, the Bureau 

recognizes that consumers may be 

harmed if mortgage loan transactions are 

needlessly delayed by concerns arising 

from the ability-to-repay requirements. 

Thus, the Bureau has decided to address 

these concerns by adding several 

examples to comment 43(c)(2)(v)–5 

illustrating the requirements of 

§ 1026.43(c)(2)(v). For example, the 

creditor complies with § 1026.43(c)(2)(v) 

by relying on an estimate of mortgagerelated obligations prepared by the 

homeowners association. In accordance 

with the guidance provided under 

comment 17(c)(2)(i)–1, the creditor need 

only exercise due diligence in 

determining mortgage-related 

obligations, and complies with 

§ 1026.43(c)(2)(v) by relying on the 

representations of other reliable parties 

in preparing estimates. Or, assume that 

the homeowners association has 

imposed a special assessment on the 

seller, but the seller does not inform the 

creditor of the special assessment, the 

homeowners association does not 

include the special assessment in the 

estimate of expenses prepared for the 

creditor, and the creditor is unaware of 

the special assessment. The creditor 

complies with § 1026.43(c)(2)(v) if it 

does not include the special assessment 

in the determination of mortgage-related 

obligations. The creditor may rely on 

the representations of other reliable 

parties, in accordance with the guidance 

provided under comment 17(c)(2)(i)–1. 

43(c)(2)(vi) 

TILA section 129C(a)(1) and (3) 

requires creditors to consider ‘‘current 

obligations’’ as part of an ability-torepay determination. Proposed 

§ 226.43(c)(2)(vi) would have 

implemented the requirement under 

TILA section 129C(a)(1) and (3) by 

requiring creditors to consider current 

debt obligations. Proposed comment 

43(c)(2)(vi)–1 would have specified that 

current debt obligations creditors must 

consider include, among other things, 

alimony and child support. The Bureau 

believes that it is reasonable to consider 

child support and alimony as ‘‘debts’’ 

given that the term ‘‘debt’’ is not defined 

in the statute. However, the Bureau 

understands that while alimony and 

child support are obligations, they may 

not be considered debt obligations 

unless and until they are not paid in a 

timely manner. Therefore, 

§ 1026.43(c)(2)(vi) specifies that 

creditors must consider current debt 

obligations, alimony, and child support 

to clarify that alimony and child 

support are included whether or not 

they are paid in a timely manner. 

Proposed comment 43(c)(2)(vi)–1 

would have referred creditors to widely 

accepted governmental and nongovernmental underwriting standards in 

determining how to define ‘‘current debt 

obligations.’’ The proposed comment 

would have given examples of current 

debt obligations, such as student loans, 

automobile loans, revolving debt, 

alimony, child support, and existing 

mortgages. The Board solicited 

comment on proposed comment 

43(c)(2)(vi)–1 and on whether more 

specific guidance should be provided to 

creditors. Commenters generally 

supported giving creditors significant 

flexibility and did not encourage the 

Bureau to adopt more specific guidance. 


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Because the Bureau believes that a wide 

range of criteria and guidelines for 

considering current debt obligations 

will contribute to reasonable, good faith 

ability-to-repay determinations, 

comment 43(c)(2)(vi)–1 as adopted 

preserves the flexible approach of the 

Board’s proposed comment. The 

comment gives examples of current debt 

obligations but does not provide an 

exhaustive list. The comment therefore 

preserves substantial flexibility for 

creditors to develop their own 

underwriting guidelines regarding 

consideration of current debt 

obligations. Reference to widely 

accepted governmental and nongovernmental underwriting standards 

has been omitted, as discussed above in 

the section-by-section analysis of 

§ 1026.43(c). 

The Board also solicited comment on 

whether additional guidance should be 

provided regarding consideration of 

debt obligations that are almost paid off. 

Commenters generally stated that 

creditors should be required to consider 

obligations that are almost paid off only 

if they affect repayment ability. The 

Bureau agrees that many different 

standards for considering obligations 

that are almost paid off could lead to 

reasonable, good faith ability-to-repay 

determinations. As adopted, comment 

43(c)(2)(vi)–1 includes additional 

language clarifying that creditors have 

significant flexibility to consider current 

debt obligations in light of attendant 

facts and circumstances, including that 

an obligation is likely to be paid off 

soon after consummation. As an 

example, comment 43(c)(2)(vi)–1 states 

that a creditor may take into account 

that an existing mortgage is likely to be 

paid off soon after consummation 

because there is an existing contract for 

sale of the property that secures that 

mortgage. 

The Board also solicited comment on 

whether additional guidance should be 

provided regarding consideration of 

debt obligations in forbearance or 

deferral. Several commenters, including 

both creditors and consumer advocates, 

supported requiring creditors to 

consider obligations in forbearance or 

deferral. At least one large creditor 

objected to requiring creditors to 

consider such obligations in all cases. 

The Bureau believes that many different 

standards for considering obligations in 

forbearance or deferral could lead to 

reasonable, good faith determinations of 

ability to repay. As adopted, comment 

43(c)(2)(vi)–1 therefore includes 

additional language clarifying that 

creditors should consider whether debt 

obligations in forbearance or deferral at 

the time of underwriting are likely to 

affect a consumer’s ability to repay 

based on the payment for which the 

consumer will be liable upon expiration 

of the forbearance or deferral period and 

other relevant facts and circumstances, 

such as when the forbearance or deferral 

period will expire. 

Parts of proposed comment 

43(c)(2)(vi)–1 and proposed comment 

43(c)(2)(vi)–2 would have provided 

guidance on verification of current debt 

obligations. All guidance regarding 

verification has been moved to the 

commentary to § 1026.43(c)(3) and is 

discussed below in the section-bysection analysis of that provision. 

The Board solicited comment on 

whether it should provide guidance on 

consideration of current debt obligations 

for joint applicants. Commenters 

generally did not comment on 

consideration of current debt obligations 

for joint applicants. One trade 

association commenter stated that joint 

applicants should be subject to the same 

standards as individual applicants. 

Because the Bureau believes that the 

current debt obligations of all joint 

applicants must be considered to reach 

a reasonable, good faith determination 

of ability to repay, the Bureau is 

adopting new comment 43(c)(2)(vi)–2. 

New comment 43(c)(2)(vi)–2 clarifies 

that when two or more consumers apply 

for credit as joint obligors, a creditor 

must consider the debt obligations of all 

such joint applicants. The comment also 

explains that creditors are not required 

to consider the debt obligations of a 

consumer acting merely as surety or 

guarantor. Finally, the comment 

clarifies that the requirements of 

§ 1026.43(c)(2)(vi) do not affect various 

disclosure requirements. 

43(c)(2)(vii) 

TILA section 129C(a)(3) requires 

creditors to consider the consumer’s 

monthly debt-to-income ratio or 

residual income the consumer will have 

after paying non-mortgage debt and 

mortgage-related obligations, as part of 

the ability-to-repay determination under 

TILA section 129C(a)(1). This provision 

is consistent with the 2008 HOEPA 

Final Rule, which grants a creditor in a 

high-cost or higher-priced mortgage loan 

a presumption of compliance with the 

requirement that the creditor assess 

repayment ability if, among other 

things, the creditor considers the 

consumer’s debt-to-income ratio or 

residual income. See 

§ 1026.34(a)(4)(iii)(C), (b)(1). Existing 

comment 34(a)(4)(iii)(C)–1 provides that 

creditors may look to widely accepted 

governmental and non-governmental 

underwriting standards in defining 

‘‘income’’ and ‘‘debt’’ including, for 

example, those set forth in the FHA 

Handbook on Mortgage Credit Analysis 

for Mortgage Insurance on One-to-Four 

Unit Mortgage Loans. 

Proposed § 226.43(c)(2)(vii) would 

have implemented TILA section 

129C(a)(3) by requiring creditors, as part 

of the repayment ability determination, 

to consider the consumer’s monthly 

debt-to-income ratio or residual income. 

Proposed comment 43(c)(2)(vii)–1 

would have cross-referenced 

§ 226.43(c)(7), regarding the definitions 

and calculations for the monthly debtto-income and residual income. 

Consistent with the 2008 HOEPA Final 

Rule, the proposed rule would have 

provided creditors flexibility to 

determine whether to use a debt-toincome ratio or residual income metric 

in assessing the consumer’s repayment 

ability. As the Board noted, if one of 

these metrics alone holds as much 

predictive power as the two together, 

then requiring creditors to use both 

metrics could reduce credit access 

without an offsetting increase in 

consumer protection. 76 FR 27390, 

27424–25 (May 11, 2011), citing 73 FR 

44550 (July 30, 2008). The proposed 

rule did not specifically address 

creditors’ use of both metrics if such an 

approach would provide incremental 

predictive power of assessing a 

consumer’s repayment ability. However, 

as discussed above in the section-bysection analysis of § 1026.43(c), the 

Board’s proposed comment 43(c)–1 

would have provided that, in evaluating 

the consumer’s repayment ability under 

§ 226.43(c), creditors may look to widely 

accepted governmental or nongovernmental underwriting standards, 

such as the FHA Handbook on Mortgage 

Credit Analysis for Mortgage Insurance 

on One-to-Four Unit Mortgage Loans, 

consistent with existing comment 

34(a)(4)(iii)(C)–1. 

In response to the proposed rule, 

industry commenters and consumer 

advocates generally supported including 

consideration of the debt-to-income 

ratio or residual income in the abilityto-repay determination. Several industry 

commenters asked that the Bureau 

provide creditors more flexibility in 

considering and verifying the debt-toincome ratio or residual income. They 

suggested that a reasonable and good 

faith determination be deemed 

sufficient, rather than use of all 

underwriting standards in any 

particular government or nongovernment handbook. Community 

banks asserted that flexible standards 

are necessary to meet their customers’ 

needs. Some consumer advocates 

suggested that creditors be permitted 

only to draw on widely accepted 


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standards that have been validated by 

experience or sanctioned by a 

government agency. They argued that 

more specific standards would help 

ensure safe and sound underwriting 

criteria, higher compliance rates, and a 

larger number of performing loans. 

Section 1026.43(c)(2)(vii) adopts the 

Board’s proposal by requiring a creditor 

making the repayment determination 

under § 1026.43(c)(1) to consider the 

consumer’s monthly debt-to-income 

ratio or residual income, in accordance 

with § 1026.43(c)(7). The Bureau 

believes that a flexible approach to 

evaluating a consumer’s debt-to-income 

ratio or residual income is appropriate 

because stricter guidelines may limit 

access to credit and create fair lending 

problems. Broad guidelines will provide 

creditors necessary flexibility to serve 

the whole of the mortgage market 

effectively and responsibly. 

Accordingly, the final rule sets 

minimum underwriting standards while 

providing creditors with flexibility to 

use their own reasonable guidelines in 

making the repayment ability 

determination required by 

§ 1026.43(c)(1). Moreover, and as in the 

2008 HOEPA Final Rule, the approach 

would provide creditors flexibility to 

determine whether to use a debt-toincome ratio or residual income, or 

both, in assessing a consumer’s 

repayment ability. 

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

Bureau is not finalizing the Board’s 

proposed comment 43(c)–1 regarding 

the use of widely accepted 

governmental or non-governmental 

underwriting standards in evaluating 

the consumer’s repayment ability. 

Instead, for the reasons discussed above, 

comment 43(c)(2)–1 provides that the 

rule and commentary permit creditors to 

adopt reasonable standards for 

evaluating factors in underwriting a 

loan, such as whether to classify 

particular inflows or obligations as 

‘‘income’’ or ‘‘debt,’’ and that, in 

evaluating a consumer’s repayment 

ability, a creditor may look to 

governmental underwriting standards. 

See section-by-section analysis of 

§ 1026.43(c)(2). 

The Bureau believes a flexible 

approach to evaluating debt and income 

is appropriate in making the repayment 

ability determination under 

§ 1026.43(c). However, for the reasons 

discussed below, the Bureau believes a 

quantitative standard for evaluating a 

consumer’s debt-to-income ratio should 

apply to loans that are ‘‘qualified 

mortgages’’ that receive a safe harbor or 

presumption of compliance with the 

repayment ability determination under 

§ 1026.43(c). For a discussion of the 

quantitative debt-to-income standard 

that applies to qualified mortgages 

pursuant to § 1026.43(e)(2) and the 

rationale for applying a quantitative 

standard in the qualified mortgage 

space, see the section-by-section 

analysis of § 1026.43(e)(2). 

43(c)(2)(viii) 

TILA section 129C(a)(1) and (3) 

requires creditors to consider credit 

history as part of the ability-to-repay 

determination. Proposed 

§ 226.43(c)(2)(viii) would have 

implemented the requirement under 

TILA section 129C(a)(1) and (3) by 

adopting the statutory requirement that 

creditors consider credit history as part 

of an ability-to-repay determination. 

Proposed comment 43(c)(2)(viii)–1 

would have referred creditors to widely 

accepted governmental and nongovernmental underwriting standards to 

define credit history. The proposed 

comment would have given examples of 

factors creditors could consider, such as 

the number and age of credit lines, 

payment history, and any judgments, 

collections, or bankruptcies. The 

proposed comment also would have 

referred creditors to credit bureau 

reports or to nontraditional credit 

references such as rental payment 

history or public utility payments. 

Commenters generally did not object 

to the proposed adoption of the 

statutory requirement to consider credit 

history as part of ability-to-repay 

determinations. Commenters generally 

supported giving creditors significant 

flexibility in how to consider credit 

history. Creditors also generally 

supported clarifying that creditors may 

look to nontraditional credit references 

such as rental payment history or public 

utility payments. 

Section 1026.43(c)(2)(viii) is adopted 

as proposed. Comment 43(c)(2)(viii)–1 

as adopted substantially maintains the 

proposed comment’s flexible approach 

to consideration of credit history. 

Comment 43(c)(2)(viii)–1 notes that 

‘‘credit history’’ may include factors 

such as the number and age of credit 

lines, payment history, and any 

judgments, collections, or bankruptcies. 

The comment clarifies that the rule does 

not require creditors to obtain or 

consider a consolidated credit score or 

prescribe a minimum credit score that 

creditors must apply. The comment 

further clarifies that the rule does not 

specify which aspects of credit history 

a creditor must consider or how various 

aspects of credit history could be 

weighed against each other or against 

other underwriting factors. The 

comment explains that some aspects of 

a consumer’s credit history, whether 

positive or negative, may not be directly 

indicative of the consumer’s ability to 

repay and that a creditor therefore may 

give various aspects of a consumer’s 

credit history as much or as little weight 

as is appropriate to reach a reasonable, 

good faith determination of ability to 

repay. The Bureau believes that this 

flexible approach is appropriate because 

of the wide range of creditors, 

consumers, and loans to which the rule 

will apply. The Bureau believes that a 

wide range of approaches to considering 

credit history will contribute to 

reasonable, good faith ability-to-repay 

determinations. As in the proposal, the 

comment, as adopted, clarifies that 

creditors may look to non-traditional 

credit references such as rental payment 

history or public utility payments, but 

are not required to do so. Reference to 

widely accepted governmental and nongovernmental underwriting standards 

has been omitted, as discussed in the 

section-by-section analysis of 

§ 1026.43(c), above. 

Portions of proposed comment 

43(c)(2)(viii)–1 discussed verification of 

credit history. All guidance regarding 

verification has been moved to the 

commentary to § 1026.43(c)(3) and is 

discussed below in the section-bysection analysis of that provision. 

Because the Bureau believes that the 

credit history of all joint applicants 

must be considered to reach a 

reasonable, good faith determination of 

joint applicants’ ability to repay, and for 

conformity with the commentary to 

§ 1026.43(c)(2)(vi) regarding 

consideration of current debt obligations 

for multiple applicants, the Bureau is 

adopting new comment 43(c)(2)(viii)–2 

regarding multiple applicants. The 

comment clarifies that, when two or 

more consumers apply jointly for credit, 

the creditor is required by 

§ 1026.43(c)(2)(viii) to consider the 

credit history of all joint applicants. 

New comment 43(c)(2)(viii)–2 also 

clarifies that creditors are not required 

to consider the credit history of a 

consumer who acts merely as a surety 

or guarantor. Finally, the comment 

clarifies that the requirements of 

§ 1026.43(c)(2)(viii) do not affect various 

disclosure requirements. 

43(c)(3) Verification Using Third-Party 

Records 

TILA section 129C(a)(1) requires that 

a creditor make a reasonable and good 

faith determination, based on ‘‘verified 

and documented information,’’ that a 

consumer has a reasonable ability to 

repay the covered transaction. The 

Board’s 2008 HOEPA Final Rule 

required that a creditor verify the 


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consumer’s income or assets relied on to 

determine repayment ability and the 

consumer’s current obligations under 

§ 1026.34(a)(4)(ii)(A) and (C). Thus, 

TILA section 129C(a)(1) differs from 

existing repayment ability rules by 

requiring a creditor to verify 

information relied on in considering the 

consumer’s ability to repay according to 

the considerations required under TILA 

section 129C(a)(3), which are discussed 

above in the section-by-section analysis 

of § 1026.43(c)(2). 

The Board’s proposal would have 

implemented TILA section 129C(a)(1)’s 

general requirement to verify a 

consumer’s repayment ability in 

proposed § 226.43(c)(3), which required 

that a creditor verify a consumer’s 

repayment ability using reasonably 

reliable third-party records, with two 

exceptions. Under the first exception, 

proposed § 226.43(c)(3)(i) provided that 

a creditor may orally verify a 

consumer’s employment status, if the 

creditor subsequently prepares a record 

of the oral employment status 

verification. Under the second 

exception, proposed § 226.43(c)(3)(ii) 

provided that, in cases where a creditor 

relies on a consumer’s credit report to 

verify a consumer’s current debt 

obligations and the consumer’s 

application states a current debt 

obligation not shown in the consumer’s 

credit report, the creditor need not 

independently verify the additional debt 

obligation, as reported. Proposed 

comment 43(c)(3)–1 clarified that 

records a creditor uses to verify a 

consumer’s repayment ability under 

proposed § 226.43(c)(3) must be specific 

to the individual consumer. Records 

regarding, for example, average incomes 

in the consumer’s geographic location or 

average incomes paid by the consumer’s 

employer would not be specific to the 

individual consumer and are not 

sufficient. 

Proposed comment 43(c)(3)–2 

provided that a creditor may obtain 

third-party records from a third-party 

service provider, as long as the records 

are reasonably reliable and specific to 

the individual consumer. As stated in 

§ 1026.43(c)(3), the standard for 

verification is that the creditor must use 

‘‘reasonably reliable third-party 

records,’’ which is fulfilled for 

reasonably reliable documents, specific 

to the consumer, provided by a thirdparty service provider. Also, proposed 

comment 43(c)(3)–2 clarified that a 

creditor may obtain third-party records, 

for example, payroll statements, directly 

from the consumer, again as long as the 

records are reasonably reliable. 

The Board also solicited comment on 

whether any documents or records 

prepared by the consumer and not 

reviewed by a third party appropriately 

could be considered in determining 

repayment ability, for example, because 

a particular record provides information 

not obtainable using third-party records. 

In particular, the Board solicited 

comment on methods currently used to 

ensure that documents prepared by selfemployed consumers (such as a year-todate profit and loss statement for the 

period after the period covered by the 

consumer’s latest income tax return, or 

an operating income statement prepared 

by a consumer whose income includes 

rental income) are reasonably reliable 

for use in determining repayment 

ability. 

Commenters generally supported the 

Board’s proposal to implement the 

Dodd-Frank Act’s verification 

requirements. Consumer groups 

generally found the proposal to be an 

accurate implementation of the statute 

and posited that the proposal would 

provide much-needed protection for 

consumers. Industry commenters 

generally also supported the proposal, 

noting that most underwriters already 

engaged in similarly sound 

underwriting practices. Some industry 

commenters noted that verifying a 

consumer’s employment status imposes 

a burden upon the consumer’s employer 

as well, however the Bureau has 

concluded that the oral verification 

provision provided by 

§ 1026.43(c)(3)(ii), discussed below, 

alleviates such concerns. 

The Bureau is adopting 

§ 1026.43(c)(3) substantially as 

proposed, with certain clarifying 

changes which are described below. The 

final rule also adds new comment 

43(c)(3)–3. In addition, for 

organizational purposes, the final rule 

generally adopts proposed comments 

43(c)(2)(iv)–4, 43(c)(2)(v)–4, 

43(c)(2)(vi)–1, 43(c)(2)(viii)–1, and 

43(c)(2)(ii)–2 in renumbered comments 

43(c)(3)–4 through –8 with revisions as 

discussed below. These changes and 

additions to § 1026.43(c)(3) and its 

commentary are discussed below. 

First, the final rule adds a new 

§ 1026.43(c)(3)(i), which provides that, 

for purposes of § 1026.43(c)(2)(i), a 

creditor must verify a consumer’s 

income or assets in accordance with 

§ 1026.43(c)(4). This is an exception to 

the general rule in § 1026.43(c)(3) that a 

creditor must verify the information that 

the creditor relies on in determining a 

consumer’s repayment ability under 

§ 1026.43(c)(2) using reasonably reliable 

third-party records. Because of this new 

provision, proposed § 226.43(c)(3)(i) and 

(ii) are adopted as proposed in 

§ 1026.43(c)(3)(ii) and (iii), with minor 

technical revisions. In addition, the 

Bureau is adopting proposed comments 

43(c)(3)–1 and –2 substantially as 

proposed with revisions to clarify that 

the guidance applies to both 

§ 1026.43(c)(3) and (c)(4). 

The Bureau is adding new comment 

43(c)(3)–3 to clarify that a credit report 

generally is considered a reasonably 

reliable third-party record. The Board’s 

proposed comment 43(c)(2)(vi)–2 stated, 

among other things, that a credit report 

is deemed a reasonably reliable thirdparty record under proposed 

§ 226.43(c)(3). Commenters did not 

address that aspect of proposed 

comment 43(c)(2)(vi)–2. The Bureau 

believes credit reports are generally 

reasonably reliable third-party records 

for verification purposes. Comment 

43(c)(3)–3 also explains that a creditor 

is not generally required to obtain 

additional reasonably reliable thirdparty records to verify information 

contained in a credit report, as the 

report itself is the means of verification. 

Likewise, comment 43(c)(3)–3 explains 

that if information is not included in the 

credit report, then the credit report 

cannot serve as a means of verifying that 

information. The comment further 

explains, however, that if the creditor 

may know or have reason to know that 

a credit report is not reasonably reliable, 

in whole or in part, then the creditor 

complies with § 1026.43(c)(3) by 

disregarding such inaccurate or 

disputed items or reports. The creditor 

may also, but is not required, to obtain 

other reasonably reliable third-party 

records to verify information with 

respect to which the credit report, or 

item therein, may be inaccurate. The 

Bureau believes that this guidance 

strikes the appropriate balance between 

acknowledging that in many cases, a 

credit report is a reasonably reliable 

third-party record for verification and 

documentation for many creditors, but 

also that a credit report may be subject 

to a fraud alert, extended alert, active 

duty alert, or similar alert identified in 

15 U.S.C. 1681c–1, or may contain debt 

obligations listed on a credit report is 

subject to a statement of dispute 

pursuant to 15 U.S.C. 1681i(b). 

Accordingly, for the reasons discussed 

above, the Bureau is adopting new 

comment 43(c)(3)–3. 

As noted above, the Bureau is 

adopting proposed comment 

43(c)(2)(iv)–4 as comment 43(c)(3)–4 for 

organizational purposes. The Board 

proposed comment 43(c)(2)(iv)–4 to 

explain that although a creditor could 

use a credit report to verify current 

obligations, the report would not reflect 

a simultaneous loan that has not yet 

been consummated or has just recently 


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been consummated. Proposed comment 

43(c)(2)(iv)–2 clarified that if the 

creditor knows or has reason to know 

that there will be a simultaneous loan 

extended at or before consummation, 

then the creditor may verify the 

simultaneous loan by obtaining thirdparty verification from the third-party 

creditor of the simultaneous loan. The 

proposed comment provided, as an 

example, that the creditor may obtain a 

copy of the promissory note or other 

written verification from the third-party 

creditor in accordance with widely 

accepted governmental or nongovernmental standards. In addition, 

proposed comment 43(c)(2)(iv)–2 crossreferenced comments 43(c)(3)–1 and –2, 

which discuss verification using thirdparty records. The Bureau generally did 

not receive comment with respect to 

this proposed comment; however, at 

least one commenter supported the 

example that a promissory note would 

serve as appropriate documentation for 

verifying a simultaneous loan. The 

Bureau is adopting proposed comment 

43(c)(2)(iv)–4 as comment 43(c)(3)–4 

with the following amendment. For 

consistency with other aspects of the 

rule, comment 43(c)(3)–4 does not 

include the Board’s proposed reference 

to widely accepted governmental or 

non-governmental standards. 

The Board proposed comment 

43(c)(2)(v)–4, which stated that creditors 

must make the repayment ability 

determination required under proposed 

§ 226.43(c) based on information 

verified from reasonably reliable 

records. The Board solicited comment 

on any special concerns regarding the 

requirement to document certain 

mortgage-related obligations, for 

example, ground rent or leasehold 

payments, or special assessments. The 

Board also solicited comment on 

whether it should provide that the 

HUD–1 or –1A or a successor form 

could serve as verification of mortgagerelated obligations reflected by the form, 

where a legal obligation exists to 

complete the HUD–1 or –1A accurately. 

To provide additional clarity, the 

Bureau is moving guidance that 

discusses verification, including 

proposed comment 43(c)(2)(v)–4, as part 

of the section-by-section analysis of, and 

commentary to, § 1026.43(c)(3). 

Additional comments from the Board’s 

proposal with respect to mortgagerelated obligations are in the section-bysection analysis of § 1026.43(c)(2)(v), 

above. 

Industry commenters and consumer 

advocates generally supported including 

consideration and verification of 

mortgage-related obligations in the 

ability-to-repay determination. Several 

industry commenters asked that the 

Bureau provide creditors more 

flexibility in considering and verifying 

mortgage-related obligations. Several 

consumer advocate commenters 

discussed the importance of verifying 

mortgage-related obligations based on 

reliable records, noting that inadequate, 

or non-existent, verification measures 

played a significant part in the subprime 

crisis. Industry commenters agreed that 

verification was appropriate, but these 

commenters also stressed the 

importance of clear and detailed 

guidance. Several commenters were 

concerned about the meaning of 

‘‘reasonably reliable records’’ in the 

context of mortgage-related obligations. 

Some commenters asked the Bureau to 

designate certain items as reasonably 

reliable, such as taxes referenced in a 

title report, statements of common 

expenses provided by community 

associations, or items identified in the 

HUD–1 or HUD–1A. 

The Bureau is adopting proposed 

comment 43(c)(2)(v)–4 as comment 

43(c)(3)–5 with revision to provide 

further explanation of its approach to 

verifying mortgage-related obligations. 

While the reasonably reliable standard 

contains an element of subjectivity, the 

Bureau concludes that this flexibility is 

necessary. The Bureau believes that it is 

important to craft a regulation with the 

flexibility to accommodate an evolving 

mortgage market. The Bureau 

determines that the reasonably reliable 

standard is appropriate in this context 

given the nature of the items that are 

defined as mortgage-related obligations. 

Thus, comment 43(c)(3)–5 incorporates 

by reference comments 43(c)(3)–1 and 

–2. Mortgage-related obligations refer to 

a limited set of charges, such as 

property taxes and lease payments, 

which a creditor can generally verify 

from an independent or objective 

source. Thus, in the context of 

mortgage-related obligations this 

standard provides certainty while being 

sufficiently flexible to adapt as 

underwriting practices develop over 

time. 

To address the concerns raised by 

several commenters, the Bureau is 

providing further clarification in 

43(c)(3)–5 to provide detailed guidance 

and several examples illustrating these 

requirements. For example, comment 

43(c)(3)–5 clarifies that records are 

reasonably reliable for purposes 

§ 1026.43(c)(2)(v) if the information in 

the record was provided by a 

governmental organization, such as a 

taxing authority or local government. 

Comment 43(c)(3)–5 also explains that a 

creditor complies with § 1026.43(c)(2)(v) 

if it relies on, for example, homeowners 

association billing statements provided 

by the seller to verify other information 

in a record provided by an entity 

assessing charges, such as a 

homeowners association. Comment 

43(c)(3)–5 further illustrates that records 

are reasonably reliable if the 

information in the record was obtained 

from a valid and legally executed 

contract, such as a ground rent 

agreement. Comment 43(c)(3)–5 also 

clarifies that other records may be 

reasonably reliable if the creditor can 

demonstrate that the source provided 

the information objectively. 

The Board’s proposal solicited 

comment regarding whether the HUD–1, 

or similar successor document, should 

be considered a reasonably reliable 

record. The Board noted, and 

commenters confirmed, that the HUD–1, 

HUD–1A, or successor form might be a 

reasonably reliable record because a 

legal obligation exists to complete the 

form accurately. Although the Bureau 

agrees with these considerations, the 

Bureau does not believe that a 

document provided in final form at 

consummation, such as the HUD–1, 

should be used for the purposes of 

determining ability to repay pursuant to 

§ 1026.43(c)(2)(v). The Bureau expects 

the ability-to-repay determination to be 

conducted in advance of consummation. 

It therefore may be impractical for a 

creditor to rely on a document that is 

produced in final form at, or shortly 

before, consummation for verification 

purposes. The Bureau is also concerned 

that real estate transactions may be 

needlessly disrupted or delayed if 

creditors delay determining the 

consumer’s ability to repay until the 

HUD–1, or similar successor document, 

is prepared. Given these concerns, and 

strictly as a matter of policy, the Bureau 

does not wish to encourage the use of 

the HUD–1, or similar successor 

document, for the purposes of 

determining a consumer’s ability to 

repay, and the Bureau is not specifically 

designating the HUD–1 as a reasonably 

reliable record in either 

§ 1026.43(c)(2)(v) or related 

commentary, such as comment 43(c)(3)– 

5. However, the Bureau acknowledges 

that the HUD–1, HUD–1A, or similar 

successor document may comply with 

§ 1026.43(c)(3). 

The Board proposed comment 

43(c)(2)(vi)–1, which discussed both 

consideration and verification of current 

debt obligations. The Bureau discusses 

portions of proposed comment 

43(c)(2)(vi)–1, regarding consideration 

of current debt obligations, in the 

section-by-section analysis of 

§ 1026.43(c)(2)(vi). As noted above, for 

organizational purposes and to provide 


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109See supra note 105. 

additional clarity, however, the Bureau 

is moving guidance that discusses 

verification, including portions of 

proposed comment 43(c)(2)(vi)–1, as 

part of the commentary to 

§ 1026.43(c)(3). With respect to 

verification, proposed comment 

43(c)(2)(vi)–1 stated that: (1) In 

determining how to verify current debt 

obligations, a creditor may look to 

widely accepted governmental and 

nongovernmental underwriting 

standards; and (2) a creditor may, for 

example, look to credit reports, student 

loan statements, automobile loan 

statements, credit card statements, 

alimony or child support court orders 

and existing mortgage statements. 

Commenters did not provide the Bureau 

with significant comment with respect 

to this proposal, although at least one 

large bank commenter specifically urged 

the Bureau to allow creditors to verify 

current debt obligations using a credit 

report. For the reasons discussed below, 

the Bureau is adopting, in relevant part, 

proposed comment 43(c)(2)(vi)–1 as 

comment 43(c)(3)–6. The Bureau 

believes that the proposed guidance 

regarding verification using statements 

and orders related to individual 

obligations could be misinterpreted as 

implying that credit reports are not 

sufficient verification of current debt 

obligations and that creditors must 

obtain statements and other 

documentation pertaining to each 

individual obligation. Comment 

43(c)(3)–6 therefore explains that a 

creditor is not required to further verify 

the existence or amount of the 

obligation listed in a credit report, 

absent circumstances described in 

comment 43(c)(3)–3. The Bureau 

believes that a credit report is a 

reasonably reliable third-party record 

and is sufficient verification of current 

debt obligations in most cases. The 

Bureau also believes that this approach 

is reflected in the Board’s proposal. For 

example, proposed comment 

43(c)(2)(vi)–2 stated that a credit report 

is a reasonably reliable third-party 

record; and proposed § 1026.43(c)(3)(ii) 

indicated that a creditor could rely on 

a consumer’s credit report to verify a 

consumer’s current debt obligations. 

Unlike proposed comment 43(c)(2)(vi)– 

1, comment 43(c)(3)–6 does not include 

reference to widely accepted 

governmental and nongovernmental 

underwriting standards for consistency 

with the amendments in other parts of 

the rule. To understand the Bureau’s 

approach to verification standards, see 

the section-by-section analysis, 

commentary, and regulation text of 

§ 1026.43(c) and § 1026.43(c)(1) above. 

The Board proposed comment 

43(c)(2)(viii)–1, which discussed both 

the consideration and verification of 

credit history. The Bureau discusses 

portions of proposed comment 

43(c)(2)(viii)–1, those regarding 

consideration of credit history, in the 

section-by-section analysis of 

§ 1026.43(c)(2)(viii). However, the 

Bureau is moving guidance on 

verification, including portions of 

proposed comment 43(c)(2)(viii)–1, to 

§ 1026.43(c)(3) and its commentary. 

Regarding verification, proposed 

comment 43(c)(2)(viii)–1 stated that: (1) 

Creditors may look to widely accepted 

governmental and nongovernmental 

underwriting standards to determine 

how to verify credit history; and (2) a 

creditor may, for example, look to credit 

reports from credit bureaus, or other 

nontraditional credit references 

contained in third-party documents, 

such as rental payment history or public 

utility payments to verify credit history. 

Commenters did not object to the 

Board’s proposed approach to 

verification of credit history. The 

Bureau is adopting this approach under 

comment 43(c)(3)–7 with the following 

exception. References to widely 

accepted governmental and 

nongovernmental underwriting 

standards have been removed, as 

discussed above in the section-bysection analysis of § 1026.43(c). Portions 

of proposed comment 43(c)(2)(viii)–1 

regarding verification are otherwise 

adopted substantially as proposed in 

new comment 43(c)(3)–7. 

The Board proposed comment 

43(c)(2)(ii)–2 to clarify that a creditor 

also may verify the employment status 

of military personnel using the 

electronic database maintained by the 

DoD to facilitate identification of 

consumers covered by credit protections 

provided pursuant to 10 U.S.C. 987, also 

known as the ‘‘Talent Amendment.’’ 109

The Board also sought additional 

comment as to whether creditors needed 

additional flexibility in verifying the 

employment status of military 

personnel, such as by verifying the 

employment status of a member of the 

military using a Leave and Earnings 

Statement. 

Industry commenters requested that 

the Bureau provide additional flexibility 

for creditors to verify military 

employment. For example, some 

industry commenters noted that a Leave 

and Earnings Statement was concrete 

evidence of employment status and 

income for military personnel and other 

industry commenters stated that 

institutions that frequently work with 

military personnel have built their own 

expertise in determining the reliability 

of using the Leave and Earnings 

Statement. These commenters argued 

that using a Leave and Earnings 

Statement is as reliable a means of 

verifying the employment status of 

military personnel as using a payroll 

statement to verify that employment 

status of a civilian. 

Accordingly, the Bureau is adopting 

proposed comment 43(c)(2)(ii)–2 as 

comment 43(c)(3)–8, for organizational 

purposes, with the following additional 

clarification. Comment 43(c)(3)–8 

clarifies that a creditor may verify 

military employment by means of a 

military Leave and Earnings Statement. 

Therefore, comment 43(c)(3)–8 provides 

that a creditor may verify the 

employment status of military personnel 

by using either a military Leave and 

Earnings Statement or by using the 

electronic database maintained by the 

DoD. 

The Board solicited comment on 

whether a creditor might appropriately 

verify a consumer’s repayment ability 

using any documents or records 

prepared by the consumer and not 

reviewed by a third party, perhaps 

because a particular record might 

provide information not obtainable 

using third-party records. The Bureau 

did not receive sufficient indication that 

such records would qualify as 

reasonably reliable and has thus not 

added additional regulatory text or 

commentary to allow for the use of such 

records. However, a creditor using 

reasonable judgment nevertheless may 

determine that such information is 

useful in verifying a consumer’s ability 

to repay. For example, the creditor may 

consider and verify a self-employed 

consumer’s income from the consumer’s 

2013 income tax return, and the 

consumer then may offer an unaudited 

year-to-date profit and loss statement 

that reflects significantly lower expected 

income in 2014. The creditor might 

reasonably use the lower 2014 income 

figure as a more conservative method of 

underwriting. However, should the 

unverified 2014 income reflect 

significantly greater income than the 

income tax return showed for 2013, a 

creditor instead would verify this 

information in accordance with 

§ 1026.43(c)(4). 

43(c)(4) Verification of Income or Assets 

TILA section 129C(a)(4) requires that 

a creditor verify amounts of income or 

assets that a creditor relied upon to 

determine repayment ability by 

reviewing the consumer’s Internal 

Revenue Service (IRS) Form W–2, tax 

returns, payroll statements, financial 


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institution records, or other third-party 

documents that provide reasonably 

reliable evidence of the consumer’s 

income or assets. TILA section 

129C(a)(4) further provides that, in 

order to safeguard against fraudulent 

reporting, any consideration of a 

consumer’s income history must 

include the verification of income using 

either (1) IRS transcripts of tax returns; 

or (2) an alternative method that quickly 

and effectively verifies income 

documentation by a third-party, subject 

to rules prescribed by the Board, and 

now the Bureau. TILA section 

129C(a)(4) is similar to existing 

§ 1026.34(a)(4)(ii)(A), adopted by the 

Board’s 2008 HOEPA Final Rule, 

although TILA section 129C(a)(4)(B) 

provides for the alternative methods of 

third-party income documentation 

(other than use of an IRS tax-return 

transcript) to be both ‘‘reasonably 

reliable’’ and to ‘‘quickly and 

effectively’’ verify a consumer’s income. 

The Board proposed to implement TILA 

section 129C(a)(4)(B), adjusting the 

requirement to (1) require the creditor to 

use reasonably reliable third-party 

records, consistent with TILA section 

129C(a)(4), rather than the ‘‘quickly and 

effectively’’ standard of TILA section 

129C(a)(4)(B); and (2) provide examples 

of reasonably reliable records that a 

creditor can use to efficiently verify 

income, as well as assets. As discussed 

in the Board’s proposal, the Board 

proposed these adjustments pursuant to 

its authority under TILA sections 105(a) 

and 129B(e). The Board believed that 

considering reasonably reliable records 

effectuates the purposes of TILA section 

129C(a)(4), is an effective means of 

verifying a consumer’s income, and 

helps ensure that consumers are offered 

and receive loans on terms that 

reasonably reflect their repayment 

ability. 

Industry and consumer group 

commenters generally supported 

proposed § 226.43(c)(4) because the 

proposal would permit a creditor to use 

a wide variety of documented income 

and/or asset verification methods, while 

maintaining the appropriate goal of 

ensuring accurate verification 

procedures. Some commenters 

requested that the Bureau allow a 

creditor to underwrite a mortgage based 

on records maintained by a financial 

institution that show an ability to repay. 

Specifically, commenters raised 

concerns with respect to customers who 

may not have certain documents, such 

as IRS Form W–2, because of their 

employment or immigration status. The 

Bureau expects that § 1026.43(c)(4) 

provides that the answer to such 

concerns is self-explanatory; a creditor 

need not, by virtue of the requirements 

of § 1026.43(c)(4), require a consumer to 

produce an IRS Form W–2 in order to 

verify income. Some industry 

commenters argued that the Bureau 

should also permit creditors to verify 

information for certain applicants, such 

as the self-employed, by using non-third 

party reviewed documents, arguing it 

would reduce costs for consumers. The 

Bureau does not find such justification 

to be persuasive, as other widely 

available documents, such as financial 

institution records or tax records, could 

easily serve as means of verification 

without imposing significant cost to the 

consumer or creditor. See also the 

discussion of comment 43(b)(13)(i)–1, 

addressing third-party records. 

Some industry commenters 

advocated, in addition, that creditors be 

allowed to employ broader, faster 

sources of income verification, such as 

internet-based tools that employ 

aggregate employer data, or be allowed 

to rely on statistically qualified models 

to estimate income or assets. The 

Bureau, however, believes that 

permitting creditors to use statistical 

models or aggregate data to verify 

income or assets would be contrary to 

the purposes of TILA section 129C(a)(4). 

Although the statute uses the words 

‘‘quickly and effectively,’’ these words 

cannot be read in isolation, but should 

instead be read in context of the entirety 

of TILA section 129C(a)(4). As noted 

above, the Bureau believes that TILA 

section 129C(a)(4) is primarily intended 

to safeguard against fraudulent reporting 

and inaccurate underwriting, rather 

than accelerate the process of verifying 

a consumer’s income, as the statute 

specifically notes that a creditor must 

verify a consumer’s income history ‘‘[i]n 

order to safeguard against fraudulent 

reporting.’’ The Bureau further believes 

that permitting the use of aggregate data 

or non-individualized estimates would 

undermine the requirements to verify a 

consumer’s income and to determine a 

consumer’s ability to repay. Rather, the 

Bureau believes that the statute requires 

verification of the amount of income or 

assets relied upon using evidence of an 

individual’s income or assets. 

For substantially the same reasons 

stated in the Board’s proposal, the 

Bureau is adopting proposed 

§ 226.43(c)(4) and its accompanying 

commentary substantially as proposed 

in renumbered § 1026.43(c)(4), with 

revisions for clarity. Accordingly, the 

Bureau is implementing TILA section 

129C(a)(4) in § 1026.43(c)(4), which 

provides that a creditor must verify the 

amounts of income or assets it relies on 

to determine a consumer’s ability to 

repay a covered transaction using thirdparty records that provide reasonably 

reliable evidence of the consumer’s 

income or assets. Section 1026.43(c)(4) 

further provides a list of illustrative 

examples of methods of verifying a 

consumer’s income or asserts using 

reasonably reliable third-party records. 

Such examples include: (1) Copies of 

tax returns the consumer filed with the 

IRS or a State taxing authority; (2) IRS 

Form W–2s or similar IRS forms for 

reporting wages or tax withholding; (3) 

payroll statements, including military 

Leave and Earnings Statements; (4) 

financial institution records; (5) records 

from the consumer’s employer or a third 

party that obtained consumer-specific 

income information from the 

consumer’s employer; (6) records from a 

government agency stating the 

consumer’s income from benefits or 

entitlements, such as a ‘‘proof of 

income’’ letter issued by the Social 

Security Administration; (7) check 

cashing receipts; and (8) receipts from a 

consumer’s use of funds transfer 

services. The Bureau also believes that 

by providing such examples of 

acceptable records, the Bureau enables 

creditors to quickly and effectively 

verify a consumer’s income, as provided 

in TILA section 129C(a)(4)(B). 

Comment 43(c)(4)–1 clarifies that 

under § 1026.43(c)(4), a creditor need 

verify only the income or assets relied 

upon to determine the consumer’s 

repayment ability. Comment 43(c)(4)–1 

also provides an example where the 

creditor need not verify a consumer’s 

annual bonus because the creditor relies 

on only the consumer’s salary to 

determine the consumer’s repayment 

ability. This comment also clarifies that 

comments 43(c)(3)–1 and –2, discussed 

above, are instructive with respect to 

income and asset verification. 

Comment 43(c)(4)–2 clarifies that, if 

consumers jointly apply for a loan and 

each consumer lists his or her income 

or assets on the application, the creditor 

need verify only the income or assets 

the creditor relies on to determine 

repayment ability. Comment 43(c)(2)(i)– 

5, discussed above, may also be 

instructive in cases of multiple 

applicants. 

Comment 43(c)(4)–3 provides that a 

creditor may verify a consumer’s 

income using an IRS tax-return 

transcript that summarizes the 

information in the consumer’s filed tax 

return, another record that provides 

reasonably reliable evidence of the 

consumer’s income, or both. Comment 

43(c)(4)–3 also clarifies that a creditor 

may obtain a copy of an IRS tax-return 

transcript or filed tax return from a 

service provider or from the consumer, 


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110The Bureau’s 2012 HOEPA Proposal proposed 

to amend this subsection, though not in a manner 

that affected the overall effect of an affirmative 

defense. See 77 FR 49090, 49153 (Aug. 15, 2012). 

and the creditor need not obtain the 

copy directly from the IRS or other 

taxing authority. For additional 

guidance, Comment 43(c)(4)–3 crossreferences guidance on obtaining 

records in comment 43(c)(3)–2. 

Finally, comment 43(c)(4)(vi)–1 states 

that an example of a record from a 

Federal, State, or local government 

agency stating the consumer’s income 

from benefits or entitlements is a ‘‘proof 

of income letter’’ (also known as a 

‘‘budget letter,’’ ‘‘benefits letter,’’ or 

‘‘proof of award letter’’) from the Social 

Security Administration. 

As discussed above, the Bureau is 

adopting § 1026.43(c)(4) as enabling 

creditors to quickly and effectively 

verify a consumer’s income, as provided 

in TILA section 129C(a)(4)(B). In 

addition, for substantially the same 

rationale as discussed in the Board’s 

proposal, the Bureau is adopting 

§ 1026.43(c)(4) using its authority under 

TILA section 105(a) to prescribe 

regulations to carry out the purposes of 

TILA. One of the purposes of TILA 

section 129C is to assure that consumers 

are offered and receive covered 

transactions on terms that reasonably 

reflect their ability to repay the loan. 

See TILA section 129B(a)(2). The 

Bureau believes that a creditor 

consulting reasonably reliable records is 

an effective means of verifying a 

consumer’s income and helps ensure 

that consumers are offered and receive 

loans on terms that reasonably reflect 

their repayment ability. The Bureau 

further believes that TILA section 

129C(a)(4) is intended to safeguard 

against fraudulent or inaccurate 

reporting, rather than to accelerate the 

creditor’s ability to verify a consumer’s 

income. Indeed, the Bureau believes 

that there is a risk that requiring a 

creditor to use quick methods to verify 

the consumer’s income would 

undermine the effectiveness of the 

ability-to-repay requirements by 

sacrificing thoroughness for speed. The 

Bureau believes instead that requiring 

the use of reasonably reliable records 

effectuates the purposes of TILA section 

129C(a)(4) without suggesting that 

creditors must obtain records or 

complete income verification within a 

specific period of time. The Bureau is 

adopting the examples of reasonably 

reliable records, proposed by the Board, 

that a creditor may use to efficiently 

verify income or assets, because the 

Bureau believes that it will facilitate 

compliance by providing clear guidance 

to creditors. 

The Bureau notes that the Board 

proposal solicited comment on whether 

it should provide an affirmative defense 

for a creditor that can show that the 

amounts of the consumer’s income or 

assets that the creditor relied upon in 

determining the consumer’s repayment 

ability were not materially greater than 

the amounts the creditor could have 

verified using third-party records at or 

before consummation. Such an 

affirmative defense, while not specified 

under TILA, would be consistent with 

the Board’s 2008 HOEPA Final Rule. 

See § 1026.34(a)(4)(ii)(B).110 Consumer 

group commenters generally opposed an 

affirmative defense, arguing that such an 

allowance would essentially gut the 

income and asset verification 

requirement provided by the rule. Other 

commenters noted that providing an 

affirmative defense might result in 

confusion, and possible litigation, over 

what the term ‘‘material’’ may mean, 

and that a rule permitting an affirmative 

defense would need to define 

materiality specifically, including from 

whose perspective materiality should be 

measured (i.e., the creditor’s or the 

consumer’s). Based on the comments 

received, the Bureau believes that an 

affirmative defense is not warranted. 

The Bureau believes that permitting an 

affirmative defense could result in 

circumvention of the § 1026.43(c)(4) 

verification requirement. For the 

reasons stated, the Bureau is not 

adopting an affirmative defense for a 

creditor that can show that the amounts 

of the consumer’s income or assets that 

the creditor relied upon in determining 

the consumer’s repayment ability were 

not materially greater than the amounts 

the creditor could have verified using 

third-party records at or before 

consummation. 

43(c)(5) Payment Calculation 

The Board proposed § 226.43(c)(5) to 

implement the payment calculation 

requirements of TILA section 129C(a), 

as enacted by section 1411 of the DoddFrank Act. TILA section 129C(a) 

contains the general requirement that a 

creditor determine the consumer’s 

‘‘ability to repay the loan, according to 

its terms, and all applicable taxes, 

insurance (including mortgage 

guarantee insurance), and assessments,’’ 

based on several considerations, 

including ‘‘a payment schedule that 

fully amortizes the loan over the term of 

the loan.’’ TILA section 129C(a)(1) and 

(3). The statutory requirement to 

consider mortgage-related obligations, 

as defined in § 1026.43(b)(8), is 

discussed above in the section-bysection analysis of § 1026.43(c)(2)(v). 

TILA section 129C(a) requires, among 

other things, that a creditor make a 

determination that a consumer ‘‘has a 

reasonable ability to repay’’ a residential 

mortgage loan. TILA section 

129C(a)(6)(D) provides the process for 

calculating the monthly payment 

amount ‘‘[f]or purposes of making any 

determination under this subsection,’’ 

i.e., subsection (a), for ‘‘any residential 

mortgage loan.’’ TILA section 

129C(a)(6)(A) through (D) requires 

creditors to make uniform assumptions 

when calculating the payment 

obligation for purposes of determining 

the consumer’s repayment ability for the 

covered transaction. Specifically, TILA 

section 129C(a)(6)(D)(i) through (iii) 

provides that, when calculating the 

payment obligation that will be used to 

determine whether the consumer can 

repay the covered transaction, the 

creditor must use a fully amortizing 

payment schedule and assume that: (1) 

The loan proceeds are fully disbursed 

on the date the loan is consummated; (2) 

the loan is repaid in substantially equal, 

monthly amortizing payments for 

principal and interest over the entire 

term of the loan with no balloon 

payment; and (3) the interest rate over 

the entire term of the loan is a fixed rate 

equal to the fully indexed rate at the 

time of the loan closing, without 

considering the introductory rate. The 

term ‘‘fully indexed rate’’ is defined in 

TILA section 129C(a)(7). 

TILA section 129C(a)(6)(D)(ii)(I) and 

(II), however, provides two exceptions 

to the second assumption regarding 

‘‘substantially equal, monthly payments 

over the entire term of the loan with no 

balloon payment’’ for loans that require 

‘‘more rapid repayment (including 

balloon payment).’’ First, this statutory 

provision authorizes the Bureau to 

prescribe regulations for calculating the 

payment obligation for loans that 

require more rapid repayment 

(including balloon payment), and which 

have an annual percentage rate that does 

not exceed the threshold for higherpriced mortgage loans. TILA section 

129C(a)(6)(D)(ii)(I). Second, for loans 

that ‘‘require more rapid repayment 

(including balloon payment),’’ and 

which exceed the higher-priced 

mortgage loan threshold, the statute 

requires that the creditor use the loan 

contract’s repayment schedule. TILA 

section 129C(a)(6)(D)(ii)(II). The statute 

does not define the term ‘‘rapid 

repayment.’’ 

The statute also provides three 

additional clarifications to the 

assumptions stated above for loans that 

contain certain features. First, for 

variable-rate loans that defer repayment 

of any principal or interest, TILA 


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section 129C(a)(6)(A) states that for 

purposes of the repayment ability 

determination a creditor must use ‘‘a 

fully amortizing repayment schedule.’’ 

This provision generally reiterates the 

requirement provided under TILA 

section 129C(a)(3) to use a payment 

schedule that fully amortizes the loan. 

Second, for covered transactions that 

permit or require interest-only 

payments, the statute requires that the 

creditor determine the consumers’ 

repayment ability using ‘‘the payment 

amount required to amortize the loan by 

its final maturity.’’ TILA section 

129C(a)(6)(B). Third, for covered 

transactions with negative amortization, 

the statute requires the creditor to also 

take into account ‘‘any balance increase 

that may accrue from any negative 

amortization provision’’ when making 

the repayment ability determination. 

TILA section 129C(a)(6)(C). The statute 

does not define the terms ‘‘variablerate,’’ ‘‘fully amortizing,’’ ‘‘interestonly,’’ or ‘‘negative amortization.’’ 

Proposed § 226.43(c)(5)(i) and (ii) 

implemented these statutory provisions, 

as discussed in further detail below. 

TILA section 129C(a), as enacted by 

section 1411 of the Dodd-Frank Act, 

largely codifies many aspects of the 

repayment ability rule under 

§ 1026.34(a)(4) from the Board’s 2008 

HOEPA Final Rule and extends such 

requirements to the entire mortgage 

market regardless of the loan’s interest 

rate. Similarly to § 1026.34(a)(4), the 

statutory framework of TILA section 

129C(a) focuses on prescribing the 

requirements that govern the 

underwriting process and extension of 

credit to consumers, rather than 

dictating which credit terms may or may 

not be permissible. However, there are 

differences between TILA section 

129C(a) and the 2008 HOEPA Final Rule 

with respect to payment calculation 

requirements. 

Current § 1026.34(a)(4) does not 

address how a creditor must calculate 

the payment obligation for a loan that 

cannot meet the presumption of 

compliance under § 1026.34(a)(4)(iii)(B). 

For example, § 1026.34(a)(4) does not 

specify how to calculate the periodic 

payment required for a negative 

amortization loan or balloon-payment 

mortgage with a term of less than seven 

years. In contrast, the Dodd-Frank Act 

lays out a specific framework for 

underwriting any loan subject to TILA 

section 129C(a). In taking this approach, 

the statutory requirements in TILA 

section 129C(a)(6)(D) addressing 

payment calculation requirements differ 

from § 1026.34(a)(4)(iii) in the following 

manner: (1) The statute generally 

premises repayment ability on monthly 

payment obligations calculated using 

the fully indexed rate, with no limit on 

the term of the loan that should be 

considered for such purpose; (2) the 

statute permits underwriting loans with 

balloon payments to differ depending 

on whether the loan’s annual percentage 

rate exceeds the applicable loan pricing 

benchmark, or meets or falls below the 

applicable loan pricing benchmark; and 

(3) the statute expressly addresses 

underwriting requirements for loans 

with interest-only payments or negative 

amortization. 

In 2006 and 2007 the Board and other 

Federal banking agencies addressed 

concerns regarding the increased risk to 

creditors and consumers presented by 

loans that permit consumers to defer 

repayment of principal and sometimes 

interest, and by adjustable-rate 

mortgages in the subprime market. The 

Interagency Supervisory Guidance 

stated that creditors should determine a 

consumer’s repayment ability using a 

payment amount based on the fully 

indexed rate, assuming a fully 

amortizing schedule. In addition, the 

2006 Nontraditional Mortgage Guidance 

addressed specific considerations for 

negative amortization and interest-only 

loans. State supervisors issued parallel 

statements to this guidance, which most 

states have adopted. TILA section 

129C(a)(3) and (6) is generally 

consistent with this longstanding 

Interagency Supervisory Guidance and 

largely extends the guidance regarding 

payment calculation assumptions to all 

loan types covered under TILA section 

129C(a), regardless of a loan’s interest 

rate. The Board proposed § 226.43(c)(5) 

to implement the payment calculation 

requirements of TILA section 

129C(a)(1), (3) and (6) for purposes of 

the repayment ability determination 

required under proposed § 226.43(c). 

Consistent with these statutory 

provisions, proposed § 226.43(c)(5) did 

not prohibit the creditor from offering 

certain credit terms or loan features, but 

rather focused on the calculation 

process the creditor would be required 

to use to determine whether the 

consumer could repay the loan 

according to its terms. Under the 

proposal, creditors generally would 

have been required to determine a 

consumer’s ability to repay a covered 

transaction using the fully indexed rate 

or the introductory rate, whichever is 

greater, to calculate monthly, fully 

amortizing payments that are 

substantially equal, unless a special rule 

applies. See proposed § 226.43(c)(5)(i). 

For clarity and simplicity, proposed 

§ 226.43(c)(5)(i) used the terms ‘‘fully 

amortizing payment’’ and ‘‘fully 

indexed rate,’’ which were defined 

separately under proposed 

§ 226.43(b)(2) and (3), respectively, as 

discussed above. Proposed comment 

43(c)(5)(i)–1 clarified that the general 

rule would apply whether the covered 

transaction is an adjustable-, step-, or 

fixed-rate mortgage, as those terms are 

defined in § 1026.18(s)(7)(i), (ii), and 

(iii), respectively. 

Proposed § 226.43(c)(5)(ii)(A) through 

(C) created exceptions to the general 

rule and provided special rules for 

calculating the payment obligation for 

balloon-payment mortgages, interestonly loans or negative amortization 

loans, as follows: 

Balloon-payment mortgages. 

Consistent with TILA section 

129C(a)(6)(D)(ii)(I) and (II), for covered 

transactions with a balloon payment, 

proposed § 226.43(c)(5)(ii)(A) provided 

special rules that differed depending on 

the loan’s rate. Proposed 

§ 226.43(c)(5)(ii)(A)(1) stated that for 

covered transactions with a balloon 

payment that are not higher-priced 

covered transactions, the creditor must 

determine a consumer’s ability to repay 

the loan using the maximum payment 

scheduled in the first five years after 

consummation. Proposed 

§ 226.43(c)(5)(ii)(A)(2) further stated that 

for covered transactions with balloon 

payments that are higher priced covered 

transactions, the creditor must 

determine the consumer’s ability to 

repay according to the loan’s payment 

schedule, including any balloon 

payment. For clarity, proposed 

§ 226.43(c)(5)(ii)(A) used the term 

‘‘higher-priced covered transaction’’ to 

refer to a covered transaction that 

exceeds the applicable higher-priced 

mortgage loan coverage threshold. 

‘‘Higher-priced covered transaction’’ is 

defined in § 1026.43(b)(4), discussed 

above. The term ‘‘balloon payment’’ has 

the same meaning as in current 

§ 1026.18(s)(5)(i). 

Interest-only loans. Consistent with 

TILA section 129C(a)(6)(B) and (D), 

proposed § 226.43(c)(5)(ii)(B) provided 

special rules for interest-only loans. 

Proposed § 226.43(c)(5)(ii)(B) required 

that the creditor determine the 

consumer’s ability to repay the interestonly loan using (1) the fully indexed 

rate or the introductory rate, whichever 

is greater; and (2) substantially equal, 

monthly payments of principal and 

interest that will repay the loan amount 

over the term of the loan remaining as 

of the date the loan is recast. For clarity, 

proposed § 226.43(c)(5)(ii)(B) used the 

terms ‘‘loan amount’’ and ‘‘recast,’’ 

which are defined and discussed under 

§ 1026.43(b)(5) and (11), respectively. 

The term ‘‘interest-only loan’’ has the 


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same meaning as in current 

§ 1026.18(s)(7)(iv). 

Negative amortization loans. 

Consistent with TILA section 

129C(a)(6)(C) and (D), proposed 

§ 226.43(c)(5)(ii)(C) provided special 

rules for negative amortization loans. 

Proposed § 226.43(c)(5)(ii)(C) required 

that the creditor determine the 

consumer’s ability to repay the negative 

amortization loan using (1) the fully 

indexed rate or the introductory rate, 

whichever is greater; and (2) 

substantially equal, monthly payments 

of principal and interest that will repay 

the maximum loan amount over the 

term of the loan remaining as of the date 

the loan is recast. Proposed comment 

43(c)(5)(ii)(C)–1 clarified that for 

purposes of the rule, the creditor would 

first have to determine the maximum 

loan amount and the period of time that 

remains in the loan term after the loan 

is recast. For clarity, proposed 

§ 226.43(c)(5)(ii)(C) used the terms 

‘‘maximum loan amount’’ and ‘‘recast,’’ 

which are defined and discussed under 

§ 1026.43(b)(7) and (11), respectively. 

The term ‘‘negative amortization loan’’ 

has the same meaning as in current 

§ 1026.18(s)(7)(v) and comment 

18(s)(7)–1. 

43(c)(5)(i) General Rule 

Proposed § 226.43(c)(5)(i) 

implemented the payment calculation 

requirements in TILA section 

129C(a)(3), 129C(6)(D)(i) through (iii), 

and stated the general rule for 

calculating the payment obligation on a 

covered transaction for purposes of the 

ability-to-repay provisions. Consistent 

with the statute, proposed 

§ 226.43(c)(5)(i) provided that unless an 

exception applies under proposed 

§ 226.43(c)(5)(ii), a creditor must make 

the repayment ability determination 

required under proposed 

§ 226.43(c)(2)(iii) by using the greater of 

the fully indexed rate or any 

introductory interest rate, and monthly, 

fully amortizing payments that are 

substantially equal. That is, under the 

proposed general rule the creditor 

would calculate the consumer’s 

monthly payment amount based on the 

loan amount, and amortize that loan 

amount in substantially equal payments 

over the loan term, using the fully 

indexed rate. 

Proposed comment 43(c)(5)(i)–1 

explained that the payment calculation 

method set forth in proposed 

§ 226.43(c)(5)(i) applied to any covered 

transaction that does not have a balloon 

payment or that is not an interest-only 

loan or negative amortization loan, 

whether it is a fixed-rate, adjustable-rate 

or step-rate mortgage. This comment 

further explained that the payment 

calculation method set forth in 

proposed § 226.43(c)(5)(ii) applied to 

any covered transaction that is a loan 

with a balloon payment, interest-only 

loan, or negative amortization loan. To 

facilitate compliance, this comment 

listed the defined terms used in 

proposed § 226.43(c)(5) and provided 

cross-references to their definitions. 

The fully indexed rate or introductory 

rate, whichever is greater. Proposed 

§ 226.43(c)(5)(i)(A) implemented the 

requirement in TILA section 

129C(a)(6)(D)(iii) to use the fully 

indexed rate when calculating the 

monthly, fully amortizing payment for 

purposes of the repayment ability 

determination. Proposed 

§ 226.43(c)(5)(i)(A) also provided that 

when creditors calculate the monthly, 

fully amortizing payment for adjustablerate mortgages, they would have to use 

the introductory interest rate if it were 

greater than the fully indexed rate (i.e., 

a premium rate). In some adjustable-rate 

transactions, creditors may set an initial 

interest rate that is not determined by 

the index or formula used to make later 

interest rate adjustments. Sometimes 

this initial rate charged to consumers is 

lower than the rate would be if it were 

determined by using the index plus 

margin, or formula (i.e., the fully 

indexed rate). However, an initial rate 

that is a premium rate is higher than the 

rate based on the index or formula. 

Thus, requiring creditors to use only the 

fully indexed rate would result in 

creditors underwriting loans that have a 

‘‘premium’’ introductory rate at a rate 

lower than the rate on which the 

consumer’s initial payments would be 

based. The Board believed that requiring 

creditors to assess the consumer’s 

ability to repay on the initial higher 

payments would better effectuate the 

statutory intent and purpose. Proposed 

comment 43(c)(5)(i)–2 provided 

guidance on using the greater of the 

premium or fully indexed rate. 

Monthly, fully amortizing payments. 

For simplicity, proposed 

§ 226.43(c)(5)(i) used the term ‘‘fully 

amortizing payment’’ to refer to the 

statutory requirements that a creditor 

use a payment schedule that repays the 

loan assuming that (1) the loan proceeds 

are fully disbursed on the date of 

consummation of the loan; and (2) the 

loan is repaid in amortizing payments 

for principal and interest over the entire 

term of the loan. See TILA sections 

129C(a)(3) and (6)(D)(i) and (ii). As 

discussed above, § 1026.43(b)(2) defines 

‘‘fully amortizing payment’’ to mean a 

periodic payment of principal and 

interest that will fully repay the loan 

amount over the loan term. The terms 

‘‘loan amount’’ and ‘‘loan term’’ are 

defined in § 1026.43(b)(5) and (b)(6), 

respectively, and discussed above. 

The statute also expressly requires 

that a creditor use ‘‘monthly amortizing 

payments’’ for purposes of the 

repayment ability determination. TILA 

section 129C(6)(D)(ii). The Board 

recognized that some loan agreements 

require consumers to make periodic 

payments with less frequency, for 

example quarterly or semi-annually. 

Proposed § 226.43(c)(5)(i)(B) did not 

dictate the frequency of payment under 

the terms of the loan agreement, but did 

require creditors to convert the payment 

schedule to monthly payments to 

determine the consumer’s repayment 

ability. Proposed comment 43(c)(5)(i)–3 

clarified that the general payment 

calculation rules do not prescribe the 

terms or loan features that a creditor 

may choose to offer or extend to a 

consumer, but establish the calculation 

method a creditor must use to determine 

the consumer’s repayment ability for a 

covered transaction. This comment 

explained, by way of example, that the 

terms of the loan agreement may require 

that the consumer repay the loan in 

quarterly or bi-weekly scheduled 

payments, but for purposes of the 

repayment ability determination, the 

creditor must convert these scheduled 

payments to monthly payments in 

accordance with proposed 

§ 226.43(c)(5)(i)(B). This comment also 

explained that the loan agreement may 

not require the consumer to make fully 

amortizing payments, but for purposes 

of the repayment ability determination 

the creditor must convert any nonamortizing payments to fully amortizing 

payments. 

Substantially equal. Proposed 

comment 43(c)(5)(i)–4 provided 

additional guidance to creditors for 

determining whether monthly, fully 

amortizing payments are ‘‘substantially 

equal.’’ See TILA section 

129C(a)(6)(D)(ii). This comment stated 

that creditors should disregard minor 

variations due to payment-schedule 

irregularities and odd periods, such as 

a long or short first or last payment 

period. The comment explained that 

monthly payments of principal and 

interest that repay the loan amount over 

the loan term need not be equal, but that 

the monthly payments should be 

substantially the same without 

significant variation in the monthly 

combined payments of both principal 

and interest. Proposed comment 

43(c)(5)(i)–4 further explained that 

where, for example, no two monthly 

payments vary from each other by more 

than 1 percent (excluding odd periods, 

such as a long or short first or last 


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111The Bureau has also determined that in many 

instances the fully indexed rate would result in a 

more lenient underwriting standard than the 

qualified mortgage calculation. See the discussion 

of non-qualified mortgage ARM underwriting 

below. 

payment period), such monthly 

payments would be considered 

substantially equal for purposes of the 

rule. The comment further provided 

that, in general, creditors should 

determine whether the monthly, fully 

amortizing payments are substantially 

equal based on guidance provided in 

current § 1026.17(c)(3) (discussing 

minor variations), and § 1026.17(c)(4)(i) 

through (iii) (discussing paymentschedule irregularities and measuring 

odd periods due to a long or short first 

period) and associated commentary. The 

proposal solicited comment on 

operational difficulties that arise by 

ensuring payment amounts meet the 

‘‘substantially equal’’ condition. The 

proposal also solicited comment on 

whether a 1 percent variance is an 

appropriate tolerance threshold. 

Examples of payment calculations. 

Proposed comment § 226.43(c)(5)(i)–5 

provided illustrative examples of how to 

determine the consumer’s repayment 

ability based on substantially equal, 

monthly, fully amortizing payments as 

required under proposed 

§ 226.43(c)(5)(i) for a fixed-rate, 

adjustable-rate and step-rate mortgage. 

The Board recognized that, although 

consistent with the statute, the proposed 

framework would require creditors to 

underwrite certain loans, such as hybrid 

ARMs with a discounted rate period of 

five or more years (e.g., 5/1, 7/1, and 10/ 

1 ARMs) to a more stringent standard as 

compared to the underwriting standard 

set forth in proposed § 226.43(e)(2)(v) 

for qualified mortgages.111 The Board 

believed this approach was consistent 

with the statute’s intent to ensure 

consumers can reasonably repay their 

loans, and that in both cases consumers’ 

interests are properly protected. See 

TILA section 129B(a)(2), 15 U.S.C. 

1639b(a)(2). To meet the definition of a 

qualified mortgage, a loan cannot have 

certain risky terms or features, such as 

provisions that permit deferral of 

principal or a term that exceeds 30 

years; no similar restrictions apply to 

loans subject to the ability-to-repay 

standard. See proposed § 226.43(e)(2)(i) 

and (ii). As a result, the risk of potential 

payment shock is diminished 

significantly for qualified mortgages. For 

this reason, the Board believed that 

maintaining the potentially more lenient 

statutory underwriting standard for 

loans that satisfy the qualified mortgage 

criteria would help to ensure that 

responsible and affordable credit 

remains available to consumers. See 

TILA section 129B(a)(2), 15 U.S.C. 

1639b(a)(2). 

Loan amount or outstanding principal 

balance. As noted above, proposed 

§ 226.43(c)(5)(i) was consistent with the 

statutory requirements regarding 

payment calculations for purposes of 

the repayment ability determination. 

The Board believed that the intent of 

these statutory requirements was to 

prevent creditors from assessing the 

consumer’s repayment ability based on 

understated payment obligations, 

especially when risky features can be 

present on the loan. However, the Board 

was concerned that the statute, as 

implemented in proposed 

§ 226.43(c)(5)(i), would require creditors 

to determine, in some cases, a 

consumer’s repayment ability using 

overstated payment amounts because 

the creditor would have to assume that 

the consumer repays the loan amount in 

substantially equal payments based on 

the fully indexed rate, regardless of 

when the fully indexed rate could take 

effect under the terms of the loan. The 

Board was concerned that this approach 

might restrict credit availability, even 

where consumers were able to 

demonstrate that they can repay the 

payment obligation once the fully 

indexed rate takes effect. 

For this reason, the proposal solicited 

comment on whether authority should 

be exercised under TILA sections 105(a) 

and 129B(e) to provide that the creditor 

may calculate the monthly payment 

using the fully indexed rate based on 

the outstanding principal balance as of 

the date the fully indexed rate takes 

effect under the loan’s terms, instead of 

the loan amount at consummation. 

Step-rate and adjustable-rate 

calculations. Due to concerns regarding 

credit availability, the proposal also 

solicited comment on alternative means 

to calculate monthly payments for steprate and adjustable-rate mortgages. The 

proposal asked for comment on whether 

or not the rule should require that 

creditors underwrite a step-rate or an 

adjustable-rate mortgage using the 

maximum interest rate in the first seven 

or ten years or some other appropriate 

time horizon that would reflect a 

significant introductory rate period. The 

section-by-section analysis of the ‘‘fully 

indexed rate’’ definition, at 

§ 1026.43(b)(3) above, discusses this 

issue in regard to step-rate mortgages. 

For discussion of payment calculation 

methods for adjustable-rate mortgages, 

see below. 

Safe harbor to facilitate compliance. 

The Board recognized that under its 

proposal, creditors would have to 

comply with multiple assumptions 

when calculating the particular payment 

for purposes of the repayment ability 

determination. The Board was 

concerned that the complexity of the 

proposed payment calculation 

requirements might increase the 

potential for unintentional errors to 

occur, making compliance difficult, 

especially for small creditors that might 

be unable to invest in advanced 

technology or software needed to ensure 

payment calculations are compliant. At 

the same time, the Board noted that the 

intent of the statutory framework and 

the proposal was to ensure consumers 

are offered and receive loans on terms 

that they can reasonably repay. Thus, 

the Board solicited comment on 

whether authority under TILA sections 

105(a) and 129B(e) should be exercised 

to provide a safe harbor for creditors 

that use the largest scheduled payment 

that can occur during the loan term to 

determine the consumer’s ability to 

repay, to facilitate compliance with the 

requirements under proposed 

§ 226.43(c)(5)(i) and (ii). 

Final Rule 

The final rule requires creditors to 

underwrite the loan at the premium rate 

if greater than the fully indexed rate for 

purposes of the repayment ability 

determination using the authority under 

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

TILA section 105(a), as amended by 

section 1100A of the Dodd-Frank Act, 

provides that the Bureau’s regulations 

may contain such additional 

requirements, classifications, 

differentiations, or other provisions, and 

may provide for such adjustments and 

exceptions for all or any class of 

transactions as in the Bureau’s judgment 

are necessary or proper to effectuate the 

purposes of TILA, prevent 

circumvention or evasion thereof, or 

facilitate compliance therewith. 15 

U.S.C. 1604(a). This approach is further 

supported by the authority under TILA 

section 129B(e) to condition terms, acts 

or practices relating to residential 

mortgage loans that the Bureau finds 

necessary and proper to ensure that 

responsible, affordable mortgage credit 

remains available to consumers in a 

manner consistent with and which 

effectuates the purposes of sections 

129B and 129C, and which are in the 

interest of the consumer. 15 U.S.C. 

1639b(e). The purposes of TILA include 

the purpose of TILA sections 129B and 

129C, to assure that consumers are 

offered and receive residential mortgage 

loans on terms that reasonably reflect 

their ability to repay the loan, among 

other things. TILA section 129B(b), 15 

U.S.C. 1639b. For the reasons discussed 

above, the Bureau believes that 


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requiring creditors to underwrite the 

loan to the premium rate for purposes 

of the repayment ability determination 

is necessary and proper to ensure that 

consumers are offered, and receive, 

loans on terms that reasonably reflect 

their ability to repay, and to prevent 

circumvention or evasion. Without a 

requirement to consider payments based 

on a premium rate, a creditor could 

originate loans with introductory-period 

payments that consumers do not have 

the ability to repay. Therefore, this 

provision is also in the interest of 

consumers. 

As discussed above, the Board 

solicited comment on whether 

payments for non-qualified mortgage 

ARMs should be calculated similarly to 

qualified mortgage ARMs, by using the 

maximum rate that will apply during a 

certain period, such as the first seven 

years or some other appropriate time 

horizon. Consumer and community 

groups were divided on this issue. Some 

supported use of the fully indexed rate, 

but one stated that underwriting ARMs 

based on the initial period of at least 

five years may be appropriate. Another 

suggested that for non-qualified 

mortgage ARMs the rule should require 

use of the maximum interest rate or 

interest rate cap, whichever is greater, to 

better protect against payment shock. A 

civil rights organization also advocated 

that ARMs that are not qualified 

mortgages should be underwritten to 

several points above the fully indexed 

rate. A combined comment from 

consumer advocacy organizations also 

supported non-qualified mortgage 

ARMs being underwritten more strictly, 

suggesting that because this is the 

market segment that will have the 

fewest controls, the predatory practices 

will migrate here, and there is 

significant danger of payment shock 

when using the fully indexed rate in a 

low-rate environment such as today’s 

market. They suggested that the rule 

follow Fannie Mae’s method, which 

requires underwriting that uses the fully 

indexed rate or the note rate plus 2 

percent, whichever is greater, for ARMs 

with initial fixed periods of up to five 

years. In addition, one joint industry 

and consumer advocacy comment 

suggested adding 2 percent to the fully 

indexed rate in order to calculate the 

monthly payment amount. 

Industry groups were strongly in favor 

of using a specific time period for 

underwriting, generally suggesting five 

years. One credit union association 

stated that use of the fully indexed rate 

is excessive and unnecessary, and will 

increase the cost of credit. Industry 

commenters stated that creditors 

generally consider only the fixed-rate 

period, and ARMs with fixed periods of 

at least five years are considered safe. 

One large bank stated that the 

calculation for ARMs, whether or not 

they are qualified mortgages, should be 

uniform to ease compliance. 

The Bureau has determined that it 

will not use its exception and 

adjustment authority to change the 

statutory underwriting scheme for nonqualified mortgage ARMs. The statutory 

scheme clearly differentiates between 

the qualified mortgage and nonqualified mortgage underwriting 

strategies. The qualified mortgage 

underwriting rules ignore any 

adjustment in interest rate that may 

occur after the first five years; thus, for 

example, for an ARM with an initial 

adjustment period of seven years, the 

interest rate used for the qualified 

mortgage calculation will be the initial 

interest rate. In addition, the qualified 

mortgage rules, by using the ‘‘maximum 

interest rate,’’ take into account any 

adjustment in interest rate that can 

occur during the first five years, 

including adjustments attributable to 

changes in the index rate. In contrast, 

the non-qualified mortgage rules have 

an unlimited time horizon but do not 

take into account adjustments 

attributable to changes in the index rate. 

Based on the its research and analysis, 

the Bureau notes that the data indicate 

that neither the fully indexed rate nor 

the maximum rate during a defined 

underwriting period produces 

consistent results with regard to abilityto-repay calculations. The Bureau finds 

that the underwriting outcomes under 

the two methods vary depending on a 

number of complex variables, such as 

the terms of the loan (e.g., the length of 

the initial adjustment period and 

interest rate caps) and the interest rate 

environment. In other words, for a 

particular loan, whether the monthly 

payment may be higher under a 

calculation that uses the fully indexed 

rate, as opposed to the maximum rate in 

the first five years, depends on a 

number of factors. Given the factspecific nature of the payment 

calculation outcomes, the Bureau 

believes that overriding the statutory 

scheme would be inappropriate. 

The Bureau also believes that 

adjusting the interest rate to be used for 

non-qualified mortgage ability-to-repay 

calculations to somewhere between the 

fully indexed rate specified in the 

statute and the maximum interest rate 

mandated for qualified mortgage 

underwriting; for example through an 

adjustment to the fully indexed rate of 

an additional 2 percent, would be 

inappropriate. The fully indexed rate 

had been in use since it was adopted by 

the Interagency Supervisory Guidance 

in 2006, and Congress was likely relying 

on that experience in crafting the 

statutory scheme. Adding to the fully 

indexed rate would potentially reduce 

the availability of credit. Such an 

adjustment also could result in a 

calculated interest rate and monthly 

payment that are higher than the 

interest rate and payment calculated for 

qualified mortgage underwriting, given 

that the qualified mortgage rules look 

only to potential adjustments during the 

first five years. 

The Bureau recognizes that 

underwriting practices today often take 

into account potential adjustments in an 

ARM that can result from increases in 

the index rate. For example, Fannie Mae 

requires underwriting that uses the fully 

indexed rate or the note rate plus 2 

percent, whichever is greater, for ARMs 

with initial fixed periods of up to five 

years. The Bureau notes that 

underwriters have the flexibility to 

adjust their practices in response to 

changing interest rate environments 

whereas the process an administrative 

agency like the Bureau must follow to 

amend a rule is more time consuming. 

The Bureau also notes that the creditor 

must make a reasonable determination 

that the consumer has the ability to 

repay the loan according to its terms. 

Therefore, in situations where there is a 

significant likelihood that the consumer 

will face an adjustment that will take 

the interest rate above the fully indexed 

rate, a creditor whose debt-to-income or 

residual income calculation indicates 

that a consumer cannot afford to absorb 

any such increase may not have a 

reasonable belief in the consumer’s 

ability to repay the loan according to its 

terms. See comment 43(c)(1)–1. 

Although the Bureau has determined 

to implement the statutory scheme as 

written and require use of the fully 

indexed rate for non-qualified mortgage 

ARMs, it will monitor this issue through 

its mandatory five-year review, and may 

make adjustments as necessary. 

As discussed above, the Board also 

solicited comment on whether or not to 

allow the fully indexed rate to be 

applied to the balance projected to be 

remaining when the fully indexed rate 

goes into effect, instead of the full loan 

amount, and thus give a potentially 

more accurate figure for the maximum 

payment that would be required for 

purposes of determining ability to 

repay. A consumer group and a group 

advocating for financial reform 

supported this possibility, saying that 

allowing lenders to apply the fully 

indexed rate to the balance remaining 

when the rate changes, rather than the 

full loan amount, will encourage longer 


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112 ‘‘A creditor shall determine the ability of the 

consumer to repay using a payment schedule that 

fully amortizes the loan over the loan term.’’ TILA 

§ 129C(a)(3). 

fixed-rate periods and safer lending, as 

well as preserve access to credit. An 

association representing credit unions 

also agreed with the possible 

amendment, stating that the new 

method would yield a more accurate 

measure of the maximum payment that 

could be owed. 

The Bureau believes it is appropriate 

for the final rule to remain consistent 

with the statutory scheme. The Bureau 

believes that changing the calculation 

method, required by the statute,112

would not be an appropriate use of its 

exception and adjustment authority. 

The Bureau believes the potentially 

stricter underwriting method of 

calculating the monthly payment by 

applying the imputed (i.e., fully 

indexed) interest rate to the full loan 

amount for non-qualified mortgage 

ARMs, provides greater assurance of the 

ability to repay. In addition, payment 

calculation using the fully indexed rate 

can only approximate the consumer’s 

payments after recast, since the index 

may have increased significantly by 

then. Accordingly, the Bureau believes 

that requiring the use of the full loan 

amount will reduce the potential 

inaccuracy of the ability-to-repay 

determination in such a situation. 

In addition, the Board solicited 

comment on whether to provide a safe 

harbor for any creditor that underwrites 

using the ‘‘largest scheduled payment 

that can occur during the loan term.’’ To 

provide such a safe harbor the Bureau 

would have to employ its exception and 

adjustment authority because the use of 

the fully indexed rate calculation is 

required by TILA section 

129C(a)(6)(D)(iii). Two industry 

commenters and an association of state 

bank regulators supported this 

exemption, but none of them provided 

a developed rationale for their support 

or included information useful in 

assessing the possible exemption. The 

Bureau does not believe that it would be 

appropriate at this time to alter the 

statutory scheme in this manner. 

As discussed above, the Board also 

solicited comment on how to lessen any 

operational difficulties of ensuring that 

payment amounts meet the 

‘‘substantially equal’’ condition, and 

whether or not allowing a one percent 

variance between payments provided an 

appropriate threshold. Only two 

commenters mentioned this issue. One 

industry commenter stated that the 1 

percent threshold was appropriate, but 

an association of state bank regulators 

believed that a 5 percent threshold 

would work better. Because the 1 

percent threshold appears to be 

sufficient to allow for payment variance 

and industry commenters did not 

express a need for a higher threshold, 

the Bureau does not believe that the 

provision should be amended. 

For the reasons stated above, the 

Bureau is adopting § 1026.43(c)(5)(i) and 

associated commentary substantially as 

proposed, with minor clarifying 

revisions. 

43(c)(5)(ii) Special Rules for Loans With 

a Balloon Payment, Interest-Only Loans, 

and Negative Amortization Loans 

Proposed § 226.43(c)(5)(ii) created 

exceptions to the general rule under 

proposed § 226.43(c)(5)(i), and provided 

special rules in proposed 

§ 226.43(c)(5)(ii)(A) through (C) for 

loans with a balloon payment, interestonly loans, and negative amortization 

loans, respectively, for purposes of the 

repayment ability determination 

required under proposed 

§ 226.43(c)(2)(iii). In addition to TILA 

section 129C(a)(6)(D)(i) through (iii), 

proposed § 226.43(c)(5)(ii)(A) through 

(C) implemented TILA sections 

129C(a)(6)(B) and (C), and TILA section 

129C(a)(6)(D)(ii)(I) and (II). Each of these 

proposed special rules is discussed 

below. 

43(c)(5)(ii)(A) 

Implementing the different payment 

calculation methods in TILA section 

129C(a)(6)(D)(ii), the Board proposed 

different rules for balloon-payment 

mortgages that are higher-priced 

covered transactions and those that are 

not, in § 1026.43(c)(5)(ii)(A)(1) and (2). 

Proposed comment 43(c)(5)(ii)(A)–1 

provided guidance on applying these 

two methods. This guidance is adopted 

as proposed with minor changes for 

clarity and to update a citation. The 

language describing the calculation 

method for balloon-payment mortgages 

that are not higher-priced covered 

transactions has been changed to reflect 

the use of the first regular payment due 

date as the start of the relevant five-year 

period. Pursuant to the Bureau’s 

rulewriting authority under TILA 

section 129C(a)(6)(D)(ii)(I), this change 

has been made to facilitate compliance 

through consistency with the amended 

underwriting method for qualified 

mortgages. See the section-by-section 

analysis of § 1026.43(e)(2)(iv)(A). As 

with the recast on five-year adjustablerate qualified mortgages, the Bureau 

believes that consumers will benefit 

from having a balloon payment moved 

to at least five years after the first 

regular payment due date, rather than 

five years after consummation. 

43(c)(5)(ii)(A)(1) 

The statute provides an exception 

from the general payment calculation 

discussed above for loans that require 

‘‘more rapid repayment (including 

balloon payment).’’ See TILA section 

129C(a)(6)(D)(ii)(I) and (II). For balloonpayment loans that are not higherpriced covered transactions (as 

determined by using the margins above 

APOR in TILA section 

129C(a)(6)(D)(ii)(I) and implemented at 

§ 1026.43(b)(4)), the statute provides 

that the payment calculation will be 

determined by regulation. The Board 

proposed that a creditor be required to 

make the repayment determination 

under proposed § 226.43(c)(2)(iii) for 

‘‘[t]he maximum payment scheduled 

during the first five years after 

consummation * * *’’ 

The Board chose a five-year period in 

order to preserve access to affordable 

short-term credit, and because five years 

was considered an adequate period for 

a consumer’s finances to improve 

sufficiently to afford a fully amortizing 

loan. The Board believed that balloonpayment loans of less than five years 

presented more risk of inability to 

repay. The Board also believed that the 

five-year period would facilitate 

compliance and create a level playing 

field because of its uniformity with the 

general qualified mortgage provision 

(see § 1026.43(e)), and balloon-payment 

qualified mortgage provision (see 

§ 1026.43(f)). The Board solicited 

comment on whether the five-year 

horizon was appropriate. Proposed 

comment § 226.43(c)(5)(ii)(A)–2 

provided further guidance to creditors 

on determining whether a balloon 

payment occurs in the first five years 

after consummation. Proposed comment 

43(c)(5)(ii)(A)–3 addressed renewable 

balloon-payment loans. This comment 

discussed balloon-payment loans that 

are not higher-priced covered 

transactions which provide an 

unconditional obligation to renew a 

balloon-payment loan at the consumer’s 

option or obligation to renew subject to 

conditions within the consumer’s 

control. This comment clarified that for 

purposes of the repayment ability 

determination, the loan term does not 

include the period of time that could 

result from a renewal provision. 

The Board recognized that proposed 

comment 43(c)(5)(ii)(A)–3 did not take 

the same approach as guidance 

contained in comment 17(c)(1)–11 

regarding treatment of renewable 

balloon-payment loans for disclosure 

purposes, or with guidance contained in 


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113See the previous section, .43(c)(5)(ii)(A)(1), for 

discussion of this statutory language. 

current comment 34(a)(4)(iv)–2 of the 

Board’s 2008 HOEPA Final Rule. 

Although the proposal differed from 

current guidance in Regulation Z, the 

Board believed this approach was 

appropriate for several reasons. First, 

the ability-to-repay provisions in the 

Dodd-Frank Act do not address 

extending the term of a balloon-payment 

loan with an unconditional obligation to 

renew provision. Second, permitting 

short-term ‘‘prime’’ balloon-payment 

loans to benefit from the special 

payment calculation rule when a 

creditor includes an unconditional 

obligation to renew, but retains the right 

to increase the interest rate at the time 

of renewal, would create a significant 

loophole in the balloon payment rules. 

Such an approach could frustrate the 

objective to ensure consumers obtain 

mortgages on affordable terms for a 

reasonable period of time because the 

interest rate could escalate within a 

short period of time, increasing the 

potential risk of payment shock to the 

consumer. This is particularly the case 

where no limits exist on the interest rate 

that the creditor can choose to offer to 

the consumer at the time of renewal. See 

TILA Section 129B(a)(2), 15 U.S.C. 

1639b(a)(2), and TILA Section 

129C(b)(2)(A)(v). Moreover, the Board 

believed it would be speculative to posit 

the interest rate at the time of renewal 

for purposes of the repayment ability 

determination. Third, the guidance 

contained in comment 17(c)(1)–11 

regarding treatment of renewable 

balloon-payment loans is meant to help 

ensure consumers are aware of their 

loan terms and avoid the uninformed 

use of credit, which differs from the 

stated purpose of this proposed 

provision, which was to help ensure 

that consumers receive loans on terms 

that reasonably reflect their repayment 

ability. TILA section 102(a), 15 U.S.C. 

1601(a)(2), and TILA section 129B(a)(2), 

15 U.S.C. 1639b(a)(2). 

Proposed comment 43(c)(5)(ii)(A)–4 

provided several illustrative examples 

of how to determine the maximum 

payment scheduled during the first five 

years after consummation for loans with 

a balloon payment that are not higherpriced covered transactions. 

In regard to the proposed five-year 

underwriting period, some commenters 

suggested that the payment period 

considered should be increased to ten 

years, stating that balloon-payment 

loans were repeatedly used in an 

abusive manner during the years of 

heavy subprime lending. The combined 

consumer advocacy organizations’ 

comment stated that the five-year 

underwriting might lead to an increase 

in five-year balloon-payment loans, 

which would be bad for sustainable 

lending. On the other hand, a trade 

association representing credit unions 

supported the five-year rule. One 

industry commenter objected to the 

whole balloon underwriting scheme, 

including the five-year rule, apparently 

preferring something less. 

For the reasons discussed by the 

Board in the proposal, and described 

above, the Bureau has determined that 

five years is an appropriate time frame 

for determining the ability to repay on 

balloon-payment mortgages that are not 

higher-priced covered transactions. 

However, for the sake of uniformity and 

ease of compliance with the qualified 

mortgage calculation and ability-torepay calculation for non-qualified 

mortgage adjustable-rate mortgages, the 

proposed provision has been changed to 

state that the five years will be 

measured from the date of the first 

regularly scheduled payment, rather 

than the date of consummation. The 

Bureau has made this determination 

pursuant to the authority granted by 

TILA section 129C(a)(6)(D)(ii)(I) to 

prescribe regulations for calculating 

payments to determine consumers’ 

ability to repay balloon-payment 

mortgages that are not higher-cost 

covered transactions. 

TILA section 129C(a)(6)(D)(ii)) refers 

to loans requiring ‘‘more rapid 

repayment (including balloon 

payment).’’ The Board solicited 

comment about whether this statutory 

language should be read as referring to 

loan types other than balloon-payment 

loans. The Bureau did not receive 

comments on this matter, and has 

determined that the rule language does 

not need to be amended to include other 

types of ‘‘rapid repayment’’ loans at this 

time. 

The Board also solicited comment 

about balloon-payment loans that have 

an unconditional obligation to renew. 

The Board asked whether or not such 

loans should be allowed to comply with 

the ability-to-repay requirements using 

the total of the mandatory renewal 

terms, instead of just the first term. As 

discussed above, proposed comment 

43(c)(5)(ii)(A)–3 made clear that this 

would not be allowed under the rule as 

proposed. The Board also solicited 

comment on any required conditions 

that the renewal obligation should have, 

if such an amendment were made. 

However, the Bureau did not receive 

comments on this matter, and the 

provision and staff comment are 

adopted as proposed. A creditor making 

any non-higher-priced balloon-payment 

mortgage of less than five years with a 

clear obligation to renew can avoid 

having the ability-to-repay 

determination applied to the balloon 

payment by including the renewal 

period in the loan term so that the 

balloon payment occurs after five years. 

Accordingly, the Bureau is adopting 

§ 1026.43(c)(5)(ii)(A)(1) and associated 

commentary substantially as proposed, 

with minor changes for clarification, as 

well as new language to reflect that the 

five-year underwriting period begins 

with the due date of the first payment, 

as discussed above. In addition, the 

Bureau has added a second example to 

comment 43(c)(5)(ii)(A)–2 to 

demonstrate the effect of the change to 

the beginning of the underwriting 

period. 

43(c)(5)(ii)(A)(2) 

Proposed § 226.43(c)(5)(ii)(A)(2) 

implemented TILA section 

129C(a)(6)(D)(ii)(II) and provided that 

for a higher-priced covered transaction, 

the creditor must determine the 

consumer’s ability to repay a loan with 

a balloon payment using the scheduled 

payments required under the terms of 

the loan, including any balloon 

payment. TILA section 

129C(a)(6)(D)(ii)(II) states that for loans 

that require ‘‘more rapid repayment 113

(including balloon payment),’’ and 

which exceed the loan pricing threshold 

set forth, the creditor must underwrite 

the loan using the ‘‘[loan] contract’s 

repayment schedule.’’ For purposes of 

proposed § 226.43(c)(5)(i)(A), ‘‘higherpriced 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, or by 3.5 or more 

percentage points for a subordinate-lien 

covered transaction. See § 1026.43(b)(4). 

The proposed rule interpreted the 

statutory requirement that the creditor 

use the loan contract’s payment 

schedule to mean that the creditor must 

use all scheduled payments under the 

terms of the loan needed to fully 

amortize the loan, consistent with the 

requirement under TILA section 

129C(a)(3). Payment of the balloon, 

either at maturity or during any 

intermittent period, is necessary to fully 

amortize the loan, and so a consumer’s 

ability to pay the balloon payment 

would need to be considered. Proposed 

comment 43(c)(5)(ii)(A)–5 provided an 

illustrative example of how to 

determine the consumer’s repayment 

ability based on the loan contract’s 

payment schedule, including any 


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balloon payment. The proposed rule 

applied to ‘‘non-prime’’ loans with a 

balloon payment regardless of the length 

of the term or any contract provision 

that provides for an unconditional 

guarantee to renew. 

In making this proposal, the Board 

expressed concern that this approach 

could lessen credit choice for non-prime 

consumers and solicited comment, with 

supporting data, on the impact of this 

approach for low-to-moderate income 

consumers. In addition, the Board asked 

for comment on whether or not a 

consumer’s ability to refinance out of a 

balloon-payment loan should be 

considered in determining ability to 

repay. 

Industry commenters who focused on 

this provision opposed applying the 

ability-to-repay determination to the 

entire payment schedule. Two trade 

associations representing small and 

mid-size banks strongly objected to 

including the balloon payment in the 

underwriting, and one stated that many 

of the loans its members currently make 

would fall into the higher-priced 

category, making these loans 

unavailable. However, the statutory 

scheme for including the balloon 

payment was supported by a state 

housing agency and the combined 

consumer protection advocacy 

organizations submitting joint 

comments. 

None of the commenters submitted 

data supporting the importance of 

higher-priced balloon-payment 

mortgages for credit availability, or 

whether consideration of a consumer’s 

ability to obtain refinancing would 

make the ability-to-repay determination 

less significant in this context. The 

Bureau notes that under § 1026.43(f) a 

balloon-payment mortgage that is a 

higher-priced covered transaction made 

by certain creditors in rural or 

underserved areas may also be a 

qualified mortgage and thus the creditor 

would not have to consider the 

consumer’s ability to repay the balloon 

payment. Because this final rule adopts 

a wider definition of ‘‘rural or 

underserved area’’ than the Board 

proposed, potential credit accessibility 

concerns have been lessened. See the 

section-by-section analysis of 

§ 1026.43(f), below. 

The statute requires the consideration 

of the balloon payment for higher-priced 

covered transactions, and the Bureau 

does not believe that using its exception 

and adjustment authority would be 

appropriate for this issue. Accordingly, 

§ 1026.43(c)(5)(ii)(A)(2) and associated 

commentary are adopted substantially 

as proposed, with minor changes for 

clarification. 

43(c)(5)(ii)(B) 

The Board’s proposed 

§ 226.43(c)(5)(ii)(B) implemented TILA 

section 129C(a)(6)(B), which requires 

that the creditor determine the 

consumer’s repayment ability using ‘‘the 

payment amount required to amortize 

the loan by its final maturity.’’ For 

clarity, the proposed rule used the term 

‘‘recast,’’ which is defined for interestonly loans as the expiration of the 

period during which interest-only 

payments are permitted under the terms 

of the legal obligation. See 

§ 1026.43(b)(11). The statute does not 

define the term ‘‘interest-only.’’ For 

purposes of this rule, the terms 

‘‘interest-only loan’’ and ‘‘interest-only’’ 

have the same meaning as in 

§ 1026.18(s)(7)(iv). 

For interest-only loans (i.e., loans that 

permit interest only payments for any 

part of the loan term), proposed 

§ 226.43(c)(5)(ii)(B) provided that the 

creditor must determine the consumer’s 

ability to repay the interest-only loan 

using (1) the fully indexed rate or any 

introductory rate, whichever is greater; 

and (2) substantially equal, monthly 

payments of principal and interest that 

will repay the loan amount over the 

term of the loan remaining as of the date 

the loan is recast. The proposed 

payment calculation rule for interestonly loans paralleled the general rule 

proposed in § 226.43(c)(5)(i), except that 

proposed § 226.43(c)(5)(ii)(B)(2) 

required a creditor to determine the 

consumer’s ability to repay the loan 

amount over the term that remains after 

the loan is recast, rather than requiring 

the creditor to use fully amortizing 

payments, as defined under proposed 

§ 226.43(b)(2). 

The Board interpreted the statutory 

text in TILA section 129C(a)(6)(B) as 

requiring the creditor to determine the 

consumer’s ability to repay an interestonly loan using the monthly principal 

and interest payment amount needed to 

repay the loan amount once the interestonly payment period expires, rather 

than using, for example, an understated 

monthly principal and interest payment 

that would amortize the loan over its 

entire term, similar to a 30-year fixed 

mortgage. The proposed rule would 

apply to all interest-only loans, 

regardless of the length of the interestonly period. The Board believed this 

approach most accurately assessed the 

consumer’s ability to repay the loan 

once it begins to amortize; this is 

consistent with the approach taken for 

interest-only loans in the 2006 

Nontraditional Mortgage Guidance. 

Proposed comment 43(c)(5)(ii)(B)–1 

provided guidance on the monthly 

payment calculation for interest-only 

loans, and clarified that the relevant 

term of the loan for calculating these 

payments is the period of time that 

remains after the loan is recast. This 

comment also explained that for a loan 

on which only interest and no principal 

has been paid, the loan amount will be 

the outstanding principal balance at the 

time of the recast. 

Proposed comment 43(c)(5)(ii)(B)–2 

provided illustrative examples for how 

to determine the consumer’s repayment 

ability based on substantially equal 

monthly payments of principal and 

interest for interest-only loans. 

Commenters did not focus on the 

calculation for interest-only loans. The 

Bureau considers the Board’s 

interpretation and implementation of 

the statute to be accurate and 

appropriate. Accordingly, 

§ 1026.43(c)(5)(ii)(B) and associated 

commentary are adopted as proposed. 

43(c)(5)(ii)(C) 

Proposed § 226.43(c)(5)(ii)(C) 

implemented the statutory requirement 

in TILA section 129C(a)(6)(C) that the 

creditor consider ‘‘any balance increase 

that may accrue from any negative 

amortization provision when making 

the repayment ability determination.’’ 

The statute does not define the term 

‘‘negative amortization.’’ 

For such loans, proposed 

§ 226.43(c)(5)(ii)(C) provided that a 

creditor must determine the consumer’s 

repayment ability using (1) the fully 

indexed rate or any introductory interest 

rate, whichever is greater; and (2) 

substantially equal, monthly payments 

of principal and interest that will repay 

the maximum loan amount over the 

term of the loan remaining as of the date 

the loan is recast. The proposed 

payment calculation rule for negative 

amortization loans paralleled the 

general rule in proposed 

§ 226.43(c)(5)(i), except that proposed 

§ 226.43(c)(5)(ii)(C)(2) required the 

creditor to use the monthly payment 

amount that repays the maximum loan 

amount over the term of the loan that 

remains after the loan is recast, rather 

than requiring the creditor to use fully 

amortizing payments, as defined under 

§ 1026.43(b)(2). The proposed rule used 

the terms ‘‘maximum loan amount’’ and 

‘‘recast,’’ which are defined and 

discussed at § 1026.43(b)(7) and (b)(11), 

respectively. 

The Board proposed that the term 

‘‘negative amortization loan’’ have the 

same meaning as set forth in 

§ 226.18(s)(7)(v), which provided that 

the term ‘‘negative amortization loan’’ 

means a loan, other than a reverse 

mortgage subject to § 226.33, that 


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114 Graduated payment mortgages that have 

negative amortization and fall within the definition 

of ‘‘negative amortization loans’’ provide for step 

payments that may be less than the interest accrued 

for a fixed period of time. The unpaid interest is 

added to the principal balance of the loan. 

115See 12 CFR 1026.18(s)(2)(ii) and comment 

18(s)(2)(ii)–2. 

116See 2006 Nontraditional Mortgage Guidance, 

at 58614, n.7. 

provides for a minimum periodic 

payment that covers only a portion of 

the accrued interest, resulting in 

negative amortization. As defined, the 

term ‘‘negative amortization loan’’ does 

not cover other loan types that may have 

a negative amortization feature, but 

which do not permit the consumer 

multiple payment options, such as 

seasonal income loans. Accordingly, 

proposed § 226.43(c)(5)(ii)(C) covered 

only loan products that permit or 

require minimum periodic payments, 

such as payment-option loans and 

graduated payment mortgages with 

negative amortization.114 The Board 

believed that covering these types of 

loans in proposed § 226.43(c)(5)(ii)(C) 

was consistent with statutory intent to 

account for the negative equity that can 

occur when a consumer makes 

payments that defer some or all 

principal or interest for a period of time, 

and to address the impact that any 

potential payment shock might have on 

the consumer’s ability to repay the loan. 

See TILA section 129C(a)(6)(C). 

In contrast, in a transaction such as a 

seasonal loan that has a negative 

amortization feature, but which does not 

provide for minimum periodic 

payments that permit deferral of some 

or all principal, the consumer repays the 

loan with fully amortizing payments in 

accordance with the payment schedule. 

Accordingly, the same potential for 

payment shock due to accumulating 

negative amortization does not exist. 

These loans with a negative 

amortization feature are therefore not 

covered by the proposed term ‘‘negative 

amortization loan,’’ and would not be 

subject to the special payment 

calculation requirements for negative 

amortization loans at proposed 

§ 226.43(c)(5)(ii)(C). 

For purposes of determining the 

consumer’s ability to repay a negative 

amortization loan under proposed 

§ 226.43(c)(5)(ii)(C), creditors would be 

required to make a two-step payment 

calculation. 

Step one: maximum loan amount. 

Proposed § 226.43(c)(5)(ii)(C) would 

have required that the creditor first 

determine the maximum loan amount 

and period of time that remains in the 

loan term after the loan is recast before 

determining the consumer’s repayment 

ability on the loan. See comment 

43(c)(5)(ii)(C)–1; see also proposed 

§ 226.43(b)(11), which defined the term 

‘‘recast’’ to mean the expiration of the 

period during which negatively 

amortizing payments are permitted 

under the terms of the legal obligation. 

Proposed comment 43(c)(5)(ii)(C)–2 

further clarified that recast for a 

negative amortization loan occurs after 

the maximum loan amount is reached 

(i.e., the negative amortization cap) or 

the introductory minimum periodic 

payment period expires. 

As discussed above, § 1026.43(b)(7) 

defines ‘‘maximum loan amount’’ as the 

loan amount plus any increase in 

principal balance that results from 

negative amortization, as defined in 

§ 1026.18(s)(7)(v), based on the terms of 

the legal obligation. Under the proposal, 

creditors would make the following two 

assumptions when determining the 

maximum loan amount: (1) The 

consumer makes only the minimum 

periodic payments for the maximum 

possible time, until the consumer must 

begin making fully amortizing 

payments; and (2) the maximum interest 

rate is reached at the earliest possible 

time. 

As discussed above under the 

proposed definition of ‘‘maximum loan 

amount,’’ the Board interpreted the 

statutory language in TILA section 

129C(a)(6)(C) as requiring creditors to 

fully account for any potential increase 

in the loan amount that might result 

under the loan’s terms where the 

consumer makes only the minimum 

periodic payments required. The Board 

believed the intent of this statutory 

provision was to help ensure that the 

creditor consider the consumer’s 

capacity to absorb the increased 

payment amounts that would be needed 

to amortize the larger loan amount once 

the loan is recast. The Board recognized 

that the approach taken towards 

calculating the maximum loan amount 

requires creditors to assume a ‘‘worstcase scenario,’’ but believed this 

approach was consistent with statutory 

intent to take into account the greatest 

potential increase in the principal 

balance. 

Moreover, the Board noted that 

calculating the maximum loan amount 

based on these assumptions is 

consistent with the approach in the 

2010 MDIA Interim Final Rule,115

which addresses disclosure 

requirements for negative amortization 

loans, and also the 2006 Nontraditional 

Mortgage Guidance, which provides 

guidance to creditors regarding 

underwriting negative amortization 

loans.116

Step two: payment calculation. Once 

the creditor knows the maximum loan 

amount and period of time that remains 

after the loan is recast, the proposed 

payment calculation rule for negative 

amortization loans would require the 

creditor to use the fully indexed rate or 

introductory rate, whichever is greater, 

to calculate the substantially equal, 

monthly payment amount that will 

repay the maximum loan amount over 

the term of the loan that remains as of 

the date the loan is recast. See proposed 

§ 226.43(c)(5)(ii)(C)(1) and (2). 

Proposed comment 43(c)(5)(ii)(C)–1 

clarified that creditors must follow this 

two-step approach when determining 

the consumer’s repayment ability on a 

negative amortization loan, and also 

provided cross-references to aid 

compliance. Proposed comment 

43(c)(5)(ii)(C)–2 provided further 

guidance to creditors regarding the 

relevant term of the loan that must be 

used for purposes of the repayment 

ability determination. Proposed 

comment 43(c)(5)(ii)(C)–3 provided 

illustrative examples of how to 

determine the consumer’s repayment 

ability based on substantially equal 

monthly payments of principal and 

interest as required under proposed 

§ 226.43(c)(5)(ii)(C) for a negative 

amortization loan. 

In discussing the ability-to-repay 

requirements for negative amortization 

loans, the Board noted the anomaly that 

a graduated payment mortgage may 

have a largest scheduled payment that is 

larger than the payment calculated 

under proposed § 226.43(c)(5)(ii)(C). 

The Board solicited comment on 

whether or not the largest scheduled 

payment should be used in determining 

ability to repay. The Bureau received 

one comment on this issue, from an 

association of State bank regulators, 

arguing that the rule should use the 

largest payment scheduled. However, 

the Bureau does not believe that a 

special rule for graduated payment 

mortgages, which would require an 

exception from the statute, is necessary 

to ensure ability to repay these loans. It 

is unlikely that the calculated payment 

will be very different from the largest 

scheduled payment, and introducing 

this added complexity to the rule is 

unnecessary. Also, the one comment 

favoring such a choice did not include 

sufficient data to support use of the 

exception and adjustment authority 

under TILA, and the Bureau is not 

aware any such data. 

Final Rule 

The Bureau did not receive comments 

on the proposed method for calculating 

payments for negative amortization 


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loans. The Bureau believes that the 

method proposed by the Board 

implements the statutory provision 

accurately and appropriately. 

Accordingly, § 1026.43(c)(5)(ii)(C) and 

associated commentary are adopted 

substantially as proposed, with minor 

changes for clarification. 

43(c)(6) Payment Calculation for 

Simultaneous Loans 

43(c)(6)(i) 

The Board’s proposed rule provided 

that for purposes of determining a 

consumer’s ability to repay a loan, ‘‘a 

creditor must consider a consumer’s 

payment on a simultaneous loan that 

is—(i) a covered transaction, by 

following paragraphs (c)(5)(i) and (ii) of 

this section’’ (i.e., the payment 

calculation rules for the covered 

transaction itself). 

Proposed comment 43(c)(6)–1 stated 

that in determining the consumer’s 

repayment ability for a covered 

transaction, the creditor must include 

consideration of any simultaneous loan 

which it knows or has reason to know 

will be made at or before consummation 

of the covered transaction. Proposed 

comment 43(c)(6)–2 explained that for a 

simultaneous loan that is a covered 

transaction, as that term was defined in 

proposed § 226.43(b)(1), the creditor 

must determine a consumer’s ability to 

repay the monthly payment obligation 

for a simultaneous loan as set forth in 

proposed § 226.43(c)(5), taking into 

account any mortgage-related 

obligations. 

The Bureau did not receive comments 

on this specific language or the use of 

the covered transaction payment 

calculation for simultaneous loans. For 

discussion of other issues regarding 

simultaneous loans, see the section-bysection analysis of § 1026.43(b)(12), 

.43(c)(2)(iv) and .43(c)(6)(ii). 

The Bureau considers the language of 

proposed§ 226.43(c)(6)(i) to be an 

accurate and appropriate 

implementation of the statute. 

Accordingly, the Bureau is adopting 

§ 1026.43(c)(6)(i) and associated 

commentary substantially as proposed, 

with minor changes for clarity. The 

requirement to consider any mortgagerelated obligations, presented in 

comment 43(c)(6)–2, is now also part of 

the regulatory text, at § 1026.43(c)(6). 

43(c)(6)(ii) 

For a simultaneous loan that is a 

HELOC, the consumer is generally not 

committed to using the entire credit line 

at consummation. The amount of funds 

drawn on a simultaneous HELOC may 

differ greatly depending, for example, 

on whether the HELOC is used as a 

‘‘piggyback loan’’ to help towards 

payment on a home purchase 

transaction or if the HELOC is opened 

for convenience to be drawn down at a 

future time. In the proposed rule, the 

Board was concerned that requiring the 

creditor to underwrite a simultaneous 

HELOC assuming a full draw on the 

credit line might unduly restrict credit 

access, especially in connection with 

non-purchase transactions, because it 

would require creditors to assess the 

consumer’s repayment ability using 

potentially overstated payment 

amounts. For this reason, the Board 

proposed under § 226.43(c)(6)(ii) that 

the creditor calculate the payment for 

the simultaneous HELOC based on the 

amount of funds to be drawn by the 

consumer at consummation of the 

covered transaction. The Board solicited 

comment on whether this approach was 

appropriate. 

Proposed comment 43(c)(6)–3 

clarified that for a simultaneous loan 

that is a HELOC, the creditor must 

consider the periodic payment required 

under the terms of the plan when 

assessing the consumer’s ability to repay 

the covered transaction secured by the 

same dwelling as the simultaneous loan. 

This comment explained that under 

proposed § 226.43(c)(6)(ii), the creditor 

must determine the periodic payment 

required under the terms of the plan by 

considering the actual amount of credit 

to be drawn by the consumer at or 

before consummation of the covered 

transaction. This comment clarified that 

the amount to be drawn is the amount 

requested by the consumer; when the 

amount requested will be disbursed, or 

actual receipt of funds, is not 

determinative. 

Several industry commenters objected 

that it is difficult to know the actual 

amount drawn on a HELOC if it is held 

by another lender. One commenter 

suggested finding another way to do this 

calculation, such as by adding 1 percent 

of the full HELOC line to the overall 

monthly payment. Two banking trade 

associations said that the full line of 

credit should be considered, and if the 

consumer does not qualify, the line of 

credit can be reduced in order to qualify 

safely. One bank stated that creditors 

regulated by Federal banking agencies 

are bound by the interagency ‘‘Credit 

Risk Guidance for Home Equity 

Lending’’ (2005) to consider the full line 

of credit, and this will create an uneven 

playing field. 

Other industry commenters supported 

use of the actual amount drawn at 

consummation. Both Freddie Mac and 

Fannie Mae stated that the Board’s 

proposal for considering the actual 

amount drawn at closing was consistent 

with their underwriting standards. In 

addition, an association representing 

one state’s credit unions stated that 

requiring consideration of a 100 percent 

draw would be onerous and inaccurate. 

It also asked that we make clear that the 

creditor does not have to recalculate a 

consumer’s ability to repay if the 

amount drawn changes at 

consummation. 

The Bureau believes that requiring 

consideration of 100 percent of a home 

equity line of credit would 

unnecessarily restrict credit availability 

for consumers. Available but 

unaccessed credit is not considered in 

determining ability to repay a mortgage 

when the consumer has other types of 

credit lines, such as credit cards. 

Although HELOCs are secured by the 

consumer’s dwelling, and thus differ 

from other types of available but 

unaccessed credit, this difference does 

not seem determinative. Any potential 

dwelling-secured home equity line of 

credit that a creditor might grant to a 

consumer could simply be requested by 

the consumer immediately following 

consummation of the covered 

transaction. The fact that the potential 

credit line has been identified and 

enumerated prior to the transaction, 

rather than after, does not seem 

significant compared to the fact that the 

consumer has chosen not to access that 

credit, and will not be making payments 

on it. As with the rest of the ability-torepay requirements, creditors should 

apply appropriate underwriting 

procedures, and are not restricted to the 

legally mandated minimum required by 

this rule, as long as they satisfy that 

minimum. 

The requirements of the 2005 ‘‘Credit 

Risk Guidance for Home Equity 

Lending’’ do not change the Bureau’s 

view of this issue. The Guidance covers 

home equity lending itself, not 

consideration of HELOCs as 

simultaneous loans when determining 

ability to repay for senior non-HELOCs. 

The requirement to consider the entire 

home equity line of credit controls only 

a bank’s granting of that line of credit. 

For this reason, the Bureau does not 

believe that banks following this 

guidance will be disadvantaged. In 

addition, the Bureau will not be 

implementing the suggested alternative 

of adding 1 percent to the calculated 

monthly payment on the covered 

transaction. The Bureau is not aware of 

any data supporting the accuracy of 

such an approach. 

In regard to the comments concerning 

difficulty in determining the amount of 

the draw and the monthly HELOC 

payment, the Bureau as discussed above 


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in the section-by-section analysis of 

§ 1026.43(c)(2)(iv) has added language 

to comment 43(c)(2)(iv)–4 providing 

more specific guidance in applying the 

knows or has reason to know standard. 

In addition, language has been added to 

comment 43(c)(6)–3, regarding payment 

calculations for simultaneous HELOCs, 

making clear that a creditor does not 

need to reconsider ability to repay if the 

consumer unexpectedly draws more 

money than planned at closing from a 

HELOC issued by a different creditor. In 

addition, the regulation language has 

been clarified to state that the creditor 

must use the amount of credit ‘‘to be’’ 

drawn at consummation, making clear 

that a violation does not occur if the 

creditor did not know or have reason to 

know that a different amount would be 

drawn. 

The Board also solicited comment on 

whether or not a safe harbor should be 

given to those creditors who consider 

the full HELOC credit line. However, 

commenters did not focus on this 

possibility. The Bureau believes that 

although a creditor may choose to 

underwrite using the full credit line as 

a means of considering ability to repay 

in relation to the actual draw, a safe 

harbor is not warranted. Because the full 

credit line should always be equal to or 

greater than the actual draw, 

appropriate use of the full credit line in 

underwriting will constitute appropriate 

compliance without a safe harbor. 

In addition to the amount of a HELOC 

that needs to be considered in 

determining ability to repay, the Board 

also solicited comment on whether the 

treatment of HELOCs as simultaneous 

loans should be limited to purchase 

transactions. The Board suggested that 

concerns regarding ‘‘piggyback loans’’ 

were not as acute with non-purchase 

transactions. 

Consumer and public interest groups 

opposed limiting the consideration of 

HELOCs to purchase transactions. 

Several consumer advocacy groups 

suggested that if only purchase 

transactions were covered, the abuses 

would migrate to the unregulated space. 

Some commenters said they did not see 

a reason to exclude the cost of a 

simultaneous loan when it is extended 

as part of a refinance. Industry 

commenters did not focus much on this 

issue, but an association representing 

credit unions supported limiting 

consideration to purchase transactions 

in order to reduce regulatory burden on 

credit unions and streamline the 

refinancing process. 

The Bureau believes that requiring 

consideration of HELOCs as 

simultaneous loans is appropriate in 

both purchase and non-purchase 

transactions. In both situations the 

HELOC is a lien on the consumer’s 

dwelling with a cost that affects the 

viability of the covered transaction loan. 

The Bureau recognizes that a 

simultaneous HELOC in connection 

with a refinancing is more likely to be 

a convenience than one issued 

simultaneously with a purchase 

transaction, which will often cover 

down payment, transaction costs or 

other major expenses. However, the 

final rule accommodates this difference 

by allowing the creditor to base its 

ability-to-repay determination on the 

actual draw. The Bureau did not receive 

and is not aware of any information or 

data that justifies excluding actual 

draws on simultaneous HELOCs in 

connection with refinances from this 

rule. 

For the reasons stated above, the 

Bureau considers the language of 

proposed§ 226.43(c)(6)(ii) to be an 

accurate and appropriate 

implementation of the statute. 

Accordingly, the Bureau is adopting 

§ 1026.43(c)(6)(ii) and associated 

commentary as proposed, with minor 

changes for clarity. 

43(c)(7) Monthly Debt-to-Income Ratio 

or Residual Income 

As discussed above, TILA section 

129C(a)(3) requires creditors to consider 

the debt-to-income ratio or residual 

income the consumer will have after 

paying non-mortgage debt and 

mortgage-related obligations, as part of 

the ability-to-repay determination under 

TILA section 129C(a)(1). The Board’s 

proposal would have implemented this 

requirement in § 226.43(c)(2)(vii). The 

Board proposed definitions and 

calculations for the monthly debt-toincome ratio and residual income in 

§ 226.43(c)(7). 

With respect to the definitions, 

proposed § 226.43(c)(7)(i)(A) would 

have defined the total monthly debt 

obligations as the sum of: the payment 

on the covered transaction, as required 

to be calculated by proposed 

§ 226.43(c)(2)(iii) and (c)(5); the monthly 

payment on any simultaneous loans, as 

required to be calculated by proposed 

§ 226.43(c)(2)(iv) and (c)(6); the monthly 

payment amount of any mortgagerelated obligations, as required to be 

considered by proposed 

§ 226.43(c)(2)(v); and the monthly 

payment amount of any current debt 

obligations, as required to be considered 

by proposed § 226.43(c)(2)(vi). Proposed 

§ 1026.43(c)(7)(i)(B) would have defined 

the total monthly income as the sum of 

the consumer’s current or reasonably 

expected income, including any income 

from assets, as required to be considered 

by proposed § 226.43(c)(2)(i) and (c)(4). 

With respect to the calculations, 

proposed § 226.43(c)(7)(ii)(A) would 

have required the creditor to consider 

the consumer’s monthly debt-to-income 

ratio by taking the ratio of the 

consumer’s total monthly debt 

obligations to total monthly income. 

Proposed § 226.43(c)(7)(ii)(B) would 

have required the creditor to consider 

the consumer’s residual income by 

subtracting the consumer’s total 

monthly debt obligations from the total 

monthly income. The Board solicited 

comment on whether consideration of 

residual income should account for loan 

amount, region of the country, and 

family size, and on whether creditors 

should be required to include Federal 

and State taxes in the consumer’s 

obligations to calculate the residual 

income. 

Proposed comment 43(c)(7)–1 would 

have stated that a creditor must 

calculate the consumer’s total monthly 

debt obligations and total monthly 

income in accordance with the 

requirements in proposed § 226.43(c)(7). 

The proposed comment would have 

explained that creditors may look to 

widely accepted governmental and nongovernmental underwriting standards to 

determine the appropriate thresholds for 

the debt-to-income ratio or residual 

income. 

Proposed comment 43(c)(7)–2 would 

have clarified that if a creditor considers 

both the consumer’s debt-to-income 

ratio and residual income, the creditor 

may base its determination of ability to 

repay on either the consumer’s debt-toincome ratio or residual income, even if 

the determination would differ with the 

basis used. In the section-by-section 

analysis of proposed § 226.43(c)(7), the 

Board explained that it did not wish to 

create an incentive for creditors to 

consider and verify as few factors as 

possible in the repayment ability 

determination. 

Proposed comment 43(c)(7)–3 would 

have provided that creditors may 

consider compensating factors to 

mitigate a higher debt-to-income ratio or 

lower residual income. The proposed 

comment would have provided that the 

creditor may, for example, consider the 

consumer’s assets other than the 

dwelling securing the covered 

transaction or the consumer’s residual 

income as a compensating factor for a 

higher debt-to-income ratio. The 

proposed comment also would have 

provided that, in determining whether 

and in what manner to consider 

compensating factors, creditors may 

look to widely accepted governmental 

and non-governmental underwriting 


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117See also Michael E. Stone, What is Housing 

Affordability? The Case for the Residual Income 

Approach, 17 Housing Pol’y Debate 179 (2006) 

(advocating use of a residual income approach but 

acknowledging that it ‘‘is neither well known, 

particularly in this country, nor widely understood, 

let alone accepted’’). 

standards. The Board solicited comment 

on whether it should provide more 

guidance on what factors creditors may 

consider, and on how creditors may 

include compensating factors in the 

repayment ability determination. 

In addition, the Board solicited 

comment on two issues related to the 

use of automated underwriting systems. 

The Board solicited comment on 

providing a safe harbor for creditors 

relying on automated underwriting 

systems that use monthly debt-toincome ratios, if the system developer 

certifies that the system’s use of 

monthly debt-to-income ratios in 

determining repayment ability is 

empirically derived and statistically 

sound. The Board also solicited 

comment on other methods to facilitate 

creditor reliance on automated 

underwriting systems, while ensuring 

that creditors can demonstrate 

compliance with the rule. 

As discussed above in the section-bysection analysis of § 1026.43(c)(2)(vii), 

industry commenters and consumer 

advocates largely supported including 

consideration of the monthly debt-toincome ratio or residual income in the 

ability-to-repay determination and 

generally favored a flexible approach to 

consideration of those factors. In 

response to the Board’s proposal, some 

consumer advocates asked that the 

Bureau conduct research on the debt-toincome ratio and residual income. They 

requested a standard that reflects the 

relationship between the debt-to-income 

ratio and residual income. One industry 

commenter recommended that the 

Bureau adopt the VA calculation of 

residual income. Another industry 

commenter suggested that the Bureau 

adopt the same definitions of the debtto-income ratio and residual income as 

for qualified residential mortgages, to 

reduce compliance burdens and the 

possibility of errors. One industry 

commenter asked that consideration of 

residual income be permitted to vary 

with family size and geographic 

location. The commenter suggested that 

the residual income calculation account 

for Federal and State taxes. Several 

consumer advocates suggested that the 

Bureau review the VA residual income 

guidelines and update the cost of living 

tiers. They affirmed that all regularly 

scheduled debt payments should be 

included in the residual income 

calculation. They noted that residual 

income should be sufficient to cover 

basic living necessities, including food, 

utilities, clothing, transportation, and 

known health care expenses. 

One industry commenter asked that 

the Bureau provide guidance on and 

additional examples of compensating 

factors, for example, situations where a 

consumer has many assets but a low 

income or high debt-to-income ratio. 

The commenter suggested that the 

Bureau clarify that the list of examples 

was not exclusive. Consumer advocates 

recommended that the Bureau not 

permit extensions of credit based on a 

good credit history or involving a high 

loan-to-value ratio if the debt-to-income 

ratio or residual income does not reflect 

an ability to repay. These commenters 

argued that credit scores and down 

payments reflect past behavior and 

incentives to make down payments, not 

ability to repay. 

The Bureau is largely adopting 

§ 1026.43(c)(7) as proposed, with certain 

clarifying changes to the commentary. 

Specifically, comment 43(c)(7)–1 

clarifies that § 1026.43(c) does not 

prescribe a specific debt-to-income ratio 

with which creditors must comply. For 

the reasons discussed above in the 

section-by-section analysis of 

§ 1026.43(c), the Bureau is not finalizing 

the portion of proposed comment 

43(c)(7)–1 which would have provided 

that the creditor may look to widely 

accepted governmental and nongovernmental underwriting standards to 

determine the appropriate threshold for 

the monthly debt-to-income ratio or the 

monthly residual income. Instead, 

comment 43(c)(7)–1 provides that an 

appropriate threshold for a consumer’s 

monthly debt-to-income ratio or 

monthly residual income is for the 

creditor to determine in making a 

reasonable and good faith determination 

of a consumer’s repayment ability. 

Comment 43(c)(7)–2 clarifies 

guidance regarding use of both monthly 

debt-to-income and monthly residual 

income by providing that if a creditor 

considers the consumer’s monthly debtto-income ratio, the creditor may also 

consider the consumer’s residual 

income as further validation of the 

assessment made using the consumer’s 

monthly debt-to-income ratio. The 

Bureau is not finalizing proposed 

comment 43(c)(7)–2, which would have 

provided that if a creditor considers 

both the consumer’s monthly debt-toincome ratio and residual income, the 

creditor may base the ability-to-repay 

determination on either metric, even if 

the ability-to-repay determination 

would differ with the basis used. The 

Bureau believes the final guidance 

better reflects how the two standards 

work together in practice, but the 

change is not intended to alter the rule. 

Comment 43(c)(7)–3 also clarifies 

guidance regarding the use of 

compensating factors in assessing a 

consumer’s ability to repay by providing 

that, for example, the creditor may 

reasonably and in good faith determine 

that an individual consumer has the 

ability to repay despite a higher 

monthly debt-to-income ratio or lower 

residual income in light of the 

consumer’s assets other than the 

dwelling securing the covered 

transaction, such as a savings account. 

The creditor may also reasonably and in 

good faith determine that a consumer 

has the ability to repay despite a higher 

debt-to-income ratio in light of the 

consumer’s residual income. The 

Bureau believes that not permitting use 

of compensating factors may reduce 

access to credit in some cases, even if 

the consumer could afford the mortgage. 

The Bureau does not believe, however, 

that the rule should provide an 

extensive list of compensating factors 

that the creditor may consider in 

assessing repayment ability. Instead, 

creditors should make reasonable and 

good faith determinations of the 

consumer’s repayment ability in light of 

the facts and circumstances. This 

approach to compensating factors is 

consistent with the final rule’s flexible 

approach to the requirement that 

creditors make a reasonable and good 

faith of a consumer’s repayment ability 

throughout § 1026.43(c). 

The Bureau will consider conducting 

a future study on the debt-to-income 

ratio and residual income. Except for 

one small creditor and the VA, the 

Bureau is not aware of any creditors that 

routinely use residual income in 

underwriting, other than as a 

compensating factor.117 The VA 

underwrites its loans to veterans based 

on a residual income table developed in 

1997. The Bureau understands that the 

table shows the residual income desired 

for the consumer based on the loan 

amount, region of the country, and 

family size, but does not account for 

differences in housing or living costs 

within regions (for instance rural 

Vermont versus New York City). The 

Bureau also understands that the 

residual income is calculated by 

deducting obligations, including Federal 

and State taxes, from effective income. 

However, at this time, the Bureau is 

unable to conduct a detailed review of 

the VA residual income guidelines, 

which would include an analysis of 

whether those guidelines are predictive 

of repayment ability, to determine if 

those standards should be incorporated, 

in whole or in part, into the ability-toVerDate Mar<15>2010 20:04 Jan 29, 2013 Jkt 229001 PO 00000 Frm 00080 Fmt 4701 Sfmt 4700 E:\FR\FM\30JAR2.SGM 30JAR2

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118Section 128A of TILA, as added by Section 

1418 of the Dodd-Frank Act, includes a definition 

of ‘‘hybrid adjustable rate mortgage.’’ However, that 

definition applies to the adjustable rate mortgage 

disclosure requirements under TILA section 128A, 

not the ability-to-repay requirements under TILA 

section 129C. 

repay analysis that applies to the entire 

residential mortgage market. Further, 

the Bureau believes that providing 

broad standards for the definition and 

calculation of residual income will help 

preserve flexibility if creditors wish to 

develop and refine more nuanced 

residual income standards in the future. 

The Bureau accordingly does not find it 

necessary or appropriate to specify a 

detailed methodology in the final rule 

for consideration of residual income. 

The final rule also does not provide 

a safe harbor for creditors relying on 

automated underwriting systems that 

use monthly debt-to-income ratios. The 

Bureau understands that creditors 

routinely rely on automated 

underwriting systems, many of which 

are proprietary and thus lack 

transparency to the individual creditors 

using the systems. Such systems may 

decide, for example, whether the debtto-income ratio and compensating 

factors are appropriate, but may not 

disclose to the individual creditors 

using such systems which compensating 

factors were used for loan approval. 

However, the Bureau does not believe a 

safe harbor is necessary in light of the 

flexibility the final rule provides to 

creditors in assessing a consumer’s 

repayment ability, including 

consideration of monthly debt-toincome ratios. See comments 43(c)(1)–1 

and 43(c)(2)–1. 

Finally, the Bureau notes the contrast 

between the flexible approach to 

considering and calculating debt-toincome in § 1026.43(c)(2)(vii) and (7) 

and the specific standards for evaluating 

debt-to-income for purposes of 

determining whether a covered 

transaction is a qualified mortgage 

under § 1026.43(e)(2). For the reasons 

discussed below in the section-bysection analysis of § 1026.43(e)(2), the 

Bureau believes a specific, quantitative 

standard for evaluating a consumer’s 

debt-to-income ratio is appropriate in 

determining whether a loan receives 

either a safe harbor or presumption of 

compliance with the repayment ability 

requirements of § 1026.43(c)(1) pursuant 

to § 1026.43(e)(2). However, the abilityto-repay requirements in § 1026.43(c) 

will apply to the whole of the mortgage 

market and therefore require flexibility 

to permit creditors to assess repayment 

ability while ensuring continued access 

to responsible, affordable mortgage 

credit. Accordingly, the final rule sets 

minimum underwriting standards while 

providing creditors with flexibility to 

use their own quantitative standards in 

making the repayment ability 

determination required by 

§ 1026.43(c)(1). 

43(d) Refinancing of Non-Standard 

Mortgages 

Two provisions of section 1411 of the 

Dodd-Frank Act address the refinancing 

of existing mortgage loans under the 

ability-to-repay requirements. As 

provided in the Dodd-Frank Act, TILA 

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

Federal agencies may create an 

exemption from the income verification 

requirements in TILA section 129C(a)(4) 

if certain conditions are met. 15 U.S.C. 

1639c(a)(5). In addition, TILA section 

129C(a)(6)(E) provides certain special 

ability-to-repay requirements to 

encourage applications to refinance 

existing ‘‘hybrid loans’’ into a ‘‘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. The 

statute allows creditors to give special 

weight to the consumer’s good standing 

and to consider whether the refinancing 

would prevent a likely default, 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 or define ‘‘hybrid’’ or 

‘‘standard loans.’’ 118 15 U.S.C. 

1639c(a)(6)(E). 

The Board noted in its proposal that 

it reviewed the Dodd-Frank Act’s 

legislative history, consulted with 

consumer advocates and representatives 

of both industry and the GSEs, and 

examined underwriting rules and 

guidelines for the refinance programs of 

private creditors, GSEs and Federal 

agencies, as well as for the Home 

Affordable Modification Program 

(HAMP). The Board noted that it also 

considered TILA section 129C(a)(5), 

which permits Federal agencies to adopt 

rules exempting refinancings from 

certain of the ability-to-repay 

requirements in TILA section 129C(a). 

