```

[Federal Register Volume 78, Number 100 (Thursday, May 23, 2013)]
[Rules and Regulations]
[Pages 30739-30747]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-12125]

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BUREAU OF CONSUMER FINANCIAL PROTECTION

12 CFR Part 1026

[Docket No. CFPB-2013-0009]
RIN 3170-AA37

Amendments to the 2013 Escrows Final Rule under the Truth in 
Lending Act (Regulation Z)

AGENCY: Bureau of Consumer Financial Protection.

ACTION: Final rule; official interpretations.

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SUMMARY: The Bureau of Consumer Financial Protection (Bureau) is 
issuing clarifying and technical amendments to a final rule issued by 
the Bureau on January 10, 2013, which, among other things, lengthens 
the time for which a mandatory escrow account established for a higher-
priced mortgage loan (HPML) must be maintained. The rule also 
established an exemption from the escrow requirement for certain 
creditors that operate predominantly in ``rural'' or ``underserved'' 
areas. The amendments clarify the determination method for the 
``rural'' and ``underserved'' designations and keep in place certain 
existing protections for HPMLs until other similar provisions take 
effect in January 2014.

DATES: This rule is effective on June 1, 2013, except for the addition 
of Sec.  1026.35(e), which will be effective from June 1, 2013 through 
January 9, 2014.

FOR FURTHER INFORMATION CONTACT: Whitney Patross, Attorney; Joseph 
Devlin and Richard Arculin, Counsels; Office of Regulations, at (202) 
435-7700.

SUPPLEMENTARY INFORMATION: 

I. Summary of Final Rule

    In January 2013, the Bureau issued several final rules concerning 
mortgage markets in the United States pursuant to the Dodd-Frank Wall 
Street Reform and Consumer Protection Act (Dodd-Frank Act), Public Law 
111-203, 124 Stat. 1376 (2010) (2013 Title XIV Final Rules). One of 
these rules was Escrow Requirements Under the Truth in Lending Act 
(Regulation Z) (2013 Escrows Final Rule),\1\ issued on January 10.\2\ 
The rule expanded on an existing Regulation Z requirement that 
creditors maintain escrow accounts for HPMLs \3\ and created an 
exemption for certain loans made by certain creditors that operate 
predominantly in ``rural'' or ``underserved'' areas. Three other of the 
2013 Title XIV Final Rules also contain provisions affecting certain 
loans made in ``rural'' or ``underserved'' areas.
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    \1\ 78 FR 4726 (Jan. 22, 2013).
    \2\ The other rules include: Ability-to-Repay and Qualified 
Mortgage Standards under the Truth in Lending Act (Regulation Z) 
(2013 ATR Final Rule), 78 FR 6407 (Jan. 30, 2013); High-Cost 
Mortgages and Homeownership Counseling Amendments to the Truth in 
Lending Act (Regulation Z) and Homeownership Counseling Amendments 
to the Real Estate Settlement Procedures Act (Regulation X) (2013 
HOEPA Final Rule), 78 FR 6855 (Jan. 31, 2013); Disclosure and 
Delivery Requirements for Copies of Appraisals and Other Written 
Valuations under the Equal Credit Opportunity Act (Regulation B) 
(2013 ECOA Appraisals Final Rule), 78 FR 7215 (Jan. 31, 2013); 
Mortgage Servicing Rules Under the Real Estate Settlement Procedures 
Act (Regulation X) (2013 RESPA Servicing Final Rule), 78 FR 10695 
(Feb. 14, 2013); Mortgage Servicing Rules Under the Truth in Lending 
Act (Regulation Z) (2013 TILA Servicing Final Rule), 78 FR 10901 
(Feb. 14, 2013); Appraisals for Higher-Priced Mortgage Loans (issued 
jointly with other agencies) (2013 Interagency Appraisals Final 
Rule), 78 FR 10367 (Feb. 13, 2013); and Loan Originator Compensation 
Requirements under the Truth in Lending Act (Regulation Z) (2013 
Loan Originator Final Rule), 78 FR 11279 (Feb. 15, 2013). On the 
same day that the Bureau issued the 2013 ATR Final Rule, it also 
issued a proposal to amend some aspects of it (2013 ATR Concurrent 
Proposal), 78 FR 6621 (Jan. 30, 2013).
    \3\ The Bureau has received questions regarding the timing of 
the establishment of escrow accounts under Sec.  1026.35. The Bureau 
understands that escrow accounts are arranged before consummation of 
a loan, and funded at consummation. Such procedures are in 
compliance with the regulation. In addition, the Bureau has received 
questions about loan modifications and would like to point out that 
the escrow requirement for HPMLs does not apply to modifications to 
existing loans, only refinances. For guidance on which changes to 
existing loans will be treated as refinances under Regulation Z, see 
12 CFR 1026.20(a) and associated commentary.
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    This final rule now makes certain clarifying and technical 
amendments to the provisions adopted in the 2013 Escrows Final Rule, 
including clarification of how to determine whether a county is 
considered ``rural'' or ``underserved'' for the application of the 
escrows requirement and the other Dodd-Frank Act regulations.\4\ 
Specifically, the Bureau is clarifying how a county's ``rural'' and 
``underserved'' status may be determined based on currently applicable 
Urban Influence Codes (UICs) established by the United States 
Department of Agriculture, Economic Research Service (USDA-ERS) (for 
``rural'') or based on Home Mortgage Disclosure Act (HMDA) data (for

[[Page 30740]]

``underserved'') and providing illustrations of the rule to facilitate 
compliance.
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    \4\ The specific provisions that rely on the ``rural'' and 
``underserved'' definitions are as follows: (1) the Sec.  
1026.35(b)(2)(iii) exemption to the 2013 Escrows Final Rule's escrow 
requirement for higher-priced mortgage loans; (2) the Sec.  
1026.43(f) allowance for balloon-payment qualified mortgages; (3) 
the Sec.  1026.32(d)(1)(ii)(C) exemption from the balloon-payment 
prohibition on high-cost mortgages for balloon-payment qualified 
mortgages; and (4) the Sec.  1026.35(c)(4)(vii)(H) exemption from 
the Sec.  1026.35(c)(4)(i) HPML second appraisal requirement for 
credit transactions used to acquire property located in a rural 
county.
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    In association with the issuance of this final rule providing 
clarifying amendments to the 2013 Escrows Final Rule, the Bureau is 
posting on its public Web site a final list of rural and underserved 
counties, for use with mortgages consummated from June 1, 2013, through 
December 31, 2013. The final list is identical to the preliminary list 
posted on the Bureau's public Web site on March 12, 2013. The Bureau 
will post the list for use in 2014 when the relevant data become 
available.
    In addition, the final rule restores certain existing Regulation Z 
requirements related to the consumer's ability to repay and prepayment 
penalties for HPMLs. The scope of these protections is being expanded 
under the Dodd-Frank Act through the 2013 Title XIV Final Rules to 
apply to most mortgage transactions, rather than just HPMLs. For this 
reason, the 2013 Escrows Final Rule removed the regulatory text 
providing these protections solely to HPMLs. That final rule, however, 
takes effect on June 1, 2013, whereas the new ability-to-repay and 
prepayment penalty provisions do not take effect until January 10, 
2014. To prevent any interruption in applicable protections, this final 
rule establishes a temporary provision to ensure the protections remain 
in place for HPMLs until the expanded provisions take effect in January 
2014.
