Vol. 78 Wednesday, 

No. 20 January 30, 2013 

Part III 

Bureau of Consumer Financial Protection 

12 CFR Part 1026 

Ability To Repay Standards Under the Truth in Lending Act (Regulation Z); 

Proposed Rule 

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6622 Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Proposed Rules 

BUREAU OF CONSUMER FINANCIAL 

PROTECTION 

12 CFR Part 1026 

[Docket No. CFPB–2013–0002] 

RIN 3170–AA34 

Ability To Repay Standards Under the 

Truth in Lending Act (Regulation Z) 

AGENCY: Bureau of Consumer Financial 

Protection. 

ACTION: Proposed rule with request for 

public comment. 

SUMMARY: The Bureau of Consumer 

Financial Protection (Bureau) is 

proposing to amend Regulation Z, 

which implements the Truth in Lending 

Act (TILA). This proposal is related to 

a final rule published elsewhere in 

today’s Federal Register. That final rule 

implements sections 1411, 1412, and 

1414 of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act 

(Dodd-Frank Act), which creates new 

TILA section 129C. Among other things, 

the Dodd-Frank Act 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.’’ The Bureau is 

proposing certain amendments to the 

final rule implementing these 

requirements, including 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 is also seeking 

feedback on whether additional 

clarification is needed regarding the 

inclusion of loan originator 

compensation in the points and fees 

calculation. 

DATES: Comments must be received on 

or before February 25, 2013, except that 

comments on the Paperwork Reduction 

Act analysis in part VIII of this Federal 

Register notice must be received on or 

before March 1, 2013. 

ADDRESSES: You may submit comments, 

identified by Docket No. CFPB–2013– 

0002 or RIN 3170–AA34, 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. 

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: 

Jennifer B. Kozma, Eamonn K. Moran, or 

Priscilla Walton-Fein, Counsels; 

Thomas J. Kearney or Mark Morelli, 

Senior Counsels; or Stephen Shin, 

Managing Counsel, Office of 

Regulations, at (202) 435–7700. 

SUPPLEMENTARY INFORMATION: 

I. Summary of Proposed Rule 

As discussed in detail under part II 

below, sections 1411, 1412, and 1414 of 

the Dodd-Frank Act created new TILA 

section 129C, which establishes, among 

other things, new ability-to-repay 

requirements. The Bureau is adopting 

final rules implementing these abilityto-repay requirements in a rule 

published elsewhere in today’s Federal 

Register (the Bureau’s 2013 ATR Final 

Rule). The Bureau believes that several 

exemptions and modifications to the 

ability-to-repay requirements may be 

appropriate. The Bureau is also 

proposing two alternative comments 

intended to clarify the calculation of 

points and fees in a transaction 

involving loan originator compensation. 

Accordingly, the Bureau solicits 

feedback regarding these exemptions 

and modifications. 

A. Proposed Exemption for Credit 

Extended Pursuant to a CommunityFocused Lending Program 

The Bureau is proposing to exempt an 

extension of credit made pursuant to a 

program administered by a housing 

finance agency (HFA) from the abilityto-repay requirements. The Bureau 

believes that this exemption may be 

necessary to preserve access to credit for 

low- to moderate-income (LMI) 

consumers. The Bureau is concerned 

that the ability-to-repay requirements 

may undermine the underwriting 

requirements of these programs. For 

example, the ability-to-repay provisions 

may require consideration of 

underwriting factors that are not 

required under HFA programs, such as 

the consumer’s credit history. The 

Bureau is also concerned that the 

ability-to-repay requirements may affect 

the ability of HFAs to offer extensions 

of credit customized to meet the needs 

of LMI consumers while promoting 

long-term housing stability. 

Furthermore, the Bureau is concerned 

that the costs of implementing and 

complying with the ability-to-repay 

requirements would result in a severe 

curtailment of the credit offered under 

these programs. The proposed 

exemption related to HFAs is discussed 

in more detail below in the section-bysection analysis of § 1026.43(a)(3)(iv). 

The Bureau is also proposing to 

exempt an extension of credit made by 

certain types of nonprofit creditors from 

the ability-to-repay requirements. 

Creditors designated by the U.S. 

Department of the Treasury as 

Community Development Financial 

Institutions and creditors designated by 

the U.S. Department of Housing and 

Urban Development as either a 

Community Housing Development 

Organization or a Downpayment 

Assistance Provider of Secondary 

Financing are included in this proposed 

exemption. The proposal also exempts 

creditors designated as nonprofit 

organizations under section 501(c)(3) of 

the Internal Revenue Code, provided 

that the extension of credit is to a 

consumer with income that does not 

exceed the qualifying limit for moderate 

income families as established pursuant 

to section 8 of the United States 

Housing Act of 1937, that during the 

calendar year preceding receipt of the 

consumer’s application the creditor 

extended credit no more than 100 times, 

and only to consumers with income that 

did not exceed the above qualifying 

limit, and that the creditor determines, 

in accordance with written procedures, 

that the consumer has a reasonable 

ability to repay the extension of credit. 

The Bureau is concerned that nonprofit 

creditors may not have the resources to 

implement and comply with the abilityto-repay requirements, and may be 

forced to cease or severely limit 

extending credit to LMI consumers, 

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1The $2 billion threshold reflects the purposes of 

the proposed category and the structure of the 

mortgage lending industry. The Bureau’s choice of 

$2 billion in assets as a threshold for purposes of 

TILA section 129C does not imply that a threshold 

of that type or of that magnitude would be an 

appropriate way to distinguish small firms for other 

purposes or in other industries. 

which would result in the denial of 

responsible, affordable mortgage credit. 

However, to prevent circumvention of 

TILA, the Bureau believes that this 

exemption should be limited to the 

nonprofit creditors identified above. 

The proposed exemption related to 

these nonprofit creditors is discussed in 

more detail below in the section-bysection analysis of § 1026.43(a)(3)(v). 

B. Proposed Exemption for Credit 

Extended Pursuant to a Homeownership 

Stabilization and Foreclosure 

Prevention Program, Federal Agency 

Refinancing Program, or GSE 

Refinancing Program 

The Bureau is proposing to exempt an 

extension of credit made pursuant to an 

Emergency Economic Stabilization Act 

(EESA) program, such as extensions of 

credit made pursuant to a State Hardest 

Hit Fund (HHF) program, from the 

ability-to-repay requirements. The 

Bureau believes that this exemption 

may be necessary to preserve access to 

credit. The Bureau is concerned that 

requiring credit extended pursuant to 

these programs to comply with the 

ability-to-repay provisions may 

unnecessarily interfere with these 

programs’ unique underwriting 

requirements, which would make it 

more difficult for many consumers to 

qualify for assistance and increase the 

cost of credit for those who do, thereby 

impacting the availability of credit for 

these at-risk consumers. Further, the 

Bureau is concerned that creditors may 

elect not to participate in these 

programs, rather than investing 

resources complying with the 

requirements of both homeownership 

stabilization programs and the abilityto-repay requirements, which would 

frustrate efforts to ameliorate the effects 

of the financial crisis and disrupt the 

financial market for consumers at risk of 

foreclosure or default, thereby harming 

those in need of the assistance provided 

under these programs. The proposed 

exemption related to these emergency 

programs is discussed in more detail 

below in the section-by-section analysis 

of § 1026.43(a)(3)(vi). 

The Bureau is proposing to exempt 

from the ability-to-repay requirements a 

refinancing that is eligible to be insured, 

guaranteed, or made pursuant to a 

program administered by the Federal 

Housing Administration, U.S. 

Department of Veterans Affairs, or the 

U.S. Department of Agriculture. The 

proposed exemption is available only 

until the Federal agency administering 

the program under which the extension 

of credit is eligible to be insured, 

guaranteed, or made prescribes rules 

pursuant to section 129C(a)(5) or 

129C(b)(3)(B)(ii) of TILA. The Bureau 

believes that this exemption is 

necessary to preserve access to credit. 

The Federal agencies described above 

have not yet prescribed rules related to 

the ability-to-repay requirements for 

refinances, pursuant to TILA section 

129C(a)(5), or the definition of qualified 

mortgage, pursuant to TILA section 

129C(b)(3)(B)(ii). The Bureau is 

concerned that the ability-to-repay 

provisions would unnecessarily 

interfere with requirements of these 

Federal agency refinance programs, 

which would make it more difficult for 

many consumers to qualify for these 

programs and increase the cost of credit 

for those who do, thereby constraining 

the availability of responsible, 

affordable credit for consumers. The 

proposed exemption related to these 

Federal agencies is discussed in more 

detail below in the section-by-section 

analysis of § 1026.43(a)(3)(vii). 

The Bureau is proposing to exempt an 

extension of credit that is a refinancing 

that is eligible to be purchased or 

guaranteed by the Federal National 

Mortgage Association (Fannie Mae) or 

the Federal Home Loan Mortgage 

Corporation (Freddie Mac) (collectively, 

the GSEs) from the ability-to-repay 

requirements. This proposed exemption 

only applies if: 

• The refinancing is made pursuant to 

an eligible targeted refinancing program, 

as defined under regulations 

promulgated by the Federal Housing 

Finance Agency; 

• Such entities are operating under 

the conservatorship or receivership of 

the Federal Housing Finance Agency on 

the date the refinancing is 

consummated; 

• The existing obligation satisfied and 

replaced by the refinancing is owned by 

Fannie Mae or Freddie Mac; 

• The existing obligation satisfied and 

replaced by the refinancing was not 

consummated on or after January 10, 

2014; and 

• The refinancing is not 

consummated on or after January 10, 

2021. 

The Bureau is concerned that the 

ability-to-repay requirements may add 

unnecessary additional costs and may 

cause needless delays for distressed 

consumers whose current mortgage 

obligations are owned by Fannie Mae or 

Freddie Mac and who seek refinancings 

pursuant to these eligible targeted 

refinancing programs. The proposed 

exemption related to these GSE 

refinancing programs is discussed in 

more detail below in the section-bysection analysis of § 1026.43(a)(3)(viii). 

C. Loans Held in Portfolio by Small 

Creditors 

The 2013 ATR Final Rule defines 

three categories of qualified mortgages. 

Qualified mortgages are provided either 

a conclusive or rebuttable presumption 

of compliance with the requirement that 

creditors make a reasonable, good faith 

determination of a consumer’s ability to 

repay before originating a mortgage 

loan. The Bureau is proposing to define 

a new, fourth category of qualified 

mortgages. 

The proposed new category would 

include certain loans originated by 

small creditors 1 that: 

• Have total assets of $2 billion or 

less at the end of the previous calendar 

year; and 

• Together with all affiliates, 

originated 500 or fewer first-lien 

covered transactions during the 

previous calendar year. 

The proposed new category would 

include only loans held in portfolio by 

these creditors. Therefore, if a creditor 

agreed prior to consummation to sell a 

loan, that loan would not be a qualified 

mortgage under the proposed definition. 

Such loans often are described as being 

subject to a ‘‘forward commitment.’’ The 

rule would provide an exception that 

would allow forward commitments to 

sell to a creditor that also meets the 

limits on asset size and number of firstlien covered transactions. To prevent 

evasion, a loan in the proposed new 

category would lose its status as a 

qualified mortgage if it is held in 

portfolio for less than three years after 

consummation, with certain exceptions. 

The loan also would have to conform 

to all of the requirements under the 

general definition of a qualified 

mortgage except the 43 percent limit on 

monthly debt-to-income ratio. In other 

words, the loan could not have: 

• Negative-amortization, interestonly, or balloon-payment features; 

• A term longer than 30 years; and 

• Points and fees greater than 3 

percent of the total loan amount (or, for 

smaller loans, the amount specified in 

the regulation). 

When underwriting the loan the creditor 

would have to: 

• Consider and verify the consumer’s 

income and assets; and 

• Base the underwriting on a monthly 

payment calculated using the maximum 

interest rate that may apply during the 

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first five years of the loan and that is 

fully amortizing. 

The creditor also would have to 

consider the consumer’s debt-to-income 

ratio or residual income and verify the 

underlying information. In contrast, the 

general definition of a qualified 

mortgage requires creditors to calculate 

debt-to-income ratio according to the 

instructions in appendix Q to the rule 

and prohibits debt-to-income ratios 

above 43 percent. In other words, under 

the proposed additional definition, a 

creditor would not have to use the 

instructions in appendix Q to calculate 

debt-to-income ratio, and a loan with a 

consumer debt-to-income ratio higher 

than 43 percent could be a qualified 

mortgage if all other criteria are met. 

The Bureau also is proposing to allow 

small creditors to charge a higher 

annual percentage rate for first-lien 

qualified mortgages in the proposed 

new category and still benefit from a 

conclusive presumption of compliance 

or ‘‘safe harbor.’’ Qualified mortgages 

can have different levels of protection 

from liability depending on their annual 

percentage rate. Under the existing 

rules, first-lien qualified mortgages with 

an annual percentage rate less than or 

equal to the average prime offer rate 

plus 1.5 percentage points and 

subordinate-lien qualified mortgages 

with an annual percentage rate less than 

or equal to the average prime offer rate 

plus 3.5 percentage points are within 

the safe harbor. A qualified mortgage 

with an annual percentage rate above 

those thresholds is presumed to comply 

with the ability-to-repay rules, but a 

consumer could rebut that presumption 

under certain circumstances. A 

qualified mortgage in the proposed new 

category would be conclusively 

presumed to comply if the annual 

percentage rate is equal to or less than 

the average prime offer rate plus 3.5 

percentage points for both first-lien and 

subordinate-lien loans. 

The Bureau is proposing these 

changes because it believes they may be 

necessary to preserve access to 

responsible, affordable mortgage credit 

for some consumers. Small creditors are 

a significant source of loans that, for 

various reasons, do not qualify for 

government guarantee and insurance 

programs and cannot be sold for 

securitization. Larger creditors often are 

unwilling to make these loans because 

they involve consumers or properties 

with unique features that make them 

difficult to assess using larger creditors’ 

underwriting standards or because 

larger creditors are unwilling to hold the 

loans in portfolio. Small creditors often 

are willing and able to consider these 

consumers and properties individually 

and to hold the loans on their balance 

sheets. Small creditors also may be the 

predominant source of credit in many 

rural areas where large creditors do not 

operate. 

Small creditors may be particularly 

well suited to make mortgage loans that 

are responsible and affordable because 

their small size, relationship-based 

lending model, and ties to their 

communities enable them to make more 

accurate assessments of consumers’ 

ability to repay than larger creditors. 

Small creditors also have strong 

incentives to carefully consider whether 

a consumer will be able to repay a 

portfolio loan at least in part because 

the small creditor retains the risk of 

default. 

Small creditors often charge higher 

interest rates and fees for legitimate 

business reasons. For example, small 

creditors often pay more for the funds 

they lend and may charge more to 

compensate for the interest rate and 

other risks associated with holding a 

loan in portfolio. 

Many small creditors have expressed 

concerns about the litigation risk 

associated with the requirement to make 

a reasonable and good faith 

determination of consumers’ ability to 

pay based on verified and documented 

information. Indeed, small creditors 

assert that they will not continue to 

make mortgage loans unless they are 

protected from liability for violations of 

the ability-to-repay rules by a 

conclusive presumption of compliance 

or ‘‘safe harbor.’’ The Bureau therefore 

believes that creating a new category of 

qualified mortgages that would include 

small creditor portfolio loans and 

raising the annual percentage rate 

threshold for the safe harbor to 

accommodate small creditors’ higher 

costs may be necessary to preserve some 

consumers’ access to mortgage credit 

and also would ensure that the mortgage 

credit is provided in a responsible, 

affordable way. 

The Bureau is soliciting comment on 

both the proposed approach to small 

creditor portfolio loans generally and on 

the specific criteria proposed. The 

proposed amendments related to small 

creditor portfolio loans are discussed in 

more detail below in the section-bysection analysis of § 1026.43(b)(4) and 

(e)(5). 

D. Higher-Priced Covered Transaction 

Threshold for Balloon-Payment 

Qualified Mortgages 

The Bureau also is proposing to allow 

small creditors operating predominantly 

in rural or underserved areas to offer 

first-lien balloon loans with a higher 

annual percentage rate and still benefit 

from a conclusive presumption of 

compliance with the ability-to-repay 

rules or ‘‘safe harbor.’’ The Bureau 

believes this change may be necessary to 

preserve access to responsible, 

affordable mortgage credit in rural and 

underserved areas. 

Consumers in rural and underserved 

areas may be able to obtain a mortgage 

loan only from small creditors because 

larger creditors often do not lend in 

those areas. Small creditors operating 

predominantly in rural and underserved 

areas assert that they cannot offer 

mortgage loans unless they are allowed 

to make balloon loans that are protected 

from liability for violations of the 

ability-to-repay rules by a safe harbor. 

The Bureau’s current rule provides 

that certain balloon loans made by small 

creditors operating predominantly in 

rural or underserved areas are qualified 

mortgages. However, qualified 

mortgages can have different levels of 

protection from liability depending on 

their annual percentage rate. Under the 

existing rules, first-lien qualified 

mortgages with an annual percentage 

rate less than or equal to the average 

prime offer rate plus 1.5 percentage 

points and subordinate-lien qualified 

mortgages with an annual percentage 

rate less than or equal to the average 

prime offer rate plus 3.5 percentage 

points are within the safe harbor. 

Qualified mortgages with annual 

percentage rates above these thresholds 

are presumed to comply with the 

ability-to-repay rules, but a consumer 

can rebut that presumption under 

certain circumstances. 

Small creditors often charge higher 

interest rates and fees for legitimate 

business reasons, such as to cover their 

higher costs and to compensate for 

interest rate and other risks associated 

with holding a loan in portfolio. 

Therefore, the Bureau is concerned that 

many balloon-payment qualified 

mortgages will have annual percentage 

rates that are too high to qualify for the 

safe harbor. Because small creditors 

operating in rural and underserved areas 

insist that they are unwilling to make 

mortgage loans outside of the safe 

harbor because of litigation risk, this 

could limit access to credit for some 

consumers. 

The Bureau is soliciting comment on 

adjusting the annual percentage rate 

threshold for balloon-payment qualified 

mortgages generally and on the specific 

threshold proposed. The proposed 

amendment is discussed in more detail 

below in the section-by-section analysis 

of § 1026.43(b)(4). 

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2 General rulemaking authority for TILA 

transferred to the Bureau in July 2011, other than 

for certain motor vehicle dealers in accordance with 

Dodd-Frank Act section 1029, 12 U.S.C. 5519. 

Pursuant to that transferred rulemaking authority, 

the Bureau issued its own Regulation Z, 12 CFR 

part 1026, which substantially parallels the Board’s 

Regulation Z, 12 CFR part 226. See 76 FR 79767 

(Dec. 22, 2011). 

3HOEPA defines a class of ‘‘high-cost mortgages,’’ 

which are generally consumer credit transactions 

secured by the consumers’ principal dwellings 

(originally excluding home-purchase loans and 

open-end lines of credit, although the Dodd-Frank 

Act amended HOEPA to cover such transactions) 

with annual percentage rates or total points and fees 

exceeding prescribed thresholds. Mortgages covered 

by the HOEPA amendments have been referred to 

as ‘‘HOEPA loans,’’ ‘‘section 32 loans,’’ ‘‘high-cost 

mortgages,’’ or ‘‘high-cost mortgage loans.’’ The 

Dodd-Frank Act now refers to these loans as ‘‘highcost mortgages.’’ See Dodd-Frank Act section 1431; 

TILA section 103(aa). For simplicity and 

consistency, this proposed rule uses the term ‘‘highcost mortgages’’ to refer to mortgage loans covered 

by the HOEPA provisions. 

4Originally 15 U.S.C. 1639(l)(2)(A), subsequently 

recodified by the Dodd-Frank Act as 15 U.S.C. 

1639(p)(2)(A). 

5Under the Board’s 2008 HOEPA Final Rule, a 

higher-priced mortgage loan is a consumer credit 

transaction secured by the consumer’s principal 

dwelling with an APR that exceeds the average 

prime offer rate (APOR) for a comparable 

transaction, as of the date the interest rate is set, by 

1.5 or more percentage points for loans secured by 

a first lien on the dwelling, or by 3.5 or more 

percentage points for loans secured by a 

subordinate lien on the dwelling. The definition of 

a ‘‘higher-priced mortgage loan’’ includes 

practically all ‘‘high-cost mortgages’’ because the 

latter transactions are determined by higher loan 

pricing threshold tests. See 12 CFR 226.35(a)(1), 

since codified in parallel by the Bureau at 12 CFR 

1026.35(a)(1). 

II. Background 

For over 20 years, consumer 

advocates, legislators, and regulators 

have raised concerns about creditors 

originating mortgage loans without 

regard to the consumer’s ability to repay 

the loan. Beginning in about 2006, these 

concerns were heightened as mortgage 

delinquencies and foreclosure rates 

increased dramatically, caused in part 

by the gradual deterioration in 

underwriting standards. See 73 FR 

44524 (Jul. 30, 2008). The following is 

presented as background information, 

including a brief summary of the 

legislative and regulatory responses to 

this issue, which culminated in the 

enactment of the Dodd-Frank Act on 

July 21, 2010, the Board of Governors of 

the Federal Reserve System’s (the 

Board) issuance of a proposed rule on 

May 11, 2011 to implement certain 

amendments to TILA made by the 

Dodd-Frank Act, the Bureau’s issuance 

of the final rule to implement sections 

1411, 1412, and 1414 of the Dodd-Frank 

Act, and this proposal to provide certain 

exemptions from and amendments to 

the ability-to-repay requirements. For 

additional detailed background 

regarding the issues addressed in this 

proposal, see the discussion in part II of 

the Bureau’s final rule, published 

elsewhere in today’s Federal Register. 

A. TILA and Regulation Z 

In 1968, Congress enacted TILA, 15 

U.S.C. 1601 et seq., based on findings 

that economic stability would be 

enhanced and competition among 

consumer credit providers would be 

strengthened by the informed use of 

credit resulting from consumers’ 

awareness of the cost of credit. One of 

the purposes of TILA is to promote the 

informed use of consumer credit by 

requiring disclosures about its costs and 

terms. See 15 U.S.C. 1601(a). TILA 

requires additional disclosures for loans 

secured by consumers’ homes and 

permits consumers to rescind certain 

transactions secured by their principal 

dwellings. See 15 U.S.C. 1635, 1637a. 

Section 105(a) of TILA directs the 

Bureau (formerly the Board) 2 to 

prescribe regulations to carry out TILA’s 

purposes, and specifically authorizes 

the Bureau, among other things, to issue 

regulations that contain such additional 

requirements, classifications, 

differentiations, or other provisions, or 

that provide for such adjustments and 

exceptions for all or any class of 

transactions, that in the Bureau’s 

judgment are necessary or proper to 

effectuate the purposes of TILA, 

facilitate compliance with TILA, or 

prevent circumvention or evasion 

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

is implemented by the Bureau’s 

Regulation Z, 12 CFR part 1026. 

Commentary provided in the Official 

Interpretations supplement to 

Regulation Z interprets the requirements 

of the regulation and provides guidance 

to creditors in applying the rules to 

specific transactions. See 12 CFR part 

1026, Supp. I. 

B. Ability-to-Repay Requirements Prior 

to the Dodd-Frank Act 

In response to evidence of abusive 

practices in the home-equity lending 

market, Congress amended TILA by 

enacting the Home Ownership and 

Equity Protection Act (HOEPA) in 1994. 

Public Law 103–325, 108 Stat. 2160. 

HOEPA created special substantive 

protections for ‘‘high-cost mortgage 

loans,’’ 3 including prohibiting a 

creditor from engaging in a pattern or 

practice of extending a high-cost 

mortgage to a consumer based on the 

consumer’s collateral without regard to 

the consumer’s repayment ability, 

including the consumer’s current and 

expected income, current obligations, 

and employment. TILA section 129(h); 

15 U.S.C. 1639(h). In addition to the 

disclosures and limitations specified in 

the statute, TILA section 129, as added 

by HOEPA, expanded the Board’s 

rulemaking authority by authorizing the 

Board to prohibit acts or practices the 

Board found to be unfair and deceptive 

in connection with mortgage loans.4

In 1995, the Board implemented the 

HOEPA amendments at §§ 226.31, 

226.32, and 226.33 of Regulation Z. See 

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

particular, § 226.32(e)(1) implemented 

TILA section 129(h) to prohibit a 

creditor from extending a high-cost 

mortgage based on the consumer’s 

collateral if, considering the consumer’s 

current and expected income, current 

obligations, and employment status, the 

consumer would be unable to make the 

scheduled payments. In 2001, the Board 

amended these regulations to expand 

HOEPA’s protections to more loans by 

revising the annual percentage rate 

(APR) threshold and the points and fees 

definition. See 66 FR 65604 (Dec. 20, 

2001). In addition, the ability-to-repay 

provisions in the regulation were 

revised to provide for a presumption of 

a violation of the rule if the creditor 

engages in a pattern or practice of 

making high-cost mortgages without 

verifying and documenting the 

consumer’s repayment ability. 

After the Board finalized the 2001 

HOEPA rules, new consumer protection 

issues arose in the mortgage market. 

During a series of national hearings held 

by the Board in 2006 and 2007, 

consumer advocates and government 

officials expressed a number of concerns 

and urged the Board to use HOEPA to 

prohibit or restrict certain underwriting 

practices, such as ‘‘stated income’’ or 

‘‘low documentation’’ loans, and certain 

product features, such as prepayment 

penalties. See 73 FR 44527 (Jul. 30, 

2008). In response to these hearings, in 

July of 2008, the Board adopted final 

rules adding new protections under 

HOEPA. See 73 FR 44522 (Jul. 30, 2008) 

(the Board’s 2008 HOEPA Final Rule). 

The Board’s 2008 HOEPA Final Rule 

defined a new class of ‘‘higher-priced 

mortgage loans’’ (HPMLs) 5 with APRs 

that are lower than those prescribed for 

HOEPA loans but that nevertheless 

exceed the average prime offer rate by 

prescribed amounts. This new category 

of loans was designed to include 

subprime credit. Among other things, 

the Board’s 2008 HOEPA Final Rule 

revised the ability-to-repay 

requirements for high-cost mortgages 

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6Originally adopted as 12 CFR 226.34(a)(4), 

226.35(b)(2), since recodified as 12 CFR 

1026.34(a)(4), 1026.35(b)(1). 

7Specifically, the rule prohibits a creditor from 

extending a higher-priced mortgage loan based on 

the collateral and without regard to the consumer’s 

repayment ability, and prohibits a creditor from 

relying on income or assets to assess repayment 

ability unless the creditor verifies such amounts 

using third party documents that provide 

reasonably reliable evidence of the consumer’s 

income and assets. For further information, see the 

Bureau’s 2012 HOEPA Proposal, 77 FR 49090 (Aug. 

15, 2012). 

8Subsequently renumbered by the Dodd-Frank 

Act as TILA section 129(p)(2). 

9Sections 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. 

10Sections 1024 through 1026 of the Dodd-Frank 

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

11Although S. Rpt. No. 111–176 contains general 

legislative history concerning the Dodd-Frank Act 

and the Senate ability-to-repay provisions, it does 

not address the House Mortgage Reform and AntiPredatory Lending Act. Separate legislative history 

for the predecessor House bills is available in H. 

Rpt. No. 110–441 for H.R. 3915 (2007), and H. Rpt. 

No. 111–194 for H.R. 1728 (2009). 

and extended these requirements to 

higher-priced mortgage loans.6

Significantly, the Board’s 2008 

HOEPA Final Rule prohibited 

individual high-cost mortgage loans or 

higher-priced mortgage loans from being 

extended based on the collateral 

without regard to repayment ability, 

rather than simply prohibiting a pattern 

or practice of making extensions based 

on the collateral without regard to 

ability to repay.7 The Board exercised 

its authority under TILA section 

129(l)(2) 8 to revise HOEPA’s restrictions 

based on a conclusion that the revisions 

were necessary to prevent unfair and 

deceptive acts or practices in 

connection with mortgage loans. See 73 

FR 44545 (July 30, 2008). In particular, 

the Board concluded that a prohibition 

on making individual loans without 

regard for repayment ability was 

necessary to ensure a remedy for 

consumers who are given unaffordable 

loans and to deter irresponsible lending, 

which injures individual consumers. 

The Board determined that imposing the 

burden to prove ‘‘pattern or practice’’ on 

an individual consumer would leave 

many consumers with a lesser remedy, 

such as those provided under some 

State laws, or without any remedy, for 

loans made without regard to repayment 

ability. The Board further determined 

that removing this burden would not 

only improve remedies for individual 

consumers, it would also increase 

deterrence of irresponsible lending. 

C. The Dodd-Frank Act 

In 2007, Congress held hearings 

focused on the extent to which lending 

practices contributed to rising subprime 

foreclosure rates. Consumer advocates 

testified that certain lending terms or 

practices contributed to the 

foreclosures, including a failure to 

consider the consumer’s ability to repay, 

low- or no-documentation loans, hybrid 

adjustable-rate mortgages, and 

prepayment penalties. Industry 

representatives, on the other hand, 

testified that adopting substantive 

restrictions on subprime loan terms 

would risk reducing access to credit for 

some consumers. In response to these 

hearings, the House of Representatives 

passed the Mortgage Reform and AntiPredatory Lending Act, both in 2007 

and again in 2009. H.R. 3915, 110th 

Cong. (2007); H.R. 1728, 111th Cong. 

(2009). Both bills would have amended 

TILA to provide consumer protections 

for mortgages, including ability-to-repay 

requirements, but neither bill was 

passed by the Senate. Instead, both 

houses shifted their focus to enacting 

comprehensive financial reform 

legislation, and the Senate passed its 

own version of ability-to-repay 

requirements as part of that effort, called 

the Restoring American Financial 

Stability Act of 2010. S. 3217, 111th 

Cong. (2010). 

After several months of additional 

debate and negotiations, the Dodd-Frank 

Act was signed into law on July 21, 

2010. Public Law 111–203, 124 Stat. 

1376 (2010). In the Dodd-Frank Act, 

Congress established the Bureau and, 

under sections 1061 and 1100A, 

consolidated the rulemaking authority 

for many consumer financial protection 

statutes, including the two primary 

Federal consumer protection statutes 

governing mortgage credit, TILA and the 

Real Estate Settlement Procedures Act 

(RESPA), in the Bureau.9 Congress also 

provided the Bureau with supervision 

authority for certain consumer financial 

protection statutes over certain entities, 

including insured depository 

institutions with total assets over $10 

billion and their affiliates, and all 

mortgage-related non-depository 

financial service providers.10

At the same time, Congress 

significantly amended the statutory 

requirements governing mortgage 

practices with the intent to restrict the 

practices that contributed to the crisis. 

Title XIV of the Dodd-Frank Act, titled 

the Mortgage Reform and Anti-Predatory 

Lending Act, contains several new 

regulations designed to prevent the 

mortgage lending practices that harmed 

consumers and contributed to the 

financial crisis.11 Sections 1411, 1412, 

and 1414 of the Dodd-Frank Act created 

new TILA section 129C, which 

establishes, among other things, new 

ability-to-repay requirements and new 

limits on prepayment penalties. Section 

1402 of the Dodd-Frank Act states that 

Congress created new TILA section 

129C upon a finding that ‘‘economic 

stabilization would be enhanced by the 

protection, limitation, and regulation of 

the terms of residential mortgage credit 

and the practices related to such credit, 

while ensuring that responsible, 

affordable mortgage credit remains 

available to consumers.’’ TILA section 

129B(a)(1), 15 U.S.C. 1639b(a)(1). 

Section 1402 of the Dodd-Frank Act 

further states that the purpose of TILA 

section 129C is to ‘‘assure that 

consumers are offered and receive 

residential mortgage loans on terms that 

reasonably reflect their ability to repay 

the loans.’’ TILA section 129B(a)(2), 15 

U.S.C. 1639b(a)(2). 

Specifically, TILA section 129C: 

• Expands coverage of the ability-torepay requirements to any consumer 

credit transaction secured by a dwelling, 

except an open-end credit plan, credit 

secured by an interest in a timeshare 

plan, reverse mortgage, or temporary 

loan. 

• Prohibits a creditor from making a 

mortgage loan unless the creditor makes 

a reasonable and good faith 

determination, based on verified and 

documented information, that the 

consumer has a reasonable ability to 

repay the loan according to its terms, 

and all applicable taxes, insurance, and 

assessments. 

• Provides a presumption of 

compliance with the ability-to-repay 

requirements if the mortgage loan is a 

‘‘qualified mortgage,’’ which does not 

contain certain risky features and limits 

points and fees on the loan. 

The statutory ability-to-repay 

standards reflect Congress’s belief that 

certain lending practices (such as lowor no-documentation loans) and terms 

(such as hybrid adjustable-rate 

mortgages and loans with negative 

amortization) led to consumers having 

mortgages they could not afford, 

resulting in high default and foreclosure 

rates. Accordingly, new TILA section 

129C prohibits a creditor from making a 

residential mortgage loan unless the 

creditor makes a reasonable and good 

faith determination, based on verified 

and documented information, that the 

consumer has a reasonable ability to 

repay the loan according to its terms. 

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12Sections 1402 through 1405 of the Dodd-Frank 

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

13Section 1032(f) of the Dodd-Frank Act, codified 

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

14Sections 1418, 1420, 1463, and 1464 of the 

Dodd-Frank Act, codified at 12 U.S.C. 2605; 15 

U.S.C. 1638, 1638a, 1639f, and 1639g. 

15The eight proposed factors were: (1) Current or 

reasonably expected income or assets; (2) current 

employment status; (3) the monthly payment on the 

mortgage; (4) the monthly payment on any 

simultaneous loan; (5) the monthly payment for 

mortgage-related obligations; (6) current debt 

obligations; (7) the monthly debt-to-income ratio, or 

residual income; and (8) credit history. 

16The alternative is based on a Dodd-Frank Act 

provision that is meant to provide flexibility for 

certain refinancings, which are no- or lowdocumentation transactions designed to move 

consumers out of risky mortgage loans and into 

more stable mortgage loan products, what the 

proposal defined as mortgage loans that, among 

other things, do not contain negative amortization, 

interest-only payments, or balloon payments, and 

have limited points and fees. 

17The Board’s proposed first alternative would 

have operated as a legal safe harbor and defined a 

‘‘qualified mortgage’’ as a mortgage for which: (a) 

The loan does not contain negative amortization, 

interest-only payments, or balloon payments, or a 

loan term exceeding 30 years; (b) the total points 

and fees do not exceed 3 percent of the total loan 

amount; (c) the consumer’s income or assets are 

verified and documented; and (d) the underwriting 

of the mortgage is based on the maximum interest 

rate in the first five years, uses a payment schedule 

that fully amortizes the loan over the loan term, and 

takes into account any mortgage-related obligations. 

The Board’s proposed second alternative would 

have provided a rebuttable presumption of 

compliance and defined a ‘‘qualified mortgage’’ as 

including the criteria listed above in the first 

alternative as well as the following additional 

underwriting requirements from the ability-to-repay 

standard: the consumer’s employment status, the 

monthly payment for any simultaneous loan, the 

consumer’s current debt obligations, the total debtto-income ratio or residual income, and the 

consumer’s credit history. 

18As the Board’s proposal noted, this standard is 

evidently meant to accommodate community banks 

that originate balloon loans to hedge against interest 

rate risk. 

To provide more certainty to creditors 

while protecting consumers from 

unaffordable loans, the Dodd-Frank Act 

provides a presumption of compliance 

with the ability-to-repay requirements 

for certain ‘‘qualified mortgages.’’ 

Qualified mortgages are prohibited from 

containing certain features that Congress 

considered to increase risks to 

consumers and must comply with 

certain limits on points and fees. The 

Act states that a creditor or assignee 

may presume that a loan has met the 

repayment ability requirement if the 

loan is a qualified mortgage, but does 

not address whether the presumption is 

conclusive or, if it can be rebutted, on 

what grounds it may be challenged. 

The Dodd-Frank Act creates special 

remedies for violations of TILA section 

129C. As amended by section 1416 of 

the Dodd-Frank Act, TILA section 

130(a) provides that a consumer who 

brings a timely action against a creditor 

for a violation of TILA section 129C(a) 

(the ability-to-repay requirements) may 

be able to recover special statutory 

damages equal to the sum of all finance 

charges and fees paid by the consumer, 

unless the creditor demonstrates that 

the failure to comply is not material. 15 

U.S.C. 1640(a). This recovery is in 

addition to actual damages; statutory 

damages in an individual action or class 

action, up to a prescribed threshold; and 

court costs and attorney fees that would 

be available for violations of other TILA 

provisions. In addition, the statute of 

limitations for an action for a violation 

of TILA section 129C is three years from 

the date of the occurrence of the 

violation (as compared to one year for 

most other TILA violations). TILA 

section 130(e), 15 U.S.C. 1640(e). 

Moreover, as amended by section 1413 

of the Dodd-Frank Act, TILA section 

130(k) provides that when a creditor or 

an assignee initiates a foreclosure 

action, a consumer may assert a 

violation of TILA section 129C(a) ‘‘as a 

matter of defense by recoupment or 

setoff.’’ 15 U.S.C. 1640(k). There is no 

time limit on the use of this defense, nor 

is there any requirement that the 

violation be apparent to the assignee on 

the face of the documents obtained from 

the creditor. However, the amount of 

special statutory damages that may be 

recovered in recoupment or setoff is 

limited to no more than three years of 

finance charges and fees. 

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

established other new standards 

concerning a wide range of mortgage 

lending practices, including 

compensation of mortgage loan 

originators,12 Federal mortgage loan 

disclosures 13 and mortgage loan 

servicing.14 Those and other DoddFrank Act provisions are the subjects of 

other rulemakings by the Bureau. For 

additional information on these 

rulemakings, see part III of the Bureau’s 

2013 ATR Final Rule. 

D. The Board’s Proposed and the 

Bureau’s Final Rules 

In 2011, the Board published for 

public comment a proposed rule 

amending Regulation Z to implement 

the foregoing ability-to-repay 

amendments to TILA made by the 

Dodd-Frank Act. See 76 FR 27390 (May 

11, 2011) (Board’s 2011 ATR Proposal or 

Board’s proposal). Consistent with the 

Dodd-Frank Act, the Board’s proposal 

applied the ability-to-repay 

requirements to any consumer credit 

transaction secured by a dwelling 

(including vacation homes and home 

equity loans), except an open-end credit 

plan, extension of credit secured by a 

consumer’s interest in a timeshare plan, 

reverse mortgage, or temporary loan 

with a term of 12 months or less. 

The Board’s proposal provided four 

options for complying with the abilityto-repay requirement. First, the proposal 

would have allowed a creditor to meet 

the general ability-to-repay standard by 

originating a mortgage loan for which 

the creditor considered and verified 

eight underwriting factors in 

determining repayment ability, and the 

mortgage payment calculation is based 

on the fully indexed rate.15 Second, the 

proposal would have allowed a creditor 

to meet the general ability-to-repay 

standard by refinancing a ‘‘non-standard 

mortgage’’ into a ‘‘standard 

mortgage.’’ 16 Under this option, the 

proposal would not have required the 

creditor to verify the consumer’s income 

or assets. Third, the proposal would 

have allowed a creditor to meet the 

general ability-to-repay standard by 

originating a ‘‘qualified mortgage,’’ 

which provides special protection from 

liability for creditors. Because the Board 

determined that it was unclear whether 

that protection is intended to be a safe 

harbor or a rebuttable presumption of 

compliance with the repayment ability 

requirement, the Board proposed two 

alternative definitions of a ‘‘qualified 

mortgage.’’ 17 Finally, the proposal 

would have allowed a small creditor 

operating predominantly in rural or 

underserved areas to originate a balloonpayment qualified mortgage if the loan 

term is five years or more, and the 

payment calculation is based on the 

scheduled periodic payments, excluding 

the balloon payment.18 The Board’s 

proposal also would have implemented 

the Dodd-Frank Act’s limits on 

prepayment penalties, lengthened the 

time creditors must retain evidence of 

compliance with the ability-to-repay 

and prepayment penalty provisions, and 

prohibited evasion of the rule by 

structuring a closed-end extension of 

credit as an open-end plan. 

As discussed above, the Bureau 

inherited rulemaking authority under 

TILA from the Board in July 2011, 

including the authority to finalize the 

Board’s 2011 ATR Proposal. See 

sections 1061 and 1100A of the DoddFrank Act. The Bureau’s 2013 ATR 

Final Rule implemented the ability-torepay requirements. Consistent with 

TILA section 129C, the Bureau’s 2013 

ATR Final Rule adopted § 1026.43(a), 

which applies the ability-to-repay 

requirements to any consumer credit 

transaction secured by a dwelling, 

except an open-end credit plan, 

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6628 Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Proposed Rules 

19TILA section 129C(b)(2)(B) defines the Average 

Prime Offer Rate as ‘‘the average prime offer rate for 

a comparable transaction as of the date on which 

the interest rate for the transaction is set, as 

published by the Bureau.’’ 15 U.S.C. 1639c(b)(2)B). 

timeshare plan, reverse mortgage, or 

temporary loan. 

As adopted, § 1026.43(c) provides that 

a creditor is prohibited from making a 

covered mortgage loan unless the 

creditor makes a reasonable and good 

faith determination, based on verified 

and documented information, that the 

consumer will have a reasonable ability 

to repay the loan, including any 

mortgage-related obligations (such as 

property taxes and mortgage insurance). 

Section 1026.43(c) describes certain 

requirements for making ability-to-repay 

determinations, but does not provide 

comprehensive underwriting standards 

to which creditors must adhere. At a 

minimum, however, the creditor must 

consider and verify eight underwriting 

factors: (1) Current or reasonably 

expected income or assets; (2) current 

employment status; (3) the monthly 

payment on the covered transaction; (4) 

the monthly payment on any 

simultaneous loan; (5) the monthly 

payment for mortgage-related 

obligations; (6) current debt obligations; 

(7) the monthly debt-to-income ratio or 

residual income; and (8) credit history. 

Section 1026.43(c)(3) generally 

requires the creditor to verify the 

information relied on in determining a 

consumer’s repayment ability using 

reasonably reliable third-party records, 

with special rules for verifying a 

consumer’s income or assets. Section 

1026.43(c)(5)(i) requires the creditor to 

calculate the monthly mortgage 

payment based on the greater of the 

fully indexed rate or any introductory 

rate, assuming monthly, fully 

amortizing payments that are 

substantially equal. Section 

1026.43(c)(5)(ii) provides special 

payment calculation rules for loans with 

balloon payments, interest-only loans, 

and negative amortization loans. 

Section 1026.43(d) provides special 

rules for complying with the ability-torepay requirements for a creditor 

refinancing a ‘‘non-standard mortgage’’ 

into a ‘‘standard mortgage.’’ This 

provision is based on TILA section 

129C(a)(6)(E), which contains special 

rules for the refinancing of a ‘‘hybrid 

loan’’ into a ‘‘standard loan.’’ The 

purpose of this provision is to provide 

flexibility for creditors to refinance a 

consumer out of a risky mortgage into a 

more stable one without undertaking a 

full underwriting process. Under 

§ 1026.43(d), a non-standard mortgage is 

defined as an adjustable-rate mortgage 

with an introductory fixed interest rate 

for a period of one year or longer, an 

interest-only loan, or a negative 

amortization loan. Under this option, a 

creditor refinancing a non-standard 

mortgage into a standard mortgage does 

not have to consider the eight specific 

underwriting criteria listed under 

§ 1026.43(c), if certain conditions are 

met. 