In proposing § 226.43(d) to implement 

TILA section 129C(a)(6)(E), the Board 

interpreted the statute as being intended 

to afford greater flexibility to creditors 

of certain home mortgage refinancings 

when complying with the general 

ability-to-repay provisions in TILA 

section 129C(a). Consistent with this 

reading of the statute, the proposal 

would have provided an exemption 

from certain criteria required to be 

considered as part of the general 

repayment ability determination under 

TILA section 129C(a). Specifically, the 

Board’s proposal would have permitted 

creditors to evaluate qualifying 

applications without having to verify 

the consumer’s income and assets as 

prescribed in the general ability-torepay requirements, provided that a 

number of additional conditions were 

met. In addition, the proposal would 

have permitted a creditor to calculate 

the monthly payment used for 

determining the consumer’s ability to 

repay the new loan based on 

assumptions that would typically result 

in a lower monthly payment than those 

required to be used under the general 

ability-to-repay requirements. The 

proposal also clarified the conditions 

that must be met in a home mortgage 

refinancing in order for this greater 

flexibility to apply. 

The Board noted that TILA section 

129C(a)(6)(E)(ii) permits creditors to 

give prevention of a ‘‘likely default 

should the original mortgage reset a 

higher priority as an acceptable 

underwriting practice.’’ 15 U.S.C. 

1639c(a)(6)(E)(ii). The Board interpreted 

this provision to mean that certain 

ability-to-repay criteria under TILA 

section 129C(a) should not apply to 

refinances that meet the requisite 

conditions. TILA section 129C(a) 

specifically prescribes the requirements 

that creditors must meet to satisfy the 

obligation to determine a consumer’s 

ability to repay a mortgage loan. The 

Board concluded that the term 

‘‘underwriting practice’’ could 

reasonably be interpreted to refer to the 

underwriting rules prescribed in earlier 

portions of TILA section 129C(a); 

namely, those concerning the general 

ability-to-repay underwriting 

requirements. 

The Board also structured its proposal 

to provide for flexibility in underwriting 

that is characteristic of so-called 

‘‘streamlined refinances,’’ which are 

offered by creditors to existing 

customers without having to go through 

a full underwriting process appropriate 

for a new origination. The Board noted 

that section 1411 of the Dodd-Frank Act 

specifically authorizes streamlined 

refinancings of loans made, guaranteed, 

or insured by Federal agencies, and 

concluded that TILA section 

129C(a)(6)(E) is most reasonably 

interpreted as being designed to address 

the remaining market for streamlined 

refinancings; namely, those offered 

under programs of private creditors and 

the GSEs. The Board stated that in its 

understanding typical streamlined 

refinance programs do not require 

documentation of income and assets, 

although a verbal verification of 


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6488 Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 

119See, e.g., Fannie Mae, FM 0509, Home 

Affordable Modification Program, at 1 (2009). 

120See, e.g., Fannie Mae, Home Affordable 

Refinance Refi Plus Options, at 2 (Mar. 29, 2010); 

Freddie Mac, Pub. No. 387, Freddie Mac-owned 

Streamlined Refinance Mortgage, at 2 (2010). 

121 ‘‘The term ‘adjustable-rate mortgage’ means a 

transaction secured by real property or a dwelling 

for which the annual percentage rate may increase 

after consummation.’’ 12 CFR 1026.18(s)(7)(i). 

122 ‘‘The term ‘interest-only’ means that, under 

the terms of the legal obligation, one or more of the 

periodic payments may be applied solely to accrued 

interest and not to loan principal; an ‘interest-only 

loan’ is a loan that permits interest-only payments.’’ 

12 CFR 1026.18(s)(7)(iv). 

123 ‘‘[T]he term ‘negative amortization’ means 

payment of periodic payments that will result in an 

increase in the principal balance under the terms 

of the legal obligation; the term ‘negative 

amortization loan’ means a loan that permits 

payments resulting in negative amortization, other 

than a reverse mortgage subject to section 226.33.’’ 

12 CFR 1026.18(s)(7)(v). 

employment may be required. The 

Board further noted that TILA section 

129C(a)(6)(E) includes three central 

elements of typical streamlined 

refinance programs, in that it requires 

that the creditor be the same for the 

existing and new mortgage loan 

obligation, that the consumer have a 

positive payment history on the existing 

mortgage loan obligation, and that the 

payment on the new refinancing be 

lower than on the existing mortgage 

loan obligation. 

One difference the Board noted 

between the statute and typical 

streamlined refinance programs is that 

the statute targets consumers facing 

‘‘likely default’’ if the existing mortgage 

‘‘reset[s].’’ The Board indicated that, by 

contrast, streamlined refinance 

programs may not be limited to 

consumers at risk in this way. For 

example, streamlined refinancing 

programs may assist consumers who are 

not facing potential default but who 

simply wish to take advantage of lower 

rates despite a drop in their home value 

or wish to switch from a less stable 

variable-rate product to a fixed-rate 

product. The Board noted parallels 

between TILA’s new refinancing 

provisions and the focus of HAMP, a 

government program specifically aimed 

at providing modifications for 

consumers at risk of ‘‘imminent 

default,’’ or in default or foreclosure.119

However, the Board noted that 

underwriting criteria for a HAMP 

modification are considerably more 

stringent than for a typical streamlined 

refinance. 

On balance, the Board interpreted the 

statutory language as being modeled on 

the underwriting standards of typical 

streamlined refinance programs rather 

than the tighter standards of HAMP. The 

Board concluded that Congress intended 

to facilitate opportunities to refinance 

loans on which payments could become 

significantly higher and thus 

unaffordable. The Board cautioned that 

applying underwriting standards that 

are too stringent could impede 

refinances that Congress intended to 

encourage. In particular, the statutory 

language permitting creditors to give 

‘‘likely default’’ a ‘‘higher priority as an 

acceptable underwriting practice’’ 

indicates that flexibility in these special 

refinances should be permitted. In 

addition, underwriting standards that go 

significantly beyond those used in 

existing streamlined refinance programs 

could create a risk that these programs 

would be unable to meet the TILA 

ability-to-repay requirements; thus, an 

important refinancing resource for atrisk consumers would be compromised 

and the overall mortgage market 

potentially disrupted at a vulnerable 

time. 

The Board noted, however, that 

consumers at risk of default when 

higher payments are required might 

present greater credit risks to the 

institutions holding their loans when 

those loans are refinanced without 

verifying the consumer’s income and 

assets. Accordingly, the Board’s 

proposal would have imposed some 

requirements that are more stringent 

than those of typical streamlined 

refinance programs as a prerequisite to 

the refinancing provision under 

proposed § 226.43(d). For example, the 

proposal would have permitted a 

consumer to have had only one 

delinquency of more than 30 days in the 

24 months immediately preceding the 

consumer’s application for a refinance. 

By contrast, the Board indicated that 

streamlined refinance programs of 

which it is aware tend to consider the 

consumer’s payment history for only the 

last 12 months.120 In addition, the 

proposal would have defined the type of 

loan into which a consumer may 

refinance under TILA’s new refinancing 

provisions to include several 

characteristics designed to ensure that 

those loans are stable and affordable. 

These include a requirement that the 

interest rate be fixed for the first five 

years after consummation and that the 

points and fees be capped at three 

percent of the total loan amount, subject 

to a limited exemption for smaller loans. 

43(d)(1) Definitions 

In the Board’s proposal, § 226.43(d)(1) 

established the scope of paragraph (d) 

and set forth the conditions under 

which the special refinancing 

provisions applied, while proposed 

§ 226.43(d)(2) addressed the definitions 

for ‘‘non-standard mortgage,’’ ‘‘standard 

mortgage,’’ and ‘‘refinancing.’’ The 

Bureau believes that paragraph (d) 

should begin with the relevant 

definitions, before proceeding to the 

scope and conditions of the special 

refinancing provisions. The rule 

finalized by the Bureau is accordingly 

reordered. The following discussion 

details the definitions adopted in 

§ 1026.43(d)(1), which were proposed 

by the Board under § 226.43(d)(2). 

Proposed § 226.43(d)(2) defined the 

terms ‘‘non-standard mortgage’’ and 

‘‘standard mortgage.’’ As noted earlier, 

the statute does not define the terms 

‘‘hybrid loan’’ and ‘‘standard loan’’ used 

in the special refinancing provisions of 

TILA section 129C(a)(6)(E). Therefore, 

the Board proposed definitions it 

believed to be consistent with the policy 

objective underlying these special 

provisions: Facilitating the refinancing 

of home mortgages on which consumers 

risk a likely default due to impending 

payment shock into more stable and 

affordable products. 

43(d)(1)(i) Non-Standard Mortgage 

As noted above, the statute does not 

define the terms ‘‘hybrid loan’’ and 

‘‘standard loan’’ used in TILA section 

129C(a)(6)(E). The Board proposed 

definitions it believed to be consistent 

with Congress’s objectives. Proposed 

§ 226.43(d)(2)(i) substituted the term 

‘‘non-standard mortgage’’ for the 

statutory term ‘‘hybrid loan’’ and would 

have defined non-standard mortgage as 

any ‘‘covered transaction,’’ as defined in 

proposed § 226.43(b)(1), that is: 

• An adjustable-rate mortgage, as 

defined in § 226.18(s)(7)(i), with an 

introductory fixed interest rate for a 

period of one year or longer; 121

• An interest-only loan, as defined in 

§ 226.18(s)(7)(iv); 122 or 

• A negative amortization loan, as 

defined in § 226.18(s)(7)(v).123

Proposed comment 43(d)(2)(i)(A)–1 

explained the application of the 

definition of non-standard mortgage to 

an adjustable-rate mortgage with an 

introductory fixed interest rate for one 

or more years. This proposed comment 

clarified that, for example, a covered 

transaction with a fixed introductory 

rate for the first two, three or five years 

that then converts to a variable rate for 

the remaining 28, 27 or 25 years, 

respectively, is a non-standard 

mortgage. By contrast, a covered 

transaction with an introductory rate for 

six months that then converts to a 

variable rate for the remaining 29 and 1⁄2

years is not a non-standard mortgage. 

The Board articulated several 

rationales for its proposed definition of 


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124See Comm. on Fin. Servs., Report on H.R. 

1728, Mortgage Reform and Anti-Predatory Lending 

Act, H. Rept. 94, 110th Cong., at 5 (2009). 

125 Id. at 51–52. 

a non-standard mortgage. First, the 

Board noted that the legislative history 

of the Dodd-Frank Act describes 

‘‘hybrid’’ mortgages as mortgages with a 

‘‘blend’’ of fixed-rate and adjustable-rate 

characteristics—generally loans with an 

initial fixed period and adjustment 

periods, such as ‘‘2/23s and 3/27s.’’ 124

The Board also stated that the legislative 

history indicates that Congress was 

concerned about consumers being 

trapped in mortgages likely to result in 

payments that would suddenly become 

significantly higher—often referred to as 

‘‘payment shock’’—because their home 

values had dropped, thereby ‘‘making 

refinancing difficult.’’ 125

The Board interpreted Congress’ 

concern about consumers being at risk 

due to payment shock as supporting an 

interpretation of the term ‘‘hybrid loan’’ 

to encompass both loans that are 

‘‘hybrid’’ in that they start with a fixed 

interest rate and convert to a variable 

rate, but also loans that are ‘‘hybrid’’ in 

that consumers can make payments that 

do not pay down principal for a period 

of time that then convert to higher 

payments covering all or a portion of 

principal. By defining ‘‘non-standard 

mortgage’’ in this way, the proposal was 

intended to increase refinancing options 

for a wide range of at-risk consumers 

while conforming to the statutory 

language and legislative intent. 

The proposed definition of ‘‘nonstandard mortgage’’ would not have 

included adjustable-rate mortgages 

whose rate is fixed for an initial period 

of less than one year. In those instances, 

the Board posited that a consumer may 

not face ‘‘payment shock’’ because the 

consumer has paid the fixed rate for 

such a short period of time. The Board 

also expressed concern that allowing 

streamlined refinancings under this 

provision where the interest rate is fixed 

for less than one year could result in 

‘‘loan flipping.’’ A creditor, for example, 

could make a covered transaction and 

then only a few months later refinance 

that loan under proposed § 226.43(d) to 

take advantage of the exemption from 

certain ability-to-repay requirements 

while still profiting from the refinancing 

fees. 

The Board expressed concern that 

under its proposed definition, a 

consumer could refinance out of a 

relatively stable product, such as an 

adjustable-rate mortgage with a fixed 

interest rate for a period of 10 years, 

which then adjusts to a variable rate for 

the remaining loan term, and that it was 

unclear whether TILA section 

129C(a)(6)(E) was intended to cover this 

type of product. The Board solicited 

comment on whether adjustable-rate 

mortgages with an initial fixed rate 

should be considered non-standard 

mortgages regardless of how long the 

initial fixed rate applies, or if the 

proposed initial fixed-rate period of at 

least one year should otherwise be 

revised. 

The proposed definition of nonstandard mortgage also did not include 

balloon-payment mortgages. The Board 

noted that balloon-payment mortgages 

are not clearly ‘‘hybrid’’ products, given 

that the monthly payments on a balloonpayment mortgage do not necessarily 

increase or change from the time of 

consummation; rather, the entire 

outstanding principal balance becomes 

due on a particular, predetermined date. 

The Board stated that consumers of 

balloon-payment mortgages typically 

expect that the entire loan balance will 

be due at once at a certain point in time 

and are generally aware well in advance 

that they will need to repay the loan or 

refinance. 

The Board solicited comment on 

whether to use its legal authority to 

include balloon-payment mortgages in 

the definition of non-standard mortgage 

for purposes of the special refinancing 

provisions of TILA section 

129C(a)(6)(E). The Board also requested 

comment generally on the 

appropriateness of the proposed 

definition of non-standard mortgage. 

Commenters on this aspect of the 

proposal generally urged the Bureau to 

expand in various ways the proposed 

definition of non-standard mortgage and 

either supported or did not address the 

proposed definition’s inclusion of 

adjustable-rate mortgages, interest-only 

loans, or negative amortization loans. 

One consumer group commented that it 

supported the Board’s proposed 

definition of non-standard mortgage. 

Other consumer group commenters 

stated that the Bureau should use its 

exemption and adjustment authority 

under TILA to include balloon-payment 

loans within the scope of proposed 

§ 226.43(d). In addition, one industry 

commenter stated that creditors should 

have flexibility to refinance a 

performing balloon-payment loan 

within the six months preceding, or 

three months following, a balloon 

payment date without regard to the 

ability-to-pay requirements. In contrast, 

one industry commenter stated that 

balloon-payment loans should not be 

included in the definition of nonstandard mortgage, because consumers 

are generally well aware of the balloon 

payment feature in a loan, which is 

clearly explained to customers. This 

industry commenter further stated that 

during the life of a balloon-payment 

loan, its customers often make regular 

payments that reduce the principal 

balance and that balloon-payment loans 

do not make it more likely that a 

consumer will default. 

While the Bureau agrees that many 

consumers may need to seek a 

refinancing when a balloon loan 

payment comes due, given the approach 

that the Bureau has taken to 

implementing the payment shock 

refinancing provision in § 1026.43(d), 

the Bureau is declining to expand the 

definition of non-standard mortgage to 

include balloon-payment mortgages. As 

discussed in more detail in the 

supplementary information to 

§ 1026.43(d)(3), as adopted § 1026.43(d) 

provides a broad exemption to all of the 

general ability-to-repay requirements set 

forth in § 1026.43(c) when a nonstandard mortgage is refinanced into a 

standard mortgage provided that certain 

conditions are met. The point of this 

exemption is to enable creditors, 

without going through full 

underwriting, to offer consumers who 

are facing increased monthly payments 

due to the recast of a loan a new loan 

with lower monthly payments. Thus, a 

key element of the exemption is that the 

monthly payment on the standard 

mortgage be materially lower than the 

monthly payment for the non-standard 

mortgage. As discussed in the sectionby-section analysis of § 1026.43(d)(1) 

below, the Bureau is adopting a safe 

harbor for reductions of 10 percent. 

Balloon payments pose a different kind 

of risk to consumers, one that arises not 

from the monthly payments (which 

often tend to be low) but from the 

balloon payment due when the entire 

remaining balance becomes due. The 

provisions of § 1026.43(d)(1) are not 

meant to address this type of risk. 

Accordingly, the Bureau declines to 

expand the definition of non-standard 

mortgage to include balloon-payment 

loans. The Bureau believes, however, 

that where a consumer is performing 

under a balloon-payment mortgage and 

is offered a new loan of a type that 

would qualify as a standard loan with 

monthly payments at or below the 

payments of the balloon-payment 

mortgage, creditors will have little 

difficulty in satisfying the ability-torepay requirements. 

Consumer group commenters and one 

GSE commenter argued that the 

definition of non-standard mortgage 

should accommodate GSE-held loans. 

These commenters stated that these 

loans should receive the same income 

verification exemption as Federal 


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agency streamlined refinancing 

programs. These commenters noted that 

while the GSEs are held in 

conservatorship by the Federal 

government, GSE-held loans should be 

treated the same as FHA for purposes of 

streamlined refinance programs, which 

are ultimately about reducing the risk to 

the taxpayer by avoiding default by 

consumers who could receive lowercost mortgage loans. Consumer group 

commenters further urged that GSE 

streamlined refinance programs should 

be subject to standards at least as 

stringent as those for the FHA 

streamlined refinance program. 

In addition, one of the GSEs 

questioned the policy justification for 

the differences between sections 

129C(a)(5) and 129C(a)(6)(E) of TILA. 

TILA section 129C(a)(5), which applies 

to certain government loans, permits 

Federal agencies to exempt certain 

refinancings from the income and asset 

verification requirement without regard 

to the original mortgage product, in 

contrast to TILA section 129C(a)(6)(E), 

which as discussed above applies only 

when the original loan is a ‘‘hybrid’’ 

loan. This commenter noted that 

consumers with certain types of 

mortgage loans, such as fixed-rate and 

balloon-payment loans, may have to go 

through a more costly and cumbersome 

process to refinance their mortgages 

than consumers with government loans. 

The Bureau declines to adopt 

regulations implementing TILA section 

129C(a)(5). The Bureau notes that TILA 

section 129C(a)(5) expressly confers 

authority on certain Federal agencies 

(i.e., HUD, VA, USDA, and RHS) to 

exempt from the income verification 

requirement refinancings of certain 

loans made, guaranteed, or insured by 

such Federal agencies. The scope of 

TILA section 129C(a)(5) is limited to 

such Federal agencies or governmentguaranteed or -insured loans. The 

Bureau also declines to expand the 

scope of § 1026.43(d) to include GSE 

refinancings that do not otherwise fall 

within the scope of § 1026.43(d). While 

accommodation for GSE-held mortgage 

loans that are not non-standard 

mortgages under § 1026.43(d) may be 

appropriate, the Bureau wishes to obtain 

additional information in connection 

with GSE refinancings and has 

requested feedback in a proposed rule 

published elsewhere in today’s Federal 

Register. However, the Bureau notes 

that to the extent a loan held by the 

GSEs (or a loan made, guaranteed or 

insured by the Federal agencies above) 

qualifies as a non-standard mortgage 

under § 1026.43(d)(1)(i) and the other 

conditions in § 1026.43(d) are met, the 

refinancing provisions of general 

applicability in § 1026.43(d) would be 

available for refinancing a GSE-held 

loan. 

Industry commenters and one 

industry trade association commented 

that special ability-to-repay 

requirements should be available for all 

rate-and-term refinancings, regardless of 

whether the refinancings are insured or 

guaranteed by the Federal government 

or involve a non-standard mortgage. 

One industry trade association stated 

that such special ability-to-repay 

requirements should incorporate similar 

standards to those established for 

certain government loans in TILA 

section 129C(a)(5), including a 

requirement that the consumer not be 30 

or more days delinquent. For such 

loans, this trade association stated that 

other requirements under TILA section 

129C(a)(6)(E) regarding payment history 

should not be imposed, because the 

consumer is already obligated to pay the 

debt and the note holder in many cases 

will already bear the credit risk. Other 

commenters stated that because a rateand-term refinancing would offer the 

consumer a better rate (except in the 

case of adjustable rate mortgages), there 

is no reason to deny the creditor the 

ability to improve its credit risk and to 

offer the consumer better financing. 

Several industry commenters and one 

GSE noted that streamlined refinancing 

programs are an important resource for 

consumers seeking to refinance into a 

lower monthly payment mortgage even 

when the underlying mortgage loan is 

not a non-standard mortgage, and urged 

the Bureau to considering modifying 

proposed § 226.43(d) to include 

conventional loans where the party 

making or purchasing the new loan 

already owns the credit risk. 

The Bureau declines to expand the 

scope of § 1026.43(d) to include rateand-term refinancings when the 

underlying mortgage is not a nonstandard mortgage, as defined in 

§ 1026.43(d)(1)(i). The Bureau believes 

that the statute clearly limits the 

refinancing provision in TILA section 

129(C)(6)(E) to circumstances where the 

loan being refinanced is a ‘‘hybrid loan’’ 

and where the refinancing could 

‘‘prevent a likely default.’’ The Bureau 

agrees with the Board that TILA section 

129C(a)(6)(E) is intended to address 

concerns about loans involving possible 

payment shock. Where a consumer has 

proven capable of making payments, is 

about to experience payment shock, is at 

risk of default, and is refinancing to a 

mortgage with a lower monthly payment 

and with product terms that do not pose 

any increased risk, the Bureau believes 

that the benefits of the refinancing 

outweigh the consumer protections 

afforded by the ability-to-repay 

requirements. Absent these exigent 

circumstances, the Bureau believes that 

creditors should determine that the 

consumer has the ability to repay the 

mortgage loan. The Bureau does not 

believe that a consumer who receives an 

initial lower monthly payment from a 

rate-and-term refinancing actually 

receives a benefit if the consumer 

cannot reasonably be expected to repay 

the loan. Also, the Bureau notes that 

some of the scenarios identified by 

commenters, such as offering a 

consumer a better rate with a rate-andterm refinancing where the creditor 

bears the credit risk, would be exempt 

from the ability-to-repay requirements. 

A refinancing that results in a reduction 

in the APR with a corresponding change 

in the payment schedule and meets the 

other conditions in § 1026.20(a) is not a 

‘‘refinancing’’ for purposes of § 1026.43, 

and therefore is not subject to the 

ability-to-repay requirements. As with 

other terms used in TILA section 129C, 

the Bureau believes that this 

interpretation is necessary to achieve 

Congress’s intent. 

Several other industry commenters 

urged the Bureau to broaden the 

definition of non-standard mortgage to 

include refinancings extended pursuant 

to the Home Affordable Refinance 

Program (HARP) and similar programs. 

One such commenter indicated that 

under HARP, a loan can only be 

refinanced if the consumer is not in 

default, the new payment is fully 

amortizing, and both the original and 

new loans comply with agency 

requirements. This commenter stated 

that HARP permits consumers who 

would not otherwise be able to 

refinance due to a high loan-to-value 

ratio or other reasons to refinance into 

another loan, providing a consumer 

benefit. The commenter indicated that 

HARP loans do not meet all of the 

proposed ability-to-repay requirements 

and that the Bureau should use its 

authority to provide that HARP and 

other similar programs are exempt from 

the ability-to-repay requirements, as 

they promote credit availability and 

increasing stability in the housing 

market. The Bureau acknowledges that 

HARP refinancings and the payment 

shock refinancings addressed under 

TILA section 129C(a)(6)(E) are both 

intended to assist consumers harmed by 

the financial crisis. Although both types 

of refinancings are motivated by similar 

goals, the Bureau does not believe that 

expanding § 1026.43(d) to include all 

HARP refinancings is consistent with 

TILA section 129C(a)(6)(E) because 

HARP refinancings are not predicated 


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on the occurrence of payment shock and 

a consumer’s likely default. For 

example, a consumer with a mortgage 

loan that will not recast and who is not 

at risk of default may qualify for a HARP 

refinancing if the consumer’s loan-tovalue ratio exceeds 80 percent. The 

Bureau strongly believes that 

§ 1026.43(d) should be limited to 

instances where a consumer is facing 

payment shock and likely default. 

While not limited to the prevention of 

payment shock and default, the Bureau 

acknowledges that extensions of credit 

made pursuant to programs such as 

HARP are intended to assist consumers 

harmed by the financial crisis. 

Furthermore, these programs employ 

complex underwriting requirements to 

determine a consumer’s ability to repay. 

Thus, it may be appropriate to modify 

the ability-to-repay requirements to 

accommodate such programs. However, 

an appropriate balance between helping 

affected consumers and ensuring that 

these consumers are offered and receive 

residential mortgage loans on terms that 

reasonably reflect consumers’ ability to 

repay must be found. To determine how 

to strike this balance, the Bureau wishes 

to obtain additional information in 

connection with these programs and has 

requested feedback in a proposed rule 

published elsewhere in today’s Federal 

Register. 

Accordingly, the definition of ‘‘nonstandard mortgage’’ is adopted as 

proposed, renumbered as 

§ 1026.43(d)(1)(i). In addition, comment 

43(d)(2)(i)(A)–1 also is adopted as 

proposed, renumbered as 

43(d)(1)(i)(A)–1. 

43(d)(1)(ii) Standard Mortgage 

Proposed § 226.43(d)(2)(ii) would 

have substituted the term ‘‘standard 

mortgage’’ for the statutory term 

‘‘standard loan’’ and defined this term 

to mean a covered transaction that has 

the following five characteristics: 

• First, the regular periodic payments 

may not: (1) Cause the principal balance 

to increase; (2) allow the consumer to 

defer repayment of principal; or (3) 

result in a balloon payment. 

• Second, the total points and fees 

payable in connection with the 

transaction may not exceed three 

percent of the total loan amount, with 

exceptions for smaller loans specified in 

proposed § 226.43(e)(3). 

• Third, the loan term may not 

exceed 40 years. 

• Fourth, the interest rate must be 

fixed for the first five years after 

consummation. 

• Fifth, the proceeds from the loan 

may be used solely to pay—(1) the 

outstanding principal balance on the 

non-standard mortgage; and (2) closing 

or settlement charges required to be 

disclosed under RESPA. 

Proposed limitations on regular 

periodic payments. Proposed 

§ 226.43(d)(2)(ii)(A) would have 

required that a standard mortgage 

provide for regular periodic payments 

that do not result in negative 

amortization, deferral of principal 

repayment, or a balloon payment. 

Proposed comment 43(d)(2)(ii)(A)–1 

clarified that ‘‘regular periodic 

payments’’ are payments that do not 

result in an increase of the principal 

balance (negative amortization) or allow 

the consumer to defer repayment of 

principal. The proposed comment 

explained that the requirement for 

‘‘regular periodic payments’’ means that 

the contractual terms of the standard 

mortgage must obligate the consumer to 

make payments of principal and interest 

on a monthly or other periodic basis 

that will repay the loan amount over the 

loan term. Proposed comment 

43(d)(2)(ii)(A)–1 further explained that, 

with the exception of payments 

resulting from any interest rate changes 

after consummation in an adjustablerate or step-rate mortgage, the periodic 

payments must be substantially equal, 

with a cross-reference to proposed 

comment 43(c)(5)(i)–3 regarding the 

meaning of ‘‘substantially equal.’’ In 

addition, the comment clarified that 

‘‘regular periodic payments’’ do not 

include a single-payment transaction 

and cross-referenced similar 

commentary on the meaning of ‘‘regular 

periodic payments’’ under proposed 

comment 43(e)(2)(i)–1. Proposed 

comment 43(d)(2)(ii)(A)–1 also crossreferenced proposed comment 

43(e)(2)(i)–2 to explain the prohibition 

on payments that ‘‘allow the consumer 

to defer repayment of principal.’’ 

One consumer group commenter 

stated that it supported the exclusion of 

negative amortization, interest-only 

payments, and balloon payments from 

the definition of standard mortgage. In 

addition, several other consumer groups 

commented in support of the Board’s 

proposal to exclude balloon-payment 

loans from the definition of standard 

mortgage. These commenters stated that 

balloon-payment products, even with 

self-executing renewal, should not be 

permitted to take advantage of an 

exemption from the general 

underwriting standards in § 1026.43(c). 

Consumer groups expressed concern 

that, in cases where the consumer does 

not have assets sufficient to make the 

balloon payment, balloon-payment 

loans will necessarily require another 

refinance or will lead to a default. The 

Bureau agrees with the concerns 

expressed by such commenters and 

believes that it is appropriate to require 

that balloon-payment loans be 

underwritten in accordance with the 

general ability-to-repay standard, rather 

than under the payment shock 

refinancing provision in § 1026.43(d). 

Accordingly, the Bureau is not 

expanding the definition of standard 

mortgage to include balloon-payment 

mortgages. 

The Bureau received no other 

comment on this proposed definition. 

Accordingly, the Bureau is adopting the 

definition of standard mortgage as 

proposed, renumbered as 

§ 1026.43(d)(1)(ii)(A). Similarly, the 

Bureau received no comment on 

proposed comment 43(d)(2)(ii)(A)–1, 

which is adopted as proposed and 

renumbered as 43(d)(1)(ii)(A)–1. 

Proposed three percent cap on points 

and fees. Proposed § 226.43(d)(2)(ii)(B) 

would have prohibited creditors from 

charging points and fees on the 

mortgage loan of more than three 

percent of the total loan amount, with 

certain exceptions for small loans. 

Specifically, proposed 

§ 226.43(d)(2)(ii)(B) cross-referenced the 

points and fees provisions under 

proposed § 226.43(e)(3), thereby 

applying the points and fees limitations 

for a ‘‘qualified mortgage’’ to a standard 

mortgage. The points and fees limitation 

for a ‘‘qualified mortgage’’ and the 

relevant exception for small loans are 

discussed in detail in the section-bysection analysis of § 1026.43(e)(3) 

below. 

The Board noted several reasons for 

the proposed limitation on the points 

and fees that may be charged on a 

standard mortgage. First, the limitation 

was intended to prevent creditors from 

undermining the provision’s purpose— 

placing at-risk consumers into more 

affordable loans—by charging excessive 

points and fees for the refinance. 

Second, the points and fees limitation 

was intended to ensure that consumers 

attain a net benefit in refinancing their 

non-standard mortgage. The higher a 

consumer’s up-front costs to refinance a 

home mortgage, the longer it will take 

for the consumer to recoup those costs 

through lower payments on the new 

mortgage. By limiting the amount of 

points and fees that can be charged in 

a refinance covered by proposed 

§ 226.43(d), the provision increases the 

likelihood that the consumer will hold 

the loan long enough to recoup those 

costs. Third, the proposed limitation 

was intended to be consistent with the 

provisions set forth in TILA section 

129C(a)(5) regarding certain 

refinancings under Federal agency 

programs. 


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6492 Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 

The Board requested comment on the 

proposal to apply the same limit on the 

points and fees that may be charged for 

a ‘‘qualified mortgage’’ under § 226.43(e) 

to the points and fees that may be 

charged on a ‘‘standard mortgage’’ under 

§ 226.43(d). The Bureau received no 

comments on this proposed points and 

fees threshold, which is adopted as 

proposed, renumbered as 

§ 1026.43(d)(1)(ii)(B). See the sectionby-section analysis of § 1026.43(e)(3) 

below for more specific information 

regarding the limitations applicable to 

‘‘points and fees’’ for qualified 

mortgages and refinancings under 

§ 1026.43(d). 

Proposed loan term of no more than 

40 years. Proposed § 226.43(d)(2)(ii)(C) 

would have provided that, to qualify as 

a standard mortgage under proposed 

§ 226.43(d), a covered transaction may 

not have a loan term of more than 40 

years. The Board stated that this 

condition was intended to ensure that 

creditors and consumers have sufficient 

options to refinance a 30-year loan, for 

example, which is unaffordable for the 

consumer in the near term, into a loan 

with lower, more affordable payments 

over a longer term. This flexibility may 

be especially important in higher cost 

areas where loan amounts on average 

exceed loan amounts in other areas. 

The Board noted that loans with 

longer terms may cost more over time, 

but indicated that it was reluctant to 

foreclose options for consumers for 

whom the lower payment of a 40-year 

loan might make the difference between 

defaulting and not defaulting. The 

Board also noted that prevalent 

streamlined refinance programs permit 

loan terms of up to 40 years and 

expressed concern about disrupting the 

current mortgage market at a vulnerable 

time. The Board specifically requested 

comment on the proposed condition to 

allow a standard mortgage to have a 

loan term of up to 40 years. The Bureau 

received no comment on this proposed 

condition, which is adopted as 

proposed, renumbered as 

§ 1026.43(d)(1)(ii)(C). 

Proposed requirement that the interest 

rate be fixed for the first five years. 

Proposed § 226.43(d)(2)(ii)(D) would 

have required that a standard mortgage 

have a fixed interest rate for the first five 

years after consummation. Proposed 

comment 43(d)(2)(ii)(D)–1 provided an 

illustrative example. The proposed 

comment also cross-referenced 

proposed comment 43(e)(2)(iv)–3.iii for 

guidance regarding step-rate mortgages. 

The Board articulated several reasons 

for requiring a minimum five-year fixedrate period for standard mortgages. First, 

the Board noted that a fixed rate for five 

years is consistent with TILA section 

129C(b)(2)(A)(v), which requires the 

creditor to underwrite a qualified 

mortgage based on the maximum 

interest rate that may apply during the 

first five years. The Board indicated that 

Congress intended both qualified 

mortgages and standard mortgages to be 

stable loan products, and therefore that 

the required five-year fixed-rate period 

for qualified mortgages would also be an 

appropriate benchmark for standard 

mortgages. The Board further stated that 

the safeguard of a fixed rate for five 

years after consummation would help to 

ensure that consumers refinance into 

products that are stable for a substantial 

period of time. In particular, a fixed 

payment for five years after 

consummation would constitute a 

significant improvement in the 

circumstances of a consumer who may 

have defaulted absent the refinance. The 

Board specifically noted that the 

proposal would permit so-called ‘‘5/1 

ARMs,’’ where the interest rate is fixed 

for the first five years, after which time 

the rate becomes variable, to be standard 

mortgages. 

The Board requested comment on the 

proposal defining a standard mortgage 

as a mortgage loan with an interest rate 

that is fixed for at least the first five 

years after consummation, including on 

whether the rate should be required to 

be fixed for a shorter or longer period 

and data to support any alternative time 

period. One consumer group commenter 

stated that the use of adjustable-rate 

mortgages should be limited in the 

definition of standard mortgage. This 

commenter stated that adjustable-rate 

mortgage loans contributed to the 

subprime lending expansion and the 

financial crisis that followed. In 

particular, this commenter expressed 

concern that adjustable-rate mortgage 

loans were utilized in loan-flipping 

schemes that trapped consumers in 

unaffordable loans, forcing such 

consumers to refinance into less 

affordable mortgage loans. This 

commenter indicated that standard 

mortgages should be limited to fixed 

and step-rate loans and, in low or 

moderate interest rate environments, 

adjustable-rate mortgages with a 5-year 

or longer-term fixed period. However, 

this commenter urged the Bureau to 

consider permitting shorter-term 

adjustable-rate mortgages to be standard 

mortgages in high interest rate 

environments because in such 

circumstance, an adjustable-rate 

mortgage could potentially reduce the 

consumer’s monthly payments at recast, 

which may outweigh the risks of 

increased payments for some 

consumers. 

The Bureau is adopting the 

requirement that a standard mortgage 

have a fixed interest rate for the first five 

years after consummation as proposed, 

renumbered as § 1026.43(d)(1)(ii)(D). 

The Bureau agrees with the Board that 

the intent of TILA section 129C(a)(6)(E) 

appears to be to facilitate refinances of 

riskier mortgages into more stable loan 

products, and accordingly, believes that 

a standard mortgage should provide for 

a significant period of time during 

which payments will be predictable, 

based on a fixed rate or step rates that 

are set at the time of consummation. 

The Bureau believes that five years is an 

appropriate standard in part because it 

is consistent with the statutory 

requirement for a qualified mortgage 

under section 129C(b)(2)(A)(v). The 

Bureau believes that predictability for 

consumers is best effectuated by a single 

rule that applies in all interest rate 

environments, rather than a rule that 

depends on the interest rate 

environment in effect at the time of the 

refinancing. Further, given that 

§ 1026.43(d) provides an exemption 

from the general ability-to-repay 

requirements in § 1026.43(c), the Bureau 

believes that it is important that a 

refinancing conducted in accordance 

with § 1026.43(d) result in a stable loan 

product and predictable payments for a 

significant period of time. 

In addition, the Board solicited 

comment on whether a balloon-payment 

mortgage of at least five years should be 

considered a standard mortgage under 

the refinancing provisions of proposed 

§ 226.43(d). The Board noted that in 

some circumstances, a balloon-payment 

mortgage with a fixed, monthly payment 

for five years might benefit a consumer 

who otherwise would have defaulted. 

The Board further noted that a five-year 

balloon-payment mortgage may not be 

appreciably less risky for the consumer 

than a ‘‘5/1 ARM,’’ which is permitted 

under the proposal, depending on the 

terms of the rate adjustment scheduled 

to occur in year five. 

As discussed above, several consumer 

groups stated that balloon products, 

even with self-executing renewal, 

should not be permitted to take 

advantage of an exemption from the 

general underwriting standards in 

§ 1026.43(c). Consumer groups 

expressed concern that, in cases where 

the consumer does not have assets 

sufficient to make the balloon payment, 

balloon-payment mortgages will 

necessarily require another refinance or 

will lead to a default. For the reasons 

discussed in the supplementary 

information to § 1026.43(d)(1)(ii)(A) 


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126The Board’s proposal originally referred to 

226.20(a), which was subsequently renumbered as 

12 CFR 1026.20(a). 

above, the Bureau is not expanding the 

definition of ‘‘standard mortgage’’ to 

include balloon-payment mortgages. 

Proposed requirement that loan 

proceeds be used for limited purposes. 

Proposed § 226.43(d)(2)(ii)(E) would 

have restricted the use of the proceeds 

of a standard mortgage to two purposes: 

• To pay off the outstanding principal 

balance on the non-standard mortgage; 

and 

• To pay closing or settlement 

charges required to be disclosed under 

the Real Estate Settlement Procedures 

Act, 12 U.S.C. 2601 et seq., which 

includes amounts required to be 

deposited in an escrow account at or 

before consummation. 

Proposed comment 43(d)(2)(ii)(E)–1 

clarified that if the proceeds of a 

covered transaction are used for other 

purposes, such as to pay off other liens 

or to provide additional cash to the 

consumer for discretionary spending, 

the transaction does not meet the 

definition of a ‘‘standard mortgage.’’ 

The Board expressed concern that 

permitting the consumers to lose 

additional equity in their homes under 

the proposed refinancing provisions 

could undermine the financial stability 

of those consumers, thus contravening 

the purposes of TILA section 

129C(a)(6)(E). The Board requested 

comment, however, on whether some de 

minimis amount of cash to the 

consumer should be permitted, either 

because this allowance would be 

operationally necessary to cover 

transaction costs or for other reasons, 

such as to reimburse a consumer for 

closing costs that were over-estimated 

but financed. 

The Bureau received only one 

comment on this aspect of the proposal. 

An association of State bank regulators 

agreed that the rule should generally 

restrict the use of the proceeds of the 

standard mortgage to paying off the 

outstanding balance on the nonstandard mortgage or to pay closing or 

settlement costs. However, they urged 

the Bureau to provide an exemption that 

would permit loan proceeds to be used 

to pay for known home repair needs and 

suggested that any such exemption 

require the consumer to provide verified 

estimates in advance in order to ensure 

that loan proceeds are used only for 

required home repairs. 

The Bureau is adopting the limitation 

on the use of loan proceeds as proposed, 

renumbered as § 1026.43(d)(1)(ii)(E). 

The Bureau declines to permit the 

proceeds of a refinancing conducted in 

accordance with § 1026.43(d) to be used 

for home repair purposes, for several 

reasons. First, the Bureau believes that 

such an exemption would be 

inconsistent with the statutory purposes 

of TILA section 129C(a)(6)(E), which is 

intended to permit refinancings on the 

basis of less stringent underwriting in 

the narrow circumstances where a 

consumer’s non-standard mortgage is 

about to recast and lead to a likely 

default by the consumer. The Bureau 

believes that permitting a consumer to 

utilize home equity for home repairs in 

connection with a refinancing 

conducted pursuant to § 1026.43(d) 

could further compromise the financial 

position of consumers who are already 

in a risky financial position. The Bureau 

believes that it would be more 

appropriate, where home repairs are 

needed, for a creditor to perform the 

underwriting required to advance any 

credit required in connection with those 

repairs. In addition, the Bureau believes 

that such an exemption could be subject 

to manipulation by fraudulent home 

contractors, by the creditor, and even by 

a consumer. It would be difficult, even 

with a requirement that the consumer 

provide verified estimates, to ensure 

that amounts being disbursed for home 

repairs actually are needed, and in fact 

used, for that purpose. 

43(d)(1)(iii) 

Proposed § 226.43(d)(2)(iii) would 

have defined the term ‘‘refinancing’’ to 

have the same meaning as in 

§ 1026.20(a).126 Section 1026.20(a) 

defines the term ‘‘refinancing’’ generally 

to mean a transaction in which an 

existing obligation is ‘‘satisfied and 

replaced by a new obligation 

undertaken by the same consumer.’’ 

Official commentary explains that 

‘‘[w]hether 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.’’ See comment 

20(a)–1. However, the following are not 

considered ‘‘refinancings’’ for purposes 

of § 1026.20(a): (1) A renewal of a 

payment obligation with no change in 

the original terms; and (2) a reduction 

in the annual percentage rate with a 

corresponding change in the payment 

schedule. See § 1026.20(a)(1) and (a)(2), 

and comment 20(a)–2. 

The Board requested comment on 

whether the proposed meaning of 

‘‘refinancing’’ should be expanded to 

include a broader range of transactions 

or otherwise should be defined 

differently or explained more fully than 

proposed. The Bureau received no 

comments on this proposed definition. 

Accordingly, the Bureau is adopting the 

definition of refinancing as proposed, 

renumbered as § 1026.43(d)(1)(iii). 

43(d)(2) Scope 

In the Board’s proposal, § 226.43(d)(2) 

addressed the definitions for ‘‘nonstandard mortgage,’’ ‘‘standard 

mortgage,’’ and ‘‘refinancing,’’ while 

proposed § 226.43(d)(1) established the 

scope of paragraph (d) and set forth the 

conditions under which the special 

refinancing provisions applied. The 

Bureau believes that paragraph (d) 

should begin with the relevant 

definitions, before proceeding to the 

scope and conditions of the special 

refinancing provisions. The rule 

finalized by the Bureau is accordingly 

reordered. The following discussion 

details the provisions adopted in 

§ 1026.43(d)(2), which were proposed 

by the Board under § 226.43(d)(1). 

Proposed § 226.43(d)(1) would have 

defined the scope of the refinancing 

provisions under proposed § 226.43(d). 

Specifically, proposed § 226.43(d) 

applied when a non-standard mortgage 

is refinanced into a standard mortgage 

and the following conditions are met— 

• The creditor of the standard 

mortgage is the current holder of the 

existing non-standard mortgage or the 

servicer acting on behalf of the current 

holder. 

• The monthly payment for the 

standard mortgage is significantly lower 

than the monthly payment for the nonstandard mortgage, as calculated under 

proposed § 226.43(d)(5). 

• The creditor receives the 

consumer’s written application for the 

standard mortgage before the nonstandard mortgage is ‘‘recast.’’ 

• The consumer has made no more 

than one payment more than 30 days 

late on the non-standard mortgage 

during the 24 months immediately 

preceding the creditor’s receipt of the 

consumer’s written application for the 

standard mortgage. 

• 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. 

Proposed comment 43(d)(1)–1 

clarified that the requirements for a 

‘‘written application,’’ a term that 

appears in § 226.43(d)(1)(iii), (d)(1)(iv) 

and (d)(1)(v), discussed in detail below, 

are found in comment 19(a)(1)(i)–3. 

Comment 19(a)(1)(i)–3 states that 

creditors may rely on the Real Estate 

Settlement Procedures Act (RESPA) and 

Regulation X (including any 

interpretations issued by HUD) in 


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deciding whether a ‘‘written 

application’’ has been received. This 

comment further states that, in general, 

Regulation X defines ‘‘application’’ to 

mean the submission of a borrower’s 

financial information in anticipation of 

a credit decision relating to a federally 

related mortgage loan. See 12 CFR 

1024.2(b). Comment 19(a)(1)(i)–3 

clarifies that an application is received 

when it reaches the creditor in any of 

the ways applications are normally 

transmitted, such as by mail, hand 

delivery, or through an intermediary 

agent or broker. The comment further 

clarifies that, if an application reaches 

the creditor through an intermediary 

agent or broker, the application is 

received when it reaches the creditor, 

rather than when it reaches the agent or 

broker. Comment 19(a)(1)(i)–3 also 

cross-references comment 19(b)–3 for 

guidance in determining whether or not 

the transaction involves an intermediary 

agent or broker. The Bureau received no 

comments on this proposed comment, 

which is adopted as proposed, 

renumbered as 43(d)(2)–1. 

43(d)(2)(i) 

Proposed § 226.43(d)(1)(i) would have 

required that the creditor for the new 

mortgage loan also be either the current 

holder of the existing non-standard 

mortgage or the servicer acting on behalf 

of the current holder. This provision 

was intended to implement the 

requirement in TILA section 

129C(a)(6)(E) that the existing loan must 

be refinanced by ‘‘the creditor into a 

standard loan to be made by the same 

creditor.’’ 

The Board interpreted the statutory 

phrase ‘‘same creditor’’ to mean that the 

creditor refinancing the loan must have 

an existing relationship with the 

consumer. The Board explained that the 

existing relationship is important 

because the creditor must be able to 

easily access the consumer’s payment 

history and potentially other 

information about the consumer in lieu 

of documenting the consumer’s income 

and assets. The Board also noted that 

this statutory provision is intended to 

ensure that the creditor of the 

refinancing has an interest in placing 

the consumer into a new loan that is 

affordable and beneficial. The proposal 

would have permitted the creditor of the 

refinanced loan to be the holder, or 

servicer acting on behalf of the holder, 

of the existing mortgage. The Board 

further explained that the existing 

servicer may be the entity conducting 

the refinance, particularly for refinances 

held by GSEs. By also permitting the 

creditor on the refinanced loan to be the 

servicer acting on behalf of the holder 

of the existing mortgage, the proposal 

was intended to apply to a loan that has 

been sold to a GSE, refinanced by the 

existing servicer, and continues to be 

held by the same GSE. The Board 

solicited comment on whether the 

proposed rule could be structured 

differently to better ensure that the 

creditor retains an interest in the 

performance of the new loan and 

whether additional guidance is needed. 

Several commenters urged the Bureau 

to impose a specific period following a 

refinancing under § 226.43(d) during 

which the creditor must remain the 

current holder of the loan. Consumer 

group commenters suggested that to be 

eligible for the non-standard mortgage 

refinancing the creditor should be 

required to maintain full interest in the 

refinanced loan for a minimum of 12 

months. These commenters expressed 

concern that the lack of such a retention 

requirement would permit creditors to 

refinance loans that are likely to fail 

without performing the robust 

underwriting that would otherwise be 

required for a new loan. If such loans 

were to be immediately sold to a third 

party, consumer groups indicated that it 

could invite abuse by creditors with an 

incentive to sell riskier loans without 

providing full value to the consumer. 

An association of State bank regulators 

urged the Bureau to adopt a two-year 

holding period during which the 

creditor must remain the current holder 

of the loan. 

One industry commenter indicated 

that the Bureau should broaden the 

scope to permit a subservicer of the loan 

to be the creditor with respect to the 

standard loan. Another industry 

commenter stated that the scope should 

be expanded to allow a creditor to 

refinance a non-standard mortgage that 

it did not originate or is not servicing. 

This commenter indicated that due to 

the volume of requests for refinancing 

received by some creditors, consumers 

may benefit from more timely 

refinancing if a third-party creditor is 

eligible to use non-standard refinancing 

provisions. 

The Bureau is adopting this 

requirement as proposed, renumbered 

as § 1026.43(d)(2)(i). As discussed in 

more detail below, as adopted 

§ 1026.43(d) provides a broad 

exemption to all of the ability-to-repay 

requirements set forth in § 1026.43(c) 

when a non-standard mortgage is 

refinanced into a standard mortgage 

provided that certain conditions are 

met. Section 1026.43(d)(2)(i) is adopted 

pursuant to the Bureau’s authority 

under section 105(a) of TILA. The 

Bureau finds that this adjustment is 

necessary to effectuate the purposes of 

TILA by ensuring that consumers are 

offered and receive residential mortgage 

loans on terms that reasonably reflect 

their ability to repay, while ensuring 

that consumers at risk of default due to 

payment shock are able to obtain 

responsible, affordable refinancing 

credit from the current holder of the 

consumer’s mortgage loan, or the 

servicer acting on behalf of the current 

holder. To prevent unscrupulous 

creditors from using § 1026.43(d) to 

engage in loan-flipping, and to ensure 

that this exemption is available only in 

those cases where consumer benefit is 

the most likely, the Bureau believes that 

it is important that the creditor of the 

standard loan be the holder of, or the 

servicer acting on behalf of the holder 

of, the non-standard loan. In such cases, 

the Bureau agrees with the Board that 

the creditor has a better incentive to 

refinance the consumer into a more 

stable and affordable loan. Therefore, 

the Bureau declines to extend the scope 

of § 1026.43(d) to cover cases in which 

the creditor of the non-standard loan is 

not the current holder of the 

nonstandard loan or servicer acting on 

behalf of that holder. 

The Bureau believes that the 

combination of this restriction and the 

other protections contained in 

§ 1026.43(d) is sufficient to prevent 

unscrupulous creditors from engaging in 

loan-flipping. Therefore, the Bureau 

does not believe that it is necessary to 

impose a specified period during which 

the creditor of the standard mortgage 

must remain the holder of the loan. As 

discussed in the section-by-section 

analysis of § 1026.43(d)(2)(vi) below, the 

Bureau has conditioned use of 

§ 1026.43(d), for non-standard loans 

consummated after the effective date of 

this final rule, on the non-standard loan 

having been made in accordance with 

the ability-to-repay requirements in 

§ 1026.43(c), including consideration of 

the eight factors listed in § 1026.43(c)(2). 

The Bureau believes that this will help 

to ensure that creditors cannot use the 

refinancing provisions of § 1026.43(d) to 

systematically make and divest riskier 

mortgages, or to cure substandard 

underwriting on a non-standard 

mortgage by refinancing the consumer 

into a loan with a lower, but still 

unaffordable, payment. TILA section 

130(k)(1) provides that consumers may 

assert as a defense to foreclosure by way 

of recoupment or setoff violations of 

TILA section 129C(a) (of which TILA 

section 129C(a)(6)(E) comprises a 

subpart). 15 U.S.C. 1640(k)(1). This 

defense to foreclosure applies against 

assignees of the loan in addition to the 

original creditor. Therefore, given that 


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the non-standard loan having been 

originated in accordance with 

§ 1026.43(c) is a condition for using the 

refinancing provision in § 1026.43(d), a 

consumer may assert violations of 

§ 1026.43(c) on the original nonstandard loan as a defense to foreclosure 

for the standard loan made under 

§ 1026.43(d), even if that standard loan 

is subsequently sold by the creditor. 

In addition to believing that 

imposition of a holding period is 

unnecessary, the Bureau has concerns 

that imposition of a holding period also 

could create adverse consequences for 

the safety and soundness of financial 

institutions. In some circumstances, a 

creditor may need for safety and 

soundness reasons to sell a portion of its 

portfolio, which may include a 

residential mortgage loan that was made 

in accordance with § 1026.43(d). 

However, such a creditor may not know 

at the time of the refinancing that it 

ultimately will need to sell the loan, and 

may even intend to remain the holder 

the loan for a longer period of time at 

the time of consummation. The Bureau 

has concerns about the burden imposed 

on issuers by a holding period in such 

circumstances where the creditor does 

not or cannot know at the time of the 

refinance under § 1026.43(d) that the 

loan will need to be sold within the next 

12 months. 

43(d)(2)(ii) 

Proposed § 226.43(d)(1)(ii) would 

have required that the monthly payment 

on the new mortgage loan be ‘‘materially 

lower’’ than the monthly payment for 

the existing mortgage loan. This 

proposed provision would have 

implemented the requirement in TILA 

section 129C(a)(6)(E) that there be ‘‘a 

reduction in monthly payment on the 

existing hybrid loan’’ in order for the 

special provisions to apply to a 

refinancing. Proposed comment 

43(d)(1)(ii)–1 provided that the monthly 

payment for the new loan must be 

‘‘materially lower’’ than the monthly 

payment for an existing non-standard 

mortgage and clarifies that the payments 

that must be compared must be 

calculated according to proposed 

§ 226.43(d)(5). The proposed comment 

also clarified that whether the new loan 

payment is ‘‘materially lower’’ than the 

non-standard mortgage payment 

depends on the facts and circumstances, 

but that, in all cases, a payment 

reduction of 10 percent or greater would 

meet the ‘‘materially lower’’ standard. 

Consumer groups and an association 

of State bank regulators supported the 

adoption of a 10 percent safe harbor for 

the ‘‘materially lower’’ standard. In 

contrast, industry commenters opposed 

the requirement that payment on the 

standard mortgage be ‘‘materially 

lower’’ than the payment on the nonstandard mortgage. These commenters 

urged the Bureau not to adopt the 10 

percent safe harbor proposed by the 

Board and stated that the 10 percent safe 

harbor would become the de facto rule 

if adopted. These commenters expressed 

concerns that the ‘‘materially lower’’ 

standard would unduly restrict access to 

credit for many consumers and 

suggested that the Bureau instead adopt 

a standard that would permit more 

consumers to qualify for the nonstandard refinancing provisions. Several 

commenters indicated that the Bureau 

should adopt a five percent safe harbor 

rather than the proposed ten percent. 

One industry commenter recommended 

that the Bureau permit reductions of a 

minimum dollar amount to satisfy the 

rule, particularly in cases where the 

monthly payment is already low. 

Finally, one industry commenter asked 

the Bureau to provide guidance 

regarding the meaning of ‘‘materially 

lower’’ when the reduction in payment 

is less than 10 percent. 

The Bureau is adopting as proposed 

the requirement that the payment on the 

standard mortgage be ‘‘materially 

lower’’ than the non-standard mortgage 

and the safe harbor for a 10 percent or 

greater reduction, renumbered as 

§ 1026.43(d)(2)(ii) and comment 

43(d)(2)(ii)–1. The Bureau agrees with 

the Board that it would be inconsistent 

with the statutory purpose to permit the 

required reduction to be merely de 

minimis. In such cases, the consumer 

likely would not obtain a meaningful 

benefit that would help to prevent 

default. As discussed in the section-bysection analysis below, § 1026.43(d)(3) 

exempts refinancings from the abilityto-repay requirements in § 1026.43(c), 

provided that certain conditions are 

met. Given that § 1026.43(d) provides a 

broad exemption to the ability-to-repay 

requirements, the Bureau believes that it 

is important that the reduction in 

payment provide significant value to the 

consumer and increase the likelihood 

that the refinancing will improve the 

consumer’s ability to repay the loan. 

Accordingly, the Bureau is adopting the 

10 percent safe harbor as proposed. The 

Bureau declines to adopt a dollar 

amount safe harbor because the 

appropriate dollar amount would 

depend on a number of factors, 

including the amount of the loan and 

monthly payment, but notes that 

reductions of less than 10 percent could 

nonetheless meet the ‘‘materially lower’’ 

standard depending on the relevant 

facts and circumstances. 

43(d)(2)(iii) 

Proposed § 226.43(d)(1)(iii) would 

have required that the creditor for the 

refinancing receive the consumer’s 

written application for the refinancing 

before the existing non-standard 

mortgage is ‘‘recast.’’ As discussed in 

the section-by-section analysis of 

§ 1026.43(b)(11) above, the proposal 

defined the term ‘‘recast’’ to mean, for 

an adjustable-rate mortgage, the 

expiration of the period during which 

payments based on the introductory 

fixed rate are permitted; for an interestonly loan, the expiration of the period 

during which the interest-only 

payments are permitted; and, for a 

negative amortization loan, the 

expiration of the period during which 

negatively amortizing payments are 

permitted. 

The Board explained that the proposal 

was intended to implement TILA 

section 129C(a)(6)(E)(ii), which permits 

creditors of certain refinances to 

‘‘consider if the extension of new credit 

would prevent a likely default should 

the original mortgage reset.’’ This 

statutory language implies that the 

special refinancing provisions apply 

only where the original mortgage has 

not yet ‘‘reset.’’ Accordingly, the Board 

concluded that Congress’s concern 

likely was prevention of default in the 

event of a ‘‘reset,’’ not loss mitigation on 

a mortgage for which a default on the 

‘‘reset’’ payment has already occurred. 

However, in recognition of the fact 

that a consumer may not realize that a 

loan will be recast until the recast 

occurs and that the consumer could not 

refinance the loan under proposed 

§ 226.43(d), the Board also requested 

comment on whether it would be 

appropriate to use legal authority to 

make adjustments to TILA to permit 

refinancings after a loan is recast. 

Consumer groups urged the Bureau to 

expand the scope of the non-standard 

refinancing provisions to apply to 

applications filed after the initial recast 

of a non-standard loan has occurred. 

These commenters stated that the intent 

of the proposal is to avoid ‘‘likely 

default’’ and indicated that for some 

consumers, notification that the 

consumer’s interest rate has adjusted 

and their payment has increased may be 

their first notice that their payment has 

gone up and increased their likelihood 

of default. One consumer group 

commenter stated that these consumers 

may be better credit risks than those 

consumers whose loans have not yet 

recast and they would clearly benefit 

from a materially lower monthly 

payment. 


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6496 Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 

Several industry commenters 

similarly urged the Bureau to modify 

the provisions to apply to applications 

for refinancings received after recast of 

the non-standard loan. One of these 

commenters stated that the timing of the 

application is irrelevant to the 

consumer’s ability to repay or the 

consumer’s need to refinance. One 

industry commenter stated that 

processing an application and assessing 

a consumer’s ability to repay a new loan 

may require additional time well before 

the recast date. This commenter urged 

the Bureau to expand the scope of the 

non-standard refinancing provisions to 

include refinancings after a loan is 

recast that are in the best interests of 

consumers. 

For the reasons discussed below, the 

Bureau is adopting § 1026.43(d)(2)(iii), 

which provides that § 1026.43(d) 

applies to the refinancing of a nonstandard mortgage into a standard 

mortgage when the creditor receives the 

consumer’s written application for the 

standard mortgage no later than two 

months after the non-standard mortgage 

has recast, provided certain other 

conditions are met. The Bureau believes 

that the best reading of TILA section 

129C(a)(6)(E) is that it is intended to 

facilitate refinancings for consumers at 

risk of default due to the ‘‘payment 

shock’’ that may occur upon the recast 

of the consumer’s loan to a higher rate 

or fully amortizing payments. The 

Bureau acknowledges that the statutory 

language contemplates that such recast 

has not yet occurred. However, the 

Bureau does not believe that Congress 

intended to provide relief for consumers 

facing imminent ‘‘payment shock’’ 

based on how promptly the consumer 

filed, or how quickly the creditor 

processed, an application for a 

refinancing. For example, the periodic 

rate on a mortgage loan may recast on 

July 1st, but the higher payment 

reflecting the recast interest rate would 

not be due until August 1st. In this 

example, a consumer may not 

experience payment shock until a 

month after the consumer’s rate recasts. 

Additionally, it may take a significant 

amount of time for a consumer to 

provide the creditor with all of the 

information required by the creditor, 

thereby triggering the receipt of an 

application for purposes of the abilityto-repay requirements. The Bureau does 

not believe that Congress intended the 

special treatment afforded by TILA 

section 129C(a)(6)(E) to hinge on 

paperwork delays such as these. The 

Bureau agrees with the arguments raised 

by commenters and believes that the 

purposes of TILA are best effectuated by 

permitting consumers to submit 

applications for refinancings for a short 

period of time after recast occurs. The 

Bureau has determined that permitting 

a consumer to apply for a refinancing 

within two months of the date of recast 

strikes the appropriate balance between 

the language of the statute and the 

practical considerations involved with 

submitting an application for a 

refinancing in response to payment 

shock. Pursuant to its authority under 

TILA section 105(a), the Bureau finds 

that modifying § 1026.43(d) to apply to 

extensions of credit where the creditor 

receives the consumer’s written 

application for the standard mortgage no 

later than two months after the nonstandard mortgage has recast ensures 

that consumers are offered and receive 

residential mortgage loans on terms that 

reasonably reflect their ability to repay 

while ensuring that responsible, 

affordable mortgage credit remains 

available to consumers at risk of default 

due to higher payments resulting from 

the recast. 

43(d)(2)(iv) 

Proposed § 226.43(d)(1)(iv) would 

have required that, during the 24 

months immediately preceding the 

creditor’s receipt of the consumer’s 

written application for the standard 

mortgage, the consumer has made no 

more than one payment on the nonstandard mortgage more than 30 days 

late. Proposed comment 43(d)(1)(iv)–1 

provided an illustrative example. 

Together with proposed 

§ 226.43(d)(1)(v), proposed 

§ 226.43(d)(1)(iv) would have 

implemented the portion of TILA 

section 129C(a)(6)(E) that requires that 

the consumer not have been 

‘‘delinquent on any payment on the 

existing hybrid loan.’’ 

Although TILA section 129C(a)(6)(E) 

contains a statutory prohibition on 

‘‘any’’ delinquencies on the existing 

non-standard (‘‘hybrid’’) mortgage, the 

Board interpreted its proposal as 

consistent with the statute in addition to 

being consistent with the consumer 

protection purpose of TILA and current 

industry practices. In addition, the 

Board noted its authority under TILA 

sections 105(a) and 129B(e)—which has 

since transferred to the Bureau—to 

adjust provisions of TILA and condition 

practices ‘‘to assure that consumers are 

offered and receive residential mortgage 

loan on terms that reasonably reflect 

their ability to repay the loans and that 

are understandable and not unfair, 

deceptive, or abusive.’’ 15 U.S.C. 

1604(a); 15 U.S.C. 1639b(e); TILA 

section 129B(a)(2), 15 U.S.C. 

1639b(a)(2). 

The Board provided several reasons 

for proposing to require a look-back 

period for payment history of 24 

months, rather than a 12-month period. 

First, the Board noted that consumers at 

risk of default when higher payments 

are required might present greater credit 

risks to the institutions holding their 

loans, even if the institutions refinance 

those loans. Second, the Board noted 

views expressed during outreach by 

GSE and creditor representatives that 

consumers with positive payment 

histories tend to be less likely than other 

consumers to become obligated on a 

new loan for which they cannot afford 

the monthly payments. The Board 

solicited comment on the proposal to 

require that the consumer have only one 

delinquency during the 24 months prior 

to applying for a refinancing, 

particularly on whether a longer or 

shorter look-back period should be 

required. 

In addition, under the proposal, late 

payments of 30 days or fewer on the 

existing, non-standard mortgage would 

not disqualify a consumer from 

refinancing the non-standard mortgage 

under the streamlined refinance 

provisions of proposed § 226.43(d). The 

Board stated that allowing 

delinquencies of 30 or fewer days is 

consistent with the statutory prohibition 

on ‘‘any’’ delinquency for several 

reasons. First, the Board noted that 

delinquencies of this length may occur 

for many reasons outside of the 

consumer’s control, such as mailing 

delays, miscommunication about where 

the payment should be sent, or payment 

crediting errors. Second, many creditors 

incorporate a late fee ‘‘grace period’’ 

into their payment arrangements, which 

permits consumers to make their 

monthly payments for a certain number 

of days after the contractual due date 

without incurring a late fee. 

Accordingly, the Board noted that the 

statute should not be read to prohibit 

consumers from obtaining needed 

refinances due to payments that are late 

but within a late fee grace period. 

Finally, the Board indicated that the 

predominant streamlined refinance 

programs of which it is aware uniformly 

measure whether a consumer has a 

positive payment history based on 

whether the consumer has made any 

payments late by 30 days (or, as in the 

proposal, more than 30 days). 

Proposed comment 43(d)(1)(iv)–2 

would have clarified that whether a 

payment is more than 30 days late 

depends on the contractual due date not 

accounting for any grace period and 

provided an illustrative example. The 

Board indicated that using the 

contractual due date for determining 


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whether a payment has been made more 

than 30 days after the due date would 

facilitate compliance and enforcement 

by providing clarity. Whereas late fee 

‘‘grace periods’’ are often not stated in 

writing, the contractual due date is 

unambiguous. Finally, the Board stated 

that using the contractual due date for 

determining whether a loan payment is 

made on time is consistent with 

standard home mortgage loan contracts. 

The Board requested comment on 

whether the delinquencies that creditors 

are required to consider under 

§ 226.43(d)(1) should be late payments 

of more than 30 days as proposed, 30 

days or more, or some other time period. 

Consumer groups supported the 

Board’s proposal to identify late 

payments as late payments of more than 

30 days. However, they stated that the 

requirement that consumers not have 

more than one delinquency in the past 

24 months to qualify for a refinance 

under § 1026.43(d) was overly stringent 

and that the appropriate standard would 

be no delinquencies in the past 12 

months. 

Several industry commenters 

similarly urged the Bureau to adopt a 

12-month period rather than the 

proposed 24-month period in which a 

consumer may have one late payment. 

These commenters stated that 

permitting only one 30-day late 

payment in the past 24 months is too 

restrictive and would require a creditor 

to overlook a recent history of timely 

payments. In addition, one industry 

commenter stated that the standard for 

defining a late payment should be late 

payments of more than 60 days. 

The Bureau is adopting this provision 

generally as proposed, renumbered as 

§ 1026.43(d)(2)(iv), with one substantive 

change. The Bureau is adopting a 12- 

month look-back period rather than the 

24-month period proposed by the Board. 

The Bureau believes that reviewing a 

consumer’s payment history over the 

last 12 months would be more 

appropriate than a 24-month period, 

and agrees that a 24-month period may 

unduly restrict consumer access to the 

§ 1026.43(d) refinancing provisions. The 

Bureau believes that the requirement 

that a consumer’s account have no more 

than one 30-day late payment in the 

past 12 months will best effectuate the 

purposes of TILA by ensuring that only 

those consumers with positive payment 

histories are eligible for the nonstandard refinancing provisions under 

§ 1026.43(d). Section 1026.43(d)(2)(iv) is 

adopted pursuant to the Bureau’s 

authority under section 105(a) of TILA. 

The Bureau finds that this adjustment is 

necessary and proper to effectuate the 

purposes of TILA by ensuring that 

consumers are offered and receive 

residential mortgage loans on terms that 

reasonably reflect their ability to repay, 

while ensuring that consumers at risk of 

default due to payment shock are able 

to obtain responsible, affordable 

refinancing credit. 

The Bureau also is adopting 

comments 43(d)(1)(iv)–1 and 

43(d)(1)(iv)–2 generally as proposed, 

with conforming amendments to reflect 

the 12-month look-back period in 

§ 1026.43(d)(2)(iv), and renumbered as 

43(d)(2)(iv)–1 and 43(d)(2)(iv)–2. The 

Bureau has made several technical 

amendments to the example in 

comment 43(d)(2)(iv)–1 for clarity. As 

proposed, the examples in the comment 

referred to dates prior to the effective 

date of this rule; the Bureau has updated 

the dates in the examples so that they 

will occur after this rule becomes 

effective. 

43(d)(2)(v) 

Proposed § 226.43(d)(1)(v) would 

have required that the consumer have 

made no payments on the non-standard 

mortgage 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. This provision complemented 

proposed § 226.43(d)(1)(iv), discussed 

above, in implementing the portion of 

TILA section 129C(a)(6)(E) that requires 

that the consumer not have been 

‘‘delinquent on any payment on the 

existing hybrid loan.’’ Taken together 

with proposed § 226.43(d)(1)(iv), the 

Board believed that this is a reasonable 

interpretation of the prohibition on 

‘‘any’’ delinquencies on the nonstandard mortgage and is supported by 

the Board’s authority under TILA 

sections 105(a) and 129B(e)—which has 

transferred to the Bureau—to adjust 

provisions of TILA and condition 

practices ‘‘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.’’ 15 U.S.C. 

1604(a); TILA section 129B(a)(2), 15 

U.S.C. 1639b(a)(2). 

The Board stated that a six-month 

‘‘clean’’ payment record indicates a 

reasonable level of financial stability on 

the part of the consumer applying for a 

refinancing. In addition, the Board 

noted that participants in its outreach 

indicated that a prohibition on 

delinquencies of more than 30 days for 

the six months prior to application for 

the refinancing was generally consistent 

with common industry practice and 

would not be unduly disruptive to 

existing streamlined refinance programs 

with well-performing loans. 

Proposed comment 43(d)(1)(v)–1 

provided an illustrative example of the 

proposed rule and clarified that if the 

number of months between 

consummation of the non-standard 

mortgage and the consumer’s 

application for the standard mortgage is 

six or fewer, the consumer may not have 

made any payment more than 30 days 

late on the non-standard mortgage. The 

comment cross-referenced proposed 

comments 43(d)(1)–2 and 43(d)(1)(iv)–2 

for an explanation of ‘‘written 

application’’ and how to determine the 

payment due date, respectively. 

One industry commenter stated that 

the prohibition on late payments in the 

past six months should be amended to 

provide flexibility when the late 

payment was due to extenuating 

circumstances. The Bureau declines to 

adopt a rule providing an adjustment for 

extenuating circumstances, for several 

reasons. First, the existence or absence 

of extenuating circumstances is a factspecific question and it would be 

difficult to distinguish by regulation 

between extenuating circumstances that 

reflect an ongoing risk with regard to the 

consumer’s ability to repay the loan 

versus extenuating circumstances that 

present less risk. In addition, an 

adjustment for extenuating 

circumstances appears to be 

inconsistent with the purposes of TILA 

section 129C(a)(6)(E), which 

contemplates that the consumer ‘‘has 

not been delinquent on any payment on 

the existing hybrid loan,’’ without 

distinguishing between payments that 

are delinquent due to extenuating 

circumstances or otherwise. 

Furthermore, by defining a late payment 

as more than 30 days late, the Bureau 

believes that many extenuating 

circumstances, for example a payment 

made three weeks late due to mail 

delivery issues, will not preclude use of 

§ 1026.43(d). 

Accordingly, the Bureau is adopting 

this provision as proposed, renumbered 

as § 1026.43(d)(2)(v). Similarly, the 

Bureau is adopting comment 

43(d)(1)(v)–1 generally as proposed, 

with several technical amendments for 

clarity and renumbered as 43(d)(2)(v)–1. 

As proposed, the examples in the 

comment referred to dates prior to the 

effective date of this rule; the Bureau 

has updated the dates in the examples 

so that they will occur after this rule 

becomes effective. Pursuant to its 

authority under TILA section 105(a), the 

Bureau finds that requiring that the 

consumer have made no payments on 

the non-standard mortgage more than 30 

days late during the six months 


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immediately preceding the creditor’s 

receipt of the consumer’s written 

application for the standard mortgage 

ensures that consumers are offered and 

receive residential mortgage loans on 

terms that reasonably reflect their ability 

to repay while ensuring that 

responsible, affordable mortgage credit 

remains available to consumers at risk 

of default due to higher payments 

resulting from the recast. 

43(d)(2)(vi) 

For the reasons discussed in the 

section-by-section analysis of 

§ 1026.43(d)(3), the Bureau is adopting a 

new § 1026.43(d)(2)(vi) that generally 

conditions use of § 1026.43(d) on the 

existing non-standard mortgage having 

been made in accordance with 

§ 1026.43(c), provided that the existing 

non-standard mortgage loan was 

consummated on or after January 10, 

2014. For the reasons discussed in the 

section-by-section analysis of 

§ 1026.43(d)(3), the Bureau believes that 

this provision is necessary and proper to 

prevent use of § 1026.43(d)’s 

streamlined refinance provision to 

circumvent or ‘‘cure’’ violations of the 

ability-to-repay requirements in 

§ 1026.43(c). Section 1026.43(d)(2)(vi) is 

adopted pursuant to the Bureau’s 

authority under TILA section 105(a). 

The Bureau finds that this adjustment is 

necessary to effectuate the purposes of 

TILA by ensuring that consumers are 

offered and receive residential mortgage 

loans on terms that reasonably reflect 

their ability to repay, while ensuring 

that consumers at risk of default due to 

payment shock are able to obtain 

responsible and affordable refinancing 

credit. Furthermore, the Bureau believes 

that this adjustment is necessary to 

prevent unscrupulous creditors from 

using § 1026.43(d) to engage in loanflipping or other practices that are 

harmful to consumers, thereby 

circumventing the requirements of 

TILA. 

43(d)(3) Exemption From Repayment 

Ability Requirements 

Under specific conditions, proposed 

§ 226.43(d)(3) would have exempted a 

creditor in a refinancing from two of the 

ability-to-repay requirements under 

proposed § 226.43(c). First, the proposal 

provided that a creditor is not required 

to comply with the income and asset 

verification requirements of proposed 

§ 226.43(c)(2)(i) and (c)(4). Second, the 

proposal provided that the creditor is 

not required to comply with the 

payment calculation requirements of 

proposed § 226.43(c)(2)(iii) and (c)(5); 

the creditor may instead use payment 

calculations prescribed in proposed 

§ 226.43(d)(5)(ii). 

For these exemptions to apply, 

proposed § 226.43(d)(3)(i)(A) would 

have required that all of the conditions 

in proposed § 226.43(d)(1)(i) through (v) 

be met. In addition, proposed 

§ 226.43(d)(3)(i)(B) would have required 

that the creditor consider whether the 

standard mortgage will prevent a likely 

default by the consumer on the nonstandard mortgage when the nonstandard mortgage is recast. This 

proposed provision implemented TILA 

section 129C(a)(6)(E)(ii), which permits 

a creditor to ‘‘consider if the extension 

of new credit would prevent a likely 

default should the original mortgage 

reset and give such concerns a higher 

priority as an acceptable underwriting 

practice.’’ As clarified in proposed 

comment 43(d)(3)(i)–1, the Board 

interpreted TILA section 129(a)(6)(E)(ii) 

to require a creditor to consider 

whether: (1) The consumer is likely to 

default on the existing mortgage once 

new, higher payments are required; and 

(2) the new mortgage will prevent the 

consumer’s default. The Board solicited 

comment regarding whether these 

proposed provisions were appropriate, 

and also specifically solicited comment 

on whether exemptions from the abilityto-repay requirements, other than those 

proposed, were appropriate. 

Several commenters expressly 

supported this proposed provision. An 

association of State bank supervisors 

stated that refinancing designed to put 

a consumer in a higher-quality standard 

mortgage before the existing lowerquality mortgage recasts should be given 

greater deference and further stated that 

it is sound policy to encourage 

refinancing where it protects both the 

economic interest of the creditor and the 

financial health of the consumer. 

Consumer groups commented that 

limited and careful exemption from 

income verification, provided that 

protections are in place, can help 

consumers and communities, while 

preventing reckless and abusive lending 

on the basis of little or no 

documentation. Civil rights 

organizations also stated that the 

streamlined refinance option would 

provide much-needed relief for 

consumers with loans that are not 

sustainable in the long term but who are 

not yet in default. These commenters 

also stated that minority consumers 

have been targeted in the past for 

unsustainable loans and that this 

provision could help to prevent further 

foreclosures and economic loss in 

minority communities, as well as for 

homeowners in general. 

Other consumer group commenters 

stated that an exemption to the income 

verification requirement for refinancing 

into standard mortgages is problematic. 

One commenter stated that, because the 

refinance would be executed by the 

same creditor that made the original 

hybrid loan, income verification would 

not be difficult. This commenter urged 

the Bureau to encourage income 

documentation when implementing the 

Dodd-Frank Act. 

Several industry commenters urged 

the Bureau to provide additional relief 

for refinancings made in accordance 

with proposed § 226.43(d), either by 

permitting the standard loan to be 

classified as a qualified mortgage or by 

providing exemptions from other of the 

proposed ability-to-repay requirements. 

One industry commenter stated that in 

addition to the proposed exemption for 

the verification of income and assets, 

refinancings conducted in accordance 

with § 226.43(d) also should be exempt 

from the requirements to consider the 

consumer’s debt-to-income ratio or 

residual income, if the consumer is still 

employed and has not incurred 

significant additional debt obligations 

prior to the refinance. This commenter 

stated that overly rigid standards could 

significantly reduce the number of 

consumers who qualify for this 

exemption. Similarly, one industry 

trade association urged the Bureau to 

exempt refinancings from the 

requirement to consider the consumer’s 

debt obligations, debt-to-income ratio, 

and employment. This commenter 

stated that the proposed requirement to 

consider these additional underwriting 

factors was seemingly in conflict with 

the purpose of proposed § 226.43(d) and 

would preclude consumers from taking 

advantage of beneficial and less costly 

refinancing opportunities. In addition, 

several industry commenters and one 

industry trade association commented 

that standard mortgages made in 

accordance with § 226.43(d) should be 

treated as qualified mortgages. 

The Bureau agrees with the concerns 

raised by commenters that the proposed 

exemptions were drawn too narrowly. 

The Bureau believes that TILA section 

129C(a)(6)(E) is intended to create 

incentives for creditors to refinance 

loans in circumstances where 

consumers have non-standard loans on 

which they are currently able to make 

payments but on which they are likely 

to be unable to make the payments after 

recast and therefore default on the loan. 

Accordingly, the Bureau believes that in 

order to create incentives for creditors to 

use the non-standard refinancing 

provision, TILA section 129C(a)(6)(E) 

must be intended to provide at least a 


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limited exemption from the general 

ability-to-repay determination as 

adopted in § 1026.43(c). Otherwise, 

creditors may have little incentive to 

provide consumers at risk of default 

with refinancings that result in 

‘‘materially lower’’ payments. The 

Bureau believes, however, that in 

implementing TILA section 

129C(a)(6)(E) it is important to balance 

the creation of additional flexibility and 

incentives for creditors to refinance 

non-standard mortgages into standard 

mortgages against the likelihood of 

benefit to the consumer. 

The Bureau notes that under the final 

rule as adopted, the availability of the 

non-standard refinancing provision 

contains several conditions that are 

intended to benefit the consumer. First, 

the special ability-to-repay requirements 

in § 1026.43(d) are available only if the 

conditions in § 1026.43(d)(2) are met. 

These conditions include limiting the 

scope of § 1026.43(d) to refinancings of 

non-standard mortgages into standard 

mortgages, which generally are more 

stable products with reduced risk of 

payment shock. The definition of 

standard mortgage in § 1026.43(d)(1)(ii) 

includes a number of limitations that 

are intended to ensure that creditors 

may only use the provisions in 

§ 1026.43(d) to offer a consumer a 

product with safer features. For 

example, as discussed in the section-bysection analysis of § 1026.43(d)(1)(ii) a 

standard mortgage may not include 

negative amortization, an interest-only 

feature, or a balloon payment; in 

addition, the term of the standard 

mortgage may not exceed 40 years, the 

interest rate must be fixed for at least 

the first five years, the loan is subject to 

a limitation on the points and fees that 

may be charged, and there are 

limitations on the use of proceeds from 

the refinancing. Furthermore, 

§ 1026.43(d)(2)(ii) requires that the 

monthly payment on the standard 

mortgage be materially lower than the 

monthly payment for the non-standard 

mortgage and, as discussed above, the 

Bureau is adopting a 10 percent safe 

harbor for what constitutes a ‘‘material’’ 

reduction. 

The Bureau has concerns that, as 

proposed by the Board, an exemption 

only from the requirement to consider 

and verify the consumer’s income or 

assets may create insufficient incentives 

for creditors to make refinancings to 

assist consumers at risk of default. For 

example, the proposal would have 

required creditors to comply with the 

requirement in § 1026.43(c)(2)(vii) to 

consider the consumer’s debt-to-income 

ratio or residual income. Accordingly, 

notwithstanding an exemption from 

income or asset verification, the 

proposal would have required 

consideration of income, as well as 

consideration of all of the other 

underwriting criteria set forth in 

§ 1026.43(c)(2). 

The Bureau believes that in light of 

the safeguards imposed by other 

portions of § 1026.43(d), as discussed 

above, it is appropriate to provide an 

exemption to all of the ability-to-repay 

requirements under § 1026.43(c) for a 

refinance conducted in accordance with 

§ 1026.43(d). The Bureau believes that a 

broad exemption from the general 

ability-to-repay determination is 

appropriate in order to create incentives 

for creditors to quickly and efficiently 

refinance consumers whose nonstandard mortgages are about to recast, 

thus rendering them likely to default, 

into more affordable, more stable 

mortgage loans. The Bureau is aware 

that some consumers may nonetheless 

default on a standard mortgage made in 

accordance with § 1026.43(d), but those 

consumers likely would have defaulted 

had the non-standard mortgage 

remained in place. For others, the 

material reduction in payment required 

under § 1026.43(d)(2) and the more 

stable product type following 

refinancing may be sufficient to enable 

consumers to avoid default. The Bureau 

believes that a refinancing conducted in 

accordance with § 1026.43(d) will 

generally improve a consumer’s chances 

of avoiding default. Section 

1026.43(d)(3) is adopted pursuant to the 

Bureau’s authority under TILA section 

105(a). The Bureau finds that this 

adjustment is necessary to effectuate the 

purposes of TILA by ensuring that 

consumers are offered and receive 

residential mortgage loans on terms that 

reasonably reflect their ability to repay, 

while ensuring that consumers at risk of 

default due to payment shock are able 

to obtain responsible and affordable 

refinancing credit. 

However, to prevent evasion or 

circumvention of the ability-to-repay 

requirements in § 1026.43(c), the Bureau 

is imposing one additional condition on 

the use of § 1026.43(d). Specifically, 

new § 1026.43(d)(2)(vi) conditions the 

use of § 1026.43(d), for non-standard 

mortgages consummated on or after the 

effective date of this rule, on the nonstandard mortgage having been made in 

accordance with § 1026.43(c). The 

Bureau has concerns that absent 

§ 1026.43(d)(2)(vi), a creditor might 

attempt to use a refinancing conducted 

in accordance with § 1026.43(d) to 

‘‘cure’’ substandard underwriting of the 

prior non-standard mortgage. For 

example, without § 1026.43(d)(2)(vi), if 

a creditor discovered that it had made 

an error in consideration of the 

underwriting factors under 

§ 1026.43(c)(2) for a non-standard 

mortgage, the creditor might consider 

conducting a refinancing under 

§ 1026.43(d), in order to argue that the 

consumer may no longer raise as a 

defense to foreclosure the underwriting 

of the original non-standard mortgage. 

The Bureau believes that conditioning 

the use of § 1026.43(d) on the earlier 

loan having been made in accordance 

with § 1026.43(c) will better effectuate 

the purposes of TILA by ensuring that 

consumers are offered and receive 

residential mortgage loans on terms that 

reasonably reflect their ability to repay 

while preventing unscrupulous 

creditors from evading the ability-torepay requirements. 

New § 1026.43(d)(2)(vi) applies only 

to non-standard mortgages 

consummated on or after the effective 

date of this rule. For non-standard loans 

consummated before the effective date 

of this final rule, a refinancing under 

§ 1026.43(d) would not be subject to this 

condition. The Bureau believes that 

non-standard mortgages made prior to 

the effective date, to which the abilityto-repay requirements in § 1026.43(c) 

did not apply, may present an increased 

risk of default when they are about to 

recast, so that facilitating refinancing 

into more stable mortgages may be 

particularly important even if the 

consumer could not qualify for a new 

loan under traditional ability-to-repay 

requirements. The Bureau believes that, 

on balance, given the conditions that 

apply to refinances under § 1026.43(d), 

refinances of these loans are more likely 

to benefit consumers than to harm 

consumers, notwithstanding the 

inapplicability of § 1026.43(d)(2)(vi). In 

addition, the concern about a creditor 

using § 1026.43(d) to ‘‘cure’’ prior 

violations of § 1026.43(c) does not apply 

to loans made before the effective date 

of this rule, as such loans were not 

required to be made in accordance with 

§ 1026.43. 

Proposed condition that the consumer 

will likely default. Proposed comment 

43(d)(3)(i)–2 would have clarified that, 

in considering whether the consumer’s 

default on the non-standard mortgage is 

‘‘likely,’’ the creditor may look to 

widely accepted governmental and nongovernmental standards for analyzing a 

consumer’s likelihood of default. The 

proposal was not intended, however, to 

constrain servicers and other relevant 

parties from using other methods to 

determine a consumer’s likelihood of 

default, including those tailored 

specifically to that servicer. As 

discussed in the supplementary 

information to the proposal, the Board 


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considered certain government 

refinancing programs as well as 

feedback from outreach participants, 

each of which suggested that there may 

be legitimate differences in servicer 

assessments of a consumer’s likelihood 

of default. The Board noted that it 

considered an ‘‘imminent default’’ 

standard but heard from consumer 

advocates that ‘‘imminent default’’ may 

be a standard that is too high for the 

refinancing provisions in TILA section 

129C(a)(6)(E) and could prevent many 

consumers from obtaining a refinancing 

to avoid payment shock. Accordingly, 

the Board’s proposal used the exact 

statutory wording—‘‘likely default’’—in 

implementing the provision permitting 

a creditor to prioritize prevention of 

default in underwriting a refinancing. 

The Board solicited comment on the 

proposal to use the term ‘‘likely default’’ 

in implementing TILA section 

129C(a)(6)(E)(ii) and on whether 

additional guidance is needed on how 

to meet the requirement that a creditor 

must reasonably and in good faith 

determine that a standard mortgage will 

prevent a likely default should the nonstandard mortgage be recast. 

Two industry trade associations urged 

the Bureau to remove proposed 

§ 226.43(d)(3)(i)(B) as a condition to the 

availability of the non-standard 

refinancing provisions. One of these 

commenters noted that a creditor would 

have to underwrite a consumer’s income 

and assets to determine whether the 

consumer would likely default, which 

would defeat the purpose of the 

proposed provision. Several industry 

commenters also indicated that the 

‘‘likelihood of default’’ standard is 

vague and accordingly subjects creditors 

to potential liability for waiving certain 

ability-to-repay requirements, and 

questioned the extent to which creditors 

would utilize the streamline refinance 

option in light of this potential liability. 

One such commenter urged the Bureau 

to eliminate this requirement or, in the 

alternative, to provide additional 

guidance regarding when a consumer is 

‘‘likely to go into default.’’ 

An association of State bank 

supervisors stated that there can be no 

quantifiable standard for the definition 

of ‘‘likely default.’’ These commenters 

further stated that institutions must use 

sound judgment and regulators must 

provide responsible oversight to ensure 

that abuses are not occurring through 

the refinancing exemption set forth in 

§ 1026.43(d). 

The Bureau is adopting the provision 

as proposed, renumbered as 

§ 1026.43(d)(3)(i)(B), and is also 

adopting comments 43(d)(3)(i)–1 and 

43(d)(3)(i)–2 as proposed. The Bureau 

believes that eliminating the 

requirement that a creditor consider 

whether the extension of new credit 

would prevent a likely default would be 

inconsistent with TILA section 

129C(a)(6)(E), which expressly includes 

language regarding consideration by the 

creditor of ‘‘[whether] the extension of 

new credit would prevent a likely 

default should the original mortgage 

reset.’’ At the same time, the Bureau 

agrees with the association of State bank 

supervisors that it would be difficult to 

impose by regulation a single standard 

for what constitutes a likely default. 

Accordingly, the Bureau is adopting the 

flexible approach proposed by the 

Board, which would permit but not 

require creditors to look to widelyaccepted standards for analyzing a 

consumer’s likelihood of default. The 

Bureau does not believe that this 

flexible approach requires a creditor to 

consider the consumer’s income and 

assets if, for example, statistical 

evidence indicates that consumers who 

experience a payment shock of the type 

that the consumer is about to experience 

have a high incidence of defaulting 

following the payment shock. 

Proposed payment calculation for 

repayment ability determination. 

Proposed comment 43(d)(3)(ii)–1 would 

have explained that, if the conditions in 

proposed § 226.43(d)(1) are met, the 

creditor may satisfy the payment 

calculation requirements for 

determining a consumer’s ability to 

repay the new loan by applying the 

calculation prescribed under proposed 

§ 226.43(d)(5)(ii), rather than the 

calculation prescribed under proposed 

§ 226.43(c)(2)(iii) and (c)(5). As 

discussed in the section-by-section 

analysis above, as adopted 

§ 1026.43(d)(3) provides an exemption 

from the requirements of § 1026.43(c) if 

certain conditions are met. Accordingly, 

while the creditor is required to 

determine whether there is a material 

reduction in payment consistent with 

§ 1026.43(d)(2)(ii) by using the payment 

calculations prescribed in 

§ 1026.43(d)(5), the creditor is not 

required to use these same payment 

calculations for purposes of 

§ 1026.43(c). Accordingly, the Bureau is 

withdrawing proposed comment 

43(d)(3)(ii)–1 as unnecessary. 

43(d)(4) Offer of Rate Discounts and 

Other Favorable Terms 

Proposed § 226.43(d)(4) would have 

provided that a creditor making a loan 

under the special refinancing provisions 

of § 226.43(d) may offer to the consumer 

the same or better rate discounts and 

other terms that the creditor offers to 

any new consumer, consistent with the 

creditor’s documented underwriting 

practices and to the extent not 

prohibited by applicable State or 

Federal law. This aspect of the proposal 

was intended to implement TILA 

section 129C(a)(6)(E)(iii), which permits 

creditors of refinancings subject to 

special ability-to-repay requirements in 

TILA section 129C(a)(6)(E) to ‘‘offer rate 

discounts and other favorable terms’’ to 

the consumer ‘‘that would be available 

to new customers with high credit 

ratings based on such underwriting 

practice.’’ 

The Bureau received no comments on 

this provision, which is adopted as 

proposed and renumbered as 

§ 1026.43(d)(4). The Bureau is 

concerned that the phrase ‘‘consistent 

with the creditor’s underwriting 

practice’’ could be misinterpreted to 

refer to the underwriting requirements 

in § 1026.43(c). As this final rule 

provides an exemption under 

§ 1026.43(d) for all of the requirements 

in § 1026.43(c), subject to the other 

conditions discussed above, the Bureau 

believes that additional clarification is 

needed to address this potential 

misinterpretation. Thus, the Bureau is 

adopting comment 43(d)(4)–1, which 

clarifies that in connection with a 

refinancing made pursuant to 

§ 1026.43(d), § 1026.43(d)(4) requires a 

creditor offering a consumer rate 

discounts and terms that are the same 

as, or better than, the rate discounts and 

terms offered to new consumers to make 

such an offer consistent with the 

creditor’s documented underwriting 

practices. Section 1026.43(d)(4) does not 

require a creditor making a refinancing 

pursuant to § 1026.43(d) to comply with 

the underwriting requirements of 

§ 1026.43(c). Rather, § 1026.43(d)(4) 

requires creditors providing such 

discounts to do so consistent with 

documented policies related to loan 

pricing, loan term qualifications, or 

other similar underwriting practices. 

For example, assume that a creditor is 

providing a consumer with a 

refinancing made pursuant to 

§ 1026.43(d) and that this creditor has a 

documented practice of offering rate 

discounts to consumers with credit 

scores above a certain threshold. 

Assume further that the consumer 

receiving the refinancing has a credit 

score below this threshold, and 

therefore would not normally qualify for 

the rate discount available to consumers 

with high credit scores. This creditor 

complies with § 1026.43(d)(4) by 

offering the consumer the discounted 

rate in connection with the refinancing 

made pursuant to § 1026.43(d), even if 

the consumer would not normally 


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qualify for that discounted rate, 

provided that the offer of the discounted 

rate is not prohibited by applicable State 

or Federal law. However, § 1026.43(d)(4) 

does not require a creditor to offer a 

consumer such a discounted rate. 

43(d)(5) Payment Calculations 

Proposed § 226.43(d)(5) would have 

prescribed the payment calculations for 

determining whether the consumer’s 

monthly payment for a standard 

mortgage will be ‘‘materially lower’’ 

than the monthly payment for the nonstandard mortgage. Proposed 

§ 226.43(d)(5) thus was intended to 

complement proposed § 226.43(d)(1)(ii) 

in implementing TILA section 

129C(a)(6)(E), which requires a 

‘‘reduction’’ in the monthly payment for 

the existing non-standard (‘‘hybrid’’) 

mortgage when refinanced into a 

standard mortgage. 

43(d)(5)(i) Non-Standard mortgage 

Proposed § 226.43(d)(5)(i) would have 

required that the monthly payment for 

a non-standard mortgage be based on 

substantially equal, monthly, fully 

amortizing payments of principal and 

interest that would result once the 

mortgage is recast. The Board stated that 

comparing the payment on the standard 

mortgage to the payment amount on 

which the consumer likely would have 

defaulted (i.e., the payment resulting on 

the existing non-standard mortgage once 

the introductory terms cease and a 

higher payment results) would promote 

needed refinances consistent with 

Congress’s intent. 

The Board noted that the payment 

that the consumer is currently making 

on the existing non-standard mortgage 

may be an inappropriately low payment 

to compare to the standard mortgage 

payment. The existing payments may be 

interest-only or negatively amortizing; 

these temporarily lower payment 

amounts would be difficult for creditors 

to ‘‘reduce’’ with a refinanced loan that 

has a comparable term length and 

principal amount. Indeed, the payment 

on a new loan with a fixed-rate rate and 

fully-amortizing payment, as is required 

for the payment calculation of a 

standard mortgage under the proposal, 

for example, is likely to be higher than 

the interest-only or negative 

amortization payment. As a result, few 

refinancings would yield a lower 

monthly payment, so many consumers 

could not receive the benefits of 

refinancing into a more stable loan 

product. 

Accordingly, the proposal would have 

required a creditor to calculate the 

monthly payment for a non-standard 

mortgage using— 

• The fully indexed rate as of a 

reasonable period of time before or after 

the date on which the creditor receives 

the consumer’s written application for 

the standard mortgage; 

• The term of the loan remaining as 

of the date of the recast, assuming all 

scheduled payments have been made up 

to the recast date and the payment due 

on the recast date is made and credited 

as of that date; and 

• A remaining loan amount that is— 

Æ For an adjustable-rate mortgage, the 

outstanding principal balance as of the 

date the mortgage is recast, assuming all 

scheduled payments have been made up 

to the recast date and the payment due 

on the recast date is made and credited 

as of that date; 

Æ For an interest-only loan, the loan 

amount, assuming all scheduled 

payments have been made up to the 

recast date and the payment due on the 

recast date is made and credited as of 

that date; 

Æ For a negative amortization loan, 

the maximum loan amount. 

Proposed comment 43(d)(5)(i)–1 

would have explained that, to determine 

whether the monthly periodic payment 

for a standard mortgage is materially 

lower than the monthly periodic 

payment for the non-standard mortgage 

under proposed § 226.43(d)(1)(ii), the 

creditor must consider the monthly 

payment for the non-standard mortgage 

that will result after the loan is recast, 

assuming substantially equal payments 

of principal and interest that amortize 

the remaining loan amount over the 

remaining term as of the date the 

mortgage is recast. The proposed 

comment noted that guidance regarding 

the meaning of ‘‘substantially equal’’ 

and ‘‘recast’’ is provided in comment 

43(c)(5)(i)–4 and § 226.43(b)(11), 

respectively. 

Proposed comment 43(d)(5)(i)–2 

would have explained that the term 

‘‘fully indexed rate’’ used for calculating 

the payment for a non-standard 

mortgage is generally defined in 

proposed § 226.43(b)(3) and associated 

commentary. The proposed comment 

explained an important difference 

between the ‘‘fully indexed rate’’ as 

defined in proposed § 226.43(b)(3), 

however, and the meaning of ‘‘fully 

indexed rate’’ in § 226.43(d)(5)(i). 

Specifically, under proposed 

§ 226.43(b)(3), the fully indexed rate is 

calculated at the time of consummation. 

Under proposed § 226.43(d)(5)(i), the 

fully indexed rate would be calculated 

within a reasonable period of time 

before or after the date on which the 

creditor receives the consumer’s written 

application for the standard mortgage. 

Comment 43(d)(5)(i)–2 clarified that 30 

days would generally be considered a 

‘‘reasonable period of time.’’ 

Proposed comment 43(d)(5)(i)–3 

would have clarified that the term 

‘‘written application’’ is explained in 

comment 19(a)(1)(i)–3. Comment 

19(a)(1)(i)–3 states that creditors may 

rely on RESPA and Regulation X 

(including any interpretations issued by 

HUD) in deciding whether a ‘‘written 

application’’ has been received. In 

general, Regulation X defines 

‘‘application’’ to mean the submission of 

a borrower’s financial information in 

anticipation of a credit decision relating 

to a federally related mortgage loan. See 

12 CFR 1024.2(b). As explained in 

comment 19(a)(1)(i)–3, an application is 

received when it reaches the creditor in 

any of the ways applications are 

normally transmitted, such as by mail, 

hand delivery, or through an 

intermediary agent or broker. If an 

application reaches the creditor through 

an intermediary agent or broker, the 

application is received when it reaches 

the creditor, rather than when it reaches 

the agent or broker. This proposed 

comment also cross-referenced 

comment 19(b)–3 for guidance in 

determining whether the transaction 

involves an intermediary agent or 

broker. 

Proposed payment calculation for an 

adjustable-rate mortgage with an 

introductory fixed rate. Proposed 

comments 43(d)(5)(i)–4 and –5 would 

have clarified the payment calculation 

for an adjustable-rate mortgage with an 

introductory fixed rate under proposed 

§ 226.43(d)(5)(i). Proposed comment 

43(d)(5)(i)–4 clarified that the monthly 

periodic payment for an adjustable-rate 

mortgage with an introductory fixed 

interest rate for a period of one or more 

years must be calculated based on 

several assumptions. First, the payment 

must be based on the outstanding 

principal balance as of the date on 

which the mortgage is recast, assuming 

all scheduled payments have been made 

up to that date and the last payment due 

under those terms is made and credited 

on that date. Second, the payment 

calculation must be based on 

substantially equal monthly payments 

of principal and interest that will fully 

repay the outstanding principal balance 

over the term of the loan remaining as 

of the date the loan is recast. Third, the 

payment must be based on the fully 

indexed rate, as defined in 

§ 226.43(b)(3), as of the date of the 

written application for the standard 

mortgage. The proposed comment set 

forth an illustrative example. Proposed 

comment 43(d)(5)(i)–5 would have 

provided a second illustrative example 

of the payment calculation for an 


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adjustable-rate mortgage with an 

introductory fixed rate. 

Proposed payment calculation for an 

interest-only loan. Proposed comments 

43(d)(5)(i)–6 and –7 would have 

explained the payment calculation for 

an interest-only loan under proposed 

§ 226.43(d)(5)(i). Proposed comment 

43(d)(5)(i)–6 would have clarified that 

the monthly periodic payment for an 

interest-only loan must be calculated 

based on several assumptions. First, the 

payment must be based on the loan 

amount, as defined in § 226.43(b)(5), 

assuming all scheduled payments are 

made under the terms of the legal 

obligation in effect before the mortgage 

is recast. The comment provides an 

example of a mortgage with a 30-year 

loan term for which the first 24 months 

of payments are interest-only. The 

comment then explains that, if the 24th 

payment is due on September 1, 2013, 

the creditor must calculate the 

outstanding principal balance as of 

September 1, 2013, assuming that all 24 

payments under the interest-only 

payment terms have been made and 

credited. 

Second, the payment calculation must 

be based on substantially equal monthly 

payments of principal and interest that 

will fully repay the loan amount over 

the term of the loan remaining as of the 

date the loan is recast. Thus, in the 

example above, the creditor must 

assume a loan term of 28 years (336 

payments). Third, the payment must be 

based on the fully indexed rate as of the 

date of the written application for the 

standard mortgage. 

Proposed comment 43(d)(5)(i)–7 

would have provided an illustration of 

the payment calculation for an interestonly loan. The example assumes a loan 

in an amount of $200,000 that has a 30- 

year loan term. The loan agreement 

provides for a fixed interest rate of 7 

percent, and permits interest-only 

payments for the first two years, after 

which time amortizing payments of 

principal and interest are required. 

Second, the example states that the nonstandard mortgage is consummated on 

February 15, 2011, and the first monthly 

payment is due on April 1, 2011. The 

loan is recast on the due date of the 24th 

monthly payment, which is March 1, 

2013. Finally, the example assumes that 

on March 15, 2012, the creditor receives 

the consumer’s written application for a 

refinancing, after the consumer has 

made 12 monthly on-time payments. 

Proposed comment 43(d)(5)(i)–7 

would have further explained that, to 

calculate the non-standard mortgage 

payment that must be compared to the 

standard mortgage payment, the creditor 

must use— 

• The loan amount, which is the 

outstanding principal balance as of 

March 1, 2013, assuming all scheduled 

interest-only payments have been made 

and credited up to that date. In this 

example, the loan amount is $200,000. 

• An interest rate of 7 percent, which 

is the interest rate in effect at the time 

of consummation of this fixed-rate nonstandard mortgage. 

• The remaining loan term as of 

March 1, 2013, the date of the recast, 

which is 28 years. 

The comment concluded by stating 

that, based on the assumptions above, 

the monthly payment for the nonstandard mortgage for purposes of 

determining whether the standard 

mortgage monthly payment is lower 

than the non-standard mortgage 

monthly payment is $1,359. This is the 

substantially equal, monthly payment of 

principal and interest required to repay 

the loan amount at the fully indexed 

rate over the remaining term. 

Proposed payment calculation for a 

negative amortization loan. Proposed 

comments 43(d)(5)(i)–8 and –9 would 

have explained the payment calculation 

for a negative amortization loan under 

proposed § 226.43(d)(5)(i)(C). Proposed 

comment 43(d)(5)(i)–8 would have 

clarified that the monthly periodic 

payment for a negative amortization 

loan must be calculated based on 

several assumptions. First, the 

calculation must be based on the 

maximum loan amount. The comment 

further stated that examples of how to 

calculate the maximum loan amount are 

provided in proposed comment 

43(b)(7)–3. 

Second, the payment calculation must 

be based on substantially equal monthly 

payments of principal and interest that 

will fully repay the maximum loan 

amount over the term of the loan 

remaining as of the date the loan is 

recast. For example, the comment states, 

if the loan term is 30 years and the loan 

is recast on the due date of the 60th 

monthly payment, the creditor must 

assume a loan term of 25 years. Third, 

the payment must be based on the fully 

indexed rate as of the date of the written 

application for the standard mortgage. 

Proposed comment 43(d)(5)(i)–9 

would have provided an illustration of 

the payment calculation for a negative 

amortization loan. The example 

assumes a loan in an amount of 

$200,000 that has a 30-year loan term. 

The loan agreement provides that the 

consumer can make minimum monthly 

payments that cover only part of the 

interest accrued each month until the 

date on which the principal balance 

increases to the negative amortization 

cap of 115 percent of the loan amount, 

or for the first five years of monthly 

payments, whichever occurs first. The 

loan is an adjustable-rate mortgage that 

adjusts monthly according to a specified 

index plus a margin of 3.5 percent. 

The example also assumed that the 

non-standard mortgage is consummated 

on February 15, 2011, and the first 

monthly payment is due on April 1, 

2011. Further, the example assumes 

that, based on the calculation of the 

maximum loan amount required under 

§ 226.43(b)(7) and associated 

commentary, the negative amortization 

cap of 115 percent is reached on July 1, 

2013, the due date of the 28th monthly 

payment. Finally, the example assumes 

that on March 15, 2012, the creditor 

receives the consumer’s written 

application for a refinancing, after the 

consumer has made 12 monthly on-time 

payments. On this date, the index value 

is 4.5 percent. 

Proposed comment 43(d)(5)(i)–9 then 

stated that, to calculate the nonstandard mortgage payment that must be 

compared to the standard mortgage 

payment under proposed 

§ 226.43(d)(1)(ii), the creditor must 

use— 

• The maximum loan amount of 

$229,243 as of July 1, 2013. 

• The fully indexed rate of 8 percent, 

which is the index value of 4.5 percent 

as of March 15, 2012 (the date on which 

the creditor receives the application for 

a refinancing) plus the margin of 3.5 

percent. 

• The remaining loan term as of July 

1, 2013, the date of the recast, which is 

27 years and 8 months (332 monthly 

payments). 

The comment concluded by stating 

that, based on the assumptions above, 

the monthly payment for the nonstandard mortgage for purposes of 

determining whether the standard 

mortgage monthly payment is lower 

than the non-standard mortgage 

monthly payment is $1,717. This is the 

substantially equal, monthly payment of 

principal and interest required to repay 

the maximum loan amount at the fully 

indexed rate over the remaining term. 

The Board requested comment on the 

proposed payment calculation for a nonstandard mortgage and on the 

appropriateness and usefulness of the 

proposed payment calculation 

examples. 

The Bureau received no specific 

comment on the payment calculations 

for non-standard mortgages set forth in 

proposed § 226.43(d)(5)(i) and its 

associated commentary. Accordingly, 

the provision that is being adopted is 

substantially similar to the version 

proposed, renumbered as 

§ 1026.43(d)(5)(i). The Bureau also is 


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adopting the associated commentary 

generally as proposed. The Bureau has 

made several technical amendments to 

the examples in comments 43(d)(5)(i)–4, 

–5, –6, –7, and –9 for clarity. As 

proposed, the examples in the comment 

referred to dates prior to the effective 

date of this rule; the Bureau has updated 

the dates in the examples so that they 

will occur after this rule becomes 

effective. 

The Bureau believes that it is 

necessary to clarify the provisions 

related to payment calculations for 

interest-only loans and negative 

amortization loans. The provisions 

adopted clarify that the payment 

calculation required by 

§ 1026.43(d)(5)(i) must be based on the 

outstanding principal balance, rather 

than the original amount of credit 

extended. Accordingly, as adopted 

§ 1026.43(d)(5)(i)(C)(2) requires the 

remaining loan amount for an interestonly loan to be based on the outstanding 

principal balance as of the date of the 

recast, assuming all scheduled 

payments have been made up to the 

recast date and the payment due on the 

recast date is made and credited as of 

that date. Similarly, 

§ 1026.43(d)(5)(i)(C)(3) requires the 

remaining loan amount for a negative 

amortization loan to be based on the 

maximum loan amount, determined 

after adjusting for the outstanding 

principal balance. The Bureau has made 

technical amendments to the example in 

comments 43(d)(5)(i)–6, –7, –8, and –9 

to conform to this clarification. 

Additionally, the Bureau has added 

new comment 43(d)(5)(i)–10 to add an 

additional illustration of the payment 

calculation for a negative amortization 

loan. As adopted, comment 43(d)(5)(i)– 

10 provides an illustrative example, 

clarifying that, pursuant to the example 

and assumptions included in the 

example, to calculate the non-standard 

mortgage payment on a negative 

amortization loan for which the 

consumer has made more than the 

minimum required payment that must 

be compared to the standard mortgage 

payment under § 1026.43(d)(1)(i), the 

creditor must use the maximum loan 

amount of $229,219 as of March 1, 2019, 

the fully indexed rate of 8 percent, 

which is the index value of 4.5 percent 

as of March 15, 2012 (the date on which 

the creditor receives the application for 

a refinancing) plus the margin of 3.5 

percent, and the remaining loan term as 

of March 1, 2019, the date of the recast, 

which is 25 years (300 monthly 

payments). The comment further 

explains that, based on these 

assumptions, the monthly payment for 

the non-standard mortgage for purposes 

of determining whether the standard 

mortgage monthly payment is lower 

than the non-standard mortgage 

monthly payment is $1,769. This is the 

substantially equal, monthly payment of 

principal and interest required to repay 

the maximum loan amount at the fully 

indexed rate over the remaining term. 

The Bureau finds that comment 

43(d)(5)(i)–10, which is adopted 

pursuant to the Bureau’s authority 

under section 105(a) of TILA, is 

necessary to facilitate compliance with 

TILA. 

43(d)(5)(ii) Standard Mortgage 

Proposed § 226.43(d)(5)(ii) would 

have prescribed the required calculation 

for the monthly payment on a standard 

mortgage that must be compared to the 

monthly payment on a non-standard 

mortgage under proposed 

§ 226.43(d)(1)(ii). The same payment 

calculation must also be used by 

creditors of refinances under proposed 

§ 226.43(d) in determining whether the 

consumer has a reasonable ability to 

repay the standard mortgage, as would 

have been required under proposed 

§ 226.43(c)(2)(ii). 

Specifically, the monthly payment for 

a standard mortgage must be based on 

substantially equal, monthly, fully 

amortizing payments using the 

maximum interest rate that may apply 

to the standard mortgage within the first 

five years after consummation. Proposed 

comment 43(d)(5)(ii)–1 would have 

clarified that the meaning of ‘‘fully 

amortizing payment’’ is defined in 

§ 226.43(b)(2), and that guidance 

regarding the meaning of ‘‘substantially 

equal’’ may be found in proposed 

comment 43(c)(5)(i)–4. Proposed 

comment 43(d)(5)(ii)–1 also explained 

that, for a mortgage with a single, fixed 

rate for the first five years, the 

maximum rate that will apply during 

the first five years after consummation 

will be the rate at consummation. For a 

step-rate mortgage, however, which is a 

type of fixed-rate mortgage, the rate that 

must be used is the highest rate that will 

apply during the first five years after 

consummation. For example, if the rate 

for the first two years is 4 percent, the 

rate for the second two years is 5 

percent, and the rate for the next two 

years is 6 percent, the rate that must be 

used is 6 percent. 

Proposed comment 43(d)(5)(ii)–2 

would have provided an illustration of 

the payment calculation for a standard 

mortgage. The example assumes a loan 

in an amount of $200,000 with a 30-year 

loan term. The loan agreement provides 

for an interest rate of 6 percent that is 

fixed for an initial period of five years, 

after which time the interest rate will 

adjust annually based on a specified 

index plus a margin of 3 percent, subject 

to a 2 percent annual interest rate 

adjustment cap. The comment states 

that, based on the above assumptions, 

the creditor must determine whether the 

standard mortgage payment is 

materially lower than the non-standard 

mortgage payment based on a standard 

mortgage payment of $1,199. This is the 

substantially equal, monthly payment of 

principal and interest required to repay 

$200,000 over 30 years at an interest 

rate of 6 percent. 

The Bureau received no specific 

comment on the payment calculations 

for standard mortgages set forth in 

proposed § 226.43(d)(5)(ii) and its 

associated commentary. Accordingly, 

this provisions is adopted as proposed, 

renumbered as § 1026.43(d)(5)(ii). The 

Bureau also is adopting the associated 

commentary generally as proposed, with 

several technical amendments for 

clarity. 

43(e) Qualified Mortgages 

Background 

As discussed above, TILA section 

129C(a)(1) prohibits a creditor from 

making a residential mortgage loan 

unless the creditor makes a reasonable 

and good faith determination, at or 

before consummation, based on verified 

and documented information, that at the 

time of consummation the consumer has 

a reasonable ability to repay the loan. 

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

(6) through (9) requires creditors 

specifically to consider and verify 

various factors relating to the 

consumer’s income and other assets, 

debts and other obligations, and credit 

history. However, the ability-to-repay 

provisions do not directly restrict 

features, term, or costs of the loan. 

TILA section 129C(b), in contrast, 

provides that loans that meet certain 

requirements shall be deemed 

‘‘qualified mortgages,’’ which are 

entitled to a presumption of compliance 

with the ability-to-repay requirements. 

The section sets forth a number of 

qualified mortgage requirements which 

focus mainly on prohibiting certain 

risky features and practices (such as 

negative amortization and interest-only 

periods or underwriting a loan without 

verifying the consumer’s income) and 

on generally limiting points and fees in 

excess of 3 percent of the total loan 

amount. The only underwriting 

provisions in the statutory definition of 

qualified mortgage are a requirement 

that ‘‘income and financial resources 

relied upon to qualify the [borrowers] be 

verified and documented’’ and a further 

requirement that underwriting be based 


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127TILA section 129B contains requirements and 

restrictions relating to mortgage originators. TILA 

section 129B(b) requires a loan originator to be 

qualified and, when required, registered and 

licensed as a mortgage originator under the Secure 

and Fair Enforcement of Mortgage Licensing Act of 

2008 (SAFE Act), and to include on all loan 

documents any unique identifier of the mortgage 

originator provided by the Nationwide Mortgage 

Licensing System and Registry. That section also 

requires the Bureau to prescribe regulations 

requiring depository institutions to establish and 

maintain procedures designed to ensure and 

monitor compliance of such institutions, including 

their subsidiaries and employees, with the SAFE 

Act. TILA section 129B(c) contains certain 

prohibitions on loan originator steering, including 

restrictions on various compensation practices, and 

requires the Bureau to prescribe regulations to 

prohibit certain specific steering activities. 

128For example, as described in the section-bysection analysis of § 1026.43(g), TILA section 

129C(c), added by section 1414(a) of the DoddFrank Act, provides that a residential mortgage loan 

that is not a ‘‘qualified mortgage’’ may not contain 

a prepayment penalty. In addition, section 1471 of 

the Dodd-Frank Act establishes a new TILA section 

129H, which sets forth appraisal requirements 

applicable to higher-risk mortgages. The definition 

of ‘‘higher-risk mortgage’’ expressly excludes 

qualified mortgages. 

129See part II.G for a discussion of the 2011 QRM 

Proposed Rule. 

upon a fully amortizing schedule using 

the maximum rate permitted during the 

first five years of the loan. TILA section 

129C(b)(2)(A)(iii) through (v). However, 

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

authorizes the Bureau to adopt 

‘‘guidelines or regulations * * * 

relating to ratios of total monthly debt 

to monthly income or alternative 

measures of ability to pay * * * .’’ And 

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

authorizes the Bureau to revise, add to, 

or subtract from the criteria that define 

a qualified mortgage upon a finding that 

the changes are necessary or proper to 

ensure that responsible, affordable 

mortgage credit remains available to 

consumers in a manner consistent with 

the purposes of TILA section 129C, 

necessary and appropriate to effectuate 

the purposes of TILA sections 129C and 

129B, to prevent circumvention or 

evasion thereof, or to facilitate 

compliance with TILA sections 129C 

and 129B.127

The qualified mortgage requirements 

are critical to implementation of various 

parts of the Dodd-Frank Act. For 

example, several consumer protection 

requirements in title XIV of the DoddFrank Act treat qualified mortgages 

differently than non-qualified mortgages 

or key off elements of the qualified 

mortgage definition.128 In addition, the 

requirements concerning retention of 

risk by parties involved in the 

securitization process under title IX of 

the Dodd-Frank Act provide special 

treatment for ‘‘qualified residential 

mortgages,’’ which under section 15G of 

the Securities Exchange Act of 1934, as 

amended by section 941(b) of the DoddFrank Act, ‘‘shall be no broader than the 

term ‘qualified mortgage,’’’ as defined 

by TILA section 129C(b) and the 

Bureau’s implementing regulations. 15 

U.S.C. 780–11(e)(4).129

For present purposes, however, the 

definition of a qualified mortgage is 

perhaps most significant because of its 

implications for ability-to-repay claims. 

TILA section 129C(b)(1) provides that 

‘‘[a]ny creditor with respect to any 

residential mortgage loan, and any 

assignee of such loan subject to liability 

under this title, may presume that the 

loan has met the [ability-to-repay] 

requirements of subsection (a), if the 

loan is a qualified mortgage.’’ But the 

statute does not describe the strength of 

the presumption or what if anything 

could be used to rebut it. As discussed 

further below, there are legal and policy 

arguments that support interpreting the 

presumption as either rebuttable or 

conclusive. 

Determining the definition and scope 

of protection afforded to qualified 

mortgages is the area of this rulemaking 

which has engendered perhaps the 

greatest interest and comment. Although 

TILA section 129C(a)(1) requires only 

that a creditor make a ‘‘reasonable and 

good faith determination’’ of the 

consumer’s ‘‘reasonable ability to 

repay’’ a residential mortgage, 

considerable concern has arisen about 

the actual and perceived litigation and 

liability risk to creditors and assignees 

under the statute. Commenters tended 

to focus heavily on the choice between 

a presumption that is rebuttable and one 

that is conclusive as a means of 

mitigating that risk, although the criteria 

that define a qualified mortgage are also 

important because a creditor would 

have to prove status as a qualified 

mortgage in order to invoke any 

(rebuttable or conclusive) presumption 

of compliance. 

In assessing the potential impacts of 

the statute, it is important to note that 

regulations issued after the mortgage 

crisis but prior to the enactment of the 

Dodd-Frank Act have already imposed 

ability-to-repay requirements for highcost and higher-priced mortgages and 

created a presumption of compliance for 

such mortgages if the creditor satisfied 

certain underwriting and verification 

requirements. Specifically, under 

provisions of the Board’s 2008 HOEPA 

Final Rule that took effect in October 

2009, creditors are prohibited from 

extending high-cost or higher-priced 

mortgage loans without regard to the 

consumer’s ability to repay. See 

§ 1026.34(a)(4). The rules provide a 

presumption of compliance with those 

ability-to-repay requirements if the 

creditor follows certain optional 

procedures regarding underwriting the 

loan payment, assessing the debt-toincome (DTI) ratio or residual income, 

and limiting the features of the loan, in 

addition to following certain procedures 

mandated for all creditors. See 

§ 1026.34(a)(4)(iii) and (iv) and 

comment 34(a)(4)(iii)–1. However, the 

2008 HOEPA Final Rule makes clear 

that even if the creditor follows these 

criteria, the presumption of compliance 

is rebuttable. See comment 34(a)(4)(iii)– 

1. The consumer can still overcome that 

presumption by showing that, despite 

following the required and optional 

procedures, the creditor nonetheless 

disregarded the consumer’s ability to 

repay the loan. For example, the 

consumer could present evidence that 

although the creditor assessed the 

consumer’s debt-to-income ratio or 

residual income, the debt-to-income 

ratio was very high or the residual 

income was very low. This evidence 

may be sufficient to overcome the 

presumption of compliance and 

demonstrate that the creditor extended 

credit without regard to the consumer’s 

ability to repay the loan. 

The Dodd-Frank Act extends a 

requirement to assess consumers’ ability 

to repay to the full mortgage market, and 

establishes a presumption using a 

different set of criteria that focus more 

on product features than underwriting 

practices. Further, the statute 

establishes similar but slightly different 

remedies than are available under the 

existing requirements. Section 1416 of 

the Dodd-Frank Act amended TILA 

section 130(a) to provide that a 

consumer who brings a timely action 

against a creditor for a violation 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. 

The statute of limitations is three years 

from the date of the occurrence of the 

violation. Moreover, as amended by 

section 1413 of the Dodd-Frank Act, 

TILA section 130(k) provides that when 

a creditor, assignee, or other holder 

initiates a foreclosure action, a 

consumer may assert a violation of the 

ability-to-repay requirements as a matter 

of defense by recoupment or setoff. 

There is no time limit on the use of this 

defense, but the amount of recoupment 

or setoff is limited with respect to the 

special statutory damages to no more 

than three years of finance charges and 

fees. This limit on setoff is more 

restrictive than under the existing 

regulations, but also expressly applies to 

assignees. 


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In light of the statutory ambiguities, 

complex policy considerations, and 

concerns about litigation risk, the 

Board’s proposal mapped out two 

alternatives at the opposite ends of a 

spectrum for defining a qualified 

mortgage and the protection afforded to 

such mortgages. At one end, the Board’s 

Alternative 1 would have defined 

qualified mortgage only to include the 

mandated statutory elements listed in 

TILA section 129C(b)(2), most of which, 

as noted above, relate to product 

features and not to the underwriting 

decision or process itself. This 

alternative would have provided 

creditors with a safe harbor to establish 

compliance with the general repayment 

ability requirement in proposed 

§ 226.43(c)(1). As the Board recognized, 

this would provide strong incentives for 

creditors to make qualified mortgages in 

order to minimize litigation risk and 

compliance burden under general 

ability-to-repay requirements, but might 

prevent consumers from seeking redress 

for failure to assess their ability to 

repay. In Alternative 2, the Board 

proposed a definition of qualified 

mortgage which incorporated both the 

statutory product feature restrictions 

and additional underwriting elements 

drawn from the general ability-to-repay 

requirements, as well as seeking 

comment on whether to establish a 

specific debt-to-income requirement. 

Alternative 2 also specified that 

consumers could rebut the presumption 

of compliance by demonstrating that a 

creditor did not adequately determine 

the consumers’ ability to repay the loan. 

As the Board recognized, this would 

better ensure that creditors fully 

evaluate consumers’ ability to repay 

qualified mortgages and preserve 

consumers’ rights to seek redress. 

However, the Board expressed concern 

that Alternative 2 would provide little 

incentive to make qualified mortgages in 

the first place, given that the 

requirements may be challenging to 

satisfy and the strength of protection 

afforded would be minimal. 

Overview of Final Rule 

As noted above and discussed in 

greater detail in the section-by-section 

analysis below, the Dodd-Frank Act 

accords the Bureau significant 

discretion in defining the scope of, and 

legal protections afforded to, a qualified 

mortgage. In developing the rules for 

qualified mortgages, the Bureau has 

carefully considered numerous factors, 

including the Board’s proposal to 

implement TILA section 129C(b), 

comments and ex parte 

communications, current regulations 

and the current state of the mortgage 

market, and the implications of the 

qualified mortgage rule on other parts of 

the Dodd-Frank Act. The Bureau is 

acutely aware of the problematic 

practices that gave rise to the financial 

crisis and sees the ability-to-pay 

requirement as an important bulwark to 

prevent a recurrence of those practices 

by establishing a floor for safe 

underwriting. At the same time, the 

Bureau is equally aware of the anxiety 

in the mortgage market today 

concerning the continued slow pace of 

recovery and the confluence of multiple 

major regulatory and capital initiatives. 

Although every industry representative 

that has communicated with the Bureau 

acknowledges the importance of 

assessing a consumer’s ability to repay 

before extending a mortgage to the 

consumer—and no creditor claims to do 

otherwise—there is nonetheless a 

widespread fear about the litigation 

risks associated with the Dodd-Frank 

Act ability-to-repay requirements. Even 

community banks, deeply ingrained 

within their local communities and 

committed to a relationship lending 

model, have expressed to the Bureau 

their fear of litigation. In crafting the 

rules to implement the qualified 

mortgage provision, the Bureau has 

sought to balance creating new 

protections for consumers and new 

responsibilities for creditors with 

preserving consumers’ access to credit 

and allowing for appropriate lending 

and innovation. 

The Bureau recognizes both the need 

for certainty in the short term and the 

risk that actions taken by the Bureau in 

order to provide such certainty could, 

over time, defeat the prophylactic aims 

of the statute or impede recovery in 

various parts of the market. For 

instance, in defining the criteria for a 

qualified mortgage, the Bureau is called 

upon to identify a class of mortgages 

which can be presumed to be affordable. 

The boundaries must be clearly drawn 

so that consumers, creditors, and 

secondary market investors can all 

proceed with reasonable assurance as to 

whether a particular loan constitutes a 

qualified mortgage. Yet the Bureau 

believes that it is not possible by rule to 

define every instance in which a 

mortgage is affordable, and the Bureau 

fears that an overly broad definition of 

qualified mortgage could stigmatize 

non-qualified mortgages or leave 

insufficient liquidity for such loans. If 

the definition of qualified mortgage is so 

broad as to deter creditors from making 

non-qualified mortgages altogether, the 

regulation would curtail access to 

responsible credit for consumers and 

turn the Bureau’s definition of a 

qualified mortgage into a straitjacket 

setting the outer boundary of credit 

availability. The Bureau does not 

believe such a result would be 

consistent with congressional intent or 

in the best interests of consumers or the 

market. 

The Bureau is thus attuned to the 

problems of the past, the pressures that 

exist today, and the ways in which the 

market might return in the future. As a 

result, the Bureau has worked to 

establish guideposts in the final rule to 

make sure that the market’s return is 

healthy and sustainable for the longterm. Within that framework, the 

Bureau is defining qualified mortgages 

to strike a clear and calibrated balance 

as follows: 

First, the final rule provides 

meaningful protections for consumers 

while providing clarity to creditors 

about what they must do if they seek to 

invoke the qualified mortgage 

presumption of compliance. 

Accordingly, the qualified mortgage 

criteria include not only the minimum 

elements required by the statute— 

including prohibitions on risky loan 

features, a cap on points and fees, and 

special underwriting rules for 

adjustable-rate mortgages—but 

additional underwriting features to 

ensure that creditors do in fact evaluate 

individual consumers’ ability to repay 

the qualified mortgages. The qualified 

mortgage criteria thus incorporate key 

elements of the verification 

requirements under the ability-to-repay 

standard and strengthen the consumer 

protections established by the ability-torepay requirements. 

In particular, the final rule provides a 

bright-line threshold for the consumer’s 

total debt-to-income ratio, so that under 

a qualified mortgage, the consumer’s 

total monthly debt payments cannot 

exceed 43 percent of the consumer’s 

total monthly income. The bright-line 

threshold for debt-to-income serves 

multiple purposes. First, it protects 

consumer interests because debt-toincome ratios are a common and 

important tool for evaluating 

consumers’ ability to repay their loans 

over time, and the 43 percent threshold 

has been utilized by the Federal 

Housing Administration (FHA) for many 

years as its general boundary for 

defining affordability. Relative to other 

benchmarks that are used in the market 

(such as GSE guidelines) that have a 

benchmark of 36 percent, before 

consideration of compensating factors, 

this threshold is a relatively liberal one 

which allows ample room for 

consumers to qualify for an affordable 

mortgage. Second, it provides a wellestablished and well-understood rule 


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130APOR means ‘‘the average prime offer rate for 

a comparable transaction as of the date on which 

the interest rate for the transaction is set, as 

published by the Bureau.’’ TILA section 

129C(b)(2)(B). 

131As described further below, under a qualified 

mortgage with a rebuttable presumption, a 

consumer can rebut that presumption by showing 

that, in fact, at the time the loan was made the 

consumer did not have sufficient income or assets 

(other than the value of the dwelling that secures 

the transaction), after paying his or her mortgage 

and other debts, to be able to meet his or her other 

living expenses of which the creditor was aware. 

132The threshold for determining which 

treatment applies generally matches the threshold 

for ‘‘higher-priced mortgage loans’’ under existing 

Regulation Z, except that the rule does not provide 

a separate, higher threshold for jumbo loans. The 

Dodd-Frank Act itself codified the same thresholds 

for other purposes. See Dodd-Frank Act section 

1411, enacting TILA section 129C(6)(d)(ii). In 

adopting the ‘‘higher-priced mortgage loans’’ 

threshold in 2008, the Board explained that the aim 

was to ‘‘cover the subprime market and generally 

exclude the prime market.’’ 73 FR 44522, 44532 

(July 30, 2008). 

133See generally, id. at 44533. 

that will provide certainty for creditors 

and help to minimize the potential for 

disputes and costly litigation over 

whether a mortgage is a qualified 

mortgage. Third, it allows room for a 

vibrant market for non-qualified 

mortgages over time. The Bureau 

recognizes that there will be many 

instances in which individual 

consumers can afford an even higher 

debt-to-income ratio based on their 

particular circumstances, although the 

Bureau believes that such loans are 

better evaluated on an individual basis 

under the ability-to-repay criteria rather 

than with a blanket presumption. The 

Bureau also believes that there are a 

sufficient number of potential borrowers 

who can afford a mortgage that would 

bring their debt-to-income ratio above 

43 percent that responsible creditors 

will continue to make such loans as 

they become more comfortable with the 

new regulatory framework. To preserve 

access to credit during the transition 

period, the Bureau has also adopted 

temporary measures as discussed 

further below. 

The second major feature of the final 

rule is the provision of carefully 

calibrated presumptions of compliance 

afforded to different types of qualified 

mortgages. Following the approach 

developed by the Board in the existing 

ability-to-repay rules to distinguish 

between prime and subprime loans, the 

final rule distinguishes between two 

types of qualified mortgages based on 

the mortgage’s Annual Percentage Rate 

(APR) relative to the Average Prime 

Offer Rate (APOR).130 For loans that 

exceed APOR by a specified amount— 

loans denominated as ‘‘higher-priced 

mortgage loans’’—the final rule provides 

a rebuttable presumption. In other 

words, the creditor is presumed to have 

satisfied the ability-to-repay 

requirements, but a consumer may rebut 

that presumption under carefully 

defined circumstances.131 For all other 

loans, i.e., loans that are not ‘‘higherpriced,’’ the final rule provides a 

conclusive presumption that the 

creditor has satisfied the ability-to-repay 

requirements once the creditor proves 

that it has in fact made a qualified 

mortgage. In other words, the final rule 

provides a safe harbor from ability-torepay challenges for the least risky type 

of qualified mortgages, while providing 

room to rebut the presumption for 

qualified mortgages whose pricing is 

indicative of a higher level of risk.132

The Bureau believes that this calibration 

will further encourage creditors to 

extend credit responsibly and provide 

certainty that promotes access to credit. 

The Bureau believes that loans that 

fall within the rebuttable presumption 

category will be loans made to 

consumers who are more likely to be 

vulnerable 133 so that, even if the loans 

satisfy the criteria for a qualified 

mortgage, those consumers should be 

provided the opportunity to prove that, 

in an individual case, the creditor did 

not have a reasonable belief that the 

loan would be affordable for that 

consumer. Under a qualified mortgage 

with a safe harbor, most of the loans 

within this category will be the loans 

made to prime borrowers who pose 

fewer risks. Furthermore, considering 

the difference in historical performance 

levels between prime and subprime 

loans, the Bureau believes that it is 

reasonable to presume conclusively that 

a creditor who has verified a consumer’s 

debt and income, determined in 

accordance with specified standards 

that the consumer has a debt-to-income 

ratio that does not exceed 43 percent, 

and made a prime mortgage with the 

product features required for a qualified 

mortgage has satisfied its obligation to 

assess the consumer’s ability to repay. 

