Vol. 80 Wednesday, 

No. 28 February 11, 2015 

Part III 

Bureau of Consumer Financial Protection 

12 CFR Part 1026 

Amendments Relating to Small Creditors and Rural or Underserved Areas 

Under the Truth in Lending Act (Regulation Z); Proposed Rule 


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7770 Federal Register / Vol. 80, No. 28 / Wednesday, February 11, 2015 / Proposed Rules 

1Specifically, on January 10, 2013, the Bureau 

issued Escrow Requirements Under the Truth in 

Lending Act (Regulation Z), 78 FR 4725 (Jan. 22, 

2013) (January 2013 Escrows Final Rule), High-Cost 

Mortgage 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), 78 FR 6855 (Jan. 31, 

2013) (2013 HOEPA Final Rule), and Ability-toRepay and Qualified Mortgage Standards Under the 

Truth in Lending Act (Regulation Z), 78 FR 6407 

(Jan. 30, 2013) (January 2013 ATR Final Rule). The 

Bureau concurrently issued a proposal to amend the 

January 2013 ATR Final Rule, which was finalized 

on May 29, 2013. See 78 FR 6621 (Jan. 30, 2013) 

(January 2013 ATR Proposal) and 78 FR 35429 (June 

12, 2013) (May 2013 ATR Final Rule). On January 

17, 2013, the Bureau issued the Real Estate 

Settlement Procedures Act (Regulation X) and Truth 

in Lending Act (Regulation Z) Mortgage Servicing 

Final Rules, 78 FR 10901 (Feb. 14, 2013) 

(Regulation Z) and 78 FR 10695 (Feb. 14, 2013) 

(Regulation X). On January 18, 2013, the Bureau 

issued the Disclosure and Delivery Requirements 

for Copies of Appraisals and Other Written 

Valuations Under the Equal Credit Opportunity Act 

(Regulation B), 78 FR 7215 (Jan. 31, 2013) and, 

jointly with other agencies, issued Appraisals for 

Higher-Priced Mortgage Loans, 78 FR 10367 (Feb. 

13, 2013) (January 2013 Interagency Appraisals 

Final Rule). On January 20, 2013, the Bureau issued 

the Loan Originator Compensation Requirements 

under the Truth in Lending Act (Regulation Z), 78 

FR 11279 (Feb. 15, 2013). 

2May 2013 ATR Final Rule; see also 

Amendments to the 2013 Mortgage Rules Under the 

Equal Credit Opportunity Act (Regulation B), Real 

Estate Settlement Procedures Act (Regulation X), 

and the Truth in Lending Act (Regulation Z), 78 FR 

60382 (Oct. 1, 2013) (September 2013 Final Rule) 

(extending application of the temporary two-year 

transition period to high-cost mortgages). 

3Amendments to the 2013 Mortgage Rules Under 

the Truth in Lending Act (Regulation Z), 79 FR 

25730 (May 6, 2014). 

4See also 2013 September Final Rule. 

5The January 2013 Interagency Appraisals Final 

Rule provides an exemption from the requirement 

to obtain a second appraisal for certain higherpriced mortgage loans if the loan is secured by a 

property in a ‘‘rural county.’’ This proposed rule 

would not affect the scope of that exemption 

because it would not change the counties that are 

defined as ‘‘rural’’ under § 1026.35(b)(2)(iv)(A). 

BUREAU OF CONSUMER FINANCIAL 

PROTECTION 

12 CFR Part 1026 

[Docket No. CFPB–2015–0004] 

RIN 3170–AA43 

Amendments Relating to Small 

Creditors and Rural or Underserved 

Areas Under the Truth in Lending Act 

(Regulation Z) 

AGENCY: Bureau of Consumer Financial 

Protection. 

ACTION: Proposed rule with request for 

public comment. 

SUMMARY: The Bureau of Consumer 

Financial Protection (Bureau) proposes 

amendments to certain mortgage rules 

issued in 2013. The proposed rule 

revises the Bureau’s regulatory 

definitions of small creditor, and rural 

and underserved areas, for purposes of 

certain special provisions and 

exemptions from various requirements 

provided to certain small creditors 

under the Bureau’s rules. 

DATES: Comments must be received on 

or before March 30, 2015. 

ADDRESSES: You may submit comments, 

identified by Docket No. CFPB–2015– 

0004 or RIN 3170–AA43, by any of the 

following methods: 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

• Email: FederalRegisterComments@

cfpb.gov. Include CFPB–2015–0004 

AND/OR RIN 3170–AA43 in the subject 

line of the message. 

• Mail: Monica Jackson, Office of the 

Executive Secretary, Consumer 

Financial Protection Bureau, 1700 G 

Street NW., Washington, DC 20552. 

• Hand Delivery/Courier: Monica 

Jackson, Office of the Executive 

Secretary, Consumer Financial 

Protection Bureau, 1275 First Street NE., 

Washington, DC 20002. 

Instructions: All submissions should 

include the agency name and docket 

number or Regulatory Information 

Number (RIN) for this rulemaking. 

Because paper mail in the Washington, 

DC area and at the Bureau is subject to 

delay, commenters are encouraged to 

submit comments electronically. In 

general, all comments received will be 

posted without change to http://

www.regulations.gov. In addition, 

comments will be available for public 

inspection and copying at 1275 First 

Street NE., Washington, DC 20002, on 

official business days between the hours 

of 10 a.m. and 5 p.m. Eastern Time. You 

can make an appointment to inspect the 

documents by telephoning (202) 435– 

7275. 

All comments, including attachments 

and other supporting materials, will 

become part of the public record and 

subject to public disclosure. Sensitive 

personal information, such as account 

numbers or Social Security numbers, 

should not be included. Comments 

generally will not be edited to remove 

any identifying or contact information. 

FOR FURTHER INFORMATION CONTACT: 

Amanda Quester, Senior Counsel, or 

Paul Ceja, Senior Counsel and Special 

Advisor, Office of Regulations, at (202) 

435–7700. 

SUPPLEMENTARY INFORMATION: 

I. Summary of the Proposed Rule 

In January 2013, the Bureau issued 

several final rules concerning mortgage 

markets in the United States (2013 Title 

XIV Final Rules), pursuant to the DoddFrank Wall Street Reform and Consumer 

Protection Act (Dodd-Frank Act), Public 

Law 111–203, 124 Stat. 1376 (2010).1

The Bureau has clarified and revised 

those rules over the past two years. The 

purpose of those updates was to address 

important questions raised by industry, 

consumer groups, or other stakeholders. 

The Bureau has also indicated that it 

would revisit the Bureau’s regulatory 

definitions of small creditor and rural 

and underserved areas promulgated in 

those rules and related amendments 

through study and possibly through 

additional rulemaking. For example, in 

promulgating a temporary two-year 

transition period in which certain small 

creditors are permitted to make balloonpayment qualified mortgages in its May 

2013 ATR Final Rule, the Bureau stated 

that it would study, during that 

transition period, whether the rural and 

underserved definitions should be 

adjusted.2 Similarly, the Bureau 

solicited comments on the small 

creditor definition in a proposal 

amending other regulatory provisions.3

The Bureau is now proposing several 

additional amendments to the 2013 

Title XIV Final Rules to revise 

Regulation Z regulatory provisions and 

official interpretations relating to 

escrow requirements for higher-priced 

mortgage loans under the Bureau’s 

January 2013 Escrows Final Rule and 

ability-to-repay/qualified mortgage 

requirements under the Bureau’s 

January 2013 ATR Final Rule and May 

2013 ATR Final Rule.4 The Bureau’s 

proposal would also affect requirements 

under the Bureau’s 2013 HOEPA Final 

Rule.5 The Bureau’s proposal reflects 

feedback from stakeholders regarding 

the Bureau’s definitions of small 

creditor and rural and underserved 

areas, as those definitions relate to 

special provisions and certain 

exemptions to requirements provided to 

small creditors under the Bureau’s 

aforementioned rules. 

Specifically, the Bureau proposes the 

following with regard to the definitions 

of small creditor and rural and 

underserved areas (as currently 

provided in §§ 1026.35(b)(2)(iii)(A), (B), 

(C), and (D), and 1026.35(b)(2)(iv)(A) 

and (B) and commentary, and crossreferenced in §§ 1026.43(e)(5) and (e)(6), 

1026.43(f)(1) and (f)(2) and commentary, 

and § 1026.32(d)(1)(ii)(C)): 

• Raising the loan origination limit 

for determining eligibility for smallcreditor status (based on the preceding 

calendar year’s originations of the 

creditor and its affiliates) from 500 

originations of covered transactions 

secured by a first lien, to 2,000 such 

originations, and excluding originated 

loans held in portfolio by the creditor 


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6See, e.g., sections 1011 and 1021 of the DoddFrank Act, 12 U.S.C. 5491 and 5511 (establishing 

and setting forth the purpose, objectives, and 

functions of the Bureau); section 1061 of the DoddFrank Act, 12 U.S.C. 5581 (consolidating certain 

rulemaking authority for Federal consumer 

financial laws in the Bureau); section 1100A of the 

Dodd-Frank Act (codified in scattered sections of 15 

U.S.C.) (similarly consolidating certain rulemaking 

authority in the Bureau). But see Section 1029 of 

the Dodd-Frank Act, 12 U.S.C. 5519 (subject to 

certain exceptions, excluding from the Bureau’s 

authority 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). 

7See title XIV of the Dodd-Frank Act, Public Law 

111–203, 124 Stat. 1376 (2010) (codified in 

scattered sections of 12 U.S.C., 15 U.S.C., and 42 

U.S.C.). 

8See section 1400(c) of the Dodd-Frank Act, 15 

U.S.C. 1601 note. 

9 78 FR 6621 (Jan. 30, 2013); 78 FR 35429 (June 

12, 2013) (providing a two-year transition period 

during which small creditors that do not operate 

predominantly in rural or underserved areas can 

offer balloon-payment qualified mortgages if they 

hold the loans in portfolio). In May 2013, the 

Bureau also finalized amendments to the January 

2013 Escrows Final Rule. Amendments to the 2013 

Escrows Final Rule under the Truth in Lending Act 

(Regulation Z), 78 FR 30739 (May 23, 2013) (May 

2013 Escrows Final Rule). 

10See, e.g., 78 FR 44685 (July 24, 2013) 

(clarifying, among other things, which mortgages to 

consider in determining small servicer status and 

the application of the small servicer exemption 

with regard to servicer/affiliate and master servicer/ 

subservicer relationships); 78 FR 45842 (July 30, 

2013); 78 FR 60382 (Oct. 1, 2013) (revising, among 

other things, two exceptions available to small 

creditors operating predominantly in ‘‘rural’’ or 

‘‘underserved’’ areas, pending the Bureau’s 

reexamination of the underlying definitions); 78 FR 

62993 (Oct. 23, 2013) (clarifying the specific 

disclosures that must be provided before counseling 

for high cost mortgages can occur and proper 

compliance regarding servicing requirements when 

a consumer is in bankruptcy or sends a cease 

communication request under the Fair Debt 

Collection Practice Act). In the fall of 2014, the 

Bureau also made further amendments to the 2013 

mortgage rules related to nonprofit entities and 

provided a cure mechanism for the points and fees 

limit that applies to qualified mortgages. 79 FR 

65300 (Nov. 3, 2014). 

and its affiliates from that limit. The 

Bureau also proposes to provide a grace 

period from calendar year to calendar 

year to allow a creditor that exceeded 

the origination limit in the preceding 

calendar year to operate, in certain 

circumstances, as a small creditor with 

respect to applications received prior to 

April 1 of the current calendar year. 

• Including in the calculation of the 

asset limit for small-creditor status (i.e., 

less than $2 billion (adjusted annually) 

in assets as of the end of the preceding 

calendar year) the assets of the creditor’s 

affiliates that originate mortgage loans. 

The Bureau also proposes to add a grace 

period to the annual asset limit, similar 

to the grace period added to the 

origination limit, to allow a creditor that 

exceeded that threshold in the 

preceding calendar year to operate, in 

certain circumstances, as a small 

creditor with respect to applications 

received before April 1 of the current 

calendar year. 

• Adjusting the time period used in 

determining whether a creditor is 

operating predominantly in rural or 

underserved areas (i.e., whether the 

creditor extended more than 50 percent 

of its total first-lien covered transactions 

secured by properties located in rural or 

underserved areas) from any of the three 

preceding calendar years to the 

preceding calendar year. As with the 

origination and asset limits for smallcreditor status, the Bureau proposes to 

add a grace period to allow a creditor 

that fails to meet this threshold in the 

preceding calendar year, to continue 

operating, in certain circumstances, as if 

it had met this threshold with respect to 

applications received before April 1 of 

the current calendar year. 

• Amending the current exemption 

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

to small creditors that operate 

predominantly in rural or underserved 

areas from the requirement for the 

establishment of escrow accounts for 

higher-priced mortgage loans, to prevent 

creditors that are currently ineligible for 

the exemption, but that might qualify if 

the proposed rule is finalized, from 

losing eligibility for the exemption 

because they established escrow 

accounts due to requirements under the 

current rule prior to the proposed 

changes in this rulemaking taking effect. 

• Expanding the definition of rural to 

include either: (1) A county that meets 

the current definition of rural county, or 

(2) a census block that is not in an urban 

area as defined by the U.S. Census 

Bureau (Census Bureau). 

• Conforming, through technical 

changes, the definition of 

‘‘underserved’’ to the proposals 

discussed above. The substance of the 

‘‘underserved’’ definition would remain 

the same. 

• Adding two new safe harbor 

provisions related to the rural or 

underserved definition for certain 

automated tools that: (1) May be 

provided on the Bureau’s Web site to 

allow creditors to determine whether 

properties are located in rural or 

underserved areas, or (2) may be 

provided on the Census Bureau’s Web 

site to assess whether a particular 

property is located in an urban area 

according to the Census Bureau’s 

definition. The Bureau also proposes to 

maintain the current safe harbor for lists 

of rural and underserved counties 

provided by the Bureau, with technical 

changes. The Bureau also proposes to 

add commentary clarifying the 

circumstances under which U.S. 

territories will be included on the lists. 

• Extending the temporary two-year 

transition period that allows certain 

small creditors to make balloonpayment qualified mortgages 

(§ 1026.43(e)(6)) and balloon-payment 

high-cost mortgages 

(§ 1026.32(d)(1)(ii)(C)), regardless of 

whether they operate predominantly in 

rural or underserved areas to certain 

covered transactions for which the 

application was received before April 1, 

2016. 

II. Background 

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 DoddFrank Act, which was signed into law 

on July 21, 2010. In the Dodd-Frank Act, 

Congress established the Bureau and 

generally consolidated the rulemaking 

authority for Federal consumer financial 

laws, including the Truth in Lending 

Act (TILA) and the Real Estate 

Settlement Procedures Act, in the 

Bureau.6 At the same time, Congress 

significantly amended the statutory 

requirements governing mortgage 

practices, with the intent to restrict the 

practices that contributed to and 

exacerbated the crisis.7

Under the statute, most of these new 

requirements would have taken effect 

automatically on January 21, 2013 if the 

Bureau had not issued implementing 

regulations by that date.8 To avoid 

uncertainty and potential disruption in 

the national mortgage market at a time 

of economic vulnerability, the Bureau 

issued several final rules (the 2013 Title 

XIV Final Rules) in a span of less than 

two weeks in January 2013 to 

implement these new statutory 

provisions and provide for an orderly 

transition. These final rules include the 

January 2013 ATR Final Rule, the 

January 2013 Escrows Final Rule, the 

2013 HOEPA Final Rule, and the 

January 2013 Interagency Appraisals 

Final Rule. Most of the mortgage rules 

released in January 2013 became 

effective on January 10, 2014. 

Concurrent with the January 2013 

ATR Final Rule, on January 10, 2013, 

the Bureau issued the January 2013 ATR 

Proposal, which the Bureau adopted on 

May 29, 2013 in the May 2013 ATR 

Final Rule.9 The Bureau has issued 

additional corrections, revisions, and 

clarifications to the provisions adopted 

by the Bureau in the 2013 Title XIV 

Final Rules and the May 2013 ATR 

Final Rule over the past two years.10

This proposal concerns additional 


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7772 Federal Register / Vol. 80, No. 28 / Wednesday, February 11, 2015 / Proposed Rules 

11 Dodd-Frank Act section 1061(a)(1)(A), 12 

U.S.C. 5581(a)(1)(A). 

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

5481(14) (defining ‘‘Federal consumer financial 

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

the provisions of title X of the Dodd-Frank Act, and 

the laws for which authorities are transferred under 

title X subtitles F and H 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(12) note (defining ‘‘enumerated 

consumer laws’’ to include certain subtitles and 

provisions of Dodd-Frank Act title XIV). 

revisions to the 2013 Title XIV Final 

Rules related to provisions regarding 

small creditors and rural and 

underserved areas. 

III. Legal Authority 

The Bureau is issuing this proposed 

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.’’ 11

Title X of the Dodd-Frank Act, 

including section 1061 of the DoddFrank Act, along with TILA and certain 

subtitles and provisions of title XIV of 

the Dodd-Frank Act, are Federal 

consumer financial laws.12

A. TILA-Specific Statutory Grants of 

Authority 

As discussed in more detail in the 

section-by-section analysis below, TILA 

as amended by the Dodd-Frank Act 

provides two specific statutory bases for 

the proposals in the Bureau’s proposed 

rule. TILA section 129D(c) authorizes 

the Bureau to exempt, by regulation, a 

creditor from the requirement (in 

section 129D(a)) that escrow accounts be 

established for higher-priced mortgage 

loans if the creditor operates 

predominantly in rural or underserved 

areas, retains its mortgage loans in 

portfolio, does not exceed (together with 

all affiliates) a total annual mortgage 

loan origination limit set by the Bureau, 

and meets any asset size threshold, and 

any other criteria, the Bureau may 

establish. TILA section 129C(b)(2)(E) 

authorizes the Bureau to provide, by 

regulation, that certain balloon-payment 

mortgages originated by small creditors 

receive qualified mortgage status, even 

though qualified mortgages are 

otherwise prohibited from having 

balloon-payment features. The creditor 

qualifications under TILA section 

129C(b)(2)(E)(iv) are essentially the 

same as those for the higher-priced 

mortgage loan escrow exemption, 

including operating predominantly in 

rural or underserved areas, together 

with all affiliates not exceeding a total 

annual mortgage loan origination limit 

set by the Bureau, retaining the balloonpayment loans in portfolio, and meeting 

any asset size threshold, and any other 

criteria, the Bureau may establish. 

B. Other Rulemaking and Exception 

Authority 

This proposed 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. 

Truth in Lending Act 

As amended by the Dodd-Frank Act, 

section 105(a) of TILA authorizes the 

Bureau to prescribe regulations to carry 

out the purposes of TILA. 15 U.S.C. 

1604(a). Under section 105(a), such 

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 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. 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). In 

particular, it is a purpose of TILA 

section 129C, as added by the DoddFrank Act, to assure that consumers are 

offered and receive residential mortgage 

loans on terms that reasonably reflect 

their ability to repay the loans and that 

are understandable and not unfair, 

deceptive, or abusive. 15 U.S.C. 

1639b(a)(2). 

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. Dodd-Frank Act section 

1100A clarified the Bureau’s section 

105(a) authority by amending that 

section to provide express authority to 

prescribe regulations that contain 

‘‘additional requirements’’ that the 

Bureau finds are necessary or proper to 

effectuate the purposes of TILA, to 

prevent circumvention or evasion 

thereof, or to facilitate compliance 

therewith. This amendment clarified the 

Bureau’s authority 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), which include 

effectuating all of TILA’s purposes. 

Therefore, the Bureau believes that its 

authority under TILA section 105(a) to 

make exceptions, adjustments, and 

additional provisions that the Bureau 

finds are necessary or proper to 

effectuate the purposes of TILA applies 

with respect to the purpose of section 

129D. That purpose is to ensure that 

consumers understand and appreciate 

the full cost of homeownership. The 

purpose of TILA section 129D is also 

informed by the findings articulated in 

section 129B(a) that economic 

stabilization would be enhanced by the 

protection, limitation, and regulation of 

the terms of residential mortgage credit 

and the practices related to such credit, 

while ensuring that responsible and 

affordable mortgage credit remains 

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

1639b(a). 

TILA section 129C(b)(3)(B)(i) 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; are 

necessary and appropriate to effectuate 

the purposes of the ability-to-repay and 

residential mortgage loan origination 

requirements; prevent circumvention or 

evasion thereof; or facilitate compliance 

with TILA sections 129B and 129C. 15 

U.S.C. 1639c(b)(3)(B)(i). In addition, 

TILA section 129C(b)(3)(A) requires the 

Bureau to prescribe regulations to carry 

out such purposes. 15 U.S.C. 

1639c(b)(3)(A). 

TILA section 105(a) grants the Bureau 

authority to make adjustments and 

exceptions to the requirements of TILA 

for all transactions subject to TILA, 

except with respect to the substantive 

provisions of TILA section 129 that 

apply to high-cost mortgages. With 

respect to the high-cost mortgage 

provisions of TILA section 129, TILA 

section 129(p), 15 U.S.C. 1639(p), as 

amended by the Dodd-Frank Act, grants 

the Bureau authority to create 

exemptions to the restrictions on highcost mortgages and to expand the 

protections that apply to high-cost 

mortgages. Under TILA section 

129(p)(1), the Bureau may exempt 


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specific mortgage products or categories 

from any or all of the prohibitions 

specified in TILA section 129(c) through 

(i), if the Bureau finds that the 

exemption is in the interest of the 

borrowing public and will apply only to 

products that maintain and strengthen 

homeownership and equity protections. 

Among these referenced provisions of 

TILA is section 129(e), the prohibition 

on balloon payments for high-cost 

mortgages. 

C. The Dodd-Frank Act 

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 and certain enumerated subtitles 

and provisions of title XIV of the DoddFrank Act are Federal consumer 

financial laws. Accordingly, the Bureau 

is exercising its authority under DoddFrank Act section 1022(b) to propose 

rules that carry out the purposes and 

objectives of TILA, title X of the DoddFrank Act, and certain enumerated 

subtitles and provisions of title XIV of 

the Dodd-Frank Act, and to prevent 

evasion of those laws. 

IV. Proposed Effective Date 

The Bureau proposes that all of the 

changes proposed in this notice take 

effect on January 1, 2016. Specifically, 

the Bureau’s proposed amendments to 

§ 1026.35(b)(2)(iii)(A), (B), (C), and (D) 

and its commentary, to 

§ 1026.35(b)(2)(iv)(A), (B), and (C) and 

its commentary, to § 1026.43(e)(6), and 

to the commentary to §§ 1026.43(e)(5) 

and 1026.43(f)(1) and (f)(2), take effect 

for covered transactions consummated 

on or after January 1, 2016. The Bureau 

believes this proposed effective date 

provides a date that is consistent with 

the end of the calendar year 

determinations required to be made 

with regard to the applicability of the 

special provisions and exemptions that 

apply to small creditors under the 

Bureau’s regulations, as would be 

amended by the Bureau’s proposal, and 

would therefore facilitate compliance by 

creditors. The Bureau seeks comment on 

whether the proposed effective date is 

appropriate, or whether the Bureau 

should adopt an alternative effective 

date. 

V. Section-by-Section Analysis of the 

Proposed Rule 

Section 1026.35 Requirements for 

Higher-Priced Mortgage Loans 

35(b) Escrow Accounts 

35(b)(2) Exemptions 

35(b)(2)(iii) 

Except as provided in 

§ 1026.35(b)(2)(v), § 1026.35(b)(2)(iii) 

provides that an escrow account need 

not be established for a transaction if 

four conditions identified in 

§ 1026.35(b)(2)(iii)(A) through (D) are 

satisfied at the time of consummation. 

