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[Federal Register Volume 77, Number 108 (Tuesday, June 5, 2012)]
[Proposed Rules]
[Pages 33120-33125]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-13608]

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BUREAU OF CONSUMER FINANCIAL PROTECTION

12 CFR Part 1026

[Docket No. CFPB-2012-0022]
RIN 3170-AA17

Truth in Lending (Regulation Z)

AGENCY: Bureau of Consumer Financial Protection.

ACTION: Notice of reopening of comment period and request for comment.

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SUMMARY: The Bureau of Consumer Financial Protection (Bureau) is 
reopening the comment period for the proposed rule published by the 
Board of Governors of the Federal Reserve System (Board) in the Federal 
Register on May 11, 2011 (76 FR 27390). On May 11, 2011, the Board 
published for notice and comment a proposed rule amending Regulation Z 
(Truth in Lending) to implement amendments to the Truth in Lending Act 
(TILA) made by the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (Dodd-Frank Act). The proposed rule addressed new 
ability-to-repay requirements that generally will apply to consumer 
credit transactions secured by a dwelling and the definition of a 
``qualified mortgage.'' Among other consumer financial protection laws, 
the Dodd-Frank Act transferred the Board's rulemaking authority for 
TILA to the Bureau as of July 21, 2011. The original comment period to 
the proposed rule closed on July 22, 2011. The Bureau is reopening the 
comment period until July 9, 2012 to seek comment specifically on 
certain new data and information submitted during or obtained after the 
close of the original comment period.

DATES: Comments must be received on or before July 9, 2012.

ADDRESSES: You may submit comments, identified by Docket No. CFPB-2012-
0022 or RIN 3170-AA17, by any of the following methods:
     Electronic: http://www.regulations.gov. Follow the 
instructions for submitting comments.
     Mail: Monica Jackson, Office of the Executive Secretary, 
Bureau of Consumer Financial Protection, 1700 G Street NW., Washington, 
DC 20552.
     Hand Delivery/Courier in Lieu of Mail: Monica Jackson, 
Office of the Executive Secretary, Bureau of Consumer Financial 
Protection, 1700 G Street NW., Washington, DC 20552.
    All submissions must include the agency name and docket number or 
Regulatory Information Number (RIN) for this rulemaking. In general, 
all comments received will be posted without change to http://www.regulations.gov. In addition, comments will be available for public 
inspection and copying at 1700 G Street NW., Washington, DC 20552, on 
official business days between the hours of 10 a.m. and 5 p.m. Eastern 
Time. You can make an appointment to inspect the documents by 
telephoning (202) 435-7275.
    All comments, including attachments and other supporting materials, 
will become part of the record and subject to

[[Page 33121]]

public disclosure. You should not include sensitive personal 
information, such as account numbers or social security numbers. The 
Bureau will not edit comments to remove any identifying or contact 
information.

FOR FURTHER INFORMATION CONTACT: Paul Mondor or Stephen Shin, Office of 
Regulations, at (202) 435-7700.

SUPPLEMENTARY INFORMATION:

I. Background

    Sections 1411, 1412, and 1414 of the Dodd-Frank Act create new TILA 
section 129C, which, among other things, establishes new ability-to-pay 
requirements and provides a presumption of compliance with those 
requirements if the mortgage loan is a ``qualified mortgage.'' On May 
11, 2011, the Board published for notice and comment a proposed rule 
amending Regulation Z to implement new TILA section 129C. 76 FR 27390. 
The comment period closed on July 22, 2011.
    As of July 21, 2011, the Dodd-Frank Act transferred the Board's 
rulemaking authority for TILA, among other consumer financial 
protection laws, to the Bureau. See sections 1061 and 1100A of the 
Dodd-Frank Act. Accordingly, all comment letters on the proposed rule 
were also transferred to the Bureau. In response to the proposed rule, 
approximately 1800 comment letters were received from numerous 
commenters, including members of Congress, lenders, consumer groups, 
trade associations, mortgage and real estate market participants, and 
individual consumers.
    In addition, after the close of the original comment period, 
various interested parties, including industry and consumer group 
commenters, submitted to the Bureau oral and written ex parte 
presentations on the proposed rule.\1\ Materials pertaining to these 
presentations are filed in the record and are publicly available at 
http://www.regulations.gov.
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    \1\ See CFPB Bulletin 11-3, CFPB Policy on Ex Parte 
Presentations in Rulemaking Proceedings, August 16, 2011.
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    Through various comment letters, ex parte communications, and the 
Bureau's own collection of data, the Bureau has received additional 
information and new data pertaining to the proposed rule. The Bureau is 
interested in providing opportunity for additional public comment on 
these materials. Accordingly, the Bureau is issuing this notice to 
reopen the comment period until July 9, 2012 in order to request 
comment specifically on certain additional information or new data, as 
discussed in detail below. The Bureau is not soliciting comment on 
other aspects of the proposed rule. Therefore, the Bureau encourages 
commenters to limit their submissions accordingly.

