25638 Federal Register / Vol. 78, No. 85 / Thursday, May 2, 2013 / Proposed Rules 

pdf/candgui.pdf (describing when a credit card 

contribution is ‘‘received’’). 19See Advisory Opinion 2012–17 (Red Blue T 

LLC, ArmourMedia, Inc., and m-Qube, Inc.); 

Advisory Opinion 2012–26 (Cooper for Congress, 

ArmourMedia, Inc., and m-Qube, Inc.); Advisory 

Opinion 2012–28 (CTIA—The Wireless 

Association); Advisory Opinion 2012–30 

(Revolution Messaging, LLC); Advisory Opinion 

2012–31 (AT&T Inc.). 

20See, e.g., Advisory Opinion 1993–04 (Cox) 

(approving a ‘‘computer driven billpayer service’’ 

that included the disbursement of funds by 

electronic transfer); Advisory Opinion 1982–25 

(Sigmund) (concluding that a wire transfer qualifies 

as a ‘‘similar draft’’). 

revise these regulations to address 

electronic contributions expressly? If so, 

should the regulations take the same 

approach as those taken previously? If 

not, why not, and what approach should 

they take instead? 

Recently, the Commission approved 

the use of text messaging to process 

contributions in a series of advisory 

opinions.19 Should the Commission 

amend its regulations to address 

contributions made by text message? If 

so, should the regulations take the same 

approach as the advisory opinions? 

Should any revised regulations also 

address issues that were not addressed 

in the advisory opinions, such as how 

political committees should report the 

receipt of contributions made by text 

message? What related issues should the 

Commission address? 

The Commission is also considering 

whether and, if so, how to revise the 

paper-oriented definitions of ‘‘money’’ 

and determinations of ‘‘disbursement’’ 

in its regulations. For example, the 

regulatory definition of ‘‘contribution’’ 

defines ‘‘money’’ as ‘‘currency * * *, 

checks, money orders, or any other 

negotiable instruments payable on 

demand.’’ 11 CFR 100.52(c); see also 11 

CFR 100.111(d) (similarly defining 

‘‘money’’ in the definition of 

‘‘expenditure’’), 102.10 (requiring 

disbursements to be made by check or 

‘‘similar draft’’ drawn on accounts 

established at the committee’s campaign 

depository). In several advisory 

opinions, the Commission has 

interpreted the term ‘‘similar draft’’ to 

include electronic disbursements.20

Should the Commission revise its 

regulations to provide expressly that 

contributions, expenditures, and 

disbursements include funds transferred 

electronically? Should any revised 

regulations take the same approach as 

the advisory opinions? If not, why not, 

and what approach should they take 

instead? 

Finally, the Commission is 

considering whether to revise its 

regulations that expressly apply only to 

cash contributions so that they also 

expressly apply to certain electronic 

contributions. For example, cash 

contributions in excess of $100 are 

prohibited. 11 CFR 110.4. The 

Commission seeks comments on 

whether prepaid debit, credit, banking, 

and gift cards are functionally the same 

as cash. If so, should the regulation be 

revised to prohibit contributions in 

excess of $100 made by prepaid debit, 

credit, banking, and gift cards? If not, 

why not? 

c. Rulemaking vs. Other Guidance 

The Commission seeks comments on 

whether a rulemaking is the best way for 

it to address questions raised by the 

receipt of electronic contributions, and 

the making of electronic disbursements, 

by political committees. As noted above, 

the Commission to date has provided 

guidance on electronic transactions 

largely through advisory opinions, 

interpretive rules, and campaign guides. 

Are these the best ways for the 

Commission to provide guidance on the 

subject in light of rapidly evolving 

technologies, or would rules on the 

subject also be helpful? How should the 

Commission craft regulations in order to 

minimize the need for serial revisions in 

the face of new and emerging 

technologies? Given the speed at which 

technology has been advancing, the 

Commission welcomes comments 

suggesting general regulatory criteria or 

standards that are flexible and adaptable 

enough to apply to new or emerging 

technology or business arrangements. 

3. Other Electronic Modernization 

Issues 

The Commission welcomes 

comments, including any pertinent data, 

concerning any electronic 

modernization issues that are not 

addressed in this notice and that relate 

to the Commission’s administration of 

the Act or Chapters 95 and 96 of Title 

26. 

Dated: April 25, 2013. 

On behalf of the Commission. 

Ellen L. Weintraub, 

Chair, Federal Election Commission. 

[FR Doc. 2013–10326 Filed 5–1–13; 8:45 am] 

BILLING CODE 6715–01–P 

BUREAU OF CONSUMER FINANCIAL 

PROTECTION 

12 CFR Parts 1024 and 1026 

[Docket No. CFPB–2013–0010] 

RIN 3170–AA37 

Amendments to the 2013 Mortgage 

Rules Under the Real Estate 

Settlement Procedure Act (Regulation 

X) and the Truth in Lending Act 

(Regulation Z) 

AGENCY: Bureau of Consumer Financial 

Protection. 

ACTION: Proposed rule with request for 

public comment. 

SUMMARY: This rule proposes 

amendments to some of the final 

mortgage rules issued by the Bureau of 

Consumer Financial Protection (Bureau) 

in January of 2013. These amendments 

clarify or correct provisions on the 

relation to State law of Regulation X’s 

servicing provisions; the small servicer 

exemption from certain servicing rules; 

the use of government-sponsored 

enterprise and Federal agency purchase, 

guarantee or insurance eligibility for 

determining qualified mortgage status; 

and the determination of debt and 

income for purposes of originating 

qualified mortgages. 

DATES: Comments must be received on 

or before June 3, 2013. 

ADDRESSES: You may submit comments, 

identified by Docket No. CFPB–2013– 

0010 or RIN 3170–AA37, by any of the 

following methods: 

• Electronic: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

• Mail/Hand Delivery/Courier: 

Monica Jackson, Office of the Executive 

Secretary, Consumer Financial 

Protection Bureau, 1700 G Street NW., 

Washington, DC 20552. 

Instructions: All submissions should 

include the agency name and docket 

number or Regulatory Information 

Number (RIN) for this rulemaking. 

Because paper mail in the Washington, 

DC area and at the Bureau is subject to 

delay, commenters are encouraged to 

submit comments electronically. In 

general, all comments received will be 

posted without change to http:// 

www.regulations.gov. In addition, 

comments will be available for public 

inspection and copying at 1700 G Street 

NW., Washington, DC 20552, on official 

business days between the hours of 10 

a.m. and 5 p.m. Eastern Time. You can 

make an appointment to inspect the 

documents by telephoning (202) 435– 

7275. 

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Federal Register / Vol. 78, No. 85 / Thursday, May 2, 2013 / Proposed Rules 25639 

1 78 FR 6407 (Jan. 30, 2013). 

2 78 FR 10695 (Feb. 14, 2013) (Regulation X), 78 

FR 10901 (Feb. 14, 2013) (Regulation Z). 

3Sections 1011 and 1021 of the Dodd-Frank Act, 

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

Public Law 111–203, sections 1001–1100H, codified 

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

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

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

excludes from this transfer of authority, subject to 

certain exceptions, any rulemaking authority over a 

motor vehicle dealer that is predominantly engaged 

in the sale and servicing of motor vehicles, the 

leasing and servicing of motor vehicles, or both. 12 

U.S.C. 5519. 

4 Dodd-Frank Act section 1400(c), 15 U.S.C. 1601 

note. 

5 78 FR 4726. 

All comments, including attachments 

and other supporting materials, will 

become part of the public record and 

subject to public disclosure. Sensitive 

personal information, such as account 

numbers or social security numbers, 

should not be included. Comments will 

not be edited to remove any identifying 

or contact information. 

FOR FURTHER INFORMATION CONTACT: 

Whitney Patross, Attorney; Joseph 

Devlin and Richard Arculin, Counsels; 

Marta Tanenhaus and R. Colgate Selden, 

Senior Counsels; Office of Regulations, 

at (202) 435–7700. 

SUPPLEMENTARY INFORMATION: 

I. Summary of Proposed Rule 

In January 2013, the Bureau issued 

several final rules concerning mortgage 

markets in the United States, pursuant 

to the Dodd-Frank Wall Street Reform 

and Consumer Protection Act (DoddFrank Act). Public Law 111–203, 124 

Stat. 1376 (2010) (2013 Title XIV Final 

Rules). On January 10, 2013, the Bureau 

issued Ability-to-Repay and Qualified 

Mortgage Standards Under the Truth in 

Lending Act (Regulation Z) (2013 ATR 

Final Rule).1 On January 17, 2013, the 

Bureau issued Mortgage Servicing Rules 

Under the Real Estate Settlement 

Procedures Act (Regulation X) (2013 

RESPA Servicing Final Rule) and 

Mortgage Servicing Rules Under the 

Truth in Lending Act (Regulation Z) 

(2013 TILA Servicing Final Rule) 

(together, 2013 Mortgage Servicing Final 

Rules).2 This publication proposes 

several amendments to those rules. 

These amendments clarify or correct 

provisions on (1) The relation to State 

law of Regulation X’s servicing 

provisions; (2) the small servicer 

exemption from certain of the new 

servicing rules; (3) the use of 

government-sponsored enterprise (GSE) 

and Federal agency purchase, guarantee 

or insurance eligibility for determining 

qualified mortgage (QM) status; and (4) 

the determination of debt and income 

for purposes of originating QMs. In 

addition to these four proposed 

revisions, which are discussed more 

fully below, the Bureau is also 

proposing certain technical corrections 

to the regulations with no substantive 

change intended. 

First, the Bureau is proposing to 

amend the commentary to Regulation X 

to clarify that under the preemption 

provisions, that regulation does not 

occupy the field of regulation of the 

practices covered by RESPA or 

Regulation X, including with respect to 

mortgage servicers or mortgage 

servicing. The proposal would also 

redesignate § 1024.13, the Regulation X 

preemption provision, as § 1024.5(c). 

Second, the Bureau is proposing to 

clarify the scope and application of an 

exemption for small servicers that is set 

forth in § 1026.41, the periodic 

statement provision, and incorporated 

by cross-reference in certain provisions 

of Regulation X. The proposal would 

clarify which mortgage loans 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. Further, the Bureau is 

proposing that three types of mortgage 

loan not be considered in determining 

small servicer status: mortgage loans 

voluntarily serviced for an unaffiliated 

entity without remuneration, reverse 

mortgages, and mortgage loans secured 

by a consumer’s interest in timeshare 

plans. The Bureau is also proposing 

other minor changes involving the small 

servicer exemption. 

Third, the Bureau is proposing to 

revise comment 43(e)(4)–4 to clarify 

what standards a creditor must meet 

when relying on a written guide or the 

automated underwriting system of one 

of the GSEs, U.S. Department of 

Housing and Urban Development 

(HUD), Veterans Administration (VA), 

U.S. Department of Agriculture (USDA), 

or Rural Housing Service (RHS) to 

determine qualified mortgage status 

under § 1026.43(e)(4). The proposed 

comment clarifies that a creditor is not 

required to satisfy certain mandates 

concerning loan delivery to the entities 

and other requirements that are wholly 

unrelated to assessing a consumer’s 

ability to repay the loan. The proposed 

comment also specifies that a creditor 

relying on approval through an entity’s 

automated underwriting system to 

establish qualified mortgage status must 

also meet the conditions on approval 

that are generated by that same system. 

The Bureau further is proposing 

revisions to comment 43(e)(4)–4 to 

clarify that a loan meeting eligibility 

requirements provided in a written 

agreement between the creditor and one 

of the GSEs, HUD, VA, USDA, or RHS 

is also eligible for purchase or guarantee 

by the GSEs or insured or guaranteed by 

the agencies for the purposes of 

§ 1026.43(e)(4). Thus, such loans could 

be qualified mortgages. 

The Bureau is also proposing new 

comment 43(e)(4)–5, which provides 

that a repurchase or indemnification 

demand by the GSEs, HUD, VA, USDA, 

or RHS is not dispositive for 

ascertaining qualified mortgage status. 

The comment provides two examples to 

illustrate the application of this 

guidance. 

Fourth, the Bureau is proposing 

changes to appendix Q of Regulation Z 

to facilitate compliance and ensure 

access to credit by assisting creditors in 

determining a consumer’s debt-toincome ratio (DTI) for the purposes of 

§ 1026.43(e)(2), the primary qualified 

mortgage provision. The Bureau is 

proposing changes to address 

compliance challenges raised by 

stakeholders, as well as technical and 

wording changes for clarification 

purposes. 

II. Background 

A. Title XIV Rulemakings Under the 

Dodd-Frank Act 

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, 

under sections 1061 and 1100A, 

generally consolidated the rulemaking 

authority for Federal consumer financial 

laws, including TILA and RESPA, in the 

Bureau.3 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. 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.4 To avoid uncertainty and 

potential disruption in the national 

mortgage market at a time of economic 

vulnerability, the Bureau issued several 

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. 

On January 10, 2013, the Bureau 

issued the 2013 ATR Final Rule, Escrow 

Requirements Under the Truth in 

Lending Act (Regulation Z) (2013 

Escrows Final Rule),5 and High-Cost 

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25640 Federal Register / Vol. 78, No. 85 / Thursday, May 2, 2013 / Proposed Rules 

6 78 FR 6855. 

7 78 FR 10367. 

8 78 FR 7215. 

9 78 FR 11279. 

10 78 FR 6622. 

11Consumer Financial Protection Bureau Lays 

Out Implementation Plan for New Mortgage Rules. 

Press Release. Feb. 13, 2013. 

12The Bureau also has received some questions 

that it does not intend to address through further 

rulemaking because they are answered by the final 

rules as adopted. For example, the Bureau has been 

asked whether residual income considerations can 

have any impact on the status of a qualified 

mortgage, specifically, whether a creditor’s failure 

to verify adequate residual income can be raised to 

refute the safe harbor for qualified mortgages that 

are not higher-priced covered transactions, under 

§ 1026.43(e)(1)(i). The Bureau believes the rule is 

already clear that residual income is relevant only 

to rebutting the presumption of compliance for 

qualified mortgages that are higher-priced covered 

transactions, under § 1026.43(e)(1)(ii)(B), and 

therefore has no effect on the safe harbor status of 

qualified mortgages that are not higher-priced 

covered transactions. 

13 12 U.S.C. 5581(a)(1). 

14Public Law 111–203, 124 Stat. 1376, section 

1061(b)(7); 12 U.S.C. 5581(b)(7). 

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

5481(14) (defining ‘‘Federal consumer financial 

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

and the provisions of title X of the Dodd-Frank Act); 

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

5481(12) (defining ‘‘enumerated consumer laws’’ to 

include TILA), Dodd-Frank section 1400(b), 15 

U.S.C. 1601 note (defining ‘‘enumerated consumer 

laws’’ to certain subtitles and provisions of Title 

XIV). 

Mortgages and Homeownership 

Counseling Amendments to the Truth in 

Lending Act (Regulation Z) and 

Homeownership Counseling 

Amendments to the Real Estate 

Settlement Procedures Act (Regulation 

X) (2013 HOEPA Final Rule).6 On 

January 17, 2013, the Bureau issued the 

2013 Mortgage Servicing Final Rules. 

On January 18, 2013, the Bureau issued 

Appraisals for Higher-Priced Mortgage 

Loans (Regulation Z) 7 (issued jointly 

with other agencies) and Disclosure and 

Delivery Requirements for Copies of 

Appraisals and Other Written 

Valuations Under the Equal Credit 

Opportunity Act (Regulation B) (2013 

Appraisals Final Rule).8 On January 20, 

2013, the Bureau issued Loan Originator 

Compensation Requirements Under the 

Truth in Lending Act (Regulation Z) 

(2013 Loan Originator Final Rule).9

Most of these rules will become 

effective on January 10, 2014. 

Concurrent with the 2013 ATR Final 

Rule, on January 10, 2013, the Bureau 

issued Proposed Amendments to the 

Ability-to-Repay Standards Under the 

Truth in Lending Act (Regulation Z) 

(2013 ATR Concurrent Proposal).10 The 

2013 ATR Concurrent Proposal would 

provide exemptions for certain 

nonprofit creditors and certain 

homeownership stabilization programs, 

an additional definition of a qualified 

mortgage for certain loans made and 

held in portfolio by small creditors, and 

specific rules for the inclusion of loan 

originator compensation in the points 

and fees calculation for QMs. The 

Bureau is currently in the process of 

considering comments received and 

finalizing this proposal. 

B. Implementation Initiative for New 

Mortgage Rules 

On February 13, 2013, the Bureau 

announced an initiative to support 

implementation of its new mortgage 

rules (Implementation Plan),11 under 

which the Bureau would work with the 

mortgage industry to ensure that the 

new rules can be implemented 

accurately and expeditiously. The 

Implementation Plan included (1) 

Coordination with other agencies; (2) 

publication of plain-language guides to 

the new rules; (3) publication of 

additional corrections and clarifications 

of the new rules, as needed; (4) 

publication of readiness guides for the 

new rules; and (5) education of 

consumers on the new rules. 

This proposal is the second issuance 

of additional corrections and 

clarifications of the new rules. The 

purpose of these updates is to address 

important questions raised by industry, 

consumer groups, or other agencies. 

Priority for this second set of updates 

has been given to issues that are 

important to a large number of 

stakeholders and that critically affect 

mortgage companies’ implementation 

decisions. In June, the Bureau plans to 

issue additional proposed clarifications 

to the new mortgage rules, including the 

servicing rules touched on here and the 

2013 Loan Originator Final Rule. We 

will also be issuing final versions of the 

recently published Escrows proposal 

and this issuance, after considering the 

comments we receive.12

III. Legal Authority 

The Bureau is issuing this proposed 

rule pursuant to its authority under 

RESPA, 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 Federal 

Reserve Board (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.’’ 13

Section 1061 of the Dodd-Frank Act also 

transferred to the Bureau all of HUD’s 

consumer protections functions relating 

to RESPA.14 Title X of the Dodd-Frank 

Act, including section 1061 of the DoddFrank Act, along with RESPA, TILA, 

and certain subtitles and provisions of 

title XIV of the Dodd-Frank Act, are 

Federal consumer financial laws.15

Section 19(a) of RESPA, 12 U.S.C. 

2617(a), authorizes the Bureau to 

prescribe such rules and regulations, to 

make such interpretations, and to grant 

such reasonable exemptions for classes 

of transactions, as may be necessary to 

achieve the purposes of RESPA, which 

includes its consumer protection 

purposes. In addition, section 6(j)(3) of 

RESPA, 12 U.S.C. 2605(j)(3), authorizes 

the Bureau to establish any 

requirements necessary to carry out 

section 6 of RESPA and section 

6(k)(1)(E) of RESPA, 12 U.S.C. 

2605(k)(1)(E), authorizes the Bureau to 

prescribe regulations that are 

appropriate to carry out RESPA’s 

consumer protection purposes. As 

identified in the 2013 RESPA Servicing 

Final Rule, the consumer protection 

purposes of RESPA include responding 

to borrower requests and complaints in 

a timely manner, maintaining and 

providing accurate information, helping 

borrowers avoid unwarranted or 

unnecessary costs and fees, and 

facilitating review for foreclosure 

avoidance options. 

Section 105(a) of TILA, 15 U.S.C. 

1604(a), authorizes the Bureau to 

prescribe regulations to carry out the 

purposes of TILA. Under 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 the purpose of TILA 

section 129C, as amended 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, and abusive. Section 105(f) of 

TILA, 15 U.S.C. 1604(f), authorizes the 

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Federal Register / Vol. 78, No. 85 / Thursday, May 2, 2013 / Proposed Rules 25641 

16 78 FR 6408 (January 30, 2013). 

17 78 FR 10902 (February 14, 2013). 

18 78 FR 10696 (February 14, 2013). 

19 78 FR 10706. 

20 Id. (specifically identifying the National 

Mortgage Settlement and the California Homeowner 

Bill of Rights). 