The Bureau proposes to make 

amendments to all of these conditions, 

as discussed below. As discussed in 

more detail above, the Bureau’s 

authority to make these revisions rests 

in TILA as amended by the Dodd-Frank 

Act, and the Bureau believes the 

revisions carry out the Dodd-Frank Act’s 

intent to treat certain small creditors 

differently than larger creditors. These 

proposed changes affect the eligibility of 

creditors for exemption from the higherpriced mortgage loan escrow 

requirements in the Bureau’s January 

2013 Escrows Final Rule. Because the 

requirements of § 1026.35(b)(2)(iii) are 

cross-referenced in the Bureau’s January 

2013 ATR Final Rule and its 2013 

HOEPA Final Rule, the proposed 

changes also affect eligibility for certain 

special provisions and exemptions 

provided in those rules. These special 

provisions and exemptions, in effect, 

facilitate the ability of certain small 

creditors that operate in rural and 

underserved areas, as well as certain 

small creditors that operate in areas that 

are neither rural nor underserved, to 

originate mortgage loans. As discussed 

in the section-by-section analysis of 

§ 1026.35(b)(2)(iii)(B) below, the special 

provisions and exemptions 

consequently help provide better access 

to credit for consumers served by those 

small creditors. 

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

Background—‘‘Rural’’ or ‘‘Underserved’’ 

Designation 

The Dodd-Frank Act amendments to 

TILA set forth two special provisions for 

small creditors operating predominantly 

in ‘‘rural’’ or ‘‘underserved’’ areas, 

without defining those terms. TILA 

section 129D, as added and amended by 

Dodd-Frank Act sections 1461 and 1462 

and implemented by § 1026.35(b), 

generally requires that creditors 

establish escrow accounts for higherpriced mortgage loans secured by a first 

lien on a consumer’s principal dwelling, 

but the statute also authorizes the 

Bureau to exempt from this requirement 

a creditor that, among other criteria, 

‘‘operates predominantly in rural or 

underserved areas.’’ TILA section 

129D(c)(1), 15 U.S.C. 1639d(c)(1). 

Similarly, the ability-to-repay 

provisions in Dodd-Frank Act section 

1412 allow balloon-payment mortgages 

to be considered qualified mortgages if, 

among other criteria, the balloonpayment mortgages are originated and 

held in portfolio by certain creditors 

that operate predominantly in rural or 

underserved areas. TILA section 

129C(b)(2)(E), 15 U.S.C. 1639c(b)(2)(E). 

In the January 2013 Escrows Final 

Rule and the January 2013 ATR Final 

Rule, the Bureau implemented the 

section 1461 higher-priced mortgage 

loan escrows requirement and the 

section 1412 balloon-payment qualified 

mortgage provision through 

§§ 1026.35(b)(2)(iii) and 1026.43(f), 

respectively. In addition, as part of the 

2013 HOEPA Final Rule, the Bureau 

adopted in § 1026.32(d)(1)(ii)(C) 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 

§ 1026.43(f). The Bureau, the Board, the 

Federal Deposit Insurance Corporation, 

the Federal Housing Finance Agency, 

the National Credit Union 

Administration, and the Office of the 

Comptroller of the Currency also 

adopted an exemption from a 

requirement to obtain a second 

appraisal for certain higher-priced 

mortgage loans under the January 2013 

Interagency Appraisals Final Rule for 

any credit transaction that finances a 

consumer’s acquisition of property 

‘‘[l]ocated in a rural county, as defined 

in 12 CFR 1026.35(b)(2)(iv)(A).’’ See, 

e.g., § 1026.35(c)(4)(vii)(H). 

Through the January 2013 Escrows 

Final Rule, the Bureau adopted 

§ 1026.35(b)(2)(iv)(A) and (B) to define 

which counties are ‘‘rural’’ and 

‘‘underserved’’ respectively for the 

purposes of the Bureau’s rules discussed 

above. The January 2013 Escrows Final 

Rule also provided comment 

35(b)(2)(iv)–1 to clarify 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 

§ 1026.35(b)(2)(iv). 78 FR 4725, 4741 

(Jan. 22, 2013). In advance of the rule’s 

effective date, the Bureau amended 

§ 1026.35(b)(2)(iv) and comment 

35(b)(2)(iv)–1 to clarify further how to 

determine whether a county is rural or 


tkelley on DSK3SPTVN1PROD with PROPOSALS2
7774 Federal Register / Vol. 80, No. 28 / Wednesday, February 11, 2015 / Proposed Rules 

13May 2013 Escrows Final Rule. 

14Section 1026.43(e)(6) requires that all of the 

same criteria be satisfied as the balloon-payment 

qualified mortgage definition in § 1026.43(f) except 

the requirement that the creditor extend more than 

50 percent of its total first-lien covered transactions 

in counties that are ‘‘rural’’ or ‘‘underserved.’’ 78 FR 

35430, 35489–90 (June 12, 2013). 

15Amendments to the 2013 Mortgage Rules 

Under the Equal Credit Opportunity Act 

(Regulation B), Real Estate Settlement Procedures 

Act (Regulation X), and the Truth in Lending Act 

(Regulation Z), 78 FR 39902, 39903 (July 2, 2013). 

16Because of updated information from the 2010 

Census, numerous counties’ status under the 

Bureau’s definition changed between 2013 and 

2014, with a small number of new counties meeting 

the definition of ‘‘rural’’ and approximately 82 

counties no longer meeting that definition. In 

proposing revisions to § 1026.35(b) and its 

commentary, the Bureau estimated that 

approximately 200–300 otherwise eligible creditors 

during 2013 might lose their eligibility for 2014 

solely because of changes in the status of the 

counties in which they operate (assuming the 

geographical distribution of their mortgage 

originations did not change significantly over the 

relevant period). Setpember 2013 Final Rule, 78 FR 

60382 at 60415–16. 

17 ‘‘Covered transaction’’ is defined in 

§ 1026.43(b)(1) to mean 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 § 1026.43(a). 

underserved for the purposes of these 

provisions.13

Since publication of the 2013 Title 

XIV Final Rules, the Bureau has 

received extensive feedback on the 

definitions of ‘‘rural’’ and 

‘‘underserved’’ that it adopted for 

purposes of the 2013 Title XIV Final 

Rule provisions described above. Many 

commenters criticized the Bureau for 

defining ‘‘rural’’ and ‘‘underserved’’ too 

narrowly and urged the Bureau to 

consider alternative definitions. 

Commenters were particularly critical of 

the Bureau’s definition of ‘‘rural,’’ 

which they asserted excluded many 

communities that are considered rural 

under other legal or regulatory 

definitions or that are commonly 

viewed as rural because of their small 

size or isolated or agricultural 

characteristics. 

In light of the feedback received, the 

Bureau added § 1026.43(e)(6) in the May 

2013 ATR Final Rule to allow small 

creditors during the period from January 

10, 2014, to January 10, 2016, to make 

balloon-payment qualified mortgages 

even if they do not operate 

predominantly in rural or underserved 

areas.14 Section 1026.43(e)(6) applies 

only to loans consummated on or before 

January 10, 2016, two years after the 

effective date of the January 2013 ATR 

Final Rule. The Bureau announced that 

it would reexamine the ‘‘rural’’ and 

‘‘underserved’’ definitions during this 

period to determine whether further 

adjustments were appropriate. The 

Bureau also indicated that it would 

explore how it can best facilitate the 

transition of small creditors that do not 

operate predominantly in rural or 

underserved areas from balloonpayment loans to adjustable-rate 

mortgages as Congress intended under 

the Dodd-Frank Act. 78 FR 35430, 

35489 (June 12, 2013). 

The Bureau subsequently proposed 

revisions to § 1026.32(d)(1)(ii)(C) to 

allow small creditors to carry over the 

flexibility provided by the May 2013 

ATR Final Rule into the HOEPA 

balloon-loan provisions.15 In the 

September 2013 Final Rule, the Bureau 

extended the exception to the general 

prohibition on balloon features for highcost mortgages under 

§ 1026.32(d)(1)(ii)(C) to allow small 

creditors, regardless of whether they 

operate predominantly in ‘‘rural’’ or 

‘‘underserved’’ areas, to continue 

originating balloon high-cost mortgages 

if the loans meet the requirements for 

qualified mortgages under 

§§ 1026.43(e)(6) or 1026.43(f). 78 FR 

60382, 60414 (Oct. 1, 2013). 

During the definitional review period 

leading up to January 10, 2016, the 

Bureau also sought to minimize 

volatility in the exemption provided by 

§ 1026.35(b)(2)(iii) to the general 

requirement that creditors establish an 

escrow account for first-lien higherpriced mortgage loans. The first year-toyear transition under the ‘‘rural’’ 

definition for purposes of this 

exemption coincided with the decennial 

redesignation of Urban Influence Codes 

(UIC) assigned to counties by the United 

States Department of Agriculture’s 

Economic Research Service (USDA– 

ERS) following the 2010 census, which 

determine which counties are 

considered ‘‘rural’’ in a particular year 

under the Bureau’s current definition. 

As a result, there was a potential that a 

significant number of otherwise eligible 

creditors during 2013 would lose their 

eligibility for the escrow exemption for 

2014 if an adjustment was not made to 

stabilize the exemption during the 

definitional review period.16

To reduce volatility in the escrow 

exemption as the definitions are being 

reevaluated, the Bureau revised 

§ 1026.35(b)(2)(iii) and its commentary 

to allow creditors to meet the condition 

in § 1026.35(b)(2)(iii)(A) for a particular 

calendar year based on loans made in 

‘‘rural’’ or ‘‘underserved’’ counties in 

any of the three preceding calendar 

years. In instituting this three-year 

lookback period, the Bureau noted that 

the revisions to § 1026.35(b)(2)(iii)(A) 

would loosely approximate the two-year 

extension of the balloon special 

provision for qualified mortgages under 

§ 1026.43(e)(6) and the two-year 

extension of the HOEPA balloon 

exemption under revised 

§ 1026.32(d)(1)(ii)(C). 78 FR 60382, 

60415–16 (Oct. 1, 2013). To satisfy the 

first of the four conditions in 

§ 1026.35(b)(2)(iii) for exemption from 

the escrow requirement, 

§ 1026.35(b)(2)(iii)(A) thus currently 

requires that during any of the three 

preceding calendar years, the creditor 

extended more than 50 percent of its 

total first-lien covered transactions, as 

defined by § 1026.43(b)(1),17 on 

properties that are located in counties 

that are either ‘‘rural’’ or ‘‘underserved,’’ 

as set forth in paragraph (b)(2)(iv) of the 

section (the ‘‘more than 50 percent’’ 

test). 

Bureau Proposal 

In advance of the sunset date for 

§ 1026.43(e)(6), the Bureau proposes to 

amend § 1026.35(b)(2)(iii)(A) and 

comment 35(b)(2)(iii)–1 to adjust the 

time period used in assessing whether 

the rural or underserved test is met. The 

Bureau proposes to eliminate the threeyear lookback period in 

§ 1026.35(b)(2)(iii)(A) and to establish 

the preceding calendar year as the 

relevant time period for assessing 

whether the ‘‘more than 50 percent’’ test 

is satisfied as a general matter. The 

Bureau’s proposal also creates a grace 

period to allow otherwise eligible 

creditors whose first-lien covered 

transactions in the preceding year failed 

to meet the ‘‘more than 50 percent’’ test 

to continue to operate with the benefit 

of the exemption with respect to 

applications received before April 1 of 

the current calendar year if their firstlien covered transactions during the 

next-to-last calendar year met the test. 

Proposed § 1026.35(b)(2)(iii)(A) also 

substitutes the word ‘‘areas’’ for 

‘‘counties’’ to conform to proposed 

changes to the ‘‘rural’’ definition in 

§ 1026.35(b)(2)(iv)(A) that are discussed 

below. 

As explained above, the Bureau 

adopted the three-year lookback period 

in § 1026.35(b)(2)(iii)(A) to minimize 

any negative impact on creditors from 

volatility in the ‘‘rural’’ and 

‘‘underserved’’ definitions during the 

period in which the Bureau is 

reconsidering the definitions. As 

originally adopted in the January 2013 

Escrows Final Rule, 

§ 1026.35(b)(2)(iii)(A) considered only 

the preceding year. The Bureau 

instituted the three-year lookback 

period to stabilize the escrow exemption 

during the period from 2013 to 2015 

while the definitions were under 


tkelley on DSK3SPTVN1PROD with PROPOSALS2
Federal Register / Vol. 80, No. 28 / Wednesday, February 11, 2015 / Proposed Rules 7775 

18As noted in the discussion of comment 

35(b)(2)(iv)–2 below, the Census Bureau released its 

list of urban areas based on the 2010 decennial 

census in 2012, and the USDA–ERS released its UIC 

designations based on the 2010 decennial census in 

2013. If the USDA–ERS continues to incorporate 

decennial census results into its UIC county 

designations in a different year than the Census 

Bureau finalizes its rural-urban classification, as in 

2012 and 2013, the effects of each decennial census 

would be incorporated into the Bureau’s proposed 

‘‘rural’’ definition over the course of two years, 

which would afford additional transition time to 

some of the creditors affected by the changes. 

review. 78 FR 60382, 60416 (Oct. 1, 

2013). This change guaranteed 

eligibility (for a creditor that was 

eligible during 2013 with respect to 

operating predominantly in rural or 

underserved areas, and met the other 

applicable criteria) through 2015. 

Stability in this specific period was a 

particular concern because during the 

definitional review the first year-to-year 

transition in the ‘‘rural’’ definition for 

purposes of this exemption was to 

coincide with the shift in USDA–ERS 

county UIC designations that occur once 

every decade. 

Once the definitional review period 

ends, the Bureau does not believe that 

it would advance the overall purposes 

of the special provisions and 

exemptions to allow creditors to 

continue utilizing them for up to three 

years after their activity stops meeting 

the applicable test. Using a three-year 

lookback period on a permanent basis 

would allow creditors to maintain 

eligibility even if their first-lien covered 

transactions do not meet the ‘‘more than 

50 percent’’ test in most calendar years, 

which seems contrary to the goal of 

identifying creditors that focus their 

activity in rural or underserved areas. 

Although the three-year lookback 

period allows creditors to anticipate 

whether they will be eligible for the 

exemption at least two years into the 

future, the Bureau does not believe that 

such extended notice will be necessary 

once the proposed revisions to the 

definitions are finalized. As explained 

in the section-by-section analysis of 

proposed § 1026.35(b)(2)(iv)(A) below, 

the areas that are rural under the 

proposed definition would only change 

once or twice a decade.18 While the 

counties defined as underserved could 

change each year, such shifts are 

unlikely to affect many creditors’ 

eligibility for the special provisions and 

exemptions because there are very few 

counties that would be underserved but 

not rural under the Bureau’s proposed 

definitions. The Bureau therefore 

believes that creditors that meet the 

‘‘more than 50 percent’’ test in a typical 

calendar year are unlikely to fail to meet 

the test in the next calendar year unless 

their geographic service area and 

offerings change substantially. 

Furthermore, creditors can monitor 

the first-lien covered transactions that 

they originate throughout the year and 

should generally be able to anticipate 

any change in their eligibility well 

before the end of the year. Any changes 

that would be made in the rural 

definition after each decennial census is 

completed would be based on 

demographic shifts that have unfolded 

over the preceding decade (which may, 

in many instances, be evident to 

creditors serving those areas) and would 

be announced well before they become 

effective, allowing time for creditors to 

assess their status and make appropriate 

transitions. Once the definitional review 

is completed, the Bureau therefore 

believes that the preceding calendar 

year will be the appropriate time period 

to utilize as a general rule in assessing 

whether the ‘‘more than 50 percent’’ test 

is met. 

Notwithstanding these considerations, 

a creditor could find out on or close to 

December 31st that it was not operating 

predominantly in rural or underserved 

areas during that calendar year. Such a 

creditor might have difficulty 

transitioning from balloon-payment 

loans to adjustable-rate mortgages and 

complying with the higher-priced 

mortgage loan escrow requirements by 

January 1 if eligibility for the special 

provisions and exemptions is based 

solely on transactions in the preceding 

calendar year. The Bureau therefore 

proposes a grace period that allows a 

creditor making a higher-priced 

mortgage loan based on an application 

received before April 1 to rely on its 

transactions from either the preceding 

calendar year or the next-to-last 

calendar year to meet the condition in 

§ 1026.35(b)(2)(iii)(A). 

Under the proposal, a creditor that is 

otherwise eligible and that met the 

‘‘more than 50 percent’’ test in calendar 

year one but fails to meet it in calendar 

year two remains eligible with respect to 

applications received before April 1 of 

calendar year three. The Bureau believes 

that a short grace period of this nature 

would facilitate the transition of 

creditors that no longer operate 

predominantly in rural or underserved 

areas and would properly balance the 

importance of the substantive consumer 

protections provided by the higherpriced mortgage loan escrows 

requirement, the ability-to-repay 

requirement, and HOEPA (for high-cost 

mortgages) with concerns that have been 

raised regarding their potential impact 

on access to credit. 

The Bureau also proposes conforming 

and technical changes to the rule and 

commentary. Because the Bureau 

proposes to revise the ‘‘rural’’ definition 

in § 1026.35(b)(2)(iv)(A) to encompass 

certain areas that are not counties, the 

Bureau also proposes to substitute the 

word ‘‘areas’’ for ‘‘counties’’ in 

§ 1026.35(b)(2)(iii)(A) where it appears. 

Proposed comment 35(b)(2)(iii)–1.i 

incorporates changes that align with the 

changes that the Bureau proposes to the 

regulation text in §§ 1026.35(b)(2)(iii)(A) 

and 1026.35(b)(2)(iv)(A). The Bureau 

also proposes to remove from comment 

35(b)(2)(iii)–1.i all discussion of the lists 

that the Bureau publishes of ‘‘rural’’ or 

‘‘underserved’’ counties pursuant to 

§ 1026.35(b)(2)(iv), in order to centralize 

updated commentary regarding such 

lists in proposed comment 35(b)(2)(iv)– 

1.iii. 

The Bureau proposes a new comment 

35(b)(2)(iii)–1.i.A that explains the 

relevant time period to use in assessing 

whether the ‘‘more than 50 percent’’ test 

in proposed § 1026.35(b)(2)(iii)(A) is 

met. As the proposed comment 

explains, whether this condition is 

satisfied generally depends on the 

creditor’s activity during the preceding 

calendar year. However, if the 

application for the loan in question was 

received before April 1, the creditor may 

instead meet this condition based on its 

activity during the next-to-last calendar 

year. 

Proposed comment 35(b)(2)(iii)–1.i.B 

explains further how the test works. It 

states that a creditor meets the ‘‘more 

than 50 percent’’ test for any higherpriced mortgage loan consummated 

during the calendar year if a majority of 

its first-lien covered transactions in the 

preceding calendar year are secured by 

properties located in rural or 

underserved areas. The proposed 

comment further explains that, if the 

creditor’s transactions in the preceding 

calendar year do not meet the ‘‘more 

than 50 percent’’ test, the creditor meets 

this condition for a higher-priced 

mortgage loan that is consummated 

during the current calendar year only if 

the application for the loan was 

received before April 1 and a majority 

of the creditor’s first-lien covered 

transactions during the next-to-last 

calendar year are secured by properties 

located in rural or underserved areas. 

Proposed comment 35(b)(2)(iii)–1.i.B 

also provides illustrative examples to 

replace the example that currently 

appears in comment 35(b)(2)(iii)–1.i. 

The Bureau invites comment on 

whether it should eliminate the threeyear lookback period as proposed and 

whether it is appropriate to rely on the 

preceding calendar year in determining 

as a general matter whether the ‘‘more 

than 50 percent’’ test is met. The Bureau 


tkelley on DSK3SPTVN1PROD with PROPOSALS2
7776 Federal Register / Vol. 80, No. 28 / Wednesday, February 11, 2015 / Proposed Rules 

19 76 FR 11597 (Mar. 2, 2011) (2011 Escrows 

Proposal). The proposed exemption also would 

have required that, during the preceding calendar 

year, the creditor extended more than 50 percent of 

its total first-lien higher-priced mortgage loans in 

counties designated as rural or underserved, among 

other requirements. 

20 76 FR 27390 (May 11, 2011). 

also seeks feedback on whether it 

should provide a grace period to 

creditors that meet this test in one 

calendar year but fail to do so in the 

next calendar year and, if so, whether 

such a grace period should apply to all 

applications received before April 1 as 

proposed. 

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

The Bureau proposes to revise the 

loan origination limit in 

§ 1026.35(b)(2)(iii)(B). Section 

1026.35(b)(2)(iii)(B) limits eligibility for 

the special provisions and exemptions 

to creditors that, together with their 

affiliates, in the preceding calendar year 

originated 500 or fewer covered 

transactions, as defined by 

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

(origination limit). Section 

1026.35(b)(2)(iii)(C) also requires such 

creditors to have less than $2 billion in 

assets (or other current yearly adjusted 

limit) at the end of the preceding 

calendar year (asset limit). The Bureau 

proposes to raise the origination limit 

from 500 loans to 2,000 loans, and to 

apply the limit only to loans not held in 

portfolio by the creditor or its affiliates. 

That is, under the proposal, the 

origination limit only applies to loans 

that were sold, assigned, or otherwise 

transferred by the creditor or its 

affiliates to another person, or subject at 

the time of consummation to a 

commitment to be acquired by another 

person. The Bureau’s proposal also adds 

a ‘‘grace period’’ from calendar year to 

calendar year to allow an otherwise 

eligible creditor that exceeded the 

origination limit in the preceding 

calendar year to continue to operate as 

a small creditor with respect to 

applications received before April 1 of 

the current calendar year—with the 

benefit of the special provisions and 

exemptions—as if it had not exceeded 

the origination limit in the preceding 

year. 

Background 

The special provisions and 

exemptions for small creditors included 

in the 2013 Title XIV Final Rules and 

related amendments (discussed in more 

detail below) are principally based on 

TILA sections 129D(c) and 

129C(b)(2)(E), as adopted by sections 

1461 and 1412, respectively, of the 

Dodd-Frank Act. TILA section 129D(c) 

authorizes the Bureau to exempt a 

creditor from the requirement (in 

section 129D(a)) that escrow accounts be 

established for higher-priced mortgage 

loans if the creditor operates 

predominantly in rural or underserved 

areas, retains its mortgage loans in 

portfolio, does not exceed (together with 

its affiliates) a total annual mortgage 

loan origination limit set by the Bureau, 

and meets any asset size threshold, and 

any other criteria the Bureau may 

establish, consistent with the purposes 

of TILA. TILA section 129C(b)(2)(E) 

permits certain balloon-payment 

mortgages to receive qualified mortgage 

status if they are originated by small 

creditors that, among other things, 

operate predominantly in rural or 

underserved areas, even though 

qualified mortgages are otherwise 

prohibited from having balloonpayment features. 

The creditor qualifications under 

TILA section 129C(b)(2)(E) essentially 

mirror the criteria for the higher-priced 

mortgage loan escrow exemption, 

including (together with all affiliates) 

not exceeding a total annual mortgage 

loan origination limit set by the Bureau, 

retaining the balloon-payment loans in 

portfolio, meeting any asset size 

threshold, and any other criteria, the 

Bureau may establish, consistent with 

the purposes of TILA. 

Both of these statutory provisions 

therefore provide that in order for a 

creditor to qualify as a ‘‘small creditor’’ 

for the exemptions from and special 

provisions related to the respective 

escrow and qualified mortgage 

requirements the following criteria must 

be met: (1) Together with all affiliates, 

does not exceed a total annual loan 

origination limit to be set by the Bureau; 

(2) a requirement that the originated 

loans be retained in portfolio (for TILA 

section 129C(b)(2)(E) this requirement 

applies only to the creditor’s originated 

balloon loans); and (3) any asset size 

threshold that the Bureau may establish. 

The statute requires the Bureau to set an 

annual loan origination limit—but 

provides the Bureau with some 

flexibility in establishing that limit. The 

statute authorizes, but does not require, 

the Bureau to establish an asset size 

threshold. The Bureau has established 

an asset limit to determine smallcreditor status. 