    In addition, the Bureau is making some technical corrections to 
enhance clarity.

II. Background

A. Title XIV Rulemakings under the Dodd-Frank Act and the 2013 Escrows 
Final Rule

    In response to an unprecedented cycle of expansion and contraction 
in the mortgage market that sparked the most severe U.S. recession 
since the Great Depression, Congress passed the Dodd-Frank Act, which 
was signed into law on July 21, 2010. In the Dodd-Frank Act, Congress 
established the Bureau and, under sections 1061 and 1100A, generally 
consolidated the rulemaking authority for Federal consumer financial 
laws, including the Truth in Lending Act (TILA), in the Bureau.\5\ At 
the same time, Congress significantly amended the statutory 
requirements governing mortgages with the intent to restrict the 
practices that contributed to and exacerbated the crisis. In January 
2013, the Bureau issued the 2013 Title XIV Final Rules as described 
above. The 2013 Escrows Final Rule,\6\ issued on January 10, was one of 
these rules. Among the other 2013 Title XIV Final Rules issued in 
January were the 2013 ATR Final Rule, 2013 HOEPA Final Rule, and 2013 
Interagency Appraisals Final Rule.
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    \5\ Sections 1011 and 1021 of the Dodd-Frank Act, in title X, 
the ``Consumer Financial Protection Act,'' Public Law 111-203, 
sections 1001-1100H, codified at 12 U.S.C. 5491 and 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.
    \6\ 78 FR 4726 (Jan. 22, 2013).
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B. Implementation Plan for New Mortgage Rules

    On February 13, 2013, the Bureau announced an initiative to support 
implementation of the new mortgage rules (Implementation Plan),\7\ 
under which the Bureau would work with the mortgage industry to ensure 
that the 2013 Title XIV Final Rules could be implemented accurately and 
expeditiously. The Implementation Plan included: (1) Coordination with 
other agencies; (2) publication of plain-language guides to the new 
rules; (3) publication of additional interpretive guidance and other 
updates regarding the new rules as needed; (4) publication of readiness 
guides for the new rules; and (5) education of consumers on the new 
rules.
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    \7\ Consumer Financial Protection Bureau Lays Out Implementation 
Plan for New Mortgage Rules. Press Release. Feb. 13, 2013.
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    This is the first final rule in connection with our planned 
issuances to clarify and provide additional guidance regarding the 2013 
Title XIV Final Rules. Priority for this first set of updates was given 
to the 2013 Escrows Final Rule because its effective date is June 1, 
2013, and certainty regarding compliance is a matter of some urgency. 
The Bureau has since issued a proposal concerning certain provisions of 
the ability-to-repay and servicing rules that take effect in January 
2014,\8\ and a proposal to seek comment on whether to delay the June 1 
implementation of a provision concerning the financing of credit 
insurance pending resolution of various interpretive issues under the 
statute and regulation.\9\ Other guidance and updates will be issued as 
needed.
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    \8\ 78 FR 25638 (May 2, 2013).
    \9\ 78 FR 27308 (May 10, 2013).
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III. Legal Authority

    The Bureau is issuing this final rule pursuant to its authority 
under TILA and the Dodd-Frank Act. Section 1061 of the Dodd-Frank Act 
transferred to the Bureau the ``consumer financial protection 
functions'' previously vested in certain other Federal agencies, 
including the Board of Governors of the Federal Reserve System (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.'' \10\ TILA, title X of the Dodd-Frank Act, and 
certain subtitles and provisions of title XIV of the Dodd-Frank Act are 
Federal consumer financial laws.\11\ Accordingly, the Bureau has 
authority to issue regulations pursuant to TILA, title X, and the 
enumerated subtitles and provisions of title XIV.
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    \10\ 12 U.S.C. 5581(a)(1).
    \11\ Dodd-Frank Act section 1002(14), 12 U.S.C. 5481(14) 
(defining ``Federal consumer financial law'' to include the 
``enumerated consumer laws'' and the provisions of title X of the 
Dodd-Frank Act); Dodd-Frank Act section 1002(12), 12 U.S.C. 5481(12) 
(defining ``enumerated consumer laws'' to include TILA), Dodd-Frank 
section 1400(b), 12 U.S.C. 5481 note (designating certain subtitles 
and provisions of title XIV of the Dodd-Frank Act as ``enumerated 
consumer laws'').
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    The Bureau is amending the changes made to Regulation Z by the 2013 
Escrows Final Rule.\12\ This final rule relies on the broad rulemaking 
authority specifically granted to the Bureau by TILA section 105(a) and 
title X of the Dodd-Frank Act, as well as the exemption authority in 
TILA section 129D(c). Additionally, because this rule re-introduces 
language from a 2008 final rule of the Board amending Regulation Z 
(2008 HOEPA Final Rule),\13\ this rule relies on the authority used in 
connection with that rule including TILA section 129(p).
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    \12\ 78 FR 4726 (Jan. 22, 2013).
    \13\ 73 FR 44522 (July 30, 2008).
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IV. Section-by-Section Analysis

Section 1026.35 Requirements for Higher-Priced Mortgage Loans

35(b) Escrow Accounts
35(b)(1)
    The Bureau proposed a technical correction to Sec.  1026.35(b)(1) 
to update a citation. The Bureau did not receive comments on this 
correction, and adopts it as proposed.
35(b)(2) Exemptions
Overview
    Four of the Bureau's January 2013 mortgage rules included 
provisions that provide for special treatment under various Regulation 
Z requirements for

[[Page 30741]]

certain credit transactions in connection with ``rural'' or 
``underserved'' areas: (1) Sec.  1026.35(b)(2)(iii) provides an 
exemption to the 2013 Escrows Final Rule's escrow requirement for 
HPMLs; (2) Sec.  1026.43(f) provides an allowance to originate balloon-
payment qualified mortgages under the 2013 ATR Final Rule; (3) Sec.  
1026.32(d)(1)(ii)(C) provides an exemption from the balloon payment 
prohibition on high-cost mortgages under the 2013 HOEPA Final Rule for 
balloon-payment qualified mortgages; and (4) Sec.  
1026.35(c)(4)(vii)(H) provides an exemption from a requirement to 
obtain a second appraisal for certain HPMLs under the 2013 Interagency 
Appraisals Final Rule. These provisions rely on the criteria for 
``rural'' and/or ``underserved'' counties set forth in Sec.  