Bureau to exempt from all or part of 

TILA any class of transactions if the 

Bureau determines that TILA coverage 

does not provide a meaningful benefit to 

consumers in the form of useful 

information or protection. Accordingly, 

the Bureau has authority to issue 

regulations pursuant to RESPA, TILA, 

title X, and the enumerated subtitles 

and provisions of title XIV. 

In addition to constitute a qualified 

mortgage a loan must meet ‘‘any 

guidelines or regulations established by 

the Bureau relating to ratios of total 

monthly debt to monthly income or 

alternative measures of ability to pay 

regular expenses after payment of total 

monthly debt, taking into account the 

income levels of the borrower and such 

other factors as the Bureau may 

determine are relevant and consistent 

with the purposes described in [TILA 

section 129C(b)(3)(B)(i).]’’ The Dodd 

Frank Act also provides the Bureau with 

authority to prescribe regulations that 

revise, add to, or subtract from the 

criteria that define a qualified mortgage 

upon a finding that such regulations are 

necessary or proper to ensure that 

responsible, affordable mortgage credit 

remains available to consumers in a 

manner consistent with the purposes of 

the ability-to-repay requirements; or are 

necessary and appropriate to effectuate 

the purposes of the ability-to-repay 

requirements, to prevent circumvention 

or evasion thereof, or to facilitate 

compliance with TILA sections 129B 

and 129C. TILA section 129C(b)(3)(B)(i), 

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

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

Bureau authority to prescribe 

regulations to carry out the purposes of 

the qualified mortgage provisions, such 

as to ensure that responsible m 

affordable mortgage credit remains 

available to consumers in a manner 

consistent with the purposes of TILA 

section 128C. TILA section 

129C(b)(3)(A), 15 U.S.C. 1639c(b)(3)(A). 

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). Title X of 

the Dodd-Frank Act is a Federal 

consumer financial law. Accordingly, 

the Bureau is exercising its authority 

under the Dodd-Frank Act section 

1022(b) to prescribe rules that carry out 

the purposes and objectives of RESPA, 

TILA, title X, and the enumerated 

subtitles and provisions of title XIV of 

the Dodd-Frank Act, and prevent 

evasion of those laws. 

The Bureau is proposing to amend 

certain rules finalized in January, 2013 

that implement a number of Dodd-Frank 

Act provisions. In particular, the Bureau 

is proposing to clarify or amend 

regulatory provisions and associated 

commentary adopted by the 2013 ATR 

Final Rule,16 the 2013 TILA Servicing 

Final Rule,17 and the 2013 RESPA 

Servicing Final Rule.18 This proposed 

rule relies on the broad rulemaking and 

exception authorities specifically 

granted to the Bureau by RESPA, TILA, 

and title X of the Dodd-Frank Act. 

IV. Section-by-Section Analysis 

A. Regulation X 

Subpart A—General Provisions 

The Bureau is proposing a technical 

amendment to the heading for Subpart 

A of Regulation X from ‘‘Subpart A— 

General’’ to ‘‘Subpart A—General 

Provisions’’ to conform the heading in 

the text of the regulation to the heading 

set forth in the corresponding 

commentary. 

Section 1024.5 Coverage of RESPA 

The Bureau is proposing to 

redesignate § 1024.13 as § 1024.5(c). 

Section 1024.13, ‘‘Relation to State 

laws,’’ sets forth rules regarding the 

relationship of the requirements in 

RESPA and Regulation X to 

requirements established pursuant to 

State law. In the 2013 RESPA Servicing 

Final Rule, the Bureau divided 

Regulation X into subparts and 

§ 1024.13 is located in new ‘‘Subpart 

B—Mortgage Settlement and Escrow 

Accounts.’’ The provisions of 

§ 1024.13(a) are intended to apply with 

respect to all of Regulation X. Because 

§ 1024.13 applies for all sections of 

Regulation X, the Bureau is 

redesignating § 1024.13 as § 1024.5(c), 

located within ‘‘Subpart A—General 

Provisions.’’ Further, the Bureau is 

proposing to remove and reserve 

§ 1024.13. 

The Bureau is further proposing to 

add commentary for proposed 

§ 1024.5(c) to make clear that Regulation 

X does not create field preemption. 

Since the Bureau issued the 2013 

RESPA Servicing Final Rule, it has 

received inquiries as to whether the 

Bureau’s mortgage servicing rules result 

in preemption of the field of mortgage 

servicing regulation. The Bureau 

addressed this question in the preamble 

to the final rule, stating that ‘‘the Final 

Servicing Rules generally do not have 

the effect of prohibiting State law from 

affording borrowers broader consumer 

protection relating to mortgage servicing 

than those conferred under the Final 

Servicing Rules.’’ 19 The preamble 

further stated that, although ‘‘in certain 

circumstances, the effect of specific 

requirements of the Final Servicing 

Rules is to preempt certain limited 

aspects of state law’’ in general, ‘‘the 

Bureau explicitly took into account 

existing standards (both State and 

Federal) and either built in flexibility or 

designed its rules to coexist with those 

standards.’’ 20

Because the Bureau has continued to 

receive questions on this issue, the 

Bureau believes it is appropriate to 

propose commentary to clarify the scope 

of proposed § 1024.5(c) and expressly 

address concerns about field 

preemption. Consistent with the 

preamble to the 2013 RESPA Servicing 

Final Rule, proposed comment 5(c)(1)-1 

would state that State laws that are in 

conflict with the requirements of RESPA 

or Regulation X may be preempted by 

RESPA and Regulation X. Proposed 

comment 5(c)(1)-1 would state further 

that nothing in RESPA or Regulation X, 

including the provisions in subpart C 

with respect to mortgage servicers or 

mortgage servicing, should be construed 

to preempt the entire field of regulation 

of the covered practices. The Bureau 

believes that this proposed addition to 

the commentary would clarify that 

RESPA and Regulation X do not 

effectuate field preemption of States’ 

regulation of mortgage servicers or 

mortgage servicing. The comment also 

makes clear that RESPA and Regulation 

X do not preempt State laws that give 

greater protection to consumers than 

they do. 

The Bureau requests comment 

regarding the addition of the proposed 

commentary, including whether further 

clarification regarding the preemption 

effects of RESPA and Regulation X is 

necessary or appropriate. 

B. Regulation Z 

Section 1026.41 Periodic Statements 

for Residential Mortgage Loans 

41(a) In General 

41(a)(1) Scope 

Section 1026.41(a)(1), which was 

established by the 2013 TILA Servicing 

Final Rule, sets forth the scope of 

mortgage loans subject to the periodic 

statement requirements. The mortgage 

loans covered by the rule are closed-end 

consumer credit transactions secured by 

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21Housing Finance Agencies are deemed small 

servicers under § 1026.41(e)(4)(ii)(B) regardless of 

loan count and loan ownership status. 

22See, e.g., 78 FR 10718–10720. 

23 12 CFR 1026.41(e). 

24 12 CFR 1024.17(k)(5). 

25 12 CFR 1024.30(b)(1). 26 Id. 

27One example of such a servicer would be a 

servicer that services 10,000 construction loans, 

which are not considered ‘‘federally related 

mortgage loans’’ pursuant to 12 CFR 1024.2, and 

100 mortgage loans that are considered ‘‘federally 

related mortgage loans’’ pursuant to 12 CFR 1024.2. 

Such servicer would be considered to service 

10,100 closed-end consumer credit transactions 

secured by a dwelling and would not qualify for the 

small servicer exemption. However, only the 100 

federally related mortgage loans serviced by the 

servicer would be subject to the mortgage servicing 

requirements set forth in Regulation X pursuant to 

12 CFR 1024.31. 

a dwelling, subject to certain 

exemptions set forth in § 1026.41(e). 

Section 1026.41(a)(1) further states that, 

for purposes of § 1026.41, ‘‘[s]uch 

transactions are referred to as mortgage 

loans.’’ 

The proposed revision would clarify 

the rule by replacing the indefinite 

reference ‘‘such transactions’’ in 

§ 1026.41(a)(1) with a reiteration of the 

loans to which the rule applies, that is, 

closed-end consumer credit transactions 

secured by a dwelling. This revision 

clarifies which transactions are 

considered ‘‘mortgage loans’’ for 

purposes of § 1026.41. 

The Bureau believes that this change 

also would reduce uncertainty about 

which loans to consider in determining 

a servicer’s eligibility for one of the 

exemptions under § 1026.41(e), the 

small servicer exemption. Section 

1026.41(e)(4)(ii) defines a small servicer 

as a servicer that services 5,000 or fewer 

mortgage loans, for all of which the 

servicer (or an affiliate) is the creditor or 

assignee.21 The proposed text clarifies 

that, in general, a servicer determines 

whether it is a small servicer by 

considering the closed-end consumer 

credit transactions secured by a 

dwelling that it services. This includes 

coupon book loans, which are exempt 

from some of the requirements of the 

periodic statement rule. However, 

pursuant to proposed 

§ 1026.41(e)(4)(iii), reverse mortgages 

and transactions secured by consumers’ 

interests in timeshares, which are 

exempt from the periodic statement 

requirements, are excluded from 

consideration for purposes of 

determining small servicer status. 

41(e) Exemptions 

41(e)(4) Small Servicers 

41(e)(4)(ii) Small Servicer Defined 

For the reasons set forth in the 2013 

Servicing Final Rules,22 the Bureau 

determined that it was appropriate to 

exempt small servicers from certain 

mortgage servicing requirements. 

Specifically, small servicers, as defined 

by § 1026.41(e)(4), are exempt from the 

Regulation Z requirement to provide 

periodic statements for residential 

mortgage loans 23 and, in Regulation X, 

from (1) Certain requirements relating to 

obtaining force-placed insurance,24 (2) 

the general servicing policies, 

procedures, and requirements,25 and (3) 

certain requirements and restrictions 

relating to communicating with 

borrowers about, and evaluation of 

applications for, loss mitigation 

options.26

The Bureau is proposing to clarify the 

scope and application of the small 

servicer exemption. Determination of a 

servicer’s status as a small servicer, and 

thus its eligibility for the small servicer 

exemption, is set forth in 

§ 1026.41(e)(4). As set forth above, this 

standard is applicable by cross-reference 

to certain provisions of Regulation X. 

Regulation X applies to ‘‘federally 

related mortgage loans,’’ which excludes 

certain loans that are ‘‘mortgage loans’’ 

as defined by Regulation Z 

§ 1026.41(a)(1). The proposed revision 

would clarify that, to qualify for the 

small servicer exemption applicable to 

either rule, the servicer must first 

qualify as a small servicer under 

§ 1026.41(a)(1)—and that determination 

is based on closed-end consumer credit 

transactions secured by a dwelling. This 

Regulation Z standard applies regardless 

of whether or not the loans considered 

are subject to the requirements of 

Regulation X. The Bureau notes that, 

although some mortgage loans not 

subject to coverage under Regulation X 

count for purposes of determining 

eligibility as a small servicer, servicing 

such loans under Regulation X rules 

would not be required. Thus, a servicer 

that services 5,000 federally related 

mortgage loans, as defined by 

Regulation X, may service more than 

5,000 mortgage loans, as defined by 

Regulation Z § 1026.41(a)(1). In this 

case, because the servicer’s loans exceed 

the 5,000 mortgage loan limit, the 

servicer is not a small servicer and, 

thus, would not qualify for the small 

servicer exemption with regard to 

Regulation Z and Regulation X. 

However, the servicer would not have to 

comply with Regulation X requirements 

for those mortgage loans counted for 

purposes of determining small servicer 

eligibility but which are not federally 

related mortgage loans. Accordingly, by 

clarifying how a servicer determines 

whether it qualifies as a small servicer 

with regard to Regulation Z, this 

proposal also would clarify how a 

servicer determines whether it qualifies 

for the small servicer exemptions from 

the mortgage servicing requirements in 

Regulation X. 

The Bureau is proposing to amend the 

commentary to § 1026.41(e)(4)(ii) to 

identify specifically which mortgage 

loans are considered for purposes of 

determining eligibility for the small 

servicer exemption. Specifically, the 

Bureau proposes to add comment 

41(e)(4)(ii)–1 to clarify that, in general 

and pursuant to § 1026.41(a)(1), the 

mortgage loans considered in 

determining qualification for the small 

servicer exemption are closed-end 

consumer credit transactions secured by 

a dwelling. Proposed comment 

41(e)(4)(ii)–1 highlights that, pursuant 

to § 1026.41(e)(4)(iii), certain closed-end 

consumer credit transactions secured by 

a dwelling are not considered in 

determining status as a small servicer, 

as discussed further below in 

connection with proposed 

§ 1026.41(e)(4)(iii). 

The Bureau requests comments and 

data regarding whether proposed 

comment 41(e)(4)(ii)–1 appropriately 

clarifies the scope of mortgage loans that 

must be considered for determining if a 

servicer qualifies as a small servicer. 

The Bureau specifically requests 

comment and data regarding whether 

any servicers service a significant 

number of closed-end consumer credit 

transactions secured by a dwelling, 

which are subject to Regulation Z, but 

service significantly fewer ‘‘federally 

related mortgage loans,’’ which are 

subject to Regulation X. For example, 

the Bureau requests comment and data 

regarding whether any servicers would 

not be considered a small servicer if the 

small servicer exemption is based on 

whether a servicer services 5,000 or 

fewer closed end consumer credit 

transactions secured by a dwelling, but 

would be a small servicer if the small 

servicer exemption is based on whether 

a servicer services 5,000 or fewer 

‘‘federally related mortgage loan[s],’’ as 

that term is defined in 12 CFR 1024.2.27

The Bureau also is proposing to 

amend § 1026.41(e)(4)(ii)(A). Proposed 

§ 1026.41(e)(4)(ii)(A) would clarify that, 

for purposes of determining small 

servicer status, a servicer considers the 

mortgage loans serviced by the servicer 

together with any mortgage loans 

serviced by any affiliates. Section 

1026.41(e)(4)(iii) states that small 

servicer status is determined by 

counting ‘‘the number of mortgage loans 

serviced by the servicer and any 

affiliates as of January 1 for the 

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28The definition of ‘‘affiliate’’ for purposes of 

subpart E of Regulation Z, which includes 

§ 1026.41, is set forth in § 1026.32(b)(2) and applies 

to all of subpart E, including the small servicer 

exemption. Affiliate, as defined in § 1026.32(b)(2), 

‘‘means any company that is controlled by, or is 

under common control with another company, as 

set forth in the Bank Holding Company Act of 1956 

(12 USC 1841 et seq.).’’ § 1026.32(b)(2). 

remainder of the calendar year.’’ To 

avoid any risk of inconsistency, the 

Bureau believes it is appropriate to 

amend § 1026.41(e)(4)(ii)(A) to conform 

the language to § 1026.41(e)(4)(iii) by 

adding the clause ‘‘together with any 

affiliates’’ such that a small servicer is 

a servicer that ‘‘services, together with 

any affiliates, 5,000 or fewer mortgage 

loans, for all of which the servicer (or 

an affiliate) is the creditor or assignee.’’ 

This change more fully conforms the 

language of § 1026.41(e)(4)(ii)(A) with 

the language of § 1026.41(e)(4)(iii) but 

does not change the meaning of the 

small servicer exemption. 

The Bureau also is proposing to 

amend the comments to 

§ 1026.41(e)(4)(ii)(A). Specifically, 

comment 41(e)(4)(ii)–1 would be 

redesignated as comment 41(e)(4)(ii)–2 

and would be amended to clarify several 

elements set forth in the 2013 TILA 

Servicing Final Rule. First, it would 

clarify that there are two concurrent 

requirements for determining whether a 

servicer is a small servicer. Second, it 

would explain that the mortgage loans 

considered in making this 

determination are those serviced by the 

servicer as well as by its affiliates. 

Finally, it would clarify that the second 

requirement of the small servicer test, 

that a servicer must be either the 

‘‘creditor or assignee’’ of the mortgage 

loans it services, means that the servicer 

must either currently own or have 

originated the mortgage loans. The 

comment also would provide examples 

to illustrate these points. 

Proposed comment 41(e)(4)(ii)–1 

would set forth the two requirements for 

determining if a servicer is a small 

servicer and would clarify that both 

requirements apply to the mortgage 

loans serviced by the servicer as well as 

by its affiliates. The comment would set 

forth both requirements: (1) A servicer, 

together with its affiliates, must service 

5,000 or fewer mortgage loans, and (2) 

the servicer must only service mortgage 

loans for which the servicer (or an 

affiliate) is the creditor or assignee. 

Proposed comment 41(e)(4)(ii)–2 would 

further clarify that to be the ‘‘creditor or 

assignee’’ of a mortgage loan, the 

servicer (or an affiliate) must either 

currently own the mortgage loan or 

must have been the entity to which the 

mortgage loan was initially payable (that 

is, the originator of the mortgage loan). 

A servicer that only services such 

mortgage loans may qualify as a small 

servicer so long as the servicer also only 

services 5,000 or fewer mortgage loans. 

The Bureau believes that this 

clarification provides a helpful 

alternative way of expressing the 

requirement stated in the rule that the 

servicer or affiliate must also be the 

creditor or assignee of a mortgage loan. 

Proposed comment 41(e)(4)(ii)–2 

further would provide examples of 

specific circumstances demonstrating 

these requirements. The first example 

illustrates the loan count requirement of 

the small servicer test and the effect 

affiliation has on that requirement. 

Proposed comment 41(e)(4)(ii)–2.i states 

that if a servicer services 3,000 mortgage 

loans, but is affiliated (as defined at 

§ 1026.32(b)(2)) 28 with another servicer 

that services 4,000 other mortgage loans, 

both servicers are considered to service 

7,000 mortgage loans and neither 

servicer is considered a small servicer. 

The second example illustrates the 

ownership requirement of the small 

servicer test. Proposed comment 

41(e)(4)(ii)–2.ii states that if a servicer 

services 3,100 mortgage loans, including 

100 mortgage loans it neither owns nor 

originated but for which it owns the 

mortgage servicing rights, the servicer is 

not a small servicer. This is because the 

servicer services some mortgage loans 

for which the servicer (or an affiliate) is 

not the creditor or assignee, 

notwithstanding that the total number of 

mortgage loans serviced is fewer than 

5,000. 

Finally, the Bureau proposes to 

redesignate comment 41(e)(4)(ii)–2 as 

41(e)(4)(ii)–3 and to revise the comment 

to provide further clarification regarding 

the application of the small servicer 

exemption in certain master servicer/ 

subservicer relationships. Under the 

2013 TILA Servicing Final Rule, 

comment 41(e)(4)(ii)–2 references 

Regulation X, 12 CFR 1024.31, for the 

definitions of ‘‘master servicer’’ and 

‘‘subservicer’’ that apply to the rule. It 

also provides the example that, even 

though a master servicer meets the 

definition of a small servicer, a 

subservicer retained by that master 

servicer that does not meet the 

definition does not qualify for the small 

servicer exemption. 

The proposed comment would clarify 

that a small servicer does not lose its 

small servicer status because it retains a 

subservicer, as that term is defined in 12 

CFR 1024.31, to service any of its 

mortgage loans. The comment would 

also clarify that, for a subservicer, as 

that term is defined in 12 CFR 1024.31, 

to gain the benefit of the small servicer 

exemption, both the master servicer and 

the subservicer must be small servicers. 

The comment points out that, generally, 

a subservicer will not qualify as a small 

servicer because it does not own or did 

not originate the mortgage loans it 

subservices. However, a subservicer 

would qualify as a small servicer if it is 

an affiliate of a master servicer that 

qualifies as a small servicer. 