Board Proposal 

Prior to the transfer by the DoddFrank Act of rulemaking authority for 

these statutory provisions to the Bureau, 

the Board issued proposals 

implementing TILA sections 129D(c) 

and 129C(b)(2)(E). With regard to 

129D(c), providing the exemption from 

the higher-priced mortgage loan escrow 

requirements, the Board proposed to 

limit the exemption to creditors that (1) 

during either of the preceding two 

calendar years, together with affiliates, 

originated and retained servicing rights 

to 100 or fewer loans secured by a first 

lien on real property or a dwelling; and 

(2) together with affiliates, do not 

maintain escrow accounts for loans 

secured by real property or a dwelling 

that the creditor or its affiliates 

currently service.19 In issuing this 

proposal, the Board stated that it sought 

to limit the exemption to creditors that 

maintain servicing portfolios too small 

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 approximately five 

years. The Board believed therefore that 

creditors would no longer need the 

benefit of the exemption if they 

originated and serviced more than 100 

first-lien transactions per year. The 

Board proposed a two-year lookback 

period—providing that the test would 

be satisfied as long as the creditor’s (and 

its affiliates’) servicing-retained 

originations did not exceed 100 during 

either of the preceding two calendar 

years. The Board did not propose an 

asset-size threshold to qualify for the 

escrow exemption but sought comment 

on whether such a threshold should be 

established and, if so, what it should be. 

The Board, with regard to the balloonpayment qualified mortgage definition 

to implement TILA section 

129C(b)(2)(E), proposed two alternative 

annual origination limits and an assetsize limit of $2 billion.20 The Board 

interpreted the qualified mortgage 

provision as designed to facilitate access 

to credit in areas where consumers may 

be able to obtain credit only from 

community banks offering balloonpayment mortgages. Under alternative 1, 

the creditor, together with all affiliates, 

extended covered transactions of some 

dollar amount or less during the 

preceding calendar year; under 

alternative 2, the creditor, together with 

all affiliates, extended some number of 

covered transactions or fewer during the 

preceding calendar year. The Board did 

not propose a specific annual 

origination limit in connection with 

TILA section 129C(b)(2)(E), but the 

Board sought comment on the issue—for 

example, whether the threshold should 

be 100 loans per year or something 

greater or something less, or whether the 

threshold should be $100 million in 

aggregate covered-transaction loan 


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Federal Register / Vol. 80, No. 28 / Wednesday, February 11, 2015 / Proposed Rules 7777 

21The Bureau also conducted further analysis to 

try to determine the most appropriate thresholds, 

although it was significantly constrained by data 

limitations with regard to mortgage originations in 

rural areas generally and in particular with regard 

to originations of balloon-payment mortgages. See 

January 2013 ATR Final Rule, 78 FR 6407, 6545. 

22 January 2013 Escrows Final Rule; January 2013 

ATR Final Rule; 2013 HOEPA Final Rule. 

23 78 FR 4726, 4737 (Jan. 22, 2013). 

24 Id. 

25 Id. 

26 Id. 

27The preamble to the January 2013 Escrows 

Final Rule noted that the increased threshold was 

not as limiting as it might first appear because the 

Bureau’s analysis of HMDA data suggested that 

even small creditors are likely to sell a significant 

number of their originations in the secondary 

market, and, assuming that most mortgage 

transactions that are retained in portfolio are also 

serviced in-house, the Bureau estimated that a 

creditor originating no more than 500 first-lien 

transactions per year would maintain and service a 

portfolio of about 670 mortgage obligations over 

time (assuming an average obligation life 

expectancy of five years). Thus, the Bureau believed 

the higher threshold in the January 2013 Escrows 

Final Rule would help to ensure that creditors that 

are subject to the escrow requirement would in fact 

maintain portfolios of sufficient size to maintain the 

escrow accounts on a cost-efficient basis over time, 

in the event that the Board’s 500-loan estimate of 

a minimum cost-effective servicing portfolio size 

was too low. At the same time, however, the Bureau 

believed that the 500 annual origination threshold 

in combination with the other requirements would 

still ensure that the balloon-payment qualified 

mortgage special provisions and escrow exemptions 

are available only to small creditors that focus 

primarily on a relationship lending model and face 

significant systems constraints. Id. 

28 In a later rulemaking, extending the same 500 

first-lien origination threshold (as well as the $ 2 

billion asset threshold) to a new category of 

qualified mortgages originated by small creditors 

(§ 1026.43(e)(5)) the Bureau stated in support of the 

threshold it was adopting that as the size of an 

institution increases it is expected that the scale of 

its lending business will increase as well. In 

addition, the Bureau noted that as the scale of a 

creditor’s lending business increases, the likelihood 

that the institution is engaged in relationship-based 

lending and employing qualitative or local 

knowledge in its underwriting decreases. May 2013 

ATR Final Rule, 78 FR 35429, 35486. 

29Specifically, for purposes of determining 

whether a loan has a safe harbor with regard to 

TILA’s ability-to-repay requirements (or instead is 

categorized as ‘‘higher-priced’’ with only a 

rebuttable presumption of compliance with those 

requirements), for first-lien covered transactions, 

the special qualified mortgage definitions in 

Continued 

amounts per year, or something greater 

or something less. 

Bureau Rulemaking 

Prior to the Board finalizing the 

above-described proposals, rulemaking 

authority to implement these sections of 

TILA passed to the Bureau in July 2011. 

The Bureau considered the Board’s 

proposals and public comment before 

finalizing those rules,21 as part of its 

rulemakings implementing title XIV of 

the Dodd-Frank Act, in January 2013.22

In coming to a determination on the 

appropriate small creditor thresholds, 

the Bureau stated its belief that TILA 

section 129D(c)(2) reflects a recognition 

that larger creditors have the systems 

capability and operational scale to 

establish cost-efficient escrow 

accounts.23 In addition, the Bureau 

stated its belief that TILA section 

129C(b)(2)(E)(iv)(II) reflects a 

recognition that larger creditors that 

operate in rural or underserved areas 

should be able to make credit available 

without resorting to balloon-payment 

mortgages.24

The Bureau, after further analysis to 

determine the appropriate thresholds, 

adopted an annual origination limit of 

500 first-lien covered transactions in the 

preceding calendar year and an assetsize limit of $2 billion, adjusted 

annually for inflation 

(§ 1026.35(b)(2)(iii)(B) and (C)). 

Specifically, the origination limit in 

§ 1026.35 (b)(2)(iii)(B) provides that, 

during the preceding calendar year, 

creditors, together with their affiliates, 

must have originated 500 or fewer 

covered transactions, as defined by 

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

The asset limit in § 1026.35(b)(2)(iii)(C) 

requires creditors to have had less than 

$2 billion in assets (or other current 

yearly adjusted threshold) at the end of 

the preceding calendar year. 

The Bureau believed that it would be 

preferable to use the same annual 

originations and asset-size limits for the 

qualified mortgage and escrow 

provisions to reflect the consistent 

statutory language, to facilitate 

compliance by not requiring institutions 

to track multiple metrics, and to 

promote consistent application of the 

two exemptions.25 The Bureau noted 

that both provisions are focused in a 

broad sense on accommodating 

creditors whose systems constraints 

might otherwise cause them to exit the 

market.26

The Bureau adopted a threshold of 

500 or fewer annual originations of firstlien transactions to provide greater 

flexibility and reduce concerns that the 

threshold in the Board’s 2011 Escrows 

Proposal would reduce access to credit 

by excluding creditors that need special 

accommodations in light of their 

capacity constraints.27 The Bureau 

believed that an origination limit was 

the most accurate means of confining 

the special provisions to the class of 

small creditors with a business model 

the Bureau believed would best 

facilitate consumers’ access to 

responsible, affordable credit, i.e., 

creditors that focus primarily on a 

relationship-lending model. The Bureau 

also believed that an asset limit is 

important to preclude a very large 

creditor with relatively modest mortgage 

operations from taking advantage of a 

provision designed for much smaller 

creditors with much different 

characteristics and incentives that lack 

the scale to make compliance less 

burdensome. 

Based on publicly available Home 

Mortgage Disclosure Act (HMDA) and 

Call Report data, the Bureau estimated 

that the small creditor provisions as 

finalized would include approximately 

95 percent of creditors with less than 

$500 million in assets, approximately 74 

percent of creditors with assets between 

$500 million and $1 billion, and 

approximately 50 percent of creditors 

with assets between $1 billion and $2 

billion. The Bureau believed these 

percentages were consistent with the 

rationale for providing special 

accommodation for small creditors and 

would be appropriate to ensure that 

consumers have access to responsible, 

affordable mortgage credit.28

The Bureau also provided small 

creditor special provisions and 

exemptions, using the limits established 

in § 1026.35(b)(2)(iii)(B) and (C), beyond 

the small creditor exemption from the 

requirement for the establishment of 

escrow accounts for first-lien higherpriced mortgage loans, and the special 

provision permitting certain balloonpayment mortgages to receive qualified 

mortgage status if originated by small 

creditors operating predominantly in 

rural or underserved areas. The Bureau 

extended these limits to create a small 

creditor exemption from the balloonpayment prohibition for high-cost loans, 

and to create a special qualified 

mortgage definition for portfolio loans 

made by small creditors. 

Specifically, the special provisions 

and exemptions provided under the 

Bureau’s 2013 Title XIV Final Rules— 

available only to small creditors— 

include the following: 

• A qualified mortgage definition for 

certain loans made and held in portfolio 

(small creditor portfolio loans), which 

are not subject to the 43 percent debtto-income ratio limit that applies to 

general qualified mortgage loans under 

§ 1026.43(e)(2)) (§ 1026.43(e)(5)). A firstlien qualified mortgage under this 

category also provides a safe harbor 

from ability-to-repay claims, if the 

mortgage’s annual percentage rate (APR) 

does not exceed the applicable Average 

Prime Offer Rate (APOR) by 3.5 or more 

percentage points. In contrast, general 

qualified mortgage loans under 

§ 1026.43(e)(2) provide safe harbors if 

their APRs do not exceed the applicable 

APOR by 1.5 or more percentage 

points.29


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7778 Federal Register / Vol. 80, No. 28 / Wednesday, February 11, 2015 / Proposed Rules 

§ 1026.43(e)(5), (e)(6) and (f) receive an APR 

threshold of the applicable APOR plus 3.5 

percentage points, rather than plus 1.5 percentage 

points. 

30Specifically these provisions allow: (1) On a 

permanent basis, balloon-payment qualified 

mortgage loans made and held in portfolio by 

certain small creditors operating predominantly in 

rural or underserved areas; and (2) for a temporary 

two year transition period—from January 10, 2014 

to January 10, 2016—balloon-payment qualified 

mortgages originated by small creditors even if they 

do not operate predominantly in rural or 

underserved areas. To meet the ‘‘operating 

predominantly’’ in ‘‘rural’’ or ‘‘underserved’’ areas 

requirement, during any of the preceding three 

calendar years the creditor must have extended 

more than 50 percent of its total covered 

transactions, as defined by § 1026.43(b)(1), and 

secured by a first lien, on properties that are located 

in counties that are either ‘‘rural’’ or ‘‘underserved,’’ 

as defined by § 1026.35(b)(2)(iv). See 

§ 1026.35(b)(2)(iii)(A), the further section-by-section 

analysis of this requirement, and the Bureau’s 

proposal to modify this provision. 

31Specifically, this provision allows: (1) On a 

permanent basis, small creditors that operate 

predominantly in rural or underserved areas to 

originate high-cost loans with balloon-payment 

features; and (2) for loans made on or before January 

10, 2016, small creditors to originate high-cost 

mortgages with balloon-payment features even if 

they do not operate predominantly in rural or 

underserved areas, under certain conditions. See 

§ 1026.32(d)(1)(ii)(C). 

32Lending activities of many creditors that 

currently qualify as small are generally limited to 

a single community. However, creditors that would 

qualify as small if the proposed provisions are 

adopted generally lend and have branches (in the 

case of depository institutions) in several 

communities and counties. 

33However, the Bureau notes that, from the 

perspective of consumers, potential lack of 

economies of scale matters only to the extent that 

it affects access to credit. 

34Amendments to the 2013 Mortgage Rules 

Under the Truth in Lending Act (Regulation Z), 79 

FR 25730 (May 6, 2014). 

• Two qualified mortgage definitions 

(i.e., a permanent and a temporary 

definition) for certain loans made and 

held in portfolio that have balloonpayment features—an exception from 

the limitation on balloon-payment 

features on general qualified mortgage 

loans (§ 1026.43(e)(6) and (f)).30 As with 

the category of first-lien qualified 

mortgages discussed above (i.e., small 

creditor portfolio loans defined in 

§ 1026.43(e)(5)) these qualified 

mortgages are also subject to a higher 

APR threshold for defining a higherpriced covered transaction, allowing 

small creditors of such qualified 

mortgages to receive a safe harbor under 

the Bureau’s ability-to-repay rule. 

• An exception from the prohibition 

on balloon-payment features for certain 

high-cost mortgages 

(§ 1026.32(d)(1)(ii)(C))—also on a 

permanent and temporary basis.31

• An exception from the requirement 

to establish escrow accounts for certain 

higher-priced mortgage loans for small 

creditors that operate predominantly in 

rural or underserved areas 

(§ 1026.35(b)(2)(iii)). 

The Bureau’s special provisions for 

and exemption of small creditors from 

certain requirements of the 2013 Title 

XIV Final Rules are consistent with the 

different treatment accorded under the 

Dodd-Frank Act to small creditors 

versus larger creditors and were a 

recognition by the Bureau of the 

important role that small creditors play 

in providing mortgage credit to 

consumers. It was the Bureau’s belief 

that small creditors’ size and 

relationship lending model often 

provide them with better ability than 

large institutions to assess ability to 

repay. The Bureau recognized that many 

small creditors use a lending model 

based on maintaining ongoing 

relationships with their customers—and 

therefore may have a more 

comprehensive understanding of the 

financial circumstances of their 

customers. And since the lending 

activities of small creditors are often 

limited to a single community, they may 

have an in-depth understanding of the 

economic and other circumstances of 

that community.32 The Bureau’s special 

provisions and exemptions were also a 

recognition that small creditors lack 

economies of scale necessary to offset 

the cost of certain regulatory 

requirements—unlike larger creditors.33

Prior to and after the effective dates of 

the 2013 Title XIV Final Rules, the 

Bureau heard repeated expressions of 

concern that the Bureau’s definition of 

small creditor was under-inclusive and 

did not cover a significant number of 

institutions that met the rationale 

underlying the special provisions and 

exemptions. Accordingly, on May 6, 

2014, in a Notice of Proposed 

Rulemaking with proposals addressing 

other elements of the 2013 Title XIV 

Final Rules, the Bureau also sought 

comment on the 500 total first-lien 

origination limit—and the requirement 

that the limit be determined for any 

given calendar year based upon results 

during the immediately prior calendar 

year.34 Specifically, the Bureau solicited 

feedback and data from (1) creditors 

designated as small creditors under the 

Bureau’s 2013 Title XIV Final Rules; 

and (2) creditors with less than $2 

billion in assets but that were not small 

creditors under the Bureau’s 2013 Title 

XIV Final Rules because their total 

annual first-lien mortgage originations 

exceeded the 500-loan limit. For such 

creditors, the Bureau requested data on 

the number and type of mortgage 

products offered and originated to be 

held in portfolio during the years prior 

to the effective date of the 2013 Title 

XIV Final Rules and subsequent to that 

date. The Bureau was particularly 

interested in how such creditors’ 

origination mix changed in light of the 

Bureau’s 2013 Title XIV Final Rules 

(including, but not limited to, the 

percentage of loans that had fixed rates, 

adjustable rates, or balloon-payment 

features), both as to loans originated for 

the secondary market and for portfolio. 

The Bureau also solicited feedback on 

the implementation efforts of such small 

creditors with respect to the Bureau’s 

2013 Title XIV Final Rules. The Bureau 

was interested in the challenges that 

creditors might face when transitioning 

from originating balloon-payment loans 

to originating adjustable-rate loans. 

Finally, the Bureau solicited comment 

on whether the 500 total first-lien 

origination limit is sufficient to serve 

the purposes of the small creditor 

designation and, to the extent it may be 

insufficient, the reasons why it is 

insufficient and the range of appropriate 

limits. 

Comments Received 

In response to the Bureau’s 

solicitation of comments in its May 6, 

2014 proposal regarding the origination 

limit, industry commenters, including 

national and state bank trade 

associations, and national and state 

credit union associations, generally 

supported an increase in the 500 loan 

origination limit. Consumer groups 

generally did not support an increase, 

absent clear evidence that the current 

limit was significantly harming 

consumers. These commenters asserted 

that evidence of consumer harm does 

not exist. 

Specifically, one major bank trade 

association for example suggested a $10 

billion asset limit and a 2,000 per year 

loan origination limit. It stated that it 

believed that the 500 annual loan 

origination limit unnecessarily restricts 

credit to qualified borrowers. It stated 

that lenders, especially smaller lenders, 

faced with this limitation on gaining 

qualified mortgage status will make 

fewer loans than they otherwise would 

have, particularly for lower loan 

amounts, making it more difficult for 

rural and underserved borrowers— 

particularly those who are seeking 

smaller loans ($40,000 or less), which 

are generally not purchased on the 

secondary market. This commenter also 

stated that while its numbers were the 

product of anecdotal reports, 

consultation with banks in the $500 to 

$750 million asset range revealed that 

1,000 loan originations per year is a 

common amount at this asset size, and 

that the 500-loan limit is unnecessarily 

restricting. 


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One community banking association 

recommended that all community bank 

mortgage loans that are held in portfolio 

for the life of the loan receive qualified 

mortgage safe harbor status and 

exemption from escrow requirements if 

they are higher-priced mortgage loans. 

This commenter noted that a limit of 

500 total first-lien originations per year 

is only 41 first-lien mortgages per 

month, or nine per week, an amount 

that a small creditor could easily 

exceed. It stated further that most 

community banks that exceed either or 

both the asset limit or origination limit 

have all the attributes of traditional, 

relationship-based community banks, 

and that it found that the origination 

limit, which it noted is extremely low 

for most community banks, is not 

consistent with the asset limit. The 

commenter urged the Bureau, at a 

minimum, to increase the origination 

limit to at least 2,000 first-lien mortgage 

loans, or to disregard loans sold into the 

secondary market when applying the 

annual loan limit. 

Other industry commenters supported 

increasing the origination limit to 1,000 

loans per year—asserting, for example, 

that: (1) This would increase the 

number of small creditors covered by 10 

percent; (2) a 1,000 loan threshold more 

appropriately matches the $2 billion 

asset limit, i.e., entities with $2 billion 

in assets have at least 500 annual 

originations and a number originate 

more than 500 loans; and (3) a number 

of entities operate close to the 500 

origination limit, and a 1,000 limit will 

provide smaller creditors with a cushion 

for fluctuation in mortgage volume, 

saving them the expense of preventative 

compliance measures in anticipation of 

exceeding the limit. 

A residential mortgage industry 

consulting firm commenter asserted that 

a bank with under 500 originations per 

year and another bank with originations 

between 500 and 1,000—but still under 

$2 billion in assets—are both likely to 

be community banks with the virtues of 

an elevated level of service and personal 

attention to borrowers. Both banks, this 

commenter noted, are equally unable to 

spread the costs of compliance across an 

organization in the way a very large 

institution is able to do—another fact, 

this commenter asserted, that is a reason 

for the small creditor exception in the 

first place. 

Some industry commenters in 

advocating for a higher loan origination 

limit argued that the Bureau’s reliance 

on HMDA data for the 500 origination 

limit was flawed. For example, one state 

bankers association noted that the 

Bureau stated that, based on HMDA 

data, the small creditor definition would 

include: 95 percent of creditors with 

less than $500 million in assets; 74 

percent of creditors with assets between 

$500 million and $1 billion; and 50 

percent of creditors with assets between 

$1 billion and $2 billion. It then stated 

that it polled its member banks and did 

not find this to be true in its state and 

reminded the Bureau, because of that 

state’s limited number of metropolitan 

statistical areas (MSAs) and rural 

nature, many creditors are not HMDA 

reporters. It concluded that basing 

small-creditor status on HMDA 

origination numbers is flawed when 

attempting to analyze rural lending 

patterns. 

Another state bankers association (in 

advocating for an increase of the 

origination limit to 1500 loans) noted 

that the Bureau has recognized that its 

adoption of annual origination limits 

and asset size limits were significantly 

constrained by data limitations. It stated 

further that, as the Bureau relied on its 

analysis of HMDA data to set the 

requirements for small-creditor status, 

data from institutions not subject to 

HMDA reporting (i.e., institutions with 

less than $43 million in assets, under 

the calendar year 2014 asset size 

threshold for HMDA reporting) were not 

considered. 

In addition to recommending 

increasing the origination limit, some 

commenters alternatively suggested that 

the origination limit either be applied to 

originated loans only if held in portfolio 

or that the limit exclude loans held in 

portfolio. 

In the first category of these 

commenters, i.e., those suggesting that 

the origination limit be applied to 

originated loans only if held in 

portfolio, one state credit union 

association stated that, due to the legal 

liability risk that surrounds nonqualified mortgages, some small credit 

unions (under $2 billion in assets) have 

made the business decision to offer only 

qualified mortgages. It stated that, of 

these small credit unions, a portion sell 

loans on the secondary market, which 

causes them to exceed the 500 total firstlien origination limit. If the loan does 

not meet the general definition of 

qualified mortgage, this commenter 

noted, it cannot be sold on the 

secondary market and the alternative 

definitions of qualified mortgage 

generally requires the credit union to 

keep the loan in portfolio for three 

years, unless an exception is met. It 

recommended therefore that the 500 

loan origination limit is more properly 

placed on first-lien covered transactions 

originated in the preceding year kept in 

portfolio versus all first-lien covered 

transactions originated in the preceding 

year which would include those sold on 

the secondary market. Alternatively, 

this organization recommended that the 

500 loan origination limit needs to be 

significantly increased for creditors that 

sell on the secondary market and also 

keep loans in portfolio. 

Also in this first category of 

commenters (i.e., those suggesting the 

origination limit only include portfolio 

loans) was a non-profit research and 

policy organization which commented 

that the 500-loan origination limit could 

be increased in narrow circumstances, 

such as increasing the loan origination 

limit for rural banks, or redefining the 

500 limit to loans held in portfolio. 

And, as noted, a community banking 

association recommended that the 

Bureau, as an alternative to increasing 

the origination limit to 2,000 loans, 

disregard loans sold into the secondary 

market when applying the origination 

threshold number. 

In the second category of commenters 

(i.e., those suggesting that loans held in 

portfolio be excluded from the 

origination limit), a state bankers 

association strongly recommended that 

the Bureau expressly state that loans 

held in an institution’s portfolio are not 

counted toward the origination limit for 

small-creditor status, in addition to 

recommending that the origination limit 

be raised to 1,500 loans in a calendar 

year. This commenter stated that 

expansion of the small creditor category 

would help avoid contraction of the 

availability of mortgage credit. It stated 

that many creditors that currently 

qualify as small creditors are given the 

incentive to limit their mortgage lending 

to remain within the small creditor 

category—due to the exemptions 

afforded to small creditors. 

Among other industry 

recommendations for revising the loan 

origination limit was a recommendation 

by a state bankers association that the 

Bureau revise the provision in which 

the loan origination limit must include 

originations by all the creditor’s 

affiliates, in addition to the creditor. 

This commenter suggested that the 

Bureau revise the definition so that the 

origination limit includes only 

originations by the creditor and its 

non-depository financial institution 

affiliates, such as finance companies, 

mortgage companies, and brokers. The 

organization stated that, in doing this, 

small creditors that are owned by the 

same bank holding company, but 

operate independently, will be more 

likely to continue to meet the lending 

needs of their communities and still 

enjoy creditor protections from 

regulatory and legal risk offered by the 


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7780 Federal Register / Vol. 80, No. 28 / Wednesday, February 11, 2015 / Proposed Rules 

small creditor qualified mortgage safe 

harbor. 