Section 1026.43(e) specifies 

requirements for originating ‘‘qualified 

mortgages,’’ as well as standards for 

when the presumption of compliance 

with ability-to-repay requirements can 

be rebutted. Section 1026.43(e)(1)(i) 

provides a safe harbor under the abilityto-repay requirements for loans that 

satisfy the definition of a qualified 

mortgage and are not higher-priced 

covered transactions (i.e., the APR does 

not exceed the Average Prime Offer Rate 

(APOR) 19 plus 1.5 percentage points for 

first-lien loans or 3.5 percentage points 

for subordinate-lien loans). Section 

1026.43(e)(1)(ii) provides a rebuttable 

presumption for qualified mortgage 

loans that are higher-priced covered 

transactions (i.e., the APR exceeds 

APOR plus 1.5 percent for first lien or 

3.5 percent for subordinate lien). 

Section 1026.43 also provides three 

options for creditors to originate a 

qualified mortgage: 

Qualified mortgage—general. Under 

the general definition for qualified 

mortgages in § 1026.43(e)(2), a creditor 

must satisfy the statutory criteria 

restricting certain product features and 

points and fees on the loan, consider 

and verify certain underwriting 

requirements that are part of the general 

ability-to-repay standard, and confirm 

that the consumer has a total (or ‘‘backend’’) debt-to-income ratio that is less 

than or equal to 43 percent. To 

determine whether the consumer meets 

the specific debt-to-income ratio 

requirement, the creditor must calculate 

the consumer’s monthly debt-to-income 

ratio in accordance with appendix Q. A 

loan that satisfies these criteria and is 

not a higher-priced covered transaction 

receives a legal safe harbor from the 

ability-to-repay requirements. A loan 

that satisfies these criteria and is a 

higher-priced covered transaction 

receives a rebuttable presumption of 

compliance with the ability-to-repay 

requirements. 

Qualified mortgage—special rules. 

The second option for originating a 

qualified mortgage provides a temporary 

alternative to the general definition in 

§ 1026.43(e)(2). This option is intended 

to avoid unnecessarily disrupting the 

mortgage market at a time when it is 

especially fragile, as a result of the 

recent mortgage crisis. Section 

1026.43(e)(4) provides that a loan is a 

qualified mortgage if it meets the 

statutory limitations on product features 

and points and fees, satisfies certain 

other requirements, and is eligible for 

purchase, guarantee, or insurance by 

one of the following entities: 

• Fannie Mae or Freddie Mac, while 

operating under the conservatorship or 

receivership of the Federal Housing 

Finance Agency pursuant to section 

1367 of the Federal Housing Enterprises 

Financial Safety and Soundness Act of 

1992; 

• Any limited-life regulatory entity 

succeeding the charter of either Fannie 

Mae or Freddie Mac pursuant to section 

1367(i) of the Federal Housing 

Enterprises Financial Safety and 

Soundness Act of 1992; 

• The U.S. Department of Housing 

and Urban Development under the 

National Housing Act (FHA); 

• The U.S. Department of Veterans 

Affairs (VA); 

• The U.S. Department of Agriculture 

(USDA); or 

• The U.S. Department of Agriculture 

Rural Housing Service (RHS). 

With respect to GSE-eligible loans, 

this temporary provision expires when 

conservatorship of the GSEs ends. With 

respect to each other category of loan, 

this provision expires on the effective 

date of a rule issued by each respective 

Federal agency pursuant to its authority 

under TILA section 129C(b)(3)(ii) to 

define a qualified mortgage. In any 

event, this temporary provision expires 

no later than January 10, 2021. 

Qualified mortgage—balloon-payment 

loans by certain creditors. The third 

option for originating qualified 

mortgages is included under 

§ 1026.43(f), which provides that a small 

creditor operating predominantly in 

rural or underserved areas can originate 

a balloon-payment qualified mortgage. 

The Dodd-Frank Act generally prohibits 

balloon-payment mortgages from being 

qualified mortgages. However, the 

statute creates a limited exception, with 

special underwriting rules, for loans 

made by a creditor that: (1) Operates 

predominantly in rural or underserved 

areas; (2) together with affiliates, has 

total annual residential mortgage loan 

originations that do not exceed a limit 

set by the Bureau; and (3) retains the 

balloon loans in portfolio. The purpose 

of this definition is to preserve credit 

availability in rural or underserved 

areas by assuring that small creditors 

offering loans that cannot be sold on the 

secondary market, and therefore must be 

placed on the creditor’s balance sheet, 

are able to use a balloon-payment 

structure as a means of controlling 

interest rate risk. 

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Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Proposed Rules 6629 

20 Inside Mortg. Fin., The 2011 Mortgage Market 

Statistical Annual (2011). 

21There is evidence that some consumers who 

would have qualified for ‘‘prime’’ loans were 

steered into subprime loans as well. The Federal 

Reserve Board on July 18, 2011 issued a consent 

cease and desist order and assessed an $85 million 

civil money penalty against Wells Fargo & Company 

of San Francisco, a registered bank holding 

company, and Wells Fargo Financial, Inc., of Des 

Moines. The order addresses allegations that Wells 

Fargo Financial employees steered potential primeeligible consumers into more costly subprime loans 

and separately falsified income information in 

mortgage applications. In addition to the civil 

money penalty, the order requires that Wells Fargo 

compensate affected consumers. See Press Release, 

Federal Reserve Board (July 20, 2011), available at 

http://www.federalreserve.gov/newsevents/press/ 

enforcement/20110720a.htm. 

22U.S. Fin. Crisis Inquiry Comm’n, The Financial 

Crisis Inquiry Report: Final Report of the National 

Commission on the Causes of the Financial and 

Economic Crisis in the United States at 215–217 

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

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

23 FCIC Report at 215. CoreLogic Chief Economist 

Mark Fleming told the FCIC that the early payment 

default rate ‘‘certainly correlates with the increase 

in the Alt-A and subprime shares and the turn of 

the housing market and the sensitivity of those loan 

products.’’ Id. 

24 FCIC Report at 217. 

25Abigail Pound, Challenges and Changes in 

Community-Based Lending for Homeownership, 

NeighborWorks America, Joint Center for Housing 

Studies of Harvard University (February 2011), 

available at http://www.jchs.harvard.edu/sites/ 

jchs.harvard.edu/files/w11-2_pound.pdf. 

Section 1026.43(f)(1)(vi) limits 

eligibility to creditors that originated 

500 or fewer covered transactions in the 

preceding calendar year and that have 

assets of no more than $2 billion (to be 

adjusted annually). In addition, to 

originate a balloon-payment qualified 

mortgage more than 50 percent of a 

creditor’s total first-lien covered 

transactions must have been secured by 

properties in counties that are ‘‘rural’’ or 

‘‘underserved,’’ as designated by the 

Bureau. A county is ‘‘rural’’ if, during a 

calendar year, it is located in neither a 

metropolitan statistical area nor a 

micropolitan statistical area adjacent to 

a metropolitan statistical area, as those 

terms are defined by the U.S. Office of 

Management and Budget. A county is 

‘‘underserved’’ if no more than two 

creditors extend covered transactions 

five or more times in that county during 

a calendar year. Also, during the 

preceding and current calendar years, 

the creditor must not have sold or 

assigned legal title to any balloonpayment qualified mortgage originated 

pursuant to this provision. Balloon 

loans by such creditors are eligible for 

qualified mortgage status if they meet 

the statutory limitations on product 

features and points and fees, and if the 

creditor follows certain other 

requirements that are part of the general 

ability-to-repay standard. 

The Bureau’s 2013 ATR Final Rule 

contains two additional requirements 

relevant to this proposal. Section 

1026.43(g) implements the Dodd-Frank 

Act limits on prepayment penalties. 

Section 1026.43(h) prohibits a creditor 

from structuring a closed-end extension 

of credit as an open-end plan to evade 

the ability-to-repay requirements. 

III. The Mortgage Loan Market 

Overview 

For a complete discussion of the 

mortgage market, the financial crisis 

that precipitated the Dodd-Frank Act, 

and more recent efforts at stabilization, 

see part II of the Bureau’s 2013 ATR 

Final Rule. The mortgage market is the 

single largest market for consumer 

financial products and services in the 

United States. In 2008 this market 

collapsed, greatly diminishing the 

wealth of millions of American 

consumers and sending the economy 

into a severe recession. A primary cause 

of the collapse was the steady 

deterioration of credit standards in 

mortgage lending. Evidence 

demonstrates that many mortgage loans 

were made solely against collateral and 

without consideration of ability to 

repay, particularly in the markets for 

‘‘subprime’’ and ‘‘Alt-A’’ products, 

which more than doubled from $400 

billion in originations in 2003 to $830 

billion in originations in 2006.20

Subprime products were sold primarily 

to consumers with poor or no credit 

history, while Alt-A loans were sold 

primarily to consumers who provided 

little or no documentation of income or 

other evidence of repayment ability.21

Because subprime and Alt-A loans 

involved additional risk, they were 

typically more expensive to consumers 

than ‘‘prime’’ mortgage loans, although 

many of them had very low introductory 

interest rates. While housing prices 

continued to increase, it was relatively 

easy for consumers to refinance their 

existing loans into more affordable 

products to avoid interest rate resets and 

other adjustments. When housing prices 

began to decline in 2005, however, 

refinancing became more difficult and 

delinquency rates on subprime and AltA products increased dramatically.22 By 

the summer of 2006, 1.5 percent of loans 

less than a year old were in default, and 

this figure peaked at 2.5 percent in late 

2007.23 As the economy worsened, the 

rates of serious delinquency (90 or more 

days past due or in foreclosure) for the 

subprime and Alt-A products began a 

steep increase from approximately 10 

percent in 2006, to 20 percent in 2007, 

to over 40 percent in 2010.24

Although the mortgage market is 

recovering, consumers today continue to 

feel the effects of the financial crisis. 

A. Community-Focused Lending 

Programs 

While governmental and nonprofit 

programs have always been an 

important source of assistance for lowto moderate-income (LMI) consumers, 

these programs have taken on even 

greater significance in light of current 

tight mortgage credit standards and 

Federal initiatives to stabilize the 

housing market. There are a variety of 

programs designed to assist LMI 

consumers with access to 

homeownership. These programs are 

generally offered through a nonprofit 

entity, local government, or a housing 

finance agency (HFA). These programs 

play a significant role in the housing 

sector of the economy. 

Types of Financial Assistance Available 

Community-focused lending programs 

typically provide LMI consumers with 

assistance ranging from housing 

counseling services to full mortgage 

loan financing. Some programs offer 

financial assistance through land trust 

programs, in which the consumer leases 

the real property and takes ownership of 

only the improvements. Many 

organizations provide ‘‘downpayment 

assistance’’ in connection with mortgage 

loan financing. This can be a gift, grant, 

or loan to the consumer to assist with 

the consumer’s down payment, or to 

pay for some of the closing costs. These 

programs often rely on subsidies from 

Federal government funds (such as 

through the HUD HOME program), local 

government funds, foundations, or 

employer funding.25

Some programs offer first-lien 

mortgage loans designed to meet the 

needs of LMI consumers. These firstlien mortgage loans may have a 

discounted interest rate, limited 

origination fees, or permit high loan-tovalue ratios. Many programs offer 

subordinate financing. Subordinatefinancing options may be simple, such 

as a relatively inexpensive subordinatelien loan to pay for closing costs. Other 

methods of subordinate financing may 

be complex. For example, one HFA 

program offers a 30-year, fixed-rate, 

subordinate-lien mortgage loan through 

partner creditors, with interest-only 

payments for the first 11 years of the 

loan’s term, and which also provides the 

LMI consumer with an interest subsidy, 

resulting in a graduated monthly 

payment between the fifth and eleventh 

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26See http://www.mhp.net/homeownership/ 

homebuyer/soft_second_works.php, describing the 

SoftSecond program offered by the Massachusetts 

Housing Partnership. 

27The first State housing finance agency was 

established in New York in 1960. See New York 

State Housing Finance Agency Act, 1960 Laws of 

New York, 183rd Session, Chap. 671. 

28For example, the Louisiana Housing 

Corporation administers affordable housing 

programs across all of Louisiana, while The Finance 

Authority of New Orleans administers programs 

only in Orleans Parish. See www.lhfa.state.la.us and 

www.financeauthority.org. 

29Bonds issued by SHFAs are tax-exempt if the 

proceeds are used to provide assistance to first-time 

or LMI-homebuyers. See 26 U.S.C. 143. 

30See www.hud.gov/homeprogram. 

31The Tax Reform Act of 1986, Public Law 99– 

514, 100 Stat. 2085 (1986), included the LowIncome Housing Tax Credit Program. Under this 

program, the IRS provides tax credits to SHFAs. 

SHFAs may transfer these tax credits to developers 

of affordable housing. Developers then sell these 

credits to fund the development program. See 

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

program_offices/comm_planning/ 

affordablehousing/training/web/lihtc/basics. 32The Massachusetts Affordable Housing Trust 

Fund provides funds to governmental subdivisions, 

nonprofit organizations, and other entities seeking 

to provide for the development of affordable 

housing. See www.masshousing.com. New York 

State’s Mitchell-Lama program provides subsidies 

such as property tax exemptions to affordable 

housing developers. See http://www.nyshcr.org/ 

Programs/mitchell-lama/. 

33National Council of State Housing Agencies, 

State HFA Factbook (2010), p. 33. 

34 Id. at 21–22, 35–36. 

35See http://www.irs.gov/Charities-&-Non-Profits/ 

Charitable-Organizations/ExemptionRequirements—Section-501(c)(3)-Organizations. 

36See http://www.irs.gov/Charities-&-Non-Profits/ 

Other-Non-Profits/Social-Welfare-Organizations. 

37See 68 FR 5704 (Feb. 4, 2003). 

38See 12 CFR 1805.201(b). 

39 Id. Treasury Department eligibility 

requirements for CDFIs stipulate that an approved 

organization must: Be a legal entity at the time of 

certification application; have a primary mission of 

promoting community development; be a financing 

entity; primarily serve one or more target markets; 

provide development services in conjunction with 

its financing activities; maintain accountability to 

its defined target market; and be a non-government 

entity and not be under control of any government 

entity (Tribal governments excluded). 

40See http://www.cdfifund.gov/docs/ 

certification/cdfi/CDFI List—07–31–12.xls. 

41See 24 CFR 200.194. 

42 ‘‘Nonprofit organizations are important 

participants in HUD’s efforts to further affordable 

housing opportunities for low- and moderateincome persons through the FHA single family 

programs. FHA’s single family regulations recognize 

a special role for nonprofit organizations in 

conjunction with the * * * provision of secondary 

financing.’’ See 67 FR 39238 (June 6, 2002). 

year of the loan; an additional 30-year 

deferred, 0 percent subordinate-lien 

mortgage loan is extended by the HFA 

equal to the amount of the subsidy.26

Some of the loans offered by these 

programs, whether first-lien or 

subordinate-financing, are structured as 

hybrid grant products that commonly 

will be forgiven. 

Housing Finance Agencies 

For over 50 years, HFAs have 

provided LMI consumers with 

opportunities for affordable 

homeownership.27 HFAs are quasigovernmental entities, chartered by 

either a State or a municipality, that 

engage in diverse housing financing 

activities for the promotion of affordable 

housing. Some HFAs are chartered to 

promote affordable housing goals across 

an entire state, while others’ jurisdiction 

extends to only particular cities or 

counties.28 These agencies are generally 

funded through tax-exempt bonds.29

HFAs issue these tax-exempt bonds, 

also known as Mortgage Revenue Bonds, 

and use the proceeds of the bond sale 

to finance affordable mortgage loans to 

LMI consumers. As of June, 2012, the 51 

State HFAs (SHFAs) had $107 billion in 

outstanding tax-free municipal debt 

available. These Mortgage Revenue 

Bonds funded approximately 100,000 

first-time homeowners per year. HFAs 

may also receive funding through 

Federal programs, such as HUD’s HOME 

Investment Partnerships Program, 

which is the largest Federal block grant 

for affordable housing.30

HFAs employ several methods of 

promoting affordable homeownership. 

These agencies may partner with local 

governments to develop and implement 

long-term community-development 

strategies. For example, HFAs may 

provide tax credits to companies that 

build or rehabilitate affordable 

housing.31 These agencies may also 

administer affordable housing trust 

funds or other State programs to 

facilitate the affordable housing 

development.32 Many HFAs also 

provide education or training courses to 

first-time or LMI consumers. 

HFAs also provide financial 

assistance directly to consumers. 

Typically, HFAs offer the first-lien 

mortgage loan, subordinate financing, 

and downpayment assistance programs 

described above. HFAs may also 

establish pooled loss reserves to selfinsure mortgage loans originated 

pursuant to the program, thereby 

permitting LMI consumers to avoid 

private mortgage insurance. In 2010, 

HFAs provided about $10 billion in 

affordable financing.33 In 2010, 89 

percent of SHFAs provided down 

payment assistance loan or grant 

assistance and 57 percent of SHFAs 

provided assistance in conjunction with 

FHA or USDA programs.34 However, 

HFAs generally do not provide direct 

financing to LMI consumers. HFAs 

partner with creditors, such as local 

banks, that extend credit pursuant to the 

HFA’s program guidelines. 

Private Organizations 

While entities such as HFAs develop 

and finance affordable housing 

programs, these mortgage loans are 

generally extended by private 

organizations. These organizations often 

are structured as nonprofit 501(c)(3) 

organizations. Under Internal Revenue 

Code section 501(c)(3), the designation 

is for nonprofit, tax-exempt, charitable 

organizations not operated for the 

benefit of private interests.35 Under 

Federal tax law, 501(c)(3) organizations 

are restricted from lobbying activities, 

while 501(c)(4) organizations, which 

must exist to promote social welfare, 

may engage in political campaigning 

and lobbying.36 Most organizations that 

provide support to LMI consumers are 

structured as 501(c)(3) organizations. 

However, some organizations are 

structured as nonprofit 501(c)(4) 

organizations. 

Various Federal programs establish 

eligibility requirements and provide 

ongoing monitoring of specific types of 

creditors that receive Federal grants and 

other support. For example, Community 

Development Financial Institutions 

(CDFIs) are approved by the U.S. 

Department of the Treasury (Treasury 

Department) to receive monetary awards 

from the Treasury Department’s CDFI 

Fund, which was established to promote 

capital development and growth in 

underserved communities. Promoting 

homeownership and providing safe 

lending alternatives are among the 

Fund’s main goals. The Treasury 

Department created the CDFI 

designation to identify and support 

small-scale creditors that are committed 

to community-focused lending, but have 

difficulty raising the capital needed to 

provide affordable housing services.37

CDFIs may operate on a for-profit or 

nonprofit basis, provided the CDFI has 

a primary mission of promoting 

community development.38 These 

programs are also subject to other 

eligibility requirements.39 As of July 

2012 there were 999 such organizations 

in the U.S., 62 percent of which are 

classified as Community Development 

(CD) Loan Funds, 22 percent as CD 

Credit Unions, while the rest are CD 

Banks, Thrifts, or CD Venture Capital 

Funds.40

The U.S. Department of Housing and 

Urban Development (HUD) may 

designate nonprofits engaging in 

affordable housing activities as 

Downpayment Assistance through 

Secondary Financing Providers 

(DAPs).41 HUD established this 

designation as part of an effort to 

promote nonprofit involvement in 

affordable housing programs.42 HUDmstockstill on DSK4VPTVN1PROD with 

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43See http://portal.hud.gov/hudportal/HUD?src=/ 

program_offices/housing/sfh/np/sfhdap01. 

44See https://entp.hud.gov/idapp/html/ 

f17npdata.cfm. 

45 ‘‘It is vital that the Department periodically and 

uniformly assess the management and financial 

ability of participating nonprofit agencies to ensure 

they are not overextending their capabilities and 

increasing HUD’s risk of loss as a mortgage 

insurance provider.’’ 65 FR 9285, 9286 (Feb. 24, 

2000). 

46 ‘‘HUD continues to strongly encourage the 

participation of nonprofit organizations, including 

community and faith-based organizations, in its 

programs. This proposed rule is not designed to 

place particular burdens on participation by 

nonprofit organizations. Rather, the proposed rule 

is designed to ensure that nonprofit organizations 

have the capacity, experience, and interest to 

participate in HUD’s housing programs.’’ 69 FR 

7324, 7325 (Feb. 13, 2004). 

47See http://portal.hud.gov/hudportal/HUD?src=/ 

program_offices/comm_planning/ 

affordablehousing/programs/home. 

48 ‘‘The Department believes that there was 

specific statutory intent to create an entitlement for 

community based nonprofit organizations who 

would own, sponsor or develop HOME assisted 

housing. While partnerships with State and local 

government are critical to the development of 

affordable housing, these organizations are viewed 

as private, independent organizations separate and 

apart from State or local governments. One of the 

major objectives of the Department’s technical 

assistance program is to increase the number of 

capable, successful CHDOs able and willing to use 

the CHDO set-aside [fund].’’ 61 FR 48736, 48737 

(Sept. 16, 1996). 

49See 24 CFR 92.300 et. seq. 

50See 24 CFR 92.2. 

51For example, no more than 5 percent of a 

Participating Jurisdiction’s fiscal year HOME 

allocation may be used for CHDO operating 

expenses. 24 CFR 92.208(a). 

52See 24 CFR 92.550 et. seq. 

53 ‘‘[Participating jurisdictions] have encountered 

new challenges in administering their programs and 

in managing their growing portfolios of older 

HOME projects. These challenges include reduced 

availability of states or local funding sources, 

reduced private lending, changes in housing 

property standards, and energy codes and 

reductions in states and local government 

workforces throughout the Nation. These challenges 

have been magnified by current housing and credit 

market conditions.’’ 76 FR 78343, 78345 (Dec. 16, 

2011). 

54The Federal Home Loan Bank of Des Moines 

provides funds for member bank programs related 

to rural homeownership, urban first-time 

homebuyers, and Native American homeownership. 

See http://www.fhlbdm.com/communityinvestment/down-payment-assistance-programs/. 

The Federal Home Loan Bank of Chicago provides 

funds for member bank programs related to down 

payment and closing cost assistance or eligible 

rehabilitation costs for the purchase of a home. See 

http://ci.fhlbc.com/Grant_Pgms/DPP.shtml. 

55FNMA offers first-lien mortgage loans through 

the My Community Mortgage program and 

subordinate-lien loans through the Community 

Seconds program. FHLMC offers both first- and 

subordinate-lien mortgage loans through the Home 

Possible program. 

56Under the Community Reinvestment Act (12 

U.S.C. 2901), depository institutions may meet 

community reinvestment goals by directly 

originating or purchasing mortgage loans provided 

to LMI consumers. See 12 CFR 228.22. 

approved nonprofits may participate in 

FHA single-family programs that allow 

them to purchase homes at a discount, 

finance FHA-insured mortgages with the 

same terms and conditions as owneroccupants, or be able to finance 

secondary loans for consumers 

obtaining FHA-insured mortgages. A 

DAP must be approved by HUD if it is 

a nonprofit or nonprofit instrumentality 

of government that provides 

downpayment assistance as a lien in 

conjunction with an FHA first mortgage; 

government entity DAPs and gift 

programs do not require approval.43 As 

of November 2012 HUD lists 233 

nonprofit agencies and nonprofit 

instrumentalities of government in the 

U.S. that are authorized to provide 

secondary financing.44 HUD performs 

field reviews and requires annual 

reports of participating nonprofit 

agencies. Additionally, HUD’s quality 

control plan requires periodic review for 

deficient policies and procedures and 

corrective actions. These approval and 

subsequent review procedures are 

intended to ensure that DAPs operate in 

compliance with HUD requirements and 

remain financially viable.45 However, 

HUD recognizes that these nonprofits 

have limited resources and gives 

consideration to DAP viability when 

crafting regulations.46

Creditors may also be certified by 

HUD as Community Housing 

Development Organizations (CHDOs) in 

connection with HUD’s HOME 

Investment Partnership Program, which 

provides grants to fund a wide range of 

activities that promote affordable 

homeownership.47 HUD Participating 

Jurisdictions confer CHDO certification 

only on community-focused nonprofits 

that are both dedicated to furthering a 

community’s affordable housing goals 

and capable of complying with the 

requirements of the HOME Program.48

Creditors designated as CHDOs are 

eligible to receive special CHDO setaside funds from HUD’s HOME program 

to fund local homebuyer assistance 

programs.49 Applicants seeking CHDO 

status must meet rigorous requirements. 

For example, a CHDO must be 

designated as a nonprofit under section 

501(c)(3) or (c)(4) of the Internal 

Revenue Code, adhere to strict 

standards of financial accountability, 

have among its purposes the provision 

of decent and affordable housing for 

LMI consumers, maintain accountability 

to the community, and have a proven 

record of capably and effectively serving 

low-income communities.50 After the 

CHDO designation is obtained, CHDO 

creditors must operate under the 

supervision of a Participating 

Jurisdiction and in accordance with the 

requirements of the HUD HOME 

Program.51 HUD conducts annual 

performance reviews to determine 

whether funds have been used in 

accordance with program 

requirements.52 While HUD continues 

to support affordable housing programs 

involving CHDOs, current market 

conditions have affected CHDO 

viability.53

Nonprofit creditors may engage in 

community-focused lending without 

obtaining one of the designations 

described above. Such nonprofits often 

rely on HFA or Federal programs for 

funding, lending guidelines, and other 

support. However, some nonprofits offer 

credit to LMI consumers independent of 

these State or Federal programs. For 

example, nonprofits may make mortgage 

loans in connection with a GSE 

affordable housing program. The 

Federal Home Loan Bank (FHLB) 

System, Fannie Mae (FNMA), and 

Freddie Mac (FHLMC) offer several 

programs to support affordable housing 

by facilitating mortgage financing for 

LMI consumers. For example, the FHLB 

Affordable Housing Program provides 

grants to member banks to fund 

programs that assist with closing costs 

or down payments, buy down principal 

amounts or interest rates, refinance an 

existing loan, or assist with 

rehabilitation or construction costs.54

Fannie Mae and Freddie Mac also offer 

two programs focused on communityfocused lending.55

Other options exist for nonprofits 

seeking to develop and fund 

community-focused lending programs. 

For example, a nonprofit may originate 

mortgage loans to LMI consumers and 

subsequently sell the loans to a bank, 

credit union, or other investor as part of 

a Community Reinvestment Act 

partnership program.56 Other nonprofits 

may operate a limited affordable 

housing assistance fund, funded entirely 

by private donations, under which LMI 

consumers may obtain subordinate 

financing. Nonprofits such as these 

often rely on the underwriting 

performed by the creditor for the firstlien mortgage loan, which is often a 

bank or credit union, to process, 

underwrite, and approve the LMI 

consumer’s application. In addition, 

some nonprofits are self-supporting and 

offer full financing to LMI consumers. 

These nonprofits often establish lending 

programs with unique guidelines, such 

as requirements that LMI consumers 

devote a minimum number of hours 

towards the construction of affordable 

housing. 

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6632 Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Proposed Rules 

57A 2011 OCC survey shows that 56 percent of 

banks tightened residential real estate underwriting 

requirements between 2007 and 2008, and 73 

percent tightened underwriting requirements 

between 2008 and 2009. See Office of the 

Comptroller of the Currency, Survey of Credit 

Underwriting Practices 2011, p. 11. 58 ‘‘[W]ith house prices becoming flat or declining 

in many parts of the country during 2007, it has 

become increasingly difficult for many subprime 

ARM borrowers to refinance. While many such 

borrowers remain current on their loans or are still 

able to refinance at market rates or into FHA 

products, an increasing number have either fallen 

behind on their existing payments or face the 

prospect of falling behind when rates reset and they 

are unable to refinance.’’ Accelerating Loan 

Modifications, Improving Foreclosure Prevention 

and Enhancing Enforcement, 110th Cong. (Dec. 6, 

2007) (testimony of John C. Dugan, Comptroller, 

Office of the Comptroller of the Currency). 

59By the third quarter of 2007, the ratio of 

mortgage-related financial obligations (which is 

comprised of mortgage debt, homeowners’ 

insurance, and property tax) to disposable personal 

income reached an all-time high of 11.3 percent. 

See http://www.federalreserve.gov/releases/ 

housedebt/. 60 ‘‘[A]nalysts are concerned that mortgage 

foreclosures will climb significantly higher and, 

along with falling housing prices, overwhelm the 

ability of mortgage markets to restructure or 

refinance loans for creditworthy borrowers.’’ 

Congressional Budget Office, Options for 

Responding to Short-Term Economic Weakness, p. 

21 (January 2008). 

61 ‘‘[A] breakdown of mortgage markets could put 

the economy on a self-reinforcing downward spiral 

of less lending, weaker economic activity, lower 

house prices, more foreclosures, even less lending, 

and so on, either causing or significantly worsening 

a recession.’’ Id. p. 21–22. 

62 12 U.S.C. 5201 et. seq.; Pub. L. 110–343 (Oct. 

3, 2008). 

63See Sec. 7002 of Public Law 111–5 (January 6, 

2009). 

64 12 U.S.C. 5219(a)(1). 

65See www.makinghomeaffordable.gov. 

66See http://www.treasury.gov/initiatives/ 

financial-stability/TARP-Programs/housing/hhf/ 

Pages/default.aspx. 

67See Press Release, Treasury Department, Relief 

for Responsible Homeowners (March 4, 2009), 

available at: http://www.treasury.gov/press-center/ 

press-releases/Pages/200934145912322.aspx. 

68See Troubled Asset Relief Program (TARP) 

Monthly Report to Congress—September 2009. 

69See United States Department of the Treasury 

Office of Financial Stability, ‘‘Troubled Asset Relief 

Program: Two Year Retrospective’’ (October 2010). 

70See e.g., Supplemental Directive 10–02 (March 

24, 2010), modifying HAMP, Supplemental 

Directive 11–07 (July 25, 2011), expanding 

eligibility for the Home Affordable Unemployment 

Program, and Supplemental Directive 12–02 (March 

9, 2012), expanding HAMP eligibility. 

71Press Release, Treasury Department, Expanding 

Our Efforts to Help More Homeowners and 

Strengthen Hard-hit Communities (Jan. 27, 2012), 

available at http://www.treasury.gov/connect/blog/ 

Pages/Expanding-our-efforts-to-help-morehomeowners-and-strengthen-hard-hitcommunities.aspx. 

72 In addition to HAMP, the Second Lien 

Modification Program, and the Home Affordable 

Foreclosure Alternatives Program, the Treasury 

Department also operates the Principal Reduction 

Alternative Program and the Home Affordable 

Unemployment Program. 

73These programs are the FHA Home Affordable 

Modification Program, USDA Special Loan 

Servicing, Veterans Affairs Home Affordable 

Modification, FHA Second Lien Modification 

Program, and the FHA Short Refinance Program. 

74See October 2012 Making Home Affordable 

Report. 

75See Hardest Hit Fund Program Guidelines 

Round 1, available at: http://www.treasury.gov/ 

initiatives/financial-stability/TARP-Programs/ 

housing/Documents/HFA_Proposal_Guidelines_- 

_1st_Rd.pdf. 

B. Homeownership Stabilization and 

Foreclosure Prevention Programs 

During the early stages of the financial 

crisis the mortgage market significantly 

tightened mortgage loan underwriting 

requirements in response to uncertainty 

over the magnitude of potential losses 

due to delinquencies, defaults, and 

foreclosures.57 This restriction in credit 

availability coincided with increasing 

unemployment, falling home values, 

and the onset of subprime ARM resets. 

As a result, many subprime ARM 

consumers could not afford their 

mortgage payments and were not able to 

obtain refinancings. This led to 

increases in delinquencies and 

foreclosures, which prompted further 

tightening of underwriting standards. 

Other subprime ARM consumers were 

able to remain current, but were not able 

to refinance because of a decrease in 

their loan-to-value ratio or an increase 

in their debt-to-income ratio.58

However, these consumers devoted 

most of their disposable income to 

mortgage payments, thereby lowering 

overall consumer demand and further 

weakening the national economy.59

Policymakers became concerned that 

the losses incurred from foreclosures on 

subprime mortgage loans would 

destabilize the entire mortgage market.60

There was a particular concern that the 

uncertainty surrounding exposure to 

these losses would lead to a fearinduced downward economic spiral.61

As the crisis worsened, industry 

stakeholders attempted to stop this selfreinforcing cycle through a series of 

measures intended to stabilize 

homeownership and prevent 

foreclosure. Beginning in late 2008, the 

Federal government, Federal agencies, 

and GSEs implemented programs 

designed to facilitate refinancings and 

loan modifications. 

The Troubled Asset Relief Program. 

The U.S. government enacted and 

implemented several programs intended 

to promote economic recovery by 

stabilizing homeownership and 

preventing foreclosure. The Emergency 

Economic Stabilization Act of 2008,62 as 

amended by the American Recovery and 

Reinvestment Act of 2009,63 authorizes 

the Treasury Department to ‘‘use loan 

guarantees and credit enhancements to 

facilitate loan modifications to prevent 

avoidable foreclosures.’’ 64 Pursuant to 

this authority, the Treasury Department 

established the Troubled Asset Relief 

Program (TARP), under which two 

programs were created to provide 

financial assistance directly to 

homeowners in danger of losing their 

homes: the Making Home Affordable 

(MHA) program and the Hardest Hit 

Fund (HHF) program. The MHA 

program is operated by the Treasury 

Department and seeks to provide 

Federally directed assistance to 

consumers who are at risk of default, 

foreclosure, or were otherwise harmed 

by the financial crisis.65 The HHF 

program provides funds to certain 

SHFAs in States where the Treasury 

Department has determined that locallydirected stabilization programs are 

required.66

MHA began with the introduction of 

the Home Affordable Modification 

Program (HAMP) in March 2009.67

HAMP, which is intended to assist 

employed homeowners by replacing the 

consumer’s current mortgage loan with 

a more affordable mortgage loan, was 

immediately successful; nearly 500,000 

trial modifications were begun during 

the first six months of the program.68

MHA offerings expanded with the 

creation of the Second Lien 

Modification Program in August 2009 

and the Home Affordable Foreclosure 

Alternatives Program in November 

2009.69 The Treasury Department 

subsequently modified these programs 

several times in response to the 

changing needs of distressed consumers 

and the mortgage market.70

MHA programs are currently 

scheduled to expire on December 31, 

2013, although there is continuing 

debate about whether to extend them.71

As of December 2012, ten programs 

have been established under MHA. The 

Treasury Department operates five MHA 

programs.72 The remaining five MHA 

programs are operated in conjunction 

with FHA, VA, or USDA programs.73

Many consumers facing default or 

foreclosure have received assistance 

under these programs. For example, 

from the beginning of the HAMP 

program to October 2012, over 1.1 

million permanent HAMP modifications 

have been completed, saving distressed 

consumers an estimated $16.2 billion.74

In March 2010 the Treasury 

Department established the HHF 

program to enable the States most 

affected by the financial crisis to 

develop innovative assistance 

programs.75 Nineteen programs have 

been established under the HHF fund, 

which is currently scheduled to expire 

on December 31, 2017. These programs 

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76The HHF provides funds to SHFAs located in 

Alabama, Arizona, California, Florida, Georgia, 

Illinois, Indiana, Kentucky, Michigan, Mississippi, 

Nevada, New Jersey, North Carolina, Ohio, Oregon, 

Rhode Island, South Carolina, Tennessee, and 

Washington, DC. 

77See Troubled Asset Relief Program (TARP) 

Monthly Report to Congress—November 2012. 

78See Keep Your Home California 2012 Fourth 

Quarterly Report. 

79See Hardest Hit Fund Program Guidelines 

Round 1, available at: http://www.treasury.gov/ 

initiatives/financial-stability/TARP-Programs/ 

housing/Documents/HFA_Proposal_Guidelines_- 

_1st_Rd.pdf. 

80From 2011–2012, the program agreements 

between the 19 SHFAs and the Treasury 

Department were modified 55 times. See http:// 

www.treasury.gov/initiatives/financial-stability/ 

TARP-Programs/housing/hhf/Pages/Archivalinformation.aspx. 

81See Tenth Amendment to Commitment to 

Purchase Financial Instrument and HFA 

Participation Agreement, available at http:// 

www.treasury.gov/initiatives/financial-stability/ 

TARP-Programs/housing/Pages/ProgramDocuments.aspx. 

82See Sec. 504 of the Veterans’ Benefits 

Improvement Act of 2008, Public Law 110–389 

(Oct. 10, 2008). 

83See HUD Mortgagee Letter 2009–07. Section 

1202(b) of the American Recovery and 

Reinvestment Act of 2009, Pub. L. 111–5 (January 

6, 2009), authorized the Secretary of Housing and 

Urban Development to increase the loan limit. 

84The FHA Streamline Refinance Program 

contains reduced underwriting requirements for 

consumers with FHA mortgage loans seeking to 

refinance into a new FHA mortgage loan with a 

reduced interest rate. The FHA has offered 

streamline refinances for over thirty years. See HUD 

Mortgagee Letter 1982–23. 

85See HUD Mortgagee Letter 2010–23. 

86See 75 FR 52429 (Aug. 26, 2010). 

87See Rural Dev. Admin. Notice No. 4615 (1980– 

D) (Feb. 1, 2012). 

88This number represents FHA’s market share by 

dollar volume. By number of originations, the FHA 

controlled 6.5 percent of the refinance market, with 

312,385 refinances originated. See FHA-Insured 

Single-Family Mortgage Originations and Market 

Share Report 2012—Q2, available at http://

portal.hud.gov/hudportal/documents/huddoc?id=

fhamktq2_2012.pdf. 

89See Hearing on FY13 Federal Housing 

Administration’s Budget Request, 112th Cong. (Mar. 

8, 2012) (testimony of Carol Galante, Acting 

Assistant Secretary for Housing/Federal Housing 

Administration Commissioner for the U.S. 

Department of Housing and Urban Development). 

90A total of 996,871 mortgage loans were 

endorsed under the FHA Streamline Refinance 

program from Fiscal Year 2009 through 2012. See 

FHA Outlook Reports for Fiscal Years 2009, 2010, 

2011, and 2012, available at http://portal.hud.gov/ 

hudportal/HUD?src=/program_offices/housing/

rmra/oe/rpts/ooe/olmenu. 

91See Office of the Special Inspector General for 

the Troubled Asset Relief Program, Quarterly 

Report to Congress, p. 64 (Oct. 25, 2012). 

92See Press Release, FHFA, Statement of FHFA 

Director James B. Lockhart (September 7, 2008), 

available at: http://www.fhfa.gov/webfiles/23/

FHFAStatement9708final.pdf. 

93See Press Release, FHFA, FHFA Announces 

Implementation Plans for Streamlined Loan 

Modification Program, (Dec. 18, 2008), available at 

http://www.fhfa.gov/webfiles/267/

SMPimplementation121808.pdf. 

94See Press Release, Treasury Department, Relief 

for Responsible Homeowners (March 4, 2009), 

available at: http://www.treasury.gov/press-center/

press-releases/Pages/200934145912322.aspx. 

95See Press Release, FHFA, FHFA Authorized 

Fannie Mae and Freddie Mac to Expand Home 

Continued 

provide assistance to homeowners in 

the District of Columbia and the 18 

states most affected by the economic 

crisis.76 The HHF provides funds 

directly to HFAs in these States, which 

are used to create foreclosure-avoidance 

programs. As of November 2012, $1.7 

billion has been allocated to support the 

57 programs established to assist 

distressed consumers in these 

localities.77 In California alone, nearly 

17,000 consumers have received over 

$166 million in assistance since the 

beginning of the program.78

As with the MHA programs discussed 

above, these HHF programs have 

evolved over time. The Treasury 

Department originally encouraged 

SHFAs to establish programs for 

mortgage modifications, principal 

forbearance, short sales, principal 

reduction for consumers with high loanto-value ratios, unemployment 

assistance, and second-lien mortgage 

loan reduction or modification.79 No 

SHFAs were able to establish all of these 

programs in the early stages of the HHF. 

However, through 2011 and 2012 State 

HHF programs were significantly 

modified and expanded.80 The 19 

SHFAs continue to modify these 

programs to develop more effective and 

efficient methods of providing 

assistance to at-risk consumers. For 

example, in September 2012 the Nevada 

HHF program was amended for the 

tenth time.81

Federal agency programs. In response 

to the financial crisis, the FHA, the VA, 

and the USDA expanded existing 

programs and implemented new 

programs intended to facilitate 

refinancings for consumers at risk of 

delinquency or default. Some of these 

programs operate in conjunction with 

the Treasury Department’s MHA 

program, while others are run solely by 

the particular Federal agency. In 2008 

Congress expanded access to 

refinancings under the VA’s Interest 

Rate Reduction Refinancing Loan 

program by raising the maximum loanto-value ratio to 100 percent and 

increasing the maximum loan amount of 

loans eligible to be guaranteed under the 

program.82 In February 2009 HUD 

increased the maximum loan amount for 

FHA-insured mortgages.83 This change 

expanded access to refinancings 

available under the FHA’s Streamline 

Refinance Program.84 Several months 

later, the FHA created the Short 

Refinance Option program to assist 

consumers with non-FHA mortgage 

loans.85 This program, which operates 

in conjunction with TARP, permits 

underwater consumers to refinance if 

the current creditor agrees to write 

down 10 percent of the outstanding 

principal balance. Similarly, in August 

2010 the Rural Housing Service of the 

USDA (RHS) adopted rules intended to 

facilitate loan modifications for 

consumers struggling to make payments 

on USDA Guaranteed Loans.86 The 

USDA subsequently created the Single 

Family Housing Guaranteed Rural 

Refinance Pilot Program, which was 

intended to refinance USDA borrowers 

into more stable and affordable 

mortgage loans.87

These efforts have enabled many 

consumers to receive refinancings under 

these programs. In 2011, the FHA 

accounted for 5.6 percent of the 

mortgage refinance market, with 

originations totaling $59 billion.88

However, the number of consumers 

receiving assistance under these 

programs varies. For example, between 

April 2009 and December 2011, the 

FHA started 5.6 million mortgage loan 

modifications.89 During a similar time 

period, nearly 997,000 FHA Streamline 

Refinances were consummated.90 In 

contrast, between February 2010 and 

September 2012, only 1,772 mortgage 

loans were refinanced under the Short 

Refinance Option program.91 Efforts 

continue to develop and enhance these 

programs to assist distressed 

homeowners while improving the 

performance of existing mortgage loans 

owned, insured, or guaranteed by these 

agencies. 

HARP and other GSE refinancing 

programs. After the GSEs were placed 

into conservatorship in late 2008, the 

Federal Housing Finance Agency 

(FHFA) took immediate steps to reduce 

GSE losses by mitigating foreclosures.92

In November 2008 FHFA and the GSEs, 

in coordination with the Treasury 

Department and other stakeholders, 

announced the Streamlined 

Modification Program, which was 

intended to help delinquent consumers 

avoid foreclosure by affordably 

restructuring mortgage payments.93 This 

program was the precursor to the Home 

Affordable Refinance Program (HARP) 

that was announced in March 2009.94

The HARP program was originally set to 

expire in June 2010 and limited to 

consumers with a loan-to-value ratio 

that did not exceed 105 percent. 

