```

[Federal Register Volume 78, Number 14 (Tuesday, January 22, 2013)]
[Rules and Regulations]
[Pages 4725-4757]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-00734]

[[Page 4725]]

Vol. 78

Tuesday,

No. 14

January 22, 2013

Part III

Bureau of Consumer Financial Protection

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12 CFR Part 1026

Escrow Requirements Under the Truth in Lending Act (Regulation Z); 
Final Rule

Federal Register / Vol. 78 , No. 14 / Tuesday, January 22, 2013 / 
Rules and Regulations

[[Page 4726]]

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BUREAU OF CONSUMER FINANCIAL PROTECTION

12 CFR Part 1026

[Docket No. CFPB-2013-0001]
RIN 3170-AA16

Escrow Requirements Under the Truth in Lending Act (Regulation Z)

AGENCY: Bureau of Consumer Financial Protection.

ACTION: Final rule; official interpretations.

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SUMMARY: The Bureau of Consumer Financial Protection (Bureau) is 
publishing a final rule that amends Regulation Z (Truth in Lending) to 
implement certain amendments to the Truth in Lending Act made by the 
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank 
Act). Regulation Z currently requires creditors to establish escrow 
accounts for higher-priced mortgage loans secured by a first lien on a 
principal dwelling. The rule implements statutory changes made by the 
Dodd-Frank Act that lengthen the time for which a mandatory escrow 
account established for a higher-priced mortgage loan must be 
maintained. The rule also exempts certain transactions from the 
statute's escrow requirement. The primary exemption applies to mortgage 
transactions extended by creditors that operate predominantly in rural 
or underserved areas, originate a limited number of first-lien covered 
transactions, have assets below a certain threshold, and do not 
maintain escrow accounts on mortgage obligations they currently 
service.

DATES: Effective date: The rule is effective June 1, 2013.
    Applicability date: Its requirements apply to transactions for 
which creditors receive applications on or after that date.

FOR FURTHER INFORMATION CONTACT: David Friend or Ebunoluwa Taiwo, 
Counsels, Office of Regulations, at (202) 435-7700.

SUPPLEMENTARY INFORMATION: 

I. Summary of the Final Rule

    In response to the recent mortgage crisis, Congress enacted the 
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank 
Act) to strengthen certain consumer protections under existing law. The 
Bureau of Consumer Financial Protection (Bureau) is issuing this final 
rule to implement provisions of the Dodd-Frank Act requiring creditors 
to establish escrow accounts for certain mortgage transactions to help 
ensure that consumers set aside funds to pay property taxes, and 
premiums for homeowners insurance, and other mortgage-related insurance 
required by the creditor. The final rule takes effect on June 1, 2013.
    The final rule has three main elements:
     As directed by the Dodd-Frank Act, the rule amends 
existing regulations that require creditors to establish and maintain 
escrow accounts for at least one year after originating a ``higher-
priced mortgage loan'' to require generally that the accounts be 
maintained for at least five years.
     The rule creates an exemption from the escrow requirement 
for small creditors that operate predominately in rural or underserved 
areas. Specifically, to be eligible for the exemption, a creditor must: 
(1) Make more than half of its first-lien mortgages in rural or 
underserved areas; (2) have an asset size less than $2 billion; (3) 
together with its affiliates, have originated 500 or fewer first-lien 
mortgages during the preceding calendar year; and (4) together with its 
affiliates, not escrow for any mortgage it or its affiliates currently 
services, except in limited instances. Under the rule, eligible 
creditors need not establish escrow accounts for mortgages intended at 
consummation to be held in portfolio, but must establish accounts at 
consummation for mortgages that are subject to a forward commitment to 
be purchased by an investor that does not itself qualify for the 
exemption.
     Finally, the rule expands upon an existing exemption from 
escrowing for insurance premiums (though not for property taxes) for 
condominium units to extend the partial exemption to other situations 
in which an individual consumer's property is covered by a master 
insurance policy.

II. Background

A. TILA and Regulation Z

    Congress enacted the Truth in Lending Act (TILA), 15 U.S.C. 1601 et 
seq., based on findings that economic stability would be enhanced and 
competition among consumer credit providers would be strengthened by 
the informed use of credit resulting from consumers' awareness of the 
cost of credit. One of the purposes of TILA is to provide meaningful 
disclosure of credit terms to enable consumers to compare credit terms 
available in the marketplace more readily and avoid the uninformed use 
of credit. TILA's disclosures differ depending on whether credit is an 
open-end (revolving) plan or a closed-end (installment) transaction. 
TILA also contains certain procedural and substantive protections for 
consumers.
    With the enactment of the Dodd-Frank Act, general rulemaking 
authority under TILA transferred from the Board of Governors of the 
Federal Reserve System (Board) to the Bureau on July 21, 2011. Pursuant 
to the Dodd-Frank Act and TILA, as amended, the Bureau published for 
public comment an interim final rule establishing a new Regulation Z, 
12 CFR part 1026, implementing TILA (except with respect to persons 
excluded from coverage by section 1029 of the Dodd-Frank Act). See 76 
FR 79768 (Dec. 22, 2011). This rule did not impose any new substantive 
obligations but did make technical and conforming changes to reflect 
the transfer of authority and certain other changes made by the Dodd-
Frank Act. The Bureau's Regulation Z took effect on December 30, 2011. 
An official commentary interprets the requirements of Regulation Z. By 
statute, creditors that follow in good faith official interpretations 
contained in the commentary are insulated from civil liability, 
criminal penalties, and administrative sanction.
    On July 30, 2008, the Board published a final rule amending 
Regulation Z to establish new regulatory protections for consumers in 
the residential mortgage market pursuant to authority originally 
granted to the Board by the Home Ownership and Equity Protection Act of 
1994 (HOEPA). See 73 FR 44522 (July 30, 2008) (2008 HOEPA Final Rule). 
Among other things, the 2008 HOEPA Final Rule defined a class of 
higher-priced mortgage loans that are subject to certain protections. A 
higher-priced mortgage loan was established by the 2008 HOEPA Final 
Rule as a closed-end transaction secured by a consumer's principal 
dwelling with an annual percentage rate that exceeds an ``average prime 
offer rate'' for a comparable transaction by 1.5 or more percentage 
points for transactions secured by a first lien, or by 3.5 or more 
percentage points for transactions secured by a subordinate lien.\1\ 
Under the 2008 HOEPA Final Rule, such transactions are subject to a 
number of special requirements, including that creditors

[[Page 4727]]

assess consumers' ability to repay such transactions before extending 
credit, that creditors establish escrow accounts for higher-priced 
mortgage loans secured by a first lien on a principal dwelling (with 
some exceptions), and imposes significant restrictions on the use of 
prepayment penalties. Specifically with regard to escrows, the rule 
required that creditors establish and maintain escrow accounts for 
property taxes and premiums for mortgage-related insurance required by 
the creditor for a minimum of one year after originating a higher-
priced mortgage loan secured by a first lien on a principal dwelling. 
The escrow requirement was effective on April 1, 2010, for transactions 
secured by site-built homes, and on October 1, 2010, for transactions 
secured by manufactured housing.
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    \1\ The ``average prime offer rate'' is derived from average 
interest rates, points, and other loan pricing terms currently 
offered to consumers by a representative sample of creditors for 
mortgage transactions that have low-risk pricing characteristics. 
The Bureau publishes average prime offer rates for a broad range of 
types of transactions in a table updated at least weekly, as well as 
the methodology the Bureau uses to derive these rates.
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B. The Dodd-Frank Act

    On July 21, 2010, Congress enacted the Dodd-Frank Act after a cycle 
of unprecedented expansion and contraction in the mortgage market 
sparked the most severe U.S. recession since the Great Depression.\2\ 
The Dodd-Frank Act created the Bureau and consolidated various 
rulemaking and supervisory authorities in the new agency, including the 
authority to implement HOEPA and TILA.\3\ At the same time, Congress 
significantly amended the statutory requirements governing mortgage 
practices with the intent to restrict the practices that contributed to 
the crisis.
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    \2\ For a more in-depth discussion of the mortgage market, the 
financial crisis, and mortgage origination generally, see the 
Bureau's 2013 ATR Final Rule, discussed below in part III.C.
    \3\ Sections 1011, 1021, and 1061 of title X of the Dodd-Frank 
Act, the ``Consumer Financial Protection Act,'' Public Law 111-203, 
sections 1001-1100H, codified at 12 U.S.C. 5491, 5511, 5581. The 
Consumer Financial Protection Act is substantially codified at 12 
U.S.C. 5481-5603.
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    As part of these changes, the Dodd-Frank Act enacted several 
substantive requirements designed to address questionable practices in 
the mortgage market. Several of these provisions expanded upon elements 
of the 2008 HOEPA Final Rule. For instance, among other provisions, 
title XIV of the Dodd-Frank Act amends TILA to establish certain 
requirements for escrow accounts for consumer credit transactions 
secured by a first lien on a consumer's principal dwelling. Sections 
1461 and 1462 of the Dodd-Frank Act create new TILA section 129D, 15 
U.S.C. 1639d, which substantially codifies Regulation Z's escrow 
requirement for higher-priced mortgage loans but lengthens the period 
for which escrow accounts are required, adjusts the rate threshold for 
determining whether escrow accounts are required for ``jumbo loans,'' 
whose principal amounts exceed the maximum eligible for purchase by the 
Federal Home Loan Mortgage Corporation (Freddie Mac), and adds two 
disclosure requirements. The new section also authorizes the Bureau to 
create an exemption from the escrow requirement for transactions 
originated and held in portfolio by creditors that operate 
predominantly in ``rural or underserved'' areas and meet certain other 
prescribed criteria.
    The Dodd-Frank Act also expanded upon the 2008 HOEPA Final Rule to 
require that creditors assess all consumers' ability to repay mortgage 
transactions, even if they are not higher-priced mortgage loans. 
Sections 1411 and 1412 set forth these ability-to-repay requirements 
and provide a presumption of compliance for certain ``qualified 
mortgages,'' including certain balloon-payment mortgages originated and 
held in portfolio by creditors that operate predominantly in ``rural or 
underserved'' areas and meet certain other prescribed criteria. The 
provisions for balloon-payment qualified mortgages and for the 
potential escrow exemption are similar but not identical under the 
statute.
    In the spring of 2011, the Board issued two proposals to implement 
the escrow and ability-to-repay/qualified mortgage provisions. 
Specifically, on March 2, 2011, the Board published a proposed rule to 
implement the requirements of sections 1461 and 1462 of the Dodd-Frank 
Act. 76 FR 11598 (Mar. 2, 2011) (the Board's 2011 Escrows Proposal). 
The Board's 2011 Escrows Proposal would have amended the escrow 
requirement of Regulation Z, by creating an exemption for transactions 
by certain creditors operating in rural or underserved areas, and by 
establishing two new disclosure requirements relating to escrow 
accounts. The proposal also would have adjusted the threshold for 
``higher-priced mortgage loans'' based on a loan's ``transaction 
coverage rate,'' rather than its annual percentage rate (APR). This 
element of the proposal grew out of a separate initiative by the Board 
in which it had proposed to expand the definition of finance charge to 
include more fees and charges, and thus also generally to increase 
APRs, under Regulation Z to make disclosures more useful to consumers. 
Because those changes would have caused more transactions to exceed the 
thresholds for higher-priced mortgage loans, the Board proposed using a 
``transaction coverage rate'' metric to keep coverage levels relatively 
constant. See 74 FR 43232 (Aug. 26, 2009); 75 FR 58539, 58660-61 (Sept. 
24, 2010).
    On May 11, 2011, the Board published a proposal 2011 ATR Proposal 
to implement the ability-to-repay/qualified mortgage provisions added 
to TILA by the Dodd Frank Act, as discussed above. See 76 FR 27390 (May 
11, 2011) (the Board's 2011 ATR Proposal). The Board's 2011 Escrows and 
2011 ATR Proposals used similar definitions of ``rural'' and 
``underserved'' but varied with regard to certain other proposed 
provisions for the balloon-payment qualified mortgage and escrow 
exemptions.
    On July 21, 2011, section 1061 of the Dodd-Frank Act transferred to 
the Bureau the ``consumer financial protection functions'' previously 
vested in certain other Federal agencies, including the Board. On 
November 23, 2012, the Bureau published a final rule that delays the 
implementation of certain disclosure requirements contained in title 
XIV of the Dodd-Frank Act, including those contained in TILA section 
129D, as added by Dodd-Frank Act sections 1461 and 1462. See 77 FR 
70105 (Nov. 23, 2012). Consequently, the disclosure portions of the 
Board's 2011 Escrows Proposal will be the subject of future rulemaking 
by the Bureau and are not finalized in this rule.