This approach will provide significant 

certainty to creditors operating in the 

prime market. The approach will also 

create lesser but still important 

protection for creditors in the subprime 

market who follow the qualified 

mortgage rules, while preserving 

consumer remedies and creating strong 

incentives for more responsible lending 

in the part of the market in which the 

most abuses occurred prior to the 

financial crisis. 

Third, the final rule provides a 

temporary special rule for certain 

qualified mortgages to provide a 

transition period to help ensure that 

sustainable credit will return in all parts 

of the market over time. The temporary 

special rule expands the definition of a 

qualified mortgage to include any loan 

that is eligible to be purchased, 

guaranteed, or insured by various 

Federal agencies or by the GSEs while 

they are operating under 

conservatorship. This temporary 

provision preserves access to credit in 

today’s market by permitting a loan that 

does not satisfy the 43 percent debt-toincome ratio threshold to nonetheless be 

a qualified mortgage based upon an 

underwriting determination made 

pursuant to guidelines created by the 

GSEs while in conservatorship or one of 

the Federal agencies. This temporary 

provision will sunset in a maximum of 

seven years. As with loans that satisfy 

the 43 percent debt-to-income ratio 

threshold, qualified mortgages under 

this temporary rule will receive either a 

rebuttable or conclusive presumption of 

compliance depending upon the pricing 

of the loan relative to APOR. The 

Bureau believes this provision will 

provide sufficient consumer protection 

while providing adequate time for 

creditors to adjust to the new 

requirements of the final rule as well as 

to changes in other regulatory, capital, 

and economic conditions. 

A detailed description of the qualified 

mortgage definition is set forth below. 

Section 1026.43(e)(1) provides the 

presumption of compliance provided to 

qualified mortgages. Section 

1026.43(e)(2) provides the criteria for a 

qualified mortgage under the general 

definition, including the restrictions on 

certain product features, verification 

requirements, and a specified debt-toincome ratio threshold. Section 

1026.43(e)(3) provides the limits on 

points and fees for qualified mortgages, 

including the limits for smaller loan 

amounts. Section 1026.43(e)(4) provides 

the temporary special rule for qualified 

mortgages. Lastly, § 1026.43(f) 

implements a statutory exemption 

permitting certain balloon-payment 

loans by creditors operating 

predominantly in rural or underserved 

areas to be qualified mortgages. 

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

Compliance 

As discussed above, the Dodd-Frank 

Act provides a presumption of 

compliance with the ability-to-repay 

requirements for qualified mortgages, 

but the statute is not clear as to whether 

that presumption is intended to be 

conclusive so as to create a safe harbor 

that cuts off litigation or a rebuttable 

presumption of compliance with the 

ability-to-repay requirements. The title 

of section 1412 refers to both a ‘‘safe 


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134 In prescribing such rules, the Bureau is to 

consider the potential impact of such rules on rural 

areas and other areas where home values are lower. 

This provision did not appear in earlier versions of 

title XIV of the Dodd-Frank Act, so there is no 

legislative history to explain the use of the word 

‘‘presumption’’ in this context. 

135See Mortgage Reform and Anti-Predatory 

Lending Act of 2007, H.R. 3915, 110th Cong. (2007). 136See H.R. 3915 § 203. Specifically, that prior 

version of title XIV would have created two types 

of qualified mortgages: (1) a ‘‘qualified mortgage,’’ 

which included loans with prime interest rates or 

government insured VA or FHA loans, and (2) a 

‘‘qualified safe harbor mortgage,’’ which met 

underwriting standards and loan term restrictions 

similar to the definition of qualified mortgage 

eventually codified at TILA section 129C(b)(2). 

137 Id. 

138See Mortgage Reform and Anti-Predatory 

Lending Act of 2009, H.R. 1728. 

139See H.R. 1728 § 203. 

140Mortgage Reform and Anti-Predatory Lending 

Act of 2009, H. Rept. No. 94, 111th Cong., at 48 

(2009). 

harbor and rebuttable presumption,’’ 

and as discussed below there are 

references to both safe harbors and 

presumptions in other provisions of the 

statute. As the Board’s proposal 

discussed, an analysis of the statutory 

construction and policy implications 

demonstrates that there are sound 

reasons for adopting either 

interpretation. See 76 FR 27390, 27452– 

55 (May 11, 2011). 

Several aspects of the statutory 

structure favor a safe harbor 

interpretation. First, TILA section 

129C(b)(1) states that a creditor or 

assignee may presume that a loan has 

‘‘met the requirements of subsection (a), 

if the loan is a qualified mortgage.’’ 

TILA section 129C(a) contains the 

general ability-to repay requirement, 

and also a set of specific underwriting 

criteria that must be considered by a 

creditor in assessing the consumer’s 

repayment ability. Rather than stating 

that the presumption of compliance 

applies only to TILA section 129C(a)(1) 

for the general ability-to-repay 

requirements, it appears Congress 

intended creditors who make qualified 

mortgages to be presumed to comply 

with both the ability-to-repay 

requirements and all of the specific 

underwriting criteria. Second, TILA 

section 129C(b)(2) does not define a 

qualified mortgage as requiring 

compliance with all of the underwriting 

criteria of the general ability-to-repay 

standard. Therefore, unlike the 

approach found in the 2008 HOEPA 

Final Rule, it appears that meeting the 

criteria for a qualified mortgage is an 

alternative way of establishing 

compliance with all of the ability-torepay requirements, which could 

suggest that meeting the qualified 

mortgage criteria conclusively satisfies 

these requirements. In other words, 

given that a qualified mortgage satisfies 

the ability-to-repay requirements, one 

could assume that meeting the qualified 

mortgage definition conclusively 

establishes compliance with those 

requirements. 

In addition, TILA section 

129C(b)(3)(B), which provides the 

Bureau authority to revise, add to, or 

subtract from the qualified mortgage 

criteria upon making certain findings, is 

titled ‘‘Revision of Safe Harbor Criteria.’’ 

Further, in section 1421 of the DoddFrank Act, Congress instructed the 

Government Accountability Office to 

issue a study on the effect ‘‘on the 

mortgage market for mortgages that are 

not within the safe harbor provided in 

the amendments made by this subtitle.’’ 

Certain policy considerations also 

favor a safe harbor. Treating a qualified 

mortgage as a safe harbor provides 

greater legal certainty for creditors and 

secondary market participants than a 

rebuttable presumption of compliance. 

Increased legal certainty may benefit 

consumers if as a result creditors are 

encouraged to make loans that satisfy 

the qualified mortgage criteria, as such 

loans cannot have certain risky features 

and have a cap on upfront costs. 

Furthermore, increased certainty may 

result in loans with a lower cost than 

would be charged in a world of legal 

uncertainty. Thus, a safe harbor may 

also allow creditors to provide 

consumers additional or more affordable 

access to credit by reducing their 

expected total litigation costs. 

On the other hand, there are also 

several aspects of the statutory structure 

that favor interpreting qualified 

mortgage as creating a rebuttable 

presumption of compliance. With 

respect to statutory construction, TILA 

section 129C(b)(1) states that a creditor 

or assignee ‘‘may presume’’ that a loan 

has met the repayment ability 

requirement if the loan is a qualified 

mortgage. As the Board’s proposal notes, 

this could suggest that originating a 

qualified mortgage provides a 

presumption of compliance with the 

repayment ability requirements, which 

the consumer can rebut with evidence 

that the creditor did not, in fact, make 

a good faith and reasonable 

determination of the consumer’s ability 

to repay the loan. Similarly, in the 

smaller loans provisions in TILA section 

129C(b)(2)(D), Congress instructed the 

Bureau to adjust the points and fees cap 

for qualified mortgages ‘‘to permit 

lenders that extend smaller loans to 

meet the requirements of the 

presumption of compliance’’ in TILA 

section 129C(b)(1).134 As noted above, 

the 2008 HOEPA Final Rule also 

contains a rebuttable presumption of 

compliance with respect to the abilityto-repay requirements that currently 

apply to high-cost and higher-priced 

mortgages. 

The legislative history of the DoddFrank Act may also favor interpreting 

‘‘qualified mortgage’’ as a rebuttable 

presumption of compliance. As 

described in a joint comment letter from 

several consumer advocacy groups, a 

prior version of Dodd-Frank Act title 

XIV from 2007 contemplated a dual 

track for liability in litigation: a 

rebuttable presumption for creditors and 

a safe harbor for secondary market 

participants.135 That draft legislation 

would have provided that creditors, 

assignees, and securitizers could 

presume compliance with the ability-torepay provision if the loan met certain 

requirements.136 However, the 

presumption of compliance would have 

been rebuttable only against the 

creditor, effectively creating a safe 

harbor for assignees and securitizers.137

The caption ‘‘safe harbor and rebuttable 

presumption’’ appears to have 

originated from the 2007 version of the 

legislation. The 2009 version of the 

legislation did not contain this dual 

track approach.138 Instead, the language 

simply stated that creditors, assignees, 

and securitizers ‘‘may presume’’ that 

qualified mortgages satisfied ability-torepay requirements, without specifying 

the nature of the presumption.139 The 

committee report of the 2009 bill 

described the provision as establishing 

a ‘‘limited safe harbor’’ for qualified 

mortgages, while also stating that ‘‘the 

presumption can be rebutted.’’ 140 This 

suggests that Congress contemplated 

that qualified mortgages would receive 

a rebuttable presumption of compliance 

with the ability-to-repay provisions, 

notwithstanding Congress’s use of the 

term ‘‘safe harbor’’ in the heading of 

section 129C(b) and elsewhere in the 

statute and legislative history. 

There are also policy reasons that 

favor interpreting ‘‘qualified mortgage’’ 

as a rebuttable presumption of 

compliance. The ultimate aim of the 

statutory provisions is to assure that, 

before making a mortgage loan, the 

creditor makes a determination of the 

consumer’s ability to repay. No matter 

how many elements the Bureau might 

add to the definition of qualified 

mortgage, it still would not be possible 

to define a class of loans which ensured 

that every consumer within the class 

could necessarily afford a particular 

loan. In light of this, interpreting the 

statute to provide a safe harbor that 

precludes a consumer from challenging 

the creditor’s determination of 

repayment ability seems to raise 


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tensions with the requirement to 

determine repayment ability. In 

contrast, interpreting a qualified 

mortgage as providing a rebuttable 

presumption of compliance would 

better ensure that creditors consider 

each consumer’s ability to repay the 

loan rather than only satisfying the 

qualified mortgage criteria. 

The Board’s Proposal 

As described above, in light of the 

statutory ambiguity and competing 

policy considerations, the Board 

proposed two alternative definitions for 

a qualified mortgage, which generally 

represent two ends of the spectrum of 

possible definitions. Alternative 1 

would have applied only the specific 

requirements listed for qualified 

mortgages in TILA section 129C(b)(2), 

and would have provided creditors with 

a safe harbor to establish compliance 

with the general repayment ability 

requirement in proposed § 226.43(c)(1). 

Alternative 2 would have required a 

qualified mortgage to satisfy the specific 

requirements listed in the TILA section 

129C(b)(2), as well as additional 

requirements taken from the general 

ability-to-repay standard in proposed 

§ 226.43(c)(2) through (7). Alternative 2 

would have provided a rebuttable 

presumption of compliance with the 

ability-to-repay requirements. Although 

the Board specifically proposed two 

alternative qualified mortgage 

definitions, it also sought comment on 

other approaches by soliciting comment 

on other alternative definitions. The 

Board also specifically solicited 

comment on what criteria should be 

included in the definition of a qualified 

mortgage to ensure that the definition 

provides an incentive to creditors to 

make qualified mortgages, while also 

ensuring that consumers have the ability 

to repay those loans. In particular, the 

Board sought comment on whether the 

qualified mortgage definition should 

require consideration of a consumer’s 

debt-to-income ratio or residual income, 

including whether and how to include 

a quantitative standard for the debt-toincome ratio or residual income for the 

qualified mortgage definition. 

Comments 

Generally, numerous industry and 

other commenters, including some 

members of Congress, supported a legal 

safe harbor while consumer groups and 

other commenters, including an 

association of State bank regulators, 

supported a rebuttable presumption. 

However, as described below, 

commenters did not necessarily support 

the two alternative proposals 

specifically as drafted by the Board. For 

instance, a significant number of 

industry commenters advocated 

incorporating the general ability-torepay requirements into the qualified 

mortgage definition, while providing a 

safe harbor for those loans that met the 

enhanced standards. And a coalition of 

industry and consumer advocates 

presented a proposal to the Bureau that 

would have provided a tiered approach 

to defining a qualified mortgage. Under 

the first tier, if the consumer’s back-end 

debt-to-income (total debt-to-income) 

ratio is 43 percent or less, the loan 

would be a qualified mortgage, and no 

other tests would be required. Under the 

second tier, if the consumer’s total debtto-income ratio is more than 43 percent, 

the creditor would apply a series of tests 

related to the consumer’s front-end 

debt-to-income ratio (housing debt-toincome), stability of income and past 

payment history, availability of reserves, 

and residual income to determine if a 

loan is a qualified mortgage. 

Comments in favor of safe harbor. 

Industry commenters strongly 

supported a legal safe harbor from 

liability for qualified mortgages. These 

commenters believe that a broad safe 

harbor with clear, bright lines would 

provide certainty and clarity for 

creditors and assignees. Generally, 

industry commenters argued that a safe 

harbor is needed in order: (i) To ensure 

creditors make loans, (ii) to ensure the 

availability of and access to affordable 

credit without increasing the costs of 

borrowing; (iii) to promote certainty and 

saleability in the secondary market, and 

(iv) to contain litigation risk and costs 

for creditors and assignees. 

Generally, although acknowledging 

ambiguities in the statutory language, 

industry commenters argued that the 

statute’s intent and legislative history 

indicate that qualified mortgages are 

meant to be a legal safe harbor, in lieu 

of the ability-to-repay standards. 

Industry commenters argued that a safe 

harbor would best ensure safe, welldocumented, and properly underwritten 

loans without limiting the availability of 

credit or increasing the costs of credit to 

consumers. Many industry commenters 

asserted that a legal safe harbor from 

liability would ensure access to 

affordable credit. Other industry 

commenters argued that a safe harbor 

ultimately benefits consumers with 

increased access to credit, reduced loan 

fees and interest rates, and less-risky 

loan features. In contrast, various 

industry commenters contended that a 

rebuttable presumption would not 

provide enough certainty for creditors 

and the secondary market. Commenters 

argued that if creditors cannot easily 

ascertain whether a loan satisfies the 

ability-to-repay requirements, creditors 

will either not make loans or will pass 

the cost of uncertain legal risk to 

consumers, which in turn would 

increase the cost of borrowing. 

Numerous industry commenters 

argued for a legal safe harbor because of 

the liabilities of an ability-to-repay 

violation and the costs associated with 

ability-to-repay litigation. Generally, 

commenters argued that a rebuttable 

presumption for qualified mortgages 

would invite more extensive litigation 

than necessary that will result in greater 

costs being borne by all consumers. 

Commenters emphasized the relatively 

severe penalties for ability-to-repay 

violations under the Dodd-Frank Act, 

including enhanced damages, an 

extended three-year statute of 

limitations, a recoupment or set-off 

provision as a defense to foreclosure, 

and new enforcement authorities by 

State attorneys general. In addition, 

assignee liabilities are amplified 

because of the recoupment and set-off 

provision in TILA section 130(k). 

Commenters asserted that the increased 

costs associated with litigation could 

make compliance too costly for smaller 

creditors, which would reduce 

competition and credit availability from 

the market. In particular, community 

bank trade association commenters 

argued that the Bureau should adopt a 

safe harbor for qualified mortgage loans 

and include bright-line requirements to 

protect community banks from litigation 

and ease the compliance burden. 

Ultimately, community bank trade 

association commenters stated that few, 

if any, banks would risk providing a 

mortgage that only has a rebuttable 

presumption attached. 

Industry commenters generally 

believed that a rebuttable presumption 

would increase the incidence of 

litigation because any consumer who 

defaults on a loan would be likely to sue 

for recoupment in foreclosure. 

Commenters were also concerned about 

frivolous challenges in court as well as 

heightened scrutiny by regulators. In 

particular, a credit union association 

commenter supported a safe harbor 

because of concerns that a rebuttable 

presumption would cause credit unions 

to be faced with significant amounts of 

frivolous foreclosure defense litigation 

in the future. In addition to increased 

incidence of litigation, industry 

commenters and other interested parties 

argued that the estimated costs of 

litigation under a rebuttable 

presumption would be overly 

burdensome for creditors and assignees. 

Some commenters and interested parties 

presented estimates of the litigation 

costs associated with claims alleging a 


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violation of the ability-to-repay 

requirements. For example, one 

industry trade association commenter 

estimated that the attorney’s fees for a 

claim involving a qualified mortgage 

under a safe harbor would cost $30,000, 

compared to $50,000 for a claim under 

a rebuttable presumption. That 

commenter provided a separate 

estimation from a law firm that the 

attorneys’ fees to the creditor will be 

approximately $26,000 in cases where 

the matter is disposed of on a motion to 

dismiss, whereas the fees for the cost of 

a full trial could reach $155,000. That 

commenter asserted that safe harbor 

claims are more likely to be dismissed 

on a motion to dismiss than the 

rebuttable presumption. 

An industry commenter and other 

interested parties argued that the 

estimated costs to creditors associated 

with litigation and penalties for an 

ability-to-repay violation could be 

substantial and provided illustrations of 

costs under the proposal, noting 

potential cost estimates of the possible 

statutory damages and attorney’s fees. 

For example, the total estimated costs 

and damages ranged between 

approximately $70,000 and $110,000 

depending on various assumptions, 

such as the interest rate on a loan or 

whether the presumption of compliance 

is conclusive or rebuttable. 

Industry commenters also generally 

argued that a safe harbor would promote 

access to credit because creditors would 

be more willing to extend credit where 

they receive protections under the 

statutory scheme. One industry trade 

association commenter cited the 2008 

HOEPA Final Rule, which provided a 

rebuttable presumption of compliance 

with the requirement to consider a 

consumer’s repayment ability upon 

meeting certain criteria, as causing a 

significant drop in higher-priced 

mortgage loan originations, and 

suggested that access to general 

mortgage credit would be similarly 

restricted if the final rule adopts a 

rebuttable presumption for the market 

as a whole. A large bank commenter 

similarly noted the lack of lending in 

the higher-priced mortgage space since 

the 2008 HOEPA Final Rule took effect. 

In addition to the liquidity constraints 

for non-qualified mortgages, 

commenters argued that the liability and 

damages from a potential ability-torepay TILA violation would be a 

disincentive for a majority of creditors 

to make non-qualified mortgage loans. 

Further, some commenters suggested 

that creditors could face reputational 

risk from making non-qualified 

mortgage loans because consumers 

would view them as ‘‘inferior’’ to 

qualified mortgages. Other commenters 

argued that reducing the protections 

afforded to qualified mortgages could 

cause creditors to act more 

conservatively and restrict credit or 

result in the denial of credit at a higher 

rate and increase the cost of credit. 

Many commenters argued that the most 

serious effects and impacts on the 

availability and cost of credit would be 

for minority, low- to moderate-income, 

and first-time borrowers. Therefore, 

industry commenters believed that a 

bright-line safe harbor would provide 

the strongest incentive for creditors to 

provide sustainable mortgage credit to 

the widest array of qualified consumers. 

Furthermore, one industry trade 

association commenter argued that not 

providing strong incentives for creditors 

would diminish the possibility of 

recovery of the housing market and the 

nation’s economy. 

Industry commenters also expressed 

concerns regarding secondary market 

considerations and assignee liability. 

Commenters urged the Bureau to 

consider commercial litigation costs 

associated with the contractually 

required repurchase (‘‘put-back’’) of 

loans sold on the secondary market 

where there is litigation over those 

loans, as well as the risk of extended 

foreclosure timelines because of ongoing 

ability-to-repay litigation. Industry 

commenters asserted that a safe harbor 

is critical to promote saleability of loans 

in the secondary market. In particular, 

they stated that clarity and certainty 

provided by a safe harbor would 

promote efficiencies in the secondary 

market because investors in securitized 

residential mortgage loans (mortgage 

backed securities, or MBS) could be 

more certain that they are not 

purchasing compliance risk along with 

their investments. Commenters asserted 

that without a safe harbor, the resulting 

uncertainty would eliminate the 

efficiencies provided by secondary sale 

or securitization of loans. By extension, 

commenters claimed that the cost of 

borrowing for consumers would 

ultimately increase. Large bank 

commenters stated that although they 

might originate non-qualified mortgage 

loans, the number would be relatively 

small and held in portfolio because they 

believe it is unlikely that non-qualified 

mortgage loans will be saleable in the 

secondary market. Generally, industry 

commenters asserted that creditors, 

regardless of size, would be unwilling to 

risk exposure outside the qualified 

mortgage space. One large bank 

commenter stated that the 2008 HOEPA 

Final Rule did not create a defense to 

foreclosure against assignees for the life 

of the loan, as does the Dodd-Frank 

Act’s ability-to-repay provisions. 

Accordingly, industry commenters 

strongly supported broad coverage of 

qualified mortgages, as noted above. 

Commenters asserted that the 

secondary market will demand a ‘‘safe 

harbor’’ for quality assurance and risk 

avoidance. If the regulatory framework 

does not provide a safe harbor, 

commenters asserted that investors 

would require creditors to agree to 

additional, strict representations and 

warranties when assigning loans. 

Contracts between loan originators and 

secondary market purchasers often 

require originators to repurchase loans 

should a loan perform poorly, and these 

commenters expect that future contracts 

will include provisions related to the 

ability-to-repay rule. Commenters assert 

that the risks and costs associated with 

additional potential put-backs to the 

creditor would increase liability and 

risk to creditors, which would 

ultimately increase the cost of credit to 

consumers. Furthermore, commenters 

contended that if the rule is too onerous 

in its application to the secondary 

market, then the secondary market 

participants may purchase fewer loans 

or increase pricing to account for the 

additional risk, such as is now the case 

for high-cost mortgages. 

Commenters noted that the risks 

associated with assignee liability are 

heightened by any vagueness in 

standards in the rule. One secondary 

market purchaser commenter argued 

that a rebuttable presumption would 

present challenges because purchasers 

(or assignees) are not part of the 

origination process. It is not feasible for 

purchasers to evaluate all of the 

considerations that went into an 

underwriting decision, so they must rely 

on the creditor’s representations that the 

loan was originated in compliance with 

applicable laws and the purchaser’s 

requirements. However, assignees may 

have to defend a creditor’s underwriting 

decision at any time during the life of 

the loan because there is no statute of 

limitations on raising the failure to 

make an ability-to-repay determination 

as a defense to foreclosure. The 

commenters argued that defending these 

cases would be difficult and costly, and 

that such burdens would be reduced by 

safe harbor protections. 

Comments in favor of rebuttable 

presumption of compliance. Consumer 

group commenters generally urged the 

Bureau to adopt a rebuttable 

presumption for qualified mortgages. 

Commenters argued that Congress 

intended a rebuttable presumption, not 

a safe harbor. In particular, commenters 

contended that the Dodd-Frank Act’s 


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141For the reasons discussed above in the sectionby-section analysis of § 1026.43(b)(4), the Bureau 

does not adopt a separate threshold for jumbo loans 

in the higher-priced covered transaction definition 

for purposes of § 1026.43(e)(1). 

legislative history and statutory text 

strongly support a rebuttable 

presumption. Commenters noted that 

the statute is designed to strike a fair 

balance between market incentives and 

market discipline, as well as a balance 

between consumers’ legal rights and 

excessive exposure to litigation risk for 

creditors. Commenters asserted that the 

purpose of the qualified mortgage 

designation is to foster sustainable 

lending products and practices built 

upon sound product design and sensible 

underwriting. To that end, a rebuttable 

presumption would accomplish the goal 

of encouraging creditors to originate 

loans that meet the qualified mortgage 

definition while assuring consumers of 

significantly greater protection from 

abusive or ineffective underwriting than 

if a safe harbor were adopted. Consumer 

group commenters contended that 

qualified mortgages can earn and 

deserve the trust of both consumers and 

investors only if they carry the 

assurance that they are soundly 

designed and properly underwritten. 

Many consumer group commenters 

asserted that a rebuttable presumption 

would provide better protections for 

consumers as well as improving 

safeguards against widespread risky 

lending while helping ensure that there 

would be no shortcuts on common 

sense underwriting. They argued that a 

legal safe harbor could invite abusive 

lending because consumers will have no 

legal recourse. Several commenters also 

asserted that no qualified mortgage 

definition could cover all contingencies 

in which such abuses could occur. 

Some commenters argued that a legal 

safe harbor would leave consumers 

unprotected against abuses, such as 

those associated with simultaneous 

liens or from inadequate consideration 

of employment and income. An 

association of State bank regulators 

favored a rebuttable presumption 

because, although a rebuttable 

presumption provides less legal 

protection than a safe harbor, a 

rebuttable presumption encourages 

institutions to consider repayment 

factors that are part of a sound 

underwriting process. That commenter 

contended that a creditor should not be 

granted blanket protection from a 

foreclosure defense of an ability-torepay violation if the creditor failed to 

consider and verify such crucial 

information as a consumer’s 

employment status and credit history, 

for example. On this point, the 

rebuttable presumption proposed by the 

Board would require creditors to make 

individualized determinations that the 

consumer has the ability to repay the 

loan based on all of the underwriting 

factors listed in the general ability-torepay standard. 

Consumer group commenters 

observed that a rebuttable presumption 

would better ensure that creditors 

actually consider a consumer’s ability to 

repay the loan. Consumer group 

commenters also asserted that the goals 

of safe, sound, sustainable mortgage 

lending and a balanced system of 

accountability are best served by a 

rebuttable presumption because 

consumers should be able to put 

evidence before a court that the 

creditor’s consideration and verification 

of the consumer’s ability to repay the 

loan was unreasonable or in bad faith. 

To that end, a rebuttable presumption 

would allow the consumer to assert that, 

despite complying with the criteria for 

a qualified mortgage and the ability-torepay standard, the creditor did not 

make a reasonable and good faith 

determination of the consumer’s ability 

to repay the loan. Without this 

accountability, commenters argued that 

the Dodd-Frank Act’s effectiveness 

would be undermined. 

Ultimately, consumer group 

commenters believed that a rebuttable 

presumption would not exacerbate 

current issues with credit access and 

availability, but would instead allow 

room for honest, efficient competition 

and affordable credit. Consumer group 

commenters generally contended that 

the fear of litigation and estimated costs 

and risks associated with ability-torepay violations are overstated and 

based on misunderstanding of the extent 

of exposure to TILA liability. Consumer 

group commenters and some ex parte 

communications asserted that the 

potential incidence of litigation is 

relatively small, and therefore liability 

cost and risk are minimal for any given 

mortgage creditor. For example, 

consumer group commenters asserted 

that there are significant practical 

limitations to consumers bringing an 

ability-to-repay claim, suggesting that 

few distressed homeowners would be 

able to obtain legal representation often 

necessary to mount a successful rebuttal 

in litigation. Consumer groups provided 

percentages of borrowers in foreclosure 

who are represented by lawyers, noting 

the difficulty of bringing a TILA 

violation claim, and addressed estimates 

of litigation costs, such as attorneys’ 

fees. Consumer groups provided 

estimates of the number of cases in 

foreclosure and the percentage of cases 

that involve TILA claims, such as a 

claim of rescission. 

Furthermore, consumer group 

commenters argued that the three-year 

cap on enhanced damages (equal to the 

sum if all finance charges and fees paid 

by the consumer within three years of 

consummation) for violation of the 

ability-to-repay requirements limits 

litigation risk significantly. Commenters 

contended that, as a general rule, a court 

is more likely to find that the ability-torepay determination at consummation 

was not reasonable and in good faith the 

earlier in the process a default occurs, 

and at that point the amount of interest 

paid by a consumer (a component of 

enhanced damages) will be relatively 

small. Commenters argued that the 

longer it takes a consumer to default, the 

harder the burden it will be for the 

consumer to show that the default was 

reasonably predictable at consummation 

and was caused by improper 

underwriting rather than a subsequent 

income or expense shock; moreover, 

even if the consumer can surmount that 

burden, the amount of damages is still 

capped at three years’ worth of paid 

interest. In addition, consumer group 

commenters contended that the 

penalties to which creditors could be 

subject on a finding of failure to meet 

the ability-to-repay requirements would 

not be so injurious or even so likely to 

be applied in all but the most egregious 

situations as to impose any meaningful 

risk upon creditors. 

Moreover, many consumer group 

commenters observed that creditors that 

comply with the rules and ensure that 

their loan originators are using sound, 

well documented and verified 

underwriting will be adequately 

protected by a rebuttable presumption. 

Final Rule 

As described above, the presumption 

afforded to qualified mortgages in the 

final rule balances consumers’ ability to 

invoke the protections of the DoddFrank Act scheme with the need to 

create sufficient certainty to promote 

access to credit in all parts of the 

market. Specifically, the final rule 

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

meet the qualified mortgage criteria and 

pose the least risk, while providing a 

rebuttable presumption for ‘‘higherpriced’’ mortgage loans, defined as 

having an APR that exceeds APOR by 

1.5 percentage points for first liens and 

3.5 percentage points for second 

liens.141 The final rule also specifically 

defines the grounds on which the 

presumption accorded to more 

expensive qualified mortgages can be 

rebutted. In issuing this final rule, the 


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142For example, data from the MBA delinquency 

survey show that serious delinquency rates for 

conventional prime mortgages averaged roughly 2 

percent from 1998 through 2011 and peaked at 7 

percent following the recent housing collapse. In 

contrast, the serious delinquency rates averaged 13 

percent over the same period. In late 2009, it 

peaked at over 30 percent.’’ Mortgage Bankers 

Association, National Delinquency Survey. For a 

discussion of the historical performance of 

subprime loans, see 2008 HOEPA Final Rule, 73 FR 

44522, 44524–26 (July 30, 2008). 

143See id. 

Bureau has drawn on the experiences 

from the current ability-to-repay 

provisions that apply to higher-priced 

mortgages, described above. Based on 

the difference in historical performance 

levels between prime and subprime 

loans, the Bureau believes that this 

approach will provide significant 

certainty to creditors while preserving 

consumer remedies and creating strong 

incentives for more responsible lending 

in the part of the market in which the 

most abuses occurred prior to the 

financial crisis. 

In issuing this final rule, the Bureau 

carefully considered the comments 

received and the interpretive and policy 

considerations for providing qualified 

mortgages either a safe harbor or 

rebuttable presumption of compliance 

with the repayment ability 

requirements. For the reasons set forth 

by the Board and discussed above, the 

Bureau finds that the statutory language 

is ambiguous and does not mandate a 

particular approach. In adopting the 

final rule, the Bureau accordingly 

focused on which interpretation would 

best promote the various policy goals of 

the statute, taking into account the 

Bureau’s authority, among other things, 

to make adjustments and exceptions 

necessary or proper to effectuate the 

purposes of TILA, as amended by the 

Dodd-Frank Act. 

Discouraging unsafe underwriting. As 

described in part II above, the ability-torepay provisions of the Dodd-Frank Act 

were codified in response to lax lending 

terms and practices in the mid-2000’s, 

which led to increased foreclosures, 

particularly for subprime borrowers. 

The statutory underwriting 

requirements for a qualified mortgage— 

for example, the requirement that loans 

be underwritten on a fully amortized 

basis using the maximum interest rate 

during the first five years and not a 

teaser rate, and the requirement to 

consider and verify a consumer’s 

income or assets—will help prevent a 

return to such lax lending. So, too, will 

the requirement that a consumer’s debtto-income ratio (including mortgagerelated obligations and obligations on 

simultaneous second liens) not exceed 

43 percent, as discussed further below. 

Notwithstanding these requirements, 

however, the Bureau recognizes that it 

is not possible to define by a bright-line 

rule a class of mortgages as to which it 

will always be the case that each 

individual consumer has the ability to 

repay his or her loan. That is especially 

true with respect to subprime loans. In 

many cases, the pricing of a subprime 

loan is the result of loan level price 

adjustments established by the 

secondary market and calibrated to 

default risk. Furthermore, the subprime 

segment of the market is comprised of 

borrowers who tend to be less 

sophisticated and who have fewer 

options available to them, and thus are 

more susceptible to being victimized by 

predatory lending practices. The 

historical performance of subprime 

loans bears all this out.142 The Bureau 

concludes, therefore, that for subprime 

loans there is reason to impose 

heightened standards to protect 

consumers and otherwise promote the 

policies of the statute. Accordingly, the 

Bureau believes that it is important to 

afford consumers the opportunity to 

rebut the presumption of compliance 

that applies to qualified mortgages with 

regard to higher-priced mortgages by 

showing that, in fact, the creditor did 

not have a good faith and reasonable 

belief in the consumer’s reasonable 

ability to repay the loan at the time the 

loan was made. 

These same considerations lead to the 

opposite result with respect to prime 

loans which satisfy the requirements for 

a qualified mortgage. The fact that a 

consumer receives a prime rate is itself 

indicative of the absence of any indicia 

that would warrant a loan level price 

adjustment, and thus is suggestive of the 

consumer’s ability to repay. Historically, 

prime rate loans have performed 

significantly better than subprime rate 

loans and the prime segment of the 

market has been subject to fewer 

abuses.143 Moreover, requiring creditors 

to prove that they have satisfied the 

qualified mortgage requirements in 

order to invoke the presumption of 

compliance will itself ensure that the 

loans in question do not contain certain 

risky features and are underwritten with 

careful attention to consumers’ debt-toincome ratios. Accordingly, the Bureau 

believes that where a loan is not a 

higher-priced covered transaction and 

meets both the product and 

underwriting requirements for a 

qualified mortgage, there are sufficient 

grounds for concluding that the creditor 

had a reasonable and good faith belief 

in the consumer’s ability to repay to 

warrant a safe harbor. 

This approach carefully balances the 

likelihood of consumers needing redress 

with the potential benefits to both 

consumers and industry of reducing 

uncertainty concerning the new regime. 

To the extent that the rule reduces 

litigation risk concerns for prime 

qualified mortgages, consumers in the 

prime market may benefit from 

enhanced competition (although, as 

discussed below, the Bureau believes 

litigation costs will be small and 

manageable for almost all creditors). In 

particular, the Bureau believes that 

larger creditors may expand 

correspondent lending relationships 

with smaller banks with respect to 

prime qualified mortgages. Larger 

creditors may also relax currently 

restrictive credit overlays (creditorcreated underwriting requirements that 

go beyond GSE or agency guidelines), 

thereby increasing access to credit. 

Scope of rebuttable presumption. In 

light of the heightened protections for 

subprime loans, the final rule also 

carefully defines the grounds on which 

the presumption that applies to higherpriced qualified mortgages can be 

rebutted. The Bureau believes that this 

feature is critical to ensuring that 

creditors have sufficient incentives to 

provide higher-priced qualified 

mortgages to consumers. Given the 

historical record of abuses in the 

subprime market, the Bureau believes it 

is particularly important to ensure that 

consumers are able to access qualified 

mortgages in light of their product 

feature restrictions and other 

protections. 

Specifically, the final rule defines the 

standard by which a consumer may 

rebut the presumption of compliance 

afforded to higher-priced qualified 

mortgages, and provides an example of 

how a consumer may rebut the 

presumption. As described below, the 

final rule provides that consumers may 

rebut the presumption with regard to a 

higher-priced covered transaction by 

showing that, at the time the loan was 

originated, the consumer’s income and 

debt obligations left insufficient residual 

income or assets to meet living 

expenses. The analysis would consider 

the consumer’s monthly payments on 

the loan, mortgage-related obligations, 

and any simultaneous loans of which 

the creditor was aware, as well as any 

recurring, material living expenses of 

which the creditor was aware. 

The Bureau believes the rebuttal 

standard in the final rule appropriately 

balances the consumer protection and 

access to credit considerations 

described above. This standard is 

consistent with the standard in the 2008 

HOEPA Final Rule, and is specified as 

the exclusive means of rebutting the 

presumption. Commentary to the 


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existing rule provides as an example of 

how its presumption may be rebutted 

that the consumer could show ‘‘a very 

high debt-to-income ratio and a very 

limited residual income.’’ Under the 

definition of qualified mortgage that the 

Bureau is adopting, however, the 

creditor generally is not entitled to a 

presumption if the debt-to-income ratio 

is ‘‘very high.’’ As a result, the Bureau 

is focusing the standard for rebutting the 

presumption in the final rule on 

whether, despite meeting a debt-toincome test, the consumer nonetheless 

had insufficient residual income to 

cover the consumer’s living expenses. 

The Bureau believes this standard is 

sufficiently broad to provide consumers 

a reasonable opportunity to demonstrate 

that the creditor did not have a good 

faith and reasonable belief in the 

consumer’s repayment ability, despite 

meeting the prerequisites of a qualified 

mortgage. At the same time, the Bureau 

believes the rebuttal standard in the 

final rule is sufficiently clear to provide 

certainty to creditors, investors, and 

regulators about the standards by which 

the presumption can successfully be 

challenged in cases where creditors 

have correctly followed the qualified 

mortgage requirements. 

Several commenters raised concerns 

about the use of oral evidence to 

impeach the information contained in 

the loan file. For example, a consumer 

may seek to show that a loan does not 

meet the requirements of a qualified 

mortgage by relying on information 

provided orally to the creditor or loan 

originator to establish that the debt-toincome ratio was miscalculated. 

Alternatively, a consumer may seek to 

show that the creditor should have 

known, based upon facts disclosed 

orally to the creditor or loan originator, 

that the consumer had insufficient 

residual income to be able to afford the 

mortgage. The final rule does not 

preclude the use of such oral evidence 

in ability-to-repay cases. The Bureau 

believes that courts will determine the 

weight to be given to such evidence on 

a case-by-case basis. To exclude such 

evidence across the board would invite 

abuses in which consumers could be 

misled or coerced by an unscrupulous 

loan originator into keeping certain facts 

out of the written record. 

Litigation risks and access to credit. In 

light of the continuing and widespread 

concern about litigation risk under the 

Dodd-Frank Act regime, the Bureau, in 

the course of developing the framework 

described above, carefully analyzed the 

impacts of potential litigation on nonqualified mortgages, any qualified 

mortgages with a rebuttable 

presumption, and any qualified 

mortgages with a safe harbor. The 

Bureau also considered secondary 

market dynamics, including the 

potential impacts on creditors from 

loans that the secondary market ‘‘puts 

back’’ on the originators because of 

ability-to-repay litigation. The Bureau’s 

analysis is described in detail in the 

section 1022(b)(2) analysis under part 

VII; the results of that analysis helped 

to shape the calibrated approach that 

the Bureau is adopting in the final rule 

and suggest that the mortgage market 

will be able to absorb litigation risks 

under the rule without jeopardizing 

access to credit. 

Specifically, as discussed in the 

section 1022(b)(2) analysis under part 

VII, the Bureau believes that even 

without the benefit of any presumption 

of compliance, the actual increase in 

costs from the litigation risk associated 

with ability-to-pay requirements would 

be quite modest. This is a function of 

the relatively small number of potential 

claims, the relatively small size of those 

claims, and the relatively low likelihood 

of claims being filed and successfully 

prosecuted. The Bureau notes that 

litigation likely would arise only when 

a consumer in fact was unable to repay 

the loan (i.e. was seriously delinquent or 

had defaulted), and even then only if 

the consumer elects to assert a claim 

and is able to secure a lawyer to provide 

representation; the consumer can 

prevail only upon proving that the 

creditor lacked a reasonable and good 

faith belief in the consumer’s ability to 

repay at consummation or failed to 

consider the statutory factors in arriving 

at that belief. 

The rebuttable presumption of 

compliance being afforded to qualified 

mortgages that are higher-priced reduces 

the litigation risk, and hence the 

potential transaction costs, still further. 

As described above, the Bureau has 

crafted the presumption of compliance 

being afforded to subprime loans so that 

it is not materially different than the 

presumption that exists today under the 

2008 HOEPA Final Rule. Indeed, the 

Bureau is defining with more 

particularity the requirements for 

rebutting this presumption. No evidence 

has been presented to the Bureau to 

suggest that the presumption under the 

2008 HOEPA Final Rule has led to 

significant litigation or to any 

distortions in the market for higherpriced mortgages. As noted above, 

commenters noted the lack of lending in 

the higher-priced mortgage space since 

the 2008 HOEPA Final Rule took effect, 

but the Bureau is unaware of evidence 

suggesting the low lending levels are the 

result of the Board’s rule, as compared 

to the general state of the economy, 

uncertainty over multiple regulatory 

and capital initiatives, and other factors. 

Relative to the Dodd-Frank Act, the 

Bureau notes that the existing regime 

already provides for attorneys’ fees and 

the same remedies against creditors in 

affirmative cases, and actually provides 

for greater remedies against creditors in 

foreclosure defense situations. 

Nevertheless, the incidence of claims 

under the existing ability-to-repay rules 

for high-cost and higher-priced loans 

and analogous State laws is relatively 

low. The Bureau’s analysis shows that 

cost estimates remain modest for both 

loans that are not qualified mortgages 

and loans that are qualified mortgages 

with a rebuttable presumption of 

compliance, and even more so for 

qualified mortgages with a safe harbor. 

The Bureau recognizes, of course, that 

under the Dodd-Frank Act ability-torepay provisions, a consumer can assert 

a claim against an assignee as a ‘‘defense 

by recoupment or set off’’ in a 

foreclosure action. There is no time 

limit on the use of this defense, but the 

consumer cannot recover as special 

statutory damages more than three years 

of finance charges and fees. To the 

extent this leads to increased litigation 

potential with respect to qualified 

mortgages as to which the presumption 

of compliance is rebuttable, this may 

cause creditors to take greater care when 

underwriting these riskier products to 

avoid potential put-back risk from 

investors. The Bureau believes that this 

is precisely what Congress intended—to 

create incentives for creditors to engage 

in sound underwriting and for 

secondary market investors to monitor 

the quality of the loans they buy—and 

that these incentives are particularly 

warranted with respect to the subprime 

market. 

At the same time, the Bureau does not 

believe that the potential assignee 

liability with respect to higher-priced 

qualified mortgages will preclude such 

loans from being sold on the secondary 

market. Specifically, in analyzing 

impacts on the secondary market the 

Bureau notes that investors are 

purchasing higher-priced mortgage 

loans that are subject to the existing 

ability-to-repay requirements and 

presumption of compliance and that the 

GSEs have already incorporated into 

their contracts with creditors a 

representation and warranty designed to 

provide investor protection in the event 

of an ability-to-repay violation. The 

Bureau agrees with industry and 

secondary market participant 

commenters that investors will likely 

require creditors to agree to similar 

representations and warranties when 

assigning or selling loans under the new 


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Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 6513 

rule because secondary market 

participants will not want to be held 

accountable for ability-to-repay 

compliance which investors will view 

as the responsibility of the creditor. For 

prime loans, this may represent an 

incremental risk of put-back to 

creditors, given that such loans are not 

subject to the current regime, but those 

loans are being provided a safe harbor 

if they are qualified mortgages. For 

subprime (higher risk) loans it is not 

clear that there is any incremental risk 

beyond that which exists today under 

the Board’s rule. There are also some 

administrative costs associated with 

such ‘‘put-backs’’ (e.g., costs associated 

with the process of putting back loans 

from the issuer or insurer or servicer on 

behalf of the securitization trust to the 

creditor as a result of the ability-torepay claims), but those costs are 

unlikely to be material for qualified 

mortgages subject to the rebuttable 

presumption and will not affect either 

the pricing of the loans or the 

availability of a secondary market for 

these loans. 

In sum, the Bureau has crafted the 

calibrated presumptions to ensure that 

these litigation and secondary market 

impacts do not jeopardize access to 

credit. With regard to subprime loans, 

there is some possibility that creditors 

who are less sophisticated or less able 

to bear any litigation risk may elect to 

refrain from engaging in subprime 

lending, but as discussed below, the 

Bureau believes that there are sufficient 

creditors with the capabilities of making 

responsible subprime loans so as to 

avoid significant adverse impact on 

credit availability in that market. 

Specific provisions. For the reasons 

discussed above, in § 1026.43(e)(1), the 

Bureau is providing a safe harbor and 

rebuttable presumption with the abilityto-repay requirements for loans that 

meet the definition of a qualified 

mortgage. As explained in comment 

43(e)(1)–1, § 1026.43(c) requires a 

creditor to make a reasonable and good 

faith determination at or before 

consummation that a consumer will be 

able to repay a covered transaction. 

Section 1026.43(e)(1)(i) and (ii) provide 

a safe harbor and rebuttable 

presumption of compliance, 

respectively, with the repayment ability 

requirements of § 1026.43(c) for 

creditors and assignees of covered 

transactions that satisfy the 

requirements of a qualified mortgage 

under § 1026.43(e)(2), (e)(4), or (f). 

Section 1026.43(e)(1)(i) provides a 

safe harbor for qualified mortgages that 

are not higher-priced covered 

transactions, by stating that a creditor or 

assignee of a qualified mortgage as 

defined in § 1026.43(e)(2), (e)(4), or (f) 

that is not a higher-priced covered 

transaction, as defined in 

§ 1026.43(b)(4), complies with the 

repayment ability requirements of 

§ 1026.43(c). Comment 43(e)(1)(i)–1 

clarifies that, to qualify for the safe 

harbor in § 1026.43(e)(1)(i), a covered 

transaction must meet the requirements 

of a qualified mortgage in 

§ 1026.43(e)(2), (e)(4), or (f) and must 

not be a higher-priced covered 

transaction, as defined in 

§ 1026.43(b)(4). 

For qualified mortgages that are 

higher-priced covered transactions, 

§ 1026.43(e)(1)(ii)(A) provides a 

rebuttable presumption of compliance 

with the repayment ability 

requirements. That section provides that 

a creditor or assignee of a qualified 

mortgage as defined in § 1026.43(e)(2), 

(e)(4), or (f) that is a higher-priced 

covered transaction, as defined 

§ 1026.43(b)(4), is presumed to comply 

with the repayment ability requirements 

of § 1026.43(c). Section 

1026.43(e)(1)(ii)(B) provides that to 

rebut the presumption of compliance, it 

must be proven that, despite meeting 

the requirements of § 1026.43(e)(2), 

(e)(4), or (f), the creditor did not make 

a reasonable and good faith 

determination of the consumer’s 

repayment ability at the time of 

consummation, by showing that the 

consumer’s income, debt obligations, 

alimony, child support, and the 

consumer’s monthly payment 

(including mortgage-related obligations) 

on the covered transaction and on any 

simultaneous loans of which the 

creditor was aware at consummation 

would leave the consumer with 

insufficient residual income or assets 

other than the value of the dwelling 

(including any real property attached to 

the dwelling) that secures the loan with 

which to meet living expenses, 

including any recurring and material 

non-debt obligations of which the 

creditor was aware at the time of 

consummation. 

Comment 43(e)(1)(ii)–1 clarifies that a 

creditor or assignee of a qualified 

mortgage under § 1026.43(e)(2), (e)(4), or 

(f) that is a higher-priced covered 

transaction is presumed to comply with 

the repayment ability requirements of 

§ 1026.43(c). To rebut the presumption, 

it must be proven that, despite meeting 

the standards for a qualified mortgage 

(including either the debt-to-income 

standard in § 1026.43(e)(2)(vi) or the 

standards of one of the entities specified 

in § 1026.43(e)(4)(ii)), the creditor did 

not have a reasonable and good faith 

belief in the consumer’s repayment 

ability. To rebut the presumption, it 

must be proven that, despite meeting 

the standards for a qualified mortgage 

(including either the debt-to-income 

standard in § 1026.43(e)(2)(vi) or the 

standards of one of the entities specified 

in § 1026.43(e)(4)(ii)), the creditor did 

not have a reasonable and good faith 

belief in the consumer’s repayment 

ability. Specifically, it must be proven 

that, at the time of consummation, based 

on the information available to the 

creditor, the consumer’s income, debt 

obligations, alimony, child support, and 

the consumer’s monthly payment 

(including mortgage-related obligations) 

on the covered transaction and on any 

simultaneous loans of which the 

creditor was aware at consummation 

would leave the consumer with 

insufficient residual income or assets 

other than the value of the dwelling 

(including any real property attached to 

the dwelling) that secures the loan with 

which to meet living expenses, 

including any recurring and material 

non-debt obligations of which the 

creditor was aware at the time of 

consummation, and that the creditor 

thereby did not make a reasonable and 

good faith determination of the 

consumer’s repayment ability. The 

comment also provides, by way of 

example, that a consumer may rebut the 

presumption with evidence 

demonstrating that the consumer’s 

residual income was insufficient to meet 

living expenses, such as food, clothing, 

gasoline, and health care, including the 

payment of recurring medical expenses 

of which the creditor was aware at the 

time of consummation, and after taking 

into account the consumer’s assets other 

than the value of the dwelling securing 

the loan, such as a savings account. In 

addition, the longer the period of time 

that the consumer has demonstrated 

actual ability to repay the loan by 

making timely payments, without 

modification or accommodation, after 

consummation or, for an adjustable-rate 

mortgage, after recast, the less likely the 

consumer will be able to rebut the 

presumption based on insufficient 

residual income and prove that, at the 

time the loan was made, the creditor 

failed to make a reasonable and good 

faith determination that the consumer 

had the reasonable ability to repay the 

loan. 

As noted above, the Bureau believes 

that the statutory language regarding 

whether qualified mortgages receive 

either a safe harbor or rebuttable 

presumption of compliance is 

ambiguous, and does not plainly 

mandate one approach over the other. 

Furthermore, the Bureau has the 

authority to tailor the strength of the 


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144These adjustments are consistent with the 

Bureau’s authority under TILA section 

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

add to, or subtract from the criteria that define a 

qualified mortgage upon a finding that such 

regulations are necessary or proper to ensure that 

responsible, affordable mortgage credit remains 

available to consumers in a manner consistent with 

the purposes of this section, necessary and 

appropriate to effectuate the purposes of TILA 

section 129B and section 129C, to prevent 

circumvention or evasion thereof, or to facilitate 

compliance with such sections. 

presumption of compliance based on 

the characteristics associated with the 

different types of qualified mortgages. 

Accordingly, the Bureau interprets TILA 

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

presumption, but exercises its 

adjustment authority under TILA 

section 105(a) to limit the ability to 

rebut the presumption in two ways, 

because an open-ended rebuttable 

presumption would unduly restrict 

access to credit without a corresponding 

benefit to consumers. 

First, the Bureau uses its adjustment 

authority under section 105(a) to limit 

the ability to rebut the presumption to 

insufficient residual income or assets 

other than the dwelling that secures the 

transaction because the Bureau believes 

exercise of this authority is necessary 

and proper to facilitate compliance with 

and to effectuate a purpose of section 

129 and TILA. The Bureau believes this 

approach, while preserving consumer 

remedies, provides clear standards to 

creditors and courts regarding the basis 

upon which the presumption of 

compliance that applies to higher-priced 

covered transactions may be rebutted, 

thereby enhancing creditor certainty 

and encouraging lending in the higherpriced mortgage market. The Bureau 

finds this approach is necessary and 

proper to ensure that consumers are 

offered and receive residential mortgage 

loans on terms that reasonably reflect 

their ability to repay the loans, a 

purpose of section 129 and TILA. 

Second, with respect to prime loans 

(loans with an APR that does not exceed 

APOR by 1.5 percentage points for first 

liens and 3.5 percentage points for 

second liens), the Bureau also uses its 

adjustment authority under TILA 

section 105(a) to provide a conclusive 

presumption (e.g., a safe harbor). Under 

the conclusive presumption, if a prime 

loan satisfies the criteria for being a 

qualified mortgage, the loan will be 

deemed to satisfy section 129C’s abilityto-repay criteria and will not be subject 

to rebuttal based on residual income or 

otherwise. The Bureau finds that this 

approach balances the competing 

consumer protection and access to 

credit considerations described above. 

As discussed above, the Bureau will not 

extend the safe harbor to higher-priced 

loans because that approach would 

provide insufficient protection to 

consumers in loans with higher interest 

rates who may require greater protection 

than consumers in prime rate loans. On 

the other hand, an approach that 

provided a rebuttable presumption of 

compliance for all qualified mortgages 

(including prime loans which 

historically have a low default rate) 

could lead creditors to make fewer 

mortgage loans to certain consumers, 

which could restrict access to credit (or 

unduly raise the cost of credit) without 

a corresponding benefit to consumers. 

The Bureau finds that this adjustment 

providing a safe harbor for prime loans 

is necessary and proper to facilitate 

compliance with and to effectuate the 

purposes of section 129C and TILA, 

including to assure that consumers are 

offered and receive residential mortgage 

loans on terms that reasonably reflect 

their ability to repay the loans.144

43(e)(2) Qualified Mortgage Defined— 

General 

As discussed above, TILA section 

129C(b)(2) defines the requirements for 

qualified mortgages to limit certain loan 

terms and features. The statute generally 

prohibits a qualified mortgage from 

permitting an increase of the principal 

balance on the loan (negative 

amortization), interest-only payments, 

balloon payments (except for certain 

balloon-payment qualified mortgages 

pursuant to TILA section 129C(b)(2)(E)), 

a term greater than 30 years, or points 

and fees that exceed a specified 

threshold. 

In addition, the statute incorporates 

limited underwriting criteria that 

overlap with some elements of the 

general ability-to-repay standard. 

Specifically, the statutory definition of 

qualified mortgage requires the creditor 

to (1) verify and document the income 

and financial resources relied upon to 

qualify the obligors on the loan; and (2) 

underwrite the loan based on a fully 

amortizing payment schedule and the 

maximum interest rate during the first 

five years, taking into account all 

applicable taxes, insurance, and 

assessments. As noted above, these 

requirements appear to be focused 

primarily on ensuring that certain 

mortgage products—no-documentation 

loans and loans underwritten based 

only on a consumer’s ability to make 

payments during short introductory 

periods with low ‘‘teaser’’ interest 

rates—are not eligible to be qualified 

mortgages. 

In addition to these limited 

underwriting criteria, the statute also 

authorizes the Bureau to establish 

additional criteria 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 consumer and other 

factors the Bureau determines relevant 

and consistent with the purposes 

described in TILA section 

129C(b)(3)(B)(i). To the extent the 

Bureau incorporates a debt-to-income or 

residual income requirement into the 

qualified mortgage definition, several 

additional elements of the general 

ability-to-repay standard would 

effectively also be incorporated into the 

qualified mortgage definition, since 

debt-to-income and residual income 

analyses by their nature require 

assessment of income, debt (including 

simultaneous loans), and mortgagerelated obligations. As discussed above, 

the Board proposed two alternatives to 

implement the qualified mortgage 

elements. Both alternatives under the 

Board’s proposal would have 

incorporated the statutory elements of a 

qualified mortgage (e.g., product feature 

and loan term restrictions, limits on 

points and fees, payment calculation 

requirements, and the requirement to 

consider and verify the consumer’s 

income or assets). However, Alternative 

2 also included the additional factors in 

the general ability-to-repay standard. 

Comments 

Qualified mortgage definition. As an 

initial matter, the majority of 

commenters generally favored defining 

qualified mortgages to reach a broad 

portion of the overall market and to 

provide clarity with regard to the 

required elements. Commenters agreed 

that clarity promotes the benefits of 

creditors lending with confidence and 

consumers receiving loans that comply 

with the basic requirements of an 

affordable loan. In addition, 

commenters generally agreed that a 

qualified mortgage should be broad, 

encompassing the vast majority of the 

existing mortgage market. Numerous 

commenters indicated that creditors 

believed that the difference between the 

legal protections afforded (or risks 

associated with) qualified mortgages 

and non-qualified mortgages would 

result in very little lending outside of 

qualified mortgages. Commenters 

asserted that a narrowly defined 

qualified mortgage would leave loans 

outside the legal protections of qualified 

mortgages and would result in 

constrained credit or increased cost of 

credit. 

As discussed in the section-by-section 

analysis of § 1026.43(e)(1), commenters 

did not necessarily support the two 


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alternatives specifically as proposed by 

the Board, but suggested variations on 

the definition of qualified mortgage that 

contain some or all of the Board’s 

proposed criteria, or additional criteria 

not specifically included in either of the 

Board’s proposed alternatives. For 

example, as described below, a coalition 

of industry and consumer advocates 

suggested a tiered approach to defining 

qualified mortgage, based primarily on 

meeting a specific back-end debt-toincome requirement, with alternative 

means of satisfying the qualified 

mortgage definition (such as housing 

debt-to-income, reserves, and residual 

income) if the back-end debt-to-income 

test is not satisfied. Similarly, one 

industry commenter suggested using a 

weighted approach to defining qualified 

mortgage, which would weight some 

underwriting factors more heavily than 

others and permit a significant factor in 

one area to compensate for a weak or 

missing factor in another area. 

Consumer group commenters and 

some industry commenters generally 

supported excluding from the definition 

of qualified mortgage certain risky loan 

features which result in ‘‘payment 

shock,’’ such as negative amortization or 

interest-only features. Consumer group 

commenters also supported limiting 

qualified mortgages to a 30-year term, as 

required by statute. Consumer group 

commenters and one industry trade 

association strongly supported requiring 

creditors to consider and verify the all 

the ability-to-repay requirements. These 

commenters contended that the abilityto-repay requirements represent prudent 

mortgage underwriting techniques and 

are essential to sustainable lending. To 

that point, these commenters argued 

that qualified mortgage loans should 

represent the best underwritten and 

most fully documented loans, which 

would justify some form of protection 

from future liability. In addition, several 

consumer group commenters suggested 

adding a further requirement that when 

assessing the consumer’s income and 

determining whether the consumer will 

be able to meet the monthly payments, 

a creditor must also take into account 

other recurring but non-debt related 

expenses. These commenters argued 

that many consumers, and especially 

low- and moderate-income consumers, 

face significant monthly recurring 

expenses, such as medical care or 

prescriptions and child care expense 

needed to enable the borrower or coborrower to work outside the home. 

These commenters further argued that 

even where the percentage of disposable 

income in such situations seems 

reasonable, the nominal amounts left to 

low- and moderate-income consumers 

may be insufficient to enable such 

households to reasonably meet all their 

obligations. While one consumer group 

commenter specifically supported the 

inclusion of a consumer’s credit history 

as an appropriate factor for a creditor to 

consider and verify when underwriting 

a loan, several commenters argued that 

the consumer’s credit history should be 

not included in the ability-to-repay 

requirements because, although credit 

history may be relevant in prudent 

underwriting, it involves a multitude of 

factors that need to be taken into 

consideration. In addition, one 

association of State bank regulators also 

favored consideration of the repayment 

factors that are part of a sound 

underwriting process. 

As noted above, some industry 

commenters also generally supported 

including the underwriting 

requirements as proposed in Alternative 

2, with some adjustments, so long as the 

resulting qualified mortgage was 

entitled to a safe harbor. These 

commenters stated that most creditors 

today are already complying with the 

full ability-to-repay underwriting 

standards, and strong standards will 

help them resist competitive forces to 

lower underwriting standards in the 

future. Other industry commenters 

argued that the qualified mortgage 

criteria should not exclude specific loan 

products because the result will be that 

such products will be unavailable in the 

market. 

Some commenters generally 

supported aligning the definition of 

qualified mortgage with the definition 

proposed by several Federal agencies to 

define ‘‘qualified residential mortgages’’ 

(QRM) for purposes of the risk retention 

requirements in title IX of the DoddFrank Act. For example, one commenter 

suggested that the required payment 

calculation for qualified mortgages be 

consistent with the QRM proposed 

requirement that the payment 

calculation be based on the maximum 

rate in the first five years after the first 

full payment required. An association of 

reverse mortgage lenders requested that 

a ‘‘qualified’’ reverse mortgage be 

defined to ensure that the Federal 

agencies finalizing the QRM rule are 

able to make a proprietary reverse 

mortgage a QRM, which would be 

exempt from the risk retention 

requirements. Lastly, numerous 

consumer group commenters argued 

that high-cost mortgages be excluded 

from being a qualified mortgage. 

Quantitative standards. Some 

industry commenters supported 

including quantitative standards for 

such variables as debt-to-income ratios 

and credit score with compensating 

factors in the qualified mortgage 

definition. These commenters 

contended that quantitative standards 

provide certainty and would help 

ensure creditworthy consumers have 

access to qualified mortgage loans. One 

consumer group commenter argued that, 

without specific quantitative standards, 

bank examiners and assignees would 

have no benchmarks against which to 

measure a creditor’s compliance or 

safety and soundness. One industry 

commenter favored quantitative 

standards such as a maximum back-end 

debt-to-income ratio because that would 

provide sufficient certainty to creditors 

and investors. One consumer group 

commenter supported including 

quantitative standards for the debt-toincome ratio because, without this, 

every loan would be open to debate as 

to whether the consumer had the ability 

to repay at the time of loan 

consummation. 

As described further below, certain 

commenters and interested parties 

requested that the Bureau adopt a 

specific debt-to-income ratio 

requirement for qualified mortgages. For 

example, some suggested that if a 

consumer’s total debt-to-income ratio is 

below a specified threshold, the 

mortgage loan should satisfy the 

qualified mortgage requirements, 

assuming other relevant conditions are 

met. In addition to a debt-to-income 

requirement, some commenters and 

interested parties suggested that the 

Bureau should include within the 

definition of a ‘‘qualified mortgage’’ 

loans with a debt-to-income ratio above 

a certain threshold if the consumer has 

a certain amount of assets, such as 

money in a savings or similar account, 

or a certain amount of residual income. 

Some industry commenters advocated 

against including quantitative standards 

for such variables as debt-to-income 

ratios and residual income. Those 

commenters argued that underwriting a 

loan involves weighing a variety of 

factors, and creditors and investors 

should be allowed to exercise discretion 

and weigh risks for each individual 

loan. To that point, one industry trade 

group commenter argued that 

community banks, for example, 

generally have conservative 

requirements for a consumer’s debt-toincome ratio, especially for loans that 

are held in portfolio by the bank, and 

consider many factors when 

underwriting mortgage loans, such as 

payment history, liquid reserves, and 

other assets. Because several factors are 

considered and evaluated in the 

underwriting process, this commenter 

asserted that community banks can be 


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6516 Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 

flexible when underwriting mortgage 

loans and provide arrangements for 

certain consumers that fall outside of 

the normal debt-to-income ratio for a 

certain loan. This commenter contended 

that strict quantitative standards would 

inhibit community banks’ relationship 

lending and ability to use their sound 

judgment in the lending process. Some 

commenters contended that requiring 

specific quantitative standards could 

restrict credit access and availability for 

consumers. 

Generally, industry commenters and 

some consumer group commenters 

believed compensating factors are 

beneficial in underwriting and should 

be permitted. These commenters 

generally believe compensating factors 

should be incorporated into the 

qualified mortgage criteria, such as in 

circumstances when a specified debt-toincome ratio threshold was exceeded. In 

their view, lending is an individualized 

decision and compensating factors can, 

for example, mitigate a consumer’s high 

debt-to-income ratio or low residual 

income. One industry trade group 

commenter argued that the inclusion of 

compensating factors would allow for a 

broader underwriting approach and 

should include family history, 

repayment history, potential income 

growth, and inter-family transactions. 

One association of State bank regulators 

suggested that the rule provide guidance 

on mitigating factors for creditors to 

consider when operating outside of 

standard parameters. For example, 

creditors lending outside of typical 

debt-to-income standards can rely upon 

other assets or the fact that a consumer 

has a high income. Other industry 

commenters argued that the rule should 

provide for enough flexibility to allow 

for common-sense underwriting and 

avoid rigid limits or formulas that 

would exclude consumers on the basis 

of one or a few underwriting factors. 

Another commenter stated that the 

rule should not set thresholds or limits 

on repayment ability factors. Instead, 

the rule should allow the creditor to 

consider the required factors and be 

held to a good faith standard. Such a 

rule permits individualized 

determinations to be made based on 

each consumer, local markets, and the 

risk tolerance of each creditor. 

Final Rule 

Section 1026.43(e)(2) of the final rule 

contains the general qualified mortgage 

definition. As set forth below, the final 

rule defines qualified mortgages under 

§ 1026.43(e)(2) as loans that satisfy all of 

the qualified mortgage criteria required 

by the statute (including underwriting 

to the maximum interest rate during the 

first five years of the loan and 

consideration and verification of the 

consumer’s income or assets), for which 

the creditor considers and verifies the 

consumer’s current debt obligations, 

alimony, and child support, and that 

have a total (‘‘back-end’’) monthly debtto-income ratio of no greater than 43 

percent, following the standards for 

‘‘debt’’ and ‘‘income’’ set forth in 

appendix Q. 

While the general definition of 

qualified mortgage in § 1026.43(e)(2) 

contains all of the statutory qualified 

mortgage elements, it does not 

separately incorporate all of the general 

ability-to-repay underwriting 

requirements that would have been part 

of the qualified mortgage definition 

under the Board’s proposed Alternative 

2. In particular, the definition of 

qualified mortgage in § 1026.43(e)(2) 

does not specifically require 

consideration of the consumer’s 

employment status, monthly payment 

on the covered transaction (other than 

the requirement to underwrite the loan 

to the maximum rate in the first five 

years), monthly payment on any 

simultaneous loans, or the consumer’s 

credit history, which are part of the 

general ability-to-repay analysis under 

§ 1026.43(c)(2). Instead, most of these 

requirements are incorporated into the 

standards for determining ‘‘debt’’ and 

‘‘income’’ pursuant to 

§ 1026.43(e)(2)(vi)(A) and (B), to which 

the creditor must look to determine if 

the loan meets the 43 percent debt-toincome ratio threshold as required in 

§ 1026.43(e)(2)(vi). In particular, that 

calculation will require the creditor to 

verify, among other things, the 

consumer’s employment status (to 

determine current or expected income) 

and the monthly payment on the 

covered transaction (including 

mortgage-related obligations) and on 

any simultaneous loans that the creditor 

knows or has reason to know will be 

made. In addition, although 

consideration and verification of a 

consumer’s credit history is not 

specifically incorporated into the 

qualified mortgage definition, creditors 

must verify a consumer’s debt 

obligations using reasonably reliable 

third-party records, which may include 

use of a credit report or records that 

evidence nontraditional credit 

references. See section-by-section 

analysis of § 1026.43(e)(2)(v) and (c)(3). 

The final rule adopts this approach 

because the Bureau believes that the 

statute is fundamentally about assuring 

that the mortgage credit consumers 

receive is affordable. Qualified 

mortgages are intended to be mortgages 

as to which it can be presumed that the 

creditor made a reasonable 

determination of the consumer’s ability 

to repay. Such a presumption would not 

be reasonable—indeed would be 

imprudent—if a creditor made a 

mortgage loan without considering and 

verifying core aspects of the consumer’s 

individual financial picture, such as 

income or assets and debt. Incorporating 

these ability-to-repay underwriting 

requirements into the qualified 

mortgage definition thus ensures that 

creditors assess the consumer’s 

repayment ability for a qualified 

mortgage using robust and appropriate 

underwriting procedures. The specific 

requirements for a qualified mortgage 

under § 1026.43(e)(2) are described 

below. 

The Bureau notes that the final rule 

does not define a ‘‘qualified’’ reverse 

mortgage. As described above, TILA 

section 129C(a)(8) excludes reverse 

mortgages from the repayment ability 

requirements. See section-by-section 

analysis of § 1026.43(a)(3)(i). However, 

TILA section 129C(b)(2)(ix) provides 

that the term ‘‘qualified mortgage’’ may 

include a ‘‘residential mortgage loan’’ 

that is ‘‘a reverse mortgage which meets 

the standards for a qualified mortgage, 

as set by the Bureau in rules that are 

consistent with the purposes of this 

subsection.’’ The Board’s proposal did 

not include reverse mortgages in the 

definition of a ‘‘qualified mortgage.’’ 

Because reverse mortgages are exempt 

from the ability-to-repay requirements, 

the effects of defining a reverse 

mortgage as a ‘‘qualified mortgage’’ 

would be, for example, to allow for 

certain otherwise banned prepayment 

penalties and permit reverse mortgages 

to be QRMs under the Dodd-Frank Act’s 

risk retention rules. The Bureau believes 

that the first effect is contrary to the 

purposes of the statute. With respect to 

the QRM rulemaking, the Bureau will 

continue to coordinate with the Federal 

agencies finalizing the QRM rulemaking 

to determine the appropriate treatment 

of reverse mortgages. 

43(e)(2)(i) 

TILA section 129C(b)(2)(A)(i) states 

that the regular periodic payments of a 

qualified mortgage may not result in an 

increase of the principal balance or 

allow the consumer to defer repayment 

of principal (except for certain balloonpayment loans made by creditors 

operating predominantly in rural or 

underserved areas, discussed below in 

the section-by-section analysis of 

§ 1026.43(f)). TILA section 

129C(b)(2)(A)(ii) states that the terms of 

a qualified mortgage may not include a 

balloon payment (subject to an 

exception for creditors operating 


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Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 6517 

predominantly in rural or underserved 

areas). The statute defines ‘‘balloon 

payment’’ as ‘‘a scheduled payment that 

is more than twice as large as the 

average of earlier scheduled payments.’’ 

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

The Board’s proposed § 226.43(e)(2)(i) 

would have implemented TILA sections 

129C(b)(2)(A)(i) and (ii). First, the 

proposed provision would have 

required that a qualified mortgage 

provide for regular periodic payments. 

Second, proposed § 226.43(e)(2)(i) 

would have provided that the regular 

periodic payments may not (1) result in 

an increase of the principal balance; (2) 

allow the consumer to defer repayment 

of principal, except as provided in 

proposed § 226.43(f); or (3) result in a 

balloon payment, as defined in 

proposed § 226.18(s)(5)(i), except as 

provided in proposed § 226.43(f). 

Proposed comment 43(e)(2)(i)–1 

would have explained that, as a 

consequence of the foregoing 

requirements, a qualified mortgage must 

require the consumer to make payments 

of principal and interest, on a monthly 

or other periodic basis, that will fully 

repay the loan amount over the loan 

term. These periodic payments must be 

substantially equal except for the effect 

that any interest rate change after 

consummation has on the payment 

amount in the case of an adjustable-rate 

or step-rate mortgage. The proposed 

comment would have also provided 

that, because proposed § 226.43(e)(2)(i) 

would have required that a qualified 

mortgage provide for regular, periodic 

payments, a single-payment transaction 

may not be a qualified mortgage. This 

comment would have clarified a 

potential evasion of the regulation, as a 

creditor otherwise could structure a 

transaction with a single payment due at 

maturity that technically would not be 

a balloon payment as defined in 

proposed § 226.18(s)(5)(i) because it is 

not more than two times a regular 

periodic payment. 

Proposed comment 43(e)(2)(i)–2 

would have provided additional 

guidance on the requirement in 

proposed § 226.43(e)(2)(i)(B) that a 

qualified mortgage may not allow the 

consumer to defer repayment of 

principal. The comment would have 

clarified that, in addition to interestonly terms, deferred principal 

repayment also occurs if the payment is 

applied to both accrued interest and 

principal but the consumer makes 

periodic payments that are less than the 

amount that would be required under a 

payment schedule that has substantially 

equal payments that fully repay the loan 

amount over the loan term. Graduated 

payment mortgages, for example, allow 

deferral of principal repayment in this 

manner and therefore may not be 

qualified mortgages. 

As noted above, the Dodd-Frank Act 

defines ‘‘balloon payment’’ as ‘‘a 

scheduled payment that is more than 

twice as large as the average of earlier 

scheduled payments.’’ However, 

proposed § 226.43(e)(2)(i)(C) would 

have cross-referenced Regulation Z’s 

existing definition of ‘‘balloon 

payment’’ in § 226.18(s)(5)(i), which 

provides that a balloon payment is ‘‘a 

payment that is more than two times a 

regular periodic payment.’’ The Board 

noted that this definition is 

substantially similar to the statutory 

one, except that it uses as its benchmark 

any regular periodic payment rather 

than the average of earlier scheduled 

payments. The Board explained that the 

difference in wording between the 

statutory definition and the existing 

regulatory definition does not yield a 

significant difference in what 

constitutes a ‘‘balloon payment’’ in the 

qualified mortgage context. Specifically, 

the Board stated its belief that because 

a qualified mortgage generally must 

provide for substantially equal, fully 

amortizing payments of principal and 

interest, a payment that is greater than 

twice any one of a loan’s regular 

periodic payments also generally will be 

greater than twice the average of its 

earlier scheduled payments. 

Accordingly, to facilitate compliance, 

the Board proposed to cross-reference 

the existing definition of ‘‘balloon 

payment.’’ The Board proposed this 

adjustment to the statutory definition 

pursuant to its authority under TILA 

section 105(a) to make such adjustments 

for all or any class of transactions as in 

the judgment of the Board are necessary 

or proper to facilitate compliance with 

TILA. The Board stated that this 

approach is further supported by its 

authority under TILA section 129B(e) to 

condition terms, acts or practices 

relating to residential mortgage loans 

that the Board finds necessary or proper 

to facilitate compliance. 

Finally, in the preamble to the Board’s 

proposal, the Board noted that some 

balloon-payment loans are renewable at 

maturity and that such loans might 

appropriately be eligible to be qualified 

mortgages, provided the terms for 

renewal eliminate the risk of the 

consumer facing a large, unaffordable 

payment obligation, which underlies the 

rationale for generally excluding 

balloon-payment loans from the 

definition of qualified mortgages. If the 

consumer is protected by the terms of 

the transaction from that risk, the Board 

stated that such a transaction might 

appropriately be treated as though it 

effectively is not a balloon-payment 

loan even if it is technically structured 

as one. The Board solicited comment on 

whether it should include an exception 

providing that, notwithstanding 

proposed § 226.43(e)(2)(i)(C), a qualified 

mortgage may provide for a balloon 

payment if the creditor is 

unconditionally obligated to renew the 

loan at the consumer’s option (or is 

obligated to renew subject to conditions 

within the consumer’s control). The 

Board sought comment on how such an 

exception should be structured to 

ensure that the large-payment risk 

ordinarily accompanying a balloonpayment loan is fully eliminated by the 

renewal terms and on how such an 

exception might be structured to avoid 

the potential for circumvention. 

As discussed above, commenters 

generally supported excluding from the 

definition of qualified mortgage certain 

risky loan features which result in 

‘‘payment shock,’’ such as negative 

amortization or interest-only features. 

Commenters generally recognized such 

features as significant contributors to 

the recent housing crisis. Industry 

commenters noted that such restrictions 

are objective criteria which creditors 

can conclusively demonstrate were met 

at the time of origination. However, one 

mortgage company asserted that such 

limitations should not apply in loss 

mitigation transactions, such as loan 

modifications and extensions, or to loan 

assumptions. That commenter noted 

that while negative amortization is not 

common in most loan modification 

programs, the feature can be used at 

times to help consumers work through 

default situations. The commenter also 

noted that deferral of payments, 

including principal payments, and 

balloon payment structures are 

commonly used to relieve payment 

default burdens. One bank commenter 

argued that the rule should permit 

qualified mortgages to have balloon 

payment features if the creditor is 

unconditionally obligated to renew the 

loan at the consumer’s option, or is 

obligated to renew subject to conditions 

within the consumer’s control. 

For the reasons discussed in the 

proposed rule, the Bureau is adopting 

§ 226.43(e)(2)(i) as proposed in 

renumbered § 1026.43(e)(2)(i), with 

certain clarifying changes. In particular, 

in addition to the proposed language, 

section 1026.43(e)(2)(i) specifies that a 

qualified mortgage is a covered 

transaction that provides for regular 

periodic payments that are substantially 

equal, ‘‘except for the effect that any 

interest rate change after consummation 

has on the payment in the case of an 

adjustable-rate or step-rate mortgage.’’ 


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This language appeared in the 

commentary to § 226.43(e)(2)(i) in the 

proposed rule, but to provide clarity, the 

Bureau is adopting this language in the 

text of § 1026.43(e)(2)(i) in the final rule. 

Notably, the Bureau is adopting in 

§ 1026.43(e)(2)(i) the proposed crossreference to the existing Regulation Z 

definition of balloon payment. Like the 

Board, the Bureau finds that the 

statutory definition and the existing 

regulatory definition do not yield a 

significant difference in what 

constitutes a ‘‘balloon payment’’ in the 

qualified mortgage context. 

Accordingly, the Bureau makes this 

adjustment pursuant to its authority 

under TILA section 105(a) because the 

Bureau believes that affording creditors 

a single definition of balloon payment 

within Regulation Z is necessary and 

proper to facilitate compliance with and 

effectuate the purposes of TILA. 

In addition, like the proposal, the 

final rule does not provide exceptions 

from the prohibition on qualified 

mortgages providing for balloon 

payments, other than the exception for 

creditors operating predominantly in 

rural or underserved areas, described 

below in the section-by-section analysis 

of § 1026.43(f). The Bureau believes that 

it is appropriate to implement the rule 

consistent with statutory intent, which 

specifies only a narrow exception from 

this general rule for creditors operating 

predominantly in rural or underserved 

areas rather than a broader exception to 

the general prohibition on qualified 

mortgages containing balloon payment 

features. With respect to renewable 

balloon-payment loans, the Bureau does 

not believe that the risk that a consumer 

will face a significant payment shock 

from the balloon feature can be fully 

eliminated, and that a rule that attempts 

to provide such special treatment for 

renewable balloon-payment loans 

would be subject to abuse. 

43(e)(2)(ii) 

TILA section 129C(b)(2)(A)(viii) 

requires that a qualified mortgage must 

not provide for a loan term that exceeds 

30 years, ‘‘except as such term may be 

extended under paragraph (3), such as 

in high-cost areas.’’ As discussed above, 

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

the Bureau to revise, add to, or subtract 

from the qualified mortgage criteria if 

the Bureau makes certain findings, 

including that such revision is 

necessary or proper to ensure that 

responsible, affordable mortgage credit 

remains available to consumers in a 

manner consistent with the purposes of 

TILA section 129C(b) or necessary and 

appropriate to effectuate the purposes of 

section 129C. 

Proposed § 226.43(e)(2)(ii) would 

have implemented the 30-year 

maximum loan term requirement in the 

statute without exception. The preamble 

to the proposed rule explains that, based 

on available information, the Board 

believed that mortgage loans with terms 

greater than 30 years are rare and, when 

made, generally are for the convenience 

of consumers who could qualify for a 

loan with a 30-year term but prefer to 

spread out their payments further. 

Therefore, the Board believed such an 

exception is generally unnecessary. The 

Board solicited comment on whether 

there are any ‘‘high-cost areas’’ in which 

loan terms in excess of 30 years are 

necessary to ensure that responsible, 

affordable credit is available and, if so, 

how they should be identified for 

purposes of such an exception. The 

Board also sought comment on whether 

any other exceptions would be 

appropriate, consistent with the Board’s 

authority in TILA section 

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

As noted above, commenters 

generally supported the 30-year term 

limitation. One commenter suggested 

the final rule should clarify that a loan 

term that is slightly longer than 30 years 

because of the due date of the first 

regular payment nevertheless meets the 

30-year term requirement. One trade 

association commenter suggested that 

creditors be provided flexibility to 

originate 40-year loans in order to 

accommodate consumers in regions of 

the country where housing prices are 

especially high, but did not provide any 

information regarding the historic 

performance of 40-year loans or discuss 

how the Bureau should define high-cost 

areas in a way that avoids abuse. An 

association of State bank regulators also 

suggested that the rule permit loan 

terms beyond 30 years in high-cost areas 

and suggested that those areas could be 

determined based on housing price 

indices. That commenter, two large 

industry trade associations, and one 

mortgage company commenter argued 

that the 30-year term limitation should 

not apply to loan modifications that 

provide a consumer with a loan with a 

lower monthly payment than he or she 

may otherwise face. One such 

commenter noted that, as a general 

matter, the rule should clarify that 

modifications of existing loans should 

not be subject to the same ability-torepay requirements to avoid depriving 

consumers of beneficial modifications. 

For the reasons discussed in the 

proposed rule, the Bureau is generally 

adopting § 226.43(e)(2)(ii) as proposed 

in renumbered § 1026.43(e)(2)(ii). In 

response to commenter concern, the 

final rule clarifies in comment 

43(e)(2)(ii)–1 that the 30-year term 

limitation in § 1026.43(e)(2)(ii) is 

applied without regard to any interim 

period between consummation and the 

beginning of the first full unit period of 

the repayment schedule. Consistent 

with the Board’s analysis, the final rule 

does not provide exceptions to the 30- 

year loan limitation. Like the Board, the 

Bureau is unaware of a basis upon 

which to conclude that an exception to 

the 30-year loan term limitation for 

qualified mortgages in high-cost areas is 

appropriate. In particular, the Bureau 

believes that loans with terms greater 

than 30 years are rare and that, when 

made, generally are for the convenience 

of consumers who could qualify for a 

loan with a 30-year term. 

The final rule also does not provide 

additional guidance on the 30-year loan 

term limitation in the context of loan 

modifications. The Bureau understands 

that private creditors may offer loan 

modifications to consumers at risk of 

default or foreclosure, and that such 

modifications may extend the duration 

of the loan beyond the initial term. If 

such modification results in the 

satisfaction and replacement of the 

original obligation, the loan would be a 

refinance under current § 1026.20(a), 

and therefore the new transaction must 

comply with the ability-to-repay 

requirements of § 1026.43(c) or satisfy 

the criteria for a qualified mortgage, 

independent of any ability-to-repay 

analysis or the qualified mortgage status 

of the initial transaction. However, if the 

transaction does not meet the criteria in 

1026.20(a), which determines a 

refinancing—generally resulting in the 

satisfaction and replacement of the 

original obligation—the loan would not 

be a refinance under § 1026.20(a), and 

would instead be an extension of the 

original loan. In such a case, compliance 

with the ability-to-repay provision, 

including a loan’s qualified mortgage 

status, would be determined as of the 

date of consummation of the initial 

transaction, regardless of a later 

modification. 

43(e)(2)(iii) 

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

defines a qualified mortgage as a loan 

for which, among other things, the total 

points and fees payable in connection 

with the loan do not exceed three 

percent of the total loan amount. TILA 

section 129C(b)(2)(D) requires the 

Bureau to prescribe rules adjusting this 

threshold to ‘‘permit lenders that extend 

smaller loans to meet the requirements 

of the presumption of compliance.’’ The 

statute further requires the Bureau, in 

prescribing such rules, to ‘‘consider the 

potential impact of such rules on rural 


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145The statutory HOEPA ability-to-repay 

provisions prohibit creditors from engaging in a 

pattern or practice of making loans without regard 

to the consumer’s repayment ability. In the 2008 

HOEPA Final Rule, the Board eliminated the 

‘‘pattern or practice’’ requirement under the HOEPA 

ability-to-repay provision and also applied the 

repayment ability requirement to higher-priced 

mortgage loans. 

146The Bureau notes that, among other 

restrictions, the 2013 HOEPA Final Rule also 

includes in § 1026.32(d)(1) a prohibition on balloon 

payment features for most high-cost mortgages, and 

retains the current restrictions on high-cost 

mortgages permitting negative amortization. As 

noted, high-cost mortgages will be subject to these 

restrictions in addition to the requirements imposed 

in this final rule. With respect to prepayment 

penalty revisions, the Dodd-Frank Act deleted the 

statutory restrictions applicable to high-cost 

mortgages. The new Dodd-Frank Act prepayment 

penalty restrictions of section 1414 are 

implemented as discussed below. 

147The points and fees limit for qualified 

mortgages set forth in the Dodd-Frank Act, as 

implemented in § 1026.43(e) of this final rule 

(including separate points and fees limits for 

smaller loans), is lower than the high-cost mortgage 

points and fees threshold. Thus, any loan that 

triggers the high-cost mortgage provisions through 

the points and fees criteria could not satisfy the 

qualified mortgage definition. Likewise, 

§ 1026.43(g) of this final rule provides that, where 

qualified mortgages are permitted to have 

prepayment penalties, such penalties may not be 

imposed more than three years after consummation 

or in an amount that exceeds 2 percent of the 

amount prepaid. This limitation aligns with the 

prepayment penalty trigger for the high-cost 

mortgage provisions, such that a loan that satisfies 

the qualified mortgage requirements would never 

trigger the high-cost mortgage provisions as a result 

of a prepayment penalty. 

areas and other areas where home 

values are lower.’’ 

Proposed § 226.43(e)(2)(iii) would 

have implemented these provisions by 

providing that a qualified mortgage is a 

loan for which the total points and fees 

payable in connection with the loan do 

not exceed the amounts specified under 

proposed § 226.43(e)(3). As discussed in 

detail in the section-by-section analysis 

of § 1026.43(e)(3), the Board proposed 

two alternatives for calculating the 

allowable points and fees for a qualified 

mortgage: One approach would have 

consisted of five ‘‘tiers’’ of loan sizes 

and corresponding limits on points and 

fees, while the other approach would 

have consisted of three ‘‘tiers’’ of points 

and fees based on a formula yielding a 

greater allowable percentage of the total 

loan amount to be charged in points and 

fees for each dollar increase in loan size. 

Additionally, proposed § 226.43(b)(9) 

would have defined ‘‘points and fees’’ to 

have the same meaning as in proposed 

§ 226.32(b)(1). 

For the reasons discussed in the 

proposed rule, the Bureau is generally 

adopting § 226.43(e)(2)(iii) as proposed 

in renumbered § 1026.43(e)(2)(iii). For a 

discussion of the final rule’s approach 

to calculating allowable points and fees 

for a qualified mortgage, see the sectionby-section analysis of § 1026.43(e)(3). 

For a discussion of the definition of 

points and fees, see the section-bysection analysis of § 1026.32(b)(1). 

As noted above, several consumer 

group commenters requested that highcost mortgages be prohibited from 

receiving qualified mortgage status. 

Those commenters noted that high-cost 

mortgages have been singled out by 

Congress as deserving of special 

regulatory treatment because of their 

potential to be abusive to consumers. 

They argue that it would seem 

incongruous for any high-cost mortgage 

to be given a presumption of 

compliance with the ability-to-repay 

rule. However, the final rule does not 

prohibit a high-cost mortgage from being 

a qualified mortgage. Under the DoddFrank Act, a mortgage loan is a high-cost 

mortgage when (1) the annual 

percentage rate exceeds APOR by more 

than 6.5 percentage points for first-liens 

or 8.5 percentage points for subordinateliens; (2) points and fees exceed 5 

percent, generally; or (3) when 

prepayment penalties may be imposed 

more than three years after 

consummation or exceed 2 percent of 

the amount prepaid. Neither the Board’s 

2011 ATR–QM Proposal nor the 

Bureau’s 2012 HOEPA Proposal would 

have prohibited loans that are high-cost 

mortgages as a result of a high interest 

rate from receiving qualified mortgage 

status. 

As a general matter, the ability-torepay requirements in this final rule 

apply to most closed-end mortgage 

loans, including closed-end high-cost 

mortgages. Notwithstanding the DoddFrank Act’s creation of a new ability-torepay regime for mortgage loans, 

Congress did not modify an existing 

prohibition in TILA section 129(h) 

against originating a high-cost mortgage 

without regard to a consumer’s 

repayment ability (HOEPA ability-torepay). Thus, under TILA (as amended 

by the Dodd-Frank Act), closed-end 

high-cost mortgages are subject both to 

the general ability-to-repay provisions 

and to HOEPA’s ability-to-repay 

requirement.145 As implemented in 

existing § 1026.34(a)(4), the HOEPA 

ability-to-repay rules contain a 

rebuttable presumption of compliance if 

the creditor takes certain steps that are 

generally less rigorous than the DoddFrank Act’s ability-to-repay 

requirements, as implemented in this 

rule. For this reason, and as explained 

further in that rulemaking, the Bureau’s 

2013 HOEPA Final Rule provides that a 

creditor complies with the high-cost 

mortgage ability-to-repay requirement 

by complying with the general abilityto-repay provision, as implemented by 

this final rule.146

The final rule does not prohibit highcost mortgages from being qualified 

mortgages for several reasons. First, the 

Dodd-Frank Act does not prohibit highcost mortgages from receiving qualified 

mortgage status. While the statute 

imposes a points and fees limit on 

qualified mortgages (3 percent, 

generally) that effectively prohibits 

loans that trigger the high-cost mortgage 

points and fee threshold from receiving 

qualified mortgage status, it does not 

impose an annual percentage rate limit 

on qualified mortgages.147 Therefore, 

nothing in the statute prohibits a 

creditor from making a loan with a very 

high interest rate such that the loan is 

a high-cost mortgage while still meeting 

the criteria for a qualified mortgage. 

In addition, the final rule does not 

prohibit high-cost mortgages from being 

qualified mortgages because the Bureau 

believes that, for loans that meet the 

qualified mortgage definition, there is 

reason to presume, subject to rebuttal, 

that the creditor had a reasonable and 

good faith belief in the consumer’s 

ability to repay notwithstanding the 

high interest rate. High-cost mortgages 

will be less likely to meet qualified 

mortgage criteria because the higher 

interest rate will generate higher 

monthly payments and thus require 

higher income to satisfy the debt-toincome test for a qualified mortgage. But 

where that test is satisfied—that is, 

where the consumer has an acceptable 

debt-to-income ratio calculated in 

accordance with qualified mortgage 

underwriting rules—there is no logical 

reason to exclude the loan from the 

definition of a qualified mortgage. 

Allowing a high-cost mortgage to be a 

qualified mortgage can benefit 

consumers. The Bureau anticipates that, 

in the small loan market, creditors may 

sometimes exceed high-cost mortgage 

thresholds due to the unique structure 

of their business. The Bureau believes it 

would be in the interest of consumers to 

afford qualified mortgage status to loans 

meeting the qualified mortgage criteria 

so as to remove any incremental 

impediment that the general ability-torepay provisions would impose on 

making such loans. The Bureau also 

believes this approach could provide an 

incentive to creditors making high-cost 

mortgages to satisfy the qualified 

mortgage requirements, which would 

provide additional consumer 

protections, such as restricting interestonly payments and limiting loan terms 

to 30 years, which are not requirements 

under HOEPA. 


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Furthermore, allowing high-cost 

mortgage loans to be qualified mortgages 

would not impact the various 

impediments to making high-cost 

mortgage loans, including enhanced 

disclosure and counseling requirements 

and the enhanced liability for HOEPA 

violations. Thus, there would remain 

strong disincentives to making high-cost 

mortgages. The Bureau does not believe 

that allowing high-cost mortgages to be 

qualified mortgages would incent 

creditors who would not otherwise 

make high-cost mortgages to start 

making them. 

43(e)(2)(iv) 

TILA section 129C(b)(2)(A)(iv) and (v) 

provides as a condition to meeting the 

definition of a qualified mortgage, in 

addition to other criteria, that the 

underwriting process for a fixed-rate or 

adjustable-rate loan be based on ‘‘a 

payment schedule that fully amortizes 

the loan over the loan term and takes 

into account all applicable taxes, 

insurance, and assessments.’’ The 

statute further states that for an 

adjustable-rate loan, the underwriting 

must be based on ‘‘the maximum rate 

permitted under the loan during the first 

5 years.’’ See TILA section 

129C(b)(2)(A)(v). The statute does not 

define the terms ‘‘fixed rate,’’ 

‘‘adjustable-rate,’’ or ‘‘loan term,’’ and 

provides no additional assumptions 

regarding how to calculate the payment 

obligation. 

These statutory requirements differ 

from the payment calculation 

requirements set forth in existing 

§ 1026.34(a)(4)(iii), which provides a 

presumption of compliance with the 

repayment ability requirements for 

higher-priced mortgage loans, where the 

creditor underwrites the loan using the 

largest payment of principal and interest 

scheduled in the first seven years 

following consummation. The existing 

presumption of compliance under 

§ 1026.34(a)(4)(iii) is available for all 

high-cost and higher-priced mortgage 

loans, except for loans with negative 

amortization or balloon-payment 

mortgages with a term less than seven 

years. In contrast, TILA section 

129C(b)(2)(A) requires the creditor to 

underwrite the loan based on the 

maximum payment during the first five 

years, and does not extend the scope of 

qualified mortgages to any loan that 

contains certain risky features or a loan 

term exceeding 30 years. Loans with a 

balloon-payment feature would not 

meet the definition of a qualified 

mortgage regardless of term length, 

unless made by a creditor that satisfies 

the conditions in § 1026.43(f). 

The Board proposed to implement the 

underwriting requirements of TILA 

section 129C(b)(2)(A)(iv) and (v), for 

purposes of determining whether a loan 

meets the definition of a qualified 

mortgage, in proposed § 226.43(e)(2)(iv). 

Under the proposal, creditors would 

have been required to underwrite a loan 

that is a fixed-, adjustable-, or step-rate 

mortgage using a periodic payment of 

principal and interest based on the 

maximum interest rate permitted during 

the first five years after consummation. 

The terms ‘‘adjustable-rate mortgage,’’ 

‘‘step-rate mortgage,’’ and ‘‘fixed-rate 

mortgage’’ would have had the meaning 

as in current § 1026.18(s)(7)(i) through 

(iii), respectively. 

Specifically, proposed 

§ 226.43(e)(2)(iv) would have provided 

that meeting the definition of a qualified 

mortgage is contingent, in part, on 

creditors meeting the following 

underwriting requirements: 

(1) Proposed § 226.43(e)(2)(iv) would 

have required that the creditor take into 

account any mortgage-related 

obligations when underwriting the 

consumer’s loan; 

(2) Proposed § 226.43(e)(2)(iv)(A) 

would have required the creditor to use 

the maximum interest rate that may 

apply during the first five years after 

consummation; and 

(3) Proposed § 226.43(e)(2)(iv)(B) 

would have required that the periodic 

payments of principal and interest repay 

either the outstanding principal balance 

over the remaining term of the loan as 

of the date the interest rate adjusts to the 

maximum interest rate that can occur 

during the first five years after 

consummation, or the loan amount over 

the loan term. 

These three underwriting conditions 

under proposed § 226.43(e)(2)(iv), and 

the approach to these criteria adopted in 

the final rule, are discussed below. 

Proposed § 226.43(e)(2)(iv) would 

have implemented TILA section 

129C(b)(2)(A)(iv) and (v), in part, and 

provided that, to be a qualified mortgage 

under proposed § 1026.43(e)(2), the 

creditor must underwrite the loan taking 

into account any mortgage-related 

obligations. Proposed comment 

43(e)(2)(iv)–6 would have provided 

cross-references to proposed 

§ 226.43(b)(8) and associated 

commentary. The Board proposed to use 

the term ‘‘mortgage-related obligations’’ 

in place of ‘‘all applicable taxes, 

insurance (including mortgage 

guarantee insurance), and assessments.’’ 

Proposed § 226.43(b)(8) would have 

defined the term ‘‘mortgage-related 

obligations’’ to mean property taxes; 

mortgage-related insurance premiums 

required by the creditor as set forth in 

proposed § 226.45(b)(1); homeowners 

association, condominium, and 

cooperative fees; ground rent or 

leasehold payments; and special 

assessments. 

Commenters generally supported the 

inclusion of mortgage-related 

obligations in the underwriting 

requirement in proposed 

§ 226.43(e)(2)(iv). Several industry trade 

associations, banks, civil rights 

organizations, and consumer advocacy 

groups specifically supported the 

requirement. Several commenters 

requested clear guidance on the 

amounts to be included in the monthly 

payment amount, including mortgagerelated obligations. In addition, a civil 

rights organization and several 

consumer advocacy groups argued that 

the creditor should also be required to 

consider recurring, non-debt expenses, 

such as medical supplies and child care. 

As discussed above in the section-bysection analysis of § 1026.43(b)(8), the 

Bureau is adopting the proposed 

definition of mortgage-related 

obligations in renumbered 

§ 1026.43(b)(8), with certain clarifying 

changes and additional examples. 

For the reasons discussed above, the 

Bureau is adopting the mortgage-related 

obligations portion of § 226.43(e)(2)(vi) 

as proposed in renumbered 

§ 1026.43(e)(2)(vi). The final rule does 

not contain a specific requirement that 

the creditor consider, when 

underwriting the consumer’s monthly 

payment, recurring non-debt expenses, 

such as medical supplies and child care. 

However, such expenses, if known to 

the creditor at the time of 

consummation, may be relevant to a 

consumer’s ability to rebut the 

presumption of compliance that applies 

to qualified mortgages that are higherpriced covered transactions. See 

section-by-section analysis of 

§ 1026.43(e)(1)(ii)(B). 

43(e)(2)(iv)(A) 

Proposed § 226.43(e)(2)(iv)(A) would 

have implemented TILA section 

129C(b)(2)(A)(iv) and (v), in part, and 

provided that, to be a qualified mortgage 

under proposed § 1026.43(e)(2), the 

creditor must underwrite the loan using 

the maximum interest rate that may 

apply during the first five years after 

consummation. However, the statute 

does not define the term ‘‘maximum 

rate,’’ nor does the statute clarify 

whether the phrase ‘‘the maximum rate 

permitted under the loan during the first 

5 years’’ means the creditor should use 

the maximum interest rate that occurs 

during the first five years of the loan 

beginning with the first periodic 

payment due under the loan, or during 


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Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 6521 

the first five years after consummation 

of the loan. The former approach would 

capture the rate recast for a 5/1 hybrid 

adjustable-rate mortgage that occurs on 

the due date of the 60th monthly 

payment, and the latter would not. 

The Board interpreted the phrase 

‘‘maximum rate permitted’’ as requiring 

creditors to underwrite the loan based 

on the maximum interest rate that could 

occur under the terms of the loan during 

the first five years after consummation, 

assuming a rising index value. See 

proposed comment 43(e)(2)(iv)–1. The 

Board noted that this interpretation is 

consistent with current guidance 

contained in Regulation Z regarding 

disclosure of the maximum interest rate. 

See MDIA Interim Rule, 75 FR 58471 

(Sept. 24, 2010). The Board further 

stated that this interpretation is 

consistent with congressional intent to 

encourage creditors to make loans to 

consumers that are less risky and that 

afford the consumer a reasonable period 

of time to repay (i.e., 5 years) on less 

risky terms. For the reasons described in 

the proposed rule, the Bureau is 

adopting the ‘‘maximum interest rate’’ 

provision in § 1026.43(e)(2)(iv) as 

proposed in renumbered 

§ 1026.43(e)(2)(iv). 

The Board proposed to interpret the 

phrase ‘‘during the first 5 years’’ as 

requiring creditors to underwrite the 

loan based on the maximum interest 

rate that may apply during the first five 

years after consummation. TILA section 

129C(b)(2)(A)(v). The preamble to the 

proposed rule explains several reasons 

for this interpretation. First, the Board 

noted that a plain reading of the 

statutory language conveys that the 

‘‘first five years’’ is the first five years of 

the loan once it comes into existence 

(i.e., once it is consummated). The 

Board believed that interpreting the 

phrase to mean the first five years 

beginning with the first periodic 

payment due under the loan would 

require an expansive reading of the 

statutory text. 

Second, the Board noted that the 

intent of this underwriting condition is 

to ensure that the consumer can afford 

the loan’s payments for a reasonable 

amount of time and that Congress 

intended for a reasonable amount of 

time to be the first five years after 

consummation. 

Third, the Board proposed this 

approach because it is consistent with 

prior iterations of this statutory text and 

the Board’s 2008 HOEPA Final Rule. As 

noted above, the Dodd-Frank Act 

codifies many aspects of the repayment 

ability requirements contained in 

existing § 1026.34(a)(4) of the Board’s 

2008 HOEPA Final Rule. 

Fourth, the Board believed that 

interpreting the phrase ‘‘during the first 

five years’’ as including the rate 

adjustment at the end of the fifth year 

would be of limited benefit to 

consumers because creditors could 

easily structure their product offerings 

to avoid application of the rule. For 

example, a creditor could move a rate 

adjustment that typically occurs on the 

due date of the 60th monthly payment 

to due date of the first month that falls 

outside the specified time horizon, 

making any proposal to extend the time 

period in order to include the rate 

adjustment of diminished value. 

Finally, the Board believed that the 

proposed timing of the five-year period 

could appropriately differ from the 

approach used under the 2010 MDIA 

Interim Final Rule, given the different 

purposes of the rules. The Board 

amended the 2010 MDIA Interim Final 

Rule to require that creditors base their 

interest rate and payment disclosures on 

the first five years after the due date of 

the first regular periodic payment rather 

than the first five years after 

consummation. See 75 FR 81836, 81839 

(Dec. 29, 2010). The revision clarified 

that the disclosure requirements for 5⁄1

hybrid adjustable-rate mortgages must 

include the rate adjustment that occurs 

on the due date of the 60th monthly 

payment, which typically occurs more 

than five years after consummation. The 

disclosure requirements under the 2010 

MDIA Interim Final Rule, as revised, are 

intended to help make consumers aware 

of changes to their loan terms that may 

occur if they choose to stay in the loan 

beyond five years and therefore, helps to 

ensure consumers avoid the uninformed 

use of credit. The Board believed a 

different approach is appropriate under 

proposed § 226.43(e)(2)(iv) because that 

requirement seeks to ensure that the 

loan’s payments are affordable for a 

reasonable period of time. For the 

reasons stated above, the Board believed 

that Congress intended the first five 

years after consummation to be a 

reasonable period of time to ensure that 

the consumer has the ability to repay 

the loan according to its terms. 

For all the above-listed reasons, the 

Board interpreted the statutory text as 

requiring that the creditor underwrite 

the loan using the maximum interest 

rate during the first five years after 

consummation. The Board solicited 

comment on its interpretation of the 

phrase ‘‘first five years’’ and the 

appropriateness of this approach. The 

Board also proposed clarifying 

commentary and examples, which are 

described below. 

As described above, commenters 

generally supported the payment 

calculation requirements in the 

proposed rule, including the five-year 

payment calculation. A comment from a 

coalition of consumer advocates 

suggested that the period may not be 

long enough to assure a consumer’s 

ability to repay given that the average 

homeowner holds their mortgage for 

approximately seven years, and 

suggested that the five-year payment 

calculation requirement be extended to 

reflect the average mortgage duration of 

the first ten years of the loan. Two 

industry commenters suggested that the 

time horizon in the required payment 

calculation for qualified mortgages be 

consistent with the proposed 

requirement in the 2011 QRM Proposed 

Rule that the payment calculation be 

based on the maximum rate in the first 

five years after the date on which the 

first regular periodic payment will be 

due. One such commenter noted that 

the payment calculation approach in the 

2011 QRM Proposed Rule is more 

protective of consumers. Another 

industry commenter suggested that the 

final rule should measure the first five 

years from the first regularly scheduled 

payment, for consistency with the 2010 

MDIA Interim Final Rule. An 

association of State bank regulators 

agreed with the Board’s reasoning, 

noting that creditors could structure 

loans to recast outside any parameter set 

by the rule and that an effective way to 

prevent purposeful evasion of the 

payment calculation provision would 

require legislation. 

Notwithstanding the Board’s 

proposed approach, the Bureau 

interprets the phrase ‘‘during the first 5 

years’’ as requiring creditors to 

underwrite the loan based on the 

maximum interest rate that may apply 

during the first five years after the first 

regular periodic payment will be due. 

Like the Board, the Bureau finds the 

statutory language to be ambiguous. 

However, the Bureau believes that the 

statutory phrase ‘‘during the first 5 

years’’ could be given either meaning, 

and that this approach provides greater 

protections to consumers by requiring 

creditors to underwrite qualified 

mortgages using the rate that would 

apply after the recast of a five-year 

adjustable rate mortgage. Further, as 

noted, this approach is consistent with 

the payment calculation in the 2011 

QRM Proposed Rule and in existing 

Regulation Z with respect to the 

disclosure requirements for interest 

rates on adjustable-rate amortizing 

loans. 

Accordingly, § 1026.43(e)(2)(iv)(A) 

provides that a qualified mortgage under 

§ 1026.43(e)(2) must be underwritten, 

taking into account any mortgageVerDate Mar<15>2010 20:04 Jan 29, 2013 Jkt 229001 PO 00000 Frm 00115 Fmt 4701 Sfmt 4700 E:\FR\FM\30JAR2.SGM 30JAR2

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6522 Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 

related obligations, using the maximum 

interest rate that may apply during the 

first five years after the date on which 

the first regular periodic payment will 

be due. Although the Bureau is 

finalizing the commentary and 

examples to § 226.43(e)(2)(iv) as 

proposed in the commentary to 

renumbered § 1026.43(e)(2)(iv), the final 

rule makes conforming changes to the 

proposed commentary to reflect the 

adjusted time horizon. The proposed 

commentary and the changes to the 

proposed commentary as implemented 

in the final rule are described below. 

The Bureau is finalizing comment 

43(e)(2)(iv)–1 as proposed, but with 

conforming changes to reflect the new 

time horizon. In the final rule, the 

comment provides guidance to creditors 

on how to determine the maximum 

interest rate during the first five years 

after the date on which the first regular 

periodic payment will be due. This 

comment explains that creditors must 

use the maximum rate that could apply 

at any time during the first five years 

after the date on which the first regular 

periodic payment will be due, 

regardless of whether the maximum rate 

is reached at the first or subsequent 

adjustment during such five year period. 

The Bureau is finalizing comment 

43(e)(2)(iv)(A)–2 as proposed. That 

comment clarifies that for a fixed-rate 

mortgage, creditors should use the 

interest rate in effect at consummation, 

and provides a cross-reference to 

§ 1026.18(s)(7)(iii) for the meaning of 

the term ‘‘fixed-rate mortgage.’’ 

The Bureau is finalizing comment 

43(e)(2)(iv)–3 as proposed, but with 

conforming changes to reflect the new 

time horizon. That comment provides 

guidance to creditors regarding 

treatment of periodic interest rate 

adjustment caps, and explains that, for 

an adjustable-rate mortgage, creditors 

should assume the interest rate 

increases after consummation as rapidly 

as possible, taking into account the 

terms of the legal obligation. The 

comment further explains that creditors 

should account for any periodic interest 

rate adjustment cap that may limit how 

quickly the interest rate can increase 

under the terms of the legal obligation. 

The comment states that where a range 

for the maximum interest rate during 

the first five years is provided, the 

highest rate in that range is the 

maximum interest rate for purposes of 

this section. Finally, the comment 

clarifies that where the terms of the 

legal obligation are not based on an 

index plus a margin, or formula, the 

creditor must use the maximum interest 

rate that occurs during the first five 

years after the date on which the first 

regular periodic payment will be due. 

The Bureau is also adopting comment 

43(e)(2)(iv)–3.i through .iii as proposed, 

but with conforming changes to the 

comment to reflect the new time 

horizon. Those comments provide 

examples of how to determine the 

maximum interest rate. For example, 

comment 43(e)(2)(iv)–3.1 illustrates how 

to determine the maximum interest rate 

in the first five years after the date on 

which the first regular periodic payment 

will be due for an adjustable-rate 

mortgage with a discounted rate for 

three years. 

The Bureau is also finalizing 

comment 43(e)(2)(iv)–4 as proposed, but 

with conforming changes to reflect the 

new time horizon. Comment 

43(e)(2)(iv)–4 clarifies the meaning of 

the phrase ‘‘first five years after the date 

on which the first regular periodic 

payment will be due.’’ This comment 

provides that under 

§ 1026.43(e)(2)(iv)(A), the creditor must 

underwrite the loan using the maximum 

interest rate that may apply during the 

first five years after the date on which 

the first regular periodic payment will 

be due, and provides an illustrative 

example. 

43(e)(2)(iv)(B) 

Proposed § 226.43(e)(2)(iv)(B) would 

have implemented TILA section 

129C(b)(2)(A)(iv) and (v), in part, by 

providing, as part of meeting the 

definition of a qualified mortgage under 

proposed § 1026.43(e)(2), that the 

creditor underwrite the loan using 

periodic payments of principal and 

interest that will repay either (1) the 

outstanding principal balance over the 

remaining term of the loan as of the date 

the interest rate adjusts to the maximum 

interest rate that occurs during the first 

five years after consummation; or (2) the 

loan amount over the loan term. See 

proposed § 226.43(e)(2)(iv)(B)(1) and (2). 

TILA section 129C(b)(2)(A)(iv) and (v) 

states that underwriting should be based 

‘‘on a payment schedule that fully 

amortizes the loan over the loan term.’’ 

The Board noted that unlike the 

payment calculation assumptions set 

forth for purposes of the general abilityto-repay rule, under TILA section 

129C(a)(6), the underwriting conditions 

for purposes of meeting the definition of 

a qualified mortgage do not specify the 

loan amount that should be repaid, and 

do not define ‘‘loan term.’’ For 

consistency and to facilitate 

compliance, the Board proposed to use 

the terms ‘‘loan amount’’ and ‘‘loan 

term’’ in proposed § 226.43(b)(5) and 

(b), respectively, for purposes of this 

underwriting condition. 

However, the Board also believed that 

a loan that meets the definition of a 

qualified mortgage and which has the 

benefit of other safeguards, such as 

limits on loan features and fees, merits 

flexibility in the underwriting process. 

Accordingly, the Board proposed to 

permit creditors to underwrite the loan 

using periodic payments of principal 

and interest that will repay either the 

outstanding principal balance as of the 

date the maximum interest rate during 

the first five years after consummation 

takes effect under the terms of the loan, 

or the loan amount as of the date of 

consummation. The Board believed the 

former approach more accurately 

reflects the largest payment amount that 

the consumer would need to make 

under the terms of the loan during the 

first five years after consummation, 

whereas the latter approach would 

actually overstate the payment amounts 

required. This approach would have set 

a minimum standard for qualified 

mortgages, while affording creditors 

latitude to choose either approach to 

facilitate compliance. 

For the reasons described in the 

proposed rule, the Bureau is finalizing 

§ 226.43(e)(2)(iv)(A) as proposed in 

renumbered § 1026.43(e)(2)(iv)(A). 

However, the final rule makes 

conforming changes to the proposed 

commentary to reflect the adjusted timehorizon to the first five years after the 

due date of the first regular periodic 

payment. The proposed commentary 

and the changes to the proposed 

commentary in the final rule are 

described below. 

The Bureau is finalizing comment 

43(e)(2)(iv)–5 as proposed, but with 

conforming changes to reflect the new 

time horizon. Comment 43(e)(2)(iv)–5 

provides further clarification to 

creditors regarding the loan amount to 

be used for purposes of this second 

condition in § 1026.43(e)(2)(iv). The 

comment explains that for a creditor to 

meet the definition of a qualified 

mortgage under § 1026.43(e)(2), the 

creditor must determine the periodic 

payment of principal and interest using 

the maximum interest rate permitted 

during the first five years after the date 

on which the first regular periodic 

payment will be due that repays either 

(1) the outstanding principal balance as 

of the earliest date the maximum 

interest rate can take effect under the 

terms of the legal obligation, over the 

remaining term of the loan, or (2) the 

loan amount, as that term is defined in 

§ 1026.43(b)(5), over the entire loan 

term, as that term is defined in 

§ 1026.43(b)(6). This comment provides 

illustrative examples for both 

approaches. 


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The Bureau is finalizing comment 

43(c)(2)(iv)–6 as proposed. That 

comment reiterates that 

§ 1026.43(e)(2)(iv) requires creditors to 

take mortgage-related obligations into 

account when underwriting the loan 

and refers to § 1026.43(b)(8) and its 

associated commentary for the meaning 

of mortgage-related obligations. 

The Bureau is also finalizing 

comment 43(e)(2)(iv)–7 as proposed, but 

with conforming changes to reflect the 

new time horizon. Comment 

43(e)(2)(iv)–7 provides examples of how 

to determine the periodic payment of 

principal and interest based on the 

maximum interest rate during the first 

five years after the date on which the 

first regular periodic payment will be 

due under § 1026.43(e)(2)(iv). The final 

rule provides an additional example of 

how to determine the periodic payment 

of principal and interest based on the 

maximum interest rate during the first 

five years after the date on which the 

first regular periodic payment will be 

due under § 1026.43(e)(2)(iv) for an 

adjustable-rate mortgage with a discount 

of seven years, to illustrate how the 

payment calculation applies in a loan 

that adjusts after the five-year time 

horizon. Comment 43(e)(2)(iv)–7.iv 

provides an example of a loan in an 

amount of $200,000 with a 30-year loan 

term, that provides for a discounted 

interest rate of 6 percent that is fixed for 

an initial period of seven years, after 

which the interest rate will adjust 

annually based on a specified index 

plus a margin of 3 percent, subject to a 

2 percent annual interest rate 

adjustment cap. The index value in 

effect at consummation is 4.5 percent. 

The loan is consummated on March 15, 

2014, and the first regular periodic 

payment is due May 1, 2014. Under the 

terms of the loan agreement, the first 

rate adjustment is on April 1, 2021 (the 

due date of the 84th monthly payment), 

which occurs more than five years after 

the date on which the first regular 

periodic payment will be due. Thus, the 

maximum interest rate under the terms 

of the loan during the first five years 

after the date on which the first regular 

periodic payment will be due is 6 

percent. Under this example, the 

transaction will meet the definition of a 

qualified mortgage if the creditor 

underwrites the loan using the monthly 

payment of principal and interest of 

$1,199 to repay the loan amount of 

$200,000 over the 30-year loan term 

using the maximum interest rate during 

the first five years after the date on 

which the first regular periodic payment 

will be due of 6 percent. 

43(e)(2)(v) 

43(e)(2)(v)(A) 

TILA section 129C(b)(2)(A)(iii) 

provides that a condition for meeting 

the requirements of a qualified mortgage 

is that the income and financial 

resources relied upon to qualify the 

obligors on the residential mortgage 

loan are verified and documented. This 

requirement is consistent with 

requirement under the general abilityto-repay standard to consider and verify 

a consumer’s income or assets using 

third-party records, pursuant to TILA 

section 129C(a)(1) and (3), as discussed 

above in the section-by-section analysis 

of § 1026.43(c)(2)(i) and (c)(4). 

Proposed § 226.43(e)(2)(v) would have 

implemented TILA section 

129C(b)(2)(A)(iii) by providing that for a 

covered transaction to be a qualified 

mortgage, the creditor must consider 

and verify the consumer’s current or 

reasonably expected income or assets to 

determine the consumer’s repayment 

ability, as required by proposed 

§ 226.43(c)(2)(i) and (c)(4). The proposal 

used the term ‘‘assets’’ instead of 

‘‘financial resources’’ for consistency 

with other provisions in Regulation Z 

and, as noted above, the Bureau believes 

that the terms have the same meaning. 

Proposed comment 43(e)(2)(v)–1 would 

have clarified that creditors may rely on 

commentary to proposed 

§ 226.43(c)(2)(i), (c)(3) and (c)(4) for 

guidance regarding considering and 

verifying the consumer’s income or 

assets to satisfy the conditions for a 

qualified mortgage under proposed 

§ 226.43(e)(2)(v). 

For the reasons discussed in the 

proposal, the Bureau is finalizing 

§ 226.43(e)(2)(v)(A) as proposed in 

renumbered § 1026.43(e)(2)(v)(A), with 

additional clarification that the value of 

the dwelling includes any real property 

to which the dwelling is attached. 

Renumbered § 1026.43(e)(2)(v)(A) also 

provides that the creditor must consider 

and verify the consumer’s current or 

reasonably expected income or assets 

other than the value of the dwelling 

(including any real property attached to 

the dwelling) that secures the loan, in 

accordance with appendix Q, in 

addition to § 1026.43(c)(2)(i) and (c)(4). 

Comment 43(e)(2)(v)–2 clarifies this 

provision, by explaining that, for 

purposes of this requirement, the 

creditor must consider and verify, at a 

minimum, any income specified in 

appendix Q. A creditor may also 

consider and verify any other income in 

accordance with § 1026.43(c)(2)(i) and 

(c)(4); however, such income would not 

be included in the total monthly debtto-income ratio determination by 

§ 1026.43(e)(2)(vi). As described below, 

appendix Q contains specific standards 

for defining ‘‘income,’’ to provide 

certainty to creditors as to whether a 

loan meets the requirements for a 

qualified mortgage. The final rule 

includes this reference to appendix Q 

and additional comment to clarify the 

relationship between the requirement to 

consider a consumer’s current or 

reasonably expected income in 

§ 1026.43(e)(2)(v)(A) and the definition 

of ‘‘income’’ in appendix Q. In other 

words, a creditor who considers 

‘‘income’’ as defined in appendix Q 

meets the income requirement in 

§ 1026.43(e)(2)(v)(A), so long as that 

income is verified pursuant to 

§ 1026.43(c)(4). In addition, comment 

43(e)(2)(v)–1 provides that for guidance 

on satisfying § 1026.43(e)(2)(v), a 

creditor may rely on commentary to 

§ 1026.43(c)(2)(i) and (vi), (c)(3), and 

(c)(4). 

43(e)(2)(v)(B) 

The Board’s proposed Alternative 2 

would have required that creditors 

consider and verify the following 

additional underwriting requirements, 

which are also required under the 

general ability-to-repay standard: the 

consumer’s employment status, the 

consumer’s monthly payment on any 

simultaneous loans, the consumer’s 

current debt obligations, the consumer’s 

monthly debt-to-income ratio or 

residual income, and the consumer’s 

credit history. The commentary would 

have provided that creditors could look 

to commentary on the general 

repayment ability provisions under 

proposed § 226.43(c)(2)(i), (ii), (iv), and 

(vi) through (viii), and (c)(3), (c)(4), 

(c)(6), and (c)(7) for guidance regarding 

considering and verifying the 

consumer’s repayment ability to satisfy 

the conditions under § 226.43(e)(2)(v) 

for a qualified mortgage. See proposed 

comment 43(e)(2)(v)–1 under 

Alternative 2. The Board proposed these 

additions pursuant to its legal authority 

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

Board believed that adding these 

requirements may be necessary to better 

ensure that the consumers are offered 

and receive loans on terms that 

reasonably reflect their ability to repay 

the loan. 

In the final rule, § 1026.43(e)(2)(v)(B) 

provides that, to meet the requirements 

for a qualified mortgage under 

§ 1026.43(e)(2), the creditor must 

consider and verify the consumer’s 

current debt obligations, alimony, and 

child support, in accordance with 

appendix Q and § 1026.43(c)(2)(vi) and 

(c)(3). In addition, new comment 

43(e)(2)(v)–3 clarifies that, for purposes 


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6524 Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 

148The proposal cited Yuliya Demyanyk & Otto 

Van Hemert, Understanding the Subprime Mortgage 

Crisis, 24 Rev. Fin. Stud. 1848 (2011); James A. 

Berkovec et al., Race, Redlining, and Residential 

Mortgage Loan Performance, 9 J. Real Est. Fin. & 

Econs. 263 (1994). 

of considering and verifying the 

consumer’s current debt obligations, 

alimony, and child support pursuant to 

§ 1026.43(e)(2)(v)(B), the creditor must 

consider and verify, at a minimum, any 

debt or liability specified in appendix 

Q. A creditor may also consider and 

verify other debt in accordance with 

§ 1026.43(c)(2)(vi) and (c)(3); however, 

such debt would not be included in the 

total monthly debt-to-income ratio 

determination required by 

§ 1026.43(e)(2)(vi). As described below, 

appendix Q contains specific standards 

for defining ‘‘debt,’’ to provide certainty 

to creditors as to whether a loan meets 

the requirements for a qualified 

mortgage. The final rule includes this 

reference to appendix Q and additional 

comment to clarify the relationship 

between the requirement to consider a 

consumer’s current debt obligations, 

alimony, and child support in 

§ 1026.43(e)(2)(v)(B) and the definition 

of ‘‘debt’’ in appendix Q. In other 

words, a creditor who considers ‘‘debt’’ 

as defined in appendix Q meets the 

requirement in § 1026.43(e)(2)(v)(B), so 

long as that income is verified pursuant 

to § 1026.43(c)(3). 

The Bureau is incorporating the 

requirement that the creditor consider 

and verify the consumer’s current debt 

obligations, alimony, and child support 

into the definition of a qualified 

mortgage in § 1026.43(e)(2) pursuant to 

its authority under TILA section 

129C(b)(3)(B)(i). The Bureau finds that 

this addition to the qualified mortgage 

criteria is necessary and proper to 

ensure that responsible, affordable 

mortgage credit remains available to 

consumers in a manner that is 

consistent with the purposes of TILA 

section 129C and necessary and 

appropriate to effectuate the purposes of 

TILA section 129C, which includes 

assuring that consumers are offered and 

receive residential mortgage loans on 

terms that reasonably reflect their ability 

to repay the loan. The Bureau also 

incorporates this requirement pursuant 

to its authority under TILA section 

105(a) to issue regulations that, among 

other things, contain such additional 

requirements, other provisions, or that 

provide for such adjustments for all or 

any class of transactions, that in the 

Bureau’s judgment are necessary or 

proper to effectuate the purposes of 

TILA, which include the above purpose 

of section 129C, among other things. 

The Bureau believes that this addition 

to the qualified mortgage criteria is 

necessary and proper to achieve this 

purpose. In particular, as discussed 

above, the Bureau finds that 

incorporating the requirement that a 

creditor consider and verify a 

consumer’s current debt obligations, 

alimony, and child support into the 

qualified mortgage criteria ensures that 

creditors consider, on an individual 

basis, and verify whether a consumer 

has the ability to repay a qualified 

mortgage. Furthermore, together with 

the requirement to consider and verify 

income, the Bureau believes this 

requirement to consider and verify debt 

obligations, alimony, and child support 

strengthens consumer protection and is 

fundamental to the underlying 

components of the requirement in 

§ 1026.43(e)(2)(vi), which provides a 

specific debt-to-income ratio threshold. 

Ultimately, the Bureau believes that 

the statute is fundamentally about 

establishing standards for determining a 

consumer’s reasonable ability to repay 

and therefore believes it is appropriate 

to incorporate the ability-to-repay 

underwriting requirements into the 

qualified mortgage definition to ensure 

consistent consumer protections for 

repayment ability for a qualified 

mortgage. However, as described above, 

most of the ability-to-repay 

requirements must be considered and 

verified to satisfy the specific debt-toincome ratio requirement in 

§ 1026.43(e)(2)(vi), which requires the 

creditor to follow the standards for 

‘‘debt’’ and ‘‘income’’ in appendix Q, 

including the consumer’s employment 

status, monthly payment on the covered 

transaction, monthly payment on 

simultaneous loans of which the 

creditor is aware, and monthly payment 

on mortgage-related obligations. For this 

reason, unlike the Board’s proposed 

Alternative 2, the final rule does not 

separately require consideration and 

verification of these factors that are part 

of the general ability-to-repay analysis. 

43(e)(2)(vi) 

TILA section 129C(b)(2)(vi) states that 

the term qualified mortgage includes 

any mortgage loan ‘‘that complies with 

any guidelines or regulations 

established by the Bureau relating to 

ratios of total monthly debt to monthly 

income or alternative measure of ability 

to pay regular expenses after payment of 

total monthly debt, taking into account 

the income levels of the consumer and 

such other factors as the Bureau may 

determine relevant and consistent with 

the purposes described in paragraph 

(3)(B)(i).’’ 

Board’s Proposal 

Under proposed § 226.43(e)(2)(v) 

under Alternative 1, creditors would not 

have been required to consider the 

consumer’s debt-to-income ratio or 

residual income to make a qualified 

mortgage. The Board noted several 

reasons for proposing this approach. 

First, the Board noted that the debt-toincome ratio and residual income are 

based on widely accepted standards 

which, although flexible, do not provide 

certainty that a loan is a qualified 

mortgage. The Board believed this 

approach is contrary to Congress’ 

apparent intent to provide incentives to 

creditors to make qualified mortgages, 

since they have less risky features and 

terms. Second, the Board noted that 

because the definition of a qualified 

mortgage under Alternative 1 would not 

require consideration of current debt 

obligations or simultaneous loans, it 

would be impossible for a creditor to 

calculate the debt-to-income ratio or 

residual income without adding those 

requirements as well. Third, the Board 

stated that data shows that the debt-toincome ratio generally does not have a 

significant predictive power of loan 

performance once the effects of credit 

history, loan type, and loan-to-value 

ratio are considered.148 Fourth, the 

Board noted that although consideration 

of the mortgage debt-to-income ratio (or 

‘‘front-end’’ debt-to-income) might help 

consumers receive loans on terms that 

reasonably reflect their ability to repay 

the loans, the Board’s outreach 

indicated that creditors often do not 

find that ‘‘front-end’’ debt-to-income 

ratio is a strong predictor of ability to 

repay. Finally, the Board stated its 

concern that the benefit of including the 

debt-to-income ratio or residual income 

in the definition of qualified mortgage 

may not outweigh the cost to certain 

consumers who may not meet widely 

accepted debt-to-income ratio standards, 

but may have other compensating 

factors, such as sufficient residual 

income or other resources to be able to 

reasonably afford the mortgage. A 

definition of qualified mortgage that 

required consideration of the 

consumer’s debt-to-income or residual 

income could limit the availability of 

credit to those consumers. 

However, under proposed 

§ 226.43(e)(2)(v) under Alternative 2, a 

qualified mortgage would have been 

defined as a loan which, among other 

things, the creditor considers the 

consumer’s monthly debt-to-income 

ratio or residual income, pursuant to 

proposed § 226.43(c)(2)(vii) and (c)(7). 

The Board noted that, without 

determining the consumer’s debt-toincome ratio, a creditor could originate 


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a qualified mortgage without any 

requirement to consider the effect of the 

new loan payment on the consumer’s 

overall financial picture. The consumer 

could have a very high total debt-toincome ratio under reasonable 

underwriting standards, and be 

predicted to default soon after the first 

scheduled mortgage payment. 

Accordingly, the Board believed that 

including the debt-to-income ratio or 

residual income in the definition of 

qualified mortgage might ensure that the 

consumer has a reasonable ability to 

repay the loan. 

The Board did not propose a 

quantitative standard for the debt-toincome ratio in the qualified mortgage 

definition, but solicited comment on the 

appropriateness of such an approach. 

The Board’s proposal noted several 

reasons for declining to introduce a 

specific debt-to-income ratio for 

qualified mortgages. First, as explained 

in the 2008 HOEPA Final Rule, the 

Board was concerned that setting a 

specific debt-to-income ratio could limit 

credit availability without providing 

adequate off-setting benefits. 73 FR 4455 

(July 30, 2008). The Board sought 

comment on what exceptions may be 

necessary for low-income consumers or 

consumers living in high-cost areas, or 

for other cases, if the Board were to 

adopt a quantitative debt-to-income 

standard. 

Second, outreach conducted by the 

Board revealed a range of underwriting 

guidelines for debt-to-income ratios 

based on product type, whether 

creditors used manual or automated 

underwriting, and special 

considerations for high- and low-income 

consumers. The Board believed that 

setting a quantitative standard would 

require it to address the operational 

issues related to the calculation of the 

debt-to-income ratio. For example, the 

Board would need clearly to define 

income and current debt obligations, as 

well as compensating factors and the 

situations in which creditors may use 

compensating factors. In addition, the 

debt-to-income ratio is often a floating 

metric, since the percentage changes as 

new information about income or 

current debt obligations becomes 

available. A quantitative standard 

would require guidelines on the timing 

of the debt-to-income ratio calculation, 

and what circumstances would 

necessitate a re-calculation of the debtto-income ratio. Furthermore, a 

quantitative standard may also need to 

provide tolerances for mistakes made in 

calculating the debt-to-income ratio. 

The rule would also need to address the 

use of automated underwriting systems 

in determining the debt-to-income. 

For all these reasons, the Board did 

not propose a quantitative standard for 

the debt-to-income ratio. The Board 

recognized, however, that creditors, and 

ultimately consumers, may benefit from 

a higher degree of certainty surrounding 

the qualified mortgage definition that a 

quantitative standard could provide. 

Therefore, the Board solicited comment 

on whether and how it should prescribe 

a quantitative standard for the debt-toincome ratio or residual income for the 

qualified mortgage definition. 

Comments 

As noted above, the Bureau received 

comments in response to the Board’s 

2011 ATR Proposal and in response to 

the Bureau’s May 2012 notice to reopen 

the comment period. The reopened 

comment period solicited comment 

specifically on new data and 

information obtained from the Federal 

Housing Finance Agency (FHFA) after 

the close of the original comment 

period. In the notice to reopen the 

comment period, the Bureau, among 

other things, solicited comment on data 

and information as well as sought 

comment specifically on certain 

underwriting factors, such as a debt-toincome ratio, and their relationship to 

measures of delinquency or their impact 

on the number or percentage of 

mortgage loans that would be a qualified 

mortgage. In addition, the Bureau 

sought comment and data on estimates 

of litigation costs and liability risks 

associated with claims alleging a 

violation of ability-to-repay 

requirements. 

Comments on general debt-to-income 

ratio or residual income requirement. In 

response to the proposed rule, some 

industry commenters argued that the 

final rule should not require 

consideration and verification of a 

consumer’s monthly debt-to-income 

ratio or residual income for a qualified 

mortgage. They argued that such an 

approach would create a vague, 

subjective definition of qualified 

mortgage. Certain industry commenters 

requested that if the Bureau added 

consideration and verification of the 

debt-to-income ratio or residual income 

to the definition of a qualified mortgage, 

the Bureau establish flexible standards. 

These commenters argued that imposing 

low debt-to-income ratio requirements 

would be devastating to many potential 

creditworthy homebuyers. 

Other industry commenters suggested 

that if the Bureau added consideration 

and verification of the debt-to-income 

ratio or residual income to the 

definition of a qualified mortgage, the 

Bureau provide clear and objective 

standards. For example, one industry 

trade group commenter noted that, 

historically, the debt-to-income ratio has 

been a key metric used to assess a 

consumer’s ability to repay a mortgage 

loan, and has been incorporated into 

both manual and automated 

underwriting systems used in the 

industry. Some industry commenters 

asked that the final rule adopt the VA 

calculation of residual income. See also 

the section-by-section analysis of 

section 1026.43(c)(7). Another industry 

commenter suggested that any mortgage 

with a residual income of at least $600 

be sufficient for a qualified mortgage. 

Another industry commenter suggested 

that, at a minimum, residual income 

considerations would require a 

workable standard with clear, specific, 

and objective criteria and be explicitly 

limited to specific expense items. An 

industry trade group commenter 

recommended that if the Bureau 

requires the use of residual income, 

creditors be allowed flexibility in 

considering residual income along with 

other factors in loan underwriting. 

Comments that addressed a specific 

debt-to-income ratio are discussed 

below. 