II. Discussion and Request for Comment

A. Federal Housing Finance Agency Mortgage Loan Data

    The Bureau seeks comment on mortgage loan data that the Bureau has 
received from the Federal Housing Finance Agency (FHFA).\2\ To date, 
the Bureau has received a sample drawn from the FHFA's Historical Loan 
Performance (HLP) dataset along with tabulations from the entire file. 
The data include a one percent random sample of all mortgage loans in 
the HLP dataset from 1997 through 2011; and tabulations of the HLP 
dataset by FHFA showing the number of loans and performance of those 
loans by year and debt-to-income (DTI) range.
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    \2\ The Bureau notes that the data received by the Bureau are 
confidential supervisory data and subject to a confidentiality 
agreement between the Bureau and the FHFA. Therefore, the Bureau is 
seeking comment on aggregate or otherwise non-confidential aspects 
of the dataset.
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    The HLP dataset consists of all mortgage loans purchased or 
guaranteed by the Federal National Mortgage Association (Fannie Mae) 
and the Federal Home Loan Mortgage Corporation (Freddie Mac) (jointly 
with Fannie Mae, the ``Enterprises''), but does not include loans 
backing private-label mortgage-backed securities (MBS) bought by the 
Enterprises.\3\ The dataset contains loan-level information on 
characteristics and performance of all single-family mortgages 
purchased or guaranteed by the Enterprises. FHFA updates the HLP 
dataset quarterly with information from each Enterprise. Among other 
elements, the dataset includes product type; payment-to-income and 
debt-to-income (PTI/DTI) ratios at origination; initial loan-to-value 
(LTV) ratios based on the purchase price or appraised property value 
and the first-lien balance; and credit score(s) for the borrower(s).
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    \3\ See Mortgage Market Note 11-02 (Apr. 11, 2011), available 
at: http://www.fhfa.gov/webfiles/20686/QRM_FINAL_ALL.pdf
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    The Bureau notes that in the context of the multi-agency 2011 
Qualified Residential Mortgage Proposal (2011 QRM Proposal) \4\ and in 
the Mortgage Market Note 11-02, FHFA has discussed or released 
historical loan performance data. In particular, the Bureau notes 
FHFA's discussion of the HLP dataset generally, including the 
limitations of the data, and the FHFA's release of historical data on 
loan volumes and delinquency rates, including any tabulations or data 
based on the HLP dataset, as provided in Mortgage Market Note 11-02.\5\
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    \4\ 76 FR 24030 (Apr. 29, 2011).
    \5\ See, e.g., Appendix A of 2011 QRM Proposal and Appendix A of 
Mortgage Market Note 11-02.
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    FHFA's HLP dataset contains certain loan-level variables that can 
be used for a variety of data modeling and analysis. The Bureau 
proposes to use these data to tabulate volumes and performance of loans 
with varying characteristics and to perform other statistical analyses 
that may assist the Bureau in defining loans with characteristics that 
make it appropriate to presume that the lender complied with the 
ability-to-pay requirements or assist the Bureau in assessing the 
benefits and costs to consumers, including access to credit, and 
covered persons of, as well as the market share covered by, alternative 
definitions of a ``qualified mortgage.'' For example, the Bureau is 
examining various measures of delinquency and their relationship to 
other variables such as a consumer's total DTI ratio.
    The tables below show the volume of loans and the percentage that 
were ever 60 days or more delinquent, tabulated by the total DTI on the 
loans and year of origination. The Bureau believes that loan 
performance, as measured by delinquency rate such as 60 days or more 
delinquent, is an appropriate metric to evaluate whether consumers had 
the ability to repay those loans at the time made. The Bureau notes 
that these specific tabulations include first-lien mortgages for first 
or second homes, that have fully documented income and that are fully 
amortizing with a maturity that does not exceed 30 years. The Bureau 
further notes that the tabulations do not include the following types 
of loans: loans for investor-owned properties, low- or no-document 
mortgages; interest-only (IO) mortgages; negatively-amortizing 
mortgages such as payment option-ARMs; or mortgages with a balloon 
payment feature.\6\
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    \6\ Some of the loans included in these tables are non-
conventional loans insured by government agencies.
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[GRAPHIC] [TIFF OMITTED] TP05JN12.001