As noted, consumer group 

commenters generally did not support 

an increase in the 500-loan origination 

limit, at least without evidence of harm 

justifying an increase. Two consumer 

group commenters in their joint 

comment letter stated, for example, that 

creditors making 500 or more loans (and 

likely even fewer) should be able to 

comply with the Bureau’s ability-torepay/qualified mortgage requirements. 

They noted that 500 loans likely involve 

millions of dollars and this exception 

will already affect thousands of 

borrowers. Expanding this exception 

any further, they asserted, will 

substantially weaken the Bureau’s 

ability-to-repay/qualified mortgage 

requirements and should not be done 

without an overwhelmingly clear and 

urgent justification. Such a justification 

does not currently exist, they stated. For 

that reason they recommended that the 

Bureau should leave the current limit 

unchanged. Another fair housing 

organization commenter mirrored the 

comment of these two organizations. 

As noted, a non-profit research and 

policy organization stated that an 

increase in the origination limit might 

be justified but only with more data 

showing the current limit is creating 

problems for small creditors to conduct 

business and reach underserved 

markets. In addition the commenter 

urged the Bureau to continue to 

examine the appropriate models to 

determine if the 500 origination limit is 

in fact harming bona fide small creditors 

or serving as a barrier for small creditors 

to reach more credit worthy borrowers. 

It stated that any increase in the 

origination limit should be reasonable 

both to ensure that small creditors can 

continue to do business (in particular 

with underserved markets) and to 

ensure that larger entities will not have 

an opportunity to take undue advantage 

of a change in the rule. Unless there is 

substantial evidence, however, that the 

loan origination limit is too low, the 

commenter supported keeping the 

exception narrow and limited. 

Bureau Proposal 

As discussed, the Bureau proposes to 

revise the origination limit in 

§ 1026.35(b)(2)(iii)(B). Specifically, the 

Bureau proposes to raise the origination 

limit from 500 covered transactions 

secured by a first-lien (or ‘‘loans’’) 

originated by the creditor and its 

affiliates to 2,000 such loans. The 

Bureau’s proposal also makes the limit 

applicable only to loans not held in 

portfolio by the creditor or its affiliates. 

That is, under the proposal, the limit 

does not apply to loans that were not 

sold, assigned, or otherwise transferred 

by the creditor or its affiliates to another 

person, or subject to a commitment to be 

acquired by another person. The 

Bureau’s proposal also adds a ‘‘grace 

period’’ from calendar year to calendar 

year to allow an otherwise eligible 

creditor that exceeded either the 

origination limit or the asset limit in the 

preceding calendar year to continue to 

operate as a small creditor with respect 

to applications received prior to April 1 

of the current calendar year—with the 

benefit of the special provisions and 

exemptions—as if it had not exceeded 

the limits in the preceding year. This 

proposed grace period is available to 

creditors that exceeded the respective 

limits in the preceding calendar year but 

had not exceeded them in the calendar 

year prior to the preceding calendar 

year. 

Proposed comment 35(b)(2)(iii)–1.ii 

explains that only originated loans not 

retained by the creditor or its affiliates 

in portfolio are counted toward the new 

2,000 origination limit. The proposed 

comment also makes clear that a loan 

transferred by a creditor to its affiliate 

is a loan not retained in portfolio (it is 

a loan transferred to ‘‘another person’’) 

and therefore is counted toward the 

2,000 origination limit. The proposed 

comment explains and adds examples 

on applying the grace period to the 

origination limit. 

Given the comments received to date 

on the origination limit, the Bureau 

believes that an adjustment of the 

current origination limit, as proposed, is 

justified. Small creditors serve a 

particularly critical function for 

consumers in rural and underserved 

areas, especially when these creditors 

make portfolio loans for which there 

may be no secondary market. At the 

same time, the Bureau recognizes 

consumer groups’ concerns that an 

expansion of the origination limit could 

undermine the Bureau’s Dodd-Frank 

Act title XIV regulatory protections. 

Specifically, the Bureau also wants to 

ensure that the origination limit is not 

set at a level that will allow larger 

creditors to take advantage of smallcreditor status to avoid important 

regulatory requirements that protect 

consumers—regulatory requirements 

that those larger creditors, unlike many 

smaller creditors, have the capacity to 

implement effectively. 

Comments received from industry 

commenters are consistent and clear— 

the current origination limit, as 

currently constructed, may have the 

effect of limiting smaller creditors’ 

ability to provide credit to qualified 

borrowers. According to commenters, 

the current origination limit does this 

by, for example, moving creditors to 

originate fewer loans than they 

otherwise would (including fewer loans 

for lower loan amounts that serve rural 

and underserved borrowers), to achieve 

or preserve small-creditor status. In 

addition, creditors that have the 

relationship lending models and 

community ties—the attributes of a 

creditor that the Bureau believes should 

be accorded small-creditor status—say 

that they simply have a volume of 

business that exceeds the current 

origination limit (even though they may 

meet the asset limit for small-creditor 

status). 

Industry commenters consistently 

noted the mismatch between the 

origination limit and asset limit. They 

also stated that the origination limit was 

clearly the more problematic of the two 

limits for community banks, credit 

unions, and other relationship lenders. 

Industry commenters stated that the 

current origination limit is particularly 

difficult for those creditors that operate 

at the margins of the origination limit 

and small-creditor status. These 

creditors face concerns about the impact 

of origination volume fluctuations from 

year to year, which may move them 

from small-creditor status to non-smallcreditor status on short-notice without 

sufficient time to modify systems and 

products to address such a change. This 

shifting status from year to year would 

force such creditors to incur an 

additional expense to plan for meeting 

the regulatory requirements otherwise 

faced by creditors without smallcreditor status. 

The issues cited by these commenters 

are clearly not the result the Bureau was 

seeking when it set the limits for 

according special status for small 

creditors. The Bureau’s intent was not to 

exclude small creditors that could 

provide responsible, affordable credit to 

consumers, such as small community 

lenders, and thereby potentially limit 

the access of those consumers to 

creditors with a lending model, 

operations, and products that may meet 

their particular needs. 

The Bureau believes its proposed 

origination limit addresses these issues 

in an effective and responsible way that 

is consistent with the intent of the 

Dodd-Frank Act in according small 

creditors different treatment with regard 

to certain requirements. Expanding the 

origination limit to 2,000 loan 

originations, and not including portfolio 

loans in that originations count, would 

increase the number of creditors that 

receive small-creditor status by 700 

creditors, from approximately 9,700 to 

approximately 10,400 (as further 


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Federal Register / Vol. 80, No. 28 / Wednesday, February 11, 2015 / Proposed Rules 7781 

discussed in the Section 1022(b) 

Analysis below). The Bureau believes 

that this increase would include 

creditors with responsible lending 

models and economies of scale that fit 

the purpose of small-creditor status. 

In particular, the proposed exclusion 

from the origination limit count of loans 

held in portfolio by the creditor (and its 

affiliates) is a recognition that smaller 

institutions that originate loans to be 

funded out of their own assets and held 

in portfolio have different interests than 

creditors, including smaller institutions, 

that originate loans to sell them into the 

secondary market. The interests of 

smaller institutions making portfolio 

loans are more likely to be aligned with 

the interests of those consumers with 

whom they do business. The proposed 

exclusion of portfolio loans is also 

consistent with the rationale behind the 

additional requirements under the 

Bureau’s rules for application of the 

small creditor special provisions to only 

those qualified mortgages that creditors 

retain in portfolio (see, e.g., TILA 

section 129C(b)(2)(E) and 

§ 1026.43(e)(5), (e)(6) and (f)). The 

rationale articulated by the Bureau in 

that instance applies here—that the 

discipline imposed when small 

creditors make loans that they will hold 

in their portfolios is important to protect 

the consumers’ interest and to prevent 

evasion. In other words, the Bureau’s 

proposal not to include portfolio loans 

in the origination limit count is based 

on a recognition not only of the small 

creditor’s community-based focus and 

commitment to relationship lending, but 

also the inherent incentives associated 

with portfolio lending by smaller 

institutions. 

The proposed grace period also 

addresses industry commenters’ 

concerns regarding the impact of 

origination volume fluctuations from 

year to year. These commenters noted 

that small creditors on the margins of 

the origination limit could lose smallcreditor status on short notice. The 

proposed grace period allows an 

otherwise eligible creditor that exceeded 

the origination limit in the preceding 

calendar year to continue to operate 

with respect to applications received 

before April 1 of the current calendar 

year with the benefit of the small 

creditor exemptions. Such a creditor 

could operate as if it had not exceeded 

the limits in the preceding year, as long 

as the creditor did not exceed the 

origination limit in the year prior to the 

preceding calendar year. This proposed 

grace period should provide the time for 

creditors to make any needed 

adjustments to change their systems to 

come into compliance with the Bureau’s 

regulatory requirements. It also helps 

alleviate additional preparation burdens 

creditors might otherwise confront in 

anticipation of not meeting the small 

creditor origination limit. 

The Bureau’s primary goal is to draw 

the appropriate line between small and 

large creditors, and to strike the right 

balance between preserving consumer 

access to credit, eliminating regulatory 

requirements that would hinder the 

ability of small creditors to provide that 

access to credit to potential borrowers, 

and maintaining effective consumer 

protections. The Bureau therefore 

continues to seek comment on 

alternative methods of achieving the 

purposes underlying small-creditor 

status and, specifically, for setting the 

origination limit and alternatives to the 

proposed grace period. 

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

The Bureau proposes to amend 

§ 1026.35(b)(2)(iii)(C) to include in the 

calculation of the $2 billion asset limit 

the assets of the creditor’s affiliates that 

originate covered transactions secured 

by a first lien. Proposed comment 

35(b)(2)(iii)–1.iii provides that, for 

purposes of § 1026.35(b)(2)(iii)(C), in 

addition to the creditor’s assets, only the 

assets of a creditor’s ‘‘affiliate’’ as 

defined in § 1026.32(b)(5) that originates 

covered transactions (as defined by 

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

are counted toward the asset limit. 

Thus, under the proposed rule, only 

assets of affiliates that engage in the 

type of mortgage lending covered by 

Regulation Z’s ability-to-repay 

provisions are counted toward the asset 

limit. 

Counting both the creditor’s assets 

and the assets of the creditor’s affiliates 

that originate mortgage loans would 

make the tests for determining smallcreditor status consistent between the 

asset limit in § 1026.35(b)(2)(iii)(C) and 

the origination limit in 

§ 1026.35(b)(2)(iii)(B), which currently 

includes the originations of the 

creditor’s affiliates in determining 

whether the limit has been exceeded. 

This additional consistency between the 

two tests may facilitate creditor 

compliance with the special provisions 

and exemptions for small creditors, 

including those that operate 

predominantly in rural or underserved 

areas, of which the two tests are a part. 

More significantly, the Bureau believes 

that this change follows logically from 

the other changes being proposed here. 

As noted, only the assets of the 

creditor’s affiliates that originate 

mortgage loans are counted toward the 

asset limit under the proposed rule. 

Given the proposed change to the 

origination limit to exclude the 

creditor’s and its affiliate’s portfolio 

loans from counting toward that limit, 

the Bureau believes the proposed 

change to the asset limit is necessary to 

ensure that small-creditor status does 

not become a means for larger creditors 

to evade important requirements that 

provide consumer protections. 

As noted previously, although it was 

not required to do so, the Bureau 

established an asset limit because it 

believed that it is important to preclude 

a very large creditor with relatively 

modest mortgage operations from taking 

advantage of a provision designed for 

much smaller creditors with much 

different characteristics and incentives 

and that lack the scale to make 

compliance less burdensome. The 

Bureau wants to prevent a situation 

where creditors with substantially more 

than $2 billion in assets (but that did 

not exceed the proposed origination 

limit of 2,000 non-portfolio loans) could 

create affiliate relationships with a 

number of entities—all under the $2 

billion asset limit—that could then 

originate an unlimited number of loans 

to be held in portfolio and maintain 

status as small creditors. Such a creditor 

is not the type of small entity that the 

Bureau intended to take advantage of 

the special provisions and exemptions 

provided to smaller creditors. 

The Bureau is seeking comment on 

this proposed change to 

§ 1026.35(b)(2)(iii)(C) (and the 

corresponding change to comment 

35(b)(2)(iii)–1.iii) to include in the 

calculation of the $2 billion asset limit 

the assets of the creditor’s affiliates that 

originate covered transactions secured 

by a first lien. In particular the Bureau 

is interested in comments on the 

potential impact of this change on 

creditors and access to credit, and the 

potential for larger creditors to obtain 

small-creditor status without this 

change and the possible impact on 

consumers. In addition, the Bureau 

seeks comment on its proposal to count 

only the assets of the creditor’s affiliates 

that originate covered transactions 

secured by a first lien toward the 

origination limit—and not the assets of 

other affiliates of the creditor. 

The Bureau also proposes to add a 

grace period to the $2 billion asset limit 

in § 1026.35(b)(2)(iii)(C). This proposed 

grace period allows an otherwise 

eligible creditor that exceeded the asset 

limit in the preceding calendar year to 

continue to operate as a small creditor 

with respect to applications received 

before April 1 of the current calendar 

year. Such a creditor could operate with 

the benefit of the small creditor special 

provisions and exemptions (assuming 


tkelley on DSK3SPTVN1PROD with PROPOSALS2
7782 Federal Register / Vol. 80, No. 28 / Wednesday, February 11, 2015 / Proposed Rules 

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

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

apply to transactions for which creditors received 

applications on or after April 1, 2010, and before 

January 1, 2014. 

36With respect to loans where escrows were 

established on or after April 1, 2010, and before 

June 1, 2013, the Supplementary Information to the 

January 2013 Escrows Final Rule explained that 

creditors should not be penalized for compliance 

with the then current regulation, which would have 

required any such loans to be escrowed after April 

1, 2010, and prior to June 1, 2013—the date the 

exemption took effect. January 2013 Escrows Final 

Rule, 78 FR 4725, 4739; see also September 2013 

Final Rule, 78 FR 60382, 60416. 

the origination limit and other 

applicable regulatory requirements are 

met) with respect to such applications. 

This proposed grace period is available 

to creditors that exceeded the asset limit 

in the preceding calendar year but had 

not exceeded it in the calendar year 

prior to the preceding calendar year. 

Proposed comment 35(b)(2)(iii)–1.iii 

explains that creditors meet the asset 

limit for any higher-priced mortgage 

loan consummated during calendar year 

2016 if the creditors’ total assets (which 

include, in addition to the creditors’ 

assets, the assets of the creditors’ 

affiliates that originate mortgage loans) 

are under the applicable asset limit on 

December 31, 2015. The proposed 

comment explains further that creditors 

that did not satisfy the applicable asset 

limit on December 31, 2015 satisfy the 

asset limit criterion for a higher-priced 

mortgage loan consummated during 

2016 if the application for the loan was 

received before April 1, 2016 and the 

creditors had total assets under the 

applicable asset limit on December 31, 

2014. The proposed comment also adds 

to the 2013 calendar year asset limit 

currently listed in the comment the 

thresholds for calendar year 2014 and 

for calendar year 2015. In providing the 

threshold for calendar year 2015 

($2,060,000,000), the proposed 

comment explains that creditors that 

had total assets of less than 

$2,060,000,000 on December 31, 2014, 

satisfy this criterion for purposes of (1) 

any loan consummated during 2015 and 

(2) any loan consummated during 2016 

for which the application was received 

before April 1, 2016. 

The Bureau proposes the grace period 

to provide consistency in requirements 

for creditors seeking and maintaining 

small-creditor status. The Bureau is 

seeking comment, however, on the need 

for the grace period for the asset limit, 

in light of industry comments indicating 

that the origination limit was the main 

focus of concern regarding failure to 

meet small-creditor status and the 

impact of origination volume 

fluctuations causing failure to meet that 

limit with possible little advance notice. 

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

In general, § 1026.35(b)(2)(iii)(D) 

currently prohibits any creditor from 

availing itself of the exemption from 

escrow requirements in 

§ 1026.35(b)(2)(iii) if the creditor 

maintains escrow accounts for any 

extension of consumer credit secured by 

real property or a dwelling that it or its 

affiliate currently services. However, 

§ 1026.35(b)(2)(iii)(D) generally provides 

that a creditor may qualify for the 

exemption if such escrow accounts were 

established for first-lien higher-priced 

mortgage loans on or after April 1, 2010, 

and before January 1, 2014, or were 

established after consummation as an 

accommodation for distressed 

consumers.35 In light of the proposed 

expansion of the ‘‘small’’ and ‘‘rural’’ 

definitions in §§ 1026.35(b)(2)(iii)(B) 

and 1026.35(b)(2)(iv)(A) discussed 

above and below, the Bureau proposes 

to substitute January 1, 2016 for January 

1, 2014 where it appears in 

§ 1026.35(b)(2)(iii)(D)(1) and its 

commentary. This proposed change 

prevents any creditors that are currently 

ineligible for the escrow exemption, but 

that would qualify if the proposed 

definitional changes are adopted, from 

losing eligibility for the escrow 

exemption because of escrow accounts 

they established for first-lien higherpriced mortgage loans pursuant to 

requirements in the current rule. 

Creditors that do not currently meet 

the requirements in 

§ 1026.35(b)(2)(iii)(A) through (D) are 

generally required under § 1026.35(b) to 

establish escrow accounts for any 

higher-priced mortgage loans those 

creditors make. However, if the 

expansions of the origination limit and 

rural definitions in proposed 

§§ 1026.35(b)(2)(iii)(B) and 

1026.35(b)(2)(iv)(A) are finalized, it is 

possible that some creditors that 

currently are ineligible under 

§ 1026.35(b)(2)(iii)(A) or (B) would meet 

the conditions in § 1026.35(b)(2)(iii)(A) 

and (B) after the changes take effect. 

Even if such creditors satisfy the 

condition set forth in 

§ 1026.35(b)(2)(iii)(C), however, current 

§ 1026.35(b)(2)(iii)(D) would generally 

deem them ineligible for exemption 

after the effective date if they maintain 

an escrow account that they were 

required to set up prior to the effective 

date. 

If the proposed changes to 

§ 1026.35(b)(2)(iii) and (iv) are finalized, 

the Bureau does not believe that such 

creditors should lose the exemption 

simply because they were required by 

applicable regulations to establish 

escrow accounts prior to January 1, 

2016. As the Bureau discussed in the 

Supplementary Information to the 

January 2013 Escrows Final Rule and 

again in finalizing amendments to the 

January 2013 Escrows Final Rule in the 

September 2013 Final Rule, the Bureau 

believes creditors should not be 

penalized for compliance with the 

current regulation.36 The Bureau thus 

believes it is appropriate to amend 

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

35(b)(2)(iii)(D)(1)–1 to exclude escrow 

accounts established on or after April 1, 

2010 and before January 1, 2016. This 

proposed change makes creditors 

eligible for the exemption provided 

under proposed § 1026.35(b)(2)(iii) if 

they otherwise meet the requirements of 

§ 1026.35(b)(2)(iii) and they do not 

establish new escrow accounts for 

transactions for which they receive 

applications on or after January 1, 2016, 

other than those described in 

§ 1026.35(b)(2)(iii)(D)(2). 

To conform the commentary to this 

change, the Bureau also proposes to 

change January 1, 2014 to January 1, 

2016 where it appears in comment 

35(b)(2)(iii)(D)(1)–1. Proposed comment 

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

the date ranges provided in 

§ 1026.35(b)(2)(iii)(D)(1) apply to 

transactions for which creditors 

received applications on or after April 1, 

2010, and before January 1, 2016. 

The Bureau solicits comment on the 

Bureau’s proposed amendments to 

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

35(b)(2)(iii)(D)(1)–1, and specifically the 

exclusion of escrow accounts 

established on or after April 1, 2010 and 

before January 1, 2016 from the 

limitation in § 1026.35(b)(2)(iii)(D). In 

particular, the Bureau seeks comment 

on the need for the proposed changes 

and the impact on consumers of 

extending the exemption to the escrow 

requirements in § 1026.35(b)(1). 

35(b)(2)(iv)(A) 

‘‘Rural’’ 

Section 1026.35(b)(2)(iv)(A) currently 

defines a county as ‘‘rural’’ during a 

calendar year if it is neither in an MSA 

nor in a micropolitan statistical area that 

is adjacent to an MSA, as those terms 

are defined by the U.S. Office of 

Management and Budget and as they are 

applied under currently applicable 

UICs, established by the USDA–ERS. It 

further provides that 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. Comments 

35(b)(2)(iv)–1 and –2 provide additional 


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37This proposed move is consistent with a 

similar move that the Bureau proposes with respect 

to the safe harbor discussion that currently appears 

with the ‘‘underserved’’ definition in 

§ 1026.35(b)(2)(iv)(B). 

38 In its comments in 2013, one industry trade 

association reported that in a recent survey of 

approximately 400 members that are community 

banks, 75 percent indicated they currently make 

balloon-payment mortgages, and only 46 percent 

would be able to use the balloon mortgage 

exemption to the ability-to-repay rule. It also noted 

that, of the banks that responded to the survey that 

considered themselves to be rural or in a rural 

community, 44 percent did not meet the Bureau’s 

definition of rural. 

39Census Bureau, 2010 Census Tallies of Census 

Tracts, Block Groups & Blocks, https://

www.census.gov/geo/maps-data/data/tallies/

tractblock.html. 

40Census Bureau, 2010 Census Urban and Rural 

Classification and Urban Area Criteria, https://

www.census.gov/geo/reference/ua/urban-rural2010.html. To qualify as an urban area, the territory 

identified must encompass at least 2,500 people, of 

which at least 1,500 must reside outside 

institutional group quarters such as correctional 

facilities, group homes for juveniles, and mental 

(psychiatric) hospitals. 

clarification about how to determine 

which counties fall within this 

definition and examples. 

The Bureau proposes to expand the 

‘‘rural’’ definition in 

§ 1026.35(b)(2)(iv)(A) to capture 

additional areas classified as ‘‘rural’’ by 

the Census Bureau, without affecting the 

status of any counties that would be 

deemed rural under the Bureau’s 

existing definition. For technical 

reasons, the Bureau also proposes to 

move the discussion of the safe harbor 

list of counties provided by the Bureau 

that is currently in § 1026.35(b)(2)(iv)(A) 

and comment 35(b)(2)(iv)(A)–1 to new 

§ 1026.35(b)(2)(iv)(C) and proposed 

comment 35(b)(2)(iv)(A)–1.iii, which are 

discussed below.37

In response to the January 2013 ATR 

Proposal and to proposed amendments 

to the January 2013 Escrows Final Rule, 

the Bureau received a number of 

comments regarding how ‘‘rural’’ and 

‘‘underserved’’ should be defined for 

purposes of the balloon-payment 

qualified mortgage provisions and the 

escrow exemption. 78 FR 30739, 30741 

(May 23, 2013); 78 FR 35430, 35491 

(June 12, 2013). Commenters including 

national and State trade groups 

representing creditors and dozens of 

small creditors argued that the current 

definitions of rural and underserved are 

too restrictive and do not adequately 

preserve consumers’ access to credit. 

Some of these commenters proposed 

that the Bureau adopt alternate 

definitions of ‘‘rural,’’ such as those 

used by the U.S. Department of 

Agriculture’s Rural Housing Loan 

Program or the Farm Credit System. 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. Another commenter 

suggested that any place not within one 

of the Census Bureau’s ‘‘urbanized 

areas,’’ which contain 50,000 or more 

people, should be considered rural. A 

credit union association suggested that 

credit unions with ‘‘rural’’ community 

charters should be exempt. It also 

objected to the current rule’s provision 

that a county designated as a 

micropolitan statistical area is not 

‘‘rural’’ if it is adjacent to an MSA. 