Several industry commenters 

recommended that if the Bureau 

required consideration and verification 

of the debt-to-income ratio or residual 

income for a qualified mortgage, 

creditors be permitted to take 

compensating factors into account. They 

suggested that the Bureau provide 

examples of compensating factors, such 

as: (1) The property being an energyefficient home; (2) the consumer having 

probability for increased earnings based 

on education, job training, or length of 

time in a profession; (3) the consumer 

having demonstrated ability to carry a 

higher total debt-load while maintaining 

a good credit history for at least 12 

months; (4) future expenses being lower, 

such as child-support payments to cease 

for child soon to reach age of majority; 

or (5) the consumer having substantial 

verified liquid assets. 

Consumer advocates generally 

supported adding consideration and 

verification of the debt-to-income ratio 

or residual income to the definition of 

a qualified mortgage. They noted that 

such inclusion would help ensure that 

consumers receive mortgages they can 

afford and that such factors are basic, 

core features of common-sense 

underwriting that are clearly related to 

the risk of consumer default. To that 

point, these commenters contended that 

residual income is an essential 

component, especially for lower-income 

families. One consumer group 

commenter stressed that residual 

income standards should be 


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6526 Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 

incorporated, and pointed to the FHFA 

data in the Bureau’s notice to reopen the 

comment period to demonstrate that 

relying solely on debt-to-income ratios 

is insufficient to ensure sound lending 

based on a consumer’s ability to repay. 

Many industry and consumer group 

commenters and interested parties 

supported use of a specific debt-toincome ratio threshold. For example, 

some suggested that if a consumer’s 

total debt-to-income ratio is below a 

specified threshold, the mortgage loan 

should satisfy the qualified mortgage 

requirements, assuming other relevant 

conditions are met. At least one 

industry commenter supported allowing 

the use of FHA underwriting guidelines 

to define ‘‘debt’’ and ‘‘income.’’ 

Although many commenters 

supported the use of a specific debt-toincome ratio threshold, both industry 

and consumer group commenters noted 

that relying on debt-to-income is only 

one element of underwriting, and that 

creditors have used other compensating 

factors and underwriting criteria. Some 

commenters acknowledged that a 

consumer’s debt-to-income ratio is a 

useful measure of loan performance; 

however, they asserted that the year of 

origination (i.e., vintage) has more 

bearing on loan performance. In 

addition, some commenters argued that 

measures of consumer credit history and 

loan-to-value are more predictive, and 

that broader economic factors largely 

determine loan performance. Several 

industry commenters recommended a 

debt-to-income ratio cutoff that is at the 

upper end of today’s relatively 

conservative lending standards, while 

permitting creditors to consider loans 

that exceed that debt-to-income ratio 

threshold if the consumer satisfies other 

objective criteria (such as reserves, 

housing payment history, and residual 

income), that help creditors assess the 

consumer’s ability to repay the loan. 

These commenters argued that the 

FHFA data in the Bureau’s notice to 

reopen the comment period demonstrate 

that when loans are properly 

underwritten, debt-to-income ratios can 

be relatively high without significantly 

affecting loan performance. 

Numerous commenters argued that 

the Bureau should consider the costs 

and benefits of selecting a maximum 

debt-to-income ratio for qualified 

mortgages. Many industry and 

consumer group commenters argued 

that a debt-to-income threshold that is 

too low would unnecessarily exclude a 

large percentage of consumers from 

qualified mortgages. One joint industry 

and consumer group comment letter 

suggested a 43 percent total debt-toincome ratio. In addition to a debt-toincome requirement, some commenters 

and interested parties suggested that the 

Bureau should include within the 

definition of a ‘‘qualified mortgage’’ 

loans with a debt-to-income ratio above 

a certain threshold if the consumer has 

a certain amount of assets, such as 

money in a savings or similar account, 

or a certain amount of residual income. 

For example, an industry commenter 

suggested a 45 percent total debt-toincome ratio, with an allowance for 

higher total debt-to-income ratios of up 

to 50 percent for consumers with 

significant assets (e.g., at least one year’s 

worth of reserves). This commenter 

asked that the Bureau carve out 

consumers who have shown ability to 

maintain a high debt-to-income ratio or 

who have a nontraditional credit 

history. This commenter explained that 

the higher the debt-to-income ratio, the 

more likely a brief interruption in 

income or unexpected large expense 

could compromise repayment ability. 

The commenter noted that only a 

numerical standard would provide 

sufficient certainty for creditors and 

investors, since they may otherwise end 

up litigating what is a reasonable debtto-income ratio. Another industry 

commenter asked that a 50 percent 

back-end debt-to-income ratio be 

sufficient. This commenter noted that 

without clear and objective standards, 

creditors trying to make a qualified 

mortgage would fall back on the 

qualified residential mortgage 

standards. 

Another industry trade association 

commenter argued that a total debt-toincome ratio threshold of 43 percent is 

problematic because according to the 

FHFA data in the Bureau’s notice to 

reopen the comment period, there is no 

appreciable difference in performance 

for loans with a 43 percent debt-toincome ratio and loans with 46 percent 

debt-to-income ratio. In other words, 

commenters argued that the FHFA data 

supports a higher debt-to-income ratio 

threshold, such as 46 percent. Another 

commenter noted that the FHFA data 

does not include data on portfolio loans. 

Some consumer group commenters 

suggested that the Bureau conduct 

further research into the role of debt-toincome ratios and the relationship 

between a consumer’s debt-to-income 

ratio and residual income. One 

commenter noted that the Bureau 

should consider a tiered-approach for 

higher-income consumers who can 

support a higher debt-to-income ratio. 

Another consumer group commenter 

argued that residual income should be 

incorporated into the definition of 

qualified mortgage. Several commenters 

suggested that the Bureau use the 

general residual income standards of the 

VA as a model for a residual income 

test, and one of these commenters 

recommended that the Bureau 

coordinate with FHFA to evaluate the 

experiences of the GSEs in using 

residual income in determining a 

consumer’s ability to repay. 

Some commenters opposed including 

a specific debt-to-income ratio threshold 

into the qualified mortgage criteria. For 

example, one commenter argued that 

though the qualified mortgage criteria 

should be as objective as possible, a 

specific debt-to-income threshold 

should not be imposed because the 

criteria should be flexible to account for 

changing markets. Another commenter 

argued that creditors should be able to 

consider debt-to-income and residual 

income ratios, but creditors should not 

be restricted to using prescribed debt-toincome or residual income ratios. One 

industry commenter contended that if 

the Bureau were to impose a 45 percent 

total debt-to-income ratio, for example, 

most larger secondary market investors/ 

servicers would impose a total debt-toincome ratio that is much lower (such 

as 43 percent or 41 percent) as a general 

rule of risk management. 

Final Rule 

The Bureau believes, based upon its 

review of the data it has obtained and 

the comments received, that the use of 

total debt-to-income as a qualified 

mortgage criterion provides a 

widespread and useful measure of a 

consumer’s ability to repay, and that the 

Bureau should exercise its authority to 

adopt a specific debt-to-income ratio 

that must be met in order for a loan to 

meet the requirements of a qualified 

mortgage. The Bureau believes that the 

qualified mortgage criteria should 

include a standard for evaluating 

whether consumers have the ability to 

repay their mortgage loans, in addition 

to the product feature requirements 

specified in the statute. At the same 

time, the Bureau recognizes concerns 

that creditors should readily be able to 

determine whether individual mortgage 

transactions will be deemed qualified 

mortgages. The Bureau addresses these 

concerns by adopting a bright-line debtto-income ratio threshold of 43 percent, 

as well as clear and specific standards, 

based on FHA guidelines, set forth in 

appendix Q for calculating the debt-toincome ratio in individual cases. 

The Bureau believes that a consumer’s 

debt-to-income ratio is generally 

predictive of the likelihood of default, 

and is a useful indicator of such. At a 

basic level, the lower the debt-to-income 

ratio, the greater the consumer’s ability 

to pay back a mortgage loan would be 


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Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 6527 

149The FHA’s comment letter provided in 

response to the 2012 notice to reopen the comment 

period describes this data. 

150See, e.g., 77 F.R. 33120, 33122–23 (June 5, 

2012) (Table 2: Ever 60+ Delinquency Rates, 

summarizing the HLP dataset by volume of loans 

and percentage that were ever 60 days or more 

delinquent, tabulated by the total DTI on the loans 

and year of origination). 

under existing conditions as well as 

changed circumstances, such as an 

increase in an adjustable rate, a drop in 

future income, or unanticipated 

expenses or new debts. The Bureau’s 

analysis of FHFA’s Historical Loan 

Performance (HLP) dataset, data 

provided by the FHA,149 and data 

provided by commenters all bear this 

out. These data indicate that debt-toincome ratio correlates with loan 

performance, as measured by 

delinquency rate (where delinquency is 

defined as being over 60 days late), in 

any credit cycle. Within a typical range 

of debt-to-income ratios for prudent 

underwriting (e.g., under 32 percent 

debt-to-income to 46 percent debt-toincome), the Bureau notes that 

generally, there is a gradual increase in 

delinquency with higher debt-to-income 

ratio.150 The record also shows that 

debt-to-income ratios are widely used as 

an important part of the underwriting 

processes of both governmental 

programs and private lenders. 

The Bureau recognizes the Board’s 

initial assessment that debt-to-income 

ratios may not have significant 

predictive power once the effects of 

credit history, loan type, and loan-tovalue are considered. In the same vein, 

the Bureau notes that some commenters 

suggested that the Bureau include 

compensating factors in addition to a 

specific debt-to-income ratio threshold. 

Even if a standard that takes into 

account multiple factors produces more 

accurate ability-to-pay determinations 

in specific cases, incorporating a multifactor test or compensating factors into 

the definition of a qualified mortgage 

would undermine the goal of ensuring 

that creditors and the secondary market 

can readily determine whether a 

particular loan is a qualified mortgage. 

Further, the Bureau believes that 

compensating factors would be too 

complex to calibrate into a bright-line 

rule and that some compensating factors 

suggested by commenters as 

appropriate, such as loan-to-value 

ratios, do not speak to a consumer’s 

repayment ability. 

Therefore, as permitted by the statute, 

the Bureau is adopting a specific debtto-income ratio threshold because this 

approach provides a clear, bright line 

criterion for a qualified mortgage that 

ensures that creditors in fact evaluate 

consumers’ ability to repay qualified 

mortgages and provides certainty for 

creditors to know that a loan satisfies 

the definition of a qualified mortgage. A 

specific debt-to-income ratio threshold 

also provides additional certainty to 

assignees and investors in the secondary 

market, which should help reduce 

possible concerns regarding legal risk 

and potentially promote credit 

availability. As numerous commenters 

have urged, there is significant value to 

providing objective requirements that 

can be determined based on loan files. 

As described below, the final rule 

generally requires creditors to use the 

standards for defining ‘‘debt’’ and 

‘‘income’’ in appendix Q, which are 

adapted from current FHA guidelines, to 

minimize burden and provide 

consistent standards. The standards set 

forth in appendix Q provide sufficient 

detail and clarity to address concerns 

that creditors may not have adequate 

certainty about whether a particular 

loan satisfies the requirements for being 

a qualified mortgage, and therefore will 

not deter creditors from providing 

qualified mortgages to consumers. The 

Bureau anticipates that the standards 

will facilitate compliance with the 

Dodd-Frank Act risk retention 

requirements, as the 2011 QRM 

Proposed Rule relied on FHA standards 

for defining ‘‘debt’’ and ‘‘income.’’ The 

Bureau has consulted with the Federal 

agencies responsible for the QRM 

rulemaking in developing this rule, and 

will continue to do so going forward. 

Based on analysis of available data 

and comments received, the Bureau 

believes that 43 percent is an 

appropriate ratio for a specific debt-toincome threshold, and that this 

approach advances the goals of 

consumer protection and preserving 

access to credit. The Bureau 

acknowledges, based on its analysis of 

the data, that there is no ‘‘magic 

number’’ which separates affordable 

from unaffordable mortgages; rather, as 

noted above, there is a gradual increase 

in delinquency rates as debt-to-income 

ratios increase. That being said, the 

Bureau understands that 43 percent is 

within the range of debt-to-income 

ratios used by many creditors and 

generally comports with industry 

standards and practices for prudent 

underwriting. As noted above, 43 

percent is the threshold used by the 

FHA as its general boundary. Although 

the Bureau notes that Fannie Mae’s and 

Freddie Mac’s guidelines generally 

require a 36 percent debt-to-income 

ratio, without compensating factors, the 

Bureau believes that a 43 percent debtto-income threshold represents an 

appropriate method to define which 

loans merit treatment as qualified 

mortgages. In particular, the Bureau 

believes that 43 percent represents a 

prudent outer boundary for a categorical 

presumption of a consumer’s ability to 

repay. 

As discussed above, there was 

significant debate among the 

commenters about the precise debt-toincome ratio threshold to establish. 

Although a lower debt-to-income 

threshold would provide greater 

assurance of a consumer’s ability to 

repay a loan, many commenters argued, 

and the Bureau agrees, that establishing 

a debt-to-income ratio threshold 

significantly below 43 percent would 

curtail many consumers’ access to 

qualified mortgages. One commenter 

estimated that roughly half of 

conventional borrowers would not be 

eligible for qualified mortgage loans if 

the debt-to-income ratio was set at 32 

percent, while 85 percent of borrowers 

would be eligible with a ratio set at 45 

percent. 

At the same time, the Bureau declines 

to establish a debt-to-income ratio 

threshold higher than 43 percent. The 

Bureau recognizes that some 

commenters suggested that debt-toincome ratios above 43 percent would 

not significantly increase the likelihood 

of default (depending to some extent on 

the presence of compensating factors), 

and that some consumers may face 

greater difficulty obtaining qualified 

mortgages absent a higher threshold. 

However, as the debt-to-income ratio 

increases, the presence of compensating 

factors becomes more important to the 

underwriting process and in ensuring 

that consumers have the ability to repay 

the loan. The general ability-to-repay 

procedures, rather than the qualified 

mortgage framework, is better suited for 

consideration of all relevant factors that 

go to a consumer’s ability to repay a 

mortgage loan. 

Thus, the Bureau emphasizes that it 

does not believe that a 43 percent debtto-income ratio represents the outer 

boundary of responsible lending. The 

Bureau notes that even in today’s creditconstrained market, approximately 22 

percent of mortgage loans are made with 

a debt-to-income ratio that exceeds 43 

percent and that prior to the mortgage 

boom approximately 20 percent of 

mortgage loans were made above that 

threshold. Various governmental 

agencies, GSEs, and creditors have 

developed a range of compensating 

factors that are applied on a case by case 

basis to assess a consumer’s ability to 

repay when the consumer’s debt-toincome ratio exceeds a specified ratio. 

Many community banks and credit 


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6528 Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 

unions have found that they can 

prudently lend to consumers with a 

higher debt-to-income ratio based upon 

their firsthand knowledge of the 

individual consumer. As discussed 

below, many of those loans will fall 

within the temporary exception that the 

Bureau is recognizing for qualified 

mortgages. Over the long term, as the 

market recovers from the mortgage crisis 

and adjusts to the ability-to-repay rules, 

the Bureau expects that there will be a 

robust and sizable market for prudent 

loans beyond the 43 percent threshold 

even without the benefit of the 

presumption of compliance that applies 

to qualified mortgages. In short, the 

Bureau does not believe that consumers 

who do not receive a qualified mortgage 

because of the 43 percent debt-toincome ratio threshold should be cut off 

from responsible credit, and has 

structured the rule to try to ensure that 

a robust and affordable ability-to-repay 

market develops over time. 

The Bureau also believes that there 

would be significant negative 

consequences to the market from setting 

a higher threshold. For instance, if the 

qualified mortgage debt-to-income ratio 

threshold were set above 43 percent, it 

might sweep in many mortgages in 

which there is not a sound reason to 

presume that the creditor had a 

reasonable belief in the consumer’s 

ability to repay. At a minimum, 

adopting a higher debt-to-income 

threshold to define qualified mortgages 

would require a corresponding 

weakening of the strength of the 

presumption of compliance—which 

would largely defeat the point of 

adopting a higher debt-to-income 

threshold. Additionally, the Bureau also 

fears that if the qualified mortgage 

boundary were to cover substantially all 

of the mortgage market, creditors might 

be unwilling to make non-qualified 

mortgage loans, with the result that the 

qualified mortgage rule would define 

the limit of credit availability. The 

Bureau believes that lending in the nonqualified mortgage market can and 

should be robust and competitive over 

time. The Bureau expects that, as credit 

conditions ease, creditors will continue 

making prudent, profitable loans in nontraditional segments, such as to 

consumers who have sufficient total 

assets or future earning potential to be 

able to afford a loan with a higher debtto-income ratio or consumers who have 

a demonstrated ability to pay housing 

expenses at or above the level of a 

contemplated mortgage. 

Finally, the Bureau acknowledges 

arguments that residual income may be 

a better measure of repayment ability in 

the long run. A consumer with a 

relatively low household income may 

not be able to afford a 43 percent debtto-income ratio because the remaining 

income, in absolute dollar terms, is too 

small to enable the consumer to cover 

his or her living expenses. Conversely, 

a consumer with a relatively high 

household income may be able to afford 

a higher debt ratio and still live 

comfortably on what is left over. 

Unfortunately, however, the Bureau 

lacks sufficient data, among other 

considerations, to mandate a bright-line 

rule based on residual income at this 

time. The Bureau expects to study 

residual income further in preparation 

for the five-year review of this rule 

required by the Dodd-Frank Act. See 

also section-by-section analysis of 

§ 1026.43(c)(7). 

The Bureau believes that it is 

important that the final rule provide 

clear standards by which creditors 

calculate a consumer’s monthly debt-toincome ratio for purposes of the specific 

debt-to-income threshold in 

§ 1026.43(e)(2)(vi). For this reason, the 

final rule provides specific standards for 

defining ‘‘debt’’ and ‘‘income’’ in 

appendix Q. These standards are based 

on the definitions of debt and income 

used by creditors originating residential 

mortgages that are insured by the FHA. 

In particular, appendix Q incorporates 

the definitions and standards in the 

HUD Handbook 4155.1, Mortgage Credit 

Analysis for Mortgage Insurance on 

One-to-Four-Unit Mortgage Loans, to 

determine and verify a consumer’s total 

monthly debt and monthly income, with 

limited modifications to remove 

portions unique to the FHA 

underwriting process, such as references 

to the TOTAL Scorecard Instructions. 

The use of FHA guidelines for this 

purpose provides clear, well-established 

standards for determining whether a 

loan is a qualified mortgage under 

§ 1026.43(e)(2). This approach is also 

consistent with the proposed approach 

to defining debt and income in the 2011 

QRM Proposed Rule, and therefore 

could facilitate compliance for creditors. 

The Bureau has consulted with the 

Federal agencies responsible for the 

QRM rulemaking and will continue to 

do so going forward as that rulemaking 

is completed, as well as to discuss 

changes to FHA guidelines that may 

occur over time. 

Accordingly, § 1026.43(e)(2)(vi) 

provides that, as a condition to being a 

qualified mortgage under 

§ 1026.43(e)(2), the consumer’s total 

monthly debt-to-income ratio does not 

exceed 43 percent. For purposes of 

§ 1026.43(e)(2)(vi), the consumer’s 

monthly debt-to-income ratio is 

calculated in accordance with appendix 

Q, except as provided in 

§ 1026.43(e)(2)(vi)(B). Section 

1026.43(e)(2)(vi)(B) contains additional 

requirements regarding the calculation 

of ‘‘debt,’’ for consistency with other 

parts of the qualified mortgage 

definition and § 1026.43. Specifically, 

that section provides that the 

consumer’s monthly debt-to-income 

ratio must be calculated using the 

consumer’s monthly payment on the 

covered transaction, including 

mortgage-related obligations, in 

accordance with § 1026.43(e)(2)(iv), and 

any simultaneous loan that the creditor 

knows or has reason to know will be 

made, in accordance with 

§ 1026.43(c)(2)(iv) and (c)(6). Comment 

43(e)(2)(vi)–1 clarifies the relationship 

between the definition of ‘‘debt’’ in 

appendix Q and the requirements of 

§ 1026.43(e)(2)(vi)(B). Specifically, the 

comment states that, as provided in 

appendix Q, for purposes of 

§ 1026.43(e)(2)(vi), creditors must 

include in the definition of ‘‘debt’’ a 

consumer’s monthly housing expense. 

This includes, for example, the 

consumer’s monthly payment on the 

covered transaction (including 

mortgage-related obligations) and 

simultaneous loans. Accordingly, 

§ 1026.43(e)(2)(vi)(B) provides the 

method by which a creditor calculates 

the consumer’s monthly payment on the 

covered transaction and on any 

simultaneous loan that the creditor 

knows or has reason to know will be 

made. 

The Bureau notes that the specific 43 

percent debt-to-income requirement 

applies only to qualified mortgages 

under § 1026.43(e)(2). For the reasons 

discussed below, the specific debt-toincome ratio requirement does not 

apply to loans that meet the qualified 

mortgage definitions in § 1026.43(e)(4) 

or (f). 

43(e)(3) Limits on Points and Fees for 

Qualified Mortgages 

43(e)(3)(i) 

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

defines a ‘‘qualified mortgage’’ as a loan 

for which, among other things, the total 

points and fees payable in connection 

with the loan do not exceed 3 percent 

of the total loan amount. TILA section 

129C(b)(2)(D) requires the Bureau to 

prescribe rules adjusting this limit to 

‘‘permit lenders that extend smaller 

loans to meet the requirements of the 

presumption of compliance.’’ The 

statute further requires the Bureau to 

‘‘consider the potential impact of such 

rules on rural areas and other areas 

where home values are lower.’’ The 

statute does not define and the 


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Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 6529 

legislative history does not provide 

guidance on the term ‘‘smaller loan’’ or 

the phrase ‘‘rural areas and other areas 

where home values are lower.’’ 

The Board proposed two alternative 

versions of § 226.43(e)(3)(i) to 

implement the 3 percent points and fees 

cap for qualified mortgages and the 

adjustment to the cap for smaller loans. 

For both alternatives, the Board 

proposed a threshold of $75,000, 

indexed to inflation, for smaller loans. 

For loans above the $75,000 threshold, 

the 3 percent points and fees cap for 

qualified mortgages would have 

applied. For loans below $75,000, 

different limits would have applied, 

depending on the amount of the loan. 

The Board explained that it set the 

smaller loan threshold at $75,000 

because it believed that Congress 

intended the exception to the 3 percent 

points and fees cap to apply to more 

than a minimal, but still limited, 

proportion of home-secured loans. The 

Board noted that HMDA data show that 

8.4 percent of first-lien, home-purchase 

(site-built) mortgages in 2008 and 9.7 

percent of such mortgages in 2009 had 

a loan amount of $74,000 or less. The 

Board also stated that outreach and 

research indicated that $2,250—3 

percent of $75,000—is within range of 

average costs to originate a first-lien 

home mortgage. Thus, the Board 

concluded that $75,000 appears to be an 

appropriate benchmark for applying the 

3 percent limit on points and fees, with 

higher limits below that threshold 

offering creditors a reasonable 

opportunity to recover their origination 

costs. 

Both of the Board’s proposed 

alternatives would have separated loans 

into tiers based on loan size, with each 

tier subject to different limits on points 

and fees. The Board’s proposed 

Alternative 1 would have consisted of 

five tiers of loan sizes and 

corresponding limits on points and fees: 

• For a loan amount of $75,000 or 

more, 3 percent of the total loan 

amount; 

• For a loan amount greater than or 

equal to $60,000 but less than $75,000, 

3.5 percent of the total loan amount; 

• For a loan amount greater than or 

equal to $40,000 but less than $60,000, 

4 percent of the total loan amount; 

• For a loan amount greater than or 

equal to $20,000 but less than $40,000, 

4.5 percent of the total loan amount; and 

• For a loan amount less than 

$20,000, 5 percent of the total loan 

amount. 

Alternative 2 would have consisted of 

three tiers of loan sizes and 

corresponding limits on points and fees. 

The first and third tiers were consistent 

with Alternative 1. The middle tier was 

a sliding scale that reduced the points 

and fees cap (as a percentage of the loan 

amount) with each dollar increase in 

loan size. The three tiers of Alternative 

2 would have consisted of: 

• For a loan amount of $75,000 or 

more, 3 percent of the total loan 

amount; 

• For a loan amount greater than or 

equal to $20,000 but less than $75,000, 

a percentage of the total loan amount 

yielded by the following formula: 

Æ Total loan amount¥$20,000 = $Z 

Æ $Z × 0.0036 basis points = Y basis 

points 

Æ 500 basis points¥Y basis points = 

X basis points 

Æ X basis points × 0.01 = Allowable 

points and fees as a percentage of the 

total loan amount. 

• For a loan amount less than 

$20,000, 5 percent of the total loan 

amount. 

The approach in Alternative 2 would 

have smoothed the transition from one 

tier to another and fixed an anomaly of 

Alternative 1. Under Alternative 1, for 

loans just above and below the dividing 

line between tiers, a greater dollar 

amount of points and fees would have 

been allowed on the smaller loans than 

on the larger loans. For example, the 

allowable points and fees on a total loan 

amount of $76,000 would have been 

$2,280 (3 percent of $76,000), but the 

permissible points and fees on a total 

loan amount of $70,000 would have 

been $2,450 (3.5 percent of $70,000). 

The Board noted that its proposal was 

designed to ensure that if a loan is a 

qualified mortgage it would not also be 

a high-cost mortgage based on the points 

and fees. The Board stated its belief that 

the statute is designed to reduce the 

compliance burden on creditors when 

they make qualified mortgages, in order 

to encourage creditors to make loans 

with stable, understandable loan 

features. The Board expressed concern 

that creating points and fees thresholds 

for small loans that might result in 

qualified mortgages also being high-cost 

mortgages would discourage creditors 

from making qualified mortgages 

because the requirements and 

limitations of high-cost loans are 

generally more stringent than for other 

loans. 

The Board requested comment on the 

proposed alternative loan size ranges 

and corresponding points and fees 

limits for qualified mortgages. The 

Board also requested comment on 

whether the loan size ranges should be 

indexed for inflation. 

The Board stated that, instead of using 

a smaller loan threshold with different 

tiers, it had considered adjusting the 

criteria for smaller loans by narrowing 

the types of charges that would be 

included in points and fees for smaller 

loans. The Board indicated that 

outreach participants disfavored this 

approach because it would have 

required different ways of calculating 

points and fees, depending on loan size, 

and thus likely would have increased 

the burden of complying with the rules 

and the risk of error. The Board also 

stated that it had considered proposing 

an alternative points and fees threshold 

for certain geographical areas. As the 

Board noted, however, property values 

shift over time, and there is substantial 

variation in property values and loan 

amounts within geographical areas. 

Thus, adjusting the limits on points and 

fees based solely on geographic areas 

would have been a less straightforward 

and less precise method of addressing 

the statute’s concern with smaller loans. 

No commenters supported these 

approaches. 

Several industry commenters argued 

that points and fees have little, if any, 

relationship to consumers’ ability to 

repay their mortgage loans and that 

qualified mortgages should therefore not 

be subject to limits on points and fees. 

Although they acknowledged that the 

Dodd-Frank Act generally prescribed a 3 

percent limit on points and fees for 

qualified mortgages, they urged the 

Bureau to use its authority to eliminate 

this requirement. 

Several industry commenters 

contended that the 3 percent limit on 

points and fees for qualified mortgages 

is too low. They maintained that the 3 

percent cap would require creditors to 

increase interest rates to recover their 

costs and would limit consumers’ 

flexibility to arrange their optimal 

combination of interest rates and points 

and fees. Industry commenters also 

claimed that the 3 percent limit would 

have a negative impact on consumers’ 

access to affordable credit. Some 

industry commenters noted that the 

GSEs’ seller/servicer guides contain 

standards that limit points and fees for 

loans that the GSEs purchase or 

securitize, with the current standards 

limiting points and fees to the greater of 

5 percent of the mortgage amount or 

$1,000. The commenters argued that 

Bureau should use its authority adopt 

the GSEs’ standards instead of the 

requirements prescribed by the DoddFrank Act. One commenter argued that, 

because of the complexity of the points 

and fees test, the Bureau should adopt 

a tolerance of one-quarter of 1 percent 

or $250 for the 3 percent limit so that 

de minimis errors in calculating points 

and fees would not prevent a loan from 


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6530 Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 

retaining the legal protection of a 

qualified mortgage. 

With respect to the two proposed 

alternative versions of section 

43(e)(3)(i), industry commenters 

generally preferred Alternative 1. They 

explained that Alternative 2 was too 

complex, would be difficult to 

implement, and would increase 

compliance and litigation costs. Some 

consumer advocates preferred 

Alternative 2, stating that it would be 

more beneficial to consumers. Other 

consumer advocates preferred 

Alternative 1, asserting that its 

simplicity would minimize 

miscalculations that could harm 

consumers. They stated that the 

difference to the consumer between 

Alternative 1 and Alternative 2 was 

marginal. Some of these consumer 

advocates argued that the benefit 

afforded by simplicity would outweigh 

the small pricing distortions. 

Commenters did not object to the 

Board’s general approach of setting a 

threshold amount for smaller loans and 

adjusting the points and fees cap for 

loans below the threshold. Instead, the 

comments discussed what the threshold 

loan amount should be for smaller loans 

and what limits should be imposed on 

points and fees for loans below the 

threshold. 

Industry commenters contended that 

the Board’s proposed limits on points 

and fees for smaller loans would be too 

low and would not permit creditors to 

recover their costs. They stated that 

many origination costs are fixed 

regardless of loan size. They asserted 

that if a creditor could not cover those 

costs through points and fees, the 

creditor would either not make the 

mortgage or increase the interest rate to 

cover the costs. Industry commenters 

expressed concern that, for smaller 

loans, a rate increase might result in the 

loan becoming a high-cost mortgage or 

in some consumers no longer being 

eligible for the loan. They contended 

that creditors would be reluctant to 

make these loans and credit availability 

would be compromised, in particular for 

low-income, minority, and rural 

consumers, and first-time home buyers. 

One commenter reported that if a 

consumer were offered a high interest 

rate to cover costs and the rate were 

increased to offset the costs of a smaller 

loan, the consumer would pay 

thousands of dollars more over the life 

of the loan. Industry commenters 

asserted that the proposed alternatives 

did not capture the congressional intent 

of providing creditors sufficient 

incentives to make smaller loans. 

Industry commenters urged the Bureau 

to revise the proposal to allow creditors 

to recover more of their costs through 

points and fees, either by increasing the 

threshold for smaller loans or raising the 

limits for loans below the threshold or 

by doing both. 

Many industry commenters 

recommended raising the threshold for 

smaller loans from the $75,000 

threshold proposed by the Board. One 

industry commenter suggested setting 

the threshold at $100,000, indexed to 

inflation. Relying on loan balances for 

median home prices, another industry 

commenter asked that the Bureau raise 

the threshold to $125,000. Many other 

industry commenters recommended 

raising the threshold to $150,000. One 

commenter noted that the average loan 

size in the United States at the end of 

the second quarter of 2010 was $193,800 

and suggested using 80 percent of the 

average loan size, rounding off to the 

nearest $10,000. 

In addition to urging the Bureau to 

raise the smaller loan threshold, many 

industry commenters recommended that 

the Bureau revise the proposal to permit 

creditors to charge higher points and 

fees for loans below the smaller loan 

threshold for qualified mortgages. 

Several industry commenters asked that 

the Bureau set the cap between 3.5 and 

5 percent, indexed to inflation, for all 

loans under the smaller loans threshold. 

One industry commenter noted that 

Fannie Mae and Freddie Mac permit 

points and fees up to 5 percent. An 

industry commenter suggested a cap 

equal to the greater of 3 percent or 

$2,000, indexed to inflation. A 

combination of industry commenters 

and consumer advocates recommended 

a cap equal to the greater of 3 percent 

or $3,000. One industry commenter 

advocated a 4 percent cap for all loans 

below $125,000. Several industry 

commenters recommended that the cap 

be set at a fixed amount plus a 

percentage to lessen the impact of 

moving from one tier to the next. 

In support of their arguments to raise 

the smaller loan threshold and to raise 

the limits on points and fees for loans 

below the threshold, several industry 

commenters provided data showing that 

many smaller loans would have 

exceeded the proposed points and fees 

caps. For example, a trade association 

commenter drew on data submitted by 

a member bank that showed that the 

majority of loans under $100,000 would 

exceed the points and fees cap, 

assuming fees paid to an affiliate title 

company were included, and that many 

loans between $100,000 and $150,000 

would also exceed the cap. A trade 

association industry commenter shared 

data from one of its members, a 

financial services provider. The member 

reviewed over 250,000 of its recent 

loans and found that none of the loans 

under $75,000 would meet the proposed 

cap and that 50 percent of the loans 

under $125,000 would meet the cap. 

Several industry commenters reported 

that if the Bureau raised the smaller 

loan threshold to $150,000, a 

significantly smaller percentage of loans 

would exceed the points and fees cap. 

A trade association representing the 

manufactured housing industry noted 

the Board’s concern about setting the 

points and fees cap so high that some 

qualified mortgages would be deemed 

high-cost mortgages under HOEPA. The 

commenter argued, however, that the 

Bureau has authority to change highcost mortgage thresholds and urged the 

Bureau to exercise this authority. The 

commenter cited section 1431 of the 

Dodd-Frank Act for the proposition that 

the Board may increase the amount of 

origination costs above $1,000 for loans 

less than $20,000. The commenter also 

said that section 1022 of the Dodd-Frank 

Act may grant the Board authority to 

exempt certain smaller sized 

manufactured home loans from the 5 

percent points and fees caps on highcost mortgages for loans above $20,000, 

based on asset class, transaction 

volume, and existing consumer 

protections. 

Consumer advocates generally 

endorsed the $75,000 threshold for 

smaller loans. They questioned industry 

concerns that the 3 percent threshold 

would limit the availability of credit for 

consumers with comparatively low loan 

amounts. Instead, the commenters 

emphasized the importance of ensuring 

that qualified mortgages are affordable. 

In their view, the 3 percent points and 

fees cap is a key factor in ensuring 

affordability, so the exception for 

smaller loans should apply to only a 

limited proportion of loans. Consumer 

advocates argued that the points and 

fees cap should not exceed the 5 percent 

HOEPA trigger. They asserted that 

points and fees should be reasonable, 

reflect actual origination costs, and not 

result in disparate pricing schemes 

disadvantaging consumers with smaller 

loans. 

One consumer advocate 

recommended analyzing the impact of a 

3 percent points and fees cap on access 

to credit for low- and moderate-income 

consumers, in particular for Community 

Reinvestment Act loans. The commenter 

asked that the Bureau describe in 

preamble the results of any analysis of 

points and fees by loan amount, and for 

Community Reinvestment Act and nonCommunity Reinvestment Act loans. 

In light of these comments, the 

Bureau is adopting revised 


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Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 6531 

151As the Board noted, resources that provide 

data on origination costs tend to use different 

methodologies to calculate points and fees and do 

not use the methodology prescribed under TILA as 

amended by the Dodd-Frank Act. The same 

concerns apply to commenters’ data on points and 

fees. 

§ 1026.43(e)(3)(i) to implement the 

limits on points and fees for qualified 

mortgages. As noted above, several 

industry commenters argued that points 

and fees have little if any bearing on 

consumers’ ability to repay their 

mortgage loans and that the points and 

fees limits would result in higher 

interest rates and reduced access to 

credit. They urged the Bureau to use its 

authority to eliminate the limits on 

points and fees for qualified mortgages. 

As an alternative to eliminating the 

points and fees limits entirely, some 

industry commenters requested that the 

Bureau adopt the GSEs’ standards 

limiting points and fees for loans that 

they purchase or securitize. Those 

standards currently limit points and fees 

to the greater of 5 percent of the loan 

amount or $1,000. 

The Bureau does not believe it would 

be appropriate to eliminate the limits on 

points and fees for qualified mortgages. 

The Bureau also declines to adopt the 

GSEs’ current standards and raise the 

general 3 percent limit on points and 

fees. The goal of TILA section 129C is 

to assure that consumers are able to 

repay their mortgages over the term of 

the loans. Originators that make large 

sums up front may be less careful in 

assuring the consumers’ ability to repay 

over time. Moreover, Congress may have 

believed that the points and fees limits 

may deter originators from imposing 

unnecessary or excessive up-front 

charges. In the absence of persuasive 

evidence that the points and fees limits 

will undermine consumers’ access to 

affordable credit, the Bureau does not 

believe it would be appropriate to 

eliminate the points and fees limits or 

to raise the general 3 percent limit. As 

discussed in more detail below, 

however, the Bureau is implementing 

revised points and fees limits for 

smaller loans. The Bureau also notes 

that the Dodd-Frank Act did not adopt 

a tolerance that would allow creditors to 

exceed the points and fees limits by 

small amounts and declines to adopt 

such a tolerance. 

As noted above, a consumer advocate 

requested that the Bureau conduct an 

analysis of the 3 percent points and fees 

cap on access to credit for low- and 

moderate-income consumers, in 

particular for Community Reinvestment 

Act loans. Given the lack of available 

data, it has not been practicable for the 

Bureau to perform such an analysis 

while finalizing this and other title XIV 

rules. The Bureau will consider whether 

it is possible and valuable to conduct 

such an analysis in the future. 

Revised § 1026.43(e)(3)(i) employs an 

approach similar to that proposed by the 

Board to implement the 3 percent cap 

on points and fees and the adjustment 

to the cap for smaller loans. Like the 

Board’s proposal, § 1026.43(e)(3)(i) sets 

a threshold for smaller loans, establishes 

tiers based on loan size, and sets limits 

on points and fees within each tier. 

However, § 1026.43(e)(3)(i) uses a mix of 

percentage and flat dollar limits to avoid 

anomalous results at tier margins and 

also adjusts the definition of smaller 

loan to include more transactions. 

Although most commenters favored 

this tiering methodology, as noted 

above, some commenters suggested that 

the Bureau reject the Board’s tiered 

approach and instead adopt a simpler 

mechanism, with all loan amounts 

below the threshold subject to a single 

percentage cap or dollar amount cap on 

points and fees. Like the Board, the 

Bureau believes the tiered approach 

provides a more flexible and calibrated 

mechanism for implementing the limits 

on points and fees for smaller loans. A 

single percentage cap that would apply 

to all smaller loans may not allow 

creditors a reasonable opportunity to 

recover costs for very small loans. It also 

may create a distortion in which loans 

just below the smaller loan threshold 

would be permitted to have significantly 

higher points and fees than loans just 

above the smaller loan threshold. A 

single dollar amount cap (e.g., $3,000) 

could result in points and fees that are 

a very high percentage of the very 

smallest loans and, as a result, could 

result in qualified mortgages also 

triggering the obligations of high-cost 

mortgages. 

Thus, as in the Board’s proposal, the 

final rule sets a threshold for smaller 

loans and establishes tiers, based on 

loan size, with different limits on points 

and fees. Specifically, § 1026.43(e)(3)(i) 

provides that a transaction is not a 

qualified mortgage unless the total 

points and fees payable in connection 

with the loan do not exceed: 

• For a loan amount greater than or 

equal to $100,000, 3 percent of the total 

loan amount; 

• For a loan amount greater than or 

equal to $60,000 but less than $100,000, 

$3,000; 

• For a loan amount greater than or 

equal to $20,000 but less than $60,000, 

5 percent of the total loan amount; 

• For a loan amount greater than or 

equal to $12,500 but less than $20,000, 

$1,000 of the total loan amount; 

• For a loan amount of less than 

$12,500, 8 percent of the total loan 

amount. 

The Bureau’s final rule departs from 

the proposal in two ways. First, 

§ 1026.43(e)(3)(i) raises the threshold for 

smaller loans to $100,000. Second, for 

loans below the $100,000 threshold, 

§ 1026.43(e)(3)(i) revises the points and 

fees caps for smaller loans within the 

various tiers. The general effect of these 

revisions will be to increase the points 

and fees that creditors can charge for 

smaller loans while still permitting 

those loans to meet the standard for a 

qualified mortgage. These two changes 

are discussed at greater length below. 

$100,000 Threshold for Smaller Loans 

To fulfill the stated purpose of the 

adjustment for smaller loans, the 

threshold should be set at a level that is 

sufficient to permit creditors making 

smaller loans a reasonable opportunity 

to recoup their origination costs and 

still offer qualified mortgages but not so 

high as to cause loans to exceed the 

HOEPA threshold to become high-cost 

mortgages. As noted above, the Board 

proposed to set the smaller loan 

threshold so that three percent of that 

amount would have provided creditors 

with a reasonable opportunity to recover 

their costs, with loans below that 

threshold subject to higher caps on 

points and fees. Thus, the Board’s 

proposed $75,000 threshold would have 

created a benchmark of $2,250. The 

Board stated that its outreach and 

research indicated that $2,250 would be 

within the range of average costs to 

originate a first-lien home mortgage. 

However, as noted above, several 

industry commenters reported, based on 

recent loan data, that creditors’ points 

and fees often exceed $2,250 for smaller 

loans and that a significant number of 

loans above $75,000 would exceed the 

three percent cap.151

This evidence suggests that the $2,250 

benchmark (and the corresponding 

$75,000 smaller loan threshold) in the 

proposal could have been insufficient to 

permit creditors to recoup all or even 

most of their origination costs. The 

Bureau is aware that the commenters’ 

loan data reflects creditors’ points and 

fees, and not the underlying costs. 

Nevertheless, the evidence that 

substantial proportions of smaller loans 

would have exceeded the points and 

fees limits raises concerns that the 

creditors would not be able to recover 

their costs through points and fees and 

still originate qualified mortgages. 

Creditors that are unable to recover their 

origination costs through points and 

fees would have to attempt to recover 

those costs through higher rates. If the 

higher rates would trigger the additional 


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6532 Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 

152 12 U.S.C. 2801 et seq. 

153The proportion of loans under the $100,000 

threshold would of course be larger than under a 

$75,000 threshold. As indicated in the Board’s 

proposal, in 2008, 8.3 percent of first-lien home 

purchase mortgages and 7.6 percent of refinances 

were under $75,000 for owner-occupied, one- to 

four-family, site-built properties. According to 2011 

HMDA data, 10.6 percent of first-lien home 

purchases and 11 percent of first-lien refinances 

were under $75,000. Nevertheless, the Bureau 

believes that the $100,000 threshold is sufficiently 

limited that it remains faithful to the statute’s 

framework, with the smaller loan exception not 

undermining the general 3 percent limit on points 

and fees. 

regulatory requirements applicable to 

high-cost loans under HOEPA or would 

render some potential consumers 

ineligible, then access to credit for at 

least some consumers could be 

compromised. Moreover, for consumers 

who plan to remain in their homes (and 

their loans) for a long time, a higher 

interest rate would result in higher 

payments over the life of the loan. 

Some commenters claimed that a 

substantial portion of loans up to 

$125,000 or $150,000 would exceed the 

3 percent points and fees cap and that 

the Bureau should raise the threshold 

accordingly. The Bureau disagrees for 

two reasons. First, this would stretch 

the meaning of ‘‘smaller loans.’’ In 2011, 

slightly under 21 percent of first-lien 

home mortgages were below $100,000 

and another 22 percent were between 

$100,000 and $150,000. Thus, 

increasing the threshold to $150,000 

would more than double the number of 

loans entitled to an exception to the 

congressionally-established points and 

fees cap and would capture over 40 

percent of the market. The Bureau 

believes that this would be an overly 

expansive construction of the term 

‘‘smaller loans’’ for the purpose of the 

exception to the general rule capping 

points and fees for qualified mortgages 

at 3 percent. Such a broad definition of 

‘‘smaller loans’’ could allow the 

exception to undermine the cap on 

points and fees and frustrate 

congressional intent that qualified 

mortgages include limited points and 

fees. The function of the smaller loan 

exception to the points and fees cap is 

to make it possible for creditors making 

smaller loans to originate qualified 

mortgages. The smaller loan exception 

should provide creditors a reasonable 

opportunity to recover most, if not all, 

of their origination costs for smaller 

loans and still originate qualified 

mortgages. It should not be transformed 

into a mechanism that ensures that 

creditors can continue to charge the 

same points and fees they have in the 

past and still have their loans meet the 

qualified mortgage standard. 

The Bureau concludes that a $100,000 

small loan threshold strikes an 

appropriate balance between 

congressional goals of allowing creditors 

offering smaller loans to meet the 

standard for qualified mortgages and 

ensuring that qualified mortgages 

include limited points and fees. The 

$100,000 threshold (and, as discussed 

below, the corresponding adjustments to 

the points and fees limits for loans 

under that threshold) should provide 

creditors with a reasonable opportunity 

to recover most, if not all, of their 

origination costs through points and 

fees, reducing the likelihood that any 

increase in rates would trigger 

obligations of high-cost loans or would 

cause loans to be higher-priced covered 

transactions under § 1026.43(b)(4). At 

the same time, the $100,000 threshold 

would not render the smaller loan 

exception so broad that it undermines 

the general 3 percent cap on points and 

fees. It would cover a significant but 

still limited proportion of mortgages. 

According to the 2011 Home Mortgage 

Disclosure Act 152 (HMDA) data, 20.4 

percent of first-lien home purchase 

mortgages and 20.9 percent of first-lien 

refinances were less than $100,000.153

Limits on Points and Fees for Smaller 

Loans 

In addition to raising the smaller loan 

threshold to $100,000, § 1026.43(e)(3)(i) 

also differs from the Board’s proposal by 

setting higher limits on points and fees 

for smaller loans. As noted above, the 

Bureau is concerned that the Board’s 

proposal would not have provided 

creditors with a reasonable opportunity 

to recover their origination costs. Thus, 

§ 1026.43(e)(3)(i) allows creditors higher 

limits on points and fees for smaller 

loans. Specifically, for loans of $60,000 

up to $100,000, § 1026.43(e)(3)(i) allows 

points and fees of no more than $3,000. 

For loans of $20,000 up to $60,000, 

§ 1026.43(e)(3)(i) allows points and fees 

of no more than 5 percent of the total 

loan amount. For loans of $12,500 up to 

$20,000, § 1026.43(e)(3)(i) allows points 

and fees of no more than $1,000. For 

loan amounts less than $12,500, 

§ 1026.43(e)(3)(i) allows points and fees 

of no more than 8 percent of the total 

loan amount. 

In contrast with the Board’s proposed 

Alternative 1, § 1026.43(e)(3)(i) creates 

smooth transitions between the tiers. As 

noted above, under Alternative 1, the 

one-half percent changes in the points 

and fees cap between tiers would have 

produced the anomalous result that 

some smaller loans would have been 

permitted to include a higher dollar 

amount of points and fees than larger 

loans. While proposed Alternative 2 

would have avoided this problem, it 

would also have been somewhat more 

complex, thereby increasing the risk of 

errors. The tiers in § 1026.43(e)(3)(i) all 

feature easy-to-calculate limits, making 

compliance easier. 

Finally, the three lower tiers are tied 

to the comparable thresholds for highcost loans to ensure that the points and 

fees on loans that satisfy the qualified 

mortgage standard do not trigger the 

additional obligations of high-cost 

mortgages. Under TILA as amended, a 

high-cost mortgage has points and fees 

equal to 5 percent of the total 

transaction amount if the transaction is 

$20,000 or more, and points and fees 

equal to the lesser of 8 percent of the 

total transaction amount or $1,000, if 

the transaction is less than $20,000. See 

TILA section 103(bb)(1)(A)(ii)(I) and (II). 

Setting the maximum points and fees 

caps based on the HOEPA triggers will 

help ensure that a qualified mortgage is 

not a high-cost mortgage because of the 

points and fees. 

Proposed comment 43(e)(3)(i)–1 

would have cross-referenced comment 

32(a)(ii)–1 for an explanation of how to 

calculate the ‘‘total loan amount.’’ The 

Bureau adopts comment 43(e)(3)(i)–1 

substantially as proposed, but it adds an 

explanation for tiers in which the 

prescribed points and fees limit is a 

fixed dollar amount rather than a 

percentage and revises the crossreference because the explanation of 

calculating ‘‘total loan amount’’ is 

moved to comment 32(b)(5)(i)–1. 

Proposed comment 43(e)(3)(i)–2 

would have explained that a creditor 

must determine which category the loan 

falls into based on the face amount of 

the note (the ‘‘loan amount’’), but must 

apply the allowable points and fees 

percentage to the ‘‘total loan amount,’’ 

which may be an amount that is 

different than the face amount of the 

note. The Bureau adopts comment 

43(e)(3)(i)–2 substantially as proposed, 

but it revises some of the limits to 

reflect the changes described above. 

Proposed comment 43(e)(3)(i)–3 

would have provided examples of 

calculations for different loan amounts. 

The Bureau adopts comment 43(e)(3)(i)– 

3 with revisions to reflect the changes 

to some of the limits described above. 

Impact on Rural Areas and Other Areas 

Where Home Values Are Lower 

TILA section 129C(b)(2)(D) requires 

the Bureau to consider the rules’ 

potential impact on ‘‘rural areas and 

other areas where home values are 

lower.’’ The Bureau considered the 

concerns raised by industry commenters 

that if the limits on points and fees for 

smaller loans were set too low, access to 

credit could be impaired, in particular 


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Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 6533 

154As noted above, the Board proposed two 

alternative definitions of qualified mortgage, but 

also solicited comment on other alternative 

definitions. The Board specifically requested 

comment on what criteria should be included in the 

definition of a qualified mortgage to ensure that the 

definition provides an incentive to creditors to 

make qualified mortgages, while also ensuring that 

consumers have the ability to repay those loans. In 

addition, as described above, the Board’s proposed 

comment 43(c)-1 would have provided that 

creditors may look to widely accepted 

governmental or non-governmental underwriting 

standards when assessing a consumer’s repayment 

ability under the general ability-to-repay standard, 

including assessing the eight specific underwriting 

criteria under proposed §§ 226.43(c)(2) and 

(e)(2)(v)-Alternative 2. Similarly, proposed 

comment 43(c)(7)–1 would have provided that, to 

determine the appropriate threshold for monthly 

debt-to-income ratio or residual income, the 

creditor may look to widely accepted governmental 

and non-governmental underwriting standards. As 

noted, various commenters suggested that the final 

rule should look to certain Federal agency 

underwriting standards for purposes of determining 

whether a loan has met certain aspects of the 

qualified mortgage definition (for example, debt-toincome ratios and residual income). 

155Eligibility standards for the GSEs and Federal 

agencies are available at: Fannie Mae, Single Family 

Selling Guide, https://www.fanniemae.com/ 

content/guide/sel111312.pdf; Freddie Mac, SingleFamily Seller/Servicer Guide, http:// 

www.freddiemac.com/sell/guide/; HUD Handbook 

4155.1, http://www.hud.gov/offices/adm/hudclips/ 

handbooks/hsgh/4155.1/41551HSGH.pdf; Lenders 

Handbook—VA Pamphlet 26–7, Web Automated 

Reference Material System (WARMS), http:// 

www.benefits.va.gov/warms/pam26_7.asp; 

Underwriting Guidelines: USDA Rural Development 

Guaranteed Rural Housing Loan Program, http:// 

www.rurdev.usda.gov/SupportDocuments/CA-SFHGRHUnderwritingGuide.pdf. 

for low income, minority, and rural 

consumers, and first-time home buyers. 

Setting the threshold for smaller loans 

too low may also negatively affect 

access to credit for manufactured 

housing, which disproportionately 

serves lower-income consumers and 

rural areas. The higher threshold and 

higher limits on points and fees for 

smaller loans should help to ensure that 

creditors are able to offer qualified 

mortgages in rural areas and other areas 

where home values are lower. 

The Bureau declines to adopt the 

recommendation of one commenter that 

it exempt smaller loans for 

manufactured homes from the points 

and fees triggers for high-cost mortgages. 

Section 1431 of the Dodd Frank Act 

provides that a loan of $20,000 or more 

is deemed a high-cost mortgage if total 

points and fees exceed 5 percent of the 

total transaction amount and that a loan 

of less than $20,000 is deemed a highcost mortgage if total points and fees 

exceed the lesser of 8 percent of the 

total transaction amount or $1,000, or 

other such dollar amount as the Bureau 

may prescribe by regulations. Such a 

change is beyond the scope of this 

rulemaking and is more appropriately 

addressed in the parallel HOEPA 

rulemaking. 

43(e)(3)(ii) 

Bona Fide Third-party Charges and 

Bona Fide Discount Points 

As discussed in the section-by-section 

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

is moving the provisions excluding 

certain bona fide third-party charges 

and bona fide discount points to 

§ 1026.32(b)(1)(i)(D) through (F). The 

Board had proposed to implement these 

provisions in proposed § 226.43(e)(3)(ii) 

through (iv). 

Indexing Points and Fees Limits for 

Inflation 

The Board requested comment on 

whether the loan size ranges for the 

qualified mortgage points and fees 

limits should be indexed for inflation. A 

few industry commenters recommended 

that the loan size ranges or the 

permitted dollar amounts of points and 

fees be adjusted for inflation. The 

Bureau believes that it is appropriate to 

adjust the points and fees limits to 

reflect inflation. In addition, the Bureau 

notes that, as prescribed by TILA 

section 103(aa)(3), what was originally a 

$400 points and fees limit for high-cost 

loans has been adjusted annually for 

inflation, and that the dollar amounts of 

the new high-cost points and fees 

thresholds in TILA section 

103(bb)(1)(A)(ii)(II) will also be adjusted 

annually for inflation. The Bureau 

believes the points and fees thresholds 

for high-cost loans and qualified 

mortgages should be treated consistently 

with respect to inflation adjustments. 

Accordingly, in new § 1026.43(e)(3)(ii), 

the Bureau provides that the dollar 

amounts, including the loan amounts, 

shall be adjusted annually to reflect 

changes in the Consumer Price Index for 

All Urban Consumers (CPI–U). The 

adjusted amounts will be published in 

new comment 43(e)(3)(ii)–1. 

43(e)(4) Qualified Mortgage Defined— 

Special Rules 

As discussed above, the Bureau is 

finalizing the general qualified mortgage 

definition in § 1026.43(e)(2). Under that 

definition, qualified mortgages would be 

limited to loans that satisfy the qualified 

mortgage product feature criteria in the 

statute (including prohibitions on 

certain risky loan features, limitations 

on points and fees, and the requirement 

to underwrite to the maximum rate in 

the first five years of the loan), for 

which the creditor considers and 

verifies the consumer’s income and 

assets and current debt obligations, 

alimony, and child support, and for 

which the consumer’s total (or ‘‘backend’’) debt-to-income ratio is less than 

or equal to 43 percent.154

The Bureau believes this approach 

establishes an appropriate benchmark 

over the long term for distinguishing 

which loans should be presumed to 

meet the ability-to-repay requirements 

under the Dodd-Frank Act, while also 

leaving room for the provision of 

responsible mortgage credit over time to 

consumers with higher debt-to-income 

ratios under the general ability-to-repay 

requirements. However, the Bureau 

acknowledges it may take some time for 

the non-qualified mortgage market to 

establish itself in light of the market 

anxiety regarding litigation risk under 

the ability-to-repay rules, the general 

slow recovery of the mortgage market, 

and the need for creditors to adjust their 

operations to account for several other 

major regulatory and capital regimes. In 

light of these factors, the Bureau has 

concluded that it is appropriate to 

provide a temporary alternative 

definition of qualified mortgage. This 

will help ensure access to responsible, 

affordable credit is available for 

consumers with debt-to-income ratios 

above 43 percent and facilitate 

compliance by creditors by promoting 

the use of widely recognized, federallyrelated underwriting standards. 

Under this temporary provision, as a 

substitute for the general qualified 

mortgage definition in § 1026.43(e)(2), 

which contains a 43 percent debt-toincome ratio threshold, the final rule 

provides a second definition of qualified 

mortgage in § 1026.43(e)(4) for loans 

that meet the prohibitions on certain 

risky loan features (e.g., negative 

amortization and interest only features) 

and the limitations on points and fees 

under § 1026.43(e)(2) and are eligible for 

purchase or guarantee by the GSEs, 

while under the conservatorship of the 

FHFA, or eligible to be insured or 

guaranteed by the U.S. Department of 

Housing and Urban Development under 

the National Housing Act (12 U.S.C. 

1707 et seq.) (FHA), the VA, the USDA, 

or the Rural Housing Service (RHS).155

The FHA, VA, USDA, and RHS have 

authority under the statute to define 

qualified mortgage standards for their 

own loans, so coverage under 

§ 1026.43(e)(4), will sunset once each 

agency promulgates its own qualified 

mortgage standards, and such rules take 

effect. See TILA section 129C(b)(3)(ii). 

Coverage of GSE-eligible loans will 

sunset when conservatorship ends. 

Even if the Federal agencies do not 

issue additional rules or 

conservatorship does not end, the 

temporary qualified mortgage definition 

in § 1026.43(e)(4) will expire seven 


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years after the effective date of the rule. 

The Bureau believes that this will 

provide an adequate period for 

economic, market, and regulatory 

conditions to stabilize. Because the 

Bureau is obligated by statute to analyze 

the impact and status of the ability-torepay rule five years after its effective 

date, the Bureau will have an 

opportunity to confirm that it is 

appropriate to allow the temporary 

provision to expire prior to the sunset. 

Covered transactions that satisfy the 

requirements of § 1026.43(e)(4) that are 

consummated before the sunset of 

§ 1026.43(e)(4) will retain their qualified 

mortgage status after the temporary 

definition expires. However, a loan 

consummated after the sunset of 

§ 1026.43(e)(4) may only be a qualified 

mortgage if it satisfies the requirements 

of § 1026.43(e)(2) or (f). 

The alternative definition of qualified 

mortgage recognizes that the current 

mortgage market is especially fragile as 

a result of the recent mortgage crisis. It 

also recognizes the government’s 

extraordinary efforts to address the 

crisis; GSE-eligible loans, together with 

the other federally insured or 

guaranteed loans, cover roughly 80 

percent of the current mortgage market. 

In light of this significant Federal role 

and the government’s focus on 

affordability in the wake of the mortgage 

crisis, the Bureau believes it is 

appropriate, for the time being, to 

presume that loans that are eligible for 

purchase, guarantee, or insurance by the 

designated Federal agencies and the 

GSEs while under conservatorship have 

been originated with appropriate 

consideration of consumers’ ability to 

repay, where those loans also satisfy the 

requirements of § 1026.43(e)(2) 

concerning restrictions on product 

features and total points and fees 

limitations. The temporary definition is 

carefully calibrated to provide a 

reasonable transition period to the 

general qualified mortgage definition, 

including the 43 percent debt-to-income 

ratio requirement. While this temporary 

definition is in effect, the Bureau will 

monitor the market to ensure it remains 

appropriate to presume that the loans 

falling within those programs have been 

originated with appropriate 

consideration of the consumer’s 

repayment ability. The Bureau believes 

this temporary approach will ultimately 

benefit consumers by minimizing any 

increases in the cost of credit as a result 

of this rule while the markets adjust to 

the new regulations. 

The Bureau believes this temporary 

alternative definition will provide an 

orderly transition period, while 

preserving access to credit and 

effectuating the broader purposes of the 

ability-to-repay statute during the 

interim period. The Bureau believes that 

responsible loans can be made above a 

43 percent debt-to-income ratio 

threshold, and has consciously 

structured the qualified mortgage 

requirements in a way that leaves room 

for responsible lending on both sides of 

the qualified mortgage line. The 

temporary exception has been carefully 

structured to cover loans that are 

eligible to be purchased, guaranteed, or 

insured by the GSEs (while in 

conservatorship) or Federal agencies 

regardless of whether the loans are 

actually so purchased, guaranteed, or 

insured; this will leave room for private 

investors to return to the market and 

secure the same legal protection as the 

GSEs and Federal agencies. At the same 

time, as the market recovers and the 

GSEs and FHA are able to reduce their 

presence in the market, the percentage 

of loans that are granted qualified 

mortgage status under the temporary 

definition will shrink towards the longterm structure. 

In addition to being a loan that is 

eligible to be made, guaranteed, or 

insured by the above-described Federal 

agencies or the GSEs while in 

conservatorship, to meet the definition 

of qualified mortgage under 

§ 1026.43(e)(4), the loan must satisfy the 

statutory qualified mortgage criteria 

regarding prohibitions on certain risky 

loan features and limitations on points 

and fees. Specifically, § 1026.43(e)(4)(i) 

provides that, notwithstanding 

§ 1026.43(e)(2), a qualified mortgage is a 

covered transaction that satisfies the 

requirements of § 1026.43(e)(2)(i) 

through (iii). As discussed above, those 

provisions require: that the loan provide 

for regular periodic payments that do 

not result in an increase of the principal 

balance, allow the consumer to defer 

repayment of principal, or result in a 

balloon payments; that the loan term 

does not exceed 30 years; and that the 

total points and fees payable in 

connection with the loan do not exceed 

the threshold set forth in § 1026.43(e)(3). 

As described further below, the 

temporary definition does not include 

requirements to (1) verify and document 

the consumer’s income or assets relied 

upon in qualifying the consumer; (2) 

underwrite a fixed rate loan based on a 

payment schedule that fully amortizes 

the loan over the term and takes into 

account all applicable taxes, insurance, 

and assessments; or (3) underwrite an 

adjustable-rate loan using the maximum 

interest rate permitted in the first five 

years. The Bureau highlights that a loan 

need not be actually purchased or 

guaranteed by the GSEs or insured or 

guaranteed by the above-listed Federal 

agencies to qualify for the temporary 

definition in § 1026.43(e)(4). Rather, the 

loan need only be eligible for such 

purchase, guarantee, or insurance. 

Notably, the temporary qualified 

mortgage definition does not include 

‘‘jumbo loans.’’ The Bureau does not 

believe that creditors making jumbo 

loans need the benefit of the temporary 

exception, as the Bureau views the 

jumbo market as already robust and 

stable. Jumbo loans can still be qualified 

mortgages if they meet the general rule 

(i.e. are within the 43 percent debt-toincome ratio and underwritten in 

accordance with the general qualified 

mortgage requirements). 

Section 1026.43(e)(4)(iii) contains the 

sunset provisions for the special 

qualified mortgage definition in 

§ 1026.43(e)(4). Specifically, 

§ 1026.43(e)(4)(iii)(A) provides that each 

respective special rule in 

§ 1026.43(e)(4)(ii)(B) (FHA loans), 

(e)(4)(ii)(C) (VA loans), (e)(4)(ii)(D) 

(USDA loans); and (e)(4)(ii)(E) (RHS 

loans) shall expire on the effective date 

of a rule issued by each respective 

agency pursuant to its authority under 

TILA section 129C(b)(3)(ii) to define a 

qualified mortgage. Section 

1026.43(e)(4)(iii)(B) provides that, 

unless otherwise expired under 

§ 1026.43(e)(4)(iii)(A), the special rules 

in § 1026.43(e)(4) are available only for 

covered transactions consummated on 

or before a date that is seven years after 

the effective date of this rule. 

Comment 43(e)(4)–1 provides 

additional clarification regarding the 

special qualified mortgage definition. 

Specifically, the comment provides that, 

subject to the sunset provided under 

§ 1026.43(e)(4)(iii), § 1026.43(e)(4) 

provides an alternative definition of 

qualified mortgage to the definition 

provided in § 1026.43(e)(2). To be a 

qualified mortgage under 

§ 1026.43(e)(4), the creditor must satisfy 

the requirements under 

§§ 1026.43(e)(2)(i) through (iii), in 

addition to being one of the types of 

loans specified in §§ 1026.43(e)(4)(ii)(A) 

through (E). 

Comment 43(e)(4)–2 clarifies the 

effect that a termination of 

conservatorship would have on loans 

that satisfy the qualified mortgage 

definition under § 1026.43(e)(4) because 

of their eligibility for purchase or 

guarantee by Fannie Mae or Freddie 

Mac. The comment provides that 

§ 1026.43(e)(4)(ii)(A) requires that a 

covered transaction be eligible for 

purchase or guarantee by Fannie Mae or 

Freddie Mac (or any limited-life 

regulatory entity succeeding the charter 


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of either) operating under the 

conservatorship or receivership of the 

FHFA pursuant to section 1367 of the 

Federal Housing Enterprises Financial 

Safety and Soundness Act of 1992 (12 

U.S.C. 4617), as amended by the 

Housing and Economic Recovery Act of 

2008). The special rule under 

§ 1026.43(e)(4)(ii)(A) does not apply if 

Fannie Mae or Freddie Mac (or any 

limited-life regulatory entity succeeding 

the charter of either) has ceased 

operating under the conservatorship or 

receivership of the FHFA. For example, 

if either Fannie Mae or Freddie Mac (or 

succeeding limited-life regulatory 

entity) ceases to operate under the 

conservatorship or receivership of the 

FHFA, § 1026.43(e)(4)(ii)(A) would no 

longer apply to loans eligible for 

purchase or guarantee by that entity; 

however, the special rule would be 

available for a loan that is eligible for 

purchase or guarantee by the other 

entity still operating under 

conservatorship or receivership. 

Comment 43(e)(4)(iii)–3 clarifies that 

the definition of qualified mortgage 

under § 1026.43(e)(4) applies only to 

loans consummated on or before a date 

that is seven years after the effective 

date of the rule, regardless of whether 

Fannie Mae or Freddie Mac (or any 

limited-life regulatory entity succeeding 

the charter of either) continues to 

operate under the conservatorship or 

receivership of the FHFA. Accordingly, 

§ 1026.43(e)(4) is available only for 

covered transactions consummated on 

or before the earlier of either: (i) The 

date Fannie Mae or Freddie Mac (or any 

limited-life regulatory entity succeeding 

the charter of either), respectively, cease 

to operate under the conservatorship or 

receivership of the FHFA pursuant to 

section 1367 of the Federal Housing 

Enterprises Financial Safety and 

Soundness Act of 1992 (12 U.S.C. 4617), 

as amended by the Housing and 

Economic Recovery Act of 2008; or (ii) 

a date that is seven years after the 

effective date of the rule, as provided by 

§ 1026.43(e)(4)(iii). 

Finally, comment 43(e)(4)(iii)–4 

clarifies that, to satisfy 

§ 1026.43(e)(4)(ii), a loan need not be 

actually purchased or guaranteed by the 

GSEs or insured or guaranteed by the 

FHA, VA, USFA, or RHS. Rather, 

§ 1026.43(e)(4)(ii) requires only that the 

loan be eligible for such purchase, 

guarantee, or insurance. Rather, 

§ 1026.43(e)(4)(ii) requires only that the 

loan be eligible for such purchase, 

guarantee, or insurance. For example, 

for purposes of § 1026.43(e)(4), a 

creditor is not required to sell a loan to 

Fannie Mae or Freddie Mac (or any 

limited-life regulatory entity succeeding 

the charter of either) to be a qualified 

mortgage. Rather, the loan must be 

eligible for purchase or guarantee by 

Fannie Mae or Freddie Mac (or any 

limited-life regulatory entity succeeding 

the charter of either), including 

satisfying any requirements regarding 

consideration and verification of a 

consumer’s income or assets, current 

debt obligations, and debt-to-income 

ratio or residual income. To determine 

eligibility, a creditor may rely on an 

underwriting recommendation provided 

by Fannie Mae and Freddie Mac’s 

Automated Underwriting Systems 

(AUSs) or written guide. Accordingly, a 

covered transaction is eligible for 

purchase or guarantee by Fannie Mae or 

Freddie Mac if: (i) The loan conforms to 

the standards set forth in the Fannie 

Mae Single-Family Selling Guide or the 

Freddie Mac Single-Family Seller/ 

Servicer Guide; or (ii) the loan receives 

an ‘‘Approve/Eligible’’ recommendation 

from Desktop Underwriter (DU); or an 

‘‘Accept and Eligible to Purchase’’ 

recommendation from Loan Prospector 

(LP). 

The Bureau is finalizing 

§ 1026.43(e)(4) pursuant to its authority 

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

prescribe regulations that revise, add to, 

or subtract from the criteria that define 

a qualified mortgage upon the findings 

described above. The Bureau believes 

the temporary qualified mortgage 

definition is necessary and proper to 

ensure that responsible, affordable 

mortgage credit remains available to 

consumers in a manner consistent with 

the purposes of TILA section 129C and 

necessary and appropriate to effectuate 

the purposes of TILA section 129C, 

which includes assuring that consumers 

are offered and receive residential 

mortgage loans on terms that reasonably 

reflect their ability to repay the loan. 

As described above, the Bureau 

believes that the provision of qualified 

mortgage status to loans that are eligible 

for purchase, guarantee, or to be insured 

by the Federal entities described above 

will provide a smooth transition to a 

more normal mortgage market. 

Similarly, the Bureau believes that 

including all loans that are eligible to be 

made, guaranteed, or insured by 

agencies of the Federal government and 

the GSEs while under conservatorship, 

will minimize the risk of disruption as 

the market adjusts to the ability-to-repay 

requirements of this rule. This 

adjustment to the qualified mortgage 

definition will also facilitate compliance 

with the ability-to-repay requirements. 

The Bureau is also finalizing 

§ 1026.43(e)(4) pursuant to its authority 

under TILA section 105(a) to issue 

regulations with such requirements, 

classifications, differentiations, or other 

provisions, and that provide for such 

adjustments and exceptions for all or 

any class of transactions, as in the 

judgment of the Bureau are necessary 

and proper to effectuate the purposes of 

TILA, to prevent circumvention or 

evasion thereof, or to facilitate 

compliance therewith. For the reasons 

described above, the Bureau believes the 

adjustments to the definition of 

qualified mortgage are necessary to 

effectuate the purposes of TILA, which 

include the above-described purpose of 

TILA section 129C, among other things, 

and to facilitate compliance therewith. 

The Bureau is exercising this 

authority to remove certain qualified 

mortgage statutory criteria, as discussed 

further below, and to add criteria related 

to eligibility for Federal agency 

programs and GSEs while 

conservatorship, as outlined above, in 

order to create this qualified mortgage 

definition. 

As noted above, § 1026.43(e)(4) 

applies to loans that are eligible for 

guarantee or insurance by the Federal 

agencies listed above. The provisions of 

section 1412 apply to all residential 

mortgage loans, including loans that are 

eligible for and are guaranteed or 

insured by the Federal agencies listed 

above. However, TILA section 

129C(b)(3)(B)(ii) provides the Federal 

agencies listed above with authority, in 

consultation with the Bureau, to 

prescribe rules defining the types of 

loans they insure, guarantee or 

administer, as the case may be, that are 

qualified mortgages and such rules may 

revise, add to, or subtract from the 

criteria used to define a qualified 

mortgage upon certain findings. 

Consistent with this authority, the 

Bureau leaves to these agencies, in 

consultation with the Bureau, further 

prescribing qualified mortgage rules 

defining the types of loans they 

respectively insure, guarantee or 

administer, and their rules may further 

revise the qualified mortgage criteria 

finalized in this rule with respect to 

these loans. In light of the Federal 

agencies’ authority in TILA section 

129C(b)(3)(B)(ii), § 1026.43(e)(4) will 

sunset once each agency has exercised 

its authority to promulgate their own 

qualified mortgage standards. 

As noted above, the final rule does 

not specifically include in the 

temporary definition the statutory 

requirements to (1) verify and document 

the consumer’s income or assets relied 

upon in qualifying the consumer; (2) 

underwrite a fixed rate loan based on a 

payment schedule that fully amortizes 

the loan over the term and takes into 

account all applicable taxes, insurance, 


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6536 Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 

and assessments; or (3) underwrite an 

adjustable-rate loan using the maximum 

interest rate permitted in the first five 

years. As discussed above, the Bureau 

believes it is appropriate, for the time 

being, to presume that loans that are 

eligible for purchase, guarantee, or 

insurance by the designated Federal 

agencies and the GSEs while under 

conservatorship have been originated 

with appropriate consideration of 

consumers’ ability to repay where the 

loans satisfy the requirements of 

§ 1026.43(e)(2) concerning restrictions 

on product features and total points and 

fees limitations. Layering additional and 

different underwriting requirements on 

top of the requirements that are unique 

to each loan program would undermine 

the purpose of the temporary definition, 

namely, to preserve access to credit 

during a transition period while the 

mortgage industry adjusts to this final 

rule and during a time when the market 

is especially fragile. Accordingly, as 

noted above, the Bureau is using its 

authority under TILA section 

129C(b)(3)(B)(i) to remove these 

statutory requirements from the 

qualified mortgage definition in 

§ 1026.43(e)(4). For similar reasons the 

Bureau is not requiring that loans that 

meet this qualified mortgage definition 

meet the 43 percent debt-to-income ratio 

requirement in § 1026.43(e)(2). The 

eligibility requirements of the GSEs and 

Federal agencies incorporate debt-toincome ratio thresholds. However, the 

GSEs and Federal agencies also permit 

consideration of certain compensating 

factors that are unique to each loan 

program. The Bureau declines to layer 

an additional debt-to-income ratio 

requirement to avoid undermining the 

purpose of the temporary qualified 

mortgage definition. 

43(f) Balloon-Payment Qualified 

Mortgages Made by Certain Creditors 

TILA section 129C(b)(2)(E) authorizes 

the Bureau to permit qualified 

mortgages with balloon payments, 

provided the loans meet four 

conditions. Specifically, those 

conditions are that: (1) The loan meets 

certain of the criteria for a qualified 

mortgage; (2) the creditor makes a 

determination that the consumer is able 

to make all scheduled payments, except 

the balloon payment, out of income or 

assets other than the collateral; (3) the 

loan is underwritten based on a 

payment schedule that fully amortizes 

the loan over a period of not more than 

30 years and takes into account all 

applicable taxes, insurance, and 

assessments; and (4) the creditor meets 

four prescribed qualifications. Those 

four qualifications are that the creditor: 

(1) Operates predominantly in rural or 

underserved areas; (2) together with all 

affiliates, has total annual residential 

mortgage loan originations that do not 

exceed a limit set by the Bureau; (3) 

retains the balloon-payment loans in 

portfolio; and (4) meets any asset-size 

threshold and any other criteria the 

Bureau may establish, consistent with 

the purposes of this subtitle. 

The four creditor qualifications are 

nearly identical to provisions in section 

1461 of the Dodd-Frank Act, which 

authorizes the Bureau under TILA 

section 129D(c) to exempt small 

creditors that operate predominantly in 

rural or underserved areas from a 

requirement to establish escrow 

accounts for certain first-lien, higherpriced mortgage loans. Specifically, the 

statute authorizes creation of an 

exemption for any creditor that (1) 

operates predominantly in rural or 

underserved areas; (2) together with all 

affiliates has total annual residential 

mortgage transaction originations that 

do not exceed a limit set by the Bureau; 

(3) retains its mortgage debt obligations 

in portfolio; and (4) meets any asset-size 

thresholds and any other criteria that 

the Bureau may establish. 

The Board interpreted the two 

provisions as serving similar but not 

identical purposes, and thus varied 

certain aspects of the proposals to 

implement the balloon-payment 

qualified mortgage and escrow 

provisions. Specifically, the Board 

interpreted the qualified mortgage 

provision as being designed to ensure 

access to credit in rural and 

underserved areas where consumers 

may be able to obtain credit only from 

community banks offering balloonpayment mortgages, and the escrow 

provision to exempt creditors that do 

not possess economies of scale to costeffectively offset the burden of 

establishing escrow accounts by 

maintaining a certain minimum 

portfolio size from being required to 

establish escrow accounts on higherpriced mortgage loans. Accordingly, the 

two Board proposals would have used 

common definitions of ‘‘rural’’ and 

‘‘underserved,’’ but did not provide 

uniformity in calculating and defining 

various other elements. For the balloon 

balloon-payment qualified mortgage 

provisions, for instance, the Board’s 

proposed § 226.43(f) would have 

required that the creditor (1) in the 

preceding calendar year, have made 

more than 50 percent of its balloonpayment mortgages in rural or 

underserved areas; and (2) have assets 

that did not exceed $2 billion. The 

Board proposed two alternatives each 

for qualifications relating to (1) the total 

annual originations limit; and (2) the 

retention of balloon-payment mortgages 

in portfolio. The proposal also would 

have implemented the four conditions 

for balloon-payment qualified mortgages 

under TILA section 129C(b)(2)(E) and 

used its adjustment and exception 

authority to add a requirement that the 

loan term be five years or longer. 

In contrast, the Board’s proposal for 

the escrows exemption under proposed 

§ 226.45(b)(2)(iii) would have required 

that the creditor have (1) in the 

preceding calendar year, have made 

more than 50 percent of its first-lien 

mortgages in rural or underserved areas; 

(2) together with all affiliates, originated 

and retained servicing rights to no more 

than 100 first-lien mortgage debt 

obligations in either the current or prior 

calendar year; and (3) together with all 

affiliates, not maintained an escrow 

account on any consumer credit secured 

by real property. The Board also sought 

comment on whether to add a 

requirement for the creditor to meet an 

asset-size limit and what that size 

should be. 

In both cases, the Board proposed to 

use a narrow definition of rural based 

on the Economic Research Service (ERS) 

of the USDA’s ‘‘urban influence codes’’ 

(UICs). The UICs are based on the 

definitions of ‘‘metropolitan statistical 

areas’’ of at least one million residents 

and ‘‘micropolitan statistical areas’’ 

with a town of at least 2,500 residents, 

as developed by the Office of 

Management and Budget, along with 

other factors reviewed by the ERS that 

place counties into twelve separately 

defined UICs depending on the size of 

the largest city and town in the county. 

The Board’s proposal would have 

limited the definition of rural to certain 

‘‘non-core’’ counties that are not located 

in or adjacent to any metropolitan or 

micropolitan area. This definition 

corresponded with UICs of 7, 10, 11, 

and 12, which would have covered 

areas in which only 2.3 percent of the 

nation’s population lives. 

In light of the overlap in criteria 

between the balloon-payment qualified 

mortgage and escrow exemption 

provisions, the Bureau considered 

comments responding to both proposals 

in determining how to finalize the 

particular elements of each rule as 

discussed further below. With regard to 

permitting qualified mortgages with 

balloon payments generally, consumer 

group commenters stated that the 

balloon-payment qualified mortgage 

exemption is a discretionary provision, 

as TILA section 129C(b)(2)(E) states that 

the Bureau ‘‘may’’ provide an 

exemption for balloon-payment 

mortgages to be qualified mortgages, and 


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156See Allen N. Berger & Gregory F. Udell, Small 

Business Credit Availability and Relationship 

Lending: The Importance of Bank Organizational 

Structure, 112 Econ. J. F32 (2002). 157See 2013 ATR Concurrent Proposal; Fed. 

Deposit Ins. Corp., FDIC Community Banking 

Study, (Dec. 2012), available at http://fdic.gov/ 

regulations/resources/cbi/study.html. 158The Bureau has similarly attempted to 

maintain consistency between the asset size, annual 

originations threshold, and requirements 

concerning portfolio loans as between the final 

rules that it is adopting with regard to balloon 

qualified mortgages and the escrow exemption and 

its separate proposal to create a new type of 

qualified mortgages originated and held by small 

portfolio creditors. The Bureau is seeking comment 

in that proposal on these elements and on whether 

other adjustments are appropriate to the existing 

rules to maintain continuity and reduce compliance 

burden. See 2013 ATR Concurrent Proposal. 

stated that such an exemption should 

not be provided in the final rule because 

such exemption would have a negative 

effect on consumers’ access to 

responsible and affordable credit. Trade 

association and industry commenters 

generally supported the balloonpayment qualified mortgage exemption, 

with some comments related to the 

specific provisions that are discussed 

below. One trade association 

commented that the exemption should 

extend to all balloon-payment mortgages 

held in portfolio by financial 

institutions; as such a broader 

exemption would achieve Congress’s 

intent as well as reduce the difficulty 

that creditors would have in complying 

with the requirements in the proposal. 

Three trade associations and several 

industry commenters commented that 

the balloon-payment qualified mortgage 

exemption was needed to ensure access 

to credit for consumers in rural areas 

because smaller institutions in those 

areas use balloon-payment mortgages to 

control interest rate risk. 

The Bureau believes Congress enacted 

the exemption in TILA section 

129C(b)(2)(E) because it was concerned 

that the restrictions on balloon-payment 

mortgages under the ability to repay and 

general qualified mortgage provisions 

might unduly constrain access to credit 

in rural and underserved areas, where 

consumers may be able to obtain credit 

only from a limited number of creditors, 

including some community banks that 

may offer only balloon-payment 

mortgages. Because Congress explicitly 

set out detailed criteria, indicating that 

it did not intend to exclude balloonpayment mortgages from treatment as 

qualified mortgages that meet those 

criteria, and the Bureau is implementing 

the statutory exemption for balloonpayment mortgages to be qualified 

mortgages provided they meet the 

conditions described below. The Bureau 

believes those criteria reflect a careful 

judgment by Congress concerning the 

circumstances in which the potential 

negative impact from restricting 

consumers’ access to responsible and 

affordable credit would outweigh any 

benefit of prohibiting qualified 

mortgages from providing for balloon 

payments. The Bureau therefore 

believes that the scope of the exemption 

provided in this final rule implements 

Congress’s judgment as to the proper 

balance between those two imperatives. 

The Bureau believes that there are 

compelling reasons underlying 

Congress’s decision not to allow 

balloon-payment mortgages to enjoy 

qualified-mortgage status except in 

carefully limited circumstances. It is the 

rare consumer who can afford to make 

a balloon payment when due. Thus, 

ordinarily a consumer facing a balloon 

payment must obtain new financing. 

Depending on market conditions at the 

time and also the consumer’s own 

economic circumstances, consumers 

may find it difficult to obtain affordable 

credit. Some consumers may be forced 

to sell their homes to pay off the 

balloon-payment mortgage. Others may 

find it necessary to take on a new loan 

on terms that create hardships for the 

consumers. Unscrupulous lenders may 

seek to take advantage of consumers 

faced with the necessity of making a 

balloon payment by offering loans on 

predatory terms. 

On the other hand, in rural and other 

underserved areas, it is not uncommon 

for consumers to seek a mortgage loan 

of a type that cannot be sold on the 

secondary market, because of special 

characteristics of either the property in 

question or the consumer. Many 

community banks make mortgages that 

are held in portfolio in these 

circumstances. To manage interest rate 

risk and avoid complexities in 

originating and servicing adjustable rate 

mortgages, these banks generally make 

balloon-payment mortgage loans which 

the banks roll over, at then current 

market interest rate, when the balloonpayment mortgage comes due. For 

example, data available through the 

National Credit Union Administration 

indicates that among credit unions 

which make mortgages in rural areas 

(using the definition of rural described 

below), 25 percent make only balloonpayment or hybrid mortgages. 

There are also substantial data 

suggesting that the small portfolio 

creditors that are most likely to rely on 

balloon-payment mortgages to manage 

their interest rate risks (or to have 

difficulty maintaining escrow accounts) 

have a significantly better track record 

than larger creditors with regard to loan 

performance. As discussed in more 

depth in the 2013 ATR Concurrent 

Proposal, because small portfolio 

lenders retain a higher percentage of 

their loans on their own books, they 

have strong incentives to engage in 

thorough underwriting. To minimize 

performance risk, small community 

lenders have developed underwriting 

standards that are different than those 

employed by larger institutions. Small 

lenders generally engage in 

‘‘relationship banking,’’ in which 

underwriting decisions rely at least in 

part on qualitative information gained 

from personal relationships between 

lenders and consumers. This qualitative 

information focuses on subjective 

factors such as consumer character and 

reliability which ‘‘may be difficult to 

quantify, verify, and communicate 

through the normal transmission 

channels of banking organization.’’ 156

While it is not possible to disaggregate 

the impact of each of the elements of the 

community banking model, the 

combined effect is highly beneficial. 

Moreover, where consumers have 

trouble paying their mortgage debt 

obligations, small portfolio creditors 

have strong incentives to work with the 

consumers to get them back on track, 

both to protect the creditors’ balance 

sheets and their reputations in their 

local communities. Market-wide data 

demonstrate that loan delinquency and 

charge-off rates are significantly lower at 

smaller banks than larger ones.157

The Bureau believes that these kinds 

of considerations underlay Congress’s 

decision to authorize the Bureau to 

establish an exemption under TILA 

section 129C(b)(2)(E) to ensure access to 

credit in rural and underserved areas 

where consumers may be able to obtain 

credit only from such community banks 

offering these balloon-payment 

mortgages. Thus, the Bureau concludes 

that exercising its authority is 

appropriate, but also that the exemption 

should implement the statutory criteria 

to ensure it effectuates Congress’s 

intent. Accordingly, as discussed in 

more detail below, the Bureau adopts 

§ 1026.43(f) largely as proposed but with 

certain changes described below to 

implement TILA section 129C(b)(2)(E). 

In particular, the Bureau has 

concluded that it is appropriate to make 

the specific creditor qualifications much 

more consistent between the balloonpayment qualified mortgage and escrow 

exemptions than originally proposed by 

the Board.158 The Bureau believes that 

this approach is justified by several 

considerations, including the largely 

identical statutory language, the similar 

congressional intents underlying the 

two provisions, and the fact that 

requiring small creditors operating 

predominantly in rural or underserved 


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areas to track overlapping but not 

identical sets of technical criteria for 

each separate provision could create 

unwarranted compliance burden that 

itself would frustrate the intent of the 

statutes. Although the Bureau has recast 

and loosened some of the criteria in 

order to promote consistency, the 

Bureau has carefully calibrated the 

changes to further the purposes of each 

rulemaking and in light of the evidence 

suggesting that small portfolio lenders’ 

relationship banking model provides 

significant consumer protections in its 

own right. 

For the foregoing reasons, the Bureau 

is adopting § 1026.43(f)(1)(vi) to 

implement TILA section 

129C(b)(2)(E)(iv) by providing that a 

balloon loan that meets the other criteria 

specified in the regulation is a qualified 

mortgage if the creditor: (1) In the 

preceding calendar year made more 

than 50 percent of its covered 

transactions secured by a first lien in 

counties designated by the Bureau as 

‘‘rural’’ or ‘‘underserved’’; (2) together 

with all affiliates extended 500 or fewer 

first-lien covered transactions in the 

preceding calendar year; and (3) has 

total assets that are less than $2 billion, 

adjusted annually for inflation. The 

final rule also creates greater parallelism 

with the escrow provision with regard 

to the requirement that the affected 

loans be held in portfolio by requiring 

in both rules that the transactions not be 

subject to a ‘‘forward commitment’’ 

agreement to sell the loan at the time of 

consummation. These qualifications and 

the other requirements under the final 

rule are discussed in more detail below. 

43(f)(1) Exemption 

The Bureau believes that the 

provisions of TILA section 129C(b)(2)(E) 

are designed to require that balloonpayment qualified mortgages meet the 

same criteria for qualified mortgages as 

described in TILA section 129C(b)(2)(A), 

except where the nature of the balloonpayment mortgage itself requires 

adjustment to the general rules. In TILA 

section 129C(b)(2)(A), a qualified 

mortgage cannot allow the consumer to 

defer repayment of principal. Deferred 

principal repayment may occur if the 

payment is applied to both accrued 

interest and principal but the consumer 

makes periodic payments that are less 

than the amount that would be required 

under a payment schedule that has 

substantially equal payments that fully 

repay the loan amount over the loan 

term. The scheduled payments that fully 

repay a balloon-payment mortgage over 

the loan term include the balloon 

payment itself and, therefore, are not 

substantially equal. Thus, balloonpayment mortgages permit the 

consumer to defer repayment of 

principal. Additionally, a qualified 

mortgage must explicitly fully amortize 

the loan amount over the loan term and 

explicitly cannot result in a balloon 

payment under TILA section 

129C(b)(2)(A). Since TILA section 

129C(b)(2)(A) contains these provisions, 

TILA section 129C(b)(2)(E) exempts 

balloon-payment qualified mortgages 

from meeting those requirements. TILA 

section 129C(b)(2)(E) has additional 

requirements that a creditor consider 

the consumer’s ability to repay the 

scheduled payments using a calculation 

methodology appropriate for a balloonpayment mortgage. 

Accordingly, the Bureau is adjusting 

the ability-to-repay requirements 

generally applicable to qualified 

mortgages under § 1026.43(e)(2) for the 

balloon-payment qualified mortgage 

exemption. Requirements that are the 

same in both the generally applicable 

qualified mortgage requirements and the 

balloon-payment qualified mortgage 

exemption are specifically described in 

paragraph (f)(1)(i). The requirements in 

the generally applicable qualified 

mortgage requirements that are 

inapplicable, for the reasons described 

below, to the balloon-payment qualified 

mortgage exemption are replaced by 

requirements in paragraph (f)(1)(ii), (iii) 

and (iv) that specifically address the 

provisions inherent in balloon-payment 

mortgages. 

43(f)(1)(i) 

TILA section 129C(b)(2)(E)(i) requires 

that a balloon-payment qualified 

mortgage meet all of the criteria for a 

qualified mortgage, except for the 

provisions that require the loan to have: 

(1) Regular periodic payments that 

provide for the complete repayment of 

principal over the loan term, (2) terms 

that do not result in a balloon payment, 

and (3) a payment schedule that fully 

amortizes the mortgage over the loan 

term taking into account all applicable 

taxes, insurance and assessments. The 

Board’s proposed § 226.43(f)(1)(i) would 

have implemented this provision by 

requiring that balloon-payment 

qualified mortgages meet the same 

requirements for other qualified 

mortgages, except for specific provisions 

of § 226.43(e)(2) that would not have to 

be considered. Commenters did not 

address these requirements specifically. 

The Bureau is adopting § 1026.43(f)(1)(i) 

to implement TILA section 

129C(b)(2)(E)(i) by providing that a 

balloon-payment qualified mortgage 

must meet the criteria for a qualified 

mortgage as required by 

§ 1026.43(e)(2)(i)(A), (e)(2)(ii), (e)(2)(iii), 

and (e)(2)(v). These requirements are 

similar to the requirements in the 

Board’s proposal, except that they are 

stated as affirmative requirements 

instead of excluding qualified mortgage 

requirements that are not required to be 

considered for balloon-payment 

qualified mortgages. 

Section 1026.43(f)(1)(i), by exclusion, 

exempts balloon-payment qualified 

mortgages from the requirements in 

§ 1026.43(e)(2)(i)(B), (e)(2)(i)(C), 

(e)(2)(iv), and (e)(2)(vi), which use 

calculation methodologies that would 

make the origination of balloonpayment qualified mortgages difficult, if 

not impossible. The requirements in 

subsequent provisions of § 1026.43(f)(1) 

are adopted below to require the 

consideration of scheduled payments 

and the debt-to-income ratio made in 

conjunction with alternative calculation 

methodologies that are appropriate for 

balloon-payment qualified mortgages. 

Comment 43(f)(1)(i)–1 clarifies that a 

balloon-payment qualified mortgage 

under this exemption must provide for 

regular periodic payments that do not 

result in an increase of the principal 

balance as required by 

§ 1026.43(e)(2)(i)(A), must have a loan 

term that does not exceed 30 years as 

required by § 1026.43(e)(2)(ii), must 

have total points and fees that do not 

exceed specified thresholds pursuant to 

§ 1026.43(e)(2)(iii), and must satisfy the 

consideration and verification 

requirements in § 1026.43(e)(2)(v). 

43(f)(1)(ii) 

TILA section 129C(b)(2)(E)(ii) requires 

a creditor making a balloon-payment 

qualified mortgage to determine that the 

consumer is able to make all scheduled 

payments, except the balloon payment, 

out of income and assets other than the 

collateral. TILA section 

129C(b)(2)(E)(iii) requires a creditor 

making a balloon-payment qualified 

mortgage to determine, among other 

things, that the scheduled payments 

include mortgage-related obligations. 

Proposed § 226.43(f)(1)(ii) would have 

required that the creditor determine that 

the consumer can make all of the 

scheduled payments, except for the 

balloon payment, from the consumer’s 

current or reasonably expected income 

or assets other than the dwelling that 

secures the loan. Commenters did not 

address this requirement specifically. 

The Bureau is adopting 

§ 1026.43(f)(1)(ii) to implement TILA 

section 129C(b)(2)(E)(ii) and a portion of 

TILA section 129C(b)(2)(E)(iii) by 

requiring a creditor to determine that 

the consumer can make all of the 

payments under the terms of the legal 

obligation, as described in 


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Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 6539 

§ 1026.43(f)(1)(iv)(A), together with all 

mortgage-related obligations and 

excluding the balloon payment, from 

the consumer’s income or assets other 

than the dwelling that secures the loan. 

Comment 43(f)(1)(ii)–1 provides an 

example to illustrate the calculation of 

the monthly payment on which this 

determination must be based. Comment 

43(f)(1)(ii)–2 provides additional 

clarification on how a creditor may 

make the required determination that 

the consumer is able to make all 

scheduled payments other than the 

balloon payment. 

43(f)(1)(iii) 

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

the addition of additional requirements 

or revision of the criteria that define a 

qualified mortgage upon the finds 

discussed below. The Board’s proposal 

did not include an explicit requirement 

to consider the consumer’s debt-toincome ratio in relation to a balloonpayment qualified mortgage. The Board, 

however, sought comment on what 

criteria should be included in the 

definition of a qualified mortgage to 

ensure that the definition provides an 

incentive to creditors to make qualified 

mortgages, while also ensuring that 

consumers have the ability to repay 

qualified mortgages. One commenter 

advocated eliminating the balloonpayment qualified mortgage exemption 

completely as they recommended that 

balloon-payment mortgages should not 

be permitted at all, but rather suggested 

that the Board and Bureau take steps to 

make the balloon-payment qualified 

mortgage exemption rare. 

As discussed above with regard to 

other categories of qualified mortgages, 

the Bureau believes 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. Thus, debt-to-income comparisons 

provide a valuable predictive metric in 

assessing the consumer’s repayment 

ability. The Bureau believes that it 

would be inconsistent with 

congressional intent to have balloonpayment qualified mortgages not meet 

those same requirements, as modified to 

the particular nature of a balloonpayment mortgage. 

Accordingly, the Bureau is adopting 

§ 1026.43(f)(1)(iii) to provide that, to 

make a balloon-payment qualified 

mortgage, a creditor must consider and 

verify the consumer’s monthly debt-toincome ratio or residual income in 

accordance with § 1026.43(c)(7) by 

using the calculation methodology 

described in § 1026.43(f)(iv)(A), together 

with all mortgage-related obligations 

and excluding the balloon payment. 

Comment 43(f)(1)(iii)–1 clarifies that the 

calculation required under 

§ 1026.43(c)(7)(i)(A) should be made 

using the payment calculation 

methodology under 

§ 1026.43(f)(1)(iv)(A), together with all 

mortgage-related obligations and 

excluding the balloon payment, in order 

to comply with § 1026.43(f)(1)(iii). 

At the same time, however, the 

Bureau declines to impose a specific 

debt-to-income or residual threshold for 

this category of qualified mortgages 

because, as discussed above, the Bureau 

believes that small creditors excel at 

making highly individualized 

determinations of ability to repay that 

take into consideration the unique 

characteristics and financial 

circumstances of the 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 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 other 

criteria in § 1026.43(f). 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. 

In adopting this requirement, the 

Bureau is adding a condition for a 

balloon-payment qualified mortgage that 

is not established by TILA section 

129C(b)(2)(E). The Bureau adds this 

condition pursuant to TILA section 

129C(b)(3)(B)(i), which authorizes the 

Bureau ‘‘to 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 this section, necessary 

and appropriate to effectuate the 

purposes of this section and Section 

129B, to prevent circumvention or 

evasion thereof, or to facilitate 

compliance with such sections.’’ A 

purpose of TILA section 129C, among 

other things, is to ensure that consumers 

are offered and receive loans on terms 

that they are reasonably able to repay. 

See TILA section 129B(a)(2). The 

Bureau believes that a creditor 

considering and verifying the 

consumer’s monthly debt-to-income 

ratio or residual income in order for the 

balloon-payment mortgage to qualify as 

a balloon-payment qualified mortgage is 

necessary, proper, and appropriate both 

to effectuate the purposes of TILA 

section 129C to prevent circumvention 

or evasion thereof and to ensure that 

responsible, affordable mortgage credit 

remains available to consumers in a 

manner consistent with the purposes of 

this section. For these reasons, the 

Bureau believes that § 1026.43(f)(1)(iii), 

in requiring a creditor considering and 

verifying the consumer’s monthly debtto-income ratio or residual income in 

order for the balloon-payment mortgage 

to qualify as a balloon-payment 

qualified mortgage, effectuates the 

purposes of TILA section 129C and 

prevents circumvention or evasion 

thereof. 

In addition the Bureau invokes its 

authority under section 105(a) in order 

to add the above qualification for a 

balloon-payment qualified mortgage. 

Section 105(a) authorizes the Bureau to 

issue regulations that, among other 

things, contain such additional 

requirements, other provisions, or that 

provide for such adjustments for all or 

any class of transactions, that in the 

Bureau’s judgment are necessary or 

proper to effectuate the purposes of 

TILA, which include the above purpose 

of section 129C, among other things. See 

15 U.S.C. 1604(a). The Bureau believes 

that this addition to the qualified 

mortgage criteria is necessary and 

proper to achieve this purpose. 

43(f)(1)(iv) 

TILA section 126C(b)(2)(E)(iii) and the 

Board proposal require that the loan be 

underwritten with specific payment 

calculation methodologies to qualify as 

a balloon-payment qualified mortgage. 

The underwriting of a loan is based on 

the terms of the legal obligation. The 

general requirements of a qualified 

mortgage in § 1026.43(e)(2) govern loans 

secured by real property or a dwelling 

with multiple methods of payment 

calculations, terms, and conditions. 

However, unlike other the types of 

qualified mortgage, the balloon-payment 

qualified mortgage deals with a specific 

type of transaction, a balloon-payment 

mortgage, with specific characteristics 

that are described in the legal 


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6540 Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 

obligation. Therefore, the Bureau 

considers the requirement of TILA 

section 129C(b)(2)(E)(iii) to be 

requirements relating to the terms of the 

legal obligation of the loan. 

Accordingly, the Bureau is adopting 

§ 1026.43(f)(1)(iv), requiring the legal 

obligation of a balloon-payment 

qualified mortgage to have the following 

terms: (1) Scheduled payments that are 

substantially equal and calculated on an 

amortization period that does not 

exceed 30 years; (2) the interest rate 

does not vary during the loan term, and 

(3) the loan term is for five years or 

longer. 

Scheduled Payments 

TILA section 129C(b)(2)(E)(iii) 

requires that a balloon-payment 

qualified mortgage must be 

underwritten based on a payment 

schedule that fully amortizes the loan 

over a period of not more than 30 years 

and takes into account all applicable 

taxes, insurance, and assessments. The 

Board’s proposed § 226.43(f)(1)(iii) 

incorporated this statutory requirement. 

Commenters did not address this 

requirement specifically. 

The Bureau is adopting the Board’s 

proposal and implements 

§ 1026.43(f)(1)(iv) to require that the 

scheduled payments, on which the 

determinations required by 

§ 1026.43(f)(1)(ii) and (f)(1)(iii) are 

based, are calculated using an 

amortization period that does not 

exceed 30 years. The requirement that 

the payments include all mortgagerelated obligations is required as part of 

§ 1026.43(f)(1)(ii), above. The Bureau 

believes that the underwriting 

referenced in TILA section 

129C(b)(2)(E)(iii) corresponds to the 

determination of the consumer’s 

repayment ability referenced in TILA 

section 129C(b)(2)(E)(ii). Comment 

43(f)(1)(iv)–1 clarifies that the 

amortization period used to determine 

the scheduled periodic payments that 

the consumer must pay under the terms 

of the legal obligation may not exceed 

30 years. 

In its proposal, the Board sought 

comment on whether a balloon-payment 

mortgage with interest-only payments 

should qualify for the balloon-payment 

exemption. One association of State 

bank regulators commented that loans 

with interest-only payments would be 

properly excluded from the exemption 

in order to permit the exemption to be 

available only to those institutions that 

appropriately utilize the balloonpayment mortgages to mitigate interest 

rate risk. The Bureau agrees with this 

assessment and believes that permitting 

interest-only payments would be 

contrary to the intent of Congress 

requiring amortizing payments as a 

requirement of a qualified mortgage, as 

interest-only payments do not provide 

any reduction in principal. Accordingly, 

the Bureau is adding comment 

43(f)(1)(iv)–2 which clarifies that a loan 

that provides for interest-only payments 

cannot qualify for the balloon-payment 

qualified mortgage exemption, because 

it would not require the consumer to 

make any payments towards the 

principal balance of the loan contrary to 

the requirement that the scheduled 

payments result in amortization of the 

loan for a period that does not exceed 

30 years. 

Fixed Interest Rate 

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

the addition of additional requirements 

upon the finding that such regulations 

are necessary or proper to ensure that 

responsible, affordable mortgage credit 

remains available to consumers. The 

Board’s proposal did not include any 

restrictions on the interest rate terms of 

the loan, but did observe that 

community banks appear to originate 

balloon-payment mortgages to hedge 

against interest-rate risk. The Board 

sought comment on what criteria should 

be included in the definition of a 

qualified mortgage to ensure that the 

definition provides an incentive to 

creditors to make qualified mortgages, 

while also ensuring that consumers 

have the ability to repay qualified 

mortgages. 

The Bureau believes that the purpose 

of the exemption was to permit balloonpayment mortgages to be originated for 

those consumers that still need or want 

them, and to permit competition 

between creditors that address interest 

rate risk through the use of adjustable 

rate mortgages and those creditors that 

address interest rate risk through the use 

of balloon-payment mortgages. The 

Bureau believes that creditors that have 

the infrastructure and resources to 

originate adjustable rate mortgages do 

not need to resort to the use of balloonpayment mortgages to address interest 

rate risk. Accordingly, the Bureau is 

adopting § 1026.43(f)(1)(iv)(B), which 

requires that the legal obligation of a 

balloon-payment qualified mortgage 

must include an interest rate that will 

not increase during the term of the loan. 

In adopting this requirement, the 

Bureau is adding a condition for a 

balloon-payment qualified mortgage that 

is not established by TILA section 

129C(b)(2)(E). The Bureau adds this 

condition pursuant to TILA section 

129C(b)(3)(B)(i), which authorizes the 

Bureau ‘‘to 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 this section, necessary 

and appropriate to effectuate the 

purposes of this section and Section 

129B, to prevent circumvention or 

evasion thereof, or to facilitate 

compliance with such sections.’’ A 

purpose of TILA section 129C is to 

ensure that consumers are offered and 

receive loans on terms that they are 

reasonably able to repay. See TILA 

section 129B(a)(2). The Bureau believes 

that requiring the legal obligation of a 

balloon-payment qualified mortgage to 

contain an interest rate that does not 

increase during the loan term is 

necessary, proper, and appropriate both 

to effectuate the purposes of TILA 

section 129C and to prevent 

circumvention or evasion thereof and to 

ensure that responsible, affordable 

mortgage credit remains available to 

consumers in a manner consistent with 

the purposes of this section. For these 

reasons, the Bureau believes that 

§ 1026.43(f)(1)(iv)(B), in requiring the 

legal obligation of a balloon-payment 

qualified mortgage to contain an interest 

rate that does not increase during the 

loan term, effectuates the purposes of 

TILA section 129C and prevents 

circumvention or evasion thereof. 

In addition the Bureau invokes its 

authority under section 105(a) in order 

to add the above qualification for a 

balloon-payment qualified mortgage. 

Section 105(a) authorizes the Bureau to 

issue regulations that, among other 

things, contain such additional 

requirements, other provisions, or that 

provide for such adjustments for all or 

any class of transactions, that in the 

Bureau’s judgment are necessary or 

proper to effectuate the purposes of 

TILA, which include the above purpose 

of Section 129C, among other things. 

See 15 U.S.C. 1604(a). The Bureau 

believes that this addition to the 

qualified mortgage criteria is necessary 

and proper to achieve this purpose. 

Loan Term of Five Years or Longer 

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

the adoption of additional requirements 

upon the finding that such regulations 

are necessary or proper to ensure that 

responsible, affordable mortgage credit 

remains available to consumers. The 

Board’s proposed § 226.43(f)(1)(iv) 

would have included the addition of a 

requirement that a balloon-payment 

qualified mortgage must have a loan 

term of five years or longer. One 

association of State bank regulators and 

an industry trade group commented that 


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Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 6541 

the five-year term requirement was 

appropriate, as the time period is 

consistent with other provisions of the 

proposed rule. One industry trade group 

and one industry commenter 

commented that three years would be a 

more appropriate term because some of 

the creditors that would qualify under 

proposed § 226.43(f)(1)(v) utilize threeyear terms. The Bureau is not persuaded 

that the exemption was meant by 

Congress to permit any current business 

practice of creditors that would satisfy 

the requirements of proposed 

§ 226.43(f)(1)(v), rather the exemption 

was meant to provide a reasonable 

exemption for some balloon-payment 

mortgages that still meet other 

requirements of a qualified mortgage. 

The Bureau notes that the statute 

requires underwriting for an adjustablerate qualified mortgage to be based on 

the maximum interest rate permitted 

during the first five years. See TILA 

Section 129C(b)(2)(A)(v). Therefore, the 

Bureau is adopting the Board’s proposal 

by implementing § 1026.43(f)(1)(iv)(C) 

requiring a loan term of five years or 

longer because it reflects the statutory 

intent that five years is a reasonable 

period to repay a loan. Since other 

requirements of a qualified mortgage 

include a review of the mortgage over a 

five-year term, it would be more 

consistent with the intent of the 

exemption for the balloon-payment 

mortgage to have at least a five-year 

term. 

The Bureau believes that it is 

appropriate to structure the exemption 

to prevent balloon-payment mortgages 

with very short loan terms from being 

qualified mortgages because such loans 

would present certain risks to 

consumers. A consumer with a loan 

term of less than five years, particularly 

where the amortization period is 

especially long, would face a balloon 

payment soon after consummation, in 

an amount virtually equal to the original 

loan amount. The consumer would 

establish little equity in the property 

under such terms, and if the pattern is 

repeated the consumer may never make 

any significant progress toward owning 

the home unencumbered. Thus, the 

greater the difference between a balloonpayment mortgage’s amortization period 

and its loan term, the more likely the 

consumer would face this problem. The 

Bureau’s requirement of a minimum 

term therefore complements the 30-year 

maximum amortization period 

prescribed by TILA section 

129C(b)(2)(E)(iii). 

In adopting this requirement, the 

Bureau is adding a condition for a 

balloon-payment qualified mortgage that 

is not established by TILA section 

129C(b)(2)(E). The Bureau adds this 

condition pursuant to TILA section 

129C(b)(3)(B)(i), which authorizes the 

Bureau ‘‘to 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 this section, necessary 

and appropriate to effectuate the 

purposes of this section and Section 

129B, to prevent circumvention or 

evasion thereof, or to facilitate 

compliance with such sections.’’ A 

purpose of TILA section 129C is to 

ensure that consumers are offered and 

receive loans on terms that they are 

reasonably able to repay. See TILA 

section 129B(a)(2). For the reasons 

discussed above, the Bureau believes 

that a minimum loan term for balloonpayment mortgages is necessary and 

appropriate both to effectuate the 

purposes of TILA section 129C and to 

prevent circumvention or evasion 

thereof. For these reasons, the Bureau 

believes that § 1026.43(f)(1)(iv)(C), in 

limiting the exemption for balloonpayment qualified mortgages to covered 

transactions with loan terms of at least 

five years and thus ensuring that such 

products truly support mortgage 

affordability, effectuates the purposes of 

TILA section 129C and prevents 

circumvention or evasion thereof. The 

Bureau also believes this minimum loan 

term for balloon-payment qualified 

mortgages is necessary, proper, and 

appropriate to ensure that responsible, 

affordable mortgage credit remains 

available to consumers in a manner 

consistent with the purposes of Section 

129C. 

In addition the Bureau invokes its 

authority under section 105(a) in order 

to add the above qualification for a 

balloon-payment qualified mortgage. 

Section 105(a) authorizes the Bureau to 

issue regulations that, among other 

things, contain such additional 

requirements, other provisions, or that 

provide for such adjustments for all or 

any class of transactions, that in the 

Bureau’s judgment are necessary or 

proper to effectuate the purposes of 

TILA, which include the above purpose 

of Section 129C, among other things. 

See 15 U.S.C. 1604(a). The Bureau 

believes that this addition to the 

qualified mortgage criteria is necessary 

and proper to achieve this purpose. 

43(f)(1)(v) and (vi) 

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

includes among the conditions for a 

balloon-payment qualified mortgage that 

the creditor (1) operates predominantly 

in rural or underserved areas; (2) 

together with all affiliates, has total 

annual residential mortgage loan 

originations that do not exceed a limit 

set by the Bureau; (3) retains the 

balloon-payment loans in portfolio; and 

(4) meets any asset-size threshold and 

any other criteria as the Bureau may 

establish. The Board proposed 

§ 226.43(f)(1)(v) to impose specific 

requirements to implement some of 

these elements and sought comment on 

alternatives to implement others. 

Specifically, the Board: (1) Proposed a 

requirement that the creditor in the 

preceding year made more than 50 

percent of its balloon-payment 

mortgages in rural or underserved areas; 

(2) sought comment on whether to adopt 

an annual originations limit based on 

either the total volume of mortgages or 

the total number of mortgages made in 

the last year by the creditor, together 

with affiliates, without proposing a 

specific threshold; (3) sought comment 

on two alternatives to implement the 

portfolio requirement by revoking a 

creditor’s ability to make balloonpayment qualified mortgages if the 

creditor sold any balloon-payment 

mortgages either in the last year or at 

any time after the final rule was 

adopted; and alternatives, and (4) did 

not have assets that exceeded $2 billion, 

adjusted annually for inflation. 

In contrast, the Board’s escrows 

proposal would have implemented 

nearly identical statutory requirements 

under TILA 129D(c) by requiring that 

the creditor (1) in the preceding 

calendar year, have made more than 50 

percent of its first-lien mortgages in 

rural or underserved areas; (2) together 

with all affiliates, originated and 

retained servicing rights to no more than 

100 first-lien mortgage debt obligations 

in either the current or prior calendar 

year; and (3) not be permitted to invoke 

the exception for any first-lien higherpriced mortgage loan that was subject to 

a ‘‘forward commitment’’ to sell the loan 

at the time of consummation. The Board 

also sought comment on whether to 

impose an asset limit without proposing 

a specific threshold, and proposed to 

impose a further requirement that the 

creditor and its affiliates not maintain 

escrow accounts for any other loans in 

order to be eligible for the exception. 

As stated above, the Bureau has 

considered the comments received 

under both proposals regarding 

implementation of the largely identical 

statutory criteria, and has concluded 

that it is appropriate to create a much 

higher degree of consistency between 

the elements in the two individual 

rules. Implementation of each of the 


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statutory elements is discussed further 

below. 

Holding of Balloon-Payment Mortgages 

in Portfolio 

TILA section 129C(b)(E)(iv) requires 

that the lender keep balloon-payment 

mortgages in portfolio. The Board 

proposed to implement this requirement 

by removing a creditor’s eligibility for 

the exemption under proposed 

§ 226.43(f)(1)(v)(C) if it sold a balloonpayment mortgage during two 

alternative periods, one that would 

cover any time after the adoption of the 

final rule and another that would look 

only to sales during the preceding or 

current calendar year. The Board 

concluded that this was the best 

approach to implement the statutory 

requirement in the qualified mortgage 

context because it would allow a 

creditor to determine at consummation 

whether a particular balloon-payment 

loan was eligible to be a qualified 

mortgage and allow the loan to maintain 

such status even if it were sold, while 

creating strong safeguards against 

gaming of the exception by revoking the 

creditor’s ability to invoke the 

provisions if they began selling such 

loans to other holders. 

In contrast, the Board’s 2011 Escrows 

Proposal would have implemented a 

parallel statutory requirement under 

TILA section 129D(c)(3) by looking to 

whether the particular first-lien, higherpriced mortgage loan was subject to sale 

under a ‘‘forward commitment.’’ 

Forward commitments are agreements 

entered into at or before consummation 

of a transaction under which a 

purchaser is committed to acquire the 

specific loan or loans meeting specified 

criteria from the creditor after 

consummation. The Board believed that 

the proposal was a reasonable way to 

implement the statutory requirement 

because it would allow the creditor and 

consumer to determine at 

consummation whether an escrow 

requirement was required to be 

established; the Board reasoned that 

fashioning the rule in a way that would 

require that an escrow account be 

established sometime after 

consummation if the particular loan was 

transferred to a non-eligible holder 

would be potentially burdensome to 

consumers, since the consumer may not 

have the funds available to make a large 

lump-sum payment at that time. At the 

same time, the Board believed the rule 

would prevent gaming of the escrows 

exception because it thought that small 

creditors would be reluctant to make a 

loan that they did not intend to keep in 

their portfolios unless they had the 

assurance of a committed buyer before 

extending the credit. 

Comments received on the escrows 

proposal had a divergence of opinion on 

how the forward commitment 

requirement would work in practice. 

One trade association commenter stated 

that the forward commitment 

requirement would prevent creditors 

from selling portfolio mortgage debt 

obligations in the future. This appears to 

be a misreading of the Board’s 2011 

Escrows Proposal, as it would not have 

restricted the sale of higher-priced 

mortgage loans. Instead, the proposed 

forward commitment requirement 

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

a forward commitment at the time of 

consummation, the higher-priced 

mortgage loan could be sold on the 

secondary market without requiring an 

escrow account to be established at that 

time. One consumer advocacy group, 

concerned about the possibility that 

creditors would use the provision to 

skirt the escrow requirements, suggested 

a blanket rule that higher-priced 

mortgage loans that are exempt must be 

maintained in the portfolio of the 

creditor or, alternatively, that upon sale 

secondary market purchasers must be 

required to establish escrow accounts 

for such mortgage debt obligations. 

After consideration of these 

comments and further analysis of 

parallels between the two rulemakings, 

the Bureau believes that it is useful and 

appropriate to implement the noforward-commitment requirement in 

both rules. Accordingly, the Bureau is 

adding § 1026.43(f)(1)(v) to provide that 

a loan is not eligible to be a balloonpayment qualified mortgage if it is 

subject, at consummation, to a 

commitment to be acquired by another 

person, other than a person that 

separately meets the requirements of 

§ 1026.43(f)(1)(vi). Comment 43(f)(1)(v)– 

1 clarifies that a balloon-payment 

mortgage that will be acquired by a 

purchaser pursuant to a forward 

commitment does not satisfy the 

requirements of § 1026.43(f)(1)(v), 

whether the forward commitment refers 

to the specific transaction or the 

balloon-payment mortgage meets 

prescribed criteria of the forward 

commitment, along with an example. 

The Bureau believes the rationale for the 

balloon-payment qualified mortgage 

exemption is not present when a loan 

will be or is eligible to be acquired 

pursuant to a forward commitment, 

even if the creditor is exempt, as the 

creditor does not intend to retain the 

balloon-payment mortgage in its 

portfolio. 

In adopting this requirement, the 

Bureau is adding a condition for a 

balloon-payment qualified mortgage that 

is not established by TILA section 

129C(b)(2)(E). The Bureau is adopting 

§ 1026.43(f)(1)(vi) pursuant to TILA 

section 129C(b)(3)(B)(i), which 

authorizes the Bureau ‘‘to 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 this section, necessary 

and appropriate to effectuate the 

purposes of this section and Section 

129B, to prevent circumvention or 

evasion thereof, or to facilitate 

compliance with such sections.’’ A 

purpose of TILA section 129C is to 

ensure that consumers are offered and 

receive loans on terms that they are 

reasonably able to repay. See TILA 

section 129B(a)(2). The Bureau believes 

that the prohibition on mortgages 

originated in conjunction with a 

forward commitment from qualifying as 

a balloon-payment qualified mortgage is 

necessary, proper, and appropriate both 

to effectuate the purposes of TILA 

section 129C and to prevent 

circumvention or evasion thereof. For 

these reasons, the Bureau believes that 

§ 1026.43(f)(1)(v), in limiting the 

exemption for balloon-payment 

qualified mortgages to mortgages that 

are not originated in conjunction with a 

forward commitment, effectuates the 

purposes of TILA section 129C and 

prevents circumvention or evasion 

thereof and is necessary, proper, and 

appropriate to do so. Limiting balloonpayment qualified mortgages to those 

that are not originated in conjunction 

with a forward commitment effectively 

facilitates compliance with the statutory 

requirement that a balloon-payment 

qualified mortgage is extended by a 

creditor that retains the balloonpayment qualified mortgages in 

portfolio. 

In addition the Bureau invokes its 

authority under section 105(a) in order 

to add the above qualification for a 

balloon-payment qualified mortgage. 

Section 105(a) authorizes the Bureau to 

issue regulations that, among other 

things, contain such additional 

requirements, other provisions, or that 

provide for such adjustments for all or 

any class of transactions, that in the 

Bureau’s judgment are necessary or 

proper to effectuate the purposes of 

TILA, which include the above purpose 

of Section 129C, among other things. 

See 15 U.S.C. 1604(a). The Bureau 

believes that this addition to the 


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159A review of data from HMDA reporting 

entities indicates that there were 700 creditors in 

2011 that otherwise meet the requirements of 

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

definition of rural, compared to 2,110 creditors that 

otherwise meet the requirements of 

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

mortgages in counties that would not be rural. The 

391 creditors originated 12,921 higher-priced 

mortgage loans, representing 30 percent of their 

43,359 total mortgage loan originations. A review of 

data from credit unions indicates that there were 

830 creditors in 2011 that otherwise meet the 

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

originate balloon-payment and hybrid mortgages in 

counties that meet the definition of rural, compared 

to 3,551 creditors that otherwise meet the 

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

balloon-payment mortgages in counties that would 

not be rural. The 415 creditors originated 4,980 

balloon-payment mortgage originations, 

representing 20 percent of their 24,968 total 

mortgage loan originations. 

qualified mortgage criteria is necessary 

and proper to achieve this purpose. 

‘‘Operates Predominantly in Rural or 

Underserved Areas’’ 

Under TILA section 

129C(b)(2)(E)(iv)(I), to qualify for the 

exemption, a creditor must ‘‘operate 

predominantly in rural or underserved 

areas.’’ The Board’s proposed 

§ 226.43(f)(1)(v)(A) would have required 

a creditor to have made during the 

preceding calendar year more than 50 

percent of its total balloon-payment 

mortgages in ‘‘rural or underserved’’ 

areas. The Board sought comment 

generally on the appropriateness of the 

proposed approach to implement the 

phrase ‘‘operate predominantly.’’ Two 

trade group commenters commented 

that the balloon exemption should 

extend to all creditors that retain 

balloon-payment mortgages in their 

portfolio, and to eliminate this proposed 

requirement, which would have the 

same effect as the extension of the 

exemption proposed generally, 

discussed above. 

Overall, the Bureau believes Congress 

enacted the exemption in TILA section 

129C(b)(2)(E) to ensure access to credit 

in rural and underserved areas where 

consumers may be able to obtain credit 

only from such community banks or 

credit unions offering balloon-payment 

mortgages. The ‘‘operates 

predominantly in’’ requirement serves 

to limit the exemption to these 

institutions. To remove this portion of 

the qualifications of the creditor would 

be to circumvent Congress’s stated 

requirement that the exemption was 

intended for creditors operating 

predominantly in rural and underserved 

areas and would potentially extend the 

exemption to, for example, a national 

bank that makes loans in rural areas and 

that is fully capable of putting on its 

balance sheet fixed rate 30-year 

mortgage loans or adjustable rate 

mortgage loans. The Bureau believes 

that ‘‘predominantly’’ indicates a 

portion greater than half, hence the 

regulatory requirement of more than 50 

percent. 

The Board also proposed 

§ 226.43(f)(2) to implement this 

provision by defining the terms ‘‘rural’’ 

and ‘‘underserved,’’ which are not 

defined in the statute. The Board’s 

proposed § 226.43(f)(2) established 

separate criteria for both rural and 

underserved areas. Commenters 

addressing the creditor qualifications 

under § 226.43(f)(2) discussed the 

definitions themselves, and did not 

comment on the necessity of creating 

definitions for the terms rural and 

underserved. The Bureau is adopting 

the Board’s approach by implementing 

section 1026.43(f)(2) which establishes 

separate criteria for both ‘‘rural’’ and 

‘‘underserved.’’ This means that a 

property could qualify for designation 

by the Bureau under either definition, 

and that covered transactions made by 

a creditor in either a rural or 

underserved area will be included in 

determining whether the creditor 

operates predominantly in such areas. 

‘‘Rural’’ 

As described above, the Board’s 

proposed definition of rural for 

purposes of both the balloon-payment 

qualified mortgage and escrows 

exception relied upon the USDA ERS 

‘‘urban influence codes’’ (UICs). The 

UICs are based on the definitions of 

‘‘metropolitan’’ and ‘‘micropolitan’’ as 

developed by the Office of Management 

and Budget, along with other factors 

reviewed by the ERS, which place 

counties into twelve separately defined 

UICs depending on the size of the 

largest city and town in the county. The 

Board’s proposal would have limited 

the definition of rural to certain ‘‘noncore’’ counties that are not located in or 

adjacent to any metropolitan or 

micropolitan area. This definition 

corresponded with UICs of 7, 10, 11, or 

12. The population that would have 

been covered under the Board’s 

proposed definition was 2.3 percent of 

the United States population under the 

2000 census. The Board believed this 

limited the definition of ‘‘rural’’ to those 

properties most likely to have only 

limited sources of mortgage credit 

because of their remoteness from urban 

centers and their resources. The Board 

sought comment on all aspects of this 

approach to defining rural, including 

whether the definition should be 

broader or narrower. 

Many commenters in both 

rulemakings, including more than a 

dozen trade group commenters, several 

individual industry commenters, one 

association of State banking regulators, 

and a United States Senator, suggested 

that this definition of a rural area was 

too narrow and would exclude too many 

creditors from qualifying for the 

balloon-payment qualified mortgage 

exemption and constrain the availability 

of credit to rural properties. The 

comment from a United States Senator 

suggested using the eligibility of a 

property to secure a single-family loan 

under the USDA’s Rural Housing Loan 

program as the definition of a rural 

property. A trade association argued 

that because community banks use 

balloon-payment mortgages to hedge 

against interest rate risk, the exemption 

should not be confined to rural areas. 

The Bureau agrees that a broader 

definition of ‘‘rural’’ is appropriate to 

ensure access to credit with regard to 

both the escrows and balloon-payment 

qualified mortgage exemptions. In 

particular, the Bureau believes that all 

‘‘non-core’’ counties should be 

encompassed in the definition of rural, 

including counties adjacent to a 

metropolitan area or a county with a 

town of at least 2,500 residents (i.e., 

counties with a UIC of 4, 6, and 9 in 

addition to the counties with the UICs 

included in the Board’s definition). The 

Bureau also believes that micropolitan 

areas which are not adjacent to a 

metropolitan area should be included 

within the definition of rural, (i.e., 

counties with a UIC of 8). These 

counties have significantly fewer 

creditors originating higher-priced 

mortgage loans and balloon-payment 

mortgages than other counties.159

Including these counties within the 

definition of rural would result in 9.7 

percent of the population being 

included within rural areas. Under this 

definition, only counties in 

metropolitan areas or in micropolitan 

areas adjacent to metropolitan areas 

would be excluded from the definition 

of rural. 

The Bureau also considered adopting 

the definition of rural used to determine 

the eligibility of a property to secure a 

single family loan under the USDA’s 

Rural Housing Loan program. For 

purposes of the Rural Housing Loan 

program, USDA subdivides counties 

into rural and non-rural areas. As a 

result, use of this definition would bring 

within the definition of rural certain 

portions of metropolitan and 

micropolitan counties. Given the size of 

some counties, particularly in western 

States, this approach may provide a 

more nuanced measure of access to 

credit in some areas than a county-byVerDate Mar<15>2010 20:04 Jan 29, 2013 Jkt 229001 PO 00000 Frm 00137 Fmt 4701 Sfmt 4700 E:\FR\FM\30JAR2.SGM 30JAR2

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160As discussed above, § 1026.43(b)(1) defines 

covered transactions as closed-end consumer credit 

transactions that are secured by a dwelling, other 

than certain tractions that are exempt from coverage 

under § 1026.43(a). 

county metric. However, use of the 

Rural Housing Loan metrics would 

incorporate such significant portions of 

metropolitan and micropolitan counties 

that 37 percent of the United States 

population would be within areas 

defined as rural. Based on a review of 

HMDA data and the location of 

mortgage transactions originated by 

HMDA reporting entities, the average 

number of creditors in the areas that 

would meet the USDA’s Rural Housing 

Loan program definition of rural is ten. 

The Bureau believes that a wholesale 

adoption of the Rural Housing Loan 

definitions would therefore expand the 

definition of rural beyond the intent of 

the escrow and balloon-payment 

qualified mortgage exemptions under 

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

which there is robust access to credit. 

Accordingly, the final rule 

incorporates the provisions of the 

escrow final rule providing that a 

county is rural if it is neither in a 

metropolitan statistical area, nor in a 

micropolitan statistical area that is 

adjacent to a metropolitan statistical 

area. The Bureau intends to continue 

studying over time the possible selective 

use of the Rural Housing Loan program 

definitions and tools provided on the 

USDA Web site to determine whether a 

particular property is located within a 

‘‘rural’’ area. For purposes of initial 

implementation, however, the Bureau 

believes that defining ‘‘rural’’ to include 

more UIC categories creates an 

appropriate balance to preserve access 

to credit and create a system that is easy 

for creditors to implement. 

‘‘Underserved’’ 

The Board’s proposed § 226.43(f)(2)(ii) 

would have defined a county as 

‘‘underserved’’ during a calendar year if 

no more than two creditors extend 

consumer credit five or more times in 

that county. The definition was based 

on the Board’s judgment that, where no 

more than two creditors are significantly 

active, the inability of one creditor to 

offer a balloon-payment mortgage would 

be detrimental to consumers who would 

have limited credit options because only 

one creditor would be left to provide the 

balloon-payment mortgage. Essentially, 

a consumer who could only qualify for 

a balloon-payment mortgage would be 

required to obtain credit from the 

remaining creditor in that area. Most of 

the same commenters that stated that 

the definition of rural was too narrow, 

as discussed above, also stated that the 

definition of underserved was too 

narrow, as well. The commenters 

proposed various different standards, 

including standards that considered the 

extent to which the property was in a 

rural area, as an alternate definition. 

The Bureau believes the purpose of 

the exemption is to permit creditors that 

rely on certain balloon-payment 

mortgage products to continue to offer 

credit to consumers, rather than leave 

the mortgage loan market, if such 

creditors’ withdrawal would 

significantly limit consumers’ ability to 

obtain mortgage credit. In light of this 

rationale, the Bureau believes that 

‘‘underserved’’ should be implemented 

in a way that protects consumers from 

losing meaningful access to mortgage 

credit. The Bureau is proposing to do so 

by designating as underserved only 

those areas where the withdrawal of a 

creditor from the market could leave no 

meaningful competition for consumers’ 

mortgage business. The Bureau believes 

that the expanded definition of rural, as 

discussed above, and the purposes of 

the balloon-payment qualified mortgage 

exemption enable continued consumer 

ability to obtain mortgage credit. 

Scope of Mortgage Operations 

The Bureau has made one other 

change to the final rule to make the 

standards more consistent as between 

the balloon qualified mortgage and 

escrows exemption with regard to what 

type of mortgage loan operations are 

tracked for purposes of determining 

whether a creditor operates 

predominantly in rural or underserved 

areas. As noted above, the Board’s 

proposed rule for balloon-payment 

qualified mortgages would have based a 

creditor’s eligibility on the geographic 

distribution of its balloon-payment 

mortgages, while the escrows proposal 

focused on the distribution of first-lien 

mortgages. Given that the underlying 

statutory language regarding ‘‘operates 

predominantly’’ is the same in each 

instance and that tracking each type of 

mortgage separately would increase 

administrative burden, the Bureau 

believes it is appropriate to base the 

threshold for both rules on the 

distribution of all first-lien ‘‘covered 

transactions’’ as defined in 

§ 1026.43(b)(1).160 The Bureau believes 

that counting all transactions will 

facilitate compliance, promote 

consistency in applying the two 

exemptions under both rulemakings, 

and be more useful in identifying which 

institutions truly specialize in serving 

rural and underserved areas. The 

Bureau also believes that it is 

appropriate to measure first-lien 

covered transactions because the 

balloon-payment mortgages that will 

meet the requirements of the balloonpayment qualified mortgage exemption 

will be first-lien covered transactions, as 

having subordinate financing along with 

the balloon-payment mortgage would be 

rare since it further constrains a 

consumer’s ability to build equity in the 

property and able to refinance the 

balloon-payment mortgage when it 

becomes due. Accordingly, a creditor 

must have made during the preceding 

calendar year more than 50 percent of 

its total covered transactions secured by 

a first lien on property in a rural or 

underserved area, which is the same as 

the requirement of § 1026.35(b)(2)(iii)(A) 

in the 2013 Escrows Final Rule. 

Total Annual Residential Mortgage Loan 

Origination 

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

requires the Bureau to establish a 

limitation on the ‘‘total annual 

residential mortgage loan originations’’ 

for a creditor seeking to fall within the 

balloon-payment qualified mortgage 

exemption. The Board’s proposed 

§ 226.43(f)(1)(v)(B) provided two 

alternatives to meet the statutory 

requirement that the creditor ‘‘together 

with all affiliates, has total annual 

residential mortgage originations that do 

not exceed a limit set by the Board.’’ 

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

first alternative was a volume based 

limit, and the second alternative was a 

total annual number of covered 

transactions limit. The Board’s proposal 

did not propose any specific numeric 

thresholds for either alternative, but 

rather sought comment on the 

appropriate volume or number of loans 

originated based on the alternatives 

described in the proposal. 