However, HARP was modified over time 

to account for the deteriorating mortgage 

market. In July 2010 the maximum loanto-value ratio was increased from 105 

percent to 125 percent.95 Nine months 

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Affordable Refinance Program to 125 Percent Loanto-Value (July 1, 2009), available at: http://

www.fhfa.gov/webfiles/13495/125_LTV_release_

and_fact_sheet_7_01_09%5B1%5D.pdf. 

96See Press Release, FHFA, FHFA Extends 

Refinance Program By One Year (March 1, 2010), 

available at: http://www.fhfa.gov/webfiles/15466/

HARPEXTENDED3110%5B1%5D.pdf. 

97See Treasury Department Press Release supra 

note 94. 

98See Press Release, FHFA, FHFA, Fannie Mae 

and Freddie Mac Announce HARP Changes to 

Reach More Borrowers (Oct. 24, 2011), available at: 

http://www.fhfa.gov/webfiles/22721/HARP_release_

102411_Final.pdf. 

99See Federal Housing Finance Agency Refinance 

Report (June 2012). 

100See Federal Housing Finance Agency 

Refinance Report (September 2012). 

101 Id. 

102 ‘‘Today, we continue to meet with lenders to 

ensure HARP is helping underwater borrowers 

refinance at today’s historical low interest rates. As 

we continue to gain insight from the program we 

will make additional operational adjustments as 

needed to enhance access to this program.’’ Edward 

J. DeMarco, Acting Director Federal Housing 

Finance Agency, Remarks at the American Mortgage 

Conference (Sept. 10, 2012), available at http://

www.fhfa.gov/webfiles/24365/2012DeMarco

NCSpeechFinal.pdf. 

103 ‘‘[C]ommunity banks tend to base credit 

decisions on local knowledge and nonstandard data 

obtained through long-term relationships and are 

less likely to rely on the models-based underwriting 

used by larger banks.’’ Federal Deposit Insurance 

Corporation, FDIC Community Banking Study, p. 1– 

1 (December 2012) (FDIC Community Banking 

Study). 

104See FCIC Report at 72. 

105See FCIC Report at 89. 

106Between 2005 and 2008, while loan 

originations at banks with assets in excess of $10 

billion fell by 51 percent, loan originations at banks 

with assets between $1 and $10 billion declined by 

31 percent, and loan originations at banks with less 

than $1 billion in assets declined by only 10 

percent. See Federal Reserve Bank of Kansas City, 

Financial Industry Perspectives (December 2009). 

107 In December 2003, the ratio of mortgagebacked securities to total assets at credit unions was 

4.67 percent. By December 2006, this ratio had 

decreased to 3.21 percent. See Accelerating Loan 

Modifications, Improving Foreclosure Prevention 

and Enhancing Enforcement, 110th Cong. (Dec. 6, 

2007) (testimony of Gigi Hyland, Board Member of 

the National Credit Union Administration). 

108 ‘‘Many customers * * * value the intimate 

knowledge their banker has of their business and/ 

or total relationship and prefer dealing consistently 

with the same individuals whom they do not have 

to frequently reeducate about their own unique 

financial and business situations. Such customers 

are consequently willing to pay relatively more for 

such service. Relationship lending thus provides a 

niche for community institutions that many large 

banks find less attractive or are less capable of 

providing.’’ See Federal Reserve Bank of Atlanta, 

On the Uniqueness of Community Banks (October 

2005). 

later FHFA extended the HARP 

expiration date by one year, to June 30, 

2011.96

Many of the nearly five million 

eligible consumers were expected to 

receive refinancings under HARP.97

However, by mid-2011 fewer than one 

million consumers had received HARP 

refinances. Fannie Mae, Freddie Mac, 

and FHFA responded by significantly 

altering the HARP program.98 Perhaps 

most significantly, the maximum loanto-value ratio was removed, facilitating 

refinances for all underwater consumers 

who otherwise fit HARP’s criteria. 

These changes were immediately 

successful. More HARP refinances were 

completed during the first six months of 

2012 than in all of 2011.99 These 

changes were especially effective in 

assisting consumers with high loan-tovalue ratios. In September 2012, 

consumers with loan-to-value ratios in 

excess of 125 percent received 26 

percent of all HARP refinances.100

The GSEs have implemented other 

streamline refinance programs intended 

to facilitate the refinancing of existing 

GSE consumers into more affordable 

mortgage loans. These programs are 

available for consumers who are not 

eligible for a refinancing under HARP. 

For example, a consumer with a loan-tovalue ratio of less than 80 percent is 

eligible for a streamline refinancing 

through Fannie Mae’s Refi Plus program 

or Freddie Mac’s Relief Refinance 

program. These programs comprise a 

significant share of GSE refinancing 

activity. From January through 

September 2012, 45 percent of GSE 

streamline refinances were non-HARP 

refinances.101 FHFA and the GSEs 

remain committed to continue 

modifying these programs to enhance 

access to refinancing credit for 

distressed consumers.102

C. The Mortgage Loan Market for Small 

Portfolio Creditors 

Securitization fundamentally altered 

mortgage lending practices. 

Traditionally, underwriting standards 

were determined at the branch or local 

bank level. These practices heavily 

emphasized the relationship between 

the bank and the consumer.103 Starting 

in the mid-1990s, much of the mortgage 

market began to move toward 

standardized underwriting practices 

based on quantifiable and verifiable data 

points, such as a consumer’s credit 

score.104 The shift toward standardized, 

electronic underwriting lowered costs 

for creditors and consumers, thereby 

increasing access to mortgage credit. 

Standardized loan-level data made it 

easier to analyze individual loans for 

compliance with underwriting 

requirements, which facilitated the 

expansion of private mortgage 

securitizations. This shift from 

portfolio-focused to securitizationfocused mortgage lending also altered 

the traditional risk calculations 

undertaken by creditors, as creditors no 

longer retained the risks associated with 

poorly underwritten loans.105

Additionally, in another departure from 

the traditional mortgage lending model, 

these creditors increasingly relied on 

the fees earned by originating and 

selling mortgage loans, as opposed to 

the interest revenue derived from the 

loan itself. 

Small community creditor access to 

the secondary mortgage market was 

limited. Many small creditors originated 

‘‘non-conforming’’ loans which could 

not be purchased by the GSEs. Also, 

many community creditors chose to 

retain the relationship model of 

underwriting, rather than fully adopting 

standardized data models popular with 

larger banks. Retaining these traditional 

business methods had important 

consequences during the subprime 

crisis. While large lending institutions 

generally depended on the secondary 

market for liquidity, small community 

banks and credit unions generally 

remained reliant on interest income 

derived from mortgage loans held in 

portfolio. As a result, community 

creditors were less affected by the 

contraction in the secondary mortgage 

market during the financial crisis.106 For 

example, the percentage of mortgagebacked securities in relation to the total 

assets of credit unions actually declined 

by more than 1.5 percent as subprime 

lending expanded.107

The magnitude of portfolio lending 

within this market remains an important 

influence on the underwriting practices 

of community banks and credit unions. 

These institutions generally rely on 

long-term relationships with a small 

group of consumers. Therefore, the 

reputation of these community banks 

and credit unions is largely dependent 

on serving their community in ways that 

cause no harm. Furthermore, by 

retaining mortgage loans in portfolio 

community creditors also retain the risk 

of delinquency or default on those 

loans. Thus, community creditors have 

an added incentive to engage in 

thorough underwriting to protect their 

balance sheet as well as their reputation. 

To minimize portfolio performance risk, 

small community creditors have 

developed underwriting standards that 

are different than those employed by 

larger institutions. Small creditors 

generally engage in ‘‘relationship 

banking,’’ in which underwriting 

decisions rely on qualitative 

information gained from personal 

relationships between creditors and 

consumers.108 This qualitative 

information, often referred to as ‘‘soft’’ 

information, focuses on subjective 

factors such as consumer character and 

reliability, which ‘‘may be difficult to 

quantify, verify, and communicate 

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109See Allen N. Berger and Gregory F. Udell, 

Small Business Credit Availability and Relationship 

Lending: The Importance of Bank Organisational 

Structure, Economic Journal (2002). 

110 ‘‘Moreover, a comparison of loss rates on 

individual loan categories suggests that community 

banks may also do a better job of underwriting loans 

than noncommunity institutions (see Table 4.4).’’ 

FDIC Community Banking Study, p. 4–6. See also 

Sumit Agarwal, Brent W. Ambrose, Souphala 

Chomsisengphet, and Chunlin Liu, The Role of Soft 

Information in a Dynamic Contract Setting: 

Evidence from the Home Equity Market, 43 Journal 

of Money, Credit and Banking 633, 649 (Oct. 2011) 

(analyzing home equity lending, the authors ‘‘find 

that the lender’s use of soft information can 

successfully reduce the risks associated with ex 

post credit losses.’’). 

111 ‘‘In particular, we find evidence that selection 

and soft information prior to purchase are 

significantly associated with reduced delinquency 

and default. And, in line with relationship lending, 

we find that this effect is most pronounced for 

borrowers with compromised credit (credit scores 

below 660), who likely benefit the most from soft 

information in the lending relationship. This 

suggests that for higher risk borrowers, relationship 

with a bank may be about more than the mortgage 

transaction.’’ O. Emre Ergungor and Stephanie 

Moulton, Beyond the Transaction: Depository 

Institutions and Reduced Mortgage Default for LowIncome Homebuyers, Federal Reserve Bank of 

Cleveland Working Paper 11–15 (August 2011). 

112Federal Reserve Board, Charge-Off and 

Delinquency Rates on Loans and Leases at 

Commercial Banks (Nov. 2012), available at http: 

//www.federalreserve.gov/releases/chargeoff/ 

default.htm. These data show that residential real 

estate charge-offs were higher at large banks than 

small ones for 12 of the previous 87 quarters, dating 

to the start of the small bank survey in 1991. For 

example, in the fourth quarter of 2009 large banks 

had a 3.16 percent charge-off rate, while the rate at 

small banks was 1.2 percent. Delinquency rates 

demonstrate a similar effect. 

113 ‘‘In two retail loan categories—residential real 

estate loans and loans to individuals—community 

banks consistently reported lower average loss rates 

from 1991 through 2011, the period for which these 

data are available.’’ FDIC Community Banking 

Study, p. 4–6. 

114 FDIC Community Banking Study, p. 3–6. 

115 FDIC Community Banking Study, p. 3–5. 

116 Id. 

117 FCIC Report at 72. 

118 FDIC Community Banking Study, p. 4–5. 

119 12 U.S.C. 5581(a)(1). 

120 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). 

through the normal transmission 

channels of a banking organisation.’’ 109

Evidence suggests that underwriting 

based on such ‘‘soft’’ information yields 

loan portfolios that perform better than 

those underwritten according to ‘‘hard’’ 

information, such as credit score and 

consumer income levels.110 For 

example, one recent study found that 

delinquency and default rates were 

significantly lower for consumers 

receiving mortgage loans from 

institutions relying on soft information 

for underwriting decisions.111 This is 

consistent with market-wide data 

demonstrating that mortgage loan 

delinquency and charge-off rates are 

significantly lower at smaller banks than 

larger ones.112 Current data also 

suggests that that these relationshipbased lending practices lead to more 

accurate underwriting decisions during 

cycles of both lending expansion and 

contraction.113

Although the number of community 

banks has declined in recent years, 

these institutions remain an important 

source of nonconforming credit in areas 

commonly considered ‘‘rural’’ or 

‘‘underserved.’’ In 2011, community 

banks held over 50 percent of all 

deposits in micropolitan areas and over 

70 percent of all deposits held in rural 

areas.114 Similarly, in 2011, there were 

more than 600 counties where 

community banks operated offices but 

where no noncommunity bank offices 

were present, and more than 600 

additional counties where community 

banks operated offices but where fewer 

than three noncommunity bank offices 

were present.115 These counties have a 

combined population of more than 16 

million people and include both rural 

and metropolitan areas.116 It is 

important to note that the cost of credit 

offered by these community institutions 

is generally higher than the cost of 

similar products offered by larger 

institutions. One reason for this 

increased expense stems from the nature 

of relationship-based underwriting 

decisions. Such qualitative evaluations 

of creditworthiness tend to take more 

time, and therefore are more expensive, 

than underwriting decisions based on 

standardized points of data.117 Also, the 

cost of funds for community banks 

tends to be higher than the cost for 

larger institutions.118

IV. Legal Authority 

The Bureau is issuing this proposed 

rule pursuant to its authority under 

TILA and the Dodd-Frank Act. See 15 

U.S.C. 1604(a), 12 U.S.C. 5511(a) and 

(b), 5512(b)(1) and (2). On July 21, 2011, 

section 1061 of the Dodd-Frank Act 

transferred to the Bureau the ‘‘consumer 

financial protection functions’’ 

previously vested in certain other 

Federal agencies, including the Board. 

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.’’ 119

TILA is defined as a Federal consumer 

financial law.120 Accordingly, the 

Bureau has authority to issue 

regulations pursuant to TILA. 

A. TILA Ability-to-Repay and Qualified 

Mortgage Provisions 

As discussed above, the Dodd-Frank 

Act amended TILA to provide that, in 

accordance with regulations prescribed 

by the Bureau, no creditor may make a 

residential mortgage loan unless the 

creditor makes a reasonable and good 

faith determination based on verified 

and documented information that, at the 

time the loan is consummated, the 

consumer has a reasonable ability to 

repay the loan, according to its terms, 

and all applicable taxes, insurance 

(including mortgage guarantee 

insurance), and assessments. TILA 

section 129C(a)(1); 15 U.S.C. 

1639c(a)(1). As described below in part 

IV.B, the Bureau has authority to 

prescribe regulations to carry out the 

purposes of TILA pursuant to TILA 

section 105(a). 15 U.S.C. 1604(a). In 

particular, it is the purpose of TILA 

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

offered and receive residential mortgage 

loans on terms that reasonably reflect 

their ability to repay the loans and that 

are understandable and not unfair, 

deceptive, or abusive. TILA section 

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

The Dodd-Frank Act also provides 

creditors originating ‘‘qualified 

mortgages’’ special protection from 

liability under the ability-to-repay 

requirements. TILA section 129C(b), 15 

U.S.C. 1639c(b). TILA generally defines 

a ‘‘qualified mortgage’’ as a residential 

mortgage loan for which: The loan does 

not contain negative amortization, 

interest-only payments, or balloon 

payments; the term does not exceed 30 

years; the points and fees generally do 

not exceed 3 percent of the loan 

amount; the income or assets are 

considered and verified; and the 

underwriting is based on the maximum 

rate during the first five years, uses a 

payment schedule that fully amortizes 

the loan over the loan term, and takes 

into account all mortgage-related 

obligations. TILA section 129C(b)(2), 15 

U.S.C. 1639c(b)(2). In addition, to 

constitute a qualified mortgage a loan 

must meet ‘‘any guidelines or 

regulations established by the Bureau 

relating to ratios of total monthly debt 

to monthly income or alternative 

measures of ability to pay regular 

expenses after payment of total monthly 

debt, taking into account the income 

levels of the borrower and such other 

factors as the Bureau may determine are 

relevant and consistent with the 

purposes described in [TILA section 

129C(b)(3)(B)(i)].’’ 

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121As discussed in the introductory material to 

part IV above, prior to the Dodd-Frank Act, 

rulemaking authority over TILA was vested in the 

Board. The Dodd-Frank Act transferred rulemaking 

authority for TILA to the Bureau, effective July 21, 

2011. See Dodd-Frank Act sections 1061, 1098, and 

1100A. Thus, the Bureau proposes these 

amendments pursuant to its authorities in section 

1061 of the Dodd-Frank Act. 

TILA also provides the Bureau with 

authority to prescribe regulations that 

revise, add to, or subtract from the 

criteria that define a qualified mortgage 

upon a finding that such regulations are 

necessary or proper to ensure that 

responsible, affordable mortgage credit 

remains available to consumers in a 

manner consistent with the purposes of 

the ability-to-repay requirements; or are 

necessary and appropriate to effectuate 

the purposes of the ability-to-repay 

requirements, to prevent circumvention 

or evasion thereof, or to facilitate 

compliance with TILA sections 129B 

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

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

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

Bureau with authority to prescribe 

regulations to carry out the purposes of 

the qualified mortgage provisions, 

namely, to ensure that responsible, 

affordable mortgage credit remains 

available to consumers in a manner 

consistent with the purposes of TILA 

section 129C. TILA section 

129C(b)(3)(A), 15 U.S.C. 1939c(b)(3)(A). 

As discussed in the section-by-section 

analysis below, the Bureau is issuing 

certain provisions of this rule pursuant 

to its authority under TILA section 

129C(b)(3)(B)(i). 

With respect to the qualified mortgage 

provisions, the Dodd-Frank Act contains 

several specific grants of regulatory 

authority. First, for purposes of defining 

‘‘qualified mortgage,’’ TILA section 

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

with authority to establish guidelines or 

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

ability to pay. Second, TILA section 

129C(b)(2)(D) provides that the Bureau 

shall prescribe rules adjusting the 

qualified mortgage points and fees 

limits described above to permit 

creditors that extend smaller loans to 

meet the requirements of the qualified 

mortgage provisions. 15 U.S.C. 

1639c(b)(2)(D)(ii). In prescribing such 

rules, the Bureau must consider their 

potential impact on rural areas and 

other areas where home values are 

lower. Id. Third, TILA section 

129C(b)(2)(E) provides the Bureau with 

authority to include in the definition of 

‘‘qualified mortgage’’ loans with balloon 

payment features, if those loans meet 

certain underwriting criteria and are 

originated by creditors that operate 

predominantly in rural or underserved 

areas, have total annual residential 

mortgage originations that do not exceed 

a limit set by the Bureau, and meet any 

asset size threshold and any other 

criteria as the Bureau may establish, 

consistent with the purposes of TILA. 

15 U.S.C. 1639c(b)(2)(E). As discussed 

in the section-by-section analysis below, 

the Bureau is issuing certain provisions 

of this rule pursuant to its authority 

under TILA sections 129C(a)(6)(D), 

(b)(2)(A)(vi), (b)(2)(D), and (b)(2)(E). 

B. Other Rulemaking and Exception 

Authorities 

This proposed rule also relies on the 

rulemaking and exception authorities 

specifically granted to the Bureau by 

TILA and the Dodd-Frank Act, 

including the authorities discussed 

below.121

TILA 

TILA section 105(a). As amended by 

the Dodd-Frank Act, TILA section 

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

Bureau to prescribe regulations to carry 

out the purposes of TILA, and provides 

that such regulations may contain 

additional requirements, classifications, 

differentiations, or other provisions, and 

may provide for such adjustments and 

exceptions for all or any class of 

transactions, that the Bureau judges are 

necessary or proper to effectuate the 

purposes of TILA, to prevent 

circumvention or evasion thereof, or to 

facilitate compliance therewith. A 

purpose of TILA is ‘‘to assure a 

meaningful disclosure of credit terms so 

that the consumer will be able to 

compare more readily the various credit 

terms available to him and avoid the 

uninformed use of credit.’’ TILA section 

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

purpose is tied to Congress’s finding 

that ‘‘economic stabilization would be 

enhanced and the competition among 

the various financial institutions and 

other firms engaged in the extension of 

consumer credit would be strengthened 

by the informed use of credit[.]’’ TILA 

section 102(a). Thus, strengthened 

competition among financial 

institutions is a goal of TILA, achieved 

through the effectuation of TILA’s 

purposes. 

As amended by section 1402 of the 

Dodd-Frank Act, section 129B(a)(2) of 

TILA provides that the purpose of 

section 129C of TILA is ‘‘to assure that 

consumers are offered and receive 

residential mortgage loans on terms that 

reasonably reflect their ability to repay 

the loans.’’ This stated purpose is tied 

to Congress’s finding that ‘‘economic 

stabilization would be enhanced by the 

protection, limitation, and regulation of 

the terms of residential mortgage credit 

and the practices related to such credit, 

while ensuring that responsible, 

affordable mortgage credit remains 

available to consumers.’’ Thus, ensuring 

that responsible, affordable mortgage 

credit remains available to consumers is 

a goal of TILA, achieved through the 

effectuation of TILA’s purposes. 

Historically, TILA section 105(a) has 

served as a broad source of authority for 

rules that promote the informed use of 

credit through required disclosures and 

substantive regulation of certain 

practices. However, Dodd-Frank Act 

section 1100A clarified the Bureau’s 

section 105(a) authority by amending 

that section to provide express authority 

to prescribe regulations that contain 

‘‘additional requirements’’ that the 

Bureau finds are necessary or proper to 

effectuate the purposes of TILA, to 

prevent circumvention or evasion 

thereof, or to facilitate compliance. This 

amendment clarified the authority to 

exercise TILA section 105(a) to 

prescribe requirements beyond those 

specifically listed in the statute that 

meet the standards outlined in section 

105(a). The Dodd-Frank Act also 

clarified the Bureau’s rulemaking 

authority over certain high-cost 

mortgages pursuant to section 105(a). As 

amended by the Dodd-Frank Act, TILA 

section 105(a) authority to make 

adjustments and exceptions to the 

requirements of TILA applies to all 

transactions subject to TILA, except 

with respect to the provisions of TILA 

section 129, 15 U.S.C. 1639, that apply 

to the high-cost mortgages defined in 

TILA section 103(bb), 15 U.S.C. 

1602(bb). 

As discussed in the section-by-section 

analysis below, the Bureau is proposing 

regulations to carry out TILA’s 

purposes, including such additional 

requirements, adjustments, and 

exceptions as, in the Bureau’s judgment, 

are necessary and proper to carry out 

the purposes of TILA, prevent 

circumvention or evasion thereof, or to 

facilitate compliance. In developing 

these aspects of the proposed rule 

pursuant to its authority under TILA 

section 105(a), the Bureau has 

considered the purposes of TILA, 

including ensuring that consumers are 

offered and receive residential mortgage 

loans on terms that reasonably reflect 

their ability to repay the loans, ensuring 

meaningful disclosures, facilitating 

consumers’ ability to compare credit 

terms, and helping consumers avoid the 

uninformed use of credit, and the 

purposes of TILA, including regulating 

the terms of residential mortgage credit 

and the practices related to such credit 

to ensure that responsible, affordable 

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122The 2013 ATR and HOEPA Final Rules also 

adopted the special calculation, prescribed under 

TILA for high-cost mortgages, for completing the 

bona fide discount point calculation for loans 

secured by personal property. 

123The Dodd-Frank Act renumbered existing 

TILA section 103(aa), which contains the definition 

of ‘‘points and fees,’’ for the high-cost mortgage 

points and fees threshold, as section 103(bb). See 

§ 1100A(1)(A) of the Dodd-Frank Act. However, in 

defining points and fees for the qualified mortgage 

points and fees limits, TILA section 129C(b)(2)(C) 

refers to TILA section 103(aa)(4) rather than TILA 

section 103(bb)(4). To give meaning to this 

provision, the Bureau concludes that the reference 

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

129C(b)(2)(C) is mistaken and therefore interprets 

TILA section 129C(b)(2)(C) as referring to the points 

and fees definition in renumbered TILA section 

103(bb)(4). 

124 ‘‘Mortgage originator’’ is generally defined to 

include ‘‘any person who, for direct or indirect 

compensation or gain, or in the expectation of 

direct or indirect compensation or gain—(i) takes a 

Continued 

mortgage credit remains available to 

consumers, strengthening competition 

among financial institutions, and 

promoting economic stabilization. 

TILA section 105(f). Section 105(f) of 

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

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. In exercising 

this authority, the Bureau must consider 

the factors identified in section 105(f) of 

TILA and publish its rationale at the 

time it proposes an exemption for 

public comment. Specifically, the 

Bureau must consider: 

(a) The amount of the loan and 

whether the disclosures, right of 

rescission, and other provisions provide 

a benefit to the consumers who are 

parties to such transactions, as 

determined by the Bureau; 

(b) The extent to which the 

requirements of this subchapter 

complicate, hinder, or make more 

expensive the credit process for the 

class of transactions; 

(c) The status of the borrower, 

including— 

(1) Any related financial arrangements 

of the borrower, as determined by the 

Bureau; 

(2) The financial sophistication of the 

borrower relative to the type of 

transaction; and 

(3) The importance to the borrower of 

the credit, related supporting property, 

and coverage under this subchapter, as 

determined by the Bureau; 

(d) Whether the loan is secured by the 

principal residence of the consumer; 

and 

(e) Whether the goal of consumer 

protection would be undermined by 

such an exemption. 

As discussed in the section-by-section 

analysis below, the Bureau is proposing 

to exempt certain transactions from the 

requirements of TILA pursuant to its 

authority under TILA section 105(f). In 

developing this proposal under TILA 

section 105(f), the Bureau has 

considered the relevant factors and 

determined that the proposed 

exemptions may be appropriate. 

The Dodd-Frank Act 

Dodd-Frank Act section 1022(b). 

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

Act authorizes the Bureau to prescribe 

rules ‘‘as may be necessary or 

appropriate to enable the Bureau to 

administer and carry out the purposes 

and objectives of the Federal consumer 

financial laws, and to prevent evasions 

thereof[.]’’ 12 U.S.C. 5512(b)(1). Section 

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

authorizes the Bureau to prescribe rules 

‘‘as may be necessary or appropriate to 

enable the Bureau to administer and 

carry out the purposes and objectives of 

the Federal consumer financial laws, 

and to prevent evasions thereof.’’ 12 

U.S.C. 5512(b)(1). TILA and title X of 

the Dodd-Frank Act are Federal 

consumer financial laws. Accordingly, 

the Bureau is exercising its authority 

under Dodd-Frank Act section 1022(b) 

to prescribe rules that carry out the 

purposes and objectives of TILA and 

title X and prevent evasion of those 

laws. 

V. Section-by-Section Analysis 

Section 1026.32 Requirements for 

High-Cost Mortgages 

32(b) Definitions 

32(b)(1) 

32(b)(1)(ii) 

Background 

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

added by Section 1412 of the DoddFrank Act, defines a ‘‘qualified 

mortgage’’ as a loan for which, among 

other things, the total ‘‘points and fees’’ 

payable in connection with the 

transaction generally do not exceed 3 

percent of the total loan amount. 

Section 1431(a) of the Dodd-Frank Act 

amended HOEPA’s points and fees 

coverage test to provide in TILA section 

103(bb)(1)(A)(ii) that a mortgage is a 

high-cost mortgage if the total points 

and fees payable in connection with the 

transaction exceed 5 percent of the total 

loan amount (for transactions of $20,000 

or more), or the lesser of 8 percent of the 

total loan amount or $1,000 (for 

transactions of less than $20,000). The 

Bureau finalized the Dodd-Frank Act’s 

amendments to TILA concerning points 

and fees limits for qualified mortgages 

and high-cost mortgages in the 2013 

ATR and 2013 HOEPA Final Rules, 

respectively. 

Those rulemakings also adopted the 

Dodd-Frank Act’s amendments to TILA 

concerning the exclusion of certain bona 

fide third-party charges and up to two 

bona fide discount points from the 

points and fees calculation for both 

qualified mortgages and high-cost 

mortgages. With respect to bona fide 

discount points in particular, TILA 

sections 129C(b)(2)(C)(ii)(I) and 

103(dd)(1) provide for the exclusion of 

up to and including two bona fide 

discount points from points and fees for 

qualified mortgages and high-cost 

mortgages, respectively, but only if the 

interest rate for the transaction before 

the discount does not exceed by more 

than one percentage point the average 

prime offer rate, as defined in 

§ 1026.35(a)(2). Similarly, TILA sections 

129C(b)(2)(C)(ii)(II) and 103(dd)(2) 

provide for the exclusion of up to and 

including one bona fide discount point 

from points and fees, but only if the 

interest rate for the transaction before 

the discount does not exceed the 

average prime offer rate by more than 

two percentage points.122 The Bureau’s 

2013 ATR and HOEPA Final Rules 

implemented the bona fide discount 

point exclusions from points and fees in 

§ 1026.32(b)(1)(i)(E) and (F) (closed-end 

credit) and (b)(2)(i)(E) and (F) (open-end 

credit), respectively. 

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

‘‘points and fees’’ for qualified 

mortgages and high-cost mortgages to 

have the same meaning, as set forth in 

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

section 103(bb)(4)).123 Points and fees 

for the high-cost mortgage threshold are 

defined in § 1026.32(b)(1) (closed-end 

credit) and (2) (open-end credit), and 

§ 1026.43(b)(9) provides that, for a 

qualified mortgage, ‘‘points and fees’’ 

has the same meaning as in 

§ 1026.32(b)(1). 

Section 1431 of the Dodd-Frank Act 

amended TILA to require that ‘‘all 

compensation paid directly or indirectly 

by a consumer or creditor to a mortgage 

originator from any source, including a 

mortgage originator that is also the 

creditor in a table-funded transaction,’’ 

be included in points and fees. TILA 

section 103(bb)(4)(B) (emphases added). 

Prior to the amendment, HOEPA had 

provided that only compensation paid 

by a consumer to a mortgage broker at 

or before closing should count toward 

the points and fees threshold. Under 

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

however, compensation paid to anyone 

that qualifies as a ‘‘mortgage originator’’ 

is to be included in points and fees.124

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residential mortgage loan application; (ii) assists a 

consumer in obtaining or applying to obtain a 

residential mortgage loan; or (iii) offers or negotiates 

terms of a residential mortgage loan.’’ TILA section 

103(cc)(2)(A). The statute excludes certain persons 

from the definition, including a person who 

performs purely administrative or clerical tasks; an 

employee of a retailer of manufactured homes who 

does not take a residential mortgage application or 

offer or negotiate terms of a residential mortgage 

loan; and, subject to certain conditions, real estate 

brokers, sellers who finance three or fewer 

properties in a 12-month period, and servicers. 

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

125For more detailed discussions, see the 

Bureau’s 2012 proposed rule regarding loan 

originator compensation at 77 FR 55272, 55276, 

55290 (Sept. 7, 2012) (2012 Loan Originator 

Proposal) and the final rule issued by the Board in 

2010 at 75 FR 58509, 5815–16, 58519–20 (Sept. 24, 

2010) (2010 Loan Originator Final Rule). 

Thus, in addition to compensation paid 

to mortgage brokerage firms, points and 

fees also includes compensation paid to 

other mortgage originators, including 

employees of a creditor (i.e., loan 

officers) or of a brokerage firm (i.e., 

individual brokers). In addition, the 

Dodd-Frank Act removed the phrase 

‘‘payable at or before closing’’ from the 

high-cost mortgage points and fees test 

and did not apply the ‘‘payable at or 

before closing’’ limitation to the points 

and fees cap for qualified mortgages. See 

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

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

The Bureau’s 2013 ATR Final Rule 

amended § 1026.32(b)(1) to implement 

revisions to the definition of ‘‘points 

and fees’’ under section 1431 of the 

Dodd-Frank Act, both for the purposes 

of HOEPA and qualified mortgages. 

Among other things, the Dodd-Frank 

Act added loan originator compensation 

to the definition of ‘‘points and fees’’ 

that had previously applied to high-cost 

mortgages under HOEPA. Section 1431 

of the Dodd-Frank Act also amended 

TILA to provide that open-end credit 

plans (i.e., HELOCs) are covered by 

HOEPA. The Bureau’s 2013 HOEPA 

Final Rule thus separately amended 

§ 1026.32(b)(2) to provide for the 

inclusion of loan originator 

compensation in points and fees for 

HELOCs, to the same extent as such 

compensation is required to be counted 

for closed-end credit transactions. 

Under § 1026.32(b)(1)(ii) (for closed-end 

credit) and § 1026.32(b)(2)(ii) (for openend credit), all compensation paid 

directly or indirectly by a consumer or 

creditor to a loan originator, as defined 

in § 1026.36(a)(1), that can be attributed 

to that transaction at the time the 

interest rate is set, is required to be 

included in points and fees. The 

commentary to § 1026.32(b)(1)(ii) as 

adopted in the 2013 ATR Final Rule 

provides details for applying this 

requirement for closed-end credit 

transactions (e.g., by clarifying when 

compensation must be known to be 

counted). The commentary to 

§ 1026.32(b)(2)(ii) as adopted in the 

2013 HOEPA Final Rule crossreferences the commentary adopted in 

§ 1026.32(b)(1)(ii) for interpretive 

guidance. 

Discussion 

In response to the Board’s 2011 ATR 

Proposal and the Bureau’s 2012 HOEPA 

Proposal, the Bureau received feedback 

regarding the inclusion of loan 

originator compensation in the qualified 

mortgage and high-cost mortgage points 

and fees calculation. In the context of 

both rulemakings, several industry 

commenters argued that including loan 

originator compensation in points and 

fees would result in ‘‘double-counting’’ 

because creditors often compensate loan 

originators with funds collected from 

consumers at consummation. The 

commenters argued that money 

collected in up-front charges to 

consumers should not be counted a 

second time toward the points and fees 

thresholds if it is passed on to a loan 

originator. In outreach, consumer 

advocates urged the Bureau not to 

assume that up-front consumer 

payments to creditors are applied to 

loan originator compensation, 

particularly in the wholesale channel 

where consumers can pay mortgage 

brokers directly. 

The Bureau’s 2013 ATR and HOEPA 

Final Rules implemented as written the 

statutory provision including loan 

originator compensation in points and 

fees. As the Bureau noted, the 

underlying statutory provisions as 

amended by the Dodd-Frank Act do not 

express any limitation on the 

requirement to count loan originator 

compensation toward the points and 

fees test. Rather, the literal language of 

TILA section 103(bb)(4) as amended by 

the Dodd-Frank Act defines points and 

fees to include all items included in the 

finance charge (except interest rate), all 

compensation paid directly or indirectly 

by a consumer or creditor to a loan 

originator, ‘‘and’’ various other 

enumerated items. Both the use of 

‘‘and’’ and the reference to ‘‘all’’ 

compensation paid ‘‘directly or 

indirectly’’ and ‘‘from any source’’ 

suggest that compensation should be 

counted as it flows downstream from 

one party to another so that it is counted 

each time that it reaches a loan 

originator, whatever the previous 

source. 

The Bureau believes the statute would 

be read to require that loan originator 

compensation be treated as additive to 

the other elements of points and fees. 

The Bureau did not believe that an 

automatic literal reading of the statute 

in all cases would be in the best interest 

of either consumers or industry, but it 

did not believe that it yet had sufficient 

information with which to choose 

definitively between the additive 

approach provided for in the statutory 

language and other potential methods of 

accounting for payments in all 

circumstances, given multiple practical 

and complex policy considerations 

involved. Accordingly, the Bureau 

decided to finalize the rule without a 

qualifying interpretation on this issue 

and to include in this proposal several 

comments to clarify interpretation of the 

statute as it applies to particular 

payment streams between particular 

parties. The Bureau is also seeking 

comment on whether additional 

guidance regarding treatment of loan 

originator compensation under the 

points and fees thresholds would be 

useful to facilitate compliance, as 

described further below. 

In approaching the interpretive issue, 

the Bureau is cognizant of the broader 

purposes of the statute. As discussed in 

the 2013 ATR Final Rule, the DoddFrank Act contains a number of 

provisions that focus on loan originator 

compensation and regulation, in 

apparent response to concerns that 

industry compensation practices 

contributed to the mortgage market 

crisis by creating strong incentives for 

brokers and retail loan officers to steer 

consumers into higher-priced loans. 

Specifically, loan originators were often 

paid a commission by creditors that 

increased with the interest rate on a 

transaction. These commissions were 

funded by creditors through the 

increased revenue received by the 

creditor as a result of the higher rate 

paid by the consumer and were closely 

tied to the price the creditor expected to 

receive for the loan on the secondary 

market as a result of that higher rate.125

In addition, many mortgage brokers 

charged consumers up-front fees to 

cover some of their costs at the same 

time that they accepted backend 

payments from creditors out of the rate. 

This may have contributed to consumer 

confusion about where the brokers’ 

loyalties lay. 

Although other provisions of the 

Dodd-Frank Act prohibit specific 

compensation practices that created 

particularly strong incentives for loan 

originators to ‘‘upcharge’’ consumers on 

a loan-by-loan basis and particular 

confusion about loan originators’ 

loyalties, the Bureau believes that the 

inclusion of loan originator 

compensation in points and fees has 

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distinct purposes. In addition to 

discouraging more generalized rentseeking and excessive loan originator 

compensation, the Bureau believes that 

Congress may have been focused on 

particular risks to consumers. Thus, 

with respect to qualified mortgages, 

including loan originator compensation 

in points and fees helps to ensure that, 

in cases in which high up-front 

compensation might otherwise cause 

the creditor and/or loan originator to be 

less concerned about long-term 

sustainability, the creditor is not able to 

invoke a presumption of compliance if 

challenged to demonstrate that it made 

a reasonable and good faith 

determination of the consumer’s ability 

to repay the loan. Similarly in HOEPA, 

the threshold triggers additional 

consumer protections, such as enhanced 

disclosures and housing counseling, for 

the loans with the highest up-front 

pricing. 

The Bureau believes that a strict 

additive rule that would automatically 

require that loan originator 

compensation be counted against the 

points and fees thresholds even if it is 

already counted against the thresholds 

for another reason under the statute 

would not serve the broader purposes of 

the statute. For instance, the Bureau 

does not believe that it is necessary or 

appropriate to count the same payment 

between a consumer and a mortgage 

broker firm twice, simply because it is 

both part of the finance charge and loan 

originator compensation. Similarly, the 

Bureau does not believe that where a 

payment from either a consumer or a 

creditor to a mortgage broker is counted 

toward points and fees, it is necessary 

or appropriate to count separately funds 

that the broker then passes on to its 

individual employees. In each case, any 

costs and risks to the consumer from 

high loan originator compensation are 

adequately captured by counting the 

funds a single time against the points 

and fees cap; thus, the Bureau does not 

believe the purposes of the statute 

would be served by counting some or all 

of the funds a second time, and is 

concerned that doing so could have 

negative impacts on the price and 

availability of credit. 

Determining the appropriate 

accounting method is significantly more 

complicated, however, when a 

consumer pays some up-front charges to 

the creditor and the creditor pays loan 

originator compensation to either its 

own employee or to a mortgage broker 

firm. As described in the 2013 ATR 

Final Rule, a creditor can fund 

compensation to a loan originator (or a 

creditor’s own loan officer) two different 

ways. First, as discussed above, the 

payment could be funded by origination 

charges paid by the consumer. Second, 

the payment could be funded through 

the interest rate, in which case the 

creditor forwards funds to the loan 

originator at consummation which the 

creditor recovers through profit realized 

on the subsequent sale of the mortgage 

or, for portfolio loans, through payments 

by the consumer over time. Because 

money is fungible, tracking how a 

creditor spends money it collects in upfront charges versus amounts collected 

through the rate to cover both loan 

originator compensation and its other 

overhead expenses would be 

extraordinarily complex and 

cumbersome. To facilitate compliance, 

the Bureau believes it is appropriate and 

necessary to adopt one or more 

generalized rules regarding the 

accounting of various payments, but did 

not have sufficient information to make 

those choices in the 2013 ATR Final 

Rule. 

The potential downstream effects of 

different accounting methods are 

significant. Under the additive approach 

where no offsetting of consumer 

payments against creditor-paid loan 

originator compensation is allowed, 

some loans might be precluded from 

being qualified mortgages given the 

other charges that are included in points 

and fees, such as fees paid to affiliates 

for settlement services. In other cases, 

creditors whose combined loan 

originator compensation and up-front 

charges would otherwise exceed the 

points and fees limits would have strong 

incentives to cap their up-front charges 

for other overhead expenses under the 

threshold and instead recover those 

expenses by increasing interest rates to 

generate higher gains on sale. This 

would adversely affect consumers who 

prefer a lower interest rate and higher 

up-front costs and, at the margins, could 

result in some consumers being unable 

to qualify for credit. Additionally, to the 

extent creditors responded to a ‘‘no 

offsetting’’ rule by increasing interest 

rates, this could increase the number of 

qualified mortgages that receive a 

rebuttable rather than conclusive 

presumption of compliance. 

One alternative would be to allow all 

consumer payments to offset creditorpaid loan originator compensation. 

However, a ‘‘full offsetting’’ approach 

would allow creditors to offset much 

higher levels of up-front points and fees 

against expenses paid through rate 

before the heightened consumer 

protections required by the Dodd-Frank 

Act would apply. For example, a 

consumer could pay 3 percentage points 

in originating charges and be charged an 

interest rate sufficient to generate a 3 

percent loan originator commission, and 

the loan could still fall within the 3 

percent cap for qualified mortgages even 

though the up-front payments may be so 

high as to cause the creditor to be 

undemanding in underwriting the loan. 

The consumer could be charged 5 

percent in originating charges and an 

interest rate sufficient to generate a five 

percentage loan originator commission 

and still stay under the HOEPA points 

and fees trigger, thereby denying 

consumers the special protections 

afforded to loans with high up-front 

costs. In markets that are less 

competitive, this would create an 

opportunity for creditors or brokerage 

firms to take advantage of their market 

power to harm consumers. Particularly 

under HOEPA, this may raise tensions 

with Congress’s apparent intent. Other 

alternatives might use a hybrid 

approach depending on the type of 

expense, type of loan, or other factors, 

but would involve more compliance 

complexity. 

In light of these complexities, the 

Bureau has proposed three comments 

(one with two alternative versions) to 

specify accounting methods where loan 

originator compensation could 

otherwise be counted twice under the 

statutory scheme. As discussed below, 

the Bureau believes that, consistent with 

TILA section 105(a), these comments 

would facilitate compliance by 

clarifying the requirements of 

§ 1026.32(b)(1)(ii). The Bureau is 

proposing comment 32(b)(1)(ii)–5.i to 

provide that a payment from a consumer 

to a mortgage broker need not be 

counted toward points and fees twice 

because it is both part of the finance 

charge under § 1026.32(b)(1)(i) and loan 

originator compensation under 

§ 1026.32(b)(1)(ii). Similarly, proposed 

comment 32(b)(1)(ii)–5.ii would clarify 

that § 1026.32(b)(1)(ii) does not require 

a creditor to include payments by a 

mortgage broker to its individual loan 

originator employee in the calculation 

of points and fees. For example, assume 

a consumer pays a $3,000 fee to a 

mortgage broker, and the mortgage 

broker pays a $1,500 commission to its 

individual loan originator employee for 

that transaction. The $3,000 mortgage 

broker fee is included in points and 

fees, but the $1,500 commission is not 

included in points and fees because it 

has already been included in points and 

fees as part of the $3,000 mortgage 

broker fee. As discussed above, the 

Bureau believes that this clarification 

may ensure that any costs to the 

consumer from loan originator 

compensation are adequately captured 

by counting the funds a single time 

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6640 Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Proposed Rules 

against the points and fees cap. The 

Bureau seeks comment regarding these 

proposed comments. 

Finally, the Bureau is seeking 

comment on two alternative versions of 

proposed comment 32(b)(1)(ii)–5.iii. 

The first would explicitly preclude 

offsetting, in accordance with the 

statute’s additive language, by 

specifying that § 1026.32(b)(1)(ii) 

requires a creditor to include 

compensation paid by a consumer or 

creditor to a loan originator in the 

calculation of points and fees in 

addition to any fees or charges paid by 

the consumer to the creditor. This 

proposed comment also contains an 

illustrative example which applies to 

both retail and wholesale transactions. 