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    The FHFA data are comprehensive and cover the entirety of mortgages 
purchased or guaranteed by the Enterprises. The Bureau has also 
acquired commercially available data on mortgages securitized into 
private label securities,\7\ and expects to perform similar data 
modeling and analysis on this data. In addition, the Bureau is seeking 
supplemental data on loans held in portfolio and non-conventional loans 
insured or guaranteed by other federal agencies. These supplemental 
data sources may also be used to inform the Bureau's analysis.
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    \7\ For example, the Bureau has procured commercially available 
loan-level data related to mortgages held in private label 
securities from Blackbox Logic LLC.
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    Certain commenters and interested parties requested that the Bureau 
adopt a specific DTI ratio requirement for qualified mortgages. For 
example, some suggested that if a borrower's total DTI 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 DTI requirement, some commenters and interested parties 
suggested that the Bureau should include within the definition of a 
``qualified mortgage'' loans with a DTI 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. The Bureau 
notes, however, that available data do not provide information on 
certain non-collateral factors, such as liquid financial reserves, 
which would enable the Bureau to examine their relationship with 
measures of loan performance and a consumer's ability to repay. 
Accordingly, the Bureau seeks data, if available, from commenters or 
interested parties on such factors (in addition to DTI ratios as 
discussed above) and their relationship to measures of delinquency or 
their impact on the number or percentage of mortgage loans that would 
be a ``qualified mortgage.''

[[Page 33124]]

Request for Comment
    1. The Bureau seeks comment on the dataset received from FHFA and 
commercially available data on mortgages securitized into private label 
securities, including the data source, parameters, and whether other 
data or studies are available or more appropriate for the purposes 
indicated above.
    2. The Bureau requests data or tabulations for loans not covered in 
the FHFA data, including loans insured by the Federal Housing 
Administration (FHA loans), the Department of Veterans Affairs (VA 
loans), the Department of Agriculture and the Rural Housing Service 
(RHS loans); or loans held in portfolio or securitized outside of the 
Enterprises or a federal agency, which would be appropriate for the 
purposes indicated above.
    3. The Bureau seeks comment and data on any measures of loan 
performance and their relationship to a consumer's DTI ratio.
    4. The Bureau seeks comment and data on any measures of residual 
income, the use of such measures in loan underwriting, the relationship 
of these measures to loan performance, and their relationship to 
measures of consumer expenditures.
    5. The Bureau seeks comment and data regarding any measures of the 
amount of liquid financial reserves available to meet (i) mortgage-
related obligations or (ii) current obligations, the use of such 
measures in loan underwriting, and the relationship of these measures 
to loan performance.
    6. The Bureau seeks comment and data regarding any measures of 
stable income and timely housing payments, the use of such measures in 
loan underwriting, and the relationship of these measures to loan 
performance.