In contrast, the Board’s escrow 

proposal would have restricted 

eligibility to creditors that, along with 

their affiliates, originate and service no 

more than 100 new first-lien loans per 

calendar year. Although the Dodd-Frank 

Act requirement to establish escrow 

accounts applies only to higher-priced 

mortgage loans that are secured by first 

liens, the Board reasoned that it was 

appropriate to base the threshold on all 

first-lien originations because creditors 

are free to establish escrow accounts for 

all of their first-lien mortgages 

voluntarily in order to achieve the scale 

necessary to escrow cost effectively. The 

Board estimated that a minimum 

servicing portfolio size of 500 is 

necessary to escrow cost effectively, and 

assumed that the average life 

expectancy of a mortgage loan is about 

five years. Based on this reasoning, the 

Board reasoned that creditors would no 


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Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 6545 

161A review of 2011 HMDA data shows creditors 

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

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

transactions per year retained in portfolio. Over a 

five year period, the total portfolio for these 

creditors would average 670 mortgage debt 

obligations. 

162 Given that escrow accounts are typically not 

maintained for loans secured by subordinate liens, 

the Bureau does not believe that it makes sense to 

count such loans toward the threshold because they 

would not contribute to a creditor’s ability to 

achieve cost-efficiency. At the same time, the 

Bureau believes it is appropriate to count all firstlien loans toward the threshold, since creditors can 

voluntarily establish escrow accounts for such loans 

in order to increase the cost-effectiveness of their 

program even though the mandatory account 

requirements under the Dodd-Frank Act apply only 

to first-lien, higher-priced mortgage loans. Focusing 

on all first-lien originations also provides a metric 

that is useful for gauging the relative scale of 

creditors’ operations for purposes of the balloonpayment qualified mortgages, while focusing solely 

on the number of higher-priced mortgage loan 

originations would not. 

longer need the benefit of the exemption 

if they originated and serviced more 

than 100 new first-lien loans per year. 

In response to the balloon-payment 

qualified mortgage loan proposal, two 

trade groups and one association of 

State bank regulators argued that other 

criteria, such as the asset-size limit or 

portfolio requirement, were sufficient 

and neither a volume nor a total annual 

number of covered transactions limit 

would be necessary. One trade group 

commenter suggested combining the 

proposed alternatives and permit 

creditors to pick which limit they would 

operate under. Other trade group and 

industry commenters indicated that it 

would be preferable to base the annual 

originations limit on the number of 

transactions rather than volume because 

of the varying dollar amount of loans 

originated, which would constrain the 

number of consumers with limited 

credit options which could obtain 

balloon-payment mortgages in rural or 

underserved areas. Four trade group and 

industry commenters suggested 

increasing the threshold for the total 

annual number of covered transactions 

by various amounts ranging from 250 to 

1,000 transactions. The commenters did 

not articulate any particular reason or 

data to support the suggested limits, 

other than one commenter who 

indicated its suggestion was intended to 

be higher than its own amount of total 

annual covered transactions. 

Similarly in the escrows rulemaking, 

commenters asserted that the 100-loan 

threshold was not in fact sufficient to 

make escrowing cost-effective. 

Suggestions for higher thresholds 

ranged from 200 to 1,000 mortgage debt 

obligations per year originated and 

serviced, though no commenters 

provided data to support their 

suggestions for alternative thresholds or 

to refute the Board’s cost analysis. One 

consumer advocacy commenter 

suggested the proposed threshold was 

too high because it counted only firstlien mortgage transactions, instead of all 

mortgage debt obligations, but offered 

no specific alternative amount. Two 

industry commenters also suggested that 

the origination limit should measure 

only the number of higher-priced 

mortgage loans originated and serviced 

by the creditor and its affiliates. 

The Bureau believes that the 

requirement of TILA section 

129C(b)(2)(E)(iv)(II) reflects Congress’s 

recognition that larger creditors who 

operate in rural or underserved areas 

should be able to make credit available 

without resorting to balloon-payment 

mortgages. Similarly, the requirement of 

TILA section 129C(d) reflects a 

recognition that larger creditors have the 

systems capability and operational scale 

to establish cost-efficient escrow 

accounts. In light of the strong concerns 

expressed in both rulemakings about the 

potential negative impacts on small 

creditors in rural and underserved areas, 

the Bureau conducted further analysis 

to try to determine the most appropriate 

thresholds, although it was significantly 

constrained by the fact that data is 

limited with regard to mortgage 

originations in rural areas generally and 

in particular with regard to originations 

of balloon-payment mortgages. 

The Bureau started with the premise 

that it would be preferable to use the 

same annual originations threshold in 

both rules in order to reflect the 

consistent language in both statutory 

provisions focusing on ‘‘total annual 

mortgage loan originations,’’ to facilitate 

compliance avoiding requiring 

institutions to track multiple metrics, 

and to promote consistent application of 

the two exemptions. This requires 

significant reconciliation between the 

two proposals, however, because the 

escrows proposal focused specifically 

on loans originated and serviced in 

order to best gauge creditors’ ability to 

maintain escrow accounts over time, 

while servicing arrangements are not 

directly relevant to the balloon-payment 

qualified mortgage. However, to the 

extent that creditors chose to offer 

balloon-payment mortgages to manage 

their interest rate risk without having to 

undertake the compliance burdens 

involved in administering adjustable 

rate mortgages over time, the Bureau 

believes that both provisions are 

focused in a broad sense on 

accommodating creditors whose 

systems constraints might otherwise 

cause them to exit the market. 

With this in mind, the Bureau 

ultimately has decided to adopt a 

threshold of 500 or fewer annual 

originations of first-lien loans for both 

rules. The Bureau believes that this 

threshold will provide greater flexibility 

and reduce concerns that the specific 

threshold that had been proposed in the 

escrows rulemaking (100 loans 

originated and serviced annually) would 

reduce access to credit by excluding 

creditors who need special 

accommodations in light of their 

capacity constraints. At the same time, 

the increase is not as dramatic as it may 

first appear because the Bureau’s 

analysis of HMDA data suggests that 

even small creditors are likely to sell off 

a significant number of loans to the 

secondary market. Assuming that most 

loans that are retained in portfolio are 

also serviced in house, the Bureau 

estimates that a creditor originating no 

more than 500 first-lien loans per year 

would maintain and service a portfolio 

of about 670 mortgage debt obligations 

over time, assuming a life expectancy of 

five years per mortgage debt 

obligation.161 Thus, the higher threshold 

will help to assure that creditors who 

are subject to the escrow requirements 

do in fact maintain portfolios of 

sufficient size to maintain the accounts 

on a cost efficient basis over time, in the 

event that the Board’s estimate of a 

minimum portfolio of 500 loans was too 

low.162 However, the Bureau believes 

that the 500 annual originations 

threshold in combination with the other 

requirements will still assure that the 

balloon-payment qualified mortgage and 

escrow exceptions are available only to 

small creditors that focus primarily on 

a relationship-lending model and face 

significant systems constraints. 

Asset-Size Threshold 

Under TILA section 

129C(b)(2)(E)(iv)(IV), to qualify for the 

exemption, a creditor must meet any 

asset-size threshold established by the 

Bureau. The Board’s proposed 

§ 226.43(f)(1)(v)(D) would have 

established the threshold for calendar 

year 2013 at $2 billion, with annual 

adjustments for inflation thereafter. 

Thus, a creditor would satisfy this 

element of the test for 2013 if it had total 

assets of $2 billion or less on December 

31, 2012. This number was based on the 

limited data available to the Board at the 

time of the proposal. Based on that 

limited information, the Board reasoned 

that none of the entities it identified as 

operating predominantly in rural or 

underserved areas had total assets as of 

the end of 2009 greater than $2 billion, 

and therefore, the limitation should be 

set at $2 billion. The Board expressly 

proposed setting the asset-size threshold 


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163The $2 billion threshold reflects the purposes 

of the balloon-payment qualified mortgage 

exemption and the structure of the mortgage 

lending industry. The choice of $2 billion in assets 

as a threshold for purposes of TILA section 

129C(b)(2)(E) 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. 

at the highest level currently held by 

any of the institutions that appear to be 

smaller institutions that served areas 

with otherwise limited credit options. 

The Board sought comment on what 

threshold would be appropriate and 

whether the asset-size test is necessary 

at all. Conversely, in the escrows 

proposal the Board did not propose an 

asset threshold, but rather simply 

requested comment on whether a 

threshold should be established and, if 

so, what it should be. 

In response to the Board’s 2011 ATR 

Proposal, one association of State bank 

regulators suggested that the asset-size 

threshold be included and be the only 

requirement for a creditor to qualify for 

the balloon-mortgage qualified mortgage 

exemption. Two trade group 

commenters suggested that a $2 billion 

asset-size threshold was appropriate, 

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

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

One industry commenter suggested that 

the asset-size threshold be $10 billion. 

In response to the Board’s 2011 

Escrows Proposal, the association of 

State bank regulators again suggested 

that an asset-size threshold be the only 

requirement to qualify for the escrow 

exception, but did not propose a 

specific dollar threshold. A trade 

association suggested a threshold of $1 

billion, but did not provide a rational 

for that amount. 

For reasons discussed above, the 

Bureau is adopting a mortgage 

origination limit as contemplated by the 

statute. Given that limitation, restricting 

the asset size of institutions that can 

claim the exemption is of limited 

importance. Nonetheless, the Bureau 

believes that an asset limitation is still 

helpful because very large institutions 

should have sufficient resources to 

adapt their systems to provide 

mortgages without balloon payments 

and with escrow accounts even if the 

scale of their mortgage operations is 

relatively modest. A very large 

institution with a relatively modest 

mortgage operation also does not have 

the same type of reputational and 

balance-sheet incentives to maintain the 

same kind of relationship-lending 

model as a smaller community-based 

lender. Accordingly, the Bureau 

believes that the $2 billion asset 

limitation by the Board remains an 

appropriate limitation and should be 

applied in both rulemakings. 

Accordingly, the creditor must have 

total assets of less than $2 billion 163 as 

of December 31, 2012, which is the 

same as the requirement of 

§ 1026.35(b)(2)(iii)(C) in the 2013 

Escrows Final Rule. 

Criteria Creditor Also Must Satisfy in 

the Final Rule Adopted From the 

Board’s 2011 Escrows Proposal 

The Bureau notes that the three 

criteria discussed above are the same in 

both TILA 129C(b)(2)(E)(iv) and 

129D(c). Commenters in both the 

Board’s 2011 ATR Proposal and the 

Board’s 2011 Escrows Proposal also 

made a note of the need to have 

consistent application of requirements 

and definitions across the Title XIV 

Rulemakings. The comments received in 

both of the Board’s proposals identified 

the same concerns and made similar 

suggestions for each of the criteria in 

both the Board’s 2011 ATR Proposal and 

2011 Escrows Proposal. The Bureau 

believes the balloon-payment qualified 

mortgage exemption is designed to 

ensure access to credit in rural and 

underserved areas where consumers 

may be able to obtain credit only from 

a limited number of creditors. One way 

to ensure continued access to credit for 

these consumers is to reduce and 

streamline regulatory requirements for 

creditors so that creditors maintain 

participation in or enter these markets. 

One method by which this can be 

accomplished is by having one set of 

requirements that are consistent 

between differing regulatory purposes. 

These criteria, since they are identical 

in TILA, can be adopted once in one 

section of Regulation Z and referenced 

by the other section. 

Accordingly, the Bureau is adopting 

§ 1026.43(f)(1)(vi) to require the creditor 

to meet the satisfy the requirements 

stated in § 1026.35(b)(iii)(A), (B), and 

(C), adopted in the 2013 Escrows Final 

Rule, in order to originate a balloonpayment qualified mortgage under 

§ 1026.43(f)(1). Comment 43(f)(1)(vi)–1.i 

clarifies that the Bureau publishes 

annually a list of counties that qualify 

as rural or underserved in accordance 

with § 1026.35(b)(2)(iii)(A). The 

comment further clarifies that the 

Bureau’s annual determination of rural 

or underserved counties are based on 

the definitions set forth in 

§ 1026.35(b)(2)(iv). Comment 

43(f)(1)(vi)–1.ii clarifies that the creditor 

along with all affiliates must not 

originate more than 500 first lien 

transactions during the preceding 

calendar year in accordance with 

§ 1026.35(b)(2)(iii)(B). Comment 

43(f)(1)(vi)–1.iii clarifies that the initial 

asset-size threshold for a creditor is $2 

billion for calendar year 2013 and will 

be updated each December to publish 

the applicable threshold for the 

following calendar year in accordance 

with§ 1026.35(b)(2)(iii)(C). The 

comment further clarifies that a creditor 

that had total assets below the threshold 

on December 31 of the preceding year 

satisfies this criterion for purposes of 

the exemption during the current 

calendar year. 

43(f)(2) Post-Consummation Transfer of 

Balloon-Payment Qualified Mortgage 

As noted in the discussion related to 

paragraph (f)(1)(v) above, TILA section 

129C(b)(E)(iv) requires that the lender 

keep balloon-payment mortgages in 

portfolio, which addressed in both the 

Board’s 2011 ATR Proposal and 2011 

Escrows Proposal in different ways. In 

light of the differences between the two 

rulemakings and in particular the 

important ramifications of qualified 

mortgage status over the life of the loan, 

however, the Bureau believes that it is 

also appropriate for this final rule to 

contain additional safeguards 

concerning post-consummation sales 

that are not pursuant to a forward 

commitment in order to prevent gaming 

of the balloon-payment qualified 

mortgage exception. As noted above, the 

Board had proposed an approach under 

which the creditor would lose its 

eligibility to originate balloon-payment 

qualified mortgages once it sold any 

balloon-payment mortgages. Under one 

alternative, a single sale after the 

effective date of the rule would have 

permanently disqualified the creditor 

from invoking the exception, while the 

other alternative would have 

disqualified the creditor from invoking 

the exception for two calendar years. 

In addition to the comments received 

on the Board’s 2011 Escrows Proposal 

related to the forward commitment 

requirement discussed in paragraph 

(f)(1)(v), above, two trade group 

commenters and one industry 

commenter indicated that the second 

alternative was preferable, but urged the 

Bureau only to look at the last calendar 

year, instead of the current or prior 

years. Of these commenters, one trade 

group and the industry commenter 

suggested adding a de minimis number 

of permitted transfers of balloonpayment qualified mortgages. One trade 

group commenter noted that the statute 

requires that only balloon-payment 

qualified mortgages be kept in portfolio. 

Another trade group commenter 


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questioned the impact that either of the 

Board’s alternatives would have on a 

rural creditors’ ability to sell a balloonpayment mortgage if the creditor was 

directed to do pursuant to action 

requirements of prudential regulators, 

such as a prompt corrective action 

notice. 

The Bureau agrees with commenters 

that the first alternative would work 

against the stated purpose of the 

balloon-payment qualified mortgage 

exemption, as creditors that would not 

qualify would forever be excluded from 

this exemption in the future. Over time, 

this would further reduce the creditors 

originating balloon-payment qualified 

mortgages and thereby reduce the 

availability of credit to those markets. In 

addition, the Bureau believes the 

Board’s second alternative mitigates but 

does not eliminate these difficulties. 

Under the second alternative the 

disqualification from originating 

balloon-payment qualified mortgages 

would be temporary rather than 

permanent, but even so creditors who 

found it necessary to sell off a balloonpayment mortgage would pay a steep 

price in terms of their ability to 

originate loans in the future, and credit 

availability would be negatively 

impacted. Commenters that supported 

the second alternative did so with the 

stated preference for the second 

alternative to the first, instead of the 

requirements of the second alternative 

itself. 

The Bureau believes these concerns 

can be eliminated or reduced by 

providing, as a general rule, that if a 

balloon-payment qualified mortgage is 

sold, that mortgage loses its status as a 

qualified mortgage, but the creditor does 

not lose its ability to originate balloonpayment qualified mortgages in the 

future. The rule would be subject to four 

exceptions to permit a balloon-payment 

qualified mortgage to be sold in 

narrowly defined circumstances without 

losing its qualified mortgage status. The 

first exception would allow for a sale to 

any person three years after 

consummation; this would require the 

creditor to keep the balloon-payment 

qualified mortgage for the same period 

of time that a consumer could bring a 

claim for violation of § 1026.43 under 

TILA section 130(e). This facilitates 

managing interest rate risk by selling 

seasoned balloon-payment qualified 

mortgages, but encourages responsible 

underwriting because the originating 

creditor would keep all risk of 

affirmative claims while those claims 

could be asserted. The second 

exemption would permit creditors to 

sell to other qualifying creditors, which 

would provide flexibility and 

consistency with the portfolio 

requirement. The third exception would 

address the need of creditors to sell 

loans to comply with requirements of 

prudential regulators, conservators, 

receivers and others who have the 

responsibility to ensure creditors are 

operating within the bounds of the law. 

The fourth exemption addresses 

changes in the ownership of the creditor 

itself, so that the balloon-payment 

qualified mortgages held by the creditor 

do not lose their qualified mortgage 

status solely because of the change in 

ownership of the creditor. 

Accordingly, the Bureau is adopting 

§ 1026.43(f)(2) to require a creditor to 

retain a balloon-payment qualified 

mortgage in its portfolio, otherwise the 

balloon-payment qualified mortgage 

will no longer be a qualified mortgage, 

with four exceptions as set forth above. 

Comment 43(f)(2)–1 clarifies that 

creditors must generally hold a balloonpayment qualified mortgage in portfolio, 

subject to four exceptions. Comment 

43(f)(2)–2 clarifies that the four 

exceptions apply to all subsequent 

transfers, and not just the initial transfer 

of the balloon-payment qualified 

mortgage, and provides an example. 

Comment 43(f)(2)(i)–1 clarifies the 

application of the exception relating to 

transfers of the balloon-payment 

qualified mortgage three years or more 

after consummation. Comment 

43(f)(2)(ii)–1 clarifies the application of 

the exemption relating to the transfer of 

a balloon-payment qualified mortgage to 

a creditor that meets the requirements of 

§ 1026.43(f)(1)(vi). Comment 

43(f)(2)(iii)–1 clarifies the application of 

the exemption related to the transfer of 

a balloon-payment qualified mortgage 

pursuant to the requirements of a 

supervisory regulator and provides an 

example. Comment 43(f)(2)(iv)–1 

clarifies the application of the 

exemption related to the transfer of a 

balloon-payment qualified mortgage as a 

result or the merger or sale of the 

creditor and provides an example. 

43(g) Prepayment Penalties 

As discussed above regarding 

treatment of prepayment penalties 

under the points and fees test for 

qualified mortgages and for high-cost 

loans under HOEPA in § 1026.32(b)(1) 

and the definition of prepayment 

penalty under § 1026.32(b)(6), the DoddFrank Act restricts prepayment 

penalties in a number of ways. Section 

1026.43(g) implements TILA section 

129C(c), which establishes general 

limits on prepayment penalties for all 

residential mortgage loans. Specifically, 

TILA section 129C(c) provides that: 

• Only a qualified mortgage may 

contain a prepayment penalty; 

• A qualified mortgage with a 

prepayment penalty may not have an 

adjustable rate and may not have an 

annual percentage rate that exceeds the 

threshold for a higher-priced mortgage 

loan; 

• The prepayment penalty may not 

exceed three percent of the outstanding 

balance during the first year after 

consummation, two percent during the 

second year after consummation, and 

one percent during the third year after 

consummation; 

• There can be no prepayment 

penalty after the end of the third year 

after consummation; and 

• A creditor may not offer a consumer 

a loan with a prepayment penalty 

without offering the consumer a loan 

that does not include a prepayment 

penalty. 

Taken together, the Dodd-Frank Act’s 

amendments to TILA relating to 

prepayment penalties mean that most 

closed-end, dwelling-secured 

transactions: (1) May provide for a 

prepayment penalty only if the 

transaction is a fixed-rate, qualified 

mortgage that is neither high-cost nor 

higher-priced under §§ 1026.32 and 

1026.35; (2) may not, even if permitted 

to provide for a prepayment penalty, 

charge the penalty more than three years 

following consummation or in an 

amount that exceeds two percent of the 

amount prepaid; and (3) may be 

required to limit any penalty even 

further to comply with the points and 

fees limitations for qualified mortgages, 

or to stay below the points and fees 

trigger for high-cost mortgages. Section 

1026.43(g) now reflects these principles. 

The Board proposal implemented 

TILA section 129C(c) in § 226.43(g) 

without significant alteration, except 

that under proposed § 226.43(g)(2)(ii), 

the Board proposed to apply the 

percentage tests outlined in the statute 

to the amount of the outstanding loan 

balance prepaid, rather than to the 

entire outstanding loan balance, to 

provide tighter restrictions on the 

penalties allowed on partial 

prepayments. 

Commenters generally supported the 

Board’s proposal, though some industry 

commenters expressed concern that 

limitations on prepayment penalties 

would reduce prices on the sale of 

mortgages in the secondary market due 

to increased prepayment risk. Consumer 

advocates generally supported limiting 

prepayment penalties, as described by 

amended TILA section 129C(c), as an 

important element in ensuring 

affordability. Other industry 

commenters expressed concern that 


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6548 Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 

164Open-end credit plans are excluded from the 

definition of ‘‘residential mortgage loan,’’ and thus 

open-end reverse mortgages are not subject to the 

prepayment penalty requirements under TILA 

section 129C(c). TILA section 103(cc)(5). 

such a limitation on the imposition of 

prepayment penalties would lead to 

fewer creditors conditionally waiving 

closing costs, noting that this 

implication might limit access to credit. 

At least one industry commenter argued 

that the Board’s proposal to limit 

prepayment penalties was too broad in 

scope, stating the legislative history 

demonstrated that the true target of the 

prepayment penalty prohibition of TILA 

section 129C(c) was limited to 

mortgages with teaser rates and/or 

balloon payments and to protect 

subprime consumers, not those 

consumers who chose a product with a 

lower interest rate in exchange for a 

prepayment penalty provision. The 

Bureau does not find this argument 

persuasive, given the plain language of 

amended TILA section 129C(c). 

After review, the Bureau is adopting 

most of the Board’s proposal, although 

as discussed below the Bureau is 

altering the prepayment limitation in 

the first year after consummation to 

reflect the separate limitations enacted 

in sections 1431 and 1432 of the DoddFrank Act, regarding high-cost 

mortgages. 

Scope; Reverse Mortgages and 

Temporary Loans 

Section 1026.43(g) implements TILA 

section 129C(c), which applies to a 

‘‘residential mortgage loan,’’ that is, to a 

consumer credit transaction secured by 

a dwelling, including any real property 

attached to the dwelling, other than an 

open-end credit plan or a transaction 

secured by a consumer’s interest in a 

timeshare plan. See TILA section 

103(cc)(5). Consequently, the regulation 

refers to ‘‘covered transaction,’’ which 

as defined in § 1026.43(b)(1) and 

discussed further in the section-bysection analysis of § 1026.43(a) excludes 

open-end credit plans and transactions 

secured by timeshares from coverage 

consistent with statutory exclusions. 

However, neither the definition of 

‘‘residential mortgage loan’’ nor the 

TILA section 129C(c)(1) prepayment 

penalty prohibition excludes reverse 

mortgages or temporary or ‘‘bridge’’ 

loans 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. See 

TILA sections 103(cc)(5), 129C(a)(8), 

129C(c). Moreover, because under TILA 

section 129C(c)(1)(A), only a qualified 

mortgage may have a prepayment 

penalty and reverse mortgages and 

temporary loans are excluded from the 

ability-to-repay and qualified mortgage 

requirements of the Dodd-Frank Act 

(and thus may not be qualified 

mortgages), prepayment penalties would 

not be permitted on either product 

absent further accommodation. 

The Board proposal sought comment 

on whether further provisions 

addressing the treatment of reverse 

mortgages were warranted. Because 

reverse mortgages are not subject to the 

ability-to-repay requirements, the Board 

did not propose to define a category of 

closed-end reverse mortgages as 

qualified mortgages, though it sought 

comment on the possibility of using its 

authority to do so, given that qualified 

mortgage status affects both application 

of the Dodd-Frank Act prepayment 

penalty provisions and certain 

provisions concerning securitization 

and ‘‘qualified residential mortgages.’’ 

See TILA section 129C(b)(2)(A)(ix) and 

(b)(3)(B).164 The Board specifically 

requested comment on whether special 

rules should be created to permit certain 

reverse mortgages to have prepayment 

penalties. In particular, the Board 

sought comment on how it might create 

criteria for a ‘‘qualified mortgage’’ 

reverse mortgage that would be 

consistent with the purposes of 

qualified mortgages under TILA section 

129C(b), and requested any supporting 

data on the prepayment rates for reverse 

mortgages. 

Consumer advocates generally 

supported the Board’s proposal to apply 

the prepayment penalty requirements to 

reverse mortgages, and industry 

commenters did not object. Moreover, 

commenters did not provide data or 

other advocacy to refute the Board’s 

reasoning for including reverse 

mortgages within the scope of 

§ 1026.43(g): (1) That the overwhelming 

majority of reverse mortgages being 

originated in the current market are 

insured by the FHA, which does not 

allow reverse mortgages to contain 

prepayment penalties; and (2) excluding 

‘‘qualified’’ reverse mortgages from 

coverage of the prepayment penalty 

prohibition would not be necessary or 

appropriate to effectuate the purposes of 

TILA section 129C, absent an articulated 

reason why such exclusion would 

‘‘assure that consumers are offered and 

receive residential mortgage loans on 

terms that reasonably affect their ability 

to repay the loans and that are 

understandable and not unfair, 

deceptive, or abusive.’’ See TILA section 

129B(a)(2). 

While the Board did not specifically 

seek comment with respect to whether 

further provisions addressing the 

treatment of bridge loans under 

§ 1026.43(g) were warranted, 

commenters nevertheless discussed the 

intersection of bridge loans and 

prepayment penalties. As discussed in 

the section-by-section analysis of 

§ 1026.32(b)(6), some industry 

commenters expressed concern that the 

availability of, or cost of, constructionto-permanent loans might suffer, should 

the rule restrict the permissible 

prepayment penalty charges levied by a 

creditor if a consumer does not convert 

the construction loan into a permanent 

loan with the same creditor within a 

specified time period. As discussed in 

the section-by-section analysis of 

§ 1026.32(b)(6), some commenters may 

have been mistaken with respect to 

whether certain fees were, in fact, a 

prepayment penalty. To the extent fees 

charged by a bridge loan are a 

prepayment penalty, however, they are 

prohibited as of the effective date. 

According to § 1026.43(a)(3)(iii), the 

construction phase of a construction-topermanent loan cannot be a qualified 

mortgage, and thus under 

§ 1026.43(g)(1)(ii)(B) such a loan cannot 

include a prepayment penalty. 

Construction-to-permanent loans are 

discussed in more detail in the sectionby-section analysis of § 1026.43(a). 

Accordingly, the Bureau is finalizing 

the rule at this time without special 

provisions to otherwise alter the general 

scope of this rule, as discussed in the 

section-by-section analysis of 

§ 1026.43(a), such as by allowing the 

application of prepayment penalties for 

either reverse mortgages or temporary 

loans. The Bureau may revisit the issue 

in subsequent years, either as part of a 

future rulemaking to evaluate 

application of all title XIV requirements 

to reverse mortgages or as part of the 

five-year review of significant rules 

required under section 1022(d) of the 

Dodd-Frank Act. 

43(g)(1) When Permitted 

TILA section 129C(c)(1)(A) provides 

that a covered transaction must not 

include a penalty for paying all or part 

of the principal balance before it is due 

unless the transaction is a qualified 

mortgage as defined in TILA section 

129C(b)(2). TILA section 129C(c)(1)(B) 

further restricts the range of qualified 

mortgages on which prepayment 

penalties are permitted by excluding 

qualified mortgages that have an 

adjustable rate or that meet the 

thresholds for ‘‘higher-priced mortgage 

loans’’ because their APRs exceed the 

average prime offer rate for a 


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Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 6549 

165The applicable APR threshold depends on 

whether a first lien or subordinate lien secures the 

transaction and whether or not the transaction’s 

original principal obligation exceeds the maximum 

principal obligation for a loan eligible for purchase 

by Freddie Mac, that is, whether or not the covered 

transaction is a ‘‘jumbo’’ loan. Specifically, the APR 

threshold is: (1) 1.5 percentage points above the 

average prime offer rate, for a first-lien, non- 

‘‘jumbo’’ loan; (2) 2.5 percentage points above the 

average prime offer rate, for a first-lien ‘‘jumbo’’ 

loan; and (3) 3.5 percentage points above the 

average prime offer rate, for a subordinate-lien loan. 

166See, e.g., § 1026.18(f) (requiring disclosures 

regarding APR increases), § 1026.18(s)(7)(i) through 

(iii) (categorizing disclosures for purposes of 

interest rate and payment disclosures), 

§ 1026.36(e)(2)(i) and (ii) (categorizing transactions 

for purposes of the safe harbor for the anti-steering 

requirement under § 1026.36(e)(1)). 

comparable transaction by a specified 

number of percentage points.165

To implement TILA section 

129C(c)(1), the Board proposed 

§ 226.43(g)(1), which provided that a 

covered transaction may not include a 

prepayment penalty unless the 

prepayment penalty is otherwise 

permitted by law, and the transaction: 

(1) Has an APR that cannot increase 

after consummation; (2) is a qualified 

mortgage, as defined in § 226.43(e) or (f); 

and (3) is not a higher-priced mortgage 

loan, as defined in § 226.45(a). The 

Board proposed under § 226.43(g)(1)(i) 

that a prepayment penalty must be 

otherwise permitted by applicable law. 

The Board reasoned that TILA section 

129C(c) limits, but does not specifically 

authorize, including a prepayment 

penalty with a covered transaction. 

Thus, TILA section 129C(c) does not 

override other applicable laws, such as 

State laws, that may be more restrictive 

with respect to prepayment penalties, so 

a prepayment penalty would not be 

permitted if otherwise prohibited by 

applicable law. This approach is 

consistent with prepayment penalty 

requirements for high-cost mortgages 

under § 1026.32(d)(7)(i) and higherpriced mortgage loans under 

§ 1026.35(b)(2)(i). 

The Board proposed 

§ 226.43(g)(1)(ii)(A) to interpret the 

statutory language to apply to covered 

transactions for which the APR may 

increase after consummation. This 

regulatory language is consistent with 

other uses of ‘‘variable-rate’’ within 

Regulation Z, such as comment 

17(c)(1)–11, which provides examples of 

variable-rate transactions. 

Some consumer advocates did not 

support the Board’s proposal, arguing 

that for certain mortgages (specifically 

step-rate mortgages) the interest rate can 

increase after consummation without 

affecting the APR. These commenters 

argued that the purpose of TILA section 

129C(c)(1)(B)(i) is to avoid allowing a 

creditor to lock a consumer into a risingcost mortgage via a prepayment penalty 

and a rising interest rate. Consumer 

groups expressed concern that a 

consumer might become ‘‘trapped’’ by a 

prepayment penalty on the one hand, 

and a rising interest rate on the other. 

The Bureau does not find this argument 

persuasive. TILA section 129C(1)(B)(i) 

prohibits a transaction with ‘‘an 

adjustable rate’’ from including a 

prepayment penalty. Longstanding rules 

under Regulation Z for closed-end 

transactions generally categorize 

transactions based on the possibility of 

APR changes, rather than interest rate 

changes.166 This distinction is relevant 

because covered transactions may have 

an APR that cannot increase after 

consummation even though a specific 

interest rate, or payments, may increase 

after consummation. For example, the 

APR for a ‘‘step-rate mortgage’’ without 

a variable-rate feature does not change 

after consummation, because the rates 

that will apply and the periods for 

which they will apply are known at 

consummation. See § 1026.18(s)(7)(ii) 

(defining ‘‘step-rate mortgage’’ for 

purposes of transaction-specific interest 

rate and payment disclosures). Thus, the 

danger of an interest rate/prepayment 

penalty ‘‘trap’’ is mitigated in a step-rate 

loan because the consumer knowledge 

of the exact payments to expect each 

month for the 36 months following 

consummation during which a 

prepayment penalty might apply. The 

Bureau therefore is adopting 

§ 1026.43(g)(1)(ii)(A) as proposed. A 

fixed-rate mortgage or a step-rate 

mortgage therefore may have a 

prepayment penalty, but an adjustablerate mortgage may not have a 

prepayment penalty. See 

§ 1026.18(s)(7)(i) through (iii) (defining 

‘‘fixed-rate mortgage,’’ ‘‘step-rate 

mortgage,’’ and ‘‘adjustable-rate 

mortgage’’). 

Balloon-Payment Mortgages 

Under TILA section 129C(c)(1)(A), a 

covered transaction may not include a 

prepayment penalty unless the 

transaction is a qualified mortgage 

under TILA section 129C(b)(2). The 

Board proposed to implement TILA 

section 129C(c)(1)(A) in 

§ 226.43(g)(1)(ii)(B) and noted that, 

under section 129C(b)(2)(e), a covered 

transaction with a balloon payment may 

be a qualified mortgage if the creditor 

originates covered transactions 

primarily in ‘‘rural’’ or ‘‘underserved’’ 

areas, as discussed in detail above in the 

section-by-section analysis of 

§ 1026.43(f); thus, a consumer could 

face a prepayment penalty if the 

consumer attempts to refinance out of a 

balloon-payment qualified mortgage 

before the balloon payment is due. The 

Board solicited comment on whether it 

would be appropriate to use its legal 

authority under TILA sections 105(a) 

and 129B(e) to provide that a balloonpayment qualified mortgage may not 

have a prepayment penalty in any case. 

Most commenters generally supported 

the Board’s decision not to extend the 

prepayment penalty ban to all balloonpayment loans, noting the need for such 

financial products in rural and 

underserved areas. In light of the access 

concerns, the Bureau declines to 

exercise its exception authority under 

TILA sections 105(a) and 129B(e) to add 

a blanket prohibition of prepayment 

penalties for all balloon-payment loans. 

Accordingly, the Bureau is adopting 

§ 1026.43(g)(1)(ii)(B) as proposed. The 

Bureau will continue to monitor the use 

of balloon-payment qualified mortgages 

and their use of prepayment penalties. 

Threshold for a Higher-Priced Mortgage 

Loan 

Under TILA section 129C(c)(1)(B), a 

covered transaction may not include a 

prepayment penalty unless the 

transaction’s APR is below the specified 

threshold for ‘‘higher-priced mortgage 

loans.’’ As discussed above, those 

thresholds are determined by reference 

to the applicable average prime offer 

rate. The Board proposed under 

§ 226.43(g)(1)(ii)(C) that a creditor 

would determine whether a transaction 

is a higher-priced mortgage loan based 

on the transaction coverage rate rather 

than the APR, for purposes of the 

prepayment penalty restriction, because 

APRs are based on a broader set of 

charges, including some third-party 

charges such as mortgage insurance 

premiums, than average prime offer 

rates. The Board expressed a concern 

that using the APR metric posed a risk 

of over-inclusive coverage beyond the 

subprime market and instead proposed 

using the transaction coverage rate. 

In August 2012, the Bureau extended 

the notice-and-comment period for 

comments relating to the proposed 

adoption of the more inclusive finance 

charge, including the transaction 

coverage rate. At that time, the Bureau 

noted that it would not be finalizing the 

more inclusive finance charge in 

January 2013. See 77 FR 54843 (Sept. 6, 

2012). The Bureau therefore does not 

address in this rulemaking the 

numerous public comments that it 

received concerning the proposed 

alternatives for the APR coverage test. 

The Bureau instead will address such 

comments in connection with its 

finalization of the 2012 TILA–RESPA 


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6550 Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 

Integration Proposal, thus resolving that 

issue together with the Bureau’s 

determination whether to adopt the 

more inclusive finance charge. The 

Bureau is thus adopting the definition of 

a higher-priced loan as defined in 

§ 1026.35(a), which corresponds to the 

thresholds specified in TILA section 

129C(1)(B)(ii). 

43(g)(2) Limits on Prepayment Penalties 

TILA section 129C(c)(3) provides that 

a prepayment penalty may not be 

imposed more than three years after the 

covered transaction is consummated 

and limits the maximum amount of the 

prepayment penalty. Specifically, TILA 

section 129C(c)(3) limits the 

prepayment penalty to (1) three percent 

of the outstanding principal balance 

during the first year following 

consummation; (2) two percent during 

the second year following 

consummation; and (3) one percent 

during the third year following 

consummation. 

The Board’s proposed § 226.43(g)(2) 

was substantially similar to TILA 

section 129C(c)(3) except that the Board 

proposed to determine the maximum 

penalty amount by applying the 

percentages established in the statute to 

the amount of the outstanding loan 

balance prepaid, rather than to the 

entire outstanding loan balance. The 

Board reasoned that calculating the 

maximum prepayment penalty based on 

the amount of the outstanding loan 

balance that is prepaid, rather than the 

entire outstanding loan balance, would 

effectuate the purposes of TILA section 

129C(c) to facilitate partial (and full) 

prepayment by more strictly limiting the 

amounts of prepayment penalties 

imposed. 

The Board noted in its proposal that 

under HOEPA as amended by the DoddFrank Act, TILA section 

103(bb)(1)(A)(iii) now defines a ‘‘highcost mortgage’’ as any loan secured by 

the consumer’s principal dwelling in 

which the creditor may charge 

prepayment fees or penalties more than 

36 months after the closing of the 

transaction, or in which the fees or 

penalties exceed, in the aggregate, more 

than two percent of the amount prepaid. 

Moreover, under amended TILA section 

129(c)(1), high-cost mortgages are 

prohibited from having prepayment 

penalties. Accordingly, any prepayment 

penalty in excess of two percent of the 

amount prepaid on any closed-end 

mortgage would both trigger and violate 

HOEPA’s high-cost mortgage 

protections. The Board did not propose 

to implement these limitations on 

prepayment penalties in § 226.43(g)(2), 

but did solicit comment on whether the 

proposed text should be modified to 

incorporate the limitation of 

prepayment penalty amounts to two 

percent of the amount prepaid, as 

provided under TILA sections 

103(bb)(1)(A)(iii) and 129(c)(1). The 

Board also solicited comment on 

whether to adopt some other threshold 

to account for the limitations on points 

and fees, including prepayment 

penalties, to satisfy the requirements for 

‘‘qualified mortgages,’’ under TILA 

section 129C(b)(2)(A)(vii) and proposed 

§ 226.43(e)(2)(iii). 

The Bureau did not receive significant 

comment on the proposed adjustment of 

determining the maximum penalty 

amount by applying the percentages 

established in the statute to the amount 

of the outstanding loan balance prepaid, 

rather than to the entire outstanding 

loan balance, and therefore is adopting 

§ 1026.43(g)(2) to measure prepayment 

penalties using the outstanding loan 

balance prepaid, as proposed. The 

Bureau is making this adjustment 

pursuant to its authority under TILA 

section 105(a) to issue regulations with 

such requirements, classifications, 

differentiations, or other provisions, and 

that provide for such adjustments and 

exceptions for all or any class of 

transactions, as in the judgment of the 

Bureau are necessary and proper to 

effectuate the purposes of TILA, to 

prevent circumvention or evasion 

thereof, or to facilitate compliance 

therewith. For instance, the Bureau 

believes that it would be inconsistent 

with congressional intent to strong 

disfavor and limit prepayment penalties 

for the Bureau to allow creditors to 

charge one or two percent of the entire 

outstanding loan balance every time that 

a consumer pays even a slightly greater 

amount than the required monthly 

payment due. 

The Bureau did not receive significant 

comment on how to resolve the differing 

prepayment thresholds for high-cost 

mortgages and qualified mortgages, as 

described by the Board. But the Bureau 

believes that it is imperative to provide 

clear guidance to creditors with respect 

to all new limitations on prepayment 

penalties in dwelling-secured credit 

transactions, as imposed by the DoddFrank Act. As noted by the Board, new 

TILA section 129C(c)(3) limits 

prepayment penalties for fixed-rate, 

non-higher-priced qualified mortgages 

to three percent, two percent, and one 

percent of the outstanding loan balance 

prepaid during the first, second, and 

third years following consummation, 

respectively. However, amended TILA 

sections 103(bb)(1)(A)(iii) and 129(c)(1) 

for high-cost mortgages effectively 

prohibit prepayment penalties in excess 

of two percent of the amount prepaid at 

any time following consummation for 

most credit transactions secured by a 

consumer’s principal dwelling by 

providing that HOEPA protections 

(including a ban on prepayment 

penalties) apply to mortgage loans with 

prepayment penalties that exceed two 

percent of the outstanding loan balance 

prepaid. The Bureau concludes that, to 

comply with both the high-cost 

mortgage provisions and the qualified 

mortgage provisions, creditors 

originating most closed-end mortgage 

loans secured by a consumer’s principal 

dwelling would need to limit the 

prepayment penalty on the transaction 

to: (1) No more than two percent of the 

amount prepaid during the first and 

second years following consummation, 

(2) no more than one percent of the 

amount prepaid during the third year 

following consummation, and (3) zero 

thereafter. 

Accordingly, the Bureau is modifying 

the final rule to reflect the two percent 

cap imposed by the Dodd-Frank Act 

amendments to HOEPA. As adopted in 

final form, § 1026.43(g)(2) amends the 

maximum prepayment penalty 

threshold for qualified mortgages during 

the first year following consummation, 

specified as three percent in TILA 

section 129C(c), to two percent, to 

reflect the interaction of the qualified 

mortgage and HOEPA revisions. In 

addition to finalizing this provision as 

a matter of reasonable interpretation of 

how the statutory provisions work 

together, the Bureau is making this 

adjustment pursuant to its authority 

under TILA section 105(a) to issue 

regulations with such requirements, 

classifications, differentiations, or other 

provisions, and that provide for such 

adjustments and exceptions for all or 

any class of transactions, as in the 

judgment of the Bureau are necessary 

and proper to effectuate the purposes of 

TILA, to prevent circumvention or 

evasion thereof, or to facilitate 

compliance therewith. The Bureau is 

exercising this adjustment to prevent 

creditor uncertainty regarding the 

interaction of qualified mortgages and 

high-cost mortgage rules, thus 

facilitating compliance. For example, 

assume a creditor issues a loan that 

meets the specifications of a 

§ 1026.43(e) qualified mortgage. The 

loan terms specify that this creditor may 

charge up to three percent of any 

prepaid amount in the year following 

consummation. If the Bureau 

implements TILA section 129C(c) and 

sections 103(bb)(1)(A)(iii) and 129(c)(1) 

for high-cost mortgages, which 

effectively prohibit prepayment 


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penalties in excess of two percent of the 

amount prepaid at any time following 

consummation, then the creditor will 

have complied with certain provisions 

of TILA while violating others. Thus, to 

avoid this complex interaction, the 

Bureau is eliminating the possibility of 

simultaneous compliance with and 

violation of TILA by reducing the 

maximum prepayment penalty allowed 

in the year following consummation to 

two percent under § 1026.43(g)(2)(ii)(A). 

Comment 43(g)(2)–1 clarifies that a 

covered transaction may include a 

prepayment penalty that may be 

imposed only during a shorter period or 

in a lower amount than provided in 

§ 1026.43(g)(2). Comment 43(g)(2)–1 

provides the example of a prepayment 

penalty that a creditor may impose for 

two years after consummation that is 

limited to one percent of the amount 

prepaid. The Bureau is changing the 

prepayment example in comment 

43(g)(2)–1 to reflect the Bureau’s 

adjustment in § 1026.43(g)(2)(ii)(A) of 

the maximum prepayment penalty in 

the first year after consummation from 

three percent to two percent. 

The Bureau recognizes that TILA 

section 129C(b)(2)(A)(vii) indirectly 

limits the amount of a prepayment 

penalty for a qualified mortgage, by 

limiting the maximum ‘‘points and fees’’ 

for a qualified mortgage to three percent 

of the total loan amount. See 

§ 1026.43(e)(2)(iii), discussed above. 

The definition of ‘‘points and fees’’ 

includes the maximum prepayment 

penalty that may be charged, as well as 

any prepayment penalty incurred by the 

consumer if the loan refinances a 

previous loan made or currently held by 

the same creditor or an affiliate of the 

creditor. See TILA section 103(bb)(4)(E), 

§ 1026.32(b)(1), and accompanying 

section-by-section analysis. Thus, if a 

creditor wants to include the maximum 

two percent prepayment penalty as a 

term of a qualified mortgage, it generally 

would have to forego any other charges 

that are included in the definition of 

points and fees. See the section-bysection analysis of § 1026.32(b)(1). 

43(g)(3) Alternative Offer Required 

Under TILA section 129C(c)(4), if a 

creditor offers a consumer a covered 

transaction with a prepayment penalty, 

the creditor also must offer the 

consumer a covered transaction without 

a prepayment penalty. The Board 

proposed § 226.43(g)(3), which 

contained language to implement TILA 

section 129C(c)(4) and added provisions 

to ensure comparability between the 

two alternative offers. Specifically, the 

proposed rule would mandate that the 

alternative covered transaction without 

a prepayment penalty must: (1) Have an 

APR that cannot increase after 

consummation and the same type of 

interest rate as the covered transaction 

with a prepayment penalty (that is, both 

must be fixed-rate mortgages or both 

must be step-rate mortgages); (2) have 

the same loan term as the covered 

transaction with a prepayment penalty; 

(3) satisfy the periodic payment 

conditions for qualified mortgages; and 

(4) satisfy the points and fees conditions 

for qualified mortgages. Proposed 

§ 226.43(g)(3) also provided that the 

alternative covered transaction must be 

a transaction for which the consumer 

likely qualifies. 

The Bureau did not receive significant 

comment on the proposal and is 

adopting § 1026.43(g)(3) as proposed. 

The Bureau is adding the additional 

conditions proposed by the Board to 

those specified in TILA section 

129C(c)(4) to ensure that the alternative 

covered transactions is a realistic 

alternative for the consumer: A loan 

under substantially similar terms as the 

loan with a prepayment penalty for 

which the consumer likely qualifies. 

The Bureau is including these 

additional requirements pursuant to the 

Bureau’s authority under TILA section 

105(a) to prescribe regulations that 

contain such additional requirements, 

classifications, differentiations, or other 

provisions, or provide for such 

adjustments or exceptions for all or any 

class of transactions, as in the judgment 

of the Bureau are necessary or proper to 

effectuate the purposes of TILA, to 

prevent circumvention or evasion 

thereof, or to facilitate compliance 

therewith. 

The Bureau believes that 

requirements designed to ensure that 

the alternative covered transactions 

effectuate the purposes of TILA section 

129C(c)(4) by enabling the consumer to 

focus on a prepayment penalty’s risks 

and benefits without having to consider 

or evaluate other differences between 

the alternative covered transactions. For 

example, under final § 1026.43(g)(3), a 

consumer is able to compare a fixed-rate 

mortgage with a prepayment penalty 

with a fixed-rate mortgage without a 

prepayment penalty, rather than with a 

step-rate mortgage without a 

prepayment penalty. Also, the Bureau 

believes requiring that the alternative 

covered transaction without a 

prepayment penalty be one for which 

the consumer likely qualifies effectuates 

the purposes of and prevents 

circumvention of TILA section 

129C(c)(4), by providing for consumers 

to be able to choose between options 

that likely are available. 

Under § 1026.43(g)(1)(i), a covered 

transaction with an APR that may 

increase after consummation may not 

have a prepayment penalty. The Board 

proposed in § 226.43(g)(3)(i) that, if a 

creditor offers a covered transaction 

with a prepayment penalty, the creditor 

must offer an alternative covered 

transaction without a prepayment 

penalty and with an APR that may not 

increase after consummation. The Board 

also proposed that the covered 

transaction with a prepayment penalty 

and the alternative covered transaction 

without a prepayment penalty must 

have the same type of interest rate. The 

Board offered these proposals to ensure 

that a consumer is able to choose 

between substantially similar alternative 

transactions. The Bureau did not receive 

significant comment on the proposal 

and is adopting the Board’s proposal 

regarding the APR and the type of 

interest rate for the alternative 

transaction. 

Higher-priced mortgage loans. The 

Board proposed that, under 

§ 226.43(g)(3), if a creditor offers a 

covered transaction with a prepayment 

penalty, which may not be a higherpriced mortgage loan, the creditor may 

offer the consumer an alternative 

covered transaction without a 

prepayment penalty that is a higherpriced mortgage loan. The Board 

reasoned that TILA section 129C(c)(4) is 

intended to ensure that a consumer has 

a choice whether to obtain a covered 

transaction with a prepayment penalty, 

not to limit the pricing of the alternative 

covered transaction without a 

prepayment penalty that the creditor 

must offer. In fact, all things being 

equal, one would expect a creditor to 

cover the increased risk of prepayment 

by increasing the rate, thereby 

increasing the likelihood that the 

transaction might be a higher-priced 

mortgage loan. Furthermore, the Board 

noted that restricting the pricing of the 

required alternative covered transaction 

without a prepayment penalty might 

result in some creditors choosing to 

offer fewer loans. The Board thus did 

not propose to limit rate increases for 

the alternative covered transaction. The 

Bureau did not receive significant 

comment on this aspect of the proposal 

and is adopting the rule as proposed. 

Timing of offer. The Board proposal 

concerning the alternative offer without 

a prepayment penalty that a creditor is 

required to offer under TILA section 

129C(c)(4) did not specify that the 

creditor makes this alternative offer at or 

by a particular time. The Board proposal 

was consistent with § 1026.36(e)(2) and 

(3), which provide a safe harbor for the 

anti-steering requirement if a loan 


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6552 Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 

167Section 1026.36(e) generally prohibits, in a 

consumer credit transaction, a loan originator from 

‘‘steering’’ a consumer to consummate a transaction 

based on the fact that the originator will receive 

greater compensation from the creditor in that 

transaction than in other transactions the originator 

offered or could have offered to the consumer, 

unless the consummated transaction is in the 

consumer’s interest. Section 1026.36(e)(3) explains 

that there is a safe harbor for this anti-steering 

requirement when the loan originator presents the 

originator presents certain loan options 

to the consumer. These rules also do not 

contain a timing requirement. The 

Board solicited comment on whether it 

would be appropriate to require that 

creditors offer the alternative covered 

transaction without a prepayment 

penalty during a specified time period, 

such as before the consumer pays a nonrefundable fee or at least fifteen 

calendar days before consummation. 

The Board also solicited comment on 

whether, if a timing requirement were 

included for the required alternative 

offer, whether a timing requirement 

should also be included under the safe 

harbor for the anti-steering requirement, 

for consistency. The Bureau did not 

receive significant comment on the 

proposal and is not including a specific 

timing requirement. The Bureau will 

continue to study required alternative 

offers to ensure that creditors offer 

consumers a meaningful alternative 

transaction that does not contain a 

prepayment penalty, in accordance with 

the purposes of TILA section 129C(c)(4). 

In the course of its review, if the Bureau 

determines that more specific timing 

requirements would provide more 

consumer choice, the Bureau may 

propose to revise § 1026.43(g)(3) 

accordingly. 

The Board proposed comment 

43(g)(3)(i)–1 to clarify that the covered 

transaction with a prepayment penalty 

and the alternative covered transaction 

without a prepayment penalty both 

must be either fixed-rate mortgages or 

step-rate mortgages. The Bureau did not 

receive significant comment on the 

proposal and is adopting the comment 

with some revisions for clarification 

only. For purposes of § 1026.43(g)(3)(i), 

the term ‘‘type of interest rate’’ means 

whether the covered transaction is a 

fixed-rate mortgage, as defined in 

§ 1026.18(s)(7)(iii), or a step-rate 

mortgage, as defined in 

§ 1026.18(s)(7)(ii). 

Substance of offer. As discussed 

above, § 1026.43(g)(1)(ii)(B) provides 

that a covered transaction with a 

prepayment penalty must be a qualified 

mortgage, as defined in § 1026.43(e)(2), 

(e)(4), or (f). The Board proposal 

concerning the alternative offer without 

a prepayment penalty that a creditor is 

required to offer under TILA section 

129C(c)(4) did not mandate that the 

alternative covered transaction offered 

without a prepayment penalty must also 

be a qualified mortgage. But under 

proposed § 226.43(g)(3)(ii) through (iv), 

the Board proposed to incorporate three 

conditions of qualified mortgages on the 

alternative offer, so that consumers may 

choose between alternative covered 

transactions that are substantially 

similar. Accordingly, the Board 

proposed that the alternative covered 

transaction without a prepayment 

penalty must: (1) Have the same loan 

term as the covered transaction with a 

prepayment penalty; (2) satisfy the 

periodic payment conditions in 

§ 1026.43(e)(2)(i); and (3) satisfy the 

points and fees condition under 

§ 1026.43(e)(2)(iii), based on the 

information known to the creditor at the 

time the transaction is offered. The 

Bureau did not receive significant 

comment on the proposal and is 

adopting the Board’s proposal. The 

Bureau is including this provision both 

as part of its interpretation of TILA 

section 129C(c)(4) and using its 

authority under TILA sections 105(a), 

which provides that the Bureau’s 

regulations may contain such additional 

requirements, classifications, 

differentiations, or other provisions, and 

may provide for such adjustments and 

exceptions for all or any class of 

transactions as in the Bureau’s judgment 

are necessary or proper to effectuate the 

purposes of TILA, prevent 

circumvention or evasion thereof, or 

facilitate compliance therewith. 15 

U.S.C. 1604(a), 1639b(e). This approach 

is further supported by the authority 

under TILA section 129B(e) to condition 

terms, acts or practices relating to 

residential mortgage loans that the 

Bureau finds necessary and proper to 

ensure that responsible, affordable 

mortgage credit remains available to 

consumers in a manner consistent with 

the purposes and to effectuate the 

purposes of section 129B and 129C, and 

that are in the interest of the consumer, 

among other things. 15 U.S.C. 1639b(e). 

The purposes of TILA include the 

purposes that apply to 129B and 129C, 

to assure that consumers are offered and 

receive residential mortgage loans on 

terms that reasonably reflect their ability 

to repay the loan. See 15 U.S.C. 

1639b(a)(2). The Bureau believes that 

requiring the creditor that offers the 

consumer a loan with a prepayment 

penalty to also offer the consumer the 

ability to choose an alternative covered 

transaction that is otherwise 

substantially similar, besides not 

including a prepayment penalty, is 

necessary and proper to fulfill such 

purposes by ensuring that the consumer 

is offered a reasonable alternative 

product that the consumer can repay 

and which does not include a 

prepayment penalty. For this reason, 

this provision is also in the interest of 

the consumer. 

The Board proposed comment 

43(g)(3)(iv)–1 to provide guidance for 

cases where a creditor offers a consumer 

an alternative covered transaction 

without a prepayment penalty under 

§ 1026.43(g)(3) and knows only some of 

the points and fees that will be charged 

for the loan. For example, a creditor 

may not know that a consumer intends 

to buy single-premium credit 

unemployment insurance, which would 

be included in the points and fees for 

the covered transaction. Proposed 

comment 43(g)(3)(iv)–1 clarified that the 

points and fees condition is satisfied if 

the creditor reasonably believes, based 

on the information known to the 

creditor at the time the offer is made, 

that the amount of points and fees to be 

charged for an alternative covered 

transaction without a prepayment 

penalty will be less than or equal to the 

amount of points and fees allowed for 

a qualified mortgage under 

§ 1026.43(e)(2)(iii). The Bureau did not 

receive significant comment on the 

proposal and is adopting the comment 

largely as proposed. 

The Board proposed comment 

43(g)(3)(v)–1 to clarify what is meant by 

an alternative transaction for which the 

consumer likely qualifies. In this 

example, the creditor has a good faith 

belief the consumer can afford monthly 

payments of up to $800. If the creditor 

offers the consumer a fixed-rate 

mortgage with a prepayment penalty for 

which monthly payments are $700 and 

an alternative covered transaction 

without a prepayment penalty for which 

monthly payments are $900, the 

requirements of § 1026.43(g)(3)(v) are 

not met. Proposed comment 43(g)(3)(v)– 

1 also clarified that, in making the 

determination the consumer likely 

qualifies for the alternative covered 

transaction, the creditor may rely on 

information provided by the consumer, 

even if the information subsequently is 

determined to be inaccurate. The 

Bureau did not receive significant 

comment on the proposal and is 

adopting the Board’s comment as 

proposed. Comment 43(g)(3)(v)–1 is 

substantially similar to comment 

36(e)(3)–4, which provides clarification 

under the rules providing a safe harbor 

for the anti-steering requirements if, 

among other things, a loan originator 

presents the consumer with loan 

options for which the consumer likely 

qualifies.167 In addition to agreeing with 


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consumer with: (1) The loan option with the lowest 

interest rate overall, (2) the loan option with the 

lowest interest rate without certain risky features, 

including a prepayment penalty, and (3) the loan 

option with the lowest total origination points or 

fees and discount points. See § 1026.36(e)(3)(i). 

168For ease of discussion, the terms ‘‘mortgage 

broker’’ and ‘‘loan originator’’ as used in this 

discussion have the same meaning as under the 

Bureau’s requirements for loan originator 

compensation. See § 1026.36(a)(1), (2). 

169TILA section 103(cc), as added by section 

1401 of the Dodd-Frank Act, defines ‘‘mortgage 

originator’’ to mean any person who, for direct or 

indirect compensation or gain, or in the expectation 

of direct or indirect compensation or gain, takes a 

residential mortgage loan application, assists a 

consumer in obtaining or applying to obtain a 

residential mortgage loan, or offers or negotiates 

terms of a residential mortgage loan. 15 U.S.C. 

1602(cc). The term ‘‘mortgage originator’’ is used, 

for example, for purposes of the anti-steering 

requirement added to TILA by section 1403 of the 

Dodd-Frank Act. See TILA section 129B(c). 

the Board’s reasoning, the Bureau is 

adopting this rule and comment to 

promote consistency and further the 

Bureau’s initiative to provide 

streamlined regulatory guidance. 

43(g)(4) Offer Through a Mortgage 

Broker 

The requirement to offer an 

alternative covered transaction without 

a prepayment penalty applies to a 

‘‘creditor.’’ See TILA section 129C(c)(4). 

TILA section 103(f), in relevant part, 

defines ‘‘creditor’’ to mean a person 

who both: (1) Regularly extends 

consumer credit which is payable by 

agreement in more than four 

installments or for which the payment 

of a finance charge is or may be 

required, and (2) is the person to whom 

the debt arising from the consumer 

credit transaction is initially payable on 

the face of the evidence of indebtedness 

(or, if there is no such evidence of 

indebtedness, by agreement). 15 U.S.C. 

1602(f). 

The Board proposed § 226.43(g)(4), 

which would apply when a creditor 

offers a covered transaction with a 

prepayment penalty through a mortgage 

broker, as defined in § 1026.36(a)(2), to 

account for operational differences in 

offering a covered transaction through 

the wholesale channel versus through 

the retail channel.168 The Board 

proposed under § 226.43(g)(4) that, if a 

creditor offers a covered transaction to 

a consumer through a mortgage broker, 

as defined in § 1026.36(a)(2), the 

creditor must present to the mortgage 

broker an alternative covered 

transaction without a prepayment 

penalty that meets the conditions in 

§ 1026.43(g)(3). The Board reasoned that 

the requirement to offer an alternative 

covered transaction without a 

prepayment penalty properly is applied 

to creditors and not to mortgage brokers, 

because creditors ‘‘offer’’ covered 

transactions, even if mortgage brokers 

present those offers to consumers. 

Further, the Board noted that, if 

Congress had intended to apply TILA 

section 129C(c)(4) to mortgage brokers, 

Congress would have explicitly applied 

that provision to ‘‘mortgage originators’’ 

in addition to creditors.169 The Board’s 

proposal also provided under proposed 

§ 226.43(g)(4)(ii) that the creditor must 

establish, by agreement, that the 

mortgage broker must present the 

consumer an alternative covered 

transaction without a prepayment 

penalty that meets the conditions in 

§ 1026.43(g)(3) offered by (1) the 

creditor, or (2) another creditor, if the 

transaction has a lower interest rate or 

a lower total dollar amount of 

origination points or fees and discount 

points. 

The Bureau did not receive significant 

comment on proposed § 226.43(g)(4) 

and is adopting § 1026.43(g)(4) largely 

as proposed. By providing for the 

presentation of a loan option with a 

lower interest rate or a lower total dollar 

amount of origination points or fees and 

discount points than the loan option 

offered by the creditor, § 1026.43(g)(4) 

facilitates compliance with 

§ 1026.43(g)(3) and with the safe harbor 

for the anti-steering requirement in 

connection with a single covered 

transaction, as governed by 

§ 1026.36(e)(3)(i). Section 1026.43(g)(4) 

does not affect the conditions that a loan 

originator must meet to take advantage 

of the safe harbor for the anti-steering 

requirement, however. Thus, if a loan 

originator chooses to use the safe 

harbor, the originator must present the 

consumer with: (1) The loan option with 

the lowest interest rate overall, (2) the 

loan option with the lowest interest rate 

without certain risky features, including 

a prepayment penalty, and (3) the loan 

option with the lowest total origination 

points or fees and discount points. See 

§ 1026.36(e)(3)(i). The Bureau believes 

that requiring a mortgage broker to 

present to a consumer the creditor’s 

alternative covered transaction without 

a prepayment penalty could confuse the 

consumer if he or she is presented with 

numerous other loan options under 

§ 1026.36(e). Presenting a consumer 

with four or more loan options for each 

type of transaction in which the 

consumer expresses an interest may not 

help the consumer to make a 

meaningful choice. When compared 

with other loan options a mortgage 

broker presents to a consumer, a 

creditor’s covered transaction without a 

prepayment penalty might not have the 

lowest interest rate (among transactions 

either with or without risky features, 

such as a prepayment penalty) or the 

lowest total dollar amount of origination 

points or fees and discount points, and 

thus might not be among the loan 

options most important for consumers 

to evaluate. Also, the creditor may have 

operational difficulties in confirming 

whether or not a mortgage broker has 

presented to the consumer the 

alternative covered transaction without 

a prepayment penalty. 

The Board proposed comment 

43(g)(4)–1 to clarify that the creditor 

may satisfy the requirement to present 

the mortgage broker such alternative 

covered transaction without a 

prepayment penalty by providing the 

mortgage broker a rate sheet that states 

the terms of such an alternative covered 

transaction without a prepayment 

penalty. The Board proposed comment 

43(g)(4)–2 to clarify that the creditor’s 

agreement with the mortgage broker 

may provide for the mortgage broker to 

present both the creditor’s covered 

transaction and a covered transaction 

offered by another creditor with a lower 

interest rate or a lower total dollar 

amount of origination points or fees and 

discount points. Comment 43(g)(4)–2 

also cross-references comment 36(e)(3)– 

3 for guidance in determining which 

step-rate mortgage has a lower interest 

rate. The Board proposed comment 

43(g)(4)–3 to clarify that a creditor’s 

agreement with a mortgage broker for 

purposes of § 1026.43(g)(4) may be part 

of another agreement with the mortgage 

broker, for example, a compensation 

agreement. The comment clarifies that 

the creditor thus need not enter into a 

separate agreement with the mortgage 

broker with respect to each covered 

transaction with a prepayment penalty. 

The Bureau did not receive significant 

comment on proposed comments 

43(g)(4)–1 through –3 and is adopting 

these comments largely as proposed. 

Provisions Not Adopted 

As explained in the preamble to the 

Board’s proposal, the Board did not 

propose specific rules under proposed 

§ 226.43(g)(4) to apply in the case where 

the loan originator is the creditor’s 

employee. The Bureau did not receive 

significant comment on that omission 

and likewise is not adopting special 

provisions under § 1026.43(g)(4) to 

apply where the loan originator is the 

creditor’s employee. The Bureau 

believes that, in such cases, the 

employee likely can present alternative 

covered transactions with and without a 

prepayment penalty to the consumer 

without significant operational 

difficulties. 


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The Board solicited comment on 

whether additional guidance was 

needed regarding offers of covered 

transactions through mortgage brokers 

that use the safe harbor for the antisteering requirement, under 

§ 226.36(e)(2) and (3). The Bureau did 

not receive significant comment on the 

proposal and concludes that additional 

guidance is not currently required. The 

Bureau will continue to study the 

interaction between prepayment penalty 

restrictions, as applied to mortgage 

brokers under § 1026.43(g)(4) and the 

safe harbor for the anti-steering 

requirement, under § 1026.36(e)(2) and 

(3) to ensure that brokers are operating 

with sufficient guidance. In the course 

of its review, if the Bureau determines 

that more guidance would provide 

clarity or otherwise reduce compliance 

burden, then the Bureau may propose to 

add additional guidance. 

43(g)(5) Creditor That Is a Loan 

Originator 

The Board proposed § 226.43(g)(5) to 

address table funding situations, where 

a creditor does not provide the funds for 

a covered transaction out of its own 

resources but rather obtains funds from 

another person and, immediately after 

consummation, assigns the note, loan 

contract, or other evidence of the debt 

obligation to the other person. Such a 

creditor generally presents to a 

consumer loan options offered by other 

creditors, and this creditor is a loan 

originator subject to the anti-steering 

requirements in § 1026.36(e). See 

§ 1026.36(a)(1); comment 36(a)(1)–1. 

Like other loan originators, such a 

creditor may use the safe harbor for the 

anti-steering requirements under 

§ 1026.36(e)(2) and (3). The Board 

proposed that, if the creditor is a loan 

originator, as defined in § 1026.36(a)(1), 

and the creditor presents a consumer a 

covered transaction with a prepayment 

penalty offered by a person to which the 

creditor would assign the covered 

transaction after consummation, the 

creditor must present the consumer an 

alternative covered transaction without 

a prepayment penalty offered by (1) the 

prospective assignee, or (2) another 

person, if the transaction offered by the 

other person has a lower interest rate or 

a lower total dollar amount of 

origination points or fees and discount 

points. The Board reasoned that its 

proposal provided flexibility with 

respect to the presentation of loan 

options, which facilitates compliance 

with § 1026.43(g)(3) and with the safe 

harbor for the anti-steering requirement 

in connection with the same covered 

transaction. See § 1026.36(e)(3)(i). 

The Bureau did not receive significant 

comment on the proposal and is 

adopting the Board’s proposal. Like 

§ 1026.43(g)(4), § 1026.43(g)(5) does not 

affect the conditions that a creditor that 

is a loan originator must meet to take 

advantage of the safe harbor for the antisteering requirement. Accordingly, if a 

creditor that is a loan originator chooses 

to use the safe harbor, the creditor must 

present the consumer (1) the loan option 

with the lowest interest rate overall, (2) 

the loan option with the lowest interest 

rate without certain risky features, 

including a prepayment penalty, and (3) 

the loan option with the lowest total 

origination points or fees and discount 

points. See § 1026.36(e)(3)(i). 

The Board proposed comment 

43(g)(5)–1 to clarify that a loan 

originator includes any creditor that 

satisfies the definition of the term but 

makes use of ‘‘table-funding’’ by a third 

party. The Bureau did not receive 

significant comment on the proposed 

comment and is adopting it as proposed. 

The Board proposed comment 43(g)(5)– 

2 to cross-reference guidance in 

comment 36(e)(3)–3 on determining 

which step-rate mortgage has a lower 

interest rate. The Bureau did not receive 

significant comment on the proposal 

and is adopting the Board’s proposed 

comment. 

43(g)(6) Applicability 

TILA section 129C(c)(1)(A) provides 

that only a qualified mortgage may 

contain a prepayment penalty and TILA 

section 129C(c)(4) further requires the 

creditor to offer the consumer an 

alternative offer that does not contain a 

prepayment penalty. The Board 

proposed § 226.43(g)(6) to provide that 

§ 226.43(g) would apply only if a 

transaction is consummated with a 

prepayment penalty and would not be 

violated if (1) a covered transaction is 

consummated without a prepayment 

penalty or (2) the creditor and consumer 

do not consummate a covered 

transaction. The Bureau did not receive 

significant comment on the proposal 

and is adopting the Board’s proposal 

under § 1026.43(g)(6). 

Section 1026.43(g)(2) limits the period 

during which a prepayment penalty 

may be imposed and the amount of any 

prepayment penalty. As provided in 

§ 1026(g)(6), those prepayment penalty 

limitations apply only if a covered 

transaction with a prepayment penalty 

is consummated. Similarly, 

§ 1026.43(g)(3) requires a creditor that 

offers a consumer a covered transaction 

with a prepayment penalty to offer the 

consumer an alternative covered 

transaction without a prepayment 

penalty. Where a consumer 

consummates a covered transaction 

without a prepayment penalty, 

§ 1026(g)(6) states that it is unnecessary 

to require that the creditor offer the 

consumer an alternative covered 

transaction without a prepayment 

penalty. Thus § 1026.43(g) applies only 

if the consumer consummates a covered 

transaction with a prepayment penalty. 

43(h) Evasion; Open-End Credit 

TILA section 129C, which addresses 

the ability-to-repay requirements and 

qualified mortgages, applies to 

residential mortgage loans. TILA section 

103(cc)(5) defines ‘‘residential mortgage 

loans’’ as excluding open-end credit 

plans, such as HELOCs. In its proposal, 

the Board recognized that the exclusion 

of open-end credit plans could lead 

some creditors to attempt to evade the 

requirements of TILA section 129C by 

structuring credit that otherwise would 

have been structured as closed-end as 

open-end instead. 

The Board proposed § 226.43(h) to 

prohibit a creditor from evading the 

requirements of § 226.43 by structuring 

a transaction that does not meet the 

definition of open-end credit in 

§ 226.2(a)(20) as open-end credit, such 

as a HELOC. The Board proposed 

comment 43(h)–1 to explain that where 

a loan is documented as open-end credit 

but the features and terms, or other 

circumstances, demonstrate that the 

loan does not meet the definition of 

open-end credit, then the loan is subject 

to the rules for closed-end credit, 

including § 226.43. The Board proposed 

these provisions using its authority 

under TILA sections 105(a) and 129B(e) 

to prevent circumvention or evasion. 

The Board noted that an overly broad 

anti-evasion rule could limit consumer 

choice by casting doubt on the validity 

of legitimate open-end plans, and the 

Board thus solicited comment on 

whether to limit the anti-evasion rule’s 

application, for example, to HELOCs 

secured by first liens where the 

consumer draws down all or most of the 

entire line of credit immediately after 

the account is opened. 

Consumer groups generally supported 

the proposed anti-evasion provision; 

some consumer groups suggested that 

the provision should be expanded to 

require all HELOCs to comply with all 

Dodd-Frank Act requirements, 

expressing concern over the potential 

for consumer abuse. Industry 

commenters generally sought 

clarification on the anti-evasion rule, 

noting that ambiguity with respect to 

the provision might limit creditors’ 

ability, or willingness, to offer HELOCs 

or other open-end credit products. 


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170Specifically, 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. 

171The Bureau notes that under the final rule, 

‘‘higher-priced covered transaction’’ is defined in 

§ 1026.43(b)(4). ‘‘Higher-priced mortgage loan’’ 

(HPML) is defined in § 1026.35. ‘‘High-cost 

mortgage’’ is defined in § 1026.32. The Bureau 

further notes that interest rate thresholds specified 

in the ‘‘higher-priced covered transaction’’ 

definition (higher-priced threshold) are similar to 

the HPML thresholds, except the final rule’s higherpriced threshold does not include a specified rate 

threshold for ‘‘jumbo’’ loans, as provided in 

§ 1026.35. 

The Bureau is adopting the Board’s 

proposal largely as proposed. Section 

1026.43(h) is also consistent with the 

Board’s 2008 HOEPA Final Rule, 

§ 1026.35(b)(4), which provides a 

similar anti-evasion provision with 

respect to higher-priced mortgage loans. 

The Bureau is including this provision 

both as part of its interpretation of TILA 

section 129C and using its authority 

under TILA section 105(a), which 

provides that the Bureau’s regulations 

may contain such additional 

requirements, classifications, 

differentiations, or other provisions, and 

may provide for such adjustments and 

exceptions for all or any class of 

transactions as in the Bureau’s judgment 

are necessary or proper to effectuate the 

purposes of TILA, prevent 

circumvention or evasion thereof, or 

facilitate compliance therewith, and 

TILA section 129B(e) to prevent 

circumvention or evasion. 15 U.S.C. 

1604(a), 1639b(e). The purposes of TILA 

include the purposes that apply to 

section 129C, to assure that consumers 

are offered and receive residential 

mortgage loans on terms that reasonably 

reflect their ability to repay the loan. 

See 15 U.S.C. 1639b(a)(2). While some 

industry commenters requested further 

clarification on this provision, so as to 

avoid limiting consumer choice, the 

Bureau believes that no further 

commentary is required. A creditor that 

offers a consumer an open-end line of 

credit in the ordinary course of business 

need not be concerned with running 

afoul of the anti-evasion requirement, 

and a creditor need not undertake any 

additional compliance or reporting steps 

to do so. A creditor only violates 

§ 1026.43(h) when the creditor 

structures credit secured by a 

consumer’s dwelling that does not meet 

the definition of open-end credit in 

§ 1026.2(a)(20) as an open-end plan in 

order to evade the ability-to-repay 

requirements. The Bureau’s approach 

should allow creditors acting in good 

faith to continue to provide credit to 

consumers in the manner best fit for 

business needs and consumer demand, 

without concern of accidentally running 

afoul of the anti-evasion requirement. 

VI. Effective Date 

This final rule is effective on January 

10, 2014. The rule applies to 

transactions for which the creditor 

received an application on or after that 

date. As discussed above in part III.C, 

the Bureau believes that this approach 

is consistent with the timeframes 

established in section 1400(c) of the 

Dodd-Frank Act and, on balance, will 

facilitate the implementation of the 

rules’ overlapping provisions, while 

also affording creditors sufficient time 

to implement the more complex or 

resource-intensive new requirements. 

As noted above, in response to the 

proposal, some industry commenters 

requested that the Bureau provide 

additional time for compliance because 

the Bureau is finalizing several mortgage 

rules at the same time. These 

commenters expressed concern over 

both the breadth and complexity of new 

rules expected from the Bureau and 

from other regulators. Some commenters 

stated that small institutions, in 

particular, might face a higher cost of 

compliance under the timeframes 

established in section 1400(c) of the 

Dodd-Frank Act. One industry 

commenter explained that the new rules 

would require creditors to alter financial 

products, modify compliance systems, 

and train staff. Another industry 

commenter noted that some credit 

unions and other institutions that rely 

on third-party providers, such as 

software vendors, to assist with 

compliance might face particular 

challenges with implementing necessary 

changes over a short time period since 

such third parties will need time to 

incorporate necessary updates and 

conduct testing, and include the 

changes in their scheduled releases. 

Some commenters urged the Bureau to 

coordinate publishing and effective 

dates among the title XIV rules and the 

QRM rulemaking, in order to assist 

creditors in minimizing compliance 

burden. 

For the reasons already discussed 

above, the Bureau believes that an 

effective date of January 10, 2014 for 

this final rule and most provisions of 

the other title XIV final rules will ensure 

that consumers receive the protections 

in these rules as soon as reasonably 

practicable, taking into account the 

timeframes established by the DoddFrank Act, the need for a coordinated 

approach to facilitate implementation of 

the rules’ overlapping provisions, and 

the need to afford creditors and other 

affected entities sufficient time to 

implement the more complex or 

resource-intensive new requirements. 

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

Analysis 

A. Overview 

In developing the final rule, the 

Bureau has considered potential 

benefits, costs, and impacts.170 In 

addition, the Bureau has consulted, or 

offered to consult with, the prudential 

regulators, SEC, HUD, FHFA, the 

Federal Trade Commission, and the 

Department of the Treasury, including 

regarding consistency with any 

prudential, market, or systemic 

objectives administered by such 

agencies. The Bureau also held 

discussions with or solicited feedback 

from the United States. Department of 

Agriculture, Rural Housing Service, the 

Federal Housing Administration, and 

the Department of Veterans Affairs 

regarding the potential impacts of the 

final rule on those entities’ loan 

programs. 

The Board issued the 2011 ATR 

Proposal prior to the transfer of 

rulemaking authority to the Bureau. As 

the Board was not subject to DoddFrank Act section 1022(b)(2), the 2011 

ATR Proposal did not contain a 

proposed Dodd-Frank Act section 1022 

analysis. 

The Dodd-Frank Act and the final rule 

establish minimum standards for 

consideration of a consumer’s 

repayment ability for creditors 

originating certain closed-end, 

residential mortgage loans. These 

underwriting requirements are similar, 

but not identical, to the ability-to-repay 

requirements that apply to high-cost and 

higher-priced mortgage loans under 

current regulations.171 In general, the 

Act and the final rule prohibit a creditor 

from making a covered transaction 

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. 

These documentation and verification 

requirements effectively prohibit no 

documentation and limited 

documentation loans that were common 

in the later years of the housing bubble. 

The final rule generally requires the 

creditor to verify the information relied 

on in considering a consumer’s debts 

relative to income or residual income 

after paying debts, using reasonably 

reliable third-party records, with special 


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rules for verifying a consumer’s income 

or assets. The creditor must 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. The final rule 

provides special payment calculation 

rules for loans with balloon payments, 

interest-only loans, and negative 

amortization loans. 

The final rule provides special rules 

for complying with the ability-to-repay 

requirements for a creditor refinancing a 

‘‘non-standard mortgage’’ into a 

‘‘standard mortgage.’’ Under the final 

rule, 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 interestonly loan, or a negative amortization 

loan. Under this provision, a creditor 

refinancing a non-standard mortgage 

into a standard mortgage does not have 

to consider the specific underwriting 

criteria a lender must otherwise 

consider under the general ability-torepay option, if certain conditions are 

met. 

To provide creditors more certainty 

about their potential liability under the 

ability-to-pay standards while 

protecting consumers from unaffordable 

loans, the Dodd-Frank Act creates a 

presumption of compliance with the 

ability-to-pay requirement when 

creditors make ‘‘qualified mortgages.’’ 

According to the statute, covered 

transactions, in general, are qualified 

mortgages where: the loan does not 

contain negative amortization, interestonly payments, or balloon payments 

(except in certain limited 

circumstances); the term does not 

exceed 30 years; points and fees 

(excluding up to two bona fide discount 

points) do not exceed three percent of 

the total loan amount; the income or 

assets and debt obligations are 

considered and verified; 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. 

Under the final rule creditors have 

three options for originating a qualified 

mortgage. Under the first option, the 

loan must satisfy basic documentation 

and verification requirements for 

income or assets and debt, and the 

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

than or equal to 43 percent. With 

respect to a loan that satisfies these 

criteria and is not a higher-priced 

covered transaction, there is a 

conclusive presumption that the 

creditor satisfied the ability-to-pay 

requirements so that the loan qualifies 

for a legal safe harbor under the abilityto-repay requirements. A loan that 

satisfies these criteria and is a higherpriced covered transaction receives a 

rebuttable presumption of compliance 

with the ability-to-repay requirements. 

The second option for originating a 

qualified mortgage provides a temporary 

expansion of the general definition. 

Through this option, a loan is a 

qualified mortgage if it meets the 

prohibitions on certain loan features, 

the limitations on points and fees and 

loan terms that apply under the general 

definition and also meets one of the 

following requirements: is eligible for 

purchase or guarantee by the Federal 

National Mortgage Association (Fannie 

Mae) or the Federal Home Loan 

Mortgage Corporation (Freddie Mac) 

(collectively, the GSEs), while operating 

under the conservatorship or 

receivership of the FHFA; is eligible to 

be purchased or guaranteed by any 

limited-life regulatory entity succeeding 

the charter of either the GSEs; or is 

eligible to be insured by the FHA, VA 

or USDA or USDA RHS. This temporary 

provision expires with respect to GSEeligible loans when conservatorship of 

the GSEs ends and expires with respect 

to each other category of loans 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. Alternatively, if GSE 

conservatorship continues or the 

Federal agencies do not issue rules 

defining qualified mortgage pursuant to 

TILA section 129C(b)(3)(ii), the 

temporary qualified mortgage definition 

expires seven years after the effective 

date of the rule. 

Unlike loans that are qualified 

mortgages under the general definition, 

there is no specific monthly debt-toincome ratio threshold to be a qualified 

mortgage under this temporary 

provision, except as may be required to 

be eligible for purchase or guarantee or 

to be insured by the GSEs or Federal 

agencies. The temporary qualified 

mortgage definition does not 

specifically include documentation and 

verification requirements or a specific 

payment calculation requirement. The 

Bureau understands that, to be eligible 

for purchase or guarantee by the GSE’s 

or to be eligible to be guaranteed or 

insured by the Federal agencies, a loan 

must first satisfy certain payment 

calculation requirements and repayment 

ability analyses (which include 

consideration of a consumer’s total 

monthly debt-to-income ratio) and the 

information on which the calculation is 

based must be documented and verified. 

As is true with respect to the first 

category of qualified mortgages 

described above, a loan that satisfies 

these criteria and is not a higher-priced 

covered transaction receives a legal safe 

harbor under 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. 

The third option for qualified 

mortgages exists only for small creditors 

operating predominantly in rural or 

underserved areas, who are allowed 

under the rule to originate a balloonpayment qualified mortgage. 

Specifically, this option exists for 

lenders originating 500 or fewer covered 

transactions, secured by a first lien, in 

the preceding calendar year, with assets 

equal to or under $2 billion (to be 

adjusted annually), and who made more 

than 50 percent of their total covered 

transactions secured by first liens on 

properties in counties that are ‘‘rural’’ or 

‘‘underserved.’’ These creditors are 

allowed to offer loans with balloon 

payments assuming the loan also meets 

certain loan-specific criteria: the 

creditor must satisfy the requirements 

under the general qualified mortgage 

definition regarding consideration and 

verification of income or assets and debt 

obligations; the loan cannot permit 

negative amortization; the creditor must 

determine that the consumer can make 

all of the scheduled payments (other 

than the final balloon payment) under 

the terms of the legal obligation from the 

consumer’s current or reasonably 

expected income or assets other than the 

dwelling that secures the transaction; 

the loan must have a term of least five 

years and no more than 30 years; the 

interest rate is fixed during the term of 

the loan; the creditor must base the 

payment calculation on the scheduled 

periodic payments, excluding the 

balloon payment; and the loan must not 

be subject to a forward commitment at 

the time of consummation. 

Unlike loans that are qualified 

mortgages under the general definition, 

there is no specific debt-to-income ratio 

requirement for balloon-payment 

qualified mortgages. However, creditors 

must generally consider and verify a 

consumer’s monthly debt-to-income 

ratio. Like the other qualified mortgage 

definitions, a loan that satisfies the 

criteria for a balloon-payment qualified 

mortgage and is not a higher-priced 

covered transaction receives a legal safe 

harbor under the ability-to-repay 

requirements for as long as the loan is 

held in portfolio by the creditor who 

originated the loan. The safe harbor also 


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172The Average Prime Offer Rate means ‘‘the 

average prime offer rate for a comparable 

transaction as of the date on which the interest rate 

for the transaction is set, as published by the 

Bureau.’’ TILA section 129C(b)(2)B). 173See 77 FR 33120 (June 5, 2012) 

applies to balloon-payment qualified 

mortgages which are sold three years or 

more after consummation. A loan that 

satisfies the balloon payment qualified 

mortgage criteria and is a higher-priced 

covered transaction receives a rebuttable 

presumption of compliance with the 

ability-to-repay requirements. 

As discussed above, the final rule 

provides a conclusive presumption of 

compliance with the ability-to-repay 

requirements for loans that satisfy the 

definition of a qualified mortgage and 

are not higher-priced covered 

transactions (i.e., APR does not exceed 

Average Prime Offer Rate (APOR) + 1.5 

percentage points for first liens or 3.5 

percentage points for subordinate 

liens).172 The final rule provides a 

rebuttable presumption of compliance 

with ability-to-repay requirements for 

all other qualified mortgage loans, 

meaning qualified mortgage loans that 

are higher-priced covered transactions. 

A consumer who seeks to rebut the 

presumption must prove that, at the 

time of consummation, in light of the 

consumer’s income and debt 

obligations, the consumer’s monthly 

payment (including mortgage-related 

obligations) on the covered transaction 

and any simultaneous loans of which 

the creditor was aware, would leave the 

consumer with insufficient residual 

income to pay living expenses, 

including recurring and material 

obligations or expenses of which the 

creditor was aware. 

Finally, the final rule implements the 

Dodd-Frank Act limits on prepayment 

penalties, lengthens the time creditors 

must retain records that evidence 

compliance with the ability-to-repay 

and prepayment penalty provisions, and 

prohibits evasion of this rule, in 

connection with credit that does not 

meet the definition of open-end credit, 

by structuring a closed-end extension of 

credit as an open-end plan. 

A consumer who brings an action 

against a creditor for a violation of the 

ability-to-repay requirements within 

three years from when the violation 

occurs 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; 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. 

After the expiration of the three-year 

time period, the consumer is precluded 

from bringing an affirmative claim 

against the creditor. At any time, when 

a creditor or an assignee initiates a 

foreclosure action, a consumer may 

assert a violation of these provisions ‘‘as 

a matter of defense by recoupment or 

setoff.’’ There is no time limit on the use 

of this defense, although the 

recoupment or setoff of finance charge 

and fees is limited to the first three 

years of finance charges and fees paid 

by the consumer under the mortgage. 

B. Data and Quantification of Benefits, 

Costs and Impacts 

Section 1022 of the Dodd-Frank Act 

requires that the Bureau, in adopting the 

rule, consider potential benefits and 

costs to consumers and covered persons 

resulting from the rule, including the 

potential reduction of access by 

consumers to consumer financial 

products or services resulting from the 

rule, as noted above; it also requires the 

Bureau to consider the impact of 

proposed rules on covered persons and 

the impact on consumers in rural areas. 

These potential benefits and costs, and 

these impacts, however, are not 

generally susceptible to particularized 

or definitive calculation in connection 

with this rule. The incidence and scope 

of such potential benefits and costs, and 

such impacts, will be influenced very 

substantially by economic cycles, 

market developments, and business and 

consumer choices, that are substantially 

independent from adoption of the rule. 

No commenter has advanced data or 

methodology that it claims would 

enable precise calculation of these 

benefits, costs, or impacts. Moreover, 

the potential benefits of the rule on 

consumers and covered persons in 

creating market changes anticipated to 

address market failures are especially 

hard to quantify. 

In considering the relevant potential 

benefits, costs, and impacts, the Bureau 

has utilized the available data discussed 

in this preamble, where the Bureau has 

found it informative, and applied its 

knowledge and expertise concerning 

consumer financial markets, potential 

business and consumer choices, and 

economic analyses that it regards as 

most reliable and helpful, to consider 

the relevant potential benefits and costs, 

and relevant impacts. The data relied 

upon by the Bureau includes the public 

comment record established by the 

proposed rule, as well as the data 

described in the Bureau’s Federal 

Register notice reopening the comment 

for this rule,173 and the public 

comments thereon. 

However, the Bureau notes that for 

some aspects of this analysis, there are 

limited data available with which to 

quantify the potential costs, benefits, 

and impacts of the final rule. For 

example, data on the number and 

volume of various loan products 

originated for the portfolios of bank and 

non-bank lenders exists only in certain 

circumstances. Data regarding many of 

the benefits of the rule such as the 

benefits from prevented defaults or from 

prevented injuries to the financial 

system are also limited. 

In light of these data limitations, the 

analysis below generally provides a 

qualitative discussion of the benefits, 

costs, and impacts of the final rule. 

General economic principles, together 

with the limited data that are available, 

provide insight into these benefits, 

costs, and impacts. Where possible, the 

Bureau has made quantitative estimates 

based on these principles and the data 

that are available. For the reasons stated 

in this preamble, the Bureau considers 

that the rule as adopted faithfully 

implements the purposes and objectives 

of Congress in the statute. Based on each 

and all of these considerations, the 

Bureau has concluded that the rule is 

appropriate as an implementation of the 

Act. 

C. Baseline for Analysis 

The provisions of Dodd Frank 

concerning minimum loan standards 

and the ability-to-repay requirement are 

self-effectuating, and the Dodd-Frank 

Act does not require the Bureau to adopt 

a regulation to implement these 

amendments. The Act does require the 

Bureau to issue regulations to ‘‘carry out 

the purposes of’’ the subsection 

governing qualified mortgages, which 

includes the ‘‘presumption of 

compliance’’ accorded those mortgages. 

In the absence of such regulations, the 

statutory provisions would take effect 

on January 21, 2013, and there would be 

no clarification beyond the statute as to 

the meaning of the ability-to-repay 

requirement, which mortgages meet the 

statutory criteria for a qualified 

mortgage, and the nature of the 

presumption of compliance with respect 

to such mortgages. Thus, many costs 

and benefits of the final rule considered 

below would arise largely or entirely 

from the statute, not from the final rule. 

The final rule would provide substantial 

benefits compared to allowing these 

provisions to take effect alone by 

clarifying parts of the statute that are 

ambiguous. Greater clarity on these 


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174The Bureau has chosen, as a matter of 

discretion, to consider the benefits and costs of 

those provisions that are required by the DoddFrank Act in order to better inform the rulemaking. 

The Bureau has discretion in future rulemakings to 

choose the relevant provisions to discuss and to 

choose the most appropriate baseline for that 

particular rulemaking. 

175The statute and final rule are designed to 

ensure a minimal level of underwriting across 

various states of the housing market and credit 

cycle. As a result, the Bureau determined, as a 

matter of discretion, that it was beneficial to 

compare certain aspects of the rule against different 

scenarios, using different historical data. 

176See Board of Governors of the Federal Reserve 

System, ‘‘Monetary Policy Report to the Congress,’’ 

(July 17, 2012), available at http:// 

www.federalreserve.gov/monetarypolicy/files/ 

20120717_mprfullreport.pdf. 

177Reliable loan level data from earlier time 

periods is generally unavailable. 

178For a general discussion of market failures, 

including incomplete markets, see Chapter 4 

(‘‘Market Failure’’) in Joseph E. Stiglitz. Economics 

of the Public Sector, 3d edition. New York: W. W. 

Norton & Company, Inc. (2000). 

issues should reduce the compliance 

burdens on covered persons by reducing 

costs for attorneys and compliance 

officers as well as potential costs of 

over-compliance and unnecessary 

litigation. 

Section 1022 of the Dodd-Frank Act 

permits the Bureau to consider the 

benefits and costs of the rule solely 

compared to the state of the world in 

which the statute takes effect without an 

implementing regulation. To provide 

the public better information about the 

benefits and costs of the statute, 

however, the Bureau has nonetheless 

chosen to evaluate the benefits, costs, 

and impacts of the major provisions of 

the final rule against a pre-statutory 

baseline. That is, the Bureau’s analysis 

below considers the benefits, costs, and 

impacts of the relevant provisions of the 

Dodd-Frank Act combined with the 

final rule implementing those 

provisions relative to the regulatory 

regime that pre-dates the Act and 

remains in effect until the final rule 

takes effect. As noted, current 

regulations have parallel but not 

identical ability-to-repay rules applied 

to higher-price and high-cost mortgage 

loans.174

In the analysis, in addition to 

referring to present market conditions, 

the Bureau refers at times to data from 

other historical periods—the market as 

it existed from 1997 to 2003 and the 

years of the bubble and the collapse— 

to provide the public a fuller sense of 

the potential impacts of the rule in other 

market conditions.175 Considering the 

current state of the market makes clear 

the near term benefits and costs of the 

provisions. However, at this point in the 

credit cycle, the market is highly 

restrictive and operating under very 

tight credit conditions.176 Against this 

background, the benefits and the costs 

of the rule may appear smaller than 

otherwise. 

The Bureau considers the mortgage 

market as it existed from 1997 through 

2003 useful to assess some of the rule’s 

possible effects when credit conditions, 

and the economy more generally, return 

to normal. During this period, home 

prices were generally rising and the 

housing market was in a positive phase. 

Notably, interest rates were falling in 

2002 and 2003, which created a very 

large surge in refinancing activity. This 

period may not be perfectly 

representative of an ‘‘average’’ market, 

but these years span almost a full 

business cycle, capturing the end of 

1990’s expansion, the early 2000’s 

recession and the beginning of the next 

expansion.177

The analysis also uses data from the 

period 2004 through 2009. Beginning in 

2004, the mortgage market in the United 

States was in the height of the housing 

bubble. In 2007 home prices, mortgage 

lending, and the economy more 

generally collapsed. The period that 

covers the ‘‘bubble’’ years and the crash 

that followed is also useful to gauge the 

impacts of the final rule. It is exactly the 

lending conditions during those years, 

and the damage they caused, that the 

statute and the final rule are primarily 

designed to prevent. Examining the 

performance and effects of the 

mortgages offered during this period, 

loans that were largely originated based 

on the perceived value of collateral, 

offers insights into the potential benefits 

and costs of the rule. 

D. Coverage of the Final Rule 

The provisions of the final rule 

require creditors to determine a 

consumer’s ability to repay a 

‘‘residential mortgage loan, ’’ excluding 

reverse mortgages and temporary bridge 

loans of 12 months or less, (referred to 

as ‘‘covered transactions’’) ’’and 

establish new rules and prohibitions on 

prepayment penalties. For these 

purposes, this rule covers with some 

exceptions, any dwelling-secured 

consumer credit transaction, regardless 

of whether the consumer credit 

transaction involves a home purchase, 

refinancing, home equity loan, first lien 

or subordinate lien, and regardless of 

whether the dwelling is a principal 

residence, second home, vacation home 

(other than a timeshare residence), a 

one- to four-unit residence, 

condominium, cooperative, mobile 

home, or manufactured home. However, 

the Dodd-Frank Act specifically 

excludes from these provisions openend credit plans or extensions of credit 

secured by an interest in a timeshare 

plan. The final rule generally also 

excludes reverse mortgages, residential 

construction loans, and bridge loans 

with a term of 12 months or less. 

E. Potential Benefits and Costs to 

Consumers and Covered Persons 

In the analysis of benefits, costs and 

impacts, the Bureau has chosen to 

consider the ability-to-repay provisions 

together with the various qualified 

mortgage provisions. The discussion 

below first addresses the economics of 

an ability-to-repay standard, and 

considers the specific market failures 

that the statute and the rule aim to 

address. In general, market failures may 

include incomplete markets, 

externalities, imperfect competition, 

imperfect information, or imperfect 

information processing by consumers 

and several of those are discussed 

here.178 The benefits and costs of the 

requirement to assess ability to repay 

based upon documented and verified 

information are then discussed along 

with the impacts of the new liabilities, 

and the presumption of compliance that 

mitigates those liabilities established 

under the Dodd-Frank Act. 

Additional provisions of the rule are 

considered including the impacts of the 

provisions related to points and fees, 

prepayment penalties and the definition 

of ‘‘rural or underserved’’. The 

relationship between these provisions 

and other mortgage related rulemakings 

is discussed. The benefits, costs and 

impacts of the final rule in relation to 

several major alternatives are then 

discussed. 

1. Economics of Ability To Repay 

The basic requirement of Section 1411 

of the Dodd-Frank Act is that a covered 

transaction may only be made when the 

creditor has made a ‘‘reasonable and 

good faith’’ determination that the 

consumer will be able to repay the loan. 

In the absence of any market 

imperfections, when negotiating a loan, 

both the lender and borrower would 

understand and consider the probability 

of default and the related costs should 

such a default occur. Creditors would 

extend credit if, and only if, the ‘‘price’’ 

of the loan, i.e., the risk-adjusted return 

(the return taking into account the 

expected loss from default) is high 

enough to justify the investment. 

Informed consumers would accept the 

loan if, and only if, the benefits of 

financing the property are worth the 

costs, including any expected costs in 

the likelihood that they default and 


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179Some consumers may also benefit from 

informational asymmetries that lead to the 

secondary market purchasing their mortgages 

without full information about the characteristics of 

the loan. 180Examples of empirical evidence of the 

persistence of moral hazard among employees in 

commercial and retail lending, include originators 

of residential mortgages, appears in Sumit Agarwal 

and and Itzhak Ben-David, ‘‘Do Loan Officers’ 

Incentives Lead to Lax Lending Standards?’’ Federal 

Reserve Bank of Chicago working paper (2012); 

Aritje Berndt; and Burton Hollifield, and Patrik 

Sandas, 2010, The Role of Mortgage Brokers in the 

Subprime Crisis, Working paper, Carnegie Mellon 

University. Cole, Shawn, Martin Kanz, and Leora 

Klapper (2010), Rewarding Calculated Risk-Taking: 

Evidence from a Series of Experiments with 

Commercial Bank Loan Officers, Working paper, 

Harvard Business School. 

181With these market failures, even if regulation 

limits opportunities for lenders to extend credit 

without retaining a portion of the risk, there may 

be cases where lenders will not pay enough 

attention to a borrower’s ability to repay. 

182See Foote, Christopher L., Kristopher S. 

Gerardi, and Paul S. Willen, ‘‘Why Did So Many 

People Make So Many Ex Post Bad Decisions? The 

Causes of the Foreclosure Crisis,’’ Public Policy 

Discussions Papers, Federal Reserve Bank of Boston 

(2012), available at http://www.bostonfed.org/ 

economic/ppdp/2012/ppdp1202.pdf. 

cannot maintain access to the specific 

property. 

The primary benefits or costs from an 

ability-to-repay requirement therefore 

derive from situations, where, absent 

such a requirement, these conditions are 

not met or where certain externalities 

may exist. These may include situations 

where the originator or creditor is not 

fully informed or has incorrect 

information about the transaction. More 

likely, a fully informed originator or 

creditor may not fully internalize all of 

the relevant costs, and is willing to 

extend credit even though the consumer 

may lack the ability to repay. Since the 

consumer willingly enters into the 

transaction, he or she must also be 

uninformed of either the true likelihood 

or true costs of default, or must not fully 

internalize all of the relevant costs. As 

discussed below, some of these 

situations arise when the lender or the 

borrower, fully understanding the risks 

of the loan and the inherent costs to 

themselves, do not factor costs borne by 

parties outside the transactions into 

their decisions. 

Collateral based or ‘‘hard money’’ 

lending is one possible case where such 

lending could occur. If the lender is 

assured (or believes he is assured) of 

recovering the value of the loan by 

gaining possession of the asset, the 

lender may not pay sufficient attention 

to the ability of the borrower to repay 

the loan or to the impact of default on 

third parties. For very low loan-to-value 

(LTV) mortgages, i.e., those where the 

value of the property more than covers 

the value of the loan, the lender may not 

care at all if the borrower can afford the 

payments. Even for higher LTV 

mortgages, if prices are rising sharply, 

borrowers with even limited equity in 

the home may be able to gain financing 

since lenders can expect a profitable 

sale or refinancing of the property as 

long as prices continue to rise. 

Other cases may involve loan 

originators who do not bear the credit 

risk of the loan, and therefore do not 

bear the ultimate costs of default. The 

common case is lenders who sell their 

loans: these lenders earn upfront 

origination fees from consumers and 

gains on sale but (absent complete 

contracts that provide otherwise) may 

not generally bear the costs of a later 

borrower default. As the relative size of 

the upfront fees increase, the potential 

agency problems do as well. The market 

recognizes the informational issues in 

these transactions and has developed 

mechanisms to mitigate adverse 

selection and moral hazard. For 

example, purchasers of loans engage in 

due diligence, either directly or by 

hiring third parties, validating the 

information provided about the loans 

and ensuring that the seller has 

provided only loans that meet agreed 

upon criteria. In addition, contracts 

provide that ex-post, should a loan 

perform poorly, the originator may have 

to repurchase the loan. This contracting 

feature is also designed to ensure that 

the initial creditor of the loan has the 

proper incentives to verify the 

borrower’s ability to repay or the 

collateral value. Still, not all 

information about the loan may be 

captured and passed among sequential 

owners of the loan; some tacit 

information, not passed on, may give 

the creditor an informational advantage 

over others and diminishes the 

creditors’ incentives to verify the 

consumer’s ability to repay.179

However, even lenders who maintain 

loans in portfolio may pay insufficient 

attention to the borrower’s ability to 

repay. Cases where the loan creditor can 

earn sufficiently high up-front 

compensation, or where incentives of 

the individual loan originators and the 

creditor differ, may lead to lending that 

does not include a realistic assessment 

of the borrower’s ability to repay. For 

example, a retail loan originator who 

earns commission may not have the 

same incentives as the owners of the 

bank that employs the loan originator 

and who will bear the ultimate cost of 

the loan once on portfolio. Even if such 

loan originators do not have final 

decision-making authority as to whether 

the creditor will make the loan, the loan 

originator controls the information that 

the underwriter receives and may have 

an information advantage that could 

systematically bias underwriting 

decisions.180 This information problem, 

and therefore the risk of poorly 

underwritten portfolio loans, may be 

even greater where the originator is not 

an employee of the creditor as is true in 

the brokerage and correspondent 

lending contexts. 

In all these cases, the common 

problem is the failure of the originator 

or creditor to internalize particular 

costs, often magnified by information 

failures and systematic biases that lead 

to underestimation of the risks involved. 

The first such costs are simply the 

pecuniary costs from a defaulted loan— 

if the loan originator or the creditor does 

not bear the ultimate credit risk, he or 

she will not invest sufficiently in 

verifying the consumer’s ability to 

repay. Even in cases where the lender 

does bear those costs, he or she will 

usually not fully internalize the private 

costs that a defaulting borrower will 

incur should default occur. Further, 

there are social costs from default that 

creditors may not internalize, as 

discussed below.181

As noted earlier, the borrower also 

must decide whether to enter into the 

mortgage, and fully informed, perfectly 

rational consumers should consider 

their own risk of default and private 

costs in the event of default. However, 

as with lenders, borrowers may not fully 

anticipate the future probability or costs 

of default, either because they are 

uninformed or for other reasons. 

Consumers may underestimate the true 

costs of homeownership or be overly 

optimistic about their own future (or 

even current) financial condition. This 

can be exacerbated in the case of less 

sophisticated consumers negotiating 

with more informed mortgage 

professionals who have an interest in 

closing the loan and who may falsely 

reassure consumers about the 

consumers’ ability to repay. 

Consumers (and as noted above, 

creditors) may also misjudge the current 

or future value of the property securing 

the loan.182 This latter phenomenon was 

very much in evidence during the later 

years of the housing bubble as many 

consumers simply assumed that in 

times of financial stress, they could 

always sell or refinance. Further, 

consumers may not understand or may 

underestimate the costs they will incur 

in the event of default, such as the loss 

of the borrower’s own home, costs of 

relocation, and the borrower’s loss of 

future credit, employment and other 


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183See for example, Kenneth P. Brevoort and 

Cheryl R. Cooper, Foreclosure’s Wake: The Credit 

Experiences of Individuals Following Foreclosure, 

Working Paper, 2010 available at http:// 

works.bepress.com/kbrevoort/2. 

184Section 1022 requires consideration of benefits 

and costs to consumers and covered persons. The 

ability to pay rule also has important potential 

benefits and costs for other individuals and firms, 

and for society at large. The Bureau discusses these 

benefits and costs here because they are particularly 

important to the Bureau’s development, and public 

understanding of, the final rule. The rule 

implements statutory provisions, enacted in the 

wake of the financial crisis, that seem clearly 

intended to help prevent the potential negative 

social externalities of poor underwriting while 

preserving the potential positive social externalities 

of mortgage lending. The Bureau reserves discretion 

in the case of each rule whether to discuss benefits 

and costs other than to consumers and covered 

persons. 

185There are several papers documenting various 

magnitudes of the negative effect on the nearby 

properties. Data in Massachusetts from 1987 to 2009 

indicate that aside from a 27% reduction in the 

value of a house (possibly due to losses associated 

with abandonment), foreclosures lead to a 1% 

reduction in the value of every other house within 

5 tenths of a mile. See John Y. Campbell, Stefano 

Giglio, and Parag Pathak, Forced Sales and House 

Prices, American Economic Review 101(5) (2011), 

abstract available at: http://www.aeaweb.org/ 

articles.php?doi=10.1257/aer.101.5.2108. Data from 

Fannie Mae for the Chicago MSA, show that a 

foreclosure within 0.9 kilometers can decrease the 

price of a house by as much as 8.7%, however the 

magnitude decreases to under 2% within five years 

of the foreclosure. See Zhenguo Lin, Eric 

Rosenblatt, and Vincent W. Yao. ‘‘Spillover Effects 

of Foreclosures on Neighborhood Property Values,’’ 

The Journal of Real Estate Finance and Economics, 

2009, 38(4), 387–407. Similarly, data from a 

Maryland dataset for 2006–2009 show that a 

foreclosure results in a 28% increase in the default 

risk to its nearest neighbors. See Charles Towe and 

Chad Lawley, 2011, ‘‘The Contagion Effect of 

Neighboring Foreclosures,’’ SSRN Working Paper 

1834805. 

186Frame, W. Scott (2010): Estimating the effect 

of mortgage foreclosures on nearby property values: 

A critical review of the literature, Economic 

Review, Federal Reserve Bank of Atlanta, ISSN 

0732–1813, Vol. 95, http://hdl.handle.net/10419/ 

57661. 

187See for example, Ingrid Gould Ellen, Johanna 

Lacoe, and Claudia Sharygin, Do Foreclosures 

Cause Crime?, Working Paper 2011. 

188A summary of recent and ongoing research is 

presented in Julia B. Isaacs, The Ongoing Impact of 

Foreclosures on Children, First Focus/The 

Brookings Institution, April 2012. See also Samuel 

R. Dastrup and Julian R. Betts, Elementary 

Education Outcomes and Stress at Home: Evidence 

from Mortgage Default in San Diego. 

189See for example, the literature summarized in 

Dwight Jaffee and John M. Quigley, The future of 

the government sponsored enterprises: the role for 

government in the U.S. mortgage market, NBER 

Working Paper Series, Working Paper 17685, 

available at http://www.nber.org/papers/w17685. 

190The Bureau recognizes that there may always 

be some frivolous lawsuits for which lenders will 

pay legal expenses. In addition, uncertainty 

inherent in the legal system also implies a base 

level of litigation. 

191 In a cost benefit accounting, the ex-post 

realization of the contingent payment from the 

creditor to the borrower is a transfer, a cost on one 

side and a benefit on the other. For risk-averse 

consumers, the ex-ante insurance value of the 

contingent payment is also a benefit. In other 

words, consumers are better off knowing that if they 

are harmed, they will recover some damages. 

opportunities for which credit reports or 

credit scores weigh in the decision.183

As noted above, neither party to the 

transaction is likely to internalize costs 

to third parties. Even among very 

informed consumers and creditors, most 

will not internalize the social costs that 

delinquency or foreclosure can have.184

Research has consistently shown that a 

foreclosure will have a negative effect 

on the other homeowners in the vicinity 

either through the displacement of 

demand that otherwise would have 

increased the neighborhood prices, 

reduced valuations of future sales if the 

buyers and/or the appraisers are using 

the sold foreclosed property as a 

comparable, vandalism, and 

disinvestment.185 While the estimated 

magnitudes and the breadth of the 

impact differ, researchers seem to agree 

that there is a negative impact on houses 

in the vicinity of the foreclosure, and 

this impact is the highest for the houses 

that are the closest to the foreclosed 

house and for the houses that get sold 

within a short period of time of the 

foreclosed sale.186

Research is also beginning to examine 

other spillover effects from foreclosures 

including increases in neighborhood 

crime 187 and social effects on family 

members such as hampered school 

performance.188 Social policy has long 

favored homeownership for the societal 

benefits that may ensue; the negative 

spillovers from foreclosures can be seen 

as the inverse of this dynamic.189

The Dodd-Frank Act and the final rule 

address these potential market failures 

through minimum underwriting 

requirements at origination and new 

liability for originators and assignees in 

cases where the standards are found not 

to be met. For qualified mortgages that 

have earned the conclusive 

presumption, meeting the qualified 

mortgage product criteria and 

underwriting requirements and pricing 

of the loan at a prime rate are judged in 

the rule to be enough to ensure that the 

lender made a reasonable and good faith 

determination that the borrower will be 

able to repay the loan. For loans where 

the final rule creates a presumption of 

compliance but leaves room for the 

borrower to rebut the presumption of 

compliance, or loans for which there is 

no presumption (i.e., loans that are not 

qualified mortgages) the lender may 

exert greater care in underwriting the 

loan than would be true in the absence 

of any liability for extending a loan 

which the consumer cannot afford to 

repay. Lenders therefore face an initial 

market tradeoff when choosing the 

optimal level of costs to bear in 

documenting and underwriting the loan 

and assessing the ability to repay 

(subject to the minimum standards all 

loans must meet): some increased effort 

(and therefore increased cost) at the 

time of origination may lower costs 

resulting from possible liability should 

the borrower become delinquent or 

default. Since assignees now share this 

liability, they have an additional 

incentive to monitor the behavior of the 

original creditor. The ex-post liability to 

the consumer mitigates the incentives 

for the creditor to shirk on the ex-ante 

investments in the underwriting. 

Even creditors making the optimal 

choice of effort when documenting, 

verifying and underwriting the loan may 

still face some legal challenges from 

consumers ex-post. This will occur 

when a consumer proves unable to 

repay a loan and wrongly believes (or 

chooses to assert) that the creditor failed 

to properly assess the consumer’s ability 

to repay before making the loan. This 

will likely result in some litigation 

expense, although the Bureau believes 

that over time, that expense will likely 

diminish as experience with litigation 

resolves more precise guidelines 

regarding what level of compliance is 

considered complete. After some 

experience, litigation expense will most 

likely result where compliance is 

insufficient or from limited novel sets of 

facts and circumstances where some 

ambiguity remains.190 Regardless of 

which party incurs the costs, the 

economic costs of these actions are the 

resources used to litigate these cases, 

thereby helping to ensure compliance 

and limiting the incidence of loosely 

documented originations. The 

reimbursement of interest and fees, 

along with the statutory damages, paid 

to the borrower, constitute, in economic 

terms, a transfer—a cost to the originator 

or assignee and a benefit to the 

compensated borrower.191

2. Potential Benefits of the Ability-ToRepay Provisions for Consumers and 

Covered Persons 

The final rule will help to ensure that 

loans are not made without regard for 

the borrower’s ability to repay and 

thereby protect consumers and as noted 

above, others affected by defaults and 

foreclosures. (These others are 

themselves consumers and the adverse 

spillover effect from defaults and 

foreclosures very much impacts their 

economic well being.) Historically, the 

conditions under which credit is 

extended have been cyclical in nature. 

Periods of tight credit, such as the 


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192From 2000 to 2009, reduced documentation 

loans grew from 2 percent of outstandings to 9 

percent. See FCIC Report pgs 110–111 for 

discussion of these loans. Other research 

documents the poor performance of these loans and 

that the increased risk was not properly priced. See, 

for example, Michael LaCour-Little and Jing Yang, 

Taking the Lie Out of Liar Loans: The Effect of 

Reduced Documentation on the Performance and 

Pricing of Alt-A and Subprime Mortgages, 2012, 

Working Paper and Wei Jiang, Ashlyn Aiko Nelson, 

and Edward Vytlacil, Liar’s Loan? Effects of 

Origination Channel and Information Falsification 

on Mortgage Delinquency, 2011, Working Paper. 

Some authors have tried to understand the 

differences between cases where lenders offered 

these loans as a benefit to certain customers and 

cases where customers simply chose a higherpriced limited doc alternative. See Irina Paley and 

Konstantinos Tzioumis, Rethinking Stated-income 

Loans: Separating the Wheat from The Chaff, 

Working Paper, 2011. For evidence that the risk on 

these loans was not fully priced, see Cost of Freddie 

Mac’s Affordable Housing Mission, presentation to 

Board of Directors, 2009 at http://fcicstatic.law.stanford.edu/cdn_media/fcic-docs/2009- 

06-04FreddieMacCostofAffordableHousingMission.pdf p.12 

analyzing the ‘‘unexpectedly poor performance of 

* * * Alt-A purchases’’ 

193For example, see Robert B. Avery, Neil Bhutta, 

Kenneth P. Brevoort, and Glenn B. Canner, The 

Mortgage Market in 2011: Highlights from the Data 

Reported under the Home Mortgage Disclosure Act, 

FEDS Working Paper Series, 2012. See also FCIC 

Report, pgs. 110–111; LaCour-Little and Yang, 2012; 

Jiang, Nelson, and Vytlacil, 2011; Paley and 

Tzioumis, 2011. 

194See FCIC Report, pgs. 110–111; LaCour-Little 

and Yang, 2012; Jiang, Nelson, and Vytlacil, 2011; 

Paley and Tzioumis, 2011. 

195See Financial Stability Oversight Council, 

Macroeconomic Effects of Risk Retention 

Requirements, January 2011, at 12. (‘‘[T]here is 

some evidence that the increased supply in 

subprime mortgage credit was in part responsible 

for greater home price appreciation * * * [and] 

increases in home prices may have reinforced 

expectations for future appreciation, which may 

have fueled more lending. Increases in loan volume, 

in turn, may have precipitated further increases in 

home prices.’’); Mian, Atif and Amir Sufi, ‘‘The 

Consequences of Mortgage Credit Expansion: 

Evidence from the U.S. Mortgage Default Crisis,’’ 

Quarterly Journal of Economics, vol. 124, no. 4 

(2009). 

196See Amromin, Gene, Jennifer Huang, Clemens 

Sialm, and Edward Zhong, ‘‘Complex Mortgages,’’ 

Continued 

conditions that exist in the current 

mortgage market, are marked by reduced 

loan activity, very stringent lending 

standards, and extreme care in 

underwriting. In such periods, the 

benefits of a regime designed to require 

prudent underwriting, may be less 

apparent, and, in the near term, 

adopting such a regime, as the final rule 

does, will likely have little direct and 

immediate effect either on consumers or 

covered persons. As explained further 

in the discussion of costs to consumers 

and covered persons, lenders generally 

are already doing what the rule requires 

and a large majority of their loans will 

qualify for the conclusive presumption 

of compliance. 

However, as credit expands, as it 

almost inevitably will, the final rule will 

help to ensure that loans are made 

properly and with regard for the 

borrower’s ability to repay. To assess the 

benefits of the final rule, therefore, it is 

useful to examine the provisions of the 

final rule in the context of the recent 

housing bubble and its collapse in 2007. 

There is growing evidence that many 

of the market failures in the previous 

discussion were in play in the years 

leading up to the housing collapse. In 

some cases, lenders and borrowers 

entered into loan contracts on the 

misplaced belief that the home’s value 

would provide sufficient protection. 

These cases included subprime 

borrowers who were offered loans 

because the lender believed that the 

house value either at the time of 

origination or in the near future could 

cover any default. Some of these 

borrowers were also counting on 

increased housing values and a future 

opportunity to refinance; others likely 

understood less about the transaction 

and were at an informational 

disadvantage relative to the lender. 

These cases also included Alt-A loans 

taken by borrowers hoping to speculate 

on housing values. 

In both of these situations, these loans 

frequently involved less traditional 

products, loans structured with minimal 

monthly payments in order to allow the 

borrower to qualify and to carry the loan 

for a period of time with minimal 

expense. Many of these loans were sold 

into the secondary market, limiting the 

lenders’ credit risk, but many lenders 

also retained these loans on their own 

portfolios either with the intent of 

earning the full anticipated profits from 

such loans over time or with the intent 

to hold the loans for a period of time 

before selling them. And throughout the 

housing boom, most lenders and 

borrowers entering into such agreements 

failed to consider the costs that default 

would inflict on other properties (and 

the consumers who inhabited them) and 

on the financial system and economy 

writ large. 

The benefits from the ability-to-repay 

requirements therefore come from 

further limiting and deterring 

unaffordable lending, above and beyond 

the current ability-to-pay requirements 

for higher-priced mortgage loans, and 

thereby reducing the ensuing private 

and social costs of excess delinquency 

and default. For example, the basic 

requirement that all loans be 

underwritten based on documented 

income and debt would have eliminated 

many of the loans made later in the 

bubble that led to crisis. Described as 

‘‘stated-income’’ loans or ‘‘liar-loans,’’ 

these mortgages became very prevalent 

in the later years of the expansion and 

had very poor, and worse than expected, 

performance when the markets 

collapsed.192 There is also growing 

evidence that incomes on many 

mortgage applications were overstated 

in the years before the crash.193

Importantly, while limited and reduced 

documentation loans were a large 

segment of the subprime market, many 

of these loans were also made to prime, 

higher credit score borrowers and on 

properties with lower loan-to-value 

ratios.194 This suggests a substantial 

benefit to the documentation and 

verification requirements across all 

segments of the market, particularly the 

substantial majority of covered 

transactions that current ability-to-pay 

requirements do not cover now and are 

not expected to cover in the future. 

As prices rose, aspiring homeowners 

borrowed money by misstating their 

income; many loan originators were at 

least indifferent to or even complicit or 

proactive in these endeavors. The 

systemic effects were evident: the 

extension of credit against inflated 

incomes expanded the supply of credit, 

which in turn continued the rapid rise 

of house prices in the later years of the 

housing boom and exacerbated the 

eventual crash.195

The statute and the final rule also 

require that creditors must underwrite 

based on an amortizing payment using 

the fully indexed rate (or the maximum 

rate in five years for qualified 

mortgages) and including, with limited 

exceptions, any balloon payments in the 

first five years. This effectively bans the 

practice of underwriting loans based 

upon low upfront payments, either the 

lower interest-only payments on 

interest-only loans or negatively 

amortizing option ARMs or the teaser 

rates on hybrid ARMs. 

In their later incarnations, interestonly and negatively amortizing loans 

(along with loans with terms greater 

than 30 years) were often sold on the 

basis of the consumer’s ability to afford 

the initial payments and without regard 

to the consumer’s ability to afford 

subsequent payments once the rate was 

recast. At the peak of the market, 

between 2004 and 2006, the percentage 

of loans that were interest-only, option 

ARMs or 40-year mortgages rose from 

just 7 percent of originations to 29 

percent. The lower payment possibility 

for these loans allows borrowers to 

qualify for loans that they otherwise 

may not have been able to afford; but 

this comes with the same risks just 

described. The performance of many of 

these loans was also very poor, and 

worse than expected, with the onset of 

the downturn.196 The final rule does not 


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6562 Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 

Federal Reserve Bank of Chicago Working Paper 

2010–17 (2010), available at http:// 

www.chicagofed.org/digital_assets/publications/ 

working_papers/2010/wp2010_17.pdf. 

197See for example, Christopher Mayer, Karen 

Pence, and Shane M. Sherlund, ‘‘The Rise in 

Mortgage Defaults,’’ Journal of Economic 

Perspectives 23, no. 1 (Winter 2009): Table 2, 

Attributes for Mortgages in Subprime and Alt-A 

Pools, p. 31. (showing that from 2003 to mid-2007, 

about 70 percent of subprime loans in securitized 

pools were hybrid adjustable rate mortgage loans.) 

198Brent W. Ambrose & Michael LaCour-Little, 

Prepayment Risk in Adjustable Rate Mortgages 

Subject to Initial Year Discounts: Some New 

Evidence, 29 Real Est. Econs. 305 (2001) (showing 

that the expiration of teaser rates causes more ARM 

prepayments, using data from the 1990s). The same 

result, using data from the 2000s and focusing on 

subprime mortgages, is reported in Shane Sherland, 

The Past, Present and Future of Subprime 

Mortgages, (Div. of Research & Statistics and Div. 

of Monetary Affairs, Fed. Reserve Bd., Washington, 

DC 2008); The result that larger payment increases 

generally cause more ARM prepayments, using data 

from the 1980s, appears in James Vanderhoff, 

Adjustable and Fixed Rate Mortgage Termination, 

Option Values and Local Market Conditions, 24 

Real Est. Econs. 379 (1996). 

199See Christopher Mayer, Karen Pence, & Shane 

Sherlund, The Rise in Mortgage Defaults, 23 J. Econ. 

Persps. 27, 37 (2009). 

200Mayer, Pence, & Sherlund, supra note 125, at 

37 provide data from the 2000s that does not find 

a causal relationship between payment shock at the 

initial interest rate adjustment and default. In 

contrast, see Anthony Pennington-Cross & Giang 

Ho, The Termination of Subprime Hybrid and 

Fixed-Rate Mortgages, 38 Real Est. Econs. 399, 420 

(2010), for evidence that among consumers with 

certain hybrid ARMs originated in the 2000s, a 

substantial number experienced an increase in 

monthly payment of at least 5% at the initial 

interest rate adjustment, and that the default rate for 

these loans was three times higher than it would 

have been if the payment had not changed. 

201See for example, Gary Gorton, The Panic of 

2007, paper presented at the Federal Reserve Bank 

of Kansas City’s Jackson Hole Conference, August 

2008, p. 12–18. 

202 .See for example, Mian and Sufi, 2009. 

203 In general, smaller dollar loans are more likely 

to be impacted by the points and fees provisions. 

ban such products outright, but rather 

requires that lenders that make such 

loans have a ‘‘reasonable and good 

faith’’ belief in the borrower’s ability to 

repay and that in formulating such a 

belief the lender must calculate the 

monthly payment based on the fully 

indexed rate and fully amortizing 

payments, and does not allow these 

loans to enjoy the presumption of 

compliance associated with qualified 

mortgage status. The new underwriting 

requirements, coupled with the liability 

for violating these rules, should deter 

improper loans and ensure proper 

underwriting and diligence when 

making such loans; again limiting cases 

of personal or social harm. 

Underwriting hybrid ARMs to the 

teaser rate was also a very common 

practice, in particular among subprime 

loans of the early 2000’s. So called ‘‘2/ 

28’’ and ‘‘3/27’’ loans were often 

underwritten based on the low initial 

payment,197 and exposed the borrower 

to potential payment shocks, and a need 

to refinance, two or three years into the 

mortgage.198 For example, in 2005, the 

teaser rate on subprime ARMs with an 

initial fixed-rate period of two or three 

years was 3.5 percentage points below 

the fully indexed rate.199 As a result, 

mortgages originated in that year faced 

a potentially large change in the interest 

rate and payment, or ‘‘payment shock,’’ 

at the first adjustment even absent any 

change in the index. 

The evidence is mixed on whether 

payment shock at the initial interest rate 

adjustment causes default.200 And 

indeed, for some borrowers, these loans 

can be efficient contracts that allow for 

the extension of credit (see discussion 

below).201 However, the widespread use 

of the product put many borrowers in 

precarious financial positions and may 

also have fueled the systemic rise in 

home prices.202 The elimination of these 

products should limit both the 

individual and the systemic harms 

which ultimately translate, in the largest 

part, into harms to individual 

consumers. 

The final rule reduces the likelihood 

that these products will reemerge on a 

broad scale and thus should limit the 

potential for individual and the 

systemic harms. The final rule bans nodoc and the old low-doc loans since the 

level of documentation is lower than 

that required by the rule). * * * The 

rule reduces the incentive to offer these 

other alternative mortgage products by 

requiring that underwriting be done 

assuming a fully amortizing payment at 

the fully indexed rate. The final rule 

also does not provide any legal 

protection for the lender that makes 

these loans (or the investor that acquires 

or guarantees them) as the loans are 

categorically disqualified from being 

qualified mortgage. These nonamortizing products will likely persist 

only in narrow niches for more 

sophisticated borrowers who want to 

match their mortgage payment to 

changes in their expected income 

stream and who have the resources to 

qualify for the products under the 

stringent underwriting assumptions the 

statute and regulation require. But these 

products will not likely be marketed as 

broadly as they were during the bubble. 

In addition to the products just 

described, loans with points and fees 

(except for bona fide discount points) 

that exceed three percent of the total 

amount cannot be qualified mortgages, 

except as applicable for smaller loans as 

defined. Creditors may take more care in 

originating a loan when more of the 

return derives from performance over 

time (interest payments) rather from 

upfront payments (points and fees). As 

such, this provision may offer lenders 

more incentive to underwrite these 

loans carefully. As loans with higher 

points and fees are usually assumed to 

be offered to borrowers in weaker 

financial circumstances, this provision 

offers protection to that class of 

borrowers.203

As discussed above, the various 

liability provisions provide the 

incentives for lenders to take proper 

care judging the borrower’s ability to 

repay. This incentive is strongest for 

loans that are not qualified mortgages. 

Within the qualified mortgage space, 

higher priced mortgage loans (HPMLs) 

are still subject to ability-to-repay 

liability but afforded a rebuttable 

presumption of compliance. This 

liability already exists under rules that 

took effect in October 2009 for HPMLs, 

so that relative to existing rules, there 

are few benefits (or costs) associated 

with the liability provisions for such 

loans. However, there are some material 

differences in the underwriting 

requirements and smaller differences in 

the scope of the presumption where the 

liability now applies where it did not in 

the past. The new assignee liability may 

also strengthen the incentives relative to 

the existing rules. 

Comparing the rebuttable 

presumption for higher priced qualified 

mortgages to the conclusive 

presumption (safe harbor) provision for 

qualified mortgages below the higherpriced threshold highlights the benefit 

of leaving the possibility of rebuttal in 

place. Borrowers paying higher rates on 

mortgage loans that meet the qualified 

mortgage product features are most 

likely to have lower credit scores, lower 

incomes and/or other risk factors; as 

such, it is among these subprime 

borrowers that a greater possibility 

exists for lenders to place the borrower 

into a loan that he or she may not have 

the ability to repay. The ability of the 

borrower to rebut the presumption of 

compliance leaves lenders with the 

additional incentive to ‘‘double check’’ 

the loan to examine further the 

borrower’s financial condition and 

residual income, and to ensure that 

these higher risk borrowers have the 

means to live in the home they just 

purchased or refinanced. 

Where a consumer is unable to afford 

his or her mortgage—and proves that the 

lender lacked a reasonable and good 

faith belief in the consumer’s repayment 

ability at the time the loan was made— 

the damages the borrower recovers are 

a benefit to that party. The same 

damages should also be considered a 


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204 In these cases, the requirements of the final 

rule are the benefits that were described earlier. 

cost to the lender and as such, estimates 

regarding the frequency of such actions 

and the dollar amounts involved are in 

the next section discussing costs. 

Another impact of the differentiated 

structure of the final rule, where certain 

loans enjoy a conclusive presumption, 

others are given a rebuttable 

presumption and still others are subject 

to ability to repay scrutiny without the 

benefit of a presumption, is that some 

borrowers may gain ‘‘better’’ loans as 

lenders choose to make loans that 

qualify for the highest level of legal 

protection. Lenders in less competitive 

environments who have some flexibility 

over product offerings and/or pricing 

power may find it more profitable to 

offer a borrower a qualified mortgage 

rather than a non-qualified mortgage if, 

for such lenders, the expected value of 

the heightened legal protection is 

enough of an expected cost savings to 

offset any revenue reduction from 

making the qualified mortgage. For 

example, a creditor may restructure the 

price of a transaction with points and 

fees otherwise just above the points and 

fees limit for a qualified mortgage to 

have fewer upfront costs, and a higher 

interest rate, so that the loan is then 

under the limit and a qualified 

mortgage. Similarly, situations could 

exist where lowering the price on a loan 

would make the loan eligible for the safe 

harbor rather than the rebuttable 

presumption. The prevalence of these 

situations, or others similar situations, 

is hard to predict and depends on the 

future prices for mortgages in each of 

these segments, the competitive nature 

of the segments, and the individual 

lender’s and borrower’s situation. 

The benefits of the rule, as discussed 

above, will be widely shared among 

individual borrowers, creditors, 

investors, and the public (consumers) 

generally. As discussed above, the loss 

that occurs when a consumer is unable 

to repay a loan is felt by the consumer, 

the holder(s) of that loan, and other 

parties outside the transaction including 

other consumers and would-beconsumers. Ensuring that lenders make 

a reasonable and good faith 

determination of the borrower’s ability 

to repay should prevent a widespread 

deterioration of underwriting standards, 

the extension of excess credit and the 

broader negative effects that can have on 

these parties. To the extent lenders are 

deterred from making unaffordable 

loans, or encouraged to make more 

affordable loans, all of these parties will 

benefit. 

3. Potential Costs of the Ability-ToRepay Provisions to Consumers and 

Covered Persons 

In this part the Bureau considers costs 

to consumers and covered persons of 

the ability to repay provisions of the 

statute and final rule, including any 

potential cost in the form of reduced 

access to credit for consumers. The 

primary ongoing costs of the 

requirements of the final rule rest in the 

underwriting costs, including costs at 

origination to verify information on 

which the lender relies in the 

underwriting decision and the increased 

liability on lenders and assignees. As 

previously noted, in the current 

environment, lenders are already largely 

complying with these requirements and 

thus the rule should impose minimal, if 

any, ex ante costs. But in other credit 

environments, when creditors may wish 

to lower their underwriting criteria and 

require less documentation and perform 

less verification, the rule would require 

them to make a good faith and 

reasonable determination of ability to 

repay and to require them to incur exante costs to document, verify and 

consider income and debt (and credit 

history). This should increase the 

quality of underwriting of mortgages at 

origination and thereby limit the 

prevalence of future delinquency and 

default, and the level of ex-post costs. 

(Of course, exogenous or unanticipated 

events and borrower behavior will still 

result in some delinquent and 

defaulting loans and some possible legal 

actions.) In this scheme, the possibility 

of legal recourse by the borrower serves 

as an incentive for better lender 

assessment of repayment ability as well 

as offering borrowers redress for 

wrongdoing. Lenders will determine the 

optimal combination of upfront 

underwriting cost and ex-post liability 

costs; to the extent these costs increase 

and competitive conditions allow 

lenders to pass this cost onto borrowers, 

some borrowers will pay more for their 

loans. At the margin, certain loans that 

were made in the past, namely those 

where the borrower has limited ability 

to repay, will not be made. 

a. Costs of the Documentation and 

Underwriting Requirements 

Two distinct requirements of the final 

rule—the requirement to verify income 

or assets, debt, and credit history, and 

the requirement to underwrite a 

mortgage based on an assessment of 

debt load using the fully indexed rate 

and fully amortizing payment—create 

costs for certain creditors and 

consumers. The final rule follows the 

statute in requiring that all creditors 

verify borrowers’ income, debt and 

credit history. Reduced documentation 

loans were originally offered to high 

credit quality borrowers with 

substantial incomes. However, in the 

2000’s, the prevalence of these loans 

increased substantially and the 

borrowers to whom they were offered 

changed. Anecdotally, some of these 

loans could have been made with full 

documentation; however, for that subset 

of loans, it was precisely the reduced 

processing times and paperwork costs of 

originating these loans that made them 

popular among mortgage brokers and 

originators during the boom. 