Several commenters criticized the 

current definition’s assumption that an 

entire county is either rural or nonrural. These commenters noted that 

many counties are in fact made up of a 

mix of rural and non-rural areas. One 

industry trade association commenter 

noted that by excluding entire counties 

the Bureau is excluding many rural 

communities where community banks 

provide much of the mortgage financing 

through loans they originate and retain 

in portfolio. According to the 

commenter, many of these loans are 

balloon-payment loans, and many 

community banks do not escrow for 

taxes and insurance. 

Many commenters cited examples of 

areas that they believe are truly rural but 

that are not classified as rural by the 

current regulation. Two trade 

association commenters noted, for 

example, that only 3 counties in 

Maryland qualified as rural, even 

though many of the remaining areas in 

Maryland are serviced by the Farm 

Credit System. Other commenters noted 

that less than a third of Louisiana 

parishes qualified as ‘‘rural,’’ even 

though by many measures Louisiana is 

a very rural state. 

A number of commenters expressed 

concern that if the rural definition is not 

expanded, the number of new lenders 

entering markets that appear to be rural 

in nature but that fall outside of the 

definition will decrease. They indicated 

that some existing lenders will either 

exit these markets or curtail certain 

types of lending, leaving consumers in 

these areas with few choices. 

Commenters noted that the ability to 

originate mortgages with balloon 

payments is important to small 

creditors, who often have unique 

product pricing risks and also may not 

have adequate staff or training to 

produce the additional disclosures 

required by adjustable-rate mortgages.38

Since the Bureau announced that the 

definition was under review, it has 

received additional feedback on the 

rural definition outside of the formal 

comment process. For example, one 

industry trade association urged the 

Bureau to expand the rural definition if 

it did not make the special provisions 

and exemptions more broadly available 

in other ways. The association noted 

that the current definition of ‘‘rural’’ 

adopted by the January 2013 ATR Final 

Rule and the January 2013 Escrows 

Final Rule covers only about 7 percent 

of the U.S. population, whereas the 

Census Bureau recognizes about 20 

percent of the U.S. population as living 

in a rural area. 

The Bureau believes that its current 

county-based approach facilitates 

application of the ‘‘rural’’ definition 

because it is easy to discern the county 

in which a property is located and to 

check whether that county appears on 

the lists published by the Bureau. 

However, the Bureau also appreciates 

the concern that has been raised by 

commenters that the current definition 

excludes from the definition certain 

areas that might otherwise be identified 

as rural, solely on the basis of the 

county in which the area is located. 

Many counties are large and may 

include both rural and urban areas, as 

commenters have noted. 

The Bureau has considered a variety 

of possible approaches that could be 

used to identify areas that are smaller 

than counties that may be rural in 

nature. Of these, the Bureau believes 

that the urban-rural classification 

completed by the Census Bureau every 

ten years may be the most suitable for 

the Bureau’s current purposes. This 

classification is done at the level of the 

census block, which is the smallest 

geographic area for which the Census 

Bureau collects and tabulates decennial 

census data. While there are only about 

3,000 counties in the United States, 

there are approximately 11 million 

census blocks.39 The Census Bureau 

delineates census blocks as ‘‘urban’’ or 

‘‘rural’’ based on each decennial census 

and most recently released its list of 

urban areas based on the 2010 Census 

in 2012. For the 2010 Census, an urban 

area consists of ‘‘a densely settled core 

of census tracts and/or census blocks 

that meet minimum population density 

requirements, along with adjacent 

territory containing non-residential 

urban land uses as well as territory with 

low population density included to link 

outlying densely settled territory with 

the densely settled core.’’ 40 The Census 

Bureau identifies two types of urban 

areas: ‘‘urbanized areas’’ of 50,000 or 

more people, and ‘‘urban clusters’’ of at 

least 2,500 and less than 50,000 people. 

Under the Census Bureau’s 

classification, ‘‘rural’’ encompasses all 

population, housing, and territory not 


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41The proposed addition of a census block prong 

in § 1026.35(b)(2)(iv)(A)’s ‘‘rural’’ definition would 

not affect the scope of the exemption from a 

requirement to obtain a second appraisal for certain 

higher-priced mortgage loans in the January 2013 

Interagency Appraisals Final Rule, since that 

exemption applies to credit transactions made by a 

creditor in a ‘‘rural county’’ as defined in 

§ 1026.35(b)(2)(iv)(A). This definition of ‘‘rural 

county’’ would be retained in § 1026.35(b)(2)(iv)(A) 

as proposed § 1026.35(b)(2)(iv)(A)(1). 

42For example, Culpeper County, Virginia is part 

of the Washington-Arlington-Alexandria, DC–VA– 

MD–WV MSA and does not currently qualify as 

‘‘rural’’ under existing § 1026.35(b)(2)(iv)(A). 

Because the Census Bureau defined some census 

blocks within Culpeper County as rural in its most 

recent rural-urban classification, those portions of 

the county qualify as rural under proposed 

§ 1026.35(b)(2)(iv)(A) until the next Census Bureau 

rural-urban classification. 

43See Qualifying Urban Areas for the 2010 

Census, 77 FR 18652 (March 27, 2012); Urban Area 

Criteria for the 2010 Census, 76 FR 53030 (Aug. 24, 

2011); Proposed Urban Area Criteria for the 2010 

Census, 75 FR 52174 (Aug. 24, 2010). 

44This proposed move is consistent with a 

similar move that the Bureau proposes with respect 

to the safe harbor discussion that currently appears 

with the ‘‘rural’’ definition in § 1026.35(b)(2)(iv)(A). 

included within either type of urban 

area. 

The Bureau proposes to ensure that 

areas with rural characteristics that are 

located in counties with both rural and 

urban characteristics are included 

within the Bureau’s definition. The 

proposal adds a second prong to the 

definition in § 1026.35(b)(2)(iv)(A), 

which includes areas designated as 

‘‘rural’’ by the Census Bureau in the 

urban-rural classification it completes 

after each decennial census. To 

implement this change, proposed 

§ 1026.35(b)(2)(iv)(A) provides that an 

area is rural during a calendar year if it 

is either (1) a county that meets the 

Bureau’s current rural definition (i.e., a 

county that is neither in an MSA nor in 

a micropolitan statistical area that is 

adjacent to an MSA, as those terms are 

defined by the U.S. Office of 

Management and Budget and as they are 

applied under currently applicable 

UICs, established by USDA–ERS), or (2) 

a census block that is not in an urban 

area, as defined by the Census Bureau 

using the latest decennial census of the 

United States. The proposed definition 

affects the exemption to the escrow 

requirement for higher-priced mortgage 

loans in § 1026.35(b)(2)(iii), the 

allowance for balloon-payment qualified 

mortgages in § 1026.43(f), and the 

exemption from the balloon-payment 

prohibition on high-cost mortgages in 

§ 1026.32(d)(1)(ii)(C).41

The proposed definition of ‘‘rural’’ 

maintains the bright-line, easy-to-apply 

county-based test from the current 

definition, while also bringing into the 

definition rural pockets within counties 

that are non-rural under the current 

rule.42 Because the Census Bureau’s 

classification is done at the census block 

level, it provides much more granularity 

than any county-based metric. To 

prepare the rural-urban classification, 

the Census Bureau uses measures based 

primarily on population counts and 

residential population density, but also 

considers a variety of criteria that 

account for nonresidential urban land 

uses, such as commercial, industrial, 

transportation, and open space that are 

part of the urban landscape.43 Since the 

1950 Census, the Census Bureau has 

reviewed and revised these criteria as 

necessary for each decennial census. 

The Census Bureau completes its ruralurban classification every ten years 

based on the results of the decennial 

census, on roughly the same schedule 

that the USDA–ERS uses in updating its 

UIC designations, which should provide 

a relatively stable but up-to-date 

measure. 

In light of the changes proposed to the 

structure of § 1026.35(b)(2)(iv)(A), the 

Bureau proposes for technical reasons to 

move the discussion of the lists of 

counties provided by the Bureau from 

§ 1026.35(b)(2)(iv)(A) and comment 

35(b)(2)(iv)–1 to new proposed 

§ 1026.35(b)(2)(iv)(C) and comment 

35(b)(2)(iv)–1.iii.A, which are discussed 

below. The Bureau also proposes 

revisions to comment 35(b)(2)(iv)–1 

that: (1) Conform to the changes made 

to § 1026.35(b)(2)(iv), (2) add a crossreference to comment 35(b)(2)(iii)–1, 

and (3) make technical changes for 

clarity. 

The Bureau also proposes to update 

the example provided in comment 

35(b)(2)(iv)–2.i to reflect the new prong 

that the Bureau proposes to add to the 

definition. Proposed comment 

35(b)(2)(iv)–2.i explains that an area is 

considered ‘‘rural’’ for a given calendar 

year based on the most recent available 

UIC designations by the USDA–ERS and 

the most recent available delineations of 

urban areas by the Census Bureau that 

are available at the beginning of the 

calendar year. As the proposed 

comment notes, these designations and 

delineations are updated by the USDA– 

ERS and the Census Bureau respectively 

once every ten years. The comment 

provides an illustrative example. 

The Bureau solicits comment on 

whether it should add a second prong 

to the rural definition based on the 

Census Bureau’s urban-rural 

classification and, if so, whether it 

should make any modifications to the 

Census Bureau’s classification in doing 

so. Although the Bureau proposes to 

maintain the current county-based test 

as part of the new definition, the Bureau 

also solicits comment on whether the 

counties included in the current 

definition should be expanded, 

contracted, eliminated, or maintained as 

is. The Bureau also requests feedback on 

any alternative approaches to defining 

‘‘rural’’ areas in § 1026.35(b)(2)(iv)(A) 

that commenters believe might be 

preferable to the Bureau’s proposal. 

35(b)(2)(iv)(B) 

‘‘Underserved’’ 

Section 1026.35(b)(2)(iv)(B) defines a 

county as ‘‘underserved’’ during a 

calendar year if, according to HMDA 

data for the preceding calendar year, no 

more than two creditors extended 

covered transactions, as defined in 

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

five or more times in the county. It 

further provides that 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. For technical reasons, the Bureau 

proposes to move the discussion of the 

lists of counties provided by the Bureau 

that appears in § 1026.35(b)(2)(iv)(B) 

and comment 35(b)(2)(iv)–1 to proposed 

new § 1026.35(b)(2)(iv)(C) and comment 

35(b)(2)(iv)–1.iii.A.44 The Bureau also 

proposes other technical changes to 

§ 1026.35(b)(2)(iv)(B) and comments 

35(b)(2)(iv)–1 and 35(b)(2)(iv)–2.ii and 

proposes to add a reference in comment 

35(b)(2)(iv)–2.ii to the new grace period 

under § 1026.35(b)(2)(iii)(A). 

Although most of the feedback that 

the Bureau has received relating to the 

definition of ‘‘rural or underserved’’ has 

focused on the definition of ‘‘rural,’’ 

some commenters have also suggested 

that the Bureau’s definition of 

‘‘underserved’’ is under-inclusive and 

have urged the Bureau to consider 

alternative definitions of 

‘‘underserved.’’ The proposed changes 

to the ‘‘rural’’ definition discussed 

above expand the term ‘‘rural or 

underserved’’ for purposes of the 

exemption to the escrow requirement 

for higher-priced mortgage loans in 

§ 1026.35(b)(2)(iii), the allowance for 

balloon-payment qualified mortgages in 

§ 1026.43(f), and the exemption from the 

balloon-payment prohibition on highcost mortgages in § 1026.32(d)(1)(ii)(C). 

Because these provisions only mention 

‘‘underserved’’ when ‘‘rural’’ is listed in 

the alternative (rural or underserved), 

the Bureau believes that expanding the 

‘‘rural’’ definition as proposed would 

address the concerns that have been 

raised by commenters about the overall 

coverage of ‘‘rural or underserved.’’ The 

Bureau has considered alternative 

definitions but believes that the current 


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45Census Bureau, 2010 Census Urban and Rural 

Classification and Urban Area Criteria, https://

www.census.gov/geo/reference/ua/urban-rural2010.html. 

46See generally Census Bureau, Frequently Asked 

Questions: How can I determine if my address is 

urban or rural?, https://ask.census.gov/

faq.php?id=5000&faqId=6405 (‘‘The 2010 Urban 

Areas can be viewed using Reference maps and the 

TIGERweb interactive web mapping system. In 

addition, beginning in the fall of 2012, the 

American FactFinder Address Search Tool will 

contain urban and rural information.’’); see also 

Census Bureau, American FactFinder, http://

factfinder2.census.gov/faces/nav/jsf/pages/

index.xhtml (providing a link to an address search 

function that allows users to find Census data by 

entering a street address). 

definition of ‘‘underserved’’ 

appropriately identifies areas where the 

withdrawal of a creditor from the 

market could leave no meaningful 

competition for consumers’ mortgage 

business. The Bureau therefore does not 

propose any substantive changes to the 

definition of ‘‘underserved’’ at this time. 

35(b)(2)(iv)(C) 

Section 1026.35(b)(2)(iv)(A) and (B) 

and comment 35(b)(2)(iv)–1 currently 

provide that 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’’ or 

‘‘underserved’’ for a particular calendar 

year. As noted above, the Bureau 

proposes to move the discussion of 

these county lists to new 

§ 1026.35(b)(2)(iv)(C)(1) and comment 

35(b)(2)(iv)–1.iii.A. In light of the 

expanded definition of ‘‘rural,’’ the 

Bureau also proposes to add two new 

safe harbor provisions in 

§ 1026.35(b)(2)(iv)(C)(2) and (3) relating 

to automated online tools that may be 

provided by the Bureau or the Census 

Bureau. 

The Bureau proposes technical 

changes to the safe harbor provision 

relating to its county lists and also 

proposes to publish its county lists in 

the Federal Register. Proposed 

comment 35(b)(2)(iv)–1.iii.A also states 

that, to the extent that U.S. territories 

are treated by the Census Bureau as 

counties and are neither MSAs nor 

micropolitan statistical areas adjacent to 

MSAs, such territories will be included 

on these lists as rural areas in their 

entireties. 

Because the proposed changes to 

§ 1026.35(b)(2)(iv) create the possibility 

that some counties would include both 

rural and non-rural areas, the Bureau 

has also adjusted the discussion of the 

county lists in proposed 

§ 1026.35(b)(2)(iv)(C)(1) to make it clear 

that the lists would not include counties 

that are partially rural and partially nonrural. The Bureau does not believe it 

would be practical to publish lists of the 

census blocks that would qualify as 

rural under proposed 

§ 1026.35(b)(2)(iv)(A)(2) because there 

are approximately 11 million census 

blocks in the United States. 

To assist creditors in implementing 

the proposed rural definition, the 

Bureau may develop an automated tool 

that allows creditors to enter property 

addresses, both individually and in 

batches, on the Bureau’s public Web site 

to determine whether the properties are 

located in a rural or underserved area 

for the relevant calendar years. The 

Bureau does not anticipate that such a 

tool would be available prior to the 

proposed effective date for this rule, but 

it proposes that such a tool could 

provide a safe harbor if and when it 

becomes available. Specifically, 

proposed § 1026.35(b)(2)(iv)(C)(2) 

provides that a property shall be 

deemed to be in an area that is ‘‘rural’’ 

or ‘‘underserved’’ in a particular 

calendar year if the property is 

designated as rural or underserved for 

that calendar year by any automated 

tool that the Bureau provides on its 

public Web site. 

Until any tool that the Bureau may 

develop becomes available, the Bureau 

anticipates that creditors would use 

resources provided by the Census 

Bureau to determine whether proposed 

§ 1026.35(b)(2)(iv)(A)(2) is satisfied— 

i.e., whether a property or batch of 

properties is not located in an urban 

area (defined as either an urbanized area 

or an urban cluster), as delineated by 

the Census Bureau. The Census Bureau 

publishes maps, lists, and other 

reference materials on its Web site.45 It 

also currently provides on its Web site 

an address search function that allows 

users to enter a property address to 

obtain census information about the 

property, including a designation that 

the property is in an urban area if that 

is the case.46 The Bureau proposes that 

this tool or any similar tool provided by 

the Census Bureau could be relied on as 

a safe harbor. Specifically, proposed 

§ 1026.35(b)(2)(iv)(C)(3) provides that a 

property shall be deemed to be in an 

area that is ‘‘rural’’ or ‘‘underserved’’ in 

a particular calendar year if the property 

is not designated as located in an urban 

area as defined by the most recent 

delineation of urban areas announced 

by the Census Bureau by any automated 

address search tool that the Census 

Bureau provides on its public Web site 

for that purpose. 

Proposed comments 35(b)(2)(iv)– 

1.iii.B and C discuss the safe harbors 

related to these online tools. Proposed 

comment 35(b)(2)(iv)–1.iii.C clarifies the 

calendar years for which the Census 

Bureau’s address search tool can be 

used, by noting that for any calendar 

year that begins after the date on which 

the Census Bureau announced its most 

recent delineation of urban areas, a 

property is deemed to be in a rural area 

if the search results provided for the 

property by any such tool available on 

the Census Bureau’s public Web site do 

not designate the property as being in an 

urban area. This is consistent with 

proposed comment 35(b)(2)(iv)–2.i, 

which explains that an area is 

considered ‘‘rural’’ for a given calendar 

year based on the most recent available 

UIC designations by the USDA–ERS and 

the most recent available delineations of 

urban areas by the Census Bureau that 

are available at the beginning of the 

calendar year. 

The Bureau solicits comment on 

whether Regulation Z should provide a 

safe harbor for automated tools of this 

nature. The Bureau is also interested in 

any feedback relating to how it could 

make the automated tool it is 

considering developing most useful to 

industry and other stakeholders as they 

implement the rural and underserved 

definitions. 

Section 1026.43 Minimum Standards for 

Transactions Secured by a Dwelling 

43(e) Qualified Mortgages 

43(e)(5) Qualified Mortgage Defined— 

Small Creditor Portfolio Loans 

Section 1026.43(e)(5) defines a 

category of qualified mortgages 

originated by certain small creditors that 

enjoy special treatment in the ability-torepay rules. These mortgages must be 

originated by creditors that meet the 

origination limit and asset limit in 

§ 1026.35(b)(2)(iii)(B) and (C), and the 

creditors must hold the loans in 

portfolio for at least three years after 

consummation, with certain exceptions. 

Such a small creditor portfolio loan can 

be a qualified mortgage even if the 

borrower’s total debt-to-income ratio 

exceeds the 43 percent debt-to-income 

ratio limit that otherwise applies to 

general qualified mortgage loans under 

§ 1026.43(e)(2). Qualified mortgages 

originated by small creditors are entitled 

to a safe harbor under the Bureau’s 

ability-to-repay rule if the loan’s APR 

does not exceed the applicable APOR by 

3.5 or more percentage points—in 

contrast to the general qualified 

mortgage safe harbor which covers loans 

with APRs that do not exceed APOR by 

1.5 or more percentage points. 

The Bureau proposes several changes 

to the commentary to § 1026.43(e)(5) to 

conform to the Bureau’s proposed 

changes to the origination limit and the 

asset limit in § 1026.35(b)(2)(iii)(B) and 

(C). Proposed comment 43(e)(5)–4 


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47Qualified mortgages consummated under 

§ 1026.43(e)(6) based on applications received 

before April 1, 2016 would retain their qualified 

mortgage status after that date, as long as the other 

requirements of § 1026.43(e)(6) are met. 

48For ease of reference for industry participants, 

this proposed new sunset date under 

§ 1026.43(e)(6)(ii) coincides with the end of the new 

proposed grace periods in § 1026.35(b)(2)(iii) for 

otherwise-eligible creditors whose covered first-lien 

transactions meet all of the applicable tests in 

§ 1026.35(b)(2)(iii)(A) through (C) in calendar year 

2014 but not in calendar year 2015. 

49Specifically, section 1022(b)(2)(A) of the DoddFrank 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. 

regarding creditor qualifications 

provides that to be eligible to make a 

qualified mortgage under § 1026.43(e)(5) 

the creditor has to satisfy the 

requirements of § 1026.35(b)(2)(iii)(B) 

and (C), including the Bureau’s 

proposed changes to the origination 

limit and the asset limit, respectively, 

and the addition of the grace periods. 

The Bureau proposes to revise comment 

43(e)(5)–8, regarding the transfer of a 

qualified mortgage to another qualifying 

creditor prior to three years after 

consummation, to conform to the 

proposed origination limit and asset 

limit in § 1026.35(b)(2)(iii)(B) and (C). 

43(e)(6)(ii) 

Section 1026.43(e)(6) provides for a 

temporary balloon-payment qualified 

mortgage that requires all of the same 

criteria to be satisfied as the balloonpayment qualified mortgage definition 

in § 1026.43(f) except the requirement 

that the creditor extend more than 50 

percent of its total first-lien covered 

transactions in counties that are ‘‘rural’’ 

or ‘‘underserved.’’ Pursuant to 

§ 1026.43(e)(6)(ii), this temporary 

provision applies only to covered 

transactions consummated on or before 

January 10, 2016 (the sunset date). The 

Bureau now proposes to change 

§ 1026.43(e)(6)(ii) to provide that the 

temporary provision applies only to 

covered transactions for which the 

application was received before April 1, 

2016. This proposed change gives small 

creditors more time to understand how 

any changes that the Bureau may make 

to the rural definition and lookback 

period will affect their status, if at all, 

and to make any required changes to 

their business practices.47 It also 

expands the scope of the temporary 

balloon-payment qualified mortgage 

provision to include certain transactions 

that have not been consummated as of 

the sunset date but for which the 

creditor has already received 

applications. This proposed change also 

affects the HOEPA balloon-loan 

provisions, because the Bureau 

extended the exception to the general 

prohibition on balloon features for highcost mortgages under 

§ 1026.32(d)(1)(ii)(C) to allow small 

creditors, regardless of whether they 

operate predominantly in ‘‘rural’’ or 

‘‘underserved’’ areas, to continue 

originating balloon high-cost mortgages 

if the loans meet the requirements for 

qualified mortgages under 

§§ 1026.43(e)(6) or 1026.43(f). 

The Bureau anticipates finalizing any 

changes to the rural definition and 

lookback period in the fall of 2015. 

Proposed § 1026.43(e)(6)(ii) allows small 

creditors that are benefiting from the 

temporary qualified mortgage balloonloan expansions but that will not meet 

the rural or underserved definition for 

calendar year 2016 more time to 

transition their business practices.48

The Bureau solicits comment on 

whether it should change the sunset 

date in § 1026.43(e)(6)(ii) and whether 

§ 1026.43(e)(6)(ii) should use the date 

the application was received or the 

consummation date in applying the 

sunset date. 

43(f) 

Section 1026.43(f)(1) provides an 

exemption to the general prohibition on 

qualified mortgages having balloonpayment features (under 

§ 1026.43(e)(2)(C)) if the creditor 

satisfies the requirements stated in 

§ 1026.35(b)(2)(iii)(A), (B), and (C) and 

other criteria are met. Pursuant to 

§ 1026.43(f)(2), a qualified mortgage 

made under this section, known as a 

balloon-payment qualified mortgage, 

immediately loses its qualified mortgage 

status upon transfer in the first three 

years after consummation, unless the 

transfer is to a creditor that satisfies the 

requirements in § 1026.35(b)(2)(iii)(A), 

(B), and (C) or one of the other 

exceptions listed in § 1026.43(f)(2) 

applies. 

The Bureau proposes to revise 

comments 43(f)(1)(vi)–1 and 43(f)(2)(ii)– 

1 to reflect the proposed revisions that 

are described in the section-by-section 

of analysis of § 1026.35 above, including 

the new grace periods and expanded 

tests that the Bureau proposes in 

§ 1026.35(b)(2)(iii)(A), (B), and (C), the 

broader rural definition that the Bureau 

proposes in § 1026.35(b)(2)(iv)(A), and 

the safe harbor provisions that the 

Bureau proposes in 

§ 1026.35(b)(2)(iv)(C). Proposed 

comment 43(f)(1)(vi)–1.i.A and B also 

includes updated examples to reflect 

these changes in the regulation text. 