For example, assume that a consumer 

pays to the creditor a $3,000 origination 

fee and that the creditor pays to its loan 

officer employee $1,500 in 

compensation attributed to the 

transaction. Assume further that the 

consumer pays no other charges to the 

creditor that are included in points and 

fees under § 1026.32(b)(1)(i) and the 

loan officer receives no other 

compensation that is included in points 

and fees under § 1026.32(b)(1)(ii). For 

purposes of calculating points and fees, 

the $3,000 origination fee is included in 

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

and the $1,500 in loan officer 

compensation is included in points and 

fees under § 1026.32(b)(1)(ii), equaling 

$4,500 in total points and fees, provided 

that no other points and fees are paid or 

compensation received. 

The second alternative would allow 

all consumer payments of up-front fees 

and points to offset creditor payments to 

the loan originator. Specifically, it 

would provide that § 1026.32(b)(1)(ii) 

requires a creditor to reduce the amount 

of loan originator compensation 

included in the points and fees 

calculation under § 1026.32(b)(1)(ii) by 

any amount paid by the consumer to the 

creditor and included in the points and 

fees calculation under § 1026.32(b)(1)(i). 

This proposed comment also contains 

an illustrative example which applies to 

both retail and wholesale transactions. 

For example, assume that a consumer 

pays to the creditor a $3,000 origination 

fee and that the creditor pays to the loan 

originator $1,500 in compensation 

attributed to the transaction. Assume 

further that the consumer pays no other 

charges to the creditor that are included 

in points and fees under 

§ 1026.32(b)(1)(i) and the loan originator 

receives no other compensation that is 

included in points and fees under 

§ 1026.32(b)(1)(ii). For purposes of 

calculating points and fees, the $3,000 

origination fee is included in points and 

fees under § 1026.32(b)(1)(i), but the 

$1,500 in loan originator compensation 

need not be included in points and fees. 

If, however, the consumer pays to the 

creditor a $1,000 origination fee and the 

creditor pays to the loan originator 

$1,500 in compensation, then the $1,000 

origination fee is included in points and 

fees under § 1026.32(b)(1)(i), and $500 

of the loan originator compensation is 

included in points and fees under 

§ 1026.32(b)(1)(ii), equaling $1,500 in 

total points and fees, provided that no 

other points and fees are paid or 

compensation received. This example 

illustrates the requirements of 

§ 1026.32(b)(1)(ii) for both retail and 

wholesale transactions. 

The Bureau solicits feedback 

regarding all aspects of both 

alternatives. In addition, the Bureau 

specifically requests feedback regarding 

whether there are differences in various 

types of loans, consumers, loan 

origination channels, or market 

segments which would justify applying 

different interpretations regarding 

offsetting to such categories. For 

example, are the risks to consumers 

from applying either the first or the 

second interpretation greater in the 

subprime market (i.e., with respect to 

higher-priced mortgages) than in the 

prime market? If so, should the Bureau 

use its authority under TILA to adopt 

different interpretations or regulatory 

approaches for these different markets 

or in adopting either approach in 

general? The Bureau also seeks feedback 

as to whether, if it were to adopt the first 

alternative in some or all instances, the 

creditor should be permitted to reduce 

the loan originator compensation by the 

full amount of points and fees included 

in finance charges or whether the 

reduction should be limited to that 

portion of points and fees denominated 

as general origination charges, rather 

than specific fees that are passed 

through to affiliates. 

Furthermore, the Bureau seeks 

comment on the implications of each 

alternative on protecting consumers 

pursuant to the ability-to-repay 

requirements, qualified mortgage 

provisions, and the high-cost mortgage 

provisions of HOEPA. The Bureau also 

seeks comment on the likely market 

reactions and impacts on the pricing of 

and access to credit of each alternative, 

particularly as to how such reactions 

might affect interest rate levels, the safe 

harbor and rebuttable presumption 

afforded to particular qualified 

mortgages, and application of the 

separate rate threshold for high-cost 

mortgages under HOEPA and whether 

adjustment to the final rule would be 

appropriate. The Bureau further seeks 

comment on the implications of both of 

the above proposed alternatives in light 

of the fact that both the qualified 

mortgage and HOEPA provisions allow 

certain ‘‘bona fide discount points’’ and 

bona fide third party charges to be 

excluded from the calculation of points 

and fees, but do not do so for affiliate 

charges. 

As discussed above, the Bureau 

adopted in the 2013 HOEPA Final Rule 

a requirement that creditors include 

compensation paid to originators of 

open-end credit plans in points and 

fees, to the same extent that such 

compensation is required to be included 

for closed-end credit transactions. The 

Bureau did not receive comments in 

response to the 2012 HOEPA Proposal 

indicating that additional or different 

guidance would be needed to calculate 

loan originator compensation in the 

open-end credit context. The Bureau 

believes that it would be useful to 

provide the public with an additional 

opportunity to comment. Thus, the 

Bureau solicits input on what guidance, 

if any, beyond that provided for closedend credit transactions, would be 

helpful for creditors in calculating loan 

originator compensation in the openend credit context. 

Finally, the Bureau seeks comment on 

whether additional guidance or 

regulatory approaches regarding the 

final rule on inclusion of loan originator 

compensation in points and fees would 

be useful to protect consumers and 

facilitate compliance. In particular, the 

Bureau seeks comment on whether it 

would be helpful to provide for 

additional adjustment of the rules or 

additional commentary to clarify any 

overlaps in definitions between the 

points and fees provisions in the abilityto-repay and HOEPA rulemakings and 

the provisions that the Bureau is 

separately finalizing in connection with 

the Bureau’s 2012 Loan Originator 

Proposal. For example, the Bureau seeks 

comment on whether additional 

guidance would be useful with regard to 

treatment of compensation by persons 

who are ‘‘loan originators’’ but are not 

employed by a creditor or mortgage 

broker, given that the loan originator 

compensation rulemaking is 

implementing provisions of the DoddFrank Act that specify when employees 

of retailers of manufactured homes, 

servicers, and other parties are loan 

originators for Dodd-Frank Act 

purposes. 

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126 In addition, section 129C(i) of TILA also 

exempts credit secured by a consumer’s interest in 

a timeshare from the ability-to-repay requirements. 

127See 76 FR 27390, 27448, 27456. 

128Section 1026.43(c) contains the ability-torepay requirements, § 1026.43(d) contains special 

ability-to-repay requirements for certain types of 

refinancings, § 1026.43(e) contains the qualified 

mortgage provisions, and § 1026.43(f) sets forth the 

provisions regarding balloon payment qualified 

mortgage loans made by certain creditors. Reverse 

mortgage loans and temporary or ‘‘bridge’’ loans 

with a term of 12 months or less remain subject to 

the prepayment penalty provisions in § 1026.43(g) 

and the anti-evasion provisions in § 1026.43(h). 

Section 1026.35 Prohibited Acts or 

Practices in Connection With HigherPriced Mortgage Loans 

35(b) Escrow Accounts 

35(b)(2) Exemptions 

Section 1026.35(b)(2)(iii) provides 

that an escrow account need not be 

established in connection with a 

mortgage if the creditor operates 

predominantly in rural or underserved 

areas, originates 500 or fewer first-lien 

mortgages per year, and has total assets 

less than $2 billion (adjusted annually 

for inflation). As discussed below in the 

section-by-section analysis of 

§ 1026.43(e)(5), the Bureau believes that 

it may be important to preserve 

consistency among § 1026.35(b)(2) and 

§ 1026.43(e)(5) and (f). The Bureau is 

not proposing specific amendments to 

§ 1026.35(b)(2) because § 1026.43(e)(5) 

as proposed is consistent with existing 

§ 1026.35(b)(2). However, if 

§ 1026.43(e)(5) is adopted with 

significant changes, the Bureau will 

consider and may adopt parallel 

amendments to § 1026.35(b)(2) and 

§ 1026.43(f) in its final rule. 

The Bureau solicits comment on the 

advantages and disadvantages of 

maintaining consistency between 

§ 1026.35(b)(2) and § 1026.43(e)(5) and 

(f) generally and on whether the Bureau 

should make conforming changes to 

§ 1026.35(b)(2) if necessary to maintain 

consistency with specific provisions of 

§ 1026.43(e)(5). 

Section 1026.43 Minimum Standards 

for Transactions Secured by a Dwelling 

43(a) Scope 

43(a)(3) 

Applicability of the Ability-to-Repay 

Requirements 

Section 129C(a)(1) of TILA, as added 

by section 1411 of the Dodd-Frank Act, 

states that, in accordance with 

regulations prescribed by the Bureau, no 

creditor may make a residential 

mortgage loan unless the creditor makes 

a reasonable and good faith 

determination based on verified and 

documented information that, at the 

time the loan is consummated, the 

consumer has a reasonable ability to 

repay the loan, according to its terms, 

and all applicable taxes, insurance 

(including mortgage guarantee 

insurance), and assessments. TILA 

section 129C(a)(6)(E) provides certain 

special rules to govern determinations 

of consumers’ ability to repay where a 

‘‘hybrid’’ loan is being refinanced by the 

same creditor into a ‘‘standard’’ product 

in anticipation of a significant risk of 

default after a reset in rates. The statute 

otherwise applies the same general 

ability-to-repay standards to all 

residential mortgage loans. 

Section 1401 of the Dodd-Frank Act 

adds new TILA section 103(cc)(5), 

which defines ‘‘residential mortgage 

loan’’ to mean, with some exceptions, 

any consumer credit transaction secured 

by a mortgage, deed of trust, or other 

equivalent consensual security interest 

on ‘‘a dwelling or on residential real 

property that includes a dwelling.’’ 

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

to mean a residential structure or mobile 

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

units of condominiums or cooperatives. 

Thus, a ‘‘residential mortgage loan’’ 

generally includes all mortgage loans, 

except mortgage loans secured by a 

structure with more than four 

residential units. However, TILA section 

103(cc)(5) specifically excludes from the 

term ‘‘residential mortgage loan’’ an 

open-end credit plan or an extension of 

credit secured by an interest in a 

timeshare plan, for purposes of the 

ability-to-repay requirements under 

TILA section 129C as well as provisions 

concerning prepayment penalties and 

other restrictions. In addition, TILA 

section 129C(a)(8) exempts reverse 

mortgages and temporary or ‘‘bridge’’ 

loans with a term of 12 months or less 

from the ability-to-repay 

requirements.126 Thus, taken together, 

the ability-to-repay requirements of 

TILA section 129C(a) apply to all 

closed-end mortgage loans secured by a 

one- to four-unit dwelling, except loans 

secured by a consumer’s interest in a 

timeshare plan, reverse mortgages, or 

temporary or ‘‘bridge’’ loans with a term 

of 12 months or less. 

The Board’s 2011 ATR Proposal 

included language to implement these 

statutory exemptions and solicited 

comment on whether any additional 

exemptions were appropriate and 

consistent with the authority under 

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

the provisions related to the definition 

of qualified mortgage.127 However, the 

Board did not propose any specific 

additional exemptions. The Bureau’s 

2013 ATR Final Rule adopted § 1026.43 

to implement the provisions of section 

129C of TILA concerning consideration 

of consumers’ ability to repay, 

limitations on prepayment penalties, 

and anti-evasion restrictions. The final 

rule’s provisions on scope are 

substantially similar to the statute, with 

modifications to conform to the usage of 

Regulation Z. Section 1026.43(a) 

provides that § 1026.43 applies to any 

consumer credit transaction that is 

secured by a dwelling, as defined in 

§ 1026.2(a)(19), other than: (1) A home 

equity line of credit subject to § 1026.40; 

or (2) a mortgage transaction secured by 

a consumer’s interest in a timeshare 

plan, as defined in 11 U.S.C. 101(53(D)). 

Further, § 1026.43(a)(3)(i) and (ii) 

provides that a reverse mortgage subject 

to § 1026.33, or a temporary or ‘‘bridge’’ 

loan with a term of 12 months or less, 

such as a loan to finance the purchase 

of a new dwelling where the consumer 

plans to sell a current dwelling within 

12 months or a loan to finance the 

initial construction of a dwelling, are 

exempt from the ability-to-repay 

requirements in § 1026.43(c) through 

(f).128 Section 1026.43(a)(3)(iii) contains 

a related exemption for the construction 

phase of a construction-to-permanent 

loan. 

Concerns Raised in Response to the 

Board’s 2011 ATR Proposal 

In the response to the Board’s requests 

for feedback, many commenters 

requested exemptions from, or 

modifications to, the ability-to-repay 

requirements. Several commenters 

identified two categories of credit that 

are of particular concern to the Bureau: 

community-focused lending programs 

and programs intended to stabilize 

homeownership and prevent 

foreclosure. 

Community-focused lending 

programs. One industry commenter 

requested that credit extended pursuant 

to a community-focused lending 

program be excluded from the ability-torepay requirements. This commenter 

explained that creditors participating in 

these programs do so to benefit the 

community as a whole and knowingly 

assume any additional risks inherent in 

such lending. Another industry 

commenter requested broad flexibility 

for community-focused lending 

programs, noting that mortgage loans 

financed by State housing finance 

agencies (SHFAs) had lower long-term 

delinquency and foreclosure rates than 

mortgage loans financed by non-SHFA 

creditors. Other commenters requested a 

variety of accommodations for 

community-focused lending programs, 

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ranging from a request to provide loans 

originated by SHFAs with qualified 

mortgage status to a request that the 

Bureau explicitly adopt the 

underwriting standards of SHFAs in the 

ability-to-repay standards. Both industry 

and consumer advocate commenters 

argued that community-focused lending 

programs provide low- to moderateincome (LMI) consumers with 

responsible and affordable mortgage 

credit. 

Homeownership stabilization and 

foreclosure prevention programs. Many 

commenters requested that the Bureau 

accommodate programs designed to 

stabilize homeownership or mitigate the 

risks of foreclosure in the 2013 ATR 

Final Rule. One industry commenter 

argued that programs developed in 

response to the financial crisis, such as 

the Home Affordable Refinance 

Program, should be exempt from the 

ability-to-repay requirements. This 

commenter noted that a complete 

exemption was necessary because many 

of these programs’ requirements 

conflicted with the proposed ability-torepay requirements. Additional analysis 

conducted by the Bureau confirmed 

arguments made by commenters that 

programs such as these contain complex 

and comprehensive underwriting 

requirements. 

The Bureau’s proposal. This feedback 

prompted the Bureau to analyze the 

effects of the ability-to-repay 

requirements on community-focused 

lending programs and homeownership 

stabilization and foreclosure prevention 

programs. As explained further below, 

the Bureau believes that several 

narrowly tailored exemptions from the 

ability-to-repay requirements may be 

warranted. Specifically, the Bureau is 

concerned that the ability-to-repay 

requirements could have significant 

unintended consequences on certain 

community-focused lending programs 

designed to assist LMI consumers to 

access mortgage credit and certain 

housing stabilization and foreclosure 

assistance programs designed to assist 

consumers who have been harmed by 

the aftermath of the financial crisis. 

Because these programs already have 

carefully calibrated underwriting 

standards and are generally subject to 

significant government monitoring, the 

Bureau is concerned that overlaying an 

additional set of underwriting 

requirements and private liabilities 

could divert resources and reduce the 

effectiveness and availability of such 

programs. Accordingly, to preserve 

access to credit and promote 

stabilization of the housing market, the 

Bureau is therefore proposing to exempt 

loans made by certain communityfocused creditors and under certain 

housing stabilization programs from the 

ability-to-repay requirements, rather 

than simply designating these 

extensions of credit as qualified 

mortgages. However, given the unique 

underwriting characteristics of these 

extensions of credit and the importance 

of ensuring access to mortgage credit for 

consumers seeking assistance under 

these programs, the Bureau believes it is 

important to seek additional public 

comment in crafting these exemptions. 

As detailed below the proposed 

exemptions are narrowly targeted to 

apply only to certain types of creditors 

and extensions of credit. For example, 

the exemptions proposed below do not 

apply to credit extended in connection 

with a proprietary community-lending 

or foreclosure prevention program. The 

Bureau recognizes that such proprietary 

programs are a critical component of 

efforts to support housing affordability 

and homeownership stabilization. 

However, the Bureau believes that 

creditors offering these proprietary 

programs have the resources and 

flexibility to incorporate the ability-torepay requirements into the programs’ 

existing underwriting requirements. In 

contrast, the Bureau believes that, for 

certain extensions of credit, creditors do 

not have the resources or flexibility to 

implement the ability-to-repay 

requirements. The exemptions proposed 

below are intended to address these 

narrow circumstances to prevent 

consumers from being harmed by 

unintended consequences caused by 

application of the ability-to-repay 

requirements. 

As detailed below under each specific 

proposed provision, the Bureau seeks 

comment on every aspect of this 

approach. In particular, the Bureau 

seeks comment on the premise that the 

ability-to-repay requirements could 

impose significant implementation and 

compliance burdens on the designated 

creditors and programs even if credit 

extended by the designated creditors or 

under the designated programs were 

granted some protection from liability as 

qualified mortgages. The Bureau also 

seeks comment on whether the creditors 

and programs identified have 

sufficiently rigorous underwriting 

standards and monitoring processes to 

protect the interests of consumers in the 

absence of TILA’s ability-to-repay 

requirements. The Bureau solicits 

feedback specifically regarding the 

particular requirements of these 

creditors and these programs, how these 

requirements account for a consumer’s 

ability to repay, and whether these 

requirements duplicate or render 

unnecessary the ability-to-repay 

provisions of § 1026.43(c) through (f). 

The Bureau also requests data related to 

the delinquency, default, and 

foreclosure rates of consumers 

participating in these programs. Finally, 

the Bureau requests feedback regarding 

whether such an exemption could harm 

consumers, such as by denying 

consumers the ability to pursue claims 

arising under violations of § 1026.43(c) 

through (f) against creditors extending 

credit in connection with these 

programs. Should the Bureau determine 

that a full exemption is not warranted, 

the Bureau seeks detailed comment on 

what modifications to the general 

ability-to-repay standards are warranted, 

or whether qualified mortgage status 

should be granted instead and, if so, 

under what conditions. The Bureau also 

solicits feedback on any alternative 

approaches that would preserve the 

availability of credit under HFA 

programs while ensuring that 

consumers receive mortgage loans that 

reasonably reflect consumers’ ability to 

repay. Finally, the Bureau seeks 

comment on whether any exemptions or 

qualified mortgage status should be 

extended to additional programs or 

creditors, and, if so, under what 

conditions. 

43(a)(3)(iv) 

As discussed above, neither TILA nor 

Regulation Z provide an exemption to 

the ability-to-repay requirements for 

credit extended pursuant to a program 

administered by a housing finance 

agency (HFA). HFAs are supported by 

taxpayers, often through tax-exempt 

bonds but occasionally through direct 

government funding, and conduct 

diverse housing finance activities. For 

example, an HFA may extend credit 

directly to LMI consumers, insure or 

purchase mortgage loans originated by 

private creditors in accordance with the 

requirements of an HFA program, or 

provide other assistance to LMI 

consumers, such as mortgage loan 

payment subsidies or assistance with 

the up-front costs of a mortgage loan. 

HFAs are quasi-governmental, 

nonprofit, entities, chartered by either a 

State or a municipality, that promote 

affordable housing and community 

development. To achieve these goals, 

HFA underwriting requirements are 

tailored to the credit characteristics of 

LMI consumers. Credit offered in 

connection with these programs is 

similarly customized to the meet the 

unique needs of these consumers while 

ensuring the ongoing financial stability 

of the HFA. As HFAs extend credit to 

promote long-term housing stability, 

rather than for profit, HFAs generally 

extend credit after performing a 

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complex and lengthy analysis of a 

consumer’s ability to repay which, given 

the unique underwriting characteristics 

of LMI consumers, often gives 

significant weight to nontraditional 

underwriting elements, extenuating 

circumstances, and other subjective 

factors that are indicative of responsible 

homeownership. 

The Bureau is concerned that the 

ability-to-repay requirements may 

undermine the underwriting 

requirements of these programs. For 

example, the ability-to-repay provisions 

may require consideration of 

underwriting factors that are not 

required under HFA programs, such as 

the consumer’s credit history. The 

Bureau is also concerned that the 

ability-to-repay requirements may affect 

the ability of HFAs to offer extensions 

of credit customized to meet the needs 

of LMI consumers while promoting 

long-term housing stability. For 

example, the Bureau is aware of several 

HFA programs offering mortgage loans 

that defer the repayment of principal 

until the consumer sells the home or 

refinances the mortgage, unless the 

consumer maintains the home as the 

consumer’s principal residence for 30 

years, in which case the deferred 

principal balance is forgiven. This 

mortgage loan would not be eligible for 

qualified mortgage status under 

§ 1026.43(e) because it provides for 

deferred repayment of principal. Thus, 

a creditor extending such a mortgage 

loan is required to comply with the 

ability-to-repay requirements of 

§ 1026.43(c). 

Based on these considerations, the 

Bureau believes that it may be 

appropriate to exempt credit extended 

pursuant to an HFA program from the 

ability-to-repay requirements. In 

addition to the issues addressed above, 

the Bureau is especially concerned that 

the costs of implementing and 

complying with the requirements of 

§ 1026.43(c) through (f) would endanger 

the viability and effectiveness of these 

programs. Nonprofit, taxpayersupported HFAs may not have sufficient 

resources to implement and comply 

with the ability-to-repay requirements. 

Some HFAs may respond to the burden 

by severely curtailing the credit offered 

under these programs. Others may 

divert resources from lending to 

compliance, which may also result in 

the denial of mortgage credit to low- to 

moderate-income consumers. Private 

creditors offering credit in connection 

with HFA programs may determine that 

complying with both the ability-to-repay 

requirements and the specialized HFA 

program requirements is too 

burdensome, which also may result in 

the denial of mortgage credit to LMI 

consumers. These private creditors may 

also determine that the potential 

liability risk involved with applying the 

ability-to-repay requirements to the 

unique characteristics of HFA 

consumers is too great, thereby reducing 

the availability of mortgage credit. 

Further, these programs may employ 

underwriting requirements that are 

uniquely tailored to meet the needs of 

low- to moderate-income consumers, 

such that applying the more generalized 

statutory ability-to-repay requirements 

would be unnecessarily burdensome 

and provide no net benefit to 

consumers. Accordingly, the Bureau is 

proposing § 1026.43(a)(3)(iv), which 

provides that an extension of credit 

made pursuant to a program 

administered by a housing finance 

agency, as defined under 24 CFR 266.5, 

is exempt from § 1026.43(c) through (f). 

Section 1026.43(a)(3)(iv) is proposed 

pursuant to the Bureau’s authority 

under section 105(a) and (f) of TILA. 

Pursuant to section 105(a) of TILA, the 

Bureau believes that this exemption is 

necessary and proper to effectuate the 

purposes of TILA. This exemption 

would ensure that consumers are 

offered and receive residential mortgage 

loans on terms that reasonably reflect 

their ability to repay. The Bureau 

believes that mortgage loans originated 

in connection with programs 

administered by State housing finance 

agencies sufficiently account for a 

consumer’s ability to repay, and the 

exemption ensures that consumers are 

able to receive assistance under these 

programs. Furthermore, without the 

exemption the Bureau believes that 

consumers in this demographic would 

be denied access to the responsible, 

affordable credit offered under these 

programs, which is contrary to the 

purposes of TILA. 

The Bureau has considered the factors 

in TILA section 105(f) and believes that, 

for the reasons discussed above, an 

exemption is appropriate under that 

provision. Specifically, the Bureau 

believes that the proposed exemption is 

appropriate for all affected consumers, 

regardless of their other financial 

arrangements and financial 

sophistication and the importance of the 

loan to them. Similarly, the Bureau 

believes that the proposed exemption is 

appropriate for all affected loans, 

regardless of the amount of the loan and 

whether the loan is secured by the 

principal residence of the consumer. 

Furthermore, the Bureau believes that, 

on balance, the proposed exemption 

will simplify the credit process without 

undermining the goal of consumer 

protection or denying important benefits 

to consumers. Based on these 

considerations and the analysis 

discussed elsewhere in this proposal, 

the Bureau believes that the proposed 

exemptions are appropriate. The Bureau 

recognizes that its exemption and 

exception authorities apply to a class of 

transactions, and proposes to apply 

these authorities to the loans covered 

under the proposal of the entities 

proposed for potential exemption. 

43(a)(v) 

As discussed above, neither TILA nor 

Regulation Z provide an exemption to 

the ability-to-repay requirements for 

nonprofit creditors. Feedback provided 

in response to solicitations for comment 

in the Board’s 2011 ATR Proposal 

alerted the Bureau to the possibility that 

many charitable organizations that 

provide credit to low- to moderateincome consumers would be negatively 

affected by the requirements of 

§ 1026.43(c) through (f). The Bureau is 

concerned that the ability-to-repay 

requirements may result in consumers 

being denied access to the affordable 

mortgage credit offered by many of these 

charitable organizations. The costs of 

implementing and complying with the 

requirements of § 1026.43(c) through (f) 

may be significantly more burdensome 

on creditors that are charitable 

organizations than other creditors. 

These nonprofit creditors may not have 

the resources to implement and comply 

with the ability-to-repay requirements, 

and may cease or severely limit 

extending credit to low- to moderateincome consumers, which would result 

in the denial of responsible, affordable 

mortgage credit. 

Credit Extended by CDFIs, CHDOs, and 

DAPs 

The Bureau has identified several 

types of creditors that focus on 

extending credit to these consumers. 

Nonprofit creditors seeking designation 

as a Community Development Financial 

Institutions (CDFIs) by the Treasury 

Department must undergo a thorough 

screening process to obtain this 

designation and then must engage in 

community-focused lending to maintain 

the designation. Creditors designated as 

Downpayment Assistance through 

Secondary Financing Providers (DAPs) 

or Community Housing Development 

Organizations (CHDOs) must meet 

similar requirements imposed by the 

U.S. Department of Housing and Urban 

Development (HUD). The Bureau is 

concerned that the ability-to-repay 

requirements will negatively affect these 

creditors, while providing little 

additional protection to consumers. 

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129 26 CFR 1.6033–6(f). 

Accordingly, the Bureau proposes 

§ 1026.43(a)(3)(v), which provides that 

an extension of credit made by one of 

the four types of creditors specified in 

proposed § 1026.43(a)(3)(v)(A) through 

(D) is exempt from § 1026.43(c) through 

(f). Proposed § 1026.43(a)(3)(v)(A) 

exempts an extension of credit made by 

a creditor designated as a Community 

Development Financial Institution, as 

defined under 12 CFR 1805.104(h). 

Proposed § 1026.43(a)(3)(v)(B) exempts 

an extension of credit made by a 

creditor designated as a Downpayment 

Assistance Provider operating in 

accordance with regulations prescribed 

by the U.S. Department of Housing and 

Urban Development applicable to such 

persons. Proposed § 1026.43(a)(3)(v)(C) 

exempts an extension of credit made by 

a creditor designated as a Community 

Housing Development Organization, as 

defined under 24 CFR 92.2, operating in 

accordance with regulations prescribed 

by the U.S. Department of Housing and 

Urban Development applicable to such 

persons. Research conducted by the 

Bureau suggests that these organizations 

only extend credit after determining that 

an applicant has the ability to repay the 

loan, as part of these organizations’ 

broader purpose of extending credit to 

promote community development. 

Furthermore, the Bureau believes that 

the requirements imposed in connection 

with obtaining and maintaining the 

designations identified in proposed 

§ 1026.43(a)(3)(v)(A) through (C) may be 

sufficient to ensure that such creditors 

provide consumers with responsible 

and affordable credit, and that 

unscrupulous or irresponsible creditors 

would not be able to use these 

designations to evade the requirements 

of TILA, extend credit without regard to 

the consumer’s ability to repay, or 

otherwise harm consumers. However, 

the Bureau requests feedback regarding 

this exemption and the analysis that 

supports it. 

Credit Extended by Other Nonprofits 

The Bureau believes that charitable 

organizations other than those 

addressed above also may be negatively 

affected by the ability-to-repay 

requirements, which may impair the 

availability of mortgage credit for lowto moderate-income consumers. 

However, the Bureau is concerned that 

an exemption for all charitable 

organizations would allow irresponsible 

creditors to harm consumers. For 

example, IRS regulations regarding 

nonprofit status do not incorporate 

consumer financial protection 

regulations, such as the ability-to-repay 

requirements. Thus, a creditor could 

operate in accordance with applicable 

IRS regulations while extending credit 

without regard to a consumer’s ability to 

repay, therefore causing the harm that 

the ability-to-repay requirements are 

intended to prevent. The Bureau is also 

concerned that an exemption for all 

charitable organizations would allow 

unscrupulous creditors to intentionally 

circumvent TILA’s ability-to-repay 

requirements and harm consumers. For 

example, IRS regulations require 

nonprofit organizations to file annual 

financial reports by the 15th day of the 

5th month after the end of the 

organization’s fiscal year.129 Thus, an 

unscrupulous creditor could operate a 

for-profit lending operation, in violation 

of IRS requirements, and extend credit 

without determining a consumer’s 

ability to repay for 17 months before 

filing the required financial report, 

which would lead to the loss of the 

creditor’s nonprofit designation. 

Therefore, the Bureau believes that an 

exemption for charitable organizations 

may be appropriate, if the exemption is 

limited to those charitable organizations 

that focus on low- to moderate-income 

consumers and will be 

disproportionately affected by the costs 

associated with the ability-to-repay 

requirements. These nonprofit creditors 

may not have the resources to 

implement and comply with the abilityto-repay requirements, and may cease or 

severely limit extending credit to LMI 

consumers, which would result in the 

denial of mortgage credit. Accordingly, 

proposed § 1026.43(a)(3)(v)(D) exempts 

an extension of credit made by a 

creditor with a tax exemption ruling or 

determination letter from the Internal 

Revenue Service under section 501(c)(3) 

of the Internal Revenue Code of 1986 

(26 CFR 1.501(c)(3)–1), provided that 

certain other limitations apply. 

Specifically, the exemption is 

available only if the creditor extended 

credit secured by a dwelling no more 

than 100 times in the calendar year 

preceding receipt of the consumer’s 

application. The Bureau believes that 

this limit of 100 transactions per year 

may be appropriate because nonprofit 

creditors that extend credit secured by 

a dwelling fewer than 100 times a year 

do not have the resources to implement 

and monitor compliance with the 

ability-to-repay requirements. In 

addition, small creditors such as these 

may devote more time to determining 

whether a consumer has the ability to 

repay a mortgage loan than a creditor 

that extends credit more than 100 times 

a year. However, the Bureau solicits 

feedback on whether this condition is 

appropriate, on the costs of 

implementing and complying with the 

ability-to-repay requirements that will 

be incurred by creditors that extend 

credit secured by a dwelling more than 

100 times a year, the extent to which 

this proposed condition would affect 

access to responsible, affordable credit, 

and whether the limit of 100 

transactions per year should be 

increased or decreased. 

The exemption in proposed 

§ 1026.43(a)(3)(v)(D) is further 

conditioned on the creditor, in the 

calendar year preceding receipt of the 

consumer’s application, extending 

credit secured by a dwelling only to 

consumers with income that did not 

exceed the qualifying limit for 

moderate-income families, as 

established pursuant to section 8 of the 

United States Housing Act of 1937 and 

amended from time to time by the U.S. 

Department of Housing and Urban 

Development. Also, the proposed 

exemption is available only if the 

extension of credit is to a consumer 

with income that does not exceed this 

qualifying limit. 

The Bureau solicits feedback on 

whether this exemption, and the 

conditions under which the exemption 

applies, are appropriate. The Bureau 

also specifically requests comment 

regarding the costs that nonprofit 

creditors will incur in connection with 

the ability-to-repay requirements, the 

extent to which these additional costs 

will affect the ability of nonprofit 

creditors to extend credit to low- to 

moderate-income consumers, and 

whether consumers could be harmed by 

providing an exemption to the abilityto-repay requirements to the creditors 

described above. 

The proposed exemption under 

§ 1026.43(a)(3)(v)(D) is limited to 

creditors designated as nonprofits under 

the Internal Revenue Code of 1986, and 

is not available for creditors operating 

on a for-profit basis. The Bureau 

believes that this distinction may be 

appropriate and necessary. It may be 

appropriate because of the difference in 

lending practices between nonprofit and 

other creditors. For-profit creditors price 

and extend credit based on several 

considerations, including the 

assumption that certain consumers will 

default and must be foreclosed upon. In 

contrast, the nonprofit creditors 

identified in § 1026.43(a)(3)(v)(D) 

appear to elevate long-term community 

stability over the creditor’s economic 

considerations. Thus, these nonprofits 

appear to have a stronger incentive to 

determine that an LMI consumer has the 

ability to repay a mortgage loan than forprofit creditors. Furthermore, this 

distinction may be necessary to preserve 

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130 26 U.S.C. 501(c)(3), 508(a); 26 CFR 1.508–1. 

131 Id. See, e.g., U.S. Gov’t Accountability Office, 

GAO–07–563, Thousands of Organizations Exempt 

from Federal Income Tax Owe Nearly $1 Billion in 

Payroll and Other Taxes (2007) 5–6. 

access to responsible and affordable 

credit. This proposed exemption is 

premised on the belief that the 

additional costs imposed by the abilityto-repay requirements will force certain 

nonprofit creditors to cease extending 

credit, or substantially limit credit 

activities, thereby harming low- to 

moderate-income consumers. By 

definition, for-profit creditors derive 

more revenue from mortgage lending 

activity than nonprofit creditors, and 

therefore presumably have the resources 

to comply with the ability-to-repay 

requirements. Thus, expanding the 

proposed exemption to apply to forprofit creditors may not be necessary to 

preserve access to responsible, 

affordable credit. However, the Bureau 

solicits comment regarding this 

analysis. 

This proposed exemption applies to 

creditors designated as nonprofits under 

section 501(c)(3), but not 501(c)(4), of 

the Internal Revenue Code of 1986. The 

Bureau recognizes that these creditors 

also may be affected by the ability-torepay requirements. However, the 

Bureau believes that this distinction 

may be appropriate. As explained 

above, the Bureau’s proposed exemption 

is premised on the belief that the 

additional costs imposed by the abilityto-repay requirements will force certain 

nonprofit creditors to cease extending 

credit, or substantially limit credit 

activities, thereby harming low- to 

moderate-income consumers. 

IRS regulations permit 501(c)(4) 

nonprofits to engage in lobbying and 

certain political activities. Nonprofit 

creditors with the resources to engage in 

lobbying or other political activities are 

presumably more likely to have the 

resources to comply with the ability-torepay requirements. Furthermore, taxexempt status under section 501(c)(3) 

requires a rigorous application to the 

government and a formal determination 

by the Internal Revenue Service that an 

organization is ‘‘exclusively’’ 

charitable.130 Tax-exempt status under 

other provisions of section 501(c), by 

contrast, can be merely self-proclaimed, 

without any formal determination by 

the government.131 The heightened 

scrutiny placed on wholly charitable 

organizations by the IRS would help 

ensure that scrupulous and responsible 

creditors that seek to provide 

responsible and affordable credit qualify 

for the exemption. 

However, the Bureau solicits 

comment regarding whether the 

proposed exemption should be 

extended to creditors designated as 

nonprofits under section 501(c)(4) of the 

Internal Revenue Code of 1986. In 

addition, the Bureau requests financial 

reports and mortgage lending activity 

data supporting the argument that the 

marginal cost of implementing and 

complying with the ability-to-repay 

requirements would cause 501(c)(4) 

nonprofit creditors to cease, or severely 

limit, extending credit to low- to 

moderate-income consumers. 

Proposed comment 43(a)(3)(v)(D)–1 

clarifies that an extension of credit is 

exempt from the requirements of 

§ 1026.43(c) through (f) if the credit is 

extended by a creditor described in 

§ 1026.43(a)(3)(v)(D), provided the 

conditions specified in 

§ 1026.43(a)(3)(v)(D)(1), (2), and (3) are 

satisfied. The conditions specified in 

§ 1026.43(a)(3)(v)(D)(1) and (2) are 

determined according to activity that 

occurred in the calendar year preceding 

the calendar year in which the 

consumer’s application was received. 

Section 1026.43(a)(3)(v)(D)(2) provides 

that during the preceding calendar year, 

the entity must have extended credit 

only to consumers with income that did 

not exceed the qualifying limit then in 

effect for moderate-income families, as 

specified in regulations prescribed by 

the U.S. Department of Housing and 

Urban Development pursuant to section 

8 of the United States Housing Act of 

1937. For example, a creditor has 

satisfied the requirements of 

§ 1026.43(a)(3)(v)(D)(2) if the creditor 

demonstrates that the creditor extended 

credit only to consumers with income 

that did not exceed the qualifying limit 

in effect on the dates the creditor 

received each consumer’s individual 

application. The condition specified in 

§ 1026.43(a)(3)(v)(D)(3), which relates to 

the current extension of credit, provides 

that the extension of credit must be to 

a consumer with income that does not 

exceed the qualifying limit specified in 

§ 1026.43(a)(3)(v)(D)(2) in effect on the 

date the creditor received the 

consumer’s application. For example, 

assume that a creditor with a tax 

exemption ruling under section 

501(c)(3) of the Internal Revenue Code 

of 1986 has satisfied the conditions 

identified in § 1026.43(a)(3)(v)(D)(1) and 

(2). If, on May 21, 2014, the creditor in 

this example extends credit secured by 

a dwelling to a consumer whose 

application reflected income in excess 

of the qualifying limit identified in 

§ 1026.43(a)(3)(v)(D)(2), the creditor has 

not satisfied the condition in 

§ 1026.43(a)(3)(v)(D)(3) and this 

extension of credit is not exempt from 

the requirements of § 1026.43(c) through 

(f). 

Legal Authority 

Section 1026.43(a)(3)(v) is proposed 

pursuant to the Bureau’s authority 

under section 105(a) and (f) of TILA. 

Pursuant to section 105(a) of TILA, the 

Bureau believes that this exemption is 

necessary and proper to effectuate the 

purposes of TILA. By ensuring the 

viability of the low- to moderate-income 

mortgage market, this exemption would 

ensure that consumers are offered and 

receive residential mortgage loans on 

terms that reasonably reflect their ability 

to repay. Without the exemption the 

Bureau believes that low- to moderateincome consumers would be denied 

access to the responsible and affordable 

credit offered by these creditors, which 

is contrary to the purposes of TILA. This 

exemption is consistent with the goals 

of TILA section 129C by ensuring that 

consumers are able to obtain 

responsible, affordable credit from the 

nonprofit creditors discussed above. 

The Bureau has considered the factors 

in TILA section 105(f) and believes that, 

for the reasons discussed above, an 

exemption is appropriate under that 

provision. Specifically, the Bureau 

believes that the proposed exemption is 

appropriate for all affected consumers, 

regardless of their other financial 

arrangements and financial 

sophistication and the importance of the 

loan to them. Similarly, the Bureau 

believes that the proposed exemption is 

appropriate for all affected loans, 

regardless of the amount of the loan and 

whether the loan is secured by the 

principal residence of the consumer. 

Furthermore, the Bureau believes that, 

on balance, the proposed exemption 

will simplify the credit process without 

undermining the goal of consumer 

protection or denying important benefits 

to consumers. Based on these 

considerations and the analysis 

discussed elsewhere in this proposal, 

the Bureau believes that the proposed 

exemptions are appropriate. The Bureau 

recognizes that its exemption and 

exception authorities apply to a class of 

transactions, and proposes to apply 

these authorities to the loans covered 

under the proposal of the entities 

proposed for potential exemption. 

43(a)(3)(vi) 

Background 

Several commenters requested that 

the Bureau modify the ability-to-repay 

requirements to accommodate 

extensions of credit made pursuant to a 

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132Section 1026.17(c)(3) provides that the 

creditor may disregard the effects of the following 

in making calculations and disclosures: (i) That 

payments must be collected in whole cents; (ii) that 

dates of scheduled payments and advances may be 

changed because the scheduled date is not a 

business day; (iii) that months have different 

numbers of days; and (iv) the occurrence of leap 

year. 

homeownership stabilization or 

foreclosure prevention program from the 

ability-to-repay requirements. The 

Bureau is concerned that the ability-torepay requirements are not sufficiently 

flexible, or may be unduly burdensome, 

with respect to extensions of credit 

made pursuant to these programs, 

which are intended to assist consumers 

at risk of default, foreclosure, or who 

were otherwise harmed by the financial 

crisis. Generally, consumers are able to 

obtain new extensions of credit, 

refinancings of existing mortgage loans, 

or loan modification agreements in 

connection with these programs. As a 

threshold matter, determining the 

applicability of these programs to the 

ability-to-repay requirements implicates 

the refinancing provisions under 

§ 1026.20 of Regulation Z as well as the 

payment shock refinancing provisions 

under TILA section 129C(a)(6)(E), as 

implemented by § 1026.43(d). 

Refinancings generally. Regulation Z 

contains several provisions regarding 

when a transaction is considered a 

‘‘refinancing,’’ and therefore subject to 

the requirements of TILA. Section 

1026.20(a) currently provides that ‘‘a 

refinancing occurs when an existing 

obligation that was subject to this 

subpart is satisfied and replaced by a 

new obligation undertaken by the same 

consumer. A refinancing is a new 

transaction requiring new disclosures to 

the consumer.’’ Comment 20(a)–1, 

which clarifies this general definition, 

provides that a refinancing is a new 

transaction requiring a complete new set 

of disclosures. Whether a refinancing 

has occurred is determined by reference 

to whether the original obligation has 

been satisfied or extinguished and 

replaced by a new obligation, based on 

the parties’ contract and applicable law. 

Comment 20(a)–1 further explains that 

the refinancing may involve the 

consolidation of several existing 

obligations, disbursement of new money 

to the consumer or on the consumer’s 

behalf, or the rescheduling of payments 

under an existing obligation. In any 

form, the new obligation must 

completely replace the prior one. 

However, changes in the terms of an 

existing obligation, such as the deferral 

of individual installments, will not 

constitute a refinancing unless 

accomplished by the cancellation of that 

obligation and the substitution of a new 

obligation. Furthermore, a substitution 

of agreements that meets the refinancing 

definition will require new disclosures, 

even if the substitution does not 

substantially alter the prior credit terms. 

Comment 20(a)–5 explains that 

§ 1026.20(a) applies only to refinancings 

undertaken by the original creditor or a 

holder or servicer of the original 

obligation. A ‘‘refinancing’’ by any other 

person is a new transaction under the 

regulation, not a refinancing under 

§ 1026.20(a). 

There are five types of transactions, 

identified in § 1026.20(a)(1) through (5), 

that are not considered refinances, three 

of which are relevant for purposes of 

these proposed exemptions. First, 

§ 1026.20(a)(1) provides that a renewal 

of a single payment obligation with no 

change in the original terms shall not be 

treated as a refinancing. Comment 

20(a)(1)–1 clarifies that this exception 

applies both to obligations with a single 

payment of principal and interest and to 

obligations with periodic payments of 

interest and a final payment of 

principal. In determining whether a new 

obligation replacing an old one is a 

renewal of the original terms or a 

refinancing, the creditor may consider it 

a renewal even if: (1) Accrued unpaid 

interest is added to the principal 

balance; (2) changes are made in the 

terms of renewal resulting from the 

factors listed in § 1026.17(c)(3); 132 and 

(3) the principal at renewal is reduced 

by a curtailment of the obligation. 

