Vol. 78 Wednesday, 

No. 142 July 24, 2013 

Part III 

Bureau of Consumer Financial Protection 

12 CFR Parts 1024 and 1026 

Amendments to the 2013 Mortgage Rules Under the Real Estate 

Settlement Procedures Act (Regulation X) and the Truth in Lending Act 

(Regulation Z); Final Rule 


emcdonald on DSK67QTVN1PROD with RULES3
44686 Federal Register / Vol. 78, No. 142 / Wednesday, July 24, 2013 / Rules and Regulations 

1Ability-to-Repay and Qualified Mortgage 

Standards Under the Truth in Lending Act 

(Regulation Z) (2013 ATR Final Rule), 78 FR 6407 

(Jan. 30, 2013). 

2Mortgage Servicing Rules Under the Real Estate 

Settlement Procedures Act (Regulation X) (2013 

RESPA Servicing Final Rule) and Mortgage 

Servicing Rules Under the Truth in Lending Act 

(Regulation Z) (2013 TILA Servicing Final Rule) 

(together, 2013 Mortgage Servicing Final Rules), 78 

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

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

3Amendments to the 2013 Escrows Final Rule 

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

FR 30739 (May 23, 2013). Those amendments 

revised 78 FR 4726 (Jan. 22, 2013) (2013 Escrows 

Final Rule). 

4 78 FR 30739 (May 23, 2013). 

BUREAU OF CONSUMER FINANCIAL 

PROTECTION 

12 CFR Parts 1024 and 1026 

[Docket No. CFPB–2013–0010] 

RIN 3170–AA37 

Amendments to the 2013 Mortgage 

Rules Under the Real Estate 

Settlement Procedures Act (Regulation 

X) and the Truth in Lending Act 

(Regulation Z) 

AGENCY: Bureau of Consumer Financial 

Protection. 

ACTION: Final rule; official 

interpretations. 

SUMMARY: This rule amends some of the 

final mortgage rules issued by the 

Bureau of Consumer Financial 

Protection (Bureau) in January of 2013. 

These amendments clarify, correct, or 

amend provisions on the relation to 

State law of Regulation X’s servicing 

provisions; implementation dates for 

adjustable-rate mortgage servicing; 

exclusions from requirements on higherpriced mortgage loans; the small 

servicer exemption from certain 

servicing rules; the use of governmentsponsored enterprise and Federal 

agency purchase, guarantee or insurance 

eligibility for determining qualified 

mortgage status; and the determination 

of debt and income for purposes of 

originating qualified mortgages. 

DATES: This rule is effective January 10, 

2014, except for the amendment to 

§ 1026.35(e), which is effective July 24, 

2013. See part V, Effective Date, in 

SUPPLEMENTARY INFORMATION. 

FOR FURTHER INFORMATION CONTACT: 

Marta Tanenhaus, Senior Counsel, Paul 

Ceja, Senior Counsel and Special 

Advisor; Joseph Devlin, Counsel; Office 

of Regulations, at (202) 435–7700. 

SUPPLEMENTARY INFORMATION: 

I. Summary of Final Rule 

In January 2013, the Bureau issued 

several final rules concerning mortgage 

markets in the United States (2013 Title 

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

Protection Act (Dodd-Frank Act). Public 

Law 111–203, 124 Stat. 1376 (2010). On 

January 10, 2013, the Bureau issued the 

2013 ATR Final Rule; 1 on January 17, 

2013, the Bureau issued the 2013 

Mortgage Servicing Final Rules; 2 and on 

May 16, 2013, the Bureau issued 

Amendments to the 2013 Escrows Final 

Rule.3 This final rule makes several 

amendments to those rules. These 

amendments clarify, correct, or amend 

provisions on (1) the relation to State 

law of Regulation X’s servicing 

provisions; (2) implementation dates for 

adjustable-rate mortgage disclosures; (3) 

exclusions from the repayment ability 

and prepayment penalty requirements 

for higher-priced mortgage loans 

(HPMLs); (4) the small servicer 

exemption from certain of the new 

servicing rules; (5) the use of 

government-sponsored enterprise (GSE) 

and Federal agency purchase, guarantee 

or insurance eligibility for determining 

qualified mortgage (QM) status; and (6) 

the determination of debt and income 

for purposes of originating QMs. In 

addition to these six revisions and 

clarifications, which are discussed more 

fully below, the Bureau is making 

certain technical corrections to the 

regulations with no substantive change 

intended. 

First, the Bureau is amending the 

commentary to the preemption 

provision of Regulation X to clarify that 

the regulation does not occupy the field 

of regulation of the practices covered by 

the Real Estate Settlement Procedures 

Act (RESPA) or Regulation X, including 

with respect to mortgage servicers or 

mortgage servicing. The rule also 

redesignates the Regulation X 

preemption provision, § 1024.13, as 

§ 1024.5(c). 

Second, in response to industry 

requests, the Bureau is providing 

clarification of the implementation 

dates for adjustable-rate mortgage 

provisions § 1026.20(c) and (d) of the 

2013 TILA Servicing Final Rule. This 

clarification is provided in the sectionby-section analysis and does not revise 

the 2013 TILA Servicing Final Rule or 

its official commentary. 

Third, the Bureau is revising 

§ 1026.35(e) of Regulation Z, as 

amended by the Amendments to the 

2013 Escrows Final Rule,4 to clarify that 

construction and bridge loans and 

reverse mortgages are not subject to its 

requirements regarding repayment 

abilities and prepayment penalties for 

HPMLs. 

Fourth, the Bureau is clarifying the 

scope and application of the exemption 

for small servicers that is set forth in 

Regulation Z’s periodic statement 

provision, § 1026.41, and incorporated 

by cross-reference in certain provisions 

of Regulation X. The rule clarifies which 

mortgage loans to consider in 

determining small servicer status and 

the application of the small servicer 

exemption with regard to servicer/ 

affiliate and master servicer/subservicer 

relationships. Further, the rule provides 

that three types of mortgage loans will 

not be considered in determining small 

servicer status: mortgage loans 

voluntarily serviced for an unaffiliated 

entity without remuneration, reverse 

mortgages, and mortgage loans secured 

by a consumer’s interest in timeshare 

plans. 

Fifth, the Bureau is revising 

regulatory text and an official 

interpretation adopted in the 2013 ATR 

Final Rule and adding a new official 

interpretation to describe qualified 

mortgages that are entitled to a 

presumption of compliance with the 

ability-to-repay requirements under the 

Dodd-Frank Act. Specifically, the 

Bureau is providing clarifications with 

regard to § 1026.43(e)(4), which allows 

qualified mortgage status to certain 

loans that are eligible for purchase, 

guarantee, or insurance by the GSEs or 

federal agencies. Section 

1026.43(e)(4)(ii)(A)–(E) is amended to 

make clear that matters wholly 

unrelated to ability to repay will not be 

relevant to determination of QM status 

under this provision. Comment 

43(e)(4)–4 explains that matters wholly 

unrelated to ability to repay are those 

matters that are wholly unrelated to 

credit risk or the underwriting of the 

loan. Comment 43(e)(4)–4 also clarifies 

the standards a creditor must meet 

when relying on a written guide or an 

automated underwriting system to 

determine qualified mortgage status 

under § 1026.43(e)(4). In addition, the 

revised comment specifies that a 

creditor relying on approval through an 

automated underwriting system to 

establish qualified mortgage status must 

also meet the conditions on approval 

that are generated by that same system. 

The Bureau is also revising comment 

43(e)(4)–4 to clarify that a loan meeting 

eligibility requirements provided in a 

written agreement with one of the GSEs, 

HUD, VA, USDA, or RHS is also eligible 

for purchase or guarantee by the GSEs 

or insured or guaranteed by the agencies 

for the purposes of § 1026.43(e)(4). In 

addition, the comment has been 

clarified to provide that loans receiving 

individual waivers from GSEs or 

agencies will be considered eligible as 


emcdonald on DSK67QTVN1PROD with RULES3
Federal Register / Vol. 78, No. 142 / Wednesday, July 24, 2013 / Rules and Regulations 44687 

5Sections 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. 

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

note. 

7 78 FR 4726 (Jan. 22, 2013). 

8 78 FR 6855 (Jan. 31, 2013). 

9 78 FR 10367 (Feb. 13, 2013). 

10 78 FR 7215 (Jan. 31, 2013). 

11 78 FR 11279 (Feb. 15, 2013). 

12 78 FR 6622 (Jan. 30, 2013). 13 78 FR 35429 (Jun. 12, 2013). 14Consumer Financial Protection Bureau Lays 

Out Implementation Plan for New Mortgage Rules. 

Press Release. Feb. 13, 2013. 15 78 FR 30739 (May 23, 2013). 

well. Thus, such loans could be 

qualified mortgages. 

The Bureau is also issuing new 

comment 43(e)(4)–5, which provides 

that a repurchase or indemnification 

demand by the GSEs, HUD, VA, USDA, 

or RHS is not dispositive for 

ascertaining qualified mortgage status. 

The comment provides two examples to 

illustrate the application of this 

guidance. 

Sixth, the Bureau is amending 

appendix Q of Regulation Z to facilitate 

compliance and ensure access to credit 

by assisting creditors in determining a 

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

for the purposes of § 1026.43(e)(2), the 

primary qualified mortgage provision. 

The Bureau is making changes to 

address compliance challenges raised by 

stakeholders, as well as technical and 

wording changes for clarification 

purposes. The Bureau’s revisions 

include clarifications to appendix Q on: 

(1) Stability of income, and the creditor 

requirement to evaluate the probability 

of the consumer’s continued 

employment; (2) with regard to salary, 

wage, and other forms of consumer 

income, the creditor requirement to 

determine whether the consumer’s 

income level can reasonably be 

expected to continue; (3) creditor 

analysis of consumer overtime and 

bonus income; (4) creditor analysis of 

consumer Social Security income; (5) 

requirements related to the analysis of 

self-employed consumer income; (6) 

requirements related to nonemployment related consumer income, 

including creditor analysis of consumer 

trust income; and (7) creditor analysis of 

rental income. The Bureau is also 

revising the introduction to appendix Q 

to make clear that creditors may refer to 

other federal agency and GSE guidance 

that is in accordance with appendix Q 

as a resource, and to provide default 

rules and an optional safe harbor when 

appendix Q’s standards do not 

otherwise resolve how to treat a 

particular type of debt or income. 

II. Background 

A. Title XIV Rulemakings Under the 

Dodd-Frank Act 

In response to an unprecedented cycle 

of expansion and contraction in the 

mortgage market that sparked the most 

severe U.S. recession since the Great 

Depression, Congress passed the DoddFrank Act, which was signed into law 

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

Congress established the Bureau and, 

under sections 1061 and 1100A, 

generally consolidated the rulemaking 

authority for Federal consumer financial 

laws, including the Truth in Lending 

Act (TILA) and RESPA, in the Bureau.5

At the same time, Congress significantly 

amended the statutory requirements 

governing mortgage practices with the 

intent to restrict the practices that 

contributed to and exacerbated the 

crisis. Under the statute, most of these 

new requirements would have taken 

effect automatically on January 21, 

2013, if the Bureau had not issued 

implementing regulations by that date.6

To avoid uncertainty and potential 

disruption in the national mortgage 

market at a time of economic 

vulnerability, the Bureau issued several 

final rules in a span of less than two 

weeks in January 2013 to implement 

these new statutory provisions and 

provide for an orderly transition. 

On January 10, 2013, the Bureau 

issued the 2013 ATR Final Rule, Escrow 

Requirements Under the Truth in 

Lending Act (Regulation Z) (2013 

Escrows Final Rule),7 and High-Cost 

Mortgages and Homeownership 

Counseling Amendments to the Truth in 

Lending Act (Regulation Z) and 

Homeownership Counseling 

Amendments to the Real Estate 

Settlement Procedures Act (Regulation 

X) (2013 HOEPA Final Rule).8 On 

January 17, 2013, the Bureau issued the 

2013 Mortgage Servicing Final Rules. 

On January 18, 2013, the Bureau issued 

Appraisals for Higher-Priced Mortgage 

Loans (Regulation Z) 9 (issued jointly 

with other agencies) and Disclosure and 

Delivery Requirements for Copies of 

Appraisals and Other Written 

Valuations Under the Equal Credit 

Opportunity Act (Regulation B) (2013 

Appraisals Final Rule).10 On January 20, 

2013, the Bureau issued Loan Originator 

Compensation Requirements Under the 

Truth in Lending Act (Regulation Z) 

(2013 Loan Originator Final Rule).11

Most of these rules will become 

effective on January 10, 2014. 

Concurrent with the 2013 ATR Final 

Rule, on January 10, 2013, the Bureau 

issued Proposed Amendments to the 

Ability-to-Repay Standards Under the 

Truth in Lending Act (Regulation Z) 

(2013 ATR Concurrent Proposal).12 This 

proposal has now been made final (May 

2013 ATR Final Rule).13 The May 2013 

ATR Final Rule provides exemptions for 

creditors with certain designations, 

loans pursuant to certain programs, 

certain nonprofit creditors, and 

mortgage loans made in connection with 

certain Federal emergency economic 

stabilization programs. The final rule 

also provides an additional definition of 

a qualified mortgage for certain loans 

made and held in portfolio by small 

creditors and a temporary definition of 

a qualified mortgage for balloon loans. 

Finally, the May 2013 ATR Final Rule 

modifies the requirements regarding the 

inclusion of loan originator 

compensation in the points and fees 

calculation. 

B. Implementation Initiative for New 

Mortgage Rules 

On February 13, 2013, the Bureau 

announced an initiative to support 

implementation of its new mortgage 

rules (Implementation Plan),14 under 

which the Bureau would work with the 

mortgage industry and other 

stakeholders to ensure that the new 

rules can be implemented accurately 

and expeditiously. The Implementation 

Plan included (1) coordination with 

other agencies; (2) publication of plainlanguage guides to the new rules; (3) 

publication of additional corrections 

and clarifications of the new rules, as 

needed; (4) publication of readiness 

guides for the new rules; and (5) 

education of consumers on the new 

rules. 

This final rule is the third final rule 

providing additional revisions and 

clarifications of and amendments to the 

2013 Title XIV Final Rules. In addition, 

the Bureau issued a proposed rule with 

further revisions and clarifications of 

and amendments to several of the 2013 

Title XIV Final Rules on June 24, 2013. 

The purpose of these updates is to 

address important questions raised by 

industry, consumer groups, or other 

agencies. Priority for these updates is 

given to issues that are important to a 

large number of stakeholders and that 

critically affect mortgage companies’ 

implementation decisions. Previously, 

the Bureau issued a final rule 15

providing corrections and clarifications 

of its 2013 Escrows Final Rule, and a 

final rule delaying the effective date for 

a provision related to credit insurance 


emcdonald on DSK67QTVN1PROD with RULES3
44688 Federal Register / Vol. 78, No. 142 / Wednesday, July 24, 2013 / Rules and Regulations 

16 78 FR 39902 (July 2, 2013). 

17 78 FR 25638 (May 2, 2013). 

18 12 U.S.C. 5581(a)(1). 

19Public Law 111–203, 124 Stat. 1376, section 

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

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

5481(14) (defining ‘‘Federal consumer financial 

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

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

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

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

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

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

laws’’ to include certain subtitles and provisions of 

Title XIV). 

financing in the 2013 Loan Originator 

Final Rule. On June 24, 2013, the 

Bureau issued additional proposed 

clarifications 16 to several of the new 

mortgage rules, including the servicing 

rules touched on here and the 2013 

Loan Originator Final Rule. The Bureau 

expects to review the comments 

received and finalize that proposal later 

this summer. Going forward, the Bureau 

will continue to assess whether 

additional clarifications or revisions are 

warranted. 

Comments on the Proposed Rule 

The Bureau received 73 comments on 

the proposed rule 17 on which this final 

rule is based. Many of these comments 

discussed issues that the proposed rule 

did not touch upon such as disparate 

impact in regard to fair lending 

enforcement, calculation methods for 

residual income, and whether or not the 

special QM provision at § 1026.43(e)(4) 

should be eliminated before the rule 

goes into effect. The Bureau notes that 

it would be inconsistent with the 

Administrative Procedure Act (APA) to 

make changes outside the scope of the 

proposal because the other commenters 

and the public would not have notice 

and opportunity to comment. In 

addition, these regulatory updates are 

intended to focus on specific narrow 

implementation issues, and broader 

policy changes would not be 

appropriate as part of this process. 

The Bureau has examined all 

comments submitted and will discuss 

those that were responsive to the 

proposal in the section-by-section 

analysis below. 

III. Legal Authority 

The Bureau is issuing this final rule 

pursuant to its authority under RESPA, 

TILA, and the Dodd-Frank Act. Section 

1061 of the Dodd-Frank Act transferred 

to the Bureau the ‘‘consumer financial 

protection functions’’ previously vested 

in certain other Federal agencies, 

including the Federal Reserve Board 

(Board). The term ‘‘consumer financial 

protection function’’ is defined to 

include ‘‘all authority to prescribe rules 

or issue orders or guidelines pursuant to 

any Federal consumer financial law, 

including performing appropriate 

functions to promulgate and review 

such rules, orders, and guidelines.’’ 18

Section 1061 of the Dodd-Frank Act also 

transferred to the Bureau all of HUD’s 

consumer protection functions relating 

to RESPA.19 Title X of the Dodd-Frank 

Act, including section 1061, along with 

RESPA, TILA, and certain subtitles and 

provisions of title XIV of the DoddFrank Act are Federal consumer 

financial laws.20

A. RESPA 

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

2617(a), authorizes the Bureau to 

prescribe such rules and regulations, to 

make such interpretations, and to grant 

such reasonable exemptions for classes 

of transactions, as may be necessary to 

achieve the purposes of RESPA, which 

include its consumer protection 

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

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

the Bureau to establish any 

requirements necessary to carry out 

section 6 of RESPA, and section 

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

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

prescribe regulations that are 

appropriate to carry out RESPA’s 

consumer protection purposes. As 

identified in the 2013 RESPA Servicing 

Final Rule, the consumer protection 

purposes of RESPA include responding 

to borrower requests and complaints in 

a timely manner, maintaining and 

providing accurate information, helping 

borrowers avoid unwarranted or 

unnecessary costs and fees, and 

facilitating review for foreclosure 

avoidance options. 

B. TILA 

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

1604(a), authorizes the Bureau to 

prescribe regulations to carry out the 

purposes of TILA. Under 105(a) such 

regulations may contain such additional 

requirements, classifications, 

differentiations, or other provisions, and 

may provide for such adjustments and 

exceptions for all or any class of 

transactions, as in the judgment of the 

Bureau are necessary or proper to 

effectuate the purposes of TILA, to 

prevent circumvention or evasion 

thereof, or to facilitate compliance 

therewith. A purpose of TILA is ‘‘to 

assure a meaningful disclosure of credit 

terms so that the consumer will be able 

to compare more readily the various 

credit terms available to him and avoid 

the uninformed use of credit.’’ TILA 

section 102(a), 15 U.S.C. 1601(a). In 

particular, it is a 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. 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. Accordingly, 

the Bureau has authority to issue 

regulations pursuant to title X as well as 

RESPA and TILA, as amended by title 

XIV. 

In addition, to constitute a qualified 

mortgage a loan must meet ‘‘any 

guidelines or regulations established by 

the Bureau relating to ratios of total 

monthly debt to monthly income or 

alternative measures of ability to pay 

regular expenses after payment of total 

monthly debt, taking into account the 

income levels of the borrower and such 

other factors as the Bureau may 

determine are relevant and consistent 

with the purposes described in [TILA 

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

Frank Act also provides the Bureau with 

authority to prescribe regulations that 

revise, add to, or subtract from the 

criteria that define a qualified mortgage 

upon a finding that such regulations are 

necessary or proper to ensure that 

responsible, affordable mortgage credit 

remains available to consumers in a 

manner consistent with the purposes of 

the ability-to-repay requirements; or are 

necessary and appropriate to effectuate 

the purposes of the ability-to-repay 

requirements, to prevent circumvention 

or evasion thereof, or to facilitate 

compliance with TILA sections 129B 

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

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

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

Bureau with authority to prescribe 

regulations to carry out the purposes of 

the qualified mortgage provisions, such 

as to ensure that responsible and 

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

C. The Dodd-Frank Act 

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

Act authorizes the Bureau to prescribe 

rules ‘‘as may be necessary or 

appropriate to enable the Bureau to 

administer and carry out the purposes 

and objectives of the Federal consumer 

financial laws, and to prevent evasions 


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Federal Register / Vol. 78, No. 142 / Wednesday, July 24, 2013 / Rules and Regulations 44689 

21 78 FR 6408 (Jan. 30, 2013). 

22 78 FR 10902 (Feb. 14, 2013). 

23 78 FR 10696 (Feb. 14, 2013). 

24 78 FR 4726 (Jan. 22, 2013). 

25 78 FR 30739 (May 23, 2013). 

26 78 FR 10706 (Feb. 14, 2013). 

27 Id. (specifically identifying the National 

Mortgage Settlement and the California Homeowner 

Bill of Rights). 

thereof.’’ 12 U.S.C. 5512(b)(1). Title X of 

the Dodd-Frank Act is a Federal 

consumer financial law. Accordingly, 

the Bureau is exercising its authority 

under the Dodd-Frank Act section 

1022(b) to prescribe rules that carry out 

the purposes and objectives of title X, as 

well as of RESPA, TILA, and the 

enumerated subtitles and provisions of 

title XIV of the Dodd-Frank Act, and to 

prevent evasion of those laws. 

The Bureau is amending certain rules 

finalized in January, 2013, that 

implement a number of Dodd-Frank Act 

provisions. In particular, the Bureau is 

clarifying or amending regulatory 

provisions and associated commentary 

adopted by the 2013 ATR Final Rule,21

the 2013 TILA Servicing Final Rule,22

the 2013 RESPA Servicing Final Rule,23

and the 2013 Escrows Final Rule 24 as 

amended by the 2013 Amendments to 

the 2013 Escrows Final Rule.25

IV. Section-by-Section Analysis 

A. Regulation X 

Subpart A—General Provisions 

The Bureau proposed a technical 

amendment to the heading for Subpart 

A of Regulation X from ‘‘Subpart A— 

General’’ to ‘‘Subpart A—General 

Provisions’’ to conform the heading in 

the text of the regulation to the heading 

set forth in the corresponding 

commentary. No comments were 

received on this change, and it is 

adopted as proposed. 

Section 1024.5 Coverage of RESPA 

The Proposal 

The Bureau proposed to redesignate 

§ 1024.13 as § 1024.5(c). Section 

1024.13, ‘‘Relation to State laws,’’ sets 

forth rules regarding the relationship of 

the requirements in RESPA and 

Regulation X to requirements 

established pursuant to State law. In the 

2013 RESPA Servicing Final Rule, the 

Bureau divided Regulation X into 

subparts and § 1024.13 was located in 

new ‘‘Subpart B—Mortgage Settlement 

and Escrow Accounts.’’ However, the 

provisions of § 1024.13(a) are intended 

to apply with respect to all of 

Regulation X. Because § 1024.13 applies 

for all sections of Regulation X, the 

Bureau proposed to redesignate 

§ 1024.13 as § 1024.5(c), located within 

‘‘Subpart A—General Provisions.’’ 

Further, the Bureau proposed to remove 

and reserve § 1024.13. 

The Bureau further proposed to add 

commentary for proposed § 1024.5(c) to 

make clear that Regulation X does not 

create field preemption. Since issuing 

the 2013 RESPA Servicing Final Rule, 

the Bureau had received inquiries as to 

whether Regulation X’s mortgage 

servicing rules result in preemption of 

the field of mortgage servicing 

regulation. The Bureau had addressed 

this question in the preamble to the 

final rule, stating that ‘‘the Final 

Servicing Rules generally do not have 

the effect of prohibiting State law from 

affording borrowers broader consumer 

protection relating to mortgage servicing 

than those conferred under the Final 

Servicing Rules.’’ 26 The preamble 

further stated that, although ‘‘in certain 

circumstances, the effect of specific 

requirements of the Final Servicing 

Rules is to preempt certain limited 

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

Bureau explicitly took into account 

existing standards (both State and 

Federal) and either built in flexibility or 

designed its rules to coexist with those 

standards.’’ 27

Because the Bureau continued to 

receive questions on this issue, the 

Bureau believed it was appropriate to 

propose commentary to clarify the scope 

of proposed § 1024.5(c) and expressly 

address concerns about field 

preemption. Consistent with the 

preamble to the 2013 RESPA Servicing 

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

1 stated that State laws that are in 

conflict with the requirements of RESPA 

or Regulation X may be preempted by 

RESPA and Regulation X. Proposed 

comment 5(c)(1)–1 stated further that 

nothing in RESPA or Regulation X, 

including the provisions in subpart C 

with respect to mortgage servicers or 

mortgage servicing, should be construed 

to preempt the entire field of regulation 

of the covered practices. This proposed 

addition to the commentary was meant 

to clarify that RESPA and Regulation X 

do not effectuate field preemption of 

States’ regulation of mortgage servicers 

or mortgage servicing. The comment 

also made clear that RESPA and 

Regulation X do not preempt State laws 

that give greater protection to 

consumers than do these federal laws. 

The Bureau requested comment 

regarding the addition of the proposed 

commentary, including whether further 

clarification regarding the preemption 

effects of RESPA and Regulation X was 

necessary or appropriate. 

Comments 

Numerous consumer and community 

groups provided similar comments 

supporting the proposed changes to the 

Regulation X preemption provision. 

These commenters supported the 

relocation of the preemption provision 

to § 1024.5(c) in the General Provisions 

subpart and the addition of comment 

5(c)(1)–1. Many of these consumer and 

community groups further suggested 

that the regulatory text itself be changed 

to replace the phrase ‘‘settlement 

practices’’ with language more clearly 

inclusive of servicing activities. Several 

also requested that an example be 

included with comment 5(c)(1)–1 

showing that a state law more protective 

of consumers will not be preempted by 

Regulation X. 

Two industry commenters supported 

the proposed changes to the Regulation 

X preemption provision. One trade 

association suggested that the Bureau 

should promote uniform servicing 

standards to help create certainty in the 

market. Another industry commenter 

stated that the current regulation 

covered the situation sufficiently and 

the proposed guidance was 

unnecessary. 

Two trade associations stated that the 

Bureau was narrowing the existing 

preemption provision to reduce the 

likelihood of preemption. One opposed 

the idea that state laws more protective 

of consumers are not preempted, and so 

opposed the inclusion of the comment. 

The other stated that the preemption 

provision for mortgage servicing 

transfers functions statutorily as a 

general preemption of mortgage 

servicing. 

Several industry commenters pointed 

out that the statute and regulation use 

the word ‘‘inconsistent’’ when 

explaining which state laws may be 

preempted, while the proposed 

comment uses the more common term 

‘‘conflict’’ to describe the situation. 

They suggested that the comment also 

use the term ‘‘inconsistent’’ to avoid 

confusion. 

Final Rule 

The relocation of the preemption 

provision and the guidance in proposed 

comment 5(c)(1)–1 were not intended to 

change the current preemption regime 

under Regulation X and the Bureau does 

not believe that they do so. The 

sentence in the regulation that 

consumer and community groups urged 

the Bureau to change simply replicates 

text in RESPA section 18. Therefore the 

Bureau does not believe that a change to 

that sentence would be appropriate. 

Comment 5(c)(1)–1 provides the 


emcdonald on DSK67QTVN1PROD with RULES3
44690 Federal Register / Vol. 78, No. 142 / Wednesday, July 24, 2013 / Rules and Regulations 

28 78 FR 30739 (May 23, 2013). 

29 Id. 

30 78 FR 4726 (Jan. 22, 2013). 

31See § 1026.35(c)(2) of the 2013 TILA Appraisals 

Rule, 78 FR 10368 (Feb. 13, 2013) (which was 

adopted by the Bureau, together with several other 

Federal agencies, as an inter-agency rulemaking); 

§ 1026.35(b)(2) of the 2013 Escrows Final Rule, 78 

FR 4727 (Jan. 22, 2013); § 1026.43(a) of the 2013 

ATR Final Rule, 78 FR 6408 (Jan. 30, 2013); and 

§ 1026.32(a) of the 2013 HOEPA Final Rule, 78 FR 

6856 (Jan. 31, 2013). 

32 78 FR 30739 (May 23, 2013). 

33 78 FR 6408 (Jan. 30, 2013); 78 FR 6856 (Jan. 

31, 2013), respectively. 

Bureau’s official interpretation of that 

regulatory language. As stated in the 

proposal, the Bureau believes that the 

relocation of the preemption provision 

and the addition of the comment are 

necessary and appropriate to eliminate 

any confusion as to how the preemption 

provision operates. In addition, the 

Bureau believes that the comment is 

sufficiently clear and does not consider 

an example to be necessary. 

The final rule adopts the amendments 

as proposed, but changes the word 

‘‘conflict’’ in the comment to 

‘‘inconsistent’’ to avoid confusion. 

B. Regulation Z 

Section 1026.20 Disclosure 

Requirements Regarding PostConsummation Events 

20(c) Rate Adjustments With a 

Corresponding Change in Payment 

20(d) Initial Rate Adjustment 

Implementation Date. In its proposal, 

the Bureau did not seek to revise or 

clarify § 1026.20(c) and (d), the 

adjustable-rate mortgage (ARM) 

servicing regulations issued by the 

Bureau in the 2013 TILA Servicing Final 

Rule. Nevertheless, the Bureau received 

unsolicited queries regarding the 

implementation dates for these rules. 

Despite the unsolicited nature of these 

comments, the Bureau believes it would 

be helpful to clarify the ARM 

implementation dates. 

ARM regulations § 1026.20(c) and (d) 

generally apply to ARMs originated both 

prior to and after the January 10, 2014, 

effective date. However, no servicer is 

required to comply with the rule until 

the effective date. 

Implementation Date for § 1026.20(d). 

Because the notice required by 

§ 1026.20(d) must be provided to the 

consumer between 210 and 240 days 

before the first payment is due after the 

initial interest rate adjustment, servicers 

will not be required to provide the 

§ 1026.20(d) notice when such payment 

is due 209 or fewer days from the 

effective date. However, payments due 

210 or more days from the effective date 

are subject to the rule. 

Implementation Date for § 1026.20(c). 

Because the notice required by 

§ 1026.20(c) must be provided to the 

consumer between 60 and 120 days 

before the first payment is due after an 

interest rate adjustment causing a 

corresponding change in payment, 

servicers will not be required to provide 

the § 1026.20(c) notice when such 

payment is due 25 to 59 days from the 

effective date. Note that, under the time 

frame of current § 1026.20(c), notices are 

required 25 to 120 days before the first 

payment is due after the interest rate 

adjustment. Thus, servicers already will 

have provided the § 1026.20(c) notices 

required by the current rule when such 

payment is due 24 or fewer days from 

the January 10, 2014, effective date. 

Section 1026.35 Requirements for 

Higher-Priced Mortgage Loans 

35(e) Repayment Ability, Prepayment 

Penalties 

The Bureau is concerned that its 

recently published Amendments to the 

2013 Escrows Final Rule 28 requiring 

industry to comply with certain 

provisions regarding repayment ability 

and prepayment penalties for HPMLs 

could be interpreted as requiring that 

certain transactions excluded from such 

requirements are now subject to those 

requirements. The Bureau believes that 

the amendments, properly understood, 

continue the exclusion for such 

transactions from the requirements. To 

provide certainty, the Bureau is revising 

§ 1026.35(e) 29 to explicitly exclude 

from coverage construction and bridge 

loans and reverse mortgages—loans that 

were previously explicitly excluded 

from such requirements, as discussed 

below. 

In January 2013, the Bureau issued 

the 2013 Escrows Final Rule,30 which 

implements certain provisions of the 

Dodd-Frank Act relating to escrow 

accounts. That final rule revised the 

definition of ‘‘higher-priced mortgage 

loan’’ in 12 CFR 1026.35(a) by removing 

certain exclusions from the scope of 

consumer credit transactions that may 

be HPMLs. The loans no longer 

excluded from the definition of HPML 

are: Transactions to finance the initial 

construction of a dwelling (construction 

loans); temporary or ‘‘bridge loans’’ with 

a terms of twelve months or less, such 

as a loan to purchase a new dwelling 

where the consumer plans to sell a 

current dwelling within twelve months 

(bridge loans); and reverse mortgages 

subject to § 1026.33 (reverse mortgages). 