C. Size and Volume of the Current Mortgage Origination Market

    Even with the economic downturn and tightening of credit standards, 
approximately $1.28 trillion in mortgage loans were originated in 
2011.\4\ In exchange for an extension of mortgage credit, consumers 
promise to make regular mortgage payments and provide their home or 
real property as collateral. The overwhelming majority of homebuyers 
continue to use mortgages to finance at least some of the purchase 
price of their property. In 2011, 93 percent of all home purchases were 
financed with a mortgage credit transaction.\5\
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    \4\ Credit Forecast 2012, Moody's Analytics (2012), available 
at: http://www.economy.com/default.asp (reflects first-lien mortgage 
loans) (data service accessibly only through paid subscription).
    \5\ 1 Inside Mortg. Fin., The 2012 Mortgage Market Statistical 
Annual 12 (2012).
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    Consumers may obtain mortgage credit to purchase a home, to 
refinance an existing mortgage, to access home equity, or to finance 
home improvement. Purchase transactions and refinancings together 
produced 6.3 million new first-lien mortgage originations in 2011.\6\ 
The proportion of

[[Page 4728]]

transactions that are for purchases as opposed to refinancings varies 
with the interest rate environment and other market factors. In 2011, 
65 percent of the market was refinance transactions and 35 percent was 
purchase transactions, by volume.\7\ Historically the distribution has 
been more even. In 2000, refinancings accounted for 44 percent of the 
market while purchase transactions comprised 56 percent; in 2005, the 
two products were split evenly.\8\
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    \6\ Credit Forecast 2012; 1 Inside Mortg. Fin., The 2012 
Mortgage Market Statistical Annual 17 (2012).
    \7\ Inside Mortg. Fin., Mortgage Originations by Product, 
Mortgage Market Statistical Annual (2012).
    \8\ Id. These percentages are based on the dollar amounts of the 
transactions.
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    With a home equity transaction, a homeowner uses his or her equity 
as collateral to secure consumer credit. The credit proceeds can be 
used, for example, to pay for home improvements. Home equity credit 
transactions and home equity lines of credit resulted in an additional 
1.3 million mortgage originations in 2011.\9\
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    \9\ Credit Forecast 2012.
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    The market for higher-priced mortgage loans remains significant. 
Data reported under the Home Mortgage Disclosure Act (HMDA) show that 
in 2011 approximately 332,000 transactions, including subordinate 
liens, were reportable as higher-priced mortgage loans. Of these 
transactions, refinancings accounted for approximately 44 percent of 
the higher-priced mortgage loan market, and 90 percent of the overall 
higher-priced mortgage loan market involved first-lien transactions. 
The median first-lien higher-priced mortgage loan was for $81,000, 
while the interquartile range (where one quarter of the transactions 
are below, and one quarter of the transactions are above) was $47,000 
to $142,000.

III. Summary of the Rulemaking Process

A. The Board's 2011 Escrows Proposal

    The Board's 2011 Escrows Proposal would have made certain 
amendments to Regulation Z's escrow requirement, in accordance with the 
Dodd-Frank Act. First, the Board's 2011 Escrows Proposal would have 
expanded the minimum period for mandatory escrow accounts from one to 
five years, and under certain circumstances longer. Second, the Board's 
2011 Escrows Proposal would have extended the partial exemption for 
certain transactions secured by a condominium unit to planned unit 
developments and other, similar property types that have governing 
associations that maintain a master insurance policy. Third, the 
Board's 2011 Escrows Proposal would have created an exemption from the 
escrow requirement for any transaction extended by a creditor that 
makes most of its first-lien higher-priced mortgage loans in counties 
designated by the Board as ``rural'' or ``underserved,'' has annual 
originations (together with affiliates) of 100 or fewer first-lien 
mortgage transactions originated and retained servicing rights in 
either the current or prior year, and does not escrow for any mortgage 
obligation it services. The Board's 2011 Escrows Proposal would have 
limited the definition of ``rural'' areas to those based on the ``urban 
influence codes'' numbered 7, 10, 11, and 12, maintained by the 
Economic Research Service (ERS) of the United States Department of 
Agriculture. Additionally, the Board's 2011 Escrows Proposal would also 
have designated a county as ``underserved'' where no more than two 
creditors extend consumer credit secured by a first lien on real 
property or a dwelling five or more times in that county during either 
of the two previous calendar years.
    The Board's 2011 Escrows Proposal also would have established two 
new disclosure requirements relating to escrow accounts. One disclosure 
would have been required to be given three business days before 
consummation of a mortgage transaction for which an escrow account 
would have been established, explaining what an escrow account is, how 
it works, and the risks of not having an escrow account. The disclosure 
would also have contained the estimated amount of the first year's 
disbursements, the amount to be paid at consummation to fund the escrow 
account initially, the amount of the consumer's regular mortgage 
payments to be paid into the escrow account, as well as a statement 
that the amount of the regular escrow payment could change in the 
future.
    In addition, the Board's 2011 Escrows Proposal would have created a 
second disclosure to be given for mortgage transactions where an escrow 
account would not be established or when an escrow account on an 
existing mortgage obligation was to be cancelled. This disclosure would 
have explained what an escrow account is, how it works, the risk of not 
having an escrow account, as well as the potential consequences of 
failing to pay home-related costs such as taxes and insurance in the 
absence of an escrow account. Further, it would have stated why there 
would be no escrow account or why it was being cancelled, as 
applicable, the amount of any fee imposed for not having an escrow 
account, and how the consumer could request that an escrow account be 
established or left in place, along with any deadline for such 
requests. The Board's 2011 Escrows Proposal would have required that 
this disclosure be delivered at least three business days before 
consummation or cancellation of the existing escrow account, as 
applicable.

B. Overview of Comments Received

    The Bureau reviewed the approximately 70 comment letters submitted 
to the Board and in one case directly to the Bureau concerning the 
Board's 2011 Escrows Proposal. These comments came from mortgage 
creditors, banks, savings associations, credit unions, industry trade 
groups, Federal agencies and officials, individual consumers, and 
consumer advocates. In addition to this overview, comments received are 
discussed in more detail, where applicable, in part V below.
    Commenters generally supported the Board's effort to implement the 
new Dodd-Frank Act escrow requirements. However, industry commenters 
expressed concerns about the costs of implementation, particularly with 
respect to the proposed disclosure requirements. In addition, several 
industry commenters recommended that the proposed exemptions from the 
escrow requirement for higher-priced mortgage loans be broadened to 
include: (1) Transactions a creditor holds in portfolio; (2) 
transactions made by community banks and local credit unions; (3) 
transactions made in broader areas than the Board's proposed 
definitions of ``rural'' and ``underserved''; and (4) transactions for 
certain chattel dwellings, including manufactured homes, trailers, and 
house boats.
    In contrast, consumer advocates were concerned that certain 
provisions could allow creditors to skirt the proposed rule. Consumer 
advocates suggested a narrower exemption than the one proposed by the 
Board to ensure that higher-priced mortgage loans made in well-served 
rural areas would be subject to the escrow requirement.

C. Other Rulemakings

    In addition to this final rule, the Bureau is adopting several 
other final rules and issuing one proposal, all relating to mortgage 
credit to implement requirements of title XIV of the Dodd-Frank Act. 
The Bureau is also issuing a final rule jointly with other Federal 
agencies to implement requirements for mortgage appraisals in title 
XIV. Each of the final rules follows a proposal issued in 2011 by the 
Board or in 2012 by the

[[Page 4729]]

Bureau alone or jointly with other Federal agencies. Collectively, 
these proposed and final rules are referred to as the Title XIV 
Rulemakings.
     Ability to Repay: The Bureau is finalizing a rule, 
following a May 2011 proposal issued by the Board (the Board's 2011 ATR 
Proposal),\10\ to implement provisions of the Dodd-Frank Act (1) 
requiring creditors to determine that a consumer has a reasonable 
ability to repay covered transactions and establishing standards for 
compliance, such as by making a ``qualified mortgage,'' and (2) 
establishing certain limitations on prepayment penalties, pursuant to 
TILA section 129C as established by Dodd-Frank Act sections 1411, 1412, 
and 1414. 15 U.S.C. 1639c. The Bureau's final rule is referred to as 
the 2013 ATR Final Rule. Simultaneously with the 2013 ATR Final Rule, 
the Bureau is issuing a proposal to amend the final rule implementing 
the ability-to-repay requirements, including by the addition of 
exemptions for certain nonprofit creditors and certain homeownership 
stabilization programs and a definition of a ``qualified mortgage'' for 
certain mortgages made and held in portfolio by small creditors (the 
2013 ATR Concurrent Proposal). The Bureau expects to act on the 2013 
ATR Concurrent Proposal on an expedited basis, so that any exceptions 
or adjustments to the 2013 ATR Final Rule can take effect 
simultaneously with that rule.
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    \10\ 76 FR 27390 (May 11, 2011).
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     HOEPA: Following its July 2012 proposal (the 2012 HOEPA 
Proposal),\11\ the Bureau is issuing a final rule to implement Dodd-
Frank Act requirements expanding protections for ``high-cost 
mortgages'' under the Homeownership and Equity Protection Act (HOEPA), 
pursuant to TILA sections 103(bb) and 129, as amended by Dodd-Frank Act 
sections 1431 through 1433. 15 U.S.C. 1602(bb) and 1639. The Bureau 
also is finalizing rules to implement certain title XIV requirements 
concerning homeownership counseling, including a requirement that 
lenders provide lists of homeownership counselors to applicants for 
federally related mortgage loans, pursuant to RESPA section 5(c), as 
amended by Dodd-Frank Act section 1450. 12 U.S.C. 2604(c). The Bureau's 
final rule is referred to as the 2013 HOEPA Final Rule.
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    \11\ 77 FR 49090 (Aug. 15,2012).
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     Servicing: Following its August 2012 proposals (the 2012 
RESPA Servicing Proposal and 2012 TILA Servicing Proposal),\12\ the 
Bureau is adopting final rules to implement Dodd-Frank Act requirements 
regarding force-placed insurance, error resolution, information 
requests, and payment crediting, as well as requirements for mortgage 
loan periodic statements and adjustable-rate mortgage reset 
disclosures, pursuant to section 6 of RESPA and sections 128, 128A, 
129F, and 129G of TILA, as amended or established by Dodd-Frank Act 
sections 1418, 1420, 1463, and 1464. 12 U.S.C. 2605; 15 U.S.C. 1638, 
1638a, 1639f, and 1639g. The Bureau also is finalizing rules on early 
intervention for troubled and delinquent borrowers, and loss mitigation 
procedures, pursuant to the Bureau's authority under section 6 of 
RESPA, as amended by Dodd-Frank Act section 1463, to establish 
obligations for mortgage servicers that it finds to be appropriate to 
carry out the consumer protection purposes of RESPA, and its authority 
under section 19(a) of RESPA to prescribe rules necessary to achieve 
the purposes of RESPA. The Bureau's final rule under RESPA with respect 
to mortgage servicing also establishes requirements for general 
servicing standards policies and procedures and continuity of contact 
pursuant to its authority under section 19(a) of RESPA. The Bureau's 
final rules are referred to as the 2013 RESPA Servicing Final Rule and 
the 2013 TILA Servicing Final Rule, respectively.
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    \12\ 77 FR 57200 (Sept. 17, 2012) (RESPA); 77 FR 57318 (Sept. 
17, 2012) (TILA).
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     Loan Originator Compensation: Following its August 2012 
proposal (the 2012 Loan Originator Proposal),\13\ the Bureau is issuing 
a final rule to implement provisions of the Dodd-Frank Act requiring 
certain creditors and loan originators to meet certain duties of care, 
including qualification requirements; requiring the establishment of 
certain compliance procedures by depository institutions; prohibiting 
loan originators, creditors, and the affiliates of both from receiving 
compensation in various forms (including based on the terms of the 
transaction) and from sources other than the consumer, with specified 
exceptions; and establishing restrictions on mandatory arbitration and 
financing of single premium credit insurance, pursuant to TILA sections 
129B and 129C as established by Dodd-Frank Act sections 1402, 1403, and 
1414(a). 15 U.S.C. 1639b, 1639c. The Bureau's final rule is referred to 
as the 2013 Loan Originator Final Rule.
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    \13\ 77 FR 55272 (Sept. 7, 2012).
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     Appraisals: The Bureau, jointly with other Federal 
agencies,\14\ is issuing a final rule implementing Dodd-Frank Act 
requirements concerning appraisals for higher-risk mortgages, pursuant 
to TILA section 129H as established by Dodd-Frank Act section 1471. 15 
U.S.C. 1639h. This rule follows the agencies' August 2012 joint 
proposal (the 2012 Interagency Appraisals Proposal).\15\ The agencies' 
joint final rule is referred to as the 2013 Interagency Appraisals 
Final Rule. In addition, following its August 2012 proposal (the 2012 
ECOA Appraisals Proposal),\16\ the Bureau is issuing a final rule to 
implement provisions of the Dodd-Frank Act requiring that creditors 
provide applicants with a free copy of written appraisals and 
valuations developed in connection with applications for transactions 
secured by a first lien on a dwelling, pursuant to section 701(e) of 
the Equal Credit Opportunity Act (ECOA) as amended by Dodd-Frank Act 
section 1474. 15 U.S.C. 1691(e). The Bureau's final rule is referred to 
as the 2013 ECOA Appraisals Final Rule.