In lieu of listing out the asset limits 

in comment 43(f)(1)(vi)–1.iii, the Bureau 

also proposes to include a crossreference in comment 43(f)(1)(vi)–1.iii 

indicating that the Bureau publishes 

notice of the asset limit each year by 

amending comment 35(b)(2)(iii)–1.iii. 

The Bureau also proposes technical 

changes to comments 43(f)(1)(vi)–1, 

43(f)(2)–2, and 43(f)(2)(ii)–1. 

VI. Dodd-Frank Act Section 1022(b) 

Analysis 

A. Overview 

In developing the proposed rule, the 

Bureau has considered potential 

benefits, costs, and impacts.49 The 

Bureau requests comment on the 

preliminary discussion presented below 

as well as submissions of additional 

data that could inform the Bureau’s 

consideration of the benefits, costs, and 

impacts. The Bureau has consulted, or 

offered to consult with, the prudential 

regulators, the Federal Housing Finance 

Agency, the Federal Trade Commission, 

the U.S. Department of Agriculture, the 

U.S. Department of Housing and Urban 

Development, the U.S. Department of 

the Treasury, the U.S. Department of 

Veterans Affairs, and the U.S. Securities 

and Exchange Commission, including 

regarding consistency with any 

prudential, market, or systemic 

objectives administered by such 

agencies. The Bureau has also consulted 

with the Census Bureau on proposed 

§ 1026.35(b)(2)(iv)(A)(2). 

As discussed in greater detail 

elsewhere throughout this 

Supplementary Information, the Bureau 

proposes several amendments to the 

Bureau’s Regulation Z and official 

interpretations relating to escrow 

requirements for higher-priced mortgage 

loans under the Bureau’s January 2013 

Escrows Final Rule and ability-to-repay/ 

qualified mortgage requirements under 

the Bureau’s January 2013 ATR Final 

Rule and May 2013 ATR Final Rule. 

Since publication of the 2013 Title XIV 

Final Rules, the Bureau has received 

extensive feedback on the definitions of 

‘‘small creditor’’ and ‘‘rural and 

underserved areas’’ with many 

commenters criticizing the Bureau for 

defining ‘‘rural’’ and ‘‘underserved’’ too 

narrowly and urging the Bureau to 

consider alternative definitions. This 

proposed rule reflects feedback from 

stakeholders regarding the Bureau’s 

definitions of small creditor and rural 

and underserved areas as those 

definitions relate to special provisions 


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50 In particular, the Bureau compares the impacts 

of the proposed provisions against the state of the 

world after January 2016 if the proposed provisions 

do not come into effect. 

51The Bureau has discretion in future 

rulemakings to choose the relevant provisions to 

discuss and to choose the most appropriate baseline 

for that particular rulemaking. 

52The quantitative 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 National Mortgage Licensing 

System data and has statistically projected 

estimated loan counts for those depository 

institutions that do not report these data either 

under HMDA or on the NCUA Call Report. The 

Bureau has projected originations of higher-priced 

mortgage loans in a similar fashion for depositories 

that do not report under HMDA. These projections 

use Poisson regressions that estimate loan volumes 

as a function of an institution’s total assets, 

employment, mortgage holdings, and geographic 

presence. 

53Every national bank, State member bank, and 

insured nonmember bank is required by its primary 

Federal regulator to file consolidated Reports of 

Condition and Income, also known as Call Reports, 

for each quarter as of the close of business on the 

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

The specific reporting requirements depend upon 

the size of the bank and whether it has any foreign 

offices. For more information, see http://

www2.fdic.gov/call_tfr_rpts/. 

54The Consumer Credit Panel is a longitudinal, 

nationally representative sample of approximately 5 

million deidentified credit records from one of the 

nationwide consumer reporting agencies. The 

sample provides tradeline-level information for all 

of the tradelines associated with each credit report 

record each month, including a commerciallyavailable credit score. This information was used 

for the analysis of how consumers’ credit scores 

differ depending on the size of the financial 

institution originating the consumers’ mortgage 

loans. 

55As explained in the section-by-section analysis 

above, the exception to the general prohibition on 

balloon-payment features for high-cost mortgages in 

the 2013 HOEPA Final Rule would also be affected 

by the proposed provisions. However, the Bureau 

believes that the effect of the proposed rule on the 

rural balloon-payment provision in the 2013 

HOEPA Final Rule is relatively small, in terms of 

both the consumers and covered persons affected, 

and thus the Bureau does not discuss this effect of 

the proposed rule in this 1022(b) analysis. 

56As discussed in the section-by-section analysis, 

there is also a temporary two-year provision that 

allows small creditors, regardless of whether they 

operate predominantly in rural or underserved 

areas, to originate qualified mortgage balloonpayment loans and high-cost mortgages with 

balloon-payment features. This proposed rule 

extends the end-date for that temporary provision. 

and certain exemptions provided to 

small creditors under the Bureau’s 

aforementioned rules. 

The discussion below considers the 

benefits, costs, and impacts of the 

following key provisions of the 

proposed rule (proposed provisions): 

• Raising the loan origination limit 

for determining eligibility for smallcreditor status; 

• An expansion of the definition of 

‘‘rural area’’ to include (1) a county that 

meets the current definition of rural 

county or (2) a census block that is not 

in an urban area as defined by the 

Census Bureau; and 

• An extension of the temporary twoyear transition period that allows 

certain small creditors to make balloonpayment qualified mortgages and 

balloon-payment high cost mortgages 

regardless of whether they operate 

predominantly in rural or underserved 

areas. 

With respect to these provisions, the 

discussion considers costs and benefits 

to consumers and costs and benefits to 

covered persons. The discussion also 

addresses certain alternative provisions 

that were considered by the Bureau in 

the development of the proposed rule. 

The Bureau has chosen to evaluate the 

benefits, costs, and impacts of the 

proposed rule against the current state 

of the world.50 That is, the Bureau’s 

analysis below considers the benefits, 

costs, and impacts of the proposed 

provisions relative to the current 

regulatory regime, as set forth primarily 

in the January 2013 ATR Final Rule, the 

May 2013 ATR Final Rule, and the 

January 2013 Escrows Final Rule.51 The 

baseline considers economic attributes 

of the relevant market and the existing 

regulatory structure. 

The Bureau has relied on a variety of 

data sources to consider the potential 

benefits, costs and impacts of the 

proposed provisions, including the 

public comment record of various Board 

and Bureau rules.52 However, in some 

instances, the requisite data are not 

available or are quite limited. Data with 

which to quantify the benefits of the 

rule are particularly limited. As a result, 

portions of this analysis rely in part on 

general economic principles to provide 

a qualitative discussion of the benefits, 

costs, and impacts of the proposed rule. 

The primary source of data used in 

this analysis is 2013 data collected 

under HMDA. The empirical analysis 

also uses data from the 4th quarter 2013 

bank and thrift Call Reports,53 and the 

4th quarter 2013 credit union Call 

Reports from the NCUA, to identify 

financial institutions and their 

characteristics. Unless otherwise 

specified, the numbers provided include 

appropriate projections made to account 

for any missing information, for 

example, any institutions that do not 

report under HMDA. The Bureau also 

utilized the data from the Bureau’s 

Consumer Credit Panel.54

Especially in light of some of the 

comments received by the Bureau that 

were discussed in the section-by-section 

analysis, it is worth emphasizing that 

the Bureau analyzes data from all 

creditors, both the ones that report 

under HMDA and the ones that do not, 

with the exception of non-depository 

institutions that do not report under 

HMDA. For HMDA reporters, the 

Bureau uses the data reported. For 

HMDA non-reporters, the Bureau uses 

projections based on the match of the 

Call Report data with HMDA. 

The proposed provisions would 

expand the number of institutions that 

are eligible to originate certain types of 

qualified mortgages and to take 

advantage of certain special provisions 

under the January 2013 ATR Final Rule, 

the May 2013 ATR Final Rule, the 

January 2013 Escrows Final Rule, and 

the 2013 HOEPA Final Rule.55 The first 

set of special provisions is tailored to 

creditors deemed as small (small 

creditors) without regard to the location 

of their originations. Small creditors can 

originate qualified mortgages without 

regard to the bright-line debt-to-income 

ratio limit that is otherwise required to 

meet the Bureau’s general qualified 

mortgage requirements (small creditor 

portfolio special provision). Qualified 

mortgages originated by small creditors 

are entitled to a safe harbor with an APR 

over 1.5 percentage points over APOR, 

as long as these loans have an APR of 

less than 3.5 percentage points over 

APOR (small creditor portfolio SH 

special provision). 

The second set of special provisions 

applies only to small creditors that 

operate predominantly in rural or 

underserved areas (rural small 

creditors). Rural small creditors can 

originate qualified mortgages with 

balloon-payment features, as long as 

these loans are kept in portfolio (rural 

qualified mortgage balloon-payment 

special provision) and other 

requirements are met.56 These qualified 

mortgages with balloon-payment 

features are entitled to a safe harbor as 

long as these loans have an APR of less 

than 3.5 percentage points over APOR. 

Also, rural small creditors are generally 

allowed to originate higher-priced 

mortgage loans without setting up an 

escrow account for property taxes and 

insurance (rural higher-priced mortgage 

loan escrow special provision). 

Among other things, the proposed 

provisions expand the number of small 

creditors by changing the origination 

limit on the number of loans that a 

small creditor could have originated 

annually together with its affiliates from 

no more than 500 to no more than 2,000. 

The proposed rule’s origination limit 

would also count only loans not held in 

portfolio by the creditor and its affiliates 

that originate covered transactions 

secured by first liens toward that limit. 

Similar to the currently effective 


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57All the numbers below are presented 

considering the affiliates’ assets to the extent that 

the affiliates’ assets are aggregated in the Call 

Reports, thus the number of newly exempted 

institutions and the number of loans that they 

originated could be slightly different from what the 

Bureau is reporting. The Bureau does not believe 

that aggregating assets of affiliates that originate 

covered transactions secured by first liens for the 

purposes of the $2 billion asset prong would result 

in many, if any, creditors that would be considered 

small under the currently effective rule, but would 

not be considered small under the proposed rule. 

58The percentage of loans with an APR that was 

1.5 to 3.5 percentage points over APOR is based 

exclusively on HMDA data. 

59As discussed further above, census blocks 

deemed rural are census blocks that are not in an 

urban area (i.e., neither in an urbanized area nor in 

an urban cluster) as defined by the Census Bureau. 

60The Bureau used data from several sources to 

estimate whether a given creditor would be 

considered rural in 2013 according to both the 

current state of the world and if the proposed rule 

were adopted. The Bureau used HMDA data for the 

creditors that report to the dataset. Since creditors 

only have to report the census tract of the property’s 

location, the Bureau assumed that a property in a 

particular census tract has the same chance of being 

rural as the percentage of that tract’s population 

that lives in rural census blocks (this information 

is available from the Census Bureau). For the 

depository institutions that did not report under 

HMDA, the Bureau is aware of the location of the 

creditors’ branches. The Bureau assumed that 

mortgage lending is spread equally across a 

creditor’s branches. The Bureau also assumed that 

if a branch is in a given county, then the same 

proportion of loans in this branch originated to 

consumers living in rural or underserved areas as 

the percentage of population living in rural or 

underserved areas in that county. 

Note that the 4,100 includes creditors that would 

not have qualified as small but for the proposed 

rule. However, out of the 700 creditors that would 

not have qualified as small but for the proposed 

rule, only around 10 percent qualify as rural even 

if the proposed provisions expanding rural areas are 

adopted. 

61Note that there is a difference in the current 

effect of the rules: currently, the creditors that are 

small, but not rural, enjoy the same special 

provisions as rural small creditors under the 

January 2013 ATR Final Rule and the May 2013 

ATR Final Rule due to a temporary two-year 

provision in the May 2013 ATR Final Rule. This 

temporary provision is discussed in the section-bysection analysis above. 

62Note the difference in baselines: currently, due 

to the temporary two-year provision discussed in 

the section-by-section, all the small creditors are 

eligible for the special provisions that apply to rural 

small creditors, except for the provisions in the 

January 2013 Escrows Final Rule. 

provisions, the proposed provisions 

include a requirement that creditors 

have less than $2 billion in total assets 

(adjusted annually), but under the 

proposed rule this threshold would 

apply to the creditor’s assets combined 

with the assets of the creditor’s affiliates 

that originate covered transactions 

secured by first liens rather than just the 

creditor’s own assets.57

Based on 2013 data, the Bureau 

estimates that the number of small 

creditors would increase from 

approximately 9,700 to approximately 

10,400 if these proposed provisions are 

adopted (out of the 11,150 creditors in 

the United States that the Bureau 

estimates are engaged in mortgage 

lending). In 2013, the approximately 

700 additional creditors originated 

about 720,000 loans (roughly 10 percent 

of the overall residential mortgage 

market), of which about 175,000 were 

kept in portfolio. Of these 175,000 

portfolio loans, the Bureau estimates 

that about 15,000 were portfolio higherpriced mortgage loans and 88 percent of 

those had an APR between 1.5 and 3.5 

percentage points over APOR.58

The proposed provisions also expand 

the areas deemed rural for the purposes 

of the rural small creditor special 

provisions described above. Currently, 

areas deemed rural are counties that are 

neither in an MSA nor in a micropolitan 

statistical area that is adjacent to an 

MSA. In addition to the current 

definition, the proposed provisions also 

count as rural areas census blocks that 

are deemed rural by the Census 

Bureau.59 Based on 2013 data, the 

Bureau estimates that the number of 

rural small creditors would increase 

from about 2,400 to about 4,100 if the 

proposed provisions are adopted.60 The 

additional 1,700 creditors originated 

about 220,000 loans, out of which 

120,000 are estimated to be portfolio 

loans and about 26,000 of those are 

estimated to be higher-priced mortgage 

loans. The Bureau is not able to estimate 

currently what percentage of these 

120,000 portfolio loans are balloonpayment loans. 

B. Potential Benefits and Costs to 

Consumers and Covered Persons 

Consumer Benefits 

Consumer benefit from the proposed 

provisions is a potential expansion in 

access to credit. Access to credit 

concerns meant to be addressed by the 

rural small creditor provisions and the 

small creditor provisions are 

interrelated, thus the Bureau discusses 

them jointly in this subsection.61

In general, most consumer protection 

regulations have two effects on 

consumers. Regulations restrict 

particular practices, or require firms to 

provide additional services, in order to 

make consumers better off. However, 

restricting firms’ practices or requiring 

additional services might result in firms 

increasing their prices or discontinuing 

certain product offerings, potentially 

resulting in reduced access to credit. 

The aforementioned small and rural 

small creditor special provisions were 

included in the January 2013 ATR Final 

Rule and the January 2013 Escrows 

Final Rule (along with the May 2013 

ATR Final Rule) in order to alleviate 

any potential access to credit concerns. 

Note that some of these provisions were 

Congressionally mandated. The 

proposed provisions expand the number 

of financial institutions that qualify for 

these special provisions. Accordingly, 

there are two effects on consumers that 

originate their mortgage loans with the 

creditors that would be exempted if the 

proposed provisions were finalized: A 

potential benefit from an increase in 

access to credit and a potential cost 

from reduction of certain consumer 

protections. 

As noted above, the potential benefit 

of the proposed provisions for 

consumers is a potential increase in 

access to credit. The magnitude of this 

potential increase depends on whether, 

but for the provisions in the proposed 

rule affecting rural small creditors: (1) 

Financial institutions that would be 

covered by the proposed provisions 

would stop or curtail originating 

mortgage loans in particular market 

segments or would increase the price of 

credit in those market segments in 

numbers sufficient to have an adverse 

impact on those market segments, (2) 

the financial institutions that would 

remain in those market segments would 

not provide a sufficient quantum of 

mortgage loan origination at the nonincreased price, and (3) there would not 

be significant new entry into the market 

segments left by the departing 

institutions. If, but for the proposed 

rule, all three of these scenarios would 

be realized, then the proposed rule 

increases access to credit. 

Analogously, the magnitude of this 

potential increase in access to credit 

depends on whether, in the absence of 

the provisions in the proposed rule 

affecting small creditors and escrow 

accounts: 62 (1) Financial institutions 

that would be covered by the proposed 

provisions have already stopped or 

curtailed originating mortgage loans in 

particular market segments or increased 

the price of credit in those market 

segments in numbers sufficient to have 

an adverse impact on those market 

segments, (2) the financial institutions 

that remained in those market segments 

do not provide a sufficient quantum of 

mortgage loan origination at the nonincreased price, and (3) there has not 

been a significant new entry into the 

market segments left by the departed 

institutions. If, but for the proposed 

rule, all three of these scenarios are 

realized, then the proposed rule 

increases access to credit. 

The Bureau received comments 

suggesting that access to credit will 

indeed be curtailed but for the proposed 

provisions (or is already curtailed, but 


tkelley on DSK3SPTVN1PROD with PROPOSALS2
Federal Register / Vol. 80, No. 28 / Wednesday, February 11, 2015 / Proposed Rules 7789 

63Using the Bureau’s Consumer Credit Panel for 

2013, the Bureau analyzed borrowers’ credit score 

distributions at creditors with various yearly 

origination counts. There was no significant 

difference between the creditors that would qualify 

as small if the proposed rule was finalized and 

larger creditors, including both the median credit 

scores and the lower tails of the distribution (for 

example, the 10th percentile of FICO scores). 

64A relationship lender might help consumers by, 

potentially, originating loans with a higher DTI 

ratio because, for example, the relationship lender 

is aware that the consumer is at a high DTI only 

temporarily. Using HMDA data, and analyzing the 

loan-to-income ratio as a proxy for DTI (since both 

variables are available in HMDA), shows that the 

median consumer of a small creditor has a loan-toincome ratio of 2.3. The figure is the same for larger 

creditors. 

65A commenter suggested that smaller creditors 

might be originating more loans for smaller 

amounts (the commenter suggested a threshold of 

$40,000). According to the Bureau’s analysis, while 

it might be true that smaller creditors make a 

disproportionate number of smaller amount loans, 

the majority of the smaller loans are made by larger 

creditors, and a sizable portion of smaller loans are 

made by creditors that already enjoy the special 

provisions under the currently effective rules. 

66 Instead of extending more credit, relationship 

lenders might be extending cheaper credit if they 

believe that their consumers are, effectively, less 

risky. In that case, given similar credit-risk profiles, 

the Bureau could expect that smaller creditors 

provide cheaper loans. However, higher-priced 

mortgage loans comprise on average 8.3 percent of 

the portfolio of creditors that would be deemed 

small due to the proposed rule and 22.2 percent of 

the portfolio of creditors that would be deemed 

small and rural due to the proposed rule. In 

comparison, the figure for larger creditors is 4.0 

percent. 

67 If the area nearby a property is sparsely 

populated, a lack of comparable properties for 

appraisal can be a concern. In 2013, there were 

about 400 tracts where the only HMDA-reported 

loans originated were portfolio loans (out of the 

roughly 73,000 tracts in HMDA). About 200 of these 

tracts had more than one loan originated in 2013. 

These 400 tracts had fewer than 1,000 loans 

between them; of these loans, about 400 were made 

by creditors that originate over 5,000 loans a year 

and about 300 were made by creditors that made 

fewer than 500 loans a year. 

68The Bureau analyzed HMDA 2013 county-level 

data. For purposes of the statistics here and below, 

‘‘counties’’ is used to refer to counties and county 

equivalents. The Bureau considered counties where 

there are currently at most five creditors operating, 

and at least one of these creditors would qualify as 

small only if the proposed rule is adopted. The 

Bureau’s analysis shows that there are only a few 

counties like this, both for the purposes of the small 

creditor special provisions and for the purposes of 

the rural small creditor special provisions. 

The cutoff of five competitors is arguably enough 

to ensure a sufficient amount of competition for a 

close-to-homogenous product. However, the Bureau 

does not mean to imply that, for example, first-lien 

covered transactions in a county constitute a market 

in the antitrust sense. 

69To the extent that the effect of the already 

effective rules might shed light on this topic, the 

January 2013 Escrows Final Rule has a special 

provision allowing rural small creditors to originate 

higher-priced mortgage loans without providing an 

escrow account. Available evidence indicates that, 

after the rule went into effect in June 2013, rural 

small creditors were just as likely to begin 

originating higher-priced mortgage loans as other 

creditors. Moreover, the counties where rural small 

creditors that started originating loans operate did 

not experience an increase in access to credit. See 

Alexei Alexandrov & Xiaoling Ang, Identifying a 

Suitable Control Group Based on Microeconomic 

Theory: The Case of Escrows in the Subprime 

Market, SSRN working paper (Dec. 30, 2014), 

available at http://papers.ssrn.com/sol3/

papers.cfm?abstract_id=2462128. 

would be increased if a rule similar to 

this proposal is finalized). These 

comments are discussed in the sectionby-section analysis. The evidence 

provided in these comments appears to 

be largely anecdotal. The Bureau’s data 

do not refute the commenters’ 

assertions; however, the Bureau does 

not have the direct evidence to estimate 

the degree to which the proposed 

provisions would increase access to 

credit. 

In a series of analyses, the Bureau did 

not find specific evidence that the 

proposed provisions would increase 

access to credit when analyzing data on 

various consumers’ characteristics 

(credit scores,63 loan amounts relative to 

income,64 availability of smaller amount 

loans,65 and pricing 66), collateral 

(census tracts with portfolio-only 

lending 67), and competition (number of 

creditors active in a county, even 

assuming that all the creditors that 

would be small,68 or small and rural, 

due to the proposed rule would exit if 

the proposed rule is not adopted). 

However, the Bureau’s data are not 

complete and do not permit the Bureau 

to analyze various relevant hypotheses. 

For example, one possible theory that 

the Bureau’s data do not confirm or 

negate is that there might be a lack of 

access to credit due to the particular 

idiosyncrasies of a property despite the 

fact that other properties in the same 

census tract are eligible for governmentsponsored entity (GSE) backing. These 

idiosyncrasies could include, for 

instance, the absence of a septic tank on 

the property or the availability of 

running water only on some properties 

in that census tract. 

Note that the presence of competition 

raises an important point related to 

some of the industry comments 

provided to the Bureau. While many 

commenters asserted access to credit 

issues, the implicit proof was that some 

smaller financial institutions could be 

originating fewer loans. However, even 

if true, that could simply mean that the 

same consumer would get a loan from 

a larger creditor instead. The Bureau’s 

analysis of the data implies that this is 

at least a possibility.69

Similarly, many commenters raised 

concerns that smaller financial 

institutions lack the economies of scale 

necessary for effective compliance and 

implementation of, for example, 

adjustable-rate mortgage disclosures or 

escrows. While this might be true, to the 

extent that outsourcing and contracting 

have not alleviated this issue, this is 

only a concern to consumers to the 

extent that larger creditors would not 

originate these loans. In other words, 

the lack of economies of scale is a 

concern to consumers only to the extent 

that the market would be less 

competitive than it would otherwise be 

if the proposed provisions are finalized. 

Consumer Costs 

The potential cost to consumers of the 

proposed provisions is the reduction of 

certain consumer protections as 

compared to the baseline established by 

the January 2013 ATR Final Rule, the 

May 2013 ATR Final Rule, and the 

January 2013 Escrows Final Rule. These 

consumer protections include a 

consumer’s private cause of action 

against a creditor for violating the 

general ability-to-repay requirements 

and the requirement that every higherpriced mortgage loan has an associated 

escrow account for the payment of 

property taxes and insurance for five 

years. 

In addition, under the January 2013 

ATR Final Rule, after January 10, 2016, 

creditors that do not meet the definition 

of ‘‘small’’ and ‘‘rural or underserved’’ 

will not be able to claim qualified 

mortgage status for any newlyoriginated balloon-payment loans. 