The Bureau removed these exclusions 

from the general definition of HPML 

and located them directly into the 

individual provisions regarding 

appraisal, escrow, ability to repay, and 

prepayment penalty requirements for 

HPMLs.31

Since adopting the above-referenced 

rules, the Bureau adopted Amendments 

to the 2013 Escrows Final Rule 32 to 

prevent the inadvertent and temporary 

elimination of certain consumer 

protections for HPMLs concerning 

ability to repay and prepayment 

penalties that were codified in 12 CFR 

1026.35(b) prior to June 1, 2013. The 

2013 Escrows Final Rule took effect 

June 1, 2013, while the 2013 ATR and 

HOEPA Final Rules 33 do not take effect 

until January 10, 2014. Consequently, 

the existing ability-to-repay and 

prepayment penalty protections for 

HPMLs would have been removed, 

pursuant to the 2013 Escrows Final 

Rule, over seven months before parallel 

provisions would take effect. The 

Amendments to the 2013 Escrows Final 

Rule restored those protections 

temporarily in, and re-codified them as 

part of, newly created 12 CFR 

1026.35(e), which took effect June 1, 

2013, and will be effective through 

January 9, 2014. 

The Bureau’s renumbering of the 

ability-to-repay and prepayment penalty 

provisions in § 1026.35(e) of Regulation 

Z, without excluding reverse mortgages 

and construction and bridge loans from 

coverage under that section, could be 

seen as removing these exclusions from 

the requirements of that temporary 

provision. To clarify that the 

Amendments to the 2013 Escrows Final 

Rule did not have that effect, the Bureau 

is revising temporary § 1026.35(e) to 

explicitly exclude construction loans, 

bridge loans, and reverse mortgages 

from its requirements. The Bureau is 

replacing current § 1026.35(e)(3) with 

new § 1026.35(e)(3), which states that 

the requirements of § 1026.35(e) do not 

apply to construction loans, bridge 

loans, and reverse mortgages. The 

Bureau is renumbering current 

§ 1026.35(e)(3), ‘‘Sunset of requirements 

on repayment ability and prepayment 

penalties,’’ as new § 1026.35(e)(4). The 

general language in § 1026.35(e) is also 

revised to reflect the addition of these 

exclusions. As noted below, the 

amendment to § 1026.35(e) will apply to 

any transaction consummated on or 

after June 1, 2013, for which the creditor 

receives an application on or before 

January 9, 2014. Then, at the time 

§ 1026.35(e) expires, the exclusions for 

construction loans, bridge loans, and 

reverse mortgages in the 2013 ATR and 

HOEPA Final Rules will take effect. 

Thus, the revision of § 1026.35(e) in this 


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Federal Register / Vol. 78, No. 142 / Wednesday, July 24, 2013 / Rules and Regulations 44691 

34 73 FR 44522 (July 30, 2008). 

35The proposal stated that Housing Finance 

Agencies are deemed small servicers under 

§ 1026.41(e)(4)(ii)(B) regardless of loan count and 

loan ownership status. 

36See, e.g., 78 FR 10718–10720 (Feb. 14, 2013). 

37 12 CFR 1026.41(e). 

38 12 CFR 1024.17(k)(5). 

39 12 CFR 1024.30(b)(1). 

40 Id. 

final rule will make clear that 

construction loans, bridge loans, and 

reverse mortgages have continued and 

will continue to be excluded from 

certain HPML requirements regarding 

prepayment penalties and a consumer’s 

ability to repay the loan. 

Legal authority. Construction loans, 

bridge loans, and reverse mortgages 

have always been excluded from the 

requirements of Regulation Z regarding 

repayment ability and prepayment 

penalties. The mortgage rules referenced 

above that implement the Dodd-Frank 

Act continue to exclude such loans from 

their requirements, including those 

governing repayment ability and 

prepayment penalties. Thus, the 

revisions to § 1026.35(e) in this final 

rule are merely technical changes to 

clarify the temporary provision’s 

consistency with the historical and 

current treatment of such loans under 

Regulation Z. 

For these reasons, the Bureau is 

revising temporary amendment 

§ 1026.35(e) to explicitly exclude 

construction loans, bridge loans, and 

reverse mortgages from its requirements 

regarding ability to repay and 

prepayment penalties for HPMLs, 

pursuant to its authority to provide for 

adjustments and exceptions under TILA 

section 105(a) and (f), and with reliance 

on the authority used by the Board in 

amending Regulation Z to include these 

requirements,34 including TILA section 

129(p). As the Board concluded before 

it, the Bureau does not believe 

subjecting these loans to the repayment 

ability and prepayment penalty 

requirements would effectuate the 

purposes of, or facilitate compliance 

with TILA and Regulation Z. Many of 

the characteristics of these loans make 

it inappropriate or unnecessary to apply 

the repayment ability and prepayment 

penalty requirements of § 1026.35(e). 

For example, because the structure of 

reverse mortgages does not provide for 

repayment, the requirements related to 

repayment are not appropriate for such 

loans. The Bureau also notes that it 

anticipates undertaking a rulemaking to 

address how the Dodd-Frank Act title 

XIV requirements apply to reverse 

mortgages, and consumer protection 

issues in the reverse mortgage market 

may be addressed through such a 

rulemaking. Thus, the Bureau both 

interprets § 1026.35(e) not to subject the 

affected loans to its requirements and 

also, pursuant to 105(a) and 105(f) of 

TILA, continues to exclude those loans 

from the requirements of § 1026.35(e). 

Notice and comment are not 

necessary for this revision of 

§ 1026.35(e), which merely makes 

explicit in the regulation the Bureau’s 

continuing interpretation that certain 

loans have been excluded from certain 

legal requirements throughout the 

renumbering process. Moreover, the 

Bureau finds good cause to proceed 

without notice and comment. 5 U.S.C. 

553(b)(B). This revision merely clarifies 

the operation of the rule that should 

already have been apparent to many 

market participants. Notice and 

comment are therefore unnecessary. In 

addition, the length of the notice and 

comment period make it impracticable 

to correct erroneous interpretations of a 

rule that is already in effect and that 

expires within months. For these 

reasons and under the authority cited 

above, the Bureau is expressly 

excluding construction and bridge loans 

and reverse mortgages from the abilityto-repay and prepayment penalty 

requirements for HPMLs under interim 

§ 1026.35(e). 

Section 1026.41 Periodic Statements 

for Residential Mortgage Loans 

41(a) In General 

41(a)(1) Scope 

Section 1026.41(a)(1) of the 2013 

TILA Servicing Final Rule addresses the 

scope of the mortgage loans subject to 

the periodic statement requirements, 

stating that the rule applies to closedend consumer credit transactions 

secured by a dwelling, subject to certain 

exemptions set forth in § 1026.41(e). It 

goes on to say that, for purposes of 

§ 1026.41, ‘‘such transactions are 

referred to as mortgage loans.’’ 

To eliminate any confusion as to 

which loans ‘‘such transactions’’ refers, 

and thus to which loans the periodic 

statement rule applies, the Bureau 

proposed to clarify § 1026.41(a)(1). The 

proposed revision would have replaced 

the indefinite reference ‘‘such 

transactions’’ in § 1026.41(a)(1) with a 

reiteration of the loans to which the rule 

applies, that is, closed-end consumer 

credit transactions secured by a 

dwelling. This revision would have 

clarified which transactions are 

considered ‘‘mortgage loans’’ for 

purposes of § 1026.41. 

The proposal stated that the Bureau 

believed this change also would reduce 

uncertainty about which loans to 

consider in determining a servicer’s 

eligibility for one of the exemptions 

under § 1026.41(e), the small servicer 

exemption. Section 1026.41(e)(4)(ii) 

defines a small servicer as a servicer 

that services 5,000 or fewer mortgage 

loans, for all of which the servicer (or 

an affiliate) is the creditor or assignee.35

The Bureau reasoned that the proposed 

text would have clarified that, in 

general, a servicer determines whether it 

is a small servicer by considering the 

closed-end consumer credit transactions 

secured by a dwelling that it services— 

including coupon book loans, which are 

exempt from some of the requirements 

of the periodic statement rule. The 

proposal noted that, pursuant to 

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

mortgages and transactions secured by 

consumers’ interests in timeshares, 

which are exempt from all of the 

requirements of § 1026.41, would be 

excluded from consideration for 

purposes of determining small servicer 

status. 

The Bureau received no comments on 

its proposed change to the regulatory 

text of § 1026.41(a)(1) and therefore is 

adopting it as proposed. The Bureau 

did, however, receive comments 

regarding the mortgage loans covered by 

the small servicer exemption, and those 

comments are discussed below in the 

sections specifically addressing the 

small servicer exemption. 

41(e) Exemptions 

41(e)(4) Small Servicers 

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

The Proposal 

The proposed rule explained that, for 

the reasons set forth in the 2013 

Servicing Final Rules,36 the Bureau 

determined that it was appropriate to 

exempt small servicers from certain 

mortgage servicing requirements. The 

proposal set forth the rules from which 

small servicers, as defined by 

§ 1026.41(e)(4), are exempt: the 

Regulation Z requirement to provide 

periodic statements for residential 

mortgage loans 37 and, in Regulation X, 

(1) certain requirements relating to 

obtaining force-placed insurance,38 (2) 

the general servicing policies, 

procedures, and requirements,39 and (3) 

certain requirements and restrictions 

relating to communicating with 

borrowers about, and evaluation of 

applications for, loss mitigation 

options.40

Scope and application of the small 

servicer exemption. The Bureau’s 

proposal would have clarified the scope 

and application of the small servicer 


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44692 Federal Register / Vol. 78, No. 142 / Wednesday, July 24, 2013 / Rules and Regulations 

41 78 FR 25638, 25642 n.27 (May 2, 2013). 

exemption. The proposal stated that 

determination of a servicer’s status as a 

small servicer, and thus its eligibility for 

the small servicer exemption, is set forth 

in § 1026.41(e)(4) and that, as set forth 

above, this standard is applicable by 

cross-reference to certain provisions of 

Regulation X. The proposal pointed out 

that Regulation X applies to ‘‘federally 

related mortgage loans,’’ which excludes 

certain loans that are ‘‘mortgage loans’’ 

as defined by Regulation Z 

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

would have clarified that, to qualify for 

the small servicer exemption applicable 

to either rule, the servicer must qualify 

as a small servicer under 

§ 1026.41(a)(1)—a determination based 

on closed-end consumer credit 

transactions secured by a dwelling. The 

proposal would have clarified that this 

Regulation Z standard applies regardless 

of whether or not the loans considered 

are subject to the requirements of 

Regulation X. The Bureau noted in the 

proposal that, although some mortgage 

loans not subject to coverage under 

Regulation X are considered for 

purposes of determining eligibility as a 

small servicer, servicing such loans 

under Regulation X rules would not be 

required. Thus, the Bureau posited, a 

servicer that services 5,000 federally 

related mortgage loans, as defined by 

Regulation X, may service more than 

5,000 mortgage loans, as defined by 

Regulation Z § 1026.41(a)(1). The 

Bureau went on to explain that, in such 

a case, because the servicer’s loans 

exceed the 5,000 mortgage loan limit, 

the servicer is not a small servicer and, 

thus, would not qualify for the small 

servicer exemption with regard to 

Regulation Z and Regulation X. The 

proposal reiterated that the servicer 

would not have to comply with 

Regulation X requirements for those 

mortgage loans counted for purposes of 

determining small servicer eligibility 

but which are not federally related 

mortgage loans. The proposal stated that 

by clarifying how a servicer determines 

whether it qualifies as a small servicer 

with regard to Regulation Z, the 

proposal also would have clarified how 

a servicer determines whether it 

qualifies for the small servicer 

exemptions from the applicable 

mortgage servicing requirements in 

Regulation X. 

To ensure understanding of the small 

servicer exemption, the Bureau 

proposed to amend the commentary to 

§ 1026.41(e)(4)(ii) to specifically identify 

which mortgage loans are considered for 

purposes of determining eligibility for 

the small servicer exemption. To this 

end, the Bureau proposed to add 

comment 41(e)(4)(ii)–1, which would 

have clarified that, in general and 

pursuant to § 1026.41(a)(1), the 

mortgage loans considered in 

determining qualification for the small 

servicer exemption are closed-end 

consumer credit transactions secured by 

a dwelling. Proposed comment 

41(e)(4)(ii)–1 also would have 

highlighted that, pursuant to 

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

consumer credit transactions secured by 

a dwelling are not considered in 

determining status as a small servicer, 

as discussed further below in 

connection with proposed 

§ 1026.41(e)(4)(iii). 

The Bureau requested comments and 

data regarding whether proposed 

comment 41(e)(4)(ii)–1 would 

appropriately clarify the scope of 

mortgage loans that must be considered 

for determining if a servicer qualifies as 

a small servicer. The Bureau specifically 

requested comment and data regarding 

whether any servicers service a 

significant number of closed-end 

consumer credit transactions secured by 

a dwelling, which are subject to 

Regulation Z, but service significantly 

fewer ‘‘federally related mortgage 

loans,’’ which are subject to Regulation 

X. By way of example, the Bureau 

requested comment and data regarding 

whether any servicers would not be 

considered a small servicer if the small 

servicer exemption were based on 

whether a servicer services 5,000 or 

fewer closed end consumer credit 

transactions secured by a dwelling, but 

would be a small servicer if the small 

servicer exemption were based on 

whether a servicer services 5,000 or 

fewer ‘‘federally related mortgage 

loan[s],’’ as that term is defined in 12 

CFR 1024.2. The proposal provided a 

specific example in a footnote of a 

servicer that services 10,000 

construction loans, which are not 

considered ‘‘federally related mortgage 

loans’’ pursuant to 12 CFR 1024.2, and 

100 mortgage loans that are considered 

‘‘federally related mortgage loans’’ 

pursuant to 12 CFR 1024.2.41 Such a 

servicer, the Bureau stated, would be 

considered to service 10,100 closed-end 

consumer credit transactions secured by 

a dwelling and would not qualify for the 

small servicer exemption. The proposal, 

however, underscored the fact that, in 

any case, only the 100 federally related 

mortgage loans serviced by the servicer 

would be subject to the mortgage 

servicing requirements set forth in 

Regulation X pursuant to 12 CFR 

1024.31. 

Comments 

In response to its request for 

comment, the Bureau received several 

comments expressing general support 

for its proposed clarification of the 

scope of loans to consider in 

determining whether a servicer is a 

small servicer, and received no 

comments opposing the proposed 

clarification. Nor did the Bureau receive 

any data or comment with regard to 

servicers servicing a disproportionate 

number of federally related mortgage 

loans, as defined by Regulation X, 

compared to the number of ‘‘mortgage 

loans’’ they service, as defined by 

Regulation Z. 

The Bureau also received a number of 

comments that were beyond the scope 

of the proposal. Three national trade 

associations urged the Bureau to revise 

the rule itself so that more servicers 

could qualify for the small servicer 

exemption, but provided no data or 

reasoning in support of this position. 

Similarly, a credit union trade 

association recommended that the 

Bureau revise the rule to consider only 

‘‘federally related mortgage loans’’ 

instead of the more inclusive ‘‘mortgage 

loans,’’ as defined by the rule, but 

likewise provided no supporting data or 

reasoning. A trade association 

representing community banks 

generally urged the Bureau to reduce the 

loan pool used to determine small 

servicer status by limiting it to 

‘‘federally related mortgage loans’’ and, 

in the alternative, specifically 

recommended carving out construction 

loans—one of the categories of loans not 

included in the definition of ‘‘federally 

related mortgage loans’’—from the 

category of ‘‘mortgage loans.’’ The trade 

association set forth reasons why 

construction loans require less oversight 

than other mortgage loans. Finally, a 

trade association representing home 

builders voiced concern that the 

proposal’s reference to construction 

loans in the footnote example might 

cause ‘‘confusion’’ which could result in 

community banks reducing their 

construction loan portfolio to preserve 

their small servicer status. To avoid this 

possibility, the trade association 

recommended excluding construction 

loans from the loans considered in 

determining small servicer status. 

Final Rule 

As stated above in section I, this final 

rule generally does not address 

comments not directly related to the 

clarifications and revisions proposed by 

the rule. Absent opposition or 

responsive comments and in view of the 

support the Bureau received for its 


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Federal Register / Vol. 78, No. 142 / Wednesday, July 24, 2013 / Rules and Regulations 44693 

42The definition of ‘‘affiliate’’ for purposes of 

subpart E of Regulation Z, which includes 

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

to all of subpart E, including the small servicer 

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

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

or is under common control with another company, 

as set forth in the Bank Holding Company Act of 

1956 (12 U.S.C 1841 et seq.).’’ 

proposed clarification that the scope of 

loans considered in determining small 

servicer status are mortgage loans, as 

defined by § 1026.41, the Bureau is 

adopting comment 41(e)(4)(ii)–1 as 

proposed and declines to revise 

§ 1026.41 with regard to the scope of 

loans considered in determining small 

servicer status. 

The Proposal 

Affiliate and master/subservicer 

relationships. The Bureau also proposed 

to amend § 1026.41(e)(4)(ii)(A), which 

states that a small servicer is a servicer 

that ‘‘services 5,000 or fewer mortgage 

loans, for all of which the servicer (or 

an affiliate) is the creditor or assignee.’’ 

Proposed § 1026.41(e)(4)(ii)(A) would 

have provided clarification that, for 

purposes of determining small servicer 

status, a servicer considers the mortgage 

loans it services together with any 

mortgage loans serviced by any 

affiliates. This change, the Bureau 

explained, would conform that section 

with § 1026.41(e)(4)(iii), which states 

that small servicer status is determined 

by counting ‘‘the number of mortgage 

loans serviced by the servicer and any 

affiliates as of January 1 for the 

remainder of the calendar year.’’ To 

avoid any risk of inconsistency, the 

Bureau believed it would have been 

appropriate to amend 

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

language to § 1026.41(e)(4)(iii) by 

adding the clause ‘‘together with any 

affiliates’’ such that a small servicer is 

a servicer that ‘‘services, together with 

any affiliates, 5,000 or fewer mortgage 

loans, for all of which the servicer (or 

an affiliate) is the creditor or assignee.’’ 

As stated in the proposal, this change 

would more fully conform the language 

of § 1026.41(e)(4)(ii)(A) with the 

language of § 1026.41(e)(4)(iii) but 

would not change the meaning of the 

small servicer exemption. 

The Bureau also proposed to amend 

the comments to § 1026.41(e)(4)(ii)(A). 

Specifically, comment 41(e)(4)(ii)–1 

would have been redesignated as 

comment 41(e)(4)(ii)–2 and would have 

been amended to clarify several 

elements set forth in the 2013 TILA 

Servicing Final Rule. First, it would 

have clarified that there are two 

concurrent requirements for 

determining whether a servicer is a 

small servicer, as discussed further 

below. Second, it would have explained 

that the mortgage loans considered in 

making this determination are those 

serviced by the servicer as well as by its 

affiliates. Finally, it would have 

clarified that the second requirement of 

the small servicer test, that a servicer 

must be either the ‘‘creditor or assignee’’ 

of the mortgage loans it services, means 

that the servicer must either currently 

own or have originated all of the 

mortgage loans it services. The comment 

also would have provided examples to 

illustrate these points. 

Proposed comment 41(e)(4)(ii)–2 

would have set forth the two 

requirements for determining if a 

servicer is a small servicer and would 

have clarified that both requirements 

apply to the mortgage loans serviced by 

the servicer as well as by its affiliates. 

The comment would have set forth both 

requirements: (1) A servicer, together 

with its affiliates, must service 5,000 or 

fewer mortgage loans, and (2) the 

servicer must only service mortgage 

loans for which the servicer (or an 

affiliate) is the creditor or assignee. 

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

would have clarified that to be the 

‘‘creditor or assignee’’ of a mortgage 

loan, the servicer (or an affiliate) must 

either currently own the mortgage loan 

or must have been the entity to which 

the mortgage loan was initially payable. 

It also would have clarified that a 

servicer that only services such 

mortgage loans may qualify as a small 

servicer so long as the servicer also only 

services 5,000 or fewer mortgage loans. 

The Bureau stated that it believed that 

this clarification would provide a 

helpful alternative way of expressing 

the requirement stated in the rule that 

the servicer or affiliate must also be the 

creditor or assignee of a mortgage loan. 

Proposed comment 41(e)(4)(ii)–2 also 

would have provided examples of 

specific circumstances demonstrating 

these requirements. The first example 

would have illustrated the effect 

affiliation has on the loan count 

requirement of the small servicer test. 

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

that if a servicer services 3,000 mortgage 

loans, but is affiliated (as defined at 

§ 1026.32(b)(2)) 42 with another servicer 

that services 4,000 other mortgage loans, 

both servicers are considered to service 

7,000 mortgage loans and neither 

servicer is considered a small servicer. 

The second example would have 

illustrated the ownership requirement of 

the small servicer test. Proposed 

comment 41(e)(4)(ii)–2.ii stated that if a 

servicer services 3,100 mortgage loans, 

including 100 mortgage loans it neither 

owns nor originated but for which it 

owns the mortgage servicing rights, the 

servicer is not a small servicer. The 

proposal explained that this is because 

the servicer services some mortgage 

loans for which the servicer (or an 

affiliate) is not the creditor or assignee, 

notwithstanding that the total number of 

mortgage loans serviced is fewer than 

5,000. 

Finally, the Bureau proposed to 

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

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

so that it would provide further 

clarification regarding the application of 

the small servicer exemption in certain 

master servicer/subservicer 

relationships. Under the 2013 TILA 

Servicing Final Rule, the Bureau 

explained, comment 41(e)(4)(ii)–2 

references Regulation X, 12 CFR 

1024.31, for the definitions of ‘‘master 

servicer’’ and ‘‘subservicer’’ that apply 

to the rule. It also provided an example 

demonstrating that even though a 

master servicer meets the definition of 

a small servicer, a subservicer retained 

by that master servicer that does not 

meet the definition does not qualify for 

the small servicer exemption. 

Proposed comment 41(e)(4)(ii)–3 

would have clarified that a small 

servicer does not lose its small servicer 

status because it retains a subservicer, as 

that term is defined in 12 CFR 1024.31, 

to service any of its mortgage loans. The 

comment also would have clarified that, 

for a subservicer, as that term is defined 

in 12 CFR 1024.31, to gain the benefit 

of the small servicer exemption, both 

the master servicer and the subservicer 

must be small servicers. The comment 

also would have pointed out that, 

generally, a subservicer will not qualify 

as a small servicer because it does not 

own or did not originate the mortgage 

loans it subservices. However, the 

comment went on to state, a subservicer 

would qualify as a small servicer if it is 

an affiliate of a master servicer that 

qualifies as a small servicer. 

Proposed comment 41(e)(4)(ii)–3 also 

would have removed the example in 

2013 TILA Servicing Rule comment 

41(e)(4)(ii)–2 described above in favor of 

three other examples that would have 

demonstrated the implication of a 

master servicer/subservicer relationship 

for purposes of qualifying for the small 

servicer exemption. In the first proposed 

example, a credit union services 4,000 

mortgage loans—all of which it 

originated or owns. The credit union 

retains a credit union service 

organization to subservice 1,000 of the 

mortgage loans and the credit union 

services the remaining 3,000 mortgage 

loans itself. The credit union has no 

affiliation relationship with the credit 

union service organization. The credit 


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43Pursuant to § 1026.32(b)(2), § 1026.41 is subject 

to the definition of ‘‘affiliate’’ as set forth in the 

Bank Holding Company Act of 1956 (the Act). See 

proposed comment 41(e)(4)(ii)–3.ii. Under the Act, 

‘‘affiliate’’ is defined as any company that controls, 

is controlled by, or is under common control with 

another company. The percentage of control is a 

determining factor in whether an affiliate 

relationship exists. The Bureau notes that, absent 

other determining factors, if a credit union’s 

percentage of control over a CUSO falls below the 

statutory minimum, there would be no affiliate 

relationship. 

44For the small servicer status of a credit union/ 

master servicer and the small servicer status of its 

unaffiliated CUSO/subservicer, see proposed 

comment 41(e)(4)(ii)–3.i, which the Bureau is 

adopting as proposed in this final rule. 

union is a small servicer and, thus, the 

small servicer exemption applies to the 

3,000 mortgage loans the credit union 

services itself. The credit union service 

organization is not a small servicer 

because it services mortgage loans it 

does not own or did not originate. 

Accordingly, the credit union service 

organization does not gain the benefit of 

the small servicer exemption and, thus, 

must comply with any applicable 

mortgage servicing requirements for the 

1,000 mortgage loans it subservices. 

Proposed comment 41(e)(4)(ii)–3.ii 

would have posited the example of a 

bank holding company that, through a 

lender subsidiary, owns or originated 

4,000 mortgage loans. In the example, 

all mortgage servicing rights for the 

4,000 mortgage loans are owned by a 

wholly owned master servicer 

subsidiary. Servicing for the 4,000 

mortgage loans is conducted by a 

wholly owned subservicer subsidiary. 

The bank holding company controls all 

of these subsidiaries and, thus, they are 

affiliates of the bank holding company 

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

master servicer and subservicer service 

5,000 or fewer mortgage loans and 

because the mortgage loans are owned 

or originated by an affiliate of each, the 

master servicer and the subservicer are 

each considered a small servicer and 

qualify for the small servicer exemption 

for all 4,000 mortgage loans. 

Proposed comment 41(e)(4)(ii)–3.iii 

would have posited the example of a 

nonbank servicer that services 4,000 

mortgage loans, all of which it 

originated or owns. The servicer retains 

a ‘‘component servicer’’ to assist it with 

servicing functions. The component 

servicer is not engaged in ‘‘servicing’’ as 

defined in 12 CFR 1024.2; that is, the 

component servicer does not receive 

any scheduled periodic payments from 

a borrower pursuant to the terms of any 

mortgage loan, including amounts for 

escrow accounts, and does not make the 

payments to the owner of the loan or 

other third parties of principal and 

interest and such other payments with 

respect to the amounts received from 

the borrower as may be required 

pursuant to the terms of the mortgage 

servicing loan documents or servicing 

contract. In this proposed example, the 

component servicer is not a subservicer 

pursuant to 12 CFR 1024.31 because it 

is not engaged in servicing, as that term 

is defined in 12 CFR 1024.2. The 

nonbank servicer is a small servicer and 

the small servicer exemption applies to 

all 4,000 mortgage loans it services. 

Comments 

Many commenters expressed their 

appreciation for the Bureau’s 

clarification of the affiliate and master/ 

subservicer relationships. Among them, 

a trade association representing the 

banking industry noted that the 

proposed clarification of the affiliate 

relationship was consistent with the 

regulation as issued by the Bureau. 

Several commenters submitted 

comments outside the scope of this 

rulemaking recommending that the 

Bureau reconsider altogether the 

inclusion of affiliate loans in 

determining eligibility for the small 

servicer exemption. A trade association 

representing credit union service 

organizations (CUSOs), a national and 

state trade association representing 

credit unions, and two individual credit 

unions raised concerns that the affiliate 

relationships some CUSOs have with 

one or more credit unions would 

prevent those CUSOs (and their credit 

union affiliates) from qualifying for the 

small servicer exemption. (The 

proposed example clarifying the master/ 

subservicer relationship included a 

CUSO that was not an affiliate.) These 

commenters recommended that the 

Bureau either revise the rule to remove 

affiliates and their mortgage loans from 

consideration in determining small 

servicer status or that the Bureau 

provide clarification regarding how to 

take into account the loans of CUSO 

affiliates that are not wholly-owned by 

credit unions or of CUSOs with multiple 

owners. Two of the commenters 

explained that many credit unions have 

an affiliate relationship with a CUSO to 

facilitate mortgage lending and 

borrowing. The trade associations noted 

the many cases of multiple credit 

unions affiliating with a single CUSO in 

order to achieve economies of scale and 

to maintain competitiveness in the 

marketplace. They indicated that these 

arrangements are particularly important 

for small credit unions with limited 

capacity. The trade association 

representing CUSOs voiced concern that 

the affiliate requirement in § 1026.41 

could have a chilling effect on the 

mortgage CUSO industry by 

encouraging credit unions to divest their 

interests in CUSOs to maintain their 

small servicer exemption or by 

discouraging credit unions that qualify 

as small servicers from investing in an 

affiliate relationship with a CUSO. 

Final Rule 

In view of the comments supporting 

the proposed clarification of affiliate 

and master/subservicer relationships 

with regard to small servicer 

qualification and in the absence of 

responsive comments to the contrary, 

the Bureau is adopting the clarifications 

as proposed. With respect to the 

comments outside the scope of this 

rulemaking recommending that the 

Bureau exclude the mortgage loans of 

affiliates from consideration in 

determining small servicer status, the 

Bureau declines to revise the rule. In 

addition to the fact that reopening 

consideration of a major policy decision 

would require notice and comment 

relatively late in the implementation 

process, the Bureau continues to believe 

that the reasons underlying the rule as 

set forth in the 2013 Servicing Final 

Rules are persuasive on the merits. 

For clarification with regard to CUSOs 

and their relationships with one or more 

credit unions, the Bureau directs both 

the CUSOs and the credit unions to the 

Bank Holding Company Act of 1956 (12 

U.S.C. 1841 et seq.) to determine 

whether their particular business 

relationships constitute affiliate 

relationships.43 For further clarification, 

the Bureau notes that, pursuant to the 

affiliate requirement in § 1026.41, in any 

affiliate relationship with a CUSO, the 

total number of the mortgage loans of 

the affiliated entities must be 

considered in determining small 

servicer status. For example, for a credit 

union and its CUSO affiliate, the total 

number of mortgage loans serviced by 

both entities must be considered to 

determine the small servicer status for 

both the credit union and the CUSO.44

The same is true for credit unions that 

are deemed affiliates under the Bank 

Holding Company Act of 1956. 

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

Determination 

Section 1026.41(e)(4)(iii) of the 2013 

TILA Servicing Final Rule sets forth 

certain criteria regarding how to 

determine if a servicer qualifies as a 

small servicer. In addition, that section 

explains that small servicer 

determination is based on the number of 

mortgage loans serviced by the servicer 

and any affiliates as of January 1 for the 

remainder of the calendar year. It also 

specifies that a servicer that ‘‘crosses the 

threshold,’’ and thus loses its small 


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Federal Register / Vol. 78, No. 142 / Wednesday, July 24, 2013 / Rules and Regulations 44695 

servicer status and its small servicer 

exemption, has six months after 

crossing the threshold or until the next 

January 1, whichever is later, to comply 

with any requirements from which the 

servicer is no longer exempt. 

The Proposal 

To provide clarification regarding the 

date for determining small service status 

and when a servicer that loses small 

servicer status must begin to comply 

with regulations from which it had been 

exempt, and that those dates apply to 

both elements of the small servicer 

exemption (loan count and ownership 

status), proposed § 1026.41(e)(4)(iii) 

included a number of revisions to the 

2013 TILA Servicing Final Rule 

§ 1026.41(e)(4)(iii). First, proposed 

§ 1026.41(e)(4)(iii) would have replaced 

the reference to a servicer that ‘‘crosses 

the threshold’’ for determining if the 

servicer qualifies as a small servicer 

with broader language indicating that a 

servicer that ‘‘ceases to qualify’’ as a 

small servicer will have six months or 

until the next January 1, whichever is 

later, to comply with any requirements 

for which a servicer is no longer exempt 

as a small servicer. The Bureau stated it 

believed that the broader phrase ‘‘ceases 

to qualify’’ would more accurately 

reflect the fact that there are two 

elements to determining if a servicer 

qualifies as a small servicer and pointed 

to the discussion above to underscore 

that either one of these elements could 

cause a servicer to lose exempt status. 

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

would have applied the transition 

period set out in the rule to situations 

in which a servicer no longer meets the 

loan count requirement as well as to 

situations in which the servicer no 

longer meets the requirement that the 

servicer is the creditor or assignee of all 

mortgage loans it services. Thus, the 

proposal stated, if a servicer exceeds the 

5,000 mortgage loan limit or begins to 

service mortgage loans it does not own 

or did not originate, it must comply 

with any requirements from which it is 

no longer exempt by either the 

following January 1 or six months after 

the change in operations that 

disqualifies it as a small servicer, 

whichever is later. The proposal would 

have provided the example that, if on 

September 1 a servicer that previously 

qualified as a small servicer begins to 

service a mortgage loan that it does not 

own and did not originate, the servicer 

has until March 1 of the following year 

to comply with the requirements from 

which it was previously exempt as a 

small servicer. 

Comments and Final Rule 

The Bureau did not receive any 

responsive comments regarding the 

proposed clarifications discussed above, 

outside of general support for providing 

clarification regarding this issue. In 

order to clarify the timing provision, the 

Bureau is adopting the changes as 

proposed. 

In this final rule, the Bureau also is 

revising a comment to 

§ 1026.41(e)(4)(iii) that provides three 

examples of the timing for when a small 

servicer is no longer considered a small 

servicer and when that former small 

servicer must start complying with any 

requirements from which it previously 

was exempt as a small servicer. The 

Bureau is revising comment 

41(e)(4)(iii)–2 to maintain consistency 

with and further clarify the changes to 

the regulatory text the Bureau is 

adopting in § 1026.41(e)(4)(iii), as 

discussed above. 