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    \14\ Specifically, the Board of Governors of the Federal Reserve 
System, the Office of the Comptroller of the Currency, the Federal 
Deposit Insurance Corporation, the National Credit Union 
Administration, and the Federal Housing Finance Agency.
    \15\ 77 FR 54722 (Sept. 5, 2012).
    \16\ 77 FR 50390 (Aug. 21, 2012).
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    The Bureau is not at this time finalizing proposals concerning 
various disclosure requirements that were added by title XIV of the 
Dodd-Frank Act, integration of mortgage disclosures under TILA and 
RESPA, or a simpler, more inclusive definition of the finance charge 
for purposes of disclosures for closed-end mortgage transactions under 
Regulation Z. The Bureau expects to finalize these proposals and to 
consider whether to adjust regulatory thresholds under the Title XIV 
Rulemakings in connection with any change in the calculation of the 
finance charge later in 2013, after it has completed quantitative 
testing, and any additional qualitative testing deemed appropriate, of 
the forms that it proposed in July 2012 to combine TILA mortgage 
disclosures with the good faith estimate (RESPA GFE) and settlement 
statement (RESPA settlement statement) required under the Real Estate 
Settlement Procedures Act (RESPA), pursuant to Dodd-Frank Act section 
1032(f) and sections 4(a) of RESPA and 105(b) of TILA, as amended by 
Dodd-Frank Act sections 1098 and 1100A, respectively (the 2012 TILA-
RESPA Proposal).\17\ Accordingly, the Bureau already has issued a final 
rule delaying implementation of various

[[Page 4730]]

affected title XIV disclosure provisions.\18\ The Bureau's approaches 
to coordinating the implementation of the Title XIV Rulemakings and to 
the finance charge proposal are discussed in turn below.
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    \17\ 77 FR 51116 (Aug. 23, 2012).
    \18\ 77 FR 70105 (Nov. 23, 2012).
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Coordinated Implementation of Title XIV Rulemakings
    As noted in all of its foregoing proposals, the Bureau regards each 
of the Title XIV Rulemakings as components of a single, comprehensive 
undertaking; each of them affecting aspects of the mortgage industry 
and its regulation. Many of these rules intersect with one or more of 
the others. Accordingly, as noted in its proposals, the Bureau is 
coordinating carefully the Title XIV Rulemakings, both in terms of 
their interrelated substantive provisions and, in recognition thereof, 
particularly with respect to their effective dates. The Dodd-Frank Act 
requirements to be implemented by the Title XIV Rulemakings generally 
will take effect on January 21, 2013, unless final rules implementing 
those requirements are issued on or before that date and provide for a 
different effective date. See Dodd-Frank Act section 1400(c), 15 U.S.C. 
1601 note. In addition, some of the Title XIV Rulemakings are to take 
effect no later than one year after they are issued. Id.
    The comments on the appropriate implementation date for this final 
rule are discussed in detail below in part VI of this notice. In 
general, however, consumer advocates requested that the Bureau put the 
protections in the Title XIV Rulemakings into effect as soon as 
practicable. In contrast, the Bureau received some industry comments 
indicating that implementing so many new requirements at the same time 
would create a significant cumulative burden for creditors. In 
addition, many commenters also acknowledged the advantages of 
implementing multiple revisions to the regulations in a coordinated 
fashion.\19\ Thus, a tension exists between coordinating the adoption 
of the Title XIV Rulemakings and facilitating industry's implementation 
of such a large set of new requirements. Some have suggested that the 
Bureau resolve this tension by adopting a sequenced implementation, 
while others have requested that the Bureau simply provide a longer 
implementation period for all of the final rules.
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    \19\ Of the several final rules being adopted under the Title 
XIV Rulemakings, six entail amendments to Regulation Z, with the 
only exceptions being the 2013 RESPA Servicing Final Rule 
(Regulation X) and the 2013 ECOA Appraisals Final Rule (Regulation 
B); the 2013 HOEPA Final Rule also amends Regulation X, in addition 
to Regulation Z. The six Regulation Z final rules involve numerous 
instances of intersecting provisions, either by cross-references to 
each other's provisions or by adopting parallel provisions. Thus, 
adopting some of those amendments without also adopting certain 
other, closely related provisions would create significant technical 
issues, e.g., new provisions containing cross-references to other 
provisions that do not yet exist, which could undermine the ability 
of creditors and other parties subject to the rules to understand 
their obligations and implement appropriate systems changes in an 
integrated and efficient manner.
---------------------------------------------------------------------------

    The Bureau recognizes that many of the new provisions will require 
creditors to make changes to automated systems and, further, that most 
administrators of large systems are reluctant to make too many changes 
to their systems at once. At the same time, however, the Bureau notes 
that the Dodd-Frank Act established virtually all of these changes to 
institutions' compliance responsibilities, and contemplated that they 
be implemented in a relatively short period of time. And, as already 
noted, the extent of interaction among many of the Title XIV 
Rulemakings necessitates that many of their provisions take effect 
together. Finally, notwithstanding commenters' expressed concerns for 
cumulative burden, the Bureau expects that creditors actually may 
realize some efficiencies from adapting their systems for compliance 
with multiple new, closely related requirements at once, especially if 
given sufficient overall time to do so.
    Accordingly, the Bureau is requiring that, as a general matter, 
creditors and other affected persons begin complying with the final 
rules on January 10, 2014. As noted above, section 1400(c) of the Dodd-
Frank Act requires that some provisions of the Title XIV Rulemakings 
take effect no later than one year after the Bureau issues them. 
Accordingly, the Bureau is establishing January 10, 2014, one year 
after issuance of the Bureau's 2013 ATR, Escrows, and HOEPA Final Rules 
(i.e., the earliest of the title XIV final rules), as the baseline 
effective date for most of the Title XIV Rulemakings. The Bureau 
believes that, on balance, this approach will facilitate the 
implementation of the rules' provisions, while also affording creditors 
sufficient time to implement the more complex or resource-intensive new 
requirements.
    The Bureau has identified certain rulemakings or selected aspects 
thereof, however, that do not present significant implementation 
burdens for industry. Accordingly, the Bureau is setting earlier 
effective dates for those final rules or certain aspects thereof, as 
applicable. Those effective dates are set forth and explained in the 
Federal Register notices for those final rules.
More Inclusive Finance Charge Proposal
    As noted above, the Bureau proposed in the 2012 TILA-RESPA Proposal 
to make the definition of finance charge more inclusive, thus rendering 
the finance charge and annual percentage rate a more useful tool for 
consumers to compare the cost of credit across different alternatives. 
77 FR 51116, 51143 (Aug. 23, 2012). Because the new definition would 
include additional costs that are not currently counted, it would cause 
the finance charges and APRs on many affected transactions to increase. 
This in turn could cause more such transactions to become subject to 
various compliance regimes under Regulation Z. Specifically, the 
finance charge is central to the calculation of a transaction's 
``points and fees,'' which in turn has been (and remains) a coverage 
threshold for the special protections afforded ``high-cost mortgages'' 
under HOEPA. Points and fees also will be subject to a 3-percent limit 
for purposes of determining whether a transaction is a ``qualified 
mortgage'' under the 2013 ATR Final Rule. Meanwhile, the APR serves as 
a coverage threshold for HOEPA protections as well as for certain 
protections afforded ``higher-priced mortgage loans'' under Sec.  
1026.35, including the mandatory escrow account requirements being 
amended by this final rule. Finally, because the 2013 Interagency 
Appraisals Final Rule uses the same APR-based coverage test as is used 
for identifying higher-priced mortgage loans, the APR affects that 
rulemaking as well. Thus, the proposed more inclusive finance charge 
would have had the indirect effect of increasing coverage under HOEPA 
and the escrow and appraisal requirements for higher-priced mortgage 
loans, as well as decreasing the number of transactions that may be 
qualified mortgages--even holding actual loan terms constant--simply 
because of the increase in calculated finance charges, and consequently 
APRs, for closed-end mortgage transactions generally.
    As noted above, these expanded coverage consequences were not the 
intent of the more inclusive finance charge proposal. Accordingly, as 
discussed more extensively in the Escrows Proposal, the HOEPA Proposal, 
the ATR Proposal, and the Interagency Appraisals Proposal, the Board 
and subsequently the Bureau (and other agencies) sought comment on 
certain adjustments to the affected regulatory thresholds to counteract 
this

[[Page 4731]]

unintended effect. First, the Board and then the Bureau proposed to 
adopt a ``transaction coverage rate'' for use as the metric to 
determine coverage of these regimes in place of the APR. The 
transaction coverage rate would have been calculated solely for 
coverage determination purposes and would not have been disclosed to 
consumers, who still would have received only a disclosure of the 
expanded APR. The transaction coverage rate calculation would exclude 
from the prepaid finance charge all costs otherwise included for 
purposes of the APR calculation except charges retained by the 
creditor, any mortgage broker, or any affiliate of either. Similarly, 
the Board and Bureau proposed to reverse the effects of the more 
inclusive finance charge on the calculation of points and fees; the 
points and fees figure is calculated only as a HOEPA and qualified 
mortgage coverage metric and is not disclosed to consumers. The Bureau 
also sought comment on other potential mitigation measures, such as 
adjusting the numeric thresholds for particular compliance regimes to 
account for the general shift in affected transactions' APRs.
    The Bureau's 2012 TILA-RESPA Proposal sought comment on whether to 
finalize the more inclusive finance charge proposal in conjunction with 
the Title XIV Rulemakings or with the rest of the TILA-RESPA Proposal 
concerning the integration of mortgage disclosure forms. See 77 FR 
51116, 51125 (Aug. 23, 2012). Upon additional consideration and review 
of comments received, the Bureau decided to defer a decision whether to 
adopt the more inclusive finance charge proposal and any related 
adjustments to regulatory thresholds until it later finalizes the TILA-
RESPA Proposal. See 77 FR 54843 (Sept. 6, 2012); 77 FR 54844 (Sept. 6, 
2012).\20\ Accordingly, this final rule as well as the 2013 HOEPA, ATR, 
and Interagency Appraisals Final Rules all are deferring any action on 
their respective proposed adjustments to regulatory thresholds.
---------------------------------------------------------------------------

    \20\ These notices extended the comment period on the more 
inclusive finance charge and corresponding regulatory threshold 
adjustments under the 2012 TILA-RESPA and HOEPA Proposals. It did 
not change any other aspect of either proposal.
---------------------------------------------------------------------------

IV. Legal Authority

    The Bureau is issuing this final rule on January 10, 2013, in 
accordance with 12 CFR 1074.1, pursuant to its authority under TILA and 
the Dodd-Frank Act. See TILA section 105(a), 15 U.S.C. 1604(a). On July 
21, 2011, section 1061 of the Dodd-Frank Act transferred to the Bureau 
the ``consumer financial protection functions'' previously vested in 
certain other Federal agencies, including the Board. The term 
``consumer financial protection function'' is defined to include ``all 
authority to prescribe rules or issue orders or guidelines pursuant to 
any Federal consumer financial law, including performing appropriate 
functions to promulgate and review such rules, orders, and 
guidelines.'' \21\ TILA is defined as a Federal consumer financial law. 
\22\ Accordingly, the Bureau has general authority to issue regulations 
pursuant to TILA.
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    \21\ 12 U.S.C. 5581(a)(1).
    \22\ See 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).
---------------------------------------------------------------------------

A. Escrow Provisions Under the Dodd-Frank Act

    As discussed above, the Dodd-Frank Act amended TILA to mandate 
escrow accounts for certain consumer credit transactions secured by a 
first lien on a consumer's principal dwelling. Sections 1461 and 1462 
of the Dodd-Frank Act create new TILA section 129D, which establishes a 
minimum period for which escrows must be held for higher-priced 
mortgage loans, creates a rate threshold for determining whether escrow 
accounts are required for ``jumbo loans,'' whose principal amounts 
exceed the maximum eligible for purchase by Freddie Mac, and adds two 
disclosure requirements concerning escrow accounts. The Dodd-Frank Act 
further provides that the Bureau may exempt certain creditors from the 
escrow requirement by regulation. See TILA section 129D(c), 15 U.S.C. 
1639(c). In addition, the Dodd-Frank Act provides the Bureau with 
authority to prescribe regulations that revise, add to, or subtract 
from the criteria that describe when an escrow account is required upon 
a finding that such regulations are in the interest of the consumers 
and in the public interest. See 15 U.S.C. 1639d note.

B. Other Rulemaking and Exception Authorities

    This final rule also relies on other rulemaking and exception 
authorities specifically granted to the Bureau by TILA and the Dodd-
Frank Act, including the authorities discussed below.
TILA Section 105(a)
    As amended by the Dodd-Frank Act, TILA section 105(a), 15 U.S.C. 