1026.35(b)(2)(iv)(A) and (B), respectively, adopted in the 2013 Escrows 
Final Rule, which takes effect on June 1, 2013. Two of the special 
provisions for creditors operating predominantly in ``rural'' or 
``underserved'' areas were set forth in the Dodd-Frank Act amendments 
to TILA, but the terms were not defined by statute. TILA section 129D, 
as added and amended by Dodd-Frank Act sections 1461 and 1462 and 
implemented by Sec.  1026.35(b), generally requires that creditors 
establish escrow accounts for HPMLs secured by a first lien on a 
consumer's principal dwelling, but the statute also authorizes the 
Bureau to exempt from this requirement transactions by a creditor that, 
among other criteria, ``operates predominantly in rural or underserved 
areas.'' TILA section 129D(c)(1). Similarly, the ability-to-repay 
provisions in Dodd-Frank Act section 1412 contain a set of criteria 
with regard to certain balloon-payment mortgages originated and held in 
portfolio by certain creditors that operate predominantly in rural or 
underserved areas, allowing those loans to be considered qualified 
mortgages. See TILA section 129C(b)(2)(E), 15 U.S.C. 1639c(b)(2)(E). In 
the 2013 Escrows and ATR Final Rules, the Bureau implemented the HPML 
escrows requirement and the section 1412 balloon-payment qualified 
mortgage provision through Sec. Sec.  1026.35(b)(2)(iii) and 
1026.43(f), respectively. In addition, the Bureau adopted an exemption 
to the general prohibition of balloon payments for high-cost mortgages 
when those mortgages meet the criteria for balloon-payment qualified 
mortgages set forth in Sec.  1026.43(f), as part of the 2013 HOEPA 
Final Rule, in Sec.  1026.32(d)(1)(ii)(C). Finally, the Bureau and 
other Federal agencies adopted Sec.  1026.35(c)(4)(vii)(H), which 
provides an exemption from a requirement to obtain a second appraisal 
for certain HPMLs under the 2013 Interagency Appraisals Final Rule for 
credit transactions used to acquire property in rural counties.
    Through the 2013 Escrows Final Rule, the Bureau adopted Sec.  
1026.35(b)(2)(iv)(A) and (B) to define ``rural'' and ``underserved'' 
respectively for the purposes of the four rules discussed above that 
contain special provisions that use one or both of those terms. The 
2013 Escrows Final Rule also provided comment 35(b)(2)(iv)-1 to clarify 
further the criteria for ``rural'' and ``underserved'' counties, and 
provided that the Bureau will annually update on its public Web site a 
list of counties that meet the definitions of rural and underserved in 
Sec.  1026.35(b)(2)(iv). In advance of the rule's June 1, 2013, 
effective date, the Bureau proposed to amend Sec.  1026.35(b)(2)(iv) 
and comment 35(b)(2)(iv)-1 to clarify how to determine whether a county 
is rural or underserved for the purposes of these provisions.
Comments
    The Bureau received several comments discussing the overall 
regulatory scheme regarding how ``rural'' and ``underserved'' should be 
defined. Most of these comments argued for an expanded scope for the 
``rural'' and ``underserved'' definitions. One industry trade 
association suggested that the rural definition should include all non-
metropolitan counties, as well as communities with populations of less 
than 50,000. Other commenters suggested that the Bureau should use 
Census Bureau data differently, and one suggested that any place not 
within one of the Census Bureau's ``Urbanized Areas,'' which contain 
50,000 or more people, be considered rural. A credit union association 
suggested that credit unions with ``rural'' community charters should 
be exempt, and that only those creditors with a physical presence in an 
underserved area should be considered in relation to the underserved 
exemption. Some commenters felt that the rule was too confusing, making 
compliance difficult.\14\ One credit union was concerned about the 
impact the escrows rule would have on mobile home lending. One 
commenter stated that, although the clarification presented in the 
proposal was welcome, there is still too much confusion regarding the 
escrows rule, and that its effective date should be postponed to 
January 2014. In addition, two commenters suggested that the Bureau 
apply exemptions based solely on the size of a creditor, regardless of 
location.
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    \14\ The Bureau notes that it has now posted the official list 
of rural and underserved counties on its public Web site for use 
with mortgages consummated from June 1, 2013, through December 31, 
2013. The final, official list is identical to the preliminary list 
posted on the Bureau's public Web site on March 12, 2013. Creditors 
may rely as a safe harbor for compliance with the relevant 
regulations on the official lists of rural and underserved counties 
posted by the Bureau. The official list for use in 2014 will be 
posted when the necessary data become available.
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    Although the Bureau has examined these comments, the proposed rule 
presented only very limited changes and clarifications to the 2013 
Final Escrows Rule, and solicited comments on those narrow issues. 
Broader concerns such as those expressed by the foregoing commenters 
about preserving consumers' access to credit will be addressed in the 
Bureau's final rule under the 2013 ATR Concurrent Proposal, which the 
Bureau expects to issue shortly. The specific provisions included in 
the proposal are discussed below, along with comments responsive to 
those issues.
35(b)(2)(iii)
The Proposal
    The Bureau proposed modifications to Sec.  1026.35(b)(2)(iii) and 
comment 35(b)(2)(iii)-1.i for clarification purposes and for 
consistency with other provisions. As adopted in January, Sec.  
1026.35(b)(2)(iii) and its commentary stated that the Bureau would 
designate or determine which counties are rural or underserved for the 
purposes of the special provisions of the four rules discussed above. 
However, that was not the Bureau's intent. Rather, the Bureau intended 
to require determinations of ``rural'' or ``underserved'' status to be 
made by creditors as prescribed by Sec.  1026.35(b)(2)(iv)(A) and (B), 
but also intended for the Bureau to apply both tests to each U.S. 
county and publish an annual list of counties that satisfy either test 
for a given calendar year, which creditors may rely upon as a safe 
harbor. Therefore, the Bureau proposed modifications to Sec.  
1026.35(b)(2)(iii)(A) and comment 35(b)(2)(iii)-1.i for the purposes of 
clarification and consistency with these provisions.
Comments and Final Rule
    All the comments the Bureau received on this specific provision 
supported the proposed change. For the reasons stated above, the 
provision is adopted as proposed.
35(b)(2)(iv)(A)
The Proposal
    As adopted in January 2013, Sec.  1026.35(b)(2)(iv)(A) defines 
``rural''

[[Page 30742]]

based on currently applicable UICs established by the USDA-ERS. The 
UICs are based on the definitions of ``metropolitan statistical area'' 
and ``micropolitan statistical area'' as developed by the Office of 
Management and Budget (OMB), along with other factors reviewed by the 
ERS that place counties into twelve separately defined UICs depending, 
in part, on the size of the largest city and town in the county. Based 
on these definitions, Sec.  1026.35(b)(2)(iv)(A) as adopted states that 
a county is ``rural'' during a calendar year if it is neither in a 
metropolitan statistical area nor in a micropolitan statistical area 
that is adjacent to a metropolitan statistical area, as those terms are 
defined by OMB and applied under currently applicable UICs.
    As adopted, comment 35(b)(2)(iv)-1.i explained that, for the 
purposes of the provision, the terms ``metropolitan statistical areas'' 
and ``micropolitan statistical areas adjacent to a metropolitan 
statistical area'' are given the same meanings used by USDA-ERS for the 
purposes of determining UICs. The USDA-ERS considers micropolitan 
counties as ``adjacent'' to a metropolitan statistical area for this 
purpose if they abut a metropolitan statistical area and have at least 
2% of employed persons commuting to work in the core of the 
metropolitan statistical area.\15\ It was thus implicit in this comment 
that ``adjacent'' is given the same meaning used by the USDA-ERS for 
the purposes of Sec.  1026.35(b)(2)(iv)(A).