To this end, the Bureau is revising the 

heading of comment 41(e)(4)(iii)–2. The 

Bureau is removing the reference to 

‘‘threshold’’ and is amending the 

heading to read: ‘‘Timing for small 

servicer exemption’’ for the same 

reasons discussed above and to 

maintain consistency with the adopted 

regulatory changes to 

§ 1026.41(e)(4)(iii). In addition, the 

Bureau is amending the examples in the 

comment to conform to and further 

clarify the changes the Bureau is 

adopting in the regulatory text. The first 

of the current examples states that a 

servicer that begins servicing more than 

5,000 loans on October 1 and is 

servicing more than 5,000 loans as of 

January 1 of the following year would 

no longer be considered a small servicer 

on April 1 of that following year. The 

second current example states that a 

servicer that begins servicing more than 

5,000 mortgage loans on February 1, and 

services more than 5,000 loans as of 

January 1 of the following year, would 

no longer be considered a small servicer 

on January 1 of that following year. The 

third example states that a servicer that 

begins servicing more than 5,000 

mortgage loans on February 1, but 

services less than 5,000 loans as of 

January 1 of the following year, is 

considered a small servicer for that 

following year. 

The revised examples clarify two 

points. The first point is that the 

application of the calendar dates apply 

to both elements of the small servicer 

test, i.e., exceeding the allowable 

maximum number of loans serviced and 

servicing mortgage loans a servicer 

either does not own or did not originate. 

The second point of clarification is that 

January 1 is the date used to determine 

whether or not a servicer is considered 

a small servicer and the other dates (the 

latter of six months from the time the 

servicer ceases to be a small servicer or 

until the next January 1) are used to 

determine when a small servicer that 

has lost its small servicer status must 

begin complying with the regulations 

for which it had been exempt. 

The first revised example explains 

that a small servicer that begins 

servicing more than 5,000 mortgage 

loans (or begins servicing one or more 

mortgage loans it does not own or did 

not originate) on October 1 and is 

servicing 5,000 mortgage loans (or 

services one or more mortgage loans it 

does not own or did not originate) as of 

January 1 of the following year, would 

no longer be considered a small servicer 

on January 1 of that following year and 

would have to comply with any 

requirements from which it is no longer 

exempt as a small servicer on April 1 of 

that following year. The second revised 

example states that a small servicer that 

begins servicing more than 5,000 

mortgage loans (or begins servicing one 

or more mortgage loans it does not own 

or did not originate) on February 1, and 

services more than 5,000 mortgage loans 

(or begins servicing one or more 

mortgage loans it does not own or did 

not originate) as of January 1 of the 

following year, would no longer be 

considered a small servicer on January 

1 of that following year and would have 

to comply with any requirements from 

which it is no longer exempt as a small 

servicer on that same January 1. The 

third revised example states that a 

servicer that begins servicing more than 

5,000 mortgage loans (or begins 

servicing one or more mortgage loans it 

does not own or did not originate) on 

February 1, but services less than 5,000 

mortgage loans (or no longer services 

mortgage loans it does not own or did 

not originate) as of January 1 of the 

following year, is considered a small 

servicer for that following year. In sum, 

the amended heading and examples 

conform to and provide further 

clarification of the proposed changes to 

the regulatory text discussed above that 

the Bureau is adopting in this final rule. 

The Proposal 

Consideration of loans serviced. The 

proposed rule also would have added 

language to § 1026.41(e)(4)(iii) to specify 

which mortgage loans should not be 

considered in determining small 

servicer status. Proposed 

§ 1026.41(e)(4)(iii) would have clarified 

that certain closed-end consumer credit 

transactions secured by a dwelling 

would not be considered for purposes of 


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44696 Federal Register / Vol. 78, No. 142 / Wednesday, July 24, 2013 / Rules and Regulations 

45The proposal stated that TILA section 128(f) 

requires periodic statements for ‘‘residential 

mortgage loans,’’ which, pursuant to TILA section 

103(cc)(5), excludes transactions secured by 

consumers’ interests in timeshare plans. For this 

reason, the proposed rule said, exception authority 

is not required to exclude such loans from 

consideration in determining if a servicer is a small 

servicer. 

determining whether a servicer qualifies 

as a small servicer. Specifically, the 

proposal went on to explain, because 

reverse mortgage transactions and 

mortgage loans secured by a consumer’s 

interest in timeshare plans are exempt 

from § 1026.41, such loans are not 

considered when determining if a 

servicer is a small servicer. The 

proposed rule also would have clarified 

that, because coupon book loans are 

exempt only from some requirements of 

§ 1026.41, such loans must be 

considered in determining whether a 

servicer is a small servicer. 

The proposal also would have 

excluded from consideration in 

connection with the small servicer 

exemption, any mortgage loan 

voluntarily serviced by a servicer for a 

creditor or assignee that is not an 

affiliate of the servicer and for which 

the servicer does not receive any 

compensation or fees (‘‘charitably 

serviced’’ mortgage loans). The Bureau 

explained that it had received feedback 

that certain servicers that otherwise 

would be considered small servicers 

voluntarily service mortgage loans for 

unaffiliated nonprofit entities for 

charitable purposes and do not receive 

compensation or fees from engaging in 

that servicing. The Bureau further 

explained that, if such charitably 

serviced mortgage loans were 

considered in connection with 

determining whether a servicer qualifies 

as a small servicer, a servicer engaging 

in this practice would not qualify for the 

small servicer exemption because the 

servicer would be servicing a mortgage 

loan it does not own or did not 

originate, notwithstanding that such 

servicer undertook to service those 

mortgage loans for charitable purposes. 

The Bureau expressed concern that 

including charitably serviced mortgage 

loans in determining small servicer 

status would cause servicers to refrain 

from charitable servicing rather than 

lose the benefits of a small servicer 

exemption. The Bureau stated its belief 

that such a result would not further the 

goal of consumer protection for the 

affected consumers and might instead 

negatively affect the availability and 

costs of credit for consumers whose 

mortgage loans would otherwise be 

serviced pursuant to such charitable 

arrangements. Further, the Bureau 

believed that consumers would be more 

likely to receive superior service from 

an entity in the business of servicing 

that is willing to donate its services than 

they would if nonprofit entities that are 

not experienced in the business of 

servicing were forced to take on those 

duties themselves. Finally, the Bureau 

stated that it believed that the benefits 

of excluding charitably serviced 

mortgage loans from small servicer 

determination would outweigh the 

potential risks to consumers that 

exclusion may pose. 

The Bureau proposed that, for the 

reasons set forth above and pursuant to 

the Bureau’s exemption authority and 

authority to provide for adjustments and 

exceptions for any class of transactions 

as may be necessary or proper to 

effectuate the purposes of TILA, under 

TILA sections 105(a) and (f), mortgage 

loans voluntarily serviced by a servicer 

for a creditor or assignee that is not an 

affiliate of the servicer and for which 

the servicer does not receive any 

compensation or fees would not be 

considered in determining a servicer’s 

qualification as a small servicer. The 

Bureau stated that it believed that 

considering such loans in determining if 

a servicer is a small servicer would 

defeat the purposes of TILA by 

penalizing charitable servicers, thereby 

dissuading them from engaging in 

charitable servicing to the detriment of 

the consumers that otherwise would 

benefit from this activity. The Bureau 

requested comment regarding whether it 

would be appropriate not to consider 

such mortgage loans when determining 

if a servicer qualifies for the small 

servicer exemption. The Bureau further 

requested comment on whether other 

mortgage loans serviced through similar 

limited arrangements should not be 

considered in determining whether a 

servicer is a small servicer. The Bureau 

emphasized in its proposed rule that it 

was neither reexamining nor seeking 

comment on the issue of exempting 

nonprofit entities engaged in mortgage 

servicing from the requirements of the 

periodic statement or any other 

mortgage servicing rule. 

Finally, the Bureau proposed to add 

comment 41(e)(4)(iii)–3. Proposed 

comment 41(e)(4)(iii)–3 would have 

clarified that mortgage loans that are not 

considered for purposes of determining 

small servicer qualification pursuant to 

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

for determining either whether a 

servicer services, together with any 

affiliates, 5,000 or fewer mortgage loans 

or whether a servicer is servicing 

mortgage loans that it does not own or 

did not originate. Proposed comment 

41(e)(4)(iii)–3 further would have 

posited the example of a servicer that 

services a total of 5,400 mortgage loans, 

of which the servicer owns or originated 

4,800 mortgage loans, services 300 

reverse mortgage transactions that it 

does not own or did not originate, and 

voluntarily services 300 mortgage loans 

that it does not own or did not originate 

for an unaffiliated nonprofit 

organization for which the servicer does 

not receive any compensation or fees. 

The example stated that neither the 

reverse mortgage transactions nor the 

mortgage loans voluntarily serviced by 

the servicer are considered for purposes 

of determining if the servicer is a small 

servicer. The example concluded that, 

because the only mortgage loans 

considered are the 4,800 other mortgage 

loans serviced by the servicer, and the 

servicer owns or originated each of 

those mortgage loans, the servicer is 

considered a small servicer and 

qualifies for the small servicer 

exemption with regard to all 5,400 

mortgage loans it services. The comment 

also would have noted that reverse 

mortgages and transactions secured by a 

consumer’s interest in timeshare plans, 

in addition to not being considered in 

determining small servicer qualification, 

also are exempt from the requirements 

of § 1026.41. In contrast, the proposed 

comment noted, although charitably 

serviced mortgage loans, as defined by 

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

considered in determining small 

servicer qualification, they are not 

exempt from the requirements of 

§ 1026.41. The comment thus would 

have clarified that a servicer that does 

not qualify as a small servicer would not 

be required to provide periodic 

statements for reverse mortgages and 

timeshare plans because they are 

exempt from the rule, but would be 

required to provide periodic statements 

for the mortgage loans it charitably 

services. 

Legal authority. The Bureau proposed 

to exclude charitably serviced mortgage 

loans and reverse mortgage transactions 

from consideration in determining a 

servicer’s status as a small servicer for 

purposes of the small servicer 

exemption in § 1024.41(e)(4) pursuant to 

its authority to provide for adjustments 

and exceptions under TILA section 

105(a) and (f).45 The proposal went on 

to say that, with respect to charitably 

serviced mortgage loans, the Bureau 

believed, for the reasons described 

above, that declining to consider such 

mortgage loans for purposes of 

determining eligibility as a small 

servicer would effectuate the purposes 

of, and would facilitate compliance with 

TILA and Regulation Z. The proposal 

further stated that, consistent with TILA 


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Federal Register / Vol. 78, No. 142 / Wednesday, July 24, 2013 / Rules and Regulations 44697 

46See 78 FR 10901, 10973 (Feb. 14, 2013). 

section 105(f) and in light of the factors 

in that provision, the Bureau believed 

that requiring servicers to consider 

mortgage loans they charitably service 

for purposes of determining eligibility 

as a small servicer would cause 

mortgage servicers to withdraw from 

such charitable relationships and not 

provide a meaningful benefit to 

consumers in the form of useful 

information or protection. In addition, 

the Bureau expressed its concern 

regarding the extent to which any 

requirement to consider such loans 

would complicate, hinder, or make 

more expensive the credit process for 

such mortgage loan transactions, 

especially considering the status of the 

borrowers that typically secure mortgage 

loans that are charitably serviced. The 

Bureau said that ultimately it believed 

the goal of consumer protection would 

be undermined if it were to consider, for 

purposes of small servicer qualification, 

mortgage loans voluntarily serviced by a 

servicer for a creditor or assignee that is 

not an affiliate of the servicer and for 

which the servicer does not receive any 

compensation or fees. 

In the proposed rule, the Bureau said 

it similarly believed that not 

considering reverse mortgages in 

determining whether a servicer is a 

small servicer would effectuate the 

purposes of, and would facilitate 

compliance with, TILA and Regulation 

Z. The Bureau said it believed this for 

the same reasons set forth in the 2013 

TILA Servicing Final Rule 46 exempting 

reverse mortgages from the requirements 

of § 1026.41. The Bureau pointed to the 

discussion in that final rule that the 

periodic statement requirements were 

designed for a traditional mortgage 

product and that information relevant 

and useful for consumers with reverse 

mortgages differs substantially from the 

information required on the periodic 

statement and, thus, would not provide 

a meaningful benefit to consumers of 

reverse mortgages. Finally, the proposal 

put forth the Bureau’s belief that not 

considering reverse mortgages in 

determining whether a servicer is a 

small servicer is proper irrespective of 

the amount of the loan, the status of the 

consumer (including related financial 

arrangements, financial sophistication, 

and the importance to the consumer of 

the loan), or whether the loan is secured 

by the principal residence of the 

consumer. 

Comments and Final Rule 

The Bureau received only positive 

comments regarding its proposed 

clarification that reverse mortgage 

transactions and mortgage loans secured 

by a consumer’s interest in timeshare 

plans, which are exempt from all 

provisions of § 1026.41, are excluded 

from the loan pool used to determine 

eligibility for the small servicer 

exemption. However, one national trade 

association representing credit unions 

contested the Bureau’s clarification that 

fixed-rate loans with coupon books 

must be considered for purposes of 

determining eligibility for the small 

servicer exemption. The commenter 

said that including fixed-rate loans with 

coupon books in the loan pool used to 

determine small servicer status but 

excluding them from the requirement to 

provide periodic statements would 

create confusion without providing 

adequate benefits. The Bureau disagrees 

and notes, as discussed above, that 

fixed-rate loans with coupon books are 

exempt only from some of the 

requirements of § 1026.41—as opposed 

to reverse mortgage transactions and 

mortgage loans secured by a consumer’s 

interest in timeshare plans which are 

not subject to any of the requirements of 

§ 1026.41. Servicers servicing fixed-rate 

loans with coupon books are exempt 

from the requirement to provide 

periodic statements for these loans 

under § 1026.41, but servicers 

nevertheless have to provide to 

consumers with such loans the 

information contained in the periodic 

statement, either in the coupon book or 

in some other form. Because servicers 

servicing fixed-rate loans with coupon 

books must comply with the 

requirements of § 1026.41 regarding 

those mortgage loans, it is appropriate 

that such loans would be considered in 

determining whether such servicers are 

small servicers and therefore exempt 

from complying with the requirements 

of § 1026.41 with regard to those loans. 

Conversely, it is appropriate to exclude 

reverse mortgage transactions and 

mortgage loans secured by a consumer’s 

interest in timeshare plans from the loan 

pool used to determine small servicer 

status because, regardless of that 

servicer’s small servicer status, there is 

no requirement for the servicer to 

comply with any of the requirements of 

§ 1026.41 with regard to those loans. 

The Bureau received strong support 

for its proposed revision of § 1026.41 to 

exclude charitably serviced loans from 

consideration in determining whether a 

servicer qualifies as a small servicer, 

that is, mortgage loans voluntarily 

serviced for a non-affiliate creditor or 

assignee and for which the servicer does 

not receive any compensation or fees. 

Commenters agreed that, absent the 

Bureau’s proposal, small servicers likely 

would relinquish their volunteer efforts 

in order to preserve their small servicer 

status. In response to one commenter’s 

request for clarification, the Bureau 

notes that its proposed revision of the 

rule with regard to volunteer servicing 

is not limited to the servicing of 

mortgage loans owned or originated by 

nonprofit organizations, although the 

Bureau suspects that most charitable 

servicing is done on behalf of such 

organizations. Due to the support 

received by the Bureau for its proposed 

revision of § 1026.41(e)(4)(iii)(A) 

excluding charitably serviced mortgage 

loans from the loan pool used to 

determine small servicer eligibility, and 

for the reasons stated above, the Bureau 

is adopting the revision as proposed. 

In addition to requesting comment 

regarding the appropriateness of 

excluding charitably serviced mortgage 

loans when determining small servicer 

status, the proposal solicited comment 

on whether other mortgage loans 

serviced through similar limited 

arrangements should not be considered 

in determining whether a servicer is a 

small servicer. The Bureau did not 

receive comments recommending that 

any other servicing arrangements be 

excluded from consideration for 

purposes of determining small servicer 

status. The Bureau did receive a 

comment outside of the scope of the 

proposal from a national trade 

association requesting guidance 

regarding the trade association’s 

conclusion that certain depository 

services some of its members provide 

for depositors who self-finance the sale 

of residential real estate do not qualify 

as ‘‘servicing,’’ as defined in 12 CFR 

1024.2(b). The trade association 

explained that, for a minimal fee, some 

banks—usually small banks—receive 

mortgage payments from a borrower and 

deposit the funds into that customer’s 

account. According to the trade 

association, the agreement between the 

bank and the depositor/creditor 

typically excludes any other services, 

such as providing servicing in the case 

of delinquency. The trade association 

expressed concern that small 

institutions will discontinue this service 

for their depository customers who 

owner-finance the sale of real property 

for fear of losing their small servicer 

status if the depository service could be 

construed as servicing mortgage loans 

that the bank does not own or did not 

originate. 

Because the comment was outside the 

scope of the proposal, the Bureau 

declines to provide the requested 

guidance. Moreover, even if the 

comment were within the scope of the 

proposal, the Bureau is not able to 


emcdonald on DSK67QTVN1PROD with RULES3
44698 Federal Register / Vol. 78, No. 142 / Wednesday, July 24, 2013 / Rules and Regulations 

47The May 2013 ATR Final Rule amended the 

2013 ATR Final Rule in part by adding two new 

types of qualified mortgages, at § 1026.43(e)(5) and 

(6). See 78 FR 35430 (June 12, 2013). 48Eligibility standards for the GSEs and Federal 

agencies are available at: Fannie Mae, Single Family 

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

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

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

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

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

Handbook—VA Pamphlet 26–7, Web Automated 

Reference Material System (WARMS), http:// 

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

Underwriting Guidelines: USDA Rural Development 

Guaranteed Rural Housing Loan Program, http:// 

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

49The rule’s effective date is January 10, 2014, 

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

definition expires at the latest after January 10, 

2021. 

provide guidance at this juncture 

because the trade association did not 

provide sufficient information about the 

banking service described. 

Section 1026.43 Minimum Standards 

for Transactions Secured by a Dwelling 

43(e) Qualified Mortgages 

43(e)(4) Qualified Mortgage Defined— 

Special Rules 

The 2013 ATR Final Rule generally 

requires creditors to make a reasonable, 

good faith determination of a 

consumer’s ability to repay any 

consumer credit transaction secured by 

a dwelling (excluding an open-end 

credit plan, timeshare plan, reverse 

mortgage, or temporary loan) and 

establishes certain protections from 

liability under this requirement for 

‘‘qualified mortgages.’’ These 

provisions, in § 1026.43(c), (e)(2), (e)(4), 

(e)(5), (e)(6) 47 and (f), implement the 

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

and the qualified mortgage provisions of 

TILA section 129C(b). 

To determine the qualified mortgage 

status of a loan, creditors must analyze 

whether the loan meets one of the 

definitions of ‘‘qualified mortgage’’ in 

§ 1026.43(e)(2), (e)(4), (e)(5), (e)(6) or (f). 

Section 1026.43(e)(4) provides a 

definition of qualified mortgage for 

loans that (1) meet the prohibitions on 

certain risky loan features (e.g., negative 

amortization and interest only features); 

(2) do not exceed certain limitations on 

points and fees under § 1026.43(e)(2); 

and (3) either are eligible for purchase 

or guarantee by one of the GSEs, while 

under the conservatorship of the Federal 

Housing Finance Agency, or are eligible 

to be insured or guaranteed by HUD 

under the National Housing Act (12 

U.S.C. 1707 et seq.), the VA, the USDA, 

or RHS.48 HUD, VA, USDA, and RHS 

have authority under the Dodd-Frank 

Act to define qualified mortgage 

standards for the types of loans they 

insure, guarantee, or administer. See 

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

under § 1026.43(e)(4) for such loans will 

sunset once each agency promulgates its 

own qualified mortgage standards and 

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

conservatorship ends. 

Even if the Federal agencies do not 

issue additional rules or 

conservatorship does not end, the 

temporary qualified mortgage definition 

in § 1026.43(e)(4) will expire seven 

years after the effective date of the 

rule.49 Covered transactions that satisfy 

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

are consummated before the sunset of 

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

mortgage status after the temporary 

definition expires. However, a loan 

consummated after the sunset of 

§ 1026.43(e)(4) may be a qualified 

mortgage only if it satisfies the 

requirements of another qualified 

mortgage provision in effect at that time. 

Eligibility Under GSE/Agency Guides 

and Automated Underwriting Systems 

The Proposal 

As adopted by the 2013 ATR Final 

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

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

not be actually purchased or guaranteed 

by a GSE or insured or guaranteed by 

HUD, VA, USDA, or RHS. Rather, 

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

loan be eligible for such purchase, 

guarantee, or insurance. For example, 

the comment provides that, for purposes 

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

required to sell a loan to a GSE for that 

loan to be a qualified mortgage. Rather, 

the loan must be eligible for purchase or 

guarantee by a GSE. The Commentary 

clarifies that, with respect to GSEs, to 

determine eligibility, a creditor may rely 

on an underwriting recommendation 

provided by one of the GSEs’ automated 

underwriting systems (AUSs) or their 

written guides. Accordingly, with regard 

to the GSEs, the comment states that a 

covered transaction is eligible for 

purchase or guarantee by Fannie Mae or 

Freddie Mac (and therefore a qualified 

mortgage under § 1026.43(e)(4)) if: (i) 

the loan conforms to the standards set 

forth in the Fannie Mae Single-Family 

Selling Guide or the Freddie Mac 

Single-Family Seller/Servicer Guide; or 

(ii) the loan receives an ‘‘Approve/ 

Eligible’’ recommendation from Desktop 

Underwriter (DU); or an ‘‘Accept and 

Eligible to Purchase’’ recommendation 

from Loan Prospector (LP). 

The Bureau proposed to revise 

comment 43(e)(4)–4 in a number of 

ways. First, the proposal would have 

clarified that a creditor is not required 

to comply with all GSE or agency 

requirements to show qualified 

mortgage status. Specifically, the 

proposed revision made clear that the 

creditor need not comply with certain 

requirements that are wholly unrelated 

to a consumer’s ability to repay, 

including activities related to selling, 

securitizing, or delivering consummated 

loans and any requirement the creditor 

is required to perform after the 

consummated loan is sold, guaranteed, 

or endorsed for insurance (in the case of 

agency loans) such as document 

custody, quality control, and servicing. 

These requirements are spelled out in 

the most depth in the GSE and agency 

written guides, but may also be 

referenced in automated underwriting 

system conditions and in written 

agreements with individual creditors, as 

discussed further below. 

The Bureau believed that the 

proposed comment would clarify the 

intended scope of the temporary 

category of qualified mortgage created in 

§ 1026.43(e)(4) and facilitate compliance 

with the provisions of Regulation Z 

adopted in the 2013 ATR Final Rule. As 

explained in the preamble to the final 

rule, the Bureau established 

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

measure designed to ensure access to 

responsible, affordable credit for 

consumers with debt-to-income ratios 

that exceed the 43 percent threshold 

that the Bureau adopted as a bright-line 

standard in the permanent general 

definition of qualified mortgage under 

§ 1026.43(e)(2) while creditors adapted 

to the new ATR rules and other changes 

in economic and regulatory conditions. 

The Bureau believed that using widely 

recognized underwriting standards of 

Federal agencies and entities under 

Federal conservatorship to define 

qualified mortgages during this interim 

period would both facilitate compliance 

and ensure responsible lending 

practices. The temporary provision 

therefore bases qualified mortgage status 

on eligibility for purchase, insurance, or 

guarantee, which requires use of the 

federally related underwriting 

standards, but does not require actual 

sale, guarantee, or insurance 

endorsement. Furthermore, the 

temporary provision requires that a 

qualified mortgage must be eligible at 

consummation. 

However, the Bureau recognized in 

the proposed rule that the GSEs and 

agencies impose a wide variety of 

requirements relating not only to 

underwriting of potentially eligible 

loans, but also to the mechanics of sale, 

guarantee, or insurance and postconsummation activities. Because 


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50Although one commenter asked that jumbo 

size, which renders a loan too large to be eligible 

for GSE purchase or guarantee, be deemed wholly 

unrelated to ability to repay, another commenter 

merely asked for guidance on whether or not 

jumbos would be excluded. The Bureau stated in 

the January 2013 final rule that the temporary 

qualified mortgage definition does not include 

‘‘jumbo’’ loans in 1026.43(e)(4), given, in part, that 

the Bureau views the jumbo market as already 

robust and stable. Excluding jumbo loan size 

eligibility conditions for GSEs would effectively 

reverse the Bureau’s conclusion on this matter. The 

Bureau continues to believe that the jumbo loan 

market does not need the benefit of temporary 

qualified mortgage definition and notes that jumbo 

loans can be qualified mortgages to the extent that 

they meet the other qualified mortgage definitions. 

underwriting is a complex process that 

involves assessment of the consumer’s 

ability to repay the loan as well as other 

credit risk factors, the Bureau believed 

that it was appropriate to base qualified 

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

the GSEs’ and agencies’ general 

standards concerning borrower, 

product, and mortgage eligibility and 

underwriting. While some of these 

underwriting requirements may be more 

closely or directly related to assessing a 

consumer’s ability to repay than others, 

the Bureau believed that attempting to 

disaggregate them would be an 

extraordinarily complex task that would 

defeat the purposes of the temporary 

definition in adopting widely 

recognized standards to facilitate 

compliance and access to responsible 

credit. Where groups of requirements 

are wholly unrelated to underwriting 

(i.e., wholly unrelated to assessing 

ability to repay and other risk-related 

factors), however, the Bureau believed 

that it was appropriate to specify that 

such requirements do not affect 

qualified mortgage status. 

The Bureau believed that the items 

described in the comment would meet 

this test and provide greater clarity to 

the temporary definition of qualified 

mortgage. Because TILA requires 

assessment of a consumer’s ability to 

repay a loan as of the time of 

consummation, the Bureau believed that 

GSE and agency requirements relating to 

post-consummation activity should not 

be relevant to qualified mortgage status. 

And because the temporary definition 

does not require actual purchase, 

guarantee, or insurance, the Bureau 

believed that it would not be 

appropriate to base qualified mortgage 

status on elements of the guides relating 

to the mechanics of actual delivery, 

purchase, guarantee, and endorsement. 

The Bureau recognized that most 

requirements wholly unrelated to 

underwriting involve postconsummation activity; however, preconsummation GSE and agency 

requirements could also be wholly 

unrelated to underwriting. For example, 

the status of a creditor’s approval or 

eligibility to do business with a GSE is 

not relevant for ascertaining qualified 

mortgage status using an AUS. The 

Bureau invited comment on this 

proposed clarification generally and on 

whether other GSE or agency 

requirements should be excluded. 

Comments 

Only one consumer group commented 

on the Bureau’s inclusion of guidance 

stating that issues wholly unrelated to 

ability to repay would not affect a loan’s 

QM status. This consumer group is also 

a nonprofit lender. Its comment 

suggested that the Bureau should state 

clearly those issues that are ‘‘related’’ to 

ability to repay, such as income or 

obligations that materially impact 

ability to repay, and violations of 

specific QM product restrictions, and 

rule out such things as credit score and 

appraisal requirements. This commenter 

also stated that failure to make this 

guidance clearer could reduce credit 

availability. 

Industry commenters overwhelmingly 

supported the interpretation that issues 

wholly unrelated to ability to repay 

should not be considered in assessing 

the QM status of a loan under 

§ 1026.43(e)(4). Most, however, also 

suggested that the guidance on what 

would be considered wholly unrelated 

to ability to repay should be clarified 

and the excluded items or categories 

expanded. Commenters agreed that 

failure to comply with postconsummation requirements should be 

excluded. As did the consumer group in 

the comment referenced above, some 

industry commenters requested that the 

Bureau make clear that items deemed 

related to ability to repay be limited to 

narrow issues of a borrower’s ability to 

make the loan’s payments, and that 

other risk-related factors be excluded. 

Specifically, commenters asked that 

factors related to willingness to repay 

(as opposed to ability to repay) and 

issues involving the attributes or defects 

of the collateral be excluded. Some 

commenters raised the issue of 

excluding jumbo loans.50 Two 

commenters requested that a time limit 

be imposed so that repurchase or 

indemnification claims on seasoned 

loans would be disregarded. One 

commenter stated that income 

determinations are variable and 

subjective, so errors made in good faith 

should not invalidate QM status. 

Another commenter asked for guidance 

on some of the issues above, rather than 

specifically requesting exclusion. 

In addition, commenters generally 

suggested that various other topics 

should be specifically listed as wholly 

unrelated to ability to repay, including: 

(1) Failure to comply with laws and 

regulations, including consumer 

protection laws and regulations; (2) 

purchase of a state-issued title guarantee 

for loans held in portfolio; (3) delayed 

note certification; (4) Ginnie Mae 

modification; (5) early buy-out 

programs; (6) non-material technical 

defects triggering repurchase or 

indemnification; and (7) ‘‘additional 

repurchase requirements.’’ 

The two GSEs both commented on the 

proposed rule, and both discussed the 

‘‘wholly unrelated to ability to repay’’ 

guidance. One specifically stated 

support for the guidance, and both 

urged the Bureau to state that collateralrelated issues were wholly unrelated to 

ability to repay. 

Final Rule 

The Bureau adopts the guidance on 

issues of what is wholly unrelated to 

ability to repay substantially as 

proposed, but has adopted the standard 

in the regulatory text to harmonize the 

eligibility requirements that must be 

met for the temporary qualified 

mortgage definition under the rule with 

those permitted under the Commentary. 

In addition, comment 43(e)(4)–4 has 

been revised to state that matters wholly 

unrelated to ability to repay are those 

matters that are wholly unrelated to 

credit risk or the underwriting of the 

loan, and to provide more detailed 

guidance on applying the standard. 

As stated in the proposed rule, 

underwriting is a complex process that 

involves assessment of the consumer’s 

ability to repay the loan as well as a 

variety of other credit risk factors. The 

Bureau made a deliberate decision in 

the 2013 ATR Final Rule to base 

qualified mortgage status under 

§ 1026.43(e)(4) on the GSEs’ and 

agencies’ general underwriting and 

credit risk analysis standards. While 

some of these factors may be more 

closely and directly focused on 

consumers’ ability to repay than others, 

the Bureau continues to believe that 

attempting to disaggregate GSE and 

agency underwriting requirements 

based on degree of relationship to 

ability to repay would be an 

extraordinarily complex task that would 

defeat the purposes of the temporary 

definition in adopting widely 

recognized standards to facilitate 

compliance and access to responsible 

credit. Indeed, the statute itself requires 

consideration of a borrower’s credit 

history, which could relate to 

willingness as well as ability to repay. 

Exclusion of requirements regarding 

collateral and other risk-related factors 


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51Because the determination is based on the 

situation at consummation, the later repayment 

history or ‘‘seasoning’’ of the loan would not be an 

appropriate metric for this standard. 

would require line-drawing exercises 

that could potentially interfere with the 

regulatory purpose. Moreover, allowing 

disaggregation would not be consistent 

with the use of AUS determinations to 

demonstrate compliance, as they 

involve interdependent risk factors and 

do not focus solely on a borrower’s 

capacity to make payments. 

The Bureau has revised the final 

comment to add an express general 

statement that matters wholly unrelated 

to ability to repay are those matters 

wholly unrelated to credit risk or the 

underwriting of the loan. The Bureau 

believes that this language, in 

conjunction with the reference to 

specific sets of requirements that are 

wholly unrelated to assessing ability to 

repay at the time of consummation 

(such as those related to selling, 

securitizing, or delivering consummated 

loans), provides useful guidance to 

stakeholders. 

As stated in the proposed rule, and 

consistent with the final rule, QM status 

depends on eligibility for sale, 

insurance, or guarantee at 

consummation, not on an actual 

executed sale, insuring, or guarantee of 

the individual loan. Accordingly, the 

Bureau considers events occurring after 

consummation and GSE and agency 

requirements concerning execution of 

an actual sale, insuring, or guarantee of 

the loan to be wholly unrelated to 

ability to repay.51 In addition, the 

Bureau believes that in regard to very 

limited matters, such as the status of a 

creditor’s approval or eligibility to do 

business with a GSE, additional preconsummation occurrences may also be 

wholly unrelated to ability to repay. 

Accordingly, the Bureau has revised the 

language in the final comment to 

identify specifically that these sets of 

requirements are considered wholly 

unrelated to ability to repay for 

purposes of the rule. 

Although the Bureau has reviewed 

many of the requests for determinations 

as to particular requirements in the 

comments received, the Bureau notes 

that with respect to certain of these 

inquiries, there was not sufficient detail 

or background information to discern 

the precise nature of the request or 

question. For instance, commenters’ 

bare suggestion that ‘‘additional 

purchase requirements’’ be deemed 

wholly unrelated to ability to repay was 

simply too vague to analyze, and would 

require further specification in order to 

apply the standard. 