1604(a), directs the Bureau to prescribe regulations to carry out the 
purposes of TILA, and provides that such regulations may contain 
additional requirements, classifications, differentiations, or other 
provisions and may provide for such adjustments and exceptions for all 
or any class of transactions that the Bureau judges are necessary or 
proper to effectuate the purposes of TILA, to prevent circumvention or 
evasion thereof, or to facilitate compliance therewith. A purpose of 
TILA is `` * * * to assure a meaningful disclosure of credit terms so 
that the consumer will be able to compare more readily the various 
credit terms available to him and avoid the uninformed use of credit* * 
* .'' TILA section 102(a), 15 U.S.C. 1601(a). This stated purpose is 
informed by Congress's finding that ``* * * economic stabilization 
would be enhanced and the competition among the various financial 
institutions and other firms engaged in the extension of consumer 
credit would be strengthened by the informed use of credit.'' Id. Thus, 
strengthened competition among financial institutions is a goal of 
TILA, achieved through the effectuation of TILA's purposes.
    Historically, TILA section 105(a) has served as a broad source of 
authority for rules that promote the informed use of credit through 
required disclosures and substantive regulation of certain practices. 
However, Dodd-Frank Act section 1100A clarified the Bureau's section 
105(a) authority by amending that section to provide express authority 
to prescribe regulations that contain ``additional requirements'' that 
the Bureau finds are necessary or proper to effectuate the purposes of 
TILA, to prevent circumvention or evasion thereof, or to facilitate 
compliance therewith. This amendment clarified the Bureau's authority 
under TILA section 105(a) to prescribe requirements beyond those 
specifically listed in the statute that meet the standards outlined in 
section 105(a), which include effectuating all of TILA's purposes. 
Therefore, the Bureau believes that its authority under TILA section 
105(a) to make exceptions, adjustments, and additional provisions that 
the Bureau finds are necessary or proper to effectuate the purposes of 
TILA applies with respect to the purpose of section 129D. That purpose 
is to ensure that consumers understand and appreciate the full cost of 
home ownership. The purpose of TILA section 129D is also informed by 
the findings articulated in section 129B(a) that economic stabilization 
would be enhanced by the

[[Page 4732]]

protection, limitation, and regulation of the terms of residential 
mortgage credit and the practices related to such credit, while 
ensuring that responsible and affordable mortgage credit remains 
available to consumers. See 15 U.S.C. 1639b(a).
    As discussed in the section-by-section analysis below, the Bureau 
is issuing regulations to carry out TILA's purposes, including such 
additional requirements, adjustments, and exceptions as, in the 
Bureau's judgment, are necessary and proper to carry out the purposes 
of TILA, prevent circumvention or evasion thereof, or to facilitate 
compliance therewith. In developing these aspects of the final rule 
pursuant to its authority under TILA section 105(a), the Bureau has 
considered the purposes of TILA, including the purposes of TILA section 
129D, and the findings of TILA, including strengthening competition 
among financial institutions and promoting economic stabilization, and 
the findings of TILA section 129B(a)(1) that economic stabilization 
would be enhanced by the protection, limitation, and regulation of the 
terms of residential mortgage credit and the practices related to such 
credit, while ensuring that responsible, affordable mortgage credit 
remains available to consumers.
Dodd-Frank Act Section 1022(b)
    Section 1022(b)(1) of the Dodd-Frank Act authorizes the Bureau to 
prescribe rules ``as may be necessary or appropriate to enable the 
Bureau to administer and carry out the purposes and objectives of the 
Federal consumer financial laws, and to prevent evasions thereof[.]'' 
12 U.S.C. 5512(b)(1). TILA and title X of the Dodd-Frank Act are 
Federal consumer financial laws.\23\ Accordingly, in adopting this 
final rule, the Bureau is exercising its authority under Dodd-Frank Act 
section 1022(b) to prescribe rules that carry out the purposes and 
objectives of TILA and title X of the Dodd-Frank Act and prevent 
evasion of those laws.
---------------------------------------------------------------------------

    \23\ See 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).
---------------------------------------------------------------------------

V. Section-by-Section Analysis

Section 1026.19 Certain Mortgage and Variable-Rate Transactions

    In the 2011 Escrows Proposal, the Board proposed a new Sec.  
226.19(f) to implement the account disclosure requirements of TILA 
section 129D, as enacted by Sections 1461 and 1462 of the Dodd- Frank 
Act. Proposed Sec.  226.19(f) \24\ would have required disclosures for 
the establishment or non-establishment of an escrow account in 
connection with consummation of a transaction secured by a first lien, 
but not a subordinate lien. As discussed above, on November 23, 2012, 
the Bureau published in the Federal Register a rule that delays the 
implementation of certain disclosure requirements contained in title 
XIV of the Dodd-Frank Act, including those contained in sections 1461 
and 1462. See 77 FR 70105 (Nov. 23, 2012). Consequently, the Bureau 
will not be adopting a new Sec.  1026.19(f) in this rule.
---------------------------------------------------------------------------

    \24\ This section-by-section analysis discusses the Board's 2011 
Escrows Proposal by reference to the Board's Regulation Z, 12 CFR 
part 226, which the Board proposed to amend, and discusses this 
final rule by reference to the Bureau's Regulation Z, 12 CFR part 
1026, which this final rule amends.
---------------------------------------------------------------------------

Section 1026.20 Subsequent Disclosure Requirements

    In the 2011 Escrows Proposal, the Board proposed a new Sec.  
226.20(d) to implement the disclosure requirements of TILA sections 
129D(j)(1)(B) and 129D(j)(2), as enacted by section 1462 of the Dodd-
Frank Act. TILA section 129D(j)(1)(B) requires a creditor or servicer 
to provide the disclosures set forth in TILA section 129D(j)(2) when a 
consumer requests closure of an escrow account that was established in 
connection with a transaction secured by real property. Proposed Sec.  
226.20(d) would have directed the creditor or servicer to disclose the 
information about escrow accounts in accordance with certain format and 
timing requirements. As previously noted, the Bureau has delayed the 
implementation of certain disclosure requirements contained in title 
XIV of the Dodd-Frank Act, including those contained in sections 1461 
and 1462. See 77 FR 70105 (Nov. 23, 2012). Consequently, the Bureau 
will not be adopting a new Sec.  1026.20(d) in this rule.

Section 1026.34 Prohibited Acts or Practices in Connection With High-
Cost Mortgages

34(a) Prohibited Acts or Practices for High-Cost Mortgages 34(a)(4)(i) 
Mortgage-Related Obligations
    In the 2011 Escrows Proposal, the Board proposed amendments to the 
definition of mortgage-related obligations in Sec.  226.34(a)(4)(i) and 
comment 34(a)(4)(i)-1, which contained cross-references to the 
definition of mortgage-related insurance in Sec.  226.35(b)(3)(i). 
Because the Board proposed removing and reserving Sec.  226.35(b)(3)(i) 
and preserving the substance of that provision in the proposed new 
Sec.  226.45(b)(1), the Board made conforming amendments to Sec.  
226.34(a)(4)(i) and staff comment 34(a)(4)(i))-1 to reflect the new 
cross-reference. Section 1026.34(a)(4)(i) and staff comment 
34(a)(4)(i)-1 are being amended under the 2013 HOEPA Final Rule to 
remove the cross-reference to Sec.  1026.35(b)(3)(i). Consequently, the 
Bureau will not be adopting conforming amendments in this rule.

Section 1026.35 Requirements for Higher-Priced Mortgage Loans

35(a) Definitions
35(a)(1)
    As noted above, the Dodd-Frank Act substantially codified the 
Board's escrow requirement for higher-priced mortgage loans, but with 
certain differences. One of those differences is the higher threshold 
above the average prime offer rate established by the Dodd-Frank Act 
for determining when escrow accounts are required for transactions that 
exceed the maximum principal balance eligible for sale to Freddie Mac 
(``jumbo'' transactions). In general, the coverage thresholds are 1.5 
percentage points above the average prime offer rate for first-lien 
transactions and 3.5 percentage points above the average prime offer 
rate for subordinate-lien transactions. Under section 1461 of the Dodd-
Frank Act, however, Congress established a new threshold of 2.5 
percentage points above the average prime offer rate for ``jumbo'' 
transactions. Under an interim final rule published concurrently with 
the Board's 2011 Escrows Proposal, the Board implemented this special 
coverage test for ``jumbo'' transactions by amending its existing 
escrow requirement for higher-priced mortgage loans in Sec.  
226.35(b)(3). See 76 FR 11319 (Mar. 2, 2011) (the Board's 2011 
``Jumbo'' Final Rule).
    Under the Board's 2011 Escrows Proposal, proposed Sec.  
226.45(a)(1) would have provided that a higher-priced mortgage loan is 
a consumer credit transaction secured by the consumer's principal 
dwelling that exceeds the applicable pricing threshold as of the date 
the transaction's rate is set. The Board's proposed Sec.  226.45(a)(1) 
incorporated the special, separate coverage threshold for ``jumbo'' 
transactions, as provided by the Dodd-Frank Act. In addition, as 
discussed above, the Board's proposed Sec.  226.45(a)(1) would have 
based ``higher-priced mortgage loan'' status on a comparison of the 
transaction's

[[Page 4733]]

``transaction coverage rate,'' rather than its APR, to the average 
prime offer rate.
    A few commenters suggested that the proposed thresholds should be 
reconsidered. However, the Bureau believes the current thresholds 
capture the expansion intended by Congress and is therefore generally 
adopting proposed Sec.  226.45(a)(1) as Sec.  1026.35(a)(1). As 
discussed above, however, the Bureau is suspending consideration of the 
transaction coverage rate until it considers the proposed expansion of 
the definition of finance charge in connection with the TILA-RESPA 
Final Rule. Accordingly, the final rule continues to base the 
definition of higher-priced mortgage loans on a comparison of the 
transaction's APR to the average prime offer rate. The Bureau will 
consider comments received concerning the transaction coverage rate 
proposal in connection with the TILA-RESPA Final Rule. Comment 
35(a)(1)-1 clarifies how to determine if a transaction is a higher-
priced mortgage loan by comparing the annual percentage rate to the 
average prime offer rate. Comment 35(a)(1)-2 clarifies when the 
comparison between the annual percentage rate and the average prime 
offer rate should occur. Comment 35(a)(1)-3 clarifies how to determine 
whether a transaction is a higher-priced mortgage loan when the 
principal balance exceeds the limit in effect as of the date the 
transaction's rate is set for the maximum principal obligation eligible 
for purchase by Freddie Mac.
35(a)(2)
    The Bureau is not altering current Sec.  1026.35(a)(2), which 
defines the ``average prime offer rate'' as the annual percentage rate 
derived from average interest rates, points, and other transaction 
pricing terms currently offered to consumers by a representative sample 
of creditors for mortgage transactions that have low-risk pricing 
characteristics. The Bureau is, however, adding comment 35(a)(2)-3 to 
clarify that the average prime offer rate in Sec.  1026.35 has the same 
meaning as in Regulation C, 12 CFR part 1003. See 12 CFR 
1003.4(a)(12)(ii).
35(b) Escrow Accounts
35(b)(1)
    As amended by the Dodd-Frank Act, TILA section 129D(a) contains the 
general requirement that an escrow account be established for any 
consumer credit transaction secured by a first lien on a consumer's 
principal dwelling. TILA section 129D(b), however, restricts that 
general requirement to four specified circumstances: (1) Where an 
escrow account is required by Federal or State law; (2) where the 
transaction is made, guaranteed, or insured by a State or Federal 
agency; (3) where the transaction's annual percentage rate exceeds the 
average prime offer rate by prescribed amounts; and (4) where an escrow 
account is ``required pursuant to regulation.''
    The Board's proposed Sec.  226.45(b)(1) implemented only the third 
of the four circumstances, pursuant to TILA section 129D(b)(3), because 
the other three either are self-effectuating or are effectuated by 
other agencies' regulations. Nonetheless, the Bureau recognizes that 
those other three provisions may have implications for existing State 
and Federal credit programs, under which the applicable agencies may 
need to revise their own underlying guidelines to accommodate or 
otherwise reflect the statutory changes. Moreover, the Board's proposed 
Sec.  226.45(b)(1) would have stated that, for purposes of Sec.  
226.45(b), ``escrow account'' has the same meaning as under Regulation 
X. This proposed provision paralleled existing Sec.  226.35(b)(3)(iv).
    No comments were received on the scope and structure of Sec.  
226.45(b)(1). The Bureau is adopting the proposed language with certain 
technical changes as Sec.  1026.35(b)(1).
35(b)(2) Exemptions
    Under existing regulations, certain categories of transactions are 
exempt from the escrow requirement. The Board proposed Sec.  
226.45(a)(3) and (b)(2)(i) and (ii) to reflect these provisions. The 
Board's proposed Sec.  226.45(a)(3) would have provided that a 
``higher-priced mortgage loan'' does not include a transaction to 
finance the initial construction of a dwelling, a temporary or 
``bridge'' transaction with a term of twelve months or less, a reverse 
mortgage transaction, or a home equity line of credit. This provision 
is identical to existing Sec.  1026.35(a)(3) (adopted as Sec.  