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    \15\ See http://www.ers.usda.gov/data-products/urban-influence-codes/documentation.aspx.
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    Nevertheless, the Bureau believed that additional commentary 
explaining the meaning of ``adjacent'' more directly would be useful to 
facilitate compliance with Sec.  1026.35(b)(2)(iv) and the provisions 
that rely on it. Accordingly, the Bureau proposed to amend comment 
35(b)(2)(iv)-1.i to state expressly that ``adjacent'' entails physical 
contiguity with a metropolitan statistical area where certain minimum 
commuting standards are also met, as defined by the USDA-ERS. The 
Bureau believed that this would be consistent with USDA-ERS's use of 
``adjacent'' and better explain the rule for compliance purposes.
    Similarly, the Bureau proposed language to specify under Sec.  
1026.35(b)(2)(iv)(A) how ``rural'' status should be determined for a 
county that does not have a currently applicable UIC because it was 
created after the USDA-ERS last categorized counties by UIC. Because 
the USDA-ERS only updates UICs decennially based on the most recent 
census, it is possible that new counties may be created that will not 
have a designated UIC until after the next census. In such instances, 
clarification was needed to explain how ``rural'' status would be 
determined. The Bureau thus proposed to amend comment 35(b)(2)(iv)-1.i 
to address this issue and explain that any such county is considered 
``rural'' for the purposes of Sec.  1026.35(b)(2)(iv) only if all 
counties from which the new county's land was taken were themselves 
rural under the rule.
    The Bureau also proposed comment 35(b)(2)(iv)-2.i to provide an 
example of how ``rural'' status would be determined. In addition, the 
Bureau proposed small technical changes to the rule provision and 
commentary to enhance clarity.
Comments
    One industry commenter supported generally the clarifications 
provided in the rule. Other industry commenters chose to neither 
support nor oppose the ``adjacent'' clarification, and asked that there 
be more analysis of the impact of excluding counties from the rural 
definition if they are ``adjacent'' to a metropolitan area.
    Industry commenters opposed the proposed method for determining the 
status of a new county, arguing that a new county should be considered 
rural if 50% of its land is taken from counties that were previously 
considered rural.
Final Rule
    The Bureau is adopting the provisions as proposed. The definition 
of ``adjacent'' was already implicit in the 2013 Escrows Final Rule, 
and the Bureau's earlier impact analyses already accounted for that 
definition. The present rule's guidance provision merely clarifies what 
was adopted then.
    The Bureau considered the suggestion to allow rural status for new 
counties if at least 50% of the counties' land comes from previously 
rural counties, but was concerned that making such determinations would 
be burdensome and inexact for compliance purposes and incongruent with 
the rule's overall rural designations. Accordingly, the Bureau is 
adopting the clarification as proposed.
35(b)(2)(iv)(B)
The Proposal
    Section 1026.35(b)(2)(iii)(A) creates an exemption from the HPML 
escrow requirement for transactions by creditors operating in rural or 
underserved counties, if they meet certain criteria involving the loans 
they originated during the preceding calendar year. Thus, the 
availability of the rural or underserved exemption always follows a 
year after the origination activity that makes a creditor eligible for 
the exemption.
    As adopted by the 2013 Escrows Final Rule, Sec.  
1026.35(b)(2)(iv)(B) stated that a county would be ``underserved'' 
during a calendar year if, ``according to Home Mortgage Disclosure Act 
(HMDA) data for that year,'' no more than two creditors extended 
covered transactions, as defined in Sec.  1026.43(b)(1), secured by a 
first lien, five or more times in the county. However, HMDA data 
typically are released for a given calendar year during the third 
quarter of each subsequent calendar year. It is thus not generally 
possible for creditors to make determinations concerning whether a 
county was underserved during the preceding calendar year based on that 
preceding year's HMDA data, because such data likely will not be 
available until late in the following year. In wording Sec.  
1026.35(b)(2)(iv)(B) as it did, the Bureau did not intend to require 
the use of HMDA data that would not be available at the time the 
determination of a county's ``underserved'' status was made; the 
Bureau's intent was to provide for the use of the most recent HMDA data 
available at the time of the determination.
    The Bureau therefore proposed to amend Sec.  1026.35(b)(2)(iv)(B) 
to clarify that a county is considered ``underserved'' during a given 
calendar year based on HMDA data for ``the preceding calendar year'' as 
opposed to ``that calendar year.'' This look-back feature coordinates 
with the look-back feature in the exemption itself at Sec.  
1026.35(b)(2)(iii)(A), so that a creditor would rely on the underserved 
status of a county based on HMDA data from two years previous to the 
use of the exemption, which are the most recent data available for use 
as the Bureau intended. The Bureau also proposed to amend comment 
35(b)(2)(iv)-1.ii to conform to this change, and to add comment 
35(b)(2)(iv)-2.ii to provide an example.
Comments and Final Rule
    The only commenter to reference this provision, an industry trade 
group, supported it. For the reasons stated above, the provision is 
adopted as proposed.
1026.35(e) Repayment Ability, Prepayment Penalties
The Proposal
    The Bureau proposed language in Sec.  1026.35(e) to keep in place 
existing requirements contained in Sec.  1026.35(b)

[[Page 30743]]

concerning assessment of consumers' ability to repay an HPML and 
limitations on prepayment penalties for HPMLs. These provisions were 
originally adopted by the Board in 2008,\16\ and will be supplanted by 
the Bureau's new rules implementing similar Dodd-Frank requirements in 
Sec.  1026.43 on January 10, 2014.
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    \16\ 73 FR 44522 (July 30, 2008).
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    The 2013 Escrows Final Rule inadvertently removed the existing 
language of Sec.  1026.35(b) between June 1, 2013, and the January 10, 
2014, effective date for the ability-to-repay and prepayment penalty 
provisions in Sec.  1026.43. The Bureau proposed restoring this 
language at Sec.  1026.35(e) and keeping it in effect during that 
intervening period. The Bureau also proposed updating existing cross-
references to the Sec.  1026.35(b) HPML provisions.
Comments and Final Rule
    The industry groups specifically commenting on this provision 
supported the proposal. To maintain consumer protections and avoid 
disruptions in the market, the provision is adopted as proposed.

V. Effective Date

    This rule is effective June 1, 2013. Section 1026.35(e) of this 
rule is a temporary provision and will be effective from June 1, 2013, 
through January 9, 2014. Section 553(d) of the Administrative Procedure 
Act generally requires publication of a final rule not less than 30 
days before its effective date, except for (1) a substantive rule which 
grants or recognizes an exemption or relieves a restriction; (2) 
interpretive rules and statements of policy; or (3) as otherwise 
provided by the agency for good cause found and published with the 
rule. 5 U.S.C. 553(d). At minimum, the Bureau believes the amendments 
fall under the third exception to section 553(d). The Bureau finds that 
there is good cause to make the amendments effective on June 1, 2013, 
because doing so will ease compliance and reduce disruption in the 
market, and ensure that the protections of the rule are uninterrupted. 