Use of Automated Underwriting 

Systems 

The Proposal 

The Bureau also proposed to revise 

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

as determined by an automated 

underwriting system of a GSE or one of 

the agencies. As explained in comment 

43(e)(4)–4 as adopted in the 2013 ATR 

Final Rule, the AUSs and the written 

guides of the GSEs as well as the 

agencies can be used for eligibility 

purposes under § 1026.43(e)(4). The 

proposed revision of the comment 

explained that to rely upon an AUS 

recommendation to demonstrate 

qualified mortgage status a creditor 

must have (1) accurately inputted the 

loan information into the automated 

system, and (2) satisfied any 

accompanying requirements or 

conditions to the AUS approval that 

would otherwise invalidate the 

recommendation, unless, as discussed 

above, the conditions are wholly 

unrelated to the consumer’s ability to 

repay. The comment as adopted in the 

2013 ATR Final Rule assumed that any 

recommendation used for compliance 

would be valid, and these clarifications 

merely listed two criteria that should be 

monitored to ensure that validity. In 

particular, because the AUSs generate a 

list of conditions that must be met in 

support of the approval designation, the 

Bureau believed that those conditions 

must be satisfied to show eligibility for 

purchase, guarantee, or insurance. The 

Bureau sought comment on these 

revisions as well and also proposed 

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

for clarity and accuracy. 

Comments 

The consumer and community group 

commenters did not discuss the 

guidance in comment 43(e)(4)–4 

requiring that an AUS determination be 

based on accurate inputs, and that the 

creditor comply with any requirements 

and conditions specified by the AUS. 

About half of the industry commenters 

that specifically discussed this guidance 

supported its inclusion. Industry 

commenters asked that the Bureau make 

clear that QM status will not be 

invalidated by minor inaccuracies and 

by inaccuracies that would not change 

the outcome of the AUS determination. 

One commenter stated that it will not be 

possible to determine whether or not a 

loan would have been approved with 

accurate inputs. 

Final Rule 

The Bureau adopts the comment as 

proposed, with minor edits for clarity. 

As stated in the regulation, a loan is a 

QM if it is eligible for purchase, 

insurance or guarantee by a GSE or 

agency other than with regard to issues 

wholly unrelated to ability to repay, and 

meets the other relevant requirements. 

For this reason, minor inaccuracies in 

input data that do not affect eligibility 

will not affect QM status. The Bureau 

believes the convenience and ease of 

compliance made possible by this 

provision are more important than 

avoiding those few situations in which 

it is difficult to determine which 

inaccuracies will affect the AUS 

outcome. 

Although the reference to issues 

wholly unrelated to ability to repay in 

the main paragraph of the proposed 

comment applied to the requirements 

and conditions accompanying an AUS 

determination, and unquestionably do 

now that the standard is in the 

regulatory language, the Bureau believes 

that repeating such language in 

paragraph ii will enhance the clarity of 

the comment, and is doing so. 

Effect of Written Contract Variances 

The Proposal 

The Bureau also proposed to revise 

comment 43(e)(4)–4 in a third way to 

clarify further that a loan meeting 

eligibility requirements provided in a 

written agreement between the creditor 

and a GSE or agency that permits 

variation from the standards of the 

written guides and/or AUSs in effect at 

the time of consummation is also 

eligible for purchase or guarantee by the 

GSEs or insurance or guarantee by the 

agencies for the purposes of 

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

be qualified mortgages. The Bureau 

recognized that these agreements 

between creditors and the GSEs or 

agencies effectively constitute 

modification of, or substitutes for, the 

general manuals or AUSs with regard to 

these creditors. In many cases, the 

agreements allow the creditors to use 

other automated underwriting systems 

rather than the GSE or agency systems, 

subject to certain conditions or 

limitations on which loans the GSE or 

agency will accept as eligible for 

purchase, guarantee, or insurance. The 

Bureau believed that it was therefore 

appropriate for the purposes of 

§ 1026.43(e)(4) to consider the 

agreements to be equivalent to the 

standard written guides for purposes of 

the specific creditor to which the 

agreement applies. Many of these 

agreements are necessary to 

accommodate local and regional market 

variations and other considerations that 

do not substantially relate to ATRrelated underwriting criteria and 


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Federal Register / Vol. 78, No. 142 / Wednesday, July 24, 2013 / Rules and Regulations 44701 

therefore are generally consistent with 

the consumer protection and other 

purposes of the rule. However, the 

Bureau did not believe that it would be 

appropriate to allow one creditor to rely 

on the terms specified in another 

creditor’s written agreement with a GSE 

or agency to establish qualified 

mortgage status, as the written 

agreements are individually negotiated 

and monitored. The Bureau sought 

comment on this proposed clarification 

generally and on whether other 

variations on standard guides and 

eligibility criteria should be considered. 

Comments 

Two consumer and community group 

commenters discussed the use of 

variances with § 1026.43(e)(4). One 

comment, from a group of organizations, 

stated that allowing use of variances 

was a mistake because the agreements 

are private and this would make them 

very difficult for consumers to enforce 

when they are violated. This comment 

also suggested that if the variance 

provision is adopted the Bureau should 

make clear that a borrower would have 

access to such variance agreements by 

sending a qualified written request 

under RESPA. The other consumer 

group commenter, which operates a 

nonprofit lender, supported the use of 

variances as provided in the comment. 

Industry commenters were very 

supportive of allowing the use of 

variances. However, one association 

representing credit unions opposed 

allowing the use of variances, stating 

that it would disadvantage smaller 

market participants. A real estate 

association commented that variances 

should be allowed but should be 

required to be made public so that any 

creditor could request use of their terms. 

Other industry commenters requested 

that the Bureau make clear that later 

assignees could rely on the QM status of 

loans originated pursuant to a variance. 

Another commenter asked that the 

Bureau specify that, in order to be relied 

on, a variance must be in effect at the 

time of consummation of the loan. 

Several industry commenters pointed 

out that these variances are often used 

with correspondent lenders, and the 

creditor who has negotiated the variance 

agreement acts as an aggregator or 

sponsor, pooling loans originated by 

others. They stated that the comment as 

proposed would present a problem 

because it states that the variance can 

only be used by a creditor who is a party 

to the agreement with the GSE. They 

further stated that this problem could 

interfere with the origination of a large 

number of loans that meet the GSEs’ 

standards, and argued that 

correspondent lenders should be 

allowed to rely on the variances of their 

sponsors or aggregators. One large bank, 

however, opposed the idea of allowing 

one creditor to rely on another’s 

variance, stating that this might allow 

loans to become QMs after 

consummation. 

One of the GSEs provided comment 

on the variance provision, strongly 

supporting it, and pointing out in 

addition that both GSEs sometimes 

grant individual loan waivers of their 

standards. The GSE stated that these 

waivers do not proceed from an increase 

in its appetite for risk, and are only 

granted ‘‘on an exceptional basis,’’ and 

that they should be treated the same as 

the negotiated variances. One industry 

association also asked that such 

individual waivers be treated this way. 

Final Rule 

The language regarding variances is 

adopted substantially as proposed, with 

two important changes. The Bureau 

agrees that disallowing correspondent 

use of variances would interfere unduly 

with the market, and is adding language 

to clarify use in such circumstances 

without allowing wholly unrelated 

entities to rely on some other creditor’s 

agreement. Also, the Bureau believes 

that individual waivers granted by the 

GSEs should benefit from the same 

treatment as creditor-specific variances 

negotiated with the GSEs. 

As with all the QM provisions, the 

status of a loan is determined at the time 

of consummation. The variance applied 

to a transaction must be in effect at the 

time a loan is consummated, and the 

loan must meet all relevant 

requirements at that time. For this 

reason, a loan cannot be retroactively 

made into a QM by a creditor or 

assignee. In addition, because the status 

is determined at consummation, later 

assignees can rely on that status if it is 

valid. Allowing correspondents to rely 

on the variances of their sponsors or 

aggregators in effect at the time of 

consummation will not change this 

situation, and it will help to alleviate 

concerns that only larger market 

participants may take advantage of 

negotiated variances. The language of 

comment 43(e)(4)–4 has been crafted to 

ensure that the correspondent is 

involved in a direct relationship with 

the variance holder and originating the 

QM pursuant to that relationship. 

In addition, the Bureau does not 

believe that allowing use of variances 

will disadvantage smaller market 

participants, since it is intended only to 

maintain the current market situation. 

Although variances are private 

agreements, with the potential for 

attendant disadvantages described by 

commenters above such as difficulty of 

enforcement, the Bureau does not 

believe it is appropriate to regulate 

transparency for these agreements 

through this narrowly focused 

amendatory rulemaking, without further 

review. As always, the Bureau will 

monitor the effects of its rules on the 

marketplace going forward. 

The Bureau has decided to allow 

loans benefitting from individual 

waivers granted by the GSEs to be 

treated the same as loans originated 

following negotiated variances. The 

Bureau has no reason to believe that 

these loans present undue risk to 

consumers, and notes that the GSEs are 

under government conservatorship. 

The provision regarding variances is 

adopted as proposed, with the two 

changes discussed above. 

Repurchase and Indemnification 

Demands 

The Proposal 

The Bureau also proposed new 

comment 43(e)(4)–5 to provide 

additional clarification on how 

repurchase and indemnification 

demands by the GSEs and agencies may 

affect the qualified mortgage status of a 

loan. The proposed comment did not 

amend the meaning of the current rule 

but clarified how a determination of the 

qualified mortgage status of a loan 

should be understood in relation to 

claims that the loan was not eligible for 

purchase, insurance, or guarantee and 

therefore not a qualified mortgage. In 

making the proposal, the Bureau 

understood that facts upon which 

eligibility status was determined at or 

before consummation could later be 

found to be incorrect. Often, a 

repurchase or indemnification demand 

by a GSE or an agency involves such 

issues. However, the mere occurrence of 

a GSE or agency demand that a creditor 

repurchase a loan or indemnify the 

agency for an insurance claim does not 

necessarily mean that the loan is not a 

qualified mortgage. 

Proposed comment 43(e)(4)–5 would 

have provided that a repurchase or 

indemnification demand by the GSEs, 

HUD, VA, USDA, or RHS is not 

dispositive in ascertaining qualified 

mortgage status. Much as qualified 

mortgage status under the general 

definition in § 1026.43(e)(2) may 

typically turn on whether the 

consumer’s debt-to-income ratio at the 

time of consummation was equal to or 

less than 43 percent, qualified mortgage 

status under § 1026.43(e)(4) may 

typically turn on whether the loan was 

eligible for purchase, guarantee, or 


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insurance at the time of consummation. 

Thus, for example, a demand for 

repurchase or indemnification based on 

post-consummation GSE or agency 

requirements would therefore not be 

relevant to qualified mortgage status. As 

indicated above, such factors meet the 

wholly unrelated to ability to repay 

standard that the Bureau is finalizing in 

§ 1026.43(e)(4). Only reasons for a 

repurchase or indemnification demand 

that specifically apply to the qualified 

mortgage status of the loan under 

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

discussed above in connection with 

comment 43(e)(4)–4. Moreover, the mere 

fact that a demand has been made, or 

even resolved, between a creditor and 

GSE or agency is not dispositive with 

regard to eligibility for purposes of 

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

involved in an ongoing business 

relationship rather than an adjudicatory 

process. However, evidence of whether 

a particular loan satisfied the 

§ 1026.43(e)(4) eligibility criteria at 

consummation may be brought to light 

in the course of dealings over a 

particular demand, depending on the 

facts and circumstances. Such 

evidence—like any evidence discovered 

after consummation that relates to the 

facts as of the time of consummation— 

may be relevant in assessing whether a 

particular loan is a qualified mortgage. 

To clarify this point further, proposed 

comment 43(e)(4)–5 included two 

examples of relevant evidence 

discovered after consummation. In the 

first example, one would assume that a 

loan’s eligibility for purchase was based 

in part on the consumer’s employment 

income of $50,000 per year. The creditor 

uses the income figure in obtaining an 

approve/eligible recommendation from 

DU. A quality control review, however, 

later determines that the documentation 

provided and verified by the creditor to 

comply with Fannie Mae requirements 

did not support the reported income of 

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

Mae demands that the creditor 

repurchase the loan. Assume that the 

quality control review is accurate, and 

that DU would not have issued an 

approve/eligible recommendation if it 

had been provided the accurate income 

figure. The Bureau believed that, given 

the facts and circumstances of this 

example, the DU determination at the 

time of consummation was invalid 

because it was based on inaccurate 

information provided by the creditor; 

therefore, the loan was never a qualified 

mortgage. 

For the second example, one would 

assume that a creditor delivered a loan, 

which the creditor determined was a 

qualified mortgage at the time of 

consummation, to Fannie Mae for 

inclusion in a particular To-BeAnnounced Mortgage Backed Security 

(MBS) pool of loans. The data submitted 

by the creditor at the time of loan 

delivery indicated that the various loan 

terms met the product type, weightedaverage coupon, weighted-average 

maturity, and other MBS pooling 

criteria, and MBS issuance disclosures 

to investors reflected this loan data. 

However, after delivery and MBS 

issuance, a quality control review 

determines that the loan violates the 

pooling criteria. The loan still meets 

eligibility requirements for other Fannie 

Mae products and loan terms. Fannie 

Mae, however, requires the creditor to 

repurchase the loan due to the violation 

of MBS pooling requirements. Assume 

that the quality control review 

determination is accurate. The reason 

the creditor repurchases this loan would 

not be relevant to the loan’s qualified 

mortgage status. The loan still meets 

other Fannie Mae eligibility 

requirements and therefore remains a 

qualified mortgage based on these facts 

and circumstances. 

The Bureau invited comment on 

proposed comment 43(e)(4)–5 in 

general. The Bureau also solicited 

comment on whether additional 

examples or other particular situations 

should be provided or whether 

alternatives for eligibility other than 

relationship to ability-to-repay 

standards should be adopted that would 

determine the qualified mortgage status 

of a loan. 

Comments 

One consumer group and nonprofit 

lender commented on the explanation of 

how repurchase and indemnification 

demands should be understood in 

relation to QM status, stating support for 

the Bureau’s rule but requesting more 

fully developed guidance on the issue. 

Industry commenters overwhelmingly 

supported the addition of comment 

43(e)(4)–5, but also had various 

suggestions for changes. One industry 

commenter, along with one of the GSEs, 

stated that the first example given, in 

which an accurate determination that 

the creditor-reported income did not 

support QM status meant that QM status 

was invalid, appeared to suggest that the 

repurchase demand was indeed 

dispositive. A trade association asked 

that the Bureau not include as ‘‘loans for 

which repurchase or indemnification 

demand has been made’’ those loans 

that are not eventually repurchased or 

indemnified. 

Both GSEs commented on this 

guidance, and both supported the 

addition of comment 43(e)(4)–5. One 

GSE also suggested that the Bureau 

should delete the examples given 

because they would cause confusion. 

One also requested that the Bureau 

make clear that even if QM status under 

§ 1026.43(e)(4) is invalidated, the loan 

may still have qualified for QM status 

under another provision. 

Final Rule 

Comment 43(e)(4)–5 is adopted as 

proposed, with two small edits to make 

clear that only QM status under 

§ 1026.43(e)(4) is being discussed in the 

examples and that in the second 

example the critical fact is that the loan 

still meets Fannie Mae’s eligibility 

requirements. 

Regarding the first example in the 

comment, it is not the repurchase 

demand nor the quality control review 

that is dispositive as to QM status, but 

the fact that the finding that the income 

figure is unsupported by the 

documentation is stated to be 

‘‘accurate.’’ The example is a 

hypothetical, and assuming the 

accuracy of an issue that would 

normally have to be established through 

an investigation of the facts and 

circumstances of the transaction allows 

for better explanation of how the rule 

works. As for the issue of what should 

be considered a repurchase or 

indemnification demand, the question is 

irrelevant to QM status. Repurchase or 

indemnification demands are 

potentially relevant to QM status only 

because they may indicate or lead to 

evidence that a loan did not qualify as 

a QM at the time of consummation. In 

addition, the Bureau believes that the 

examples will increase clarity for 

stakeholders, and not cause confusion. 

Accordingly, the Bureau considers the 

two examples presented as providing 

clear and appropriate guidance on the 

issue, with the edits mentioned above. 

Appendix Q to Part 1026—Standards for 

Determining Monthly Debt and Income 

Overview 

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 (DTI) that is 

less than or equal to 43 percent. To 

determine whether the consumer meets 

the specific DTI requirement, the 

creditor must calculate the consumer’s 

monthly DTI in accordance with 

appendix Q. The Bureau adopted the 43 


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52The Bureau notes that the specific 43 percent 

debt-to-income requirement applies only to 

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

specific DTI requirement does not apply to loans 

that meet the qualified mortgage definitions in 

§ 1026.43(e)(4), (5), (6), or (f), or that are not 

qualified mortgages and instead comply with the 

general ability-to-repay standard. 53 78 FR 25648. 

percent DTI requirement and other 

modifications to the statutory criteria 

pursuant to its authorities under TILA 

section 129C and 105(a).52

Appendix Q, as adopted, contains 

detailed requirements for determining 

‘‘debt’’ and ‘‘income’’ for the purposes 

of the DTI calculation based on the 

definitions of those terms set forth in 

HUD Handbook 4155.1, Mortgage Credit 

Analysis for Mortgage Insurance on 

One-to-Four-Unit Mortgage Loans. The 

standards in the Handbook are used by 

creditors originating residential 

mortgages insured by the Federal 

Housing Administration (FHA) to 

determine and verify a consumer’s total 

monthly debt and monthly income. For 

the purposes of appendix Q, the Bureau 

largely codified the Handbook, but 

modified various portions of it to 

remove standards and references unique 

to the FHA underwriting process. 

In adopting appendix Q in the 2013 

ATR Final Rule, the Bureau believed 

that using, to the extent possible, 

existing HUD/FHA underwriting 

guidelines as the foundation for 

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

DTI purposes would provide creditors 

with well-established standards for 

determining whether a loan is a 

qualified mortgage under 

§ 1026.43(e)(2). 

Following publication of the 2013 

ATR Final Rule, the Bureau received a 

number of inquiries from industry 

stakeholders regarding provisions 

codified in the appendix that they 

believed had been intended to function 

as flexible standards used by the FHA 

for insurance underwriting purposes, 

rather than codified as bright-line 

requirements for determining debt and 

income. Concerns were raised that these 

provisions may be properly suited for 

the purposes of a holistic and 

qualitative underwriting analysis but are 

not well-suited to function as regulatory 

requirements that are not subject to 

discretionary variance or waiver on an 

individual basis. Stakeholders also 

expressed concern that many of these 

provisions provided little clarity or 

guidance for creditors for compliance 

purposes. Similarly, stakeholders 

expressed concerns that the broad 

nature of these provisions could 

undermine the presumption of 

compliance available to creditors who 

make qualified mortgages and expose 

them to significant litigation risk. 

In response to these concerns, the 

Bureau included certain proposed 

revisions to appendix Q in its proposed 

rule to facilitate compliance when 

determining DTI and to further the 

purposes of the ATR Final Rule. The 

Bureau agreed that certain provisions of 

appendix Q as adopted were not 

properly suited to function as 

regulations. The Bureau intended 

appendix Q to serve as a reliable 

mechanism for creditors to evaluate 

income and debts for the purpose of 

determining DTI and not as a general 

and flexible underwriting policy for 

assessing risk (as it is used by FHA in 

the context of insurance). The Bureau 

also recognized that it would not have 

the same level of discretion regarding 

the application of appendix Q.53

The Bureau therefore proposed 

revisions to appendix Q on: (1) Stability 

of income, and the creditor requirement 

to evaluate the probability of the 

consumer’s continued employment; (2) 

with regard to salary, wage, and other 

forms of consumer income, the creditor 

requirement to determine whether the 

consumer’s income level can reasonably 

be expected to continue; (3) creditor 

analysis of consumer overtime and 

bonus income; (4) creditor analysis of 

consumer Social Security income; (5) 

requirements related to the analysis of 

self-employed consumer income; (6) 

requirements related to nonemployment related consumer income, 

including creditor analysis of consumer 

trust income; and (7) creditor analysis of 

rental income. 

The Bureau also proposed other 

revisions to clarify the application of 

appendix Q, as well as general technical 

and wording changes throughout 

appendix Q for consistency and 

clarification, including technical 

changes to conform to the specific 

purpose that appendix Q serves in the 

2013 ATR Final Rule, as opposed to the 

function that the HUD Handbook serves 

for FHA underwriting. 

Overview of Comments on Bureau’s 

Appendix Q Proposals 

Commenters, including both industry 

and consumer commenters, generally 

supported the Bureau’s proposed 

changes to appendix Q. A bank for 

example stated that it appreciated the 

Bureau’s efforts to establish clear and 

reliable standards within appendix Q, 

and that it generally believed the 

proposed amendments would allow 

creditors to underwrite loans with 

improved confidence that appendix Q 

standards have been met. A bank trade 

association stated that it appreciated the 

Bureau’s efforts to clarify the ability-torepay regulations and stated that it 

believed the Bureau’s proposals would 

go a long way in improving the final 

rules. A state credit union association 

stated that it strongly supported the 

Bureau’s proposed changes to appendix 

Q as certain provisions adopted in 

appendix Q are not suitable to function 

as regulations. A consumer organization 

stated its support for the Bureau’s 

clarifications of appendix Q but also 

suggested the need for further 

clarifications. Most commenters 

suggested additional clarifications to 

appendix Q, some specific to the 

Bureau’s proposals, and some beyond 

the Bureau’s specific proposals— 

including general revisions. 

Response to General Comments on 

Appendix Q 

The Bureau appreciates the comments 

received on its appendix Q proposals. 

The Bureau believes that the proposals 

as adopted in this final rule will further 

the purpose and intent of appendix Q by 

establishing clearer requirements for 

assessing the debt and income of 

consumers, while at the same time 

facilitating creditor compliance and 

access to credit for consumers. The 

comments received generally support 

the Bureau’s view. 

I. CONSUMER ELIGIBILITY 

A. Section I.A. Stability of Income 

The Proposal 

The Bureau proposed revising the 

criteria in appendix Q for determining 

whether a consumer’s income is 

‘‘stable’’ for the purposes of DTI. 

Appendix Q as adopted required in 

section I.A.3.a that creditors evaluate 

the ‘‘probability of continued 

employment’’ by analyzing, among 

other things, (1) the consumer’s past 

employment record; (2) the consumer’s 

qualification for the position; (3) the 

consumer’s previous training and 

education; and (4) the employer’s 

confirmation of continued employment. 

Stakeholders had raised concerns that, 

beyond analysis of a consumer’s past 

employment record and current 

employment status, each of these 

requirements was incompatible with 

appendix Q’s purpose of providing clear 

rules for determining debt and income, 

and was likely to result in compliance 

difficulty and significant exposure to 

litigation risk for creditors attempting to 

avoid such risk by originating qualified 

mortgages and thereby taking advantage 

of the presumption of compliance. 

Stakeholders, for example, indicated 


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that many employers were likely to be 

unwilling for various reasons (including 

but not limited to economic uncertainty) 

to confirm that a consumer’s 

employment will continue into the 

future, and similarly creditors may be 

unqualified to evaluate a consumer’s 

education, training, and job 

qualifications. 

In response to these concerns, the 

Bureau proposed to amend appendix Q 

in section I.A.3.a to eliminate the 

requirements that creditors determine 

the ‘‘probability of continued 

employment’’ by considering a 

consumer’s ‘‘qualifications for the 

position’’ and ‘‘previous training and 

education.’’ The Bureau proposed 

instead to amend the section to require 

creditors to examine a consumer’s past 

and current employment. The Bureau 

also proposed to remove the 

requirement that creditors obtain the 

‘‘employer’s confirmation of continued 

employment’’ and instead require only 

that the creditor examine the 

‘‘employer’s confirmation of current, 

ongoing employment status.’’ The 

Bureau believed that requirements for a 

creditor to evaluate a consumer’s 

training, education, and qualifications 

for his or her position are not wellsuited to function as regulations 

designed to enable creditors to 

determine debts and income and in turn 

calculate DTI, and may increase 

exposure to litigation risk. Specifically, 

the Bureau indicated that it was not 

entirely clear what creditors would need 

to do in order to comply with these 

requirements, or how those 

determinations would affect a 

consumer’s income for the purpose of 

calculating DTI. 

The Bureau also stated its belief that 

requiring creditors to obtain an 

employer’s confirmation of the 

consumer’s continued employment 

would not function properly as a 

regulatory requirement because 

employers likely would be unwilling to 

provide any confirmation of 

employment continuing beyond current, 

ongoing employment. The Bureau 

pointed out that without the benefit of 

waiver or variance, such a requirement 

could serve to disqualify any such 

consumer’s employment income from 

being included in the DTI calculation— 

which would frustrate access to credit. 

The Bureau stated further that a 

confirmation of current, ongoing 

employment status is adequate to verify 

employment for purposes of 

determining income. To that end, the 

Bureau also proposed for clarification 

purposes a proposed note to section 

I.A.3 that states creditors may assume 

that employment is ongoing if a 

consumer’s employer verifies current 

employment and does not indicate that 

employment has been, or is set to be 

terminated. The proposed note made 

clear, however, that creditors should not 

rely upon a verification of current 

employment that includes an 

affirmative statement that the 

employment is likely to cease, such as 

a statement that indicates the employee 

has given (or been given) notice of 

employment suspension or termination. 

Finally, the Bureau also proposed 

several other technical, non-substantive 

changes to section I.A for clarification 

purposes. 

Comments 

Commenters, primarily from industry, 

who submitted comments concerning 

the Bureau’s proposed changes to 

section I.A.3 were generally supportive 

of those changes although some 

clarification or additional guidance was 

suggested by several. 

Several bank trade associations and a 

bank, in expressing support for the 

changes, noted that: (1) While it is 

reasonable to require an examination of 

current employment, provisions which 

require a creditor to speculate or predict 

future employment are problematic; (2) 

creditors should not be asked to second 

guess employer hiring decisions or be 

expert in establishing qualifications for 

positions; (3) the eliminated criteria 

could have a negative impact on 

consumers with ‘‘on the job’’ education; 

and (4) employers will not discuss 

certainty of continued employment for 

fear that it could create a new 

employment contract for at-will 

employees. These commenters also 

suggested that the Bureau provide 

guidance that verbal confirmation 

would satisfy the requirement that the 

creditor examine the employer’s 

confirmation of the consumer’s 

‘‘current, ongoing employment status’’ 

as provided in I.A.3.a as proposed by 

the Bureau. 

A state banking association 

commenter, in expressing support for 

the Bureau’s proposal to replace the 

section I.A.3.a requirement that the 

creditor obtain an employer’s 

‘‘confirmation of continued 

employment’’ for an applicant with a 

requirement to ‘‘confirm current, 

ongoing employment,’’ requested that 

the Bureau provide additional 

clarification for instances in which 

employment is inherently dependent on 

contingencies outside the employee’s or 

employer’s control—such as applicants 

whose salaries are funded through 

ongoing grants, agency funded positions 

at a nonprofit organization or federal 

work programs, or applicants who are 

political appointees. A national banking 

association commenter requested 

similar clarification noting that 

flexibility is required to ensure that all 

populations are adequately served. 

One commenter, a manufactured 

housing lender, with regard to the 

Bureau’s proposed note amending 

section I.A.3.a, stated that the Bureau 

should make clear that the creditor has 

no obligation to inquire—either in 

writing or verbally—as to the 

employee’s job performance and/or 

whether any suspension or termination 

is imminent. 

A credit union commenter that 

indicated that it serves the education 

community stated, in referring to the 

Bureau’s proposed note amending 

I.A.3.a, that the employment of many of 

its members who are teachers, 

professors and other educators is 

established by year-to-year contracts 

that generally include a termination 

date. The commenter noted that these 

contracts are generally renewable and 

negotiated through the teacher’s 

association or other union 

representation. The commenter stated 

that the Bureau’s proposed note would 

likely preclude it from relying upon a 

copy of a member’s contract as evidence 

of stability of income since if the 

contract included a termination date the 

commenter would be unable to assume 

that the member’s employment is 

‘‘ongoing.’’ The commenter suggested 

the proposed note be expanded to 

consider fields of employment that may 

be viewed as ‘‘seasonal’’ or industries 

where employment is established by 

contract, such as the education 

community, so that a creditor could also 

examine past and current employment 

as part of its analysis of the stability of 

income. 

The manufactured housing lender 

commenter also suggested that if the 

Bureau adopted its proposal to amend 

section I.A.3.a to eliminate the 

obligation of creditors to predict a 

consumer’s likelihood of continued 

employment, that it remove existing 

section I.A.3.b. Section I.A.3.b provides 

that ‘‘creditors may favorably consider 

the stability of a consumer’s income if 

he/she changes jobs frequently within 

the same line of work, but continues to 

advance in income or benefits. In this 

analysis, income stability takes 

precedence over job stability.’’ The 

commenter stated that this section 

existed as a caveat to the obligation of 

creditors to predict a consumer’s future 

employment or advancement, and with 

the elimination of that requirement it is 

no longer necessary. 


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54The Bureau notes that Section II.E.4, Projected 

Income for New Job, provides the means for creditor 

assessment of projected income where such income 

does not already satisfy the requirements of Section 

I. 

Final Rule 

The Bureau is adopting the revisions 

to section I.A.3 as proposed. The Bureau 

agrees with commenters that 

elimination of the requirements that the 

creditor: (1) examine the consumer’s 

qualifications for the position, previous 

training and education; and (2) examine 

the employer’s confirmation of the 

consumer’s continued employment— 

will provide clearer and more 

appropriate standards for creditors 

under appendix Q, and facilitate 

compliance with the Bureau’s ATR 

Final Rule. 

With regard to the comment 

suggesting that the Bureau amend its 

proposed note in section I.A.3.a to 

expand it to consider industries where 

employment is established by contract, 

including the education community, the 

Bureau appreciates the comment and 

recognizes the special circumstances 

confronted by contract employees. The 

Bureau believes, however, that 

additional revisions to section I.A.3.a 

are not necessary given the existing 

provisions of appendix Q with regard to 

the treatment of seasonal employment 

and income. That language, at sections 

I.A.2.b and I.B.5, provides the means for 

creditor assessment of the employment 

and stability of income of contract 

employees for purposes of appendix 

Q.54

With regard to the comment 

requesting that the Bureau clarify that 

the creditor has no obligation to inquire 

about a consumer’s job performance 

and/or whether any suspension or 

termination is imminent, the Bureau’s 

revisions to I.A.3.a do not require 

creditors to affirmatively make such 

inquiries. That section, as revised, only 

provides that a creditor cannot rely on 

a verification of current employment if 

it includes an affirmative statement that 

employment is likely to cease. 

Concerning the comment requesting 

that the Bureau provide guidance to 

explicitly allow verbal confirmation by 

employers of the consumer’s current, 

ongoing employment status, the Bureau 

would like to review this request further 

to ensure that such guidance would be 

consistent with the purposes of 

appendix Q and the ATR Final Rule. 

Similarly, with regard to the comment 

requesting clarification that a creditor’s 

obligation to only consider a consumer’s 

past and current and ongoing (and not 

continual) employment as proposed by 

the Bureau includes employment in 

contingent situations outside of the 

employee’s or employer’s control, the 

Bureau plans to review this issue further 

to determine whether such clarification 

to the existing appendix Q requirements 

is necessary, and how any such 

clarification would be framed. As 

discussed above, the Bureau believes 

appendix Q provides creditors with the 

ability to assess the employment and 

stability of income of employees 

generally and contract employees in 

particular. 

Finally, with regard to the comment 

recommending the deletion of section 

I.A.3.b as unnecessary with the 

adoption of the Bureau’s proposed 

revisions to section I.A.3.a, the Bureau 

disagrees, as it believes that section 

I.A.3.b, as amended by the Bureau’s 

proposed revisions, has continuing 

relevance in the determination of the 

stability of the consumer’s income. As 

revised, section I.A.3.a requires an 

examination of the consumer’s past 

employment record and a verification of 

current, ongoing employment status as a 

method of assessing stability of income. 

Section I.A.3.b provides creditors with 

an additional method of assessing 

stability of income, and of meeting the 

ability to repay and qualified mortgage 

requirements, in the situation where a 

consumer changes jobs frequently. 

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

Forms of Income 

Section I.B.1.a of appendix Q, the 

‘‘General Policy on Consumer Income 

Analysis,’’ as adopted in the ATR Final 

Rule stated that creditors must analyze 

the income for each consumer who will 

be obligated for the mortgage debt to 

determine whether his/her income level 

can be reasonably expected to continue 

‘‘through at least the first three years of 

the mortgage loan.’’ Sections I.B.2 and 

I.B.3 of appendix Q as adopted similarly 

required that creditors determine 

whether overtime and bonus income 

‘‘will likely continue’’ and that they 

‘‘establish and document an earnings 

trend for overtime and bonus income.’’ 