226.35(a)(3) in the 2008 HOEPA Final Rule), which provides that the 
term ``higher-priced mortgage loan'' does not include a transaction to 
finance the initial construction of a dwelling, a temporary or 
``bridge'' transaction with a term of twelve months or less, a reverse 
mortgage transaction, or a home equity line of credit. The Board's 
proposed Sec.  226.45(b)(2)(i) would have provided that escrow accounts 
need not be established for transactions secured by shares in a 
cooperative. This provision would track existing Sec.  
1026.35(b)(3)(ii)(A). It also is consistent with new TILA section 
129D(e), as added by section 1461 of the Dodd-Frank Act.
    In light of the way in which the Dodd-Frank Act has expanded on 
various elements of the 2008 HOEPA Final Rule, the Bureau believes that 
a more tailored approach is appropriate to specify what types of 
transactions are exempt from specific substantive requirements in 
Regulation Z. Accordingly, with the exception of home equity lines of 
credit (HELOCs), the Bureau is using its exemption authority under TILA 
section 129D \25\ to recodify the exemptions that were formerly located 
in Sec.  1026.35(a)(3) and Sec.  1026.35(b)(3)(ii)(A) in the exemptions 
from coverage of the escrow requirement under new Sec.  1026.35(b)(2). 
The separate exemption for HELOCs is no longer necessary because Sec.  
1026.35(a)(1) has been modified to apply only to closed-end consumer 
credit transactions.\26\ The Bureau believes that the use of its 
exemption authority is appropriate given the nature of the transactions 
at issue and would benefit consumers and industry alike. Given that 
reverse mortgages are unique transactions that are currently addressed 
by Sec.  1026.33,\27\ the Bureau believes it is in the interest of 
consumers and the public interest to pursue a course involving further 
review of Sec.  1026.33 and to consider whether new or different 
protections would be appropriate for reverse mortgages at a later 
date.\28\ In addition, because of the nature of construction-only and 
bridge loan transactions, the Bureau believes that exempting these 
transactions is in the interest of consumers and the public interest. 
In both cases, the payments and amounts of property taxes and hazard 
insurance will depend on various time-sensitive factors for loan 
transactions that generally do not exist for more than one or two 
years, making maintaining

[[Page 4734]]

an escrow account for a minimum of five years impractical. The 
recodification of the other exemptions from the escrows requirements is 
purely for organizational purposes and has no substantive effect. 
Exemptions from the new appraisal requirements are being finalized 
separately by the 2013 Interagency Appraisals Final Rule, in Sec.  
1026.35(c).
---------------------------------------------------------------------------

    \25\ The Bureau may prescribe rules that revise, add to, or 
subtract from the criteria of section 129D(b) of TILA if the Bureau 
determines that such rules are in the interest of consumers and the 
public interest. See 15 U.S.C. 1639d note. These exceptions are also 
justified by section 105(a) of TILA which provides that the Bureau 
in its regulations to carry out the purposes of TILA may provide for 
such adjustments and exceptions for all or any class of transactions 
that the Bureau judges are necessary or proper to effectuate the 
purposes of TILA, to prevent circumvention or evasion thereof, or to 
facilitate compliance therewith. See 15 U.S.C. 1604(a).
    \26\ The Bureau notes that open-end credit transactions are 
excluded from section 129D(a) of TILA under Dodd-Frank Act section 
1461. See 15 U.S.C. 1639d.
    \27\ Reverse mortgages are also excluded from section 129D(a) of 
TILA under Dodd-Frank Act section 1461. See 15 U.S.C. 1639d.
    \28\ See, e.g., Consumer Financial Protection Bureau, Reverse 
Mortgages: Report to Congress (June 28, 2012) available at: http://files.consumerfinance.gov/a/assets/documents/201206_cfpb_Reverse_Mortgage_Report.pdf.
---------------------------------------------------------------------------

35(b)(2)(i)
    The Board's proposed Sec.  226.45(b)(2)(i) would have provided that 
escrow accounts need not be established for transactions secured by 
shares in a cooperative, tracking the existing regulation, which is now 
located at Sec.  1026.35(b)(3)(ii)(A). The Bureau is adopting this 
proposal with certain conforming changes as Sec.  1026.35(b)(2)(i)(A). 
The Bureau is adopting the Board's proposed exemption for transactions 
to finance the initial construction of a dwelling as Sec.  
1026.35(b)(2)(i)(B). The Bureau is adopting the Board's proposed 
exemption for ``bridge'' loan transactions as Sec.  
1026.35(b)(2)(i)(C). Finally, the Bureau is adopting the Board's 
proposed exemption for reverse mortgage transactions as Sec.  
1026.35(b)(2)(i)(D) with certain conforming changes. Comment 
35(b)(2)(i)-1 clarifies the operation of the exemption for transactions 
to finance the initial construction of a dwelling under Sec.  
1026.35(b)(2)(i)(B) in relation to a construction-to-permanent mortgage 
transaction, noting that where a transaction is determined to be a 
higher-priced mortgage loan, only the permanent phase of the 
transaction is subject to Sec.  1026.35.
35(b)(2)(ii)
    As added by section 1461 of the Dodd- Frank Act, new TILA section 
129D(e) codifies the current provision stating that escrow accounts 
that are established in connection with transactions secured by 
condominium units need not reserve funds to cover mortgage-related 
insurance, found in existing Sec.  1026.35(b)(3)(ii)(B), and expands it 
to other, similar ownership arrangements involving governing 
associations that have an obligation to maintain a master insurance 
policy. The Board's proposed Sec.  226.45(b)(2)(ii) would have provided 
that insurance premiums need not be included in escrow accounts for 
transactions secured by dwellings in condominiums, planned unit 
developments (PUDs), or similar arrangements in which ownership 
requires participation in a governing association, where the governing 
association has an obligation to the dwelling owners to maintain a 
master policy insuring all dwellings.
    Several commenters suggested that even with this expanded 
definition other ownership structures might not be captured by the 
Board's proposed exemption. The Bureau is responding to these comments 
by revising the proposed language to adopt the umbrella term ``common 
interest community,'' which one commenter had suggested would be 
sufficiently broad to capture the various arrangements under which a 
governing association has an obligation to the dwelling owners to 
maintain a master policy insuring all dwellings. The Bureau is adopting 
the Board's proposed comment 45(b)(2)(ii)-1 as comment 35(b)(2)(ii)-1, 
which parallels existing comment 35(b)(3)(ii)(B)-1, but with conforming 
amendments to reflect the expanded scope of the exemption. The Bureau 
also is adopting the Board's proposed comment 45(b)(2)(ii)-2 as comment 
A22b)(2)(ii)-2 to provide details about the nature of PUDs and to 
clarify that the exemption is available for not only condominiums and 
PUDs but also any other type of property ownership arrangement that has 
a governing association with an obligation to maintain a master 
insurance policy. Following a request from one commenter, the Bureau 
additionally adds comment 35(b)(2)(ii)-3 to clarify that properties 
with multiple governing associations would also qualify for the limited 
exemption provided in Sec.  1026.35(b)(2)(ii).
35(b)(2)(iii)
    As adopted by Dodd-Frank Act section 1461, TILA section 129D(c) 
authorizes the Bureau to exempt from the higher-priced mortgage loan 
escrow requirement a creditor that: (1) Operates predominantly in rural 
or underserved areas; (2) together with all affiliates, has total 
annual mortgage loan originations that do not exceed a limit set by the 
Bureau; (3) retains its mortgage obligations in portfolio; and (4) 
meets any asset-size threshold and any other criteria as the Bureau may 
establish. As discussed above, Dodd-Frank Act section 1412 ability-to-
repay provisions contain a similar set of criteria with regard to 
certain balloon-payment mortgages originated and held in portfolio by 
creditors that operate predominantly in rural or underserved areas. The 
statute authorizes the Bureau to issue regulations permitting certain 
balloon-payment mortgages issued by the specified creditors to receive 
a presumption of compliance with the ability-to-repay requirements as 
``qualified mortgages,'' even though the general qualified mortgage 
criteria prohibit balloon-payment features. Specifically, in addition 
to having to meet certain transaction-specific features and 
underwriting requirements, balloon-payment qualified mortgages may be 
made only by a creditor that: (1) Operates predominantly in rural or 
underserved areas; (2) together with all affiliates, has total annual 
residential mortgage transaction originations that do not exceed a 
limit set by the Bureau; (3) retains the balloon-payment mortgages in 
portfolio; and (4) meets any asset-size threshold and any other 
criteria as the Bureau may establish. See TILA section 129C(b)(2)(E), 
15 U.S.C. 1639c(b)(2)(E).
    The Board interpreted the two provisions as serving similar but not 
identical purposes, and thus varied certain aspects of the proposals to 
implement the balloon qualified mortgage and escrow provisions. 
Specifically, the Board interpreted the escrow provision as being 
designed to exempt creditors that do not possess economies of scale to 
offset cost-effectively the burden of establishing escrow accounts by 
maintaining a certain minimum portfolio size from being required to 
establish escrow accounts on higher-priced mortgage loans, and the 
balloon-payment qualified mortgage provision to ensure access to credit 
in rural and underserved areas where consumers may be able to obtain 
credit only from community banks offering balloon-payment mortgages. 
Accordingly, the two Board proposals would have used similar 
definitions of ``rural'' and ``underserved,'' but did not provide 
uniformity in calculating and defining various other elements. 
Specifically, the Board's proposed Sec.  226.45(b)(2)(iii) would have 
implemented the escrow exemption in TILA section 129D(c) by requiring 
that the creditor have (1) in the prior year made more than 50 percent 
of its first-lien higher-priced mortgage loans in rural or underserved 
areas, (2) together with all affiliates, originated and retained 
servicing rights to no more than 100 first-lien mortgage obligations in 
either the current or prior calendar year, and (3) together with all 
affiliates, not maintained an escrow account on any consumer credit 
transaction secured by real property or a dwelling that is currently 
serviced by the creditor or its affiliates. The Board also sought 
comment on whether to add a requirement for the creditor to meet an 
asset-size limit and what that size should be.
    In contrast, the Board's proposal for balloon qualified mortgages 
would have required that the creditor (1) in the

[[Page 4735]]

preceding calendar year, have made more than 50 percent of its balloon-
payment mortgages in rural or underserved areas; and (2) have assets 
that did not exceed $2 billion. The Board proposed two alternatives for 
qualifications relating to (1) the total annual originations limit; and 
(2) the retention of balloon-payment mortgages in portfolio.
    In both cases, the Board proposed to use a narrow definition of 
rural based on the Economic Research Service (ERS) of the United States 
Department of Agriculture's (USDA) ``urban influence codes'' (UICs). 
The UICs are based on the definitions of ``metropolitan'' and 
``micropolitan'' as developed by the Office of Management and Budget, 
along with other factors reviewed by the ERS that place counties into 
twelve separately defined UICs depending on the size of the largest 
city and town in the county. The Board's proposal would have limited 
the definition of rural to certain ``non-core'' counties, which are 
areas outside of any metropolitan or micropolitan area, excluding those 
adjacent to a metropolitan area of at least one million residents or 
adjacent to a micropolitan area with a town of at least 2,500 
residents. This definition corresponded with UICs of 7, 10, 11, and 12, 
which would have covered areas in which only 2.3 percent of the 
nation's population lives.
    In light of the overlap in criteria between the escrow exemption 
and balloon qualified mortgage provisions, the Bureau considered 
comments responding to both proposals in determining how to finalize 
the particular elements of each rule as discussed further below. With 
regard to exercising the Bureau's authority to create an escrows 
exemption in general, the bulk of the comments received asserted that 
the Bureau should exercise such authority but that the scope of the 
proposal was too limited and would lead to reduced access to credit or 
increased costs for consumers in rural areas because of increased 
compliance costs for creditors. Two industry commenters suggested a 
blanket exemption for community banks, but did not identify any 
criteria to define a community bank. Five industry commenters suggested 
the exemption should be based solely on loan-to-value ratio of the 
transaction being originated, ranging from 50 percent to 80 percent, 
without using any of the statutory requirements. Four trade association 
commenters suggested that the exemption should be based solely on 
whether the debt obligation was being kept in the creditor's portfolio. 
One consumer advocacy group stated that the exemption was too broad 
because, under its reading of section 1461 of the Dodd-Frank Act, the 
exemption was not meant to protect access to credit but, rather, to 
protect communities that need credit but cannot find credit with terms 
better than the terms of higher-priced mortgage loans.
    The Bureau believes that escrows generally provide meaningful 
consumer protections, as consumers may not incorporate recurring costs 
related to the ownership of a dwelling to their monthly mortgage 
payments to anticipate the total costs associated with the dwelling. 