From this perspective, for certain 

consumers and creditors, requiring full 

documentation and verification may 

result in the loan being made with a less 

efficient contractual form, or possibly in 

the loan not being made. In these latter 

cases, consumers would lose the 

benefits they get from the mortgage (the 

benefits of owning a home, for example, 

or the benefits of obtaining better terms 

on a loan through a refinancing) and 

creditors would lose any profits on the 

loan. However, for most other 

originators, and consumers, reduced 

documentation loans were a way to 

grant credit to unqualified borrowers 

who did not have the means to afford 

the mortgage. As discussed in the 

benefits section, the elimination of these 

loans in these circumstances is a 

principal benefit of the rule.204

For borrowers for whom the most 

efficient outcome (from a societal 

perspective) is, in fact, a reduced 

documentation mortgage, the 

requirements in the final rule have two 

possible costs. The time and material to 

verify the required underwriting 

elements with documents are true 

resource costs; depending on 

competitive conditions, the lender or 

the borrower may bear the actual costs. 

Precise estimates of these costs from 

time and motion studies or cost function 

analyses are not available, but the 

required pay stubs or tax records should 

not be a large burden. The final rule 

allows income to be verified utilizing 

copies of tax returns which the 

consumer can provide the creditor and 

permits debts to be verified utilizing a 

credit report. For those with more 

idiosyncratic income sources that would 

somehow not be reflected on a tax 

return, the costs may be slightly higher. 

However, it is also possible that certain 

loans that would be made absent the 

documentation requirements would not 

be made under the rule. This could 

happen, for example, in cases where the 


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6564 Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 

205To the extent that these requirements are 

inefficiently high, the cost is due to current practice 

and not to the final rule discussed here. 

206The Bureau’s regulations are accompanied by 

some form of liability for non-compliance, and the 

Bureau generally does not address litigation costs 

and liability as part of its analysis under Section 

cost of documenting the required factors 

is sufficiently high or where the 

borrower pays an exorbitant ‘‘privacy’’ 

cost in disclosing the documents. The 

final rule only requires that income or 

assets be verified to the extent they are 

relied upon by the creditor in assessing 

the consumer’s ability to repay; thus the 

consumer is not required to disclose or 

document income or assets except if the 

consumer prefers to have her ability to 

repay assessed without regard to the 

undisclosed information. In the event 

that there are cases in which, despite 

these rules, a consumer who could 

qualify for a mortgage is unwilling to 

incur the privacy cost in documenting 

income or assets, the transaction will 

not occur: and the benefit to consumers 

and lenders from these ‘lost’ 

transactions is the relevant cost. 

Relative to industry practice today, 

these requirements are likely to impose 

only a very limited burden for creditors. 

With the exception of the two situations 

discussed below, most loans today are 

made under very stringent, and perhaps 

inefficiently high, documentation 

requirements.205 The Bureau 

understands that full documentation is 

required for all purchase loans and 

many refinance loans being supported 

by government programs such as FHA. 

In addition, both Fannie Mae and 

Freddie Mac currently require full 

documentation. The Bureau believe that 

only a small subset of loans that 

creditors intend to hold on portfolio are 

underwritten today without the 

documentation that meets or is very 

close to the documentation required by 

the final rule. For this limited set of 

loans, the rule imposes the costs already 

described: The direct compliance costs 

to collect the required documentation in 

order to verify the information provided 

by the consumer and any costs from 

forgone transactions. 

One exception to the stringent 

documentation requirements now 

prevailing in the market (and exceeding 

the requirements of the rule) are certain 

streamlined refinance programs aimed 

at aiding the housing market recovery 

and certain targeted housing support 

programs offered to low and moderate 

income borrowers. The Bureau 

recognizes that the requirements of the 

final rule could greatly increase costs for 

these programs and hinder their 

success. It also recognizes that the 

possibility of consumer harm is likely 

limited in these contexts. As a result, 

elsewhere in today’s Federal Register 

the Bureau is proposing certain 

exemptions from these requirements 

and seeking comment on the scope of 

such exemptions. 

There may also be some situations 

where lenders may have systems to 

document and verify the required 

information, but who do so in a manner 

that varies slightly from the provisions 

of the rule. These lenders may have to 

bear some costs to modify their systems 

or practices, but as noted above the 

Bureau understands there to be few 

such cases. Lenders who do collect 

information as required by the final 

rule, but who may use it differently may 

also incur some costs. For example, 

certain lenders may have systems or 

procedures in which the calculation of 

the DTI ratio does not conform to the 

requirements in appendix Q. Such a 

creditor could continue its current 

practices, which should they satisfy the 

ability-to-repay requirements, albeit 

without the benefit of a presumption of 

compliance. Lenders that prefer to make 

qualified mortgages with a presumption 

of compliance would have to bear the 

costs to modify systems or make other 

changes in order to calculate the 

required figures according to the rule. 

Modifications to information technology 

systems may also be necessary to enable 

lenders to label and track qualified 

mortgages. 

More broadly, the Bureau also 

recognizes that the establishment of the 

ability-to-pay requirements and the 

related distinction for qualified 

mortgages under the Act, will require 

modifications to existing compliance 

systems and to creditors’ other 

management policies and procedures. 

For example, review and monitoring 

procedures may have to be altered to 

ensure compliance with the new 

requirements. Again, given the current 

state of the mortgage market, it is likely 

that many of these procedures are 

largely already in place. 

If measured relative to the benchmark 

of the earlier periods, either the period 

from 1997 to 2003 or the later years of 

the bubble, the requirements of the final 

rule could be seen to impose more 

substantial costs. Over the former 

period, there were more limited 

documentation loans than today, 

however it appears that many of these 

arose in the situations described where 

such lending is efficient. By the latter 

period, there were even more such loans 

and the balance appears to have shifted 

to one where many if not most of the 

limited documentation loans had 

misstated income and other 

deficiencies. 

During those periods there were likely 

some lenders, as evidenced by the 

existence of no-income, no-asset (NINA) 

loans, that used underwriting systems 

that did not look at or verify income, 

debts, or assets, but rather relied 

primarily on credit score and LTV. 

Under the final rule, these lenders 

would be impacted in two ways: They 

would have to collect and verify 

income, assets and debts; and more 

importantly, they would have to change 

much of their underlying business 

model to consider the required factors. 

As noted, the Bureau does not believe 

such lending is currently being 

practiced, and the benefits of preventing 

such lending may be substantial (as 

discussed above). 

The requirements that all loans be 

underwritten assuming a fully 

amortizing payment and the fully 

indexed rate (or to obtain qualified 

mortgage status the maximum rate 

within 5 years of origination) have costs 

similar in nature to the documentation 

requirements. There are some 

individuals or households with 

projected increases in income that will 

match the projected increased housing 

costs; the final rule allows the creditor 

to factor expected future income into 

the denominator of the debt-to-income 

calculation but does require that the 

numerator be calculated on the fullyindexed payment. There also may be 

individuals with constant income but a 

housing need that is shorter than the 

introductory period. In at least these 

latter cases, there may be some loans 

where it is efficient to qualify the 

borrower only on the current payment 

or some other amount. It is difficult to 

quantify the set of borrowers affected in 

this way, however to the extent that 

those loans are not made, both the 

lender and borrower will incur the costs 

of lost profits and lost consumer 

benefits, respectively. 

The provisions of the rule requiring 

extended retention times for 

documentation sufficient to show 

compliance with the rule (from two 

years to three years) will also impose 

some very limited costs on creditors. 

Electronic storage, communication and 

backup are very inexpensive and are 

likely to decrease in costs further. 

b. Liability Costs 

Creditor may trade off the ex-ante 

underwriting cost just discussed with 

ex-post liability costs that stem from 

TILA’s liability provisions and their 

interaction with the rule’s qualified 

mortgage and presumption of 

compliance provisions.206 Qualified 


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Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 6565 

1022 because the considerations are self-evident 

and the analysis is simplified by assuming full 

compliance. In general, to the extent regulated 

entities under-comply with a consumer protection 

regulation, they will experience less compliance 

costs, consumers will experience less benefits, and 

the entities will be at a higher risk of litigation costs 

and liability, including from private suits to the 

extent the relevant statute, such as TILA, provides 

for private liability. In addition, even if there is full 

compliance, there will always be some residual risk 

of non-meritorious litigation. The Bureau, however, 

has chosen to discuss litigation costs and liability 

in this analysis because these considerations are 

particularly important in the context of this final 

rule. The meaning and effect of the presumption of 

compliance that attaches to qualified mortgages is 

a key issue in this rulemaking and has been a major 

focus for commenters and interested parties. As 

such, the Bureau is addressing these considerations 

in this analysis. In other rulemakings, the Bureau 

notes that consideration of litigation costs is not 

always necessary and remains at its discretion. 

207As described in the comment letter, ‘‘the data 

conform generally to the type and kind of FHA data 

featured in a recent Discussion Paper published by 

the Philadelphia Federal Reserve in December 2011, 

FHA Lending: Recent Trends and Their Implication 

for the Future.’’ The letter contains charts and data 

from that paper. 

208 In sizing the mortgage market and various 

components, the Bureau relied on aggregate market 

data from the Mortgage Market Annual, published 

by Inside Mortgage Finance and on data provided 

by the Market Data section of the FHA Web site 

which can be found at http://www.fhfa.gov/ 

Default.aspx?Page=70. 

209The proprietary industry data available for 

sale only contains loan level information for 

portfolio loans that are serviced by the largest 

servicers in the country. 

210Estimates for the GSE loans and the FHA loans 

are derived from the datasets provided to the CFPB 

and described above. For loans in private label 

securities, estimates are made based upon reported 

average characteristics of loans in subprime and 

Alt-A securitizations. The aggregate value of loans 

originated and held on balance sheet are estimated 

using data from Inside Mortgage Finance and the 

distribution of DTI is assumed to mirror the 

distribution at the GSEs. Statistical projections 

described below support such an assumption. 

mortgages with interest rates below the 

threshold for higher-priced covered 

transactions enjoy a conclusive 

presumption of compliance (although 

disputes may arise as to whether a 

particular loan meets the qualified 

mortgage test); qualified mortgages 

above the specified interest rate 

threshold enjoy a rebuttable 

presumption of compliance with the 

ability-to-repay requirements; and, loans 

that are not qualified mortgages are 

subject to general ability-to-repay 

provisions, under which the borrower 

will bear the burden of proof for 

establishing a violation. Within each 

segment, lenders and borrowers (or their 

attorneys in contingency arrangements) 

must pay for the costs of litigation, 

whether such litigation arises in the 

context of a private right of action 

brought by the borrower, or a defense 

raised by the borrower to a foreclosure. 

Originators and assignees also face 

various contingencies that may arise if 

such a claim is raised or succeeds. 

Within each segment, the additional 

costs increase proportionally with 

borrowers’ probability of delinquency or 

default. For example, the additional cost 

for qualified mortgages with a rebuttable 

presumption of compliance is smallest 

for lower debt-to-income (DTI) ratio 

loans (since these borrowers are less 

likely to be in a position to need or want 

to bring claims) and increases as the DTI 

ratio (keeping other factors constant) 

rises. The same is true as the interest 

rate of a loan increases, assuming that 

interest rate is accurately calibrated to 

risk. 

In estimating empirically the long-run 

additional liability costs from alleged or 

actual violations of the final rule, the 

Bureau examines the mortgage market 

as it existed from 1997 to 2003. The 

Bureau applies that market data and the 

pre-statute baseline to compare the 

liability for creditors under the final 

rule to the liability they would have 

incurred under the legal regime that 

existed under federal law just before 

passage of the Act. 

i. Size of the Market Segments 

The data used in estimating liability 

costs comes from several sources. Data 

regarding the loans guaranteed or 

purchased by Fannie Mae and Freddie 

Mac are from the Historical Loan 

Performance (HLP) dataset maintained 

by FHFA. The FHFA shared a one 

percent random sample of these loans 

with the Bureau, along with information 

about their characteristics and 

performance. In the notice to reopen the 

comment period for this rulemaking, the 

Bureau detailed these data and 

requested comment. Commenters were 

generally supportive of using these data, 

but suggested looking at other sources as 

well including proprietary industry 

datasets available for sale. These data 

cover a large but select portion of GSE 

loans. In contrast, the HLP data cover 

the entire universe of GSE loans and 

even the one percent sample is more 

representative. As such, the Bureau 

believes the HLP data are the better data 

for the GSE segment of the market and 

has consulted with the suggested 

sources in other parts of the analysis. 

Over the 1997–2003 period loans 

guaranteed or purchased by the GSEs 

comprised roughly 47 percent of the 

mortgage market. 

Similarly, information on loans 

insured by the FHA was provided by the 

FHA in response to the June 5, 2012 

notice. The data cover the years from 

1997 to 2011 and exclude Home Equity 

Conversion Mortgages (HECM) as well 

as mortgages with seller-funded 

downpayment.207 Combined with loan 

insured by the Veterans Administration 

or the Rural Housing Service, these 

loans comprised an estimated 9 percent 

of the market during this period. The 

Bureau did not get loan-level data from 

the VA or RHS.208

Data on mortgages in non-agency 

securitizations were taken from 

proprietary industry sources that the 

Bureau has licensed. While less 

complete than the HLP files, these data 

also include data on the characteristics 

and performance of individual loans. 

Over the 1997 to 2003 period, this 

segment comprised roughly 13 percent 

of originations. The remaining loans are 

those held on the balance sheets of 

banks, thrifts and credit unions. While 

aggregate data regarding the 

performance of these portfolios is 

available, comprehensive loan level data 

similar to the enterprise, FHA and 

private-label loans is not.209 As a result, 

the actual characteristics of individual 

loans are not available. 

Without the temporary provisions 

granting qualified mortgage status to 

certain loans that are eligible to be 

purchased by the GSEs or insured by 

FHA, VA and RHS, of the mortgages 

originated during the 1997 to 2003 

period, the Bureau estimates that 

roughly 70 percent of would have been 

qualified mortgages. Most of these loans 

would qualify for the safe harbor, and 

perhaps one to four percent points of 

these loans would have been qualified 

mortgages subject to the rebuttable 

presumption. Another 22 percent of 

loans would have been non-qualified 

mortgages subject to the ability-to-repay 

requirements. The remaining 8 percent 

of loans made over that period were 

appear to have been made without 

sufficient documentation to be 

permitted under TILA section 129C 

documentation or were subprime hybrid 

adjustable rate mortgages underwritten 

to teaser rates in a way that is no longer 

allowed under the final rule. An 

important caveat is that these estimates 

are not adjusted to account for: (1) 

Loans with total points and fees above 

the thresholds and therefore not eligible 

to be qualified mortgages; (2) the 

exception of rural balloon loans to 

qualified mortgages; or the exception for 

streamlined refinancings of nontraditional loans.210

Based on data from 2011, the Bureau 

estimates that without the temporary 

provisions granting qualified mortgage 

status to certain loans purchasable by 

the GSEs or insurable by FHA, VA and 

RHS, 76 percent of mortgages would 

have been qualified mortgages inside 


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211The estimates in this analysis are based upon 

data and statistical analyses performed by the 

Bureau. To estimate counts and properties of 

mortgages for entities that do not report under 

HMDA, the Bureau has matched HMDA data to Call 

Report data and MCR data and has statistically 

projected estimated loan counts for those 

depository institutions that do not report these data 

either under HMDA or on the NCUA call report. 

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

report HMDA in a similar fashion. These 

projections use Poisson regressions that estimate 

loan volumes as a function of an institution’s total 

assets, employment, mortgage holdings and 

geographic presence. Neither HMDA nor the Call 

Report data have loan level estimates of the DTI. To 

estimate these figures, the Bureau has matched the 

HMDA data to data on the HLP dataset provided by 

the FHFA. This allows estimation of coefficients in 

a probit model to predict DTI using loan amount, 

income and other variables. This model is then 

used to estimate DTI for loans in HMDA. 

212 In the HLP data, under four percent of loans 

originated from 1997 to 2003 that satisfy most of the 

requirements of the first definition of a qualified 

mortgage (i.e.,not no-doc or low-doc, not IO, not 

neg-am and with DTI ratio equal to or below 43%) 

were ever 60 days delinquent. Among all FHA 

insured loans over the same years, just under 6 

percent of loans with a DTI ratio equal to or below 

43 percent were ever 60 days delinquent. Some of 

these loans would have a conclusive presumption 

of compliance with the ability-to-pay requirements 

and others would have the rebuttable presumption. 

The four percent and one percent figures are likely 

to slightly overestimate the rates for loans in the 

safe harbor and may be underestimates for loans 

with the rebuttable presumption. 

213There may be some loans that are currently 

made with a rebuttable presumption that will no 

longer have that presumption but instead will be 

covered the general ability to repay standards. For 

example, higher priced covered transactions with 

more than three points and fees will not qualify for 

the presumption under the final rule. 

214Under the Board’s rule, the presumption of 

compliance attaches if the creditor ‘‘tak[es] into 

account’’ either the ‘‘ratio of total debt obligations 

to income or the income the consumer will have 

after paying debt obligations.’’ The consumer may 

rebut the presumption ‘‘with evidence that the 

creditor nonetheless disregarded repayment’’ such 

as by offering ‘‘evidence of a very high debt-toincome ratio and very limited residual income.’’ 

Under the final rule, however, a creditor cannot 

claim the benefit of the presumption of compliance 

if the debt to income is very high, since the final 

rule contains specific debt-to-income criteria for 

qualified mortgages. Thus, under the final rule, to 

rebut the presumption the consumer must prove 

insufficient residual income. 

the safe harbor, 2 percent of mortgages 

would have been qualified mortgages 

with a rebuttable presumption, and 22 

percent of mortgages would have been 

subject to the ability-to-repay 

requirements. These estimates are 

subject to the same limitation stated 

above.211

ii. Liability Costs for Qualified 

Mortgages 

For qualified mortgages claimed to be 

within the safe harbor, borrowers will 

have no claim against the lender for 

ability-to-repay violations unless the 

loan does not in fact meet the 

requirements for safe harbor treatment. 

Based on the experience of loans 

originated during the 1997–2003 period, 

the Bureau estimates that roughly four 

percent of qualified mortgages loans 

will ever be 60 days delinquent and less 

than one percent are expected to result 

in foreclosure.212 The performance of 

the qualified mortgages that have a 

conclusive presumption of compliance 

is expected to be slightly better than 

these averages. 

The Bureau believes that only a very 

small fraction of these delinquent or 

foreclosed-upon borrowers would seek 

to raise an ability-to-repay claim. The 

conclusive presumption precludes 

liability for loans which meet the 

eligbility criteria for a safe haror, i.e. 

loans whose product features make 

them eligible; for which the lender 

verified income, assets, and debts and 

properly calculated the DTI ratio to be 

43 percent or less; and which are not 

higher priced. And even if a loan is 

erroneously categorized as a qualified 

mortgage with a safe harbor, a borrower 

still cannot recover unless the lender 

has violated the general ability-to-repay 

requirements, including the requirement 

that the lender make a ‘‘reasonable and 

good faith’’ determination that the 

consumer had the ability to repay. 

Generally, only a small percentage of 

borrowers contest foreclosure and even 

smaller percentage do so with the 

benefit of legal representation. This fact, 

and the limited chance of success for 

borrowers to raise successful claims, 

makes it very unlikely that many claims 

will arise from borrowers with these 

qualified mortgages. 

For qualified mortgage loans above 

the higher-priced threshold, costs (as 

well as benefits) of the final rule derive 

from the differences, including 

differences with respect to the originator 

and assignee liability, between the 

existing liability rules and the final rule. 

Under existing rules, creditors that 

make a higher-priced mortgage loan 

(HPML) are not allowed to extend credit 

without regard to ‘‘the consumer’s 

repayment ability as of consummation, 

including the consumer’s current and 

reasonably expected income, 

employment, assets other than the 

collateral, current obligations, and 

mortgage-related obligations.’’ Further, a 

creditor is presumed to have complied 

if the creditor properly verifies and 

documents income and assets, made the 

determination using the largest payment 

of principal and interest scheduled in 

the first seven years following 

consummation, and took into account 

the ratio of total debt obligations to 

income, or the income the consumer 

had after paying debt obligations. 

As noted, 1 to 4 percent of loans, 

based on data from the 1997- 2003 

period, are estimated to be qualified 

mortgages with a rebuttable 

presumption. As just described, the 

delinquency rates and default rates are 

expected to be just around 4 percent and 

1 percent respectively. 

Nearly all of the mortgages that will 

be qualified mortgages above the higherpriced threshold are currently covered 

by the existing HPML presumption of 

compliance,213 because the 

requirements in the final rule that 

qualified mortgage loans be fully 

documented, have verified income and 

be underwritten to the maximum 

payment in the first five years of the 

loan (with the exception for rural 

balloon loans) will in most cases also 

satisfy the requirements for obtaining 

the presumption under the 2008 HOEPA 

Final Rule. The final rule’s requirements 

for obtaining the status of a qualified 

mortgage (and thus the rebuttable 

presumption) are slightly more 

prescriptive than the existing rules for 

gaining that presumption and this 

difference in the criteria for 

qualification may leave borrowers with 

slightly less opportunity to rebut the 

presumption of compliance.214

For the subset of these borrowers that 

are in default more than three years into 

the mortgage, that seek to and are able 

to successfully rebut the lender’s 

presumption of compliance (when 

seeking an offset during foreclosure), 

and that are therefore entitled to 

compensation, the returns from this 

action are in fact reduced relative to the 

existing rules which do not limit the 

recovery period in a claim for offset in 

a foreclosure proceeding brought by the 

creditor. As such, the probability that 

lenders will have to defend such an 

action is reduced relative to current 

rules although the subset described 

above is likely to be so small that the 

impact will be immaterial. As discussed 

below, relative to the existing rules 

lenders may face increased putback risk 

from investors although that, too, is 

small. 

For the set of borrowers that are in 

default within the first three years, 

potential damages are not reduced; 

however, the increased requirements at 

origination to qualify for qualified 

mortgage status, and the 

correspondingly more limited grounds 

on which to rebut the presumption 

reduce the probability of a successful 

challenge. So here too, the probability 

that lenders will have to defend such an 

action may be reduced or at least held 

constant relative to current rules. 

Overall, therefore the ex-post liabilities 


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215As amended by section 1413 of the DoddFrank Act, TILA provides that when a creditor, an 

assignee, other holder or their agent initiates a 

foreclosure action, a consumer may assert a 

violation of TILA section 129C(a) ‘‘as a matter of 

defense by recoupment or setoff.’’ TILA section 

130(k). There is no time limit on the use of this 

defense and the amount of recoupment or setoff is 

limited, with respect to the special statutory 

damages, to no more than three years of finance 

charges and fees. In contrast, for high cost loans as 

under existing law, an assignee generally continues 

to be subject to all claims and defenses, not only 

in foreclosure, with respect to that mortgage that the 

consumer could assert against the creditor of the 

mortgage, unless the assignee demonstrates, by a 

preponderance of evidence, that a reasonable 

person exercising ordinary due diligence, could not 

determine that the mortgage was a high cost 

mortgage. TILA 131(d). 

216See Fannie Mae, ‘‘Delivery of Higher-Priced 

Mortgage Loans, Revised Qualifying Rate 

Requirements, Assessment of Late Charges, 

Clarifications to Points and Fees Limitation, and 

Updates to Reporting under the Home Mortgage 

Disclosure Act,’’ Announcement 09–24 (July 10, 

2009), available at https://www.fanniemae.com/ 

content/announcement/0924.pdf. 

217See Freddie Mac, ‘‘Higher-Priced Mortgages 

Loans and Rate Spread Data,’’ Bulletin 2009–17 

(July 8, 2009), available at http:// 

www.freddiemac.com/sell/guide/bulletins/pdf/ 

bll0917.pdf. 

218See Federal Housing Finance Agency, 

‘‘Strategic Plan for Enterprise Conservatorships,’’ 

(Feb. 21, 2012), available at http://www.fhfa.gov/ 

webfiles/23344/ 

StrategicPlanConservatorshipsFINAL.pdf. Also see 

Federal Housing Finance Agency, ‘‘Building a New 

Infrastucture for the Secondary Mortgage Market,’’ 

available at http://www.fhfa.gov/webfiles/24572/ 

FHFASecuritizationWhitePaper100412FINAL.pdf. 

219The Bureau believes that the requirements for 

higher-priced balloon loans made by lenders who 

do not meet the rural or underserved test effectively 

ban these products. 

220Note that several state laws have ability-torepay requirements applicable to conforming loans 

and/or higher priced loans, and there are variations 

in their applicability, requirements, and liability 

provisions. The benefits and costs of the final rule 

will be attenuated to the extent that certain states 

already provide similar requirements. 

221H.15 monthly series from Federal Reserve 

Board of Governors downloaded from St, Louis 

Fred at http://research.stlouisfed.org/fred2/series/ 

MORTG/downloaddata?cid=114. 

222Because some of the costs are independent of 

loan size, one has to make assumptions about the 

underlying loan value; otherwise, all calculations 

could simply be done as percentages of loan 

balances. The figures used here are consistent with 

those used by commenters that provided similar 

calculations. 

for lenders are likely reduced for these 

loans. 

Relative to current rules for HPMLs, 

the current rule extends liability to 

assignees.215 The establishment of 

assignee liability does not increase the 

amount that a borrower can obtain from 

a successful legal action; however, it 

does increase the number of parties 

from whom the borrower can seek 

redress. Borrowers in a foreclosure 

action in a judicial state can now assert 

their claim against the assignee bringing 

the foreclosure action, rather than 

having to initiate an affirmative lawsuit 

against the originator that no longer 

holds the loan. The effect is to reduce 

the costs of bringing these defensive 

actions and therefore increasing their 

likely number. For loans that are not 

sold, or for borrowers wishing to bring 

affirmative actions, the establishment of 

assignee liability has little or no effect. 

The extension of liability to assignees 

may also increase the cost of contracting 

between the two parties. Under the final 

rule, the borrower now has a contingent 

claim against two parties. As a result, 

the two parties will want to contract exante about the extent of each party’s 

liability under the various 

contingencies. This increase in 

contracting costs should be small for 

two reasons. First, even in the absence 

of assignee liability, the market has 

already included these contingencies in 

standard contracts. For example, 

following the Board’s 2008 rule, the 

Fannie Mae seller servicer guide was 

amended to include provisions that 

HPMLs are ‘‘eligible for delivery to 

Fannie Mae provided [that] * * * 

lenders represent and warrant when 

they sell an HPML to Fannie Mae that 

the mortgage complies in all respects 

with Regulation Z requirements for 

HPMLs, including the underwriting and 

consumer protection requirements.216’’ 

The Freddie Mac seller servicer guide 

has similar provisions.217 With 

contracts like these already in place, it 

appears that amending contracts for the 

particulars of the final rule should be 

small. Second, underwriting guidelines, 

pooling and servicing agreements and 

other contracts in the mortgage market 

are currently being reworked and 

refined.218 Among the myriad of 

changes, addenda to manage the abilityto-repay liabilities of the current rule 

should be only a small cost. 

iii. Non-Qualified Mortgages and 

Estimation of Costs 

The remaining loans are not qualified 

mortgages. These include for example, 

mortgage loans with a back-end DTI 

ratio over 43 percent, loans with points 

and fees above three percent of the loan 

balance, mortgages with a term over 30 

years, or balloon loans that do not 

qualify for qualified mortgage balloon 

definition.219 For loans in this segment 

priced below the higher-priced 

threshold, the obligation to assess the 

consumer’s ability to repay and the 

liability where the lender fails to do so 

is a new liability for both the originator 

and any assignees. For loans in this 

segment above the higher-priced 

threshold, lenders cannot invoke a 

rebuttable presumption of compliance 

and for those loans that are not highcost loans, assignees are subject to 

expanded liability as compared to 

current rules.220

The Bureau has estimated litigation 

costs under the new ability to pay 

standards for non-qualified mortgages. 

Estimating costs for non-qualified 

mortgages should reasonably serve an 

upper bound for the costs for qualified 

mortgages. Costs for putbacks, or loans 

the buyers of which force the sellers to 

take back on their books because they 

do not satisfy the final rule are also 

estimated. 

Estimating the increased liability 

costs involves a series of assumptions 

about the performance of these loans, 

the probability that borrowers will bring 

particular actions, and the subsequent 

behavior of lenders and courts. Some 

assumptions about costs are also 

necessary. 

Under the ability-to-repay provisions, 

consumers can bring an action against 

the lender at any point during the first 

three years of the loan or as an offset to 

foreclosure at any time. In the latter 

cases, the recovery of interest and 

finance charges is capped at the amount 

paid during the first three years. 

The Bureau has estimated these costs 

as follows. To begin, assume an average 

loan balance of $210,000 (just below the 

mean balance for first lien loans 

reported in HMDA in 2011), an average 

interest rate of 7 percent (the average 

mortgage rate for 30 yr. mortgages from 

1997 to 2003) 221, and an average of 

$3,150 (1.5 points) paid up front in fees. 

Further, assume that, on average, 

affirmative cases and contested early 

foreclosures happen at the midpoint of 

the period, 18 months after 

consummation. This implies that for the 

affirmative cases, and the early 

foreclosures borrowers contest, 

successful borrowers are reimbursed for 

fees and interest an average of roughly 

$29,200.222 (The Bureau assumes in this 

calculation that all prevailing borrowers 

receive $4,000 in statutory TILA 

damages.) For the later foreclosures, 

defined here as foreclosure that occur 

three or more years after loan 

consummation, borrowers who contest 

foreclosure are reimbursed for 36 

months of interest or roughly $51,250. 

Based on data from the FHFA for 

1997–2003 for loans with DTI ratios 

above 43 percent, it is reasonable to 

assume, 3.5 percent of loans reach 60 

day delinquency during the first three 

years of the loan but do not start a 

foreclosure process, an additional 1.5 

percent of loans start the foreclosure 

process within the first three years, and 

an additional 1.5 percent of loans start 

the foreclosure process after three 


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223These values are derived from GSE loans with 

at DTI ratio above 43% originated during the 1997– 

2003 period. For these loans, roughly 7 percent ever 

reached 60 days late, one-half of those in the first 

three years. Roughly 3 percent ever reached 180 

days delinquent which is a rough proxy for 

foreclosure. One could also assume that some 

additional borrowers simply stop paying their loans 

strategically in order to extract funds from the 

originator or assignee, however that possibility 

seems unreasonable. 

224See Mortgage Bankers Association comment 

letter, docket CFPB–2012–0029, submitted Sep. 7, 

2012. See also National Consumer Law Center 

comment letter, docket CFPB–2012–0029, 

submitted Sep. 7, 2012. 

225MBA National Delinquency Survey. 

226Comment letters submitted to the Board 

suggest roughly this number of hours when 

assessing the cost of a rebuttable presumption. See 

MBA Comment Letter dated July 22, 2011. 

years.223 The Bureau believes that 

consumers who have fallen behind on 

their mortgage payments are unlikely to 

initiate an ability to repay claim in court 

prior to foreclosure. Rather, they will 

likely seek to work with their servicer 

and the owner of the loan to cure the 

delinquency through, e.g., forbearance 

or some form of loan modification, or 

where that is not possible, to reach an 

agreement to enable the consumer to 

walk away from the property and the 

loan (i.e., deed in lieu or short sale). 

Once a foreclosure proceeding is 

commenced, however, it will then be in 

the interest of consumers to assert 

ability-to-repay claims where there is a 

plausible basis to do so; this is 

especially true in judicial foreclosure 

states because an ability-to-repay claim 

can be asserted as a defense by way of 

offset against whoever holds the loan at 

the time of the foreclosure (i.e., the 

originator or assignee). 

The ability of consumers to assert 

such claims either defensively or, in 

non-judicial foreclosure states, in 

affirmative actions will depend to some 

extent upon their ability to obtain legal 

representation. In its notice reopening 

the comment period for the rule, the 

Bureau specifically requested 

information and data regarding the 

frequency of such actions. In general, 

industry commenters asserted, that even 

under the rebuttable presumption 

standard, future legal actions under the 

rule would be very common. In contrast, 

consumer and community groups 

pointed to the available evidence and 

experience to suggest that only a very 

small minority of consumers in 

foreclosure are represented and that 

very few claims are brought. Consumer 

group commenters pointed out the 

practical limitations of consumers to 

bring an ability-to-repay claim, noting 

that few distressed homeowners would 

be able to afford and obtain legal 

representation often necessary to mount 

a successful rebuttal in litigation. 

Consumer groups also provided 

percentages of borrowers in foreclosure 

who are represented by lawyers, noting 

the difficulty of bringing a TILA 

violation claim, and addressed estimates 

of litigation costs, such as attorney’s 

fees. The data provided however are 

quite limited: two commenters (both 

representing industry) suggest that 

during the recent years there were 

roughly 900 mortgage-related TILA 

cases filed each year in Federal court 

while data regarding the number of 

TILA claims brought in state courts 

were not provided.224

More specifically the Bureau has 

considered the available evidence with 

respect to the extent of litigation under 

laws potentially analogous to this one, 

such as the 2008 HOEPA Final Rule 

(which does not provide assignee 

liability, except as applicable to high 

cost mortgages) and under HOEPA and 

state anti-predatory lending laws (which 

generally do provide for assignee 

liability). So far as the Bureau is aware, 

claims under these rules have been very 

infrequent. Industry participants likely 

have access to the most complete 

information about litigation activity, 

much of which activity is not reported 

in legal databases such as Lexis and 

Westlaw. Industry commenters, 

however, did not bring forth any 

evidence to suggest that claims have 

been anything but rare. Thus, relative to 

the one to two million annual 

foreclosure starts from 2009 through 

2011,225 the record supports a 

conclusion that litigation under TILA 

generally and under the most directly 

analogous federal and state laws has 

been very limited. 

Industry commenters maintained that 

past experience is not a guide because 

new liability under the Dodd-Frank Act 

will increase incentives for litigation. 

The Bureau recognizes that the 

availability of new ability-to-repay 

remedies may make it easier for 

consumers to obtain representation (by 

providing those consumers whose loans 

are not currently covered by the Board 

rule with new rights; and those 

consumers whose loans are covered, 

with more easily asserted, and to that 

extent more valuable claims). Thus, the 

analysis below of litigation costs relies 

on very conservative (likely unrealistic) 

assumptions about the extent to which 

the Dodd-Frank liability provisions will 

increase litigation levels above levels 

under current laws. 

Among the three percent of borrowers 

that are in foreclosure, the Bureau 

assumes that 20 percent will bring an 

action against the lender for failing to 

meet the ability-to-repay requirements; 

that implies that 0.6 percent of 

borrowers will bring claims. As noted, 

this value is many times higher than 

recent experience with the 2008 HOEPA 

Final Rule or analogous state laws 

would suggest and is a very 

conservative upper bound. One half of 

these borrowers, should they prevail, 

are assumed to be entitled to 18 months 

of interest and the other half to 36 

months of interest. Based on our 

assumed loan size ($210,000), interest 

rate (7%), and origination fees ($3,150) 

as discussed above, on average a 

successful borrower will have a claim of 

$40,225 (including the statutory TILA 

damages, before legal costs). 

To estimate legal costs, assume that in 

each case, the lender will move for 

summary judgment based upon what 

they are likely to claim to be undisputed 

evidence documenting their 

consideration of borrowers’ ability to 

pay. The consumer would likely claim 

that he or she was unable to pay the 

mortgage from its inception, and would 

have to present evidence from which it 

could be inferred that the creditor did 

not make a ‘‘reasonable and good faith 

determination’’ of the consumer’s ability 

to repay. To estimate legal costs, assume 

that in each case, following any 

discovery permitted, the lender will 

move for summary judgment, which is 

a written request for a judgment in the 

moving party’s favor (along with a 

written legal brief in support of the 

motion with supporting documents and 

affidavits) before a lawsuit goes to trial, 

claiming that all factual and legal issues 

can be decided in the moving party’s 

favor, as a means to avoid trial 

altogether. The opposing party (i.e., the 

consumer) would need to show that 

there are triable issues of fact. The 

analysis assumes that, in these motions, 

the lender will succeed four-fifths of the 

time. In the remaining one fifth of cases, 

the lender settles prior to summary 

judgment and pays the full value of the 

claim. This assumption is also 

conservative. In evidence provided by 

industry commenters which the 

commenters suggested were analogous, 

lenders prevailed in nearly all of the 

cases cited. 

To litigate these cases, the borrower is 

assumed to spend 60 hours of attorney 

time up to and including responding to 

the motion for summary judgment while 

the lender, given its resources, is 

assumed to spend 170 hours up to and 

including filing the relevant motions.226

In 2011, the average wage for lawyers in 

the legal services industry was $68.75/ 

hr; adjusting that figure to reflect 

benefits and other forms of 


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227For illustration purposes, the Bureau assumes 

that 20 percent of the potential litigants have 

private costs of litigation of less than $1,000. Under 

the assumptions above, the creditor prefers to incur 

the legal costs to file for summary judgment as 

opposed to settling outright (the creditor’s expected 

payoff is roughly $5,000 dollars more in this case). 

228This is calculated as 0.6 percent of borrowers 

bringing cases multiplied by $35,345 in expected 

lender costs per case divided by the $210,000 loan 

amount. 

229At the same time, higher litigation costs may 

deter certain consumers from bringing suit. 

230Securitized loans performed very poorly just 

following the bubble, with delinquency rates many 

times that of loans in more typical times. Adjusting 

the figures to reflect this better performance and the 

increased origination standards in the final rule, 

yields the 1–3 basis points. See Andreas Fuster, 

Laurie Goodman, David Lucca and Laurel Madar, 

Linsey Molloy, Paul Willen, The Rising Gap 

Between Primary and Seconadary Mortgage Rates, 

November 2012 available at: http:// 

www.newyorkfed.org/research/conference/2012/ 

mortgage/primsecsprd_frbny.pdf. 

compensation, and a 50 percent markup for firm yields an hourly rate for 

legal services of $150/hr. With these 

assumptions, borrowers are willing to 

bring cases, and lenders will defend 

them, since on average both sides are 

ahead relative to simply dropping the 

claim or paying it in full.227 To reflect 

the expected value of these costs, the 

costs of non-qualified mortgages would 

increase by 10 basis points (0.1 percent 

of the loan amount, or roughly $212 for 

the $210,000 loan).228 Assuming loans 

with a weighted average life of four 

years, this could add roughly 2.5 basis 

points (0.025 percentage points) to the 

rate of each loan. Were the whole cost 

passed on to the consumer, increasing 

the rate from 7.0 percent to 7.025 

percent, the monthly payment would 

rise by roughly $3.50. The resource cost 

to litigate this case is also roughly 10 

basis points since it includes the 

lenders’ and the borrowers’ legal 

expenses of $25,500 and $9,000, 

respectively, and excludes the transfer 

of $40,225 that occurs in successful 

cases. 

iv. Sensitivity Analysis 

As part of a sensitivity analysis, the 

Bureau has estimated these costs under 

different assumptions. Notably, industry 

commenters provided estimates of the 

costs for various types of cases related 

to mortgage actions. These comments 

suggest a much higher cost for legal 

expenses of $300 per hour and closer to 

300 hours to litigate cases that involve 

motions for summary judgment. Using 

these figures (and the assumption that 

borrowers’ legal expenses include a 

proportionally higher 150 hours at 

$300/hr), the increased cost of each loan 

is approximately 31 basis points or an 

increase in the interest rate of just under 

8 basis points (0.08 percentage points). 

Importantly, in this scenario, using the 

assumptions set forth previously about 

loan size and other factors, lenders 

would spend $107,000 to defend claims 

worth substantially less than the legal 

costs ($40,225).229 It is possible, 

however, that lenders would be willing 

to litigate such cases in order to 

discourage future litigation but, if so, 

one would expect a corresponding 

diminution of litigation over time. 

As a second sensitivity test, going 

back to the original legal cost estimates, 

one can assume that of the 3.5 percent 

of borrowers who find themselves 

behind on their payments during the 

first three years, 84 percent (or 3 percent 

of total borrowers) chose to bring 

affirmative claims. This would 

quintuple the original estimates on a per 

loan basis to fifty basis points spread 

over a four-year average life. Similarly, 

one could assume that a larger 

percentage of borrowers in default bring 

claims. Raising that assumption from 20 

percent to 40 percent results in 

estimated costs of 20 basis points per 

loan. 

Originators and assignees share the 

liability for ability-to-repay violations. 

Depending on the contract in place, 

lenders will bear some repurchase risk 

for those loans that are sold into the 

secondary market. For example, sellers 

of loans to the GSEs already bear this 

risk for HPMLs since the enterprises 

have the right to put the loan back in 

case of ability-to-repay violations. In 

cases where the lender is defunct or 

there are other issues affecting the 

lender’s capacity to reassume the risk, 

the purchaser of the loan may be unable 

to exercise that right and will bear the 

additional liability costs. The need of 

both the seller and the buyer to budget 

for expected capital and liquidity 

charges in these situations, and to 

negotiate the specific transactions, will 

also add some costs. However, in recent 

work, some economists have estimated 

that even for loans from the 2005 to 

2008 vintage repurchase risk added 

conservatively about 19 basis points (or 

0.19 percent of the loan amount) to the 

cost of a loan. Given the much lower 

default rates in the coming years (based 

on the default rates during the 1997– 

2003 period), and the increased 

underwriting requirements mandated by 

the final rule even for non-qualified 

mortgages, these costs are likely to be 

closer to 1–3 basis points at most.230

v. Summary of Litigation Costs 

Combining liability costs and 

repurchase costs, estimated costs for 

non-qualified mortgage loans (loans 

made under the ability-to-repay 

standard without any presumption of 

compliance) are estimated to increase by 

approximately twelve basis points (or 3 

basis points (0.03 percentage points) on 

the rate); under very conservative 

estimates, this figure could be as high as 

forty basis points (or ten basis points 

(0.01 percentage points) on the rate). 

Depending on the competitive 

conditions in the relevant product and 

geographic markets, some of this 

increase will be passed on to borrowers 

and the rest will be absorbed by lenders. 

Certain borrowers may be priced out of 

the market as a result of the price 

increase. However, the number of such 

borrowers is likely to be very small 

given the values above since an increase 

of even ten basis points on the rate on 

an average mortgage would increase the 

monthly payment by less than $10. 

vi. Temporary Provisions for Qualified 

Mortgages 

As described in the preamble, the 

final rule recognizes the fragility of the 

current mortgage market and therefore 

includes temporary measures extending 

qualified mortgage status to loans that in 

the long run may not be qualified 

mortgages. These include loans with a 

DTI above 43 percent and that 

nonetheless can be purchased or 

guaranteed by the GSEs, insured by the 

FHA, VA or RHS. Based on the data as 

of year-end 2011, such loans are 

approximately 18 percent of the market. 

Without fuller data on the points and 

fees and product features associated 

with most loans, it is hard to estimate 

precisely the size of this segment or 

predict how large it would be several 

years from now with, or without, the 

statute taking effect. Ignoring those 

features, based on information about the 

rates and fees on these loans we believe 

roughly 97 percent of these loans should 

qualify for the legal safe harbor with the 

conclusive presumption of compliance 

(i.e., they are not higher-priced covered 

transactions) and 3 percent are 

estimated to qualify for the rebuttable 

presumption (i.e., they are higher-priced 

covered transactions). The temporary 

expansion of the definition of a 

qualified mortgage results in over 95 

percent of the market being granted 

qualified mortgage status. 

Extending qualified mortgage status to 

these loans reduces costs to lenders as 

described above and limits some of the 

consumer protections that an increased 

possibility of liability would create if a 

creditor were able to satisfy the GSE or 

federal agency underwriting standards 

without having a reasonable and good 

faith believe in the consumer’s ability to 

repay. However, the added certainty 


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6570 Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 

from this reduced liability should 

benefit both consumers and covered 

persons. The mortgage market is still 

fragile, even four plus years past the 

most turbulent portions of the financial 

crisis. With lenders and the markets in 

general adjusting to new regulations 

designed to counter the forces behind 

the crisis, extending qualified mortgage 

status to these segments of loans should 

limit any disruption to the supply of 

mortgage credit with only limited effects 

on consumers. The extension of 

qualified mortgage status to these loans 

should allow the market time to digest 

the rules and for any increase in premia 

associated with uncertainty about 

litigation and putback costs to diminish. 

c. Access to Credit 

Overall, the Bureau believes that the 

final rule will not lead to a significant 

reduction in consumers’ access to 

consumer financial products and 

services, namely mortgage credit. The 

Bureau notes the potential for the ability 

to repay requirements, including 

increased documentation and 

amortization requirements, to prevent 

some consumers from qualifying for a 

loan. First, the final rule generally bans 

no-doc and low-doc loans to the extent 

the level of documentation is lower than 

that required by the rule. The final rule 

would by definition prevent borrowers 

who would only qualify for these types 

of loans from receiving a mortgage; as 

discussed, that is one of the benefits of 

the rule. Second, the final rule generally 

increases documentation requirements 

for mortgage loans and requires 

underwriting to be done based on an 

assumed fully amortizing loan at the 

fully indexed rate. 

As noted above, when measured 

against the current marketplace, the 

Bureau anticipates the effect of these 

requirements on access to credit to be 

very small. The Bureau anticipates that, 

as the economy recovers, the currently 

restrictive credit environment will 

loosen. Indeed, if anything, the Bureau 

anticipates that the immediate effect of 

the rule may be to contribute to the 

recovery of the mortgage market by 

reducing legal uncertainty which may 

be affecting lending. This is especially 

true if the impact of the rule were 

compared to a post-statutory baseline 

(i.e. to the implementation of the DoddFrank ability to pay and qualified 

mortage provisions without 

implementing regulations.) 

Measured against the years leading up 

to the financial crisis, when lending 

standards were quite loose, the effects of 

the final rule on access to credit would 

of course have been significantly larger. 

The final rule will set a floor to the 

loosening of credit in order to prevent 

the deterioration of lending standards to 

dangerous levels. A primary goal of the 

statute was to prevent a repeat of the 

deterioration of lending standards that 

contributed to the financial crisis, 

which harmed consumers in various 

ways and significantly curtailed their 

access to credit. Such a goal will, by 

definition, entail some potential 

diminution of access to credit as market 

standards change over time. The Bureau 

believes that, to the extent the final rule 

reduces credit access, it will primarily 

reduce inefficient lending that ignores 

or inappropriately discounts a 

consumer’s ability to repay the loan, 

thereby preventing consumer harm, 

rather than impeding access to credit for 

borrowers that do have an ability to 

repay. The Bureau notes that the rule 

may have a disproportionate impact on 

access to credit for consumers with 

atypical financial characteristics, such 

as income streams that are inconsistent 

over time or particularly difficult to 

document. 

There also exists the potential for both 

increased documentation requirements 

and increased liability to increase the 

price of mortgage loans for some 

consumers. As discussed above, price 

increases from both increased 

documentation requirements and 

increased liability should be small. The 

documentation requirements, such as 

providing a pay stub or tax return, will 

impose relatively little additional cost to 

most consumers. Similarly, the 

increased documentation costs for 

creditors should not be significant, or 

result in more than relatively small 

increases in the cost of mortgage loans. 

With respect to liability costs, the 

Bureau notes that over 95 percent of the 

current market is estimated to satisfy 

one of the definitions of a qualified 

mortgage, greatly reducing the expected 

cost of litigation. The Bureau also notes 

that the clear standards established for 

determining whether a loan is a 

qualified mortgage should reduce 

uncertainty regarding litigation costs, 

which will mitigate any resulting 

impact on access to credit. In light of the 

foregoing considerations, the Bureau 

believes that the ability to repay 

requirements and the accompanying 

potential litigation costs will create, at 

most, relatively small price increases for 

mortgage loans. These small price 

increases, in turn, are not likely to result 

in the denial of credit to more than a 

relatively small number of borrowers, 

some of whom commenters pointed out 

could be low income, at the margin. 

The Bureau notes that concerns have 

been raised concerning the application 

of increased documentation and 

amortization requirements to such 

entities as certain nonprofits and state 

housing finance agencies, as well as 

certain refinancing programs. As 

applied to such entities and programs, 

the final rule may restrict access to 

mortgage credit, including for 

consumers who may otherwise have 

limited credit options, while doing little 

to further the consumer protection 

purposes of the statute. To address these 

concerns, the Bureau has proposed 

separately to exempt some such entities 

and programs from these documentation 

and amortization requirements. 

The Bureau also notes that concerns 

have been raised regarding the 

application of the qualified mortgage 

criteria and the general ability to repay 

requirements to certain small creditors. 

These concerns arise from the 

observation that for many community 

banks and credit unions, for example, 

compliance resources are scarce and 

compliance costs as a percentage of 

revenue can be high. At the same time, 

these institutions employ a traditional 

model of relationship lending that did 

not succumb to the general deterioration 

in lending standards that contributed to 

the financial crisis. Moreover, because 

this business model may be based on 

particularized knowledge of customers 

and the development of durable 

customer relationships, the resulting 

loans may be beneficial to customers 

even when they do not conform to the 

general standards set forth in the final 

rule. Further, these institutions have 

particularly strong incentives not only 

to maintain positive reputations in their 

communities, but also, because they 

often keep the loans they make in their 

own portfolios, to pay appropriate 

attention to the borrower’s ability to 

repay the loan. Accordingly, the Bureau 

has proposed separately to provide 

additional criteria by which certain 

small portfolio lenders may make 

qualified mortgages. 

Greater access to credit can be 

associated with higher home prices and 

higher homeownership rates, and as 

discussed in the section on costs, there 

is some evidence of positive social 

effects from home ownership. As such, 

were the rule to overly restrict credit, it 

is important to note that these positive 

spillovers would also be limited. 

However, the Bureau does not believe 

that the rule will result in an 

inappropriate reduction in access to 

credit; rather, over time, the final rule 

should ensure that lending standards do 

not deteriorate to dangerous levels, 

while at the same time ensuring that 

lending not be too restrictive. 


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231For purposes of this provision of the rule, a 

higher priced mortgage is defined in the Act as a 

first lien, non-jumbo mortgage with an APR that is 

more than 150 basis points above APOR; a first lien, 

jumbo mortgage with an APR that is more than 250 

basis points above APOR; and a second lien 

mortgage with an APR that is 350 basis points above 

APOR. 

232As explained in the final rule, FHA loans used 

a method of interest calculaton which results in 

consumers who pay off loans during the course of 

a month being obligated to pay interest until the 

end of the month. The Final Rule treats that as a 

prepayment penalty and provides an extended 

compliance period to allow time for FHA to change 

this feature of its loans. 

233See 73 FR 44522 (July 30, 2008). 

4. Potential impacts of other provisions 

Below, the Bureau discusses the 

impacts of several other provisions of 

the final rule and notes their interaction 

with other rulemakings. These include 

the points and fees provisions (which 

interact with the HOEPA rulemaking), 

the provisions of the statute regarding 

prepayment penalties, and the 

definition of rural or underserved areas 

(which interacts with the current 

rulemaking regarding escrow account 

requirements for certain higher-priced 

mortgage loans and with the 2013 

HOEPA final rule). The interagency rule 

on appraisal requirements for high-risk 

mortgage loans also interacts with the 

QM definition. 

a. Points and Fees Provisions 

To be a ‘‘qualified mortgage,’’ the 

statute requires (among the other 

requirements already discussed) that the 

total points and fees payable in 

connection with the loan do not exceed 

3 percent of the total loan amount and 

requires the Bureau to prescribe rules 

adjusting this limit to ‘‘permit lenders 

that extend smaller loans to meet the 

requirements of the presumption of 

compliance.’’ As noted earlier, such a 

restriction may have the effect of 

limiting cases where creditors, having 

received more funds up front, are less 

concerned about the long-term 

performance of the loan. 

In the final rule, that limit is amended 

to a tiered approach with the following 

limits: for a loan amount greater than or 

equal to $100,000, three percent of the 

total loan amount; for a loan amount 

greater than or equal to $60,000 but less 

than $100,000, $3,000; for a loan 

amount greater than or equal to $20,000 

but less than $60,000, five percent of the 

total loan amount; for a loan amount 

greater than or equal to $12,500 but less 

than $20,000, $1,000 of the total loan 

amount; and, for a loan amount of less 

than $12,500, eight percent of the total 

loan amount. 

The higher limits for smaller dollar 

loans should allow more loans to be 

made as qualified mortgages. Data on 

the points and fees associated with a 

representative set of loans is not 

currently available. As a result, the 

Bureau cannot estimate precisely how 

many loans are impacted by this change. 

Under TILA as amended, a high-cost 

mortgage has points and fees equal to 

five percent of the total transaction 

amount if the transaction is $20,000 or 

more, and points and fees equal to the 

lesser of eight percent of the total 

transaction amount or $1,000, if the 

transaction is less than $20,000. Setting 

the maximum points and fees caps 

based on the HOEPA triggers will help 

ensure that a qualified mortgage is not 

a high-cost mortgage because of the 

points and fees. 

The Dodd-Frank Act substantially 

expanded the scope of compensation 

included in points and fees for both the 

qualified mortgage and high-cost 

mortgage points and fees limits. In 

addition to compensation paid to 

mortgage brokerage firms and individual 

brokers, points and fees also includes 

compensation paid to other mortgage 

originators, including employees of a 

creditor (i.e., loan officers). Under the 

existing rule, only consumer payments 

to mortgage brokers are included in 

points and fees for the high-cost 

mortgage threshold. Also under the Act, 

any fees paid to and retained by 

affiliates of the creditor must be 

included in points and fees (except for 

any bona fide third-party charge not 

retained by the creditor, loan originator, 

or an affiliate of either, unless otherwise 

required under the rule). The final rule 

restates these provisions. 

In a concurrent proposal published 

elsewhere in today’s Federal Register, 

the Bureau proposed one alternative 

which would permit loan originator 

compensation to be netted against other 

upfront charges paid by the consumer 

and one that would not. Still, the 

inclusion of loan originator 

compensation in points and fees under 

the Final Rule (together with the 

statutory provisions implementing in 

the Final Rule regarding the treatment of 

charges due to third parties affiliated 

with the creditor) could have the effect 

of limiting the number of loans eligible 

to be qualified mortgages. For most 

prime loans, the Bureau believes that 

this change will not have a major 

impact: current industry pricing 

practices and the exemption for bona 

fide discount points suggest that few of 

these loans will be constrained by the 

points and fees limits. 

For loans near the border of higherpriced loans (i.e. loans one percentage 

point above APOR), the exemption for 

bona-fide discount points is reduced 

and for loans priced at two percentage 

points or more above APOR the 

exemption is eliminated. For these 

loans, the inclusion of loan originator 

compensation and affiliate fees could 

limit qualified mortgage status for 

certain loans. Loans that will qualify for 

the safe harbor, but where the borrower 

pays for these charges through a higher 

interest rate, may lose the conclusive 

presumption of compliance and instead 

have only the rebuttable presumption. 

This impact is most likely greater for 

lenders with affiliated companies whose 

charges must be included in the points 

and fees calculations. 

b. Prepayment Penalties 

The Final Rule implements the 

provisions of Dodd-Frank with respect 

to prepayment penalties. Specifically, in 

accordance with the statute, the rule 

prohibits prepayment penalties for any 

mortgage other than a fixed-rate 

mortgage that is a qualified mortgage 

and not a higher-priced mortgage.231

Where the Final Rule permits 

prepayment penalties, it limits these 

penalties to 2 percent of the outstanding 

balance on the loan during the first year 

after consummation and 1 percent of the 

outstanding balance during the second 

year after consummation. 

Available information from the 

sources described above suggests that 

loans originated today do not contain 

prepayment penalties, and this is likely 

to be true for the foreseeable future. 

Neither loans originated for sale to 

Fannie Mae and Freddie Mac, nor loans 

insured by FHA generally contain 

prepayment penalties.232 Moreover, the 

Bureau understands that prime loans, 

which make up the vast majority of 

originations today, have in recent years 

rarely had prepayment penalties.233

Some originators may make subprime 

loans they hold on portfolio for which 

they charge prepayment penalties, but 

data on terms of loans on portfolio are 

not available and at least in the current 

market, this is likely to be a very small 

number of loans. With the low interest 

rates that prevail today, lenders see little 

reason to limit prepayment risk by 

charging prepayment penalties. 

Prepayment penalties by design 

impose costs on consumers to switch 

from their current loans to loans with 

lower interest rates. This cost can be 

particularly high for consumers with 

potentially increasing payments and 

who seek to refinance to avoid the 

increases. Moreover, these penalties are 

complex and often not transparent to 

consumers. Consumers may not focus 

on prepayment penalty terms because 

they are more focused on the terms they 


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6572 Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 

234Over 70 percent of subprime loans from 2001 

through 2007 had prepayment penalties. See 

Demyank and Hemert, Review of Financial Studies, 

24,6, 2011. 

find more salient, such as interest rate 

and payment amount. Leading up to the 

mortgage crisis, some loan originators 

sometimes took advantage of 

consumers’ lack of awareness or 

understanding of prepayment 

penalties.234 Originators could sell 

unsuspecting consumers loans with 

substantial expected payment increases 

as well as substantial prepayment 

penalties that would prevent the 

consumer from refinancing. 

By limiting prepayment penalties to 

prime, fixed-rate qualified mortgages, 

the Final Rule benefits consumers by 

limiting these cases and lowering the 

cost of exiting a mortgage. Consumers 

will be able to refinance at lower cost, 

either when market rates drop or when 

the consumer’s risk profile improves. In 

other cases, consumers who are sold 

mortgages with rates higher than their 

risk profile warrants will be able to 

refinance their mortgages to a market 

rate at lower cost. In still other cases, 

consumers will be able to sell their 

homes and move at lower cost. This cost 

reduction from restriction of 

prepayment penalties is particularly 

important to consumers who incur 

drops in income or increases in 

expenses that cause them to struggle to 

make their mortgage payments. 

However, to the extent prepayment 

penalties compensate investors for 

legitimate prepayment risk, restricting 

penalties will reduce the value of 

certain mortgages and limit the returns 

to creditors and investors (which 

includes entities that are covered 

persons as well as entities that are not 

covered persons). In these cases, the 

cost of credit for some consumers will 

rise as creditors raise prices to 

compensate for increased prepayment 

risk. Currently, the number of loans that 

would have prepayment penalties but 

for the Final Rule appears to be very 

small, however, so costs to consumers 

and covered persons are expected to be 

de minimis. 

c. Definition of Small Lenders, Rural 

and Underserved 

The final rule allows certain small 

creditors operating predominantly in 

rural or underserved areas to originate 

balloon-payment qualified mortgages. 

Specifically, this option exists for 

lenders originating 500 or fewer covered 

transactions (including their affiliates), 

secured by a first lien, in the preceding 

calendar year, with assets under $2 

billion (to be adjusted annually), and 

who made more than 50 percent of their 

total covered transactions secured by 

first liens on properties in counties that 

are ‘‘rural’’ or ‘‘underserved.’’ For the 

purposes of the final rule, and the 2013 

Escrow rule published elsewhere in 

today’s Federal Register, the Bureau has 

defined rural to include noncore 

counties and those micropolitan 

counties that are not adjacent to 

metropolitan statistical areas using the 

Department of Agriculture’s urban 

influence codes. Relative to the 

proposed rule that only included a 

subset of rural counties, the final rule 

expands the exemption. The Bureau has 

not altered the definition of underserved 

from that contained in the proposed 

rule. 

Although there is no comprehensive 

evidence with respect to the prevalence 

of balloon loans, the Bureau 

understands anecdotally from outreach 

that in these rural areas, creditors 

sometimes have difficulty selling certain 

loans on the secondary market either 

because of unique features of the rural 

property or of the rural borrower. In 

these instances, the creditors will make 

a portfolio loan. Because of their small 

size, some of these creditors eschew 

ARMs and manage interest rate risk by 

making balloon payment loans which 

the creditors then roll-over based on 

then-current interest rate when the 

balloon payment comes due. 

Relative to a pre-statutory baseline, 

the rural balloon provisions of the rule 

have minimal effect. Relative to a poststatutory baseline in which the statute 

was implemented without the exception 

for rural lenders, the provisions of the 

rule have the following impacts on 

consumers and covered persons. 

Creditors covered by the rule’s 

definition are permitted to make balloon 

loans which are qualified mortgages, 

potentially mitigating consumer access 

to credit issues that might arise if 

balloon payment mortgages were 

restricted. The rule creates certain 

minimum, consumer-protective 

requirements with respect to such 

balloon loans, such as a minimum term 

of five years and a requirement that the 

interest rate be fixed for that period of 

time. The rule also requires that 

creditors verify and consider income 

and debts before making such loans 

(albeit without a fixed debt-to-income 

requirement). However, to the extent 

these creditors rely on this permission 

to make balloon loans rather than other 

types of qualified mortgages, the rule 

also denies these consumers the 

consumer protections associated with 

not giving balloon loans qualified 

mortgage status. 

According to the definition used in 

the final rule, approximately 10 percent 

of the U.S. population lives in areas that 

the Bureau defines as rural or 

underserved: the Bureau estimates that 

2,707 small creditors, currently issuing 

first-lien mortgages and operating 

predominantly in rural or underserved 

areas, will be able to originate balloon 

qualified mortgages as a result of the 

provision. Given the low population 

density of the areas currently defined as 

rural, the corresponding limits on the 

number of creditors, and the challenges 

of making loans that could be sold in 

the secondary market, keeping this 

source of credit in the community with 

the safeguards added by the rule is 

likely more important to consumers 

than the consumer protections 

associated with not allowing balloon 

loans to be qualified mortgages. In 

somewhat less rural areas, for example 

the micropolitan counties not covered 

by the definition in the final rule, there 

are more creditors that can provide 

alternative forms of credit, such as ARM 

loans, and more creditors in general. 

d. Qualified Mortgages and Appraisals 

One impact of the current definition 

of qualified mortgage is related to 

higher-risk mortgages as defined in the 

Act. The Act contains special appraisal 

requirements with respect to higher-risk 

mortgages; those requirements are the 

subject of an interagency rulemaking 

process which resulted in a proposed 

rule in August which the agencies 

expect to finalize shortly. The Act 

generally defines a higher-risk mortgage 

as a closed-end consumer credit 

transaction secured by a principal 

dwelling with an APR exceeding rate 

thresholds substantially similar to rate 

triggers currently in Regulation Z for 

higher-priced mortgage loans, but 

excluding qualified mortgages. In 

general, as the number of loans defined 

as qualified mortgages increases, the 

number of loans that would be covered 

by the proposed appraisal requirements 

decreases. Based on the general 

definition of qualified mortgage in the 

final rule, those higher priced mortgage 

loans with a debt-to-income ratio of 43 

or less would be exempt from the new 

requirements for interior appraisals. The 

temporary provision allowing additional 

loans (e.g. loans with a higher debt to 

income ratio and that are purchasable 

by the GSEs or insurable by FHA), to be 

qualified mortgages could further 

remove mortgages from that 

requirement. The impact of this 

reduction in the scope of appraisal 

requirements is relatively muted for first 

lien mortgages because of the small 

number of high-risk mortgages to begin 


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235 It is also possible that other contracting 

arrangements will develop. The industry is 

currently working on various changes to the 

traditional pooling and servicing agreements, for 

example. 

with and the fact that most lenders 

already do a full interior appraisal and 

share the results with the consumer. 

E. Potential Specific Impacts of the 

Final Rule 

1. Depository Institutions and Credit 

Unions With $10 Billion or Less in Total 

Assets, as Described in Section 1026 

Some depository institutions and 

credit unions with $10 billion or less in 

total assets as described in Section 1026 

may see different impacts from the final 

rule than larger institutions. These 

differences are driven by the lending 

practices and portfolios at smaller 

depository institutions and credit 

unions, notably those below roughly $2 

billion in assets, and by the nature of 

these institutions’ relationship to the 

secondary market. 

The Bureau understands that lending 

practices at many smaller institutions 

(according to comment letters and 

outreach) are based on a more personal 

relationship-based model, and less on 

automated systems, at least when the 

lender plans to keep the loan on 

portfolio rather than sell it. To the 

extent that the documentation and 

verification requirements in the final 

rule differ from current practice at these 

institutions, the final rule may impose 

some new compliance costs. However, 

unless these institutions keep all of the 

loans they originate on portfolio, which 

seems unlikely, they are already subject 

to documentation requirements from the 

secondary market so that any 

incremental costs are likely to be small. 

In addition, data from HMDA indicate 

that, on average, a larger proportion of 

loan originations at smaller institutions 

are higher-priced mortgage loans and 

will therefore have the rebuttable 

presumption of compliance rather than 

the safe harbor. These loans already are 

subject to an obligation to assess 

repayment ability and a rebuttable 

presumption under the Board’s 2009 

rule, so any new effects on these loans 

from the final rule, at least the loans 

these institutions keep on portfolio, are 

expected to be limited. Historically, 

delinquency rates on mortgages at 

smaller institutions are lower than the 

average in the industry and as such, the 

expected litigation costs for these loans 

are also probably quite low. 

Nevertheless, the proposal posted 

elsewhere in today’s Federal Register 

asks for comment on whether the safe 

harbor should be extended to additional 

loans at particular smaller institutions. 

The establishment of assignee liability 

for violation of the ability-to-repay 

provisions may also differentially 

impact smaller institutions by 

increasing counterparty risk for entities 

purchasing mortgages from these 

institutions. As described above, 

creditors and secondary market 

purchasers are expected to contract 

around the new ability-to-repay 

liability. For example, both Fannie Mae 

and Freddie Mac require lenders to 

represent and warrant that loans sold to 

the enterprises meet the current abilityto-repay requirements and to repurchase 

loans in cases where violations are 

found. Under such an arrangement,235

should a consumer bring a claim, the 

purchaser will look to the originator to 

repurchase the loan; if the originator is 

no longer in business or does not have 

the financial means to do so, the 

purchaser will have to bear the risk. 

This places greater incentive on 

purchasers to vet potential 

counterparties and may impact some 

smaller institutions’ ability to sell loans. 

The impact is likely greatest for loans 

made under the general ability-to-repay 

standard rather than for qualified 

mortgages. In the near term, the 

temporary provisions expanding the 

number of qualified mortgages, will 

greatly mitigate costs for these 

institutions. 

2. Impact of the Provisions on 

Consumers in Rural Areas 

The final rule should have minimal 

differential impacts on consumers in 

rural areas. In these areas, a greater 

fraction of loans are made by smaller 

institutions and carried on portfolio. 

The availability or pricing for fixed rate 

or adjustable-rate loans that are 

qualified mortgages is likely to be 

unaffected. Notably, the liability for 

these loans is nearly unchanged; those 

below the threshold will be subject to 

the safe harbor while those above the 

threshold have a rebuttable presumption 

similar to the one in place under 

existing regulation. Only the very small 

number of loans made by these 

institutions and then sold may be 

impacted by the changes in 

counterparty risk. Consumers 

constrained to borrow from these 

lenders may see a small increase in the 

price of credit, either from the lenders 

now having to fund the loan on the 

balance sheet or facing reduced prices 

in the secondary market. The possible 

increases in compliance costs just 

described may also lead to very small 

increases in rates. 

An important difference between the 

rural and the non-rural consumers is the 

availability of balloon loans following 

the rule. While the balloon loans in the 

non-rural areas that are not underserved 

cannot be qualified mortgages, small 

lenders operating predominantly in the 

rural or underserved areas can, under 

certain conditions, originate balloons 

loans that are qualified mortgages. Thus, 

rural consumers will preserve access to 

credit, while potentially experiencing 

the lack of protection associated with 

prohibiting balloon transactions from 

being qualified mortgages. Despite the 

fact that excluding a small creditor from 

the balloon loan market generally does 

not significantly disrupt the pricesetting process, this might not be true 

for rural markets. In particular, there are 

567 counties that have three creditors or 

fewer (that originate five or more 

covered transactions per year), 

according to HMDA 2011. Going from 

three creditors to two could 

significantly increase prices for 

consumers. 

Data regarding the specific mortgages 

originated and held on bank and credit 

union portfolios is very limited; the 

exception is the data on the credit union 

call report showing the total number 

and amount of balloon loans together 

with hybrid adjustable-rate mortgages. 

According to these data, there appear to 

be few institutions, and therefore very 

few consumers affected in this way. In 

counties where the problem should be 

worst, namely micropolitan counties not 

covered by the rural or underserved 

definition, there are just under 50 credit 

unions that extend balloon loans and 

not ARMs; in total they originate 1,200 

balloon loans. Consumers seeking credit 

at these institutions, or similarly 

situated banks or thrifts, may face some 

costs in taking a different product or in 

switching institutions depending on the 

product offerings and prices in the 

market. The Bureau believes any price 

increase is likely not significant as these 

areas are served by multiple lenders. On 

average, according to the 2011 HMDA 

data, 16 lenders on average made 

higher-priced mortgage loans in these 

counties, a proxy for what could be 

balloon loans. 

F. Alternatives Considered 

Two factors are most relevant when 

comparing the benefits, costs and 

impacts of the final rule to alternative 

regulatory implementations: the 

requirements for underwriting each loan 

and the eventual legal liability attached 

to that loan. The current rule differs 

from the Board’s proposal along both 

dimensions, particularly in regard to 

qualified mortgages, as it uses a slightly 

different structure overall, such as 

incorporating a specific debt-to-income 


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ratio requirement. It also varies in 

structure from some other proposals 

offered by commenters. However, even 

within the structure developed in the 

final rule, the parameters within the 

rule (e.g. the DTI ratio threshold) could 

have been different. In order to more 

fully illuminate the impacts of the final 

rule, this section first considers the final 

rule in comparison to the proposals and 

then to other reasonable alternatives. 

In the 2011 ATR Proposal, the Board 

proposed two alternative definitions for 

a qualified mortgage. The Board’s 

Alternative 1 proposed to define a 

qualified mortgage using only the 

statutory provisions (except for the 

discretionary requirement to consider 

the consumer’s debt-to-income ratio or 

residual income). That is, the definition 

of a qualified mortgage would be based 

on product features, cost limitations 

(points and fees limit) and income 

verification but would not require the 

creditor to follow any other specific 

underwriting procedures. Alternative 1 

would have operated as a legal safe 

harbor with the conclusive presumption 

of compliance. 

The final rule maintains a minimum 

standard for documenting and verifying 

loans and varies the legal liability with 

the perceived consumer risk. 

Alternative 1, on the other hand, placed 

more emphasis on the restrictions on 

product features to protect consumers. 

Loans without interest-only, negative 

amortization or balloon features, or 

where total points and fees do not 

exceed three points were assumed safe 

and therefore had limited requirements 

for documenting income and debt 

(relative to other loans) and were 

afforded the conclusive presumption of 

compliance. 

Compared to this alternative, the final 

rule with the temporary provisions 

likely offers qualified mortgage status to 

a similar number of loans: without the 

effects of the temporary provisions, 

fewer loans would qualify as qualified 

mortgages. The final rule also mandates 

stricter documentation and verification 

of qualified mortgages and limits the 

presumption of compliance in the case 

of higher-priced covered transactions. 

Compared to Alternative 1, only those 

loans that meet the product, features 

and point-and-fee limitations and that 

have a DTI ratio less than or equal to 43 

percent are qualified mortgages. This 

approach limits the reliance on 

compensating factors when 

underwriting high DTI ratio loans and 

recognizes that while such loans may be 

in the creditor’s interest, there is a 

greater possibility that the consumer 

may not have the ability to repay the 

loan. This change likely increases costs 

slightly in order to provide this 

consumer protection. Requiring the 

additional verification of debts for 

qualified mortgages also provides 

additional consumer protection. Since 

this is current practice in the market 

today, this likely adds very little cost for 

the time being; however, it does impose 

costs as credit expands to the point that 

the market would otherwise relax 

verification requirements—as well as 

benefits to consumers and society at 

large from preventing loans based on 

unverified (or no) data. Compared to 

Alternative 1, the only difference in the 

strength of the liability protection for 

qualified mortgages is for those loans 

above the higher-priced threshold. In 

the final rule, these loans have a 

rebuttable presumption of compliance 

rather than a conclusive presumption. 

However, given that the legal standard 

today is a rebuttable presumption, the 

final rule nearly maintains the status 

quo for borrowers with HPMLs; 

adopting Alternative 1 would have been 

a slight diminution of these borrower’s 

legal rights. 

The Board’s Alternative 2 would have 

provided the lender with a rebuttable 

presumption of compliance and would 

have defined a ‘‘qualified mortgage’’ as 

including the statutory criteria as well 

the additional underwriting 

requirements from the general ability-torepay standard. The Board proposed to 

permit, but not require, creditors to 

comply with the underwriting 

requirements by looking to ‘‘widely 

accepted governmental and nongovernmental underwriting standards’’ 

(such as the FHA’s standards). The 

important difference between this 

aspect of Alternative 2 and Alternative 

1 is that, under Alternative 2, the 

relative weights for such tradeoffs had 

to be derived from widely accepted 

standards. 

Compared to Alternative 2, the final 

rule with the temporary provisions 

likely offers qualified mortgage status to 

a similar number of loans; without the 

effects of the temporary provisions, 

fewer loans would be eligible to be 

qualified mortgages. Under the final 

rule, there is little difference in the 

documentation and verification 

requirements; however, the 

presumption of compliance is 

strengthened for the majority of 

qualified mortgages. Compared to 

Alternative 2 (and to Alternative 1), 

only those loans that meet the product, 

features and cost limitations and that 

have a DTI ratio less than or equal to 43 

percent are qualified mortgages. This 

limits the use of compensating factors 

for high DTI loans and recognizes that 

while such loans may be in the 

creditor’s interest, there is a greater 

possibility that the consumer may not 

have the ability to repay the loan. This 

change likely increases costs slightly in 

order to provide this consumer 

protection. Both Alternative 2 and the 

final rule have very similar 

documentation and verification 

standards so there is little difference in 

the benefits and costs along that 

dimension. Relative to Alternative 2, the 

difference in the liability standard is for 

those qualified mortgages below the 

higher-priced threshold. In the final 

rule, these loans have a conclusive 

presumption of compliance rather than 

just a rebuttable presumption. 

As noted in the preamble, a coalition 

of industry and consumer advocates 

presented another alternative proposal 

to the Bureau that would have provided 

a tiered approach to defining a qualified 

mortgage. Under the first tier, if the 

consumer’s total debt-to-income ratio is 

43 percent or less, the loan would be a 

qualified mortgage, and no other tests 

would be required. Under the second 

tier, if the consumer’s total debt-toincome ratio is more than 43 percent, 

the creditor would apply a series of tests 

related to the consumer’s front-end 

debt-to-income ratio (housing debt to 

income), stability of income and past 

payment history, availability of reserves, 

and residual income to determine if a 

loan is a qualified mortgage. This would 

have allowed some loans with up to 50 

percent DTI ratios to meet the qualified 

mortgage definition. To the extent that 

it relies on additional factors beyond the 

DTI ratio, this alternative is similar to 

the Board’s approach. However, the 

coalition’s proposal generally restricted 

the factors considered to be factors 

related to ability to repay, rather than 

other factors related to credit or 

collateral in its determination. These 

commenters also supported a rebuttable 

presumption standard for qualified 

mortgages. 

Relative to this alternative, the final 

rule will likely include fewer loans as 

qualified mortgages. The loans that will 

not be qualified mortgages are those that 

would qualify only under one or more 

of the additional factors besides DTI 

ratio that the alternative included: 

housing expenses, stability of income, 

reserves etc. As a result, these loans will 

have to meet the ability-to-repay 

standard of the final rule, providing 

additional consumer protections with 

the minor added costs described above. 

Relative to a rule including these 

factors, the final rule is simpler and 

easier to implement for industry, 

lowering costs overall. In addition, 

creditors are free to include such factors 

in their own credit decisions and to 


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236For purposes of assessing the impacts of the 

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

defined in the RFA to include small businesses, 

small not-for-profit organizations, and small 

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

business’’ is determined by application of Small 

Business Administration regulations and reference 

to the North American Industry Classification 

System (NAICS) classifications and size standards. 

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

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

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

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

village, school district, or special district with a 

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

237 5 U.S.C. 609. 

238 76 FR 27479–27480. 

develop the best models for their 

inclusion. The Bureau views this more 

dynamic outcome as a benefit relative to 

a more prescriptive rule detailing how 

such factors should be traded off against 

each other. This alternative did include 

a rebuttable presumption of compliance 

for all qualified mortgages; as such, the 

final rule’s safe harbor limits liability 

costs and consumer benefits, as already 

discussed, for those qualified mortgages 

that are not higher priced covered 

transactions. 

As noted, the Bureau also considered 

certain alternatives to its own version of 

the final rule. One such alternative 

would have used a threshold of a 36 

percent DTI ratio to define qualified 

mortgages. This would have left roughly 

an additional 15 percent of loans, both 

during the 1997–2003 period and during 

2011, without a presumption of 

compliance. As noted however, the 

Bureau believes that 43 percent is a 

more efficient threshold: it is an 

accepted market standard, rates of 

delinquency and default for borrowers 

between 36 and 43 percent are still 

modest, and many borrowers— 

particularly in higher cost housing 

markets—borrow at these levels. 

The Bureau also considered whether 

all qualified mortgages should have the 

same degree of presumption with the 

qualified mortgage standard—either all 

being afforded a conclusive 

presumption of compliance or all being 

afforded a rebuttable presumption. As 

discussed in the section-by-section 

analysis, the Bureau determined that the 

bifurcated approach in which only 

higher-priced covered transactions 

provide the consumer with the 

opportunity to rebut the presumption of 

compliance best balances the concerns 

of costs, certainty, and consumer 

protection. 

VIII. Final Regulatory Flexibility Act 

The Regulatory Flexibility Act (RFA) 

generally requires an agency to conduct 

an initial regulatory flexibility analysis 

(IRFA) and a final regulatory flexibility 

analysis (FRFA) of any rule subject to 

notice-and-comment rulemaking 

requirements, unless the agency certifies 

that the rule will not have a significant 

economic impact on a substantial 

number of small entities.236 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.237

In the 2011 ATR Proposal, the Board 

did not certify that the rule would not 

have a significant economic impact on 

a substantial number of small entities 

and therefore prepared an IRFA.238 In 

this IRFA the Board solicited comment 

on any costs, compliance requirements, 

or changes in operating procedures 

arising from the application of the 

proposed rule to small businesses, 

comment regarding any state or local 

statutes or regulations that would 

duplicate, overlap, or conflict with the 

proposed rule, and comment on 

alternative means of compliance for 

small entities with the ability-to-repay 

requirements and restrictions on 

prepayment penalties. Comments 

addressing the ability-to-repay 

requirements and restrictions on 

prepayment penalties are addressed in 

the section-by-section analysis above. 

Comments addressing the impact on the 

cost of credit are discussed below. 

1. A Statement of the Need for, and 

Objectives of, the Rule 

The Bureau is publishing a final rule 

to establish new ability-to-repay 

requirements related to mortgage 

origination. As discussed in the 

preamble, the final rule’s amendments 

to Regulation Z implement certain 

amendments to TILA that were added 

by sections 1411, 1412, 1413, and 1414 

of the Dodd-Frank Act in response to 

the recent foreclosure crisis to address 

certain lending practices (such as lowor no-documentation loans or 

underwriting mortgages without 

including any principal repayments in 

the underwriting determination) that led 

to consumers having mortgages they 

could not afford, thereby contributing to 

high default and foreclosure rates. 

A full discussion of the market 

failures motivating these provisions of 

the Dodd-Frank Act and the final rule is 

included in the preamble and in the 

Bureau’s section 1022 analysis above. 

Those discussions also describe the 

specific ways the final rule addresses 

these issues. However, in general, the 

purpose of the Dodd-Frank Act abilityto-repay requirements is to assure that 

consumers are offered and receive 

residential mortgage loans on terms that 

reasonably reflect their ability to repay 

the loans and that are understandable 

and not unfair, deceptive or abusive. 

Prior to the Dodd-Frank Act, existing 

Regulation Z provided ability-to-repay 

requirements for high-cost and higherpriced mortgages. Accordingly, new 

TILA section 129C generally 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, 

including any mortgage-related 

obligations (such as property taxes and 

mortgage insurance). Consistent with 

the statute, the final rule applies the 

ability-to-repay requirements of TILA 

section 129C to any consumer credit 

transaction secured by a dwelling, 

except an open-end credit plan, 

timeshare plan, reverse mortgage, or 

temporary loan. 

Congress also recognized the 

importance of maintaining access to 

responsible, affordable mortgage credit. 

To provide creditors more certainty 

about their potential liability under the 

ability-to-repay standards while 

protecting consumers from unaffordable 

loans, the Dodd-Frank Act creates a 

presumption of compliance with the 

ability-to-repay requirement when 

creditors make ‘‘qualified mortgages.’’ 

Qualified mortgages do not contain 

certain features that Congress deemed to 

create a risk to consumers’ ability to 

repay, and must be underwritten using 

standards set forth in the statute that are 

designed to assure that consumers will 

have the ability to repay these loans. 

The final rule establishes standards for 

complying with the ability-to-repay 

requirements, including defining 

‘‘qualified mortgage.’’ The final rule 

provides three options for originating a 

qualified mortgage: under the general 

definition in § 1026.43(e)(2), for loans 

where the consumer’s monthly debt-toincome ratio would not exceed 43 

percent; under the definition 

§ 1026.43(e)(4), for a maximum of seven 

years, for loans that are eligible for 

purchase by the GSEs while in 

conservatorship or certain other Federal 

agencies, and under § 1026.43(f), for 

loans that have balloon-payment 

features if the creditor operates 

predominantly in rural or underserved 

areas and meets certain asset-size and 

transaction volume limits. 

Congress did not explicitly define the 

nature of the presumption of 

compliance that attaches to a qualified 

mortgage. Congress also left some 

contours of a qualified mortgage 


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undefined, such as whether there 

should be a minimum debt-to-income 

ratio. Congress left these decisions to 

the Bureau and granted broad authority 

to revise, add to, or subtract from the 

qualified mortgage criteria upon a 

finding that doing so is ‘‘necessary or 

proper’’ or ‘‘necessary and appropriate’’ 

to achieve certain specified standards, 

such as ensuring that responsible, 

affordable mortgage credit remains 

available to consumers. 

As discussed above, the final rule 

recognizes both the need to assure that 

consumers are offered and receive loans 

based on a reasonable and good faith 

determination of their repayment ability 

and the need to ensure that responsible, 

affordable mortgage credit remains 

available to consumers. The Bureau 

believes, based upon its analysis of the 

data available to it, that, under the final 

rule, the vast majority of loans 

originated today can meet the standards 

for a qualified mortgage so long as 

creditors follow the required 

procedures, such as verifying income or 

assets, and current debt obligations, 

alimony and child support. The Bureau 

also believes, based upon its analysis of 

the historical performance of loans 

meeting the rule’s definition of 

‘‘qualified mortgages,’’ that consumers 

will be able to repay these loans. The 

Bureau believes that the final rule will 

not restrict creditors’ ability to make 

responsible loans, both within and 

outside the qualified mortgage space. 

The final rule provides special rules 

for complying with the ability-to-repay 

requirements for a creditor refinancing a 

‘‘non-standard mortgage’’ into a 

‘‘standard mortgage.’’ 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. 

In addition to the ability-to-repay and 

qualified mortgage provisions, the final 

rule implements the Dodd-Frank Act 

limits on prepayment penalties and 

lengthens the time creditors must retain 

records that evidence compliance with 

the ability-to-repay and prepayment 

penalty provisions. 

2. Summary of Significant Issues Raised 

by Comments in Response to the Initial 

Regulatory Flexibility Analysis, 

Statement of the Assessment of the 

Bureau of Such Issues, and a Statement 

of Any Changes Made as a Result of 

Such Comments 

The Board’s IRFA estimated the 

possible compliance costs for small 

entities from each major component of 

the rule against a pre-statute baseline. 

The Board requested comments on the 

IRFA. 

The Board did not receive any 

comments in its IRFA. Industry 

commenters generally expressed 

concern with respect to the costs they 

anticipated from the 2011 ATR 

Proposal. The Bureau received 

numerous comments describing in 

general terms the impact of the 

proposed rule on small creditors and the 

need for the qualified mortgage 

definition to be structured as a safe 

harbor with clear, well-defined 

standards to ensure that the largest 

number of consumers possible can 

access credit. Small creditors are 

particularly concerned about the 

litigation risk associated with the 

requirement to make a reasonable and 

good faith determination of consumers’ 

ability to repay based on verified and 

documented information. Because of 

their size, small creditors note that they 

are particularly unsuited to bear the 

burden and cost of litigation and would 

find it particularly difficult to absorb the 

cost of an adverse judgment. Indeed, 

small creditors insist 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.’’ These 

small creditors’ concerns about 

compliance with the ability-to-repay 

rule and associated litigation risk have 

been repeatedly expressed to the Bureau 

by their trade associations and 

prudential regulators. 

Several commenters on the 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 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. 

Some industry commenters supported 

not including quantitative standards for 

such variables as debt-to-income ratios 

and residual income because they 

argued that underwriting a loan 

involves weighing a variety of factors, 

and creditors and investors should be 

allowed to exercise discretion and 

weigh risks for each individual loan. To 

that point, one industry trade group 

commenter argued that community 

banks, for example, generally have 

conservative requirements for a 

consumer’s debt-to-income ratio, 

especially for loans that are held in 

portfolio by the bank, and consider 

many factors when underwriting for 

mortgage loans, such as payment 

history, liquid reserves, and other 

assets. Because several factors are 

considered and evaluated in the 

underwriting process, this commenter 

asserted that community banks can be 

flexible when underwriting for mortgage 

loans and provide arrangements for 

certain consumers that fall outside of 

the normal debt-to-income ratio for a 

certain loan. This commenter contended 

that strict quantitative standards would 

inhibit community banks’ relationship 

lending and ability to use their sound 

judgment in the lending process. Some 

commenters contended that requiring 

specific quantitative standards could 

restrict credit access and availability for 

consumers. 

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. 

Some industry commenters urged the 

Bureau to allow balloon mortgage loans 

held in portfolio by the originating 

banks for the life of the loan to be 

included under this safe harbor so that 

small creditors could continue to meet 

the specific needs of their customers. 

These comments, and the responses, 

are discussed in the section-by-section 

analysis and element 6–1 of this FRFA. 

3. Response to the Small Business 

Administration Chief Counsel for 

Advocacy 

The SBA Office of Advocacy 

(Advocacy) provided a formal comment 

letter to the Bureau in response to the 

Bureau’s reopening of the comment 

period for certain issues relating to the 

ability-to-repay/qualified mortgage 

rulemaking. Among other things, this 

letter expressed concern about the 

following issues: the qualified mortgage 

definition and the use of data as a 

means for measuring a consumer’s 

ability to repay. 

First, Advocacy expressed concern 

that the qualified mortgage definition 

will have major implications on the 

viability of community banks. Advocacy 

pointed to the assertion made by small 

banks that they will no longer originate 

mortgage loans if they are only provided 

with a rebuttable presumption of 

compliance. In addition, according to 

Advocacy, small banks contend that 

establishing the qualified mortgage as a 


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239The Average Prime Offer Rate means ‘‘the 

average prime offer rate for a comparable 

transaction as of the date on which the interest rate 

for the transaction is set, as published by the 

Bureau.’’ TILA section 129C(b)(2)B). 

240Regulation Z generally applies to ‘‘each 

individual or business that offers or extends credit 

when four conditions are met: (i) The credit is 

offered or extended to consumers; (ii) the offering 

or extension of credit is done regularly; (iii) the 

credit is subject to a finance charge or is payable 

by a written agreement in more than four 

installments, and (iv) the credit is primarily for 

personal, family, or household purposes.’’ Section 

1026.1(c)(1). Regulation Z provides, in general, that 

a person regularly extends consumer credit only if 

the person extended credit more than 5 times for 

transactions secured by a dwelling in the preceding 

year. 

241The current SBA size standards are found on 

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

table-small-business-size-standards. 

242See id. 

rebuttable presumption of compliance 

will reduce the availability and 

affordability of mortgages to consumers 

due to increased litigation and 

compliance costs, and the exit by 

certain small lenders unable to manage 

the risk. According to Advocacy, small 

banks assert that one way to enable 

them to compete effectively (and to 

ensure consumers can obtain affordable 

loans) is to establish the qualified 

mortgage as a safe harbor and allow for 

non-traditional loans such as mortgages 

with balloon payments to continue to be 

made. 

The Bureau carefully considered the 

arguments for establishing the qualified 

mortgage as a safe harbor or rebuttable 

presumption of compliance in light of 

the proposed rule, and a complete 

discussion of the consideration of the 

Bureau’s final rule can be found in the 

respective section of the section-bysection analysis, the Bureau’s section 

1022(b)(2) discussion, and in element 6– 

1 of this FRFA. 

As discussed in more detail 

elsewhere, the final rule provides a safe 

harbor under the ability-to-repay 

requirements for mortgage loans that 

satisfy the definition of a qualified 

mortgage and are not higher-priced 

covered transactions (i.e., APR does not 

exceed Average Prime Offer Rate 

(APOR) 239 + 1.5 percentage points for 

first liens or 3.5 percentage points for 

subordinate liens). The final rule 

provides a rebuttable presumption for 

all other qualified mortgage loans, 

meaning qualified mortgage loans that 

are higher-priced covered transactions 

(i.e., APR exceeds APOR + 1.5 

percentage points for first lien or 3.5 

percentage points for subordinate lien). 

The Bureau believes that a bifurcated 

approach to the presumption of 

compliance provides the best way of 

balancing consumer protection and 

access to credit considerations and is 

consistent with the purposes of the 

statute, while calibrating consumer 

protections and risk levels to match the 

historical record of loan performance. 

To reduce uncertainty in potential 

litigation, the final rule defines the 

standard by which a consumer may 

rebut the presumption of compliance 

afforded to higher-priced qualified 

mortgages. 

The Bureau notes that the Board’s 

proposed § 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, this final 

rule is related to a proposed rule 

published elsewhere in today’s Federal 

Register. As discussed in more detail 

below, in that proposal, the Bureau is 

proposing certain amendments to this 

final rule, including a proposal to define 

as a qualified mortgage a larger category 

of loans made and held in portfolio by 

small creditors than this final rule 

defines as a qualified mortgage. 

Second, Advocacy expressed concern 

about using loan performance, as 

measured by the delinquency rate, as an 

appropriate metric to evaluate whether 

consumers had the ability to repay at 

the time their loans were consummated. 

Advocacy noted that a consumer’s 

circumstances might change after the 

loan was made due to unemployment or 

illness. The Bureau agrees that 

consumers’ circumstances can change 

and lead to delinquency or default. 

However, the Bureau also believes that 

DTI is an indicator of the consumer’s 

ability to repay. All things being equal, 

consumers carrying loans with higher 

DTI ratios will be less able to absorb any 

such shocks and are more likely to 

default. 

4. A Description of and an Estimate of 

the Number of Small Entities to Which 

the Rule Will Apply 

The final rule will apply to creditors 

that engage in originating or extending 

certain dwelling-secured credit. The 

credit provisions of TILA and 

Regulation Z have broad applicability to 

individuals and businesses that 

originate and extend even small 

numbers of home-secured credit. See 

1026.1(c)(1).240 Small entities that 

originate or extend closed-end loans 

secured by a dwelling are potentially 

subject to at least some aspects of the 

final rule. 

For purposes of assessing the impacts 

of the final rule on small entities, ‘‘small 

entities’’ is defined in the RFA to 

include small businesses, small 

nonprofit organizations, and small 

government jurisdictions. 5 U.S.C. 

601(6). A ‘‘small business’’ is 

determined by application of SBA 

regulations and reference to the North 

American Industry Classification 

System (NAICS) classifications and size 

standards.241 5 U.S.C. 601(3). Under 

such standards, banks and other 

depository institutions are considered 

‘‘small’’ if they have $175 million or less 

in assets, and for other financial 

businesses, the threshold is average 

annual receipts (i.e., annual revenues) 

that do not exceed $7 million.242

The Bureau can identify through data 

under the Home Mortgage Disclosure 

Act, Reports of Condition and Income 

(Call Reports), and data from the 

National Mortgage Licensing System 

(NMLS) the approximate numbers of 

small depository institutions that will 

be subject to the final rule. Origination 

data is available for entities that report 

in HMDA, NMLS or the credit union 

call reports; for other entities, the 

Bureau has estimated their origination 

activities using statistical projection 

methods. 

The following table provides the 

Bureau’s estimate of the number and 

types of entities to which the rule will 

apply: 


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5. Projected Reporting, Recordkeeping, 

and Other Compliance Requirements 

The final rule does not impose new 

reporting requirements. The final rule 

does, however, impose new 

recordkeeping and other compliance 

requirements on certain small entities. 

The requirements on small entities from 

each major component of the rule are 

presented below. 

The Bureau discusses impacts against 

a pre-statute baseline. This baseline 

assumes compliance with the Federal 

rules that overlap with the final rule. 

The impact of the rule relative to the 

pre-statute baseline will be smaller than 

the impact would be if not for 

compliance with the existing Federal 

rules. In particular, creditors have 

already incurred some of the one-time 

costs necessary to comply with the final 

rule when they came into compliance 

with the 2008 HOEPA Final Rule on 

higher-priced mortgage loans. And 

creditors already have budgeted for 

some of the ongoing costs of the final 

rule to the extent those are costs 

necessary to remaining in compliance 

with the 2008 HOEPA Final Rule. These 

expenses attributable to the 2008 

HOEPA Final Rule will facilitate and 

thereby reduce the cost of compliance 

with this final rule. 

Recordkeeping Requirements 

The final rule imposes new record 

retention requirements on covered 

persons. As discussed above, the final 

rule requires creditors to retain evidence 

of compliance with § 1026.43 

(containing the ability-to-repay/ 

qualified mortgage provisions and 

prepayment penalty restrictions) for 

three years after consummation. The 

final rule clarifies that creditors need 

not maintain actual paper copies of the 

documentation used to underwrite a 

transaction. For most covered persons, 

the required records will be kept in 

electronic form and creditors need 

retain only enough information to 

reconstruct the required records. This 

should limit any burden associated with 

the record retention requirement for 

creditors. 

Other Compliance Requirements 

As discussed in detail in the sectionby-section analysis and the Bureau’s 

section 1022(b)(2) discussion above, the 

final rule imposes new compliance 

requirements on creditors. In general, 

creditors will have to update their 

policies and procedures; additionally, 

creditors may have to update their 

systems, for example, to store flags 

identifying qualified mortgages, and to 

ensure compliance. The Bureau believes 

that small creditors’ major one-time 

costs will be to learn about the final 

rule, consider whether they need to 

modify their underwriting practices and 

procedures to comply with the rule and, 

if necessary, modify their practices and 

procedures. The precise costs to small 

entities of modifying their underwriting 

practices, should they need to do so, are 

difficult to predict. These costs will 

depend on a number of factors, 

including, among other things, the 

current practices and systems used by 

such entities to collect and analyze 

consumer income, asset, and liability 

information, the complexity of the terms 

of credit products that they offer, and 

the range of such product offerings. To 

the extent that most small creditors’ 

processes already align with the rule, 

any additional compliance costs should 

be minimal. 

When originating mortgages, the 

creditor must 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. The final rule 

provides special payment calculation 

rules for loans with balloon payments, 

interest-only loans, and negative 

amortization loans. The final rule may 

therefore increase compliance costs for 

small entities, particularly for creditors 

that offer products that contain balloon 

payments, interest-only loans, and 

negative amortization loans. The precise 

costs to small entities of updating their 

processes and systems to account for 

these additional calculations are 

difficult to predict, but these costs are 

mitigated, in some circumstances, by 

the presumption of compliance or safe 

harbor for qualified mortgages. 

The Final Rule also includes 

requirements for documentation and 

verification of certain information that 

the creditor must consider in assessing 

a consumer’s repayment ability. The 

final rule provides special rules for 

verification of a consumer’s income or 

assets, and provides examples of records 

that can be used. Different verification 


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243The Average Prime Offer Rate means ‘‘the 

average prime offer rate for a comparable 

transaction as of the date on which the interest rate 

for the transaction is set, as published by the 

Bureau.’’ TILA section 129C(b)(2)B). 

requirements apply to qualified 

mortgages. Creditors that originate 

qualified mortgages under the general 

definition must verify a consumer’s 

income or assets, current debt 

obligations, alimony, and child support, 

and must also verify a consumer’s 

monthly debt-to-income ratio. The final 

rule does not contain specific 

verification requirements for creditors 

originating qualified mortgages under 

the temporary provisions; however, 

such loans must comply with eligibility 

requirements (including underwriting 

requirements) of the GSEs or the Federal 

agency program applicable to the loan. 

The final rule also provides special 

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

refinancing a ‘‘non-standard mortgage’’ 

into a ‘‘standard mortgage.’’ This 

provision is based on TILA section 

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

rules for the refinance 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 the 

final rule, 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 under the general 

ability-to-repay option, if certain 

conditions are met, thus reducing 

compliance costs for small entities. 

Prepayment limitations, as discussed 

in detail in the section-by-section 

analysis and the Bureau’s section 1022 

analysis, are also included in the final 

rule. 

Estimate of the Classes of Small Entities 

Which Will Be Subject to the 

Requirement 

Section 603(b)(4) of the RFA requires 

an estimate of the classes of small 

entities which will be subject to the 

requirement. The classes of small 

entities which will be subject to the 

reporting, recordkeeping, and 

compliance requirements of the final 

rule are the same classes of small 

entities that are identified above in part 

VIII.B.4. 

Section 604(a)(5) of the RFA also 

requires an estimate of the type of 

professional skills necessary for the 

preparation of the reports or records. 

The Bureau anticipates that the 

professional skills required for 

compliance with the final rule are the 

same or similar to those required in the 

ordinary course of business of the small 

entities affected by the final rule. 

Compliance by the small entities that 

will be affected by the final rule will 

require continued performance of the 

basic functions that they perform today: 

Managing information about consumers 

and conducting sound underwriting 

practices for mortgage originations. 

6–1. Description of the Steps the Agency 

has Taken To Minimize the Significant 

Economic Impact on Small Entities 

The Bureau understands the new 

provisions will impose a cost on small 

entities, and has attempted to mitigate 

the burden consistent with statutory 

objectives. The Bureau has also taken 

numerous additional steps that are 

likely to reduce the overall cost of the 

rule. Nevertheless, the rule will 

certainly create new one-time and 

ongoing costs for creditors. The sectionby-section analysis of each provision 

and the Bureau’s section 1022 analysis 

contain a complete discussion of the 

following steps taken to mitigate the 

burden. 

The final rule provides small creditors 

with the option of offering only 

qualified mortgages, which will enjoy 

either a presumption of compliance 

with respect to the repayment ability 

requirement (for higher-priced covered 

transactions) or a safe harbor from the 

repayment ability requirement, thus 

reducing litigation risks and costs for 

small creditors. 

The Bureau believes that a variety of 

underwriting standards can yield 

reasonable, good faith ability-to-repay 

determinations. The Bureau is 

permitting creditors to develop and 

apply their own underwriting standards 

(and to make changes to those standards 

over time in response to empirical 

information and changing economic and 

other conditions) as long as those 

standards lead to ability-to-repay 

determinations that are reasonable and 

in good faith. In addition, the Bureau 

will permit creditors to use their own 

definitions and other technical 

underwriting criteria and notes that 

underwriting guidelines issued by 

governmental entities such as the FHA 

are a source to which creditors may 

refer for guidance on definitions and 

technical underwriting criteria. The 

Bureau believes this flexibility is 

necessary given the wide range of 

creditors, consumers, and mortgage 

products to which this rule applies. The 

Bureau believes this increased 

flexibility will reduce the burden on 

small creditors by allowing them to 

determine the practices that fit best with 

their business model. 

Qualified Mortgage Provisions 

The general definition of the qualified 

mortgage includes a very clear standard 

of 43 percent for the debt-to-income 

threshold and clear methods to compute 

that figure. The clarity of this provision, 

and others, should make 

implementation of and compliance with 

these provisions of the rule. The Bureau 

carefully considered the arguments for 

establishing the qualified mortgage as a 

safe harbor or rebuttable presumption of 

compliance in light of the proposed 

rule, and a complete discussion of the 

consideration of the Bureau’s final rule 

can be found in the respective section 

of the section-by-section analysis. The 

final rule establishes standards for 

complying with the ability-to-repay 

requirements, including defining 

‘‘qualified mortgage.’’ The final rule 

provides three options for originating a 

qualified mortgage: under the general 

definition in § 1026.43(e)(2), for loans 

where the consumer’s monthly debt-toincome ratio would not exceed 43 

percent; under the definition 

§ 1026.43(e)(4), for a maximum of seven 

years, for loans that are eligible for 

purchase by the GSEs while in 

conservatorship or certain other Federal 

agencies, and under § 1026.43(f), for 

loans that have balloon-payment 

features if the creditor operates 

predominantly in rural or underserved 

areas and meets certain asset-size and 

transaction volume limits. The final rule 

provides a safe harbor under the abilityto-repay requirements for mortgage 

loans that satisfy the definition of a 

qualified mortgage and are not higherpriced covered transactions (i.e., APR 

does not exceed Average Prime Offer 

Rate (APOR) 243 + 1.5 percentage points 

for first liens or 3.5 percentage points 

for subordinate liens). The final rule 

provides a rebuttable presumption for 

all other qualified mortgage loans, 

meaning qualified mortgage loans that 

are higher-priced covered transactions 

(i.e., APR exceeds APOR + 1.5 

percentage points for first lien or 3.5 

percentage points for subordinate lien). 

The Bureau believes that a bifurcated 

approach to the presumption of 

compliance provides the best way of 

balancing consumer protection and 

access to credit considerations and is 

consistent with the purposes of the 

statute, while calibrating consumer 

protections and risk levels to match the 

historical record of loan performance. 

To reduce uncertainty in potential 


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6580 Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 

litigation, the final rule defines the 

standard by which a consumer may 

rebut the presumption of compliance 

afforded to higher-priced qualified 

mortgages. The Bureau’s approach to the 

standards with which a consumer can 

rebut the presumption that applies to 

higher-priced transactions is further 

designed to ensure careful calibration. 

The Bureau considered several 

alternatives, including only the safe 

harbor standard and only the rebuttable 

presumption standard. In its 

rulemaking, the Bureau tried to balance 

consumers’ access to credit concerns 

with the consumer protection associated 

with reducing consumers’ cost of 

litigation. Compared to the final rule, 

only the safe harbor standard marginally 

increased consumers’ access to credit, 

but significantly reduced consumer 

protection. Conversely, only the 

rebuttable presumption standard 

marginally increased consumer 

protection, but significantly decreased 

consumers’ access to credit. 

Balloon-Payment Qualified Mortgage 

Provisions 

The Bureau has also provided an 

exception to the general provision that 

a qualified mortgage may not provide 

for a balloon payment for loans that are 

originated by certain small creditors and 

that meet specified criteria. The Bureau 

understands that community banks 

originate balloon-payment loans to 

hedge against interest rate risk, rather 

than making adjustable-rate mortgages, 

and that community banks hold these 

balloon-payment loans in portfolio 

virtually without exception because 

they are not eligible for sale in the 

secondary market. Under the final rule, 

the Bureau is permitting small creditors 

operating predominantly in rural or 

underserved areas to originate a balloonpayment qualified mortgage. 

Unlike loans that are qualified 

mortgages under the general definition, 

there is no specific debt-to-income ratio 

requirement for balloon-payment 

qualified mortgages. However, creditors 

must consider and verify a consumer’s 

monthly debt-to-income ratio. Like the 

other qualified mortgage definitions, a 

loan that satisfies the criteria for a 

balloon-payment qualified mortgage and 

is not a higher-priced covered 

transaction receives a legal safe harbor 

under the ability-to-repay requirements. 

A loan that satisfies those criteria and is 

a higher-priced covered transaction 

receives a rebuttable presumption of 

compliance with the ability-to-repay 

requirements. The Bureau believes that 

this exception will decrease the 

economic impact of the final rule on 

small entities. In response to concerns 

regarding the proposed provisions for 

holding balloon-payment loans in 

portfolio, the final rule provides more 

flexible portfolio requirements which 

permit certain transfers. 

Concurrent Proposal for Portfolio Loans 

Made by Small Creditors 

The Bureau notes that the Board’s 

proposal did not include special 

provisions for portfolio loans made by 

small creditors and the Board’s proposal 

did not address such an 

accommodation. 

The Bureau understands that creditors 

generally have in place underwriting 

policies, procedures, and internal 

controls that require verification of the 

consumer’s reasonably expected income 

or assets, employment status, debt 

obligations and simultaneous loans, and 

debt-to-income or residual income. 

Notably, in response to the proposal, 

commenters stated that most creditors 

today are already complying with the 

full ability-to-repay underwriting 

standards. For these institutions, there 

would be no additional burden as a 

result of the verification requirements in 

the final rule, since those institutions 

collect the required information in the 

normal course of business. To the extent 

small creditors do not verify and 

document some or all of the information 

required by the proposed rule in the 

normal course of business, they will 

need to engage in certain one-time 

implementation efforts and system 

adjustments. These one-time costs might 

include expenses related to creditors 

needing to reanalyze their product lines, 

retrain staff, and reorganize the 

processing and administrative elements 

of their mortgage operations. 

In a related proposed rule published 

elsewhere in today’s Federal Register, 

the Bureau is proposing certain 

amendments to this final rule, including 

an additional definition of a qualified 

mortgage for certain loans made and 

held in portfolio by small creditors. The 

proposed new category would include 

certain loans originated by small 

creditors that: (1) Have total assets less 

than $2 billion at the end of the 

previous calendar year; and (2) together 

with all affiliates, originated 500 or 

fewer covered transactions, secured by 

first-liens during the previous calendar 

year. These loans generally conform the 

requirements under the general 

definition of a qualified mortgage except 

the 43 percent limit on monthly debt-toincome ratio. Under the proposed 

additional definition, a creditor would 

not have to use the instructions in the 

appendix to the final rule 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.’’ In addition, the Bureau 

also is proposing to allow small 

creditors operating predominantly in 

rural or underserved areas to offer firstlien balloon loans with a higher annual 

percentage rate and still benefit from a 

conclusive presumption of compliance 

with the ability to repay rules or ‘‘safe 

harbor.’’ The Bureau is proposing these 

changes because it believes they may be 

necessary to preserve access to credit for 

some consumers. The regulatory 

requirement to make a reasonable and 

good faith determination based on 

verified and documented evidence that 

a consumer has a reasonable ability to 

repay may entail significant litigation 

risk for small creditors. The Bureau 

believes that small creditors have 

historically engaged in responsible 

mortgage underwriting that includes 

thorough and thoughtful determinations 

of consumers’ ability to repay, at least 

in part because they bear the risk of 

default associated with loans held in 

their portfolios. The Bureau also 

believes that because small creditors’ 

lending model is based on maintaining 

ongoing, mutually beneficial 

relationships with their customers, they 

therefore have a more comprehensive 

understanding of their customers’ 

financial circumstances and are better 

able to assess ability to repay than larger 

creditors. 

Further, the Bureau understands that 

the only sources of mortgage credit 

available to consumers in rural and 

underserved areas may be small 

creditors because larger creditors may 

be unable or unwilling to lend in these 

areas. For these reasons, the Bureau is 

proposing a new category of qualified 

mortgages that would include small 

creditor portfolio loans and is also 

proposing to raise the annual percentage 

rate threshold for the safe harbor to 

accommodate small creditors’ higher 

costs. The Bureau believes these steps 

may be necessary to preserve some rural 

and underserved consumers’ access to 

non-conforming credit. 

6–2. Description of the Steps the Agency 

Has Taken To Minimize Any Additional 

Cost of Credit for Small Entities 

Section 603(d) of the RFA requires the 

Bureau to consult with small entities 

regarding the potential impact of the 

proposed rule on the cost of credit for 

small entities and related matters. 5 


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244For 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. 

U.S.C. 603(d). The Bureau notes that the 

Board was not subject to this 

requirement when it issued its IRFA. 

The Bureau does not believe that the 

final rule will result in an increase in 

the cost of business credit for small 

entities. Instead, the final rule will 

apply only to mortgage loans obtained 

by consumers primarily for personal, 

family, or household purposes and the 

final rule will not apply to loans 

obtained primarily for business 

purposes. Given that the final rule does 

not increase the cost of credit for small 

entities, the Bureau has not taken 

additional steps to minimize the cost of 

credit for small entities. 

IX. Paperwork Reduction Act Analysis 

Certain provisions of this final rule 

contain ‘‘collection of information’’ 

requirements within the meaning of the 

Paperwork Reduction Act of 1995 (44 

U.S.C. 3501 et seq.) (Paperwork 

Reduction Act or PRA). 

This final rule amends 12 CFR part 

1026 (Regulation Z). Regulation Z 

currently contains collections of 

information approved by the Office of 

Management and Budget (OMB). The 

Bureau’s OMB control number for 

Regulation Z is 3170–0015. The PRA (44 

U.S.C 3507(a), (a)(2) and (a)(3)) requires 

that a Federal agency may not conduct 

or sponsor a collection of information 

unless OMB approved the collection 

under the PRA and the OMB control 

number obtained is displayed. Further, 

notwithstanding any other provision of 

law, no person is required to comply 

with, or is subject to any penalty for 

failure to comply with, a collection of 

information that does not display a 

currently valid OMB control number (44 

U.S.C. 3512). 

This final rule contains information 

collection requirements that have not 

been approved by the OMB and, 

therefore, are not effective until OMB 

approval is obtained. The unapproved 

information collection requirements are 

contained in sections 1026.25(c)(3) and 

1026.43(c)–(f) of these regulations. The 

Bureau will publish a separate notice in 

the Federal Register announcing the 

submission of these information 

collection requirements to OMB as well 

as OMB’s action on these submissions; 

including, the OMB control number and 

expiration date. 

On May 11, 2011, the Board of 

Governors of the Federal Reserve 

System (Board) published notice of the 

proposed rule in the Federal Register 

(76 FR 27390). The information 

collection requirements in 

§§ 1026.25(c)(3) and 1026.43(c)–(f) were 

contained in the Board’s proposal; 

however, these requirements were not 

separately discussed in the proposal’s 

PRA section. For full public 

transparency, the Bureau now claims 

these requirements as information 

collections. The Bureau received no 

PRA-related comments to the Board’s 

proposal on the information collections 

in §§ 1026.25(c)(3) and 1026.43(c). 

A. Overview 

As described below, the final rule 

amends the collections of information 

currently in Regulation Z to implement 

amendments to TILA made by the 

Dodd-Frank Act. The Dodd-Frank Act 

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 will have a reasonable ability 

to repay the loan, including any 

mortgage-related obligations (such as 

property taxes). TILA section 129C(a); 

15 U.S.C. 1639c(a). The Dodd-Frank Act 

provides special protection from 

liability for creditors who make 

‘‘qualified mortgages.’’ TILA section 

129C(b); 15 U.S.C. 1639c(b). The 

purpose of the Dodd-Frank Act abilityto-repay requirement is to assure that 

consumers are offered and receive 

residential mortgage loans on terms that 

reasonably reflect their ability to repay 

the loans and that are understandable 

and not unfair, deceptive or abusive. 

TILA section 129B(a)(2); 15 U.S.C. 

1639b(a)(2). Prior to the Dodd-Frank 

Act, existing Regulation Z provided 

ability-to-repay requirements for highcost and higher-priced mortgage loans. 

The Dodd-Frank Act expanded the 

scope of the ability-to-repay 

requirement to cover all residential 

mortgage loans. 

The final rule establishes standards 

for complying with the ability-to-repay 

requirement, including defining 

‘‘qualified mortgage.’’ The final rule 

provides three options for originating a 

qualified mortgage: under the general 

definition in § 1026.43(e)(2), for loans 

where the consumer’s monthly debt-toincome ratio do not exceed 43 percent; 

under the definition § 1026.43(e)(4), for 

a maximum of seven years, for loans 

that are eligible for purchase by the 

GSEs while in conservatorship or 

certain other Federal agencies, and 

under § 1026.43(f), for loans that have a 

balloon-payment if the creditor operates 

predominantly in rural or underserved 

areas and meets certain underwriting 

requirements, and asset-size and 

transaction volume limits. 

In addition to the ability-to-repay and 

qualified mortgage provisions, the final 

rule implements the Dodd-Frank Act 

limits on prepayment penalties and 

lengthens the time creditors must retain 

records that evidence compliance with 

the ability-to-repay and prepayment 

penalty provisions. Currently, 

Regulation Z requires creditors to retain 

evidence of compliance for two years 

after disclosures must be made or action 

must be taken. The final rule amends 

Regulation Z to require creditors to 

retain evidence of compliance with the 

ability-to-repay/qualified mortgage 

provisions and prepayment penalty 

restrictions in § 1026.43 for three years 

after consummation for consistency 

with statute of limitations on claims 

under TILA section 129C. See generally 

the section-by-section analysis of 

§§ 1026.25 and 1026.43, above. 

The information collection in the final 

rule is required to provide benefits for 

consumers and would be mandatory. 

See 15 U.S.C. 1601 et seq.; 12 U.S.C. 

2601 et seq. Because the Bureau does 

not collect any information under the 

final rule, no issue of confidentiality 

arises. The likely respondents would be 

depository institutions (i.e., commercial 

banks/savings institutions and credit 

unions) and non-depository institutions 

(i.e., mortgage companies or other nonbank lenders) subject to Regulation Z.244

Under the final rule, the Bureau 

generally accounts for the paperwork 

burden associated with Regulation Z for 

the following respondents pursuant to 

its administrative enforcement 

authority: insured depository 

institutions with more than $10 billion 

in total assets, their depository 

institution affiliates, and certain 

nondepository lenders. The Bureau and 

the FTC generally both have 

enforcement authority over nondepository institutions for Regulation Z. 

Accordingly, the Bureau has allocated to 

itself half of the estimated burden to 

non-depository institutions. 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, the total estimated burden 

under the changes to Regulation Z for 

all of the nearly 14,300 institutions 

subject to the final rule, including 


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6582 Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 

245There are 153 depository institutions (and 

their depository affiliates) that are subject to the 

Bureau’s administrative enforcement authority. In 

addition there are 146 privately insured credit 

unions that are subject to the Bureau’s 

administrative enforcement authority. For purposes 

of this PRA analysis, the Bureau’s respondents 

under Regulation Z are 135 depository institutions 

that originate either open or closed-end mortgages; 

77 privately insured credit unions that originate 

either open or closed-end mortgages; and an 

estimated 2,787 non-depository institutions that are 

subject to the Bureau’s administrative enforcement 

authority. Unless otherwise specified, all references 

to burden hours and costs for the Bureau 

respondents for the collection under Regulation Z 

are based on a calculation that includes one half of 

burden for the estimated 2,787 nondepository 

institutions and 77 privately insured credit unions. 

Bureau respondents,245 would be 

approximately 14,300 hours for onetime changes. The aggregate estimates of 

total burdens presented in this part VIII 

are based on estimated costs that are 

weighted averages across respondents. 

The Bureau expects that the amount of 

time required to implement each of the 

changes for a given institution may vary 

based on the size, complexity, and 

practices of the respondent. 

B. Information Collection Requirements 

The Bureau believes the following 

aspects of the final rule would be 

information collection requirements 

under the PRA. 

1. Ability-To-Repay Verification and 

Documentation Requirements 

Section 1026.43(c)(2) of the final rule 

contains eight specific criteria that a 

creditor must consider in assessing a 

consumer’s repayment ability. Section 

1026.43(c)(3) of the final rule requires 

creditors originating residential 

mortgage loans to verify the information 

that the creditor relies on in 

determining a consumer’s repayment 

ability under § 1026.43(c)(2) using 

reasonably reliable third-party records. 

Section 1026.43(c)(4) of the final rule 

provides special rules for verification of 

a consumer’s income or assets, and 

provides examples of records that can 

be used to verify the consumer’s income 

or assets (for example, tax-return and 

payroll transcripts). 

If a creditor chooses to make a 

qualified mortgage, different verification 

requirements apply to qualified 

mortgages. Creditors that originate 

qualified mortgages under 

§ 1026.43(e)(2) or (f) must verify a 

consumer’s income or assets, and 

current debt obligations, alimony and 

child support and must also verify a 

consumer’s monthly debt-to-income 

ratio (or, in the case of qualified 

mortgages under § 1026.43(f), residual 

income). The final rule does not contain 

specific verification requirements for 

creditors originating qualified mortgages 

under § 1026.43(e)(4); however, such 

loans must comply with eligibility 

requirements (including underwriting 

requirements) of the GSEs or the Federal 

agency program applicable to the loan. 

The Bureau estimates one-time and 

ongoing costs to respondents of 

complying with the requirements in 

§ 1026.43 as follows. 

One-time costs. The Bureau estimates 

that covered persons will incur one-time 

costs associated with reviewing the final 

rule. Specifically, the Bureau estimates 

that, for each covered person, one 

attorney and one compliance officer will 

each take 21 minutes (42 minutes in 

total) to read and review the sections of 

the Federal Register that describe the 

verification and documentation 

requirements, based on the length of the 

sections. 

The Bureau estimates the one-time 

costs to the 135 depository institutions 

(including their depository affiliates) 

that are mortgage originator respondents 

of the Bureau under Regulation Z would 

be $7,700, or 94 hours. For the 

estimated 2,787 nondepository 

institutions and 77 privately insured 

credit unions that are subject to the 

Bureau’s administrative enforcement 

authority, the Bureau is taking the half 

the burden for purposes of this PRA 

analysis. Accordingly, the Bureau 

estimates the total one-time costs across 

all relevant providers of reviewing the 

relevant sections of the Federal Register 

to be about 1000 hours or roughly 

$81,000. 

Ongoing costs. The Bureau does not 

believe that the verification and 

documentation requirements of the final 

rule will result in additional ongoing 

costs for most covered persons. The 

Bureau understands that creditors 

generally have in place underwriting 

policies, procedures, and internal 

controls that require verification of the 

consumer’s reasonably expected income 

or assets, employment status, debt 

obligations and simultaneous loans, 

credit history, and debt-to-income or 

residual income. Notably, in response to 

the 2011 ATR Proposal, commenters 

stated that most creditors today are 

already complying with the full abilityto-repay underwriting standards. For 

these institutions, there would be no 

additional burden as a result of the 

verification requirements in the final 

rule, since those institutions collect the 

required information in the normal 

course of business. 

2. Record Retention Requirement 

The final rule imposes new record 

retention requirements on covered 

persons. As discussed above in part V, 

the final rule requires creditors to retain 

evidence of compliance with § 1026.43 

(containing the ability-to-repay/ 

qualified mortgage provisions and 

prepayment penalty restrictions) for 

three years after consummation. See 

part V above, section-by-section analysis 

of § 1026.25. 

The Bureau estimates one-time and 

ongoing costs to respondents of 

complying with the record retention 

requirement in § 1026.25 as follows. 

One-time costs. The Bureau estimates 

that covered persons will incur one-time 

costs associated with reviewing the final 

rule. Specifically, the Bureau estimates 

that, for each covered person, one 

attorney and one compliance officer will 

each take 9 minutes (18 minutes in 

total) to read and review the sections of 

the final rule that describe the record 

retention requirements, based on the 

length of the sections. 

The Bureau estimates the one-time 

costs to the 135 depository institutions 

(including their depository affiliates) 

that are mortgage originator respondents 

of the Bureau under Regulation Z would 

be $3,300, or 40 hours. For the 

estimated 2,787 nondepository 

institutions and 77 privately insured 

credit unions that are subject to the 

Bureau’s administrative enforcement 

authority, the Bureau is taking the half 

the burden for purposes of this PRA 

analysis. Accordingly, the Bureau 

estimates the total one-time costs across 

all relevant providers of reviewing the 

relevant sections of the Federal Register 

to be about 430 hours or roughly 

$35,000. 

Ongoing costs. The Bureau believes 

that any burden associated with the 

final rule’s record keeping requirement 

will be minimal or de minimis. Under 

current rules, creditors must retain 

evidence of compliance with Regulation 

Z for two years after consummation; the 

final rule extends that period to three 

years after consummation for evidence 

of compliance with the ability-to-repay/ 

qualified mortgage provisions and the 

prepayment penalty limitations in this 

final rule. The final rule clarifies that 

creditors need retain only enough 

information to reconstruct the required 

records. 

The final rule clarifies that creditors 

need not maintain actual paper copies 

of the documentation used to 

underwrite a transaction. See comments 

25(a)(2) and 25(c)(3)–1. For most 

covered persons, the required records 

will be kept in electronic form. This 

further reduces any burden associated 

with the final rule’s record retention 

requirement for creditors that keep the 

required records in electronic form, as 

the only additional requirement will be 

to store data for an additional year, to 


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the extent such creditors are currently 

storing such data for the minimum 

period required by Regulation Z. 

Furthermore, the Bureau believes that 

many creditors will retain such records 

for at least three years in the ordinary 

course of business, even in the absence 

of a change to record retention 

requirements, due to the Dodd-Frank 

Act’s extension of the statute of 

limitations for civil liability for 

violations of the prepayment penalty 

provisions or ability-to-repay provisions 

(including the qualified mortgage 

provisions) to three years after the date 

of a violation. Even absent the rule, the 

Bureau believes that most creditors will 

retain records of compliance with 

§ 1026.43 for the life of the loan, given 

that the statute allows borrowers to 

bring a defensive claim for recoupment 

or setoff in the event that a creditor or 

assignee initiates foreclosure 

proceedings. 

C. Summary of Burden Hours 

The below table summarizes the one 

time and annual burdens under 

Regulation Z associated with 

information collections affected by the 

final rule for Bureau respondents under 

the PRA. For the two collections, the 

one-time burden for Bureau respondents 

is approximately 1,570 hours. 

The Consumer Financial Protection 

Bureau has a continuing interest in the 

public’s opinions of our collections of 

information. At any time, comments 

regarding the burden estimate, or any 

other aspect of this collection of 

information, including suggestions for 

reducing the burden, may be sent to: 

The Consumer Financial Protection 

Bureau (Attention: PRA Office), 1700 G 

Street NW., Washington, DC, 20552, or 

by the internet to 

CFPB_Public_PRA@cfpb.gov. 

List of Subjects in 12 CFR Part 1026 

Advertising, Consumer protection, 

Mortgages, Reporting and recordkeeping 

requirements, Truth in Lending. 

Authority and Issuance 

For the reasons set forth in the 

preamble, the Bureau amends 

Regulation Z, 12 CFR part 1026, as set 

forth below: 

PART 1026—TRUTH IN LENDING 

(REGULATION Z) 

■ 1. The authority citation for part 1026 

continues to read as follows: 

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

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

U.S.C. 1601 et seq. 

Subpart D—Miscellaneous 

■ 2. Section 1026.25 is amended by: 

■ A. Revising paragraph (a); and 

■ B. Adding and reserving paragraphs 

(c)(1) and (c)(2). 

■ C. Adding paragraph (c)(3). 

The additions and revisions read as 

follows: 

§ 1026.25 Record retention. 

(a) General rule. A creditor shall 

retain evidence of compliance with this 

regulation, other than advertising 

requirements under §§ 1026.16 and 

1026.24 and certain requirements for 

mortgage loans under paragraph (c) of 

this section, for two years after the date 

disclosures are required to be made or 

action is required to be taken. The 

administrative agencies responsible for 

enforcing the regulation may require a 

creditor under their jurisdictions to 

retain records for a longer period if 

necessary to carry out their enforcement 

responsibilities under section 108 of the 

Act. 

* * * * * 

(c) Records related to certain 

requirements for mortgage loans. (1) 

[Reserved] 

(2) [Reserved] 

(3) Records related to minimum 

standards for transactions secured by a 

dwelling. Notwithstanding paragraph (a) 

of this section, a creditor shall retain 

evidence of compliance with § 1026.43 

of this regulation for three years after 

consummation of a transaction covered 

by that section. 

Subpart E—Special Rules for Certain 

Home Mortgage Transactions 

■ 3. Section 1026.32 is amended by: 

■ A. Revising the section heading; 

■ B. Revising paragraph (b)(1); 

■ C. Removing and reserving paragraph 

(b)(2); 

■ D. Adding paragraph (b)(3) through (6) 

The additions and revisions read as 

follows: 

§ 1026.32 Requirements for high-cost 

mortgages. 

* * * * * 

(b) Definitions. For purposes of this 

subpart, the following definitions apply: 

(1) In connection with a closed-end 

credit transaction, points and fees 

means the following fees or charges that 

are known at or before consummation: 

(i) All items included in the finance 

charge under § 1026.4(a) and (b), except 

that the following items are excluded: 

(A) Interest or the time-price 

differential; 

(B) Any premium or other charge 

imposed in connection with any Federal 

or State agency program for any 

guaranty or insurance that protects the 

creditor against the consumer’s default 

or other credit loss; 

(C) For any guaranty or insurance that 

protects the creditor against the 

consumer’s default or other credit loss 

and that is not in connection with any 

Federal or State agency program: 

(1) If the premium or other charge is 

payable after consummation, the entire 

amount of such premium or other 

charge; or 

(2) If the premium or other charge is 

payable at or before consummation, the 

portion of any such premium or other 

charge that is not in excess of the 

amount payable under policies in effect 

at the time of origination under section 

203(c)(2)(A) of the National Housing Act 

(12 U.S.C. 1709(c)(2)(A)), provided that 

the premium or charge is required to be 

refundable on a pro rata basis and the 

refund is automatically issued upon 

notification of the satisfaction of the 

underlying mortgage loan; 

(D) Any bona fide third-party charge 

not retained by the creditor, loan 

originator, or an affiliate of either, 

unless the charge is required to be 

included in points and fees under 

paragraph (b)(1)(i)(C), (iii), or (iv) of this 

section; 

(E) Up to two bona fide discount 

points paid by the consumer in 

connection with the transaction, if the 

interest rate without any discount does 

not exceed: 

(1) The average prime offer rate, as 

defined in § 1026.35(a)(2), by more than 

one percentage point; or 

(2) For purposes of paragraph (a)(1)(ii) 

of this section, for transactions that are 

secured by personal property, the 

average rate for a loan insured under 

Title I of the National Housing Act (12 

U.S.C. 1702 et seq.) by more than one 

percentage point; and 

(F) If no discount points have been 

excluded under paragraph (b)(1)(i)(E) of 

this section, then up to one bona fide 

discount point paid by the consumer in 

connection with the transaction, if the 

interest rate without any discount does 

not exceed: 

(1) The average prime offer rate, as 

defined in § 1026.35(a)(2), by more than 

two percentage points; or 

(2) For purposes of paragraph (a)(1)(ii) 

of this section, for transactions that are 

secured by personal property, the 

average rate for a loan insured under 

Title I of the National Housing Act (12 

U.S.C. 1702 et seq.) by more than two 

percentage points; 

(ii) All compensation paid directly or 

indirectly by a consumer or creditor to 

a loan originator, as defined in 

§ 1026.36(a)(1), that can be attributed to 


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that transaction at the time the interest 

rate is set; 

(iii) All items listed in § 1026.4(c)(7) 

(other than amounts held for future 

payment of taxes), unless: 

(A) The charge is reasonable; 

(B) The creditor receives no direct or 

indirect compensation in connection 

with the charge; and 

(C) The charge is not paid to an 

affiliate of the creditor; 

(iv) Premiums or other charges 

payable at or before consummation for 

any credit life, credit disability, credit 

unemployment, or credit property 

insurance, or any other life, accident, 

health, or loss-of-income insurance for 

which the creditor is a beneficiary, or 

any payments directly or indirectly for 

any debt cancellation or suspension 

agreement or contract; 

(v) The maximum prepayment 

penalty, as defined in paragraph (b)(6)(i) 

of this section, that may be charged or 

collected under the terms of the 

mortgage loan; and 

(vi) The total prepayment penalty, as 

defined in paragraph (b)(6)(i) of this 

section, incurred by the consumer if the 

consumer refinances the existing 

mortgage loan with the current holder of 

the existing loan, a servicer acting on 

behalf of the current holder, or an 

affiliate of either. 

(2) [Reserved] 

(3) Bona fide discount point—(i) 

Closed-end credit. The term bona fide 

discount point means an amount equal 

to 1 percent of the loan amount paid by 

the consumer that reduces the interest 

rate or time-price differential applicable 

to the transaction based on a calculation 

that is consistent with established 

industry practices for determining the 

amount of reduction in the interest rate 

or time-price differential appropriate for 

the amount of discount points paid by 

the consumer. 

(ii) [Reserved] 

(4) Total loan amount—(i) Closed-end 

credit. The total loan amount for a 

closed-end credit transaction is 

calculated by taking the amount 

financed, as determined according to 

§ 1026.18(b), and deducting any cost 

listed in § 1026.32(b)(1)(iii), (iv), or (vi) 

that is both included as points and fees 

under § 1026.32(b)(1) and financed by 

the creditor. 

(ii) [Reserved] 

(5) Affiliate means any company that 

controls, is controlled by, or is under 

common control with another company, 

as set forth in the Bank Holding 

Company Act of 1956 (12 U.S.C. 1841 et 

seq.). 

(6) Prepayment penalty—(i) Closedend credit transactions. For a closedend credit transaction, prepayment 

penalty means a charge imposed for 

paying all or part of the transaction’s 

principal before the date on which the 

principal is due, other than a waived, 

bona fide third-party charge that the 

creditor imposes if the consumer 

prepays all of the transaction’s principal 

sooner than 36 months after 

consummation, provided, however, that 

interest charged consistent with the 

monthly interest accrual amortization 

method is not a prepayment penalty for 

extensions of credit insured by the 

Federal Housing Administration that are 

consummated before January 21, 2015. 

(ii) [Reserved] 

* * * * * 

■ 4. Add § 1026.43 to read as follows: 

§ 1026.43 Minimum standards for 

transactions secured by a dwelling. 

(a) Scope. This section applies to any 

consumer credit transaction that is 

secured by a dwelling, as defined in 

§ 1026.2(a)(19), including any real 

property attached to a dwelling, other 

than: 

(1) A home equity line of credit 

subject to § 1026.40; 

(2) A mortgage transaction secured by 

a consumer’s interest in a timeshare 

plan, as defined in 11 U.S.C. 101(53(D)); 

or 

(3) For purposes of paragraphs (c) 

through (f) of this section: 

(i) A reverse mortgage subject to 

§ 1026.33; 

(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-topermanent loan. 