Classifying a loan as a qualified 

mortgage when it would not have been 

a qualified mortgage otherwise (utilizing 

the small creditor portfolio special 

provision or the rural qualified mortgage 

balloon-payment special provision) or 

making a loan a safe harbor qualified 

mortgage loan when it would have 

otherwise been a rebuttable 

presumption qualified mortgage 

(utilizing the small creditor portfolio SH 

special provision) makes it more 

difficult for consumers to sue their 

creditor successfully for failing to 

properly evaluate the consumers’ ability 

to repay while originating the loans. 

A creditor may have an incentive to 

originate loans without considering 

ability to repay to the full extent. As the 

Bureau noted in the January 2013 ATR 

Final Rule, there are at least three 

reasons why these incentives exist. 

First, the creditor might re-sell the loan 

to the secondary market or might have 

at least a portion of the default risk 

insured by a third party. In this case, the 

creditor does not have the privately 

optimal incentive to verify ability to 

repay. The December 2014 Credit Risk 

Retention Final Rule’s requirement of 

‘‘skin in the game’’ is designed to 


tkelley on DSK3SPTVN1PROD with PROPOSALS2
7790 Federal Register / Vol. 80, No. 28 / Wednesday, February 11, 2015 / Proposed Rules 

70 79 FR 77602 (Dec. 24, 2014). 

71See John Y. Campbell et al., Consumer 

Financial Protection, 25(1) Journal of Economic 

Perspectives 91, 96 (2011). ‘‘[A] rationale for 

government mortgage policy is a public interest in 

reducing the incidence of foreclosures, which, as 

we mentioned, reduce not only the value of 

foreclosed properties, but also the prices of 

neighboring properties [. . .]. The negative effect on 

the neighborhood is an externality that will not be 

taken into account by private lenders even if their 

foreclosure decisions are privately optimal.’’ 

72 Id. ‘‘In the late 1920s, the dominant mortgage 

form was a short-term balloon loan that required 

frequent refinancing. Low house prices and reduced 

bank lending capacity in the early 1930s prevented 

many homeowners from refinancing, causing a 

wave of foreclosures that exacerbated the 

Depression.’’ 

73 Id. at 96. 

74Note that if the third party is, for example, the 

FHA, then the loan would currently be a qualified 

mortgage regardless of whether this proposed rule 

is finalized. 

75See Nathan B. Anderson & Jane Dokko, 

Liquidity Problems and Early Payment Default 

Among Subprime Mortgages, Federal Reserve’s 

Finance and Economics Discussion Series, available 

at http://www.federalreserve.gov/pubs/feds/2011/

201109/201109pap.pdf. 

76The percentage of loans with an APR that was 

1.5 to 3.5 percentage points over APOR is based 

exclusively on HMDA data. 

ameliorate this issue.70 Second, the loan 

officer might not have the right 

incentive to verify a consumer’s ability 

to repay due to internal organization 

issues: the loan officer might be 

benefiting from the creditor’s eventual 

profit due to the loan only proximately 

and, potentially, the loan officer might 

have a suboptimal compensation 

scheme (for example, compensating 

simply based on the volume originated). 

Third, the creditor is unlikely to 

consider a consumer’s private costs of 

foreclosure and the negative externality 

arising from the foreclosure process.71

In particular, since the Great 

Depression, balloon-payment loans have 

been seen by economists and consumer 

advocates as raising particular risks of 

foreclosure.72 The provision of a private 

cause of action solves, to an extent, this 

negative externality issue. 

Counting only the loans that are not 

kept in portfolio towards the origination 

limit ensures that a small creditor can 

always originate more portfolio loans 

without being concerned with the 

possibility of crossing the origination 

limit. The fact that a creditor keeps the 

loan in portfolio gives the creditor more 

incentives not to originate a loan that a 

consumer would not be able to repay: it 

potentially deals with the ‘‘skin in the 

game’’ issue described above. 

However, a creditor keeping a loan in 

portfolio does not fully ensure that the 

creditor will only originate loans that 

consumers are able to repay. First, as 

noted above, ‘‘the negative effect on the 

neighborhood is an externality that will 

not be taken into account by private 

lenders even if their foreclosure 

decisions are privately optimal.’’ 73

Second, it is important to note that a 

loan can be in portfolio (and thus 

eligible for special provisions provided 

by the proposed rule), yet fully or 

almost fully insured by a third party. In 

these cases, the creditor does not bear 

the risk for these loans even though the 

loan is in portfolio: there is no or little 

‘‘skin in the game.’’ 74 Finally, the loan 

officer might not be compensated 

optimally, although advocates of 

relationship lending suggest that smaller 

creditors do not suffer from the internal 

organization problems described above 

to the same extent as larger creditors. 

The Bureau requests comment and any 

data shedding light on the degree of 

such concerns, particularly at creditors 

that would be deemed small solely due 

to the proposed rule. 

Escrow accounts protect consumers 

from a financial shock (sometimes 

unexpected, especially for first-time 

buyers) of having to pay the first lumpsum property tax bill all at once, 

possibly soon after spending much of 

the household’s savings on the 

downpayment and closing costs. Recent 

research argues that postponing that 

payment by nine months (which an 

escrow account approximates by 

spreading payments over time) 

decreases the probability of an early 

payment default by 3 to 4 percent.75 As 

noted in the January 2013 Escrows Final 

Rule, costs to consumers of not having 

escrow accounts also include the 

inconvenience of paying several bills 

instead of one; the lack of a budgeting 

device to enable consumers not to incur 

a major expense later on; and the 

possibility of underestimating the 

overall cost of maintaining a residence. 

The extent of the potential cost to 

consumers depends on whether, but for 

the proposed provisions expanding the 

special provisions of the January 2013 

ATR Final Rule and May 2013 ATR 

Final Rule: (1) Creditors that would 

qualify for special provisions solely due 

to the proposed provisions would have 

incentives to originate loans that do not 

consider consumers’ ability to repay 

despite these loans being in the 

creditors’ portfolios; (2) consumers of 

these creditors who proved unable to 

repay would be unable to secure 

effective loss mitigation options from 

the creditors that would leave 

consumers as well off as they would 

have been without getting a loan that 

they proved to be unable to repay; and 

(3) absent the proposed provisions, 

these creditors would have stronger 

incentives to consider consumers’ 

ability to repay or the consumers would 

elect to sue their local lender, would 

succeed in obtaining counsel to 

represent them, and would prevail in 

such suits. The Bureau does not possess 

evidence to confirm or deny whether 

these conditions are satisfied. Anecdotal 

evidence suggests that smaller lenders’ 

loans performed better than larger 

lenders loans through the crisis. 

Similarly, the extent of the potential 

cost to consumers from expanding the 

special provisions of the January 2013 

Escrows Final Rule depends on whether 

but for the proposed provisions: (1) The 

creditors that would be exempted solely 

due to the proposed provisions would 

not provide escrow accounts for five 

years despite these loans being in the 

creditors’ portfolios; (2) consumers of 

these creditors who experienced a shock 

due to the first-time lump-sum payment 

and proved to be unable to repay were 

unable to secure effective loss 

mitigation options from the creditors 

that would leave the consumers as well 

off as they otherwise would have been 

with an escrow account; and (3) 

consumers of these creditors actually 

experience such shocks. 

As noted above, the Bureau estimates 

that the about 1,700 creditors that 

would be small and rural under the 

proposed provisions, but not under the 

currently effective rule, originated about 

220,000 loans and 120,000 portfolio 

loans in 2013. Out of those 120,000 

portfolio loans, 26,000 were portfolio 

higher-priced mortgage loans. The 

Bureau does not possess a good estimate 

of what percentage of these 120,000 

portfolio loans are balloon-payment 

loans. Assuming HPML lending 

continued at the same level among these 

creditors, about 26,000 loans would lose 

the mandatory escrow protections; 

however, many of these creditors might 

extend escrow protections despite not 

being subject to a requirement to do so. 

The Bureau believes that the 

approximately 700 creditors that would 

be small under the proposed provisions, 

but not under the currently effective 

rule, originated 720,000 loans, including 

175,000 portfolio loans, in 2013. Out of 

those 175,000 portfolio loans the Bureau 

estimates that about 15,000 were 

portfolio higher-priced mortgage loans 

and 88 percent of those had an APR 

between 1.5 and 3.5 percentage points 

over APOR.76 The Bureau believes that 

about 13,000 loans would be deemed 

safe harbor qualified mortgages due to 

the proposed provisions. The Bureau 

does not possess a good estimate of 

what percentage of these 175,000 

portfolio loans would not have been 


tkelley on DSK3SPTVN1PROD with PROPOSALS2
Federal Register / Vol. 80, No. 28 / Wednesday, February 11, 2015 / Proposed Rules 7791 

77There are two types of risk that creditors avoid 

by originating, for example, a succession of fiveyear balloon loans as opposed to a 30-year fixed rate 

loan. The first type of risk is the interest rate risk: 

cost of funds may increase and the fixed rate will 

be too cheap, in a sense, for current market 

conditions. This type of risk is almost fully hedged 

by choosing an appropriate index for a 5/5 

adjustable-rate mortgage. The second type of risk is 

the risk of the deterioration of the consumer’s 

idiosyncratic conditions. For example, if the 

consumer’s credit profile deteriorates or the 

consumer loses their job, their fixed rate will be too 

cheap for that consumer’s current conditions. 

Arguably, creditors can project this risk better than 

individual consumers and are the lowest costavoiders, especially if one assumes that moral 

hazard is not a major concern in this situation (that 

consumers are not more likely to lose a job simply 

because they know that their mortgage is a 30-year 

loan as opposed to a 5-year balloon loan). 

78See Alexei Alexandrov & Sergei Koulayev, 

Using the Economics of the Pass Through in 

Proving Antitrust Injury in Robinson-Patman Cases, 

SSRN working paper (Jan. 26, 2015), available at 

http://papers.ssrn.com/sol3/papers.cfm?abstract_

id=2555952. 

79Currently, creditors qualify as operating 

predominantly in rural or underserved areas based 

on a three-year lookback period: a creditor is 

considered as operating predominantly in rural or 

underserved areas as long as the creditor operated 

predominantly in rural or underserved areas in any 

of the three preceding years. Thus, this proposed 

provision could potentially deem a creditor that 

would be rural in January 2016 not rural if the 

proposed rule is adopted. However, the Bureau 

believes that this possibility will not actually occur 

or, in other words, any small creditor that was 

operating in predominantly rural or underserved 

areas in any of the preceding three years according 

to the current definition would qualify as rural 

small under the proposed rule. 

qualified mortgages but for the small 

creditor special provision. 

Covered Person Benefits and Costs 

The creditors that would enjoy the 

special provisions due to the proposed 

provisions would experience benefits 

roughly symmetric to the protections 

that consumers lose. In particular, 

creditors that would qualify as rural 

small creditors would be able to 

originate qualified mortgage balloonpayment portfolio loans and pass the 

risk onto consumers, and small creditors 

could originate portfolio loans that 

would not be qualified mortgages or safe 

harbor qualified mortgages otherwise, 

resulting in a reduced probability of a 

successful lawsuit.77 Additionally, rural 

small creditors would reduce 

accounting and compliance costs of 

providing escrow accounts. To be 

eligible for these benefits, the firms 

might need to spend a nominal amount 

on checking whether they qualify for the 

special provision. 

Some of these firm benefits could be 

passed through to consumers in terms of 

lower prices or better service. Economic 

theory suggests that the pass-through 

rate should be higher the more 

competitive markets are, all else being 

equal.78 However, a market being 

competitive would suggest lesser access 

to credit concerns. The Bureau does not 

possess the data required to estimate the 

applicable pass-through rates, and will 

therefore not discuss the pass-through 

possibilities further. 

The benefit of originating balloonpayment loans to the firms is cheaper 

risk management. With balloonpayment loans, both the interest rate 

risk and the risk of the consumers’ 

credit files deteriorating are borne by 

the consumers. While the creditor is 

arguably the lowest cost avoider in both 

cases, consumers might not realize the 

riskiness involved in balloon-payment 

loans, encouraging the creditor to pass 

on the risk to consumers. The Bureau 

does not possess a good estimate of 

what percentage of these creditors’ 

portfolio loans are balloon-payment 

loans. 

The Bureau believes that an 

additional 1,700 creditors would qualify 

as small and rural were the proposed 

provisions adopted. These creditors 

would not have to provide consumers 

with escrow accounts when originating 

higher-priced mortgage loans; however, 

the Bureau believes that about 1,300 of 

the 1,700 creditors already originate 

higher-priced mortgage loans, thus these 

savings might be small (or none) for 

these firms since these firms currently 

have to provide escrow accounts. Note, 

that the marginal costs of providing an 

escrow account are small, if not 

negative: For various reasons, a creditor 

that has an escrow system established 

generally prefers consumers to establish 

an escrow account even if one is not 

required by government regulations. 

Approximately 700 creditors would 

be deemed as small due to the proposed 

provisions. These creditors originated 

approximately 175,000 portfolio loans 

in 2013, out of which about 13,000 

loans would be deemed safe harbor 

qualified mortgages due to the proposed 

provisions. The Bureau does not possess 

sufficient data to estimate what 

percentage of these loans would be 

qualified mortgages solely due to the 

proposed provisions. Loans being 

deemed qualified mortgages or safe 

harbor qualified mortgages imply a 

reduced risk of losing consumerinitiated ability-to-repay litigation. The 

Bureau previously estimated that this 

risk would account for, at most, 0.1 

percent of the loan amount. 

Note that all 700 creditors are 

currently not eligible for the small 

creditor special provision, and thus any 

sunk costs necessary to transition to 

originating non-qualified mortgage loans 

have already been incurred, except for 

those creditors that have decided not to 

originate any non-qualified mortgage 

loans. 

To be eligible for these benefits, the 

creditors might need to spend a nominal 

amount on checking whether they 

qualify for the special provisions. Since 

the proposed provisions would be 

expanding special provisions and 

extending qualified mortgage status, 

covered persons would not experience 

any costs other than, potentially, a 

nominal amount to check whether they 

qualify for the exemptions or extensions 

of qualified mortgage status. 

Temporary Balloon-Payment Qualified 

Mortgage Period—Benefits and Costs to 

Consumers and Covered Persons 

The Bureau is proposing to provide an 

extension of the two-year temporary 

special provision that effectively 

deemed all small creditors rural for the 

purposes of the rural qualified mortgage 

balloon-payment special provision. This 

proposed temporary special provision, 

allowing these creditors to make 

qualified mortgage balloon-payment 

loans, is applicable (for transactions 

with mortgage applications received in 

the first three months of 2016) to any 

creditor that is currently small 

regardless of whether they operate 

predominantly in rural or underserved 

areas. The Bureau estimates that there 

are about 5,700 such creditors, and that 

they originated about 430,000 loans, out 

of which about 220,000 were portfolio 

loans in 2013. Note, that only the 

transactions with applications received 

in the first quarter of 2016 would be 

eligible for this special provision. The 

Bureau does not possess a good estimate 

of what percentage of these portfolio 

loans are balloon-payment loans. 

The benefits and costs to consumers 

and to covered persons are identical to 

the ones discussed above during the 

discussion of the rural balloon-payment 

qualified mortgage special provision. 

Note that various property 

idiosyncrasies that might make access to 

credit an issue in rural areas are less 

likely for the consumers of these 5,700 

creditors since they do not operate 

predominantly in rural areas, even as 

defined by the proposed rule. 

The Bureau is also proposing an 

annual grace period for creditors that 

stop qualifying as either small creditors 

or small and rural creditors.79 Given the 

proposed origination limit, the Bureau 

believes that the number of these 

transitions is likely to be low from yearto-year: the number of the creditors that 

are close to the proposed threshold of 

small is minimal in comparison to the 

total number qualified (approximately 

10,400 small creditors and 

approximately 4,100 rural small 


tkelley on DSK3SPTVN1PROD with PROPOSALS2
7792 Federal Register / Vol. 80, No. 28 / Wednesday, February 11, 2015 / Proposed Rules 

80 If anything, these creditors are overrepresented 

in non-rural counties. 

81 5 U.S.C. 601 et seq. 

82 5 U.S.C. 609. 

83 It is theoretically possible that a creditor 

qualifies as small under the current definition, but 

would fail to qualify as small due to the proposed 

rule provision including in the calculation of the 

asset limit for small-creditor status the assets of the 

creditor’s affiliates that originate mortgage loans. 

The Bureau is unaware of any such creditors and 

the proposed rule requests comments on their 

prevalence. 

creditors if the proposed provisions are 

adopted) and rural areas would change 

only after each decennial Census. Thus 

the Bureau does not estimate the effect 

of this provision in this 1022(b)(2) 

analysis. 

C. Impact on Covered Persons With No 

More Than $10 Billion in Assets 

The only covered persons affected by 

the proposed provisions are those with 

no more than $10 billion in assets. The 

effect on these covered persons is 

described above. 

D. Impact on Access to Credit 

The Bureau does not believe that 

there will be an adverse impact on 

access to credit resulting from the 

proposed provisions. Moreover, as 

described above, the Bureau received 

comments strongly suggesting that there 

will be an expansion of access to credit. 

E. Impact on Rural Areas 

The rural small creditor proposed 

provisions affect only creditors 

operating predominantly in rural or 

underserved areas, as defined according 

to the definition that the Bureau is 

proposing. These creditors 

predominantly originate loans to 

consumers that live in rural areas, thus 

the vast majority of the up to 120,000 

consumers that would be affected by 

these provisions live in rural areas. The 

effect of these proposed provisions is 

described above. 

The creditors that would qualify as 

small if the proposed provisions were 

adopted are about as well represented in 

rural as in non-rural counties, according 

to the current definition of rural, thus 

there would be no disproportionate 

effect on rural areas.80

F. Discussion of Significant Alternatives 

Instead of proposing that a property is 

in a rural area if the property is either 

in one of the counties currently 

designated as rural by the Bureau or if 

the property is not in an urban area as 

designated by the Census Bureau, the 

Bureau considered proposing that a 

property is in a rural area only if the 

property is not in an urban area as 

designated by the Census Bureau. The 

effective difference between the two 

definitions is that under the proposed 

definition areas designated as urban 

areas by the Census Bureau that are 

located in counties currently designated 

as rural by the Bureau would be 

classified as rural, but these urban areas 

would not be classified as rural under 

the alternative. 

For example, Wise County in Virginia 

(population of about 40,000, density of 

about 100 people per square mile) is 

currently designated as a rural area by 

the Bureau. Under the proposed 

definition the whole county remains 

rural. However, under the alternative 

definition, some census blocks in that 

county, including most of the census 

blocks that comprise the town of Wise, 

Virginia (population of about 3,000, 

density of about 1,000 people per square 

mile) would stop being classified as 

rural areas. A similar example is 

Gillespie County in Texas (population 

of about 25,000, density of about 25 

people per square mile), which is 

entirely rural under the current 

definition and under the proposed 

definition. Most of the city of 

Fredericksburg (population of about 

11,000, density of about 1,500 people 

per square mile) in Gillespie County 

would not be considered rural under the 

alternative. Overall, about 22 percent of 

the U.S. population lives in areas that 

would be deemed as rural if the 

proposed provisions are finalized. 

About 19 percent of the U.S. population 

lives in census blocks that are not in an 

urban area according to the Census 

Bureau. 

In comparison to this alternative, the 

proposed provisions allow several 

hundred small creditors to continue to 

enjoy the special provisions for 

creditors operating predominantly in 

rural or underserved areas. Under the 

alternative, these creditors would have 

to incur the cost of adapting to 

originating mortgages without enjoying 

the provisions that they currently enjoy. 

Moreover, under the alternative, 

compliance might become more 

burdensome for the remaining creditors 

that would qualify as rural small 

creditors even if the proposed rule is not 

finalized: They would not be able to 

simply check a list of rural counties (as 

they do now), since parts of these 

counties would cease to be rural. These 

costs, both the cost of adaptation for 

some creditors and the cost of more 

complicated compliance for others, are 

likely fixed, and economic theory 

suggests that these creditors would not 

pass these costs on to consumers. 

Other consumer benefits and costs 

and covered persons benefits and costs 

of these several hundred small creditors 

ceasing to qualify as rural are similar to 

the ones described above for the 

proposed provisions in general. 

VII. Regulatory Flexibility Act Analysis 

The Regulatory Flexibility Act (RFA), 

as amended by the Small Business 

Regulatory Enforcement Fairness Act of 

1996, requires each agency to consider 

the potential impact of its regulations on 

small entities, including small 

businesses, small governmental units, 

and small nonprofit organizations. The 

RFA defines a ‘‘small business’’ as a 

business that meets the size standard 

developed by the Small Business 

Administration pursuant to the Small 

Business Act. 

The RFA generally requires an agency 

to conduct an initial regulatory 

flexibility analysis (IRFA) and a final 

regulatory flexibility analysis 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.81

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.82

Neither an IRFA nor a small business 

review panel is required for this 

proposal because the proposal, if 

adopted, would not have a significant 

impact on a substantial number of small 

entities. 

The proposed rule does not have a 

significant economic impact on any 

small entities.83 As noted in the Section 

1022(b)(2) Analysis, above, the Bureau 

does not expect that the proposed rule 

would impose costs on covered persons, 

including small entities. All methods of 

compliance under current law would 

remain available to small entities should 

these provisions become effective. Thus, 

a small entity that is in compliance with 

current law would not need to take any 

additional action if the proposal were 

adopted. The Bureau requests comments 

on this analysis and any relevant data. 

Certification 

Accordingly, the undersigned certifies 

that this proposed rule, if adopted, does 

not have a significant economic impact 

on a substantial number of small 

entities. 

VIII. Paperwork Reduction Act 

Under the Paperwork Reduction Act 

of 1995 (PRA) (44 U.S.C. 3501 et seq.), 

Federal agencies are generally required 

to seek the Office of Management and 

Budget (OMB) approval for information 


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collection requirements prior to 

implementation. The collections of 

information related to Regulation Z have 

been previously reviewed and approved 

by OMB in accordance with the PRA 

and assigned OMB Control Number 

3170–0015 (Regulation Z). Under the 

PRA, the Bureau may not conduct or 

sponsor, and, notwithstanding any other 

provision of law, a person is not 

required to respond to an information 

collection unless the information 

collection displays a valid control 

number assigned by OMB. 

The Bureau has determined that this 

proposed rule does not impose any new 

or revised information collection 

requirements (recordkeeping, reporting, 

or disclosure requirements) on covered 

entities or members of the public that 

would constitute collections of 

information requiring OMB approval 

under the PRA. The Bureau seeks 

comment on whether the proposed rule 

imposes any new or revised information 

collection requirements. 

List of Subjects in 12 CFR Part 1026 

Advertising, Consumer protection, 

Credit, Credit Unions, Mortgages, 

National Banks, Savings Associations, 

Recordkeeping requirements, Reporting, 

Truth in lending. 

Authority and Issuance 

For the reasons set forth in the 

preamble, the Bureau proposes to 

amend 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 E—Special Rules for Certain 

Home Mortgage Transactions 

■ 2. Section 1026.35 is amended by 

revising paragraphs (b)(2)(iii)(A), (B), 

(C), and (D) introductory text, (D)(1), 

(b)(2)(iv)(A) and (B), and adding 

paragraph (b)(2)(iv)(C) to read as 

follows: 

§ 1026.35 Requirements for higher-priced 

mortgage loans. 