For consumers who struggle with their monthly mortgage payments, there 
is a higher probability of foreclosure as a result. Based on recent 
research,\29\ consumers that do not have an escrow account in the first 
year after consummation result in 0.35 percent more foreclosures per 
year for first-lien, higher-priced mortgages. However, in rural and 
underserved areas where there are fewer creditors that may be willing 
to extend higher-priced mortgage loans, the number of providers could 
be further reduced when additional costs associated with establishing 
and maintaining escrow accounts are taken into account. The reduction 
in the number of providers could lead to some consumers being unable to 
obtain higher-priced mortgage loans, or to increase the costs of the 
higher-priced mortgage loans as a result of a concentrated market with 
limited competition to a point where the consumer would be unable to 
repay the higher-priced mortgage loan.
---------------------------------------------------------------------------

    \29\ Nathan B. Anderson and Jane B. Dokko, Liquidity Problems 
and Early Payment Default Among Subprime Mortgages, Finance and 
Economics Discussion Series, Federal Reserve Board (2011), available 
at: http://www.federalreserve.gov/pubs/feds/2011/201109/201109pap.pdf.
---------------------------------------------------------------------------

    There are also substantial data suggesting that the small portfolio 
creditors that are most likely to have difficulty maintaining escrow 
accounts (or to rely on balloon loan transactions to manage their 
interest rate risks) have a significantly better track record than 
larger creditors with regard to the performance of their mortgage 
transactions. As discussed in more depth in the 2013 ATR Concurrent 
Proposal, because small portfolio creditors retain a higher percentage 
of their transactions on their own books, they have strong incentives 
to engage in thorough underwriting. To minimize performance risk, small 
community creditors have developed underwriting standards that differ 
from those employed by larger institutions. Small creditors generally 
engage in ``relationship banking,'' in which underwriting decisions 
rely at least in part on qualitative information gained from personal 
relationships between creditors and consumers. This qualitative 
information focuses on subjective factors such as consumer character 
and reliability which ``may be difficult to quantify, verify, and 
communicate through the normal transmission channels of banking 
organization.'' \30\ While it is not possible to disaggregate the 
impact of each of the elements of the community banking model, the 
combined effect is highly beneficial. Moreover, where consumers have 
trouble paying their mortgage obligations, small portfolio creditors 
have stronger incentives to work with the consumers to get them back on 
track, to protect both the creditors' balance sheets and their 
reputations in their local communities. Market-wide data demonstrate 
that mortgage delinquency and charge-off rates are significantly lower 
at smaller banks than at larger banks.\31\
---------------------------------------------------------------------------

    \30\ See Allen N. Berger and Gregory F. Udell, Small Business 
Credit Availability and Relationship Lending: The Importance of Bank 
Organizational Structure, Economic Journal (2002).
    \31\ See 2013 ATR Concurrent Proposal; FDIC, Community Banking 
Study, December 2012, available at: http://www.fdic.gov/regulations/resources/cbi/report/cbi-full.pdf.
---------------------------------------------------------------------------

    The Bureau believes that Congress carefully weighed these 
considerations in authorizing the Bureau to establish an exemption in 
TILA section 129D(c) to ensure access to credit in rural and 
underserved areas where consumers may be able to obtain credit only 
from community banks that cannot maintain escrow accounts on a cost-
effective basis. Thus, the Bureau concludes that exercising its 
authority is appropriate, but also that the exemption should implement 
the statutory criteria to ensure it effectuates Congress's intent. 
Accordingly, as discussed in more detail below, the Bureau is adopting 
Sec.  1026.35(b)(2)(iii) largely as proposed, but with certain changes 
described below, to implement TILA section 129D(c).
    In particular, the Bureau has concluded that it is appropriate to 
make the specific creditor qualifications much more consistent between 
the balloon-payment qualified mortgage and escrow exemptions than 
originally proposed by the Board.\32\ The Bureau believes that

[[Page 4736]]

this approach is justified by several considerations, including the 
very similar statutory language, the similar congressional intents 
underlying the two provisions, and the fact that requiring small 
creditors operating predominantly in rural or underserved areas to 
track overlapping but not identical sets of technical criteria for each 
separate provision could create unwarranted compliance burden that 
itself would frustrate the intent of the statutes. Although the Bureau 
has recast and loosened some of the criteria to promote consistency, 
the Bureau has carefully calibrated the changes to further the purpose 
of each rulemaking. Further, the Bureau believes that any risk to 
consumers from the modifications is minimal given the nature of the 
small creditors' operations and in particular the fact that they are 
required to hold the affected transactions in portfolio (in this final 
rule's case, indirectly, by virtue of the requirement that a 
transaction originated under the escrow exemption not be subject to a 
forward commitment at consummation). As discussed in more detail below 
and in the 2013 ATR Concurrent Proposal, which also proposes to adopt 
several of the criteria to define a new type of qualified mortgage, the 
creditors at issue have strong motivations to provide vigorous 
underwriting and high levels of customer service to protect their 
balance sheets and reputations in their local communities. This 
motivation is manifest in the fact that they have demonstrably lower 
credit losses on their mortgage originations than larger institutions.
---------------------------------------------------------------------------

    \32\ The Bureau has similarly attempted to maintain consistency 
between the asset-size limit, annual originations threshold, and 
requirements concerning portfolio transactions as between the final 
rules that it is adopting with regard to balloon qualified mortgages 
and the escrow exemption and its separate proposal to create a new 
type of qualified mortgage originated and held by small portfolio 
creditors. The Bureau is seeking comment in that proposal on these 
elements and on whether other adjustments are appropriate to the 
existing rules to maintain continuity and reduce compliance burden. 
See the 2013 ATR Concurrent Proposal.
---------------------------------------------------------------------------

    For the foregoing reasons, the Bureau is adopting Sec.  
1026.35(b)(2)(iii) to implement TILA section 129D(c) by providing that 
a transaction is exempt from the escrow account requirement otherwise 
applicable to a higher-priced mortgage loan if the creditor: (1) In the 
preceding calendar year made more than 50 percent of its first-lien 
covered transactions in counties designated by the Bureau as ``rural'' 
or ``underserved''; (2) together with all affiliates extended 500 or 
fewer first-lien covered transactions in the preceding calendar year; 
and (3) has total assets that are less than $2 billion, adjusted 
annually for inflation. The final rule also creates greater parallelism 
with the balloon qualified mortgage provision with regard to the 
requirement that the affected transactions be held in portfolio by 
requiring in both rules that the transactions not be subject to a 
``forward commitment'' agreement at the time of consummation. These 
qualifications and the other requirements under the final rule are 
discussed in more detail below.
35(b)(2)(iii)(A)
``Operates Predominantly in Rural or Underserved Areas''
    Under TILA section 129D(c)(1), to qualify for the exemption, a 
creditor must ``operate predominantly in rural or underserved areas.'' 
The Board's 2011 Escrows Proposal would have required a creditor to 
have made during the preceding calendar year more than 50 percent of 
its first-lien higher-priced mortgage loans in ``rural or underserved'' 
counties. One industry commenter agreed with the Board's proposal. 
Numerous commenters to the Board's proposal in this rule and the 
Board's 2011 ATR Proposal objected to the proposed definition of 
``rural or undeserved'' as discussed below, but commenters did not 
generally dispute the definition of ``predominantly'' as meaning more 
than 50 percent of originations of its first-lien higher-priced 
mortgage loans in rural or underserved counties.
    The Bureau believes Congress enacted the exemption in TILA section 
129D(c)(1) to ensure access to credit in rural and underserved areas 
where consumers may be able to obtain credit only from community banks 
or other small creditors serving those areas. The ``operates 
predominantly in'' requirement serves to limit the exemption to these 
institutions. To remove this portion of the qualifications of the 
creditor would be to circumvent Congress's stated requirement that the 
exemption was intended for creditors operating predominantly in rural 
or underserved areas. The Bureau believes that ``predominantly'' 
indicates a portion greater than half, hence the regulatory requirement 
of more than 50 percent.
    Upon further analysis of the differences in the proposals for the 
escrows exemption and the balloon-payment qualified mortgage 
provisions, however, the Bureau believes that further harmonization 
between the two sets of requirements is warranted. The Board's 2011 
Escrows Proposal would have required creditors to track first-lien 
higher-priced mortgage loans by county, while the qualified mortgage 
proposal would have required creditors to track balloon-payment 
mortgages. Given that the underlying statutory language regarding 
``operates predominantly'' is the same in each instance and that 
tracking each type of mortgage separately would increase administrative 
burden, the Bureau believes it is appropriate to base the threshold for 
both rules on the distribution of all first-lien ``covered 
transactions'' as defined in Sec.  1026.43(b)(1). As provided in the 
2013 ATR Final Rule, a covered transaction is defined in Sec.  
1026.43(b)(1) as a consumer credit transaction that is secured by a 
dwelling, as defined in Sec.  1026.2(a)(19), other than a transaction 
exempt from coverage under Sec.  1026.43(a). The Bureau believes that 
counting only first-lien transactions will facilitate compliance, as 
well as promote consistency in applying to creditors the two exemptions 
under both rulemakings, since both exemptions relate to first-lien 
transactions. Balloon-payment mortgages that will meet the 
qualifications of the balloon-payment qualified mortgage exemption will 
be first-lien covered transactions, as having subordinate financing 
along with the balloon-payment mortgage would be rare since it further 
constrains a consumers' ability to build equity in the property and to 
refinance the balloon-payment mortgage when it becomes due. 
Subordinate-lien, higher-priced mortgage loans are not required to 
establish escrow accounts, as only first-lien higher priced mortgage 
loans must establish escrow accounts under Sec.  1026.35(b)(1).
    Accordingly, Sec.  1026.35(b)(2)(iii)(A) provides that, during the 
preceding calendar year, a creditor must have made more than 50 percent 
of its total first-lien covered transactions in counties designated 
``rural'' or ``underserved'' as defined by Sec.  1026.35(b)(2)(iv), 
discussed below. Comment 35(b)(2)(iii)-1.i states that the Bureau 
publishes annually a list of counties that qualify as rural or 
underserved.
35(b)(2)(iii)(B)
Total Annual Mortgage Originations
    TILA section 129D(c)(3) provides that, to qualify for the 
exemption, a creditor together with its affiliates must have total 
annual mortgage originations that do not exceed a limit set by the 
Bureau. The Board's proposed Sec.  226.45(b)(2)(iii)(B) required that 
the creditor and its affiliates, during either of the preceding two 
calendar years, have originated and retained servicing rights to 100 or 
fewer mortgage obligations secured by a first lien on real property or 
a dwelling. Although the Dodd-Frank Act requirement to establish escrow 
accounts applies only

[[Page 4737]]

to higher-priced mortgage loans that are secured by first liens, the 
Board reasoned that it was appropriate to base the threshold on all 
first-lien originations because creditors are free to establish escrow 
accounts for all of their first-lien mortgages voluntarily to achieve 
the scale necessary to escrow cost-effectively. The Board estimated 
that a minimum servicing portfolio size of 500 is necessary to escrow 
cost-effectively, and assumed that the average life expectancy of a 
mortgage loan is about five years. Based on this reasoning, the Board 
believed that creditors would no longer need the benefit of the 
exemption if they originated and serviced more than 100 first-lien 
transactions per year. In contrast, the Board did not propose a 
specific annual originations threshold in connection with the balloon-
payment qualified mortgages, but rather sought comment on whether to 
adopt a threshold based on the number of transactions or dollar volume 
and what numeric threshold would be appropriate.
    In connection with the Board's 2011 Escrows Proposal, trade 
association and industry commenters generally said that the proposed 
maximum annual volume of originations would be insufficient to make the 
escrow accounts cost effective for creditors. No commenters provided 
information to support their suggestions for alternative thresholds or 
to refute the Board's analysis that creditors can provide escrow 
accounts cost-effectively when they annually originate and retain 
servicing rights to more than 100 mortgage obligations secured by a 
first lien on real property or a dwelling. Suggestions for higher 
thresholds ranged from 200 to 1,000 mortgage obligations per year 
originated and serviced. One consumer advocacy commenter suggested the 
proposed threshold was too high because it counted only first-lien 
mortgage transactions, instead of all mortgage obligations, but offered 
no specific alternative amount. Two industry commenters also suggested 
that the origination limit should measure only the number of higher-
priced mortgage loans originated and serviced by the creditor and its 
affiliates.
    In response to the Board's 2011 ATR Proposal, two trade 
associations and one group of State bank regulators, argued that other 
criteria, such as the asset-size limit or portfolio requirement, were 
sufficient and that neither a volume nor a total annual originations 
limit would be necessary. One industry trade association suggested 
combining the proposed alternatives and permitting creditors to elect 
under which limit they would operate. Other trade group and industry 
commenters indicated that the total annual originations limit would be 
preferable because of the varying dollar amount of transactions 
originated, which would constrain the number of consumers with limited 
credit options who could obtain balloon-payment mortgages in rural or 
underserved areas. Four trade group and industry commenters suggested a 
range for the total annual originations limit of 250 to 1,000 
transactions.