Second, § 1026.20(a)(2) provides that 

a reduction in the APR with a 

corresponding change in the payment 

schedule shall not be considered a 

refinancing. Comment 20(a)(2)–1 

explains that ‘‘a reduction in the annual 

percentage rate with a corresponding 

change in the payment schedule is not 

a refinancing. If the annual percentage 

rate is subsequently increased (even 

though it remains below its original 

level) and the increase is effected in 

such a way that the old obligation is 

satisfied and replaced, new disclosures 

must then be made.’’ Comment 20(a)(2)– 

2 further clarifies that a corresponding 

change in the payment schedule to 

implement a lower APR would be a 

shortening of the maturity, or a 

reduction in the payment amount or the 

number of payments of an obligation. 

Additionally, the exemption in 

§ 1026.20(a)(2) does not apply if the 

maturity is lengthened, or if the 

payment amount or number of 

payments is increased beyond that 

remaining on the existing transaction. 

Third, § 1026.20(a)(4) provides that a 

change in the payment schedule or a 

change in collateral requirements as a 

result of the consumer’s default or 

delinquency, unless the rate is 

increased, or the new amount financed 

exceeds the unpaid balance plus earned 

finance charge and premiums for 

continuation of insurance of the types 

described in § 1026.4(d) shall not be 

considered a refinancing. Comment 

20(a)(4)–1, which refers to the 

agreements described in § 1026.20(a)(4) 

as ‘‘workout agreements,’’ explains that 

a workout agreement is not a 

refinancing unless the APR is increased 

or additional credit is advanced beyond 

amounts already accrued plus insurance 

premiums. 

TILA section 129C(a)(6)(E). As 

discussed further in the Bureau’s 2013 

ATR Final Rule, two provisions of 

section 1411 of the Dodd-Frank Act 

address refinancing of existing mortgage 

loans under the ability-to-repay 

requirements. As amended by the DoddFrank Act, TILA section 129C(a)(5) 

provides that Federal agencies may 

create an exemption from the income 

and verification requirements for certain 

streamlined refinancings of loans made, 

guaranteed, or insured by various 

federal agencies. 15 U.S.C. 1639(a)(5). In 

addition, TILA section 129C(a)(6)(E) 

provides special ability-to-repay 

requirements to encourage applications 

to refinance existing ‘‘hybrid loans’’ into 

‘‘standard loans’’ with the same 

creditor, where the consumer has not 

been delinquent on any payments on 

the existing loan and the monthly 

payments would be reduced under the 

refinanced loan. 15 U.S.C. 

1639c(a)(6)(E). The statute allows 

creditors to give special weight to the 

mortgagor’s good standing and to 

whether the refinancing would prevent 

a likely default after the interest rate on 

the existing loan resets, as well as other 

potentially favorable treatment to the 

consumer. However, it does not 

expressly exempt applications for such 

‘‘payment shock refinancings’’ from 

TILA’s general ability-to-repay 

requirements. 

The Bureau implemented TILA 

section 129C(a)(6)(E) in § 1026.43(d). 

Although the Bureau used its authority 

to interpret and implement TILA to 

modify the payment shock refinancing 

provisions, § 1026.43(d) still applies to 

only a narrow category of refinancings. 

Specifically, § 1026.43(d) applies only 

if: 

• The refinancing is conducted in 

response to an application to refinance 

a non-standard mortgage into a standard 

mortgage; 

• The creditor for the standard 

mortgage is the current holder of the 

existing non-standard mortgage or the 

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133Specifically, § 1026.43(d)(1)(ii) also defines 

‘‘standard mortgage’’ as an extension of credit 

subject to the ability-to-repay requirements: (1) that 

provides for regular periodic payments that do not 

cause the principal balance to increase, allow the 

consumer to defer repayment of principal, or result 

in a balloon payment, as defined in 

§ 1026.18(s)(5)(i); (2) for which the total points and 

fees payable in connection with the transaction do 

not exceed the amounts specified for qualified 

mortgages in § 1026.43(e)(3); (3) for which the term 

does not exceed 40 years; (4) for which the interest 

rate is fixed for at least the first five years after the 

date on which the first regular periodic payment 

will be due; and (5) for which the proceeds from 

the loan are used solely to pay off the outstanding 

principal balance on the non-standard mortgage, or 

to pay closing or settlement charges required to be 

disclosed under the Real Estate Settlement 

Procedures Act, 12 U.S.C. 2601 et seq. 

servicer acting on behalf of the current 

holder; 

• The creditor receives the 

consumer’s written application for the 

standard mortgage before the nonstandard mortgage is recast; 

• The creditor considers whether the 

standard mortgage likely will prevent a 

default by the consumer on the nonstandard mortgage once the loan is 

recast; 

• The creditor determines that the 

monthly payment for the standard 

mortgage is materially lower than the 

monthly payment for the non-standard 

mortgage, as calculated under 

§ 1026.43(d)(5); 

• The consumer has made no more 

than one payment more than 30 days 

late on the non-standard mortgage 

during the 12 months immediately 

preceding the application for 

refinancing; 

• The consumer has made no 

payments more than 30 days late during 

the six months immediately preceding 

the creditor’s receipt of the consumer’s 

written application for the standard 

mortgage; and 

• If the non-standard mortgage was 

consummated on or after January 10, 

2014, the non-standard mortgage was 

made in accordance with § 1026.43(c) or 

(e), as applicable. 

With the exception of the last 

requirement, which the Bureau added 

using discretionary authority to prevent 

potential evasion of the statutory 

scheme, all of these requirements are 

based on statutory text. The definition 

of ‘‘standard mortgage’’ also constrains 

application of the provision; while it 

does not require that the non-standard 

loan be replaced by a qualified 

mortgage, it does incorporate some of 

the product feature protections from the 

qualified mortgage framework.133 Thus, 

while § 1026.43(d) may facilitate 

refinancings for some consumers at risk 

of default, § 1026.43(d) would not apply 

to many extensions of credit made in 

connection with homeownership 

stabilization or foreclosure prevention 

programs. These extensions of credit 

remain subject to the ability-to-repay 

requirements. 

Concerns raised in response to the 

Board’s 2011 ATR Proposal. In response 

to the Board’s request for feedback, 

many commenters requested that the 

Bureau accommodate programs 

designed to stabilize homeownership or 

mitigate the risks of foreclosure in the 

2013 ATR Final Rule. One industry 

commenter argued that programs 

developed in response to the financial 

crisis, such as the Home Affordable 

Refinance Program, should be exempt 

from the ability-to-repay requirements. 

This commenter noted that a complete 

exemption was necessary because many 

of these programs’ requirements 

conflicted with the proposed ability-torepay requirements. 

Discussion 

Prompted by the feedback provided, 

the Bureau has conducted a thorough 

review of homeownership stabilization 

programs under sections 101 and 109 of 

the Emergency Economic Stabilization 

Act of 2008 (12 U.S.C. 5211, 5219) 

(EESA), such as the Making Home 

Affordable program administered by the 

Treasury Department. Based on this 

analysis, the Bureau believes it may be 

appropriate to exempt any extension of 

credit under these programs from the 

ability-to-repay requirements. 

At the outset the Bureau notes that 

some of the activities conducted under 

these EESA programs (as well as a wide 

variety of proprietary loan modification 

programs by private creditors) would 

not trigger ability-to-repay requirements 

because such transactions involve 

modifications of existing loans by the 

holder or servicer of the original loan 

obligation rather than a new extension 

of credit through a refinancing. As 

discussed above, Regulation Z 

distinguishes between refinancing of an 

existing credit obligation by a creditor 

that is not the holder or servicer of the 

existing obligation, which trigger 

generally TILA’s requirements, and 

refinancings by the existing holder or 

servicer, which trigger TILA’s 

requirements under certain 

circumstances. Specifically, with regard 

to activities by the holder or servicer of 

the existing obligation, § 1026.20(a) and 

related commentary state that a 

refinancing that triggers TILA 

disclosures only occurs where there is a 

new extension of credit that entirely 

replaces an existing obligation with a 

new obligation undertaken by the same 

consumer. As discussed above, the 

regulation and commentary distinguish 

lesser modifications that do not 

completely extinguish the original 

obligation and further provide various 

exceptions stating that certain activities 

by the holder or servicer of the original 

obligation do not constitute refinancings 

that trigger disclosure requirements 

even if the activities involve 

replacement of the original obligation. 

The list of such exceptions includes 

certain credit renewals (including those 

with principal reductions), reductions 

in APR with corresponding changes in 

the payment schedule, and certain 

‘‘workout agreements’’ in response to a 

consumer’s default or delinquency. 

Although many activities conducted 

under these EESA programs do not 

implicate TILA, the Bureau is concerned 

that the ability-to-repay requirements 

may deter creditors from participating 

in these programs. The Bureau is 

concerned that where refinancings and 

other new extensions of credit are 

involved, application of the ability-torepay requirements and liabilities in 

addition to existing EESA program 

requirements could significantly chill 

creditor participation. The requirements 

of these programs appear to be 

comprehensive and tailored to the 

specific needs of consumers who are at 

risk of default or foreclosure. The 

Bureau also is concerned that requiring 

credit extended pursuant to these 

programs to comply with the ability-torepay provisions may unnecessarily 

interfere with these unique 

underwriting requirements, which 

would make it more difficult for many 

consumers to qualify for assistance and 

increase the cost of credit for those who 

do, thereby impacting the availability of 

credit for these at-risk consumers. 

Further, participation in the programs is 

entirely voluntary, and already involves 

substantial compliance burdens in order 

to satisfy Federal requirements. If those 

burdens are exacerbated by the addition 

of the ability-to-repay requirements, the 

Bureau is concerned that creditors may 

elect not to participate in these 

programs, rather than investing 

resources complying with the 

requirements of both homeownership 

stabilization programs and the abilityto-repay provisions. A response such as 

this would frustrate efforts to ameliorate 

the effects of the financial crisis and 

disrupt the financial market for 

consumers at risk of foreclosure or 

default, thereby harming those in need 

of the assistance provided under these 

programs. 

Due to these factors, the Bureau has 

considered whether it would be 

practical to address potential chilling 

effects with only a narrow exemption 

from or modification to the ability-torepay requirements. An exemption from 

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6648 Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Proposed Rules 

only the requirement to consider the 

consumer’s debt-to-income ratio under 

§ 1026.43(c)(2)(7), or a modification to 

the refinancing provisions in 

§ 1026.43(d), for instance, may address 

only partially the inconsistencies 

between the requirements of these 

programs and the ability-to-repay 

requirements. Also, if redundancies or 

inconsistencies such as these exist, the 

ability-to-repay requirements may not 

provide additional, meaningful 

protection to consumers. 

Accordingly, proposed 

§ 1026.43(a)(3)(vi) provides that an 

extension of credit made pursuant to a 

program authorized by sections 101 and 

109 of the Emergency Economic 

Stabilization Act of 2008 (12 U.S.C. 

5211; 5219) is exempt from § 1026.43(c) 

through (f). Although this proposed 

exemption may help consumers who are 

at risk of default or foreclosure and are 

likely to need responsible and 

affordable credit, the Bureau wishes to 

obtain additional information regarding 

whether consumers seeking assistance 

under these Federal programs may need 

the protection afforded by the ability-torepay requirements. Therefore, in 

addition to soliciting general feedback 

regarding whether this proposed 

exemption is appropriate, the Bureau 

solicits feedback regarding whether 

applicability of the ability-to-repay 

requirements would constrict the 

availability of credit offered under these 

programs, whether consumers have 

suffered financial loss or other harm by 

creditors participating in these 

programs, and the extent to which the 

requirements of these Federal programs 

account for a consumer’s ability to 

repay. 

Proposed comment 43(a)(3)(vi)–1 

explains that creditors need not 

determine whether an activity under 

EESA constitutes a loan modification or 

workout, a refinancing that is subject to 

new disclosures under § 1026.20(a), or 

an independent extension of new credit 

that would trigger TILA requirements in 

any event. Under any of these scenarios, 

§ 1026.43(c) through (f) would not 

apply. In this respect, the exemption 

proposed under § 1026.43(a)(3)(vi) is 

broader than the proposed exemptions 

for other housing stabilization programs. 

Creditors participating in the other 

housing stabilization programs 

identified in proposed 

§ 1026.43(a)(3)(vii) and (viii) would not 

be subject to ability-to-repay 

requirements when providing loan 

modifications and workouts, and would 

be exempt when conducting 

refinancings under § 1026.20(a) as the 

holder or servicer of the original 

obligation. However, independent 

refinancings as third-party creditors 

would be subject to ability-to-repay 

requirements under the narrower 

exemptions provided for housing 

stabilization programs offered by the 

Federal Housing Administration, 

Department of Veterans Affairs, 

Department of Agriculture, or Fannie 

Mae or Freddie Mac while they are 

under conservatorship. 

Section 1026.43(a)(3)(vi) is proposed 

pursuant to the Bureau’s authority 

under section 105(a) and (f) of TILA. 

Pursuant to section 105(a) of TILA, the 

Bureau finds that this exemption is 

necessary and proper to effectuate the 

purposes of TILA. This exemption 

would ensure that consumers are 

offered and receive residential mortgage 

loans on terms that reasonably reflect 

their ability to repay. In the Bureau’s 

judgment extensions of credit made 

pursuant to a program authorized by 

sections 101 and 109 of the Emergency 

Economic Stabilization Act of 2008 

sufficiently account for a consumer’s 

ability to repay, and the exemption 

ensures that consumers are able to 

receive assistance under these programs. 

Furthermore, without the exemption the 

Bureau believes that consumers at risk 

of default or foreclosure would be 

denied access to the responsible, 

affordable credit offered under these 

programs, which is contrary to the 

purposes of TILA. 

The Bureau has considered the factors 

in TILA section 105(f) and believes that, 

for the reasons discussed above, an 

exemption is appropriate under that 

provision. Specifically, the Bureau 

believes that the proposed exemption is 

appropriate for all affected consumers, 

regardless of their other financial 

arrangements and financial 

sophistication and the importance of the 

loan to them. Similarly, the Bureau 

believes that the proposed exemption is 

appropriate for all affected loans, 

regardless of the amount of the loan and 

whether the loan is secured by the 

principal residence of the consumer. 

Furthermore, the Bureau believes that, 

on balance, the proposed exemption 

will simplify the credit process without 

undermining the goal of consumer 

protection or denying important benefits 

to consumers. Based on these 

considerations and the analysis 

discussed elsewhere in this proposal, 

the Bureau believes that the proposed 

exemptions are appropriate. The Bureau 

recognizes that its exemption and 

exception authorities apply to a class of 

transactions, and proposes to apply 

these authorities to the loans covered 

under the proposal of the entities 

proposed for potential exemption. 

43(a)(3)(vii) 

As discussed under § 1026.43(a)(3)(vi) 

above, a transaction is subject to the 

ability-to-repay requirements if, 

pursuant to the definition of refinancing 

under § 1026.20(a), the existing 

obligation is satisfied and replaced by 

the new obligation, provided that the 

transaction is not otherwise exempt 

under § 1026.20(a)(1) through (5). 

Section 129C(a)(5) of TILA, as added 

by section 1411 of the Dodd-Frank Act, 

provides that the Department of 

Housing and Urban Development, the 

Department of Veterans Affairs, the 

Department of Agriculture, and the 

Rural Housing Service may modify 

certain ability-to-repay requirements, 

with respect to certain loans made, 

guaranteed, or insured by such agencies. 

These agencies may exempt 

refinancings from the income 

verification requirements in TILA 

section 129C(a)(4) provided that the 

conditions identified in TILA section 

129C(a)(5)(A) through (G) are met. 

Specifically, the consumer must not be 

30 days or more past due on the prior 

existing residential mortgage loan, the 

refinancing may not increase the 

principal balance outstanding on the 

prior existing residential mortgage loan, 

except to the extent of fees and charges 

allowed by the department or agency 

making, guaranteeing, or insuring the 

refinancing, and the total points and 

fees (as defined in TILA section 

103(aa)(4), other than bona fide third 

party charges not retained by the 

mortgage originator, creditor, or an 

affiliate of either) payable in connection 

with the refinancing do not exceed 3 

percent of the total new loan amount. 

Further, the interest rate on the 

refinancing must be lower than the 

interest rate of the original loan, unless 

the consumer is replacing an adjustablerate loan with a fixed-rate loan, under 

guidelines that the department or 

agency shall establish for loans they 

make, guarantee, or issue. The 

refinancing must also be subject to a 

payment schedule that will fully 

amortize the refinancing and does not 

result in a balloon payment, as defined 

in TILA section 129C(b)(2)(A)(ii), in 

accordance with the regulations 

prescribed by the department or agency 

making, guaranteeing, or insuring the 

refinancing. The final condition 

provides that both the residential 

mortgage loan being replaced and the 

new refinancing must satisfy all 

requirements of the department or 

agency making, guaranteeing, or 

insuring the refinancing. 

The Board solicited feedback in its 

2011 ATR Proposal regarding the impact 

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134 76 FR 27390, 27448. 

135 76 FR 27390, 27456. 

of certain proposed provisions related to 

refinancings. The Board requested 

comment regarding whether exemptions 

from the ability-to-repay requirements, 

other than those proposed, were 

appropriate.134 The Board specifically 

solicited comment on whether there 

were any appropriate exemptions 

consistent with the Board’s authority in 

TILA section 129C(b)(3)(B)(i).135 Several 

commenters argued that the ability-torepay requirements adopted by the 

Bureau should account for the 

requirements of Federal agency 

programs. Some commenters stated that 

Federal agency loans, such as loans 

made under a program administered by 

the U.S. Department of Housing and 

Urban Development, should be exempt 

from several of the ability-to-repay 

requirements. 

The Federal agencies described above 

have not yet prescribed rules related to 

the ability-to-repay requirements for 

refinances, pursuant to TILA section 

129C(a)(5), or the definition of qualified 

mortgage, pursuant to TILA section 

129C(b)(3)(B)(ii). An exemption to the 

ability-to-repay requirements may be 

necessary until these Federal agencies 

have prescribed such rules. Without 

such an exemption, the Bureau is 

concerned that the ability-to-repay 

provisions would unnecessarily 

interfere with requirements of these 

Federal agency refinance programs, 

which would make it more difficult for 

many consumers to qualify for these 

programs and increase the cost of credit 

for those who do, thereby constraining 

the availability of responsible, 

affordable credit for consumers. 

Accordingly, the Bureau is proposing 

§ 1026.43(a)(3)(vii), which provides that 

an extension of credit that is a 

refinancing, as defined under 

§ 1026.20(a) but without regard for 

whether the creditor is the creditor, 

holder, or servicer of the original 

obligation, that is eligible to be insured, 

guaranteed, or made pursuant to a 

program administered by the Federal 

Housing Administration, U.S. 

Department of Veterans Affairs, or the 

U.S. Department of Agriculture is 

exempt from § 1026.43(c) through (f), 

provided that the agency administering 

the program under which the extension 

of credit is eligible to be insured, 

guaranteed, or made has not prescribed 

rules pursuant to section 129C(a)(5) or 

129C(b)(3)(B)(ii) of TILA. The Bureau 

solicits comment regarding whether this 

exemption is appropriate, whether there 

are any additional conditions that 

should be required, whether the abilityto-repay requirements would negatively 

affect the availability of credit offered 

under Federal agency programs, and 

whether consumers could be harmed by 

exempting these extensions of credit 

from the ability-to-repay requirements. 

As explained above, TILA section 

129C(a)(5) permits the Department of 

Housing and Urban Development, the 

Department of Veterans Affairs, the 

Department of Agriculture, and the 

Rural Housing Service to exempt certain 

refinancings from the income 

verification requirements in TILA 

section 129C(a)(4) provided that the 

conditions identified in TILA section 

129C(a)(5)(A) through (G) are met. For 

the reasons discussed in this section the 

Bureau believes that this temporary 

exemption may be necessary to preserve 

access to affordable and responsible 

credit by maintaining the status quo in 

the Federal agency refinancing market 

until the Federal agencies exercise the 

authority granted under TILA section 

129C(a)(5) or issue rules implementing 

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

temporary nature of this exemption 

ensures that these Federal agencies 

retain their discretionary authority 

under TILA section 129C(a)(5). 

Proposed comment 43(a)(3)(vii)–1 

clarifies that the requirements of 

§ 1026.43(c) through (f) do not apply to 

an extension of credit that is a 

refinancing, as defined by § 1026.20(a) 

but without regard for whether the 

creditor is the creditor, holder, or 

servicer of the original obligation, that is 

eligible to be insured, guaranteed, or 

made pursuant to programs 

administered by the Federal agencies 

identified in § 1026.43(a)(3)(vii), 

provided that rules issued by such 

agencies pursuant to TILA section 

129C(a)(5) or 129C(b)(3)(B)(ii) have not 

become effective on or before the date 

the refinancing is consummated. This 

proposed comment also provides three 

illustrative examples. The first example 

clarifies that, if a consumer applies for 

a refinancing that is eligible to be 

insured, guaranteed, or made pursuant 

to a program administered by the U.S. 

Department of Veterans Affairs, and the 

U.S. Department of Veterans Affairs has 

issued rules pursuant to section 

129C(a)(5) or 129C(b)(3)(B)(ii) of TILA 

that have become effective, the 

exemption in § 1026.43(a)(3)(vii) does 

not apply because those rules will 

separately govern the status of U.S. 

Department of Veterans Affairs loans. 

The second illustrative example in 

proposed comment 43(a)(3)(vii)–1 rests 

on two assumptions: first, that a 

consumer applies for a refinancing of a 

subordinate-lien mortgage loan that is 

eligible to be insured, guaranteed, or 

made pursuant to a program 

administered by the U.S. Department of 

Veterans Affairs and the U.S. 

Department of Veterans Affairs has 

issued rules pursuant to TILA section 

129C(b)(3)(B)(ii) or 129C(a)(5) that have 

become effective; second, that such 

effective rules apply to refinancings of 

first-lien mortgage loans, but not 

subordinate-lien mortgage loans. Based 

on these assumptions the exemption in 

§ 1026.43(a)(3)(vii) does not apply, 

regardless of the status of the particular 

loans under the rules issued, because 

the U.S. Department of Veterans Affairs 

has issued rules pursuant to TILA 

section 129C(b)(3)(B)(ii) or 129C(a)(5) 

that have become effective. The 

exemption does not apply even if the 

applicability of such Federal agency 

rules is determined based on program 

type instead of loan type. Thus, the 

exemption in § 1026.43(a)(3)(vii) does 

not apply even if the U.S. Department 

of Veterans Affairs rules do not apply to 

the particular U.S. Department of 

Veterans Affairs program under which 

the refinancing is eligible to be insured, 

guaranteed, or made. 

The third illustrative example under 

proposed comment 43(a)(3)(vii)–1 is 

also predicated on two assumptions: 

First, that a consumer applies for a 

refinancing that is eligible to be insured, 

guaranteed, or made pursuant to a 

program administered by the Federal 

Housing Administration and the Federal 

Housing Administration has issued 

rules pursuant to TILA section 

129C(b)(3)(B)(ii) or 129C(a)(5) that have 

become effective; second, that the 

refinancing for which the consumer 

applies is also eligible to be insured, 

guaranteed, or made pursuant to a 

program administered by the U.S. 

Department of Agriculture, but the U.S. 

Department of Agriculture has not 

issued rules pursuant to TILA section 

129C(b)(3)(B)(ii) or 129C(a)(5), or the 

U.S. Department of Agriculture has 

issued rules implementing TILA section 

129C(b)(3)(B)(ii) or 129C(a)(5) that have 

not yet taken effect at the time the 

refinancing is consummated. Based on 

these assumptions the exemption 

applies to that refinancing because the 

refinancing is eligible to be insured, 

guaranteed, or made pursuant to a 

program administered by a Federal 

agency identified in § 1026.43(a)(3)(vii), 

and such Federal agency has not issued 

rules pursuant to section 

129C(b)(3)(B)(ii) or 129C(a)(5) of TILA 

that have become effective. 

Section 1026.43(a)(3)(vii) is proposed 

pursuant to the Bureau’s authority 

under section 105(a) and (f) of TILA. 

Pursuant to section 105(a) of TILA, the 

Bureau finds that this exemption is 

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6650 Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Proposed Rules 

136 76 FR 27390, 27448. 

137 76 FR 27390, 27456. 

138See, e.g., 12 CFR 1291.1; 74 FR 38514, 38516 

(Aug. 4, 2009). 

necessary and proper to effectuate the 

purposes of TILA. This exemption 

would ensure that consumers are 

offered and receive residential mortgage 

loans on terms that reasonably reflect 

their ability to repay. In the Bureau’s 

judgment refinancings made pursuant to 

the Federal agency refinancing programs 

discussed above sufficiently account for 

a consumer’s ability to repay, and the 

exemption ensures that consumers are 

able to obtain refinancing credit under 

these programs. Furthermore, without 

the exemption the Bureau believes that 

consumers seeking Federal agency 

refinancings would be denied access to 

the responsible, affordable credit offered 

under these programs, which is contrary 

to the purposes of TILA. 

The Bureau has considered the factors 

in TILA section 105(f) and believes that, 

for the reasons discussed above, an 

exemption is appropriate under that 

provision. Specifically, the Bureau 

believes that the proposed exemption is 

appropriate for all affected consumers, 

regardless of their other financial 

arrangements and financial 

sophistication and the importance of the 

loan to them. Similarly, the Bureau 

believes that the proposed exemption is 

appropriate for all affected loans, 

regardless of the amount of the loan and 

whether the loan is secured by the 

principal residence of the consumer. 

Furthermore, the Bureau believes that, 

on balance, the proposed exemption 

will simplify the credit process without 

undermining the goal of consumer 

protection or denying important benefits 

to consumers. Based on these 

considerations and the analysis 

discussed elsewhere in this proposal, 

the Bureau believes that the proposed 

exemptions are appropriate. The Bureau 

recognizes that its exemption and 

exception authorities apply to a class of 

transactions, and proposes to apply 

these authorities to the loans covered 

under the proposal of the entities 

proposed for potential exemption. 

43(a)(3)(viii) 

As discussed under § 1026.43(a) 

above, § 1026.43(c), which implements 

section 129C(a)(1) of TILA, requires a 

creditor to make a reasonable and good 

faith determination based on verified 

and documented information that, at the 

time the mortgage loan is consummated, 

the consumer has a reasonable ability to 

repay the loan according to its terms, 

including all applicable taxes, insurance 

(including mortgage guarantee 

insurance), and assessments. Section 

1026.43(a)(1) through (3), which 

implements TILA sections 103(cc)(5) 

and 129C(a)(8), applies these ability-torepay requirements to all closed-end 

mortgage loans secured by a one- to 

four-unit dwelling, except loans secured 

by a consumer’s interest in a timeshare 

plan, reverse mortgages, temporary or 

‘‘bridge’’ loans with a term of 12 months 

or less, and the construction phrase of 

a construction-to-permanent loan. As 

discussed under § 1026.43(a)(3)(vi) 

above, a transaction is subject to the 

ability-to-repay requirements if, 

pursuant to the definition of refinancing 

under § 1026.20(a), the existing 

obligation is satisfied and replaced by 

the new obligation, provided that the 

transaction is not otherwise exempt 

under § 1026.20(a)(1) through (5). 

The Board did not include an 

exemption related to refinancing 

programs administered by Fannie Mae 

or Freddie Mac in its 2011 ATR 

Proposal. However, the Board solicited 

feedback regarding the impact of certain 

proposed provisions related to 

refinancings. The Board requested 

comment regarding whether exemptions 

from the ability-to-repay requirements, 

other than those proposed, were 

appropriate.136 The Board specifically 

solicited comment on whether there 

were any appropriate exemptions 

consistent with the Board’s authority in 

TILA section 129C(b)(3)(B)(i).137 In 

response, industry commenters, 

industry trade organization commenters, 

GSE commenters, and consumer 

advocate commenters argued that the 

ability-to-repay requirements should 

accommodate loans held by Fannie Mae 

and Freddie Mac while in 

conservatorship. 

As with the Federal homeownership 

stabilization and Federal agency 

refinance programs discussed above, the 

Bureau is concerned that application of 

the ability-to-repay requirements may 

constrict certain types of credit, thereby 

harming certain consumers. The risk of 

impairing credit availability is of 

particular concern with respect to 

programs offered by Fannie Mae and 

Freddie Mac intended to provide 

affordable refinancings to consumers 

harmed by the financial crisis. As 

discussed in part III above, programs 

such as HARP enable consumers with 

high loan-to-value ratios to obtain 

affordable refinancings. The GSEs 

implemented these programs while 

under the conservatorship of FHFA, 

which has defined these programs as 

‘‘eligible targeted refinancing 

programs.’’ 138 These programs are 

intended to assist consumers with loanto-value ratios that are high enough to 

make obtaining a refinancing difficult, if 

not impossible. Programs such as HARP 

employ underwriting requirements 

tailored to the unique characteristics of 

these consumers. The GSEs have 

modified these programs over time to 

increase the number of distressed 

consumers eligible for an affordable 

refinancing. As the GSEs have expanded 

access to these programs, FHFA has 

ensured that these programs require 

careful underwriting. These carefully 

calibrated underwriting requirements 

promote GSE stability by ensuring that 

consumers who receive these 

refinancings are able to repay the loan. 

Given the complexity of underwriting 

requirements for programs such as 

HARP, the Bureau is concerned that the 

ability-to-repay requirements may add 

unnecessary additional costs and may 

cause needless delays for consumers 

who seek refinancings pursuant to an 

eligible targeted refinancing program 

offered by one of these entities. While 

HARP, which is the most well-known 

eligible targeted refinancing program, is 

scheduled to expire prior to the effective 

date of the Bureau’s 2013 ATR Final 

Rule, FHFA may decide to extend this 

program, or design a similar program 

intended to preserve credit for 

distressed homeowners. Furthermore, 

the risk of harm to consumers may be 

insignificant while these entities remain 

in conservatorship. The current GSE 

underwriting requirements for targeted 

eligible refinancing programs appear to 

sufficiently account for the consumer’s 

ability to repay the mortgage loan, and 

FHFA supervision may be sufficient to 

ensure that consumers are extended 

only affordable and responsible 

refinancings by these entities. 

Accordingly, the Bureau is proposing 

§ 1026.43(a)(3)(viii), which provides 

that an extension of credit that is a 

refinancing, as defined under 

§ 1026.20(a) but without regard for 

whether the creditor is the creditor, 

holder, or servicer of the original 

obligation, that is eligible for purchase 

or guarantee by Fannie Mae or Freddie 

Mac is exempt from § 1026.43(c) 

through (f), provided that the 

refinancing is made pursuant to an 

eligible targeted refinancing program, as 

defined under 12 CFR 1291.1, that such 

entities are operating under the 

conservatorship or receivership of the 

Federal Housing Finance Agency 

pursuant to section 1367 of the Federal 

Housing Enterprises Financial Safety 

and Soundness Act of 1992 (12 U.S.C. 

4617(i)) on the date the refinancing is 

consummated, that the existing 

obligation satisfied and replaced by the 

refinancing is owned by Fannie Mae or 

Freddie Mac, that the existing obligation 

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satisfied and replaced by the refinancing 

was not consummated on or after 

January 10, 2014, and that the 

refinancing was not consummated on or 

after January 10, 2021. Although this 

proposed exemption may be 

appropriate, the Bureau is concerned 

that unscrupulous creditors may use the 

exemption to engage in loan-flipping or 

other harmful practices. Therefore, the 

Bureau believes that this exemption 

should be limited to transactions where 

the existing obligation satisfied and 

replaced by the refinancing was not 

consummated on or after January 10, 

2014, the effective date of the Bureau’s 

2013 ATR Final Rule. The Bureau 

requests feedback on whether this 

exemption is appropriate, whether this 

exemption will ensure access to 

responsible and affordable refinancing 

credit, and whether consumers could be 

harmed by this exemption. 

The proposed exemption refers to 

eligible targeted refinancing programs, 

as defined pursuant to regulations 

prescribed by FHFA. As discussed 

above, the Bureau believes that FHFA 

oversight is important to ensure that 

distressed consumers receive 

refinancing credit extended in a 

responsible manner. Further, the Bureau 

believes that referring to FHFA 

regulations will ensure that any 

modifications to the definition will be 

made after notice and comment, thereby 

affording the public and the Bureau the 

opportunity to address potential 

changes. However, the Bureau requests 

comment regarding whether it would be 

more appropriate to refer to another 

public method of identifying these 

programs, and, if so, what method of 

public identification would be 

appropriate. The Bureau also solicits 

feedback regarding whether reference to 

a notice published by FHFA pursuant to 

12 CFR 1253.3 or 1253.4 would 

facilitate compliance more effectively 

than the proposed reference to 12 CFR 

1291.1. 

Proposed comment 43(a)(3)(viii)–1 

explains that § 1026.43(a)(3)(viii) 

provides an exemption from the 

requirements of § 1026.43(c) through (f) 

for certain extensions of credit that are 

considered refinancings, as defined in 

§ 1026.20(a) but without regard for 

whether the creditor is the creditor, 

holder, or servicer of the original 

obligation, that are eligible for purchase 

or guarantee by Fannie Mae or Freddie 

Mac. The comment further explains that 

the exemption provided by 

§ 1026.43(a)(3)(viii) is available only 

while these entities remain in 

conservatorship. For example, if Fannie 

Mae remains in conservatorship, but 

Freddie Mac exits conservatorship, the 

exemption continues to apply to 

refinancings that are eligible for 

purchase by Fannie Mae, provided the 

other conditions specified in 

§ 1026.43(a)(3)(viii) are met. Further, as 

noted above, the exemption is available 

only if the existing obligation that will 

be satisfied and replaced by the 

refinancing was consummated prior to 

January 10, 2014. For example, if a 

consumer applies for an extension of 

credit that is a refinancing, as defined 

by § 1026.20(a), that is eligible to be 

purchased by Fannie Mae or Freddie 

Mac, but the consumer’s current 

mortgage loan was consummated on or 

after January 10, 2014, the exemption 

provided by § 1026.43(a)(3)(viii) does 

not apply. 

Section 1026.43(a)(3)(viii) is proposed 

pursuant to the Bureau’s authority 

under section 105(a) and (f) of TILA. 

Pursuant to section 105(a) of TILA, the 

Bureau finds that this exemption is 

necessary and proper to effectuate the 

purposes of TILA. This exemption 

would ensure that consumers are 

offered and receive residential mortgage 

loans on terms that reasonably reflect 

their ability to repay. In the Bureau’s 

judgment the exemption ensures that 

consumers are able to obtain credit 

under refinancing programs 

administered by Fannie Mae and 

Freddie Mac. Furthermore, without the 

exemption the Bureau believes that 

consumers seeking a refinancing would 

be denied access to the responsible, 

affordable credit offered by these 

entities, which is contrary to the 

purposes of TILA. 

The Bureau has considered the factors 

in TILA section 105(f) and believes that, 

for the reasons discussed above, an 

exemption is appropriate under that 

provision. Specifically, the Bureau 

believes that the proposed exemption is 

appropriate for all affected consumers, 

regardless of their other financial 

arrangements and financial 

sophistication and the importance of the 

loan to them. Similarly, the Bureau 

believes that the proposed exemption is 

appropriate for all affected loans, 

regardless of the amount of the loan and 

whether the loan is secured by the 

principal residence of the consumer. 

Furthermore, the Bureau believes that, 

on balance, the proposed exemption 

will simplify the credit process without 

undermining the goal of consumer 

protection or denying important benefits 

to consumers. Based on these 

considerations and the analysis 

discussed elsewhere in this proposal, 

the Bureau believes that the proposed 

exemptions are appropriate. The Bureau 

recognizes that its exemption and 

exception authorities apply to a class of 

transactions, and proposes to apply 

these authorities to the loans covered 

under the proposal of the entities 

proposed for potential exemption. 

43(b) Definitions 

43(b)(4) 

Background 

TILA section 129C(a)(1) through (4) 

and the Bureau’s rules thereunder, 

§ 1026.43(c), prohibit a creditor from 

making a residential mortgage loan 

unless the creditor makes a reasonable, 

good faith determination, based on 

verified and documented information, 

that the consumer has a reasonable 

ability to repay the loan. TILA section 

129C(b) provides a safe harbor or 

rebuttable presumption of compliance 

with regard to these ability-to-repay 

requirements if a loan is a qualified 

mortgage. In general, a loan with a 

balloon payment cannot be a qualified 

mortgage. However, TILA section 

129C(b)(2)(E) provides that certain 

balloon loans originated and held in 

portfolio by small creditors operating 

predominantly in rural or underserved 

areas can be qualified mortgages. 

Creditors may view qualified mortgage 

status as important at least in part 

because TILA section 130(a) and (k) 

provides that, if a creditor fails to 

comply with the ability-to-repay 

requirements, a consumer may be able 

to recover special statutory damages 

equal to the sum of all finance charges 

and fees paid within the first three years 

after consummation and may be able to 

assert the creditor’s failure to comply to 

obtain recoupment or setoff in a 

foreclosure action even after the statute 

of limitations for affirmative claims has 

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

authorizes the Bureau to prescribe 

regulations that revise, add to, or 

subtract from the criteria that define a 

qualified mortgage upon a finding that 

such regulations are, among other 

things, necessary or proper to ensure 

that responsible, affordable credit 

remains available to consumers in a 

manner consistent with the purposes of 

TILA section 129C. 

Section 1026.43(e) and (f) defines 

three categories of qualified mortgages. 

First, § 1026.43(e)(2) provides a general 

definition of a qualified mortgage. 

Second, § 1026.43(e)(4) provides that 

certain loans that are eligible to be 

purchased, guaranteed, or insured by 

certain governmental entities or Fannie 

Mae or Freddie Mac while operating 

under conservatorship are qualified 

mortgages. Section 1026.43(e)(4) expires 

after seven years and may expire sooner 

with respect to some loans if other 

governmental entities exercise their 

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6652 Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Proposed Rules 

rulemaking authority under TILA 

section 129C. Third, § 1026.43(f) 

provides that certain balloon loans are 

qualified mortgages if they are made by 

a small creditor that: 

• Had total assets less than $2 billion 

(adjusted for inflation) as of the end of 

the preceding calendar year; 

• Together with all affiliates, 

extended 500 or fewer first-lien covered 

transactions during the preceding 

calendar year; and 

• Extended more than 50 percent of 

its total covered transactions secured by 

properties that are in rural or 

underserved areas during the preceding 

calendar year. 

Section 1026.43(f) includes only loans 

held in portfolio by these small 

creditors. Therefore, it includes only 

loans that were not subject, at 

consummation, to a commitment to be 

acquired by any other person. In 

addition, to prevent evasion, 

§ 1026.43(f) includes only loans that are 

held in portfolio by the originating 

creditor for at least three years, subject 

to certain exceptions. 

Section 1026.43(e)(1) provides that a 

qualified mortgage, regardless of which 

regulatory definition it falls under, may 

be subject to one of two different levels 

of protection from liability based on 

whether or not it is a higher-priced 

covered transaction as defined in 

§ 1026.43(b)(4). Under § 1026.43(e)(1)(i), 

a qualified mortgage that is not a higherpriced covered transaction is subject to 

a conclusive presumption of 

compliance, or safe harbor. In contrast, 

under § 1026.43(e)(1)(ii) a qualified 

mortgage that is a higher-priced covered 

transaction is subject to a rebuttable 

presumption of compliance. 

Section 1026.43(b)(4) defines a 

higher-priced covered transaction to 

mean a transaction within the scope of 

§ 1026.43 with an annual percentage 

rate that exceeds the average prime offer 

rate for a comparable transaction as of 

the date the interest rate is set by 1.5 or 

more percentage points for a first-lien 

covered transaction or by 3.5 or more 

percentage points for a subordinate-lien 

covered transaction. These thresholds 

generally conform to the thresholds for 

‘‘higher-priced mortgage loans’’ under 

§ 1026.35. 

The Bureau’s Proposal Regarding Small 

Creditor Portfolio Loans 

As discussed in the section-by-section 

analysis of § 1026.43(e)(5) below, the 

Bureau is proposing to create an 

additional category of qualified 

mortgages that would include certain 

loans originated and held in portfolio by 

small creditors. The Bureau proposes to 

amend § 1026.43(b)(4) to provide that a 

first-lien loan that is a qualified 

mortgage under proposed 

§ 1026.43(e)(5) would be a higher-priced 

covered transaction if the annual 

percentage rate exceeds the average 

prime offer rate for a comparable 

transaction by 3.5 or more percentage 

points. This would have the effect of 

extending the qualified mortgage safe 

harbor to first-lien qualified mortgages 

made and held in portfolio by certain 

small creditors, as described in 

proposed § 1026.43(e)(5), that have an 

annual percentage rate between 1.5 and 

3.5 percentage points higher than the 

average prime offer rate. Without the 

proposed change to § 1026.43(b)(4), 

these loans would be considered higherpriced covered transactions and would 

fall under the rebuttable presumption of 

compliance described in 

§ 1026.43(e)(1)(ii). 

The Bureau believes that the proposed 

change may be warranted to preserve 

access to credit for some consumers. As 

discussed above in part III, the Bureau 

understands that small creditors are a 

significant source of loans that do not 

conform to the requirements for 

government guarantee and insurance 

programs or purchase by entities such as 

Fannie Mae and Freddie Mac. The 

Bureau understands that larger creditors 

may be unwilling to make at least some 

of these loans because the consumers or 

properties involved do not conform to 

the standardized underwriting criteria 

used by larger creditors or are illiquid 

because they are non-conforming and 

therefore entail greater risk. For similar 

reasons, the Bureau understands that 

larger creditors may be unwilling to 

purchase such loans. Small creditors 

often are willing to evaluate the merits 

of unique consumers and properties 

using flexible underwriting criteria and 

make highly individualized 

underwriting decisions. Small creditors 

often hold these loans on their balance 

sheets, retaining the associated credit, 

liquidity, and other risks. 

The Bureau also understands that 

small creditors are a significant source 

of credit in rural areas. As discussed 

above in part III, small creditors are 

significantly more likely than larger 

creditors to operate offices in rural 

areas, and there are hundreds of 

counties nationwide where the only 

creditors are small creditors and 

hundreds more where larger creditors 

have only a limited presence. 

The Bureau also understands that 

small creditors may charge consumers 

higher interest rates and fees than larger 

creditors for several legitimate business 

reasons. As discussed above in part III, 

small creditors may pay more for funds 

than larger creditors. Small creditors 

generally rely heavily on deposits to 

fund lending activities and therefore 

pay more in expenses per dollar of 

revenue as interest rates fall and the 

spread between loan yields and deposit 

costs narrow. Small creditors also may 

rely more on interest income than larger 

creditors, as larger creditors obtain 

higher percentages of their income from 

noninterest sources such as trading, 

investment banking, and fiduciary 

services. 

In addition, small creditors may find 

it more difficult to limit their exposure 

to interest rate risk than larger creditors 

and therefore may charge higher rates to 

compensate for that exposure. Similarly, 

any individual loan poses a 

proportionally more significant credit 

risk to a smaller creditor than to a larger 

creditor, and small creditors may charge 

higher rates or fees to compensate for 

that risk. Consumers obtaining loans 

that cannot readily be sold into the 

securitization markets also may pay 

higher interest rates and fees to 

compensate for the risk associated with 

the illiquidity of such loans. 