Moreover, the final list of counties prepared using this rule is 
identical to the preliminary list, which was posted along with the 
proposal on the Bureau's public Web site on March 12, 2013. In 
addition, the effective date for the 2013 Escrows Final Rule, which 
this rule amends, is June 1, 2013, and failure to make this rule 
effective on the same day would make compliance more difficult and 
create more disruption in the market, not less. Therefore, the Bureau 
believes that the benefits from making this rule effective on June 1 
outweigh providing additional time to comply with this rule.

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

A. Overview

    In developing the final rule, the Bureau has considered its 
potential benefits, costs, and impacts.\17\ The Bureau requested 
comment on its preliminary analysis as well as submissions of 
additional data that could inform the Bureau's analysis. 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.
---------------------------------------------------------------------------

    \17\ Section 1022(b)(2)(A) of the Dodd-Frank Act, 12 U.S.C. 
5521(b)(2), directs the Bureau, when prescribing a rule under the 
Federal consumer financial laws, to consider the potential benefits 
and costs of regulation to consumers and covered persons, including 
the potential reduction of access by consumers to consumer financial 
products or services; the impact on insured depository institutions 
and credit unions with $10 billion or less in total assets as 
described in section 1026 of the Dodd-Frank Act; and the impact on 
consumers in rural areas. Section 1022(b)(2)(B) of the Dodd-Frank 
Act directs the Bureau to consult with appropriate prudential 
regulators or other Federal agencies regarding consistency with 
prudential, market, or systemic objectives that those agencies 
administer.
---------------------------------------------------------------------------

    The final rule clarifies how to determine whether a county is 
considered ``rural'' or ``underserved'' for the application of the 
special provisions adopted in certain of the 2013 Title XIV Final 
Rules.\18\ These changes do not have a material impact on consumers or 
covered persons. Nevertheless, two commenters requested that the Bureau 
analyze the impact of excluding counties from the rural definition if 
they are ``adjacent'' to a metropolitan area. However, the scope of the 
related clarification was limited to specifying that ``adjacent'' is 
given the same meaning used by the USDA-ERS for the purposes of Sec.  
1026.35(b)(2)(iv)(A), which was implicit in the 2013 Escrows Final 
Rule. The impacts of the stated definitions are discussed in the 
various 2013 Title XIV Final Rules and the final list of rural and 
underserved counties for use during 2013 is being posted at the 
Bureau's public Web site along with publication of this notice.
---------------------------------------------------------------------------

    \18\ The special provisions that rely on the ``rural'' and 
``underserved'' definitions are as follows: (1) the Sec.  
1026.35(b)(2)(iii) exemption to the 2013 Escrows Final Rule's escrow 
requirement for higher-priced mortgage loans; (2) the Sec.  
1026.43(f) allowance for balloon-payment qualified mortgages; (3) 
the Sec.  1026.32(d)(1)(ii)(C) exemption from the balloon payment 
prohibition on high-cost mortgages for balloon-payment qualified 
mortgages; and (4) the Sec.  1026.35(c)(4)(vii)(H) exemption from 
the Sec.  1026.35(c)(4)(i) HPML second appraisal requirement for 
credit transactions used to acquire property located in a rural 
county.
---------------------------------------------------------------------------

    Other provisions of the rule are related to underwriting and 
features of HPMLs. As described above, existing Regulation Z contains 
requirements related to the consumer's ability to repay and prepayment 
penalties for HPMLs. The scope of these protections is being expanded 
in connection with the Dodd-Frank Act title XIV rulemakings to apply to 
most mortgage transactions, rather than just HPMLs. For this reason, 
the 2013 Escrows Final Rule removed the regulatory text providing these 
protections solely to HPMLs. That final rule, however, takes effect on 
June 1, 2013, whereas the new ability-to-repay and prepayment penalty 
provisions do not take effect until January 10, 2014. Without the 
correction provided by this final rule, the final rules issued in 
January would have inadvertently created an interruption in applicable 
protections for certain consumers obtaining HPMLs effective June 1, 
2013, and a corresponding interruption of the requirements for lenders. 
This rule will establish a temporary provision to ensure the 
protections remain in place for HPMLs until the expanded provisions 
take effect in January 2014. Because the avoided interruption was 
inadvertent, the Bureau's 1022 analyses in the 2013 Title XIV Final 
Rules considered the impact of the protections at issue in this rule as 
if they were remaining in place, which they now are.

B. Potential Benefits and Costs to Consumers and Covered Persons

    Compared to the baseline established by the issuance of the final 
rules in January 2013, this final rule will provide consumers who 
obtain HPMLs from June 1, 2013, through and including January 9, 2014, 
the benefit of the existing protections under Regulation Z regarding 
ability to repay and prepayment penalties.\19\ These provisions are 
designed to limit consumers' exposure to collateral-based lending, 
potentially harmful prepayment penalties, and other harms. The price of 
HPMLs may be slightly higher than they would be in the absence of these 
protections; however, these effects are likely to be minimal.
---------------------------------------------------------------------------

    \19\ The Bureau has discretion in any rulemaking to choose an 
appropriate scope of analysis with respect to potential benefits and 
costs and an appropriate baseline.

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[[Page 30744]]

    Compared to the same baseline, covered persons issuing such 
mortgages during this time period will incur any costs related to the 
ability-to-pay requirements and the restrictions on certain prepayment 
penalties. These costs will include the costs of documenting and 
verifying the consumer's ability to repay and some expected litigation-
related costs. As noted above, the evidence to date is that these costs 
are quite limited. The 2013 ATR Final Rule and the Board's earlier 2008 
HOEPA Final Rule discuss these costs and benefits in greater detail. 
This rule simply extends these impacts from June 1, 2013, through and 
including January 9, 2014. The Bureau also believes that the rule will 
benefit both consumers and covered persons in limiting unnecessary and 
possibly disruptive changes in the regulatory regime.
    The final rule may have a small differential impact on depository 
institutions and credit unions with $10 billion or less in total assets 
as described in Section 1026. To the extent that HPMLs comprise a 
larger percentage of originations at these institutions, the relative 
increase in costs may be higher relative to other lenders.
    The final rule will also have some differential impacts on 
consumers in rural areas. In these areas, a greater fraction of loans 
are HPMLs. For this reason, to the extent that these added protections 
lead to additional lender costs, interest rates may be slightly higher 
on average; however, rural consumers will derive greater benefit from 
the proposed provisions than non-rural consumers.
    Given the small changes implemented in this rule, the Bureau does 
not believe that the final rule will meaningfully reduce consumers' 
access to credit.

VII. Regulatory Flexibility Act Analysis

    The Regulatory Flexibility Act (RFA) generally requires an agency 
to conduct an initial regulatory flexibility analysis (IRFA) and a 
final regulatory flexibility analysis (FRFA) of any rule subject to 
notice-and-comment rulemaking requirements.\20\ These analyses must 
``describe the impact of the proposed rule on small entities.'' \21\ An 
IRFA or FRFA is not required if the agency certifies that the rule will 
not have a significant economic impact on a substantial number of small 
entities,\22\ or if the agency considers a series of closely related 
rules as one rule for purposes of complying with the IRFA or FRFA 
requirements.\23\ 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.\24\
---------------------------------------------------------------------------

    \20\ 5 U.S.C. 601 et. seq.