    The Bureau believes that the requirement of TILA section 129D(c)(2) 
reflects a recognition that larger creditors have the systems 
capability and operational scale to establish cost-efficient escrow 
accounts. Similarly, the Bureau believes the requirement of TILA 
section 129C(b)(2)(E)(iv)(II) reflects Congress's recognition that 
larger creditors who operate in rural or underserved areas should be 
able to make credit available without resorting to balloon-payment 
mortgages. In light of the strong concerns expressed in both 
rulemakings about the potential negative impacts on small creditors in 
rural and underserved areas, the Bureau conducted further analysis to 
try to determine the most appropriate thresholds, although it was 
significantly constrained by the fact that data are limited with regard 
to mortgage originations in rural and underserved areas generally and 
in particular with regard to originations of balloon-payment mortgages.
    The Bureau started with the premise that it would be preferable to 
use the same annual originations threshold in both rules to reflect the 
consistent language in both statutory provisions focusing on total 
annual mortgage loan originations, to facilitate compliance by not 
requiring institutions to track multiple metrics and to promote 
consistent application of the two exemptions. This approach requires 
significant reconciliation between the two proposals, however, because 
the escrows proposal focused specifically on transactions originated 
and serviced to gauge creditors' ability to maintain escrow accounts 
over time, while retention of servicing is not directly relevant to the 
balloon-payment qualified mortgage. However, to the extent that 
creditors chose to offer balloon-payment mortgages to manage their 
interest rate risk without having to undertake the compliance burdens 
involved in administering adjustable rate mortgages over time, the 
Bureau believes that both provisions are focused in a broad sense on 
accommodating creditors whose systems constraints might otherwise cause 
them to exit the market.
    With this in mind, the Bureau ultimately decided to adopt a 
threshold of 500 or fewer annual originations of first-lien 
transactions for both rules. The Bureau believes that this threshold 
will provide greater flexibility and reduce concerns that the specific 
threshold that had been proposed in the Board's 2011 Escrows Proposal 
(100 higher-priced mortgage loans originated and serviced annually in 
either of the preceding two years) would reduce access to credit by 
excluding creditors that need special accommodations in light of their 
capacity constraints. At the same time, the increase is not as dramatic 
as it may first appear because the Bureau's analysis of HMDA data 
suggests that even small creditors are likely to sell a significant 
number of their originations in the secondary market. Assuming that 
most mortgage transactions that are retained in portfolio are also 
serviced in house, the Bureau estimates that a creditor originating no 
more than 500 first-lien transactions per year would maintain and 
service a portfolio of about 670 mortgage obligations over time, 
assuming an average obligation life expectancy of five years.\33\ Thus, 
the higher threshold will help to ensure that creditors that are 
subject to the escrow requirement do in fact maintain portfolios of 
sufficient size to maintain the escrow accounts on a cost efficient 
basis over time, in the event that the Board's estimate of a minimum 
portfolio of 500 transactions was too low. However, the Bureau believes 
that the 500 annual originations threshold in combination with the 
other requirements will still ensure that the balloon-payment qualified 
mortgage and escrow exemptions are available only to small creditors 
that focus primarily on a relationship-lending model and face 
significant systems constraints.
---------------------------------------------------------------------------

    \33\ A review of 2011 HMDA data shows creditors that otherwise 
meet the criteria of Sec.  1026.43(f)(1)(vi) and originate between 
200 and 500 or fewer first-lien covered transactions per year 
average 134 transactions per year retained in portfolio. Over a five 
year period, the total portfolio for these creditors would average 
670 mortgage obligations.
---------------------------------------------------------------------------

    The Bureau also believes that it is appropriate to focus the annual 
originations threshold on all first-lien originations. Given that 
escrow accounts are typically not maintained for transactions secured 
by subordinate liens, the Bureau does not believe that it makes sense 
to count such transactions toward the threshold because they would not 
contribute to a creditor's ability to achieve cost-efficiency. At the 
same time, the Bureau believes it is appropriate to count all

[[Page 4738]]

first-lien transactions toward the threshold because creditors can 
voluntarily establish escrow accounts for such transactions to increase 
the cost-effectiveness of their program even though the mandatory 
account requirements under the Dodd-Frank Act apply only to first-lien, 
higher-priced mortgage loans. Focusing on all first-lien originations 
also provides a metric that is useful for gauging the relative scale of 
creditors' operations for purposes of the balloon-payment qualified 
mortgages, while focusing solely on the number of higher-priced 
mortgage loan originations would not. Accordingly, the Bureau adopts 
Sec.  1026.35(b)(2)(iii)(B) requiring to creditor and its affiliates to 
have originated 500 or fewer covered transactions secured by a first 
lien.
35(b)(2)(iii)(C)
Asset-Size Threshold
    TILA section 129D(c)(4) provides that, to qualify for the 
exemption, a creditor must meet any asset-size threshold established by 
the Bureau. The Board's 2011 Escrows Proposal did not establish an 
asset-size threshold but did request comment on whether one should be 
added and, if so, what threshold level would be appropriate. In 
contrast, the Board proposed a $2 billion threshold for the balloon 
qualified mortgage exception. This number was based on the limited data 
available to the Board at the time of the proposal. Based on that 
limited information, the Board reasoned that none of the entities it 
identified as operating predominantly in rural or underserved areas had 
total assets as of the end of 2009 greater than $2 billion, and 
therefore, the limitation should be set at $2 billion. The Board 
expressly proposed setting the asset-size threshold at the highest 
level currently held by any of the institutions that appear to be 
smaller institutions that served areas with otherwise limited credit 
options.
    In response to the Board's 2011 Escrows Proposal, a group of State 
bank regulators and a trade association advocated including an asset-
size prerequisite in the exemption. The group of State bank regulators 
suggested that the asset-size prerequisite be the sole requirement to 
obtain the exemption but did not propose a specific dollar threshold. 
The industry commenter suggested the asset-size be $1 billion in 
assets, but did not provide a rationale for the amount.
    Based on the Board's 2011 ATR Proposal, one group of State bank 
regulators suggested that the asset-size threshold be included and be 
the only requirement for a creditor to qualify for the balloon-mortgage 
qualified mortgage exemption. Two trade association commenters 
suggested that a $2 billion asset-size threshold was appropriate, with 
one also suggesting that the asset-size threshold be the only 
requirement for a creditor to qualify for the balloon-payment qualified 
mortgage exemption. One industry commenter suggested that the asset-
size threshold be $10 billion.
    For reasons discussed above, the Bureau is adopting an annual 
originations limit as contemplated by the statute. Given that 
limitation, restricting the asset size of institutions that can claim 
the exemption is of limited importance. Nonetheless, the Bureau 
believes that an asset-size limitation is still helpful because very 
large institutions should have sufficient resources to adapt their 
systems to make mortgages without a balloon payment and to establish 
and maintain escrow accounts even if the scale of their mortgage 
operations is relatively modest. A very large institution with a 
relatively modest mortgage operation also does not have the same type 
of reputational and balance-sheet incentives to maintain the same kind 
of relationship-banking model as a smaller community-based creditor. An 
asset-size limitation can guard against circumvention of the rule if a 
larger institution were to elect to enter a rural area to make a 
limited number of higher-priced mortgage loans or balloon-payment 
mortgages. Therefore, the Bureau believes that the $2 billion asset 
limitation proposed by the Board in the Board's 2011 ATR Proposal 
remains an appropriate limitation and should be adopted in both this 
final rule and the 2013 ATR Final Rule.\34\
---------------------------------------------------------------------------

    \34\ The $2 billion threshold reflects the purposes of the 
exemption and the structure of the mortgage servicing industry. The 
Bureau's choice of $2 billion in assets as a threshold for purposes 
of TILA section 129D(c)(4) does not imply that a threshold of that 
type or of that magnitude would be an appropriate way to distinguish 
small firms for other purposes or in other industries.
---------------------------------------------------------------------------

    Accordingly, the Bureau adopts Sec.  1026.35(b)(2)(iii)(C) to 
require creditors to have total assets as of the end of the preceding 
calendar year that are less than $2 billion and is effectively adopting 
the same threshold by cross-reference to Sec.  1026.35(b)(2)(iii) for 
purposes of the balloon-payment qualified mortgage exemption in the 
2013 ATR Final Rule. As provided in Sec.  1026.35(b)(2)(iii)(C), this 
threshold dollar amount will adjust automatically each year based on 
the year-to-year change in the average of the Consumer Price Index for 
Urban Wage Earners and Clerical Workers (CPI-W), not seasonally 
adjusted, for each 12-month period ending in November, with rounding to 
the nearest million dollars. Comment 35(b)(2)(iii)-1.iii recites this 
initial threshold and further clarifies that a creditor that had total 
assets below the threshold on December 31 of the preceding year 
satisfies this criterion for purposes of the exemption during the 
current calendar year. The comment also notes that the Bureau will 
publish notice of each year's asset threshold by amending the comment.
35(b)(2)(iii)(D)
Creditor and Affiliates Do Not Maintain Escrows
    As adopted by section 1461 of the Dodd-Frank Act, TILA section 
129D(c)(4) provides that, to qualify for the exemption, a creditor must 
meet any other criteria established by the Bureau consistent with the 
provisions of TILA. The Board's proposed Sec.  226.45(b)(2)(iii)(C) 
would have required that, to obtain the exemption, the creditor and its 
affiliates not maintain an escrow account for any mortgage they 
currently service through at least such mortgage obligation's second 
installment due date. The Board used the second installment due date as 
a cutoff point because it recognized that a creditor may sometimes hold 
a mortgage obligation for a short period after consummation to take 
steps necessary before transferring and assigning the mortgage debt 
obligation to the intended investor. The Board recognized that the 
process of transferring and assigning the mortgage obligation could 
extend beyond the mortgage obligation's first payment due date, 
especially when the first payment is due shortly after consummation.
    The Board believed this additional condition was necessary to 
effectuate the purpose of the exemption. The Board reasoned that, if a 
creditor already establishes and maintains escrow accounts, it has the 
capacity to escrow and therefore has no need for the exemption. 
Moreover, the Board concluded that a creditor's capacity to escrow 
should reflect not only its own activities but those of any affiliate 
because it assumed that a creditor could rely on its affiliate to help 
meet the escrow requirement. The Board sought comment, however, on 
three aspects: first, whether affiliates' capacities to escrow should 
be considered; second, whether the second payment due date is the 
appropriate cutoff point for whether a creditor has established an 
escrow account for purposes of the exemption; and third, whether the 
proposal should allow some de minimis number of

[[Page 4739]]

mortgage obligations for which escrows are maintained and, if so, what 
that number should be.
    Six trade association commenters, five industry commenters and a 
Federal agency submitted comments noting that many creditors had only 
begun to establish escrow accounts for mortgage transactions after the 
Board adopted the 2008 HOEPA Final Rule, which took effect for most 
transactions in April 2010. Many of the same commenters argued that it 
would be unfair to deny the exemption in TILA section 129D(c) to those 
creditors that established escrow accounts only to comply with the 
current escrow requirements. Two trade association commenters and one 
industry commenter suggested a de minimis number of mortgage 
obligations ranging from 10 to 50 mortgage obligations to address the 
exclusion of creditors currently escrowing that would otherwise qualify 
for the exemption. In addition, one industry commenter suggested that a 
creditor that establishes escrow accounts for distressed mortgage 
obligations should still be eligible for the exemption, as these 
creditors are doing so as an accommodation to the consumer to attempt 
to avoid foreclosure. No comments were received as to whether the 
second payment due date is the appropriate cutoff point for whether a 
creditor has established an escrow account for purposes of the 
exemption.
    The Bureau is adopting the Board's proposal in Sec.  
1026.35(b)(2)(iii)(D), with the addition of two exceptions based on 
comments received. The Bureau agrees with the Board generally that 
creditors that currently provide escrow accounts can afford to 
establish and maintain escrow accounts for higher-priced mortgage 
loans. Thus, to qualify for the exemption, a creditor and its 
affiliates must not maintain escrow accounts for any extensions of 
consumer credit secured by real property or a dwelling that the 
creditor, or its affiliates, currently services through at least the 
second installment due date. However, the Bureau agrees with commenters 
that those creditors that would otherwise qualify for the exemption but 
for their compliance with the current regulation, and creditors that 
establish escrow accounts as an accommodation to distressed consumers, 
should still be able to qualify for the exemption in TILA section 
129D(c). In particular, the Bureau notes that Congress's decision to 
codify and expand upon the escrow requirement from the 2008 HOEPA Final 
Rule while simultaneously providing authority to exempt certain 
mortgage transactions by creditors operating predominantly in rural or 
underserved areas suggests that Congress intended to provide relief to 
creditors that were struggling to meet the existing requirements. 
Accordingly, the Bureau is adopting Sec.  1026.35(b)(2)(iii)(D)(1) and 
(2) to provide exceptions to the exemption's general prerequisite that 
a creditor and its affiliates not maintain an escrow account.
    Comment 35(b)(2)(iii)-1.iv clarifies that the limitation excluding 
creditors and their affiliates who currently maintain escrow accounts 
for other mortgage obligations they service applies only to mortgage 
obligations serviced at the time a transaction purporting to invoke the 
escrows exemption is consummated. Thus, the exemption still could apply 
even if the creditor or its affiliates previously established and 
maintained escrows for mortgage obligations it no longer services. 