Proposed comment 41(e)(4)(ii)–3 also 

removes the previous example 

described above in favor of three other 

examples that demonstrate the 

implication of a master servicer/ 

subservicer relationship for purposes of 

qualifying for the small servicer 

exemption. In the first example, a credit 

union services 4,000 mortgage loans— 

all of which it originated or owns. The 

credit union retains a credit union 

service organization to subservice 1,000 

of the mortgage loans and the credit 

union services the remaining 3,000 

mortgage loans itself. The credit union 

has no affiliation relationship with the 

credit union service. The credit union is 

a small servicer and, thus, the small 

servicer exemption applies to the 3,000 

mortgage loans the credit union services 

itself. The credit union service 

organization is not a small servicer 

because it services mortgage loans it 

does not own or did not originate. 

Accordingly, the credit union service 

organization does not gain the benefit of 

the small servicer exemption and, thus, 

must comply with any applicable 

mortgage servicing requirements for the 

1,000 mortgage loans it subservices. 

Proposed comment 41(e)(4)(ii)–3.ii 

posits the example of a bank holding 

company that, through a lender 

subsidiary, owns or originated 4,000 

mortgage loans. All mortgage servicing 

rights for the 4,000 mortgage loans are 

owned by a wholly owned master 

servicer subsidiary. Servicing for the 

4,000 mortgage loans is conducted by a 

wholly owned subservicer subsidiary. 

The bank holding company controls all 

of these subsidiaries and, thus, they are 

affiliates of the bank holding company 

pursuant § 1026.32(b)(2). Because the 

master servicer and subservicer service 

5,000 or fewer mortgage loans and 

because the mortgage loans are owned 

or originated by an affiliate of each, the 

master servicer and the subservicer are 

each considered a small servicer and 

qualify for the small servicer exemption 

for all 4,000 mortgage loans. 

Proposed comment 41(e)(4)(ii)–3.iii 

posits the example of a nonbank 

servicer that services 4,000 mortgage 

loans, all of which it originated or owns. 

The servicer retains a ‘‘component 

servicer’’ to assist it with servicing 

functions. The component servicer is 

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not engaged in ‘‘servicing’’ as defined in 

12 CFR 1024.2; that is, the component 

servicer does not receive any scheduled 

periodic payments from a borrower 

pursuant to the terms of any mortgage 

loan, including amounts for escrow 

accounts, and does not make the 

payments to the owner of the loan or 

other third parties of principal and 

interest and such other payments with 

respect to the amounts received from 

the borrower as may be required 

pursuant to the terms of the mortgage 

servicing loan documents or servicing 

contract. The component servicer is not 

a subservicer pursuant to 12 CFR 

1024.31 because it is not engaged in 

servicing, as that term is defined in 12 

CFR 1024.2. The nonbank servicer is a 

small servicer and the small servicer 

exemption applies to all 4,000 mortgage 

loans it services. 

41(e)(4)(iii) Small Servicer 

Determination 

Under the 2013 TILA Servicing Final 

Rule, § 1026.41(e)(4)(iii) sets forth 

certain criteria regarding how to 

determine if a servicer qualifies as a 

small servicer. Section 1026.41(e)(4)(iii) 

explains that the small servicer 

determination is based on the number of 

mortgage loans serviced by the servicer 

and any affiliates as of January 1 for the 

remainder of the calendar year. It also 

states that a servicer that ‘‘crosses the 

threshold,’’ and thus loses its small 

servicer status and its small servicer 

exemption, has six months after 

crossing the threshold or until the next 

January 1, whichever is later, to comply 

with any requirements from which the 

servicer is no longer exempt. 

Proposed § 1026.41(e)(4)(iii) includes 

a number of revisions to 

§ 1026.41(e)(4)(iii) as adopted by the 

2013 TILA Servicing Final Rule. First, 

proposed § 1026.41(e)(4)(iii) would 

replace the reference to a servicer that 

‘‘crosses the threshold’’ for determining 

if the servicer qualifies a small servicer 

with broader language indicating that a 

servicer that ‘‘ceases to qualify’’ as a 

small servicer will have six months or 

until the next January 1, whichever is 

later, to comply with any requirements 

for which a servicer is no longer exempt 

as a small servicer. The broader phrase 

‘‘ceases to qualify’’ more accurately 

reflects the fact that there are two 

elements to determining if a servicer 

qualifies as a small servicer, as 

discussed above, either one of which 

could cause a servicer to lose exempt 

status. 

Proposed § 1026.41(e)(4)(iii) thus 

would apply the transition period set 

out in the rule to situations in which a 

servicer no longer meets the loan count 

requirement as well as to situations in 

which the servicer no longer meets the 

requirement that the servicer is the 

creditor or assignee of all mortgage 

loans it services. Thus, if a servicer 

exceeds the 5,000 mortgage loan limit or 

begins to service mortgage loans it does 

not own or did not originate, it must 

comply with any requirements from 

which it is no longer exempt by either 

the following January 1 or six months 

after the change in operations that 

disqualifies it as a small servicer, 

whichever is later. For example, if on 

September 1 a servicer that previously 

qualified as a small servicer begins to 

service a mortgage loan that it does not 

own and did not originate, the servicer 

has until March 1 of the following year 

to comply with the requirements from 

which it was previously exempt as a 

small servicer. 

The proposal also would add 

language to specify which mortgage 

loans should not be considered in 

determining small servicer status. 

Proposed § 1026.41(e)(4)(iii) would 

clarify that certain closed-end consumer 

credit transactions secured by a 

dwelling would not be considered for 

purposes of determining whether a 

servicer qualifies as a small servicer. 

Specifically, because such loans are 

exempt from § 1026.41, reverse 

mortgage transactions and mortgage 

loans secured by a consumer’s interest 

in timeshare plans are not considered 

when determining if a servicer is a small 

servicer. (Because coupon book loans 

are exempt only from some 

requirements of § 1026.41, such loans 

are considered in determining whether 

a servicer is a small servicer.) 

The Bureau also is proposing to 

exclude from consideration any 

mortgage loan voluntarily serviced by a 

small servicer for a creditor or assignee 

that is not an affiliate of the servicer and 

for which the servicer does not receive 

any compensation or fees (‘‘charitably 

serviced’’ mortgage loans). The Bureau 

has received feedback that certain 

servicers that would otherwise be 

considered small servicers, voluntarily 

service mortgage loans for unaffiliated 

non-profit entities for charitable 

purposes and do not receive 

compensation or fees from engaging in 

that servicing. If such charitably 

serviced mortgage loans are considered 

in connection with determining whether 

a servicer qualifies as a small servicer, 

a servicer engaging in this practice 

would not qualify for the small servicer 

exemption because the servicer would 

be servicing a mortgage loan it does not 

own or did not originate, 

notwithstanding that such servicer 

undertook to service those mortgage 

loans for charitable purposes. 

The Bureau is concerned that 

including charitably serviced mortgage 

loans in determining status as a small 

servicer would cause servicers to refrain 

from charitable servicing rather than 

lose the benefits of a small servicer 

exemption. The Bureau believes such a 

result would not further the goal of 

consumer protection for the affected 

consumers and may instead negatively 

affect the availability and costs of credit 

for consumers whose mortgage loans 

would otherwise be serviced pursuant 

to such charitable arrangements. 

Further, the Bureau believes consumers 

more likely would receive superior 

service from an entity in the business of 

servicing that is willing to donate its 

services than from a non-profit entity 

that owns the mortgage servicing rights 

but is not experienced in the business 

of servicing. The Bureau believes that 

the benefits of excluding charitably 

serviced mortgage loans from small 

servicer determination outweigh the 

potential risks to consumers that 

exclusion may pose. 

For the reasons set forth above, 

pursuant to the Bureau’s exemption 

authority and authority to provide for 

adjustments and exceptions for any 

class of transactions as may be 

necessary or proper to effectuate the 

purposes of TILA, under TILA sections 

105(a) and (f), the Bureau proposes that 

mortgage loans voluntarily serviced by a 

servicer for a creditor or assignee that is 

not an affiliate of the servicer and for 

which the servicer does not receive any 

compensation or fees are not considered 

in determining a servicer’s qualification 

as a small servicer. As discussed, the 

Bureau believes that considering such 

loans in determining if a servicer is a 

small servicer would defeat the 

purposes of TILA by penalizing 

charitable servicers, thereby dissuading 

them from engaging in charitable 

servicing to the detriment of the 

consumers that otherwise would benefit 

from this activity. The Bureau requests 

comment regarding whether it is 

appropriate not to consider such 

mortgage loans when determining if a 

servicer qualifies for a small servicer 

exemption. The Bureau further requests 

comment on whether other mortgage 

loans serviced through similar limited 

arrangements should not be considered 

in determining whether a servicer is a 

small servicer. However, the Bureau 

emphasizes that, in this proposed 

rulemaking, it is neither reexamining 

nor seeking comment on the issue of 

exempting nonprofit entities engaged in 

mortgage servicing from the 

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29TILA section 128(f) requires periodic 

statements for ‘‘residential mortgage loans,’’ which, 

pursuant to TILA section 103(cc)(5), excludes 

transactions secured by consumers’ interests in 

timeshare plans. For this reason, exception 

authority is not required to exclude such loans from 

consideration in determining if a servicer is a small 

servicer. 

30See 78 FR 10973. 

31Eligibility standards for the GSEs and Federal 

agencies are available at: Fannie Mae, Single Family 

Selling Guide, https://www.fanniemae.com/

content/guide/sel111312.pdf; Freddie Mac, SingleFamily Seller/Servicer Guide, http:// 

www.freddiemac.com/sell/guide/; HUD Handbook 

4155.1, http://www.hud.gov/offices/adm/hudclips/

handbooks/hsgh/4155.1/41551HSGH.pdf; Lenders 

Handbook—VA Pamphlet 26–7, Web Automated 

Reference Material System (WARMS), http:// 

www.benefits.va.gov/warms/pam26_7.asp; 

Underwriting Guidelines: USDA Rural Development 

Guaranteed Rural Housing Loan Program, http://

www.rurdev.usda.gov/SupportDocuments/CA-SFHGRHUnderwritingGuide.pdf. 

requirements of the periodic statement 

or any other mortgage servicing rule. 

Finally, the Bureau proposes to add 

comment 41(e)(4)(iii)–3. Proposed 

comment 41(e)(4)(iii)–3 would clarify 

that mortgage loans that are not 

considered for purposes of determining 

small servicer qualification pursuant to 

§ 1026.41(e)(4)(iii), are not considered 

for determining either whether a 

servicer services, together with any 

affiliates, 5,000 or fewer mortgage loans 

or whether a servicer is servicing 

mortgage loans that it does not own or 

did not originate. Proposed comment 

41(e)(4)(iii)–3 would further posit the 

example of a servicer that services 5,400 

mortgage loans. Of these mortgage loans, 

the servicer owns or originated 4,800 

mortgage loans, services 300 reverse 

mortgage transactions that it does not 

own or did not originate, and 

voluntarily services 300 mortgage loans 

that it does not own or did not originate 

for an unaffiliated non-profit 

organization for which the servicer does 

not receive any compensation or fees. 

Neither the reverse mortgage 

transactions nor the mortgage loans 

voluntarily serviced by the servicer are 

considered for purposes of determining 

if the servicer is a small servicer. Thus, 

because the only mortgage loans 

considered are the 4,800 other mortgage 

loans serviced by the servicer, and the 

servicer owns or originated each of 

those mortgage loans, the servicer is 

considered a small servicer and 

qualifies for the small servicer 

exemption with regard to all 5,400 

mortgage loans it services. The comment 

also notes that reverse mortgages and 

transactions secured by a consumer’s in 

timeshare plans, in addition to not being 

considered in determining small 

servicer qualification, also are exempt 

from the requirements of § 1026.41. In 

contrast, although charitably serviced 

mortgage loans, as defined by 

§ 1026.41(e)(4)(iii), are likewise not 

considered in determining small 

servicer qualification, they are not 

exempt from the requirements of 

§ 1026.41. Thus, a servicer that does not 

qualify as a small servicer would not be 

required to provide periodic statements 

for reverse mortgages and timeshare 

plans because they are exempt from the 

rule, but would be required to provide 

periodic statements for the mortgage 

loans it charitably services. 

Legal authority. The Bureau is 

proposing to exclude charitably serviced 

mortgage loans and reverse mortgage 

transactions from consideration in 

determining a servicer’s status as a 

small servicer for purposes of the small 

servicer exemption in § 1024.41(e)(4) 

pursuant to its authority to provide for 

adjustments and exceptions under TILA 

section 105(a) and (f).29 With respect to 

charitably serviced mortgage loans, the 

Bureau believes, for the reasons 

described above, that declining to 

consider such mortgage loans for 

purposes of determining eligibility as a 

small servicer effectuates the purposes 

of, and facilitates compliance with TILA 

and Regulation Z. Further, consistent 

with TILA section 105(f) and in light of 

the factors in that provision, the Bureau 

believes that requiring servicers to 

consider mortgage loans they charitably 

service for purposes of determining 

eligibility as a small servicer would 

cause mortgage servicers to withdraw 

from such charitable relationships and 

will not provide a meaningful benefit to 

consumers in the form of useful 

information or protection. In addition, 

the Bureau is concerned regarding the 

extent to which any requirement to 

consider such loans will complicate, 

hinder, or make more expensive the 

credit process for such mortgage loan 

transactions, especially considering the 

status of the borrowers that typically 

secure mortgage loans that are 

charitably serviced. Ultimately, the 

Bureau believes the goal of consumer 

protection would be undermined if it 

considers for purposes of small servicer 

qualification, mortgage loans voluntarily 

serviced by a servicer for a creditor or 

assignee that is not an affiliate of the 

servicer and for which the servicer does 

not receive any compensation or fees. 

The Bureau similarly believes that not 

considering reverse mortgage in 

determining whether a servicer is a 

small servicer effectuates the purposes 

of, and facilitates compliance with, 

TILA and Regulation Z. The Bureau 

believes this for the same reasons set 

forth in the 2013 TILA Servicing Final 

Rule 30 exempting reverse mortgages 

from the requirements of § 1024.41. As 

discussed in that Final Rule, the 

periodic statement requirements were 

designed for a traditional mortgage 

product such that information relevant 

and useful for consumers with reverse 

mortgages differs substantially from the 

information required on the periodic 

statement and, thus, would not provide 

a meaningful benefit to consumers of 

reverse mortgages. The Bureau believes 

that not considering reverse mortgages 

in determining whether a servicer is a 

small servicer is proper irrespective of 

the amount of the loan, the status of the 

consumer (including related financial 

arrangements, financial sophistication, 

and the importance to the consumer of 

the loan), or whether the loan is secured 

by the principal residence of the 

consumer. 

Section 1026.43 Minimum Standards 

for Transactions Secured by a Dwelling 

43(e) Qualified Mortgages 

43(e)(4) Qualified Mortgage Defined— 

Special Rules 

The 2013 ATR Final Rule generally 

requires creditors to make a reasonable, 

good faith determination of a 

consumer’s ability to repay any 

consumer credit transaction secured by 

a dwelling (excluding an open-end 

credit plan, timeshare plan, reverse 

mortgage, or temporary loan) and 

establishes certain protections from 

liability under this requirement for 

‘‘qualified mortgages.’’ These 

provisions, in § 1026.43(c), (e)(2) and 

(4), and (f), implement the baseline 

requirement of TILA section 129C(a)(1) 

and the qualified mortgage provisions of 

TILA section 129C(b). 

To determine the qualified mortgage 

status of a loan, creditors must analyze 

whether the loan meets one of the 

definitions of ‘‘qualified mortgage’’ in 

§ 1026.43(e)(2), (e)(4), or (f). Section 

1026.43(e)(4) provides a definition of 

qualified mortgage for loans that (1) 

meet the prohibitions on certain risky 

loan features (e.g., negative amortization 

and interest only features); (2) do not 

exceed certain limitations on points and 

fees under § 1026.43(e)(2); and (3) either 

are eligible for purchase or guarantee by 

the GSEs, while under the 

conservatorship of the Federal Housing 

Finance Agency, or are eligible to be 

insured or guaranteed by HUD under 

the National Housing Act (12 U.S.C. 

1707 et seq.), the VA, the USDA, or 

RHS.31 HUD, VA, USDA, and RHS have 

authority under the Dodd-Frank Act to 

define qualified mortgage standards for 

their own loans. See TILA section 

129C(b)(3)(B)(ii). Coverage under 

§ 1026.43(e)(4) for such loans will 

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32The rule’s effective date is January 10, 2014, 

thus the § 1026.43(e)(4) qualified mortgage 

definition expires at the latest on January 10, 2021. 33The Bureau issued a concurrent proposed rule 

after January 10, 2013 when the 2013 ATR Final 

Rule was issued. The proposed Amendments to the 

Ability to Repay Standards under the Truth in 

Lending Act amend the 2013 ATR Final Rule by 

providing exemptions for certain nonprofit 

creditors and certain homeownership stabilization 

programs and an additional definition of a qualified 

mortgage for certain loans made and held in 

portfolio by small creditors. The Bureau also seeks 

feedback in the proposal on whether additional 

clarification is needed regarding the inclusion of 

loan originator compensation in the points and fees 

calculation. The concurrent proposal is available at: 

http://files.consumerfinance.gov/f/ 

201301_cfpb_concurrent-proposal_ability-torepay.pdf. 

sunset once each agency promulgates its 

own qualified mortgage standards and 

such rules take effect. Coverage of GSEeligible loans will sunset when 

conservatorship ends. 

Even if the Federal agencies do not 

issue additional rules or 

conservatorship does not end, the 

temporary qualified mortgage definition 

in § 1026.43(e)(4) will expire seven 

years after the effective date of the 

rule.32 Covered transactions that satisfy 

the requirements of § 1026.43(e)(4) that 

are consummated before the sunset of 

§ 1026.43(e)(4) will retain their qualified 

mortgage status after the temporary 

definition expires. However, a loan 

consummated after the sunset of 

§ 1026.43(e)(4) may be a qualified 

mortgage only if it satisfies the 

requirements of § 1026.43(e)(2) or (f), 

under the final rule.33

Eligibility Under GSE/Agency Guides 

and Automated Underwriting Systems 

As adopted by the 2013 ATR Final 

Rule, comment 43(e)(4)–4 clarifies that, 

to satisfy § 1026.43(e)(4)(ii), a loan need 

not be actually purchased or guaranteed 

by a GSE or insured or guaranteed by 

HUD, VA, USDA, or RHS. Rather, 

§ 1026.43(e)(4)(ii) requires only that the 

loan be eligible for such purchase, 

guarantee, or insurance. For example, 

the comment provides that, for purposes 

of § 1026.43(e)(4), a creditor is not 

required to sell a loan to the GSEs for 

that loan to be a qualified mortgage. 

Rather, the loan must be eligible for 

purchase or guarantee by the GSEs. To 

determine eligibility, a creditor may rely 

on an underwriting recommendation 

provided by one of the GSEs’ or 

agencies’ automated underwriting 

systems (AUSs) or their written guides. 

Accordingly, with regard to the GSEs, 

the comment states that a covered 

transaction is eligible for purchase or 

guarantee by Fannie Mae or Freddie 

Mac (and therefore a qualified mortgage 

under § 1026.43(e)(4)) if: (i) the loan 

conforms to the standards set forth in 

the Fannie Mae Single-Family Selling 

Guide or the Freddie Mac Single-Family 

Seller/Servicer Guide; or (ii) the loan 

receives an ‘‘Approve/Eligible’’ 

recommendation from Desktop 

Underwriter (DU); or an ‘‘Accept and 

Eligible to Purchase’’ recommendation 

from Loan Prospector (LP). 

The Bureau is proposing to revise 

comment 43(e)(4)–4 in a number of 

ways as discussed here and below. First, 

the proposal would clarify that a 

creditor is not required to comply with 

all GSE or agency requirements to show 

qualified mortgage status. Specifically, 

the proposed revision specifies that the 

creditor need not comply with certain 

requirements that are wholly unrelated 

to a consumer’s ability to repay, 

including activities related to selling, 

securitizing, or delivering consummated 

loans and any requirement the creditor 

is required to perform after the 

consummated loan is sold, guaranteed, 

or endorsed for insurance (in the case of 

agency loans) such as document 

custody, quality control, and servicing. 