The Bureau received inquiries from 

industry stakeholders on these sections 

of Appendix Q similar to those received 

regarding section I.A.1, noting, among 

other things, (1) that these provisions 

codify general, forward-looking 

standards that are better suited for the 

purposes of a holistic and qualitative 

underwriting analysis (such as the FHA 

guidelines for determining insurance 

eligibility) and may not function 

properly as regulations; and (2) because 

the Bureau may not have the flexibility 

to waive or grant variances on an 

individual basis regarding the 

application of appendix Q, these 

provisions will undermine the purpose 

of appendix Q to serve as a reliable 

mechanism for evaluating income and 

debts for the purpose of determining the 

qualified mortgage status of a loan, and 

also increase the risk of litigation. 

In response to these issues raised by 

stakeholders, the Bureau proposed 

several amendments to section I.B of 

appendix Q to explain and clarify the 

criteria for calculating a consumer’s 

employment income and to determine 

whether a consumer’s income is 

continuing for the purposes of the DTI 

calculation. 

I.B.1. General Policy on Consumer 

Income Analysis 

The Proposal 

The Bureau proposed to amend 

section I.B.1.a to require creditors to 

evaluate only whether a consumer’s 

income level would not be reasonably 

expected to continue based on the 

documentation provided, with no threeyear requirement. In support of this 

proposal, the Bureau stated its belief 

that the intended purpose of appendix 

Q would not be served by requiring 

creditors to predict a consumer’s 

employment status up to three years 

after application. The Bureau stated 

further that creditors should be required 

to analyze recent and current 

employment, along with any evidence 

in the applicant’s documentation 

indicating whether employment is 

likely to continue. The Bureau therefore, 

proposed to add a note to section 1.B.1.a 

to make clear that creditors should not 

assume that a consumer’s wage or salary 

income can be reasonably expected to 

continue if the verification of current 

employment includes an affirmative 

statement that the employment is likely 

to cease, such as a statement that 

indicates the employee has given (or 

been given) notice of employment 

suspension or termination. The Bureau 

stated however, that if the consumer’s 

application and the employment 

confirmation indicate that the consumer 

is currently employed and provide no 

such indication that employment will 

cease, the Bureau believed, as reflected 

in the proposed note, that the creditor 

should be able to use that consumer’s 

income without an obligation to predict 

whether or not that consumer will be 

employed on some future date. 

Comments 

Various industry participants 

commented on the Bureau’s proposed 

amendments to section 1.B.1.a of 

appendix Q, and the elimination of the 

3-year requirement. These commenters 


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suggested additional clarifications to 

this section. 

A joint bank trade association and a 

bank recommended revising section 

1.B.1.a to require each consumer to 

disclose to the lender whether the 

consumer has reason to believe that 

their income level will not continue 

through the first three years of the 

mortgage. These commenters noted that 

consumers are in the best position to 

know whether they expect to retire, take 

a leave of absence or otherwise not have 

their income continue for the first three 

years of the mortgage loan, and that 

lenders have no way to reliably 

determine this. They stated further that 

questioning consumers about retirement 

or time off to raise children raises 

potential fair lending issues. They also 

requested guidance on the treatment of 

statements from consumers such as, ‘‘I 

might retire.’’ 

Another bank trade association, in 

commenting on the Bureau’s proposed 

elimination of the requirement to 

analyze whether the consumer’s income 

level can reasonably be expected to 

continue through the first three years of 

the mortgage loan, requested 

clarification of how far into the future 

creditors must reasonably expect 

income to continue. 

One bank commenter in stating its 

support for the Bureau’s proposed 

changes in sections I.B.1, 2 and 3, stated 

that it agreed with the Bureau that 

creditors cannot be reasonably expected 

to evaluate and document whether a 

consumer’s income level can be 

expected to continue for a three-year 

period. 

Various other commenters suggested 

several other changes to section I.B. For 

example, similar to the joint bank trade 

association comment on I.B.1.a 

discussed above, several commenters 

raised possible fair lending issues with 

regard to the section I.B.1 notes, 

specifically, section i, which states that 

effective income for consumers 

planning to retire during the first threeyear period must include documented 

retirement benefits, Social Security 

payments, and other payments expected 

to be received in retirement. One bank, 

for example, stated that while it 

supported the existing section i it 

recommended that, to mitigate potential 

fair lending risks based on age, the 

Bureau add a clarification that creditors 

should not ask consumers about future 

retirement plans, but should consider 

documented retirement benefits and 

payments if a consumer disclosed a plan 

to retire during the first three-year 

period. Another bank commenter 

similarly requested that the Bureau 

explicitly state, for fair lending reasons, 

that creditors are not expected to ask 

consumers if they plan to retire. This 

commenter also noted that it would be 

impracticable if not impossible to get 

documented benefits and payments if 

the consumer has yet to actually receive 

any retirement income and may not 

activate the source for up to a period of 

three years. The joint bank trade 

association commenter referred to above 

suggested adding language to section i 

of the notes indicating that effective 

income requirements for consumers 

planning to retire only applies to those 

who disclose such plans. A bank 

commenter, citing existing section ii of 

the notes, which prohibits creditors 

from asking consumers about possible 

future maternity leave, suggested, for 

fair lending reasons, that the Bureau add 

a clarification that creditors should not 

ask consumers about future medical 

leaves, and a joint bank trade 

association commenter suggested 

changing the term ‘‘maternity’’ leave to 

‘‘medical’’ leave in section ii of the 

notes. 

Final Rule 

The Bureau is adopting the revisions 

to section I.B.1 as proposed. The Bureau 

continues to believe that the 

requirement in section I.B.1.a 

eliminated by the Bureau’s proposal, 

i.e., that the consumer’s income must be 

analyzed to determine whether the 

consumer’s income level can be 

reasonably expected to continue 

‘‘through the first three years of the 

mortgage loan,’’ does not serve the 

intended purposes of appendix Q. 

Instead, as proposed, the Bureau revises 

section I.B.1.a to require only that the 

creditor determine whether a 

consumer’s income level ‘‘can be 

reasonably expected to continue.’’ New 

section iii of the notes to section I.B.1, 

adopted by this final rule, provides that 

creditors can assume that the 

consumer’s salary or wage income can 

be reasonably expected to continue if 

the consumer’s employer verifies 

current employment and income and 

does not indicate that employment has 

been or is set to be terminated. That 

section states further, however, that this 

assumption cannot be made by the 

creditor if a verification of current 

employment includes an affirmative 

statement that the consumer’s 

employment is likely to cease—such as 

a statement that the consumer has given 

or been given notice of employment 

suspension or termination. The Bureau 

believes that, as revised by this final 

rule, section I.B.1 effectively sets out the 

analysis required of the creditor for 

assessing the continuance of consumer 

salary and wage income, and is 

consistent with the purposes of 

appendix Q. 

With regard to the commenter that 

requested clarification to appendix Q on 

how far into the future creditors must 

reasonably expect a consumer’s income 

to continue, the Bureau believes that 

section I.B.1.a, as revised by the Bureau, 

effectively sets out the standard needed 

to be followed by creditors. As stated in 

new section iii of the notes, creditors 

can ‘‘assume that salary or wage income 

. . . can be reasonably expected to 

continue if the consumer’s employer 

verifies current employment and 

income and does not indicate that 

employment has been or is set to be 

terminated.’’ That section, as revised by 

the Bureau, does not require creditors to 

make a determination that the 

consumer’s income will continue 

through the first three years of the 

mortgage loan, or any other specified 

period. 

The Bureau appreciates the 

recommendations from some 

commenters that section I.B.1 be 

amended to require consumers to 

disclose whether they have reason to 

believe their income level will not 

continue as the consumer is in the best 

position to know their future 

employment and income status. 

However, section I.B.1 already provides 

that creditors may assume that the 

consumer’s salary or wage income can 

be reasonably expected to continue if 

the consumer’s employer verifies 

current employment and income and 

does not indicate that employment has 

been, or is set to be terminated. Where 

no such appropriate verification is 

provided, the creditor must analyze the 

consumer’s income and determine 

whether the consumer’s income level 

can be reasonably expected to continue. 

In such cases, the Bureau believes that 

further analysis should be required of 

creditors, and that, as revised, section 

I.B provides creditors with an effective 

regulatory framework for carrying out 

that analysis. 

With regard to the fair lending 

concerns raised by some commenters 

regarding questions presented to 

consumers relating to future retirement 

plans, the Bureau agrees that the final 

rule and appendix Q do not obligate 

creditors to ask consumers when they 

expect to retire. If, however, a consumer 

discloses a plan to retire during the first 

three-year period by making an 

affirmative statement of such plans, 

creditors should consider documented 

retirement benefits, Social Security 

payments, and other payments expected 

to be received in retirement. The Bureau 

similarly believes that the ATR Final 

Rule and appendix Q do not require 


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55The Bureau’s proposed rule preamble at 78 FR 

25650 also briefly referred to Bureau changes to 

section I.B.3. However, this was a typographical 

error and no Bureau changes were proposed to 

section I.B.3. 

creditors to ask whether a consumer 

may, in the future, take medical leave. 

The Bureau does not believe it is 

necessary, however, to amend appendix 

Q with specific statements in that 

regard. In all cases, the Bureau expects 

creditors to fully comply with all 

applicable fair lending laws. 

I.B.2. Overtime and Bonus Income. 

The Proposal 

The Bureau also proposed changes to 

section 1.B.2 regarding overtime and 

bonus income.55 Specifically, the 

Bureau proposed to eliminate the 

requirement in section I.B.2.a that 

creditors determine whether such 

income ‘‘will continue.’’ Instead, the 

proposal would have amended section 

I.B.2.a. to provide that creditors must 

focus on evaluating the consumer’s 

documented overtime and bonus 

income history for the past two years 

and any submitted documentation 

indicating whether the income likely 

will cease. In proposing this change the 

Bureau stated that it recognized that 

overtime and bonus income may vary 

from year to year and generally may be 

less reliable than salary but noted that, 

in certain occupations, overtime and 

bonus income may be an integral and 

reliable component of the consumer’s 

income. The Bureau stated further that 

while it believed that creditors must 

confirm that overtime and bonus 

income is not anomalous, the 

requirement to analyze the consumer’s 

two-year overtime and bonus income 

history, and to verify that the submitted 

documentation does not indicate 

overtime or bonus income will cease, 

would adequately address this concern 

while satisfying the purposes of the 

qualified mortgage provision. 

Comments 

Several industry commenters, 

including several banks, a joint trade 

association, several state bank 

associations, and a state credit union 

association provided comments specific 

to the Bureau’s proposed change to 

section I.B.2.a. These commenters 

generally supported the Bureau’s 

proposed changes. Some of these 

commenters suggested additional 

changes to sections I.B.2 and I.B.3. 

A bank commenter, in stating support 

for the Bureau’s proposed change 

eliminating language requiring creditors 

to determine whether overtime and 

bonus income will continue, and 

substituting language focusing on a twoyear income history, commented that 

the change would facilitate better access 

to credit for consumers who rely on 

overtime and bonus income. Two state 

bank associations similarly expressed 

support for the Bureau’s proposed 

change, with one stating that while most 

employers are not willing to indicate 

bonus income is likely to continue, they 

are willing to affirm such bonus 

payments were paid and if they have 

ceased to exist. This second bank 

association commenter stated further 

that in the absence of confirmation from 

the employer that a bonus program or 

overtime is no longer available to an 

employee, past history is an excellent 

predictive tool. Another bank 

commenter, in stating that the Bureau’s 

analysis supporting its proposed change 

to I.B.2.a on overtime and bonus income 

was sound, recommended that the 

formulation for assessing overtime and 

bonus income in that section be applied 

to other parts of appendix Q, on 

different types of income. 

A state credit union association 

commenter stated that while the 

Bureau’s proposed change to section 

I.B.2.a is adequate to satisfy the 

qualified mortgage provision, there are 

still concerns from credit unions that 

warrant further guidance. Specifically, 

this commenter requested that the 

Bureau provide examples of 

documentation and/or further 

clarification to assist in determining 

whether bonus and overtime income is 

anomalous. 

A joint trade association commenter 

suggested revisions to section I.B.2.a to 

provide that overtime and bonus income 

can be used if the consumer has 

received the income for the past two 

years and there is no evidence in the 

loan file that it will not continue. In 

support of this revision, the commenter 

stated that the lender should not be in 

a position to determine that the income 

will or will not continue. The 

commenter further stated that the twoyear history should satisfy this element 

on its own absent evidence to the 

contrary. 

A credit union commenter stated that 

in some lines of work such as nursing, 

overtime is a standard component of the 

overall compensation plan. It stated 

further that the requirement in section 

I.B.2.a, as revised by the Bureau’s 

proposal, to document and evaluate at 

least two years of overtime income, 

could adversely impact certain 

consumers who are new to their field or 

recently hired and do not yet have two 

years of overtime history. The 

commenter urged the Bureau to 

reconsider the impact on nurses, 

firefighters and law enforcement 

personnel who are just beginning their 

careers, and to make appropriate 

adjustments to the proposed revision. 

A mortgage lender specializing in the 

financing of manufactured housing 

commented on section I.B.2.b, which, in 

addition to requiring creditors to 

develop an average of bonus and 

overtime income for the past two years, 

states that ‘‘periods of overtime and 

bonus income less than two years may 

be acceptable provided the creditor can 

justify and document in writing the 

reason for using the income for 

qualifying purposes’’ (emphasis added). 

This commenter stated that without 

clear direction and guidance from the 

Bureau as to what justification and 

documentation would suffice in these 

instances, lenders will instead choose to 

exclude this income rather than face 

regulatory scrutiny and a potential 

lawsuit for choosing to include the 

income. A joint trade association 

commenter suggested several technical 

edits to I.B.2.b. 

Several industry commenters 

provided comments on section I.B.3. 

Section I.B.3.a requires a creditor to 

establish and document an earnings 

trend for overtime and bonus income 

and, if either type of income shows a 

continual decline, to document in 

writing a sound rationalization for 

including the income when qualifying 

the consumer. Section I.B.3.b provides 

that a period of more than two years 

must be used in calculating the average 

overtime and bonus income if the 

income varies significantly from year to 

year. 

With regard to section I.B.3, a joint 

trade association commenter suggested 

removing and reformatting this section 

as part of a new I.B.2.c and I.B.2.d to 

provide that eligible bonus or overtime 

income be calculated as the lesser of the 

current year or the average of the 

previous two years, as long as there is 

no evidence in the loan file that the 

income will not continue, and the 

creditor documents in writing a sound 

rationalization for including the income. 

This commenter noted that income from 

bonuses and overtime, commissions and 

self-employment can be variable and 

susceptible to significant declines from 

circumstances within and outside of the 

control of the consumer. The 

commenter stated that the revisions it 

was proposing to this section and others 

in appendix Q would provide a new and 

simple qualitative test for determining 

the amount of income to include in the 

DTI analysis. The commenter stated that 

the test would require lenders to use the 

lesser amount of the average of two 


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year’s past income or the most recent 

year’s earnings. 

With specific regard to section I.B.3.b, 

which states that ‘a period of more than 

two years must be used in calculating 

the average overtime and bonus income 

if the income varies significantly from 

year to year,’’ this joint trade association 

commenter stated that the word 

‘‘significantly’’ in that section is too 

vague for a legal standard and will 

invite litigation. It stated further that 

lenders should only use the most recent 

income, not the average, for declining 

income and provide a rationale for the 

inclusion of the income. A bank 

similarly commented on section I.B.3.b, 

that as the term ‘‘varies significantly’’ in 

that section is not defined that the 

requirement in that section that a period 

of more than two years must be used in 

calculating the average overtime and 

bonus income either be eliminated or 

clarified. 

Final Rule 

The Bureau is adopting the revisions 

to section I.B.2 regarding overtime and 

bonus income as proposed. The Bureau 

believes that the revisions proposed to 

section I.B.2.a, eliminating language 

requiring creditors to determine 

whether overtime and bonus income 

will continue, and substituting language 

that states that such income can be used 

if the consumer has received it for the 

past two years and documentation 

submitted for the loan does not indicate 

this income will likely cease, will 

facilitate creditor compliance and, as 

stated by a commenter, better access to 

credit for consumers who are dependent 

upon overtime and bonus income. At 

the same time the Bureau believes that 

the changes to this section otherwise 

further the purpose and intent of 

appendix Q and the qualified mortgage 

provision through clear requirements for 

a creditor assessment of the consumer’s 

receipt of the overtime or bonus income 

for the previous two years, and a review 

of the loan documentation for 

indications that the income will likely 

cease. As some commenters noted, 

employers may not be willing to 

indicate if bonus income, for example, 

is likely to continue, and in the absence 

of employer confirmation, past history 

can be used as a predictive tool. 

With regard to other proposed 

changes to section I.B.2.a raised by 

commenters, such as a suggestion to 

substitute language that there is no 

evidence in the loan file that the 

overtime or bonus income will not 

continue, or possible changes to address 

the potential impact of the two-year 

requirement on new employees who 

depend on overtime or bonus income, 

the Bureau believes that the Bureau’s 

revisions strike the right balance 

between facilitating compliance and 

ensuring an adequate assessment of 

consumer income for purposes of the 

DTI and the ATR requirements. For 

example, as revised by this final rule, 

section I.B.2.a provides that bonus or 

overtime income may be used if the 

documentation in the loan file does not 

indicate that the consumer’s overtime or 

bonus income ‘‘will likely cease,’’ 

which is very similar to the language 

suggested by the commenter. To the 

extent that the commenter’s proposed 

language would have a different effect, 

the Bureau believes that the final rule’s 

approach provides clear, objective 

guidance to creditors that is consistent 

with the analysis required by the rest of 

appendix Q. As for the potential impact 

of the two-year requirement on new 

employees, the Bureau believes that 

current section I.B.2.b, as discussed 

further below, provides creditors with 

the ability to assess the overtime and 

bonus income of new employees. 

As for comments on sections beyond 

the Bureau’s specific proposed changes 

to section I.B.2.a, for example with 

regard to sections I.B.2.b and I.B.3, the 

Bureau does not believe any changes to 

those sections are warranted at this 

time. With regard to section I.B.2.b for 

example, the Bureau believes that 

section provides flexibility for creditors 

to justify and properly document the 

use of a period of overtime and bonus 

income of less than two years. The other 

requirements of section I.B.2.a (that 

documentation submitted for the loan 

does not indicate the overtime or bonus 

income will likely cease) and section 

I.B.3.a will continue to apply to the 

income analysis of the consumer. With 

regard to the comments on section I.B.3, 

suggesting a removal of that section and 

a reformatting into a new test in section 

I.B.2.c. for determining the amount of 

income to include in the DTI analysis, 

the Bureau appreciates the comment but 

believes that sections I.B.2, as amended 

by this final rule, and I.B.3, provide for 

a required income analysis consistent 

with the purposes and intent of 

appendix Q. Regarding the comments 

on section I.B.3.b, the Bureau will 

continue to review this section to 

determine if further clarification is 

needed with regard to a creditor 

determination of whether overtime or 

bonus income ‘‘varies significantly,’’ but 

is not making any changes at this time. 

The Bureau needs additional 

information in order to fully assess 

whether this standard requires 

additional clarification for creditors in 

making the necessary appendix Q 

determinations, and whether possible 

alternative standards would be 

adequate. 

I.B.11. Social Security Income 

The Proposal 

The Bureau proposed several 

clarifications to the provisions in 

section I.B.11 of appendix Q as adopted, 

explaining how to account for Social 

Security income. 

Section I.B.11 as adopted by the ATR 

Final Rule required that (1) Social 

Security income either be verified by 

the Social Security Administration 

(SSA) or through Federal tax returns; (2) 

the creditor obtain a complete copy of 

the current awards letter; and (3) the 

creditor obtain proof of continuation of 

payments, given that not all Social 

Security income is for retirement-aged 

recipients. The Bureau proposed to 

amend section I.B.11 to remove the 

mention of Federal tax returns and 

instead require only that creditors 

obtain a benefit verification letter issued 

by the SSA. In support of this change 

the Bureau stated its belief that a Social 

Security benefit verification letter 

would provide easily accessible proof of 

the receipt of Social Security benefits 

and their continuance. 

The Bureau also proposed to clarify in 

section I.B.11 that a creditor shall 

assume a benefit is ongoing and will not 

expire within three years absent 

evidence of expiration. The Bureau 

stated, in support of this change, its 

belief that this would provide a more 

workable and accurate standard for 

verification of Social Security income. 

Comments 

Several banks, national and state 

banking trade associations, a state credit 

union, and a consumer group submitted 

comments on the Bureau’s proposal to 

amend section I.B.11 to remove the 

reference to Federal tax returns and to 

require creditors to obtain a benefit 

verification letter. Most industry 

commenters saw the change as reducing 

compliance flexibility, and the 

consumer group requested further 

changes to protect against falsification 

of income. 

With regard to the industry 

commenters, a bank trade association 

stated that it could find no justification 

for what it saw as eliminating the 

flexibility of allowing the use of Federal 

tax returns in the current rule. It stated 

that while it agreed with the Bureau’s 

explanation for the change, i.e., that a 

Social Security benefit verification letter 

would more easily provide proof of the 

receipt of Social Security benefits and 

their continuance, the explanation did 


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not provide a reason to eliminate the 

Federal tax return option. A bank 

commenter requested that I.B.11 be 

revised to permit Federal tax returns or 

other alternative documentation that 

verifies receipt of Social Security 

Income. A state banking association 

commented that in many cases 

applicants have lost or misplaced their 

award letters but that they can easily 

document and verify Social Security 

income through Federal tax returns and/ 

or monthly bank statements. Another 

state banking association stated that the 

Federal tax return option would 

facilitate compliance. A state credit 

union commented that it was concerned 

that limiting verification to a benefit 

verification letter could facilitate 

discrimination. Another state credit 

union trade association, in stating its 

concern about the supposed elimination 

of the Federal tax return option, stated 

that it could delay the lending process 

as a result of consumers who cannot 

locate their Social Security benefit 

verification letter and who therefore 

need to request a copy from the SSA, 

resulting in a potential increased 

workload for the SSA. A credit union 

commenter, in recommending the 

Federal tax return option, stated that 

sole reliance on the Social Security 

benefit verification letter could pose a 

potential risk of fraud through a 

modification of the letter by the 

recipient before it is received by the 

lending institution. 

One bank commenter stated that it 

supported the Bureau’s proposal to 

require creditors to obtain a Social 

Security benefit verification letter to 

verify Social Security income, but 

recommended the adoption of language 

acknowledging that creditors may 

obtain federal tax returns in addition to 

verification letters. This commenter 

noted that tax returns may be useful to 

creditors to determine an applicable tax 

rate used to gross up non-taxable Social 

Security income, and that they may be 

needed to verify income received other 

than from Social Security. This 

commenter also stated its support for 

the Bureau’s proposed clarification 

providing that Social Security income 

shall be assumed not to expire within 

three years, absent evidence of 

expiration, stating that it would reduce 

potential barriers to accessing credit for 

Social Security income recipients, while 

providing creditors clear guidance to 

mitigate fair lending risk. 

A consumer group commenter stated 

that so long as the documentation 

requirements for Social Security income 

require that the Social Security benefit 

verification letter come directly from the 

SSA, this documentation is sufficient. It 

noted, however, that if the verification 

letter is delivered to the lender through 

a broker or originator working for the 

lender, this is not sufficient 

documentation as it may become a 

vehicle for falsification of income. The 

commenter therefore recommended that 

section I.B.11 be revised to require 

creditors to use either tax returns or 

bank statements showing the deposit of 

benefits into the bank account, in 

addition to requiring a verification 

letter—where the verification letter 

cannot be obtained directly from the 

government payor. The commenter 

noted that the additional information 

will provide more substantial 

verification in a form that is still readily 

available to applicants. It concluded on 

this point that this approach will ensure 

that homeowners have easy access to 

needed income documentation without 

providing a means for public benefit 

documentation to be used to inflate 

income on a loan. This commenter also 

suggested, referring to section ii of the 

notes to section I.B.11 (which allows 

some portion of Social Security income 

to be ‘‘grossed up’’ if deemed nontaxable by the IRS), that the Bureau 

should specify that grossing up of Social 

Security benefits should be done based 

on a tax bracket that is appropriate for 

the income received. It stated further on 

this point that the language currently in 

I.B.11 will lead to and support the 

existing practice of grossing up that 

allows, rather than prevents, many 

unaffordable loans, as many 

homeowners who receive Social 

Security benefits have their income 

grossed up to the top tax bracket. 

Final Rule 

The Bureau is adopting the revisions 

to section I.B.11 as proposed. The 

Bureau believes that the Social Security 

benefit verification letter provides the 

best method of verifying receipt of 

Social Security income by the consumer 

and its continuance. The Bureau 

understands the concerns expressed by 

various industry commenters regarding 

the potential limitation on compliance 

flexibility resulting from the removal of 

the supposed option to verify Social 

Security income through Federal tax 

returns. The Bureau notes, however, 

that section I.B.11 as adopted in the 

2013 ATR Final Rule required, in 

addition to income verification by the 

SSA or Federal tax returns, a complete 

copy of the current awards letter, and 

documented continuation of payments. 

The proposed revisions to section I.B.11 

simplify these requirements by 

providing that one document—the 

Social Security benefit verification 

letter—satisfies all needs for 

documentation. A Federal tax return is 

of less value in demonstrating a 

consumer’s continued receipt of Social 

Security income and would not be 

available for consumers who only 

recently began to receive Social Security 

benefits. Section I.B.11 as revised by the 

final rule specifically provides that if 

the Social Security benefit verification 

letter does not indicate a defined 

expiration date within three years of 

loan origination, the creditor must 

consider the income effective and likely 

to continue. The consumer’s bank 

statements, suggested by some 

commenters as an alternative means to 

verify income, also are of less value in 

demonstrating continuance of receipt. 

The Bureau notes moreover that 

continuing to require the Social Security 

benefits letter to verify that such 

benefits are not likely to cease parallels 

the general requirement of employer 

verification of current, ongoing 

employment. 

As far as the concern expressed by a 

commenter that the Social Security 

benefit verification letter could become 

a vehicle for falsification of income if 

not required to be received directly from 

the government payor—and in which 

case it was suggested that tax returns or 

bank statements be required as 

additional verification—the Bureau 

believes that effective due diligence by 

creditors will limit such a possibility. 

The Bureau expects that creditors will 

exercise the same due diligence against 

fraud with regard to their review of 

Social Security benefit verification 

letters that they apply in their review of 

any mortgage loan related documents 

submitted to them. With regard to the 

comments received expressing concern 

about consumers who are unable to 

locate their Social Security Benefit 

verification letters, it is the Bureau’s 

understanding that benefit verification 

letters may be requested on-line or over 

the phone toll-free from the SSA or from 

a local SSA office. 

Finally, with regard to the comment 

requesting that the Bureau put 

limitations on the grossing up of Social 

Security benefits (as permitted under 

section I.B.11 in some instances), the 

Bureau is not addressing that issue at 

this time, as this requires further review 

and consideration. Other commenters 

made suggestions for changes with 

regard to section II.E, Non-Taxable and 

Projected Income, and the gross-up rate 

allowed for non-taxable income 

generally (discussed later in this 

preamble) which, in addition to Social 

Security income, includes Federal 

government employee retirement 

income, State government retirement 

income, military allowances, as well as 


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other types of income. The Bureau 

needs additional time to fully consider 

and evaluate the implications of these 

comments, including those specifically 

related to Social Security income, to 

ensure consistency with and furtherance 

of the purposes of appendix Q. 

C. Section I.D. General Information on 

Self-Employed Consumers and Income 

Analysis 

The Proposal 

Section I.D of appendix Q, as adopted, 

permitted income from self-employed 

consumers to be considered income for 

the purposes of the DTI calculation if 

certain criteria were met, including 

various documentation requirements 

and analysis of the financial strength of 

the consumer’s business. The 

documentation requirements in section 

I.D.4 included the requirement to 

provide a ‘‘business credit report for 

corporations and ‘S’ corporations.’’ The 

analysis of the financial strength of the 

business in section I.D.6 required that 

the creditor carefully analyze the 

‘‘source of the business’s income’’ and 

the ‘‘general economic outlook of 

similar businesses in the area.’’ 

Following the publication of appendix 

Q the Bureau received inquiries from 

stakeholders concerning these 

requirements and also noted compliance 

difficulties and increased risk of 

litigation that could arise from them. 

Industry raised specific concerns that 

business credit reports can be expensive 

and difficult to obtain, and that a 

requirement to assess economic 

conditions for geographic areas can be 

both costly and difficult, as well as 

imprecise. 

The Bureau proposed to make several 

amendments to these income stability 

requirements for self-employed 

consumers. The Bureau’s first proposed 

amendment eliminated the requirement 

in current section I.D.4 that selfemployed consumers provide a business 

credit report for corporations and ‘‘S’’ 

corporations. In proposing this 

amendment the Bureau stated that it 

recognized that business credit reports 

for many smaller businesses can be 

difficult or very expensive to obtain. 

The Bureau also stated its belief that 

while these reports may provide some 

valuable information for the purposes of 

an underwriting analysis, they are less 

suited to function as a requirement to 

determine income for self-employed 

consumers. 

The Bureau’s second proposed 

amendment eliminated two 

requirements under the requirement to 

analyze a business’s financial strength 

in section I.D.6. Section I.D.6, as 

adopted, required creditors (1) to 

evaluate the sources of the business’s 

income and (2) to evaluate the general 

economic outlook for similar businesses 

in the area. In proposing this 

amendment the Bureau stated its belief 

that both of these requirements demand 

that the creditor engage in complex 

analysis without providing clarity 

concerning what types of evaluations 

are satisfactory for the purpose of 

complying with the rule. The Bureau 

also stated that such a provision is 

better suited to function as part of an 

underwriting analysis subject to waiver, 

variance, and guidance rather than a 

regulatory rule. 

The Bureau’s proposal also made 

technical revisions to section I.D to 

accommodate removal of these 

requirements. 

Comments 

Industry commenters—several banks 

and national and state trade 

associations—submitted comments on 

the Bureau’s proposed changes to 

sections I.D.4 and I.D.6. The 

commenters generally supported the 

Bureau’s proposals. 

A bank stated that it agreed with the 

Bureau’s proposals to eliminate the 

requirement for business credit reports, 

citing the potential difficulty and 

expense associated with obtaining such 

reports. The bank stated that requiring 

a business credit report could increase 

the cost of credit or restrict access to 

credit for self-employed consumers. The 

bank also noted that appendix Q 

requires creditors to obtain year-to-date 

profit and loss statements and balance 

sheets from self-employed consumers, 

and suggested, in the alternative, that 

creditors be permitted to accept 

quarterly tax filings if the consumers 

most recent tax return is greater than 

four months old. This commenter also 

stated its agreement with the Bureau’s 

proposal to eliminate creditor 

requirements to evaluate both the 

sources of consumer’s business income 

and the general economic outlook for 

similar businesses in the area stating 

that it agreed with the Bureau’s 

conclusion that such requirements are 

ill-suited to a regulatory rule designed 

for consumer transactions. The 

commenter added further that such 

requirements are too subjective for 

purposes of establishing documentation 

standards for income. 

Another bank commenter expressed 

support for the Bureau’s proposed 

elimination of the business credit report 

requirement in section I.D.4, and with 

regard to the Bureau’s proposed 

elimination of the creditor requirements 

in section I.D.6 stated that it agreed that 

requiring creditors to analyze a 

business’s financial strength is beyond 

the scope of the DTI standard. This 

commenter suggested the removal of 

section I.D.6 entirely from appendix Q, 

stating that the type of determination 

required by this section is highly 

subjective and that such subjectivity 

greatly undermines the certainty 

presumed to be tied to a safe harbor test. 

This commenter also suggested a change 

to section I.D.4.c to make clear that 

profit and loss statements will only be 

required if quarterly tax returns are not 

available. 

A joint trade association commenter 

also suggested the entire deletion of 

section I.D.6, stating that subjective 

criteria should be removed in favor of 

documented income. This commenter 

also supported the elimination of the 

business credit report requirement in 

section I.D.4.d. It also suggested changes 

to section I.D.4.c, stating that profit and 

loss statements and balance sheets 

should only be required if they are 

needed because quarterly taxes are not 

available. 

Two state banking association 

commenters also supported the Bureau’s 

proposal to eliminate the requirements 

in section I.D.4.d, and I.D.6. One 

association, with regard to section 

I.D.4.d, noted that credit reports for 

small businesses can be difficult to 

obtain and quite expensive. The other 

association stated, with regard to I.D.6, 

that the creditor requirements proposed 

to be eliminated by the Bureau in that 

section would be inherently difficult for 

creditors to make and would carry no 

indication of accuracy. A state credit 

union association also expressed 

support for the Bureau’s changes in 

these sections. 