    \21\ 5 U.S.C. 603(a). For purposes of assessing the impacts of 
the rule on small entities, ``small entities'' is defined in the RFA 
to include small businesses, small not-for-profit organizations, and 
small government jurisdictions. 5 U.S.C. 601(6). A ``small 
business'' is determined by application of Small Business 
Administration regulations and reference to the North American 
Industry Classification System (NAICS) classifications and size 
standards. 5 U.S.C. 601(3). A ``small organization'' is any ``not-
for-profit enterprise which is independently owned and operated and 
is not dominant in its field.'' 5 U.S.C. 601(4). A ``small 
governmental jurisdiction'' is the government of a city, county, 
town, township, village, school district, or special district with a 
population of less than 50,000. 5 U.S.C. 601(5).
    \22\ 5 U.S.C. 605(b).
    \23\ 5 U.S.C. 605(c).
    \24\ 5 U.S.C. 609.
---------------------------------------------------------------------------

    This rulemaking is part of a series of rules that have revised and 
expanded the regulatory requirements for entities that offer HPMLs. In 
January 2013, the Bureau adopted the 2013 Escrows Final Rule and 2013 
ATR Final Rule, along with other related rules mentioned above. Section 
VIII of the supplementary information to each of these rules set forth 
the Bureau's analyses and determinations under the RFA with respect to 
those rules. See 78 FR 4749, 78 FR 6575. The Bureau also notes because 
the potential interruption in applicable protections created by the 
issuance of the final rules in January was inadvertent, its regulatory 
flexibility analyses considered the impact of the protections at issue 
in this rule remaining in place for HPMLs until the expanded provisions 
take effect in January 2014. Because these rules qualify as ``a series 
of closely related rules,'' for purposes of the RFA, the Bureau relies 
on those analyses and determines that it has met or exceeded the IRFA 
and FRFA requirements.
    In the alternative, the Bureau also concludes that the final rule 
will not have a significant impact on a substantial number of small 
entities. The rule will establish a temporary provision to ensure the 
protections remain in place for HPMLs until the expanded provisions 
take effect in January 2014. Since the new requirements and liabilities 
that will take effect in January 2014 as applied to HPMLs are very 
similar in nature to those that exist under the pre-existing 
regulations, the gap absent the rule's correction would have been 
short-lived and would have affected only the higher-priced mortgage 
loan market. It is therefore very unlikely that, absent this 
correction, covered persons would have altered their behavior 
substantially in the intervening period.
    The rule also clarifies how to determine whether a county is 
considered ``rural'' or ``underserved'' for the application of the 
special provisions adopted in certain of the 2013 Title XIV Final 
Rules.\25\ These changes will not have a material impact on small 
entities.\26\
---------------------------------------------------------------------------

    \25\ The special provisions that rely on the ``rural'' and 
``underserved'' definitions are as follows: (1) The Sec.  
1026.35(b)(2)(iii) exemption to the 2013 Escrows Final Rule's escrow 
requirement for higher-priced mortgage loans; (2) the Sec.  
1026.43(f) allowance for balloon-payment qualified mortgages; (3) 
the Sec.  1026.32(d)(1)(ii)(C) exemption from the balloon payment 
prohibition on high-cost mortgages for balloon-payment qualified 
mortgages; and (4) the Sec.  1026.35(c)(4)(vii)(H) exemption from 
the Sec.  1026.35(c)(4)(i) HPML second appraisal requirement for 
credit transactions used to acquire property located in a rural 
county.
    \26\ One commenter suggested that the RFA analysis omitted a 
consideration of the costs of compliance for this rule and the 
related 2013 Title XIV Final Rules more broadly. As noted, a 
discussion of the compliance costs for small entities under the RFA 
was included with the publication of the 2013 Title XIV Final Rules: 
This rule only clarifies or makes minor technical amendments to 
existing rules and does not impose the burdens noted by the 
commenter.
---------------------------------------------------------------------------

    For these reasons, the Bureau affirms that this final rule will not 
have a significant impact on a substantial number of small entities.

VIII. Paperwork Reduction Act

    This final rule will amend 12 CFR part 1026 (Regulation Z), which 
implements the Truth in Lending Act (TILA). Regulation Z currently 
contains collections of information approved by OMB. The Bureau's OMB 
control number for Regulation Z is 3170-0015. However, the Bureau has 
determined that this rule will not materially alter these collections 
of information nor impose any new recordkeeping, reporting, or 
disclosure requirements on the public that would constitute collections 
of information requiring approval under the Paperwork Reduction Act, 44 
U.S.C. 3501 et seq.

List of Subjects in 12 CFR Part 1026

    Advertising, Consumer protection, Mortgages, Recordkeeping 
requirements, Reporting, Truth in lending.

Authority and Issuance

    For the reasons set forth in the preamble, the Bureau amends 
Regulation Z, 12 CFR part 1026, as set forth below:

PART 1026--TRUTH IN LENDING (REGULATION Z)

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

[[Page 30745]]

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

Subpart C--Closed-End Credit

0
2. Section 1026.23 is amended by revising paragraph (a)(3)(ii) to read 
as follows:

Sec.  1026.23  Right of rescission.

    (a) * * *
    (3) * * *
    (ii) For purposes of this paragraph (a)(3), the term ``material 
disclosures'' means the required disclosures of the annual percentage 
rate, the finance charge, the amount financed, the total of payments, 
the payment schedule, and the disclosures and limitations referred to 
in Sec. Sec.  1026.32(c) and (d) and 1026.35(e)(2).
* * * * *

Subpart E--Special Rules for Certain Home Mortgage Transactions

0
3. Section 1026.34 is amended by revising paragraph (a)(4)(i) to read 
as follows:

Sec.  1026.34  Prohibited acts or practices in connection with high-
cost mortgages.

    (a) * * *
    (4) * * *
    (i) Mortgage-related obligations. For purposes of this paragraph 
(a)(4), mortgage-related obligations are expected property taxes, 
premiums for mortgage-related insurance required by the creditor as set 
forth in Sec.  1026.35(b), and similar expenses.
* * * * *

0
4. Section 1026.35, as amended by the final rule published on January 
22, 2013, 78 FR 4726, effective June 1, 2013, is further amended by 
revising the last sentence of paragraph (b)(1), revising paragraphs 
(b)(2)(iii)(A), and (b)(iv)(A) and (B), and adding paragraph (e) to 
read as follows:

Sec.  1026.35  Requirements for higher-priced mortgage loans.

* * * * *
    (b) * * *
    (1) For purposes of this paragraph (b), the term ``escrow account'' 
has the same meaning as under Regulation X (12 CFR 1024.17(b)), as 
amended.
    (2) * * *
    (iii) * * *
    (A) During the preceding calendar year, the creditor extended more 
than 50 percent of its total covered transactions, as defined by Sec.  