These requirements are spelled out in 

the most depth in the GSE and agency 

written guides, but may also be 

referenced in automated underwriting 

system conditions and written 

agreements with individual creditors, as 

discussed further below. 

The Bureau believes that the proposed 

comment will clarify the intended scope 

of the temporary category of qualified 

mortgage created in § 1026.43(e)(4) and 

facilitate compliance with the 

provisions of Regulation Z adopted in 

the 2013 ATR Final Rule. As the Bureau 

explained in the preamble to the final 

rule, the Bureau established 

§ 1026.43(e)(4) as a temporary transition 

measure designed to ensure access to 

responsible, affordable credit for 

consumers with debt-to-income ratios 

that exceed the 43% threshold that the 

Bureau adopted as a bright-line standard 

in the permanent general definition of 

qualified mortgage under § 1026.43(e)(2) 

while creditors adapted to the new ATR 

rules and other changes in economic 

and regulatory conditions. The Bureau 

believed that using widely recognized, 

federally related underwriting standards 

to define qualified mortgages during this 

interim period would both facilitate 

compliance and ensure responsible 

lending practices. The temporary 

provision therefore bases qualified 

mortgage status on eligibility for 

purchase, insurance, or guarantee, but 

does not require actual sale, guarantee, 

or insurance endorsement. Furthermore, 

the temporary provision requires that a 

qualified mortgage must be eligible at 

consummation. 

However, the Bureau recognizes that 

the GSEs and agencies impose a wide 

variety of requirements relating not only 

to underwriting of potentially eligible 

loans, but also to the mechanics of sale, 

guarantee, or insurance and postconsummation activities. Because 

underwriting is a complex process that 

involves assessment of the consumer’s 

ability to repay the loan as well as other 

credit risk factors, the Bureau continues 

to believe that it is appropriate to base 

qualified mortgage status under 

§ 1026.43(e)(4) on the GSEs’ and 

agencies’ general standards concerning 

borrower, product, and mortgage 

eligibility and underwriting. While 

some of these underwriting 

requirements may be more closely 

related to assessing a consumer’s ability 

to repay than others, the Bureau 

believes that attempting to disaggregate 

them would be an extraordinarily 

complex task that would defeat the 

purposes of the temporary definition in 

adopting widely recognized standards to 

facilitate compliance and access to 

responsible credit. Where groups of 

requirements are wholly unrelated to 

underwriting (i.e., wholly unrelated to 

assessing ability to repay and other riskrelated factors), however, the Bureau 

believes that it is appropriate to specify 

that such requirements do not affect 

qualified mortgage status. 

The Bureau believes that the items 

specified in the comment meet this test 

and provide greater clarity to the 

temporary definition of qualified 

mortgage. Because TILA requires 

assessment of a consumer’s ability to 

repay a loan as of the time of 

consummation, the Bureau believes that 

GSE and agency requirements relating to 

post-consummation activity should not 

be relevant to qualified mortgage status. 

And because the temporary definition 

does not require actual purchase, 

guarantee, or insurance, the Bureau 

believes that it would not be appropriate 

to base qualified mortgage status on 

elements of the guides relating to the 

mechanics of actual delivery, purchase, 

guarantee, and endorsement. The 

Bureau recognizes that most 

requirements wholly unrelated to 

underwriting involve postconsummation activity, however, preconsummation GSE and agency 

requirements could also be wholly 

unrelated to underwriting. For example, 

the status of a creditor’s approval or 

eligibility to do business with a GSE is 

not relevant for ascertaining qualified 

mortgage status. The Bureau invites 

comment on this proposed clarification 

generally and on whether other GSE or 

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agency requirements should be 

excluded. 

The Bureau is also proposing to revise 

comment 43(e)(4)–4 to clarify eligibility 

as determined by an automated 

underwriting system of a GSE, or one of 

the agencies. Thus, the AUSs and the 

written guides of the GSEs as well as the 

agencies can be used for eligibility 

purposes. The proposed language would 

explain that to rely upon an AUS 

recommendation to demonstrate 

qualified mortgage status a creditor 

must have (1) accurately input the loan 

information into the automated system, 

and (2) satisfied any accompanying 

requirements or conditions to the AUS 

approval that would otherwise 

invalidate the recommendation, unless 

the conditions concern activities related 

to selling, securitizing, or delivering 

consummated loans or postconsummation requirements as 

discussed above. The comment as 

adopted in the 2013 ATR Final Rule 

assumed that any recommendation used 

for compliance would be valid, and 

these clarifications merely list two 

criteria that should be monitored to 

ensure that validity. In particular, 

because the AUSs generate a list of 

conditions that must be met in support 

of the approval designation, the Bureau 

believes that those conditions must be 

satisfied to show eligibility for 

purchase, guarantee, or insurance. The 

Bureau seeks comment on these 

revisions as well and is also proposing 

technical edits to comment 43(e)(4)–4 

for clarity and accuracy. 

Effect of Written Contract Variances 

The Bureau also is proposing to revise 

comment 43(e)(4)–4 in a third way to 

clarify further that a loan meeting 

eligibility requirements provided in a 

written agreement between the creditor 

and a GSE or agency that permits 

variation from the standards of the 

written guides and/or AUSs in effect at 

the time of consummation is also 

eligible for purchase or guarantee by the 

GSEs or insurance or guarantee by the 

agencies for the purposes of 

§ 1026.43(e)(4). Thus, such loans would 

be qualified mortgages. The Bureau 

recognizes that these agreements 

between creditors and the GSEs or 

agencies effectively constitute 

modification of, or substitutes for, the 

general manuals or AUSs with regard to 

these creditors. In many cases, the 

agreements allow the creditors to use 

other automated underwriting systems 

rather than the GSE or agency systems, 

subject to certain conditions or 

limitations on which loans the GSE or 

agency will accept as eligible for 

purchase, guarantee, or insurance. The 

Bureau believes that it is therefore 

appropriate for the purposes of 

§ 1026.43(e)(4) to consider the 

agreements to be equivalent to the 

standard written guides for purposes of 

the specific creditor to which the 

agreement applies. Many of these 

agreements are necessary to 

accommodate local and regional market 

variations and other considerations that 

do not substantially relate to ATRrelated underwriting criteria and 

therefore are generally consistent with 

the consumer protection and other 

purposes of the rule. However, the 

Bureau does not believe that it would be 

appropriate to allow one creditor to rely 

on the terms specified in another 

creditor’s written agreement with a GSE 

or agency to establish qualified 

mortgage status, as the written 

agreements are individually negotiated 

and monitored. The Bureau seeks 

comment on this proposed clarification 

generally and on whether other 

variations on standard guides and 

eligibility criteria should be considered. 

Repurchase and Indemnification 

Demands 

The Bureau is also proposing new 

comment 43(e)(4)–5 to provide 

additional clarification on how 

repurchase and indemnification 

demands by the GSEs and agencies may 

affect the qualified mortgage status of a 

loan. The proposed comment does not 

amend the meaning of the current rule 

but clarifies how a determination of the 

qualified mortgage status of a loan 

should be understood in relation to 

claims that the loan was not eligible for 

purchase or insurance and therefore not 

a qualified mortgage. The Bureau 

understands that facts upon which 

eligibility status was determined at or 

before consummation could later be 

found to be incorrect. Often, a 

repurchase or indemnification demand 

by a GSE or an agency involves such 

issues. However, the mere occurrence of 

a GSE or agency demand that a creditor 

repurchase a loan or indemnify the 

agency for an insurance claim does not 

necessarily mean that the loan is not a 

qualified mortgage. 

Proposed comment 43(e)(4)–5 

specifically provides that a repurchase 

or indemnification demand by the GSEs, 

HUD, VA, USDA, or RHS is not 

dispositive in ascertaining qualified 

mortgage status. Much as qualified 

mortgage status under the general 

definition in § 1026.43(e)(2) may 

typically turn on whether the 

consumer’s debt-to-income ratio at the 

time of consummation was equal to or 

less than 43%, qualified mortgage status 

under § 1026.43(e)(4) may typically turn 

on whether the loan was eligible for 

purchase, guarantee, or insurance at the 

time of consummation. Thus, for 

example, a demand for repurchase or 

indemnification based on postconsummation GSE or agency 

requirements would therefore not be 

relevant to qualified mortgage status. 

Rather, only reasons for a repurchase or 

indemnification demand that 

specifically apply to the qualified 

mortgage status of the loan under 

§ 1026.43(e)(4) would be relevant, as 

discussed above in connection with 

proposed comment 43(e)(4)–4. 

Moreover, the mere fact that a demand 

has been made, or even resolved, as 

between a creditor and GSE or agency 

is not dispositive with regard to 

eligibility for purposes of 

§ 1026.43(e)(4), as those parties are 

involved in an ongoing business 

relationship rather than an adjudicatory 

process. However, evidence of whether 

a particular loan satisfied the 

§ 1026.43(e)(4) eligibility criteria at 

consummation may be brought to light 

in the course of dealings over a 

particular demand, depending on the 

facts and circumstances. Such 

evidence—like any evidence discovered 

after consummation that relates to the 

facts as of the time of consummation— 

may be relevant in assessing whether a 

particular loan is a qualified mortgage. 

To clarify this point further, proposed 

comment 43(e)(4)–5 also includes two 

examples of relevant evidence 

discovered after consummation. In the 

first example, assume eligibility to 

purchase a loan was based in part on the 

consumer’s employment income of 

$50,000 per year. The creditor uses the 

income figure in obtaining an approve/ 

eligible recommendation from DU. A 

quality control review, however, later 

determines that the documentation 

provided and verified by the creditor to 

comply with Fannie Mae requirements 

did not support the reported income of 

$50,000 per year. As a result, Fannie 

Mae demands that the creditor 

repurchase the loan. Assume that the 

quality control review is accurate, and 

that DU would not have issued an 

approve/eligible recommendation if it 

had been provided the accurate income 

figure. The Bureau believes that, given 

the facts and circumstances of this 

example, the DU determination at the 

time of consummation was invalid 

because it was based on inaccurate 

information provided by the creditor; 

therefore, the loan was never a qualified 

mortgage. 

For the second example, assume a 

creditor delivered a loan, that the 

creditor determined was a qualified 

mortgage at the time of consummation, 

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34The Bureau notes that the specific 43 percent 

debt-to-income requirement applies only to 

qualified mortgages under § 1026.43(e)(2). The 

specific debt-to-income ratio requirement does not 

apply to loans that meet the qualified mortgage 

definitions in § 1026.43(e)(4) or (f), or that are not 

qualified mortgages and instead comply with the 

general ability-to-repay standard. 

to Fannie Mae for inclusion in a 

particular To-Be-Announced Mortgage 

Backed Security (MBS) pool of loans. 

The data submitted by the creditor at 

the time of loan delivery indicated that 

the various loan terms met the product 

type, weighted-average coupon (WAC), 

weighted-average maturity (WAM), and 

other MBS pooling criteria, and MBS 

issuance disclosures to investors reflect 

this loan data. However, after delivery 

and MBS issuance, a quality control 

review determines that the loan violates 

the pooling criteria. The loan still meets 

eligibility requirements for other Fannie 

Mae products and loan terms. Fannie 

Mae, however, requires the creditor to 

repurchase the loan due to the violation 

of MBS pooling requirements. Assume 

that the quality control review 

determination is accurate. The reason 

the creditor repurchases this loan is not 

relevant to the loan’s qualified mortgage 

status. The loan still meets other Fannie 

Mae eligibility requirements and 

therefore remains a qualified mortgage 

based on these facts and circumstances. 

The Bureau invites comment on 

proposed comment 43(e)(4)–5 in 

general. The Bureau also solicits 

comment on whether additional 

examples or other particular situations 

should be provided or whether 

alternatives for eligibility other than 

relationship to ability-to-repay 

standards should be adopted that would 

determine the qualified mortgage status 

of a loan. 

Section 1026.43(e)(4) was adopted 

pursuant to the Bureau’s exception and 

adjustment authority under TILA 

section 105(a) and its authority to 

revise, add to, or subtract from criteria 

that define a qualified mortgage under 

TILA section 129C(b)(3)(B)(i). The 

Bureau proposes these revisions to 

comment 43(e)(4)–4 and proposes new 

comment 43(e)(4)–5 to provide 

additional clarity to § 1026.43(e)(4) 

pursuant to that authority. 

Appendix Q to Part 1026—Standards for 

Determining Monthly Debt and Income 

Section 1026.43(e)(2) defines 

‘‘qualified mortgages’’ as loans that 

satisfy all of the qualified mortgage 

criteria required by the statute 

(including underwriting to the 

maximum interest rate during the first 

five years of the loan and consideration 

and verification of the consumer’s 

income or assets), for which the creditor 

considers and verifies the consumer’s 

current debt obligations, alimony, and 

child support, and that have a total (i.e., 

back-end) monthly DTI of no greater 

than 43 percent, following the standards 

for ‘‘debt’’ and ‘‘income’’ set forth in 

appendix Q to the rule. The Bureau 

adopted the 43 percent DTI requirement 

and other modifications to the statutory 

criteria pursuant to its authorities under 

TILA section 129C and 105(a).34

The Bureau also adopted and 

incorporated into the rule appendix Q, 

which contains detailed requirements 

for determining ‘‘debt’’ and ‘‘income’’ 

for the purposes of the DTI calculation 

based on the definitions of those terms 

set forth in HUD Handbook 4155.1, 

Mortgage Credit Analysis for Mortgage 

Insurance on One-to-Four-Unit 

Mortgage Loans. The standards in the 

Handbook are used by creditors 

originating FHA-insured residential 

mortgages to determine and verify a 

consumer’s total monthly debt and 

monthly income. For the purposes of 

appendix Q, the Bureau largely codified 

the Handbook, but modified various 

portions of it to remove standards and 

references unique to the FHA 

underwriting process, such as references 

to the TOTAL Scorecard Instructions 

and certain borrower qualification 

procedures. 

As discussed in the preamble to the 

2013 ATR Final Rule, the Bureau 

believes that, to the extent possible, 

using existing FHA underwriting 

guidelines as the foundation for 

determining ‘‘debt’’ and ‘‘income’’ for 

DTI purposes provides creditors with 

well-established standards for 

determining whether a loan is a 

qualified mortgage under 

§ 1026.43(e)(2). The Bureau also 

believes that this approach is consistent 

with the proposed approach to defining 

debt and income in the 2011 Proposed 

Qualified Residential Mortgage Rule 

(QRM), thus facilitating compliance. 

However, the Bureau stated it would 

continue to consult with the Federal 

agencies responsible for the QRM 

rulemaking on possible changes to FHA 

guidelines that may occur over time, 

which could affect the definition of debt 

and income in both rules. 

Since publication of the 2013 ATR 

Final Rule, the Bureau has received 

numerous inquiries from industry 

regarding provisions of the appendix 

that they believe were intended to 

function as flexible underwriting 

standards used by the FHA for 

insurance underwriting purposes, but 

now have been codified as bright-line 

requirements for determining debt and 

income. For example, some provisions 

of the appendix as adopted would 

require creditors to assess a consumer’s 

qualifications for employment, predict 

whether a consumer’s income will 

continue for up to three years, or assess 

economic conditions that may affect 

future income for self-employed 

consumers. Stakeholders have raised 

concerns that these provisions may be 

properly suited for the purposes of a 

holistic and qualitative underwriting 

analysis—such as a determination of 

insurance eligibility where the FHA has 

discretion to grant waivers or variances 

based on a given set of facts or offer 

informal guidance—but are not wellsuited to function as regulatory 

requirements that are not subject to 

discretionary variance or waiver on an 

individual basis. Stakeholders also 

pointed out that many of these 

provisions (such as requirements to 

evaluate a consumer’s qualification for 

his or her job) provide little clarity or 

guidance for creditors to follow to 

comply with them—again a 

consequence of their original purpose to 

function as discretionary ‘‘guidelines’’ 

and not bright-line requirements. 

Similarly, stakeholders have expressed 

concerns that the broad nature of these 

provisions could undermine the 

presumption of compliance available to 

creditors who make qualified mortgages 

and expose them to significant litigation 

risk. 

As discussed below, the Bureau 

adopted these provisions of appendix Q 

largely for consistency with existing 

underwriting standards used by FHA, 

but in light of the concerns raised by 

stakeholders agrees that certain 

provisions as adopted are not properly 

suited to function as regulations. The 

Bureau intended appendix Q to serve as 

a reliable mechanism for creditors to 

evaluate income and debts for the 

purpose of determining DTI and in turn 

the qualified mortgage status of a loan. 

It did not intend for appendix Q to 

function as a general and flexible 

underwriting policy for assessing risk 

(as it is used by FHA in the context of 

insurance), and recognizes that the 

Bureau will not have the same level of 

discretion regarding the application of 

appendix Q. Thus, in light of these 

inquiries, the Bureau proposes the 

following revisions to appendix Q to 

facilitate compliance when determining 

DTI and to further the purposes of the 

ATR Rule. 

In addition, the Bureau proposes 

other revisions to clarify the application 

of appendix Q, as well as general 

technical and wording changes 

throughout appendix Q for consistency 

and clarification, including technical 

changes to conform to the specific 

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purpose that appendix Q serves in the 

2013 ATR Final Rule, as opposed to the 

function that the HUD Handbook serves 

for FHA underwriting. 

I. CONSUMER ELIGIBILITY 

A. Section I.A. Stability of Income 

The Bureau proposes revising the 

criteria in appendix Q for determining 

whether a consumer’s income is 

‘‘stable’’ for the purposes of DTI. 

Appendix Q as adopted requires in 

section I.A.3 that creditors evaluate the 

‘‘probability of continued employment’’ 

by analyzing, among other things, (i) 

The consumer’s past employment 

record; (ii) the consumer’s qualification 

for the position; (iii) the consumer’s 

previous training and education; and 

(iv) the employer’s confirmation of 

continued employment. Stakeholders 

have raised concerns that, beyond 

analysis of a consumer’s past 

employment record and current 

employment status, each of these 

requirements is incompatible with 

appendix Q’s purpose of providing clear 

rules for determining debt and income, 

and is likely to result in compliance 

difficulty and significant exposure to 

litigation risk for creditors attempting to 

avoid such risk by originating qualified 

mortgages and thereby taking advantage 

of the presumption of compliance. For 

instance, stakeholders have informed 

the Bureau that many employers are 

likely to be unwilling for various 

reasons (including but not limited to 

economic uncertainty) to confirm that a 

consumer’s employment will continue 

into the future, and similarly creditors 

may be unqualified to evaluate a 

consumer’s education, training, and job 

qualifications. The Bureau believes that 

requirements for a creditor to evaluate a 

consumer’s training, education, and 

qualifications for his or her position are 

not well-suited to function as 

regulations designed to enable creditors 

to determine debts and income and in 

turn calculate a DTI ratio, and may 

increase exposure to litigation risk. In 

the context of codified regulations as 

opposed to guidelines subject to waiver, 

variance, or other guidance, it is not 

entirely clear what creditors would need 

to do in order to comply with them, or 

how those determinations would affect 

a consumer’s income for the purpose of 

calculating DTI. In turn this could 

increase the risk of litigation to creditors 

attempting to operate in qualified 

mortgage space. 

The Bureau believes that requiring 

creditors to obtain an employer’s 

confirmation of the consumer’s 

continued employment will not 

function properly as a regulatory 

requirement because employers likely 

will be unwilling to provide any 

confirmation of employment continuing 

beyond current, ongoing employment. 

Without the benefit of waiver or 

variance, such a requirement could 

serve to disqualify any such consumer’s 

employment income from being 

included in the DTI calculation—which 

would frustrate access to credit. 