A national trade association that 

represents real estate agents commented 

that it supported the Bureau’s proposals 

eliminating the requirements relating to 

self-employed consumers in I.D.4.d and 

I.D.6, stating that it agreed with the 

Bureau’s assessment that these 

requirements are too expensive and 

complex, and without clarity. This 

commenter also suggested additional 

clarifications beyond the Bureau’s 

proposals, to section I.D and section 

I.B.7, as those sections relate to many of 

its members who work as self-employed 

contractors working in association with 

real estate brokers, not as employees. In 

particular this commenter requested 

additional clarity on how creditors 

should consider real estate commission 

income. 

Final Rule 

The Bureau is adopting its revisions 

to section I.D.4 and I.D.6 as proposed. 


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With regard to the revisions to section 

I.D.4, and the elimination from the 

documentation requirements for selfemployed consumers business credit 

reports for corporations and ‘‘S’’ 

corporations, the Bureau recognizes the 

concerns expressed by commenters 

regarding the expense associated with 

obtaining such reports, and agrees with 

commenters that this additional expense 

could increase the cost of credit or 

restrict access to credit for selfemployed consumers. 

With regard to the Bureau’s revisions 

to section I.D.6 and the elimination of 

the requirements that creditors evaluate 

sources of the consumer’s business 

income, and the general economic 

outlook for similar businesses in the 

area, the Bureau agrees with 

commenters who noted the subjective 

nature of these requirements, and 

recognizes the difficulty for creditors in 

making these assessments. The Bureau 

believes that these requirements are 

better suited to a flexible underwriting 

analysis than a regulatory rule. With 

regard to those commenters who 

recommended the elimination of section 

I.D.6 in its entirety, the Bureau believes 

that the revisions to that section 

adopted by the Bureau significantly 

improve this requirement as an 

assessment of the business’s financial 

strength, and make this an effective and 

useful measure for purposes of the DTI 

analysis. Furthermore, the standard as 

revised is straightforward for creditors, 

i.e., annual earnings that are stable or 

increasing are acceptable, while income 

from businesses that show a significant 

decline in income over the analysis 

period is not acceptable. 

The Bureau notes the other changes to 

these sections beyond the Bureau’s 

specific proposals recommended by 

some commenters, including, for 

example, that creditors be permitted to 

accept quarterly tax filings as an 

alternative to profit and loss statements 

and balance sheets under section I.D.4.c, 

and additional clarification on selfemployed contractors, and real estate 

commission income, under I.D. and 

I.B.7. The Bureau appreciates those 

recommendations, but will need to fully 

evaluate them for purposes of 

consistency with and furtherance of the 

purposes of appendix Q, and the 

implications for all stakeholders. 

II. NON-EMPLOYMENT RELATED 

CONSUMER INCOME 

A. Section II.B. Investment and Trust 

Income 

The Proposal 

Section II.B.2 of appendix Q as 

adopted permitted trust income to be 

considered income for the purposes of 

the DTI calculation ‘‘if guaranteed, 

constant payments will continue for at 

least the first three years of the mortgage 

term.’’ Appendix Q then provided a list 

of required documentation consumers 

must provide but did not otherwise 

specify the universe creditors must 

review to make and support the threeyear determination. 

The Bureau proposed an amendment 

to this section to delineate more clearly 

the breadth of the analysis for trust 

income by specifying that the analysis is 

limited to the documents appendix Q 

requires. Specifically, the proposal 

revised ‘‘if guaranteed, constant 

payments will continue for at least the 

first three years of the mortgage term’’ 

by adding ‘‘as evidenced by trust 

income documentation.’’ Under the 

requirements in section II.B.2 as 

adopted, there was no specific cut-off 

for the amount of diligence required or 

information that must be collected to 

satisfy the requirement. The Bureau 

stated its belief in proposing the 

amendment that it would facilitate 

compliance and help ensure access to 

credit by making the standard clear and 

easy to apply. 

Section II.B.3.a of appendix Q as 

adopted required, for notes receivable 

income to be considered income, that 

the consumer provide a copy of the note 

and documentary evidence that 

payments have been consistently made 

over the prior 12 months. If the 

consumer is not the original payee on 

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

required the creditor to establish that 

the consumer is ‘‘now a holder in due 

course, and able to enforce the note.’’ 

The Bureau proposed an amendment to 

eliminate the requirement that the 

consumer be a holder in due course, 

which requirement the Bureau believed 

may require further investigation than is 

necessary to establish that the income is 

effective for the purposes of the rule. 

The proposal would have amended 

appendix Q to require only that the 

consumer is able to enforce the note. 

Comments 

Industry commenters who submitted 

comments on the Bureau’s proposal to 

revise section II.B.2 of appendix Q 

either supported the changes or 

requested additional clarification on 

existing language in the section. 

A bank commenter, for example, 

stated that the change to section II.B.2.a 

concerning trust income provided 

clearer guidance with respect to the 

required documentation, and would 

help facilitate continued access to credit 

for recipients of such income. This 

commenter expressed concerns, 

however, with the requirement that trust 

income be ‘‘guaranteed’’ and 

recommended its elimination. This 

commenter stated that while trust 

income documentation may provide 

insight into periods of likely income 

continuance, it is unclear as to whether 

such documentation would provide 

evidence of an absolute guarantee of 

payment. Other commenters similarly 

objected to the word ‘‘guaranteed.’’ 

Another bank commenter stated that 

while it agreed with the Bureau’s 

proposed changes to limit the analysis 

for trust income only to trust 

documentation, it encouraged the 

Bureau to remove ‘‘guaranteed’’ as it 

seems to imply that documentation will 

be available in the form of a guarantee 

or that an individual can be requested 

to provide such a guarantee. This 

commenter stated that the creditor 

should be expected to review the trust 

documentation to ensure the income is 

not clearly scheduled to end in the first 

three years of the mortgage. A joint trade 

association commenter also suggested 

the deletion of the word ‘‘guaranteed’’ 

in this section, stating that it is unclear 

who would provide the guarantee, and 

that this is not in keeping with current 

practice. A state banking association 

stated that it supported the Bureau’s 

proposed addition of the phrase ‘‘as 

evidenced by the trust income 

documentation’’ to section II.B.2.a so 

long as the provision regarding required 

trust income documentation allows for 

the consumer to provide a trustee’s 

statement confirming the amount of the 

trust, frequency of distribution and 

duration of payments. This state 

banking association commenter stated 

that reliance on a trustee’s statement 

would allow its state’s banks to take 

advantage of the protection afforded by 

state law (rather than having to collect 

a complete copy of the trust agreement). 

With regard to the Bureau’s proposed 

changes to section II.B.3, a bank 

commenter agreed with the Bureau’s 

proposal to eliminate the requirement 

for creditors to establish that consumers 

are holders in due course if the 

consumer is not the original payee on 

the note. This commenter noted that 

creditors will be required to obtain a 

copy of the note, which should 

generally be sufficient to establish 

enforceability. This commenter also 

recommended shortening the 

documentation period to evidence 

consistency of payment receipts in 

section II.B.3.b from 12 months to six 

months. Finally, this commenter stated 

that the list of acceptable 

documentation in section II.B.3.b to 

establish that evidence of receipt of 


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44712 Federal Register / Vol. 78, No. 142 / Wednesday, July 24, 2013 / Rules and Regulations 

notes receivable (i.e., deposit slips, 

cancelled checks or tax returns) is too 

restrictive, and does not take into 

account other common electronic 

payment methods. The commenter 

recommended modifying the list of 

acceptable documentation types to 

include, but not be limited to, deposit 

slips or receipts, cancelled checks, bank 

statements or tax returns. A joint trade 

association and a bank also 

recommended expansion of the list of 

acceptable documentation in section 

II.B.3.b to include bank statements and 

other deposit accounts, as electronic 

payments are an increasingly common 

way to transfer money regularly 

between consumers. 

Final Rule 

The Bureau is adopting the revisions 

to sections II.B.2 and II.B.3 as proposed 

with two modifications. The changes 

proposed by the Bureau to both sections 

were generally accepted by commenters. 

However, with regard to section II.B.2 

the Bureau agrees with commenters that 

the use of the word ‘‘guarantee’’ in that 

section, i.e., that income from the trust 

may be used if ‘‘guaranteed’’ constant 

payments will continue, is unclear and 

should be eliminated. The Bureau 

believes that the requirement for 

creditor evaluation of the trust 

documentation, with proper due 

diligence by the creditor in the review 

of such documentation, is sufficient to 

meet the requirement in section II.B.2 

with regard to the continuance of the 

trust income. With regard to the state 

banking association commenter 

recommending that required trust 

documentation include a trustee’s 

statement, the Bureau notes that section 

II.B.2 specifically provides that 

‘‘required trust documentation’’ 

includes a trustee statement confirming 

the amount of the trust, the frequency of 

the distribution, and the duration of 

payments. 

With regard to section II.B.3, the 

Bureau agrees with the commenters that 

suggested a modification of the list of 

acceptable documentation in section 

II.B.3.ii to take into account common 

electronic payment methods. The 

Bureau is therefore modifying this list to 

include, in addition to deposit slips, 

cancelled checks and tax returns, also 

deposit receipts and bank or other 

account statements. Finally, with regard 

to the comment recommending 

shortening the documentation period in 

section II.B.3.b from 12 months to six 

months, the Bureau appreciates the 

comment but believes this requires 

further evaluation to ensure consistency 

with the purposes of appendix Q and 

the ATR Final Rule. 

B. Section II.D. Rental Income 

The Proposal 

Appendix Q, as adopted, allowed 

creditors to consider certain rental 

income payable to the consumer taking 

out the loan for the purposes of the DTI 

calculation in section II.D. Section 

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

consider income from roommates in a 

single-family property occupied as the 

consumer’s primary residence as 

‘‘income’’ for the purposes of 

determining the consumer’s DTI, but 

that it is acceptable to consider rental 

income payable to the consumer from 

boarders related by blood, marriage, or 

law. The Bureau originally adopted this 

provision of appendix Q for consistency 

with existing FHA standards used by 

industry. 

Following publication of the 2013 

ATR Final Rule, the Bureau became 

aware of concerns regarding 

requirements that boarders be related to 

the homeowner in order for rental 

income payable to the consumer to be 

considered ‘‘income’’ for DTI purposes. 

The Bureau did not believe that the 

relation requirement was useful in 

determining whether or not the rental 

income should be used in determining 

DTI. The Bureau therefore proposed to 

eliminate the requirement that boarders 

be related by blood, marriage, or law 

from section II.D.3.a. 

Comments 

Commenters generally supported the 

Bureau’s proposed change to section 

II.D.3.a, eliminating the prohibition on 

considering rental income payable to a 

consumer from boarders in a singlefamily property who are not related by 

blood, marriage or by law. Various 

commenters recommended further 

clarifications to this section. 

A joint trade association commenter 

in recommending the same change to 

section II.D.3.a. as proposed by the 

Bureau, stated that rental income 

evidenced on tax returns should be 

given equal treatment regardless of the 

relationship status of renters. Another 

national trade association commenter 

stated that it generally agreed with the 

Bureau’s proposed changes to this 

section, but that it believed that the 

guidelines need to be further modified 

to be workable. Specifically this 

commenter stated that the requirements 

as currently written will be difficult to 

administer because they depend on 

distinctions and varying definitions of 

the terms ‘‘roommate’’ and ‘‘boarder.’’ 

The commenter noted that these terms 

are not defined in the regulation, and 

they have no set meaning in law or 

custom. The commenter stated that it 

did not believe that these regulations 

should impose or dictate the types of 

habitation agreements that people 

choose to enter. A state bank association 

commenter noted that the Bureau’s 

proposal retains the prohibition on 

using rental income paid by roommates, 

and that neither the rule nor appendix 

Q provides a definition of roommate or 

boarder. Stating that the provision to 

limit rental income to boarders is 

unnecessarily restrictive, the commenter 

requested that creditors be permitted to 

consider rental income received from 

roommates or boarders, provided such 

income is shown on the applicant’s tax 

return. A similar comment from another 

state bank association stated that if the 

distinction between rental income 

received from roommates and boarders 

is retained it requested that the Bureau 

define within the regulation the terms 

‘‘roommate’’ and ‘‘boarder.’’ 

Final Rule 

The Bureau agrees with those 

commenters on the Bureau’s proposed 

revisions to section II.D.3 that the 

requirements as proposed would be 

difficult to administer and comply with 

as they depend on distinctions between 

‘‘roommate’’ and ‘‘boarder’’ which are 

undefined terms in that section, and in 

appendix Q generally. The Bureau 

believes that rental income established 

through tax returns is the relevant factor 

for purposes of a DTI analysis, and that 

the distinction between the terms 

roommate and boarder is not relevant to 

that determination. Therefore the 

Bureau is modifying section II.D.3.a to 

eliminate the prohibition on the 

acceptability of income from roommates 

in a single family property occupied as 

the consumer’s primary residence, and 

to provide that income from either 

roommates or boarders is acceptable. 

The Bureau retains the section II.D.3.b 

requirement that rental income may be 

considered effective if shown on the 

consumer’s tax return, and states further 

that, if not on the tax return, rental 

income paid by the roommate or 

boarder may not be used in qualifying. 

Clarifications and other Technical 

Changes 

As noted above, the Bureau proposed 

various other technical and wording 

changes in appendix Q, for consistency 

and clarification. The Bureau is 

adopting those revisions as proposed. 

Comments on Aspects of Appendix Q 

beyond Bureau’s Specific Proposals 

As noted previously, various 

commenters submitted comments on 

aspects of appendix Q that were not the 

subject of the Bureau’s specific 


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Federal Register / Vol. 78, No. 142 / Wednesday, July 24, 2013 / Rules and Regulations 44713 

proposals, including suggestions for 

significant revisions to appendix Q. 

Those comments are summarized and 

addressed below. 

Adopt or Allow Use of GSE Guidelines 

Several banks and a joint trade 

association commenter recommended 

that the Bureau either allow creditors to 

use GSE guidelines in certain instances 

not addressed by appendix Q, or to look 

to and adopt certain existing GSE 

guideline language. Specifically, one 

bank commenter urged the Bureau to 

expressly allow creditors to use GSE 

guidelines for any matter not addressed 

by appendix Q, as GSE guidance is 

widely used by industry and is 

consistent with prudent underwriting. 

This commenter stated, for example, 

that appendix Q does not specify how 

to annuitize assets, but that GSE 

guidance spells out how to annuitize a 

consumer’s assets in qualifying a 

borrower. It also stated that, as a general 

matter, appendix Q should be revised to 

allow creditors to ‘‘add back’’ amounts 

deducted from a borrower’s income, 

consistent with a Fannie Mae 

worksheet. This commenter also noted 

several other specific areas where 

adoption of GSE guidance on add-backs 

was requested, for example, certain addbacks permitted by the GSEs with regard 

to section I.E. Income Analysis: 

Individual Tax Returns (IRS Form 

1040); and with regard to section II.D.5. 

Rental Income, Analyzing IRS Form 

1040 Schedule E. In addition this 

commenter recommended with regard 

to section II.E.4. Projected Income for a 

New Job, adoption of the GSEs’ 

approach in assessing the projected 

income of certain teachers. A joint trade 

association commenter similarly 

recommended replacing, for reasons of 

clarity, appendix Q language in section 

I.B.12. Automobile Allowances and 

Expense Account Payments, with GSE 

guidance, and replacing language in 

sections I.E, F, G and H with a 

requirement to follow GSE guidelines 

for self-employed cash flow analysis, 

including the use of several GSE forms, 

and the adoption of GSE requirements 

in section II.E.2. Adding Non-Taxable 

Income to a Consumer’s Gross Income. 

This commenter also recommended that 

appendix Q follow current GSE 

guidelines for an identified list of areas 

where it stated appendix Q is silent and 

where it was seeking additional clarity. 

Another bank commenter stated that 

there are instances in which the 

Appendix Q guidelines fail to reflect the 

level of detail needed to underwrite in 

the current mortgage market, and noted 

that the GSEs have adopted guidelines 

which provide greater detail and in 

some instances would be clearer and 

better suited to setting a regulatory 

requirement. This commenter 

encouraged the Bureau to review certain 

specifically identified sections of the 

GSE guidelines which it stated might 

provide more clarity than the present 

appendix Q rules. This commenter 

stated, however, that it was not 

recommending that the Bureau defer to 

the GSE guidelines which are subject to 

change without opportunity for notice 

and comment. It requested the Bureau 

review, for example, GSE guidelines 

with regard to ‘‘income from other 

sources’’ in section I.B.1.b, giving as an 

example GSE guidelines on 

documenting of tips and foreign income. 

Like the previously discussed 

commenters, it also suggested review of 

sections I.E, F, G and H. 

Generally Revise Appendix Q to 

Eliminate Subjective Determinations 

Several commenters suggested major 

revisions to appendix Q to address what 

the commenters viewed as standards 

that require creditors to make subjective 

determinations on a consumer’s debt 

and income. For example, a joint trade 

association commenter stated that it was 

concerned that appendix Q mandates a 

calculation of DTI that will require 

lenders to establish essentially a manual 

underwriting process due to the 

numerous subjective determinations 

prescribed by the rule. It stated further 

that if qualified mortgages will comprise 

a significant fraction of mortgage 

originations, the proper calculation of 

DTI under appendix Q must be able to 

be incorporated into an automated 

underwriting system. The commenter 

therefore urged the Bureau to revise 

appendix Q to minimize the 

requirements for subjective 

determinations by lenders and to 

provide sufficient certainty to allow its 

integration into automated underwriting 

systems. It stated further that, for 

appendix Q to be an effective bright-line 

rule, the application of appendix Q 

should ideally deliver the same result 

regardless of the lender implementing it. 

However, the commenter noted, to do 

that would mean requirements for 

quantitative inputs, with supporting 

documentation, that eliminate any need 

for subjective determinations. This 

commenter concluded that appendix Q 

will be relied upon to verify the 

sufficiency of the lender’s determination 

whether a loan is a qualified mortgage 

and should be able to be conclusively 

proven by written evidence, such as a 

loan file, in a court of law. This 

commenter supplemented its comment 

with a detailed chart with suggested 

revisions and comments on the Bureau’s 

proposals, and on a number of other 

appendix Q provisions beyond the 

Bureau’s specific proposals. 

A bank commenter echoed the 

comments of the joint trade association 

commenter that appendix Q needs to be 

revised to remove requirements for 

subjective determinations. This 

commenter stated, however, that it 

believes the structure and form of 

appendix Q can be retained while 

making tailored changes to its 

provisions as necessary to allow it to 

serve the intended purposes of 

appendix Q and the ATR Final Rule. A 

lender specializing in manufactured 

housing financing requested that the 

Bureau examine all of appendix Q with 

the goal of providing clarity and 

reducing litigation, and commented 

further that in order to incentivize 

lenders to gravitate towards qualified 

mortgages, the guidelines for making a 

qualified mortgage must be as objective 

as possible. To that end this commenter 

stated that should the Bureau ultimately 

decide not to remove the DTI 

requirements and appendix Q, it should 

amend certain sections of appendix Q 

that the commenter believes may not 

function properly as regulations. 

A GSE commenter recommended that 

the Bureau treat appendix Q as guidance 

rather than regulation that is subject to 

notice and comment rulemaking as it is 

the commenter’s opinion that there are 

provisions of appendix Q that are not 

properly suited to be regulations. This 

commenter stated that such guidance 

could be revised as needed, and in 

relatively short order, in response to 

changing market conditions and 

industry practices, and that, in contrast, 

if appendix Q remains as a regulation 

subject to notice and comment it loses 

such flexibility. Another GSE 

commenter also recommended that the 

Bureau issue appendix Q in the form of 

a handbook or other written guidance, 

akin to the manner in which FHA 

provides underwriting standards to 

lenders, citing the Bureau’s loss of 

flexibility and ability to respond 

promptly, if appendix Q remains a 

regulation subject to notice and 

comment rulemaking. 

A consumer group commenter stated 

that while it supported the Bureau’s 

proposed clarifications to appendix Q it 

recommended that the Bureau go further 

to clarify it in a way that is consistent 

with automated underwriting. This 

commenter stated further that while 

manual underwriting is used by some 

lenders, lenders should not be required 

to underwrite in this manner simply to 

comply with the definitions of debt and 

income included in appendix Q. 


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Other Comments on Aspects of 

Appendix Q beyond the Bureau’s 

Proposals 

In addition to the comments 

discussed above, various commenters 

had comments on certain specific 

sections in appendix Q, relating to 

matters not included in the Bureau’s 

proposals. As noted, a joint trade 

association commenter supplemented 

its comment letter with a detailed chart 

of suggested changes to a variety of 

appendix Q sections both with regard to 

sections which were included in the 

Bureau’s specific proposals, and 

sections that were not included. Various 

bank commenters stated that they 

endorsed the comments made by this 

commenter. Included in the joint trade 

association commenter’s suggested 

changes of sections outside of the 

Bureau’s proposals, for example, were 

changes to sections II.A. Alimony, Child 

Support, and Maintenance Income 

Criteria; II.C. Military Government 

Agency and Assistance and Program 

Income; and III.2. Debt to Income Ratio 

Computation for Recurring Obligations. 

As discussed above, this commenter 

also identified a list of areas where it 

stated appendix Q is silent and where 

it was seeking additional guidance. In 

its comment letter, this commenter also 

suggested a new quantitative test for 

determining the amount of consumer 

income to include in the DTI analysis, 

which it suggested not only be applied 

to overtime and bonus income, but other 

income analysis in appendix Q as well. 

Another Bank association commenter 

identified various areas with regard to 

sources of income that it stated 

appendix Q did not address, or did not 

adequately address, and for which it 

was seeking additional clarification, 

including, for example, asset 

amortization, stock options, capital gain 

income, foreign income, relocation 

earnings, and contractor and other 

irregular income situations. This 

commenter also requested additional 

guidance on section I.C. Consumers 

Employed by a Family Owned Business, 

and suggested changes with regard to 

section II.E. Non-Taxable and Projected 

Income to allow creditors to use a 25 

percent ‘‘gross-up’’ rate for all nontaxable income. Other commenters that 

raised issues on sections outside of 

those sections that were the subject of 

the Bureau’s specific proposals included 

a consumer commenter that 

recommended that the 12-month 

maximum for defining projected 

obligations (in section V.1) should be 

extended for loans with predictable 

repayment requirements and inflexible 

repayment terms, such as private 

student loans and student loan 

repayment programs. 

Response to Comments on Aspects of 

Appendix Q beyond Bureau’s Specific 

Proposals 

The Bureau appreciates the comments 

received on other aspects of appendix Q 

that were not the subject of the Bureau’s 

specific proposals. These comments will 

assist the Bureau in its efforts to ensure 

the continuing effectiveness and utility 

of appendix Q as a part of the DTI 

analysis. 

The Bureau notes that a substantial 

number of industry commenters cited 

particular areas of appendix Q that they 

asserted either provided no guidance, or 

insufficient guidance, to enable 

creditors to make the required income 

and debt determinations. As described 

above, many of these commenters 

suggested that the Bureau adopt, allow 

creditors to use, or look to GSE 

guidelines with regard to certain types 

of income and/or debt not specifically 

addressed by appendix Q in order to, in 

effect, provide a means for filling this 

gap. The Bureau believes in general that 

the long history and experience of other 

federal agencies as well as the GSEs in 

matters addressed by appendix Q can be 

helpful in this context and 

acknowledges that requirements 

established by the other federal agencies 

and the GSEs already play a significant 

role in the mortgage market. 

Indeed, the Bureau notes that the 

temporary qualified mortgage status 

established by the ATR Final Rule 

provides creditors with the option to 

issue qualified mortgages without 

relying on the standards set forth in 

Appendix Q. Under Section 

1026.43(e)(4), creditors who prefer 

federal agency or GSE underwriting 

rules can use those rules to obtain 

qualified mortgage status by ensuring 

that, among other things, their loans 

either are eligible for purchase or 

guarantee by the GSEs or to be insured 

or guaranteed by the agencies. 

The Bureau notes further, however, 

that while appendix Q does not 

specifically refer to every possible type 

of debt or income, it does set forth basic 

guidelines for the treatment of debt and 

income. Section I of appendix Q 

addresses consumer employment 

related income, and section I.B.1 sets 

out standards for analysis of salary, 

wage, and other consumer employment 

related income. Section I.B.1.b provides 

that income from sources other than 

salaries or wages ‘‘can be considered as 

effective’’ when it is ‘‘properly verified 

and documented by the creditor.’’ This 

provision sets the rule for the treatment 

of types of income whose treatment is 

not otherwise more specifically 

addressed by appendix Q. Likewise, 

section III.2.a provides as a general rule 

that recurring charges extending ten 

months or more for specified recurring 

obligations and ‘‘other continuing 

obligations’’ must be treated as debt. 

In light of these circumstances, the 

Bureau has revised the introduction to 

appendix Q to make two points. First, 

where guidance issued by federal 

agencies including the U.S. Department 

of Housing and Urban Development, the 

U.S. Department of Veterans Affairs, the 

U.S. Department of Agriculture, or the 

Rural Housing Service, or issued by the 

GSEs, Fannie Mae and Freddie Mac, 

while operating under the 

conservatorship or receivership of the 

Federal Housing Finance Agency, or 

issued by a limited-life regulatory entity 

succeeding the charter of either Fannie 

Mae or Freddie Mac (collectively, 

Agency or GSE guidance) is in 

accordance with appendix Q, creditors 

may look to that guidance as a helpful 

resource in applying appendix Q. Thus, 

where only the broad principle 

contained in section I.B.1.b applies to a 

particular type of income, a creditor 

may look to Agency or GSE guidance 

that is in accordance with appendix Q’s 

standards in determining whether that 

income has been properly documented 

and verified. For example, appendix Q 

does not specifically address additional 

steps a creditor might take to document 

and verify wage or salary income when 

it is earned from foreign sources and 

paid in foreign currency. Agency or GSE 

guidance may therefore be used to 

provide more specific standards with 

regard to verification or calculation of 

such income, as long as the guidance 

used is not inconsistent with the 

requirements of appendix Q. Similarly, 

where the treatment of a particular 

recurring obligation is not specifically 

addressed in appendix Q, the creditor 

may look to Agency or GSE guidance for 

purposes of determining how to assess 

that obligation, as long as that guidance 

is in accordance with the requirements 

of section III of appendix Q. 

Second, in the event that there may be 

consumer situations that present 

questions that appendix Q simply does 

not presently address at all, the Bureau 

is adding language to the introduction 

providing that when the standards 

contained in appendix Q do not resolve 

the treatment of a specific kind of debt 

or income, the creditor may either (1) 

exclude the income or include the debt, 

or (2) treat the income or debt in 

accordance with guidance issued by the 

federal agencies or GSEs. The 

introduction makes clear, however, that 

the Bureau expects that the aboveVerDate Mar<15>2010 17:18 Jul 23, 2013 Jkt 229001 PO 00000 Frm 00030 Fmt 4701 Sfmt 4700 E:\FR\FM\24JYR3.SGM 24JYR3

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56 78 FR 25648. 

57Specifically, section 1022(b)(2)(A) of the DoddFrank Act calls for the Bureau to consider the 

potential benefits and costs of a regulation to 

consumers and covered persons, including the 

potential reduction of access by consumers to 

consumer financial products or services; the impact 

on depository institutions and credit unions with 

$10 billion or less in total assets as described in 

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

on consumers in rural areas. 

58For convenience, the reference to these January 

2013 rules is also meant to encompass the rules 

issued in May 2013 that amended the January rules, 

including the final rule amending the 2013 Escrows 

Final Rule, issued on May 16, 2013. 

59The Bureau has discretion in any rulemaking 

to choose an appropriate scope of analysis with 

respect to potential benefits and costs and an 

appropriate baseline. 

described default rule on excluding 

income and including debts and the 

optional safe harbor reliance on GSE or 

Agency guidance will be used sparingly. 

The introduction emphasizes that the 

creditor may not rely on Agency or GSE 

guidance to reach a resolution contrary 

to that provided by appendix Q’s 

standards, even if the Agency or GSE 

guidance specifically addresses the 

particular type of debt or income but the 

appendix Q standards are more 

generalized. For clarity, the introduction 

provides a definition for when appendix 

Q’s standards resolve the appropriate 

treatment of a specific kind of income 

or debt: where the appendix Q 

standards provide a discernible answer 

to the question of how to treat the debt 

or income. Under this definition, the 

Bureau believes that the use of the 

default rule or the optional safe harbor 

should only rarely be necessary. Thus, 

while the Bureau’s revisions to 

appendix Q reflect commenters’ 

concerns about the possibility of gaps in 

appendix Q, the Bureau emphasizes that 

as revised by this final rule, the 

introduction to appendix Q only allows 

creditors to use Agency or GSE guidance 

whenever appendix Q does not resolve 

how to treat a particular type of debt or 

income (or where such guidance is used 

in applying appendix Q consistent with 

its standards, as discussed above). Addbacks to income permitted by Agency or 

GSE guidance, for example, are not 

permitted by appendix Q except in 

accordance with its standards. 

With regard to the request by some 

commenters for a major revision to 

appendix Q, including, for example, the 

removal of all requirements for 

subjective determinations, the Bureau 

believes that the revisions made by 

today’s final rule, including the default 

rule and the optional safe harbor just 

described, will provide creditors with 

the means necessary to effectively carry 

out the analysis required by appendix 

Q. The Bureau will continue to review 

the implementation of appendix Q to 

ensure that creditors can readily comply 

with its requirements, but the Bureau 

believes that, with today’s final rule, 

appendix Q currently meets that 

standard. 

As discussed, some commenters 

suggested that the appendix Q 

requirements be revised to allow its 

integration into automated underwriting 

systems. After the Bureau’s rules go into 

effect in January 2014, the Bureau, in 

reviewing the implementation of those 

rules, including the ATR Final Rule, 

will give additional consideration to the 

suggestions raised by these commenters. 

In the meantime, the Bureau believes 

that the temporary qualified mortgage 

provisions established by the ATR Final 

Rule should provide the needed 

flexibility for creditors. Regarding the 

comments suggesting that the Bureau 

treat appendix Q as guidance rather 

than as a regulation subject to notice 

and comment in order to respond to 

changing market conditions and 

industry practices, as previously stated, 

the Bureau ‘‘did not intend for appendix 

Q to function as a general flexible 

underwriting policy for assessing risk 

(as it is used by FHA in the context of 

insurance), and recognizes that the 

Bureau will not have the same level of 

discretion regarding the application of 

appendix Q.’’ 56 Indeed, the Bureau 

believes that appendix Q could not fully 

serve its intended purpose of providing 

clarity and certainty as to the DTI 

determination were it treated as 

guidance. Moreover, the Bureau believes 

that appendix Q, particularly as 

clarified and revised by today’s final 

rule, provides creditors with sufficient 

and appropriate standards for assessing 

the income and debt of consumers. 

V. Effective Date 

The amendments in this rule are 

effective January 10, 2014, except for the 

change to § 1026.35(e). The amendment 

to § 1026.35(e) is effective immediately 

on publication of this rule in the 

Federal Register. As explained above, 

this amendment clarifies the Bureau’s 

interpretation of § 1026.35(e); it is 

therefore an interpretive rule, for which 

an immediate effective date is 

appropriate. In addition, the Bureau 

concludes that good cause exists to 

make the amendment effective 

immediately. The clarification will 

provide certainty to the industry and 

imposes no obligations with which 

mortgage lenders must comply. 

Applicability date. The amendment to 

§ 1026.35(e) applies to any transaction 

consummated on or after June 1, 2013, 

and for which the creditor receives an 

application on or before January 9, 2014. 

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

A. Overview 

In developing the final rule, the 

Bureau has considered potential 

benefits, costs, and impacts.57 In 

addition, the Bureau has consulted, or 

offered to consult with, the prudential 

regulators, SEC, HUD, VA, USDA, 

FHFA, the Federal Trade Commission, 

and the Department of the Treasury, 

including regarding consistency with 

any prudential, market, or systemic 

objectives administered by such 

agencies. 

As noted above, this rule makes 

amendments to some of the final 

mortgage rules issued by the Bureau in 

January of 2013.58 These amendments 

clarify, correct, or amend provisions on 

(1) the relation to State law of 

Regulation X’s servicing provisions; (2) 

implementation transition requirements 

for adjustable-rate mortgage disclosures; 

(3) the small servicer exemption from 

certain of the new servicing rules; (4) 

exclusions from the repayment ability 

and prepayment penalty requirements 

for higher-priced mortgage loans 

(HPMLs); (5) the use of governmentsponsored enterprise (GSE) and Federal 

agency purchase, guarantee or insurance 

eligibility for determining qualified 

mortgage (QM) status; and (6) the 

determination of debt and income for 

purposes of originating QMs. In 

addition to these revisions, which are 

discussed more fully below, the Bureau 

is also making certain technical 

corrections to the regulations with no 

substantive change intended. 