B. Litigation Cost Estimates

    In response to information received from commenters and ex parte 
communications, the Bureau is seeking comment and data on estimates of 
litigation costs and liability risks associated with claims alleging a 
violation of ability-to-repay requirements for a mortgage loan that is 
not a ``qualified mortgage,'' in addition to costs and risks that might 
apply to a ``qualified mortgage.''
    As discussed in detail in the proposal, section 1416 of the Dodd-
Frank Act creates special remedies for violations of TILA section 
129C(a) and provides that the statute of limitations for an action for 
a violation of TILA section 129C is three years from the date of the 
occurrence of the violation. In addition, section 1413 of the Dodd-
Frank Act provides that a consumer may assert a violation of TILA 
section 129C as a defense to foreclosure by recoupment or set off 
without regard for the time limit on a private action for damages. 
However, new TILA section 129C, among other things, provides a 
presumption of compliance with the ability-to-repay requirements if the 
mortgage loan is a ``qualified mortgage.'' To implement this special 
protection from liability, the Board proposed two alternative 
definitions of a ``qualified mortgage'' that would provide either a 
legal safe harbor or a rebuttable presumption that the ability-to-repay 
requirements had been met.
    Commenters and ex parte communications addressed various aspects of 
the alternative proposals implementing the presumption of compliance 
for a ``qualified mortgage.'' In particular, some commenters and 
interested parties presented estimates of the litigation costs 
associated with claims alleging a violation of the ability-to-repay 
requirements. Commenters and interested parties argued that these 
estimated costs should inform the Bureau's determination between a safe 
harbor or a rebuttable presumption as well as the scope of coverage of 
a ``qualified mortgage.'' Other commenters and interested parties noted 
that additional litigation costs should be considered, such as 
commercial litigation costs associated with ``put-back'' liabilities 
and risks for loans sold on the secondary market and extended 
foreclosure timelines because of ongoing ability-to-repay litigation.
    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.\8\ 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 a safe harbor or rebuttable presumption. On the other 
hand, 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.\9\ 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. Consumer groups also provided 
percentages of borrowers in foreclosure who are represented by lawyers, 
noting the difficulty in bringing a TILA violation claim, and addressed 
estimates of litigation costs, such as attorney's fees.
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    \8\ See, e.g., letter from David H. Stevens, Mortgage Bankers 
Association, to Board of Governors of the Federal Reserve System, 
July 22, 2011.
    \9\ See, e.g., letter from Center for Responsible Lending, 
National Consumer Law Center, Consumer Federation of America, and 
National Association of Consumer Advocates, to Consumer Financial 
Protection Bureau and Board of Governors of the Federal Reserve 
System, July 22, 2011; Memorandum on ``Rebuttable Presumption: A 
Perspective on Litigation Risk by the Numbers'' from Center for 
Responsible Lending and National Consumer Law Center, to Consumer 
Financial Protection Bureau, dated October 11, 2011.
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    The Bureau is reopening the comment period to seek comment and data 
on various factors the Bureau believes are relevant to analyzing 
estimated costs associated with litigation for a claim alleging a 
violation of ability-to-repay requirements, as described below.
Request for Comment
    Foreclosure and other times when a suit may be filed. The Dodd-
Frank Act provides that a borrower may assert a violation of the 
ability-to-repay requirements as a defense to foreclosure. Therefore, 
the Bureau believes that estimates of serious delinquency and number of 
homes entering foreclosure are critical to measuring the potential 
costs of ability-to-repay litigation risk. Although aggregate data on 
serious delinquency and homes entering foreclosure are available from 
various sources such as the Mortgage Bankers Association National 
Delinquency Survey, the Bureau notes that more granular estimates of 
homes entering foreclosure can be estimated from the FHFA data and 
other data sources.
    1. The Bureau seeks comment on the most appropriate measure of 
delinquency for purposes of calculating potential costs associated with 
ability-to-repay litigation in the foreclosure context.
    2. The Bureau seeks comment on estimates of potential lawsuits 
asserting an ability-to-repay violation during the first three years 
after consummation--when the borrower has not yet defaulted but 
nevertheless sues the lender.
    Number of potential litigants and complaints filed. Consumer groups 
argued that due to the complexity of mortgage-related litigation, such 
as a violation of TILA, asserting an ability-to-repay violation would 
require access to a lawyer. These groups noted that appropriate proxies 
for the number of