* * * * * 

(b) * * * 

(2) * * * 

(iii) * * * 

(A) During the preceding calendar 

year, or, if the application for the 

transaction was received before April 1, 

during either of the two preceding 

calendar years, the creditor extended 

more than 50 percent of its total covered 

transactions, as defined by 

§ 1026.43(b)(1), secured by first liens on 

properties that are located in areas that 

are either ‘‘rural’’ or ‘‘underserved,’’ as 

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

section; 

(B) During the preceding calendar 

year, or, if the application for the 

transaction was received before April 1, 

during either of the two preceding 

calendar years, the creditor and its 

affiliates together originated no more 

than 2,000 covered transactions, as 

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

first liens, that were sold, assigned, or 

otherwise transferred to another person, 

or that were subject at the time of 

consummation to a commitment to be 

acquired by another person; 

(C) As of the preceding December 

31st, or, if the application for the 

transaction was received before April 1, 

as of either of the two preceding 

December 31sts, the creditor and its 

affiliates that originate covered 

transactions, as defined by 

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

together, had total assets of less than 

$2,000,000,000; this asset threshold 

shall adjust automatically each year, 

based on the year-to-year change in the 

average of the Consumer Price Index for 

Urban Wage Earners and Clerical 

Workers, not seasonally adjusted, for 

each 12-month period ending in 

November, with rounding to the nearest 

million dollars (see comment 

35(b)(2)(iii)–1.iii for the applicable 

threshold); and 

(D) Neither the creditor nor its 

affiliate maintains an escrow account of 

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

this section for any extension of 

consumer credit secured by real 

property or a dwelling that the creditor 

or its affiliate currently services, other 

than: 

(1) Escrow accounts established for 

first-lien higher-priced mortgage loans 

on or after April 1, 2010, and before 

January 1, 2016; or 

* * * * * 

(iv) * * * 

(A) An area is ‘‘rural’’ during a 

calendar year if it is: 

(1) A county that 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); or 

(2) A census block that is not in an 

urban area, as defined by the U.S. 

Census Bureau using the latest 

decennial census of the United States. 

(B) An area is ‘‘underserved’’ during 

a calendar year if, according to Home 

Mortgage Disclosure Act (HMDA) data 

for the preceding calendar year, it is a 

county in which no more than two 

creditors extended covered transactions, 

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

a first lien on property in the county 

five or more times. 

(C) A property shall be deemed to be 

in an area that is ‘‘rural’’ or 

‘‘underserved’’ in a particular calendar 

year if the property is: 

(1) Located in a county that appears 

on the lists published by the Bureau of 

counties that are entirely rural or 

underserved for that calendar year, 

(2) Designated as rural or underserved 

for that calendar year by any automated 

tool that the Bureau provides on its 

public Web site, or 

(3) Not designated as located in an 

urban area as defined by the most recent 

delineation of urban areas announced 

by the Census Bureau by any automated 

address search tool that the U.S. Census 

Bureau provides on its public Web site 

for that purpose. 

* * * * * 

■ 3. Section 1026.43 is amended by 

revising paragraph (e)(6) to read as 

follows: 

§ 1026.43 Minimum standards for 

transactions secured by a dwelling. 

* * * * * 

(e) * * * 

(6) Qualified mortgage defined— 

temporary balloon-payment qualified 

mortgage rules. (i) Notwithstanding 

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

qualified mortgage is a covered 

transaction: 

(A) That satisfies the requirements of 

paragraph (f) of this section other than 

the requirements of paragraph (f)(1)(vi); 

and 

(B) For which the creditor satisfies the 

requirements stated in 

§ 1026.35(b)(2)(iii)(B) and (C). 

(ii) The provisions of this paragraph 

(e)(6) apply only to covered transactions 

for which the application was received 

before April 1, 2016. 

■ 4. In Supplement I to Part 1026— 

Official Interpretations: 

■ A. Under Section 1026.35— 

Requirements for Higher-Priced 

Mortgage Loans: 

■ i. Under Paragraph 35(b)(2)(iii), 

paragraph 1 is revised. 

■ ii. Under Paragraph 35(b)(2)(iii)(D)(1), 

paragraph 1 is revised. 

■ iii. Under Paragraph 35(b)(2)(iv), 

paragraphs 1 and 2 are revised. 

■ B. Under Section 1026.43—Minimum 

Standards for Transactions Secured by 

a Dwelling: 


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■ i. Under Paragraph 43(e)(5), 

paragraphs 4 and 8 are revised. 

■ ii. Under Paragraph 43(f)(1)(vi), 

paragraph 1 is revised. 

■ iii. Under Paragraph 43(f)(2), 

paragraph 2 is revised. 

■ iv. Under Paragraph 43(f)(2)(ii), 

paragraph 1 is revised. 

The revisions read as follows: 

Supplement I to Part 1026—Official 

Interpretations 

Subpart E—Special Rules for Certain Home 

Mortgage Transactions 

* * * * * 

Section 1026.35—Requirements for HigherPriced Mortgage Loans 

* * * * * 

35(b) Escrow Accounts 

* * * * * 

35(b)(2) Exemptions 

* * * * * 

Paragraph 35(b)(2)(iii) 

1. Requirements for exemption. Under 

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

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

establish an escrow account for taxes and 

insurance for a higher-priced mortgage loan, 

provided the following four conditions are 

satisfied when the higher-priced mortgage 

loan is consummated: 

i. During the preceding calendar year, or 

during either of the two preceding calendar 

years if the application for the loan was 

received before April 1, more than 50 percent 

of the creditor’s total covered transactions, as 

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

first liens on properties located in areas that 

are either ‘‘rural’’ or ‘‘underserved,’’ as set 

forth in § 1026.35(b)(2)(iv). 

A. In general, whether this condition (the 

‘‘more than 50 percent’’ test) is satisfied 

depends on the creditor’s activity during the 

preceding calendar year. However, if the 

application for the loan in question was 

received before April 1, the creditor may 

instead meet the ‘‘more than 50 percent’’ test 

based on its activity during the next-to-last 

calendar year. This provides creditors with a 

grace period if their activity meets the ‘‘more 

than 50 percent’’ test (in 

§ 1026.35(b)(2)(iii)(A)) in one calendar year 

but fails to meet it in the next calendar year. 

B. A creditor meets the ‘‘more than 50 

percent’’ test for any higher-priced mortgage 

loan consummated during a calendar year if 

a majority of its first-lien covered 

transactions in the preceding calendar year 

are secured by properties located in rural or 

underserved areas. If the creditor’s 

transactions in the preceding calendar year 

do not meet the ‘‘more than 50 percent’’ test, 

the creditor meets this condition for a higherpriced mortgage loan consummated during 

the current calendar year only if the 

application for the loan was received before 

April 1 and a majority of the creditor’s firstlien covered transactions during the next-tolast calendar year are secured by properties 

located in rural or underserved areas. The 

following examples are illustrative: 

1. Assume that a creditor originated 180 

first-lien covered transactions during 2015 

and that 91 of these are secured by properties 

located in rural or underserved areas. 

Because a majority of the creditor’s first-lien 

covered transactions during 2015 are secured 

by properties located in rural or underserved 

areas, the creditor can meet this condition for 

exemption for any higher-priced mortgage 

loan consummated during 2016. 

2. Assume that a creditor originated 180 

first-lien covered transactions during 2015, 

including 90 transactions secured by 

properties that are located in rural or 

underserved areas. Assume further that the 

same creditor originated 200 first-lien 

covered transactions during 2014, including 

101 transactions secured by properties that 

are located in rural or underserved areas. 

Assume further that the creditor 

consummates a higher-priced mortgage loan 

in 2016 for which the application was 

received in November 2016. Because the 

majority of the creditor’s first-lien covered 

transactions during 2015 are not secured by 

properties that are located in rural or 

underserved areas, and the application was 

received on or after April 1, 2016, the 

creditor does not meet this condition for 

exemption. However, assume instead that 

this creditor consummates a higher-priced 

mortgage loan in 2016 based on an 

application received in February 2016. The 

creditor meets this condition for exemption 

for this loan because the application was 

received before April 1, 2016, and the 

majority of the creditor’s first-lien covered 

transactions in 2014 are secured by 

properties that are located in areas that were 

rural or underserved. 

ii. The creditor and its affiliates together 

originated no more than 2,000 covered 

transactions, as defined in § 1026.43(b)(1), 

secured by first liens, that were not sold, 

assigned, or otherwise transferred by the 

creditor or its affiliates to another person, or 

that were subject at the time of 

consummation to a commitment to be 

acquired by another person, during the 

preceding calendar year or during either of 

the two preceding calendar years if the 

application for the loan was received before 

April 1. For purposes of 

§ 1026.35(b)(2)(iii)(B), a transfer of a first-lien 

covered transaction to ‘‘another person’’ 

includes a transfer by a creditor to its 

affiliate. 

A. In general, whether this condition is 

satisfied depends on the creditor’s activity 

during the preceding calendar year. However, 

if the application for the loan in question is 

received before April 1, the creditor may 

instead meet this condition based on activity 

during the next-to-last calendar year. This 

provides creditors with a grace period if their 

activity falls at or below the threshold in one 

calendar year but exceeds it in the next 

calendar year. 

B. For example, assume that a creditor and 

its affiliates together originated 1,500 loans 

that were not retained in the portfolio of the 

creditor or its affiliates in 2015 and 2,500 

such loans in 2016. Because the 2016 

transaction activity exceeds the threshold but 

the 2015 transaction activity does not, the 

creditor satisfies this condition for exemption 

for a higher-priced mortgage loan 

consummated during 2017 if the creditor 

received the application for the loan before 

April 1, 2017, but does not satisfy this 

condition for a higher-priced mortgage loan 

consummated during 2017 if the application 

for the loan was received on or after April 1, 

2017. 

iii. As of the end of the preceding calendar 

year, or as of the end of either of the two 

preceding calendar years if the application 

for the loan was received before April 1, the 

creditor and its affiliates that originate 

covered transactions secured by a first lien, 

together, had total assets that are less than 

the applicable annual asset threshold(s). For 

purposes of § 1026.35(b)(2)(iii)(C), in 

addition to the creditor’s assets, only the 

assets of a creditor’s ‘‘affiliate’’ as defined in 

§ 1026.32(b)(5) that originates covered 

transactions (as defined by § 1026.43(b)(1)) 

secured by a first lien, are counted toward 

the applicable annual asset threshold. A 

creditor satisfies this criterion for purposes of 

any higher-priced mortgage loan 

consummated during 2016, for example, if 

the creditor (together with its affiliates that 

originate first-lien covered transactions) had 

total assets of less than the applicable asset 

threshold on December 31, 2015. A creditor 

that (together with its affiliates that originate 

first-lien covered transactions) did not meet 

the applicable asset threshold on December 

31, 2015 satisfies this criterion for a higherpriced mortgage loan consummated during 

2016 if the application for the loan was 

received before April 1, 2016 and the creditor 

(together with its affiliates that originate firstlien covered transactions) had total assets of 

less than the applicable asset threshold on 

December 31, 2014, which is $2,060,000,000. 

The asset threshold shall adjust 

automatically each year based on the year-toyear change in the average of the Consumer 

Price Index for Urban Wage Earners and 

Clerical Workers, not seasonally adjusted, for 

each 12-month period ending in November, 

with rounding to the nearest million dollars. 

The Bureau will publish notice of the asset 

threshold each year by amending this 

comment. For historical purposes, the prior 

asset thresholds were: 

A. For calendar year 2013, the asset 

threshold was $2,000,000,000. Creditors that 

had total assets of less than $2,000,000,000 

on December 31, 2012, satisfied this criterion 

for purposes of the exemption during 2013. 

B. For calendar year 2014, the asset 

threshold was $2,028,000,000. Creditors that 

had total assets of less than $2,028,000,000 

on December 31, 2013, satisfied this criterion 

for purposes of the exemption during 2014. 

C. For calendar year 2015, the asset 

threshold was $2,060,000,000. Creditors that 

had total assets of less than $2,060,000,000 

on December 31, 2014, satisfied this criterion 

for purposes of (1) any loan consummated in 

2015 and (2) any loan consummated in 2016 

for which the application was received before 

April 1, 2016. 

* * * * * 

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

1. Exception for certain accounts. Escrow 

accounts established for first-lien higherpriced mortgage loans for which applications 


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were received on or after April 1, 2010, and 

before January 1, 2016, are not counted for 

purposes of § 1026.35(b)(2)(iii)(D). For 

applications received on and after January 1, 

2016, creditors, together with their affiliates, 

that establish new escrow accounts, other 

than those described in 

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

the exemption provided under 

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

their affiliates, that continue to maintain 

escrow accounts established for first-lien 

higher-priced mortgage loans for which 

applications were received on or after April 

1, 2010, and before January 1, 2016, still 

qualify for the exemption provided under 

§ 1026.35(b)(2)(iii) so long as they do not 

establish new escrow accounts for 

transactions for which they received 

applications on or after January 1, 2016, other 

than those described in 

§ 1026.35(b)(2)(iii)(D)(2), and they otherwise 

qualify under § 1026.35(b)(2)(iii). 

* * * * * 

Paragraph 35(b)(2)(iv) 

1. Requirements for ‘‘rural’’ or 

‘‘underserved’’ status. An area is considered 

to be ‘‘rural’’ or ‘‘underserved’’ during a 

particular calendar year for purposes of 

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

test for ‘‘rural’’ or the test for ‘‘underserved’’ 

in § 1026.35(b)(2)(iv). A creditor’s 

originations of covered transactions, as 

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

liens on properties located in such areas are 

considered in determining whether the 

creditor satisfies the condition in 

§ 1026.35(b)(2)(iii)(A). See comment 

35(b)(2)(iii)–1. 

i. Under § 1026.35(b)(2)(iv)(A), an area is 

rural during a calendar year if it is: a county 

that is neither in a metropolitan statistical 

area nor in a micropolitan statistical area that 

is adjacent to a metropolitan statistical area; 

or a census block that is not in an urban area, 

as defined by the U.S. Census Bureau using 

the latest decennial census of the United 

States. Metropolitan statistical areas and 

micropolitan statistical 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). For 

purposes of § 1026.35(b)(2)(iv)(A)(1), 

‘‘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. A county is a ‘‘rural’’ area 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/dataproducts/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 a rural area 

only if all counties from which the new 

county’s land was taken are themselves rural 

under currently applicable UICs. 

ii. Under § 1026.35(b)(2)(iv)(B), an area is 

underserved during a calendar year if, 

according to Home Mortgage Disclosure Act 

(HMDA) data for the preceding calendar year, 

it is a county in which no more than two 

creditors extended covered transactions, as 

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

lien, five or more times in the county. 

Specifically, a county is an ‘‘underserved’’ 

area 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 coapplicant’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. 

iii. A. Each calendar year, the Bureau 

applies the ‘‘underserved’’ area test and the 

‘‘rural’’ area test to each county in the United 

States. If the entire county satisfies either 

test, the Bureau will include the county on 

a published list of entirely ‘‘rural’’ or 

‘‘underserved’’ counties for a particular 

calendar year. To facilitate compliance with 

appraisal requirements in § 1026.35(c), the 

Bureau will also create a list of those 

counties that are entirely ‘‘rural,’’ without 

regard to whether the counties are 

‘‘underserved.’’ These lists will not include 

counties that are partially rural and partially 

non-rural. To the extent that U.S. territories 

are treated by the Census Bureau as counties 

and are neither metropolitan statistical areas 

nor micropolitan statistical areas adjacent to 

metropolitan statistical areas, such territories 

will be included on these lists as rural areas 

in their entireties. The Bureau will post on 

its public Web site the applicable lists for 

each calendar year by the end of that year 

and publish such lists in the Federal 

Register, to assist creditors in ascertaining 

the availability to them of the exemption 

during the following year. Any county that 

the Bureau includes on its published lists of 

counties that are entirely ‘‘rural’’ or 

‘‘underserved’’ for a particular year is 

deemed to qualify as a ‘‘rural’’ or 

‘‘underserved’’ area for that calendar year for 

purposes of § 1026.35(b)(2)(iv). 

B. The Bureau may provide on its public 

Web site an automated tool that allows 

creditors to determine whether properties are 

located in areas that are rural or underserved 

according to the definitions in 

§ 1026.35(b)(2)(iv) for a particular calendar 

year. A property is deemed to be in a rural 

or underserved area during a particular 

calendar year if it is identified as being in a 

rural or underserved area by any such tool 

that may be provided on the Bureau’s public 

Web site. 

C. The U.S. Census Bureau may provide on 

its public Web site an automated address 

search tool that indicates if a property is 

located in an urban area for purposes of the 

Census Bureau’s most recent delineation of 

urban areas. For any calendar year that began 

after the date on which the Census Bureau 

announced its most recent delineation of 

urban areas, a property is deemed to be in a 

rural area if the search results provided for 

the property by any such tool available on 

the Census Bureau’s public Web site do not 

designate the property as being in an urban 

area. 

2. Examples. i. An area is considered 

‘‘rural’’ for a given calendar year based on the 

most recent available UIC designations by the 

USDA–ERS and the most recent available 

delineations of urban areas by the U.S. 

Census Bureau that are available at the 

beginning of the calendar year. These 

designations and delineations are updated by 

the USDA–ERS and the U.S. Census Bureau 

respectively once every ten years. As an 

example, assume a creditor makes first-lien 

covered transactions in Census Block X that 

is located in County Y during calendar year 

2017. As of January 1, 2017, the most recent 

UIC designations were published in the 

second quarter of 2013, and the most recent 

delineation of urban areas was announced in 

the Federal Register in 2012, see U.S. Census 

Bureau, Qualifying Urban Areas, 77 FR 

18652 (Mar. 27, 2012). To determine whether 

County Y is entirely rural during calendar 

year 2017, the creditor can use USDA–ERS’s 

2013 UIC designations. If County Y is not 

entirely rural, the creditor can use the U.S. 

Census Bureau’s 2012 delineation of urban 

areas to determine whether Census Block X 

is rural and is therefore a ‘‘rural’’ area for 

purposes of § 1026.35(b)(2)(iv)(A). 

ii. A county is considered an 

‘‘underserved’’ area 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 2016, and the most 

recent HMDA data are for calendar year 2015, 

published in the third quarter of 2016. The 

creditor will use the 2015 HMDA data to 

determine ‘‘underserved’’ area status for 

County Y in calendar year 2016 for the 

purposes of qualifying for the ‘‘rural or 

underserved’’ exemption for (1) any higherpriced mortgage loans consummated in 

calendar year 2017 or (2) any higher-priced 

mortgage loan consummated during 2018 for 

which the application was received prior to 

April 1, 2018. 

* * * * * 

Section 1026.43—Minimum Standards for 

Transactions Secured by a Dwelling 

* * * * * 

Paragraph 43(e)(5) 

* * * * * 

4. Creditor qualifications. To be eligible to 

make qualified mortgages under 

§ 1026.43(e)(5), a creditor must satisfy the 

requirements stated in § 1026.35(b)(2)(iii)(B) 

and (C). Section 1026.35(b)(2)(iii)(B) requires 

that, during the preceding calendar year, or, 

if the application for the transaction was 

received before April 1, during either of the 

two preceding calendar years, the creditor 

and its affiliates together originated no more 

than 2,000 covered transactions, as defined 

by § 1026.43(b)(1), secured by first liens, that 


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7796 Federal Register / Vol. 80, No. 28 / Wednesday, February 11, 2015 / Proposed Rules 

were sold, assigned, or otherwise transferred 

to another person, or that were subject at the 

time of consummation to a commitment to be 

acquired by another person. Section 

1026.35(b)(2)(iii)(C) requires that, as of the 

preceding December 31st, or, if the 

application for the transaction was received 

before April 1, as of either of the two 

preceding December 31sts, the creditor and 

its affiliates that originate covered 

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

secured by a first lien, together, had total 

assets of less than $2 billion, adjusted 

annually by the Bureau for inflation. 

* * * * * 

8. Transfer to another qualifying creditor. 

Under § 1026.43(e)(5)(ii)(B), a qualified 

mortgage under § 1026.43(e)(5) may be sold, 

assigned, or otherwise transferred at any time 

to another creditor that meets the 

requirements of § 1026.43(e)(5)(i)(D). A 

qualified mortgage under § 1026.43(e)(5) 

transferred to a creditor that meets these 

criteria would retain its qualified mortgage 

status even if it is transferred less than three 

years after consummation. 

* * * * * 

43(f) Balloon-Payment Qualified Mortgages 

Made by Certain Creditors 

43(f)(1) Exemption 

* * * * * 

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 or 

during either of the two preceding calendar 

years if the application for the transaction 

was received before April 1, 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 areas 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), an area is considered to 

be rural if it is: a county that 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; or a census block that is not in 

an urban area, as defined by the U.S. Census 

Bureau using the latest decennial census of 

the United States. A county is considered to 

be an underserved area 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. 

A. The Bureau determines annually which 

counties in the United States are entirely 

rural or underserved and publishes on its 

public Web site lists of those counties to 

assist creditors in determining whether they 

meet this criterion. The Bureau may also 

provide an automated tool on its public Web 

site that can be used to determine whether 

specific properties are located in areas that 

qualify as ‘‘rural’’ or ‘‘underserved’’ 

according to the definitions in 

§ 1026.35(b)(2)(iv) for a particular calendar 

year. The U.S. Census Bureau may also 

provide on its public Web site an automated 

address search tool that indicates if a specific 

property address is located in an urban area 

for purposes of the Census Bureau’s most 

recent delineation of urban areas. For any 

calendar year that begins after the date on 

which the Census Bureau announced its most 

recent delineation of urban areas, a property 

is located in an area that qualifies as ‘‘rural’’ 

according to the definitions in 

§ 1026.35(b)(2)(iv) if the search results 

provided for the property by any such tool 

available on the Census Bureau’s public Web 

site do not identify the property as being in 

an urban area. 

B. For example, if a creditor originated 100 

first-lien covered transactions during 2016 

and 90 first-lien covered transactions during 

2017, the creditor meets this element of the 

exception for any transaction consummated 

during 2018 if at least 46 of its 2017 covered 

transactions are secured by first liens on 

properties that are located in one or more 

counties on the Bureau’s lists for 2017 or are 

located in one or more census blocks that are 

not in an urban area, as defined by the 

Census Bureau. 

C. Alternatively, if the creditor’s 2017 

transactions do not meet the test, the creditor 

satisfies this criterion for any transaction 

consummated during 2018 for which it 

received the application before April 1 if at 

least 51 of its 2016 covered transactions are 

secured by first liens on properties that are 

located in one or more counties on the 

Bureau’s lists for 2016 or are located in one 

or more census blocks that are not in an 

urban area. 

ii. During the preceding calendar year, or, 

if the application for the transaction was 

received before April 1, during either of the 

two preceding calendar years, the creditor 

together with its affiliates originated no more 

than 2,000 covered transactions, as defined 

by § 1026.43(b)(1), secured by first liens, that 

were sold, assigned, or otherwise transferred 

to another person, or that were subject at the 

time of consummation to a commitment to be 

acquired by another person, to satisfy the 

requirement of § 1026.35(b)(2)(iii)(B). 

iii. As of the preceding December 31st, or, 

if the application for the transaction was 

received before April 1, as of either of the 

two preceding December 31sts, the creditor 

and its affiliates that originate covered 

transactions secured by a first lien, together, 

had total assets that do not exceed the 

applicable asset threshold established by the 

Bureau, to satisfy the requirement of 

§ 1026.35(b)(2)(iii)(C). The Bureau publishes 

notice of the asset threshold each year by 

amending comment 35(b)(2)(iii)–1.iii. 

43(f)(2) Post-Consummation Transfer of 

Balloon-Payment Qualified Mortgage 

* * * * * 

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 conditions relating to 

operating 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)(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) Extend 

over 50 percent of its total first-lien covered 

transactions, as defined in § 1026.43(b)(1), on 

properties located in rural or underserved 

areas; (2) together with all affiliates, originate 

no more than 2,000 first-lien covered 

transactions not retained in the portfolio of 

the creditor or its affiliates; and (3) have, 

together with its affiliates that originate 

covered transactions secured by a first lien, 

total assets less than $2 billion (as adjusted 

for inflation) at the end of the calendar year. 

These tests are assessed based on 

transactions and assets from the calendar 

year preceding consummation of the 

transaction or from either of the two calendar 

years preceding consummation if the 

application for the transaction was received 

before April 1 of the calendar year in which 

the loan was consummated. A balloonpayment 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. 

* * * * * 

Dated: January 27, 2015. 

Richard Cordray, 

Director, Bureau of Consumer Financial 

Protection. 

[FR Doc. 2015–02125 Filed 2–10–15; 8:45 am] 

BILLING CODE 4810–AM–P 


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