For these reasons, the Bureau 

proposes to amend appendix Q in 

section I.A.3 to remove the requirements 

that creditors determine the ‘‘probability 

of continued employment’’ by 

considering a consumer’s 

‘‘qualifications for the position’’ and 

‘‘previous training and education.’’ 

Instead, the Bureau is proposing to 

amend the provision to require creditors 

to examine past and current 

employment. The Bureau is also 

proposing to remove the requirement 

that creditors obtain ‘‘the employer’s 

confirmation of continued employment’’ 

and instead require only that the 

creditor examine a confirmation of 

current, ongoing employment. 

The Bureau believes that a 

confirmation of current, ongoing 

employment status is adequate to verify 

employment for purposes of 

determining income and is proposing to 

amend appendix Q accordingly. In 

addition, the Bureau is adding for 

clarification purposes a proposed note 

that states creditors may assume that 

employment is ongoing if a consumer’s 

employer verifies current employment 

and does not indicate that employment 

has been, or is set to be terminated. The 

proposed note would make clear that 

creditors should not rely upon a 

verification of current employment that 

includes an affirmative statement that 

the employment is likely to cease, such 

as a statement that indicates the 

employee has given (or been given) 

notice of employment suspension or 

termination. The Bureau also is 

proposing other technical changes to 

section I.A for clarification purposes; no 

substantive change is intended by these 

amendments. 

B. Section I.B. Salary, Wage and Other 

Forms of Income 

The ‘‘General Policy on Consumer 

Income Analysis’’ in section I.B.1.a of 

appendix Q as adopted states that 

creditors must analyze the income for 

each consumer who will be obligated for 

the mortgage debt to determine whether 

his/her income level can be reasonably 

expected to continue ‘‘through at least 

the first three years of the mortgage 

loan.’’ Similarly, sections I.B.2 and I.B.3 

of appendix Q as adopted require that 

creditors determine whether overtime 

and bonus income ‘‘will likely 

continue’’ and that they ‘‘establish and 

document an earnings trend for 

overtime and bonus income.’’ With 

respect to these provisions, the Bureau 

received inquiries from industry 

stakeholders similar to those discussed 

above, noting that these provisions 

codify general, forward-looking 

standards that are better suited for the 

purposes of a holistic and qualitative 

underwriting analysis (such as the FHA 

guidelines for determining insurance 

eligibility) and may not function 

properly as regulations. And, because 

the Bureau may not have the same 

flexibility to waive or grant variances on 

an individual basis regarding the 

application of appendix Q that the FHA 

has with respect to its underwriting 

requirements, these provisions will 

undermine the purpose of appendix Q 

to serve as a reliable mechanism for 

evaluating income and debts for the 

purpose of determining the qualified 

mortgage status of a loan, and also 

increase the risk of litigation. 

The Bureau believes that the intended 

purpose of appendix Q will not be 

served by requiring creditors to predict 

a consumer’s employment status up to 

three years after application. As noted 

above, the Bureau largely adopted these 

provisions from the existing FHA 

underwriting guidelines for the 

purposes of consistency with existing 

standards used by industry to evaluate 

debts and income. However, the Bureau 

believes that these requirements are 

unlikely to function properly as 

regulatory requirements and may 

frustrate appendix Q’s purpose of 

providing clear and reliable standards 

for determining debts and income for 

purposes of the 2013 ATR Final Rule. 

The Bureau also believes that the broad 

nature of these provisions could 

increase the risk of litigation to creditors 

attempting to take advantage of the 

qualified mortgage presumption of 

compliance. For these reasons, the 

Bureau is proposing amendments to 

section I.B.1 of appendix Q to explain 

and clarify the criteria for calculating a 

consumer’s employment income and to 

determine whether a consumer’s income 

is continuing for the purposes of the DTI 

calculation. The Bureau also is 

proposing to amend section I.B.1.a to 

require creditors to evaluate only 

whether a consumer’s income level 

would not be reasonably expected to 

continue based on the documentation 

provided, with no three-year 

requirement. The Bureau believes that 

creditors should be required to analyze 

recent and current employment, along 

with any evidence in the applicant’s 

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25650 Federal Register / Vol. 78, No. 85 / Thursday, May 2, 2013 / Proposed Rules 

documentation indicating whether 

employment is likely to continue. The 

Bureau is proposing to add a note would 

make clear that creditors should not 

assume that a consumer’s wage or salary 

income can be reasonably expected to 

continue if the verification of current 

employment includes an affirmative 

statement that the employment is likely 

to cease, such as a statement that 

indicates the employee has given (or 

been given) notice of employment 

suspension or termination. However, if 

the consumer’s application and the 

employment confirmation indicate that 

the consumer is currently employed and 

provide no such indication that 

employment will cease, the Bureau 

believes the creditor should be able to 

use that consumer’s income without an 

obligation to predict whether or not that 

consumer will be employed on some 

future date. 

For similar reasons, the Bureau also is 

proposing changes to sections 1.B.2 and 

1.B.3, regarding bonus and overtime 

income. The Bureau is proposing to 

eliminate the requirement in section 

I.B.2.a that creditors determine whether 

such income ‘‘will continue.’’ Instead, 

creditors must focus on evaluating the 

consumer’s documented bonus and 

overtime income history for the past two 

years and any submitted documentation 

indicating whether the income likely 

will cease. The Bureau recognizes that 

bonus and overtime income may vary 

from year to year and generally may be 

less reliable than salary. However, in 

certain occupations, overtime and bonus 

income may be an integral and reliable 

component of the consumer’s income. 

The Bureau believes that creditors must 

confirm that bonus and overtime 

income is not anomalous. Even so, the 

Bureau believes the requirement to 

analyze the consumer’s two-year 

overtime bonus and overtime history 

and to verify that the submitted 

documentation does not indicate bonus 

or overtime income will cease 

adequately addresses this concern while 

satisfying the purposes of the qualified 

mortgage provision. 

The Bureau further is proposing 

clarifications to the provisions in 

section I.B.11 of appendix Q as adopted 

explaining how to account for Social 

Security income. Section I.B.11 as 

adopted requires that Social Security 

income either be verified by the Social 

Security Administration or through 

Federal tax returns. While the provision 

as adopted references Federal tax 

returns, the Bureau believes that a 

Social Security benefit verification letter 

may more easily provide proof of the 

receipt of Social Security benefits and 

their continuance. Thus, the Bureau is 

proposing to amend section I.B.11 to 

remove the option of using Federal tax 

returns and instead require creditors to 

obtain a benefit verification letter issued 

by the Social Security Administration. 

The Bureau also proposes to clarify in 

section I.B.11 that a creditor shall 

assume a benefit is ongoing and will not 

expire within three years absent 

evidence of expiration. The Bureau 

believes this would provide a more 

workable and accurate standard for 

verification of Social Security income. 

C. Section I.D. General Information on 

Self-Employed Consumers and Income 

Analysis 

As adopted, section I.D of appendix Q 

permits income from self-employed 

consumers to be considered income for 

the purposes of the DTI calculation if 

certain criteria are met, including 

various documentation requirements 

and analysis of the financial strength of 

the consumer’s business. Among the 

documentation requirements in section 

I.D.4 is the requirement to provide a 

‘‘business credit report for corporations 

and ‘S’ corporations.’’ The analysis of 

the financial strength of the business in 

section I.D.6 requires that the creditor 

carefully analyze the ‘‘source of the 

business’s income’’ and the ‘‘general 

economic outlook of similar businesses 

in the area.’’ Like other provisions of 

appendix Q discussed above, the Bureau 

has received inquiries from stakeholders 

concerning these requirements and also 

noted compliance difficulties and 

increased risk of litigation that may 

arise from them. Specifically, industry 

has raised concerns that business credit 

reports can be expensive and difficult to 

obtain, and a requirement to assess 

economic conditions for geographic 

areas both costly and difficult, as well 

as imprecise—which is contrary to the 

purpose of appendix Q to provide 

reliable and uniform standards for 

assessing income. Furthermore, the 

broad and fact-specific nature of this 

requirement could also increase 

litigation risk by undermining the 

qualified mortgage presumption of 

compliance. 

The Bureau proposes to make several 

amendments to these income stability 

requirements for self-employed 

consumers. The first amendment 

eliminates the requirement in current 

section I.D.4 that self-employed 

consumers provide a business credit 

report for corporations and ‘‘S’’ 

corporations. The Bureau recognizes 

that business credit reports for many 

smaller businesses can be difficult or 

very expensive to obtain. The Bureau 

believes that these reports may provide 

some valuable information for the 

purposes of an underwriting analysis, 

but are less suited to function as a 

requirement to determining income for 

self-employed consumers. 

The second proposed amendment 

eliminates two requirements under the 

requirement to analyze a business’s 

financial strength in section I.D.6. 

Current section I.D.6 requires creditors 

(i) to evaluate the sources of the 

business’s income and (ii) to evaluate 

the general economic outlook for similar 

businesses in the area. The Bureau 

believes that both of these requirements 

demand that the creditor engage in 

complex analysis without providing 

clarity concerning what types of 

evaluations are satisfactory for the 

purpose of complying with the rule. As 

discussed above, such a provision is 

better-suited to function as part of an 

underwriting analysis subject to waiver, 

variance, and guidance rather than a 

regulatory rule—and as adopted could 

increase the risk of litigation risk to 

creditors. Accordingly, the proposal 

would eliminate these requirements. 

The Bureau’s proposal also makes 

technical revisions to section I.D. to 

accommodate removal of these 

requirements. 

II. NON-EMPLOYMENT RELATED 

CONSUMER INCOME 

A. Section II.B. Investment and Trust 

Income 

Section II.B.2 of appendix Q as 

adopted permits trust income to be 

considered income for the purposes of 

the DTI calculation ‘‘if guaranteed, 

constant payments will continue for at 

least the first three years of the mortgage 

term.’’ Current appendix Q then 

provides a list of required 

documentation consumers must provide 

but does not otherwise specify the 

universe creditors must review to make 

and support the three-year 

determination. 

For clarification purposes, the Bureau 

proposes to delineate more clearly the 

breadth of the analysis for trust income 

by specifying that the analysis is limited 

to the documents appendix Q requires. 

Specifically, the proposal revises ‘‘if 

guaranteed, constant payments will 

continue for at least the first three years 

of the mortgage term’’ by adding ‘‘as 

evidenced by trust income 

documentation.’’ Under the current 

requirements in section II.B.2, there is 

no specific cut-off for the amount of 

diligence required or information that 

must be collected to satisfy the 

requirement. The Bureau believes that 

the amendment will facilitate 

compliance and help ensure access to 

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Federal Register / Vol. 78, No. 85 / Thursday, May 2, 2013 / Proposed Rules 25651 

35Section 1022(b)(2)(A) of the Dodd-Frank Act, 

12 U.S.C. 5521(b)(2), directs the Bureau, when 

prescribing a rule under the Federal consumer 

financial laws, to consider the potential benefits 

and costs of regulation to consumers and covered 

persons, including the potential reduction of access 

by consumers to consumer financial products or 

services; the impact on insured depository 

institutions and credit unions with $10 billion or 

less in total assets as described in section 1026 of 

the Dodd-Frank Act; and the impact on consumers 

in rural areas. Section 1022(b)(2)(B) of the DoddFrank Act directs the Bureau to consult with 

appropriate prudential regulators or other Federal 

agencies regarding consistency with prudential, 

market, or systemic objectives that those agencies 

administer. 

36The Bureau has discretion in any rulemaking 

to choose an appropriate scope of analysis with 

respect to potential benefits and costs and an 

appropriate baseline. 

credit by making the standard clear and 

easy to apply. 

For notes receivable income to be 

considered income, section II.B.3.a of 

appendix Q as adopted requires that the 

consumer provide a copy of the note 

and documentary evidence that 

payments have been consistently made 

over the prior 12 months. If the 

consumer is not the original payee on 

the note, however, section II.B.3.b 

requires the creditor to establish that the 

consumer is ‘‘now a holder in due 

course, and able to enforce the note.’’ 

The Bureau proposes to eliminate the 

requirement that the consumer be a 

holder in due course, which may 

require further investigation than is 

necessary to establish that the income is 

effective for the purposes of the rule. 

The proposal would amend appendix Q 

to require only that the consumer is able 

to enforce the note. 

B. Section II.D. Rental Income 

As adopted, appendix Q allows 

creditors to consider certain rental 

income payable to the consumer taking 

out the loan for the purposes of the DTI 

calculation in section II.D. Section 

II.D.3.a states that it is not acceptable to 

consider income from roommates in a 

single-family property occupied as the 

consumer’s primary residence as 

‘‘income’’ for the purposes of 

determining the consumer’s DTI, but 

that it is acceptable to consider rental 

income payable to the consumer from 

boarders related by blood, marriage, or 

law. The Bureau adopted this provision 

of appendix Q for consistency with 

existing FHA standards used by 

industry. 

Since publication of the Final Rule, 

the Bureau has become aware of 

concerns that may arise from 

requirements that boarders be related to 

the homeowner in order for rental 

income payable to the consumer to be 

considered ‘‘income’’ for DTI purposes. 

The Bureau does not believe that the 

relation requirement is useful in 

determining whether or not the rental 

income should be used in determining 

DTI. The Bureau accordingly proposes 

to eliminate the requirement that 

boarders be related by blood, marriage, 

or law from section II.D.3.a. 

The Bureau adopted Appendix Q 

under its TILA section 105(a) and its 

authority under TILA section 

129C(b)(2)(vi) to establish guidelines or 

regulations relating to ratios of total 

monthly debt to monthly income for the 

purposes of defining qualified 

mortgages and, more broadly, its 

authority under 129C(b)(3) to prescribe 

rules to implement the qualified 

mortgage and revise, add to or subtract 

form the qualified mortgage criteria. The 

Bureau invites comment on these 

proposed changes to appendix Q. The 

Bureau also seeks comment on other 

potential amendments that may better 

facilitate compliance while furthering 

the purposes of the qualified mortgage 

provision and the 2013 ATR Final Rule. 

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

Act 

A. Overview 

The Bureau is considering the 

potential benefits, costs, and impacts of 

the proposed rule.35 The Bureau 

requests comment on the preliminary 

analysis presented below as well as 

submissions of additional data that 

could inform the Bureau’s analysis of 

the benefits, costs, and impacts of the 

proposed rule. The Bureau has 

consulted, or offered to consult with, 

the prudential regulators, SEC, HUD, 

VA, USDA, FHFA, the Federal Trade 

Commission, and the Department of the 

Treasury, including regarding 

consistency with any prudential, 

market, or systemic objectives 

administered by such agencies. 

As noted above, this rule proposes 

amendments to some of the final 

mortgage rules issued by the Bureau in 

January of 2013. These amendments 

clarify or correct provisions on (1) The 

small servicer exemption from the new 

servicing rules; (2) the use of GSE and 

federal agency purchase, guarantee, or 

insurance eligibility for determining 

qualified mortgage status; (3) the 

determination of debt and income for 

purposes of originating qualified 

mortgages; and (4) the relation to State 

law of Regulation X’s servicing 

provisions. 

B. Potential Benefits and Costs to 

Consumers and Covered Persons 

The Bureau believes that, compared to 

the baseline established by the final 

rules issued in January 2013,36 the 

primary benefit of most of the 

provisions of the proposed rule to both 

consumers and covered persons is an 

increase in clarity and precision of the 

regulations and an accompanying 

reduction in compliance costs. More 

specifically, the provisions that would 

clarify: (1) The definition of qualified 

mortgage under the test that they be 

eligible for purchase or guarantee by the 

GSEs or insured or guaranteed by the 

agencies for the purposes of the 

provisions adopted by the 2013 ATR 

Final Rule; (2) the proposed new 

comment which provides that a 

repurchase or indemnification demand 

by the GSEs, FHA, VA, USDA, or RHS 

is not determinative of qualified 

mortgage status; (3) the proposed 

changes to appendix Q of Regulation Z 

assisting creditors in determining a 

consumer’s debt-to-income ratio (DTI); 

and, (4) the proposed amendment to 

Regulation X to clarify that the 

preemption provisions in Regulation X 

do not preempt the field of regulation of 

the practices covered by RESPA and 

Regulation X all should add clarity to 

the rule and thus lower costs of 

compliance. The Bureau believes that 

each of these changes simply conform 

the rules to the policies intended by the 

final rules issued in January. 

Accordingly, the discussion of benefits, 

costs, or impacts discussed in part VII 

of each of the January rules considered 

each of the proposed provisions. 

One of the proposed changes may 

slightly alter whether particular persons 

are covered by a relevant exemption. 

Specifically, the proposal would modify 

the text of the Regulation Z servicing 

rule to clarify scope and application of 

the small servicer exemption, to clarify 

the application of the small servicer 

exemption with regard to servicer/ 

affiliate and master servicer/subservicer 

relationships, and to exclude mortgage 

loans voluntarily serviced for an 

unaffiliated entity without 

remuneration, reverse mortgage 

transactions, and mortgage loans 

secured by consumers’ interest in 

timeshare plans from being considered 

when determining whether a servicer 

qualifies as a small servicer. In total, 

these changes are expected to grant the 

small servicer exemption to a larger 

number of firms: These entities should 

benefit from lower costs while their 

customers may lose some of the 

protections embedded in the relevant 

rules. The nature and magnitude of 

these protections and their potential 

costs are described in part VII of both of 

the 2013 Mortgage Servicing Final 

Rules. 

The proposed rule is not expected to 

have a differential impact on depository 

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25652 Federal Register / Vol. 78, No. 85 / Thursday, May 2, 2013 / Proposed Rules 

37 5 U.S.C. 601 et seq. 

38 5 U.S.C. 603(a). For purposes of assessing the 

impacts of the proposed rule on small entities, 

‘‘small entities’’ is defined in the RFA to include 

small businesses, small not-for-profit organizations, 

and small government jurisdictions. 5 U.S.C. 601(6). 

A ‘‘small business’’ is determined by application of 

Small Business Administration regulations and 

reference to the North American Industry 

Classification System (NAICS) classifications and 

size standards. 5 U.S.C. 601(3). A ‘‘small 

organization’’ is any ‘‘not-for-profit enterprise 

which is independently owned and operated and is 

not dominant in its field.’’ 5 U.S.C. 601(4). A ‘‘small 

governmental jurisdiction’’ is the government of a 

city, county, town, township, village, school 

district, or special district with a population of less 

than 50,000. 5 U.S.C. 601(5). 

39 5 U.S.C. 605(b). 

40 5 U.S.C. 605(c). 

41 5 U.S.C. 609. 

institutions and credit unions with $10 

billion or less in total assets as 

described in section 1026 or on 

consumers in rural areas. Given the 

small changes for the proposed rule, the 

Bureau does not believe that the 

proposed rule would meaningfully 

reduce consumers’ access to consumer 

products and services. 

VI. Regulatory Flexibility Act Analysis 

The Regulatory Flexibility Act (RFA) 

generally requires an agency to conduct 

an initial regulatory flexibility analysis 

(IRFA) and a final regulatory flexibility 

analysis (FRFA) of any rule subject to 

notice-and-comment rulemaking 

requirements.37 These analyses must 

‘‘describe the impact of the proposed 

rule on small entities.’’ 38 An IRFA or 

FRFA is not required if the agency 

certifies that the rule will not have a 

significant economic impact on a 

substantial number of small entities,39

or if the agency considers a series of 

closely related rules as one rule for 

purposes of complying with the IRFA or 

FRFA requirements.40 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.41

This rulemaking is part of a series of 

rules that have revised and expanded 

the regulatory requirements for entities 

that originate or service mortgage loans. 