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complaints filed would be the percentage of borrowers in foreclosure 
who are represented by a lawyer as well as the number of other types of 
TILA violation cases. The Bureau notes that survey and other data 
indicate that a majority of borrowers in default would not have legal 
representation.\10\
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    \10\ For example, the New York State Judiciary reported that 
before New York mandated settlement conferences in residential 
foreclosure cases, up to ninety percent of borrowers sued failed to 
appear and received default judgments. See State of New York Unified 
Court System, 2010 Report of the Chief Administrator of the Courts, 
at 8, 11 (2010), available at: http://www.courts.state.ny.us/publications/pdfs/foreclosurereportnov2010.pdf. The court stated: 
``The lack of representation in foreclosure cases continues to be 
one of the greatest challenges we face in fulfilling our statutory 
mandate.'' Id. at 12. Similarly, in one of the most mature 
foreclosure diversion programs in the country, in Philadelphia, 4.5 
percent of the homeowners who participated had legal representation. 
See The Reinvestment Fund, Philadelphia Residential Mortgage 
Foreclosure Diversion Program: Initial Report of Findings, at 10 
(June 2011), available at: http://www.trfund.com/resource/downloads/policypubs/Foreclosure_Diversion_Initial_Report.pdf. In addition, 
a 2010 survey of foreclosure mediation programs across the United 
States by the Department of Justice and the Department of Housing 
and Urban Development reported that ``legal resources for homeowners 
in mediation programs generally are quite limited.'' Department of 
Justice & Department of Housing & Urban Development, Emerging 
Strategies for Effective Foreclosure Mediation Programs, at 6 
(2010), available at: http://www.justice.gov/atj/effective-mediation-prog-strategies.pdf.
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    1. The Bureau seeks comment or data on whether and if so, how the 
number of lawsuits alleging an ability-to-repay violation would vary 
under the following circumstances:
    (a) The mortgage loan is conceded not to be a ``qualified 
mortgage.''
    (b) The mortgage loan is claimed to be a ``qualified mortgage.''
Potential Outcomes From Litigation and Damages
    As noted above, sections 1413 and 1416 of the Dodd-Frank Act 
provide special statutory remedies for violations of TILA section 
129C(a), which can include an award of damages in the amount equal to 
the sum of all finance charges and fees paid by the consumer within the 
three-year statute of limitations and in the case of a defense to 
foreclosure, recoupment or set off.
    1. The Bureau seeks comment on the likelihood of potential outcomes 
of litigation, such as dismissal, summary judgment, settlement, or 
judgment after trial, and the effect on costs under various scenarios 
including:
    (a) The mortgage loan is conceded not to be a ``qualified 
mortgage.''
    (b) The mortgage loan is claimed to be a ``qualified mortgage.''
    2. The Bureau seeks comment and data on assumptions about a loan, 
such as interest rate, purchase price, finance charges, and fees, 
required to calculate average amount of damages awarded in a TILA case 
involving a violation of the ability-to-repay requirements based on the 
scenarios listed above in paragraph 1.
    3. The Bureau seeks comment on the impact of other aspects of 
damages, such as a consumer's attorney's fees, and lender's litigation 
costs.
Other Factors or Costs
    1. The Bureau seeks comment on whether any additional factors 
should be considered in assessing the litigation-related costs 
associated with the ability-to-repay requirements.
    2. The Bureau seeks comment and data on any other potential costs 
of ability-to-repay litigation, including:
    (a) Costs associated with risks that loans are ``put back'' to 
originators by secondary market participants due to a potential 
ability-to-repay claim or proven violation. Factors that may determine 
the total cost of put backs may include: (i) Number and type of 
representation and warranty provisions in purchase and sale agreements 
going forward; (ii) number of loans that could potentially be put back; 
(iii) frequency of put backs being realized; and (iv) cost to lender 
net of any recovery through foreclosure or sale.
    (b) Costs associated with extended foreclosure timelines due to 
ability-to-repay litigation.

    Dated: May 31, 2012.
Richard Cordray,
Director, Bureau of Consumer Financial Protection.
[FR Doc. 2012-13608 Filed 6-4-12; 8:45 am]
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