(b) Definitions. For purposes of this 

section: 

(1) Covered transaction means a 

consumer credit transaction that is 

secured by a dwelling, as defined in 

§ 1026.2(a)(19), including any real 

property attached to a dwelling, other 

than a transaction exempt from coverage 

under paragraph (a) of this section. 

(2) Fully amortizing payment means a 

periodic payment of principal and 

interest that will fully repay the loan 

amount over the loan term. 

(3) Fully indexed rate means the 

interest rate calculated using the index 

or formula that will apply after recast, 

as determined at the time of 

consummation, and the maximum 

margin that can apply at any time 

during the loan term. 

(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, or by 3.5 or more 

percentage points for a subordinate-lien 

covered transaction. 

(5) Loan amount means the principal 

amount the consumer will borrow as 

reflected in the promissory note or loan 

contract. 

(6) Loan term means the period of 

time to repay the obligation in full. 

(7) Maximum loan amount means the 

loan amount plus any increase in 

principal balance that results from 

negative amortization, as defined in 

§ 1026.18(s)(7)(v), based on the terms of 

the legal obligation assuming: 

(i) The consumer makes only the 

minimum periodic payments for the 

maximum possible time, until the 

consumer must begin making fully 

amortizing payments; and 

(ii) The maximum interest rate is 

reached at the earliest possible time. 

(8) Mortgage-related obligations mean 

property taxes; premiums and similar 

charges identified in § 1026.4(b)(5), (7), 

(8), and (10) that are required by the 

creditor; fees and special assessments 

imposed by a condominium, 

cooperative, or homeowners association; 

ground rent; and leasehold payments. 

(9) Points and fees has the same 

meaning as in § 1026.32(b)(1). 

(10) Prepayment penalty has the same 

meaning as in § 1026.32(b)(6). 

(11) Recast means: 

(i) For an adjustable-rate mortgage, as 

defined in § 1026.18(s)(7)(i), the 

expiration of the period during which 

payments based on the introductory 

fixed interest rate are permitted under 

the terms of the legal obligation; 

(ii) For an interest-only loan, as 

defined in § 1026.18(s)(7)(iv), the 

expiration of the period during which 

interest-only payments are permitted 

under the terms of the legal obligation; 

and 

(iii) For a negative amortization loan, 

as defined in § 1026.18(s)(7)(v), the 

expiration of the period during which 

negatively amortizing payments are 

permitted under the terms of the legal 

obligation. 

(12) Simultaneous loan means 

another covered transaction or home 

equity line of credit subject to § 1026.40 

that will be secured by the same 

dwelling and made to the same 

consumer at or before consummation of 

the covered transaction or, if to be made 

after consummation, will cover closing 

costs of the first covered transaction. 

(13) Third-party record means: 


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(i) A document or other record 

prepared or reviewed by an appropriate 

person other than the consumer, the 

creditor, or the mortgage broker, as 

defined in § 1026.36(a)(2), or an agent of 

the creditor or mortgage broker; 

(ii) A copy of a tax return filed with 

the Internal Revenue Service or a State 

taxing authority; 

(iii) A record the creditor maintains 

for an account of the consumer held by 

the creditor; or 

(iv) If the consumer is an employee of 

the creditor or the mortgage broker, a 

document or other record maintained by 

the creditor or mortgage broker 

regarding the consumer’s employment 

status or employment income. 

(c) Repayment ability—(1) General 

requirement. A creditor shall not make 

a loan that is a covered transaction 

unless the creditor makes a reasonable 

and good faith determination at or 

before consummation that the consumer 

will have a reasonable ability to repay 

the loan according to its terms. 

(2) Basis for determination. Except as 

provided otherwise in paragraphs (d), 

(e), and (f) of this section, in making the 

repayment ability determination 

required under paragraph (c)(1) of this 

section, a creditor must consider the 

following: 

(i) The consumer’s current or 

reasonably expected income or assets, 

other than the value of the dwelling, 

including any real property attached to 

the dwelling, that secures the loan; 

(ii) If the creditor relies on income 

from the consumer’s employment in 

determining repayment ability, the 

consumer’s current employment status; 

(iii) The consumer’s monthly payment 

on the covered transaction, calculated in 

accordance with paragraph (c)(5) of this 

section; 

(iv) The consumer’s monthly payment 

on any simultaneous loan that the 

creditor knows or has reason to know 

will be made, calculated in accordance 

with paragraph (c)(6) of this section; 

(v) The consumer’s monthly payment 

for mortgage-related obligations; 

(vi) The consumer’s current debt 

obligations, alimony, and child support; 

(vii) The consumer’s monthly debt-toincome ratio or residual income in 

accordance with paragraph (c)(7) of this 

section; and 

(viii) The consumer’s credit history. 

(3) Verification using third-party 

records. A creditor must verify the 

information that the creditor relies on in 

determining a consumer’s repayment 

ability under § 1026.43(c)(2) using 

reasonably reliable third-party records, 

except that: 

(i) For purposes of paragraph (c)(2)(i) 

of this section, a creditor must verify a 

consumer’s income or assets that the 

creditor relies on in accordance with 

§ 1026.43(c)(4); 

(ii) For purposes of paragraph (c)(2)(ii) 

of this section, a creditor may verify a 

consumer’s employment status orally if 

the creditor prepares a record of the 

information obtained orally; and 

(iii) For purposes of paragraph 

(c)(2)(vi) of this section, if a creditor 

relies on a consumer’s credit report to 

verify a consumer’s current debt 

obligations and a consumer’s 

application states a current debt 

obligation not shown in the consumer’s 

credit report, the creditor need not 

independently verify such an obligation. 

(4) Verification of income or assets. A 

creditor must verify the amounts of 

income or assets that the creditor relies 

on under § 1026.43(c)(2)(i) to determine 

a consumer’s ability to repay a covered 

transaction using third-party records 

that provide reasonably reliable 

evidence of the consumer’s income or 

assets. A creditor may verify the 

consumer’s income using a tax-return 

transcript issued by the Internal 

Revenue Service (IRS). Examples of 

other records the creditor may use to 

verify the consumer’s income or assets 

include: 

(i) Copies of tax returns the consumer 

filed with the IRS or a State taxing 

authority; 

(ii) IRS Form W–2s or similar IRS 

forms used for reporting wages or tax 

withholding; 

(iii) Payroll statements, including 

military Leave and Earnings Statements; 

(iv) Financial institution records; 

(v) Records from the consumer’s 

employer or a third party that obtained 

information from the employer; 

(vi) Records from a Federal, State, or 

local government agency stating the 

consumer’s income from benefits or 

entitlements; 

(vii) Receipts from the consumer’s use 

of check cashing services; and 

(viii) Receipts from the consumer’s 

use of a funds transfer service. 

(5) Payment calculation—(i) General 

rule. Except as provided in paragraph 

(c)(5)(ii) of this section, a creditor must 

make the consideration required under 

paragraph (c)(2)(iii) of this section 

using: 

(A) The fully indexed rate or any 

introductory interest rate, whichever is 

greater; and 

(B) Monthly, fully amortizing 

payments that are substantially equal. 

(ii) Special rules for loans with a 

balloon payment, interest-only loans, 

and negative amortization loans. A 

creditor must make the consideration 

required under paragraph (c)(2)(iii) of 

this section for: 

(A) A loan with a balloon payment, as 

defined in § 1026.18(s)(5)(i), using: 

(1) The maximum payment scheduled 

during the first five years after the date 

on which the first regular periodic 

payment will be due for a loan that is 

not a higher-priced covered transaction; 

or 

(2) The maximum payment in the 

payment schedule, including any 

balloon payment, for a higher-priced 

covered transaction; 

(B) An interest-only loan, as defined 

in § 1026.18(s)(7)(iv), using: 

(1) The fully indexed rate or any 

introductory interest rate, whichever is 

greater; and 

(2) Substantially equal, monthly 

payments of principal and interest that 

will repay the loan amount over the 

term of the loan remaining as of the date 

the loan is recast. 

(C) A negative amortization loan, as 

defined in § 1026.18(s)(7)(v), using: 

(1) The fully indexed rate or any 

introductory interest rate, whichever is 

greater; and 

(2) Substantially equal, monthly 

payments of principal and interest that 

will repay the maximum loan amount 

over the term of the loan remaining as 

of the date the loan is recast. 

(6) Payment calculation for 

simultaneous loans. For purposes of 

making the evaluation required under 

paragraph (c)(2)(iv) of this section, a 

creditor must consider, taking into 

account any mortgage-related 

obligations, a consumer’s payment on a 

simultaneous loan that is: 

(i) A covered transaction, by following 

paragraph (c)(5)of this section; or 

(ii) A home equity line of credit 

subject to § 1026.40, by using the 

periodic payment required under the 

terms of the plan and the amount of 

credit to be drawn at or before 

consummation of the covered 

transaction. 

(7) Monthly debt-to-income ratio or 

residual income—(i) Definitions. For 

purposes of this paragraph (c)(7), the 

following definitions apply: 

(A) Total monthly debt obligations. 

The term total monthly debt obligations 

means the sum of: the payment on the 

covered transaction, as required to be 

calculated by paragraphs (c)(2)(iii) and 

(c)(5) of this section; simultaneous 

loans, as required by paragraphs 

(c)(2)(iv) and (c)(6) of this section; 

mortgage-related obligations, as required 

by paragraph (c)(2)(v) of this section; 

and current debt obligations, alimony, 

and child support, as required by 

paragraph (c)(2)(vi) of this section. 

(B) Total monthly income. The term 

total monthly income means the sum of 

the consumer’s current or reasonably 


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expected income, including any income 

from assets, as required by paragraphs 

(c)(2)(i) and (c)(4) of this section. 

(ii) Calculations— (A) Monthly debtto-income ratio. If a creditor considers 

the consumer’s monthly debt-to-income 

ratio under paragraph (c)(2)(vii) of this 

section, the creditor must consider the 

ratio of the consumer’s total monthly 

debt obligations to the consumer’s total 

monthly income. 

(B) Monthly residual income. If a 

creditor considers the consumer’s 

monthly residual income under 

paragraph (c)(2)(vii) of this section, the 

creditor must consider the consumer’s 

remaining income after subtracting the 

consumer’s total monthly debt 

obligations from the consumer’s total 

monthly income. 

(d) Refinancing of non-standard 

mortgages—(1) Definitions. For 

purposes of this paragraph (d), the 

following definitions apply: 

(i) Non-standard mortgage. The term 

non-standard mortgage means a covered 

transaction that is: 

(A) An adjustable-rate mortgage, as 

defined in § 1026.18(s)(7)(i), with an 

introductory fixed interest rate for a 

period of one year or longer; 

(B) An interest-only loan, as defined 

in § 1026.18(s)(7)(iv); or 

(C) A negative amortization loan, as 

defined in § 1026.18(s)(7)(v). 

(ii) Standard mortgage. The term 

standard mortgage means a covered 

transaction: 

(A) That provides for regular periodic 

payments that do not: 

(1) Cause the principal balance to 

increase; 

(2) Allow the consumer to defer 

repayment of principal; or 

(3) Result in a balloon payment, as 

defined in § 1026.18(s)(5)(i); 

(B) For which the total points and fees 

payable in connection with the 

transaction do not exceed the amounts 

specified in paragraph (e)(3) of this 

section; 

(C) For which the term does not 

exceed 40 years; 

(D) For which the interest rate is fixed 

for at least the first five years after 

consummation; and 

(E) For which the proceeds from the 

loan are used solely for the following 

purposes: 

(1) To pay off the outstanding 

principal balance on the non-standard 

mortgage; and 

(2) To pay closing or settlement 

charges required to be disclosed under 

the Real Estate Settlement Procedures 

Act, 12 U.S.C. 2601 et seq. 

(iii) Refinancing. The term 

refinancing has the same meaning as in 

§ 1026.20(a). 

(2) Scope. The provisions of this 

paragraph (d) apply to the refinancing of 

a non-standard mortgage into a standard 

mortgage when the following conditions 

are met: 

(i) The creditor for the standard 

mortgage is the current holder of the 

existing non-standard mortgage or the 

servicer acting on behalf of the current 

holder; 

(ii) The monthly payment for the 

standard mortgage is materially lower 

than the monthly payment for the nonstandard mortgage, as calculated under 

paragraph (d)(5) of this section. 

(iii) The creditor receives the 

consumer’s written application for the 

standard mortgage no later than two 

months after the non-standard mortgage 

has recast. 

(iv) 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 creditor’s receipt of the 

consumer’s written application for the 

standard mortgage. 

(v) 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 

(vi) If the non-standard mortgage was 

consummated on or after January 10, 

2014, the non-standard mortgage was 

made in accordance with paragraph (c) 

or (e) of this section, as applicable. 

(3) Exemption from repayment ability 

requirements. A creditor is not required 

to comply with the requirements of 

paragraph (c) of this section if: 

(i) The conditions in paragraph (d)(2) 

of this section are met; and 

(ii) The creditor has considered 

whether the standard mortgage likely 

will prevent a default by the consumer 

on the non-standard mortgage once the 

loan is recast. 

(4) Offer of rate discounts and other 

favorable terms. A creditor making a 

covered transaction under this 

paragraph (d) may offer to the consumer 

rate discounts and terms that are the 

same as, or better than, the rate 

discounts and terms that the creditor 

offers to new consumers, consistent 

with the creditor’s documented 

underwriting practices and to the extent 

not prohibited by applicable State or 

Federal law. 

(5) Payment calculations. For 

purposes of determining whether the 

consumer’s monthly payment for a 

standard mortgage will be materially 

lower than the monthly payment for the 

non-standard mortgage, the following 

provisions shall be used: 

(i) Non-standard mortgage. For 

purposes of the comparison conducted 

pursuant to paragraph (d)(2)(ii) of this 

section, the creditor must calculate the 

monthly payment for a non-standard 

mortgage based on substantially equal, 

monthly, fully amortizing payments of 

principal and interest using: 

(A) The fully indexed rate as of a 

reasonable period of time before or after 

the date on which the creditor receives 

the consumer’s written application for 

the standard mortgage; 

(B) The term of the loan remaining as 

of the date on which the recast occurs, 

assuming all scheduled payments have 

been made up to the recast date and the 

payment due on the recast date is made 

and credited as of that date; and 

(C) A remaining loan amount that is: 

(1) For an adjustable-rate mortgage 

under paragraph (d)(1)(i)(A) of this 

section, the outstanding principal 

balance as of the date of the recast, 

assuming all scheduled payments have 

been made up to the recast date and the 

payment due on the recast date is made 

and credited as of that date; 

(2) For an interest-only loan under 

paragraph (d)(1)(i)(B) of this section, the 

outstanding principal balance as of the 

date of the recast, assuming all 

scheduled payments have been made up 

to the recast date and the payment due 

on the recast date is made and credited 

as of that date; or 

(3) For a negative amortization loan 

under paragraph (d)(1)(i)(C) of this 

section, the maximum loan amount, 

determined after adjusting for the 

outstanding principal balance. 

(ii) Standard mortgage. For purposes 

of the comparison conducted pursuant 

to paragraph (d)(2)(ii) of this section, the 

monthly payment for a standard 

mortgage must be based on substantially 

equal, monthly, fully amortizing 

payments based on the maximum 

interest rate that may apply during the 

first five years after consummation. 

(e) Qualified mortgages—(1) Safe 

harbor and presumption of 

compliance—(i) Safe harbor for 

transactions that are not higher-priced 

covered transactions. A creditor or 

assignee of a qualified mortgage, as 

defined in paragraphs (e)(2), (e)(4), or (f) 

of this section, that is not a higherpriced 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 paragraphs 

(e)(2), (e)(4), or (f) of this section, that is 

a higher-priced covered transaction, as 


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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 

requirements of paragraphs (e)(2), (e)(4), 

or (f) of this section, the creditor did not 

make a reasonable and good faith 

determination of the consumer’s 

repayment ability at the time of 

consummation, by showing that the 

consumer’s income, debt obligations, 

alimony, child support, and the 

consumer’s monthly payment 

(including mortgage-related obligations) 

on the covered transaction and on any 

simultaneous loans of which the 

creditor was aware at consummation 

would leave the consumer with 

insufficient residual income or assets 

other than the value of the dwelling 

(including any real property attached to 

the dwelling) that secures the loan with 

which to meet living expenses, 

including any recurring and material 

non-debt obligations of which the 

creditor was aware at the time of 

consummation. 

(2) Qualified mortgage defined— 

general. Except as provided in 

paragraphs (e)(4) or (f) of this section, a 

qualified mortgage is a covered 

transaction: 

(i) That provides for regular periodic 

payments that are substantially equal, 

except for the effect that any interest 

rate change after consummation has on 

the payment in the case of an 

adjustable-rate or step-rate mortgage, 

that do not: 

(A) Result in an increase of the 

principal balance; 

(B) Allow the consumer to defer 

repayment of principal, except as 

provided in paragraph (f) of this section; 

or 

(C) Result in a balloon payment, as 

defined in § 1026.18(s)(5)(i), except as 

provided in paragraph (f) of this section; 

(ii) For which the loan term does not 

exceed 30 years; 

(iii) For which the total points and 

fees payable in connection with the loan 

do not exceed the amounts specified in 

paragraph (e)(3) of this section; 

(iv) For which the creditor 

underwrites the loan, taking into 

account the monthly payment for 

mortgage-related obligations, using: 

(A) The maximum interest rate that 

may apply during the first five years 

after the date on which the first regular 

periodic payment will be due; and 

(B) Periodic payments of principal 

and interest that will repay either: 

(1) The outstanding principal balance 

over the remaining term of the loan as 

of the date the interest rate adjusts to the 

maximum interest rate set forth in 

paragraph (e)(2)(iv)(A) of this section, 

assuming the consumer will have made 

all required payments as due prior to 

that date; or 

(2) The loan amount over the loan 

term; 

(v) For which the creditor considers 

and verifies at or before consummation 

the following: 

(A) The consumer’s current or 

reasonably expected income or assets 

other than the value of the dwelling 

(including any real property attached to 

the dwelling) that secures the loan, in 

accordance with appendix Q and 

paragraphs (c)(2)(i) and (c)(4) of this 

section; and 

(B) The consumer’s current debt 

obligations, alimony, and child support 

in accordance with appendix Q and 

paragraphs (c)(2)(vi) and (c)(3) of this 

section; and 

(vi) For which the ratio of the 

consumer’s total monthly debt to total 

monthly income at the time of 

consummation does not exceed 43 

percent. For purposes of this paragraph 

(e)(2)(vi), the ratio of the consumer’s 

total monthly debt to total monthly 

income is determined: 

(A) Except as provided in paragraph 

(e)(2)(vi)(B) of this section, in 

accordance with the standards in 

appendix Q; 

(B) Using the consumer’s monthly 

payment on: 

(1) The covered transaction, including 

the monthly payment for mortgagerelated obligations, in accordance with 

paragraph (e)(2)(iv) of this section; and 

(2) Any simultaneous loan that the 

creditor knows or has reason to know 

will be made, in accordance with 

paragraphs (c)(2)(iv) and (c)(6) of this 

section. 

(3) Limits on points and fees for 

qualified mortgages. (i) A covered 

transaction is not a qualified mortgage 

unless the transaction’s total points and 

fees, as defined in § 1026.32(b)(1), do 

not exceed: 

(A) For a loan amount greater than or 

equal to $100,000 (indexed for 

inflation): 3 percent of the total loan 

amount; 

(B) For a loan amount greater than or 

equal to $60,000 (indexed for inflation) 

but less than $100,000 (indexed for 

inflation): $3,000 (indexed for inflation); 

(C) For a loan amount greater than or 

equal to $20,000 (indexed for inflation) 

but less than $60,000 (indexed for 

inflation): 5 percent of the total loan 

amount; 

(D) For a loan amount greater than or 

equal to $12,500 (indexed for inflation) 

but less than $20,000 (indexed for 

inflation): $1,000 (indexed for inflation); 

(E) For a loan amount less than 

$12,500 (indexed for inflation): 8 

percent of the total loan amount. 

(ii) The dollar amounts, including the 

loan amounts, in paragraph (e)(3)(i) of 

this section shall be adjusted annually 

on January 1 by the annual percentage 

change in the Consumer Price Index for 

All Urban Consumers (CPI–U) that was 

reported on the preceding June 1. See 

the official commentary to this 

paragraph (e)(3)(ii) for the current dollar 

amounts. 

(4) Qualified mortgage defined— 

special rules—(i) General. 

Notwithstanding paragraph (e)(2) of this 

section, a qualified mortgage is a 

covered transaction that satisfies: 

(A) The requirements of paragraphs 

(e)(2)(i) through (iii) of this section; and 

(B) One or more of the criteria in 

paragraph (e)(4)(ii) of this section. 

(ii) Eligible loans. A qualified 

mortgage under this paragraph (e)(4) 

must be one of the following at 

consummation: 

(A) A loan that is eligible: 

(1) To be purchased or guaranteed by 

the Federal National Mortgage 

Association or the Federal Home Loan 

Mortgage Corporation operating under 

the conservatorship or receivership of 

the Federal Housing Finance Agency 

pursuant to section 1367(a) of the 

Federal Housing Enterprises Financial 

Safety and Soundness Act of 1992 (12 

U.S.C. 4617(a)); or 

(2) To be purchased or guaranteed by 

any limited-life regulatory entity 

succeeding the charter of either the 

Federal National Mortgage Association 

or the Federal Home Loan Mortgage 

Corporation pursuant to section 1367(i) 

of the Federal Housing Enterprises 

Financial Safety and Soundness Act of 

1992 (12 U.S.C. 4617(i)); 

(B) A loan that is eligible to be 

insured by the U.S. Department of 

Housing and Urban Development under 

the National Housing Act (12 U.S.C. 

1707 et seq.); 

(C) A loan that is eligible to be 

guaranteed the U.S. Department of 

Veterans Affairs; 

(D) A loan that is eligible to be 

guaranteed by the U.S. Department of 

Agriculture pursuant to 42 U.S.C. 

1472(h); or 

(E) A loan that is eligible to be insured 

by the Rural Housing Service. 

(iii) Sunset of special rules. (A) Each 

respective special rule described in 

paragraph (e)(4)(ii)(B), (C), (D), or (E) of 

this section shall expire on the effective 

date of a rule issued by each respective 


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6588 Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 

agency pursuant to its authority under 

TILA section 129C(b)(3)(ii) to define a 

qualified mortgage. 

(B) Unless otherwise expired under 

paragraph (e)(4)(iii)(A) of this section, 

the special rules in this paragraph (e)(4) 

are available only for covered 

transactions consummated on or before 

January 10, 2021. 

(f) Balloon-payment qualified 

mortgages made by certain creditors— 

(1) Exemption. Notwithstanding 

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

qualified mortgage may provide for a 

balloon payment, provided: 

(i) The loan satisfies the requirements 

for a qualified mortgage in paragraphs 

(e)(2)(i)(A), (e)(2)(ii), (e)(2)(iii), and 

(e)(2)(v) of this section, but without 

regard to the standards in appendix Q; 

(ii) The creditor determines at or 

before consummation that the consumer 

can make all of the scheduled payments 

under the terms of the legal obligation, 

as described in paragraph (f)(1)(iv) of 

this section, together with the 

consumer’s monthly payments for all 

mortgage-related obligations and 

excluding the balloon payment, from 

the consumer’s current or reasonably 

expected income or assets other than the 

dwelling that secures the loan; 

(iii) 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 (c)(7)(i)(A) 

shall be determined in accordance with 

paragraph (f)(iv)(A) of this section, 

together with the consumer’s monthly 

payments for all mortgage-related 

obligations and excluding the balloon 

payment; 

(iv) The legal obligation provides for: 

(A) Scheduled payments that are 

substantially equal, calculated using an 

amortization period that does not 

exceed 30 years; 

(B) An interest rate that does not 

increase over the term of the loan; and 

(C) A loan term of five years or longer. 

(v) The loan is not subject, at 

consummation, to a commitment to be 

acquired by another person, other than 

a person that satisfies the requirements 

of paragraph (f)(1)(vi) of this section; 

and 

(vi) The creditor satisfies the 

requirements stated in 

§ 1026.35(b)(2)(iii)(A), (B), and (C). 

(2) Post-consummation transfer of 

balloon-payment qualified mortgage. A 

balloon-payment qualified mortgage, 

extended pursuant to paragraph (f)(1), 

immediately loses its status as a 

qualified mortgage under paragraph 

(f)(1) if legal title to the balloon-payment 

qualified mortgage is sold, assigned, or 

otherwise transferred to another person 

except when: 

(i) The balloon-payment qualified 

mortgage is sold, assigned, or otherwise 

transferred to another person three years 

or more after consummation of the 

balloon-payment qualified mortgage; 

(ii) The balloon-payment qualified 

mortgage is sold, assigned, or otherwise 

transferred to a creditor that satisfies the 

requirements of paragraph (f)(1)(vi) of 

this section; 

(iii) The balloon-payment 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 

governmental agency with jurisdiction 

to examine the creditor pursuant to 

State or Federal law, or an agreement 

between the creditor and such an 

agency; or 

(iv) The balloon-payment 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. 

(g) Prepayment penalties—(1) When 

permitted. A covered transaction must 

not include a prepayment penalty 

unless: 

(i) The prepayment penalty is 

otherwise permitted by law; and 

(ii) The transaction: 

(A) Has an annual percentage rate that 

cannot increase after consummation; 

(B) Is a qualified mortgage under 

paragraph (e)(2), (e)(4), or (f) of this 

section; and 

(C) Is not a higher-priced mortgage 

loan, as defined in § 1026.35(a). 

(2) Limits on prepayment penalties. A 

prepayment penalty: 

(i) Must not apply after the three-year 

period following consummation; and 

(ii) Must not exceed the following 

percentages of the amount of the 

outstanding loan balance prepaid: 

(A) 2 percent, if incurred during the 

first two years following consummation; 

and 

(B) 1 percent, if incurred during the 

third year following consummation. 

(3) Alternative offer required. A 

creditor must not offer a consumer a 

covered transaction with a prepayment 

penalty unless the creditor also offers 

the consumer an alternative covered 

transaction without a prepayment 

penalty and the alternative covered 

transaction: 

(i) Has an annual percentage rate that 

cannot increase after consummation and 

has the same type of interest rate as the 

covered transaction with a prepayment 

penalty; for purposes of this paragraph 

(g), the term ‘‘type of interest rate’’ refers 

to whether a transaction: 

(A) Is a fixed-rate mortgage, as defined 

in § 1026.18(s)(7)(iii); or 

(B) Is a step-rate mortgage, as defined 

in § 1026.18(s)(7)(ii); 

(ii) Has the same loan term as the loan 

term for the covered transaction with a 

prepayment penalty; 

(iii) Satisfies the periodic payment 

conditions under paragraph (e)(2)(i) of 

this section; 

(iv) Satisfies the points and fees 

conditions under paragraph (e)(2)(iii) of 

this section, based on the information 

known to the creditor at the time the 

transaction is offered; and 

(v) Is a transaction for which the 

creditor has a good faith belief that the 

consumer likely qualifies, based on the 

information known to the creditor at the 

time the creditor offers the covered 

transaction without a prepayment 

penalty. 

(4) Offer through a mortgage broker. If 

the creditor offers a covered transaction 

with a prepayment penalty to the 

consumer through a mortgage broker, as 

defined in § 1026.36(a)(2), the creditor 

must: 

(i) Present the mortgage broker an 

alternative covered transaction without 

a prepayment penalty that satisfies the 

requirements of paragraph (g)(3) of this 

section; and 

(ii) Establish by agreement that the 

mortgage broker must present the 

consumer an alternative covered 

transaction without a prepayment 

penalty that satisfies the requirements of 

paragraph (g)(3) of this section, offered 

by: 

(A) The creditor; or 

(B) Another creditor, if the transaction 

offered by the other creditor has a lower 

interest rate or a lower total dollar 

amount of discount points and 

origination points or fees. 

(5) Creditor that is a loan originator. 

If the creditor is a loan originator, as 

defined in § 1026.36(a)(1), and the 

creditor presents the consumer a 

covered transaction offered by a person 

to which the creditor would assign the 

covered transaction after 

consummation, the creditor must 

present the consumer an alternative 

covered transaction without a 

prepayment penalty that satisfies the 

requirements of paragraph (g)(3) of this 

section, offered by: 

(i) The assignee; or 


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(ii) Another person, if the transaction 

offered by the other person has a lower 

interest rate or a lower total dollar 

amount of origination discount points 

and points or fees. 

(6) Applicability. This paragraph (g) 

applies only if a covered transaction is 

consummated with a prepayment 

penalty and is not violated if: 

(i) A covered transaction is 

consummated without a prepayment 

penalty; or 

(ii) The creditor and consumer do not 

consummate a covered transaction. 

(h) Evasion; open-end credit. In 

connection with credit secured by a 

consumer’s dwelling that does not meet 

the definition of open-end credit in 

§ 1026.2(a)(20), a creditor shall not 

structure the loan as an open-end plan 

to evade the requirements of this 

section. 

5. Reserved appendices N, O, and P 

are added, and appendix Q is added to 

read as follows: 

Appendix N to Part 1026—[Reserved] 

Appendix O to Part 1026—[Reserved] 

Appendix P to Part 1026—[Reserved] 

Appendix Q to Part 1026—Standards 

for Determining Monthly Debt and 

Income 

Section 1026.43(e)(2)(vi) provides that, to 

satisfy the requirements for a qualified 

mortgage under § 1026.43(e)(2), the ratio of 

the consumer’s total monthly debt to total 

monthly income at the time of consummation 

cannot exceed 43 percent. Section 

1026.43(e)(2)(vi)(A) requires the creditor to 

calculate the ratio of the consumer’s total 

monthly debt to total monthly income using 

the following standards, with additional 

requirements for calculating debt and income 

appearing in § 1026.43(e)(2)(vi)(B). 

I. Consumer Eligibility 

A. Stability of Income. 

1. Effective Income. Income may not be 

used in calculating the consumer’s income 

ratios if it comes from any source that cannot 

be verified, is not stable, or will not continue. 

2. Verifying Employment History. 

a. The creditor must verify the consumer’s 

employment for the most recent two full 

years, and the consumer must: 

i. Explain any gaps in employment that 

span one or more months, and 

ii. Indicate if he/she was in school or the 

military for the recent two full years, 

providing evidence supporting this claim, 

such as college transcripts, or discharge 

papers. 

b. Allowances can be made for seasonal 

employment, typical for the building trades 

and agriculture, if documented by the 

creditor. 

Note: A consumer with a 25 percent or 

greater ownership interest in a business is 

considered self-employed and will be 

evaluated as a self-employed consumer for 

underwriting purposes. 

3. Analyzing a Consumer’s Employment 

Record. 

a. When analyzing the probability of 

continued employment, creditors must 

examine: 

i. The consumer’s past employment record; 

ii. Qualifications for the position; 

iii. Previous training and education; and 

iv. The employer’s confirmation of 

continued employment. 

b. Favorably consider a consumer for a 

mortgage if he/she changes jobs frequently 

within the same line of work, but continues 

to advance in income or benefits. In this 

analysis, income stability takes precedence 

over job stability. 

4. Consumers Returning to Work After an 

Extended Absence. A consumer’s income 

may be considered effective and stable when 

recently returning to work after an extended 

absence if he/she: 

a. Is employed in the current job for six 

months or longer; and 

b. Can document a two-year work history 

prior to an absence from employment using: 

i. Traditional employment verifications; 

and/or 

ii. Copies of IRS Form W–2s or pay stubs. 

Note: An acceptable employment situation 

includes individuals who took several years 

off from employment to raise children, then 

returned to the workforce. 

c. Important: Situations not meeting the 

criteria listed above may not be used in 

qualifying. Extended absence is defined as 

six months. 

B. Salary, Wage and Other Forms of 

Income. 

1. General Policy on Consumer Income 

Analysis. 

a. The income of each consumer who will 

be obligated for the mortgage debt must be 

analyzed to determine whether his/her 

income level can be reasonably expected to 

continue through at least the first three years 

of the mortgage loan. 

b. In most cases, a consumer’s income is 

limited to salaries or wages. Income from 

other sources can be considered as effective, 

when properly verified and documented by 

the creditor. 

Notes: 

i. Effective income for consumers planning 

to retire during the first three-year period 

must include the amount of: 

a. Documented retirement benefits; 

b. Social Security payments; or 

c. Other payments expected to be received 

in retirement. 

ii. Creditors must not ask the consumer 

about possible, future maternity leave. 

2. Overtime and Bonus Income. 

a. Overtime and bonus income can be used 

to qualify the consumer if he/she has 

received this income for the past two years, 

and it will likely continue. If the employment 

verification states that the overtime and 

bonus income is unlikely to continue, it may 

not be used in qualifying. 

b. The creditor must develop an average of 

bonus or overtime income for the past two 

years. Periods of overtime and bonus income 

less than two years may be acceptable, 

provided the creditor can justify and 

document in writing the reason for using the 

income for qualifying purposes. 

3. Establishing an Overtime and Bonus 

Income Earning Trend. 

a. The creditor must establish and 

document an earnings trend for overtime and 

bonus income. If either type of income shows 

a continual decline, the creditor must 

document in writing a sound rationalization 

for including the income when qualifying the 

consumer. 

b. A period of more than two years must 

be used in calculating the average overtime 

and bonus income if the income varies 

significantly from year to year. 

4. Qualifying Part-Time Income. 

a. Part-time and seasonal income can be 

used to qualify the consumer if the creditor 

documents that the consumer has worked the 

part-time job uninterrupted for the past two 

years, and plans to continue. Many low and 

moderate income families rely on part-time 

and seasonal income for day to day needs, 

and creditors should not restrict 

consideration of such income when 

qualifying these consumers. 

b. Part-time income received for less than 

two years may be included as effective 

income, provided that the creditor justifies 

and documents that the income is likely to 

continue. 

c. Part-time income not meeting the 

qualifying requirements may not be used in 

qualifying. 

Note: For qualifying purposes, ‘‘part-time’’ 

income refers to employment taken to 

supplement the consumer’s income from 

regular employment; part-time employment 

is not a primary job and it is worked less than 

40 hours. 

5. Income from Seasonal Employment. 

a. Seasonal income is considered 

uninterrupted, and may be used to qualify 

the consumer, if the creditor documents that 

the consumer: 

i. Has worked the same job for the past two 

years, and 

ii. Expects to be rehired the next season. 

b. Seasonal employment includes: 

i. Umpiring baseball games in the summer; 

or 

ii. Working at a department store during 

the holiday shopping season. 

6. Primary Employment Less Than 40 Hour 

Work Week. 

a. When a consumer’s primary 

employment is less than a typical 40-hour 

work week, the creditor should evaluate the 

stability of that income as regular, on-going 

primary employment. 

b. Example: A registered nurse may have 

worked 24 hours per week for the last year. 

Although this job is less than the 40-hour 

work week, it is the consumer’s primary 

employment, and should be considered 

effective income. 

7. Commission Income. 

a. Commission income must be averaged 

over the previous two years. To qualify 

commission income, the consumer must 

provide: 

i. Copies of signed tax returns for the last 

two years; and 

ii. The most recent pay stub. 

b. Consumers whose commission income 

was received for more than one year, but less 

than two years may be considered favorably 

if the underwriter can: 


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i. Document the likelihood that the income 

will continue, and 

ii. Soundly rationalize accepting the 

commission income. 

Notes: 

i. Unreimbursed business expenses must 

be subtracted from gross income. 

ii. A commissioned consumer is one who 

receives more than 25 percent of his/her 

annual income from commissions. 

iii. A tax transcript obtained directly from 

the IRS may be used in lieu of signed tax 

returns, and the cost of the transcript may be 

charged to the consumer. 

8. Qualifying Commission Income Earned 

for Less Than One Year. 

a. Commission income earned for less than 

one year is not considered effective income. 

Exceptions may be made for situations in 

which the consumer’s compensation was 

changed from salary to commission within a 

similar position with the same employer. 

b. A consumer may also qualify when the 

portion of earnings not attributed to 

commissions would be sufficient to qualify 

the consumer for the mortgage. 

9. Employer Differential Payments. If the 

employer subsidizes a consumer’s mortgage 

payment through direct payments, the 

amount of the payments: 

a. Is considered gross income, and 

b. Cannot be used to offset the mortgage 

payment directly, even if the employer pays 

the servicing creditor directly. 

10. Retirement Income. Retirement income 

must be verified from the former employer, 

or from Federal tax returns. If any retirement 

income, such as employer pensions or 

401(k)’s, will cease within the first full three 

years of the mortgage loan, such income may 

not be used in qualifying. 

11. Social Security Income. Social Security 

income must be verified by the Social 

Security Administration or on Federal tax 

returns. If any benefits expire within the first 

full three years of the loan, the income source 

may not be used in qualifying. 

Notes: 

i. The creditor must obtain a complete 

copy of the current awards letter. 

ii. Not all Social Security income is for 

retirement-aged recipients; therefore, 

documented continuation is required. 

iii. Some portion of Social Security income 

may be ‘‘grossed up’’ if deemed nontaxable 

by the IRS. 

12. Automobile Allowances and Expense 

Account Payments. 

a. Only the amount by which the 

consumer’s automobile allowance or expense 

account payments exceed actual 

expenditures may be considered income. 

b. To establish the amount to add to gross 

income, the consumer must provide the 

following: 

i. IRS Form 2106, Employee Business 

Expenses, for the previous two years; and 

ii. Employer verification that the payments 

will continue. 

c. If the consumer uses the standard permile rate in calculating automobile expenses, 

as opposed to the actual cost method, the 

portion that the IRS considers depreciation 

may be added back to income. 

d. Expenses that must be treated as 

recurring debt include: 

i. The consumer’s monthly car payment; 

and 

ii. Any loss resulting from the calculation 

of the difference between the actual 

expenditures and the expense account 

allowance. 

C. Consumers Employed by a Family 

Owned Business. 

1. Income Documentation Requirement. 

In addition to normal employment 

verification, a consumer employed by a 

family owned business is required to provide 

evidence that he/she is not an owner of the 

business, which may include: 

a. Copies of signed personal tax returns, or 

b. A signed copy of the corporate tax return 

showing ownership percentage. 

Note: A tax transcript obtained directly 

from the IRS may be used in lieu of signed 

tax returns, and the cost of the transcript may 

be charged to the consumer. 

D. General Information on Self-Employed 

Consumers and Income Analysis. 

1. Definition: Self Employed Consumer. A 

consumer with a 25 percent or greater 

ownership interest in a business is 

considered self-employed. 

2. Types of Business Structures. There are 

four basic types of business structures. They 

include: 

a. Sole proprietorships; 

b. Corporations; 

c. Limited liability or ‘‘S’’ corporations; 

and 

d. Partnerships. 

3. Minimum Length of Self Employment. 

a. Income from self-employment is 

considered stable, and effective, if the 

consumer has been self-employed for two or 

more years. 

b. Due to the high probability of failure 

during the first few years of a business, the 

requirements described in the table below are 

necessary for consumers who have been selfemployed for less than two years. 

4. General Documentation Requirements 

for Self Employed Consumers. Self-employed 

consumers must provide the following 

documentation: 

a. Signed, dated individual tax returns, 

with all applicable tax schedules for the most 

recent two years; 

b. For a corporation, ‘‘S’’ corporation, or 

partnership, signed copies of Federal 

business income tax returns for the last two 

years, with all applicable tax schedules; 

c. Year to date profit and loss (P&L) 

statement and balance sheet; and 

d. Business credit report for corporations 

and ‘‘S’’ corporations. 

5. Establishing a Consumer’s Earnings 

Trend. 

a. When qualifying a consumer for a 

mortgage loan, the creditor must establish the 

consumer’s earnings trend from the previous 

two years using the consumer’s tax returns. 

b. If a consumer: 

i. Provides quarterly tax returns, the 

income analysis may include income through 

the period covered by the tax filings, or 

ii. Is not subject to quarterly tax returns, or 

does not file them, then the income shown 

on the P&L statement may be included in the 

analysis, provided the income stream based 

on the P&L is consistent with the previous 

years’ earnings. 

c. If the P&L statements submitted for the 

current year show an income stream 

considerably greater than what is supported 

by the previous year’s tax returns, the 

creditor must base the income analysis solely 

on the income verified through the tax 

returns. 


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d. If the consumer’s earnings trend for the 

previous two years is downward and the 

most recent tax return or P&L is less than the 

prior year’s tax return, the consumer’s most 

recent year’s tax return or P&L must be used 

to calculate his/her income. 

6. Analyzing the Business’s Financial 

Strength: 

a. To determine if the business is expected 

to generate sufficient income for the 

consumer’s needs, the creditor must carefully 

analyze the business’s financial strength, 

including the: 

i. Source of the business’s income; 

ii. General economic outlook for similar 

businesses in the area. 

b. Annual earnings that are stable or 

increasing are acceptable, while businesses 

that show a significant decline in income 

over the analysis period are not acceptable. 

E. Income Analysis: Individual Tax 

Returns (IRS Form 1040). 

1. General Policy on Adjusting Income 

Based on a Review of IRS Form 1040. The 

amount shown on a consumer’s IRS Form 

1040 as adjusted gross income must either be 

increased or decreased based on the 

creditor’s analysis of the individual tax 

return and any related tax schedules. 

2. Guidelines for Analyzing IRS Form 1040. 

The table below contains guidelines for 

analyzing IRS Form 1040: 


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F. Income Analysis: Corporate Tax Returns 

(IRS Form 1120). 

1. Description: Corporation. A corporation 

is a State-chartered business owned by its 

stockholders. 

2. Need To Obtain Consumer Percentage of 

Ownership Information. 

a. Corporate compensation to the officers, 

generally in proportion to the percentage of 

ownership, is shown on the: 

i. Corporate tax return IRS Form 1120; and 

ii. Individual tax returns. 

b. When a consumer’s percentage of 

ownership does not appear on the tax 

returns, the creditor must obtain the 


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information from the corporation’s 

accountant, along with evidence that the 

consumer has the right to any compensation. 

3. Analyzing Corporate Tax Returns. 

a. In order to determine a consumer’s selfemployed income from a corporation the 

adjusted business income must: 

i. Be determined; and 

ii. Multiplied by the consumer’s percentage 

of ownership in the business. 

b. The table below describes the items 

found on IRS Form 1120 for which an 

adjustment must be made in order to 

determine adjusted business income. 

G. Income Analysis: ‘‘S’’ Corporation Tax 

Returns (IRS Form 1120S). 

1. Description: ‘‘S’’ Corporation. 

a. An ‘‘S’’ corporation is generally a small, 

start-up business, with gains and losses 

passed to stockholders in proportion to each 

stockholder’s percentage of business 

ownership. 

b. Income for owners of ‘‘S’’ corporations 

comes from IRS Form W–2 wages, and is 

taxed at the individual rate. The IRS Form 

1120S, Compensation of Officers line item is 

transferred to the consumer’s individual IRS 

Form 1040. 

2. Analyzing ‘‘S’’ Corporation Tax Returns. 

a. ‘‘S’’ corporation depreciation and 

depletion may be added back to income in 

proportion to the consumer’s share of the 

corporation’s income. 

b. In addition, the income must also be 

reduced proportionately by the total 

obligations payable by the corporation in less 

than one year. 

c. Important: The consumer’s withdrawal 

of cash from the corporation may have a 

severe negative impact on the corporation’s 

ability to continue operating, and must be 

considered in the income analysis. 

H. Income Analysis: Partnership Tax 

Returns (IRS Form 1065). 

1. Description: Partnership. 

a. A partnership is formed when two or 

more individuals form a business, and share 

in profits, losses, and responsibility for 

running the company. 

b. Each partner pays taxes on his/her 

proportionate share of the partnership’s net 

income. 

2. Analyzing Partnership Tax Returns. 

a. Both general and limited partnerships 

report income on IRS Form 1065, and the 

partners’ share of income is carried over to 

Schedule E of IRS Form 1040. 

b. The creditor must review IRS Form 1065 

to assess the viability of the business. Both 

depreciation and depletion may be added 

back to the income in proportion to the 

consumer’s share of income. 

c. Income must also be reduced 

proportionately by the total obligations 

payable by the partnership in less than one 

year. 

d. Important: Cash withdrawals from the 

partnership may have a severe negative 

impact on the partnership’s ability to 

continue operating, and must be considered 

in the income analysis. 

II. Non-Employment Related Consumer 

Income 

A. Alimony, Child Support, and 

Maintenance Income Criteria. Alimony, child 

support, or maintenance income may be 

considered effective, if: 

1. Payments are likely to be received 

consistently for the first three years of the 

mortgage; 

2. The consumer provides the required 

documentation, which includes a copy of 

the: 

i. Final divorce decree; 

ii. Legal separation agreement; 

iii. Court order; or 

iv. Voluntary payment agreement; and 

3. The consumer can provide acceptable 

evidence that payments have been received 

during the last 12 months, such as: 

i. Cancelled checks; 

ii. Deposit slips; 

iii. Tax returns; or 

iv. Court records. 

Notes: 

i. Periods less than 12 months may be 

acceptable, provided the creditor can 

adequately document the payer’s ability and 

willingness to make timely payments. 

ii. Child support may be ‘‘grossed up’’ 

under the same provisions as non-taxable 

income sources. 

B. Investment and Trust Income. 

1. Analyzing Interest and Dividends. 

a. Interest and dividend income may be 

used as long as tax returns or account 

statements support a two-year receipt history. 

This income must be averaged over the two 

years. 

b. Subtract any funds that are derived from 

these sources, and are required for the cash 

investment, before calculating the projected 

interest or dividend income. 

2. Trust Income. 

a. Income from trusts may be used if 

guaranteed, constant payments will continue 

for at least the first three years of the 

mortgage term. 

b. Required trust income documentation 

includes a copy of the Trust Agreement or 

other trustee statement, confirming the: 

i. Amount of the trust; 

ii. Frequency of distribution; and 

iii. Duration of payments. 

c. Trust account funds may be used for the 

required cash investment if the consumer 

provides adequate documentation that the 

withdrawal of funds will not negatively affect 

income. The consumer may use funds from 

the trust account for the required cash 

investment, but the trust income used to 

determine repayment ability cannot be 

affected negatively by its use. 

3. Notes Receivable Income. 

a. In order to include notes receivable 

income to qualify a consumer, he/she must 

provide: 

i. A copy of the note to establish the 

amount and length of payment, and 

ii. Evidence that these payments have been 

consistently received for the last 12 months 

through deposit slips, cancelled checks, or 

tax returns. 

b. If the consumer is not the original payee 

on the note, the creditor must establish that 

the consumer is now a holder in due course, 

and able to enforce the note. 

4. Eligible Investment Properties. 

Follow the steps in the table below to 

calculate an investment property’s income or 

loss if the property to be subject to a 

mortgage is an eligible investment property. 


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C. Military, Government Agency, and 

Assistance Program Income. 

1. Military Income. 

a. Military personnel not only receive base 

pay, but oftentimes are entitled to additional 

forms of pay, such as: 

i. Income from variable housing 

allowances; 

ii. Clothing allowances; 

iii. Flight or hazard pay; 

iv. Rations; and 

v. Proficiency pay. 

b. These types of additional pay are 

acceptable when analyzing a consumer’s 

income as long as the probability of such pay 

to continue is verified in writing. 

Note: The tax-exempt nature of some of the 

above payments should also be considered. 

2. VA Benefits. 

a. Direct compensation for service-related 

disabilities from the Department of Veterans 

Affairs (VA) is acceptable, provided the 

creditor receives documentation from the 

VA. 

b. Education benefits used to offset 

education expenses are not acceptable. 

3. Government Assistance Programs. 

a. Income received from government 

assistance programs is acceptable as long as 

the paying agency provides documentation 

indicating that the income is expected to 

continue for at least three years. 

b. If the income from government 

assistance programs will not be received for 

at least three years, it may not be used in 

qualifying. 

c. Unemployment income must be 

documented for two years, and there must be 

reasonable assurance that this income will 

continue. This requirement may apply to 

seasonal employment. 

4. Mortgage Credit Certificates. 

a. If a government entity subsidizes the 

mortgage payments either through direct 

payments or tax rebates, these payments may 

be considered as acceptable income. 

b. Either type of subsidy may be added to 

gross income, or used directly to offset the 

mortgage payment, before calculating the 

qualifying ratios. 

5. Homeownership Subsidies. 

a. A monthly subsidy may be treated as 

income, if a consumer is receiving subsidies 

under the housing choice voucher home 

ownership option from a public housing 

agency (PHA). Although continuation of the 

homeownership voucher subsidy beyond the 

first year is subject to Congressional 

appropriation, for the purposes of 

underwriting, the subsidy will be assumed to 

continue for at least three years. 

b. If the consumer is receiving the subsidy 

directly, the amount received is treated as 

income. The amount received may also be 

treated as nontaxable income and be ‘‘grossed 

up’’ by 25 percent, which means that the 

amount of the subsidy, plus 25 percent of 

that subsidy may be added to the consumer’s 

income from employment and/or other 

sources. 

c. Creditors may treat this subsidy as an 

‘‘offset’’ to the monthly mortgage payment 

(that is, reduce the monthly mortgage 

payment by the amount of the home 

ownership assistance payment before 

dividing by the monthly income to determine 

the payment-to-income and debt-to-income 

ratios). The subsidy payment must not pass 

through the consumer’s hands. 

d. The assistance payment must be: 

i. Paid directly to the servicing creditor; or 

ii. Placed in an account that only the 

servicing creditor may access. 

Note: Assistance payments made directly 

to the consumer must be treated as income. 

D. Rental Income. 

1. Analyzing the Stability of Rental Income. 

a. Rent received for properties owned by 

the consumer is acceptable as long as the 

creditor can document the stability of the 

rental income through: 

i. A current lease; 

ii. An agreement to lease, or 

iii. A rental history over the previous 24 

months that is free of unexplained gaps 

greater than three months (such gaps could 

be explained by student, seasonal, or military 

renters, or property rehabilitation). 

b. A separate schedule of real estate is not 

required for rental properties as long as all 

properties are documented on the Uniform 

Residential Loan Application. 

Note: The underwriting analysis may not 

consider rental income from any property 

being vacated by the consumer, except under 

the circumstances described below. 

2. Rental Income From Consumer 

Occupied Property. 

a. The rent for multiple unit property 

where the consumer resides in one or more 

units and charges rent to tenants of other 

units may be used for qualifying purposes. 

b. Projected rent for the tenant-occupied 

units only may: 

i. Be considered gross income, only after 

deducting vacancy and maintenance factors, 

and 

ii. Not be used as a direct offset to the 

mortgage payment. 

3. Income from Roommates in a Single 

Family Property. 

a. Income from roommates in a single 

family property occupied as the consumer’s 

primary residence is not acceptable. Rental 

income from boarders however, is acceptable, 

if the boarders are related by blood, marriage, 

or law. 

b. The rental income may be considered 

effective, if shown on the consumer’s tax 

return. If not on the tax return, rental income 

paid by the boarder may not be used in 

qualifying. 

4. Documentation Required To Verify 

Rental Income. Analysis of the following 

required documentation is necessary to verify 

all consumer rental income: 

a. IRS Form 1040 Schedule E; and 

b. Current leases/rental agreements. 

5. Analyzing IRS Form 1040 Schedule E. 

a. The IRS Form 1040 Schedule E is 

required to verify all rental income. 

Depreciation shown on Schedule E may be 

added back to the net income or loss. 

b. Positive rental income is considered 

gross income for qualifying purposes, while 

negative income must be treated as a 

recurring liability. 

c. The creditor must confirm that the 

consumer still owns each property listed, by 

comparing Schedule E with the real estate 

owned section of the URLA. 

6. Using Current Leases To Analyze Rental 

Income. 

a. The consumer can provide a current 

signed lease or other rental agreement for a 

property that was acquired since the last 

income tax filing, and is not shown on 

Schedule E. 

b. In order to calculate the rental income: 

i. Reduce the gross rental amount by 25 

percent for vacancies and maintenance; 

ii. Subtract PITI and any homeowners 

association dues; and 

iii. Apply the resulting amount to income, 

if positive, or recurring debts, if negative. 

7. Exclusion of Rental Income From 

Property Being Vacated by the Consumer. 

Underwriters may not consider any rental 

income from a consumer’s principal 

residence that is being vacated in favor of 

another principal residence, except under the 

conditions described below: 

Notes: 

i. This policy assures that a consumer 

either has sufficient income to make both 

mortgage payments without any rental 


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income, or has an equity position not likely 

to result in defaulting on the mortgage on the 

property being vacated. 

ii. This applies solely to a principal 

residence being vacated in favor of another 

principal residence. It does not apply to 

existing rental properties disclosed on the 

loan application and confirmed by tax 

returns (Schedule E of form IRS 1040). 

8. Policy Exceptions Regarding the 

Exclusion of Rental Income From a Principal 

Residence Being Vacated by a Consumer. 

When a consumer vacates a principal 

residence in favor of another principal 

residence, the rental income, reduced by the 

appropriate vacancy factor, may be 

considered in the underwriting analysis 

under the circumstances listed in the table 

below. 

E. Non Taxable and Projected Income. 

1. Types of Non Taxable Income. 

Certain types of regular income may not be 

subject to Federal tax. Such types of 

nontaxable income include: 

a. Some portion of Social Security, some 

Federal government employee retirement 

income, Railroad Retirement Benefits, and 

some State government retirement income: 

b. Certain types of disability and public 

assistance payments; 

c. Child support; 

d. Military allowances; and 

e. Other income that is documented as 

being exempt from Federal income taxes. 

2. Adding Non Taxable Income to a 

Consumer’s Gross Income. 

a. The amount of continuing tax savings 

attributed to regular income not subject to 

Federal taxes may be added to the 

consumer’s gross income. 

b. The percentage of non-taxable income 

that may be added cannot exceed the 

appropriate tax rate for the income amount. 

Additional allowances for dependents are not 

acceptable. 

c. The creditor: 

i. Must document and support the amount 

of income grossed up for any non-taxable 

income source, and 

ii. Should use the tax rate used to calculate 

the consumer’s last year’s income tax. 

Note: If the consumer is not required to file 

a Federal tax return, the tax rate to use is 25 

percent. 

3. Analyzing Projected Income. 

a. Projected or hypothetical income is not 

acceptable for qualifying purposes. However, 

exceptions are permitted for income from the 

following sources: 

i. Cost-of-living adjustments; 

ii. Performance raises; and 

iii. Bonuses. 

b. For the above exceptions to apply, the 

income must be: 

i. Verified in writing by the employer; and 

ii. Scheduled to begin within 60 days of 

loan closing. 

4. Project Income for New Job. 

a. Projected income is acceptable for 

qualifying purposes for a consumer 

scheduled to start a new job within 60 days 

of loan closing if there is a guaranteed, nonrevocable contract for employment. 

b. The creditor must verify that the 

consumer will have sufficient income or cash 

reserves to support the mortgage payment 

and any other obligations between loan 

closing and the start of employment. 

Examples of this type of scenario are teachers 

whose contracts begin with the new school 

year, or physicians beginning a residency 

after the loan closes fall under this category. 

c. The loan is not eligible for endorsement 

if the loan closes more than 60 days before 

the consumer starts the new job. To be 

eligible for endorsement, the creditor must 

obtain from the consumer a pay stub or other 

acceptable evidence indicating that he/she 

has started the new job. 

III. Consumer Liabilities: Recurring 

Obligations 

1. Types of Recurring Obligation. Recurring 

obligations include: 

a. All installment loans; 

b. Revolving charge accounts; 

c. Real estate loans; 

d. Alimony; 

e. Child support; and 

f. Other continuing obligations. 

2. Debt to Income Ratio Computation for 

Recurring Obligations. 

a. The creditor must include the following 

when computing the debt to income ratios for 

recurring obligations: 

i. Monthly housing expense; and 

ii. Additional recurring charges extending 

ten months or more, such as 

a. Payments on installment accounts; 

b. Child support or separate maintenance 

payments; 

c. Revolving accounts; and 

d. Alimony. 

b. Debts lasting less than ten months must 

be included if the amount of the debt affects 

the consumer’s ability to pay the mortgage 

during the months immediately after loan 

closing, especially if the consumer will have 

limited or no cash assets after loan closing. 


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Note: Monthly payments on revolving or 

open-ended accounts, regardless of the 

balance, are counted as a liability for 

qualifying purposes even if the account 

appears likely to be paid off within 10 

months or less. 

3. Revolving Account Monthly Payment 

Calculation. If the credit report shows any 

revolving accounts with an outstanding 

balance but no specific minimum monthly 

payment, the payment must be calculated as 

the greater of: 

a. 5 percent of the balance; or 

b. $10. 

Note: If the actual monthly payment is 

documented from the creditor or the creditor 

obtains a copy of the current statement 

reflecting the monthly payment, that amount 

may be used for qualifying purposes. 

4. Reduction of Alimony Payment for 

Qualifying Ratio Calculation. Since there are 

tax consequences of alimony payments, the 

creditor may choose to treat the monthly 

alimony obligation as a reduction from the 

consumer’s gross income when calculating 

qualifying ratios, rather than treating it as a 

monthly obligation. 

IV. Consumer Liabilities: Contingent 

Liability 

1. Definition: Contingent Liability. A 

contingent liability exists when an individual 

is held responsible for payment of a debt if 

another party, jointly or severally obligated, 

defaults on the payment. 

2. Application of Contingent Liability 

Policies. The contingent liability policies 

described in this topic apply unless the 

consumer can provide conclusive evidence 

from the debt holder that there is no 

possibility that the debt holder will pursue 

debt collection against him/her should the 

other party default. 

3. Contingent Liability on Mortgage 

Assumptions. Contingent liability must be 

considered when the consumer remains 

obligated on an outstanding FHA-insured, 

VA-guaranteed, or conventional mortgage 

secured by property that: 

a. Has been sold or traded within the last 

12 months without a release of liability, or 

b. Is to be sold on assumption without a 

release of liability being obtained. 

4. Exemption From Contingent Liability 

Policy on Mortgage Assumptions. When a 

mortgage is assumed, contingent liabilities 

need not be considered if the: 

a. Originating creditor of the mortgage 

being underwritten obtains, from the servicer 

of the assumed loan, a payment history 

showing that the mortgage has been current 

during the previous 12 months, or 

b. Value of the property, as established by 

an appraisal or the sales price on the HUD– 

1 Settlement Statement from the sale of the 

property, results in a loan-to-value (LTV) 

ratio of 75 percent or less. 

5. Contingent Liability on Cosigned 

Obligations. 

a. Contingent liability applies, and the debt 

must be included in the underwriting 

analysis, if an individual applying for a 

mortgage is a cosigner/co-obligor on: 

i. A car loan; 

ii. A student loan; 

iii. A mortgage; or 

iv. Any other obligation. 

b. If the creditor obtains documented proof 

that the primary obligor has been making 

regular payments during the previous 12 

months, and does not have a history of 

delinquent payments on the loan during that 

time, the payment does not have to be 

included in the consumer’s monthly 

obligations. 

V. Consumer Liabilities: Projected 

Obligations and Obligations Not Considered 

Debt 

1. Projected Obligations. 

a. Debt payments, such as a student loan 

or balloon-payment note scheduled to begin 

or come due within 12 months of the 

mortgage loan closing, must be included by 

the creditor as anticipated monthly 

obligations during the underwriting analysis. 

b. Debt payments do not have to be 

classified as projected obligations if the 

consumer provides written evidence that the 

debt will be deferred to a period outside the 

12-month timeframe. 

c. Balloon-payment notes that come due 

within one year of loan closing must be 

considered in the underwriting analysis. 

2. Obligations Not Considered Debt. 

Obligations not considered debt, and 

therefore not subtracted from gross income, 

include: 

a. Federal, State, and local taxes; 

b. Federal Insurance Contributions Act 

(FICA) or other retirement contributions, 

such as 401(k) accounts (including 

repayment of debt secured by these funds): 

c. Commuting costs; 

d. Union dues; 

e. Open accounts with zero balances; 

f. Automatic deductions to savings 

accounts; 

g. Child care; and 

h. Voluntary deductions. 

6. In Supplement I to Part 1026—Official 

Interpretations: 

A. Under Section 1026.25—Record 

Retention: 

i. Under 25(a) General rule, paragraph 2 is 

revised. 

ii. Section 25(c) Records related to certain 

requirements for mortgage loans, 25(c)(3) 

Records related to minimum standards for 

transactions secured by a dwelling, and 

paragraphs 1 and 2 are added. 

B. The heading for Section 1026.32 is 

revised. 

C. Under revised Section 1026.32: 

i. Under 32(b) Definitions: 

a. Paragraph 32(b)(1) and paragraph 1 are 

added. 

b. Under Paragraph 32(b)(1)(i), paragraph 1 

is revised. 

c. Paragraph 32(b)(1)(i)(B) and paragraph 1 

are added. 

d. Paragraph 32(b)(1)(i)(C) and paragraphs 

1 and 2 are added. 

e. Paragraph 32(b)(1)(i)(D) and paragraphs 

1, 2, 3, and 4 are added. 

f. Paragraph 32(b)(1)(i)(E) and paragraphs 

1, 2, and 3 are added. 

g. Paragraph 32(b)(1)(i)(F) and paragraphs 

1 and 2 are added. 

h. Under Paragraph 32(b)(1)(ii), paragraphs 

1 and 2 are revised and paragraphs 3 and 4 

are added. 

i. Paragraph 32(b)(1)(iii) and paragraph 1 

are added. 

j. Under Paragraph 32(b)(1)(iv), paragraph 

1 is revised and paragraphs 2 and 3 are 

added. 

k. 32(b)(3) Bona fide discount point, 

32(b)(3)(i) Closed-end credit, and paragraph 1 

are added. 

l. 32(b)(4) Total loan amount, 32(b)(4)(i) 

Closed-end credit, and paragraph 1 are 

added. 

m. 32(b)(6) Prepayment penalty and 

paragraphs 1 and 2 are added. 

D. Section 1026.43—Minimum Standards 

for Transactions Secured by a Dwelling is 

added. 

The revisions and additions read as 

follows: 

Supplement I to Part 1026—Official 

Interpretations 

* * * * * 

Subpart D—Miscellaneous 

* * * * * 

Section 1026.25—Record Retention 

25(a) General rule. 

* * * * * 

2. Methods of retaining evidence. Adequate 

evidence of compliance does not necessarily 

mean actual paper copies of disclosure 

statements or other business records. The 

evidence may be retained by any method that 

reproduces records accurately (including 

computer programs). Unless otherwise 

required, the creditor need retain only 

enough information to reconstruct the 

required disclosures or other records. Thus, 

for example, the creditor need not retain each 

open-end periodic statement, so long as the 

specific information on each statement can 

be retrieved. 

* * * * * 

25(c) Records related to certain 

requirements for mortgage loans. 

25(c)(3) Records related to minimum 

standards for transactions secured by a 

dwelling. 

1. Evidence of compliance with repayment 

ability provisions. A creditor must retain 

evidence of compliance with § 1026.43 for 

three years after the date of consummation of 

a consumer credit transaction covered by that 

section. (See comment 25(c)-2 for guidance 

on the retention of evidence of compliance 

with the requirement to offer a consumer a 

loan without a prepayment penalty under 

§ 1026.43(g)(3).) If a creditor must verify and 

document information used in underwriting 

a transaction subject to § 1026.43, the 

creditor shall retain evidence sufficient to 

demonstrate compliance with the 

documentation requirements of the rule. 

Although a creditor need not retain actual 

paper copies of the documentation used in 

underwriting a transaction subject to 

§ 1026.43, to comply with § 1026.25(c)(3), the 

creditor must be able to reproduce such 

records accurately. For example, if the 

creditor uses a consumer’s Internal Revenue 

Service (IRS) Form W–2 to verify the 

consumer’s income, the creditor must be able 

to reproduce the IRS Form W–2 itself, and 


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not merely the income information that was 

contained in the form. 

2. Dwelling-secured transactions and 

prepayment penalties. If a transaction 

covered by § 1026.43 has a prepayment 

penalty, the creditor must maintain records 

that document that the creditor complied 

with requirements for offering the consumer 

an alternative transaction that does not 

include a prepayment penalty under 

§ 1026.43(g)(3), (4), or (5). However, the 

creditor need not maintain records that 

document compliance with those provisions 

if a transaction is consummated without a 

prepayment penalty or if the creditor and 

consumer do not consummate a covered 

transaction. If a creditor offers a transaction 

with a prepayment penalty to a consumer 

through a mortgage broker, to evidence 

compliance with § 1026.43(g)(4) the creditor 

should retain evidence of the alternative 

covered transaction presented to the 

mortgage broker, such as a rate sheet, and the 

agreement with the mortgage broker required 

by § 1026.43(g)(4)(ii). 

* * * * * 

Subpart E—Special Rules for Certain 

Home Mortgage Transactions 

* * * * * 

Section 1026.32—Requirements for 

High-Cost Mortgages 

* * * * * 

32(b) Definitions. 

Paragraph 32(b)(1). 

1. Known at or before consummation. 

Section 1026.32(b)(1) includes in points and 

fees for closed-end credit transactions those 

items listed in § 1026.32(b)(1)(i) through (vi) 

that are known at or before consummation. 

The following examples clarify how to 

determine whether a charge or fee is known 

at or before consummation. 

i. General. In general, a charge or fee is 

‘‘known at or before consummation’’ if the 

creditor knows at or before consummation 

that the charge or fee will be imposed in 

connection with the transaction, even if the 

charge or fee is scheduled to be paid after 

consummation. Thus, for example, if the 

creditor charges the consumer $400 for an 

appraisal conducted by an affiliate of the 

creditor, the $400 is included in points and 

fees, even if the consumer finances it and 

repays it over the loan term, because the 

creditor knows at or before consummation 

that the charge or fee is imposed in 

connection with the transaction. By contrast, 

if a creditor does not know whether a charge 

or fee will be imposed, it is not included in 

points and fees. For example, charges or fees 

that the creditor may impose if the consumer 

seeks to modify a loan after consummation 

are not included in points and fees, because 

the creditor does not know at or before 

consummation whether the consumer will 

seek to modify the loan and therefore incur 

the fees or charges. 

ii. Prepayment penalties. Notwithstanding 

the guidance in comment 32(b)(1)-1.i, under 

§ 1026.32(b)(1)(v) the maximum prepayment 

penalty that may be charged or collected 

under the terms of the mortgage loan is 

included in points and fees because the 

amount of the maximum prepayment penalty 

that may be charged or collected is known at 

or before consummation. 

iii. Certain mortgage and credit insurance 

premiums. Notwithstanding the guidance in 

comment 32(b)(1)-1.i, under 

§ 1026.32(b)(1)(i)(C)(1) and (iii) premiums 

and charges for private mortgage insurance 

and credit insurance that are payable after 

consummation are not included in points 

and fees, even if the amounts of such 

premiums and charges are known at or before 

consummation. 

Paragraph 32(b)(1)(i). 

1. General. Section 1026.32(b)(1)(i) 

includes in the total ‘‘points and fees’’ items 

included in the finance charge under 

§ 1026.4(a) and (b). However, certain items 

that may be included in the finance charge 

are excluded from points and fees under 

§ 1026.32(b)(1)(i)(A) through (F). Items 

excluded from the finance charge under other 

provisions of § 1026.4 are not included in the 

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

but may be included in points and fees under 

§ 1026.32(b)(1)(ii) through (vi). To illustrate: 

A fee imposed by the creditor for an 

appraisal performed by an employee of the 

creditor meets the definition of ‘‘finance 

charge’’ under § 1026.4(a) as ‘‘any charge 

payable directly or indirectly by the 

consumer and imposed directly or indirectly 

by the creditor as an incident to or a 

condition of the extension of credit.’’ 

However, § 1026.4(c)(7) specifies that 

appraisal fees are not included in the finance 

charge. A fee imposed by the creditor for an 

appraisal performed by an employee of the 

creditor therefore would not be included in 

the finance charge and would not be counted 

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

Section 1026.32(b)(1)(iii), however, expressly 

includes in points and fees items listed in 

§ 1026.4(c)(7) (including appraisal fees) if the 

creditor receives compensation in connection 

with the charge. A creditor would receive 

compensation for an appraisal performed by 

its own employee. Thus, the appraisal fee in 

this example must be included in the 

calculation of points and fees. 

Paragraph 32(b)(1)(i)(B). 

1. Federal and State mortgage insurance 

premiums and guaranty fees. Under 

§ 1026.32(b)(1)(i)(B), mortgage insurance 

premiums or guaranty fees in connection 

with a Federal or State agency program are 

excluded from points and fees, even though 

they are included in the finance charge under 

§ 1026.4(a) and (b). For example, if a 

consumer is required to pay a $2,000 

mortgage insurance premium for a loan 

insured by the Federal Housing 

Administration, the $2,000 must be included 

in the finance charge but is not counted in 

points and fees. Similarly, if a consumer pays 

a 2 percent funding fee for a loan guaranteed 

by the U.S. Department of Veterans Affairs or 

through the U.S Department of Agriculture’s 

Rural Development Single Family Housing 

Guaranteed Loan Program, the fee is included 

in the finance charge but is not included in 

points and fees. 

Paragraph 32(b)(1)(i)(C). 

1. Private mortgage insurance premiums. i. 

Payable after consummation. Under 

§ 1026.32(b)(1)(i)(C)(1), private mortgage 

insurance premiums payable after 

consummation are excluded from points and 

fees. 

ii. Payable at or before consummation. A. 

General. Under § 1026.32(b)(1)(i)(C)(2), 

private mortgage insurance premiums 

payable at or before consummation (i.e., 

single or up-front premiums) may be 

excluded from points and fees, even though 

they are included in the finance charge under 

§ 1026.4(a) and (b). However, the portion of 

the premium that exceeds the amount 

payable under policies in effect at the time 

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

the National Housing Act (12 U.S.C. 

1709(c)(2)(A)) is included in points and fees. 

To determine whether any portion of the 

premium exceeds the amount payable under 

policies in effect at the time of origination 

under section 203(c)(2)(A) of the National 

Housing Act, a creditor references the 

premium amount that would be payable for 

the transaction under that Act, as 

implemented by applicable regulations and 

other written authorities issued by the 

Federal Housing Administration (such as 

Mortgagee Letters), even if the transaction 

would not qualify to be insured under that 

Act (including, for example, because the 

principal amount exceeds the maximum 

insurable under that Act). 

B. Non-refundable premiums. To qualify 

for the exclusion from points and fees, 

private mortgage insurance premiums 

payable at or before consummation must be 

required to be refunded on a pro rata basis 

and the refund must be automatically issued 

upon notification of the satisfaction of the 

underlying mortgage loan. 

C. Example. Assume that a $3,000 private 

mortgage insurance premium charged on a 

closed-end mortgage loan is payable at or 

before closing and is required to be refunded 

on a pro rata basis and that the refund is 

automatically issued upon notification of the 

satisfaction of the underlying mortgage loan. 

Assume also that the maximum premium 

allowable under the National Housing Act is 

$2,000. In this case, the creditor could 

exclude $2,000 from points and fees but 

would have to include the $1,000 that 

exceeds the allowable premium under the 

National Housing Act. However, if the $3,000 

private mortgage insurance premium were 

not required to be refunded on a pro rata 

basis or if the refund were not automatically 

issued upon notification of the satisfaction of 

the underlying mortgage loan, the entire 

$3,000 premium would be included in points 

and fees. 

2. Method of paying private mortgage 

insurance premiums. The portion of any 

private mortgage insurance premiums 

payable at or before consummation that does 

not qualify for an exclusion from points and 

fees under § 1026.32(b)(1)(i)(C)(2) must be 

included in points and fees for purposes of 

§ 1026.32(b)(1)(i) whether paid in cash or 

financed and whether the insurance is 

optional or required. 

Paragraph 32(b)(1)(i)(D). 

1. Charges not retained by the creditor, 

loan originator, or an affiliate of either. In 

general, a creditor is not required to count in 

points and fees any bona fide third-party 

charge not retained by the creditor, loan 


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originator, or an affiliate of either. For 

example, if bona fide charges are imposed by 

a third-party settlement agent and are not 

retained by the creditor, loan originator, or an 

affiliate of either, those charges are not 

included in points and fees, even if those 

charges are included in the finance charge 

under § 1026.4(a)(2). The term loan originator 

has the same meaning as in § 1026.36(a)(1). 

2. Private mortgage insurance. The 

exclusion for bona fide third-party charges 

not retained by the creditor, loan originator, 

or an affiliate of either is limited by 

§ 1026.32(b)(1)(i)(C) in the general definition 

of ‘‘points and fees.’’ Section 

1026.32(b)(1)(i)(C) requires inclusion in 

points and fees of premiums or other charges 

payable at or before consummation for any 

private guaranty or insurance protecting the 

creditor against the consumer’s default or 

other credit loss to the extent that the 

premium or charge exceeds the amount 

payable under policies in effect at the time 

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

the National Housing Act (12 U.S.C. 

1709(c)(2)(A)). These premiums or charges 

must also be included if the premiums or 

charges are not required to be refundable on 

a pro-rated basis, or the refund is not 

required to be automatically issued upon 

notification of the satisfaction of the 

underlying mortgage loan. Under these 

circumstances, even if the premiums or other 

charges are not retained by the creditor, loan 

originator, or an affiliate of either, they must 

be included in the points and fees calculation 

for qualified mortgages. See comments 

32(b)(1)(i)(c)-1 and -2 for further discussion 

of including private mortgage insurance 

premiums payable at or before 

consummation in the points and fees 

calculation. 

3. Real estate-related fees. The exclusion 

for bona fide third-party charges not retained 

by the creditor, loan originator, or an affiliate 

of either is limited by § 1026.32(b)(1)(iii) in 

the general definition of points and fees. 

Section 1026.32(b)(1)(iii) requires inclusion 

in points and fees of items listed in 

§ 1026.4(c)(7) unless the charge is reasonable, 

the creditor receives no direct or indirect 

compensation in connection with the charge, 

and the charge is not paid to an affiliate of 

the creditor. If a charge is required to be 

included in points and fees under 

§ 1026.32(b)(1)(iii), it may not be excluded 

under § 1026.32(b)(1)(i)(D), even if the 

criteria for exclusion in § 1026.32(b)(1)(i)(D) 

are satisfied. 

4. Credit insurance. The exclusion for bona 

fide third-party charges not retained by the 

creditor, loan originator, or an affiliate of 

either is limited by § 1026.32(b)(1)(iv) in the 

general definition of points and fees. Section 

1026.32(b)(1)(iv) requires inclusion in points 

and fees of premiums and other charges for 

credit insurance and certain other types of 

insurance. If a charge is required to be 

included in points and fees under 

§ 1026.32(b)(1)(iv), it may not be excluded 

under § 1026.32(b)(1)(i)(D), even if the 

criteria for exclusion in § 1026.32(b)(1)(i)(D) 

are satisfied. 

Paragraph 32(b)(1)(i)(E). 

1. Bona fide discount point. The term bona 

fide discount point is defined in 

§ 1026.32(b)(3). 

2. Average prime offer rate. The average 

prime offer rate for purposes of paragraph 

(b)(1)(i)(E) of this section is the average prime 

offer rate that applies to a comparable 

transaction as of the date the discounted 

interest rate for the transaction is set. For the 

meaning of ‘‘comparable transaction,’’ refer 

to comment 35(a)(2)-2. The table of average 

prime offer rates published by the Bureau 

indicates how to identify the comparable 

transaction. See comment 35(a)(2)-2. 

3. Example. Assume a transaction that is a 

first-lien, purchase-money home mortgage 

with a fixed interest rate and a 30-year term. 

Assume also that the consumer locks in an 

interest rate of 6 percent on May 1, 2014 that 

was discounted from a rate of 6.5 percent 

because the consumer paid two discount 

points. Finally, assume that the average 

prime offer rate as of May 1, 2014 for home 

mortgages with a fixed interest rate and a 30- 

year term is 5.5 percent. The creditor may 

exclude two bona fide discount points from 

the points and fees calculation because the 

rate from which the discounted rate was 

derived (6.5 percent) exceeded the average 

prime offer rate for a comparable transaction 

as of the date the rate on the transaction was 

set (5.5 percent) by only 1 percentage point. 

Paragraph 32(b)(1)(i)(F). 

1. Bona fide discount point and average 

prime offer rate. Comments 32(b)(1)(i)(E)-1 

and -2 provide guidance concerning the 

definition of bona fide discount point and 

average prime offer rate, respectively. 

2. Example. Assume a transaction that is a 

first-lien, purchase-money home mortgage 

with a fixed interest rate and a 30-year term. 

Assume also that the consumer locks in an 

interest rate of 6 percent on May 1, 2014, that 

was discounted from a rate of 7 percent 

because the consumer paid four discount 

points. Finally, assume that the average 

prime offer rate as of May 1, 2014, for home 

mortgages with a fixed interest rate and a 30- 

year term is 5 percent. The creditor may 

exclude one discount point from the points 

and fees calculation because the rate from 

which the discounted rate was derived (7 

percent) exceeded the average prime offer 

rate for a comparable transaction as of the 

date the rate on the transaction was set (5 

percent) by only 2 percentage points. 

Paragraph 32(b)(1)(ii). 

1. Loan originator compensation—general. 

Compensation paid by a consumer or creditor 

to a loan originator is included in the 

calculation of points and fees for a 

transaction, provided that such 

compensation can be attributed to that 

particular transaction at the time the interest 

rate is set. Loan originator compensation 

includes amounts the loan originator retains 

and is not dependent on the label or name 

of any fee imposed in connection with the 

transaction. 

2. Loan originator compensation— 

attributable to a particular transaction. i. 

Loan originator compensation includes the 

dollar value of compensation, such as a 

bonus, commission, or award of 

merchandise, services, trips, or similar 

prizes, that is paid by a consumer or creditor 

to a loan originator and can be attributed to 

that particular transaction. The amount of 

compensation that can be attributed to a 

particular transaction is the dollar value of 

compensation that the loan originator will 

receive if the transaction is consummated. As 

explained in comment 32(b)(1)(ii)-3, the 

amount of compensation that a loan 

originator will receive is calculated as of the 

date the interest rate is set and includes 

compensation that is paid before, at, or after 

consummation. 

ii. Loan originator compensation excludes 

compensation that cannot be attributed to 

that transaction, including, for example: 

A. Compensation based on the long term 

performance of the loan originator’s loans. 

B. Compensation based on the overall 

quality of a loan originator’s loan files. 

C. The base salary of a loan originator. 

However, any compensation in addition to 

the base salary that can be attributed to the 

transaction at the time the interest rate is set 

must be included in loan originator 

compensation for the purpose of calculating 

points and fees. 

3. Loan originator compensation—timing. 

Compensation paid to a loan originator that 

can be attributed to a transaction must be 

included in the points and fees calculation 

for that loan regardless of whether the 

compensation is paid before, at, or after 

consummation. The amount of loan 

originator compensation that can be 

attributed to a transaction is determined as of 

the date the interest rate is set. Thus, loan 

originator compensation for a transaction 

includes the portion of a bonus, commission, 

or award of merchandise, services, trips, or 

similar prizes that can be attributed to that 

transaction at the time the creditor sets the 

interest rate for the transaction, even if that 

bonus, commission, or award of 

merchandise, services, trips, or similar prizes 

is not paid until after consummation. For 

example, assume a $100,000 transaction and 

that, as of the date the interest rate is set, the 

loan originator is entitled to receive a 

commission equal to 1 percent of the loan 

amount at consummation, i.e., $1,000, 

payable at the end of the month. In addition, 

assume that after the date the interest rate is 

set but before consummation of the 

transaction, the loan originator originates 

other transactions that enable the loan 

originator to meet a loan volume threshold, 

which increases the loan originator’s 

commission to 1.25 percent of the loan 

amount, i.e., $1,250. In this case, the creditor 

need include only $1,000 as loan originator 

compensation in points and fees because, as 

of the date the interest rate was set, the loan 

originator would have been entitled to 

receive $1,000 upon consummation of the 

transaction. 

4. Loan originator compensation— 

examples. The following examples illustrate 

the rule: 

i. Assume that, according to a creditor’s 

compensation policies, the creditor awards 

its loan officers a bonus every year based on 

the number of loan applications taken by the 

loan officer that result in consummated 

transactions during that year, and that each 

consummated transaction increases the yearend bonus by $100. In this case, $100 of the 

bonus is loan originator compensation that 

must be included in points and fees for the 

transaction. 


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ii. Assume that, according to a creditor’s 

compensation policies, the creditor awards 

its loan officers a year-end bonus equal to a 

flat dollar amount for each of the 

consummated transactions originated by the 

loan officer during that year. Assume also 

that the per-transaction dollar amount is 

finalized at the end of the year, according to 

a predetermined schedule that provides for a 

specific per-transaction dollar amount based 

on the total dollar value of consummated 

transactions originated by the loan officer. If 

on the date the interest rate for a transaction 

is set, the loan officer has originated total 

volume that qualifies the loan officer to 

receive a $300 bonus per transaction under 

the predetermined schedule, then $300 of the 

year-end bonus can be attributed to that 

particular transaction and therefore is loan 

originator compensation that must be 

included in points and fees for that 

transaction. 

iii. Assume that, according to a creditor’s 

compensation policies, the creditor awards 

its loan officers a bonus at the end of the year 

based on the number of consummated 

transactions originated by the loan officer 

during that year. Assume also that, for the 

first 10 transactions originated by the loan 

officer in a given year, no bonus is awarded; 

for the next 10 transactions originated by the 

loan officer up to 20, a bonus of $100 per 

transaction is awarded; and for each 

transaction originated after the first 20, a 

bonus of $200 per transaction is awarded. In 

this case, if, on the date the interest rate for 

the transaction is set, the loan officer has 

originated 10 or fewer transactions that year, 

then none of the year-end bonus is 

attributable to the transaction and therefore 

none of the bonus is included in points and 

fees for that transaction. If, on the date the 

interest rate for the transaction is set, the loan 

officer has originated at more than 10 but no 

more than 20 transactions, $100 of the bonus 

is attributable to the transaction and is 

included in points and fees for that 

transaction. If, on the date the interest rate for 

the transaction is set, the loan officer has 

originated more than 20 transactions, $200 of 

the bonus is attributable to the transaction 

and is included in points and fees for the 

transaction. 

iv. Assume that, according to a creditor’s 

compensation policies, the creditor pays its 

loan officers a base salary of $500 per week 

and awards its loan officers a bonus of $250 

for each consummated transaction. For each 

transaction, none of the $500 base salary is 

counted in points and fees as loan originator 

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

because no precise portion of the base salary 

can be attributed to a particular transaction, 

but the $250 bonus is counted as loan 

originator compensation that is included in 

points and fees. 

Paragraph 32(b)(1)(iii). 

1. Other charges. Section 1026.32(b)(1)(iii) 

defines points and fees to include all items 

listed in § 1026.4(c)(7), other than amounts 

held for the future payment of taxes, unless 

certain exclusions apply. An item listed in 

§ 1026.4(c)(7) may be excluded from the 

points and fees calculation if the charge is 

reasonable; the creditor receives no direct or 

indirect compensation from the charge; and 

the charge is not paid to an affiliate of the 

creditor. For example, a reasonable fee paid 

by the consumer to an independent, thirdparty appraiser may be excluded from the 

points and fees calculation (assuming no 

compensation is paid to the creditor or its 

affiliate and no charge is paid to an affiliate). 

By contrast, a fee paid by the consumer for 

an appraisal performed by the creditor must 

be included in the calculation, even though 

the fee may be excluded from the finance 

charge if it is bona fide and reasonable in 

amount. 

Paragraph 32(b)(1)(iv). 

1. Credit insurance and debt cancellation 

or suspension coverage. In determining 

points and fees for purposes of 

§ 1026.32(b)(1), premiums paid at or before 

consummation for credit insurance or any 

debt cancellation or suspension agreement or 

contract are included in points and fees 

whether they are paid in cash or, if permitted 

by applicable law, financed and whether the 

insurance or coverage is optional or required. 

Such charges are also included whether the 

amount represents the entire premium or 

payment for the coverage or an initial 

payment. 

2. Credit property insurance. Credit 

property insurance includes insurance 

against loss of or damage to personal 

property, such as a houseboat or 

manufactured home. Credit property 

insurance covers the creditor’s security 

interest in the property. Credit property 

insurance does not include homeowners’ 

insurance, which, unlike credit property 

insurance, typically covers not only the 

dwelling but its contents and protects the 

consumer’s interest in the property. 

3. Life, accident, health, or loss-of-income 

insurance. Premiums or other charges for 

these types of insurance are included in 

points and fees only if the creditor is a 

beneficiary. If the consumer or another 

person designated by the consumer is the 

sole beneficiary, then the premiums or other 

charges are not included in points and fees. 

32(b)(3) Bona fide discount point. 

32(b)(3)(i) Closed-end credit. 

1. Definition of bona fide discount point. 

Section 1026.32(b)(3) provides that, to be 

bona fide, a discount point must reduce the 

interest rate based on a calculation that is 

consistent with established industry 

practices for determining the amount of 

reduction in the interest rate or time-price 

differential appropriate for the amount of 

discount points paid by the consumer. To 

satisfy this standard, a creditor may show 

that the reduction is reasonably consistent 

with established industry norms and 

practices for secondary mortgage market 

transactions. For example, a creditor may 

rely on pricing in the to-be-announced (TBA) 

market for mortgage-backed securities (MBS) 

to establish that the interest rate reduction is 

consistent with the compensation that the 

creditor could reasonably expect to receive in 

the secondary market. The creditor may also 

establish that its interest rate reduction is 

consistent with established industry 

practices by showing that its calculation 

complies with requirements prescribed in 

Fannie Mae or Freddie Mac guidelines for 

interest rate reductions from bona fide 

discount points. For example, assume that 

the Fannie Mae Single-Family Selling Guide 

or the Freddie Mac Single Family Seller/ 

Servicer Guide imposes a cap on points and 

fees but excludes from the cap discount 

points that result in a bona fide reduction in 

the interest rate. Assume the guidelines 

require that, for a discount point to be bona 

fide so that it would not count against the 

cap, a discount point must result in at least 

a 25 basis point reduction in the interest rate. 

Accordingly, if the creditor offers a 25 basis 

point interest rate reduction for a discount 

point and the requirements of 

§ 1026.32(b)(1)(i)(E) or (F) are satisfied, the 

discount point is bona fide and is excluded 

from the calculation of points and fees. 

32(b)(4) Total loan amount. 

32(b)(4)(i) Closed-end credit. 

1. Total loan amount; examples. Below are 

several examples showing how to calculate 

the total loan amount for closed-end 

mortgage loans, each using a $10,000 amount 

borrowed, a $300 appraisal fee, and $400 in 

prepaid finance charges. A $500 single 

premium for optional credit unemployment 

insurance is used in one example. 

i. If the consumer finances a $300 fee for 

a creditor-conducted appraisal and pays $400 

in prepaid finance charges at closing, the 

amount financed under § 1026.18(b) is $9,900 

($10,000 plus the $300 appraisal fee that is 

paid to and financed by the creditor, less 

$400 in prepaid finance charges). The $300 

appraisal fee paid to the creditor is added to 

other points and fees under 

§ 1026.32(b)(1)(iii). It is deducted from the 

amount financed ($9,900) to derive a total 

loan amount of $9,600. 

ii. If the consumer pays the $300 fee for the 

creditor-conducted appraisal in cash at 

closing, the $300 is included in the points 

and fees calculation because it is paid to the 

creditor. However, because the $300 is not 

financed by the creditor, the fee is not part 

of the amount financed under § 1026.18(b). In 

this case, the amount financed is the same as 

the total loan amount: $9,600 ($10,000, less 

$400 in prepaid finance charges). 

iii. If the consumer finances a $300 fee for 

an appraisal conducted by someone other 

than the creditor or an affiliate, the $300 fee 

is not included with other points and fees 

under § 1026.32(b)(1)(iii). In this case, the 

amount financed is the same as the total loan 

amount: $9,900 ($10,000 plus the $300 fee for 

an independently-conducted appraisal that is 

financed by the creditor, less the $400 paid 

in cash and deducted as prepaid finance 

charges). 

iv. If the consumer finances a $300 fee for 

a creditor-conducted appraisal and a $500 

single premium for optional credit 

unemployment insurance, and pays $400 in 

prepaid finance charges at closing, the 

amount financed under § 1026.18(b) is 

$10,400 ($10,000, plus the $300 appraisal fee 

that is paid to and financed by the creditor, 

plus the $500 insurance premium that is 

financed by the creditor, less $400 in prepaid 

finance charges). The $300 appraisal fee paid 

to the creditor is added to other points and 

fees under § 1026.32(b)(1)(ii), and the $500 

insurance premium is added under 

1026.32(b)(1)(iv). The $300 and $500 costs 

are deducted from the amount financed 


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($10,400) to derive a total loan amount of 

$9,600. 

32(b)(6) Prepayment penalty. 

1. Examples of prepayment penalties; 

closed-end credit transactions. For purposes 

of § 1026.32(b)(6)(i), the following are 

examples of prepayment penalties: 

i. A charge determined by treating the loan 

balance as outstanding for a period of time 

after prepayment in full and applying the 

interest rate to such ‘‘balance,’’ even if the 

charge results from interest accrual 

amortization used for other payments in the 

transaction under the terms of the loan 

contract. ‘‘Interest accrual amortization’’ 

refers to the method by which the amount of 

interest due for each period (e.g., month) in 

a transaction’s term is determined. For 

example, ‘‘monthly interest accrual 

amortization’’ treats each payment as made 

on the scheduled, monthly due date even if 

it is actually paid early or late (until the 

expiration of any grace period). Thus, under 

the terms of a loan contract providing for 

monthly interest accrual amortization, if the 

amount of interest due on May 1 for the 

preceding month of April is $3,000, the loan 

contract will require payment of $3,000 in 

interest for the month of April whether the 

payment is made on April 20, on May 1, or 

on May 10. In this example, if the consumer 

prepays the loan in full on April 20 and if 

the accrued interest as of that date is $2,000, 

then assessment of a charge of $3,000 

constitutes a prepayment penalty of $1,000 

because the amount of interest actually 

earned through April 20 is only $2,000. 

ii. A fee, such as an origination or other 

loan closing cost, that is waived by the 

creditor on the condition that the consumer 

does not prepay the loan. However, the term 

prepayment penalty does not include a 

waived bona fide third-party charge imposed 

by the creditor if the consumer pays all of a 

covered transaction’s principal before the 

date on which the principal is due sooner 

than 36 months after consummation. For 

example, assume that at consummation, the 

creditor waives $3,000 in closing costs to 

cover bona fide third-party charges but the 

terms of the loan agreement provide that the 

creditor may recoup the $3,000 in waived 

charges if the consumer repays the entire 

loan balance sooner than 36 months after 

consummation. The $3,000 charge is not a 

prepayment penalty. In contrast, for example, 

assume that at consummation, the creditor 

waives $3,000 in closing costs to cover bona 

fide third-party charges but the terms of the 

loan agreement provide that the creditor may 

recoup $4,500, in part to recoup waived 

charges, if the consumer repays the entire 

loan balance sooner than 36 months after 

consummation. The $3,000 that the creditor 

may impose to cover the waived bona fide 

third-party charges is not a prepayment 

penalty, but the additional $1,500 charge is 

a prepayment penalty and subject to the 

restrictions under § 1026.43(g). 

iii. A minimum finance charge in a simple 

interest transaction. 

iv. Computing a refund of unearned 

interest by a method that is less favorable to 

the consumer than the actuarial method, as 

defined by section 933(d) of the Housing and 

Community Development Act of 1992, 15 

U.S.C. 1615(d). For purposes of computing a 

refund of unearned interest, if using the 

actuarial method defined by applicable State 

law results in a refund that is greater than the 

refund calculated by using the method 

described in section 933(d) of the Housing 

and Community Development Act of 1992, 

creditors should use the State law definition 

in determining if a refund is a prepayment 

penalty. 

2. Fees that are not prepayment penalties; 

closed-end credit transactions. For purposes 

of § 1026.32(b)(6)(i), fees that are not 

prepayment penalties include, for example: 

i. Fees imposed for preparing and 

providing documents when a loan is paid in 

full if such fees are imposed whether or not 

the loan is prepaid. Examples include a loan 

payoff statement, a reconveyance document, 

or another document releasing the creditor’s 

security interest in the dwelling that secures 

the loan. 

ii. Loan guarantee fees. 

* * * * * 

Section 1026.43—Minimum Standards for 

Transactions Secured by a Dwelling 

1. Record retention. See § 1026.25(c)(3) and 

comments 25(c)(3)–1 and –2 for guidance on 

the required retention of records as evidence 

of compliance with § 1026.43. 

43(a) Scope. 

1. Consumer credit. In general, § 1026.43 

applies to consumer credit transactions 

secured by a dwelling, but certain dwellingsecured consumer credit transactions are 

exempt or partially exempt from coverage 

under § 1026.43(a)(1) through (3). (See 

§ 1026.2(a)(12) for the definition of 

‘‘consumer credit.’’) Section 1026.43 does not 

apply to an extension of credit primarily for 

a business, commercial, or agricultural 

purpose, even if it is secured by a dwelling. 

See § 1026.3 and associated commentary for 

guidance in determining the primary purpose 

of an extension of credit. In addition, 

§ 1026.43 does not apply to any change to an 

existing loan that is not treated as a 

refinancing under § 1026.20(a). 

2. Real property. ‘‘Dwelling’’ means a 

residential structure that contains one to four 

units, whether or not the structure is attached 

to real property. See § 1026.2(a)(19). For 

purposes of § 1026.43, the term ‘‘dwelling’’ 

includes any real property to which the 

residential structure is attached that also 

secures the covered transaction. For example, 

for purposes of § 1026.43(c)(2)(i), the value of 

the dwelling that secures the covered 

transaction includes the value of any real 

property to which the residential structure is 

attached that also secures the covered 

transaction. 

Paragraph 43(a)(3). 

1. Renewable temporary or ‘‘bridge’’ loan. 

Under § 1026.43(a)(3)(ii), a temporary or 

‘‘bridge’’ loan with a term of 12 months or 

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

Examples of such a loan are a loan to finance 

the purchase of a new dwelling where the 

consumer plans to sell a current dwelling 

within 12 months and a loan to finance the 

initial construction of a dwelling. Where a 

temporary or ‘‘bridge loan’’ is renewable, the 

loan term does not include any additional 

period of time that could result from a 

renewal provision provided that any renewal 

possible under the loan contract is for one 

year or less. For example, if a construction 

loan has an initial loan term of 12 months but 

is renewable for another 12-month loan term, 

the loan is exempt from § 1026.43(c) through 

(f) because the initial loan term is 12 months. 

2. Construction phase of a construction-topermanent loan. Under § 1026.43(a)(3)(iii), a 

construction phase of 12 months or less of a 

construction-to-permanent loan is exempt 

from § 1026.43(c) through (f). A constructionto-permanent loan is a potentially multipleadvance loan to finance the construction, 

rehabilitation, or improvement of a dwelling 

that may be permanently financed by the 

same creditor. For such a loan, the 

construction phase and the permanent phase 

may be treated as separate transactions for 

the purpose of compliance with § 1026.43(c) 

through (f), and the construction phase of the 

loan is exempt from § 1026.43(c) through (f), 

provided the initial term is 12 months or less. 

See § 1026.17(c)(6)(ii), allowing similar 

treatment for disclosures. Where the 

construction phase of a construction-topermanent loan is renewable for a period of 

one year or less, the term of that construction 

phase does not include any additional period 

of time that could result from a renewal 

provision. For example, if the construction 

phase of a construction-to-permanent loan 

has an initial term of 12 months but is 

renewable for another 12-month term before 

permanent financing begins, the construction 

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

because the initial term is 12 months. Any 

renewal of one year or less also qualifies for 

the exemption. The permanent phase of the 

loan is treated as a separate transaction and 

is not exempt under § 1026.43(a)(3)(iii). It 

may be a qualified mortgage if it satisfies the 

appropriate requirements. 

43(b) Definitions. 

43(b)(1) Covered transaction. 

1. The definition of covered transaction 

restates the scope of the rule as described at 

§ 1026.43(a). 

43(b)(3) Fully indexed rate. 

1. Discounted and premium adjustable-rate 

transactions. In some adjustable-rate 

transactions, creditors may set an initial 

interest rate that is not determined by the 

index or formula used to make later interest 

rate adjustments. In some cases, the initial 

rate charged to consumers is lower than the 

rate would be if it were calculated using the 

index or formula that will apply after recast, 

as determined at consummation (i.e., a 

‘‘discounted rate’’). In other cases, the initial 

rate may be higher (i.e., a ‘‘premium rate’’). 

For purposes of determining the fully 

indexed rate where the initial interest rate is 

not determined using the index or formula 

for subsequent interest rate adjustments, the 

creditor must use the interest rate that would 

have applied had the creditor used such 

index or formula plus margin at the time of 

consummation. That is, in determining the 

fully indexed rate, the creditor must not take 

into account any discounted or premium 

rate. To illustrate, assume an adjustable-rate 

transaction where the initial interest rate is 

not based on an index or formula, or is based 

on an index or formula that will not apply 

after recast, and is set at 5 percent for the first 


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five years. The loan agreement provides that 

future interest rate adjustments will be 

calculated based on a specific index plus a 

3 percent margin. If the value of the index 

at consummation is 5 percent, the interest 

rate that would have been applied at 

consummation had the creditor based the 

initial rate on this index is 8 percent (5 

percent plus 3 percent margin). For purposes 

of § 1026.43(b)(3), the fully indexed rate is 8 

percent. For discussion of payment 

calculations based on the greater of the fully 

indexed rate or premium rate for purposes of 

the repayment ability determination under 

§ 1026.43(c), see § 1026.43(c)(5)(i) and 

comment 43(c)(5)(i)–2. 

2. Index or formula value at 

consummation. The value at consummation 

of the index or formula need not be used if 

the contract provides for a delay in the 

implementation of changes in an index value 

or formula. For example, if the contract 

specifies that rate changes are based on the 

index value in effect 45 days before the 

change date, the creditor may use any index 

value in effect during the 45 days before 

consummation in calculating the fully 

indexed rate. 

3. Interest rate adjustment caps. If the 

terms of the legal obligation contain a 

periodic interest rate adjustment cap that 

would prevent the initial rate, at the time of 

the first adjustment, from changing to the rate 

determined using the index or formula value 

at consummation (i.e., the fully indexed rate), 

the creditor must not give any effect to that 

rate cap when determining the fully indexed 

rate. That is, a creditor must determine the 

fully indexed rate without taking into 

account any periodic interest rate adjustment 

cap that may limit how quickly the fully 

indexed rate may be reached at any time 

during the loan term under the terms of the 

legal obligation. To illustrate, assume an 

adjustable-rate mortgage has an initial fixed 

rate of 5 percent for the first three years of 

the loan, after which the rate will adjust 

annually to a specified index plus a margin 

of 3 percent. The loan agreement provides for 

a 2 percent annual interest rate adjustment 

cap, and a lifetime maximum interest rate of 

10 percent. The index value in effect at 

consummation is 4.5 percent; the fully 

indexed rate is 7.5 percent (4.5 percent plus 

3 percent), regardless of the 2 percent annual 

interest rate adjustment cap that would limit 

when the fully indexed rate would take effect 

under the terms of the legal obligation. 

4. Lifetime maximum interest rate. A 

creditor may choose, in its sole discretion, to 

take into account the lifetime maximum 

interest rate provided under the terms of the 

legal obligation when determining the fully 

indexed rate. To illustrate, assume an 

adjustable-rate mortgage has an initial fixed 

rate of 5 percent for the first three years of 

the loan, after which the rate will adjust 

annually to a specified index plus a margin 

of 3 percent. The loan agreement provides for 

a 2 percent annual interest rate adjustment 

cap and a lifetime maximum interest rate of 

7 percent. The index value in effect at 

consummation is 4.5 percent; under the 

generally applicable rule, the fully indexed 

rate is 7.5 percent (4.5 percent plus 3 

percent). Nevertheless, the creditor may 

choose to use the lifetime maximum interest 

rate of 7 percent as the fully indexed rate, 

rather than 7.5 percent, for purposes of 

§ 1026.43(b)(3). Furthermore, if the creditor 

chooses to use the lifetime maximum interest 

rate and the loan agreement provides a range 

for the maximum interest rate, then the 

creditor complies by using the highest rate in 

that range as the maximum interest rate for 

purposes of § 1026.43(b)(3). 

5. Step-rate and fixed-rate mortgages. 

Where the interest rate offered under the 

terms of the legal obligation is not based on, 

and does not vary with, an index or formula 

(i.e., there is no fully indexed rate), the 

creditor must use the maximum interest rate 

that may apply at any time during the loan 

term. To illustrate: 

i. Assume a step-rate mortgage with an 

interest rate fixed at 6.5 percent for the first 

two years of the loan, 7 percent for the next 

three years, and 7.5 percent thereafter for the 

remainder of loan term. For purposes of this 

section, the creditor must use 7.5 percent, 

which is the maximum rate that may apply 

during the loan term. ‘‘Step-rate mortgage’’ is 

defined in § 1026.18(s)(7)(ii). 

ii. Assume a fixed-rate mortgage with an 

interest rate at consummation of 7 percent 

that is fixed for the 30-year loan term. For 

purposes of this section, the maximum 

interest rate that may apply during the loan 

term is 7 percent, which is the interest rate 

that is fixed at consummation. ‘‘Fixed-rate 

mortgage’’ is defined in § 1026.18(s)(7)(iii). 

43(b)(4) Higher-priced covered transaction. 

1. Average prime offer rate. The average 

prime offer rate is defined in § 1026.35(a)(2). 

For further explanation of the meaning of 

‘‘average prime offer rate,’’ and additional 

guidance on determining the average prime 

offer rate, see comments 35(a)(2)–1 through 

–4. 

2. Comparable transaction. A higherpriced covered transaction is a consumer 

credit transaction that is secured by the 

consumer’s dwelling with an annual 

percentage rate that exceeds by the specified 

amount the average prime offer rate for a 

comparable transaction as of the date the 

interest rate is set. The published tables of 

average prime offer rates indicate how to 

identify a comparable transaction. See 

comment 35(a)(2)–2. 

3. Rate set. A transaction’s annual 

percentage rate is compared to the average 

prime offer rate as of the date the 

transaction’s interest rate is set (or ‘‘locked’’) 

before consummation. Sometimes a creditor 

sets the interest rate initially and then re-sets 

it at a different level before consummation. 

The creditor should use the last date the 

interest rate is set before consummation. 

43(b)(5) Loan amount. 

1. Disbursement of the loan amount. The 

definition of ‘‘loan amount’’ requires the 

creditor to use the entire loan amount as 

reflected in the loan contract or promissory 

note, even though the loan amount may not 

be fully disbursed at consummation. For 

example, assume the consumer enters into a 

loan agreement where the consumer is 

obligated to repay the creditor $200,000 over 

15 years, but only $100,000 is disbursed at 

consummation and the remaining $100,000 

will be disbursed during the year following 

consummation in a series of advances 

($25,000 each quarter). For purposes of this 

section, the creditor must use the loan 

amount of $200,000, even though the loan 

agreement provides that only $100,000 will 

be disbursed to the consumer at 

consummation. Generally, creditors should 

rely on § 1026.17(c)(6) and associated 

commentary regarding treatment of multipleadvance and construction-to-permanent 

loans as single or multiple transactions. See 

also comment 43(a)(3)–2. 

43(b)(6) Loan term. 

1. General. The loan term is the period of 

time it takes to repay the loan amount in full. 

For example, a loan with an initial 

discounted rate that is fixed for the first two 

years, and that adjusts periodically for the 

next 28 years has a loan term of 30 years, 

which is the amortization period on which 

the periodic amortizing payments are based. 

43(b)(7) Maximum loan amount. 

1. Calculation of maximum loan amount. 

For purposes of § 1026.43(c)(2)(iii) and 

(c)(5)(ii)(C), a creditor must determine the 

maximum loan amount for a negative 

amortization loan by using the loan amount 

plus any increase in principal balance that 

can result from negative amortization based 

on the terms of the legal obligation. In 

determining the maximum loan amount, a 

creditor must assume that the consumer 

makes the minimum periodic payment 

permitted under the loan agreement for as 

long as possible, until the consumer must 

begin making fully amortizing payments; and 

that the interest rate rises as quickly as 

possible after consummation under the terms 

of the legal obligation. Thus, creditors must 

assume that the consumer makes the 

minimum periodic payment until any 

negative amortization cap is reached or until 

the period permitting minimum periodic 

payments expires, whichever occurs first. 

‘‘Loan amount’’ is defined in § 1026.43(b)(5); 

‘‘negative amortization loan’’ is defined in 

§ 1026.18(s)(7)(v). 

2. Assumed interest rate. In calculating the 

maximum loan amount for an adjustable-rate 

mortgage that is a negative amortization loan, 

the creditor must assume that the interest 

rate will increase as rapidly as possible after 

consummation, taking into account any 

periodic interest rate adjustment caps 

provided in the loan agreement. For an 

adjustable-rate mortgage with a lifetime 

maximum interest rate but no periodic 

interest rate adjustment cap, the creditor 

must assume that the interest rate increases 

to the maximum lifetime interest rate at the 

first adjustment. 

3. Examples. The following are examples 

of how to determine the maximum loan 

amount for a negative amortization loan (all 

amounts shown are rounded, and all 

amounts are calculated using non-rounded 

values): 

i. Adjustable-rate mortgage with negative 

amortization. A. Assume an adjustable-rate 

mortgage in the amount of $200,000 with a 

30-year loan term. The loan agreement 

provides that the consumer can make 

minimum monthly payments that cover only 

part of the interest accrued each month until 

the principal balance reaches 115 percent of 

its original balance (i.e., a negative 


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amortization cap of 115 percent) or for the 

first five years of the loan (60 monthly 

payments), whichever occurs first. The 

introductory interest rate at consummation is 

1.5 percent. One month after the first day of 

the first full calendar month following 

consummation, the interest rate adjusts and 

will adjust monthly thereafter based on the 

specified index plus a margin of 3.5 percent. 

The maximum lifetime interest rate is 10.5 

percent; there are no other periodic interest 

rate adjustment caps that limit how quickly 

the maximum lifetime rate may be reached. 

The minimum monthly payment for the first 

year is based on the initial interest rate of 1.5 

percent. After that, the minimum monthly 

payment adjusts annually, but may increase 

by no more than 7.5 percent over the 

previous year’s payment. The minimum 

monthly payment is $690 in the first year, 

$742 in the second year, and $797 in the first 

part of the third year. 

B. To determine the maximum loan 

amount, assume that the initial interest rate 

increases to the maximum lifetime interest 

rate of 10.5 percent at the first adjustment 

(i.e., the due date of the first periodic 

monthly payment) and accrues at that rate 

until the loan is recast. Assume the consumer 

makes the minimum monthly payments as 

scheduled, which are capped at 7.5 percent 

from year-to-year. As a result, the consumer’s 

minimum monthly payments are less than 

the interest accrued each month, resulting in 

negative amortization (i.e., the accrued but 

unpaid interest is added to the principal 

balance). Thus, assuming that the consumer 

makes the minimum monthly payments for 

as long as possible and that the maximum 

interest rate of 10.5 percent is reached at the 

first rate adjustment (i.e., the due date of the 

first periodic monthly payment), the negative 

amortization cap of 115 percent is reached on 

the due date of the 27th monthly payment 

and the loan is recast. The maximum loan 

amount as of the due date of the 27th 

monthly payment is $229,251. 

ii. Fixed-rate, graduated payment mortgage 

with negative amortization. A loan in the 

amount of $200,000 has a 30-year loan term. 

The loan agreement provides for a fixed 

interest rate of 7.5 percent, and requires the 

consumer to make minimum monthly 

payments during the first year, with 

payments increasing 12.5 percent over the 

previous year every year for four years. The 

payment schedule provides for payments of 

$943 in the first year, $1,061 in the second 

year, $1,193 in the third year, $1,343 in the 

fourth year, and $1,511 for the remaining 

term of the loan. During the first three years 

of the loan, the payments are less than the 

interest accrued each month, resulting in 

negative amortization. Assuming that the 

consumer makes the minimum periodic 

payments for as long as possible, the 

maximum loan amount is $207,662, which is 

reached at the end of the third year of the 

loan (on the due date of the 36th monthly 

payment). See comment 43(c)(5)(ii)(C)–3 

providing examples of how to determine the 

consumer’s repayment ability for a negative 

amortization loan. 

43(b)(8) Mortgage-related obligations. 

1. General. Section 1026.43(b)(8) defines 

mortgage-related obligations, which must be 

considered in determining a consumer’s 

ability to repay pursuant to § 1026.43(c). 

Section 1026.43(b)(8) includes, in the 

evaluation of mortgage-related obligations, 

fees and special assessments owed to a 

condominium, cooperative, or homeowners 

association. Section 1026.43(b)(8) includes 

ground rent and leasehold payments in the 

definition of mortgage-related obligations. 

See commentary to § 1026.43(c)(2)(v) 

regarding the requirement to take into 

account any mortgage-related obligations for 

purposes of determining a consumer’s ability 

to repay. 

2. Property taxes. Section 1026.43(b)(8) 

includes property taxes in the evaluation of 

mortgage-related obligations. Obligations that 

are related to the ownership or use of real 

property and paid to a taxing authority, 

whether on a monthly, quarterly, annual, or 

other basis, are property taxes for purposes 

of § 1026.43(b)(8). Section 1026.43(b)(8) 

includes obligations that are equivalent to 

property taxes, even if such obligations are 

not denominated as ‘‘taxes.’’ For example, 

governments may establish or allow 

independent districts with the authority to 

impose levies on properties within the 

district to fund a special purpose, such as a 

local development bond district, water 

district, or other public purpose. These levies 

may be referred to as taxes, assessments, 

surcharges, or by some other name. For 

purposes of § 1026.43(b)(8), these are 

property taxes and are included in the 

determination of mortgage-related 

obligations. 

3. Insurance premiums and similar 

charges. Section 1026.43(b)(8) includes in the 

evaluation of mortgage-related obligations 

premiums and similar charges identified in 

§ 1026.4(b)(5), (7), (8), or (10) that are 

required by the creditor. This includes all 

premiums or charges related to coverage 

protecting the creditor against a consumer’s 

default, credit loss, collateral loss, or similar 

loss, if the consumer is required to pay the 

premium or charge. For example, if Federal 

law requires flood insurance to be obtained 

in connection with the mortgage loan, the 

flood insurance premium is a mortgagerelated obligation for purposes of 

§ 1026.43(b)(8). Section 1026.43(b)(8) does 

not include premiums or similar charges 

identified in § 1026.4(b)(5), (7), (8), or (10) 

that are not required by the creditor and that 

the consumer purchases voluntarily. For 

example: 

i. If a creditor does not require earthquake 

insurance to be obtained in connection with 

the mortgage loan, but the consumer 

voluntarily chooses to purchase such 

insurance, the earthquake insurance 

premium is not a mortgage-related obligation 

for purposes of § 1026.43(b)(8). 

ii. If a creditor requires a minimum amount 

of coverage for homeowners’ insurance and 

the consumer voluntarily chooses to 

purchase a more comprehensive amount of 

coverage, the portion of the premium 

allocated to the required minimum coverage 

is a mortgage-related obligation for purposes 

of § 1026.43(b)(8), while the portion of the 

premium allocated to the more 

comprehensive coverage voluntarily 

purchased by the consumer is not a 

mortgage-related obligation for purposes of 

§ 1026.43(b)(8). 

iii. If the consumer purchases insurance or 

similar coverage not required by the creditor 

at consummation without having requested 

the specific non-required insurance or 

similar coverage and without having agreed 

to the premium or charge for the specific 

non-required insurance or similar coverage 

prior to consummation, the premium or 

charge is not voluntary for purposes of 

§ 1026.43(b)(8) and is a mortgage-related 

obligation. 

4. Mortgage insurance, guarantee, or 

similar charges. Section 1026.43(b)(8) 

includes in the evaluation of mortgagerelated obligations premiums or charges 

protecting the creditor against the consumer’s 

default or other credit loss. This includes all 

premiums or similar charges, whether 

denominated as mortgage insurance, 

guarantee insurance, or otherwise, as 

determined according to applicable State or 

Federal law. For example, monthly ‘‘private 

mortgage insurance’’ payments paid to a nongovernmental entity, annual ‘‘guarantee fee’’ 

payments required by a Federal housing 

program, and a quarterly ‘‘mortgage 

insurance’’ payment paid to a State agency 

administering a housing program are all 

mortgage-related obligations for purposes of 

§ 1026.43(b)(8). Section 1026.43(b)(8) 

includes these charges in the definition of 

mortgage-related obligations if the creditor 

requires the consumer to pay them, even if 

the consumer is not legally obligated to pay 

the charges under the terms of the insurance 

program. For example, if a mortgage 

insurance program obligates the creditor to 

make recurring mortgage insurance 

payments, and the creditor requires the 

consumer to reimburse the creditor for such 

recurring payments, the consumer’s 

payments are mortgage-related obligations for 

purposes of § 1026.43(b)(8). However, if a 

mortgage insurance program obligates the 

creditor to make recurring mortgage 

insurance payments, and the creditor does 

not require the consumer to reimburse the 

creditor for the cost of the mortgage 

insurance payments, the recurring mortgage 

insurance payments are not mortgage-related 

obligations for purposes of § 1026.43(b)(8). 

5. Relation to the finance charge. Section 

1026.43(b)(8) includes in the evaluation of 

mortgage-related obligations premiums and 

similar charges identified in § 1026.4(b)(5), 

(7), (8), or (10) that are required by the 

creditor. These premiums and similar 

charges are mortgage-related obligations 

regardless of whether the premium or similar 

charge is excluded from the finance charge 

pursuant to § 1026.4(d). For example, a 

premium for insurance against loss or 

damage to the property written in connection 

with the credit transaction is a premium 

identified in § 1026.4(b)(8). If this premium 

is required by the creditor, the premium is 

a mortgage-related obligation pursuant to 

§ 1026.43(b)(8), regardless of whether the 

premium is excluded from the finance charge 

pursuant to § 1026.4(d)(2). 

43(b)(11) Recast. 

1. Date of the recast. The term ‘‘recast’’ 

means, for an adjustable-rate mortgage, the 

expiration of the period during which 


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payments based on the introductory fixed 

rate are permitted; for an interest-only loan, 

the expiration of the period during which the 

interest-only payments are permitted; and, 

for a negative amortization loan, the 

expiration of the period during which 

negatively amortizing payments are 

permitted. For adjustable-rate mortgages, 

interest-only loans, and negative 

amortization loans, the date on which the 

recast is considered to occur is the due date 

of the last monthly payment based on the 

introductory fixed rate, the interest-only 

payment, or the negatively amortizing 

payment, respectively. To illustrate: A loan 

in an amount of $200,000 has a 30-year loan 

term. The loan agreement provides for a fixed 

interest rate and permits interest-only 

payments for the first five years of the loan 

(60 months). The loan is recast on the due 

date of the 60th monthly payment. Thus, the 

term of the loan remaining as of the date the 

loan is recast is 25 years (300 months). 

43(b)(12) Simultaneous loan. 

1. General. Section 1026.43(b)(12) defines 

a simultaneous loan as another covered 

transaction or a home equity line of credit 

(HELOC) subject to § 1026.40 that will be 

secured by the same dwelling and made to 

the same consumer at or before 

consummation of the covered transaction, 

whether it is made by the same creditor or 

a third-party creditor. (As with all of 

§ 1026.43, the term ‘‘dwelling’’ includes any 

real property attached to a dwelling.) For 

example, assume a consumer will enter into 

a legal obligation that is a covered transaction 

with Creditor A. Immediately prior to 

consummation of the covered transaction 

with Creditor A, the consumer opens a 

HELOC that is secured by the same dwelling 

with Creditor B. For purposes of this section, 

the loan extended by Creditor B is a 

simultaneous loan. See commentary to 

§ 1026.43(c)(2)(iv) and (c)(6), discussing the 

requirement to consider the consumer’s 

payment obligation on any simultaneous loan 

for purposes of determining the consumer’s 

ability to repay the covered transaction 

subject to this section. 

2. Same consumer. For purposes of the 

definition of ‘‘simultaneous loan,’’ the term 

‘‘same consumer’’ includes any consumer, as 

that term is defined in § 1026.2(a)(11), that 

enters into a loan that is a covered 

transaction and also enters into another loan 

(e.g., second-lien covered transaction or 

HELOC) secured by the same dwelling. 

Where two or more consumers enter into a 

legal obligation that is a covered transaction, 

but only one of them enters into another loan 

secured by the same dwelling, the ‘‘same 

consumer’’ includes the person that has 

entered into both legal obligations. For 

example, assume Consumer A and Consumer 

B will both enter into a legal obligation that 

is a covered transaction with a creditor. 

Immediately prior to consummation of the 

covered transaction, Consumer B opens a 

HELOC that is secured by the same dwelling 

with the same creditor; Consumer A is not a 

signatory to the HELOC. For purposes of this 

definition, Consumer B is the same consumer 

and the creditor must include the HELOC as 

a simultaneous loan. 

43(b)(13) Third-party record. 

1. Electronic records. Third-party records 

include records transmitted electronically. 

For example, to verify a consumer’s credit 

history using third-party records as required 

by § 1026.43(c)(2)(viii) and 1026.43(c)(3), a 

creditor may use a credit report prepared by 

a consumer reporting agency that is 

transmitted electronically. 

2. Forms. A record prepared by a third 

party includes a form a creditor gives to a 

third party to provide information, even if 

the creditor completes parts of the form 

unrelated to the information sought. For 

example, if a creditor gives a consumer’s 

employer a form for verifying the consumer’s 

employment status and income, the creditor 

may fill in the creditor’s name and other 

portions of the form unrelated to the 

consumer’s employment status or income. 

Paragraph 43(b)(13)(i). 

1. Reviewed record. Under 

§ 1026.43(b)(13)(i), a third-party record 

includes a document or other record 

prepared by the consumer, the creditor, the 

mortgage broker, or the creditor’s or mortgage 

broker’s agent, if the record is reviewed by 

an appropriate third party. For example, a 

profit-and-loss statement prepared by a selfemployed consumer and reviewed by a thirdparty accountant is a third-party record 

under § 1026.43(b)(13)(i). In contrast, a profitand-loss statement prepared by a selfemployed consumer and reviewed by the 

consumer’s non-accountant spouse is not a 

third-party record under § 1026.43(b)(13)(i). 

Paragraph 43(b)(13)(iii). 

1. Creditor’s records. Section 

1026.43(b)(13)(iii) provides that a third-party 

record includes a record the creditor 

maintains for an account of the consumer 

held by the creditor. Examples of such 

accounts include checking accounts, savings 

accounts, and retirement accounts. Examples 

of such accounts also include accounts 

related to a consumer’s outstanding 

obligations to a creditor. For example, a 

third-party record includes the creditor’s 

records for a first-lien mortgage to a 

consumer who applies for a subordinate-lien 

home equity loan. 

43(c) Repayment ability. 

43(c)(1) General requirement. 

1. Reasonable and good faith 

determination. i. General. Creditors generally 

are required by § 1026.43(c)(1) to make 

reasonable and good faith determinations of 

consumers’ ability to repay. Section 

1026.43(c) and the accompanying 

commentary describe certain requirements 

for making this ability-to-repay 

determination, but do not provide 

comprehensive underwriting standards to 

which creditors must adhere. For example, 

the rule and commentary do not specify how 

much income is needed to support a 

particular level of debt or how credit history 

should be weighed against other factors. So 

long as creditors consider the factors set forth 

in § 1026.43(c)(2) according to the 

requirements of § 1026.43(c), creditors are 

permitted to develop their own underwriting 

standards and make changes to those 

standards over time in response to empirical 

information and changing economic and 

other conditions. Whether a particular 

ability-to-repay determination is reasonable 

and in good faith will depend not only on the 

underwriting standards adopted by the 

creditor, but on the facts and circumstances 

of an individual extension of credit and how 

a creditor’s underwriting standards were 

applied to those facts and circumstances. A 

consumer’s statement or attestation that the 

consumer has the ability to repay the loan is 

not indicative of whether the creditor’s 

determination was reasonable and in good 

faith. 

ii. Considerations. A. The following may be 

evidence that a creditor’s ability-to-repay 

determination was reasonable and in good 

faith: 

1. The consumer demonstrated actual 

ability to repay the loan by making timely 

payments, without modification or 

accommodation, for a significant period of 

time after consummation or, for an 

adjustable-rate, interest-only, or negativeamortization mortgage, for a significant 

period of time after recast; 

2. The creditor used underwriting 

standards that have historically resulted in 

comparatively low rates of delinquency and 

default during adverse economic conditions; 

or 

3. The creditor used underwriting 

standards based on empirically derived, 

demonstrably and statistically sound models. 

B. In contrast, the following may be 

evidence that a creditor’s ability-to-repay 

determination was not reasonable or in good 

faith: 

1. The consumer defaulted on the loan a 

short time after consummation or, for an 

adjustable-rate, interest-only, or negativeamortization mortgage, a short time after 

recast; 

2. The creditor used underwriting 

standards that have historically resulted in 

comparatively high levels of delinquency and 

default during adverse economic conditions; 

3. The creditor applied underwriting 

standards inconsistently or used 

underwriting standards different from those 

used for similar loans without reasonable 

justification; 

4. The creditor disregarded evidence that 

the underwriting standards it used are not 

effective at determining consumers’ 

repayment ability; 

5. The creditor disregarded evidence that 

the consumer may have insufficient residual 

income to cover other recurring obligations 

and expenses, taking into account the 

consumer’s assets other than the property 

securing the loan, after paying his or her 

monthly payments for the covered 

transaction, any simultaneous loans, 

mortgage-related obligations, and any current 

debt obligations; or 

6. The creditor disregarded evidence that 

the consumer would have the ability to repay 

only if the consumer subsequently refinanced 

the loan or sold the property securing the 

loan. 

C. All of the considerations listed in 

paragraphs (A) and (B) above may be relevant 

to whether a creditor’s ability-to-repay 

determination was reasonable and in good 

faith. However, these considerations are not 

requirements or prohibitions with which 

creditors must comply, nor are they elements 

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establish a violation of the ability-to-repay 

requirements. For example, creditors are not 

required to validate their underwriting 

criteria using mathematical models. These 

considerations also are not absolute in their 

application; instead they exist on a 

continuum and may apply to varying 

degrees. For example, the longer a consumer 

successfully makes timely payments after 

consummation or recast the less likely it is 

that the creditor’s determination of ability to 

repay was unreasonable or not in good faith. 

Finally, each of these considerations must be 

viewed in the context of all facts and 

circumstances relevant to a particular 

extension of credit. For example, in some 

cases inconsistent application of 

underwriting standards may indicate that a 

creditor is manipulating those standards to 

approve a loan despite a consumer’s inability 

to repay. The creditor’s ability-to-repay 

determination therefore may be unreasonable 

or in bad faith. However, in other cases 

inconsistently applied underwriting 

standards may be the result of, for example, 

inadequate training and may nonetheless 

yield a reasonable and good faith ability-torepay determination in a particular case. 

Similarly, although an early payment default 

on a mortgage will often be persuasive 

evidence that the creditor did not have a 

reasonable and good faith belief in the 

consumer’s ability to repay (and such 

evidence may even be sufficient to establish 

a prima facie case of an ability-to-repay 

violation), a particular ability-to-repay 

determination may be reasonable and in good 

faith even though the consumer defaulted 

shortly after consummation if, for example, 

the consumer experienced a sudden and 

unexpected loss of income. In contrast, an 

ability-to-repay determination may be 

unreasonable or not in good faith even 

though the consumer made timely payments 

for a significant period of time if, for 

example, the consumer was able to make 

those payments only by foregoing necessities 

such as food and heat. 

2. Repayment ability at consummation. 

Section 1026.43(c)(1) requires the creditor to 

determine, at or before the time the loan is 

consummated, that a consumer will have a 

reasonable ability to repay the loan. A change 

in the consumer’s circumstances after 

consummation (for example, a significant 

reduction in income due to a job loss or a 

significant obligation arising from a major 

medical expense) that cannot be reasonably 

anticipated from the consumer’s application 

or the records used to determine repayment 

ability is not relevant to determining a 

creditor’s compliance with the rule. 

However, if the application or records 

considered at or before consummation 

indicate there will be a change in a 

consumer’s repayment ability after 

consummation (for example, if a consumer’s 

application states that the consumer plans to 

retire within 12 months without obtaining 

new employment or that the consumer will 

transition from full-time to part-time 

employment), the creditor must consider that 

information under the rule. 

3. Interaction with Regulation B. Section 

1026.43(c)(1) does not require or permit the 

creditor to make inquiries or verifications 

prohibited by Regulation B, 12 CFR part 

1002. 

43(c)(2) Basis for determination. 

1. General. Section 1026.43(c)(2) sets forth 

factors creditors must consider when making 

the ability-to-repay determination required 

under § 1026.43(c)(1) and the accompanying 

commentary provides guidance regarding 

these factors. Creditors must conform to these 

requirements and may rely on guidance 

provided in the commentary. However, 

§ 1026.43(c) and the accompanying 

commentary do not provide comprehensive 

guidance on definitions and other technical 

underwriting criteria necessary for evaluating 

these factors in practice. So long as a creditor 

complies with the provisions of § 1026.43(c), 

the creditor is permitted to use its own 

definitions and other technical underwriting 

criteria. A creditor may, but is not required 

to, look to guidance issued by entities such 

as the Federal Housing Administration, the 

U.S. Department of Veterans Affairs, the U.S. 

Department of Agriculture, or Fannie Mae or 

Freddie Mac while operating under the 

conservatorship of the Federal Housing 

Finance Agency. For example, a creditor may 

refer to such guidance to classify particular 

inflows, obligations, or property as 

‘‘income,’’ ‘‘debt,’’ or ‘‘assets.’’ Similarly, a 

creditor may refer to such guidance to 

determine what information to use when 

evaluating the income of a self-employed or 

seasonally employed consumer or what 

information to use when evaluating the credit 

history of a consumer who has obtained few 

or no extensions of traditional ‘‘credit’’ as 

defined in § 1026.2(a)(14). These examples 

are illustrative, and creditors are not required 

to conform to guidance issued by these or 

other such entities. However, as required by 

§ 1026.43(c)(1), a creditor must ensure that its 

underwriting criteria, as applied to the facts 

and circumstances of a particular extension 

of credit, result in a reasonable, good faith 

determination of a consumer’s ability to 

repay. For example, a definition used in 

underwriting that is reasonable in isolation 

may lead to ability-to-repay determinations 

that are unreasonable or not in good faith 

when considered in the context of a 

creditor’s underwriting standards or when 

adopted or applied in bad faith. Similarly, an 

ability-to-repay determination is not 

unreasonable or in bad faith merely because 

the underwriting criteria used included a 

definition that was by itself unreasonable. 

Paragraph 43(c)(2)(i). 

1. Income or assets generally. A creditor 

may base its determination of repayment 

ability on current or reasonably expected 

income from employment or other sources, 

assets other than the dwelling that secures 

the covered transaction, or both. The creditor 

may consider any type of current or 

reasonably expected income, including, for 

example, the following: salary; wages; selfemployment income; military or reserve duty 

income; bonus pay; tips; commissions; 

interest payments; dividends; retirement 

benefits or entitlements; rental income; 

royalty payments; trust income; public 

assistance payments; and alimony, child 

support, and separate maintenance 

payments. The creditor may consider any of 

the consumer’s assets, other than the value of 

the dwelling that secures the covered 

transaction, including, for example, the 

following: funds in a savings or checking 

account, amounts vested in a retirement 

account, stocks, bonds, certificates of deposit, 

and amounts available to the consumer from 

a trust fund. (As stated in § 1026.43(a), the 

value of the dwelling includes the value of 

the real property to which the residential 

structure is attached, if the real property also 

secures the covered transaction.) 

2. Income or assets relied on. A creditor 

need consider only the income or assets 

necessary to support a determination that the 

consumer can repay the covered transaction. 

For example, if a consumer’s loan application 

states that the consumer earns an annual 

salary from both a full-time job and a parttime job and the creditor reasonably 

determines that the consumer’s income from 

the full-time job is sufficient to repay the 

loan, the creditor need not consider the 

consumer’s income from the part-time job. 

Further, a creditor need verify only the 

income (or assets) relied on to determine the 

consumer’s repayment ability. See comment 

43(c)(4)–1. 

3. Reasonably expected income. If a 

creditor relies on expected income in excess 

of the consumer’s income, either in addition 

to or instead of current income, the 

expectation that the income will be available 

for repayment must be reasonable and 

verified with third-party records that provide 

reasonably reliable evidence of the 

consumer’s expected income. For example, if 

the creditor relies on an expectation that a 

consumer will receive an annual bonus, the 

creditor may verify the basis for that 

expectation with records that show the 

consumer’s past annual bonuses, and the 

expected bonus must bear a reasonable 

relationship to the past bonuses. Similarly, if 

the creditor relies on a consumer’s expected 

salary from a job the consumer has accepted 

and will begin after receiving an educational 

degree, the creditor may verify that 

expectation with a written statement from an 

employer indicating that the consumer will 

be employed upon graduation at a specified 

salary. 

4. Seasonal or irregular income. A creditor 

reasonably may determine that a consumer 

can make periodic loan payments even if the 

consumer’s income, such as self-employment 

income, is seasonal or irregular. For example, 

assume a consumer receives seasonal income 

from the sale of crops or from agricultural 

employment. Each year, the consumer’s 

income arrives during only a few months. If 

the creditor determines that the consumer’s 

annual income divided equally across 12 

months is sufficient for the consumer to 

make monthly loan payments, the creditor 

reasonably may determine that the consumer 

can repay the loan, even though the 

consumer may not receive income during 

certain months. 

5. Multiple applicants. When two or more 

consumers apply for an extension of credit as 

joint obligors with primary liability on an 

obligation, § 1026.43(c)(2)(i) does not require 

the creditor to consider income or assets that 

are not needed to support the creditor’s 

repayment ability determination. If the 

income or assets of one applicant are 


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sufficient to support the creditor’s repayment 

ability determination, the creditor is not 

required to consider the income or assets of 

the other applicant. For example, if a 

husband and wife jointly apply for a loan and 

the creditor reasonably determines that the 

wife’s income is sufficient to repay the loan, 

the creditor is not required to consider the 

husband’s income. 