Small creditors have repeatedly 

asserted to the Bureau and to other 

regulators that they are unable or 

unwilling to assume the risk of litigation 

associated with the ability-to-repay 

requirements and therefore are 

unwilling to make loans outside the 

scope of the qualified mortgage safe 

harbor. The Bureau does not believe that 

the regulatory requirement to make a 

reasonable and good faith determination 

based on verified and documented 

evidence that a consumer has a 

reasonable ability to repay would entail 

significant litigation risk for small 

creditors. As discussed in part III above, 

small creditors as a group have 

consistently experienced lower credit 

losses for residential mortgage loans 

than larger creditors. The Bureau 

believes this is strong evidence that 

small creditors have historically 

engaged in responsible mortgage 

underwriting that includes considered 

determinations of consumers’ ability to 

repay, at least in part because they bear 

the risk of default associated with loans 

held in their portfolios. The Bureau also 

believes that because many small 

creditors use a lending model based on 

maintaining ongoing relationships with 

their customers and have specialized 

knowledge of the community in which 

they operate, they therefore may have a 

more comprehensive understanding of 

their customers’ financial circumstances 

and may be better able to assess ability 

to repay than larger creditors. In 

addition, the Bureau believes that small 

creditors operating in limited 

geographical areas may face significant 

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risk of harm to their reputation within 

their community if they make loans that 

consumers cannot repay. 

However, the Bureau acknowledges 

that small creditors may be particularly 

burdened by the time, effort, and cost of 

ability-to-repay litigation and that it 

may be particularly difficult for small 

creditors to absorb the cost of adverse 

judgments. The Bureau therefore 

believes that small creditors may have a 

particular need for the protection from 

liability the qualified mortgage safe 

harbor provides. 

The Bureau notes that the Board’s 

proposed § 1026.43 did not include 

special provisions for portfolio loans 

made by small creditors and the Board’s 

proposal did not address such an 

accommodation. However, several 

commenters on the Board’s proposal 

urged the Bureau to adopt less stringent 

regulatory requirements for small 

creditors or for loans held in portfolio 

by small creditors. For example, at least 

two commenters on the Board’s 

proposal, a credit union and a state 

trade group for small banks, urged the 

Bureau to exempt small portfolio 

creditors from the ability to repay and 

qualified mortgage rule. Two other trade 

group commenters urged the Bureau to 

adopt less stringent regulatory 

requirements for small creditors than for 

larger creditors at least in part because 

mortgage loans made by small creditors 

often are held in portfolio and therefore 

historically have been conservatively 

underwritten. A number of other 

commenters expressed concerns that the 

availability of portfolio mortgage loans 

from small creditors would be severely 

limited because the proposed exception 

for rural balloon loans was too 

restrictive. In addition, small creditors’ 

concerns about compliance with the 

ability-to-repay rule and their perceived 

litigation risk have been repeatedly 

expressed to the Bureau by their trade 

associations and prudential regulators. 

The existing qualified mortgage safe 

harbor applies only to loans for which 

the annual percentage rate is less than 

1.5 percentage points above the average 

prime offer rate for comparable 

transactions. For the reasons stated 

above, the Bureau believes that many 

loans made by small creditors would 

exceed the current annual percentage 

rate threshold. The Bureau therefore is 

concerned that small creditors may 

reduce the number of mortgage loans 

they make or cease making mortgage 

loans altogether if subjected to the 

current ability-to-repay and qualified 

mortgage rules. The availability of 

mortgage credit for some consumers 

therefore could be limited. The Bureau 

believes that raising the interest rate 

threshold as proposed will preserve 

access to responsible, affordable credit 

for consumers that are unable to obtain 

less costly loans from other creditors 

because they do not qualify for 

conforming loans or because they live in 

rural or underserved areas. 

Accordingly, the Bureau is proposing 

to use its authority under TILA sections 

105(a) and 129C(b)(3)(B)(i) to permit 

certain small creditors to make first-lien 

portfolio loans at a higher annual 

percentage rate and still benefit from the 

qualified mortgage safe harbor. For the 

reasons stated above, the Bureau 

believes the proposed amendments are 

consistent with the purposes of TILA 

generally and TILA section 129C 

specifically. The Bureau solicits 

comment regarding whether the 

proposed amendment to § 1026.43(b)(4) 

is needed to preserve access to 

responsible, affordable mortgage credit 

and regarding any adverse effects the 

proposed amendment would have on 

consumers. The Bureau also solicits 

comment on the proposed 3.5 

percentage point threshold and whether 

another threshold would be more 

appropriate. Finally, the Bureau solicits 

comment on whether, in order to 

preserve access to mortgage credit, the 

Bureau also should raise the threshold 

for subordinate-lien covered 

transactions that are qualified mortgages 

under § 1026.43(e)(5), and, if so, what 

threshold would be appropriate for 

those loans. 

As discussed above, the Bureau is 

aware that certain small creditors 

originate balloon loans to hedge against 

interest rate risk. These small creditors 

usually offer consumers refinancings 

before the balloon payment becomes 

due. The Bureau believes that most 

small creditors that follow this practice 

will be eligible for either the balloon 

loan qualified mortgage provision in 

§ 1026.43(f) or the small creditor 

portfolio exemption in proposed 

§ 1026.43(e)(5). However, the Bureau 

solicits feedback regarding whether 

there are small creditors that would not 

be covered by these provisions. If such 

small creditors exist, the Bureau 

requests feedback regarding whether 

these creditors need additional time, 

beyond the January 10, 2014 effective 

date of the Bureau’s 2013 ATR Final 

Rule, to comply with the ability-torepay requirements, or if such creditors 

require any additional accommodations, 

modifications, or exemptions. 

The Bureau’s Proposal Regarding 

Balloon Loans 

The Bureau also is proposing to 

amend the definition of higher-priced 

covered transaction in § 1026.43(b)(4) 

with respect to qualified mortgages that 

are balloon loans originated and held in 

portfolio by small creditors operating 

predominantly in rural or underserved 

areas as described in § 1026.43(f). The 

Board proposes to amend 

§ 1026.43(b)(4) to provide that a firstlien loan that is a qualified mortgage 

under § 1026.43(f) is a higher-priced 

covered transaction if the annual 

percentage rate exceeds the average 

prime offer rate for a comparable 

transaction by 3.5 or more percentage 

points. This would have the effect of 

extending the qualified mortgage safe 

harbor described in § 1026.43(e)(1)(i) to 

first-lien balloon loans made and held 

in portfolio by small creditors operating 

predominantly in rural or underserved 

areas, as described in § 1026.43(f), that 

have an annual percentage rate between 

1.5 and 3.5 percentage points above the 

average prime offer rate. Without the 

proposed change to § 1026.43(b)(4), 

these loans would be considered higherpriced covered transactions and would 

fall under the rebuttable presumption of 

compliance described in 

§ 1026.43(e)(1)(ii). 

The Bureau believes that the proposed 

change may be necessary to preserve 

access to responsible, affordable 

mortgage credit for consumers in rural 

and underserved areas. As discussed in 

part III above, the Bureau understands 

that larger creditors often are not 

present in rural and underserved areas 

and that the only sources of mortgage 

credit available to consumers in these 

areas therefore may be small creditors. 

The Bureau also understands that many 

of the small creditors lending in these 

areas depend on balloon payment 

features to limit their interest rate risk. 

These creditors rely on the fact that 

consumers will be forced to refinance 

before the balloon payment becomes 

due, giving the creditor an opportunity 

to impose a higher interest rate if, for 

example, market interest rates have 

risen. 

These small creditors have repeatedly 

asserted to the Bureau and other 

regulators that they will not continue to 

extend mortgage credit unless they can 

make balloon loans that are covered by 

the qualified mortgage safe harbor. 

Section 1026.43(f), which implements 

TILA section 129C(b)(2)(E), provides 

that certain balloon loans made and 

held in portfolio by small creditors 

operating predominantly in rural or 

underserved areas are qualified 

mortgages. However, the Bureau 

believes that many of these qualified 

mortgages will have annual percentage 

rates higher than the safe harbor 

threshold. 

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As discussed above with regard to the 

Bureau’s proposal regarding small 

creditor portfolio loans and in part III, 

small creditors, including small 

creditors operating in rural and 

underserved areas, may charge 

consumers higher interest rates and fees 

for several legitimate business reasons. 

Small creditors may pay more for funds 

than larger creditors. Small creditors 

generally rely heavily on deposits to 

fund lending activities and therefore 

pay more in expenses per dollar of 

revenue as interest rates fall and the 

spread between loan yields and deposit 

costs narrow. Small creditors also may 

rely more on interest income than larger 

creditors, as larger creditors obtain a 

higher percentage of their income from 

noninterest sources such as trading, 

investment banking, and fiduciary 

services. 

In addition, small creditors may find 

it more difficult to limit their exposure 

to interest rate risk than larger creditors 

and therefore may charge higher rates to 

compensate for that exposure. Similarly, 

any individual loan poses a 

proportionally more significant credit 

risk to a smaller creditor than to a larger 

creditor, and small creditors may charge 

higher rates or fees to compensate for 

that risk. Consumers obtaining loans 

that cannot readily be sold into the 

securitization markets may also pay 

higher interest rates and fees to 

compensate for the risk associated with 

the illiquidity of such loans. 

As also discussed above, the Bureau 

does not believe that small creditors, 

including those operating in rural and 

underserved areas, face significant 

litigation risk from the ability-to-repay 

requirements. Small creditors as a group 

have consistently experienced lower 

credit losses for residential mortgages 

than larger creditors. The Bureau 

believes this is strong evidence that 

small creditors have historically 

engaged in responsible mortgage 

underwriting that includes considered 

determinations of consumers’ ability to 

repay, at least in part because they bear 

the risk of default associated with loans 

held in their portfolios. The Bureau also 

believes that because many small 

creditors use a lending model based on 

maintaining ongoing relationships with 

their customers and have specialized 

knowledge of the communities in which 

they operate, they therefore may have a 

more comprehensive understanding of 

their customers’ financial circumstances 

and may be better able to assess ability 

to repay than larger creditors. In 

addition, the Bureau believes that small 

creditors operating in limited 

geographical areas may face significant 

risk of harm to their reputation within 

their community if they make loans that 

consumers cannot repay. 

However, the Bureau acknowledges 

that small creditors may be particularly 

burdened by the time, effort, and cost of 

ability-to-repay litigation and that it 

may be particularly difficult for small 

creditors to absorb the cost of adverse 

judgments. The Bureau therefore 

believes that small creditors may have a 

particular need for the protection from 

liability the qualified mortgage safe 

harbor provides. 

The existing qualified mortgage safe 

harbor applies to first-lien loans only if 

the annual percentage rate is less than 

1.5 percentage points above the average 

prime offer rate for comparable 

transactions. The Bureau believes that 

many balloon loans made by small 

creditors operating in rural and 

underserved areas will exceed that 

threshold. The Bureau therefore is 

concerned that, unless § 1026.43(b)(4) is 

amended, small creditors operating in 

rural and underserved areas may reduce 

the number of mortgage loans they make 

or stop making mortgage loans 

altogether, further limiting the 

availability of mortgage credit in rural 

and underserved areas. 

Accordingly, the Bureau therefore 

believes that it may be necessary to use 

its authority under TILA sections 105(a) 

and 129C(b)(3)(B)(i) to amend 

§ 1026.43(b)(4) as proposed in order to 

ensure that § 1026.43(f) has the desired 

effect of preserving access to 

responsible, affordable mortgage credit 

in rural and underserved areas. For the 

reasons stated above, the Bureau 

believes the proposed amendments are 

consistent with the purposes of TILA 

generally and TILA section 129C in 

particular. Providing for qualified 

mortgages on this basis would ensure 

that consumers are offered and receive 

residential mortgage loans on terms that 

reasonably reflect their ability to repay 

and that responsible affordable mortgage 

credit remains available to consumers in 

a manner consistent with the purposes 

of the ability-to-repay requirements. 

The Bureau is proposing this 

amendment rather than finalizing it as 

part of the 2013 ATR Final Rule in order 

to solicit comment on the following 

issues, among others. The Bureau 

solicits comment regarding whether the 

proposed amendment to § 1026.43(b)(4) 

is needed to preserve access to 

responsible, affordable mortgage credit 

in rural and underserved areas and 

regarding any adverse effects the 

proposed amendment would have on 

consumers in these or other areas. The 

Bureau also solicits comment on the 3.5 

percentage point threshold and whether 

another threshold would be more 

appropriate. Finally, the Bureau solicits 

comment on whether, in order to 

preserve access to mortgage credit in 

rural and underserved areas, the Bureau 

also should raise the threshold for 

subordinate-lien covered transactions 

that are qualified mortgages under 

§ 1026.43(f), and, if so, what threshold 

would be appropriate. 

43(e) Qualified Mortgages 

43(e)(1) Safe Harbor and Presumption of 

Compliance 

TILA section 129C(a)(1) through (4) 

and the Bureau’s rules thereunder, 

§ 1026.43(c), generally prohibit a 

creditor from making a residential 

mortgage loan unless the creditor makes 

a reasonable, good faith determination 

that the consumer has a reasonable 

ability to repay the loan. TILA section 

129C(b) and the Bureau’s rules 

thereunder, § 1026.43(e), provide a safe 

harbor or rebuttable presumption of 

compliance with regard to these abilityto-repay requirements if a loan is a 

qualified mortgage. 

As described above, § 1026.43(e)(1)(i) 

provides that a creditor or assignee of a 

qualified mortgage that is not a higherpriced covered transaction, as defined 

in § 1026.43(b)(4), complies with the 

repayment ability requirements. In 

contrast, § 1026.43(e)(1)(ii) provides that 

a creditor or assignee of a qualified 

mortgage that is a higher-priced covered 

transaction is presumed to comply with 

the repayment ability requirements, but 

that presumption can be rebutted by a 

consumer under certain circumstances. 

Section 1026.43(e)(2), (e)(4), and (f) 

establishes standards for three 

categories of qualified mortgages, as 

discussed further below. 

The Bureau proposes to make 

conforming changes to § 1026.43(e)(1) to 

include references to a new category of 

qualified mortgages defined by 

proposed § 1026.43(e)(5). Section 

1026.43(e)(5) qualified mortgages would 

be covered by the safe harbor described 

in § 1026.43(e)(1)(i) if they are not 

higher-priced covered transactions and 

would be subject to the rebuttable 

presumption of compliance described in 

§ 1026.43(e)(1)(ii) if they are higherpriced covered transactions. However, 

the Bureau is proposing to apply a 

different definition of higher-priced 

covered transaction to first-lien 

qualified mortgages defined under 

§ 1026.43(e)(5). The section-by-section 

analysis of § 1026.43(b)(4), above, 

describes the proposed alternate 

definition of higher-priced covered 

transactions. The section-by-section 

analysis of proposed § 1026.43(e)(5), 

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below, describes the proposed new 

category of qualified mortgages. 

43(e)(2) Qualified Mortgage Defined— 

General 

The Bureau proposes to make a 

conforming amendment to 

§ 1026.43(e)(2) to include a reference to 

§ 1026.43(e)(5), as described in the 

section-by-section analysis of proposed 

§ 1026.43(e)(5), below. 

43(e)(5) Qualified Mortgage Defined— 

Small Creditor Portfolio Loans 

Background 

TILA section 129C(a)(1) through (4) 

and the Bureau’s rules thereunder, 

§ 1026.43(c), prohibit a creditor from 

making a residential mortgage loan 

unless the creditor makes a reasonable, 

good faith determination, based on 

verified and documented information, 

that the consumer has a reasonable 

ability to repay the loan. TILA section 

129C(b) provides that a creditor or 

assignee may presume that a loan has 

met the ability-to-repay requirements if 

a loan is a qualified mortgage. Creditors 

may view qualified mortgage status as 

important at least in part because TILA 

section 130 provides that, if a creditor 

fails to comply with the ability-to-repay 

requirements, a consumer may be able 

to recover special statutory damages 

equal to the sum of all finance charges 

and fees paid within the first three years 

after consummation and may be able to 

assert the creditor’s failure to comply to 

obtain recoupment or setoff in a 

foreclosure action even after the statute 

of limitations on affirmative claims has 

expired. TILA section 129C(b)(2)(A)(vi) 

authorizes, but does not require, the 

Bureau to establish limits on debt-toincome ratio or other measures of a 

consumer’s ability to pay regular 

expenses after making payments on 

mortgage and other debts. TILA section 

129C(b)(3)(B)(i) authorizes the Bureau to 

revise, add to, or subtract from the 

criteria that define a qualified mortgage 

upon a finding that such regulations are, 

among other things, necessary or proper 

to ensure that responsible, affordable 

credit remains available to consumers in 

a manner consistent with the purposes 

of TILA section 129C or necessary and 

appropriate to effectuate the purposes of 

TILA sections 129B and 129C. 

Section 1026.43(e) and (f) defines 

three categories of qualified mortgages. 

First, § 1026.43(e)(2) prescribes the 

general definition of a qualified 

mortgage. Under § 1026.43(e)(2), a 

covered transaction is a qualified 

mortgage if: it does not include negative 

amortization, interest-only, or balloon 

features; it has a term not in excess of 

30 years; it complies with the limits on 

points and fees detailed in 

§ 1026.43(e)(3); the underwriter 

calculated the required payments in a 

specified way; the creditor considered 

and verified certain factors related to the 

consumer’s ability to repay; and the 

consumer’s monthly debt-to-income 

ratio, calculated according to 

instructions in appendix Q, does not 

exceed 43 percent. Second, 

§ 1026.43(e)(4) provides that certain 

loans that are eligible to be purchased, 

guaranteed, or insured by certain 

governmental entities or Fannie Mae or 

Freddie Mac while operating under 

conservatorship are qualified mortgages. 

Section 1026.43(e)(4) expires seven 

years after its effective date and may 

expire earlier with respect to certain 

loans if other government entities 

exercise their rulemaking authority 

under TILA section 129C or if the GSEs 

exit conservatorship. Third, § 1026.43(f) 

provides that certain loans with a 

balloon payment made by small 

creditors operating predominantly in 

rural or underserved areas are qualified 

mortgages. 

The Bureau’s Proposal 

Proposed § 1026.43(e)(5) would define 

a fourth category of qualified mortgages 

which would include loans originated 

and held in portfolio by certain small 

creditors. This additional category of 

qualified mortgages would be similar in 

several respects to § 1026.43(f), which 

provides that certain balloon loans 

made by small creditors operating 

predominantly in rural or underserved 

areas are qualified mortgages. As under 

§ 1026.43(f), the additional category 

would include loans originated by small 

creditors, as defined by asset-size and 

transaction thresholds, and held in 

portfolio by those creditors. However, 

proposed § 1026.43(e)(5) would not be 

limited to small creditors operating 

predominantly in rural or underserved 

areas and would not include loans that 

have a balloon payment. 

Specifically, the new category would 

include certain loans originated by 

creditors that: 

• Have total assets that do not exceed 

$2 billion as of the end of the preceding 

calendar year (adjusted annually for 

inflation); and 

• Together with all affiliates, 

extended 500 or fewer first-lien covered 

transactions during the preceding 

calendar year. 

The proposed additional category 

would include only loans held in 

portfolio by these creditors. Therefore, 

proposed § 1026.43(e)(5) would provide 

that a loan must not be subject at 

consummation to a commitment to be 

acquired by any person other than a 

person that also meets the above assetsize and number of transactions criteria. 

Section 1026.43(e)(5) also would 

provide that a loan would lose its 

qualified mortgage status under 

§ 1026.43(e)(5) if it is sold, assigned, or 

otherwise transferred, subject to 

exceptions for transfers that are made 

three or more years after consummation, 

to another qualifying institution, as 

required by a supervisory action, or 

pursuant to a merger or acquisition. 

The loan also would have to conform 

to all of the requirements under the 

§ 1026.43(e)(2) general definition of a 

qualified mortgage except with regard to 

monthly debt-to-income ratio. In other 

words, the loan could not have: 

• Negative amortization, interestonly, or balloon payment features; 

• A term longer than 30 years; and 

• Points and fees greater than 3 

percent of the total loan amount (or, for 

smaller loans, a specified amount). 

When underwriting the loan the 

creditor would have to take into account 

the monthly payment for any mortgagerelated obligations, and: 

• Use the maximum interest rate that 

may apply during the first five years and 

periodic payments of principal and 

interest that will repay the full 

principal; and 

• Consider and verify the consumer’s 

current and reasonably expected income 

or assets other than the value of the 

property securing the loan. 

The creditor also would be required to 

consider the consumer’s debt-to-income 

ratio or residual income and to verify 

the underlying information generally in 

accordance with § 1026.43(c). In 

contrast, the general definition of a 

qualified mortgage in § 1026.43(e)(2) 

requires a creditor to calculate the 

consumer’s debt-to-income ratio 

according to instructions in appendix Q 

and specifies that the consumer’s debtto-income ratio must be 43 percent or 

less. 

As with all qualified mortgages, a 

qualified mortgage under § 1026.43(e)(5) 

would receive either a rebuttable or 

conclusive presumption of compliance 

with the ability-to-repay requirements 

in § 1026.43(c), depending on the 

annual percentage rate. However, as 

described above in the section-bysection analysis of § 1026.43(b)(4), the 

Bureau is proposing an alternate 

definition of higher-priced covered 

transaction that would apply to first-lien 

covered transactions that are qualified 

mortgages under proposed 

§ 1026.43(e)(5). Amended as proposed, 

§ 1026.43(b)(4) would provide that a 

first-lien covered transaction that is a 

qualified mortgage under proposed 

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§ 1026.43(e)(5) is a higher-priced 

covered transaction if the annual 

percentage rate exceeds the average 

prime offer rate for a comparable 

transaction by 3.5 or more percentage 

points. This would have the effect of 

extending the qualified mortgage safe 

harbor described in § 1026.43(e)(1)(i) to 

first-lien qualified mortgages defined 

under proposed § 1026.43(e)(5) even if 

those loans have annual percentage 

rates between 1.5 and 3.5 percentage 

points higher than the average prime 

offer rate. Without the proposed 

amendment to § 1026.43(b)(4), such 

loans would be covered by the 

rebuttable presumption of compliance 

described in § 1026.43(e)(1)(ii). This 

proposal and the Bureau’s rationale for 

it are discussed in more detail in the 

section-by-section analysis of 

§ 1026.43(b)(4), above. 

The Bureau believes the proposed 

change is necessary to preserve access to 

responsible, affordable credit for some 

consumers. As discussed above in part 

III and the section-by-section analysis of 

§ 1026.43(b)(4), the Bureau understands 

that small creditors are a significant 

source of non-conforming mortgage 

credit. The Bureau believes that many of 

these loans would not be made by larger 

creditors because the consumers or 

properties involved are not readily 

assessed using the standardized 

underwriting criteria used by larger 

creditors or because larger creditors are 

unwilling to make loans that cannot be 

sold to the securitization markets. The 

Bureau therefore believes that access to 

mortgage credit for some consumers 

could be restricted if small creditors 

stopped making non-conforming loans. 

The Bureau believes that such an 

impact could be particularly significant 

in rural areas, where the Bureau 

understands that small creditors are a 

significant source of credit. Small 

creditors are significantly more likely 

than larger creditors to operate offices in 

rural areas, and there are hundreds of 

counties nationwide where the only 

creditors are small creditors and 

hundreds more where larger creditors 

have only a limited presence. 

The Bureau believes that, as discussed 

above, small creditors’ lower credit 

losses for residential mortgage loans are 

evidence that small creditors are 

particularly well suited to originating 

responsible, affordable mortgage credit. 

The Bureau believes small creditors may 

be better able to assess ability to repay 

because they are more likely to base 

underwriting decisions on local 

knowledge and nonstandard data and 

less likely to rely on standardized 

underwriting criteria. Because many 

small creditors use a lending model 

based on maintaining ongoing 

relationships with their customers, they 

may have a more comprehensive 

understanding of their customer’s 

financial circumstances. Small 

creditors’ lending activities often are 

limited to a single community, allowing 

the creditor to have an in-depth 

understanding of the economic and 

other circumstances of that community. 

In addition, because small creditors 

often consider a smaller volume of 

applications for mortgage credit, small 

creditors may be more willing to 

consider the unique facts and 

circumstances attendant to each 

consumer and property and senior 

personnel are more likely to be able to 

bring their judgment to bear regarding 

individual underwriting decisions. 

Small creditors have particularly 

strong incentives to make careful 

assessments of a consumer’s ability to 

repay because small creditors bear the 

risk of default associated with loans 

held in portfolio and because each loan 

represents a proportionally greater risk 

to a small creditor than to a larger one. 

In addition, small creditors operating in 

limited geographical areas may face 

significant risk of harm to their 

reputation within their community if 

they make loans that consumers cannot 

repay. 

The Bureau does not believe that 

small creditors face significant litigation 

risk from the ability-to-repay 

requirements. For the reasons stated 

above, the Bureau believes that small 

creditors as a group generally are better 

positioned to assess ability to repay than 

larger creditors, have particularly strong 

incentives to accurately assess ability to 

repay independent of the threat of 

ability-to-repay litigation, and 

historically have been very successful at 

accurately assessing ability to repay, as 

demonstrated by their comparatively 

low credit losses. In addition, the 

Bureau believes that because many 

small creditors use a lending model 

based on maintaining ongoing 

relationships with their customers, 

those customers may be more likely to 

pursue alternatives to litigation in the 

event that difficulties with a loan arise. 

The Bureau therefore believes that it is 

unlikely that small creditors will face 

significant liability for claims of 

noncompliance filed by their customers 

or will be significantly disadvantaged by 

recoupment and setoff claims in 

foreclosure actions. 

However, the Bureau understands 

that, because of their size, small 

creditors may be particularly challenged 

by both the burden and cost of 

litigation, including litigation regarding 

ability-to-repay determinations. The 

Bureau therefore gives credence to small 

creditors’ assertions that they are unable 

or unwilling to assume the risk of 

litigation associated with the ability-torepay requirements and therefore are 

unwilling to make loans outside the 

scope of the qualified mortgage safe 

harbor. 

The Bureau therefore is proposing to 

extend the protections of the qualified 

mortgage safe harbor to small creditor 

portfolio loans. The Bureau believes that 

the proposed rule is necessary to 

preserve access to responsible, 

affordable mortgage credit for some 

consumers. 

The Bureau is proposing to extend 

qualified mortgage status only to 

portfolio loans made by small creditors, 

rather than all portfolio loans, because, 

as discussed above, the Bureau believes 

that small creditors are a unique and 

important source of non-conforming 

mortgage credit and mortgage credit in 

rural areas for which there is no readily 

available replacement, that small 

creditors may be particularly burdened 

by the litigation risk associated with the 

ability-to-repay rules and are 

particularly likely to reduce or cease 

mortgage lending if subjected to these 

rules without accommodation, and that 

small creditors have both strong 

incentives and particular ability to make 

these loans in a way that ensures that 

consumers are able to repay that may 

not be present for larger creditors. 

The proposed definition would 

include portfolio loans made by 

creditors that have assets of $2 billion 

or less and, together with all affiliates, 

originate 500 or fewer first-lien 

mortgages each year. The Bureau is 

proposing these specific thresholds 

because they are consistent with the 

§ 1026.43(f) qualified mortgage 

definition, which includes certain 

balloon loans made and held in 

portfolio by small creditors operating 

predominantly in rural or underserved 

areas, and with thresholds used in the 

Bureau’s 2013 Escrows Final Rule. The 

Bureau believes it is important to 

maintain consistent criteria, particularly 

between § 1026.43(e)(5) and (f), for 

several reasons. First, the Bureau 

believes the rationale for proposed 

§ 1026.43(e)(5) is similar to the rationale 

for § 1026.43(f) and the relevant 

thresholds in § 1026.35(b). The Bureau 

therefore believes that its stated 

rationale for these criteria in those 

contexts also applies in the context of 

proposed § 1026.43(e)(5). Similarly, the 

Bureau also believes that if there is a 

convincing rationale for establishing 

these criteria in § 1026.43(e)(5), that 

rationale may apply to adjusting the 

other sections as well. Second, the 

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Bureau believes that inconsistencies 

between the two qualified mortgage 

sections could create an undesirable 

regulatory advantage for balloon loans. 

The Bureau is particularly concerned 

with avoiding inconsistencies between 

the two definitions that would create 

regulatory incentives to make balloon 

loans where a creditor has the capability 

of making other mortgages that better 

protect consumers’ interests. Third, the 

Bureau believes that maintaining 

consistent criteria between the three 

provisions will minimize compliance 

burdens by minimizing the number of 

metrics that must be tracked in order to 

determine creditors’ eligibility. 

However, the Bureau also acknowledges 

that there may be disadvantages to using 

the same thresholds in § 1026.43(e)(5) in 

the absence of further limitations such 

as the requirement that creditors operate 

predominantly in rural or underserved 

areas in order to originate balloonpayment qualified mortgages or invoke 

the exception to the escrows rule. The 

Bureau is soliciting comment on these 

issues. 

The proposed definition would 

include only loans originated and held 

in portfolio. First, the definition would 

include only loans that are originated 

without a forward commitment other 

than a commitment to sell to another 

institution that is eligible to originate 

qualified mortgages under 

§ 1026.43(e)(5). Second, the rule would 

provide that a loan generally loses its 

qualified mortgage status under 

§ 1026.43(e)(5) if it is sold, assigned, or 

otherwise transferred, except: if it is 

transferred three years or more after 

consummation; if it is transferred to a 

creditor that also meets the asset-size 

and number of transaction criteria; if it 

is transferred pursuant to a supervisory 

action or by a conservator, receiver, or 

bankruptcy trustee; or if it is transferred 

as part of a merger or acquisition of the 

creditor. 

The Bureau believes the discipline 

imposed when small creditors make 

loans that they will hold in their 

portfolio is important to protect 

consumers’ interests and to prevent 

evasion. The Bureau is proposing that 

these loans generally must be held in 

portfolio for three years in order to 

retain their status as a qualified 

mortgage to conform to the statute of 

limitations for affirmative claims for 

violations of the ability-to-repay rules. If 

a small creditor holds a qualified 

mortgage in portfolio for three years, it 

retains all of the litigation risk for 

potential violations of the ability-torepay rules except in the event of a 

subsequent foreclosure. 

The Bureau acknowledges that 

limitations on the ability of a creditor to 

sell loans in its portfolio may limit the 

creditor’s ability to manage its 

regulatory capital levels by adjusting the 

value of its assets, may affect the 

creditor’s ability to manage interest rate 

risk by preventing sales of seasoned 

loans, and may present other safety and 

soundness concerns. The Bureau has 

consulted with prudential regulators on 

these issues and believes the proposed 

exceptions address these concerns 

without sacrificing the consumer 

protection provided by the portfolio 

requirement. For these reasons, the 

Bureau is adopting parallel exceptions 

in the 2013 ATR Final Rule in 

§ 1026.43(f), which describes 

requirements for balloon-payment 

qualified mortgages. However, the 

Bureau is soliciting comment on 

whether the proposed exceptions are 

appropriate and on whether other 

exceptions should be provided, either in 

addition to or in lieu of those proposed. 

Qualified mortgages under 

§ 1026.43(e)(5) would differ from 

qualified mortgages under the 

§ 1026.43(e)(2) general definition in two 

key respects. First, the Bureau is 

proposing to raise the annual percentage 

rate threshold for the qualified mortgage 

safe harbor for qualified mortgages 

under § 1026.43(e)(5), as described 

above in the section-by-section analysis 

of § 1026.43(b)(4). Second, the Bureau is 

proposing to require creditors to 

consider the consumer’s debt-to-income 

ratio or residual income and to verify 

the underlying information generally in 

accordance with § 1026.43(c). In 

contrast, the general definition of a 

qualified mortgage in § 1026.43(e)(2) 

requires a creditor to calculate the 

consumer’s debt-to-income ratio 

according to appendix Q and specifies 

that the consumer’s debt-to-income ratio 

must be 43 percent or less. 

The Bureau believes that 

consideration of debt-to-income ratio or 

residual income is fundamental to any 

determination of ability to repay. A 

consumer is able to repay a loan if he 

or she has sufficient funds to pay his or 

her other obligations and expenses and 

still make the payments required by the 

terms of the loan. Arithmetically 

comparing the funds to which a 

consumer has recourse with the amount 

of those funds the consumer has already 

committed to spend or is committing to 

spend in the future is necessary to 

determine whether sufficient funds 

exist. 

However, for the same reasons that 

the Bureau declined to impose a specific 

43-percent threshold for balloonpayment qualified mortgages under 

§ 1026.43(f), the Bureau does not believe 

it is necessary to impose a specific debtto-income or residual income threshold 

for this category of qualified mortgages. 

As discussed above, the Bureau believes 

that small creditors may be particularly 

able to make highly individualized 

determinations of ability to repay that 

take into consideration the unique 

characteristics and financial 

circumstances of a particular consumer. 

While the Bureau believes that many 

creditors can make mortgage loans with 

consumer debt-to-income ratios above 

43 percent that consumers are able to 

repay, the Bureau also believes that 

portfolio loans made by small creditors 

are particularly likely to be made 

responsibly and to be affordable for the 

consumer even if such loans exceed the 

43 percent threshold. The Bureau 

therefore believes that it is appropriate 

to presume compliance even above the 

43 percent threshold for small creditors 

who meet the criteria set forth in 

§ 1026.43(e)(5). The Bureau believes that 

the discipline imposed when small 

creditors make loans that they will hold 

in their portfolio is sufficient to protect 

consumers’ interests in this regard. 

Because the Bureau is not proposing a 

specific limit on consumer debt-toincome ratio, the Bureau does not 

believe it is necessary to require 

creditors to calculate debt-to-income 

ratio in accordance with a particular 

standard such as that set forth in 

appendix Q. The Bureau is proposing to 

make this change to the rule pursuant to 

its authority under TILA section 

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

regulations for debt-to-income ratio with 

which qualified mortgages must 

comply. 

The Bureau is proposing ten 

comments to clarify the requirements 

described in proposed § 1026.43(e)(5). 

Proposed comment 43(e)(5)–1 would 

provide additional guidance regarding 

the requirement to comply with the 

general definition of a qualified 

mortgage under § 1026.43(e)(2). The 

proposed comment would restate the 

regulatory requirement that a covered 

transaction must satisfy the 

requirements of the § 1026.43(e)(2) 

general definition of qualified mortgage, 

except with regard to debt-to-income 

ratio, to be a qualified mortgage under 

§ 1026.43(e)(5). As an example, the 

proposed comment would explain that 

a qualified mortgage under 

§ 1026.43(e)(5) may not have a loan term 

in excess of 30 years because longer 

terms are prohibited for qualified 

mortgages under § 1026.43(e)(2)(ii). As 

another example, the proposed 

comment would explain that a qualified 

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mortgage under § 1026.43(e)(5) may not 

result in a balloon payment because 

§ 1026.43(e)(2)(i)(C) provides that 

qualified mortgages may not have 

balloon payments except as provided 

under § 1026.43(f). Finally, the 

proposed comment would clarify that a 

covered transaction may be a qualified 

mortgage under § 1026.43(e)(5) even 

though the consumer’s monthly debt-toincome ratio exceeds 43 percent, 

§ 1026.43(e)(2)(vi) notwithstanding. 

Proposed comment 43(e)(5)–2 would 

clarify that § 1026.43(e)(5) does not 

prescribe a specific monthly debt-toincome ratio with which creditors must 

comply. Instead, creditors must 

consider a consumer’s debt-to-income 

ratio or residual income calculated 

generally in accordance with 

§ 1026.43(c)(7) and verify the 

information used to calculate the debtto-income ratio or residual income in 

accordance with § 1026.43(c)(3) and (4). 

The proposed comment would explain 

that § 1026.43(c)(7) refers creditors to 

§ 1026.43(c)(5) for instructions on 

calculating the payment on the covered 

transaction and that § 1026.43(c)(5) 

requires creditors to calculate the 

payment differently than 

§ 1026.43(e)(2)(iv). The proposed 

comment would clarify that, for 

purposes of the qualified mortgage 

definition in § 1026.43(e)(5), creditors 

must base their calculation of the 

consumer’s debt-to-income ratio or 

residual income on the payment on the 

covered transaction calculated 

according to § 1026.43(e)(2)(iv) instead 

of according to § 1026.43(c)(5). Finally, 

the proposed comment would clarify 

that creditors are not required to 

calculate the consumer’s monthly debtto-income ratio in accordance with 

appendix Q as is required under the 

general definition of qualified mortgages 

by § 1026.43(e)(2)(vi). 

Proposed comment 43(e)(5)–3 would 

note that the term ‘‘forward 

commitment’’ is sometimes used to 

describe a situation where a creditor 

originates a mortgage loan that will be 

transferred or sold to a purchaser 

pursuant to an agreement that has been 

entered into at or before the time the 

transaction is consummated. The 

proposed comment would clarify that a 

mortgage that will be acquired by a 

purchaser pursuant to a forward 

commitment does not satisfy the 

requirements of § 1026.43(e)(5), whether 

the forward commitment provides for 

the purchase and sale of the specific 

transaction or for the purchase and sale 

of transactions with certain prescribed 

criteria that the transaction meets. 

However, the proposed comment also 

would clarify that a forward 

commitment to another person that also 

meets the requirements of 

§ 1026.43(e)(5)(i)(D) is permitted. The 

proposed comment would give the 

following example: Assume a creditor 

that is eligible to make qualified 

mortgages under § 1026.43(e)(5) makes a 

mortgage. If that mortgage meets the 

purchase criteria of an investor with 

which the creditor has an agreement to 

sell such loans after consummation, 

then the loan does not meet the 

definition of a qualified mortgage under 

§ 1026.43(e)(5). However, if the investor 

meets the requirements of 

§ 1026.43(e)(5)(i)(D), the mortgage will 

be a qualified mortgage if all other 

applicable criteria also are satisfied. 

Proposed comment 43(e)(5)–4 would 

reiterate that, to be eligible to make 

qualified mortgages under 

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

the requirements of 

§ 1026.35(b)(2)(iii)(B) and (C). For ease 

of reference, the comment would state 

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

during the preceding calendar year, the 

creditor and its affiliates together 

originated 500 or fewer first-lien 

covered transactions and that 

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

the end of the preceding calendar year, 

the creditor had total assets of less than 

$2 billion, adjusted annually for 

inflation. 

Proposed comment 43(e)(5)–5 would 

clarify that creditors generally must 

hold a loan in portfolio to maintain the 

transaction’s status as a qualified 

mortgage under § 1026.43(e)(5), subject 

to four exceptions. The proposed 

comment would clarify that, unless one 

of these exceptions applies, a loan is no 

longer a qualified mortgage under 

§ 1026.43(e)(5) once legal title to the 

debt obligation is sold, assigned, or 

otherwise transferred to another person. 

Accordingly, unless one of the 

exceptions applies, the transferee could 

not benefit from the presumption of 

compliance for qualified mortgages 

under § 1026.43(e)(1) unless the loan 

also met the requirements of another 

qualified mortgage definition. Proposed 

comment 43(e)(5)–6 would clarify that 

§ 1026.43(e)(5)(ii) applies not only to an 

initial sale, assignment, or other transfer 

by the originating creditor but to 

subsequent sales, assignments, and 

other transfers as well. The proposed 

comment would give the following 

example: Assume Creditor A originates 

a qualified mortgage under 

§ 1026.43(e)(5). Six months after 

consummation, Creditor A sells the 

qualified mortgage to Creditor B 

pursuant to § 1026.43(e)(5)(ii)(B) and the 

loan retains its qualified mortgage status 

because Creditor B complies with the 

limits on asset size and number of 

transactions. If Creditor B sells the 

qualified mortgage, it will lose its 

qualified mortgage status under 

§ 1026.43(e)(5) unless the sale qualifies 

for one of the § 1026.43(e)(5)(ii) 

exceptions for sales three or more years 

after consummation, to another 

qualifying institution, as required by 

supervisory action, or pursuant to a 

merger or acquisition. 

Proposed comment 43(e)(5)–7 would 

clarify that, under § 1026.43(e)(5)(ii)(A), 

if a qualified mortgage under 

§ 1026.43(e)(5) is sold, assigned, or 

otherwise transferred three years or 

more after consummation, the loan 

retains its status as a qualified mortgage 

under § 1026.43(e)(5) following the 

transfer. The proposed comment would 

clarify that this is true even if the 

transferee is not itself eligible to 

originate qualified mortgages under 

§ 1026.43(e)(5). The proposed comment 

would clarify that, once three or more 

years after consummation have passed, 

the qualified mortgage will continue to 

be a qualified mortgage throughout its 

life, and a transferee, and any 

subsequent transferees, may invoke the 

presumption of compliance for qualified 

mortgages under § 1026.43(e)(1). 

Proposed comment 43(e)(5)–8 would 

clarify that, under § 1026.43(e)(5)(ii)(B), 

a qualified mortgage under 

§ 1026.43(e)(5) may be sold, assigned, or 

otherwise transferred at any time to 

another creditor that meets the 

requirements of § 1026.43(e)(5)(v). The 

proposed comment would note that 

section § 1026.43(e)(5)(v) requires that a 

creditor, during the preceding calendar 

year, originated 500 or fewer first-lien 

covered transactions and had total 

assets less than $2 billion (adjusted for 

inflation) at the end of the preceding 

calendar year. The proposed comment 

would clarify that a qualified mortgage 

under § 1026.43(e)(5) that is transferred 

to a creditor that meets these criteria 

would retain its qualified mortgage 

status even if it is transferred less than 

three years after consummation. 

Proposed comment 43(e)(5)–9 would 

clarify that § 1026.43(e)(5)(ii)(C) 

facilitates sales that are deemed 

necessary by supervisory agencies to 

revive troubled creditors and resolve 

failed creditors. The proposed comment 

would note that this section provides 

that a qualified mortgage under 

§ 1026.43(e)(5) retains its qualified 

mortgage status if it is sold, assigned, or 

otherwise transferred to: another person 

pursuant to a capital restoration plan or 

other action under 12 U.S.C. 1831o; the 

actions or instructions of any person 

acting as conservator, receiver or 

bankruptcy trustee; an order of a State 

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Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Proposed Rules 6659 

or Federal government agency with 

jurisdiction to examine the creditor 

pursuant to State or Federal law; or an 

agreement between the creditor and 

such an agency. The proposed comment 

would clarify that a qualified mortgage 

under § 1026.43(e)(5) that is sold, 

assigned, or otherwise transferred under 

these circumstances retains its qualified 

mortgage status regardless of how long 

after consummation it is sold and 

regardless of the size or other 

characteristics of the transferee. The 

proposed comment also would clarify 

that § 1026.43(e)(5)(ii)(C) does not apply 

to transfers done to comply with a 

generally applicable regulation with 

future effect designed to implement, 

interpret, or prescribe law or policy in 

the absence of a specific order by or a 

specific agreement with a governmental 

agency described in 

§ 1026.43(e)(5)(ii)(C) mandating the sale 

of one or more qualified mortgages 

under § 1026.43(e)(5) held by the 

creditor, or one of the other 

circumstances listed in 

§ 1026.43(e)(5)(ii)(C). As an example, 

the proposed comment would explain 

that a qualified mortgage under 

§ 1026.43(e)(5) that is sold pursuant to 

a capital restoration plan under 12 

U.S.C. 1831o would retain its status as 

a qualified mortgage following the sale. 

However, if the creditor simply chose to 

sell the same qualified mortgage as one 

way to comply with general regulatory 

capital requirements in the absence of 

supervisory action or agreement, the 

mortgage would lose its status as a 

qualified mortgage following the sale 

unless it qualifies under another 

definition of qualified mortgage. 