The analysis in this section relies on 

data that the Bureau has obtained and 

the record established by the Board and 

Bureau during the development of the 

2013 Title XIV Final Rules. However, 

the Bureau notes that for some analyses, 

there are limited data available with 

which to quantify the potential costs, 

benefits, and impacts of this final rule. 

In particular, the Bureau did not receive 

comments specifically addressing the 

Section 1022 analysis in the proposed 

rule. 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. 

B. Potential Benefits and Costs to 

Consumers and Covered Persons 

The Bureau believes that, compared to 

the baseline established by the final 

rules issued in January 2013,59 the 


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60 5 U.S.C. 601 et seq. 

61 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 nonprofit 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). 

62 5 U.S.C. 605(b). 

primary benefit of most of the 

provisions of the final rule to both 

consumers and covered persons is an 

increase in clarity and precision of the 

regulations and an accompanying 

reduction in compliance costs. 

More specifically, the provisions that 

clarify: (1) That the preemption 

provisions in Regulation X do not 

preempt the field of regulation of the 

practices covered by RESPA and 

Regulation X; (2) the timing of required 

disclosures for adjustable-rate 

mortgages; and, (3) the exclusion of 

construction loans, bridge loans, and 

reverse mortgages from the requirements 

of the ability-to-repay and prepayment 

penalty provisions in § 1026.35(e) 

generally conform the rules to the 

policies articulated by the final rules 

already issued. The discussion of 

benefits, costs, or impacts discussed in 

part VII of each of the January rules 

included consideration of each of these 

provisions. 

The final rule also modifies the text 

of the Regulation Z servicing rule to 

clarify the scope and application of the 

small servicer exemption. Specifically, 

it clarifies the application of the small 

servicer exemption with regard to 

servicer/affiliate and master servicer/ 

subservicer relationships and excludes 

mortgage loans voluntarily serviced for 

an unaffiliated entity without 

remuneration, reverse mortgage 

transactions, mortgage loans secured by 

consumers’ interest in timeshare plans, 

from being considered when 

determining whether a servicer qualifies 

as a small servicer. In total, these 

changes are expected to grant the small 

servicer exemption to a larger number of 

firms. These entities should benefit from 

lower costs while their customers may 

lose some of the protections embedded 

in the relevant rules. The nature and 

magnitude of these protections and their 

potential costs are described in part VII 

of both of the 2013 Mortgage Servicing 

Final Rules. 

The provisions that clarify and amend 

the definition of qualified mortgage 

should also add clarity to the rules and 

thus lower costs of compliance. These 

include the clarification of the test that 

they be eligible for purchase or 

guarantee by the GSEs or insured or 

guaranteed by the agencies, the 

clarification that a repurchase or 

indemnification demand by the GSEs, 

FHA, VA, USDA, or RHS is not 

determinative of qualified mortgage 

status, and the revisions clarifying that 

a loan meeting eligibility requirements 

provided in a written agreement with 

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

RHS is also eligible as are loans 

receiving individual waivers from GSEs 

or agencies. 

These provisions make explicit that 

matters wholly unrelated to ability to 

repay will not be relevant to 

determination of QM status and that a 

creditor is not required to satisfy certain 

mandates concerning loan delivery and 

other requirements that are wholly 

unrelated to assessing a consumer’s 

ability to repay the loan. They also 

clarify that loans meeting GSE or agency 

eligibility requirements set forth in an 

applicable written contract variance or 

individual waiver at the time of 

consummation are eligible for GSE or 

agency purchase, guarantee, or 

insurance under § 1026.43(e)(4). As 

such, these provisions should lower the 

burden for these loans to be qualified 

mortgages. The Bureau believes that 

these changes provide useful guidance 

to industry and generally conform the 

rules to the policies intended by the 

final rules issued in January. 

Accordingly, the discussion of benefits, 

costs, or impacts discussed in part VII 

of each of the January rules included 

consideration of the effects of each of 

these provisions. 

The amendments to appendix Q in 

this final rule reduce the creditor’s 

requirements to obtain affirmative 

confirmation that several types of 

income will continue in the future. 

Under these amendments, creditors may 

assume in the absence of contrary 

evidence, that certain past, current, and/ 

or ongoing conditions can be reasonably 

expected to continue. Other provisions 

clarify the types of evidence that 

creditors may rely on to verify income, 

while another expands the types of 

rental income that may be used in the 

DTI calculation. The Bureau is also 

revising the introduction to appendix Q 

to clarify that creditors may look to 

guidance from certain federal agencies 

and the GSEs in applying appendix Q so 

long as that guidance is in accordance 

with the standards in appendix Q and 

to provide a default rule of excluding 

income and including debts and an 

optional safe harbor for reliance on GSE 

or Agency guidance when appendix Q’s 

standards do not otherwise resolve how 

to treat a particular type of debt or 

income. As noted earlier, the Bureau 

believes that these provisions will 

establish clearer requirements for 

assessing the debt and income of 

consumers while at the same time 

facilitating creditor compliance. More 

specifically, these provisions should 

increase the probability that certain 

loans are originated as qualified 

mortgages and receive a presumption of 

compliance with the ability-to-repay 

standards. For such loans, the costs of 

origination may be slightly lower as a 

result of the slightly decreased liability 

for the lender and any assignees and for 

possibly decreased compliance costs. 

Consumers may benefit from slightly 

increased access to credit and lower 

costs on the affected loans; however, 

these consumers will also not have the 

added consumer protections that 

accompany loans made under the 

general ability-to-repay provisions. A 

more detailed discussion of these effects 

is contained in the discussion of 

benefits, costs, and impacts in part VII 

of the 2013 ATR Final Rule. 

The final rule is generally not 

expected to have a differential impact 

on depository institutions and credit 

unions with $10 billion or less in total 

assets as described in section 1026 or on 

consumers in rural areas. The main 

exception is for those depository 

institutions and credit unions, which by 

virtue of their size, are more likely to 

qualify for the small servicer exemption 

and to benefit from the reduction in 

compliance burden. 

Given the nature of the changes made 

by the final rule, the Bureau does not 

believe that the final rule will materially 

reduce consumers’ access to consumer 

products and services. Rather, the 

reduced burden in many of the changes 

in this rule should generally help to 

improve access to credit. 

VII. Regulatory Flexibility Act Analysis 

The Regulatory Flexibility Act (RFA) 

generally requires an agency to conduct 

an initial regulatory flexibility analysis 

(IRFA) and a final regulatory flexibility 

analysis (FRFA) of any rule subject to 

notice-and-comment rulemaking 

requirements.60 These analyses must 

‘‘describe the impact of the proposed 

rule on small entities.’’ 61 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,62

or if the agency considers a series of 

closely related rules as one rule for 


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63 5 U.S.C. 605(c). 

64 5 U.S.C. 609. 

purposes of complying with the IRFA or 

FRFA requirements.63 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.64

This rulemaking is part of a series of 

rules that have revised and expanded 

the regulatory requirements for entities 

that originate or service mortgage loans. 

In January 2013, the Bureau adopted the 

2013 ATR Final Rule and the 2013 

Mortgage Servicing Final Rules, along 

with other related rules mentioned 

above. Part VIII of the supplementary 

information to each of these rules set 

forth the Bureau’s analyses and 

determinations under the RFA with 

respect to those rules. See 78 FR 10861 

(Regulation X), 78 FR 10994 (Regulation 

Z—servicing), 78 FR 6575 (Regulation 

Z—ATR). Because this final rule 

generally makes clarifying changes to 

conform the January rules to their 

intended purposes, the RFA analyses 

associated with those rules generally 

take into account the impact of the 

changes made by this final rule. 

Because these rules qualify as ‘‘a 

series of closely related rules,’’ for 

purposes of the RFA, the Bureau relies 

on those analyses and determines that it 

has met or exceeded the IRFA and FRFA 

requirements. 

In the alternative, the Bureau also 

concludes that the final rule will not 

have a significant impact on a 

substantial number of small entities. As 

noted, this final rule generally clarifies 

the existing rules. These changes will 

not have a material impact on small 

entities. In the instance of the small 

servicer exemption, the rule likely 

reduces burden for the affected firms. In 

addition, the changes to appendix Q 

will likely reduce compliance costs by 

increasing clarity and providing more 

objective standards for evaluating 

certain kinds of income. The changes to 

appendix Q should also increase the 

probability that certain loans are 

originated as qualified mortgages and 

receive a presumption of compliance 

with the ability-to-repay standards. 

Therefore, the undersigned certifies that 

the rule will not have a significant 

impact on a substantial number of small 

entities. 

VIII. Paperwork Reduction Act 

This final rule amends 12 CFR 1026 

(Regulation Z), which implements the 

Truth in Lending Act (TILA), and 12 

CFR 1024 (Regulation X), which 

implements the Real Estate Settlement 

Procedures Act (RESPA). Regulations Z 

and X currently contain collections of 

information approved by OMB. The 

Bureau’s OMB control number for 

Regulation Z is 3170–0015 and for 

Regulation X is 3170–0016. However, 

the Bureau has determined that this 

final rule will not materially alter these 

collections of information or impose any 

new recordkeeping, reporting, or 

disclosure requirements on the public 

that would constitute collections of 

information requiring approval under 

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

3501 et seq. 

List of Subjects 

12 CFR Part 1024 

Condominiums, Consumer protection, 

Housing, Mortgage servicing, Mortgages, 

Recordkeeping requirements, Reporting. 

12 CFR Part 1026 

Advertising, Consumer protection, 

Credit, Credit unions, Mortgages, 

National banks, Reporting and 

recordkeeping requirements, Savings 

associations, Truth in lending. 

Authority and Issuance 

For the reasons set forth in the 

preamble, the Bureau amends 

Regulation X, 12 CFR part 1024, as 

amended by the final rule published on 

February 14, 2013, 78 FR 10695, and 

Regulation Z, 12 CFR part 1026, as 

amended by the final rules published on 

January 30, 2013, 78 FR 6407 and 

February 14, 2013, 78 FR 10901 as set 

forth below: 

PART 1024—REAL ESTATE 

SETTLEMENT PROCEDURES ACT 

(REGULATION X) 

■ 1. The authority citation for part 1024 

continues to read as follows: 

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

2609, 2617, 5512, 5532, 5581. 

Subpart A—General Provisions 

■ 2. The subpart A heading is revised to 

read as set forth above. 

■ 3. Section 1024.5 is amended by 

adding paragraph (c) to read as follows: 

§ 1024.5 Coverage of RESPA. 

* * * * * 

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

laws that are inconsistent with RESPA 

or this part are preempted to the extent 

of the inconsistency. However, RESPA 

and these regulations do not annul, 

alter, affect, or exempt any person 

subject to their provisions from 

complying with the laws of any State 

with respect to settlement practices, 

except to the extent of the 

inconsistency. 

(2) Upon request by any person, the 

Bureau is authorized to determine if 

inconsistencies with State law exist; in 

doing so, the Bureau shall consult with 

appropriate Federal agencies. 

(i) The Bureau may not determine that 

a State law or regulation is inconsistent 

with any provision of RESPA or this 

part, if the Bureau determines that such 

law or regulation gives greater 

protection to the consumer. 

(ii) In determining whether provisions 

of State law or regulations concerning 

affiliated business arrangements are 

inconsistent with RESPA or this part, 

the Bureau may not construe those 

provisions that impose more stringent 

limitations on affiliated business 

arrangements as inconsistent with 

RESPA so long as they give more 

protection to consumers and/or 

competition. 

(3) Any person may request the 

Bureau to determine whether an 

inconsistency exists by submitting to 

the address established by the Bureau to 

request an official interpretation, a copy 

of the State law in question, any other 

law or judicial or administrative 

opinion that implements, interprets or 

applies the relevant provision, and an 

explanation of the possible 

inconsistency. A determination by the 

Bureau that an inconsistency with State 

law exists will be made by publication 

of a notice in the Federal Register. 

‘‘Law’’ as used in this section includes 

regulations and any enactment which 

has the force and effect of law and is 

issued by a State or any political 

subdivision of a State. 

(4) A specific preemption of 

conflicting State laws regarding notices 

and disclosures of mortgage servicing 

transfers is set forth in § 1024.33(d). 

Subpart B—Mortgage Settlement and 

Escrow Accounts 

§ 1024.13 [Removed and Reserved] 

■ 4. Section 1024.13 is removed and 

reserved. 

■ 5. In Supplement I to Part 1024, 

Subpart A is added to read as follows: 

Supplement I to Part 1024—Official 

Bureau Interpretations 

* * * * * 

Subpart A—General Provisions 

§ 1024.5 Coverage of RESPA 

5(c) Relation to State laws. 

Paragraph 5(c)(1). 

1. State laws that are inconsistent 

with the requirements of RESPA or 


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Regulation X may be preempted by 

RESPA or Regulation X. State laws that 

give greater protection to consumers are 

not inconsistent with and are not 

preempted by RESPA or Regulation X. 

In addition, nothing in RESPA or 

Regulation X should be construed to 

preempt the entire field of regulation of 

the practices covered by RESPA or 

Regulation X, including the regulations 

in Subpart C with respect to mortgage 

servicers or mortgage servicing. 

* * * * * 

PART 1026—TRUTH IN LENDING 

(REGULATION Z) 

■ 6. The authority citation for part 1026 

is revised to read as follows: 

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

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

U.S.C. 1601 et seq. 

Subpart E—Special Rules for Certain 

Home Mortgage Transactions 

■ 7. Section 1026.35 is amended by 

revising paragraph (e) introductory text, 

redesignating paragraph (e)(3) as 

paragraph (e)(4), and adding new 

paragraph (e)(3) to read as follows: 

§ 1026.35 Requirements for higher-priced 

mortgage loans. 

* * * * * 

(e) Repayment ability, prepayment 

penalties. Except as provided in 

paragraph (e)(3) of this section, higherpriced mortgage loans are subject to the 

following restrictions: 

* * * * * 

(3) Exclusions. This paragraph (e) 

does not apply to a transaction to 

finance the initial construction of a 

dwelling; a temporary or ‘‘bridge’’ loan 

with a term of twelve months or less, 

such as a loan to purchase a new 

dwelling where the consumer plans to 

sell a current dwelling within twelve 

months; or a reverse mortgage 

transaction subject to § 1026.33. 

* * * * * 

■ 8. Section 1026.41 is amended by 

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

and (iii) to read as follows: 

§ 1026.41 Periodic statements for 

residential mortgage loans. 

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

applies to a closed-end consumer credit 

transaction secured by a dwelling, 

unless an exemption in paragraph (e) of 

this section applies. A closed-end 

consumer credit transaction secured by 

a dwelling is referred to as a mortgage 

loan for purposes of this section. 

* * * * * 

(e) * * * 

(4) * * * 

(ii) Small servicer defined. A small 

servicer is a servicer that either: 

(A) Services, together with any 

affiliates, 5,000 or fewer mortgage loans, 

for all of which the servicer (or an 

affiliate) is the creditor or assignee; or 

(B) Is a Housing Finance Agency, as 

defined in 24 CFR 266.5. 

(iii) Small servicer determination. In 

determining whether a servicer is a 

small servicer, the servicer is evaluated 

based on the mortgage loans serviced by 

the servicer and any affiliates as of 

January 1 for the remainder of the 

calendar year. A servicer that ceases to 

qualify as a small servicer will have six 

months from the time it ceases to 

qualify or until the next January 1, 

whichever is later, to comply with any 

requirements from which the servicer is 

no longer exempt as a small servicer. 

The following mortgage loans are not 

considered in determining whether a 

servicer qualifies as a small servicer: 

(A) Mortgage loans voluntarily 

serviced by the servicer for a creditor or 

assignee that is not an affiliate of the 

servicer and for which the servicer does 

not receive any compensation or fees. 

(B) Reverse mortgage transactions. 

(C) Mortgage loans secured by 

consumers’ interests in timeshare plans. 

■ 9. Section 1026.43 is amended by 

revising paragraphs (e)(4)(ii)(A) 

introductory text through (E) to read as 

follows: 

§ 1026.43 Minimum standards for 

transactions secured by a dwelling. 

* * * * * 

(e) * * * 

(4) * * * 

(ii) * * * 

(A) A loan that is eligible, except with 

regard to matters wholly unrelated to 

ability to repay: 

* * * * * 

(B) A loan that is eligible to be 

insured, except with regard to matters 

wholly unrelated to ability to repay, by 

the U.S. Department of Housing and 

Urban Development under the National 

Housing Act (12 U.S.C. 1707 et seq.); 

(C) A loan that is eligible to be 

guaranteed, except with regard to 

matters wholly unrelated to ability to 

repay, by the U.S. Department of 

Veterans Affairs; 

(D) A loan that is eligible to be 

guaranteed, except with regard to 

matters wholly unrelated to ability to 

repay, by the U.S. Department of 

Agriculture pursuant to 42 U.S.C. 

1472(h); or 

(E) A loan that is eligible to be 

insured, except with regard to matters 

wholly unrelated to ability to repay, by 

the Rural Housing Service. 

* * * * * 

■ 10. Appendix Q to Part 1026 is revised 

to read as follows: 

Appendix Q to Part 1026—Standards 

for Determining Monthly Debt and 

Income 

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

satisfy the requirements for a qualified 

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

the consumer’s total monthly debt payments 

to total monthly income at the time of 

consummation cannot exceed 43 percent. 

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

creditor to calculate the ratio of the 

consumer’s total monthly debt payments to 

total monthly income using the following 

standards, with additional requirements for 

calculating debt and income appearing in 

§ 1026.43(e)(2)(vi)(B). Where guidance issued 

by the U.S. Department of Housing and 

Urban Development, the U.S. Department of 

Veterans Affairs, the U.S. Department of 

Agriculture, or the Rural Housing Service, or 

issued by the Federal National Mortgage 

Association (Fannie Mae) or the Federal 

Home Loan Mortgage Corporation (Freddie 

Mac) while operating under the 

conservatorship or receivership of the 

Federal Housing Finance Agency, or issued 

by a limited-life regulatory entity succeeding 

the charter of either Fannie Mae or Freddie 

Mac (collectively, Agency or GSE guidance) 

is in accordance with appendix Q, creditors 

may look to that guidance as a helpful 

resource in applying appendix Q. Moreover, 

when the following standards do not resolve 

how a specific kind of debt or income should 

be treated, the creditor may either (1) exclude 

the income or include the debt, or (2) rely on 

Agency or GSE guidance to resolve the issue. 

The following standards resolve the 

appropriate treatment of a specific kind of 

debt or income where the standards provide 

a discernible answer to the question of how 

to treat the debt or income. However, a 

creditor may not rely on Agency or GSE 

guidance to reach a resolution contrary to 

that provided by the following standards, 

even if such Agency or GSE guidance 

specifically addresses the particular type of 

debt or income but the following standards 

provide more generalized guidance. 

I. Consumer Employment Related Income 

A. Stability of Income 

1. Effective Income. Income may not be 

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

cannot be verified, is not stable, or will not 

continue. 

2. Verifying Employment History. 

a. The creditor must verify the consumer’s 

employment for the most recent two full 

years, and the creditor must require the 

consumer to: 

i. Explain any gaps in employment that 

span one or more months, and 

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

military for the recent two full years, 

providing evidence supporting this claim, 

such as college transcripts, or discharge 

papers. 

b. Allowances can be made for seasonal 

employment, typical for the building trades 

and agriculture, if documented by the 

creditor. 


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Note: A consumer with a 25 percent or 

greater ownership interest in a business is 

considered self-employed and will be 

evaluated as a self-employed consumer. 

3. Analyzing a Consumer’s Employment 

Record. 

a. When analyzing a consumer’s 

employment, creditors must examine: 

i. The consumer’s past employment record; 

and 

ii. The employer’s confirmation of current, 

ongoing employment status. 

Note: Creditors may assume that 

employment is ongoing if a consumer’s 

employer verifies current employment and 

does not indicate that employment has been, 

or is set to be terminated. Creditors should 

not rely upon a verification of current 

employment that includes an affirmative 

statement that the employment is likely to 

cease, such as a statement that indicates the 

employee has given (or been given) notice of 

employment suspension or termination. 

b. Creditors may favorably consider the 

stability of a consumer’s income if he/she 

changes jobs frequently within the same line 

of work, but continues to advance in income 

or benefits. In this analysis, income stability 

takes precedence over job stability. 

4. Consumers Returning to Work After an 

Extended Absence. A consumer’s income 

may be considered effective and stable when 

recently returning to work after an extended 

absence if he/she: 

a. Is employed in the current job for six 

months or longer; and 

b. Can document a two year work history 

prior to an absence from employment using: 

i. Traditional employment verifications; 

and/or 

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

Note: An acceptable employment situation 

includes individuals who took several years 

off from employment to raise children, then 

returned to the workforce. 

c. Important: Situations not meeting the 

criteria listed above may not be used in 

qualifying. Extended absence is defined as 

six months. 

B. Salary, Wage and Other Forms of Income 

1. General Policy on Consumer Income 

Analysis. 

a. The income of each consumer who will 

be obligated for the mortgage debt and whose 

income is being relied upon in determining 

ability to repay must be analyzed to 

determine whether his/her income level can 

be reasonably expected to continue. 

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

limited to salaries or wages. Income from 

other sources can be considered as effective, 

when properly verified and documented by 

the creditor. 

Notes: i. Effective income for consumers 

planning to retire during the first three-year 

period must include the amount of: 

a. Documented retirement benefits; 

b. Social Security payments; or 

c. Other payments expected to be received 

in retirement. 

ii. Creditors must not ask the consumer 

about possible, future maternity leave. 

iii. Creditors may assume that salary or 

wage income from employment verified in 

accordance with section I.A.3 above can be 

reasonably expected to continue if a 

consumer’s employer verifies current 

employment and income and does not 

indicate that employment has been, or is set 

to be terminated. Creditors should not 

assume that income can be reasonably 

expected to continue if a verification of 

current employment includes an affirmative 

statement that the employment is likely to 

cease, such as a statement that indicates the 

employee has given (or been given) notice of 

employment suspension or termination. 

2. Overtime and Bonus Income. 

a. Overtime and bonus income can be used 

to qualify the consumer if he/she has 

received this income for the past two years, 

and documentation submitted for the loan 

does not indicate this income will likely 

cease. If, for example, the employment 

verification states that the overtime and 

bonus income is unlikely to continue, it may 

not be used in qualifying. 

b. The creditor must develop an average of 

bonus or overtime income for the past two 

years. Periods of overtime and bonus income 

less than two years may be acceptable, 

provided the creditor can justify and 

document in writing the reason for using the 

income for qualifying purposes. 

3. Establishing an Overtime and Bonus 

Income Earning Trend. 

a. The creditor must establish and 

document an earnings trend for overtime and 

bonus income. If either type of income shows 

a continual decline, the creditor must 

document in writing a sound rationalization 

for including the income when qualifying the 

consumer. 

b. A period of more than two years must 

be used in calculating the average overtime 

and bonus income if the income varies 

significantly from year to year. 

4. Qualifying Part-Time Income. 

a. Part-time and seasonal income can be 

used to qualify the consumer if the creditor 

documents that the consumer has worked the 

part-time job uninterrupted for the past two 

years, and plans to continue. Many low and 

moderate income families rely on part-time 

and seasonal income for day to day needs, 

and creditors should not restrict 

consideration of such income when 

qualifying the income of these consumers. 

b. Part-time income received for less than 

two years may be included as effective 

income, provided that the creditor justifies 

and documents that the income is likely to 

continue. 

c. Part-time income not meeting the 

qualifying requirements may not be used in 

qualifying. 

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

income refers to employment taken to 

supplement the consumer’s income from 

regular employment; part-time employment 

is not a primary job and it is worked less than 

40 hours. 

5. Income from Seasonal Employment. 

a. Seasonal income is considered 

uninterrupted, and may be used to qualify 

the consumer, if the creditor documents that 

the consumer: 

i. Has worked the same job for the past two 

years, and 

ii. Expects to be rehired the next season. 

b. Seasonal employment includes, but is 

not limited to: 

i. Umpiring baseball games in the summer; 

or 

ii. Working at a department store during 

the holiday shopping season. 

6. Primary Employment Less Than 40 Hour 

Work Week. 

a. When a consumer’s primary 

employment is less than a typical 40-hour 

work week, the creditor should evaluate the 

stability of that income as regular, on-going 

primary employment. 

b. Example: A registered nurse may have 

worked 24 hours per week for the last year. 

Although this job is less than the 40-hour 

work week, it is the consumer’s primary 

employment, and should be considered 

effective income. 

7. Commission Income. 

a. Commission income must be averaged 

over the previous two years. To qualify 

commission income, the consumer must 

provide: 

i. Copies of signed tax returns for the last 

two years; and 

ii. The most recent pay stub. 

b. Consumers whose commission income 

was received for more than one year, but less 

than two years may be considered favorably 

if the underwriter can: 

i. Document the likelihood that the income 

will continue, and 

ii. Soundly rationalize accepting the 

commission income. 

Notes: i. Unreimbursed business expenses 

must be subtracted from gross income. 

ii. A commissioned consumer is one who 

receives more than 25 percent of his/her 

annual income from commissions. 

iii. A tax transcript obtained directly from 

the IRS may be used in lieu of signed tax 

returns. 

8. Qualifying Commission Income Earned 

for Less Than One Year. 

a. Commission income earned for less than 

one year is not considered effective income. 

Exceptions may be made for situations in 

which the consumer’s compensation was 

changed from salary to commission within a 

similar position with the same employer. 

b. A consumer’s income may also qualify 

when the portion of earnings not attributed 

to commissions would be sufficient to qualify 

the consumer for the mortgage. 

9. Employer Differential Payments. 

If the employer subsidizes a consumer’s 

mortgage payment through direct payments, 

the amount of the payments: 

a. Is considered gross income, and 

b. Cannot be used to offset the mortgage 

payment directly, even if the employer pays 

the servicing creditor directly. 

10. Retirement Income. 

Retirement income must be verified from 

the former employer, or from Federal tax 

returns. If any retirement income, such as 

employer pensions or 401(k)’s, will cease 

within the first full three years of the 

mortgage loan, such income may not be used 

in qualifying. 

11. Social Security Income. 

Social Security income must be verified by 

a Social Security Administration benefit 

verification letter (sometimes called a ‘‘proof 

of income letter,’’ ‘‘budget letter,’’ ‘‘benefits 


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letter,’’ or ‘‘proof of award letter’’). If any 

benefits expire within the first full three 

years of the loan, the income source may not 

be used in qualifying. 

Notes: i. If the Social Security 

Administration benefit verification letter 

does not indicate a defined expiration date 

within three years of loan origination, the 

creditor shall consider the income effective 

and likely to continue. Pending or current reevaluation of medical eligibility for benefit 

payments is not considered an indication 

that the benefit payments are not likely to 

continue. 

ii. Some portion of Social Security income 

may be ‘‘grossed up’’ if deemed nontaxable 

by the IRS. 

12. Automobile Allowances and Expense 

Account Payments. 

a. Only the amount by which the 

consumer’s automobile allowance or expense 

account payments exceed actual 

expenditures may be considered income. 

b. To establish the amount to add to gross 

income, the consumer must provide the 

following: 

i. IRS Form 2106, Employee Business 

Expenses, for the previous two years; and 

ii. Employer verification that the payments 

will continue. 

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

as opposed to the actual cost method, the 

portion that the IRS considers depreciation 

may be added back to income. 

d. Expenses that must be treated as 

recurring debt include: 

i. The consumer’s monthly car payment; 

and 

ii. Any loss resulting from the calculation 

of the difference between the actual 

expenditures and the expense account 

allowance. 

C. Consumers Employed by a Family Owned 

Business. 

1. Income Documentation Requirement. 

In addition to normal employment 

verification, a consumer employed by a 

family owned business is required to provide 

evidence that he/she is not an owner of the 

business, which may include: 

a. Copies of signed personal tax returns, or 

b. A signed copy of the corporate tax return 

showing ownership percentage. 

Note: A tax transcript obtained directly 

from the IRS may be used in lieu of signed 

tax returns. 

D. General Information on Self-Employed 

Consumers and Income Analysis. 

1. Definition: Self-Employed Consumer. 

A consumer with a 25 percent or greater 

ownership interest in a business is 

considered self-employed. 

2. Types of Business Structures. 

There are four basic types of business 

structures. They include: 

a. Sole proprietorships; 

b. Corporations; 

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

and 

d. Partnerships. 

3. Minimum Length of Self Employment. 

a. Income from self-employment is 

considered stable, and effective, if the 

consumer has been self-employed for two or 

more years. 

b. Due to the high probability of failure 

during the first few years of a business, the 

requirements described in the table below are 

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

4. General Documentation Requirements 

for Self-Employed Consumers. 

Self-employed consumers must provide the 

following documentation: 

a. Signed, dated individual tax returns, 

with all applicable tax schedules for the most 

recent two years; 

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

partnership, signed copies of Federal 

business income tax returns for the last two 

years, with all applicable tax schedules; and 

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

statement and balance sheet. 

5. Establishing a Self-Employed 

Consumer’s Earnings Trend. 

a. When qualifying income, the creditor 

must establish the consumer’s earnings trend 

from the previous two years using the 

consumer’s tax returns. 

b. If a consumer: 

i. Provides quarterly tax returns, the 

income analysis may include income through 

the period covered by the tax filings, or 

ii. Is not subject to quarterly tax returns, or 

does not file them, then the income shown 

on the P&L statement may be included in the 

analysis, provided the income stream based 

on the P&L is consistent with the previous 

years’ earnings. 

c. If the P&L statements submitted for the 

current year show an income stream 

considerably greater than what is supported 

by the previous year’s tax returns, the 

creditor must base the income analysis solely 

on the income verified through the tax 

returns. 

d. If the consumer’s earnings trend for the 

previous two years is downward and the 

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

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

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

to calculate his/her income. 

6. Analyzing the Business’s Financial 

Strength. 

The creditor must consider the business’s 

financial strength by examining annual 

earnings. Annual earnings that are stable or 

increasing are acceptable, while businesses 

that show a significant decline in income 

over the analysis period are not acceptable. 

E. Income Analysis: Individual Tax Returns 

(IRS Form 1040). 

1. General Policy on Adjusting Income 

Based on a Review of IRS Form 1040. 

The amount shown on a consumer’s IRS 

Form 1040 as adjusted gross income must 

either be increased or decreased based on the 

creditor’s analysis of the individual tax 

return and any related tax schedules. 

2. Guidelines for Analyzing IRS Form 1040. 

The table below contains guidelines for 

analyzing IRS Form 1040: 

BILLING CODE 4810–AM–P 


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F. Income Analysis: Corporate Tax Returns 

(IRS Form 1120). 

1. Description: Corporation. 

A corporation is a State-chartered business 

owned by its stockholders. 

2. Need To Obtain Consumer Percentage of 

Ownership Information. 

a. Corporate compensation to the officers, 

generally in proportion to the percentage of 

ownership, is shown on the: 

i. Corporate tax return IRS Form 1120; and 

ii. Individual tax returns. 

b. When a consumer’s percentage of 

ownership does not appear on the tax 

returns, the creditor must obtain the 


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information from the corporation’s 

accountant, along with evidence that the 

consumer has the right to any compensation. 

3. Analyzing Corporate Tax Returns. 

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

adjusted business income must: 

i. Be determined; and 

ii. Multiplied by the consumer’s percentage 

of ownership in the business. 

b. The table below describes the items 

found on IRS Form 1120 for which an 

adjustment must be made in order to 

determine adjusted business income. 

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

Returns (IRS Form 1120S). 

1. Description: ‘‘S’’ Corporation. 

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

start-up business, with gains and losses 

passed to stockholders in proportion to each 

stockholder’s percentage of business 

ownership. 

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

comes from IRS Form W–2 wages, and is 

taxed at the individual rate. The IRS Form 

1120S, Compensation of Officers line item is 

transferred to the consumer’s individual IRS 

Form 1040. 

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

a. ‘‘S’’ corporation depreciation and 

depletion may be added back to income in 

proportion to the consumer’s share of the 

corporation’s income. 

b. In addition, the income must also be 

reduced proportionately by the total 

obligations payable by the corporation in less 

than one year. 

c. Important: The consumer’s withdrawal 

of cash from the corporation may have a 

severe negative impact on the corporation’s 

ability to continue operating, and must be 

considered in the income analysis. 

H. Income Analysis: Partnership Tax Returns 

(IRS Form 1065). 

1. Description: Partnership. 

a. A partnership is formed when two or 

more individuals form a business, and share 

in profits, losses, and responsibility for 

running the company. 

b. Each partner pays taxes on his/her 

proportionate share of the partnership’s net 

income. 