In January 2013, the Bureau adopted the 

2013 ATR Final Rule and the 2013 

Mortgage Servicing Final Rules, along 

with other related rules mentioned 

above. Part VIII of the supplementary 

information to each of these rules set 

forth the Bureau’s analyses and 

determinations under the RFA with 

respect to those rules. See 78 FR 10861 

(Regulation X), 78 FR 10994 (Regulation 

Z—servicing), 78 FR 6575 (Regulation 

Z—ATR). The Bureau also notes that 

any lack of clarity, along with the 

resulting potential confusion or 

compliance burden, was inadvertent; as 

such, its Regulatory Flexibility analyses 

considered the impact of the provisions 

at issue in this rule as if no such lack 

of clarity existed. Because these rules 

qualify as ‘‘a series of closely related 

rules,’’ for purposes of the RFA, the 

Bureau relies on those analyses and 

determines that it has met or exceeded 

the IRFA requirement. 

In the alternative, the Bureau also 

concludes that the proposed rule would 

not have a significant impact on a 

substantial number of small entities. As 

noted, the proposal generally clarifies 

the existing rule. These changes would 

not have a material impact on small 

entities. In the instance of the small 

servicer exemption, the rule likely 

reduces burden for the affected firms. 

Therefore, the Bureau affirms that the 

proposal would not have a significant 

impact on a substantial number of small 

entities. 

VII. Paperwork Reduction Act 

This proposed rule would amend 12 

CFR part 1026 (Regulation Z), which 

implements the Truth in Lending Act 

(TILA), and 12 CFR part 1024 

(Regulation X), which implements the 

Real Estate Settlement Procedures Act 

(RESPA). Regulations Z and X currently 

contain collections of information 

approved by OMB. The Bureau’s OMB 

control number for Regulation Z is 

3170–0015 and for Regulation X is 

3170–0016. However, the Bureau has 

determined that this proposed rule 

would not materially alter these 

collections of information or impose any 

new recordkeeping, reporting, or 

disclosure requirements on the public 

that would constitute collections of 

information requiring approval under 

the Paperwork Reduction Act, 44 U.S.C. 

3501 et seq. Comments on this 

determination may be submitted to the 

Bureau as instructed in the ADDRESSES

section of this notice and to the 

attention of the Paperwork Reduction 

Act Officer. 

List of Subjects 

12 CFR Part 1024 

Condominiums, Consumer protection, 

Housing, Mortgage servicing, Mortgages, 

Recordkeeping requirements, Reporting. 

12 CFR Part 1026 

Advertising, Consumer protection, 

Credit, Credit unions, Mortgages, 

National banks, Reporting and 

recordkeeping requirements, Savings 

associations, Truth in lending. 

Authority and Issuance 

For the reasons set forth in the 

preamble, the Bureau proposes to 

further amend Regulation X, 12 CFR 

part 1024, as amended by the final rule 

published on February 14, 2013, 78 FR 

10695, and further amend Regulation Z, 

12 CFR part 1026, as amended by the 

final rules published on January 30, 

2013, 78 FR 6407, and February 14, 

2013, 78 FR 10901, as set forth below: 

PART 1024—REAL ESTATE 

SETTLEMENT PROCEDURES ACT 

(REGULATION X) 

■ 1. The authority citation for part 1024 

continues to read as follows: 

Authority: 12 U.S.C. 2603–2605, 2607, 

2609, 2617, 5512, 5532, 5581. 

■ 2. In subpart A, the heading is revised 

to read as follows: 

Subpart A—General Provisions 

■ 3. Section 1024.5 is amended by 

adding paragraph (c) to read as follows: 

§ 1024.5 Coverage of RESPA. 

* * * * * 

(c) Relation to State laws. (1) State 

laws that are inconsistent with RESPA 

or this part are preempted to the extent 

of the inconsistency. However, RESPA 

and these regulations do not annul, 

alter, affect, or exempt any person 

subject to their provisions from 

complying with the laws of any State 

with respect to settlement practices, 

except to the extent of the 

inconsistency. 

(2) Upon request by any person, the 

Bureau is authorized to determine if 

inconsistencies with State law exist; in 

doing so, the Bureau shall consult with 

appropriate Federal agencies. 

(i) The Bureau may not determine that 

a State law or regulation is inconsistent 

with any provision of RESPA or this 

part, if the Bureau determines that such 

law or regulation gives greater 

protection to the consumer. 

(ii) In determining whether provisions 

of State law or regulations concerning 

affiliated business arrangements are 

inconsistent with RESPA or this part, 

the Bureau may not construe those 

provisions that impose more stringent 

limitations on affiliated business 

arrangements as inconsistent with 

RESPA so long as they give more 

protection to consumers and/or 

competition. 

(3) Any person may request the 

Bureau to determine whether an 

inconsistency exists by submitting to 

the address established by the Bureau to 

request an official interpretation, a copy 

of the State law in question, any other 

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law or judicial or administrative 

opinion that implements, interprets or 

applies the relevant provision, and an 

explanation of the possible 

inconsistency. A determination by the 

Bureau that an inconsistency with State 

law exists will be made by publication 

of a notice in the Federal Register. 

‘‘Law’’ as used in this section includes 

regulations and any enactment which 

has the force and effect of law and is 

issued by a State or any political 

subdivision of a State. 

(4) A specific preemption of 

conflicting State laws regarding notices 

and disclosures of mortgage servicing 

transfers is set forth in § 1024.33(d). 

Subpart B—Mortgage Settlement and 

Escrow Accounts 

■ 4. Section 1024.13 is removed and 

reserved. 

■ 5. In Supplement I to Part 1024, 

Subpart A is added to read as follows: 

Supplement I to Part 1024—Official 

Bureau Interpretations 

* * * * * 

Subpart A—General Provisions 

Section 1024.5 Coverage of RESPA 

5(c) Relation to State laws. 

Paragraph 5(c)(1). 

1. State laws that are in conflict with 

the requirements of RESPA or 

Regulation X may be preempted by 

RESPA or Regulation X. State laws that 

give greater protection to consumers do 

not conflict with and are not preempted 

by RESPA or Regulation X. In addition, 

nothing in RESPA or Regulation X 

should be construed to preempt the 

entire field of regulation of the practices 

covered by RESPA or Regulation X, 

including the regulations in Subpart C 

with respect to mortgage servicers or 

mortgage servicing. 

* * * * * 

PART 1026—TRUTH IN LENDING 

(REGULATION Z) 

■ 6. The authority citation for part 1026 

is revised 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 

■ 7. Section 1026.41 is amended by 

revising paragraphs (a)(1), (e)(4)(ii), and 

(e)(4)(iii) to read as follows: 

§ 1026.41 Periodic statements for 

residential mortgage loans. 

(a) In general. (1) Scope. This section 

applies to a closed-end consumer credit 

transaction secured by a dwelling, 

unless an exemption in paragraph (e) of 

this section applies. A closed-end 

consumer credit transaction secured by 

a dwelling is referred to as a mortgage 

loan for purposes of this section. 

* * * * * 

(e) * * * 

(4) * * * 

(ii) Small servicer defined. A small 

servicer is a servicer that either: 

(A) Services, together with any 

affiliates, 5,000 or fewer mortgage loans, 

for all of which the servicer (or an 

affiliate) is the creditor or assignee; or 

(B) Is a Housing Finance Agency, as 

defined in 24 CFR 266.5. 

(iii) Small servicer determination. In 

determining whether a servicer is a 

small servicer, the servicer is evaluated 

based on the mortgage loans serviced by 

the servicer and any affiliates as of 

January 1 for the remainder of the 

calendar year. A servicer that ceases to 

qualify as a small servicer will have six 

months from the time it ceases to 

qualify or until the next January 1, 

whichever is later, to comply with any 

requirements from which the servicer is 

no longer exempt as a small servicer. 

The following mortgage loans are not 

considered in determining whether a 

servicer qualifies as a small servicer: 

(A) Mortgage loans voluntarily 

serviced by the servicer for a creditor or 

assignee that is not an affiliate of the 

servicer and for which the servicer does 

not receive any compensation or fees. 

(B) Reverse mortgage transactions. 

(C) Mortgage loans secured by 

consumers’ interests in timeshare plans. 

* * * * * 

■ 8. Appendix Q to Part 1026-Standards 

for Determining Monthly Debt and 

Income is revised to read as follows: 

Appendix Q to Part 1026—Standards 

for Determining Monthly Debt and 

Income 

Section 1026.43(e)(2)(vi) provides that, to 

satisfy the requirements for a qualified 

mortgage under § 1026.43(e)(2), the ratio of 

the consumer’s total monthly debt payments 

to total monthly income at the time of 

consummation cannot exceed 43 percent. 

Section 1026.43(e)(2)(vi)(A) requires the 

creditor to calculate the ratio of the 

consumer’s total monthly debt payments to 

total monthly income using the following 

standards, with additional requirements for 

calculating debt and income appearing in 

§ 1026.43(e)(2)(vi)(B). 

I. Consumer Employment Related Income 

A. Stability of Income. 

1. Effective Income. Income may not be 

used in calculating the consumer’s debt-toincome ratio if it comes from any source that 

cannot be verified, is not stable, or will not 

continue. 

2. Verifying Employment History. 

a. The creditor must verify the consumer’s 

employment for the most recent two full 

years, and the creditor must require the 

consumer to: 

i. Explain any gaps in employment that 

span one or more months, and 

ii. Indicate if he/she was in school or the 

military for the recent two full years, 

providing evidence supporting this claim, 

such as college transcripts, or discharge 

papers. 

b. Allowances can be made for seasonal 

employment, typical for the building trades 

and agriculture, if documented by the 

creditor. 

Note: A consumer with a 25 percent or 

greater ownership interest in a business is 

considered self-employed and will be 

evaluated as a self-employed consumer. 

3. Analyzing a Consumer’s Employment 

Record. 

a. When analyzing a consumer’s 

employment, creditors must examine: 

i. The consumer’s past employment record; 

and 

ii. The employer’s confirmation of current, 

ongoing employment status. 

Note: Creditors may assume that 

employment is ongoing if a consumer’s 

employer verifies current employment and 

does not indicate that employment has been, 

or is set to be terminated. Creditors should 

not rely upon a verification of current 

employment that includes an affirmative 

statement that the employment is likely to 

cease, such as a statement that indicates the 

employee has given (or been given) notice of 

employment suspension or termination. 

b. Creditors may favorably consider the 

stability of a consumer’s income if he/she 

changes jobs frequently within the same line 

of work, but continues to advance in income 

or benefits. In this analysis, income stability 

takes precedence over job stability. 

4. Consumers Returning to Work After an 

Extended Absence. A consumer’s income 

may be considered effective and stable when 

recently returning to work after an extended 

absence if he/she: 

a. Is employed in the current job for six 

months or longer; and 

b. Can document a two year work history 

prior to an absence from employment using: 

i. Traditional employment verifications; 

and/or 

ii. Copies of IRS Form W–2s or pay stubs. 

Note: An acceptable employment situation 

includes individuals who took several years 

off from employment to raise children, then 

returned to the workforce. 

c. Important: Situations not meeting the 

criteria listed above may not be used in 

qualifying. Extended absence is defined as 

six months. 

B. Salary, Wage and Other Forms of 

Income. 

1. General Policy on Consumer Income 

Analysis. 

a. The income of each consumer who will 

be obligated for the mortgage debt and whose 

income is being relied upon in determining 

ability to repay must be analyzed to 

determine whether his/her income level can 

be reasonably expected to continue. 

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b. In most cases, a consumer’s income is 

limited to salaries or wages. Income from 

other sources can be considered as effective, 

when properly verified and documented by 

the creditor. 

Notes: 

i. Effective income for consumers planning 

to retire during the first three-year period 

must include the amount of: 

a. Documented retirement benefits; 

b. Social Security payments; or 

c. Other payments expected to be received 

in retirement. 

ii. Creditors must not ask the consumer 

about possible, future maternity leave. 

iii. Creditors may assume that salary or 

wage income from employment verified in 

accordance with section I.A.3 above can be 

reasonably expected to continue if a 

consumer’s employer verifies current 

employment and income and does not 

indicate that employment has been, or is set 

to be terminated. Creditors should not 

assume that income can be reasonably 

expected to continue if a verification of 

current employment that includes an 

affirmative statement that the employment is 

likely to cease, such as a statement that 

indicates the employee has given (or been 

given) notice of employment suspension or 

termination. 

2. Overtime and Bonus Income. 

a. Overtime and bonus income can be used 

to qualify the consumer if he/she has 

received this income for the past two years, 

and documentation submitted for the loan 

does not indicate this income will likely 

cease. If, for example, the employment 

verification states that the overtime and 

bonus income is unlikely to continue, it may 

not be used in qualifying. 

b. The creditor must develop an average of 

bonus or overtime income for the past two 

years. Periods of overtime and bonus income 

less than two years may be acceptable, 

provided the creditor can justify and 

document in writing the reason for using the 

income for qualifying purposes. 

3. Establishing an Overtime and Bonus 

Income Earning Trend. 

a. The creditor must establish and 

document an earnings trend for overtime and 

bonus income. If either type of income shows 

a continual decline, the creditor must 

document in writing a sound rationalization 

for including the income when qualifying the 

consumer. 

b. A period of more than two years must 

be used in calculating the average overtime 

and bonus income if the income varies 

significantly from year to year. 

4. Qualifying Part-Time Income. 

a. Part-time and seasonal income can be 

used to qualify the consumer if the creditor 

documents that the consumer has worked the 

part-time job uninterrupted for the past two 

years, and plans to continue. Many low and 

moderate income families rely on part-time 

and seasonal income for day to day needs, 

and creditors should not restrict 

consideration of such income when 

qualifying the income of these consumers. 

b. Part-time income received for less than 

two years may be included as effective 

income, provided that the creditor justifies 

and documents that the income is likely to 

continue. 

c. Part-time income not meeting the 

qualifying requirements may not be used in 

qualifying. 

Note: For qualifying purposes, ‘‘part-time’’ 

income refers to employment taken to 

supplement the consumer’s income from 

regular employment; part-time employment 

is not a primary job and it is worked less than 

40 hours. 

5. Income from Seasonal Employment. 

a. Seasonal income is considered 

uninterrupted, and may be used to qualify 

the consumer, if the creditor documents that 

the consumer: 

i. Has worked the same job for the past two 

years, and 

ii. Expects to be rehired the next season. 

b. Seasonal employment includes, but is 

not limited to: 

i. Umpiring baseball games in the summer; 

or 

ii. Working at a department store during 

the holiday shopping season. 

6. Primary Employment Less Than 40 Hour 

Work Week. 

a. When a consumer’s primary 

employment is less than a typical 40-hour 

work week, the creditor should evaluate the 

stability of that income as regular, on-going 

primary employment. 

b. Example: A registered nurse may have 

worked 24 hours per week for the last year. 

Although this job is less than the 40-hour 

work week, it is the consumer’s primary 

employment, and should be considered 

effective income. 

7. Commission Income. 

a. Commission income must be averaged 

over the previous two years. To qualify 

commission income, the consumer must 

provide: 

i. Copies of signed tax returns for the last 

two years; and 

ii. The most recent pay stub. 

b. Consumers whose commission income 

was received for more than one year, but less 

than two years may be considered favorably 

if the underwriter can: 

i. Document the likelihood that the income 

will continue, and 

ii. Soundly rationalize accepting the 

commission income. 

Notes: 

i. Unreimbursed business expenses must 

be subtracted from gross income. 

ii. A commissioned consumer is one who 

receives more than 25 percent of his/her 

annual income from commissions. 

iii. A tax transcript obtained directly from 

the IRS may be used in lieu of signed tax 

returns. 

8. Qualifying Commission Income Earned 

for Less Than One Year. 

a. Commission income earned for less than 

one year is not considered effective income. 

Exceptions may be made for situations in 

which the consumer’s compensation was 

changed from salary to commission within a 

similar position with the same employer. 

b. A consumer’s income may also qualify 

when the portion of earnings not attributed 

to commissions would be sufficient to qualify 

the consumer for the mortgage. 

9. Employer Differential Payments. If the 

employer subsidizes a consumer’s mortgage 

payment through direct payments, the 

amount of the payments: 

a. Is considered gross income, and 

b. Cannot be used to offset the mortgage 

payment directly, even if the employer pays 

the servicing creditor directly. 

10. Retirement Income. Retirement income 

must be verified from the former employer, 

or from Federal tax returns. If any retirement 

income, such as employer pensions or 

401(k)’s, will cease within the first full three 

years of the mortgage loan, such income may 

not be used in qualifying. 

11. Social Security Income. Social Security 

income must be verified by a Social Security 

Administration benefit verification letter 

(sometimes called a ‘‘proof of income letter,’’ 

‘‘budget letter,’’ ‘‘benefits letter,’’ or ‘‘proof of 

award letter’’). If any benefits expire within 

the first full three years of the loan, the 

income source may not be used in qualifying. 

Notes: 

i. If the Social Security Administration 

benefit verification letter does not indicate a 

defined expiration date within three years of 

loan origination, the creditor shall consider 

the income effective and likely to continue. 

Pending or current re-evaluation of medical 

eligibility for benefit payments is not 

considered an indication that the benefit 

payments are not likely to continue. 

ii. Some portion of Social Security income 

may be ‘‘grossed up’’ if deemed nontaxable 

by the IRS. 

12. Automobile Allowances and Expense 

Account Payments. 

a. Only the amount by which the 

consumer’s automobile allowance or expense 

account payments exceed actual 

expenditures may be considered income. 

b. To establish the amount to add to gross 

income, the consumer must provide the 

following: 

i. IRS Form 2106, Employee Business 

Expenses, for the previous two years; and 

ii. Employer verification that the payments 

will continue. 

c. If the consumer uses the standard permile rate in calculating automobile expenses, 

as opposed to the actual cost method, the 

portion that the IRS considers depreciation 

may be added back to income. 

d. Expenses that must be treated as 

recurring debt include: 

i. The consumer’s monthly car payment; 

and 

ii. Any loss resulting from the calculation 

of the difference between the actual 

expenditures and the expense account 

allowance. 

C. Consumers Employed by a Family 

Owned Business. 

1. Income Documentation Requirement. 

In addition to normal employment 

verification, a consumer employed by a 

family owned business is required to provide 

evidence that he/she is not an owner of the 

business, which may include: 

a. Copies of signed personal tax returns, or 

b. A signed copy of the corporate tax return 

showing ownership percentage. 

Note: A tax transcript obtained directly 

from the IRS may be used in lieu of signed 

tax returns. 

D. General Information on Self-Employed 

Consumers and Income Analysis. 

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1. Definition: Self-Employed Consumer. A 

consumer with a 25 percent or greater 

ownership interest in a business is 

considered self-employed. 

2. Types of Business Structures. There are 

four basic types of business structures. They 

include: 

a. Sole proprietorships; 

b. Corporations; 

c. Limited liability or ‘‘S’’ corporations; 

and 

d. Partnerships. 

3. Minimum Length of Self Employment. 

a. Income from self-employment is 

considered stable, and effective, if the 

consumer has been self-employed for two or 

more years. 

b. Due to the high probability of failure 

during the first few years of a business, the 

requirements described in the table below are 

necessary for consumers who have been selfemployed for less than two years. 

4. General Documentation Requirements 

for Self-Employed Consumers. Self-employed 

consumers must provide the following 

documentation: 

a. Signed, dated individual tax returns, 

with all applicable tax schedules for the most 

recent two years; 

b. For a corporation, ‘‘S’’ corporation, or 

partnership, signed copies of Federal 

business income tax returns for the last two 

years, with all applicable tax schedules; and 

c. Year to date profit and loss (P&L) 

statement and balance sheet. 