Proposed comment 43(e)(5)–10 would 

clarify that a qualified mortgage under 

§ 1026.43(e)(5) retains its qualified 

mortgage status if a creditor merges 

with, is acquired by, or acquires another 

person regardless of whether the 

creditor or its successor is eligible to 

originate new qualified mortgages under 

§ 1026.43(e)(5) after the merger or 

acquisition. However, the proposed 

comment also would clarify that the 

creditor or its successor can originate 

new qualified mortgages under 

§ 1026.43(e)(5) after the merger or 

acquisition only if the creditor or its 

successor complies with all of the 

requirements of § 1026.43(e)(5) at that 

time. The proposed comment would 

provide the following example: Assume 

a creditor that originates 250 covered 

transactions each year and originates 

qualified mortgages under 

§ 1026.43(e)(5) is acquired by a larger 

creditor that originates 10,000 covered 

transactions each year. Following the 

acquisition, the small creditor would no 

longer be able to originate 

§ 1026.43(e)(5) qualified mortgages 

because, together with its affiliates, it 

would originate more than 500 covered 

transactions each year. However, the 

§ 1026.43(e)(5) qualified mortgages 

originated by the small creditor before 

the acquisition would retain their 

qualified mortgage status. 

For the reasons stated above, the 

Bureau believes that the proposed 

amendments are authorized by TILA 

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

because they are necessary to ensure 

that responsible, affordable mortgage 

credit remains available to consumers 

and because they are consistent with the 

purposes of TILA generally and TILA 

section 129C, regarding repayment 

ability, specifically. 

The Bureau solicits comment on the 

proposed approach to small creditor 

portfolio loans generally and also on 

several specific issues. First, the Bureau 

solicits comment on whether nonconforming mortgage credit is likely to 

be unavailable under the current rule 

and whether amending the rule as 

proposed would ensure that such credit 

is made available in a responsible, 

affordable way. 

Second, the Bureau solicits comment 

on the following issues relating to the 

criteria describing small creditors: 

Whether the Bureau should adopt 

criteria consistent with those used in 

§ 1026.35(b) and in the § 1026.43(f) 

definition of qualified mortgages which 

applies to certain balloon loans made by 

small creditors operating predominantly 

in rural and underserved areas; whether 

the proposed $2 billion asset threshold 

is appropriate and whether the 

threshold should be higher or lower; 

and whether to include a limitation on 

the number of first-lien covered 

transactions extended by the creditor 

and its affiliates and, if so, whether the 

proposed 500 transaction limit is 

appropriate. 

Third, the Bureau solicits comment 

regarding the requirement that loans be 

held in portfolio generally, including 

whether the proposed exemptions are 

appropriate and whether other criteria, 

guidance, or exemptions should be 

included regarding the requirement to 

hold loans in portfolio, either in lieu of 

or in addition to those included in the 

proposal. 

Fourth, the Bureau solicits comment 

on the loan feature and underwriting 

requirements with which qualified 

mortgages under proposed 

§ 1026.43(e)(5) would have to comply. 

The Bureau solicits comment on 

whether qualified mortgages under 

proposed § 1026.43(e)(5) should be 

exempt from additional provisions of 

§ 1026.43(e)(2) and or should be subject 

to any other loan feature or 

underwriting requirements, either in 

lieu of or in addition to those proposed. 

In particular, the Bureau solicits 

comment on whether these qualified 

mortgages should be exempt from the 

requirement to consider debt-to-income 

ratio calculated according to appendix 

Q and the prohibition on debt-to-income 

ratios in excess of 43 percent and 

whether other requirements related to 

debt-to-income ratio or residual income 

should be provided, either in lieu of or 

in addition to those proposed. 

Finally, the Bureau solicits comment 

on the following issue. The proposal 

would provide different legal status to 

loans with identical terms because the 

creditor is small and intends to hold the 

loan in portfolio. As discussed above, 

the Bureau believes that the size of and 

relationship lending model employed 

by small creditors may provide 

significant assurances that the mortgage 

credit they extend will be responsible 

and affordable. However, to the extent 

that consumers may have a choice of 

creditors, some of whom are not small, 

it is not clear that consumers shopping 

for mortgage loans would be aware that 

their choice of creditor could 

significantly impact their legal rights. 

The Bureau solicits comment on the 

extent and significance of this risk 

generally. Specifically, the Bureau 

solicits comment on whether consumers 

who obtain small creditor portfolio 

loans likely could have obtained credit 

from other sources and on the extent to 

which a consumer who obtains a 

portfolio loan from a small creditor 

would be disadvantaged by the inability 

to make an affirmative claim of 

noncompliance with the ability-to-repay 

rules or to assert noncompliance in a 

foreclosure action. 

43(f) Balloon-Payment Qualified 

Mortgages Made by Certain Creditors 

Section 1026.43(f) provides that 

certain balloon loans made and held in 

portfolio by certain small creditors are 

qualified mortgages. As discussed above 

in the section-by-section analysis of 

§ 1026.43(e)(5), the Bureau believes that 

it may be important to preserve 

consistency among § 1026.43(e)(5) and 

(f) and § 1026.35(b)(2). The Bureau is 

not proposing specific amendments to 

§ 1026.43(f) because § 1026.43(e)(5) as 

proposed is consistent with existing 

§ 1026.43(f). However, if § 1026.43(e)(5) 

is adopted with significant changes, the 

Bureau will consider and may adopt 

parallel amendments to § 1026.43(f) in 

its final rule. 

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139Specifically, section 1022(b)(2)(A) of the 

Dodd-Frank Act calls for the Bureau to consider the 

potential benefits and costs of a regulation to 

consumers and covered persons, including the 

potential reduction of access by consumers to 

consumer financial products or services; the impact 

on depository institutions and credit unions with 

$10 billion or less in total assets as described in 

section 1026 of the Dodd-Frank Act; and the impact 

on consumers in rural areas. 

The Bureau solicits comment on the 

advantages and disadvantages of 

maintaining consistency between 

§ 1026.35(b)(2) and § 1026.43(e)(5) and 

(f) generally and on whether the Bureau 

should make conforming changes to 

§ 1026.43(f) if necessary to maintain 

consistency with specific provisions of 

§ 1026.43(e)(5). 

43(g) Prepayment Penalties 

The Bureau proposes to make a 

conforming amendment to § 1026.43(g) 

to include a reference to § 1026.43(e)(5), 

as described in the section-by-section 

analysis of proposed § 1026.43(e)(5), 

above. 

VI. Section 1022(b)(2) of the DoddFrank Act 

In developing the final rule, the 

Bureau has considered potential 

benefits, costs, and impacts.139 In 

addition, the Bureau has consulted, or 

offered to consult with, the prudential 

regulators, SEC, HUD, FHFA, the 

Federal Trade Commission, and the 

Department of the Treasury, including 

regarding consistency with any 

prudential, market, or systemic 

objectives administered by such 

agencies. The Bureau also held 

discussions with or solicited feedback 

from the United States Department of 

Agriculture, Rural Housing Service, the 

Federal Housing Administration, and 

the Department of Veterans Affairs 

regarding the potential impacts of the 

final rule on those entities’ loan 

programs. 

This proposal is related to a final rule 

published elsewhere in today’s Federal 

Register (2013 ATR Final Rule). The 

2013 ATR Final Rule implements 

sections 1411, 1412, and 1414 of the 

Dodd-Frank Wall Street Reform and 

Consumer Protection Act (the DoddFrank Act), which creates new TILA 

section 129C. Among other things, the 

Dodd-Frank Act 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.’’ 

The Bureau is proposing certain 

amendments to the final rule 

implementing these requirements, 

including 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 is also seeking 

feedback on whether additional 

clarification is needed regarding the 

inclusion of loan originator 

compensation in the points and fees 

calculation. 

The proposed exemptions for certain 

nonprofit creditors and certain 

homeownership stabilization programs 

include exemptions for various 

extensions of credit from the ability-torepay requirements. These exemptions 

include: extensions of credit made 

pursuant to programs administered by 

HFA; extensions of credit made by 

certain types of nonprofit creditors 

including creditors designated by the 

Treasury Department as Community 

Development Financial Institutions and 

creditors designated by the Department 

of Housing and Urban Development as 

either a Community Housing 

Development Organization or a 

Downpayment Assistance Provider of 

Secondary Financing; extensions of 

credit by certain creditors designated as 

nonprofit organizations under section 

501(c)(3) of the Internal Revenue Code 

that provide credit to LMI borrowers; 

extensions of credit made pursuant to 

an Emergency Economic Stabilization 

Act program, such as extensions of 

credit made pursuant to a State HHF 

program; refinancings that are eligible to 

be insured, guaranteed, or made 

pursuant to a program administered by 

the Federal Housing Administration, 

U.S. Department of Veterans Affairs, or 

the U.S. Department of Agriculture for 

a limited period of time; and certain 

refinancings eligible to be purchased or 

guaranteed by Fannie Mae or Freddie 

Mac pursuant to an eligible targeted 

refinancing program. 

The proposed additional definition of 

a qualified mortgage includes certain 

loans originated by creditors that have 

total assets of $2 billion or less at the 

end of the previous calendar year; and 

that, together with all affiliates, 

originated 500 or fewer first-lien 

covered transactions during the 

previous calendar year. Loans held in 

portfolio by these creditors that conform 

to all of the requirements under the 

general definition of a qualified 

mortgage except the 43 percent limit on 

monthly debt-to-income ratio, and that 

meet the documentation and 

verification requirements for qualified 

mortgages under the general standard, 

would be considered qualified 

mortgages. Qualified mortgages under 

this proposed definition would be 

provided either a conclusive or 

rebuttable presumption of compliance 

with the requirement that creditors 

make a reasonable, good faith 

determination of a consumer’s ability to 

repay before originating a mortgage 

loan. 

The Bureau also is proposing to allow 

small creditors to charge a higher 

annual percentage rate for first-lien 

qualified mortgages in the proposed 

new category and still benefit from a 

conclusive presumption of compliance 

or ‘‘safe harbor.’’ Under the existing 

rules, first-lien qualified mortgages with 

an annual percentage rate less than or 

equal to the average prime offer rate 

plus 1.5 percentage points and 

subordinate-lien qualified mortgages 

with an annual percentage rate less than 

or equal to the average prime offer rate 

plus 3.5 percentage points are within 

the safe harbor. A qualified mortgage in 

the proposed new category would be 

conclusively presumed to comply if the 

annual percentage rate is equal to or less 

than the average prime offer rate plus 

3.5 percentage points for both first-lien 

and subordinate-lien loans. 

The Bureau also is proposing to allow 

small creditors operating predominantly 

in rural or underserved areas to offer 

first-lien balloon loans with a higher 

annual percentage rate and still benefit 

from a conclusive presumption of 

compliance with the ability-to-repay 

rules or ‘‘safe harbor.’’ The Bureau’s 

current rule provides that certain 

balloon loans made by small creditors 

operating predominantly in rural or 

underserved areas are qualified 

mortgages. Under the existing rules, 

first-lien qualified mortgages with an 

annual percentage rate less than or 

equal to the average prime offer rate 

plus 1.5 percentage points and 

subordinate-lien qualified mortgages 

with an annual percentage rate less than 

or equal to the average prime offer rate 

plus 3.5 percentage points are within 

the safe harbor. Qualified mortgages 

with annual percentage rates above 

these thresholds are presumed to 

comply with the ability-to-repay rules, 

but a consumer could rebut that 

presumption under certain 

circumstances. 

The proposal also provides two 

alternative comments regarding the 

provisions of the 2013 ATR Final Rule 

regarding the inclusion of loan 

originator compensation in the 

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Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Proposed Rules 6661 

140Section 1022 requires consideration of benefits 

and costs of Bureau rules issued under the Federal 

consumer financial laws to consumers and covered 

persons. Here, the Bureau discusses the benefits 

and costs of commentary provisions to better inform 

the public and its rulemaking. The Bureau reserves 

discretion in the case of each rule whether to 

discuss benefits and costs of such commentary 

provisions. 

141See http://www.cdfifund.gov/docs/ 

certification/cdfi/CDFI List-07-31-12.xls. 

142See https://entp.hud.gov/idapp/html/ 

f17npdata.cfm. 

143 Includes 2011 data for institutions with CHDO 

reservations and CHDO loans without a rental 

tenure type. See http://www.hud.gov/offices/cpd/ 

affordablehousing/reports/open/. 

144 Includes data for institutions shown to offer 

secondary financing at https://entp.hud.gov/idapp/ 

html/f17npdata.cfm. 

calculation of points and fees.140 The 

analysis generally examines the 

benefits, costs and impacts of the 

proposed provisions against the baseline 

of the January 2013 ATR Rule published 

elsewhere in today’s Federal Register. 

This baseline focuses the discussion of 

benefits, costs and impacts on the 

incremental effect of this rulemaking on 

the mortgage market. 

The analysis in this section relies on 

data that the Bureau have obtained, 

outreach to industry and other members 

of the public, and the record established 

by the Board and Bureau during the 

development of the 2013 ATR Final 

Rule. However, the Bureau notes that for 

some analyses, there are limited data 

available with which to quantify the 

potential costs, benefits, and impacts of 

the proposal. Still, general economic 

principles together with the limited data 

that are available provide insight into 

the benefits, costs, and impacts and 

where relevant, the analysis provides a 

qualitative discussion of the benefits, 

costs, and impacts of the final rule. 

The Bureau will further consider the 

benefits, costs and impacts of the 

proposed provisions and asks interested 

parties to provide general information, 

data, and research results on potential 

effects on the mortgage loans affected by 

the proposed exemptions and 

extensions of qualified mortgage status, 

the current underwriting practices of 

entities covered by these provisions and 

other information that may inform the 

analysis of the benefits, costs, and 

impacts of these proposals. 

A. Potential Benefits and Costs to 

Consumers and Covered Persons 

1. Exemptions From Ability-to-Repay 

Requirements 

As described in the Section 1022 

Analysis of the 2013 ATR rule 

published elsewhere in today’s Federal 

Register, there are a number of 

situations where lenders may engage in 

lending with too little regard for the 

borrower’s ability to repay. The 2013 

Final ATR Rule is designed to minimize 

such activity by ensuring proper 

documentation and verification related 

to extensions of credit and by requiring 

consideration of a number of factors 

including the consumer’s debt-toincome ratio and credit history. Lenders 

who fail to follow these requirements, or 

who extend credit without a 

‘‘reasonable and good faith 

determination’’ of the borrower’s ability 

to repay, are subject to liability. The 

proposed exemptions from the abilityto-repay requirements are designed to 

eliminate these requirements and 

thereby to limit lenders’ costs and 

protect credit availability in carefully 

defined circumstances, namely 

programs that have been developed to 

serve consumers and that assess 

repayment ability in ways that do not 

necessarily comport with the 

requirements of the Act and the final 

rule. 

As described earlier, mortgage lending 

by community-focused lending 

programs, State housing finance 

agencies, and not-for profit 

organizations varies widely in the form 

of financing, the products offered and 

the precise nature of underwriting. In 

particular, the Bureau understands that 

many of these lenders do not use 

documentation and verification 

procedures closely aligned with the 

requirements of the 2013 ATR rule or 

consider all of the underwriting factors 

specified in the rule. The benefits of the 

proposed rule derive from eliminating 

the costs of imposing these 

requirements on these particular 

extensions of credits and assuring that 

credit remains available through these 

programs without regard to the rule’s 

underwriting factors. Access to credit 

may be a specific concern for the 

populations generally served by these 

lenders and programs. 

As explained in the 2013 ATR Final 

Rule, in general, consumers and others 

could be harmed by this action as it 

removes particular consumer 

protections and could allow some 

deleterious lending to occur. However, 

in all of the cases discussed above, the 

Bureau believes, subject to public 

comment, that the community-focused 

mission of the creditor organizations 

and the close interaction between 

lenders and borrowers should mitigate 

any potential harms to borrowers and 

any costs from the rule. 

Data regarding the exact scope of 

lending through these channels are 

limited as are data regarding the 

performance of these loans. There are 51 

State Housing Finance Agencies and 

approximately 1,000 CDFIs, 62 percent 

of which are classified as Community 

Development (CD) Loan Funds, 22 

percent as CD Credit Unions, while the 

rest are CD Banks, Thrifts, or CD 

Venture Capital Funds.141 There are 233 

nonprofit agencies and nonprofit 

instrumentalities of government in the 

U.S. that are authorized to provide 

secondary financing,142 267 creditors 

certified by HUD as Community 

Housing Development Organizations 

(CHDOs) in connection with HUD’s 

HOME Investment Partnership 

Program,143 and 231 organizations 

certified as Downpayment Assistance 

through Secondary Financing 

Providers.144 A comprehensive list of 

these institutions is not available; 

however the Bureau believes that there 

may be substantial overlap among these 

institutions. The Bureau seeks 

information on the quantity and types of 

credit extended by each of these types 

of organizations. 

The number or volume of loans made 

by these institutions is limited. There is 

some data suggesting that SHFA bonds 

funded approximately 67,000 loans in 

2010 with a value of just over $8 billion. 

Data regarding CDFIs indicate that these 

institutions funded just under $4 billion 

in loans, however data on the type of 

housing supported is unavailable. 

Lending at CHDOs totaled $64 million 

in 2011 with just under 500 loans. 

The exemption in the proposed rule 

for certain streamlined refinance 

programs offers benefits to consumers, 

creditors and others to the extent that 

any impediments to refinancings are 

removed. Some streamlined refinance 

programs are aimed at efficiently 

extending mortgage credit to enable 

current borrowers to obtain more 

affordable mortgages. Many of these 

borrowers cannot afford their mortgage 

payments and/or are underwater and 

unable to obtain refinancing. Programs 

that help with refinances can aid these 

borrowers, their communities and the 

broader recovery. To the extent that 

these refinance programs have 

documentation and underwriting 

requirements that do not align with the 

requirements of the 2013 ATR Final 

Rule, compliance with that rule could 

harm lending activity; the exemptions 

in the proposed rule should remove any 

possible impediments. The limitation of 

the exemption to government or GSE 

sponsored streamlined refinance 

programs limits the risk to borrowers 

from removal of some of the protections 

in the final rule. 

Programs established under MHA 

impacted by the proposed rule appear to 

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145 Includes loans made under Second Lien 

Modification Program (2MP) Activity and HAMP 

Principal Reduction Alternative. See October 2012 

Making Home Affordable Report. 

146Figures reflect differences in outstanding loans 

across all states from 2011Q3 to 2012Q3 for most 

states, or latest yearly figures where these were not 

available. See http://www.treasury.gov/initiatives/ 

financial-stability/TARP-Programs/housing/Pages/ 

Program-Documents.aspx. 

147http://portal.hud.gov/hudportal/documents/ 

huddoc?id=fhamktq2_2012.pdf. 

148http://www.fhfa.gov/webfiles/24596/Aug12%20Refi%20Report.pdf. 

149To the extent that the cost advantage is 

material, this provision could give some smaller 

institutions a slight advantage over lenders not 

eligible to make qualified mortgages using this 

definition. 

150The possibility that small creditors qualifying 

for this exemption can make certain mortgages as 

qualified mortgages, while their larger competitors 

can only make these loans subject to the ability-topay provisions, may allow them to offer these loans 

at lower rates. However, as discussed in the 2013 

ATR Final Rule published elsewhere in today’s 

Federal Register, any effects on pricing are likely 

to be small. 

151The estimates in this analysis are based upon 

data and statistical analyses performed by the 

Bureau. To estimate counts and properties of 

mortgages for entities that do not report under 

HMDA, the Bureau has matched HMDA data to Call 

Report data and MCR data and has statistically 

projected estimated loan counts for those 

depository institutions that do not report these data 

either under HMDA or on the NCUA call report. 

The Bureau has projected originations of higherpriced mortgage loans for depositories that do not 

report HMDA in a similar fashion. These 

projections use Poisson regressions that estimate 

loan volumes as a function of an institution’s total 

assets, employment, mortgage holdings and 

geographic presence. Neither HMDA nor the Call 

Report data have loan level estimates of the DTI. To 

estimate these figures, the Bureau has matched the 

HMDA data to data on the HLP dataset provided by 

the FHFA. This allows estimation of coefficients in 

a probit model to predict DTI using loan amount, 

income and other variables. This model is then 

used to estimate DTI for loans in HMDA. 

have made roughly 67,000 loans 

between October 2011 and 2012; 145

volume was similar under the HHF 

program initiated by Treasury.146

Available data indicate that roughly 

312,000 loans were made in 2011 under 

targeted refinance programs at FHA 

(similar data for VA and USDA loans are 

not available).147 There were just over 

400,000 loans issued under HARP in 

2011 and the Bureau understands that 

volume has risen considerably in 

2012.148 The Bureau intends to seek 

detailed information on each of the 

government programs including loan 

volumes, characteristics and 

performance. 

2. Extension of qualified mortgage status 

The benefits to covered persons from 

extending qualified mortgage status to 

certain loans made by smaller creditors 

and held on portfolio also derive from 

limiting the potential costs of these 

loans. By granting creditors that qualify 

under the proposed qualified mortgage 

category a conclusive or rebuttable 

presumption of compliance with the 

ability-to-repay provisions, the proposal 

would limit the legal liability of these 

creditors and most expected litigation 

costs. These creditors may also benefit 

from a reduction in some 

documentation and verification costs as 

explained in the 2013 ATR Final rule. 

These cost reductions in turn could 

enhance the willingness of such 

creditors to make these loans or reduce 

the amount the creditors would 

otherwise charge for these loans.149 The 

costs to consumers of the proposed rule 

derive from the related reduction in 

consumer protection for the borrower as 

borrowers at these institutions will have 

less recourse in the instances where the 

creditor did, in fact, offer the mortgage 

without reaching a ‘reasonable and good 

faith’ belief in the borrower’s ability-torepay. There is also the potential for the 

broader costs that can result from 

additional lending made without 

adequate consideration of the 

borrower’s ability to repay as discussed 

in the Section 1022 analysis of the 2013 

Final ATR rule. 

Given the lower default and 

delinquency rates at these smaller 

community focused institutions, the 

avoided costs related to liability and 

litigation are likely small. However, the 

lower default and delinquency rates at 

these institutions, the relationship 

lending that they engage in, and 

restrictions on reselling the loans on the 

secondary market, together imply that 

the risk of consumer harm (and 

therefore the costs of this proposal) and 

also very small.150 The impacts of this 

proposal are generally expected to be 

limited. 

Based on data from 2011, roughly 

9,200 institutions with approximately 

450,000 loans on portfolio are likely to 

be effected by this provision.151 Based 

on the Bureau’s estimates, on average, 

16.7 percent of portfolio loans at these 

institutions are estimated to have a DTI 

ratio above 43%. For the subset of these 

loans that also do not contain any of the 

prohibited features for qualified 

mortgages, the proposed rule removes 

the ability-to-repay liability and grants 

the creditor a conclusive or rebuttable 

presumption of compliance. The Bureau 

is unable to estimate the percentage of 

these loans that would not qualify for 

the temporary expansion of the 

qualified mortgage definition in the 

final rule. 

Similar tradeoffs are involved in the 

proposal to raise the threshold from 1.5 

percentage points above APOR to 3.5 

percentage points above APOR for first 

lien mortgages originated and held by 

these institutions and for the qualified 

balloon mortgages made by institutions 

predominantly operating in rural or 

underserved areas. For loans in this 

APR band, including those with a DTI 

ratio below 43 that are already qualified 

mortgages and those with a DTI ratio 

above 43 percent that would be defined 

as qualified mortgages under this 

proposal, the presumption of 

compliance with the ability-to-repay 

requirements would be strengthened. 

The Bureau estimates that roughly 8–10 

percent of portfolio loans at these 

institutions are likely to be affected by 

this change. Strengthening the 

presumption of compliance for these 

loans will benefit consumers and/or 

covered persons to the extent doing so 

improves credit access or reduces costs. 

Strengthening the presumption will 

have a cost to consumers to the extent 

consumers who are unable to afford 

their mortgage and would otherwise be 

able to make out a claim and recover 

their losses would be unable to do so. 

3. Proposed Comments Regarding Points 

and Fees Calculation 

As discussed in detail above, the 

proposal provides two alternative 

comments of the provisions in the rule 

regarding the treatment of compensation 

paid to a mortgage originator in the 

calculation of points and fees. One 

would explicitly preclude offsetting, 

while the other would allow creditors to 

offset the amount of loan originator 

compensation by the amount of finance 

charges paid by the consumer. The 

Bureau is also seeking comment on 

whether other alternatives might be 

preferable to the ‘‘no offsetting’’ result. 

The Bureau has also proposed a separate 

clarification, explaining that mortgage 

brokers need not double-count 

payments to loan originator employees 

when determining points and fees. 

In general, offsetting across the 

various sources of compensation will 

lower the total amount of points and 

fees relative to calculations without 

such offsetting. As a result, keeping all 

other provisions of a given loan fixed, 

calculations involving offsetting will 

result in a greater number of loans 

eligible to be qualified mortgages and 

less likely to be above the points and 

fees triggers under HOEPA. The extent 

to which this occurs, and the extent to 

which lenders may adjust pricing and 

compensation practices in response to 

these provisions will determine the net 

effect. At present, the Bureau has 

limited standardized and representative 

data regarding the total points and fees 

and mortgage originator compensation. 

In general, for most prime loans, the 

Bureau believes that variations in these 

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152 5 U.S.C. 601 et. seq. 

153 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). 

154 5 U.S.C. 605(b). 

155 5 U.S.C. 609. 

156 5 U.S.C. 601(3). The current SBA size 

standards are located on the SBA’s Web site at 

http://www.sba.gov/content/table-small-businesssize-standards. 

calculations will not have major 

impacts: Current industry pricing 

practices and the exemption for bona 

fide discount points suggest that fewer 

of these loans will be constrained by the 

points and fees limits. For loans with 

higher APRs, where the exemption for 

bona-fide discount points is reduced or 

eliminated, the method for calculation 

of points and fees could limit qualified 

mortgage status for certain loans. Other 

loans that will still be qualified 

mortgages, but where the borrower pays 

for these charges through a higher 

interest rate may lose the presumption 

of compliance and instead have only the 

rebuttable presumption. Any impacts 

are most likely greater for lenders with 

affiliated companies where more 

charges must be included in the points 

and fees calculations. 

B. Potential Specific Impacts of the 

Final Rule 

1. Potential Impact on Consumer Access 

to Consumer Financial Products or 

Services 

The Bureau does not anticipate that 

the proposed rule would reduce 

consumers’ access to credit. As 

discussed above, the Bureau believes 

that the proposed rule would in fact 

enhance certain consumers’ access to 

mortgage credit as compared to the 

January ATR final rule because it would 

facilitate lending under various 

programs and under the new qualified 

mortgage definition. 

2. Depository Institutions and Credit 

Unions With $10 Billion or Less in Total 

Assets, As Described in Section 1026 

Depository institutions and credit 

unions with $10 billion or less in total 

assets as described in Section 1026 

would see differential impacts from the 

proposed rule. The depository 

institutions and credit unions that are 

CDFIs, and are therefore covered under 

the proposed exemption from the 

ability-to-repay requirements and the 

institutions covered by new definition 

of qualified mortgages for small creditor 

portfolio loans contained in the 

proposal are all, by definition, in this 

group and are therefore uniquely 

impacted by the rule. The provisions for 

streamlined refinance apply to all 

creditors who can utilize those 

programs and therefor these will not 

have any specific impact. 

3. Impact of the Provisions on 

Consumers in Rural Areas 

The proposed rule would have some 

differential impacts on consumers in 

rural areas. In these areas, a greater 

fraction of loans are made by smaller 

institutions and carried on portfolio and 

therefore the small creditor portfolio 

exemption would be likely to have 

greater impacts. The Bureau 

understands that mortgage loans in 

these areas and by these institutions are 

less standardized and often cannot be 

sold into the secondary market. As a 

result, interest rates may be slightly 

higher on average and therefore, a bigger 

portion of the transactions will be 

affected by the rule and, therefore, rural 

consumers will derive greater benefit 

from the proposed provisions than nonrural consumers. 

The Bureau requests commenters to 

submit data and to provide suggestions 

for additional nationally representative 

data to assess the issues discussed above 

and other potential benefits, costs, and 

impacts of the proposed rule. The 

Bureau also seeks information or data 

on the potential impact of the proposed 

rule on depository institutions and 

credit unions with total assets of $10 

billion or less as described in DoddFrank Act section 1026 as compared to 

depository institutions and credit 

unions with assets that exceed this 

threshold and their affiliates. Further, 

the Bureau seeks information or data on 

the proposed rule’s potential impact on 

consumers in rural areas as compared to 

consumers in urban areas. 

VII. Regulatory Flexibility Act Analysis 

A. Overview 

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.152 These analyses must 

‘‘describe the impact of the proposed 

rule on small entities.’’ 153 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.154

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.155

An IRFA is not required for this 

proposal because it would not have a 

significant economic impact on a 

substantial number of small entities. 

The analysis below evaluates the 

potential economic impact of the 

proposed rule on small entities as 

defined by the RFA. The analysis 

generally examines the regulatory 

impact of the provisions of the proposed 

rule and additional proposed 

modifications against the baseline of the 

final rule published elsewhere in 

today’s Federal Register. 

B. Number and Classes of Affected 

Entities 

The proposed rule will apply to all 

creditors that extend closed-end credit 

secured by real property or a dwelling. 

All small entities that extend these 

loans are potentially subject to at least 

some aspects of the proposal. This 

proposal may impact small businesses, 

small nonprofit organizations, and small 

government jurisdictions. A ‘‘small 

business’’ is determined by application 

of SBA regulations and reference to the 

North American Industry Classification 

System (NAICS) classifications and size 

standards.156 Under such standards, 

depository institutions with $175 

million or less in assets are considered 

small; other financial businesses are 

considered small if such entities have 

average annual receipts (i.e., annual 

revenues) that do not exceed $7 million. 

Thus, commercial banks, savings 

institutions, and credit unions with 

$175 million or less in assets are small 

businesses, while other creditors 

extending credit secured by real 

property or a dwelling are small 

businesses if average annual receipts do 

not exceed $7 million. 

The Bureau can identify through data 

under the Home Mortgage Disclosure 

Act, Reports of Condition and Income 

(Call Reports), and data from the 

National Mortgage Licensing System 

(NMLS) the approximate numbers of 

small depository institutions that will 

be subject to the final rue. Origination 

data is available for entities that report 

in HMDA, NMLS or the credit union 

call reports; for other entities, the 

Bureau has estimated their origination 

activities using statistical projection 

methods. 

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157See https://entp.hud.gov/idapp/html/ 

f17npdata.cfm. 

158See http://www.cdfifund.gov/docs/ 

certification/cdfi/CDFI List-07-31-12.xls. 

The following table provides the 

Bureau’s estimate of the number and 

types of entities to which the rule will 

apply: 

It is difficult to determine the number 

of small nonprofits that would be 

subject to the proposed regulation. 

Nonprofits do not generally file Call 

Reports or HMDA reports. As explained 

in part II above, as of November 2012 

there are 233 nonprofit agencies and 

nonprofit instrumentalities of 

government in the U.S. that are 

authorized by HUD to provide 

secondary financing,157 267 institutions 

designated as Community Housing 

Development Organizations that 

provided credit in 2011, and 231 

institutions designated as 

Downpayment Assistance through 

Secondary Financing Providers. A 

comprehensive list of these institutions 

is not available; however the Bureau 

believes that there may be substantial 

overlap among these institutions and 

that most of these institutions would 

qualify as small entities. 

Also, as of July 2012 there were 999 

organizations designated by the 

Treasury Department as CDFIs, 356 of 

which are depository institutions 

counted above. Among the remaining, 

some are nonprofits and most likely 

small.158

C. Impact of Exemption for Certain 

Community-Focused Lending Programs 

The proposed provisions related to 

community-focused lending programs 

discussed above all provide exemptions 

from the ability-to-repay requirements. 

Measured against the baseline of the 

burdens imposed by the Bureau’s 2013 

ATR Final Rule, the Bureau believes 

that these proposed provisions impose 

either no or insignificant additional 

burdens on small entities. The Bureau 

believes that these proposed provisions 

will reduce the burdens associated with 

implementation costs, additional 

underwriting costs, and compliance 

costs stemming from the ability-to-repay 

requirements. 

Proposed 1026.43(a)(3)(iii) provides 

that an extension of credit made 

pursuant to a program administered by 

a housing finance agency, as defined by 

24 CFR 266.5, is exempt from the 

requirements of § 1026.43(c) through (f). 

This provision would remove the 

burden to small government 

jurisdictions, and small entities 

extending credit pursuant to programs 

administered by these housing finance 

agencies, of having to modify the 

underwriting practices associated with 

these programs to implement the abilityto-repay requirements. This provision 

would also remove the burden to small 

entities of having to develop and 

maintain policies and procedures to 

monitor compliance with the ability-torepay requirements. 

The proposal provides that an 

extension of credit made by a creditor 

designated as a Community 

Development Financial Institution, a 

Downpayment Assistance through 

Secondary Financing Provider, and a 

Community Housing Development 

Organization are exempt from the 

ability-to-repay requirements. This 

provision would remove the burden to 

small entities of having to implement 

the ability-to-repay requirements. This 

provision would also remove the burden 

to small entities of having to develop 

and maintain policies and procedures to 

monitor compliance with the ability-torepay requirements. 

Regulatory burdens may be associated 

with obtaining and maintaining one of 

the designations required to qualify for 

the exemption. However, this decision 

is voluntary and the Bureau presumes 

that a small entity would not do so 

unless the burden reduction resulting 

from the exemption outweighed the 

additional burden imposed by obtaining 

and maintaining the designation. Thus, 

additional burdens would still be part of 

an overall burden reduction. 

The proposal provides that an entity 

with a tax exemption ruling or 

determination letter from the Internal 

Revenue Service under section 501(c)(3) 

of the Internal Revenue Code of 1986 is 

exempt from the ability-to-repay 


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requirements, provided that: During the 

calendar year preceding receipt of the 

consumer’s application, the entity 

extended credit secured by a dwelling 

no more than 100 times; during the 

calendar year preceding receipt of the 

consumer’s application, the entity 

extended credit secured by a dwelling 

only to consumers with income that did 

not exceed the qualifying limit for 

moderate income families as established 

pursuant to section 8 of the United 

States Housing Act of 1937; the 

extension of credit is to a consumer 

with income that does not exceed this 

qualifying limit; and that the creditor 

determines, in accordance with written 

procedures, that the consumer has a 

reasonable ability to repay the extension 

of credit. 

For eligible entities, this provision 

would remove the burden of complying 

with the ability-to-repay requirements. 

This provision would also remove the 

burden to small entities of having to 

develop and maintain policies and 

procedures to monitor compliance with 

the ability-to-repay requirements in the 

2013 ATR Final Rule. While small 

creditors would be required to maintain 

documentation of their own procedures 

regarding the determination of a 

consumer’s ability to repay, the Bureau 

believes that such small nonprofits 

already have written policies and 

procedures. 

D. Impact of Exemption for Certain 

Homeownership Stabilization, 

Foreclosure Prevention, and 

Refinancing Programs 

The proposed provisions related to 

certain homeownership stabilization, 

foreclosure prevention, and refinancing 

programs discussed above all provide 

exemptions from the ability-to-repay 

requirements. Measured against the 

baseline of the burdens imposed by the 

Bureau’s 2013 Final Rule, the Bureau 

believes that these proposed provisions 

impose either no or insignificant 

additional burdens on small entities. 

The Bureau believes that these proposed 

provisions will reduce the burdens 

associated with implementation costs, 

additional underwriting costs, and 

compliance costs stemming from the 

ability-to-repay requirements. 

The proposal provides that an 

extension of credit made pursuant to a 

program authorized by sections 101 and 

109 of the Emergency Economic 

Stabilization Act of 2008 is exempt from 

the ability-to-repay requirements. This 

provision would remove the burden to 

small entities of having to modify the 

underwriting practices associated with 

these programs to implement the abilityto-repay requirements. This provision 

would also remove the burden to small 

entities of having to develop and 

maintain policies and procedures to 

monitor compliance with these abilityto-repay requirements. 

The proposal provides that an 

extension of credit that is a refinancing 

that is eligible to be insured, guaranteed, 

or made pursuant to a program 

administered by the Federal Housing 

Administration, U.S. Department of 

Veterans Affairs, or the U.S. Department 

of Agriculture is exempt from the 

ability-to-repay requirements, provided 

that the agency administering the 

program under which the extension of 

credit is eligible to be insured, 

guaranteed, or made has not prescribed 

rules pursuant to section 129C(a)(5) or 

129C(b)(3)(B)(ii) of TILA. This provision 

would remove the burden to small 

entities of having to modify the 

underwriting practices currently used 

for Federal agency refinance programs 

to implement the ability-to-repay 

requirements. This provision would also 

remove the burden to small entities of 

having to develop and maintain policies 

and procedures to monitor compliance 

with these ability-to-repay 

requirements, with respect to extensions 

of credit exempt from these 

requirements pursuant to this proposed 

provision. Pursuant to the proposal, 

small entities need determine only 

whether regulations applicable to 

refinancings prescribed by the relevant 

Federal agency have taken effect. Prior 

to that point in time, small entities are 

relieved of any burden imposed by the 

ability-to-repay requirements with 

respect to refinancings eligible to be 

insured, guaranteed, or made pursuant 

to a Federal agency program. 

The proposal covers certain 

refinancings eligible to be purchased or 

guaranteed by Fannie Mae or Freddie 

Mac pursuant to an eligible targeted 

refinancing program. This provision 

would remove the burden to small 

entities of having to modify the 

underwriting practices currently used 

for GSE refinance programs to 

implement the ability-to-repay 

requirements. This provision would also 

remove the burden to small entities of 

having to develop and maintain policies 

and procedures to monitor compliance 

with the ability-to-repay requirements, 

with respect to extensions of credit 

exempt from these requirements 

pursuant to this proposed provision. 

Further, by exempting creditors 

extending credit pursuant to one of 

these programs, the proposal removes 

any economic burdens associated with 

ability-to-repay litigation risk. 

The proposed provision may add an 

additional burden on small entities by 

requiring a determination of whether 

Fannie Mae or Freddie Mac owns the 

existing obligation to determine if the 

proposed provision applies. However, 

in refinancings creditors generally must 

determine ownership of the existing 

obligation prior to consummation to 

determine the accurate amount of the 

outstanding obligation. Thus, the 

Bureau believes that the proposed 

provision will shift this determination 

to an earlier point in the refinancing 

process, and will likely not create a new 

burden on small entities. A small entity 

may choose not to make use of the 

proposed provision in the event that 

such burden outweighed the benefit. 

The Bureau requests feedback regarding 

whether this provision will create new 

or additional burdens on small entities. 

E. Small Creditor Qualified Mortgages 

Retained in Portfolio 

The proposal creates a new category 

of qualified mortgage for certain 

mortgage loans made and retained by 

certain small creditors. The proposed 

new category would apply to creditors 

that, at the end of the prior calendar 

year: (1) Had total assets of less than $2 

billion; and (2) together with the 

creditor’s affiliates, originated no more 

than 500 first-lien covered transactions. 

Each of these loans must have complied 

with the general requirements 

applicable to qualified mortgages under 

§ 1026.43(e)(2), except for the 43 percent 

debt-to-income ratio limitation in 

§ 1026.43(e)(2)(vi). The $2 billion asset 

threshold in the proposed definition 

would be adjusted annually based on 

the year-to-year change in the average of 

the Consumer Price Index for Urban 

Wage Earners and Clerical Workers, not 

seasonally adjusted. 

This proposal would reduce burden 

on small creditors by removing the 43 

percent debt-to-income limitation for 

qualified mortgages. The increase in the 

threshold from APOR plus 1.5 

percentage points to APOR plus 3.5 

percentage points would reduce burden 

for the loans at these institutions 

between these rates as these loans 

would now qualify for a conclusive, 

rather than a rebuttable presumption. 

At the small creditors identified, 16.7 

percent of mortgage loans on portfolio 

are estimated to have a debt to income 

ratios above 43 percent. For these loans, 

the proposal grants creditors a 

presumption of compliance with the 

ability-to-repay requirements; rough 

estimates indicate that three quarters of 

these will gain a conclusive 

presumption and the remaining loans 

will gain the rebuttable presumption. 

It is difficult to estimate the reduction 

in potential future liability costs 

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6666 Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Proposed Rules 

159These proposed commentary provisions do 

not circumscribe conduct, and therefore do not in 

themselves present cognizable impacts for purposes 

of the Regulatory Flexibility Act. Nevertheless, the 

Bureau has considered such impacts on small 

entities as part of this particular rulemaking in 

order to better inform the public and its rulemaking. 

associated with the changes. However, 

the Bureau notes that lending practices 

at smaller institutions are reportedly 

based on a more personal relationship 

based model and historically, 

delinquency rates on mortgages at 

smaller institutions are lower than the 

average in the industry. As such, the 

expected litigation costs from the 

ability-to-repay provisions of the 2013 

ATR Final Rule, and therefore the 

reduced burden from this proposal, 

should be small. Small creditors will 

benefit most from the increased 

certainty regarding the lower frequency 

of litigation. 

The Bureau acknowledges that 

possibility that this proposal may 

increase small creditor burden by 

requiring such creditors to maintain 

records relating to eligibility for the 

exemption, but the Bureau believes that 

these costs are negligible, as creditor 

asset size and origination activity are 

data that all banks are likely to maintain 

for routine supervisory purposes. Thus, 

the Bureau believes that the burden 

reduction stemming from a reduction in 

liability costs would outweigh any 

potential recordkeeping costs, resulting 

in overall burden reduction. Small 

entities for which such cost reductions 

are outweighed by additional record 

keeping costs may choose not to utilize 

the proposed exemption. 

F. Proposed Clarification Regarding 

Inclusion of Loan Originator 

Compensation in the Points and Fees 

Calculation 

As discussed in detail above, the 

Dodd-Frank Act requires creditors to 

include all compensation paid directly 

or indirectly by a consumer or creditor 

to a mortgage originator from any 

source, including a mortgage originator 

that is also the creditor in a table-funded 

transaction, in the calculation of points 

and fees. The statute does not express 

any limitation on this requirement, and 

thus, the Bureau believes it would be 

read to require that loan originator 

compensation be treated as additive to 

up-front charges paid by the consumer 

and the other elements of points and 

fees. The Bureau was concerned that 

this may not be the optimal outcome, 

but did not believe that it had sufficient 

information with which to determine 

definitively that an alternative approach 

was warranted. 

The proposal provides two alternative 

comments on the rule.159 One would 

explicitly preclude offsetting, while the 

other would allow creditors to offset the 

amount of loan originator compensation 

by the amount of finance charges paid 

by the consumer. The Bureau is also 

seeking comment on whether other 

alternatives might be appropriate. The 

Bureau has also proposed a separate 

comment, explaining that mortgage 

brokers need not double-count 

payments to loan originator employees 

when determining points and fees. 

Measured against the baseline of the 

statutory requirements, these proposed 

alternatives either reduce or have no 

effect on the burden on small creditors. 