Paragraph 43(c)(2)(ii). 

1. Employment status and income. 

Employment status need not be full-time, and 

employment need not occur at regular 

intervals. If, in determining the consumer’s 

repayment ability, the creditor relies on 

income from the consumer’s employment, 

then that employment may be, for example, 

full-time, part-time, seasonal, irregular, 

military, or self-employment, so long as the 

creditor considers those characteristics of the 

employment. Under § 1026.43(c)(2)(ii), a 

creditor must verify a consumer’s current 

employment status only if the creditor relies 

on the consumer’s employment income in 

determining the consumer’s repayment 

ability. For example, if a creditor relies 

wholly on a consumer’s investment income 

to determine repayment ability, the creditor 

need not verify or document employment 

status. See comments 43(c)(2)(i)–5 and 

43(c)(4)–2 for guidance on which income to 

consider when multiple consumers apply 

jointly for a loan. 

Paragraph 43(c)(2)(iii). 

1. General. For purposes of the repayment 

ability determination required under 

§ 1026.43(c)(2), a creditor must consider the 

consumer’s monthly payment on a covered 

transaction that is calculated as required 

under § 1026.43(c)(5). 

Paragraph 43(c)(2)(iv). 

1. Home equity lines of credit. For 

purposes of § 1026.43(c)(2)(iv), a 

simultaneous loan includes any covered 

transaction or home equity line of credit 

(HELOC) subject to § 1026.40 that will be 

made to the same consumer at or before 

consummation of the covered transaction and 

secured by the same dwelling that secures 

the covered transaction. A HELOC that is a 

simultaneous loan that the creditor knows or 

has reason to know about must be considered 

as a mortgage obligation in determining a 

consumer’s ability to repay the covered 

transaction even though the HELOC is not a 

covered transaction subject to § 1026.43. See 

§ 1026.43(a) discussing the scope of this 

section. ‘‘Simultaneous loan’’ is defined in 

§ 1026.43(b)(12). For further explanation of 

‘‘same consumer,’’ see comment 43(b)(12)–2. 

2. Knows or has reason to know. In 

determining a consumer’s repayment ability 

for a covered transaction under 

§ 1026.43(c)(2), a creditor must consider the 

consumer’s payment obligation on any 

simultaneous loan that the creditor knows or 

has reason to know will be or has been made 

at or before consummation of the covered 

transaction. For example, where a covered 

transaction is a home purchase loan, the 

creditor must consider the consumer’s 

periodic payment obligation for any 

‘‘piggyback’’ second-lien loan that the 

creditor knows or has reason to know will be 

used to finance part of the consumer’s down 

payment. The creditor complies with this 

requirement where, for example, the creditor 

follows policies and procedures that are 

designed to determine whether at or before 

consummation the same consumer has 

applied for another credit transaction secured 

by the same dwelling. To illustrate, assume 

a creditor receives an application for a home 

purchase loan where the requested loan 

amount is less than the home purchase price. 

The creditor’s policies and procedures must 

require the consumer to state the source of 

the down payment and provide verification. 

If the creditor determines the source of the 

down payment is another extension of credit 

that will be made to the same consumer at 

or before consummation and secured by the 

same dwelling, the creditor knows or has 

reason to know of the simultaneous loan and 

must consider the simultaneous loan. 

Alternatively, if the creditor has information 

that suggests the down payment source is the 

consumer’s existing assets, the creditor 

would be under no further obligation to 

determine whether a simultaneous loan will 

be extended at or before consummation of the 

covered transaction. The creditor is not 

obligated to investigate beyond reasonable 

underwriting policies and procedures to 

determine whether a simultaneous loan will 

be extended at or before consummation of the 

covered transaction. 

3. Scope of timing. For purposes of 

§ 1026.43(c)(2)(iv), a simultaneous loan 

includes a loan that comes into existence 

concurrently with the covered transaction 

subject to § 1026.43(c). A simultaneous loan 

does not include a credit transaction that 

occurs after consummation of the covered 

transaction that is subject to this section. 

However, any simultaneous loan that 

specifically covers closing costs of the 

covered transaction, but is scheduled to be 

extended after consummation must be 

considered for the purposes of 

§ 1026.43(c)(2)(iv). 

Paragraph 43(c)(2)(v). 

1. General. A creditor must include in its 

repayment ability assessment the consumer’s 

monthly payment for mortgage-related 

obligations, such as the expected property 

taxes and premiums or similar charges 

identified in § 1026.4(b)(5), (7), (8), or (10) 

that are required by the creditor. See 

§ 1026.43(b)(8) defining the term ‘‘mortgagerelated obligations.’’ Mortgage-related 

obligations must be included in the creditor’s 

determination of repayment ability regardless 

of whether the amounts are included in the 

monthly payment or whether there is an 

escrow account established. Section 

1026.43(c)(2)(v) includes only payments that 

occur on an ongoing or recurring basis in the 

evaluation of the consumer’s monthly 

payment for mortgage-related obligations. 

One-time charges, or obligations satisfied at 

or before consummation, are not ongoing or 

recurring, and are therefore not part of the 

consumer’s monthly payment for purposes of 

§ 1026.43(c)(2)(v). For example: 

i. Assume that a consumer will be required 

to pay property taxes, as described in 

comment 43(b)(8)–2, on a quarterly, annual, 

or other basis after consummation. Section 

1026.43(c)(2)(v) includes these recurring 

property taxes in the evaluation of the 

consumer’s monthly payment for mortgagerelated obligations. However, if the consumer 

will incur a one-time charge to satisfy 

property taxes that are past due, 

§ 1026.43(c)(2)(v) does not include this onetime charge in the evaluation of the 

consumer’s monthly payment for mortgagerelated obligations. 

ii. Assume that a consumer will be 

required to pay mortgage insurance 

premiums, as described in comment 

43(b)(8)–2, on a monthly, annual, or other 

basis after consummation. Section 

1026.43(c)(2)(v) includes these recurring 

mortgage insurance payments in the 

evaluation of the consumer’s monthly 

payment for mortgage-related obligations. 

However, if the consumer will incur a onetime fee or charge for mortgage insurance or 

similar purposes, such as an up-front 

mortgage insurance premium imposed at 

consummation, § 1026.43(c)(2)(v) does not 

include this up-front mortgage insurance 

premium in the evaluation of the consumer’s 

monthly payment for mortgage-related 

obligations. 

2. Obligations to an association, other than 

special assessments. Section 1026.43(b)(8) 

defines mortgage-related obligations to 

include obligations owed to a condominium, 

cooperative, or homeowners association. 

However, § 1026.43(c)(2)(v) does not require 

a creditor to include in the evaluation of the 

consumer’s monthly payment for mortgagerelated obligations payments to such 

associations imposed in connection with the 

extension of credit, or imposed as an incident 

to the transfer of ownership, if such 

obligations are fully satisfied at or before 

consummation. For example, if a 

homeowners association imposes a one-time 

transfer fee on the transaction, and the 

consumer will pay the fee at or before 

consummation, § 1026.43(c)(2)(v) does not 

require the creditor to include this one-time 

transfer fee in the evaluation of the 

consumer’s monthly payment for mortgagerelated obligations. Section 1026.43(c)(2)(v) 

also does not require the creditor to include 

this fee in the evaluation of the consumer’s 

monthly payment for mortgage-related 

obligations if the consumer finances the fee 

in the loan amount. However, if the 

consumer incurs the obligation and will 

satisfy the obligation with recurring 

payments after consummation, regardless of 

whether the obligation is escrowed, 

§ 1026.43(c)(2)(v) requires the creditor to 

include the transfer fee in the evaluation of 

the consumer’s monthly payment for 

mortgage-related obligations. 

3. Special assessments imposed by an 

association. Section 1026.43(b)(8) defines 

mortgage-related obligations to include 

special assessments imposed by a 

condominium, cooperative, or homeowners 

association. Section 1026.43(c)(2)(v) does not 

require a creditor to include special 

assessments in the evaluation of the 

consumer’s monthly payment for mortgagerelated obligations if the special assessments 

are fully satisfied at or before consummation. 

For example, if a homeowners association 

imposes a special assessment that the 

consumer will have to pay in full at or before 

consummation, § 1026.43(c)(2)(v) does not 

include the special assessment in the 


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evaluation of the consumer’s monthly 

payment for mortgage-related obligations. 

Section 1026.43(c)(2)(v) does not require a 

creditor to include special assessments in the 

evaluation of the consumer’s monthly 

payment for mortgage-related obligations if 

the special assessments are imposed as a onetime charge. For example, if a homeowners 

association imposes a special assessment that 

the consumer will have to satisfy in one 

payment, § 1026.43(c)(2)(v) does not include 

this one-time special assessment in the 

evaluation of the consumer’s monthly 

payment for mortgage-related obligations. 

However, if the consumer will pay the 

special assessment on a recurring basis after 

consummation, regardless of whether the 

consumer’s payments for the special 

assessment are escrowed, § 1026.43(c)(2)(v) 

requires the creditor to include this recurring 

special assessment in the evaluation of the 

consumer’s monthly payment for mortgagerelated obligations. 

4. Pro rata amount. For purposes of 

§ 1026.43(c)(2)(v), the creditor may divide the 

recurring payments for mortgage-related 

obligations into monthly, pro rata amounts. 

In considering a mortgage-related obligation 

that is not paid monthly, if the mortgage loan 

is originated pursuant to a government 

program the creditor may determine the pro 

rata monthly amount of the mortgage-related 

obligation in accordance with the specific 

requirements of that program. If the mortgage 

loan is originated pursuant to a government 

program that does not contain specific 

standards for determining the pro rata 

monthly amount of the mortgage-related 

obligation, or if the mortgage loan is not 

originated pursuant to a government 

program, the creditor complies with 

§ 1026.43(c)(2)(v) by dividing the total 

amount of a particular non-monthly 

mortgage-related obligation by no more than 

the number of months from the month that 

the non-monthly mortgage-related obligation 

was due prior to consummation until the 

month that the non-monthly mortgage-related 

obligation will be due after consummation. 

When determining the pro rata monthly 

payment amount, the creditor may also 

consider comment 43(c)(2)(v)–5, which 

explains that the creditor need not project 

potential changes. The following examples 

further illustrate how a creditor may 

determine the pro rata monthly amount of 

mortgage-related obligations, pursuant to 

§ 1026.43(c)(2)(v): 

i. Assume that a consumer applies for a 

mortgage loan on February 1st. Assume 

further that the subject property is located in 

a jurisdiction where property taxes are paid 

in arrears on the first day of October. The 

creditor complies with § 1026.43(c)(2)(v) by 

determining the annual property tax amount 

owed in the prior October, dividing the 

amount by 12, and using the resulting 

amount as the pro rata monthly property tax 

payment amount for the determination of the 

consumer’s monthly payment for mortgagerelated obligations. The creditor complies 

even if the consumer will likely owe more in 

the next year than the amount owed the prior 

October because the jurisdiction normally 

increases the property tax rate annually, 

provided that the creditor does not have 

knowledge of an increase in the property tax 

rate at the time of underwriting. See also 

comment 43(c)(2)(v)–5 regarding estimates of 

mortgage-related obligations. 

ii. Assume that a subject property is 

located in a special water district, the 

assessments for which are billed separately 

from local property taxes. The creditor 

complies with § 1026.43(c)(2)(v) by dividing 

the full amount that will be owed by the 

number of months in the assessment period, 

and including the resulting amount in the 

calculation of monthly mortgage-related 

obligations. However, § 1026.43(c)(2)(v) does 

not require a creditor to adjust the monthly 

amount to account for potential deviations 

from the average monthly amount. For 

example, assume in this example that the 

special water assessment is billed every eight 

months, that the consumer will have to pay 

the first water district bill four months after 

consummation, and that the seller will not 

provide the consumer with any funds to pay 

for the seller’s obligation (i.e., the four 

months prior to consummation). Although 

the consumer will be required to budget 

twice the average monthly amount to pay the 

first water district bill, § 1026.43(c)(2)(v) does 

not require the creditor to use the increased 

amount; the creditor complies with 

§ 1026.43(c)(2)(v) by using the average 

monthly amount. 

iii. Assume that the subject property is 

located in an area where flood insurance is 

required by Federal law, and assume further 

that the flood insurance policy premium is 

paid every three years following 

consummation. The creditor complies with 

§ 1026.43(c)(2)(v) by dividing the three-year 

premium by 36 months and including the 

resulting amount in the determination of the 

consumer’s monthly payment for mortgagerelated obligations. The creditor complies 

even if the consumer will not establish a 

monthly escrow for flood insurance. 

iv. Assume that the subject property is part 

of a homeowners association that has 

imposed upon the seller a special assessment 

of $1,200. Assume further that this special 

assessment will become the consumer’s 

obligation upon consummation of the 

transaction, that the consumer is permitted to 

pay the special assessment in twelve $100 

installments after consummation, and that 

the mortgage loan will not be originated 

pursuant to a government program that 

contains specific requirements for prorating 

special assessments. The creditor complies 

with § 1026.43(c)(2)(v) by dividing the $1,200 

special assessment by 12 months and 

including the resulting $100 monthly amount 

in the determination of the consumer’s 

monthly payment for mortgage-related 

obligations. The creditor complies by using 

this calculation even if the consumer intends 

to pay the special assessment in a manner 

other than that used by the creditor in 

determining the monthly pro rata amount, 

such as where the consumer intends to pay 

six $200 installments. 

5. Estimates. Estimates of mortgage-related 

obligations should be based upon 

information that is known to the creditor at 

the time the creditor underwrites the 

mortgage obligation. Information is known if 

it is reasonably available to the creditor at the 

time of underwriting the loan. Creditors may 

rely on guidance provided under comment 

17(c)(2)(i)–1 in determining if information is 

reasonably available. For purposes of this 

section, the creditor need not project 

potential changes, such as by estimating 

possible increases in taxes and insurance. 

See comment 43(c)(2)(v)–4 for additional 

examples discussing the projection of 

potential changes. The following examples 

further illustrate the requirements of 

§ 1026.43(c)(2)(v): 

i. Assume that the property is subject to a 

community governance association, such as a 

homeowners association. The creditor 

complies with § 1026.43(c)(2)(v) by relying 

on an estimate of mortgage-related 

obligations prepared by the homeowners 

association. In accordance with the guidance 

provided under comment 17(c)(2)(i)–1, the 

creditor need only exercise due diligence in 

determining mortgage-related obligations, 

and complies with § 1026.43(c)(2)(v) by 

relying on the representations of other 

reliable parties in preparing estimates. 

ii. Assume that the homeowners 

association has imposed a special assessment 

on the seller, but the seller does not inform 

the creditor of the special assessment, the 

homeowners association does not include the 

special assessment in the estimate of 

expenses prepared for the creditor, and the 

creditor is unaware of the special assessment. 

The creditor complies with § 1026.43(c)(2)(v) 

if it does not include the special assessment 

in the determination of mortgage-related 

obligations. The creditor may rely on the 

representations of other reliable parties, in 

accordance with the guidance provided 

under comment 17(c)(2)(i)–1. 

iii. Assume that the homeowners 

association imposes a special assessment 

after the creditor has completed 

underwriting, but prior to consummation. 

The creditor does not violate 

§ 1026.43(c)(2)(v) if the creditor does not 

include the special assessment in the 

determination of the consumer’s monthly 

payment for mortgage-related obligations, 

provided the homeowners association does 

not inform the creditor about the special 

assessment during underwriting. Section 

1026.43(c)(2)(v) does not require the creditor 

to re-underwrite the loan. The creditor has 

complied with § 1026.43(c)(2)(v) by 

including the obligations known to the 

creditor at the time the loan is underwritten, 

even if the creditor learns of new mortgagerelated obligations before the transaction is 

consummated. 

Paragraph 43(c)(2)(vi). 

1. Consideration of current debt 

obligations. Section 1026.43(c)(2)(vi) requires 

creditors to consider a consumer’s current 

debt obligations and any alimony or child 

support the consumer is required to pay. 

Examples of current debt obligations include 

student loans, automobile loans, revolving 

debt, and existing mortgages that will not be 

paid off at or before consummation. Creditors 

have significant flexibility to consider 

current debt obligations in light of attendant 

facts and circumstances, including that an 

obligation is likely to be paid off soon after 

consummation. For example, a creditor may 

take into account that an existing mortgage is 


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likely to be paid off soon after consummation 

because there is an existing contract for sale 

of the property that secures that mortgage. 

Similarly, creditors should consider whether 

debt obligations in forbearance or deferral at 

the time of underwriting are likely to affect 

the consumer’s ability to repay based on the 

payment for which the consumer will be 

liable upon expiration of the forbearance or 

deferral period and other relevant facts and 

circumstances, such as when the forbearance 

or deferral period will expire. 

2. Multiple applicants. When two or more 

consumers apply for an extension of credit as 

joint obligors with primary liability on an 

obligation, § 1026.43(c)(2)(vi) requires a 

creditor to consider the debt obligations of all 

such joint applicants. For example, if a coapplicant is repaying a student loan at the 

time of underwriting, the creditor complies 

with § 1026.43(c)(2)(vi) by considering the 

co-applicant’s student loan obligation. If one 

consumer is merely a surety or guarantor, 

§ 1026.43(c)(2)(vi) does not require a creditor 

to consider the debt obligations of such 

surety or guarantor. The requirements of 

§ 1026.43(c)(2)(vi) do not affect the disclosure 

requirements of this part, such as, for 

example, §§ 1026.17(d), 1026.23(b), 

1026.31(e), 1026.39(b)(3), and 1026.46(f). 

Paragraph 43(c)(2)(vii). 

1. Monthly debt-to-income ratio and 

residual income. See § 1026.43(c)(7) and its 

associated commentary regarding the 

definitions and calculations for the monthly 

debt-to-income ratio and residual income. 

Paragraph 43(c)(2)(viii). 

1. Consideration of credit history. ‘‘Credit 

history’’ may include factors such as the 

number and age of credit lines, payment 

history, and any judgments, collections, or 

bankruptcies. Section 1026.43(c)(2)(viii) does 

not require creditors to obtain or consider a 

consolidated credit score or prescribe a 

minimum credit score that creditors must 

apply. The rule also does not specify which 

aspects of credit history a creditor must 

consider or how various aspects of credit 

history should be weighed against each other 

or against other underwriting factors. Some 

aspects of a consumer’s credit history, 

whether positive or negative, may not be 

directly indicative of the consumer’s ability 

to repay. A creditor therefore may give 

various aspects of a consumer’s credit history 

as much or as little weight as is appropriate 

to reach a reasonable, good faith 

determination of ability to repay. Where a 

consumer has obtained few or no extensions 

of traditional ‘‘credit,’’ as defined in 

§ 1026.2(a)(14), a creditor may, but is not 

required to, look to nontraditional credit 

references, such as rental payment history or 

utility payments. 

2. Multiple applicants. When two or more 

consumers apply for an extension of credit as 

joint obligors with primary liability on an 

obligation, § 1026.43(c)(2)(viii) requires a 

creditor to consider the credit history of all 

such joint applicants. If a consumer is merely 

a surety or guarantor, § 1026.43(c)(2)(viii) 

does not require a creditor to consider the 

credit history of such surety or guarantor. 

The requirements of § 1026.43(c)(2)(viii) do 

not affect the disclosure requirements of this 

part, such as, for example, §§ 1026.17(d), 

1026.23(b), 1026.31(e), 1026.39(b)(3), and 

1026.46(f). 

43(c)(3) Verification using third-party 

records. 

1. Records specific to the individual 

consumer. Records a creditor uses for 

verification under § 1026.43(c)(3) and (4) 

must be specific to the individual consumer. 

Records regarding average incomes in the 

consumer’s geographic location or average 

wages paid by the consumer’s employer, for 

example, are not specific to the individual 

consumer and are not sufficient for 

verification. 

2. Obtaining records. To conduct 

verification under § 1026.43(c)(3) and (4), a 

creditor may obtain records from a thirdparty service provider, such as a party the 

consumer’s employer uses to respond to 

income verification requests, as long as the 

records are reasonably reliable and specific to 

the individual consumer. A creditor also may 

obtain third-party records directly from the 

consumer, likewise as long as the records are 

reasonably reliable and specific to the 

individual consumer. For example, a creditor 

using payroll statements to verify the 

consumer’s income, as allowed under 

§ 1026.43(c)(4)(iii), may obtain the payroll 

statements from the consumer. 

3. Credit report as a reasonably reliable 

third-party record. A credit report generally 

is considered a reasonably reliable thirdparty record under § 1026.43(c)(3) for 

purposes of verifying items customarily 

found on a credit report, such as the 

consumer’s current debt obligations, monthly 

debts, and credit history. Section 

1026.43(c)(3) generally does not require 

creditors to obtain additional reasonably 

reliable third-party records to verify 

information contained in a credit report. For 

example, if a credit report states the existence 

and amount of a consumer’s debt obligation, 

the creditor is not required to obtain 

additional verification of the existence or 

amount of that obligation. In contrast, a 

credit report does not serve as a reasonably 

reliably third-party record for purposes of 

verifying items that do not appear on the 

credit report. For example, certain monthly 

debt obligations, such as legal obligations 

like alimony or child support, may not be 

reflected on a credit report. Thus, a credit 

report that does not list a consumer’s 

monthly alimony obligation does not serve as 

a reasonably reliable third-party record for 

purposes of verifying that obligation. If a 

credit report reflects a current debt obligation 

that a consumer has not listed on the 

application, the creditor complies with 

§ 1026.43(c)(3) if the creditor considers the 

existence and amount of the debt obligation 

as it is reflected in the credit report. 

However, in some cases a creditor may know 

or have reason to know that a credit report 

may be inaccurate in whole or in part. For 

example, a creditor may have information 

indicating that a credit report is subject to a 

fraud alert, extended alert, active duty alert, 

or similar alert identified in 15 U.S.C. 1681c– 

1 or that a debt obligation listed on a credit 

report is subject to a statement of dispute 

pursuant to 15 U.S.C. 1681i(b). A creditor 

may also have other reasonably reliable thirdparty records or other information or 

evidence that the creditor reasonably finds to 

be reliable that contradict the credit report or 

otherwise indicate that the credit report is 

inaccurate. If a creditor knows or has reason 

to know that a credit report may be 

inaccurate in whole or in part, the creditor 

complies with § 1026.43(c)(3) by disregarding 

an inaccurate or disputed item, items, or 

credit report, but does not have to obtain 

additional third-party records. The creditor 

may also, but is not required, to obtain other 

reasonably reliable third-party records to 

verify information with respect to which the 

credit report, or item therein, may be 

inaccurate. For example, the creditor might 

obtain statements or bank records regarding 

a particular debt obligation subject to a 

statement of dispute. See also comment 

43(c)(3)–6, which describes a situation in 

which a consumer reports a debt obligation 

that is not listed on a credit report. 

4. Verification of simultaneous loans. 

Although a credit report may be used to 

verify current obligations, it will not reflect 

a simultaneous loan that has not yet been 

consummated and may not reflect a loan that 

has just recently been consummated. If the 

creditor knows or has reason to know that 

there will be a simultaneous loan extended 

at or before consummation, the creditor may 

verify the simultaneous loan by obtaining 

third-party verification from the third-party 

creditor of the simultaneous loan. For 

example, the creditor may obtain a copy of 

the promissory note or other written 

verification from the third-party creditor. For 

further guidance, see comments 43(c)(3)–1 

and –2 discussing verification using thirdparty records. 

5. Verification of mortgage-related 

obligations. Creditors must make the 

repayment ability determination required 

under § 1026.43(c)(2) based on information 

verified from reasonably reliable records. For 

general guidance regarding verification see 

comments 43(c)(3)–1 and –2, which discuss 

verification using third-party records. With 

respect to the verification of mortgage-related 

obligations that are property taxes required to 

be considered under § 1026.43(c)(2)(v), a 

record is reasonably reliable if the 

information in the record was provided by a 

governmental organization, such as a taxing 

authority or local government. The creditor 

complies with § 1026.43(c)(2)(v) by relying 

on property taxes referenced in the title 

report if the source of the property tax 

information was a local taxing authority. 

With respect to other information in a record 

provided by an entity assessing charges, such 

as a homeowners association, the creditor 

complies with § 1026.43(c)(2)(v) if it relies on 

homeowners association billing statements 

provided by the seller. Records are also 

reasonably reliable if the information in the 

record was obtained from a valid and legally 

executed contract. For example, the creditor 

complies with § 1026.43(c)(2)(v) by relying 

on the amount of monthly ground rent 

referenced in the ground rent agreement 

currently in effect and applicable to the 

subject property. Records, other than those 

discussed above, may be reasonably reliable 

for purposes of § 1026.43(c)(2)(v) if the 

source provided the information objectively. 

6. Verification of current debt obligations. 

Section 1026.43(c)(3) does not require 


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creditors to obtain additional records to 

verify the existence or amount of obligations 

shown on a consumer’s credit report or listed 

on the consumer’s application, absent 

circumstances described in comment 

43(c)(3)–3. Under § 1026.43(c)(3)(iii), if a 

creditor relies on a consumer’s credit report 

to verify a consumer’s current debt 

obligations and the consumer’s application 

lists a debt obligation not shown on the 

credit report, the creditor may consider the 

existence and amount of the obligation as it 

is stated on the consumer’s application. The 

creditor is not required to further verify of 

the existence or amount of the obligation, 

absent circumstances described in comment 

43(c)(3)–3. 

7. Verification of credit history. To verify 

credit history, a creditor may, for example, 

look to credit reports from credit bureaus or 

to reasonably reliable third-party records that 

evidence nontraditional credit references, 

such as evidence of rental payment history or 

public utility payments. 

8. Verification of military employment. A 

creditor may verify the employment status of 

military personnel by using a military Leave 

and Earnings Statement or by using the 

electronic database maintained by the 

Department of Defense to facilitate 

identification of consumers covered by credit 

protections provided pursuant to 10 U.S.C. 

987. 

43(c)(4) Verification of income or assets. 

1. Income or assets relied on. A creditor 

need consider, and therefore need verify, 

only the income or assets the creditor relies 

on to evaluate the consumer’s repayment 

ability. See comment 43(c)(2)(i)–2. For 

example, if a consumer’s application states 

that the consumer earns a salary and is paid 

an annual bonus and the creditor relies on 

only the consumer’s salary to evaluate the 

consumer’s repayment ability, the creditor 

need verify only the salary. See also 

comments 43(c)(3)–1 and –2. 

2. Multiple applicants. If multiple 

consumers jointly apply for a loan and each 

lists income or assets on the application, the 

creditor need verify only the income or assets 

the creditor relies on in determining 

repayment ability. See comment 43(c)(2)(i)– 

5. 

3. Tax-return transcript. Under 

§ 1026.43(c)(4), a creditor may verify a 

consumer’s income using an Internal 

Revenue Service (IRS) tax-return transcript, 

which summarizes the information in a 

consumer’s filed tax return, another record 

that provides reasonably reliable evidence of 

the consumer’s income, or both. A creditor 

may obtain a copy of a tax-return transcript 

or a filed tax return directly from the 

consumer or from a service provider. A 

creditor need not obtain the copy directly 

from the IRS or other taxing authority. See 

comment 43(c)(3)–2. 

Paragraph 43(c)(4)(vi). 

1. Government benefits. In verifying a 

consumer’s income, a creditor may use a 

written or electronic record from a 

government agency of the amount of any 

benefit payments or awards, such as a ‘‘proof 

of income letter’’ issued by the Social 

Security Administration (also known as a 

‘‘budget letter,’’ ‘‘benefits letter,’’ or ‘‘proof of 

award letter’’). 

43(c)(5) Payment calculation. 

43(c)(5)(i) General rule. 

1. General. For purposes of 

§ 1026.43(c)(2)(iii), a creditor must determine 

the consumer’s ability to repay the covered 

transaction using the payment calculation 

methods set forth in § 1026.43(c)(5). The 

payment calculation methods differ 

depending on the type of credit extended. 

The payment calculation method set forth in 

§ 1026.43(c)(5)(i) applies to any covered 

transaction that does not have a balloon 

payment, or that is not an interest-only or 

negative amortization loan, whether such 

covered transaction is a fixed-rate, 

adjustable-rate or step-rate mortgage. The 

terms ‘‘fixed-rate mortgage,’’ ‘‘adjustable-rate 

mortgage,’’ ‘‘step-rate mortgage,’’ ‘‘interestonly loan’’ and ‘‘negative amortization loan’’ 

are defined in § 1026.18(s)(7)(iii), (i), (ii), (iv) 

and (v), respectively. For the meaning of the 

term ‘‘balloon payment,’’ see 

§ 1026.18(s)(5)(i). The payment calculation 

methods set forth in § 1026.43(c)(5)(ii) apply 

to any covered transaction that is a loan with 

a balloon payment, interest-only loan, or 

negative amortization loan. See comment 

43(c)(5)(i)–5 and the commentary to 

§ 1026.43(c)(5)(ii), which provide examples 

for calculating the monthly payment for 

purposes of the repayment ability 

determination required under 

§ 1026.43(c)(2)(iii). 

2. Greater of the fully indexed rate or 

introductory rate; premium adjustable-rate 

transactions. A creditor must determine a 

consumer’s repayment ability for the covered 

transaction using substantially equal, 

monthly, fully amortizing payments that are 

based on the greater of the fully indexed rate 

or any introductory interest rate. In some 

adjustable-rate transactions, creditors may set 

an initial interest rate that is not determined 

by the index or formula used to make later 

interest rate adjustments. Sometimes, this 

initial rate charged to consumers is lower 

than the rate would be if it were determined 

by using the index plus margin, or formula 

(i.e., fully indexed rate). However, an initial 

rate that is a premium rate is higher than the 

rate based on the index or formula. In such 

cases, creditors must calculate the fully 

amortizing payment based on the initial 

‘‘premium’’ rate. ‘‘Fully indexed rate’’ is 

defined in § 1026.43(b)(3). 

3. Monthly, fully amortizing payments. 

Section 1026.43(c)(5)(i) does not prescribe 

the terms or loan features that a creditor may 

choose to offer or extend to a consumer, but 

establishes the calculation method a creditor 

must use to determine the consumer’s 

repayment ability for a covered transaction. 

For example, the terms of the loan agreement 

may require that the consumer repay the loan 

in quarterly or bi-weekly scheduled 

payments, but for purposes of the repayment 

ability determination, the creditor must 

convert these scheduled payments to 

monthly payments in accordance with 

§ 1026.43(c)(5)(i)(B). Similarly, the loan 

agreement may not require the consumer to 

make fully amortizing payments, but for 

purposes of the repayment ability 

determination under § 1026.43(c)(5)(i), the 

creditor must convert any non-amortizing 

payments to fully amortizing payments. 

4. Substantially equal. In determining 

whether monthly, fully amortizing payments 

are substantially equal, creditors should 

disregard minor variations due to paymentschedule irregularities and odd periods, such 

as a long or short first or last payment period. 

That is, monthly payments of principal and 

interest that repay the loan amount over the 

loan term need not be equal, but the monthly 

payments should be substantially the same 

without significant variation in the monthly 

combined payments of both principal and 

interest. For example, where no two monthly 

payments vary from each other by more than 

1 percent (excluding odd periods, such as a 

long or short first or last payment period), 

such monthly payments would be considered 

substantially equal for purposes of this 

section. In general, creditors should 

determine whether the monthly, fully 

amortizing payments are substantially equal 

based on guidance provided in 

§ 1026.17(c)(3) (discussing minor variations), 

and § 1026.17(c)(4)(i) through (iii) (discussing 

payment-schedule irregularities and 

measuring odd periods due to a long or short 

first period) and associated commentary. 

5. Examples. The following are examples 

of how to determine the consumer’s 

repayment ability based on substantially 

equal, monthly, fully amortizing payments as 

required under § 1026.43(c)(5)(i) (all amounts 

shown are rounded, and all amounts are 

calculated using non-rounded values): 

i. Fixed-rate mortgage. A loan in an 

amount of $200,000 has a 30-year loan term 

and a fixed interest rate of 7 percent. For 

purposes of § 1026.43(c)(2)(iii), the creditor 

must determine the consumer’s ability to 

repay the loan based on a payment of $1,331, 

which is the substantially equal, monthly, 

fully amortizing payment that will repay 

$200,000 over 30 years using the fixed 

interest rate of 7 percent. 

ii. Adjustable-rate mortgage with discount 

for five years. A loan in an amount of 

$200,000 has a 30-year loan term. The loan 

agreement provides for a discounted interest 

rate of 6 percent that is fixed for an initial 

period of five years, after which the interest 

rate will adjust annually based on a specified 

index plus a margin of 3 percent, subject to 

a 2 percent annual periodic interest rate 

adjustment cap. The index value in effect at 

consummation is 4.5 percent; the fully 

indexed rate is 7.5 percent (4.5 percent plus 

3 percent). Even though the scheduled 

monthly payment required for the first five 

years is $1199, for purposes of 

§ 1026.43(c)(2)(iii) the creditor must 

determine the consumer’s ability to repay the 

loan based on a payment of $1,398, which is 

the substantially equal, monthly, fully 

amortizing payment that will repay $200,000 

over 30 years using the fully indexed rate of 

7.5 percent. 

iii. Step-rate mortgage. A loan in an 

amount of $200,000 has a 30-year loan term. 

The loan agreement provides that the interest 

rate will be 6.5 percent for the first two years 

of the loan, 7 percent for the next three years 

of the loan, and 7.5 percent thereafter. 

Accordingly, the scheduled payment 

amounts are $1,264 for the first two years, 

$1,328 for the next three years, and $1,388 

thereafter for the remainder of the term. For 


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purposes of § 1026.43(c)(2)(iii), the creditor 

must determine the consumer’s ability to 

repay the loan based on a payment of $1,398, 

which is the substantially equal, monthly, 

fully amortizing payment that would repay 

$200,000 over 30 years using the fully 

indexed rate of 7.5 percent. 

43(c)(5)(ii) Special rules for loans with a 

balloon payment, interest-only loans, and 

negative amortization loans. 

Paragraph 43(c)(5)(ii)(A). 

1. General. For loans with a balloon 

payment, the rules differ depending on 

whether the loan is a higher-priced covered 

transaction, as defined under § 1026.43(b)(4), 

or is not a higher-priced covered transaction 

because the annual percentage rate does not 

exceed the applicable threshold calculated 

using the applicable average prime offer rate 

(APOR) for a comparable transaction. 

‘‘Average prime offer rate’’ is defined in 

§ 1026.35(a)(2); ‘‘higher-priced covered 

transaction’’ is defined in § 1026.43(b)(4). For 

higher-priced covered transactions with a 

balloon payment, the creditor must consider 

the consumer’s ability to repay the loan 

based on the payment schedule under the 

terms of the legal obligation, including any 

required balloon payment. For loans with a 

balloon payment that are not higher-priced 

covered transactions, the creditor should use 

the maximum payment scheduled during the 

first five years of the loan following the date 

on which the first regular periodic payment 

will be due. ‘‘Balloon payment’’ is defined in 

§ 1026.18(s)(5)(i). 

2. First five years after the date on which 

the first regular periodic payment will be 

due. Under § 1026.43(c)(5)(ii)(A)(1), the 

creditor must determine a consumer’s ability 

to repay a loan with a balloon payment that 

is not a higher-priced covered transaction 

using the maximum payment scheduled 

during the first five years (60 months) after 

the date on which the first regular periodic 

payment will be due. To illustrate: 

i. Assume a loan that provides for regular 

monthly payments and a balloon payment 

due at the end of a six-year loan term. The 

loan is consummated on August 15, 2014, 

and the first monthly payment is due on 

October 1, 2014. The first five years after the 

first monthly payment end on October 1, 

2019. The balloon payment must be made on 

the due date of the 72nd monthly payment, 

which is September 1, 2020. For purposes of 

determining the consumer’s ability to repay 

the loan under § 1026.43(c)(2)(iii), the 

creditor need not consider the balloon 

payment that is due on September 1, 2020. 

ii. Assume a loan that provides for regular 

monthly payments and a balloon payment 

due at the end of a five-year loan term. The 

loan is consummated on August 15, 2014, 

and the first monthly payment is due on 

October 1, 2014. The first five years after the 

first monthly payment end on October 1, 

2019. The balloon payment must be made on 

the due date of the 60th monthly payment, 

which is September 1, 2019. For purposes of 

determining the consumer’s ability to repay 

the loan under § 1026.43(c)(2)(iii), the 

creditor must consider the balloon payment 

that is due on September 1, 2019. 

3. Renewable balloon-payment mortgage; 

loan term. A balloon-payment mortgage that 

is not a higher-priced covered transaction 

could provide that a creditor is 

unconditionally obligated to renew a balloonpayment mortgage at the consumer’s option 

(or is obligated to renew subject to conditions 

within the consumer’s control). See comment 

17(c)(1)–11 discussing renewable balloonpayment mortgages. For purposes of this 

section, the loan term does not include any 

period of time that could result from a 

renewal provision. To illustrate, assume a 

three-year balloon-payment mortgage that is 

not a higher-priced covered transaction 

contains an unconditional obligation to 

renew for another three years at the 

consumer’s option. In this example, the loan 

term for the balloon-payment mortgage is 

three years, and not the potential six years 

that could result if the consumer chooses to 

renew the loan. Accordingly, the creditor 

must underwrite the loan using the 

maximum payment scheduled in the first five 

years after consummation, which includes 

the balloon payment due at the end of the 

three-year loan term. See comment 

43(c)(5)(ii)(A)–4.ii, which provides an 

example of how to determine the consumer’s 

repayment ability for a three-year renewable 

balloon-payment mortgage that is not a 

higher-priced covered transaction. 

4. Examples of loans with a balloon 

payment that are not higher-priced covered 

transactions. The following are examples of 

how to determine the maximum payment 

scheduled during the first five years after the 

date on which the first regular periodic 

payment will be due (all amounts shown are 

rounded, and all amounts are calculated 

using non-rounded values): 

i. Balloon-payment mortgage with a threeyear loan term; fixed interest rate. A loan 

agreement provides for a fixed interest rate of 

6 percent, which is below the APORcalculated threshold for a comparable 

transaction; thus the loan is not a higherpriced covered transaction. The loan amount 

is $200,000, and the loan has a three-year 

loan term but is amortized over 30 years. The 

monthly payment scheduled for the first 

three years following consummation is 

$1,199, with a balloon payment of $193,367 

due at the end of the third year. For purposes 

of § 1026.43(c)(2)(iii), the creditor must 

determine the consumer’s ability to repay the 

loan based on the balloon payment of 

$193,367. 

ii. Renewable balloon-payment mortgage 

with a three-year loan term. Assume the same 

facts above in comment 43(c)(5)(ii)(A)–4.i, 

except that the loan agreement also provides 

that the creditor is unconditionally obligated 

to renew the balloon-payment mortgage at 

the consumer’s option at the end of the threeyear term for another three years. In 

determining the maximum payment 

scheduled during the first five years after the 

date on which the first regular periodic 

payment will be due, the creditor must use 

a loan term of three years. Accordingly, for 

purposes of § 1026.43(c)(2)(iii), the creditor 

must determine the consumer’s ability to 

repay the loan based on the balloon payment 

of $193,367. 

iii. Balloon-payment mortgage with a sixyear loan term; fixed interest rate. A loan 

provides for a fixed interest rate of 6 percent, 

which is below the APOR threshold for a 

comparable transaction, and thus, the loan is 

not a higher-priced covered transaction. The 

loan amount is $200,000, and the loan has a 

six-year loan term but is amortized over 30 

years. The loan is consummated on March 

15, 2014, and the monthly payment 

scheduled for the first six years following 

consummation is $1,199, with the first 

monthly payment due on May 1, 2014. The 

first five years after the date on which the 

first regular periodic payment will be due 

end on May 1, 2019. The balloon payment of 

$183,995 is required on the due date of the 

72nd monthly payment, which is April 1, 

2020 (more than five years after the date on 

which the first regular periodic payment will 

be due). For purposes of § 1026.43(c)(2)(iii), 

the creditor may determine the consumer’s 

ability to repay the loan based on the 

monthly payment of $1,199, and need not 

consider the balloon payment of $183,995 

due on April 1, 2020. 

5. Higher-priced covered transaction with a 

balloon payment. Where a loan with a 

balloon payment is a higher-priced covered 

transaction, the creditor must determine the 

consumer’s repayment ability based on the 

loan’s payment schedule, including any 

balloon payment. For example (all amounts 

are rounded): Assume a higher-priced 

covered transaction with a fixed interest rate 

of 7 percent. The loan amount is $200,000 

and the loan has a ten year loan term, but is 

amortized over 30 years. The monthly 

payment scheduled for the first ten years is 

$1,331, with a balloon payment of $172,955. 

For purposes of § 1026.43(c)(2)(iii), the 

creditor must consider the consumer’s ability 

to repay the loan based on the payment 

schedule that fully repays the loan amount, 

including the balloon payment of $172,955. 

Paragraph 43(c)(5)(ii)(B). 

1. General. For loans that permit interestonly payments, the creditor must use the 

fully indexed rate or introductory rate, 

whichever is greater, to calculate the 

substantially equal, monthly payment of 

principal and interest that will repay the loan 

amount over the term of the loan remaining 

as of the date the loan is recast. For 

discussion regarding the fully indexed rate, 

and the meaning of ‘‘substantially equal,’’ see 

comments 43(b)(3)–1 through –5 and 

43(c)(5)(i)–4, respectively. Under 

§ 1026.43(c)(5)(ii)(B), the relevant term of the 

loan is the period of time that remains as of 

the date the loan is recast to require fully 

amortizing payments. For a loan on which 

only interest and no principal has been paid, 

the loan amount will be the outstanding 

principal balance at the time of the recast. 

‘‘Loan amount’’ and ‘‘recast’’ are defined in 

§ 1026.43(b)(5) and (b)(11), respectively. 

‘‘Interest-only’’ and ‘‘Interest-only loan’’ are 

defined in § 1026.18(s)(7)(iv). 

2. Examples. The following are examples 

of how to determine the consumer’s 

repayment ability based on substantially 

equal, monthly payments of principal and 

interest under § 1026.43(c)(5)(ii)(B) (all 

amounts shown are rounded, and all 

amounts are calculated using non-rounded 

values): 

i. Fixed-rate mortgage with interest-only 

payments for five years. A loan in an amount 


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6610 Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 

of $200,000 has a 30-year loan term. The loan 

agreement provides for a fixed interest rate of 

7 percent, and permits interest-only 

payments for the first five years. The monthly 

payment of $1,167 scheduled for the first five 

years would cover only the interest due. The 

loan is recast on the due date of the 60th 

monthly payment, after which the scheduled 

monthly payments increase to $1,414, a 

monthly payment that repays the loan 

amount of $200,000 over the 25 years 

remaining as of the date the loan is recast 

(300 months). For purposes of 

§ 1026.43(c)(2)(iii), the creditor must 

determine the consumer’s ability to repay the 

loan based on a payment of $1,414, which is 

the substantially equal, monthly, fully 

amortizing payment that would repay 

$200,000 over the 25 years remaining as of 

the date the loan is recast using the fixed 

interest rate of 7 percent. 

ii. Adjustable-rate mortgage with discount 

for three years and interest-only payments for 

five years. A loan in an amount of $200,000 

has a 30-year loan term, but provides for 

interest-only payments for the first five years. 

The loan agreement provides for a 

discounted interest rate of 5 percent that is 

fixed for an initial period of three years, after 

which the interest rate will adjust each year 

based on a specified index plus a margin of 

3 percent, subject to an annual interest rate 

adjustment cap of 2 percent. The index value 

in effect at consummation is 4.5 percent; the 

fully indexed rate is 7.5 percent (4.5 percent 

plus 3 percent). The monthly payments for 

the first three years are $833. For the fourth 

year, the payments are $1,167, based on an 

interest rate of 7 percent, calculated by 

adding the 2 percent annual adjustment cap 

to the initial rate of 5 percent. For the fifth 

year, the payments are $1,250, applying the 

fully indexed rate of 7.5 percent. These first 

five years of payments will cover only the 

interest due. The loan is recast on the due 

date of the 60th monthly payment, after 

which the scheduled monthly payments 

increase to $1,478, a monthly payment that 

will repay the loan amount of $200,000 over 

the remaining 25 years of the loan (300 

months). For purposes of § 1026.43(c)(2)(iii), 

the creditor must determine the consumer’s 

ability to repay the loan based on a monthly 

payment of $1,478, which is the substantially 

equal, monthly payment of principal and 

interest that would repay $200,000 over the 

25 years remaining as of the date the loan is 

recast using the fully indexed rate of 7.5 

percent. 

Paragraph 43(c)(5)(ii)(C). 

1. General. For purposes of determining 

the consumer’s ability to repay a negative 

amortization loan, the creditor must use 

substantially equal, monthly payments of 

principal and interest based on the fully 

indexed rate or the introductory rate, 

whichever is greater, that will repay the 

maximum loan amount over the term of the 

loan that remains as of the date the loan is 

recast. Accordingly, before determining the 

substantially equal, monthly payments the 

creditor must first determine the maximum 

loan amount and the period of time that 

remains in the loan term after the loan is 

recast. ‘‘Recast’’ is defined in 

§ 1026.43(b)(11). Second, the creditor must 

use the fully indexed rate or introductory 

rate, whichever is greater, to calculate the 

substantially equal, monthly payment 

amount that will repay the maximum loan 

amount over the term of the loan remaining 

as of the date the loan is recast. For 

discussion regarding the fully indexed rate 

and the meaning of ‘‘substantially equal,’’ see 

comments 43(b)(3)–1 through –5 and 

43(c)(5)(i)–4, respectively. For the meaning of 

the term ‘‘maximum loan amount’’ and a 

discussion of how to determine the 

maximum loan amount for purposes of 

§ 1026.43(c)(5)(ii)(C), see § 1026.43(b)(7) and 

associated commentary. ‘‘Negative 

amortization loan’’ is defined in 

§ 1026.18(s)(7)(v). 

2. Term of loan. Under 

§ 1026.43(c)(5)(ii)(C), the relevant term of the 

loan is the period of time that remains as of 

the date the terms of the legal obligation 

recast. That is, the creditor must determine 

substantially equal, monthly payments of 

principal and interest that will repay the 

maximum loan amount based on the period 

of time that remains after any negative 

amortization cap is triggered or any period 

permitting minimum periodic payments 

expires, whichever occurs first. 

3. Examples. The following are examples 

of how to determine the consumer’s 

repayment ability based on substantially 

equal, monthly payments of principal and 

interest as required under 

§ 1026.43(c)(5)(ii)(C) (all amounts shown are 

rounded, and all amounts are calculated 

using non-rounded values): 

i. Adjustable-rate mortgage with negative 

amortization. A. Assume an adjustable-rate 

mortgage in the amount of $200,000 with a 

30-year loan term. The loan agreement 

provides that the consumer can make 

minimum monthly payments that cover only 

part of the interest accrued each month until 

the date on which the principal balance 

reaches 115 percent of its original balance 

(i.e., a negative amortization cap of 115 

percent) or for the first five years of the loan 

(60 monthly payments), whichever occurs 

first. The introductory interest rate at 

consummation is 1.5 percent. One month 

after consummation, the interest rate adjusts 

and will adjust monthly thereafter based on 

the specified index plus a margin of 3.5 

percent. The index value in effect at 

consummation is 4.5 percent; the fully 

indexed rate is 8 percent (4.5 percent plus 3.5 

percent). The maximum lifetime interest rate 

is 10.5 percent; there are no other periodic 

interest rate adjustment caps that limit how 

quickly the maximum lifetime rate may be 

reached. The minimum monthly payment for 

the first year is based on the initial interest 

rate of 1.5 percent. After that, the minimum 

monthly payment adjusts annually, but may 

increase by no more than 7.5 percent over the 

previous year’s payment. The minimum 

monthly payment is $690 in the first year, 

$742 in the second year, and $797 in the first 

part of the third year. 

B. To determine the maximum loan 

amount, assume that the interest rate 

increases to the maximum lifetime interest 

rate of 10.5 percent at the first adjustment 

(i.e., the due date of the first periodic 

monthly payment), and interest accrues at 

that rate until the loan is recast. Assume that 

the consumer makes the minimum monthly 

payments scheduled, which are capped at 7.5 

percent from year-to-year, for the maximum 

possible time. Because the consumer’s 

minimum monthly payments are less than 

the interest accrued each month, negative 

amortization occurs (i.e., the accrued but 

unpaid interest is added to the principal 

balance). Thus, assuming that the consumer 

makes the minimum monthly payments for 

as long as possible and that the maximum 

interest rate of 10.5 percent is reached at the 

first rate adjustment (i.e., the due date of the 

first periodic monthly payment), the negative 

amortization cap of 115 percent is reached on 

the due date of the 27th monthly payment 

and the loan is recast as of that date. The 

maximum loan amount as of the due date of 

the 27th monthly payment is $229,251, and 

the remaining term of the loan is 27 years 

and nine months (333 months). 

C. For purposes of § 1026.43(c)(2)(iii), the 

creditor must determine the consumer’s 

ability to repay the loan based on a monthly 

payment of $1,716, which is the substantially 

equal, monthly payment of principal and 

interest that will repay the maximum loan 

amount of $229,251 over the remaining loan 

term of 333 months using the fully indexed 

rate of 8 percent. See comments 43(b)(7)–1 

and –2 discussing the calculation of the 

maximum loan amount, and § 1026.43(b)(11) 

for the meaning of the term ‘‘recast.’’ 

ii. Fixed-rate, graduated payment 

mortgage. A loan in the amount of $200,000 

has a 30-year loan term. The loan agreement 

provides for a fixed interest rate of 7.5 

percent, and requires the consumer to make 

minimum monthly payments during the first 

year, with payments increasing 12.5 percent 

over the previous year every year for four 

years (the annual payment cap). The payment 

schedule provides for payments of $943 in 

the first year, $1,061 in the second year, 

$1,193 in the third year, $1,343 in the fourth 

year, and then requires $1,511 for the 

remaining term of the loan. During the first 

three years of the loan, the payments are less 

than the interest accrued each month, 

resulting in negative amortization. Assuming 

the minimum payments increase year-to-year 

up to the 12.5 percent payment cap, the 

consumer will begin making payments that 

cover at least all of the interest accrued at the 

end of the third year. Thus, the loan is recast 

on the due date of the 36th monthly 

payment. The maximum loan amount on that 

date is $207,662, and the remaining loan 

term is 27 years (324 months). For purposes 

of § 1026.43(c)(2)(iii), the creditor must 

determine the consumer’s ability to repay the 

loan based on a monthly payment of $1,497, 

which is the substantially equal, monthly 

payment of principal and interest that will 

repay the maximum loan amount of $207,662 

over the remaining loan term of 27 years 

using the fixed interest rate of 7.5 percent. 

43(c)(6) Payment calculation for 

simultaneous loans. 

1. Scope. In determining the consumer’s 

repayment ability for a covered transaction 

under § 1026.43(c)(2)(iii), a creditor must 

include consideration of any simultaneous 

loan which it knows, or has reason to know, 

will be made at or before consummation of 


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Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 6611 

the covered transaction. For a discussion of 

the standard ‘‘knows or has reason to know,’’ 

see comment 43(c)(2)(iv)–2. For the meaning 

of the term ‘‘simultaneous loan,’’ see 

§ 1026.43(b)(12). 

2. Payment calculation—covered 

transaction. For a simultaneous loan that is 

a covered transaction, as that term is defined 

under § 1026.43(b)(1), a creditor must 

determine a consumer’s ability to repay the 

monthly payment obligation for a 

simultaneous loan as set forth in 

§ 1026.43(c)(5), taking into account any 

mortgage-related obligations required to be 

considered under § 1026.43(c)(2)(v). For the 

meaning of the term ‘‘mortgage-related 

obligations,’’ see § 1026.43(b)(8). 

3. Payment calculation—home equity line 

of credit. For a simultaneous loan that is a 

home equity line of credit subject to 

§ 1026.40, the creditor must consider the 

periodic payment required under the terms of 

the plan when assessing the consumer’s 

ability to repay the covered transaction 

secured by the same dwelling as the 

simultaneous loan. Under § 1026.43(c)(6)(ii), 

a creditor must determine the periodic 

payment required under the terms of the plan 

by considering the actual amount of credit to 

be drawn by the consumer at consummation 

of the covered transaction. The amount to be 

drawn is the amount requested by the 

consumer; when the amount requested will 

be disbursed, or actual receipt of funds, is not 

determinative. Any additional draw against 

the line of credit that the creditor of the 

covered transaction does not know or have 

reason to know about before or during 

underwriting need not be considered in 

relation to ability to repay. For example, 

where the creditor’s policies and procedures 

require the source of down payment to be 

verified, and the creditor verifies that a 

simultaneous loan that is a HELOC will 

provide the source of down payment for the 

first-lien covered transaction, the creditor 

must consider the periodic payment on the 

HELOC by assuming the amount drawn is at 

least the down payment amount. In general, 

a creditor should determine the periodic 

payment based on guidance in the 

commentary to § 1026.40(d)(5) (discussing 

payment terms). 

43(c)(7) Monthly debt-to-income ratio or 

residual income. 

1. Monthly debt-to-income ratio or monthly 

residual income. Under § 1026.43(c)(2)(vii), 

the creditor must consider the consumer’s 

monthly debt-to-income ratio, or the 

consumer’s monthly residual income, in 

accordance with the requirements in 

§ 1026.43(c)(7). In contrast to the qualified 

mortgage provisions in § 1026.43(e), 

§ 1026.43(c) does not prescribe a specific 

monthly debt-to-income ratio with which 

creditors must comply. Instead, an 

appropriate threshold for a consumer’s 

monthly debt-to-income ratio or monthly 

residual income is for the creditor to 

determine in making a reasonable and good 

faith determination of a consumer’s ability to 

repay. 

2. Use of both monthly debt-to-income 

ratio and monthly residual income. If a 

creditor considers the consumer’s monthly 

debt-to-income ratio, the creditor may also 

consider the consumer’s residual income as 

further validation of the assessment made 

using the consumer’s monthly debt-toincome ratio. 

3. Compensating factors. The creditor may 

consider factors in addition to the monthly 

debt-to-income ratio or residual income in 

assessing a consumer’s repayment ability. For 

example, the creditor may reasonably and in 

good faith determine that a consumer has the 

ability to repay despite a higher debt-toincome ratio or lower residual income in 

light of the consumer’s assets other than the 

dwelling, including any real property 

attached to the dwelling, securing the 

covered transaction, such as a savings 

account. The creditor may also reasonably 

and in good faith determine that a consumer 

has the ability to repay despite a higher debtto-income ratio in light of the consumer’s 

residual income. 

43(d) Refinancing of non-standard 

mortgages. 

43(d)(1) Definitions. 

43(d)(1)(i) Non-standard mortgage. 

Paragraph 43(d)(1)(i)(A). 

1. Adjustable-rate mortgage with an 

introductory fixed rate. Under 

§ 1026.43(d)(1)(i)(A), an adjustable-rate 

mortgage with an introductory fixed interest 

rate for one year or longer is considered a 

‘‘non-standard mortgage.’’ For example, a 

covered transaction that has a fixed 

introductory rate for the first two, three, or 

five years and then converts to a variable rate 

for the remaining 28, 27, or 25 years, 

respectively, is a ‘‘non-standard mortgage.’’ A 

covered transaction with an introductory rate 

for six months that then converts to a 

variable rate for the remaining 29 and onehalf years is not a ‘‘non-standard mortgage.’’ 

43(d)(1)(ii) Standard mortgage. 

Paragraph 43(d)(1)(ii)(A). 

1. Regular periodic payments. Under 

§ 1026.43(d)(1)(ii)(A), a ‘‘standard mortgage’’ 

must provide for regular periodic payments 

that do not result in an increase of the 

principal balance (negative amortization), 

allow the consumer to defer repayment of 

principal (see comment 43(e)(2)(i)–2), or 

result in a balloon payment. Thus, the terms 

of the legal obligation must require the 

consumer to make payments of principal and 

interest on a monthly or other periodic basis 

that will repay the loan amount over the loan 

term. Except for payments resulting from any 

interest rate changes after consummation in 

an adjustable-rate or step-rate mortgage, the 

periodic payments must be substantially 

equal. For an explanation of the term 

‘‘substantially equal,’’ see comment 

43(c)(5)(i)–4. In addition, a single-payment 

transaction is not a ‘‘standard mortgage’’ 

because it does not require ‘‘regular periodic 

payments.’’ See also comment 43(e)(2)(i)–1. 

Paragraph 43(d)(1)(ii)(D). 

1. First five years after consummation. A 

‘‘standard mortgage’’ must have an interest 

rate that is fixed for at least the first five years 

(60 months) after consummation. For 

example, assume an adjustable-rate mortgage 

that applies the same fixed interest rate to 

determine the first 60 payments of principal 

and interest due. The loan is consummated 

on August 15, 2013, and the first monthly 

payment is due on October 1, 2013. The date 

that is five years after consummation is 

August 15, 2018. The first interest rate 

adjustment occurs on September 1, 2018. 

This loan meets the criterion for a ‘‘standard 

mortgage’’ under § 1026.43(d)(1)(ii)(D) 

because the interest rate is fixed until 

September 1, 2018, which is more than five 

years after consummation. For guidance 

regarding step-rate mortgages, see comment 

43(e)(2)(iv)–3.iii. 

Paragraph 43(d)(1)(ii)(E). 

1. Permissible use of proceeds. To qualify 

as a ‘‘standard mortgage,’’ the loan’s proceeds 

may be used for only two purposes: paying 

off the non-standard mortgage and paying for 

closing costs, including paying escrow 

amounts required at or before closing. If the 

proceeds of a covered transaction are used for 

other purposes, such as to pay off other liens 

or to provide additional cash to the consumer 

for discretionary spending, the transaction 

does not meet the definition of a ‘‘standard 

mortgage.’’ 

43(d)(2) Scope. 

1. Written application. For an explanation 

of the requirements for a ‘‘written 

application’’ in § 1026.43(d)(2)(iii), (d)(2)(iv), 

and (d)(2)(v), see comment 19(a)(1)(i)–3. 

Paragraph 43(d)(2)(ii). 

1. Materially lower. The exemptions 

afforded under § 1026.43(d)(3) apply to a 

refinancing only if the monthly payment for 

the new loan is ‘‘materially lower’’ than the 

monthly payment for an existing nonstandard mortgage. The payments to be 

compared must be calculated based on the 

requirements under § 1026.43(d)(5). Whether 

the new loan payment is ‘‘materially lower’’ 

than the non-standard mortgage payment 

depends on the facts and circumstances. In 

all cases, a payment reduction of 10 percent 

or more meets the ‘‘materially lower’’ 

standard. 

Paragraph 43(d)(2)(iv). 

1. Late payment—12 months prior to 

application. Under § 1026.43(d)(2)(iv), the 

exemptions in § 1026.43(d)(3) apply to a 

covered transaction only if, during the 12 

months immediately preceding the creditor’s 

receipt of the consumer’s written application 

for a refinancing, the consumer has made no 

more than one payment on the non-standard 

mortgage more than 30 days late. (For an 

explanation of ‘‘written application,’’ see 

comment 43(d)(2)–1.) For example, assume a 

consumer applies for a refinancing on May 1, 

2014. Assume also that the consumer made 

a non-standard mortgage payment on August 

15, 2013, that was 45 days late. The 

consumer made no other late payments on 

the non-standard mortgage between May 1, 

2013, and May 1, 2014. In this example, the 

requirement under § 1026.43(d)(2)(iv) is met 

because the consumer made only one 

payment that was over 30 days late within 

the 12 months prior to applying for the 

refinancing (i.e., eight and one-half months 

prior to application). 

2. Payment due date. Whether a payment 

is more than 30 days late is measured in 

relation to the contractual due date not 

accounting for any grace period. For 

example, if the contractual due date for a 

non-standard mortgage payment is the first 

day of every month, but no late fee will be 

charged as long as the payment is received 


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6612 Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 

by the 16th of the month, the payment due 

date for purposes of § 1026.43(d)(2)(iv) and 

(v) is the first day of the month, not the 16th 

day of the month. Thus, a payment due 

under the contract on October 1st that is paid 

on November 1st is made more than 30 days 

after the payment due date. 

Paragraph 43(d)(2)(v). 

1. Late payment—six months prior to 

application. Under § 1026.43(d)(2)(v), the 

exemptions in § 1026.43(d)(3) apply to a 

covered transaction only if, during the six 

months immediately preceding the creditor’s 

receipt of the consumer’s written application 

for a refinancing, the consumer has made no 

payments on the non-standard mortgage 

more than 30 days late. (For an explanation 

of ‘‘written application’’ and how to 

determine the payment due date, see 

comments 43(d)(2)–1 and 43(d)(2)(iv)–2.) For 

example, assume a consumer with a nonstandard mortgage applies for a refinancing 

on May 1, 2014. If the consumer made a 

payment on March 15, 2014, that was 45 days 

late, the requirement under § 1026.43(d)(2)(v) 

is not met because the consumer made a 

payment more than 30 days late one and onehalf months prior to application. If the 

number of months between consummation of 

the non-standard mortgage and the 

consumer’s application for the standard 

mortgage is six or fewer, the consumer may 

not have made any payment more than 30 

days late on the non-standard mortgage. 

Paragraph 43(d)(2)(vi). 

1. Non-standard mortgage loan made in 

accordance with ability-to-repay or qualified 

mortgage requirements. For non-standard 

mortgages that are consummated on or after 

January 10, 2014, § 1026.43(d)(2)(vi) provides 

that the refinancing provisions set forth in 

§ 1026.43(d) apply only if the non-standard 

mortgage was made in accordance with the 

requirements of § 1026.43(c) or (e), as 

applicable. For example, if a creditor 

originated a non-standard mortgage on or 

after January 10, 2014 that did not comply 

with the requirements of § 1026.43(c) and 

was not a qualified mortgage pursuant to 

§ 1026.43(e), § 1026.43(d) would not apply to 

the refinancing of the non-standard mortgage 

loan into a standard mortgage loan. However, 

§ 1026.43(d) applies to the refinancing of a 

non-standard mortgage loan into a standard 

mortgage loan, regardless of whether the nonstandard mortgage loan was made in 

compliance with § 1026.43(c) or (e), if the 

non-standard mortgage loan was 

consummated prior to January 10, 2014. 

43(d)(3) Exemption from repayment ability 

requirements. 

1. Two-part determination. To qualify for 

the exemptions in § 1026.43(d)(3), a creditor 

must have considered, first, whether the 

consumer is likely to default on the existing 

mortgage once that loan is recast and, second, 

whether the new mortgage likely would 

prevent the consumer’s default. 

43(d)(4) Offer of rate discounts and other 

favorable terms. 

1. Documented underwriting practices. In 

connection with a refinancing made pursuant 

to § 1026.43(d), § 1026.43(d)(4) requires a 

creditor offering a consumer rate discounts 

and terms that are the same as, or better than, 

the rate discounts and terms offered to new 

consumers to make such an offer consistent 

with the creditor’s documented underwriting 

practices. Section 1026.43(d)(4) does not 

require a creditor making a refinancing 

pursuant to § 1026.43(d) to comply with the 

underwriting requirements of § 1026.43(c). 

Rather, § 1026.43(d)(4) requires creditors 

providing such discounts to do so consistent 

with documented policies related to loan 

pricing, loan term qualifications, or other 

similar underwriting practices. For example, 

assume that a creditor is providing a 

consumer with a refinancing made pursuant 

to § 1026.43(d) and that this creditor has a 

documented practice of offering rate 

discounts to consumers with credit scores 

above a certain threshold. Assume further 

that the consumer receiving the refinancing 

has a credit score below this threshold, and 

therefore would not normally qualify for the 

rate discount available to consumers with 

high credit scores. This creditor complies 

with § 1026.43(d)(4) by offering the consumer 

the discounted rate in connection with the 

refinancing made pursuant to § 1026.43(d), 

even if the consumer would not normally 

qualify for that discounted rate, provided that 

the offer of the discounted rate is not 

prohibited by applicable State or Federal law. 

However, § 1026.43(d)(4) does not require a 

creditor to offer a consumer such a 

discounted rate. 

43(d)(5) Payment calculations. 

43(d)(5)(i) Non-Standard mortgage. 

1. Payment calculation for a non-standard 

mortgage. In determining whether the 

monthly periodic payment for a standard 

mortgage is materially lower than the 

monthly periodic payment for the nonstandard mortgage under § 1026.43(d)(2)(ii), 

the creditor must consider the monthly 

payment for the non-standard mortgage that 

will result after the loan is ‘‘recast,’’ 

assuming substantially equal payments of 

principal and interest that amortize the 

remaining loan amount over the remaining 

term as of the date the mortgage is recast. For 

guidance regarding the meaning of 

‘‘substantially equal,’’ see comment 

43(c)(5)(i)–4. For the meaning of ‘‘recast,’’ see 

§ 1026.43(b)(11) and associated commentary. 

2. Fully indexed rate. The term ‘‘fully 

indexed rate’’ in § 1026.43(d)(5)(i)(A) for 

calculating the payment for a non-standard 

mortgage is generally defined in 

§ 1026.43(b)(3) and associated commentary. 

Under § 1026.43(b)(3) the fully indexed rate 

is calculated at the time of consummation. 

For purposes of § 1026.43(d)(5)(i), however, 

the fully indexed rate is calculated within a 

reasonable period of time before or after the 

date the creditor receives the consumer’s 

written application for the standard 

mortgage. Thirty days is generally considered 

‘‘a reasonable period of time.’’ 

3. Written application. For an explanation 

of the requirements for a ‘‘written 

application’’ in § 1026.43(d)(5)(i), see 

comment 19(a)(1)(i)–3. 

4. Payment calculation for an adjustablerate mortgage with an introductory fixed rate. 

Under § 1026.43(d)(5)(i), the monthly 

periodic payment for an adjustable-rate 

mortgage with an introductory fixed interest 

rate for a period of one or more years must 

be calculated based on several assumptions. 

i. First, the payment must be based on the 

outstanding principal balance as of the date 

on which the mortgage is recast, assuming all 

scheduled payments have been made up to 

that date and the last payment due under 

those terms is made and credited on that 

date. For example, assume an adjustable-rate 

mortgage with a 30-year loan term. The loan 

agreement provides that the payments for the 

first 24 months are based on a fixed rate, after 

which the interest rate will adjust annually 

based on a specified index and margin. The 

loan is recast on the due date of the 24th 

payment. If the 24th payment is due on 

September 1, 2014, the creditor must 

calculate the outstanding principal balance 

as of September 1, 2014, assuming that all 24 

payments under the fixed rate terms have 

been made and credited timely. 

ii. Second, the payment calculation must 

be based on substantially equal monthly 

payments of principal and interest that will 

fully repay the outstanding principal balance 

over the term of the loan remaining as of the 

date the loan is recast. Thus, in the example 

above, the creditor must assume a loan term 

of 28 years (336 monthly payments). 

iii. Third, the payment must be based on 

the fully indexed rate, as described in 

§ 1026.43(d)(5)(i)(A). 

5. Example of payment calculation for an 

adjustable-rate mortgage with an 

introductory fixed rate. The following 

example illustrates the rule described in 

comment 43(d)(5)(i)–4: 

i. A loan in an amount of $200,000 has a 

30-year loan term. The loan agreement 

provides for a discounted introductory 

interest rate of 5 percent that is fixed for an 

initial period of two years, after which the 

interest rate will adjust annually based on a 

specified index plus a margin of 3 percentage 

points. 

ii. The non-standard mortgage is 

consummated on February 15, 2014, and the 

first monthly payment is due on April 1, 

2014. The loan is recast on the due date of 

the 24th monthly payment, which is March 

1, 2016. 

iii. On March 15, 2015, the creditor 

receives the consumer’s written application 

for a refinancing after the consumer has made 

12 monthly on-time payments. On this date, 

the index value is 4.5 percent. 

iv. To calculate the non-standard mortgage 

payment that must be compared to the 

standard mortgage payment under 

§ 1026.43(d)(2)(ii), the creditor must use: 

A. The outstanding principal balance as of 

March 1, 2016, assuming all scheduled 

payments have been made up to March 1, 

2016, and the last payment due under the 

fixed rate terms is made and credited on 

March 1, 2016. In this example, the 

outstanding principal balance is $193,948. 

B. The fully indexed rate of 7.5 percent, 

which is the index value of 4.5 percent as of 

March 15, 2015 (the date on which the 

application for a refinancing is received) plus 

the margin of 3 percent. 

C. The remaining loan term as of March 1, 

2016, the date of the recast, which is 28 years 

(336 monthly payments). 

v. Based on these assumptions, the 

monthly payment for the non-standard 

mortgage for purposes of determining 


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whether the standard mortgage monthly 

payment is lower than the non-standard 

mortgage monthly payment (see 

§ 1026.43(d)(2)(ii)) is $1,383. This is the 

substantially equal, monthly payment of 

principal and interest required to repay the 

outstanding principal balance at the fully 

indexed rate over the remaining term. 

6. Payment calculation for an interest-only 

loan. Under § 1026.43(d)(5)(i), the monthly 

periodic payment for an interest-only loan 

must be calculated based on several 

assumptions: 

i. First, the payment must be based on the 

outstanding principal balance as of the date 

of the recast, assuming all scheduled 

payments are made under the terms of the 

legal obligation in effect before the mortgage 

is recast. For a loan on which only interest 

and no principal has been paid, the 

outstanding principal balance at the time of 

recast will be the loan amount, as defined in 

§ 1026.43(b)(5), assuming all scheduled 

payments are made under the terms of the 

legal obligation in effect before the mortgage 

is recast. For example, assume that a 

mortgage has a 30-year loan term, and 

provides that the first 24 months of payments 

are interest-only. If the 24th payment is due 

on September 1, 2015, the creditor must 

calculate the outstanding principal balance 

as of September 1, 2015, assuming that all 24 

payments under the interest-only payment 

terms have been made and credited timely 

and that no payments of principal have been 

made. 

ii. Second, the payment calculation must 

be based on substantially equal monthly 

payments of principal and interest that will 

fully repay the loan amount over the term of 

the loan remaining as of the date the loan is 

recast. Thus, in the example above, the 

creditor must assume a loan term of 28 years 

(336 monthly payments). 

iii. Third, the payment must be based on 

the fully indexed rate, as described in 

§ 1026.43(d)(5)(i)(A). 

7. Example of payment calculation for an 

interest-only loan. The following example 

illustrates the rule described in comment 

43(d)(5)(i)–6: 

i. A loan in an amount of $200,000 has a 

30-year loan term. The loan agreement 

provides for a fixed interest rate of 7 percent, 

and permits interest-only payments for the 

first two years (the first 24 payments), after 

which time amortizing payments of principal 

and interest are required. 

ii. The non-standard mortgage is 

consummated on February 15, 2014, and the 

first monthly payment is due on April 1, 

2014. The loan is recast on the due date of 

the 24th monthly payment, which is March 

1, 2016. 

iii. On March 15, 2015, the creditor 

receives the consumer’s written application 

for a refinancing, after the consumer has 

made 12 monthly on-time payments. The 

consumer has made no additional payments 

of principal. 

iv. To calculate the non-standard mortgage 

payment that must be compared to the 

standard mortgage payment under 

§ 1026.43(d)(2)(ii), the creditor must use: 

A. The loan amount, which is the 

outstanding principal balance as of March 1, 

2016, assuming all scheduled interest-only 

payments have been made and credited up to 

that date. In this example, the loan amount 

is $200,000. 

B. An interest rate of 7 percent, which is 

the interest rate in effect at the time of 

consummation of this fixed-rate nonstandard mortgage. 

C. The remaining loan term as of March 1, 

2016, the date of the recast, which is 28 years 

(336 monthly payments). 

v. Based on these assumptions, the 

monthly payment for the non-standard 

mortgage for purposes of determining 

whether the standard mortgage monthly 

payment is lower than the non-standard 

mortgage monthly payment (see 

§ 1026.43(d)(2)(ii)) is $1,359. This is the 

substantially equal, monthly payment of 

principal and interest required to repay the 

loan amount at the fully indexed rate over 

the remaining term. 

8. Payment calculation for a negative 

amortization loan. Under § 1026.43(d)(5)(i), 

the monthly periodic payment for a negative 

amortization loan must be calculated based 

on several assumptions: 

i. First, the calculation must be based on 

the maximum loan amount, determined after 

adjusting for the outstanding principal 

balance. If the consumer makes only the 

minimum periodic payments for the 

maximum possible time, until the consumer 

must begin making fully amortizing 

payments, the outstanding principal balance 

will be the maximum loan amount, as 

defined in § 1026.43(b)(7). In this event, the 

creditor complies with 

§ 1026.43(d)(5)(i)(C)(3) by relying on the 

examples of how to calculate the maximum 

loan amount, see comment 43(b)(7)–3. If the 

consumer makes payments above the 

minimum periodic payments for the 

maximum possible time, the creditor must 

calculate the maximum loan amount based 

on the outstanding principal balance. In this 

event, the creditor complies with 

§ 1026.43(d)(5)(i)(C)(3) by relying on the 

examples of how to calculate the maximum 

loan amount in comment 43(d)(5)(i)–10. 

ii. Second, the calculation must be based 

on substantially equal monthly payments of 

principal and interest that will fully repay 

the maximum loan amount over the term of 

the loan remaining as of the date the loan is 

recast. For example, if the loan term is 30 

years and the loan is recast on the due date 

of the 60th monthly payment, the creditor 

must assume a remaining loan term of 25 

years (300 monthly payments). 

iii. Third, the payment must be based on 

the fully indexed rate as of the date of the 

written application for the standard 

mortgage. 

9. Example of payment calculation for a 

negative amortization loan if only minimum 

payments made. The following example 

illustrates the rule described in comment 

43(d)(5)(i)–8: 

i. A loan in an amount of $200,000 has a 

30-year loan term. The loan agreement 

provides that the consumer can make 

minimum monthly payments that cover only 

part of the interest accrued each month until 

the date on which the principal balance 

increases to the negative amortization cap of 

115 percent of the loan amount, or for the 

first five years of monthly payments (60 

payments), whichever occurs first. The loan 

is an adjustable-rate mortgage that adjusts 

monthly according to a specified index plus 

a margin of 3.5 percent. 

ii. The non-standard mortgage is 

consummated on February 15, 2014, and the 

first monthly payment is due on April 1, 

2014. Assume that the consumer has made 

only the minimum periodic payments. 

Assume further that, based on the calculation 

of the maximum loan amount required under 

§ 1026.43(b)(7) and associated commentary, 

the negative amortization cap of 115 percent 

would be reached on June 1, 2016, the due 

date of the 27th monthly payment. 

iii. On March 15, 2015, the creditor 

receives the consumer’s written application 

for a refinancing, after the consumer has 

made 12 monthly on-time payments. On this 

date, the index value is 4.5 percent. 

iv. To calculate the non-standard mortgage 

payment that must be compared to the 

standard mortgage payment under 

§ 1026.43(d)(2)(ii), the creditor must use: 

A. The maximum loan amount of $229,251 

as of June 1, 2016; 

B. The fully indexed rate of 8 percent, 

which is the index value of 4.5 percent as of 

March 15, 2015 (the date on which the 

creditor receives the application for a 

refinancing) plus the margin of 3.5 percent; 

and 

C. The remaining loan term as of June 1, 

2016, the date of the recast, which is 27 years 

and nine months (333 monthly payments). 

v. Based on these assumptions, the 

monthly payment for the non-standard 

mortgage for purposes of determining 

whether the standard mortgage monthly 

payment is lower than the non-standard 

mortgage monthly payment (see 

§ 1026.43(d)(2)(ii)) is $1,716. This is the 

substantially equal, monthly payment of 

principal and interest required to repay the 

maximum loan amount at the fully indexed 

rate over the remaining term. 

10. Example of payment calculation for a 

negative amortization loan if payments above 

minimum amount made. The following 

example illustrates the rule described in 

comment 43(d)(5)(i)–8: 

i. A loan in an amount of $200,000 has a 

30-year loan term. The loan agreement 

provides that the consumer can make 

minimum monthly payments that cover only 

part of the interest accrued each month until 

the date on which the principal balance 

increases to the negative amortization cap of 

115 percent of the loan amount, or for the 

first five years of monthly payments (60 

payments), whichever occurs first. The loan 

is an adjustable-rate mortgage that adjusts 

monthly according to a specified index plus 

a margin of 3.5 percent. The introductory 

interest rate at consummation is 1.5 percent. 

One month after consummation, the interest 

rate adjusts and will adjust monthly 

thereafter based on the specified index plus 

a margin of 3.5 percent. The maximum 

lifetime interest rate is 10.5 percent; there are 

no other periodic interest rate adjustment 

caps that limit how quickly the maximum 

lifetime rate may be reached. The minimum 

monthly payment for the first year is based 


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6614 Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 

on the initial interest rate of 1.5 percent. 

After that, the minimum monthly payment 

adjusts annually, but may increase by no 

more than 7.5 percent over the previous 

year’s payment. The minimum monthly 

payment is $690 in the first year, $742 in the 

second year, $798 in the third year, $857 in 

the fourth year, and $922 in the fifth year. 

ii. The non-standard mortgage is 

consummated on February 15, 2014, and the 

first monthly payment is due on April 1, 

2014. Assume that the consumer has made 

more than the minimum periodic payments, 

and that after the consumer’s 12th monthly 

on-time payment the outstanding principal 

balance is $195,000. Based on the calculation 

of the maximum loan amount after adjusting 

for this outstanding principal balance, the 

negative amortization cap of 115 percent 

would be reached on March 1, 2019, the due 

date of the 60th monthly payment. 

iii. On March 15, 2015, the creditor 

receives the consumer’s written application 

for a refinancing, after the consumer has 

made 12 monthly on-time payments. On this 

date, the index value is 4.5 percent. 

iv. To calculate the non-standard mortgage 

payment that must be compared to the 

standard mortgage payment under 

§ 1026.43(d)(2)(ii), the creditor must use: 

A. The maximum loan amount of $229,219 

as of March 1, 2019. 

B. The fully indexed rate of 8 percent, 

which is the index value of 4.5 percent as of 

March 15, 2015 (the date on which the 

creditor receives the application for a 

refinancing) plus the margin of 3.5 percent. 

C. The remaining loan term as of March 1, 

2019, the date of the recast, which is exactly 

25 years (300 monthly payments). 

v. Based on these assumptions, the 

monthly payment for the non-standard 

mortgage for purposes of determining 

whether the standard mortgage monthly 

payment is lower than the non-standard 

mortgage monthly payment (see 

§ 1026.43(d)(2)(ii)) is $1,769. This is the 

substantially equal, monthly payment of 

principal and interest required to repay the 

maximum loan amount at the fully indexed 

rate over the remaining term. 

43(d)(5)(ii) Standard mortgage. 

1. Payment calculation for a standard 

mortgage. In determining whether the 

monthly periodic payment for a standard 

mortgage is materially lower than the 

monthly periodic payment for a non-standard 

mortgage, the creditor must consider the 

monthly payment for the standard mortgage 

that will result in substantially equal, 

monthly, fully amortizing payments (as 

defined in § 1026.43(b)(2)) using the rate as 

of consummation. For guidance regarding the 

meaning of ‘‘substantially equal’’ see 

comment 43(c)(5)(i)–4. For a mortgage with a 

single, fixed rate for the first five years after 

consummation, the maximum rate that will 

apply during the first five years after 

consummation will be the rate at 

consummation. For a step-rate mortgage, 

however, the rate that must be used is the 

highest rate that will apply during the first 

five years after consummation. For example, 

if the rate for the first two years after the date 

on which the first regular periodic payment 

will be due is 4 percent, the rate for the 

following two years is 5 percent, and the rate 

for the next two years is 6 percent, the rate 

that must be used is 6 percent. 

2. Example of payment calculation for a 

standard mortgage. The following example 

illustrates the rule described in comment 

43(d)(5)(ii)–1: A loan in an amount of 

$200,000 has a 30-year loan term. The loan 

agreement provides for an interest rate of 6 

percent that is fixed for an initial period of 

five years, after which time the interest rate 

will adjust annually based on a specified 

index plus a margin of 3 percent, subject to 

a 2 percent annual interest rate adjustment 

cap. The creditor must determine whether 

the standard mortgage monthly payment is 

materially lower than the non-standard 

mortgage monthly payment (see 

§ 1026.43(d)(2)(ii)) based on a standard 

mortgage payment of $1,199. This is the 

substantially equal, monthly payment of 

principal and interest required to repay 

$200,000 over 30 years at an interest rate of 

6 percent. 

43(e) Qualified mortgages. 

43(e)(1) Safe harbor and presumption of 

compliance. 

1. General. Section 1026.43(c) requires a 

creditor to make a reasonable and good faith 

determination at or before consummation 

that a consumer will be able to repay a 

covered transaction. Section 1026.43(e)(1)(i) 

and (ii) provide a safe harbor and 

presumption of compliance, respectively, 

with the repayment ability requirements of 

§ 1026.43(c) for creditors and assignees of 

covered transactions that satisfy the 

requirements of a qualified mortgage under 

§ 1026.43(e)(2), (e)(4), or (f). See 

§ 1026.43(e)(1)(i) and (ii) and associated 

commentary. 

43(e)(1)(i) Safe harbor for transactions that 

are not higher-priced covered transactions. 

1. Safe harbor. To qualify for the safe 

harbor in § 1026.43(e)(1)(i), a covered 

transaction must meet the requirements of a 

qualified mortgage under § 1026.43(e)(2), 

(e)(4), or (f) and must not be a higher-priced 

covered transaction, as defined in 

§ 1026.43(b)(4). For guidance on determining 

whether a loan is a higher-priced covered 

transaction, see comment 43(b)(4)–1. 

43(e)(1)(ii) Presumption of compliance for 

higher-priced covered transactions. 

1. General. Under § 1026.43(e)(1)(ii), a 

creditor or assignee of a qualified mortgage 

under § 1026.43(e)(2), (e)(4), or (f) that is a 

higher-priced covered transaction is 

presumed to comply with the repayment 

ability requirements of § 1026.43(c). To rebut 

the presumption, it must be proven that, 

despite meeting the standards for a qualified 

mortgage (including either the debt-toincome standard in § 1026.43(e)(2)(vi) or the 

standards of one of the entities specified in 

§ 1026.43(e)(4)(ii)), the creditor did not have 

a reasonable and good faith belief in the 

consumer’s repayment ability. Specifically, it 

must be proven that, at the time of 

consummation, based on the information 

available to the creditor, the consumer’s 

income, debt obligations, alimony, child 

support, and the consumer’s monthly 

payment (including mortgage-related 

obligations) on the covered transaction and 

on any simultaneous loans of which the 

creditor was aware at consummation would 

leave the consumer with insufficient residual 

income or assets other than the value of the 

dwelling (including any real property 

attached to the dwelling) that secures the 

loan with which to meet living expenses, 

including any recurring and material nondebt obligations of which the creditor was 

aware at the time of consummation, and that 

the creditor thereby did not make a 

reasonable and good faith determination of 

the consumer’s repayment ability. For 

example, a consumer may rebut the 

presumption with evidence demonstrating 

that the consumer’s residual income was 

insufficient to meet living expenses, such as 

food, clothing, gasoline, and health care, 

including the payment of recurring medical 

expenses of which the creditor was aware at 

the time of consummation, and after taking 

into account the consumer’s assets other than 

the value of the dwelling securing the loan, 

such as a savings account. In addition, the 

longer the period of time that the consumer 

has demonstrated actual ability to repay the 

loan by making timely payments, without 

modification or accommodation, after 

consummation or, for an adjustable-rate 

mortgage, after recast, the less likely the 

consumer will be able to rebut the 

presumption based on insufficient residual 

income and prove that, at the time the loan 

was made, the creditor failed to make a 

reasonable and good faith determination that 

the consumer had the reasonable ability to 

repay the loan. 

43(e)(2) Qualified mortgage defined— 

general. 

Paragraph 43(e)(2)(i). 

1. Regular periodic payments. Under 

§ 1026.43(e)(2)(i), a qualified mortgage must 

provide for regular periodic payments that 

may not result in an increase of the principal 

balance (negative amortization), deferral of 

principal repayment, or a balloon payment. 

Thus, the terms of the legal obligation must 

require the consumer to make payments of 

principal and interest, on a monthly or other 

periodic basis, that will fully repay the loan 

amount over the loan term. The periodic 

payments must be substantially equal except 

for the effect that any interest rate change 

after consummation has on the payment in 

the case of an adjustable-rate or step-rate 

mortgage. In addition, because 

§ 1026.43(e)(2)(i) requires that a qualified 

mortgage provide for regular periodic 

payments, a single-payment transaction may 

not be a qualified mortgage. 

2. Deferral of principal repayment. Under 

§ 1026.43(e)(2)(i)(B), a qualified mortgage’s 

regular periodic payments may not allow the 

consumer to defer repayment of principal, 

except as provided in § 1026.43(f). A loan 

allows the deferral of principal repayment if 

one or more of the periodic payments may be 

applied solely to accrued interest and not to 

loan principal. Deferred principal repayment 

also occurs if the payment is applied to both 

accrued interest and principal but the 

consumer is permitted to make periodic 

payments that are less than the amount that 

would be required under a payment schedule 

that has substantially equal payments that 

fully repay the loan amount over the loan 

term. Graduated payment mortgages, for 


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Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 6615 

example, allow deferral of principal 

repayment in this manner and therefore may 

not be qualified mortgages. 

Paragraph 43(e)(2)(ii). 

1. General. The 30-year term limitation in 

§ 1026.43(e)(2)(ii) is applied without regard 

to any interim period between consummation 

and the beginning of the first full unit period 

of the repayment schedule. For example, 

assume a covered transaction is 

consummated on March 20, 2014 and the due 

date of the first regular periodic payment is 

April 30, 2014. The beginning of the first full 

unit period of the repayment schedule is 

April 1, 2014 and the loan term therefore 

ends on April 1, 2044. The transaction would 

comply with the 30-year term limitation in 

§ 1026.43(e)(2)(ii). 

Paragraph 43(e)(2)(iv). 

1. Maximum interest rate during the first 

five years. For a qualified mortgage, the 

creditor must underwrite the loan using a 

periodic payment of principal and interest 

based on the maximum interest rate that may 

apply during the first five years after the date 

on which the first regular periodic payment 

will be due. Creditors must use the maximum 

rate that could apply at any time during the 

first five years after the date on which the 

first regular periodic payment will be due, 

regardless of whether the maximum rate is 

reached at the first or subsequent adjustment 

during the five year period. 

2. Fixed-rate mortgage. For a fixed-rate 

mortgage, creditors should use the interest 

rate in effect at consummation. ‘‘Fixed-rate 

mortgage’’ is defined in § 1026.18(s)(7)(iii). 

3. Interest rate adjustment caps. For an 

adjustable-rate mortgage, creditors should 

assume the interest rate increases after 

consummation as rapidly as possible, taking 

into account the terms of the legal obligation. 

That is, creditors should account for any 

periodic interest rate adjustment cap that 

may limit how quickly the interest rate can 

increase under the terms of the legal 

obligation. Where a range for the maximum 

interest rate during the first five years is 

provided, the highest rate in that range is the 

maximum interest rate for purposes of 

§ 1026.43(e)(2)(iv). Where the terms of the 

legal obligation are not based on an index 

plus margin or formula, the creditor must use 

the maximum interest rate that occurs during 

the first five years after the date on which the 

first regular periodic payment will be due. To 

illustrate: 

i. Adjustable-rate mortgage with discount 

for three years. Assume an adjustable-rate 

mortgage has an initial discounted rate of 5 

percent that is fixed for the first three years, 

measured from the first day of the first full 

calendar month following consummation, 

after which the rate will adjust annually 

based on a specified index plus a margin of 

3 percent. The index value in effect at 

consummation is 4.5 percent. The loan 

agreement provides for an annual interest 

rate adjustment cap of 2 percent, and a 

lifetime maximum interest rate of 12 percent. 

The first rate adjustment occurs on the due 

date of the 36th monthly payment; the rate 

can adjust to no more than 7 percent (5 

percent initial discounted rate plus 2 percent 

annual interest rate adjustment cap). The 

second rate adjustment occurs on the due 

date of the 48th monthly payment; the rate 

can adjust to no more than 9 percent (7 

percent rate plus 2 percent annual interest 

rate adjustment cap). The third rate 

adjustment occurs on the due date of the 60th 

monthly payment; the rate can adjust to no 

more than 11 percent (9 percent rate plus 2 

percent annual interest rate cap adjustment). 

The maximum interest rate during the first 

five years after the date on which the first 

regular periodic payment will be due is 11 

percent (the rate on the due date of the 60th 

monthly payment). For further discussion of 

how to determine whether a rate adjustment 

occurs during the first five years after the 

date on which the first regular periodic 

payment will be due, see comment 

43(e)(2)(iv)–7. 

ii. Adjustable-rate mortgage with discount 

for three years. Assume the same facts as in 

paragraph 3.i except that the lifetime 

maximum interest rate is 10 percent, which 

is less than the maximum interest rate in the 

first five years after the date on which the 

first regular periodic payment will be due of 

11 percent that would apply but for the 

lifetime maximum interest rate. The 

maximum interest rate during the first five 

years after the date on which the first regular 

periodic payment will be due is 10 percent. 

iii. Step-rate mortgage. Assume a step-rate 

mortgage with an interest rate fixed at 6.5 

percent for the first two years, measured from 

the first day of the first full calendar month 

following consummation, 7 percent for the 

next three years, and then 7.5 percent for the 

remainder of the loan term. The maximum 

interest rate during the first five years after 

the date on which the first regular periodic 

payment will be due is 7.5 percent. 

4. First five years after the date on which 

the first regular periodic payment will be 

due. Under § 1026.43(e)(2)(iv)(A), the 

creditor must underwrite the loan using the 

maximum interest rate that may apply during 

the first five years after the date on which the 

first regular periodic payment will be due. To 

illustrate, assume an adjustable-rate mortgage 

with an initial fixed interest rate of 5 percent 

for the first five years, measured from the 

first day of the first full calendar month 

following consummation, after which the 

interest rate will adjust annually to the 

specified index plus a margin of 6 percent, 

subject to a 2 percent annual interest rate 

adjustment cap. The index value in effect at 

consummation is 5.5 percent. The loan 

consummates on September 15, 2014, and 

the first monthly payment is due on 

November 1, 2014. The first rate adjustment 

to no more than 7 percent (5 percent plus 2 

percent annual interest rate adjustment cap) 

occurs on the due date of the 60th monthly 

payment, which is October 1, 2019, and 

therefore, the rate adjustment occurs during 

the first five years after the date on which the 

first regular periodic payment will be due. To 

meet the definition of qualified mortgage 

under § 1026.43(e)(2), the creditor must 

underwrite the loan using a monthly 

payment of principal and interest based on 

an interest rate of 7 percent. 

5. Loan amount. To meet the definition of 

qualified mortgage under § 1026.43(e)(2), a 

creditor must determine the periodic 

payment of principal and interest using the 

maximum interest rate permitted during the 

first five years after the date on which the 

first regular periodic payment will be due 

that repays either: 

i. The outstanding principal balance as of 

the earliest date the maximum interest rate 

during the first five years after the date on 

which the first regular periodic payment will 

be due can take effect under the terms of the 

legal obligation, over the remaining term of 

the loan. To illustrate, assume a loan in an 

amount of $200,000 has a 30-year loan term. 

The loan agreement provides for a 

discounted interest rate of 5 percent that is 

fixed for an initial period of three years, 

measured from the first day of the first full 

calendar month following consummation, 

after which the interest rate will adjust 

annually based on a specified index plus a 

margin of 3 percent, subject to a 2 percent 

annual interest rate adjustment cap and a 

lifetime maximum interest rate of 9 percent. 

The index value in effect at consummation 

equals 4.5 percent. Assuming the interest rate 

increases after consummation as quickly as 

possible, the rate adjustment to the lifetime 

maximum interest rate of 9 percent occurs on 

the due date of the 48th monthly payment. 

The outstanding principal balance on the 

loan at the end of the fourth year (after the 

48th monthly payment is credited) is 

$188,218. The creditor will meet the 

definition of qualified mortgage if it 

underwrites the covered transaction using 

the monthly payment of principal and 

interest of $1,564 to repay the outstanding 

principal balance of $188,218 over the 

remaining 26 years of the loan term (312 

months) using the maximum interest rate 

during the first five years of 9 percent; or 

ii. The loan amount, as that term is defined 

in § 1026.43(b)(5), over the entire loan term, 

as that term is defined in § 1026.43(b)(6). 

Using the same example above, the creditor 

will meet the definition of qualified mortgage 

if it underwrites the covered transaction 

using the monthly payment of principal and 

interest of $1,609 to repay the loan amount 

of $200,000 over the 30-year loan term using 

the maximum interest rate during the first 

five years of 9 percent. 

6. Mortgage-related obligations. Section 

1026.43(e)(2)(iv) requires creditors to take the 

consumer’s monthly payment for mortgagerelated obligations into account when 

underwriting the loan. For the meaning of the 

term ‘‘mortgage-related obligations,’’ see 

§ 1026.43(b)(8) and associated commentary. 

7. Examples. The following are examples 

of how to determine the periodic payment of 

principal and interest based on the maximum 

interest rate during the first five years after 

the date on which the first regular periodic 

payment will be due for purposes of meeting 

the definition of qualified mortgage under 

§ 1026.43(e) (all payment amounts shown are 

rounded, and all amounts are calculated 

using non-rounded values; all initial fixed 

interest rate periods are measured from the 

first day of the first full calendar month 

following consummation): 

i. Fixed-rate mortgage. A loan in an 

amount of $200,000 has a 30-year loan term 

and a fixed interest rate of 7 percent. The 

maximum interest rate during the first five 

years after the date on which the first regular 


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6616 Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 

periodic payment will be due for a fixed-rate 

mortgage is the interest rate in effect at 

consummation, which is 7 percent under this 

example. The monthly fully amortizing 

payment scheduled over the 30 years is 

$1,331. The creditor will meet the definition 

of qualified mortgage if it underwrites the 

loan using the fully amortizing payment of 

$1,331. 

ii. Adjustable-rate mortgage with discount 

for three years. A. A loan in an amount of 

$200,000 has a 30-year loan term. The loan 

agreement provides for a discounted interest 

rate of 5 percent that is fixed for an initial 

period of three years, after which the interest 

rate will adjust annually based on a specified 

index plus a margin of 3 percent, subject to 

a 2 percent annual interest rate adjustment 

cap and a lifetime maximum interest rate of 

9 percent. The index value in effect at 

consummation is 4.5 percent. The loan is 

consummated on March 15, 2014, and the 

first regular periodic payment is due May 1, 

2014. The loan agreement provides that the 

first rate adjustment occurs on April 1, 2017 

(the due date of the 36th monthly payment); 

the second rate adjustment occurs on April 

1, 2018 (the due date of the 48th monthly 

payment); and the third rate adjustment 

occurs on April 1, 2019 (the due date of the 

60th monthly payment). Under this example, 

the maximum interest rate during the first 

five years after the date on which the first 

regular periodic payment due is 9 percent 

(the lifetime interest rate cap), which applies 

beginning on April 1, 2018 (the due date of 

the 48th monthly payment). The outstanding 

principal balance at the end of the fourth 

year (after the 48th payment is credited) is 

$188,218. 

B. The transaction will meet the definition 

of a qualified mortgage if the creditor 

underwrites the loan using the monthly 

payment of principal and interest of $1,564 

to repay the outstanding principal balance at 

the end of the fourth year of $188,218 over 

the remaining 26 years of the loan term (312 

months), using the maximum interest rate 

during the first five years after the date on 

which the first regular periodic payment will 

be due of 9 percent. Alternatively, the 

transaction will meet the definition of a 

qualified mortgage if the creditor underwrites 

the loan using the monthly payment of 

principal and interest of $1,609 to repay the 

loan amount of $200,000 over the 30-year 

loan term, using the maximum interest rate 

during the first five years after the date on 

which the first regular periodic payment will 

be due of 9 percent. 

iii. Adjustable-rate mortgage with discount 

for five years. A. A loan in an amount of 

$200,000 has a 30-year loan term. The loan 

agreement provides for a discounted interest 

rate of 6 percent that is fixed for an initial 

period of five years, after which the interest 

rate will adjust annually based on a specified 

index plus a margin of 3 percent, subject to 

a 2 percent annual interest rate adjustment 

cap. The index value in effect at 

consummation is 4.5 percent. The loan 

consummates on March 15, 2014 and the first 

regular periodic payment is due May 1, 2014. 

Under the terms of the loan agreement, the 

first rate adjustment to no more than 8 

percent (6 percent plus 2 percent annual 

interest rate adjustment cap) is on April 1, 

2019 (the due date of the 60th monthly 

payment), which occurs less than five years 

after the date on which the first regular 

periodic payment will be due. Thus, the 

maximum interest rate under the terms of the 

loan during the first five years after the date 

on which the first regular periodic payment 

will be due is 8 percent. 

B. The transaction will meet the definition 

of a qualified mortgage if the creditor 

underwrites the loan using the monthly 

payment of principal and interest of $1,436 

to repay the outstanding principal balance at 

the end of the fifth year of $186,109 over the 

remaining 25 years of the loan term (300 

months), using the maximum interest rate 

during the first five years after the date on 

which the first regular periodic payment will 

be due of 8 percent. Alternatively, the 

transaction will meet the definition of a 

qualified mortgage if the creditor underwrites 

the loan using the monthly payment of 

principal and interest of $1,468 to repay the 

loan amount of $200,000 over the 30-year 

loan term, using the maximum interest rate 

during the first five years after the date on 

which the first regular periodic payment will 

be due of 8 percent. 

iv. Adjustable-rate mortgage with discount 

for seven years. A. A loan in an amount of 

$200,000 has a 30-year loan term. The loan 

agreement provides for a discounted interest 

rate of 6 percent that is fixed for an initial 

period of seven years, after which the interest 

rate will adjust annually based on a specified 

index plus a margin of 3 percent, subject to 

a 2 percent annual interest rate adjustment 

cap. The index value in effect at 

consummation is 4.5 percent. The loan is 

consummated on March 15, 2014, and the 

first regular periodic payment is due May 1, 

2014. Under the terms of the loan agreement, 

the first rate adjustment is on April 1, 2021 

(the due date of the 84th monthly payment), 

which occurs more than five years after the 

date on which the first regular periodic 

payment will be due. Thus, the maximum 

interest rate under the terms of the loan 

during the first five years after the date on 

which the first regular periodic payment will 

be due is 6 percent. 

B. The transaction will meet the definition 

of a qualified mortgage if the creditor 

underwrites the loan using the monthly 

payment of principal and interest of $1,199 

to repay the loan amount of $200,000 over 

the 30-year loan term using the maximum 

interest rate during the first five years after 

the date on which the first regular periodic 

payment will be due of 6 percent. 

iv. Step-rate mortgage. A. A loan in an 

amount of $200,000 has a 30-year loan term. 

The loan agreement provides that the interest 

rate is 6.5 percent for the first two years of 

the loan, 7 percent for the next three years, 

and then 7.5 percent for remainder of the 

loan term. The maximum interest rate during 

the first five years after the date on which the 

first regular periodic payment will be due is 

7.5 percent, which occurs on the due date of 

the 60th monthly payment. The outstanding 

principal balance at the end of the fifth year 

(after the 60th payment is credited) is 

$187,868. 

B. The transaction will meet the definition 

of a qualified mortgage if the creditor 

underwrites the loan using a monthly 

payment of principal and interest of $1,388 

to repay the outstanding principal balance of 

$187,868 over the remaining 25 years of the 

loan term (300 months), using the maximum 

interest rate during the first five years after 

the date on which the first regular periodic 

payment will be due of 7.5 percent. 

Alternatively, the transaction will meet the 

definition of a qualified mortgage if the 

creditor underwrites the loan using a 

monthly payment of principal and interest of 

$1,398 to repay $200,000 over the 30-year 

loan term using the maximum interest rate 

during the first five years after the date on 

which the first regular periodic payment will 

be due of 7.5 percent. 

Paragraph 43(e)(2)(v). 

1. General. For guidance on satisfying 

§ 1026.43(e)(2)(v), a creditor may rely on 

commentary to § 1026.43(c)(2)(i) and (vi), 

(c)(3), and (c)(4). 

2. Income or assets. Section 

1026.43(e)(2)(v)(A) requires creditors to 

consider and verify the consumer’s current or 

reasonably expected income or assets. For 

purposes of this requirement, the creditor 

must consider and verify, at a minimum, any 

income specified in appendix Q. A creditor 

may also consider and verify any other 

income in accordance with § 1026.43(c)(2)(i) 

and (c)(4); however, such income would not 

be included in the total monthly debt-toincome ratio determination required by 

§ 1026.43(e)(2)(vi). 

3. Debts. Section 1026.43(e)(2)(v)(B) 

requires creditors to consider and verify the 

consumer’s current debt obligations, 

alimony, and child support. For purposes of 

this requirement, the creditor must consider 

and verify, at a minimum, any debt or 

liability specified in appendix Q. A creditor 

may also consider and verify other debt in 

accordance with § 1026.43(c)(2)(vi) and 

(c)(3); however, such debt would not be 

included in the total monthly debt-to-income 

ratio determination required by 

§ 1026.43(e)(2)(vi). 

Paragraph 43(e)(2)(vi). 

1. Calculation of monthly payment on the 

covered transaction and simultaneous loans. 

As provided in appendix Q, for purposes of 

§ 1026.43(e)(2)(vi), creditors must include in 

the definition of ‘‘debt’’ a consumer’s 

monthly housing expense. This includes, for 

example, the consumer’s monthly payment 

on the covered transaction (including 

mortgage-related obligations) and on 

simultaneous loans. Accordingly, 

§ 1026.43(e)(2)(vi)(B) provides the method by 

which a creditor calculates the consumer’s 

monthly payment on the covered transaction 

and on any simultaneous loan that the 

creditor knows or has reason to know will be 

made. 

43(e)(3) Limits on points and fees for 

qualified mortgages. 

Paragraph 43(e)(3)(i). 

1. Total loan amount. The term ‘‘total loan 

amount’’ is defined in § 1026.32(b)(4)(i). For 

an explanation of how to calculate the ‘‘total 

loan amount’’ under § 1026.43(e)(3)(i), see 

comment 32(b)(4)(i)–1. 

2. Calculation of allowable points and fees. 

A creditor must determine which category 

the loan falls into based on the face amount 


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Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 6617 

of the note (the ‘‘loan amount’’ as defined in 

§ 1026.43(b)(5)). For categories with a 

percentage limit, the creditor must apply the 

allowable points and fees percentage to the 

‘‘total loan amount,’’ which may be different 

than the loan amount. A creditor must 

calculate the allowable amount of points and 

fees for a qualified mortgage as follows: 

i. First, the creditor must determine the 

‘‘tier’’ into which the loan falls based on the 

loan amount. The loan amount is the 

principal amount the consumer will borrow, 

as reflected in the promissory note or loan 

contract. See § 1026.43(b)(5). For example, if 

the loan amount is $55,000, the loan falls 

into the tier for loans greater than or equal 

to $20,000 but less than $60,000, to which a 

5 percent cap on points and fees applies. For 

tiers with a prescribed dollar limit on points 

and fees (e.g., for loans from $60,000 up to 

$100,000, the limit is $3,000), the creditor 

does not need to do any further calculations. 

ii. Second, for tiers with a percentage limit, 

the creditor must determine the total loan 

amount based on the calculation for the total 

loan amount under comment 32(b)(4)(i)–1. If 

the loan amount is $55,000, for example, the 

total loan amount may be a different amount, 

such as $52,000. 

iii. Third, the creditor must apply the 

percentage cap on points and fees to the total 

loan amount. For example, for a loan of 

$55,000 where the total loan amount is 

$52,000, the allowable points and fees are 5 

percent of $52,000, or $2,600. 

3. Sample determination of allowable 

points and fees. 

i. A covered transaction with a loan 

amount of $105,000 falls into the first points 

and fees tier, to which a points and fees cap 

of 3 percent of the total loan amount applies. 

See § 1026.43(e)(3)(i)(A). Therefore, if the 

calculation under comment 32(b)(4)(i)–1 

results in a total loan amount of $102,000, 

then the allowable total points and fees for 

this loan are 3 percent of $102,000, or $3,060. 

ii. A covered transaction with a loan 

amount of $75,000 falls into the second 

points and fees tier, to which a points and 

fees cap of $3,000 applies. See 

§ 1026.43(e)(3)(i)(B). The allowable total 

points and fees for this loan are $3,000, 

regardless of the total loan amount. 

iii. A covered transaction with a loan 

amount of $50,000 falls into the third points 

and fees tier, to which a points and fees cap 

of 5 percent of the total loan amount applies. 

See § 1026.43(e)(3)(i)(C). Therefore, if the 

calculation under comment 32(b)(4)(i)–1 

results in a total loan amount of $48,000, 

then the allowable total points and fees for 

this loan are 5 percent of $48,000, or $2,400. 

iv. A covered transaction with a loan 

amount of $15,000 falls into the fourth points 

and fees tier, to which a points and fees cap 

of $1,000 applies. See § 1026.43(e)(3)(i)(D). 

The allowable total points and fees for this 

loan are $1,000, regardless of the total loan 

amount. 

v. A covered transaction with a loan 

amount of $10,000 falls into the fifth points 

and fees tier, to which a points and fees cap 

of 8 percent of the total loan amount applies. 

See § 1026.43(e)(3)(i)(E). Therefore, if the 

calculation under comment 32(b)(4)(i)–1 

results in a total loan amount of $7,000, then 

the allowable total points and fees for this 

loan are 8 percent of $7,000, or $560. 

Paragraph 43(e)(3)(ii). 

1. Annual adjustment for inflation. The 

dollar amounts, including the loan amounts, 

in § 1026.43(e)(3)(i) will be adjusted annually 

on January 1 by the annual percentage 

change in the CPI–U that was in effect on the 

preceding June 1. The Bureau will publish 

adjustments after the June figures become 

available each year. 

43(e)(4) Qualified mortgage defined— 

special rules. 

1. Alternative definition. Subject to the 

sunset provided under § 1026.43(e)(4)(iii), 

§ 1026.43(e)(4) provides an alternative 

definition of qualified mortgage to the 

definition provided in § 1026.43(e)(2). To be 

a qualified mortgage under § 1026.43(e)(4), 

the creditor must satisfy the requirements 

under § 1026.43(e)(2)(i) through (iii), in 

addition to being one of the types of loans 

specified in § 1026.43(e)(4)(ii)(A) through (E). 

2. Termination of conservatorship. Section 

1026.43(e)(4)(ii)(A) requires that a covered 

transaction be eligible for purchase or 

guarantee by the Federal National Mortgage 

Association (‘‘Fannie Mae’’) or the Federal 

Home Loan Mortgage Corporation (‘‘Freddie 

Mac’’) (or any limited-life regulatory entity 

succeeding the charter of either) 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). The 

special rule under § 1026.43(e)(4)(ii)(A) does 

not apply if Fannie Mae or Freddie Mac (or 

any limited-life regulatory entity succeeding 

the charter of either) has ceased operating 

under the conservatorship or receivership of 

the Federal Housing Finance Agency. For 

example, if either Fannie Mae or Freddie Mac 

(or succeeding limited-life regulatory entity) 

ceases to operate under the conservatorship 

or receivership of the Federal Housing 

Finance Agency, § 1026.43(e)(4)(ii)(A) would 

no longer apply to loans eligible for purchase 

or guarantee by that entity; however, the 

special rule would be available for a loan that 

is eligible for purchase or guarantee by the 

other entity still operating under 

conservatorship or receivership. 

3. Timing. Under § 1026.43(e)(4)(iii), the 

definition of qualified mortgage under 

paragraph (e)(4) applies only to loans 

consummated on or before January 10, 2021, 

regardless of whether Fannie Mae or Freddie 

Mac (or any limited-life regulatory entity 

succeeding the charter of either) continues to 

operate under the conservatorship or 

receivership of the Federal Housing Finance 

Agency. Accordingly, § 1026.43(e)(4) is 

available only for covered transactions 

consummated on or before the earlier of 

either: 

i. The date Fannie Mae or Freddie Mac (or 

any limited-life regulatory entity succeeding 

the charter of either), respectively, cease to 

operate 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); 

or 

ii. January 10, 2021, as provided by 

§ 1026.43(e)(4)(iii). 

4. Eligible for purchase, guarantee, or 

insurance. To satisfy § 1026.43(e)(4)(ii), a 

loan need not be actually purchased or 

guaranteed by Fannie Mae or Freddie Mac or 

insured or guaranteed by the U.S. 

Department of Housing and Urban 

Development, U.S. Department of Veterans 

Affairs, U.S. Department of Agriculture, or 

Rural Housing Service. Rather, 

§ 1026.43(e)(4)(ii) requires only that the loan 

be eligible (i.e., meet the criteria) for such 

purchase, guarantee, or insurance. For 

example, for purposes of § 1026.43(e)(4), a 

creditor is not required to sell a loan to 

Fannie Mae or Freddie Mac (or any limitedlife regulatory entity succeeding the charter 

of either) to be a qualified mortgage; 

however, the loan must be eligible for 

purchase or guarantee by Fannie Mae or 

Freddie Mac (or any limited-life regulatory 

entity succeeding the charter of either), 

including satisfying any requirements 

regarding consideration and verification of a 

consumer’s income or assets, credit history, 

and debt-to-income ratio or residual income. 

To determine eligibility, a creditor may rely 

on an underwriting recommendation 

provided by Fannie Mae or Freddie Mac’s 

Automated Underwriting Systems (AUSs) or 

written guide in effect at the time. 

Accordingly, a covered transaction is eligible 

for purchase or guarantee by Fannie Mae or 

Freddie Mac if: 

i. The loan conforms to the standards set 

forth in the Fannie Mae Single-Family 

Selling Guide or the Freddie Mac SingleFamily Seller/Servicer Guide; or 

ii. The loan receives one of the following 

recommendations from the corresponding 

automated underwriting system: 

A. An ‘‘Approve/Eligible’’ 

recommendation from Desktop Underwriter 

(DU); or 

B. An ‘‘Accept and Eligible to Purchase’’ 

recommendation from Loan Prospector (LP). 

43(f) Balloon-Payment qualified mortgages 

made by certain creditors. 

43(f)(1) Exemption. 

Paragraph 43(f)(1)(i). 

1. Satisfaction of qualified mortgage 

requirements. Under § 1026.43(f)(1)(i), for a 

mortgage that provides for a balloon payment 

to be a qualified mortgage, the mortgage must 

satisfy the requirements for a qualified 

mortgage in paragraphs (e)(2)(i)(A), (e)(2)(ii), 

(iii), and (v). Therefore, a covered transaction 

with balloon payment terms must provide for 

regular periodic payments that do not result 

in an increase of the principal balance, 

pursuant to § 1026.43(e)(2)(i)(A); must have a 

loan term that does not exceed 30 years, 

pursuant to § 1026.43(e)(2)(ii); must have 

total points and fees that do not exceed 

specified thresholds pursuant to 

§ 1026.43(e)(2)(iii); and must satisfy the 

consideration and verification requirements 

in § 1026.43(e)(2)(v). 

Paragraph 43(f)(1)(ii). 

1. Example. Under § 1026.43(f)(1)(ii), if a 

qualified mortgage provides for a balloon 

payment, the creditor must determine that 

the consumer is able to make all scheduled 

payments under the legal obligation other 

than the balloon payment. For example, 

assume a loan in an amount of $200,000 that 

has a five-year loan term, but is amortized 


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6618 Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 

over 30 years. The loan agreement provides 

for a fixed interest rate of 6 percent. The loan 

consummates on March 3, 2014, and the 

monthly payment of principal and interest 

scheduled for the first five years is $1,199, 

with the first monthly payment due on April 

1, 2014. The balloon payment of $187,308 is 

required on the due date of the 60th monthly 

payment, which is April 1, 2019. The loan 

can be a qualified mortgage if the creditor 

underwrites the loan using the scheduled 

principal and interest payment of $1,199, 

plus the consumer’s monthly payment for all 

mortgage-related obligations, and satisfies the 

other criteria set forth in § 1026.43(f). 

2. Creditor’s determination. A creditor 

must determine that the consumer is able to 

make all scheduled payments other than the 

balloon payment to satisfy § 1026.43(f)(1)(ii), 

in accordance with the legal obligation, 

together with the consumer’s monthly 

payments for all mortgage-related obligations 

and excluding the balloon payment, to meet 

the repayment ability requirements of 

§ 1026.43(f)(1)(ii). A creditor satisfies 

§ 1026.43(f)(1)(ii) if it uses the maximum 

payment in the payment schedule, excluding 

any balloon payment, to determine if the 

consumer has the ability to make the 

scheduled payments. 

Paragraph 43(f)(1)(iii). 

1. Debt-to-income or residual income. A 

creditor must consider and verify the 

consumer’s monthly debt-to-income ratio or 

residual income to meet the requirements of 

§ 1026.43(f)(1)(iii). To calculate the 

consumer’s monthly debt-to-income or 

residual income for purposes of 

§ 1026.43(f)(1)(iii), the creditor may rely on 

the definitions and calculation rules in 

§ 1026.43(c)(7) and its accompanying 

commentary, except for the calculation rules 

for a consumer’s total monthly debt 

obligations (which is a component of debt-toincome and residual income under 

§ 1026.43(c)(7)). For purposes of calculating 

the consumer’s total monthly debt 

obligations under § 1026.43(f)(1)(iii), the 

creditor must calculate the monthly payment 

on the covered transaction using the payment 

calculation rules in § 1026.43(f)(1)(iv)(A), 

together with all mortgage-related obligations 

and excluding the balloon payment. 

Paragraph 43(f)(1)(iv). 

1. Scheduled payments. Under 

§ 1026.43(f)(1)(iv)(A), the legal obligation 

must provide that scheduled payments must 

be substantially equal and determined using 

an amortization period that does not exceed 

30 years. Balloon payments often result when 

the periodic payment would fully repay the 

loan amount only if made over some period 

that is longer than the loan term. For 

example, a loan term of 10 years with 

periodic payments based on an amortization 

period of 20 years would result in a balloon 

payment being due at the end of the loan 

term. Whatever the loan term, the 

amortization period used to determine the 

scheduled periodic payments that the 

consumer must pay under the terms of the 

legal obligation may not exceed 30 years. 

2. Substantially equal. The calculation of 

payments scheduled by the legal obligation 

under § 1026.43(f)(1)(iv)(A) are required to 

result in substantially equal amounts. This 

means that the scheduled payments need to 

be similar, but need not be equal. For further 

guidance on substantially equal payments, 

see comment 43(c)(5)(i)–4. 

3. Interest-only payments. A mortgage that 

only requires the payment of accrued interest 

each month does not meet the requirements 

of § 1026.43(f)(1)(iv)(A). 

Paragraph 43(f)(1)(v). 

1. Forward commitments. A creditor may 

make a mortgage loan that will be transferred 

or sold to a purchaser pursuant to an 

agreement that has been entered into at or 

before the time the transaction is 

consummated. Such an agreement is 

sometimes known as a ‘‘forward 

commitment.’’ A balloon-payment mortgage 

that will be acquired by a purchaser pursuant 

to a forward commitment does not satisfy the 

requirements of § 1026.43(f)(1)(v), 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 purchase and 

sale of a balloon-payment qualified mortgage 

to another person that separately meets the 

requirements of § 1026.43(f)(1)(vi) is 

permitted. For example: assume a creditor 

that meets the requirements of 

§ 1026.43(f)(1)(vi) makes a balloon-payment 

mortgage that meets the requirements of 

§ 1026.43(f)(1)(i) through (iv); if the balloonpayment mortgage meets the purchase 

criteria of an investor with which the creditor 

has an agreement to sell such loans after 

consummation, then the balloon-payment 

mortgage does not meet the definition of a 

qualified mortgage in accordance with 

§ 1026.43(f)(1)(v). However, if the investor 

meets the requirement of § 1026.43(f)(1)(vi), 

the balloon-payment qualified mortgage 

retains its qualified mortgage status. 

Paragraph 43(f)(1)(vi). 

1. Creditor qualifications. Under 

§ 1026.43(f)(1)(vi), to make a qualified 

mortgage that provides for a balloon 

payment, the creditor must satisfy three 

criteria that are also required under 

§ 1026.35(b)(2)(iii)(A), (B) and (C), which 

require: 

i. During the preceding calendar year, the 

creditor extended over 50 percent of its total 

first-lien covered transactions, as defined in 

§ 1026.43(b)(1), on properties that are located 

in counties that are designated either ‘‘rural’’ 

or ‘‘underserved,’’ as defined in 

§ 1026.35(b)(2)(iv), to satisfy the requirement 

of § 1026.35(b)(2)(iii)(A). Pursuant to 

§ 1026.35(b)(2)(iv), a county is considered to 

be rural if it is neither in 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 considered to be underserved if no more 

than two creditors extend covered 

transactions secured by a first lien five or 

more times in that county during a calendar 

year. The Bureau determines annually which 

counties in the United States are rural or 

underserved and publishes on its public Web 

site lists of those counties to enable creditors 

to determine whether they meet this 

criterion. Thus, for example, if a creditor 

originated 90 first-lien covered transactions 

during 2013, the creditor meets this element 

of the exception in 2014 if at least 46 of those 

transactions are secured by first liens on 

properties located in one or more counties 

that are on the Bureau’s lists for 2013. 

ii. During the preceding calendar year, the 

creditor together with its affiliates originated 

500 or fewer first-lien covered transactions, 

as defined by § 1026.43(b)(1), to satisfy the 

requirement of § 1026.35(b)(2)(iii)(B). 

iii. As of the end of the preceding calendar 

year, the creditor had total assets that do not 

exceed the current asset threshold 

established by the Bureau, to satisfy the 

requirement of § 1026.35(b)(2)(iii)(C). For 

calendar year 2013, the asset threshold was 

$2,000,000,000. 

43(f)(2) Post-consummation transfer of 

balloon-payment qualified mortgage. 

1. Requirement to hold in portfolio. 

Creditors generally must hold a balloonpayment qualified mortgage in portfolio to 

maintain the transaction’s status as a 

qualified mortgage under § 1026.43(f)(1), 

subject to four exceptions. Unless one of 

these exceptions applies, a balloon-payment 

qualified mortgage is no longer a qualified 

mortgage under § 1026.43(f)(1) once legal title 

to the debt obligation is sold, assigned, or 

otherwise transferred to another person. 

Accordingly, unless one of the exceptions 

applies, the transferee could not benefit from 

the presumption of compliance for qualified 

mortgages under § 1026.43(f)(1) unless the 

loan also met the requirements of another 

qualified mortgage definition. 

2. Application to subsequent transferees. 

The exceptions contained in § 1026.43(f)(2) 

apply not only to an initial sale, assignment, 

or other transfer by the originating creditor 

but to subsequent sales, assignments, and 

other transfers as well. For example, assume 

Creditor A originates a qualified mortgage 

under § 1026.43(f)(1). Six months after 

consummation, Creditor A sells the qualified 

mortgage to Creditor B pursuant to 

§ 1026.43(f)(2)(ii) and the loan retains its 

qualified mortgage status because Creditor B 

complies with the limits on operating 

predominantly in rural or underserved areas, 

asset size, and number of transactions. If 

Creditor B sells the qualified mortgage, it will 

lose its qualified mortgage status under 

§ 1026.43(f)(1) unless the sale qualifies for 

one of the § 1026.43(f)(2) 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. 

Paragraph 43(f)(2)(i). 

1. Transfer three years after 

consummation. Under § 1026.43(f)(2)(i), if a 

balloon-payment qualified mortgage under 

§ 1026.43(f)(1) is sold, assigned, or otherwise 

transferred three years or more after 

consummation, the balloon-payment 

qualified mortgage retains its status as a 

qualified mortgage under § 1026.43(f)(1) 

following the sale. The transferee need not be 

eligible to originate qualified mortgages 

under § 1026.43(f)(1)(vi). The balloonpayment qualified mortgage will continue to 

be a qualified mortgage throughout its life, 

and the transferee, and any subsequent 

transferees, may invoke the presumption of 

compliance for qualified mortgages under 

§ 1026.43(f)(1). 


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Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 6619 

Paragraph 43(f)(2)(ii). 

1. Transfer to another qualifying creditor. 

Under § 1026.43(f)(2)(ii), a balloon-payment 

qualified mortgage under § 1026.43(f)(1) may 

be sold, assigned, or otherwise transferred at 

any time to another creditor that meets the 

requirements of § 1026.43(f)(1)(vi). That 

section requires that a creditor: (1) Operate 

predominantly in a rural or underserved area 

during the preceding calendar year; (2) 

during the preceding calendar year, together 

with all affiliates, originated 500 or fewer 

first-lien covered transactions; and (3) had 

total assets less than $2 billion (as adjusted 

for inflation) at the end of the preceding 

calendar year. A balloon-payment qualified 

mortgage under § 1026.43(f)(1) 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. 

Paragraph 43(f)(2)(iii). 

1. Supervisory sales. Section 

1026.43(f)(2)(iii) facilitates sales that are 

deemed necessary by supervisory agencies to 

revive troubled creditors and resolve failed 

creditors. A balloon-payment qualified 

mortgage under § 1026.43(f)(1) retains its 

qualified mortgage status if it is sold, 

assigned, or otherwise transferred to another 

person pursuant to: (1) A capital restoration 

plan or other action under 12 U.S.C. 1831o; 

(2) the actions or instructions of any person 

acting as conservator, receiver, or bankruptcy 

trustee; (3) an order of a State or Federal 

government agency with jurisdiction to 

examine the creditor pursuant to State or 

Federal law; or (4) an agreement between the 

creditor and such an agency. A balloonpayment qualified mortgage under 

§ 1026.43(f)(1) 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(f)(2)(iii) does not apply to 

transfers done to comply with a generally 

applicable regulation with future effect 

designed to implement, interpret, or 

prescribe law or policy in the absence of a 

specific order by or a specific agreement with 

a governmental agency described in 

§ 1026.43(f)(2)(iii) directing the sale of one or 

more qualified mortgages under 

§ 1026.43(f)(1) held by the creditor or one of 

the other circumstances listed in 

§ 1026.43(f)(2)(iii). For example, a balloonpayment qualified mortgage under 

§ 1026.43(f)(1) 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. 

Paragraph 43(f)(2)(iv). 

1. Mergers and acquisitions. A qualified 

mortgage under § 1026.43(f)(1) retains its 

qualified mortgage status if a creditor merges 

with, is acquired by another person, or 

acquires another person regardless of 

whether the creditor or its successor is 

eligible to originate new balloon-payment 

qualified mortgages under § 1026.43(f)(1) 

after the merger or acquisition. However, the 

creditor or its successor can originate new 

balloon-payment qualified mortgages under 

§ 1026.43(f)(1) only if it complies with all of 

the requirements of § 1026.43(f)(1) after the 

merger or acquisition. For example, assume 

a small creditor that originates 250 first-lien 

covered transactions each year and originates 

balloon-payment qualified mortgages under 

§ 1026.43(f)(1) is acquired by a larger creditor 

that originates 10,000 first-lien covered 

transactions each year. Following the 

acquisition, the small creditor would no 

longer be able to originate balloon-payment 

qualified mortgages because, together with its 

affiliates, it would originate more than 500 

first-lien covered transactions each year. 

However, the balloon-payment qualified 

mortgages originated by the small creditor 

before the acquisition would retain their 

qualified mortgage status. 

43(g) Prepayment penalties. 

43(g)(2) Limits on prepayment penalties. 

1. Maximum period and amount. Section 

1026.43(g)(2) establishes the maximum 

period during which a prepayment penalty 

may be imposed and the maximum amount 

of the prepayment penalty. A covered 

transaction may include a prepayment 

penalty that may be imposed during a shorter 

period or in a lower amount than provided 

under § 1026.43(g)(2). For example, a covered 

transaction may include a prepayment 

penalty that may be imposed for two years 

after consummation and that equals 1 percent 

of the amount prepaid in each of those two 

years. 

43(g)(3) Alternative offer required. 

Paragraph 43(g)(3)(i). 

1. Same type of interest rate. Under 

§ 1026.43(g)(3)(i), if a creditor offers a 

consumer a covered transaction with a 

prepayment penalty, the creditor must offer 

the consumer an alternative covered 

transaction without a prepayment penalty 

and with an annual percentage rate that 

cannot increase after consummation. Under 

§ 1026.43(g)(3)(i), if the covered transaction 

with a prepayment penalty is a fixed-rate 

mortgage, as defined in § 1026.18(s)(7)(iii), 

then the alternative covered transaction 

without a prepayment penalty must also be 

a fixed-rate mortgage. Likewise, if the 

covered transaction with a prepayment 

penalty is a step-rate mortgage, as defined in 

§ 1026.18(s)(7)(ii), then the alternative 

covered transaction without a prepayment 

penalty must also be a step-rate mortgage. 

Paragraph 43(g)(3)(iv). 

1. Points and fees. Whether or not an 

alternative covered transaction without a 

prepayment penalty satisfies the points and 

fees conditions for a qualified mortgage is 

determined based on the information known 

to the creditor at the time the creditor offers 

the consumer the transaction. At the time a 

creditor offers a consumer an alternative 

covered transaction without a prepayment 

penalty under § 1026.43(g)(3), the creditor 

may know the amount of some, but not all, 

of the points and fees that will be charged for 

the transaction. For example, a creditor may 

not know that a consumer intends to buy 

single-premium credit unemployment 

insurance, which would be included in the 

points and fees for the covered transaction. 

The points and fees condition under 

§ 1026.43(g)(3)(iv) is satisfied if a creditor 

reasonably believes, based on information 

known to the creditor at the time the offer is 

made, that the amount of points and fees to 

be charged for an alternative covered 

transaction without a prepayment penalty 

will be less than or equal to the amount of 

points and fees allowed for a qualified 

mortgage under § 1026.43(e)(2)(iii). 

Paragraph 43(g)(3)(v). 

1. Transactions for which the consumer 

likely qualifies. Under § 1026.43(g)(3)(v), the 

alternative covered transaction without a 

prepayment penalty the creditor must offer 

under § 1026.43(g)(3) must be a transaction 

for which the creditor has a good faith belief 

the consumer likely qualifies. For example, 

assume the creditor has a good faith belief 

the consumer can afford monthly payments 

of up to $800. If the creditor offers the 

consumer a fixed-rate mortgage with a 

prepayment penalty for which monthly 

payments are $700 and an alternative 

covered transaction without a prepayment 

penalty for which monthly payments are 

$900, the requirements of § 1026.43(g)(3)(v) 

are not met. The creditor’s belief that the 

consumer likely qualifies for the covered 

transaction without a prepayment penalty 

should be based on the information known 

to the creditor at the time the creditor offers 

the transaction. In making this 

determination, the creditor may rely on 

information provided by the consumer, even 

if the information subsequently is 

determined to be inaccurate. 

43(g)(4) Offer through a mortgage broker. 

1. Rate sheet. Under § 1026.43(g)(4), where 

the creditor offers covered transactions with 

a prepayment penalty to consumers through 

a mortgage broker, as defined in 

§ 1026.36(a)(2), the creditor must present the 

mortgage broker an alternative covered 

transaction that satisfies the requirements of 

§ 1026.43(g)(3). Creditors may comply with 

this requirement by providing a rate sheet to 

the mortgage broker that states the terms of 

such an alternative covered transaction 

without a prepayment penalty. 

2. Alternative to creditor’s offer. Section 

1026.43(g)(4)(ii) requires that the creditor 

provide, by agreement, for the mortgage 

broker to present the consumer an alternative 

covered transaction that satisfies the 

requirements of § 1026.43(g)(3) offered by 

either the creditor or by another creditor, if 

the other creditor offers a covered transaction 

with a lower interest rate or a lower total 

dollar amount of discount points and 

origination points or fees. The agreement 

may provide for the mortgage broker to 

present both the creditor’s covered 

transaction and an alternative covered 

transaction offered by another creditor with 

a lower interest rate or a lower total dollar 

amount of origination discount points and 

points or fees. See comment 36(e)(3)–3 for 

guidance in determining which step-rate 

mortgage has a lower interest rate. 

3. Agreement. The creditor’s agreement 

with a mortgage broker for purposes of 


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6620 Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Rules and Regulations 

§ 1026.43(g)(4) may be part of another 

agreement with the mortgage broker, for 

example, a compensation agreement. Thus, 

the creditor need not enter into a separate 

agreement with the mortgage broker with 

respect to each covered transaction with a 

prepayment penalty. 

43(g)(5) Creditor that is a loan originator. 

1. Loan originator. The definition of ‘‘loan 

originator’’ in § 1026.36(a)(1) applies for 

purposes of § 1026.43(g)(5). Thus, a loan 

originator includes any creditor that satisfies 

the definition of loan originator but makes 

use of ‘‘table-funding’’ by a third party. See 

comment 36(a)–1.i and ii. 

2. Lower interest rate. Under 

§ 1026.43(g)(5), a creditor that is a loan 

originator must present an alternative 

covered transaction without a prepayment 

penalty that satisfies the requirements of 

§ 1026.43(g)(3) offered by either the assignee 

for the covered transaction or another person, 

if that other person offers a transaction with 

a lower interest rate or a lower total dollar 

amount of origination points or fees or 

discount points. See comment 36(e)(3)–3 for 

guidance in determining which step-rate 

mortgage has a lower interest rate. 

43(h) Evasion; open-end credit. 

1. Subject to closed-end credit rules. Where 

a creditor documents a loan as open-end 

credit but the features and terms, or other 

circumstances, demonstrate that the loan 

does not meet the definition of open-end 

credit in § 1026.2(a)(20), the loan is subject 

to the rules for closed-end credit, including 

§ 1026.43. 

Dated: January 10, 2013. 

Richard Cordray, 

Director, Bureau of Consumer Financial 

Protection. 

[FR Doc. 2013–00736 Filed 1–16–13; 11:15 am] 

BILLING CODE 4810–AM–P 


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