5. Establishing a Self-Employed 

Consumer’s Earnings Trend. 

a. When qualifying income, the creditor 

must establish the consumer’s earnings trend 

from the previous two years using the 

consumer’s tax returns. 

b. If a consumer: 

i. Provides quarterly tax returns, the 

income analysis may include income through 

the period covered by the tax filings, or 

ii. Is not subject to quarterly tax returns, or 

does not file them, then the income shown 

on the P&L statement may be included in the 

analysis, provided the income stream based 

on the P&L is consistent with the previous 

years’ earnings. 

c. If the P&L statements submitted for the 

current year show an income stream 

considerably greater than what is supported 

by the previous year’s tax returns, the 

creditor must base the income analysis solely 

on the income verified through the tax 

returns. 

d. If the consumer’s earnings trend for the 

previous two years is downward and the 

most recent tax return or P&L is less than the 

prior year’s tax return, the consumer’s most 

recent year’s tax return or P&L must be used 

to calculate his/her income. 

6. Analyzing the Business’s Financial 

Strength. 

The creditor must consider the business’s 

financial strength by examining annual 

earnings. Annual earnings that are stable or 

increasing are acceptable, while businesses 

that show a significant decline in income 

over the analysis period are not acceptable. 

E. Income Analysis: Individual Tax 

Returns (IRS Form 1040). 

1. General Policy on Adjusting Income 

Based on a Review of IRS Form 1040. The 

amount shown on a consumer’s IRS Form 

1040 as adjusted gross income must either be 

increased or decreased based on the 

creditor’s analysis of the individual tax 

return and any related tax schedules. 

2. Guidelines for Analyzing IRS Form 1040. 

The table below contains guidelines for 

analyzing IRS Form 1040: 

BILLING CODE 4810–AM–P 


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BILLING CODE 4810–AM–C 

F. Income Analysis: Corporate Tax Returns 

(IRS Form 1120). 

1. Description: Corporation. A corporation 

is a State-chartered business owned by its 

stockholders. 

2. Need To Obtain Consumer Percentage of 

Ownership Information. 

a. Corporate compensation to the officers, 

generally in proportion to the percentage of 

ownership, is shown on the: 

i. Corporate tax return IRS Form 1120; and 

ii. Individual tax returns. 


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b. When a consumer’s percentage of 

ownership does not appear on the tax 

returns, the creditor must obtain the 

information from the corporation’s 

accountant, along with evidence that the 

consumer has the right to any compensation. 

3. Analyzing Corporate Tax Returns. 

a. In order to determine a consumer’s selfemployed income from a corporation the 

adjusted business income must: 

i. Be determined; and 

ii. Multiplied by the consumer’s percentage 

of ownership in the business. 

b. The table below describes the items 

found on IRS Form 1120 for which an 

adjustment must be made in order to 

determine adjusted business income. 

G. Income Analysis: ‘‘S’’ Corporation Tax 

Returns (IRS Form 1120S). 

1. Description: ‘‘S’’ Corporation. 

a. An ‘‘S’’ corporation is generally a small, 

start-up business, with gains and losses 

passed to stockholders in proportion to each 

stockholder’s percentage of business 

ownership. 

b. Income for owners of ‘‘S’’ corporations 

comes from IRS Form W–2 wages, and is 

taxed at the individual rate. The IRS Form 

1120S, Compensation of Officers line item is 

transferred to the consumer’s individual IRS 

Form 1040. 

2. Analyzing ‘‘S’’ Corporation Tax Returns. 

a. ‘‘S’’ corporation depreciation and 

depletion may be added back to income in 

proportion to the consumer’s share of the 

corporation’s income. 

b. In addition, the income must also be 

reduced proportionately by the total 

obligations payable by the corporation in less 

than one year. 

c. Important: The consumer’s withdrawal 

of cash from the corporation may have a 

severe negative impact on the corporation’s 

ability to continue operating, and must be 

considered in the income analysis. 

H. Income Analysis: Partnership Tax 

Returns (IRS Form 1065). 

1. Description: Partnership. 

a. A partnership is formed when two or 

more individuals form a business, and share 

in profits, losses, and responsibility for 

running the company. 

b. Each partner pays taxes on his/her 

proportionate share of the partnership’s net 

income. 

2. Analyzing Partnership Tax Returns. 

a. Both general and limited partnerships 

report income on IRS Form 1065, and the 

partners’ share of income is carried over to 

Schedule E of IRS Form 1040. 

b. The creditor must review IRS Form 1065 

to assess the viability of the business. Both 

depreciation and depletion may be added 

back to the income in proportion to the 

consumer’s share of income. 

c. Income must also be reduced 

proportionately by the total obligations 

payable by the partnership in less than one 

year. 

d. Important: Cash withdrawals from the 

partnership may have a severe negative 

impact on the partnership’s ability to 

continue operating, and must be considered 

in the income analysis. 

II. Non-Employment Related Consumer 

Income 

A. Alimony, Child Support, and 

Maintenance Income Criteria. Alimony, child 

support, or maintenance income may be 

considered effective, if: 

1. Payments are likely to be received 

consistently for the first three years of the 

mortgage; 

2. The consumer provides the required 

documentation, which includes a copy of 

the: 

i. Final divorce decree; 

ii. Legal separation agreement; 

iii. Court order; or 

iv. Voluntary payment agreement; and 

3. The consumer can provide acceptable 

evidence that payments have been received 

during the last 12 months, such as: 

i. Cancelled checks; 

ii. Deposit slips; 

iii. Tax returns; or 

iv. Court records. 

Notes: 

i. Periods less than 12 months may be 

acceptable, provided the creditor can 

adequately document the payer’s ability and 

willingness to make timely payments. 

ii. Child support may be ‘‘grossed up’’ 

under the same provisions as non-taxable 

income sources. 

B. Investment and Trust Income. 

1. Analyzing Interest and Dividends. 

a. Interest and dividend income may be 

used as long as tax returns or account 

statements support a two-year receipt history. 

This income must be averaged over the two 

years. 

b. Subtract any funds that are derived from 

these sources, and are required for the cash 

investment, before calculating the projected 

interest or dividend income. 

2. Trust Income. 

a. Income from trusts may be used if 

guaranteed, constant payments will continue 

for at least the first three years of the 

mortgage term as evidenced by trust income 

documentation. 

b. Required trust income documentation 

includes a copy of the Trust Agreement or 

other trustee statement, confirming the: 

i. Amount of the trust; 

ii. Frequency of distribution; and 

iii. Duration of payments. 

c. Trust account funds may be used for the 

required cash investment if the consumer 

provides adequate documentation that the 

withdrawal of funds will not negatively affect 

income. The consumer may use funds from 

the trust account for the required cash 

investment, but the trust income used to 

determine repayment ability cannot be 

affected negatively by its use. 

3. Notes Receivable Income. 

a. In order to include notes receivable 

income, the consumer must provide: 

i. A copy of the note to establish the 

amount and length of payment, and 

ii. Evidence that these payments have been 

consistently received for the last 12 months 

through deposit slips, cancelled checks, or 

tax returns. 

b. If the consumer is not the original payee 

on the note, the creditor must establish that 

the consumer is able to enforce the note. 

4. Eligible Investment Properties. 

Follow the steps in the table below to 

calculate an investment property’s income or 

loss if the property to be subject to a 

mortgage is an eligible investment property. 


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C. Military, Government Agency, and 

Assistance Program Income. 

1. Military Income. 

a. Military personnel not only receive base 

pay, but often times are entitled to additional 

forms of pay, such as: 

i. Income from variable housing 

allowances; 

ii. Clothing allowances; 

iii. Flight or hazard pay; 

iv. Rations; and 

v. Proficiency pay. 

b. These types of additional pay are 

acceptable when analyzing a consumer’s 

income as long as the probability of such pay 

to continue is verified in writing. 

Note: The tax-exempt nature of some of the 

above payments should also be considered. 

2. VA Benefits. 

a. Direct compensation for service-related 

disabilities from the Department of Veterans 

Affairs (VA) is acceptable, provided the 

creditor receives documentation from the 

VA. 

b. Education benefits used to offset 

education expenses are not acceptable. 

3. Government Assistance Programs. 

a. Income received from government 

assistance programs is acceptable as long as 

the paying agency provides documentation 

indicating that the income is expected to 

continue for at least three years. 

b. If the income from government 

assistance programs will not be received for 

at least three years, it may not be used in 

qualifying. 

c. Unemployment income must be 

documented for two years, and there must be 

reasonable assurance that this income will 

continue. This requirement may apply to 

seasonal employment. 

Note: Social Security income is acceptable 

as provided in section I.B.11. 

4. Mortgage Credit Certificates. 

a. If a government entity subsidizes the 

mortgage payments either through direct 

payments or tax rebates, these payments may 

be considered as acceptable income. 

b. Either type of subsidy may be added to 

gross income, or used directly to offset the 

mortgage payment, before calculating the 

qualifying ratios. 

5. Homeownership Subsidies. 

a. A monthly subsidy may be treated as 

income, if a consumer is receiving subsidies 

under the housing choice voucher home 

ownership option from a public housing 

agency (PHA). Although continuation of the 

homeownership voucher subsidy beyond the 

first year is subject to Congressional 

appropriation, for the purposes of 

underwriting, the subsidy will be assumed to 

continue for at least three years. 

b. If the consumer is receiving the subsidy 

directly, the amount received is treated as 

income. The amount received may also be 

treated as nontaxable income and be ‘‘grossed 

up’’ by 25 percent, which means that the 

amount of the subsidy, plus 25 percent of 

that subsidy may be added to the consumer’s 

income from employment and/or other 

sources. 

c. Creditors may treat this subsidy as an 

‘‘offset’’ to the monthly mortgage payment 

(that is, reduce the monthly mortgage 

payment by the amount of the home 

ownership assistance payment before 

dividing by the monthly income to determine 

the payment-to-income and debt-to-income 

ratios). The subsidy payment must not pass 

through the consumer’s hands. 

d. The assistance payment must be: 

i. Paid directly to the servicing creditor; or 

ii. Placed in an account that only the 

servicing creditor may access. 

Note: Assistance payments made directly 

to the consumer must be treated as income. 

D. Rental Income. 

1. Analyzing the Stability of Rental Income. 

a. Rent received for properties owned by 

the consumer is acceptable as long as the 

creditor can document the stability of the 

rental income through: 

i. A current lease; 

ii. An agreement to lease; or 

iii. A rental history over the previous 24 

months that is free of unexplained gaps 

greater than three months (such gaps could 

be explained by student, seasonal, or military 

renters, or property rehabilitation). 

b. A separate schedule of real estate is not 

required for rental properties as long as all 

properties are documented on the Uniform 

Residential Loan Application. 

Note: The underwriting analysis may not 

consider rental income from any property 

being vacated by the consumer, except under 

the circumstances described below. 

2. Rental Income From Consumer 

Occupied Property. 

a. The rent for multiple unit property 

where the consumer resides in one or more 

units and charges rent to tenants of other 

units may be used for qualifying purposes. 

b. Projected rent for the tenant-occupied 

units only may: 

i. Be considered gross income, only after 

deducting vacancy and maintenance factors, 

and 

ii. Not be used as a direct offset to the 

mortgage payment. 

3. Income from Roommates in a Single 

Family Property. 

a. Income from roommates in a single 

family property occupied as the consumer’s 

primary residence is not acceptable. Rental 

income from boarders however, is acceptable. 

b. The rental income may be considered 

effective, if shown on the consumer’s tax 

return. If not on the tax return, rental income 

paid by the boarder may not be used in 

qualifying. 

4. Documentation Required To Verify 

Rental Income. Analysis of the following 

required documentation is necessary to verify 

all consumer rental income: 

a. IRS Form 1040 Schedule E; and 

b. Current leases/rental agreements. 

5. Analyzing IRS Form 1040 Schedule E. 

a. The IRS Form 1040 Schedule E is 

required to verify all rental income. 

Depreciation shown on Schedule E may be 

added back to the net income or loss. 

b. Positive rental income is considered 

gross income for qualifying purposes, while 

negative income must be treated as a 

recurring liability. 

c. The creditor must confirm that the 

consumer still owns each property listed, by 

comparing Schedule E with the real estate 

owned section of the Uniform Residential 

Loan Application (URLA). 

6. Using Current Leases To Analyze Rental 

Income. 

a. The consumer can provide a current 

signed lease or other rental agreement for a 

property that was acquired since the last 

income tax filing, and is not shown on 

Schedule E. 

b. In order to calculate the rental income: 

i. Reduce the gross rental amount by 25 

percent for vacancies and maintenance; 

ii. Subtract PITI and any homeowners 

association dues; and 

iii. Apply the resulting amount to income, 

if positive, or recurring debts, if negative. 

7. Exclusion of Rental Income From 

Property Being Vacated by the Consumer. 

Underwriters may not consider any rental 

income from a consumer’s principal 

residence that is being vacated in favor of 

another principal residence, except under the 

conditions described below: 

Notes: 


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i. This policy assures that a consumer 

either has sufficient income to make both 

mortgage payments without any rental 

income, or has an equity position not likely 

to result in defaulting on the mortgage on the 

property being vacated. 

ii. This applies solely to a principal 

residence being vacated in favor of another 

principal residence. It does not apply to 

existing rental properties disclosed on the 

loan application and confirmed by tax 

returns (Schedule E of form IRS 1040). 

8. Policy Exceptions Regarding the 

Exclusion of Rental Income From a Principal 

Residence Being Vacated by a Consumer. 

When a consumer vacates a principal 

residence in favor of another principal 

residence, the rental income, reduced by the 

appropriate vacancy factor, may be 

considered in the underwriting analysis 

under the circumstances listed in the table 

below. 

E. Non-Taxable and Projected Income. 

1. Types of Non-Taxable Income. 

Certain types of regular income may not be 

subject to Federal tax. Such types of nontaxable income include: 

a. Some portion of Social Security, some 

Federal government employee retirement 

income, Railroad Retirement Benefits, and 

some State government retirement income; 

b. Certain types of disability and public 

assistance payments; 

c. Child support; 

d. Military allowances; and 

e. Other income that is documented as 

being exempt from Federal income taxes. 

2. Adding Non-Taxable Income to a 

Consumer’s Gross Income. 

a. The amount of continuing tax savings 

attributed to regular income not subject to 

Federal taxes may be added to the 

consumer’s gross income. 

b. The percentage of non-taxable income 

that may be added cannot exceed the 

appropriate tax rate for the income amount. 

Additional allowances for dependents are not 

acceptable. 

c. The creditor: 

i. Must document and support the amount 

of income grossed up for any non-taxable 

income source, and 

ii. Should use the tax rate used to calculate 

the consumer’s last year’s income tax. 

Note: If the consumer is not required to file 

a Federal tax return, the tax rate to use is 25 

percent. 

3. Analyzing Projected Income. 

a. Projected or hypothetical income is not 

acceptable for qualifying purposes. However, 

exceptions are permitted for income from the 

following sources: 

i. Cost-of-living adjustments; 

ii. Performance raises; and 

iii. Bonuses. 

b. For the above exceptions to apply, the 

income must be: 

i. Verified in writing by the employer; and 

ii. Scheduled to begin within 60 days of 

loan closing. 

4. Projected Income for New Job. 

a. Projected income is acceptable for 

qualifying purposes for a consumer 

scheduled to start a new job within 60 days 

of loan closing if there is a guaranteed, nonrevocable contract for employment. 

b. The creditor must verify that the 

consumer will have sufficient income or cash 

reserves to support the mortgage payment 

and any other obligations between loan 

closing and the start of employment. 

Examples of this type of scenario are teachers 

whose contracts begin with the new school 

year, or physicians beginning a residency 

after the loan closes. 

c. The income does not qualify if the loan 

closes more than 60 days before the 

consumer starts the new job. 

III. Consumer Liabilities: Recurring 

Obligations 

1. Types of Recurring Obligation. Recurring 

obligations include: 

a. All installment loans; 

b. Revolving charge accounts; 

c. Real estate loans; 

d. Alimony; 

e. Child support; and 

f. Other continuing obligations. 

2. Debt to Income Ratio Computation for 

Recurring Obligations. 

a. The creditor must include the following 

when computing the debt to income ratios for 

recurring obligations: 

i. Monthly housing expense; and 

ii. Additional recurring charges extending 

ten months or more, such as 

a. Payments on installment accounts; 

b. Child support or separate maintenance 

payments; 

c. Revolving accounts; and 

d. Alimony. 

b. Debts lasting less than ten months must 

be included if the amount of the debt affects 

the consumer’s ability to pay the mortgage 

during the months immediately after loan 

closing, especially if the consumer will have 

limited or no cash assets after loan closing. 


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Note: Monthly payments on revolving or 

open-ended accounts, regardless of the 

balance, are counted as a liability for 

qualifying purposes even if the account 

appears likely to be paid off within 10 

months or less. 

3. Revolving Account Monthly Payment 

Calculation. If the credit report shows any 

revolving accounts with an outstanding 

balance but no specific minimum monthly 

payment, the payment must be calculated as 

the greater of: 

a. 5 percent of the balance; or 

b. $10. 

Note: If the actual monthly payment is 

documented from the creditor or the creditor 

obtains a copy of the current statement 

reflecting the monthly payment, that amount 

may be used for qualifying purposes. 

4. Reduction of Alimony Payment for 

Qualifying Ratio Calculation. Since there are 

tax consequences of alimony payments, the 

creditor may choose to treat the monthly 

alimony obligation as a reduction from the 

consumer’s gross income when calculating 

the ratio, rather than treating it as a monthly 

obligation. 

IV. Consumer Liabilities: Contingent 

Liability 

1. Definition: Contingent Liability. A 

contingent liability exists when an individual 

is held responsible for payment of a debt if 

another party, jointly or severally obligated, 

defaults on the payment. 

2. Application of Contingent Liability 

Policies. The contingent liability policies 

described in this topic apply unless the 

consumer can provide conclusive evidence 

from the debt holder that there is no 

possibility that the debt holder will pursue 

debt collection against him/her should the 

other party default. 

3. Contingent Liability on Mortgage 

Assumptions. Contingent liability must be 

considered when the consumer remains 

obligated on an outstanding FHA-insured, 

VA-guaranteed, or conventional mortgage 

secured by property that: 

a. Has been sold or traded within the last 

12 months without a release of liability, or 

b. Is to be sold on assumption without a 

release of liability being obtained. 

4. Exemption From Contingent Liability 

Policy on Mortgage Assumptions. When a 

mortgage is assumed, contingent liabilities 

need not be considered if the: 

a. Originating creditor of the mortgage 

being underwritten obtains, from the servicer 

of the assumed loan, a payment history 

showing that the mortgage has been current 

during the previous 12 months, or 

b. Value of the property, as established by 

an appraisal or the sales price on the HUD– 

1 Settlement Statement from the sale of the 

property, results in a loan-to-value (LTV) 

ratio of 75 percent or less. 

5. Contingent Liability on Cosigned 

Obligations. 

a. Contingent liability applies, and the debt 

must be included in the underwriting 

analysis, if an individual applying for a 

mortgage is a cosigner/co-obligor on: 

i. A car loan; 

ii. A student loan; 

iii. A mortgage; or 

iv. Any other obligation. 

b. If the creditor obtains documented proof 

that the primary obligor has been making 

regular payments during the previous 12 

months, and does not have a history of 

delinquent payments on the loan during that 

time, the payment does not have to be 

included in the consumer’s monthly 

obligations. 

V. Consumer Liabilities: Projected 

Obligations and Obligations Not Considered 

Debt 

1. Projected Obligations. 

a. Debt payments, such as a student loan 

or balloon-payment note scheduled to begin 

or come due within 12 months of the 

mortgage loan closing, must be included by 

the creditor as anticipated monthly 

obligations during the underwriting analysis. 

b. Debt payments do not have to be 

classified as projected obligations if the 

consumer provides written evidence that the 

debt will be deferred to a period outside the 

12-month timeframe. 

c. Balloon-payment notes that come due 

within one year of loan closing must be 

considered in the underwriting analysis. 

2. Obligations Not Considered Debt. 

Obligations not considered debt, and 

therefore not subtracted from gross income, 

include: 

a. Federal, State, and local taxes; 

b. Federal Insurance Contributions Act 

(FICA) or other retirement contributions, 

such as 401(k) accounts (including 

repayment of debt secured by these funds): 

c. Commuting costs; 

d. Union dues; 

e. Open accounts with zero balances; 

f. Automatic deductions to savings 

accounts; 

g. Child care; and 

h. Voluntary deductions. 