As discussed above and in the sectionby-section analysis, the Bureau believes 

the statute would be read to require loan 

originator compensation to be treated as 

additive to the other elements of points 

and fees. This places a burden on small 

creditors, since it makes it more likely 

that mortgage loans will not be eligible 

for a presumption of compliance as 

qualified mortgages under the ability-torepay rules and will be classified as 

high-cost mortgages for purposes of 

HOEPA. One of the alternatives that the 

Bureau has proposed would simply 

state this result expressly. The other 

reduces the burden on small creditors 

imposed by the statue by providing 

small creditors with greater pricing 

flexibility. The second proposed 

comment, addressing double-counting 

of employee compensation, also would 

reduce burden on small entities 

regardless of what standard the Bureau 

adopts in connection with the first 

proposed comment. 

G. Conclusion 

Each element of this proposal results 

in an economic burden reduction for 

these small entities. The proposed 

exemptions for nonprofit creditors 

would lessen any economic impact 

resulting from the ability-to-repay 

requirements. The proposed exemptions 

for homeownership stabilization, 

foreclosure prevention, and refinancing 

programs would also soften any 

economic impact on small entities 

extending credit pursuant to those 

programs. The proposed new category of 

qualified mortgage would make it easier 

for small entities to originate qualified 

mortgages. While all of these proposed 

exemptions may entail additional 

recordkeeping costs, the Bureau believes 

that these costs are minimal and 

outweighed by the cost reductions 

resulting from the proposal. Small 

entities for which such cost reductions 

are outweighed by additional record 

keeping costs may choose not to utilize 

the proposed exemptions. 

Certification 

Accordingly, the undersigned certifies 

that this proposal would not have a 

significant economic impact on a 

substantial number of small entities. 

The Bureau requests comment on the 

analysis above and requests any relevant 

data. 

VIII. Paperwork Reduction Act 

Certain provisions of this notice of 

proposed rulemaking contain 

‘‘collection of information’’ 

requirements within the meaning of the 

Paperwork Reduction Act of 1995 (44 

U.S.C. 3501 et seq.) (Paperwork 

Reduction Act or PRA). The collection 

of information contained in this 

proposed rule, and identified as such, 

has been submitted to the Office of 

Management and Budget (OMB) for 

review under section 3507(d) of the 

PRA. Notwithstanding any other 

provision of law, under the PRA, the 

Bureau may not conduct or sponsor, and 

a person is not required to respond to, 

this information collection unless the 

information collection displays a 

currently valid control number. 

This proposed rule would amend 12 

CFR part 1026 (Regulation Z), which 

implements the Truth in Lending Act 

(TILA). Regulation Z currently contains 

collections of information approved by 

OMB. The Bureau’s OMB control 

number for Regulation Z is 3170–0015. 

As described below, the proposed rule 

would amend the collections of 

information currently in Regulation Z. 

A. Overview 

This proposal is related to a final rule 

published elsewhere in today’s Federal 

Register. That final rule implements 

sections 1411, 1412, and 1414 of the 

Dodd-Frank Wall Street Reform and 

Consumer Protection Act (the DoddFrank Act), which creates new TILA 

section 129C. Among other things, the 

Dodd-Frank Act 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.’’ 

The Bureau is proposing certain 

amendments to the final rule 

implementing these ability-to-repay 

requirements, including exemptions for 

certain nonprofit creditors and certain 

homeownership stabilization programs 

and an additional definition of a 

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Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Proposed Rules 6667 

160For purposes of this PRA analysis, references 

to ‘‘creditors’’ or ‘‘lenders’’ shall be deemed to refer 

collectively to commercial banks, savings 

institutions, credit unions, and mortgage companies 

(i.e., non-depository lenders), unless otherwise 

stated. Moreover, reference to ‘‘respondents’’ shall 

generally mean all categories of entities identified 

in the sentence to which this footnote is appended, 

except as otherwise stated or if the context indicates 

otherwise. 

qualified mortgage for certain loans 

made and held in portfolio by small 

creditors that have total assets less than 

$2 billion at the end of the previous 

calendar year; and, together with all 

affiliates, originated 500 or fewer firstlien covered transactions during the 

previous calendar year. The Bureau also 

is proposing to allow small creditors to 

charge a higher annual percentage rate 

for first-lien qualified mortgages in the 

proposed new category and still benefit 

from a conclusive presumption of 

compliance or ‘‘safe harbor,’’ and to 

allow small creditors operating 

predominantly in rural or underserved 

areas to offer first-lien balloon loans 

with a higher annual percentage rate 

and still benefit from a conclusive 

presumption of compliance with the 

ability-to-repay rules or ‘‘safe harbor.’’ 

The information collection in the 

proposed rule is required to provide 

benefits for consumers and would be 

mandatory. See 15 U.S.C. 1601 et seq.; 

12 U.S.C. 2601 et seq. Because the 

Bureau does not collect any information 

under the final rule, no issue of 

confidentiality arises. The likely 

respondents would be depository 

institutions (i.e., commercial banks, 

savings institutions and credit unions) 

and non-depository institutions (i.e., 

mortgage companies or other non-bank 

lenders) subject to Regulation Z.160

Under the proposal, the Bureau 

generally accounts for the paperwork 

burden associated with Regulation Z for 

the following respondents pursuant to 

its administrative enforcement 

authority: insured depository 

institutions with more than $10 billion 

in total assets, their depository 

institution affiliates, and certain 

nondepository lenders. The Bureau and 

the FTC generally both have 

enforcement authority over nondepository institutions for Regulation Z. 

Accordingly, the Bureau has allocated to 

itself half of the estimated burden to 

non-depository institutions. Other 

Federal agencies are responsible for 

estimating and reporting to OMB the 

total paperwork burden for the 

institutions for which they have 

administrative enforcement authority. 

They may, but are not required to, use 

the Bureau’s burden estimation 

methodology. 

Using the Bureau’s burden estimation 

methodology, there is no change to the 

total estimated burden under Regulation 

Z as a result of the proposed rule. 

B. Information Collection Requirements 

1. Ability-To-Repay Verification and 

Documentation Requirements 

As discussed above, the final rule 

published elsewhere in today’s Federal 

Register contains specific criteria that a 

creditor must consider in assessing a 

consumer’s repayment ability while 

different verification requirements 

apply to qualified mortgages. As 

described in the relevant sections of the 

final rule, the Bureau does not believe 

that the verification and documentation 

requirements of the proposed rule result 

in additional ongoing costs for most 

covered persons. However, for some 

creditors, notably the communityfocused lending programs, State housing 

finance agencies, and not-for profit 

organizations exempted in the proposed 

rule, lending can vary widely, in the 

form of financing, the products offered 

and the precise nature of underwriting. 

These processes may not involve the 

more traditional products covered by 

the qualified mortgage definition nor do 

these lenders use documentation and 

verification procedures closely aligned 

with the requirements of the 2013 ATR 

rule. 

For these lenders, the proposed rule 

should eliminate any costs from 

imposing these requirements on these 

particular extensions of credits. The 

Bureau estimates one-time and ongoing 

costs to respondents of complying with 

the proposed rule as follows. 

One-time costs. The Bureau estimates 

that covered persons will incur one-time 

costs associated with reviewing the 

relevant sections of the Federal Register 

and training relevant employees. In 

general, the Bureau estimates these costs 

to include, for each covered person, the 

costs for one attorney and one 

compliance officer to read and review 

the sections of the proposed rule that 

describe the verification and 

documentation requirements for loans 

in addition to the costs for each loan 

officer or other loan originator to receive 

training concerning the requirements. 

However, the Bureau believes that 

respondents will review the relevant 

sections of this proposal along with the 

2013 ATR Final Rule to best understand 

any new regulatory requirements and 

their coverage. As such, there is no 

additional one-time burden attributed to 

the proposed rule. 

Ongoing costs. The exemption of the 

covered institutions should reduce any 

burden related to these provisions. 

However, in the final rule, the Bureau 

did not attribute any paperwork burden 

to these provisions on the assumption 

that the verification and documentation 

requirements of the final rule will not 

result in additional ongoing costs for 

most covered persons. As such, it would 

be inappropriate to credit any reduction 

in burden to the proposed rule. 

C. Summary of Burden Hours 

As noted, the Bureau does not believe 

the proposed rule results in any changes 

in the burdens under Regulation Z 

associated with information collections 

for Bureau respondents under the PRA. 

D. Comments 

The Bureau has a continuing interest 

in the public’s opinions of our 

collections of information. Comments 

are specifically requested concerning: (i) 

Whether the proposed collections of 

information are necessary for the proper 

performance of the functions of the 

Bureau, including whether the 

information will have practical utility; 

(ii) the accuracy of the estimated burden 

associated with the proposed collections 

of information; (iii) how to enhance the 

quality, utility, and clarity of the 

information to be collected; and (iv) 

how to minimize the burden of 

complying with the proposed 

collections of information, including the 

application of automated collection 

techniques or other forms of information 

technology. Comments regarding the 

burden estimate, or any other aspect of 

this collection of information, including 

suggestions for reducing the burden, 

should be sent to: The Office of 

Management and Budget (OMB), 

Attention: Desk Officer for the 

Consumer Financial Protection Bureau, 

Office of Information and Regulatory 

Affairs, Washington, DC, 20503, or by 

the internet to 

submissions@omb.eop.gov, With copies 

to the Bureau at the Consumer Financial 

Protection Bureau (Attention: PRA 

Office), 1700 G Street NW., Washington, 

DC, 20552, or by the internet to 

CFPB_Public_PRA@cfpb.gov. 

List of Subjects in 12 CFR Part 1026 

Advertising, Consumer protection, 

Mortgages, Reporting and recordkeeping 

requirements, Truth in Lending. 

Text of Proposed Revisions 

Certain conventions have been used 

to highlight the proposed revisions. 

New language is shown inside flboldfaced arrowsfi, while language that 

would be deleted is shown inside [boldfaced brackets]. 

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6668 Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Proposed Rules 

Authority and Issuance 

For the reasons set forth above, the 

Bureau of Consumer Financial 

Protection proposes to amend 

Regulation Z, 12 CFR part 1026, as set 

forth below: 

PART 1026—TRUTH IN LENDING 

(REGULATION Z) 

■ 1. The authority citation for part 1026 

continues to read as follows: 

Authority: 12 U.S.C. 2601, 2603–2605, 

2607, 2609, 2617, 5511, 5512, 5532, 5581; 15 

U.S.C. 1601 et seq. 

Subpart E—Special Rules for Certain 

Home Mortgage Transactions 

■ 2. Section 1026.43, as added 

elsewhere in this issue of the Federal 

Register, is amended by revising 

paragraphs (a)(3)(ii) and (iii), adding 

new paragraphs (a)(3)(iv) through (viii), 

revising paragraphs (b)(4), (e)(1), (e)(2), 

and (g)(1)(ii)(B), and adding new 

paragraph (e)(5), to read as follows: 

§ 1026.43 Minimum standards for 

transactions secured by a dwelling. 

(a) * * * 

(3) * * * 

(ii) A temporary or ‘‘bridge’’ loan with 

a term of 12 months or less, such as a 

loan to finance the purchase of a new 

dwelling where the consumer plans to 

sell a current dwelling within 12 

months or a loan to finance the initial 

construction of a dwelling; [or] 

(iii) A construction phase of 12 

months or less of a construction-topermanent loanfl;fi ø.¿ 

fl(iv) An extension of credit made 

pursuant to a program administered by 

a Housing Finance Agency, as defined 

under 24 CFR 266.5; 

(v) An extension of credit made by: 

(A) A creditor designated as a 

Community Development Financial 

Institution, as defined under 12 CFR 

1805.104(h); 

(B) A creditor designated as a 

Downpayment Assistance through 

Secondary Financing Provider, pursuant 

to 24 CFR 200.194(a), operating in 

accordance with regulations prescribed 

by the U.S. Department of Housing and 

Urban Development applicable to such 

persons; 

(C) A creditor designated as a 

Community Housing Development 

Organization, as defined under 24 CFR 

92.2, operating in accordance with 

regulations prescribed by the U.S. 

Department of Housing and Urban 

Development applicable to such 

persons; or 

(D) A creditor with a tax exemption 

ruling or determination letter from the 

Internal Revenue Service under section 

501(c)(3) of the Internal Revenue Code 

of 1986 (26 CFR 1.501(c)(3)-1), provided 

that: 

(1) During the calendar year preceding 

receipt of the consumer’s application, 

the entity extended credit secured by a 

dwelling no more than 100 times; 

(2) During the calendar year preceding 

receipt of the consumer’s application, 

the entity extended credit secured by a 

dwelling only to consumers with 

income that did not exceed the 

qualifying limit for moderate income 

families as established pursuant to 

section 8 of the United States Housing 

Act of 1937 and amended from time to 

time by the U.S. Department of Housing 

and Urban Development; 

(3) The extension of credit is to a 

consumer with income that does not 

exceed the qualifying limit specified in 

paragraph (a)(3)(v)(D)(2) of this section; 

and 

(4) The creditor determines, in 

accordance with written procedures, 

that the consumer has a reasonable 

ability to repay the extension of credit. 

(vi) An extension of credit made 

pursuant to a program authorized by 

sections 101 and 109 of the Emergency 

Economic Stabilization Act of 2008 (12 

U.S.C. 5211; 5219); 

(vii) An extension of credit that is a 

refinancing, as defined under 

§ 1026.20(a) but without regard for 

whether the creditor is the creditor, 

holder, or servicer of the original 

obligation, that is eligible to be insured, 

guaranteed, or made pursuant to a 

program administered by the Federal 

Housing Administration, U.S. 

Department of Veterans Affairs, or the 

U.S. Department of Agriculture, 

provided that the agency administering 

the program under which the extension 

of credit is eligible to be insured, 

guaranteed, or made has not prescribed 

rules pursuant to section 129C(a)(5) or 

129C(b)(3)(B)(ii) of TILA; or 

(viii) An extension of credit that is a 

refinancing, as defined under 

§ 1026.20(a) but without regard for 

whether the creditor is the creditor, 

holder, or servicer of the original 

obligation, that is eligible to be 

purchased or guaranteed by the Federal 

National Mortgage Association or the 

Federal Home Loan Mortgage 

Corporation, provided that: 

(A) The refinancing is made pursuant 

to an eligible targeted refinancing 

program, as defined under 12 CFR 

1291.1; 

(B) Such entities are operating under 

the conservatorship or receivership of 

the Federal Housing Finance Agency 

pursuant to section 1367 of the Federal 

Housing Enterprises Financial Safety 

and Soundness Act of 1992 (12 U.S.C. 

4617(i)) on the date the refinancing is 

consummated; 

(C) The existing obligation satisfied 

and replaced by the refinancing is 

owned by the Federal National Mortgage 

Association or the Federal Home Loan 

Mortgage Corporation; 

(D) The existing obligation satisfied 

and replaced by the refinancing was not 

consummated on or after January 10, 

2014; and 

(E) The refinancing is not 

consummated on or after January 10, 

2021.fi 

(b) * * * 

(4) Higher-priced covered transaction 

means a covered transaction with an 

annual percentage rate that exceeds the 

average prime offer rate for a 

comparable transaction as of the date 

the interest rate is set by 1.5 or more 

percentage points for a first-lien covered 

transactionfl, other than a qualified 

mortgage under paragraph (e)(5) or (f) of 

this section; by 3.5 or more percentage 

points for a first-lien covered 

transaction that is a qualified mortgage 

under paragraph (e)(5) or (f) of this 

section;fi or by 3.5 or more percentage 

points for a subordinate-lien covered 

transaction. 

* * * * * 

(e) Qualified mortgages. (1) Safe 

harbor and presumption of compliance. 

(i) Safe harbor for loans that are not 

higher-priced covered transactions. A 

creditor or assignee of a qualified 

mortgage, as defined in paragraphs 

(e)(2), (e)(4), fl(e)(5),fi or (f) of this 

section, that is not a higher-priced 

covered transaction, as defined in 

paragraph (b)(4) of this section, 

complies with the repayment ability 

requirements of paragraph (c) of this 

section. 

(ii) Presumption of compliance for 

higher-priced covered transactions. (A) 

A creditor or assignee of a qualified 

mortgage, as defined in paragraph (e)(2), 

(e)(4), fl(e)(5),fi or (f) of this section, 

that is a higher-priced covered 

transaction, as defined in paragraph 

(b)(4) of this section, is presumed to 

comply with the repayment ability 

requirements of paragraph (c) of this 

section. 

(B) To rebut the presumption of 

compliance described in paragraph 

(e)(1)(ii)(A) of this section, it must be 

proven that, despite meeting the 

prerequisites of paragraph (e)(2), (e)(4), 

fl(e)(5),fi or (f) of this section, the 

creditor did not make a reasonable and 

good faith determination of the 

consumer’s repayment ability at the 

time of consummation, by showing that 

the consumer’s income, debt 

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Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Proposed Rules 6669 

obligations, alimony, child support, and 

the consumer’s monthly payment 

(including mortgage-related obligations) 

on the covered transaction and on any 

simultaneous loans of which the 

creditor was aware at consummation 

would leave the consumer with 

insufficient residual income or assets 

other than the value of the dwelling 

(including any real property attached to 

the dwelling) that secures the loan with 

which to meet living expenses, 

including any recurring and material 

non-debt obligations of which the 

creditor was aware at the time of 

consummation. 

(2) Qualified mortgage defined— 

general. Except as provided in 

paragraph (e)(4)fl, (e)(5),fi or (f) of this 

section, a qualified mortgage is a 

covered transaction: 

* * * * * 

fl(5) Qualified mortgage defined— 

small creditor portfolio loans. (i) 

Notwithstanding paragraph (e)(2) of this 

section, a qualified mortgage is a 

covered transaction: 

(A) That satisfies the requirements of 

paragraph (e)(2) of this section other 

than the requirements of paragraph 

(e)(2)(vi) and without regard to the 

standards in appendix Q to this part; 

(B) For which the creditor considers 

at or before consummation the 

consumer’s monthly debt-to-income 

ratio or residual income and verifies the 

debt obligations and income used to 

determine that ratio in accordance with 

paragraph (c)(7) of this section, except 

that the calculation of the payment on 

the covered transaction for purposes of 

determining the consumer’s total 

monthly debt obligations in paragraph 

(c)(7)(i)(A) shall be determined in 

accordance with paragraph (e)(2)(iv) of 

this section instead of paragraph (c)(5) 

of this section; 

(C) That is not subject, at 

consummation, to a commitment to be 

acquired by another person, other than 

a person that satisfies the requirements 

of paragraph (e)(5)(i)(D) of this section; 

and 

(D) For which the creditor satisfies the 

requirements stated in 

§ 1026.35(b)(2)(iii)(B) and (C). 

(ii) A qualified mortgage extended 

pursuant to paragraph (e)(5)(i) of this 

section immediately loses its status as a 

qualified mortgage under paragraph 

(e)(5)(i) if legal title to the qualified 

mortgage is sold, assigned, or otherwise 

transferred to another person except 

when: 

(A) The qualified mortgage is sold, 

assigned, or otherwise transferred to 

another person three years or more after 

consummation of the qualified 

mortgage; 

(B) The qualified mortgage is sold, 

assigned, or otherwise transferred to a 

creditor that satisfies the requirements 

of paragraph (e)(5)(i)(D) of this section; 

(C) The qualified mortgage is sold, 

assigned, or otherwise transferred to 

another person pursuant to a capital 

restoration plan or other action under 12 

U.S.C. 1831o, actions or instructions of 

any person acting as conservator, 

receiver, or bankruptcy trustee, an order 

of a State or Federal government agency 

with jurisdiction to examine the creditor 

pursuant to State or Federal law, or an 

agreement between the creditor and 

such an agency; or 

(D) The qualified mortgage is sold, 

assigned, or otherwise transferred 

pursuant to a merger of the creditor with 

another person or acquisition of the 

creditor by another person or of another 

person by the creditor.fi 

* * * * * 

(g) * * * 

(1) * * * 

(ii) * * * 

(B) Is a qualified mortgage under 

paragraph (e)(2), (e)(4), fl(e)(5),fi or (f) 

of this section; and 

* * * * * 

■ 3. In Supplement I to Part 1026— 

Official Interpretations: 

A. Under Section 1026.32— 

Requirements for High-Cost Mortgages: 

i. Under 32(b) Definitions: 

a. Under Paragraph 32(b)(1)(ii), as 

amended elsewhere in this issue of the 

Federal Register, paragraph 5 under that 

heading is added. 

B. Under Section 1026.43—Minimum 

Standards for Transactions Secured by 

a Dwelling, as added elsewhere in this 

issue of the Federal Register: 

i. Under 43(a) Scope: 

a. The heading Paragraph 

43(a)(3)(v)(D) and paragraph 1 under 

that heading are added. 

b. The heading Paragraph 43(a)(3)(vi) 

and paragraph 1 under that heading are 

added. 

c. The heading Paragraph 43(a)(3)(vii) 

and paragraph 1 under that heading are 

added. 

d. The heading Paragraph 

43(a)(3)(viii) and paragraph 1 under that 

heading are added. 

ii. Under 43(e) Qualified Mortgages: 

a. The heading Paragraph 43(e)(5) and 

paragraphs 1 through 10 under that 

heading are added. 

Supplement I to Part 1026—Official 

Interpretations 

* * * * * 

Subpart E—Special Rules for Certain 

Home Mortgage Transactions 

* * * * * 

Section 1026.32—Requirements for 

High-Cost Mortgages 

* * * * * 

32(b) Definitions. 

Paragraph 32(b)(1). 

Paragraph 32(b)(1)(ii). 

* * * * * 

fl5. Loan originator compensation— 

calculating loan originator 

compensation in connection with other 

charges or payments included in the 

finance charge or made to loan 

originators. i. Consumer payments to 

mortgage brokers. Mortgage broker fees 

already included in the points and fees 

calculation under § 1026.32(b)(1)(i) need 

not be counted again under 

§ 1026.32(b)(1)(ii). For example, assume 

a mortgage broker charges a consumer a 

$3,000 fee for a transaction. The $3,000 

mortgage broker fee is included in the 

finance charge under § 1026.4(a)(3). 

Because the $3,000 mortgage broker fee 

is already included in points and fees 

under § 1026.32(b)(1)(i), it is not 

counted again under § 1026.32(b)(1)(ii). 

ii. Payments by a mortgage broker to 

its individual loan originator employee. 

Compensation paid by a mortgage 

broker to its individual loan originator 

employee is not included in points and 

fees under § 1026.32(b)(1)(ii). For 

example, assume a consumer pays a 

$3,000 fee to a mortgage broker, and the 

mortgage broker pays a $1,500 

commission to its individual loan 

originator employee for that transaction. 

The $3,000 mortgage broker fee is 

included in points and fees, but the 

$1,500 commission is not included in 

points and fees because it has already 

been included in points and fees as part 

of the $3,000 mortgage broker fee. 

Alternative 1 

iii. Creditor’s origination fees. Section 

1026.32(b)(1)(ii) requires a creditor to 

include compensation paid by a 

consumer or creditor to a loan originator 

in the calculation of points and fees in 

addition to any fees or charges paid by 

the consumer to the creditor included in 

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

For example, assume that a consumer 

pays to the creditor a $3,000 origination 

fee and that the creditor pays to its loan 

officer employee $1,500 in 

compensation attributed to the 

transaction. Assume further that the 

consumer pays no other charges to the 

creditor that are included in points and 

fees under § 1026.32(b)(1)(i) and the 

loan officer receives no other 

compensation that is included in points 

and fees under § 1026.32(b)(1)(ii). For 

purposes of calculating points and fees, 

the $3,000 origination fee is included in 

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

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and the $1,500 in loan officer 

compensation is included in points and 

fees under § 1026.32(b)(1)(ii), equaling 

$4,500 in total points and fees, provided 

that no other points and fees are paid or 

compensation received. 

Alternative 2 

iii. Creditor’s origination fees. Section 

1026.32(b)(1)(ii) requires a creditor to 

reduce the amount of loan originator 

compensation included in the points 

and fees calculation under 

§ 1026.32(b)(1)(ii) by any amount 

included in the points and fees 

calculation under § 1026.32(b)(1)(i). For 

example, assume that a consumer pays 

to the creditor a $3,000 origination fee 

and that the creditor pays to the loan 

originator $1,500 in compensation 

attributed to the transaction. Assume 

further that the consumer pays no other 

charges to the creditor that are included 

in points and fees under 

§ 1026.32(b)(1)(i) and the loan originator 

receives no other compensation that is 

included in points and fees under 

§ 1026.32(b)(1)(ii). For purposes of 

calculating points and fees, the $3,000 

origination fee is included in points and 

fees under § 1026.32(b)(1)(i), but the 

$1,500 in loan originator compensation 

need not be included in points and fees. 

If, however, the consumer pays to the 

creditor a $1,000 origination fee and the 

creditor pays to the loan originator 

$1,500 in compensation, then the $1,000 

origination fee is included in points and 

fees under § 1026.32(b)(1)(i), and $500 

of the loan originator compensation is 

included in points and fees under 

§ 1026.32(b)(1)(ii), equaling $1,500 in 

total points and fees, provided that no 

other points and fees are paid or 

compensation received. This example 

illustrates the requirements of 

§ 1026.32(b)(1)(ii) for both retail and 

wholesale transactions.fi 

* * * * * 

Section 1026.43—Minimum Standards 

for Transactions Secured by a Dwelling 

43(a) Scope 

* * * * * 

flParagraph 43(a)(3)(v)(D). 

1. General. An extension of credit is 

exempt from the requirements of 

§ 1026.43(c) through (f) if the credit is 

extended by a creditor described in 

§ 1026.43(a)(3)(v)(D), provided the 

conditions specified in that section are 

satisfied. The conditions specified in 

§ 1026.43(a)(3)(v)(D)(1) and (2) are 

determined according to activity that 

occurred in the calendar year preceding 

the calendar year in which the 

consumer’s application was received. 

Section 1026.43(a)(3)(v)(D)(2) provides 

that, during the preceding calendar year, 

the creditor must have extended credit 

only to consumers with income that did 

not exceed the qualifying limit then in 

effect for moderate income families, as 

specified in regulations prescribed by 

the U.S. Department of Housing and 

Urban Development pursuant to section 

8 of the United States Housing Act of 

1937. For example, a creditor has 

satisfied the requirement in 

§ 1026.43(a)(3)(v)(D)(2) if the creditor 

extended credit only to consumers with 

incomes that did not exceed the 

qualifying limit in effect on the dates 

the creditor received each consumer’s 

individual application. The condition 

specified in § 1026.43(a)(3)(v)(D)(3), 

which relates to the current extension of 

credit, provides that the extension of 

credit must be to a consumer with 

income that does not exceed the 

qualifying limit specified in 

§ 1026.43(a)(3)(v)(D)(2) in effect on the 

date the creditor received the 

consumer’s application. For example, 

assume that a creditor with a tax 

exemption ruling under section 

501(c)(3) of the Internal Revenue Code 

of 1986 has satisfied the conditions 

identified in § 1026.43(a)(3)(v)(D)(1) and 

(2). If, on May 21, 2014, the creditor in 

this example extends credit secured by 

a dwelling to a consumer whose 

application reflected income in excess 

of the qualifying limit identified in 

§ 1026.43(a)(3)(v)(D)(2) in effect on the 

date the creditor received that 

consumer’s application, the creditor has 

not satisfied the condition in 

§ 1026.43(a)(3)(v)(D)(3) and this 

extension of credit is not exempt from 

the requirements of § 1026.43(c) through 

(f). 

Paragraph 43(a)(3)(vi). 

1. General. The requirements of 

§ 1026.43(c) through (f) do not apply to 

a mortgage loan modification made in 

connection with a program authorized 

by sections 101 and 109 of the 

Emergency Economic Stabilization Act 

of 2008. If a creditor is underwriting an 

extension of credit that is a refinancing, 

as defined by § 1026.20(a), that will be 

made pursuant to a program authorized 

by sections 101 and 109 of the 

Emergency Economic Stabilization Act 

of 2008, the creditor also need not 

comply with § 1026.43(c) through (f). A 

creditor need not determine whether the 

mortgage loan modification is 

considered a refinancing under 

§ 1026.20(a) for purposes of determining 

applicability of § 1026.43; if the 

transaction is made in connection with 

these programs, the requirements of 

§ 1026.43(c) through (f) do not apply. In 

addition, if a creditor underwrites a new 

extension of credit, such as a 

subordinate-lien mortgage loan, that 

will be made pursuant to a program 

authorized by sections 101 and 109 of 

the Emergency Economic Stabilization 

Act of 2008, the creditor need not 

comply with the requirements of 

§ 1026.43(c) through (f). 

Paragraph 43(a)(3)(vii). 

1. General. The requirements of 

§ 1026.43(c) through (f) do not apply to 

an extension of credit that is a 

refinancing, as defined by § 1026.20(a) 

but without regard for whether the 

creditor is the creditor, holder, or 

servicer of the original obligation, that is 

eligible to be insured, guaranteed, or 

made pursuant to programs 

administered by the Federal agencies 

identified in § 1026.43(a)(3)(vii), 

provided that rules issued by such 

agencies pursuant to section 

129C(b)(3)(B)(ii) or 129C(a)(5) of TILA 

have not become effective on or before 

the date the refinancing is 

consummated. For example: 

i. Assume that a consumer applies for 

a refinancing that is eligible to be 

insured, guaranteed, or made pursuant 

to a program administered by the U.S. 

Department of Veterans Affairs. If the 

U.S. Department of Veterans Affairs has 

issued rules pursuant to TILA section 

129C(b)(3)(B)(ii) or 129C(a)(5) that have 

become effective, the exemption in 

§ 1026.43(a)(3)(vii) does not apply 

because those rules will separately 

govern the status of U.S. Department of 

Veterans Affairs loans. 

ii. Assume that a consumer applies for 

a refinancing of a subordinate-lien 

mortgage loan that is eligible to be 

insured, guaranteed, or made pursuant 

to a program administered by the U.S. 

Department of Veterans Affairs and the 

U.S. Department of Veterans Affairs has 

issued rules pursuant to TILA section 

129C(b)(3)(B)(ii) or 129C(a)(5) that have 

become effective. Assume further that 

such effective rules apply to 

refinancings of first-lien mortgage loans, 

but not subordinate-lien mortgage loans. 

The exemption in § 1026.43(a)(3)(vii) 

does not apply, regardless of the status 

of the particular loans under the rules 

issued, because the U.S. Department of 

Veterans Affairs has issued rules 

pursuant to TILA section 

129C(b)(3)(B)(ii) or 129C(a)(5) that have 

become effective. The exemption does 

not apply even if the applicability of 

such Federal agency rules is determined 

based on program type instead of loan 

type. Thus, the exemption in 

§ 1026.43(a)(3)(vii) does not apply even 

if the U.S. Department of Veterans 

Affairs rules do not apply to the 

particular U.S. Department of Veterans 

Affairs program under which the 

refinancing is eligible to be insured, 

guaranteed, or made. 

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iii. Assume that a consumer applies 

for a refinancing that is eligible to be 

insured, guaranteed, or made pursuant 

to a program administered by the 

Federal Housing Administration and the 

Federal Housing Administration has 

issued rules pursuant to TILA section 

129C(b)(3)(B)(ii) or 129C(a)(5) that have 

become effective. Assume further that 

the refinancing for which the consumer 

applies is also eligible to be insured, 

guaranteed, or made pursuant to a 

program administered by the U.S. 

Department of Agriculture, but the U.S. 

Department of Agriculture has not 

issued rules pursuant to TILA section 

129C(b)(3)(B)(ii) or 129C(a)(5), or the 

U.S. Department of Agriculture has 

issued rules implementing TILA section 

129C(b)(3)(B)(ii) or 129C(a)(5) that have 

not yet taken effect at the time the 

refinancing is consummated. The 

exemption applies to that refinancing 

because the refinancing is eligible to be 

to be insured, guaranteed, or made 

pursuant to a pursuant to program 

administered by a Federal agency 

identified in § 1026.43(a)(3)(vii), and 

such Federal agency has not issued 

rules pursuant to section 

129C(b)(3)(B)(ii) or 129C(a)(5) of TILA 

that have become effective. 

Paragraph 43(a)(3)(viii). 

1. General. Section 1026.43(a)(3)(viii) 

provides an exemption from the 

requirements of § 1026.43(c) through (f) 

for certain extensions of credit that are 

considered refinancings, as defined in 

§ 1026.20(a) but without regard for 

whether the creditor is the creditor, 

holder, or servicer of the original 

obligation, that are eligible for purchase 

or guarantee by Fannie Mae or Freddie 

Mac. The exemption provided by 

§ 1026.43(a)(3)(viii) is available only 

while these entities remain in 

conservatorship. For example, if Fannie 

Mae remains in conservatorship, but 

Freddie Mac exits conservatorship, the 

exemption continues to apply to 

refinancings that are eligible for 

purchase by Fannie Mae, provided the 

other conditions specified in 

§ 1026.43(a)(3)(viii) are met. Further, the 

exemption is available only if the 

existing obligation that will be satisfied 

and replaced by the refinancing was 

consummated prior to January 10, 2014. 

For example, if a consumer applies for 

an extension of credit that is a 

refinancing, as defined by § 1026.20(a), 

that is eligible to be purchased by 

Fannie Mae or Freddie Mac, but the 

consumer’s current mortgage loan was 

consummated on or after January 10, 

2014, the exemption provided by 

§ 1026.43(a)(3)(viii) does not apply.fi 

* * * * * 

43(e) Qualified mortgages. 

* * * * * 

flParagraph 43(e)(5). 

1. Satisfaction of qualified mortgage 

requirements. For a covered transaction 

to be a qualified mortgage under 

§ 1026.43(e)(5), the mortgage must 

satisfy the requirements for a qualified 

mortgage under § 1026.43(e)(2), other 

than the requirements regarding debt-toincome ratio. For example, a qualified 

mortgage under § 1026.43(e)(5) may not 

have a loan term in excess of 30 years 

because longer terms are prohibited for 

qualified mortgages under 

§ 1026.43(e)(2)(ii). Similarly, a qualified 

mortgage under § 1026.43(e)(5) may not 

result in a balloon payment because 

§ 1026.43(e)(2)(i)(C) provides that 

qualified mortgages may not have 

balloon payments except as provided 

under § 1026.43(f). However, a covered 

transaction need not comply with 

§ 1026.43(e)(2)(vi), which prohibits 

consumer monthly debt-to-income 

ratios in excess of 43 percent. A covered 

transaction therefore can be a qualified 

mortgage under § 1026.43(e)(5) even 

though the consumer’s monthly debt-toincome ratio is greater than 43 percent. 

2. Debt-to-income ratio or residual 

income. Section 1026.43(e)(5) does not 

prescribe a specific monthly debt-toincome ratio with which creditors must 

comply. Instead, creditors must 

consider a consumer’s debt-to-income 

ratio or residual income calculated 

generally in accordance with 

§ 1026.43(c)(7) and verify the 

information used to calculate the debtto-income ratio or residual income in 

accordance with § 1026.43(c)(3) and (4). 

However, § 1026.43(c)(7) refers creditors 

to § 1026.43(c)(5) for instructions on 

calculating the payment on the covered 

transaction. Section 1026.43(c)(5) 

requires creditors to calculate the 

payment differently than 

§ 1026.43(e)(2)(iv). For purposes of the 

qualified mortgage definition in 

§ 1026.43(e)(5), creditors must base their 

calculation of the consumer’s debt-toincome ratio or residual income on the 

payment on the covered transaction 

calculated according to 

§ 1026.43(e)(2)(iv) instead of according 

to § 1026.43(c)(5). Creditors are not 

required to calculate the consumer’s 

monthly debt-to-income ratio in 

accordance with appendix Q to this part 

as is required under the general 

definition of qualified mortgages by 

§ 1026.43(e)(2)(vi). 

3. Forward commitments. A creditor 

may make a mortgage loan that will be 

transferred or sold to a purchaser 

pursuant to an agreement that has been 

entered into at or before the time the 

transaction is consummated. Such an 

agreement is sometimes known as a 

‘‘forward commitment.’’ A mortgage that 

will be acquired by a purchaser 

pursuant to a forward commitment does 

not satisfy the requirements of 

§ 1026.43(e)(5), whether the forward 

commitment provides for the purchase 

and sale of the specific transaction or for 

the purchase and sale of transactions 

with certain prescribed criteria that the 

transaction meets. However, a forward 

commitment to another person that also 

meets the requirements of 

§ 1026.43(e)(5)(i)(D) is permitted. For 

example: assume a creditor that is 

eligible to make qualified mortgages 

under § 1026.43(e)(5) makes a mortgage. 

If that mortgage meets the purchase 

criteria of an investor with which the 

creditor has an agreement to sell loans 

after consummation, then the loan does 

not meet the definition of a qualified 

mortgage under § 1026.43(e)(5). 

However, if the investor meets the 

requirements of § 1026.43(e)(5)(i)(D), the 

mortgage will be a qualified mortgage if 

all other applicable criteria also are 

satisfied. 

4. Creditor qualifications. To be 

eligible to make qualified mortgages 

under § 1026.43(e)(5), a creditor must 

satisfy the requirements stated in 

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

1026.35(b)(2)(iii)(B) requires that, 

during the preceding calendar year, the 

creditor and its affiliates together 

originated 500 or fewer first-lien 

covered transactions. Section 

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

the end of the preceding calendar year, 

the creditor had total assets of less than 

$2 billion, adjusted annually by the 

Bureau for inflation. 

5. Requirement to hold in portfolio. 

Creditors generally must hold a loan in 

portfolio to maintain the transaction’s 

status as a qualified mortgage under 

§ 1026.43(e)(5), subject to four 

exceptions. Unless one of these 

exceptions applies, a loan is no longer 

a qualified mortgage under 

§ 1026.43(e)(5) once legal title to the 

debt obligation is sold, assigned, or 

otherwise transferred to another person. 

Accordingly, unless one of the 

exceptions applies, the transferee could 

not benefit from the presumption of 

compliance for qualified mortgages 

under § 1026.43(e)(1) unless the loan 

also met the requirements of another 

qualified mortgage definition. 

6. Application to subsequent 

transferees. The exceptions contained in 

§ 1026.43(e)(5)(ii) apply not only to an 

initial sale, assignment, or other transfer 

by the originating creditor but to 

subsequent sales, assignments, and 

other transfers as well. For example, 

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6672 Federal Register / Vol. 78, No. 20 / Wednesday, January 30, 2013 / Proposed Rules 

assume Creditor A originates a qualified 

mortgage under § 1026.43(e)(5). Six 

months after consummation, Creditor A 

sells the qualified mortgage to Creditor 

B pursuant to § 1026.43(e)(5)(ii)(B) and 

the loan retains its qualified mortgage 

status because Creditor B complies with 

the limits on asset size and number of 

transactions. If Creditor B sells the 

qualified mortgage, it will lose its 

qualified mortgage status under 

§ 1026.43(e)(5) unless the sale qualifies 

for one of the § 1026.43(e)(5)(ii) 

exceptions for sales three or more years 

after consummation, to another 

qualifying institution, as required by 

supervisory action, or pursuant to a 

merger or acquisition. 

7. Transfer three years after 

consummation. Under 

§ 1026.43(e)(5)(ii)(A), if a qualified 

mortgage under § 1026.43(e)(5) is sold, 

assigned, or otherwise transferred three 

years or more after consummation, the 

loan retains its status as a qualified 

mortgage under § 1026.43(e)(5) 

following the transfer. The transferee 

need not be eligible to originate 

qualified mortgages under 

§ 1026.43(e)(5). The loan will continue 

to be a qualified mortgage throughout its 

life, and the transferee, and any 

subsequent transferees, may invoke the 

presumption of compliance for qualified 

mortgages under § 1026.43(e)(1). 

8. Transfer to another qualifying 

creditor. Under § 1026.43(e)(5)(ii)(B), a 

qualified mortgage under § 1026.43(e)(5) 

may be sold, assigned, or otherwise 

transferred at any time to another 

creditor that meets the requirements of 

§ 1026.43(e)(5)(v). That section requires 

that a creditor, during the preceding 

calendar year, together with all 

affiliates, 500 or fewer first-lien covered 

transactions and had total assets less 

than $2 billion (as adjusted for inflation) 

at the end of the preceding calendar 

year. A qualified mortgage under 

§ 1026.43(e)(5) transferred to a creditor 

that meets these criteria would retain its 

qualified mortgage status even if it is 

transferred less than three years after 

consummation. 

9. Supervisory sales. Section 

1026.43(e)(5)(ii)(C) facilitates sales that 

are deemed necessary by supervisory 

agencies to revive troubled creditors and 

resolve failed creditors. A qualified 

mortgage under § 1026.43(e)(5) retains 

its qualified mortgage status if it is sold, 

assigned, or otherwise transferred to 

another person pursuant to: a capital 

restoration plan or other action under 12 

U.S.C. 1831o; the actions or instructions 

of any person acting as conservator, 

receiver or bankruptcy trustee; an order 

of a State or Federal government agency 

with jurisdiction to examine the creditor 

pursuant to State or Federal law; or an 

agreement between the creditor and 

such an agency. A qualified mortgage 

under § 1026.43(e)(5) that is sold, 

assigned, or otherwise transferred under 

these circumstances retains its qualified 

mortgage status regardless of how long 

after consummation it is sold and 

regardless of the size or other 

characteristics of the transferee. Section 

1026.43(e)(5)(ii)(C) does not apply to 

transfers done to comply with a 

generally applicable regulation with 

future effect designed to implement, 

interpret, or prescribe law or policy in 

the absence of a specific order by or a 

specific agreement with a governmental 

agency described in 

§ 1026.43(e)(5)(ii)(C) directing the sale 

of one or more qualified mortgages 

under § 1026.43(e)(5) held by the 

creditor or one of the other 

circumstances listed in 

§ 1026.43(e)(5)(ii)(C). For example, a 

qualified mortgage under § 1026.43(e)(5) 

that is sold pursuant to a capital 

restoration plan under 12 U.S.C. 1831o 

would retain its status as a qualified 

mortgage following the sale. However, if 

the creditor simply chose to sell the 

same qualified mortgage as one way to 

comply with general regulatory capital 

requirements in the absence of 

supervisory action or agreement it 

would lose its status as a qualified 

mortgage following the sale unless it 

qualifies under another definition of 

qualified mortgage. 

10. Mergers and acquisitions. A 

qualified mortgage under § 1026.43(e)(5) 

retains its qualified mortgage status if a 

creditor merges with, is acquired by, or 

acquires another person regardless of 

whether the creditor or its successor is 

eligible to originate new qualified 

mortgages under § 1026.43(e)(5) after the 

merger or acquisition. However, the 

creditor or its successor can originate 

new qualified mortgages under 

§ 1026.43(e)(5) only if it complies with 

all of the requirements of § 1026.43(e)(5) 

after the merger or acquisition. For 

example, assume a creditor that 

originates 250 covered transactions each 

year and originates qualified mortgages 

under § 1026.43(e)(5) is acquired by a 

larger creditor that originates 10,000 

covered transactions each year. 

Following the acquisition, the small 

creditor would no longer be able to 

originate § 1026.43(e)(5) qualified 

mortgages because, together with its 

affiliates, it would originate more than 

500 covered transactions each year. 

However, the § 1026.43(e)(5) qualified 

mortgages originated by the small 

creditor before the acquisition would 

retain their qualified mortgage status. fi 

Dated: January 10, 2013. 

Richard Cordray, 

Director, Bureau of Consumer Financial 

Protection. 

[FR Doc. 2013–00739 Filed 1–16–13; 11:15 am] 

BILLING CODE 4810–AM–P 

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