1026.43(b)(1), secured by a first lien, on properties that are located 
in counties that are either ``rural'' or ``underserved,'' as set forth 
in paragraph (b)(2)(iv) of this section;
* * * * *
    (iv) * * *
    (A) A county is ``rural'' during a calendar year if it is neither 
in a metropolitan statistical area nor in a micropolitan statistical 
area that is adjacent to a metropolitan statistical area, as those 
terms are defined by the U.S. Office of Management and Budget and as 
they are applied under currently applicable Urban Influence Codes 
(UICs), established by the United States Department of Agriculture's 
Economic Research Service (USDA-ERS). A creditor may rely as a safe 
harbor on the list of counties published by the Bureau to determine 
whether a county qualifies as ``rural'' for a particular calendar year.
    (B) A county is ``underserved'' during a calendar year if, 
according to Home Mortgage Disclosure Act (HMDA) data for the preceding 
calendar year, no more than two creditors extended covered 
transactions, as defined in Sec.  1026.43(b)(1), secured by a first 
lien, five or more times in the county. A creditor may rely as a safe 
harbor on the list of counties published by the Bureau to determine 
whether a county qualifies as ``underserved'' for a particular calendar 
year.
* * * * *
    (e) Repayment ability, prepayment penalties. Higher-priced mortgage 
loans are subject to the following restrictions:
    (1) Repayment ability. A creditor shall not extend credit based on 
the value of the consumer's collateral without regard to the consumer's 
repayment ability as of consummation as provided in Sec.  
1026.34(a)(4).
    (2) Prepayment penalties. A loan may not include a penalty 
described by Sec.  1026.32(d)(6) unless:
    (i) The penalty is otherwise permitted by law, including Sec.  
1026.32(d)(7) if the loan is a mortgage transaction described in Sec.  
1026.32(a); and
    (ii) Under the terms of the loan:
    (A) The penalty will not apply after the two-year period following 
consummation;
    (B) The penalty will not apply if the source of the prepayment 
funds is a refinancing by the creditor or an affiliate of the creditor; 
and
    (C) The amount of the periodic payment of principal or interest or 
both may not change during the four-year period following consummation.
    (3) Sunset of requirements on repayment ability and prepayment 
penalties. The requirements described in this paragraph (e) shall 
expire at 11:59 p.m. on January 9, 2014.

0
5. In Supplement I to Part 1026--Official Interpretations:
0
A. Under Section 1026.32--Requirements for Certain Closed-End Home 
Mortgages, under Paragraph 32(d) Limitations, paragraph 1 is revised.
0
B. Under Section 1026.34--Prohibited Acts or Practices in Connection 
with High-Cost Mortgages:
0
i. Under Paragraph 34(a)(4) Repayment ability for high-cost mortgages, 
paragraph 1 is revised.
0
ii. Under Paragraph 34(a)(4)(i) Mortgage-Related Obligations, paragraph 
1 is revised.
0
C. Under Section 1026.35--Requirements for Higher-Priced Mortgage 
Loans, as amended by the final rule published on January 22, 2013, 78 
FR 4726, effective June 1, 2013, is further amended:
0
i. Under Paragraph 35(b)(2)(iii), paragraphs 1 and i are revised.
0
ii. Under Paragraph 35(b)(2)(iv), paragraph 1 is revised and paragraph 
2 is added.
0
iii. The headings 35(e) Rules for Higher-Priced Mortgage Loans and 
Paragraph 35(e)(2)(ii)(C), and paragraphs 1 and 2 are added.
    The revisions and additions read as follows:

Supplement I to Part 1026--Official Interpretations

* * * * *

Subpart E--Special Rules for Certain Home Mortgage Transactions

* * * * *

Sec.  1026.32--Requirements for Certain Closed-End Home Mortgages

* * * * *
Paragraph 32(d) Limitations
    1. Additional prohibitions applicable under other sections. 
Section 1026.34 sets forth certain prohibitions in connection with 
mortgage credit subject to Sec.  1026.32, in addition to the 
limitations in Sec.  1026.32(d). Further, Sec.  1026.35 prohibits 
certain practices in connection with transactions that meet the 
coverage test in Sec.  1026.35(a). Because the coverage test in 
Sec.  1026.35(a) is generally broader than the coverage test in 
Sec.  1026.32(a), most Sec.  1026.32 mortgage loans are also subject 
to the prohibitions set forth in Sec.  1026.35 (such as escrows), in 
addition to the limitations in Sec.  1026.32(d).
* * * * *

Sec.  1026.34--Prohibited Acts or Practices in Connection with 
High-Cost Mortgages

* * * * *

Paragraph 34(a)(4) Repayment Ability for High-Cost Mortgages

    1. Application of repayment ability rule. The Sec.  
1026.34(a)(4) prohibition against making loans without regard to 
consumers' repayment ability applies to mortgage loans described in 
Sec.  1026.32(a). In addition, the Sec.  1026.34(a)(4) prohibition 
applies to higher-

[[Page 30746]]

priced mortgage loans described in Sec.  1026.35(a). See Sec.  
1026.35(e)(1).
* * * * *

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

    1. Mortgage-related obligations. A creditor must include in its 
repayment ability analysis the expected property taxes and premiums 
for mortgage-related insurance required by the creditor as set forth 
in Sec.  1026.35(b), as well as similar mortgage-related expenses. 
Similar mortgage-related expenses include homeowners' association 
dues and condominium or cooperative fees.
* * * * *

Sec.  1026.35--Requirements for Higher-Priced Mortgage Loans

* * * * *

Paragraph 35(b)(2)(iii)

    1. Requirements for exemption. Under Sec.  1026.35(b)(2)(iii), 
except as provided in Sec.  1026.35(b)(2)(v), a creditor need not 
establish an escrow account for taxes and insurance for a higher-
priced mortgage loan, provided the following four conditions are 
satisfied when the higher-priced mortgage loan is consummated:
    i. During the preceding calendar year, more than 50 percent of 
the creditor's total first-lien covered transactions, as defined in 
Sec.  1026.43(b)(1), are secured by properties located in counties 
that are either ``rural'' or ``underserved,'' as set forth in Sec.  
1026.35(b)(2)(iv). Pursuant to that section, a creditor may rely as 
a safe harbor on a list of counties published by the Bureau to 
determine whether counties in the United States are rural or 
underserved for a particular calendar year. Thus, for example, if a 
creditor originated 90 covered transactions, as defined by Sec.  
1026.43(b)(1), secured by a first lien, during 2013, the creditor 
meets this condition for an exemption in 2014 if at least 46 of 
those transactions are secured by first liens on properties that are 
located in such counties.
* * * * *

Paragraph 35(b)(2)(iv)

    1. Requirements for ``rural'' or ``underserved'' status. A 
county is considered to be ``rural'' or ``underserved'' for purposes 
of Sec.  1026.35(b)(2)(iii)(A) if it satisfies either of the two 
tests in Sec.  1026.35(b)(2)(iv). The Bureau applies both tests to 
each county in the United States. If a county satisfies either test, 
the Bureau will include the county on a published list of ``rural'' 
or ``underserved'' counties for a particular calendar year. To 
facilitate compliance with appraisal requirements in Sec.  