■ 9. In Supplement I to Part 1026— 

Official Interpretations: 

A. Under Section 1026.41—Periodic 

Statements for Residential Mortgage 

Loans: 

i. Under 41(e)(4) Small servicers: 

a. Under 41(e)(4)(ii) Small servicer 

defined, paragraphs 1 and 2 are revised 

and paragraph 3 is added. 

b. Under Paragraph 41(e)(4)(iii) Small 

servicer determination, paragraph 3 is 

added. 

B. Under Section 1026.43—Minimum 

Standards for Transactions Secured by 

a Dwelling: 

i. Under 43(e)(4) Qualified mortgage 

defined-special rules, paragraph 4 is 

revised and paragraph 5 is added. 

The revisions and additions read as 

follows: 

Supplement I to Part 1026—Official 

Interpretations 

* * * * * 

Subpart E—Special Rules for Certain 

Home Mortgage Transactions 

* * * * * 

Section 1026.41—Periodic Statements 

for Residential Mortgage Loans 

* * * * * 

41(e)(4)(ii) Small servicer defined. 

1. Mortgage loans considered. Pursuant to 

§ 1026.41(a)(1), the mortgage loans 

considered in determining status as small 

servicer are closed-end consumer credit 

transactions secured by a dwelling, subject to 

the exclusions in § 1026.41(e)(4)(iii). 

2. Requirements to be a small servicer. 

Pursuant to § 1026.41(e)(4)(ii)(A), to qualify 

as a small servicer, a servicer must service, 

together with any affiliates, 5,000 or fewer 

mortgage loans, for all of which the servicer 

(or an affiliate) is the creditor or assignee. 

There are two elements to this requirement. 

First, a servicer, together with any affiliates, 

must service 5,000 or fewer mortgage loans. 

Second, a servicer must service only 

mortgage loans for which the servicer (or an 

affiliate) is the creditor or assignee. To be the 

creditor or assignee of a mortgage loan, the 

servicer (or an affiliate) must either currently 

own the mortgage loan or must have been the 

entity to which the mortgage loan obligation 

was initially payable (that is, the originator 

of the mortgage loan). A servicer is not a 

small servicer if it services any mortgage 

loans for which the servicer or an affiliate is 

not the creditor or assignee (that is, for which 

the servicer or an affiliate is not the owner 

or was not the originator). The following two 

examples demonstrate circumstances in 

which a servicer would not qualify as a small 

servicer because it did not meet both 

requirements for determining a servicer’s 

status as a small servicer: 

i. A servicer services 3,000 mortgage loans, 

all of which it or an affiliate owns or 

originated. An affiliate of the servicer 

services 4,000 other mortgage loans, all of 

which it or an affiliate owns or originated. 

Because the number of mortgage loans 

serviced by a servicer is determined by 

counting the mortgage loans serviced by a 

servicer together with any affiliates, both of 

these servicers are considered to be servicing 

7,000 mortgage loans and neither servicer is 

a small servicer. 

ii. A servicer services 3,100 mortgage 

loans—3,000 mortgage loans it owns or 

originated and 100 mortgage loans it neither 

owns nor originated, but for which it owns 

the mortgage servicing rights. The servicer is 

not a small servicer because it services 

mortgage loans for which the servicer (or an 

affiliate) is not the creditor or assignee, 

notwithstanding that the servicer services 

fewer than 5,000 mortgage loans. 

3. Master servicing and subservicing. A 

servicer that qualifies as a small servicer does 

not lose its small servicer status if it retains 

a subservicer, as that term is defined in 12 

CFR 1024.31, to service any of its mortgage 

loans. A subservicer can gain the benefit of 

the small servicer exemption only if (1) the 

master servicer, as that term is defined in 12 

CFR 1024.31, is a small servicer and (2) the 

subservicer is a small servicer. A subservicer 

generally will not qualify as a small servicer 

because it does not own or did not originate 

the mortgage loans it subservices—unless it 

is an affiliate of a master servicer that 

qualifies as a small servicer. The following 

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Federal Register / Vol. 78, No. 85 / Thursday, May 2, 2013 / Proposed Rules 25661 

examples demonstrate the application of the 

small servicer exemption for different forms 

of servicing relationships: 

i. A credit union services 4,000 mortgage 

loans, all of which it originated or owns. The 

credit union retains a credit union service 

organization, that is not an affiliate, to 

subservice 1,000 of the mortgage loans. The 

credit union is a small servicer and, thus, can 

gain the benefit of the small servicer 

exemption for the 3,000 mortgage loans the 

credit union services itself. The credit union 

service organization is not a small servicer 

because it services mortgage loans it does not 

own or did not originate. Accordingly, the 

credit union service organization does not 

gain the benefit of the small servicer 

exemption and, thus, must comply with any 

applicable mortgage servicing requirements 

for the 1,000 mortgage loans it subservices. 

ii. A bank holding company, through a 

lender subsidiary, owns or originated 4,000 

mortgage loans. All mortgage servicing rights 

for the 4,000 mortgage loans are owned by a 

wholly owned master servicer subsidiary. 

Servicing for the 4,000 mortgage loans is 

conducted by a wholly owned subservicer 

subsidiary. The bank holding company 

controls all of these subsidiaries and, thus, 

they are affiliates of the bank holding 

company pursuant 12 CFR 1026.32(b)(2). 

Because the master servicer and subservicer 

service 5,000 or fewer mortgage loans, and 

because all the mortgage loans are owned or 

originated by an affiliate, the master servicer 

and the subservicer both qualify for the small 

servicer exemption for all 4,000 mortgage 

loans. 

iii. A nonbank servicer services 4,000 

mortgage loans, all of which it originated or 

owns. The servicer retains a ‘‘component 

servicer’’ to assist it with servicing functions. 

The component servicer is not engaged in 

‘‘servicing’’ as defined in 12 CFR 1024.2; that 

is, the component servicer does not receive 

any scheduled periodic payments from a 

borrower pursuant to the terms of any 

mortgage loan, including amounts for escrow 

accounts, and does not make the payments to 

the owner of the loan or other third parties 

of principal and interest and such other 

payments with respect to the amounts 

received from the borrower as may be 

required pursuant to the terms of the 

mortgage servicing loan documents or 

servicing contract. The component servicer is 

not a subservicer pursuant to 12 CFR 1024.31 

because it is not engaged in servicing, as that 

term is defined in 12 CFR 1024.2. The 

nonbank servicer is a small servicer and, 

thus, can gain the benefit of the small 

servicer exemption with regard to all 4,000 

mortgage loans it services. 

41(e)(4)(iii) Small servicer determination. 

* * * * * 

3. Mortgage loans not considered in 

determining whether a servicer is a small 

servicer. Mortgage loans that are not 

considered for purposes of determining 

whether a servicer is a small servicer 

pursuant to § 1026.41(e)(4)(iii), are not 

considered either for determining whether a 

servicer, together with any affiliates, services 

5,000 or fewer mortgage loans or whether a 

servicer is servicing only mortgage loans that 

it owns or originated. For example, assume 

a servicer services 5,400 mortgage loans. Of 

these mortgage loans, the servicer owns or 

originated 4,800 mortgage loans, services 300 

reverse mortgage transactions that it does not 

own or did not originate, and voluntarily 

services 300 mortgage loans that it does not 

own or did not originate for an unaffiliated 

non-profit organization for which the servicer 

does not receive any compensation or fees. 

Neither the reverse mortgage transactions nor 

the mortgage loans voluntarily serviced by 

the servicer are considered in determining 

whether a servicer is a small servicer. Thus, 

because the only mortgage loans considered 

are the 4,800 other mortgage loans serviced 

by the servicer, and the servicer owns or 

originated each of those mortgage loans, the 

servicer is considered a small servicer and 

qualifies for the small servicer exemption 

with regard to all 5,400 mortgage loans it 

services. Note that reverse mortgages and 

mortgage loans secured by consumers’ 

interests in timeshare plans, in addition to 

not being considered in determining small 

servicer qualification, also are exempt from 

the requirements of the § 1026.41. In contrast, 

although charitably serviced mortgage loans, 

as defined by § 1026.41(e)(4)(iii), are likewise 

not considered in determining small servicer 

qualification, they are not exempt from the 

requirements of § 1026.41. Thus, a servicer 

that does not qualify as a small servicer 

would not have to provide periodic 

statements for reverse mortgages and 

timeshare plans because they are exempt 

from the rule, but would have to provide 

periodic statements for mortgage loans it 

charitably services. 

* * * * * 

Section 1026.43—Minimum Standards for 

Transactions Secured by a Dwelling 

* * * * * 

43(e)(4) Qualified mortgage defined— 

special rules. 

* * * * * 

4. Eligible for purchase, guarantee, or 

insurance. To satisfy § 1026.43(e)(4)(ii), a 

loan need not be actually purchased or 

guaranteed by Fannie Mae or Freddie Mac or 

insured or guaranteed by one of the Agencies 

(the U.S. Department of Housing and Urban 

Development (HUD), U.S. Department of 

Veterans Affairs (VA), U.S. Department of 

Agriculture (USDA), or Rural Housing 

Service (RHS)). Rather, § 1026.43(e)(4)(ii) 

requires only that the creditor determine that 

the loan is eligible (i.e., meets the criteria) for 

such purchase, guarantee, or insurance at 

consummation. For example, for purposes of 

§ 1026.43(e)(4), a creditor is not required to 

sell a loan to Fannie Mae or Freddie Mac (or 

any limited-life regulatory entity succeeding 

the charter of either) for that loan to be a 

qualified mortgage; however, the loan must 

be eligible for purchase or guarantee by 

Fannie Mae or Freddie Mac (or any limitedlife regulatory entity succeeding the charter 

of either), including satisfying any 

requirements regarding consideration and 

verification of a consumer’s income or assets, 

credit history, and debt-to-income ratio or 

residual income. To determine eligibility for 

purchase or guarantee, a creditor may rely on 

a valid underwriting recommendation 

provided by a GSE or Agency automated 

underwriting systems (AUS); compliance 

with the standards in the GSE or Agency 

written guide in effect at the time; or a 

written agreement between the creditor and 

a GSE or Agency that permits variation from 

the standards of the written guides and/or 

variation from the AUSs, in effect at the time. 

However, the creditor need not satisfy 

standards that are wholly unrelated to 

assessing a consumer’s ability to repay that 

the creditor is required to perform such as 

requirements related to selling, securitizing, 

or delivering already consummated loans and 

any requirement that the creditor must 

perform after the consummated loan is sold, 

guaranteed, or endorsed for insurance such 

as document custody, quality control, or 

servicing. Accordingly, a covered transaction 

is eligible for purchase or guarantee by 

Fannie Mae or Freddie Mac, for example, if: 

i. The loan conforms to the relevant 

standards set forth in the Fannie Mae SingleFamily Selling Guide or the Freddie Mac 

Single-Family Seller/Servicer Guide in effect 

at the time, or to standards set forth in a 

written agreement between the creditor and 

Fannie Mae or Freddie Mac that permits 

variation from the standards of those guides; 

or 

ii. The creditor inputs information 

accurately into the Fannie Mae or Freddie 

Mac AUS or another AUS pursuant to a 

written agreement between the creditor and 

Fannie Mae or Freddie Mac that permits 

variation from the GSE AUS; the loan 

receives one of the recommendations 

specified below in paragraphs A or B from 

the corresponding GSE AUS or an equivalent 

recommendation pursuant to another AUS as 

authorized in the written agreement; and the 

creditor satisfies any requirements and 

conditions specified by the relevant AUS, the 

non-satisfaction of which would invalidate 

that recommendation: 

A. An ‘‘Approve/Eligible’’ 

recommendation from Desktop Underwriter 

(DU); or 

B. A risk class of ‘‘Accept’’ and purchase 

eligibility of ‘‘Freddie Mac Eligible’’ from 

Loan Prospector (LP). 

5. Repurchase and indemnification 

demands. A repurchase or indemnification 

demand by Fannie Mae, Freddie Mac, HUD, 

VA, USDA, or RHS is not dispositive of 

qualified mortgage status. Qualified mortgage 

status under § 1026.43(e)(4) depends on 

whether a loan is eligible to be purchased, 

guaranteed, or insured at the time of 

consummation, provided that other 

requirements under § 1026.43(e)(4) are 

satisfied. Some repurchase or 

indemnification demands are not related to 

eligibility criteria at consummation. See 

comment 43(e)(4)-4. Further, even where a 

repurchase or indemnification demand 

relates to whether the loan satisfied relevant 

eligibility requirements as of the time of 

consummation, the mere fact that a demand 

has been made, or even resolved, between a 

creditor and GSE or agency is not dispositive 

for purposes of § 1026.43(e)(4). However, 

evidence of whether a particular loan 

satisfied the § 1026.43(e)(4) eligibility criteria 

at consummation may be brought to light in 

the course of dealings over a particular 

demand, depending on the facts and 

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25662 Federal Register / Vol. 78, No. 85 / Thursday, May 2, 2013 / Proposed Rules 

circumstances. Accordingly, each loan 

should be evaluated by the creditor based on 

the facts and circumstances relating to the 

eligibility of that loan at the time of 

consummation. For example: 

i. Assume eligibility to purchase a loan was 

based in part on the consumer’s employment 

income of $50,000 per year. The creditor uses 

the income figure in obtaining an approve/ 

eligible recommendation from DU. A quality 

control review, however, later determines 

that the documentation provided and verified 

by the creditor to comply with Fannie Mae 

requirements did not support the reported 

income of $50,000 per year. As a result, 

Fannie Mae demands that the creditor 

repurchase the loan. Assume that the quality 

control review is accurate, and that DU 

would not have issued an approve/eligible 

recommendation if it had been provided the 

accurate income figure. The DU 

determination at the time of consummation 

was invalid because it was based on 

inaccurate information provided by the 

creditor; therefore, the loan was never a 

qualified mortgage. 

ii. Assume that a creditor delivered a loan, 

which the creditor determined was a 

qualified mortgage at the time of 

consummation under § 1026.43(e)(4), to 

Fannie Mae for inclusion in a particular ToBe-Announced Mortgage Backed Security 

(MBS) pool of loans. The data submitted by 

the creditor at the time of loan delivery 

indicated that the various loan terms met the 

product type, weighted-average coupon 

(WAC), weighted-average maturity (WAM), 

and other MBS pooling criteria, and MBS 

issuance disclosures to investors reflected 

this loan data. However, after delivery and 

MBS issuance, a quality control review 

determines that the loan violates the pooling 

criteria. The loan still meets eligibility 

requirements for Fannie Mae products and 

loan terms. Fannie Mae, however, requires 

the creditor to repurchase the loan due to the 

violation of MBS pooling requirements. 

Assume that the quality control review 

determination is accurate. The reason the 

creditor repurchases this loan is wholly 

unrelated to assessing a consumer’s ability to 

repay under § 1026.43(e)(4). The loan still 

meets Fannie Mae eligibility requirements 

and therefore remains a qualified mortgage 

based on these facts and circumstances. 

* * * * * 

Dated: April 19, 2013. 

Richard Cordray, 

Director, Bureau of Consumer Financial 

Protection. 

[FR Doc. 2013–09750 Filed 5–1–13; 8:45 am] 

BILLING CODE 4810–AM–P 

DEPARTMENT OF TRANSPORTATION 

Federal Aviation Administration 

14 CFR Part 39 

[Docket No. FAA–2013–0361; Directorate 

Identifier 2013–NM–026–AD] 

RIN 2120–AA64 

Airworthiness Directives; The Boeing 

Company Airplanes 

AGENCY: Federal Aviation 

Administration (FAA), DOT. 

ACTION: Notice of proposed rulemaking 

(NPRM). 

SUMMARY: We propose to adopt a new 

airworthiness directive (AD) for all The 

Boeing Company Model 727 series 

airplanes. This proposed AD was 

prompted by a report of cracking in the 

left-side chord of the fin closure rib on 

the vertical stabilizer. This proposed AD 

would require repetitive inspections of 

the left and right side chords of the fin 

closure rib for cracking and corrosion, 

and related investigative and corrective 

actions if necessary. We are proposing 

this AD to detect and correct cracking 

and corrosion in the left and right side 

chords of the fin closure rib, which 

could lead to widespread cracking in 

the chords that might weaken the fin 

closure rib structure and result in loss 

of airplane control due to lack of 

horizontal stabilizer support. 

DATES: We must receive comments on 

this proposed AD by June 17, 2013. 

ADDRESSES: You may send comments, 

using the procedures found in 14 CFR 

11.43 and 11.45, by any of the following 

methods: 

• Federal eRulemaking Portal: Go to 

http://www.regulations.gov. Follow the 

instructions for submitting comments. 

• Fax: 202–493–2251. 

• Mail: U.S. Department of 

Transportation, Docket Operations, 

M–30, West Building Ground Floor, 

Room W12–140, 1200 New Jersey 

Avenue SE., Washington, DC 20590. 

• Hand Delivery: Deliver to Mail 

address above between 9 a.m. and 5 

p.m., Monday through Friday, except 

Federal holidays. 

For Boeing service information 

identified in this proposed AD, contact 

Boeing Commercial Airplanes, 

Attention: Data & Services Management, 

P.O. Box 3707, MC 2H–65, Seattle, WA 

98124–2207; telephone 206–544–5000, 

extension 1; fax 206–766–5680; Internet 

https://www.myboeingfleet.com. You 

may review copies of the referenced 

service information at the FAA, 

Transport Airplane Directorate, 1601 

Lind Avenue SW., Renton, Washington. 

For information on the availability of 

this material at the FAA, call 425–227– 

1221. 

Examining the AD Docket 

You may examine the AD docket on 

the Internet at http:// 

www.regulations.gov; or in person at the 

Docket Management Facility between 9 

a.m. and 5 p.m., Monday through 

Friday, except Federal holidays. The AD 

docket contains this proposed AD, the 

regulatory evaluation, any comments 

received, and other information. The 

street address for the Docket Office 

(phone: 800–647–5527) is in the 

ADDRESSES section. Comments will be 

available in the AD docket shortly after 

receipt. 

FOR FURTHER INFORMATION CONTACT: 

Berhane Alazar, Aerospace Engineer, 

Airframe Branch, ANM–120S, FAA, 

Seattle Aircraft Certification Office, 

1601 Lind Avenue SW., Renton, 

Washington 98057–3356; phone: 425– 

917–6577; fax: 425–917–6590; email: 

berhane.alazar@faa.gov. 

SUPPLEMENTARY INFORMATION: 

Comments Invited 

We invite you to send any written 

relevant data, views, or arguments about 

this proposal. Send your comments to 

an address listed under the ADDRESSES

section. Include ‘‘Docket No. FAA– 

2013–0361; Directorate Identifier 2013– 

NM–026–AD’’ at the beginning of your 

comments. We specifically invite 

comments on the overall regulatory, 

economic, environmental, and energy 

aspects of this proposed AD. We will 

consider all comments received by the 

closing date and may amend this 

proposed AD because of those 

comments. 

We will post all comments we 

receive, without change, to http:// 

www.regulations.gov, including any 

personal information you provide. We 

will also post a report summarizing each 

substantive verbal contact we receive 

about this proposed AD. 

Discussion 

During a routine maintenance 

inspection an operator reported finding 

a crack on the left-side chord of the fin 

closure rib. The crack measured 2.4 

inches long and ran along the length of 

the chord. Cracking on the left-side 

chord of the fin closure rib is the result 

of intergranual stress corrosion caused 

by the material properties of 2024–T351 

extrusion from which the closure rib 

chord is made. This material becomes 

vulnerable after the surface finishes 

begin to break down as a result of 

normal in-service aging. We are 

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