2. Analyzing Partnership Tax Returns. 

a. Both general and limited partnerships 

report income on IRS Form 1065, and the 

partners’ share of income is carried over to 

Schedule E of IRS Form 1040. 

b. The creditor must review IRS Form 1065 

to assess the viability of the business. Both 

depreciation and depletion may be added 

back to the income in proportion to the 

consumer’s share of income. 

c. Income must also be reduced 

proportionately by the total obligations 

payable by the partnership in less than one 

year. 

d. Important: Cash withdrawals from the 

partnership may have a severe negative 

impact on the partnership’s ability to 

continue operating, and must be considered 

in the income analysis. 

II. Non-Employment Related Consumer 

Income 

A. Alimony, Child Support, and Maintenance 

Income Criteria. 

Alimony, child support, or maintenance 

income may be considered effective, if: 

1. Payments are likely to be received 

consistently for the first three years of the 

mortgage; 

2. The consumer provides the required 

documentation, which includes a copy of 

the: 

i. Final divorce decree; 

ii. Legal separation agreement; 

iii. Court order; or 

iv. Voluntary payment agreement; and 

3. The consumer can provide acceptable 

evidence that payments have been received 

during the last 12 months, such as: 

i. Cancelled checks; 

ii. Deposit slips; 

iii. Tax returns; or 

iv. Court records. 

Notes: i. Periods less than 12 months may 

be acceptable, provided the creditor can 

adequately document the payer’s ability and 

willingness to make timely payments. 

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

under the same provisions as non-taxable 

income sources. 

B. Investment and Trust Income. 

1. Analyzing Interest and Dividends. 

a. Interest and dividend income may be 

used as long as tax returns or account 

statements support a two-year receipt history. 

This income must be averaged over the two 

years. 

b. Subtract any funds that are derived from 

these sources, and are required for the cash 

investment, before calculating the projected 

interest or dividend income. 

2. Trust Income. 

a. Income from trusts may be used if 

constant payments will continue for at least 

the first three years of the mortgage term as 

evidenced by trust income documentation. 

b. Required trust income documentation 

includes a copy of the Trust Agreement or 

other trustee statement, confirming the: 

i. Amount of the trust; 

ii. Frequency of distribution; and 

iii. Duration of payments. 

c. Trust account funds may be used for the 

required cash investment if the consumer 

provides adequate documentation that the 

withdrawal of funds will not negatively affect 

income. The consumer may use funds from 

the trust account for the required cash 

investment, but the trust income used to 

determine repayment ability cannot be 

affected negatively by its use. 

3. Notes Receivable Income. 

a. In order to include notes receivable 

income, the consumer must provide: 

i. A copy of the note to establish the 

amount and length of payment, and 

ii. Evidence that these payments have been 

consistently received for the last 12 months 

through deposit slips, deposit receipts, 

cancelled checks, bank or other account 

statements, or tax returns. 

b. If the consumer is not the original payee 

on the note, the creditor must establish that 

the consumer is able to enforce the note. 

4. Eligible Investment Properties. 

Follow the steps in the table below to 

calculate an investment property’s income or 

loss if the property to be subject to a 

mortgage is an eligible investment property. 


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C. Military, Government Agency, and 

Assistance Program Income. 

1. Military Income. 

a. Military personnel not only receive base 

pay, but often times are entitled to additional 

forms of pay, such as: 

i. Income from variable housing 

allowances; 

ii. Clothing allowances; 

iii. Flight or hazard pay; 

iv. Rations; and 

v. Proficiency pay. 

b. These types of additional pay are 

acceptable when analyzing a consumer’s 

income as long as the probability of such pay 

to continue is verified in writing. 

Note: The tax-exempt nature of some of the 

above payments should also be considered. 

2. VA Benefits. 

a. Direct compensation for service-related 

disabilities from the Department of Veterans 

Affairs (VA) is acceptable, provided the 

creditor receives documentation from the 

VA. 

b. Education benefits used to offset 

education expenses are not acceptable. 

3. Government Assistance Programs. 

a. Income received from government 

assistance programs is acceptable as long as 

the paying agency provides documentation 

indicating that the income is expected to 

continue for at least three years. 

b. If the income from government 

assistance programs will not be received for 

at least three years, it may not be used in 

qualifying. 

c. Unemployment income must be 

documented for two years, and there must be 

reasonable assurance that this income will 

continue. This requirement may apply to 

seasonal employment. 

Note: Social Security income is acceptable 

as provided in section I.B.11. 

4. Mortgage Credit Certificates. 

a. If a government entity subsidizes the 

mortgage payments either through direct 

payments or tax rebates, these payments may 

be considered as acceptable income. 

b. Either type of subsidy may be added to 

gross income, or used directly to offset the 

mortgage payment, before calculating the 

qualifying ratios. 

5. Homeownership Subsidies. 

a. A monthly subsidy may be treated as 

income, if a consumer is receiving subsidies 

under the housing choice voucher home 

ownership option from a public housing 

agency (PHA). Although continuation of the 

homeownership voucher subsidy beyond the 

first year is subject to Congressional 

appropriation, for the purposes of 

underwriting, the subsidy will be assumed to 

continue for at least three years. 

b. If the consumer is receiving the subsidy 

directly, the amount received is treated as 

income. The amount received may also be 

treated as nontaxable income and be ‘‘grossed 

up’’ by 25 percent, which means that the 

amount of the subsidy, plus 25 percent of 

that subsidy may be added to the consumer’s 

income from employment and/or other 

sources. 

c. Creditors may treat this subsidy as an 

‘‘offset’’ to the monthly mortgage payment 

(that is, reduce the monthly mortgage 

payment by the amount of the home 

ownership assistance payment before 

dividing by the monthly income to determine 

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

ratios). The subsidy payment must not pass 

through the consumer’s hands. 

d. The assistance payment must be: 

i. Paid directly to the servicing creditor; or 

ii. Placed in an account that only the 

servicing creditor may access. 

Note: Assistance payments made directly 

to the consumer must be treated as income. 

D. Rental Income. 

1. Analyzing the Stability of Rental Income. 

a. Rent received for properties owned by 

the consumer is acceptable as long as the 

creditor can document the stability of the 

rental income through: 

i. A current lease; 

ii. An agreement to lease; or 

iii. A rental history over the previous 24 

months that is free of unexplained gaps 

greater than three months (such gaps could 

be explained by student, seasonal, or military 

renters, or property rehabilitation). 

b. A separate schedule of real estate is not 

required for rental properties as long as all 

properties are documented on the Uniform 

Residential Loan Application. 

Note: The underwriting analysis may not 

consider rental income from any property 

being vacated by the consumer, except under 

the circumstances described below. 

2. Rental Income From Consumer 

Occupied Property. 

a. The rent for multiple unit property 

where the consumer resides in one or more 

units and charges rent to tenants of other 

units may be used for qualifying purposes. 

b. Projected rent for the tenant-occupied 

units only may: 

i. Be considered gross income, only after 

deducting vacancy and maintenance factors, 

and 

ii. Not be used as a direct offset to the 

mortgage payment. 

3. Income from Roommates or Boarders in 

a Single Family Property. 

a. Rental income from roommates or 

boarders in a single family property occupied 

as the consumer’s primary residence is 

acceptable. 

b. The rental income may be considered 

effective if shown on the consumer’s tax 

return. If not on the tax return, rental income 

paid by the roommate or boarder may not be 

used in qualifying. 

4. Documentation Required To Verify 

Rental Income. 

Analysis of the following required 

documentation is necessary to verify all 

consumer rental income: 

a. IRS Form 1040 Schedule E; and 

b. Current leases/rental agreements. 

5. Analyzing IRS Form 1040 Schedule E. 

a. The IRS Form 1040 Schedule E is 

required to verify all rental income. 

Depreciation shown on Schedule E may be 

added back to the net income or loss. 

b. Positive rental income is considered 

gross income for qualifying purposes, while 

negative income must be treated as a 

recurring liability. 

c. The creditor must confirm that the 

consumer still owns each property listed, by 

comparing Schedule E with the real estate 

owned section of the Uniform Residential 

Loan Application (URLA). 

6. Using Current Leases To Analyze Rental 

Income. 

a. The consumer can provide a current 

signed lease or other rental agreement for a 

property that was acquired since the last 

income tax filing, and is not shown on 

Schedule E. 

b. In order to calculate the rental income: 

i. Reduce the gross rental amount by 25 

percent for vacancies and maintenance; 

ii. Subtract PITI and any homeowners 

association dues; and 

iii. Apply the resulting amount to income, 

if positive, or recurring debts, if negative. 

7. Exclusion of Rental Income From 

Property Being Vacated by the Consumer. 

Underwriters may not consider any rental 

income from a consumer’s principal 

residence that is being vacated in favor of 


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another principal residence, except under the 

conditions described below: 

Notes: i. This policy assures that a 

consumer either has sufficient income to 

make both mortgage payments without any 

rental income, or has an equity position not 

likely to result in defaulting on the mortgage 

on the property being vacated. 

ii. This applies solely to a principal 

residence being vacated in favor of another 

principal residence. It does not apply to 

existing rental properties disclosed on the 

loan application and confirmed by tax 

returns (Schedule E of form IRS 1040). 

8. Policy Exceptions Regarding the 

Exclusion of Rental Income From a Principal 

Residence Being Vacated by a Consumer. 

When a consumer vacates a principal 

residence in favor of another principal 

residence, the rental income, reduced by the 

appropriate vacancy factor, may be 

considered in the underwriting analysis 

under the circumstances listed in the table 

below. 

E. Non-Taxable and Projected Income 

1. Types of Non-Taxable Income. 

Certain types of regular income may not be 

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

a. Some portion of Social Security, some 

Federal government employee retirement 

income, Railroad Retirement Benefits, and 

some State government retirement income; 

b. Certain types of disability and public 

assistance payments; 

c. Child support; 

d. Military allowances; and 

e. Other income that is documented as 

being exempt from Federal income taxes. 

2. Adding Non-Taxable Income to a 

Consumer’s Gross Income. 

a. The amount of continuing tax savings 

attributed to regular income not subject to 

Federal taxes may be added to the 

consumer’s gross income. 

b. The percentage of non-taxable income 

that may be added cannot exceed the 

appropriate tax rate for the income amount. 

Additional allowances for dependents are not 

acceptable. 

c. The creditor: 

i. Must document and support the amount 

of income grossed up for any non-taxable 

income source, and 

ii. Should use the tax rate used to calculate 

the consumer’s last year’s income tax. 

Note: If the consumer is not required to file 

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

percent. 

3. Analyzing Projected Income. 

a. Projected or hypothetical income is not 

acceptable for qualifying purposes. However, 

exceptions are permitted for income from the 

following sources: 

i. Cost-of-living adjustments; 

ii. Performance raises; and 

iii. Bonuses. 

b. For the above exceptions to apply, the 

income must be: 

i. Verified in writing by the employer; and 

ii. Scheduled to begin within 60 days of 

loan closing. 

4. Projected Income for New Job. 

a. Projected income is acceptable for 

qualifying purposes for a consumer 

scheduled to start a new job within 60 days 

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

b. The creditor must verify that the 

consumer will have sufficient income or cash 

reserves to support the mortgage payment 

and any other obligations between loan 

closing and the start of employment. 

Examples of this type of scenario are teachers 

whose contracts begin with the new school 

year, or physicians beginning a residency 

after the loan closes. 

c. The income does not qualify if the loan 

closes more than 60 days before the 

consumer starts the new job. 

III. Consumer Liabilities: Recurring 

Obligations 

1. Types of Recurring Obligation. Recurring 

obligations include: 

a. All installment loans; 

b. Revolving charge accounts; 

c. Real estate loans; 

d. Alimony; 

e. Child support; and 

f. Other continuing obligations. 

2. Debt to Income Ratio Computation for 

Recurring Obligations. 

a. The creditor must include the following 

when computing the debt to income ratios for 

recurring obligations: 

i. Monthly housing expense; and 

ii. Additional recurring charges extending 

ten months or more, such as 

a. Payments on installment accounts; 

b. Child support or separate maintenance 

payments; 

c. Revolving accounts; and 

d. Alimony. 

b. Debts lasting less than ten months must 

be included if the amount of the debt affects 


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Federal Register / Vol. 78, No. 142 / Wednesday, July 24, 2013 / Rules and Regulations 44725 

the consumer’s ability to pay the mortgage 

during the months immediately after loan 

closing, especially if the consumer will have 

limited or no cash assets after loan closing. 

Note: Monthly payments on revolving or 

open-ended accounts, regardless of the 

balance, are counted as a liability for 

qualifying purposes even if the account 

appears likely to be paid off within 10 

months or less. 

3. Revolving Account Monthly Payment 

Calculation. If the credit report shows any 

revolving accounts with an outstanding 

balance but no specific minimum monthly 

payment, the payment must be calculated as 

the greater of: 

a. 5 percent of the balance; or 

b. $10. 

Note: If the actual monthly payment is 

documented from the creditor or the creditor 

obtains a copy of the current statement 

reflecting the monthly payment, that amount 

may be used for qualifying purposes. 

4. Reduction of Alimony Payment for 

Qualifying Ratio Calculation. Since there are 

tax consequences of alimony payments, the 

creditor may choose to treat the monthly 

alimony obligation as a reduction from the 

consumer’s gross income when calculating 

the ratio, rather than treating it as a monthly 

obligation. 

IV. Consumer Liabilities: Contingent 

Liability 

1. Definition: Contingent Liability. A 

contingent liability exists when an individual 

is held responsible for payment of a debt if 

another party, jointly or severally obligated, 

defaults on the payment. 

2. Application of Contingent Liability 

Policies. The contingent liability policies 

described in this topic apply unless the 

consumer can provide conclusive evidence 

from the debt holder that there is no 

possibility that the debt holder will pursue 

debt collection against him/her should the 

other party default. 

3. Contingent Liability on Mortgage 

Assumptions. Contingent liability must be 

considered when the consumer remains 

obligated on an outstanding FHA-insured, 

VA-guaranteed, or conventional mortgage 

secured by property that: 

a. Has been sold or traded within the last 

12 months without a release of liability, or 

b. Is to be sold on assumption without a 

release of liability being obtained. 

4. Exemption From Contingent Liability 

Policy on Mortgage Assumptions. When a 

mortgage is assumed, contingent liabilities 

need not be considered if the: 

a. Originating creditor of the mortgage 

being underwritten obtains, from the servicer 

of the assumed loan, a payment history 

showing that the mortgage has been current 

during the previous 12 months, or 

b. Value of the property, as established by 

an appraisal or the sales price on the HUD– 

1 Settlement Statement from the sale of the 

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

ratio of 75 percent or less. 

5. Contingent Liability on Cosigned 

Obligations. 

a. Contingent liability applies, and the debt 

must be included in the underwriting 

analysis, if an individual applying for a 

mortgage is a cosigner/co-obligor on: 

i. A car loan; 

ii. A student loan; 

iii. A mortgage; or 

iv. Any other obligation. 

b. If the creditor obtains documented proof 

that the primary obligor has been making 

regular payments during the previous 12 

months, and does not have a history of 

delinquent payments on the loan during that 

time, the payment does not have to be 

included in the consumer’s monthly 

obligations. 

V. Consumer Liabilities: Projected 

Obligations and Obligations Not Considered 

Debt 

1. Projected Obligations 

a. Debt payments, such as a student loan 

or balloon-payment note scheduled to begin 

or come due within 12 months of the 

mortgage loan closing, must be included by 

the creditor as anticipated monthly 

obligations during the underwriting analysis. 

b. Debt payments do not have to be 

classified as projected obligations if the 

consumer provides written evidence that the 

debt will be deferred to a period outside the 

12-month timeframe. 

c. Balloon-payment notes that come due 

within one year of loan closing must be 

considered in the underwriting analysis. 

2. Obligations Not Considered Debt 

Obligations not considered debt, and 

therefore not subtracted from gross income, 

include: 

a. Federal, State, and local taxes; 

b. Federal Insurance Contributions Act 

(FICA) or other retirement contributions, 

such as 401(k) accounts (including 

repayment of debt secured by these funds): 

c. Commuting costs; 

d. Union dues; 

e. Open accounts with zero balances; 

f. Automatic deductions to savings 

accounts; 

g. Child care; and 

h. Voluntary deductions. 

11. In Supplement I to Part 1026—Official 

Interpretations: 

A. Under Section 1026.41—Periodic 

Statements for Residential Mortgage Loans: 

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

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

paragraphs 1 and 2 are revised and paragraph 

3 is added. 

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

servicer determination, paragraph 3 is added. 

B. Under Section 1026.43—Minimum 

Standards for Transactions Secured by a 

Dwelling: 

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

defined-special rules, paragraph 4 is revised 

and paragraph 5 is added. 

The revisions and additions read as 

follows: 

Supplement I to Part 1026—Official 

Interpretations 

* * * * * 

Subpart E—Special Rules for Certain 

Home Mortgage Transactions 

* * * * * 

§ 1026.41 Periodic Statements for 

Residential Mortgage Loans 

* * * * * 

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

1. Mortgage loans considered. 

Pursuant to § 1026.41(a)(1), the 

mortgage loans considered in 

determining status as a small servicer 

are closed-end consumer credit 

transactions secured by a dwelling, 

subject to the exclusions in 

§ 1026.41(e)(4)(iii). 

2. Requirements to be a small servicer. 

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

qualify as a small servicer, a servicer 

must service, together with any 

affiliates, 5,000 or fewer mortgage loans, 

for all of which the servicer (or an 

affiliate) is the creditor or assignee. 

There are two elements to this 

requirement. First, a servicer, together 

with any affiliates, must service 5,000 or 

fewer mortgage loans. Second, a servicer 

must service only mortgage loans for 

which the servicer (or an affiliate) is the 

creditor or assignee. To be the creditor 

or assignee of a mortgage loan, the 

servicer (or an affiliate) must either 

currently own the mortgage loan or 

must have been the entity to which the 

mortgage loan obligation was initially 

payable (that is, the originator of the 

mortgage loan). A servicer is not a small 

servicer if it services any mortgage loans 

for which the servicer or an affiliate is 

not the creditor or assignee (that is, for 

which the servicer or an affiliate is not 

the owner or was not the originator). 

The following two examples 

demonstrate circumstances in which a 

servicer would not qualify as a small 

servicer because it did not meet both 

requirements for determining a 

servicer’s status as a small servicer: 

i. A servicer services 3,000 mortgage 

loans, all of which it or an affiliate owns 

or originated. An affiliate of the servicer 

services 4,000 other mortgage loans, all 

of which it or an affiliate owns or 

originated. Because the number of 

mortgage loans serviced by a servicer is 

determined by counting the mortgage 

loans serviced by a servicer together 

with any affiliates, both of these 

servicers are considered to be servicing 

7,000 mortgage loans and neither 

servicer is a small servicer. 

ii. A service services 3,100 mortgage 

loans—3,000 mortgage loans it owns or 

originated and 100 mortgage loans it 

neither owns nor originated, but for 

which it owns the mortgage servicing 

rights. The servicer is not a small 

servicer because it services mortgage 

loans for which the servicer (or an 

affiliate) is not the creditor or assignee, 

notwithstanding that the servicer 

services fewer than 5,000 mortgage 

loans. 


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44726 Federal Register / Vol. 78, No. 142 / Wednesday, July 24, 2013 / Rules and Regulations 

3. Master servicing and subservicing. 

A servicer that qualifies as a small 

servicer does not lose its small servicer 

status if it retains a subservicer, as that 

term is defined in 12 CFR 1024.31, to 

service any of its mortgage loans. A 

subservicer can gain the benefit of the 

small servicer exemption only if (1) the 

master servicer, as that term is defined 

in 12 CFR 1024.31, is a small servicer 

and (2) the subservicer is a small 

servicer. A subservicer generally will 

not qualify as a small servicer because 

it does not own or did not originate the 

mortgage loans it subservices—unless it 

is an affiliate of a master servicer that 

qualifies as a small servicer. The 

following examples demonstrate the 

application of the small servicer 

exemption for different forms of 

servicing relationships: 

i. A credit union services 4,000 

mortgage loans, all of which it 

originated or owns. The credit union 

retains a credit union service 

organization, that is not an affiliate, to 

subservice 1,000 of the mortgage loans. 

The credit union is a small servicer and, 

thus, can gain the benefit of the small 

servicer exemption for the 3,000 

mortgage loans the credit union services 

itself. The credit union service 

organization is not a small servicer 

because it services mortgage loans it 

does not own or did not originate. 

Accordingly, the credit union service 

organization does not gain the benefit of 

the small servicer exemption and, thus, 

must comply with any applicable 

mortgage servicing requirements for the 

1,000 mortgage loans it subservices. 

ii. A bank holding company, through 

a lender subsidiary, owns or originated 

4,000 mortgage loans. All mortgage 

servicing rights for the 4,000 mortgage 

loans are owned by a wholly owned 

master servicer subsidiary. Servicing for 

the 4,000 mortgage loans is conducted 

by a wholly owned subservicer 

subsidiary. The bank holding company 

controls all of these subsidiaries and, 

thus, they are affiliates of the bank 

holding company pursuant 12 CFR 

1026.32(b)(2). Because the master 

servicer and subservicer service 5,000 or 

fewer mortgage loans, and because all 

the mortgage loans are owned or 

originated by an affiliate, the master 

servicer and the subservicer both qualify 

for the small servicer exemption for all 

4,000 mortgage loans. 

iii. A nonbank servicer services 4,000 

mortgage loans, all of which it 

originated or owns. The servicer retains 

a ‘‘component servicer’’ to assist it with 

servicing functions. The component 

servicer is not engaged in ‘‘servicing’’ as 

defined in 12 CFR 1024.2; that is, the 

component servicer does not receive 

any scheduled periodic payments from 

a borrower pursuant to the terms of any 

mortgage loan, including amounts for 

escrow accounts, and does not make the 

payments to the owner of the loan or 

other third parties of principal and 

interest and such other payments with 

respect to the amounts received from 

the borrower as may be required 

pursuant to the terms of the mortgage 

servicing loan documents or servicing 

contract. The component servicer is not 

a subservicer pursuant to 12 CFR 

1024.31 because it is not engaged in 

servicing, as that term is defined in 12 

CFR 1024.2. The nonbank servicer is a 

small servicer and, thus, can gain the 

benefit of the small servicer exemption 

with regard to all 4,000 mortgage loans 

it services. 

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

determination. 

* * * * * 

2. Timing for small servicer 

exemption. The following examples 

demonstrate when a servicer either is 

considered or is no longer considered a 

small servicer: 

i. A servicer that begins servicing 

more than 5,000 mortgage loans (or 

begins servicing one or more mortgage 

loans it does not own or did not 

originate) on October 1, and services 

more than 5,000 mortgage loans (or 

services one or more mortgage loans it 

does not own or did not originate) as of 

January 1 of the following year, would 

no longer be considered a small servicer 

on January 1 of that following year and 

would have to comply with any 

requirements from which it is no longer 

exempt as a small servicer on April 1 of 

that following year. 

ii. A servicer that begins servicing 

more than 5,000 mortgage loans (or 

begins servicing one or more mortgage 

loans it does not own or did not 

originate) on February 1, and services 

more than 5,000 mortgage loans (or 

services one or more mortgage loans it 

does not own or did not originate) as of 

January 1 of the following year, would 

no longer be considered a small servicer 

on January 1 of that following year and 

would have to comply with any 

requirements from which it is no longer 

exempt as a small servicer on that same 

January 1. 

iii. A servicer that begins servicing 

more than 5,000 mortgage loans (or 

begins servicing one or more mortgage 

loans it does not own or did not 

originate) on February 1, but services 

less than 5,000 mortgage loans (or no 

longer services mortgage loans it does 

not own or did not originate) as of 

January 1 of the following year, is 

considered a small servicer for that 

following year. 

* * * * * 

3. Mortgage loans not considered in 

determining whether a servicer is a 

small servicer. Mortgage loans that are 

not considered for purposes of 

determining whether a servicer is a 

small servicer pursuant to 

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

either for determining whether a 

servicer, together with any affiliates, 

services 5,000 or fewer mortgage loans 

or whether a servicer is servicing only 

mortgage loans that it owns or 

originated. For example, assume a 

servicer services 5,400 mortgage loans. 

Of these mortgage loans, the servicer 

owns or originated 4,800 mortgage 

loans, voluntarily services 300 mortgage 

loans that it does not own or did not 

originate for an unaffiliated nonprofit 

organization for which the servicer does 

not receive any compensation or fees, 

and services 300 reverse mortgage 

transactions that it does not own and 

did not originate. Because the only 

mortgage loans considered are the 4,800 

mortgage loans owned or originated by 

the servicer, the servicer is considered 

a small servicer and qualifies for the 

small servicer exemption with regard to 

all 5,400 mortgage loans it services. 

Note that reverse mortgages and 

mortgage loans secured by consumers’ 

interests in timeshare plans, in addition 

to not being considered in determining 

small servicer qualification, are also 

exempt from the requirements of 

§ 1026.41. In contrast, although 

charitably serviced mortgage loans, as 

defined by § 1026.41(e)(4)(iii), are 

likewise not considered in determining 

small servicer qualification, they are not 

exempt from the requirements of 

§ 1026.41. Thus, a servicer that does not 

qualify as a small servicer would not 

have to provide periodic statements for 

reverse mortgages and timeshare plans 

because they are exempt from the rule, 

but would have to provide periodic 

statements for mortgage loans it 

charitably services. 

* * * * * 

§ 1026.43 Minimum Standards for 

Transactions Secured by a Dwelling 

* * * * * 

43(e)(4) Qualified mortgage defined— 

special rules. 

* * * * * 

4. Eligible for purchase, guarantee, or 

insurance except with regard to matters 

wholly unrelated to ability to repay. To 

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

not be actually purchased or guaranteed 

by Fannie Mae or Freddie Mac or 

insured or guaranteed by one of the 


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Federal Register / Vol. 78, No. 142 / Wednesday, July 24, 2013 / Rules and Regulations 44727 

Agencies (the U.S. Department of 

Housing and Urban Development 

(HUD), U.S. Department of Veterans 

Affairs (VA), U.S. Department of 

Agriculture (USDA), or Rural Housing 

Service (RHS)). Rather, 

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

creditor determine that the loan is 

eligible (i.e., meets the criteria) for such 

purchase, guarantee, or insurance at 

consummation. For example, for 

purposes of § 1026.43(e)(4), a creditor is 

not required to sell a loan to Fannie Mae 

or Freddie Mac (or any limited-life 

regulatory entity succeeding the charter 

of either) for that loan to be a qualified 

mortgage; however, the loan must be 

eligible for purchase or guarantee by 

Fannie Mae or Freddie Mac (or any 

limited-life regulatory entity succeeding 

the charter of either), including 

satisfying any requirements regarding 

consideration and verification of a 

consumer’s income or assets, credit 

history, debt-to-income ratio or residual 

income, and other credit risk factors, but 

not any requirements regarding matters 

wholly unrelated to ability to repay. To 

determine eligibility for purchase, 

guarantee or insurance, a creditor may 

rely on a valid underwriting 

recommendation provided by a GSE 

automated underwriting system (AUS) 

or an AUS that relies on an Agency 

underwriting tool; compliance with the 

standards in the GSE or Agency written 

guide in effect at the time; a written 

agreement between the creditor or a 

direct sponsor or aggregator of the 

creditor and a GSE or Agency that 

permits variation from the standards of 

the written guides and/or variation from 

the AUSs, in effect at the time of 

consummation; or an individual loan 

waiver granted by the GSE or Agency to 

the creditor. For creditors relying on the 

variances of a sponsor or aggregator, a 

loan that is transferred directly to or 

through the sponsor or aggregator at or 

after consummation complies with 

§ 1026.43(e)(4). In using any of the four 

methods listed above, the creditor need 

not satisfy standards that are wholly 

unrelated to assessing a consumer’s 

ability to repay that the creditor is 

required to perform. Matters wholly 

unrelated to ability to repay are those 

matters that are wholly unrelated to 

credit risk or the underwriting of the 

loan. Such matters include requirements 

related to the status of the creditor 

rather than the loan, requirements 

related to selling, securitizing, or 

delivering the loan, and any 

requirement that the creditor must 

perform after the consummated loan is 

sold, guaranteed, or endorsed for 

insurance such as document custody, 

quality control, or servicing. 

Accordingly, a covered transaction is 

eligible for purchase or guarantee by 

Fannie Mae or Freddie Mac, for 

example, if: 

i. The loan conforms to the relevant 

standards set forth in the Fannie Mae 

Single-Family Selling Guide or the 

Freddie Mac Single-Family Seller/ 

Servicer Guide in effect at the time, or 

to standards set forth in a written 

agreement between the creditor or a 

sponsor or aggregator of the creditor and 

Fannie Mae or Freddie Mac in effect at 

that time that permits variation from the 

standards of those guides; 

ii. The loan has been granted an 

individual waiver by a GSE, which will 

allow purchase or guarantee in spite of 

variations from the applicable 

standards; or 

iii. The creditor inputs accurate 

information into the Fannie Mae or 

Freddie Mac AUS or another AUS 

pursuant to a written agreement 

between the creditor and Fannie Mae or 

Freddie Mac that permits variation from 

the GSE AUS; the loan receives one of 

the recommendations specified below in 

paragraphs A or B from the 

corresponding GSE AUS or an 

equivalent recommendation pursuant to 

another AUS as authorized in the 

written agreement; and the creditor 

satisfies any requirements and 

conditions specified by the relevant 

AUS that are not wholly unrelated to 

ability to repay, the non-satisfaction of 

which would invalidate that 

recommendation: 

A. An ‘‘Approve/Eligible’’ 

recommendation from Desktop 

Underwriter (DU); or 

B. A risk class of ‘‘Accept’’ and 

purchase eligibility of ‘‘Freddie Mac 

Eligible’’ from Loan Prospector (LP). 

5. Repurchase and indemnification 

demands. A repurchase or 

indemnification demand by Fannie 

Mae, Freddie Mac, HUD, VA, USDA, or 

RHS is not dispositive of qualified 

mortgage status. Qualified mortgage 

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

whether a loan is eligible to be 

purchased, guaranteed, or insured at the 

time of consummation, provided that 

other requirements under 

§ 1026.43(e)(4) are satisfied. Some 

repurchase or indemnification demands 

are not related to eligibility criteria at 

consummation. See comment 43(e)(4)-4. 

Further, even where a repurchase or 

indemnification demand relates to 

whether the loan satisfied relevant 

eligibility requirements as of the time of 

consummation, the mere fact that a 

demand has been made, or even 

resolved, between a creditor and GSE or 

agency is not dispositive for purposes of 

§ 1026.43(e)(4). However, evidence of 

whether a particular loan satisfied the 

§ 1026.43(e)(4) eligibility criteria at 

consummation may be brought to light 

in the course of dealing over a particular 

demand, depending on the facts and 

circumstances. Accordingly, each loan 

should be evaluated by the creditor 

based on the facts and circumstances 

relating to the eligibility of that loan at 

the time of consummation. For example: 

i. Assume eligibility to purchase a 

loan was based in part on the 

consumer’s employment income of 

$50,000 per year. The creditor uses the 

income figure in obtaining an approve/ 

eligible recommendation from DU. A 

quality control review, however, later 

determines that the documentation 

provided and verified by the creditor to 

comply with Fannie Mae requirements 

did not support the reported income of 

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

Mae demands that the creditor 

repurchase the loan. Assume that the 

quality control review is accurate, and 

that DU would not have issued an 

approve/eligible recommendation if it 

had been provided the accurate income 

figure. The DU determination at the 

time of consummation was invalid 

because it was based on inaccurate 

information provided by the creditor; 

therefore, the loan was never a qualified 

mortgage under § 1026.43(e)(4). 

ii. Assume that a creditor delivered a 

loan, which the creditor determined was 

a qualified mortgage at the time of 

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

Fannie Mae for inclusion in a particular 

To-Be-Announced Mortgage Backed 

Security (MBS) pool of loans. The data 

submitted by the creditor at the time of 

loan delivery indicated that the various 

loan terms met the product type, 

weighted-average coupon, weightedaverage maturity, and other MBS 

pooling criteria, and MBS issuance 

disclosures to investors reflected this 

loan data. However, after delivery and 

MBS issuance, a quality control review 

determines that the loan violates the 

pooling criteria. 

eligibility requirements for Fannie Mae 

products and loan terms. Fannie Mae, 

however, requires the creditor to 

repurchase the loan due to the violation 

of MBS pooling requirements. Assume 

that the quality control review 

determination is accurate. Because the 

loan still meets Fannie Mae’s eligibility 

requirements, it remains a qualified 

mortgage based on these facts and 

circumstances. 


emcdonald on DSK67QTVN1PROD with RULES3
44728 Federal Register / Vol. 78, No. 142 / Wednesday, July 24, 2013 / Rules and Regulations 

* * * * * Dated: July 10, 2013. 

Richard Cordray, 

Director, Bureau of Consumer Financial 

Protection. 

[FR Doc. 2013–16962 Filed 7–23–13; 8:45 am] 

BILLING CODE 4810–AM–P 


emcdonald on DSK67QTVN1PROD with RULES3