1026.35(c), the Bureau will also create a list of only those 
counties that are ``rural'' but excluding those that are only 
``underserved.'' The Bureau will post on its public Web site the 
applicable lists for each calendar year by the end of that year, 
thus permitting creditors to ascertain the availability to them of 
the exemption during the following year. For 2012, however, the list 
will be published before June 1, 2013. A creditor may rely as a safe 
harbor, pursuant to section 130(f) of the Truth in Lending Act, on 
the lists of counties published by the Bureau to determine whether a 
county qualifies as ``rural'' or ``underserved'' for a particular 
calendar year. A creditor's originations of covered transactions, as 
defined by Sec.  1026.43(b)(1), secured by a first lien, in such 
counties during that year are considered in determining whether the 
creditor satisfies the condition in Sec.  1026.35(b)(2)(iii)(A) and 
therefore will be eligible for the exemption during the following 
calendar year.
    i. Under Sec.  1026.35(b)(2)(iv)(A), a county is rural during a 
calendar year if it is neither in a metropolitan statistical area 
nor in a micropolitan statistical area that is adjacent to a 
metropolitan statistical area. These areas are defined by the Office 
of Management and Budget and applied under currently applicable 
Urban Influence Codes (UICs), established by the United States 
Department of Agriculture's Economic Research Service (USDA-ERS). 
Accordingly, for purposes of Sec.  1026.35(b)(2)(iv)(A), 
``adjacent'' has the meaning applied by the USDA-ERS in determining 
a county's UIC; as so applied, ``adjacent'' entails a county not 
only being physically contiguous with a metropolitan statistical 
area but also meeting certain minimum population commuting patterns. 
Specifically, a county is ``rural'' if the USDA-ERS categorizes the 
county under UIC 4, 6, 7, 8, 9, 10, 11, or 12. Descriptions of UICs 
are available on the USDA-ERS Web site at http://www.ers.usda.gov/data-products/urban-influence-codes/documentation.aspx. A county for 
which there is no currently applicable UIC (because the county has 
been created since the USDA-ERS last categorized counties) is rural 
only if all counties from which the new county's land was taken are 
themselves rural under currently applicable UICs.
    ii. Under Sec.  1026.35(b)(2)(iv)(B), a county is underserved 
during a calendar year if, according to Home Mortgage Disclosure Act 
(HMDA) data for the preceding calendar year, no more than two 
creditors extended covered transactions, as defined in Sec.  
1026.43(b)(1), secured by a first lien, five or more times in the 
county. Specifically, a county is ``underserved'' if, in the 
applicable calendar year's public HMDA aggregate dataset, no more 
than two creditors have reported five or more first-lien covered 
transactions with HMDA geocoding that places the properties in that 
county. For purposes of this determination, because only covered 
transactions are counted, all first-lien originations (and only 
first-lien originations) reported in the HMDA data are counted 
except those for which the owner-occupancy status is reported as 
``Not owner-occupied'' (HMDA code 2), the property type is reported 
as ``Multifamily'' (HMDA code 3), the applicant's or co-applicant's 
race is reported as ``Not applicable'' (HMDA code 7), or the 
applicant's or co-applicant's sex is reported as ``Not applicable'' 
(HMDA code 4). The most recent HMDA data are available at http://www.ffiec.gov/hmda.
    2. Examples. i. A county is considered ``rural'' for a given 
calendar year based on the most recent available UIC designations, 
which are updated by the USDA-ERS once every ten years. As an 
example, assume a creditor makes first-lien covered transactions in 
County X during calendar year 2014, and the most recent UIC 
designations have been published in the second quarter of 2013. To 
determine ``rural'' status for County X during calendar year 2014, 
the creditor will use the 2013 UIC designations. However, to 
determine ``rural'' status for County X during 2012 or 2013, the 
creditor would use the UIC designations last published in 2003.
    ii. A county is considered ``underserved'' for a given calendar 
year based on the most recent available HMDA data. For example, 
assume a creditor makes first-lien covered transactions in County Y 
during calendar year 2013, and the most recent HMDA data is for 
calendar year 2012, published in the third quarter of 2013. To 
determine ``underserved'' status for County Y in calendar year 2013 
for the purposes of qualifying for the ``rural or underserved'' 
exemption in calendar year 2014, the creditor will use the 2012 HMDA 
data.
* * * * *

35(e) Rules for Higher-Priced Mortgage Loans

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

    1. Payment change. Section 1026.35(e)(2) provides that a loan 
subject to this section may not have a penalty described by Sec.  
1026.32(d)(6) unless certain conditions are met. Section 
1026.35(e)(2)(ii)(C) lists as a condition that the amount of the 
periodic payment of principal or interest or both may not change 
during the four-year period following consummation. For examples 
showing whether a prepayment penalty is permitted or prohibited in 
connection with particular payment changes, see comment 
32(d)(7)(iv)-1. Those examples, however, include a condition that 
Sec.  1026.35(e)(2) does not include: The condition that, at 
consummation, the consumer's total monthly debt payments may not 
exceed 50 percent of the consumer's monthly gross income. For 
guidance about circumstances in which payment changes are not 
considered payment changes for purposes of this section, see comment 
32(d)(7)(iv)-2.
    2. Negative amortization. Section 1026.32(d)(2) provides that a 
loan described in Sec.  1026.32(a) may not have a payment schedule 
with regular periodic payments that cause the principal balance to 
increase. Therefore, the commentary to Sec.  1026.32(d)(7)(iv) does 
not include examples of payment changes in connection with negative 
amortization. The following examples show whether, under Sec.  
1026.35(e)(2), prepayment penalties are permitted or prohibited in 
connection with particular payment changes, when a loan agreement 
permits negative amortization:
    i. Initial payments for a variable-rate transaction consummated 
on January 1, 2010, are $1,000 per month and the loan agreement 
permits negative amortization to occur. Under the loan agreement, 
the first date that a scheduled payment in a different amount may be 
due is January 1, 2014, and the creditor does not have the right to 
change scheduled payments prior to that date even if negative 
amortization occurs. A prepayment penalty is permitted with this 
mortgage transaction provided that the other Sec.  1026.35(e)(2) 
conditions are met, that is: Provided that the prepayment penalty is

[[Page 30747]]

permitted by other applicable law, the penalty expires on or before 
December 31, 2011, and the penalty will not apply if the source of 
the prepayment funds is a refinancing by the creditor or its 
affiliate.
    ii. Initial payments for a variable-rate transaction consummated 
on January 1, 2010 are $1,000 per month and the loan agreement 
permits negative amortization to occur. Under the loan agreement, 
the first date that a scheduled payment in a different amount may be 
due is January 1, 2014, but the creditor has the right to change 
scheduled payments prior to that date if negative amortization 
occurs. A prepayment penalty is prohibited with this mortgage 
transaction because the payment may change within the four-year 
period following consummation.

    Dated: May 16, 2013.
Richard Cordray,
Director, Bureau of Consumer Financial Protection.
[FR Doc. 2013-12125 Filed 5-22-13; 8:45 am]
BILLING CODE 4810-AM-P
```