However, if a creditor or an affiliate escrows for mortgage obligations 
currently serviced, those institutions are ineligible to invoke the 
escrows exemption until the escrow accounts are no longer maintained. 
The comment also clarifies that a creditor or its affiliate 
``maintains'' an escrow account for a mortgage obligation only if it 
services the mortgage obligation at least through the due date of the 
second periodic payment under the terms of the legal obligation.
    Comment 35(b)(2)(iii)(D)(1)-1 clarifies that escrow accounts 
created by a creditor and its affiliates established between April 1, 
2010, and June 1, 2013 are not counted for purposes of Sec.  
1026.35(b)(2)(iii)(D). In addition, the comment clarifies that 
creditors that continue to maintain escrow accounts that were 
established between April 1, 2010, and June 1, 2013 until the 
termination of those escrow accounts will still qualify for the 
exemption, so long as they or their affiliates do not establish escrow 
accounts for other mortgage obligations that the creditor and its 
affiliates service after June 1, 2013 and they otherwise qualify under 
Sec.  1026.35(b)(2)(iii). Comment 35(b)(2)(iii)(D)(2)-1 clarifies that 
escrow accounts established after consummation for distressed consumers 
are not considered to be maintaining escrow accounts for purposes of 
Sec.  1026.35(b)(2)(iii)(D), although creditors that establish escrow 
accounts after consummation as a regular business practice are 
considered to be maintaining escrow accounts and cannot qualify for the 
exception under Sec.  1026.35(b)(2)(iii).
35(b)(2)(iv)
``Rural'' and ``Underserved'' Defined
    As adopted in the Dodd-Frank Act, TILA section 129D(c)(1) requires, 
among other criteria for the escrows exemption, that the creditor 
operate predominantly in ``rural'' and ``underserved'' areas, but does 
not define either term. As discussed above, the Board proposed separate 
definitions for ``rural'' and ``underserved,'' respectively, in both 
the Board's 2011 Escrows Proposal and the 2011 ATR Proposal, and the 
definitions for the two terms were similar across the two proposals.
    Commenters on the two proposals addressed the specific definitions 
themselves but not the necessity of creating a definition for ``rural'' 
that is separate from ``underserved.'' The Bureau is adopting the 
Board's approach in Sec.  1026.35(b)(2)(iv) which establishes a 
definition of rural that is separate from underserved. Thus, creditors' 
activity in either type of area will count toward their eligibility for 
the escrows exemption and for making balloon-payment qualified 
mortgages.
    ``Rural.'' As described above, the Board's proposed definition of 
rural for purposes of both the balloon-payment qualified mortgage and 
escrows exemptions would have relied upon the ERS's ``urban influence 
codes'' (UICs), which in turn are based on the definitions of 
``metropolitan statistical area'' and ``micropolitan statistical 
area.'' \35\ The Board's proposal would have limited the definition of 
rural to certain ``non-core'' counties, which are areas outside of any 
metropolitan or micropolitan area that are not adjacent to a 
metropolitan area with at least one million residents or to a 
micropolitan area with a town of at least 2,500 residents. This 
definition corresponded to UICs 7, 10, 11, and 12. The counties that 
would have been covered under the Board's proposed definition contain 
2.3 percent of the United States population under the 2000 census. The 
Board believed this approach limited the definition of ``rural'' to 
those properties most likely to have only limited sources of mortgage 
credit because of their remoteness from urban centers and their 
resources. However, the Board sought comment on all aspects of this 
approach to defining rural, including whether the definition should be 
broader or

[[Page 4740]]

narrower or based on information other than UIC codes.
---------------------------------------------------------------------------

    \35\ The ERS places counties into twelve separately defined UICs 
depending on the size of the largest city or town in the county or 
in adjacent counties. Descriptions of UICs can be found on the ERS 
Web site at http://www.ers.usda.gov/data-products/urban-influence-codes/documentation.aspx.
---------------------------------------------------------------------------

    Many commenters to both the 2011 ATR Proposal and the 2011 Escrows 
Proposal, including more than a dozen trade group commenters, several 
individual industry commenters, one association of State banking 
regulators, and a United States Senator, stated that the rural 
definition was too narrow. The trade association and industry 
commenters, and the group of State banking regulators, had various 
proposals to broaden the definition, from the addition of other UICs 
and a combination of county population and asset size to the adoption 
of other regulatory definitions of ``rural,'' such as those governing 
credit unions. The comment from a United States Senator suggested using 
the eligibility of a property to secure a single-family mortgage under 
the USDA's Rural Housing Loan program as the definition of a rural 
property.
    The Bureau agrees that a broader definition of ``rural'' is 
appropriate to ensure access to credit with regard to both the escrows 
and balloon-payment qualified mortgage exemptions. In particular, the 
Bureau believes that all ``non-core'' counties should be encompassed in 
the definition of rural, including counties adjacent to a metropolitan 
area of at least one million residents or a county with a town of at 
least 2,500 residents (i.e., counties with a UIC of 4, 6, or 9 in 
addition to the counties with the UICs included in the Board's 
definition). The Bureau also believes that micropolitan areas that are 
not adjacent to a metropolitan area should be included within the 
definition of rural (i.e., counties with a UIC of 8), as these areas 
are not located adjacent to metropolitan areas that are served by many 
creditors. These counties have significantly fewer creditors 
originating higher-priced mortgage loans and balloon-payment mortgages 
than other counties.\36\ Including these counties within the definition 
of rural would result in 9.7 percent of the U.S. population being 
located within rural areas. Under this definition, only counties in 
metropolitan areas or in micropolitan areas adjacent to metropolitan 
areas would be excluded from the definition of rural.
---------------------------------------------------------------------------

    \36\ A review of data from HMDA reporters indicates that there 
were 700 creditors in 2011 that otherwise meet the requirements of 
new Sec.  1026.35(b)(2)(iii), of which 391 originate higher-priced 
mortgage loans in counties that meet the definition of rural, 
compared to 2,110 creditors that otherwise meet the requirements of 
Sec.  1026.35(b)(2)(iii) that originate balloon-payment mortgages in 
counties that would not be rural. The 391 creditors originated 
12,921 higher-priced mortgage loans, representing 30 percent of 
their 43,359 total mortgage loan originations. A review of data from 
credit unions indicates that there were 830 creditors in 2011 that 
otherwise meet the requirements of Sec.  1026.35(b)(2)(iii), of 
which 415 originate balloon-payment and hybrid mortgages in counties 
that meet the definition of rural, compared to 3,551 creditors that 
otherwise meet the requirements of Sec.  1026.35(b)(2)(iii) that 
originate balloon-payment mortgages in counties that would not be 
rural. The 415 creditors originated 4,980 balloon-payment mortgage 
originations, representing 20 percent of their 24,968 total mortgage 
loan originations.
---------------------------------------------------------------------------

    The Bureau also considered adopting the definition of rural used to 
determine the eligibility of a property to secure a single-family 
mortgage under the USDA's Rural Housing Loan program. This definition 
subdivides counties into rural and non-rural areas based upon whether 
certain areas are open country, or contain a town, village, city or 
place, with certain population criteria, and excludes areas associated 
with an urban area. Given the size of some counties, particularly in 
western States, this approach may provide a more nuanced measure of 
access to credit in some areas than a county-by-county metric. However, 
use of the Rural Housing Loan metrics would incorporate such 
significant portions of metropolitan and micropolitan counties that 37 
percent of the United States population would be within areas defined 
as rural. Based on a review of HMDA data and the location of mortgage 
transactions originated by HMDA reporting entities, the average number 
of creditors in the areas that would meet the USDA's Rural Housing Loan 
program definition of rural is ten. The Bureau believes that a 
wholesale adoption of the Rural Housing Loan definitions would 
therefore expand the definition of rural beyond the intent of the 
escrow and balloon-payment qualified mortgage exemptions under sections 
1412 and 1461 of the Dodd-Frank Act by incorporating areas in which 
there is robust access to credit.
    Accordingly, the final rule implements Sec.  1026.35(b)(2)(iv)(A) 
to provide that a county is rural if it is neither in a metropolitan 
statistical area, nor in a micropolitan statistical area that is 
adjacent to a metropolitan statistical area. The Bureau intends to 
continue studying over time the possible selective use of the Rural 
Housing Loan program definitions and tools provided on the USDA Web 
site to determine whether a particular property is located within a 
``rural'' area. For purposes of initial implementation, however, the 
Bureau believes that defining ``rural'' to include more UIC categories 
creates an appropriate balance to preserve access to credit and create 
a system that is easy for creditors to implement.
    ``Underserved.'' The Board's proposed Sec.  226.45(b)(2)(iv)(B) 
would have defined a county as ``underserved'' during a calendar year 
if no more than two creditors extend credit secured by a first lien on 
real property or a dwelling five or more times in that county. The 
definition was based on the Board's judgment that, where no more than 
two creditors are significantly active, the inability of one creditor 
to offer a higher-priced mortgage loan would be detrimental to 
consumers who would have limited credit options because only one 
creditor, or no creditors, would be left to provide the higher-priced 
mortgage loan. Essentially, a consumer who could only qualify for a 
higher-priced mortgage loan would be required to obtain credit from the 
remaining creditor in that area or would be left with no credit options 
at all. Most of the same commenters that stated that the proposed 
definition of rural was too narrow, as discussed above, also stated 
that this definition of underserved was too narrow. The commenters 
proposed various different standards, including standards that 
considered the extent to which the property was in a rural area, as an 
alternate definition of underserved.
    The Bureau agrees with the Board that the purpose of the exemption 
is to permit creditors to continue to offer credit to consumers, rather 
than to refuse to make higher-priced mortgage loans if such creditors' 
withdrawal would significantly limit consumers' ability to obtain 
mortgage credit. In light of this rationale, the Bureau believes that 
``underserved'' should be implemented in a way that protects consumers 
from losing meaningful access to mortgage credit and that it is 
appropriate to focus the definition on identifying areas where the 
withdrawal of a creditor from the market could leave no meaningful 
competition for consumers' mortgage business. The Bureau notes that the 
final rule's expanded definition of ``rural,'' as discussed above, will 
also address concerns about access to credit in many areas. 
Accordingly, the Bureau is adopting Sec.  1026.35(b)(2)(iv)(B) to 
define a property as ``underserved'' if it is located in a county where 
no more than two creditors extend covered transactions secured by a 
first lien five or more times in that county during a calendar year, 
substantially consistent with the Board's proposal. As adopted, Sec.  
1026.35(b)(2)(iv)(B) also expressly states that the numbers of 
creditors and of their originations in counties for purposes of this 
definition is as reported in HMDA data for the year in question.

[[Page 4741]]

    The Bureau adopted this definition based on HMDA data to provide an 
objective, easily administered rule and one that is consistent with the 
purpose of preserving credit access in underserved areas. Given that 
many smaller creditors may not be subject to HMDA reporting 
requirements, the Bureau recognizes that many counties may be 
underserved under the definition being adopted, because it is based on 
HMDA data, yet additional information (if it were available) could 
reveal that more than two creditors are significantly active in such 
counties. The Bureau may examine further whether a refinement to the 
underserved definition is warranted.
    Commentary guidance on ``rural'' and ``underserved'' definitions. 
Comment 35(b)(2)(iv)-1 clarifies that the Bureau will annually update 
on its Web site a list of counties deemed rural or underserved under 
the definitions of rural and underserved in Sec.  1026.35(b)(2)(iv). It 
also clarifies that the definition of rural corresponds to UICs 4, 6, 
7, 8, 9, 10, 11, and 12, as determined by the Economic Research Service 
of the USDA. It further clarifies that the definition of underserved 
counties is based on HMDA data. Finally, the comment provides that the 
Bureau also publishes a list of only those counties that are rural but 
not also underserved, to facilitate compliance with Sec.  
1026.35(c).\37\ As this final rule takes effect on June 1, 2013, the 
Bureau expects to publish lists applicable for the current year within 
approximately four to six weeks after publication of this final rule, 
but in any event before this final rule takes effect.
---------------------------------------------------------------------------

    \37\ Section 1026.35(c) is being adopted separately by the 
Bureau jointly with other Federal agencies, to implement the new 
appraisal requirements in TILA section 129H, in the 2013 Interagency 
Appraisals Final Rule, as discussed in part III.C, above. That new 
section provides an exemption for creditors operating in rural, but 
not underserved, areas. Consequently, the single, combined list of 
all counties that are either rural or underserved that the Bureau 
will publish annually for purposes of the exemption from this final 
rule's escrow requirement is inadequate for the analogous purpose 
under the new appraisal requirements in Sec.  1026.35(c).
---------------------------------------------------------------------------

35(b)(2)(v)
    As established by the Dodd-Frank Act, TILA section 129D(c)(3) 
requires that the exemption from the escrow requirements apply only 
where a creditor ``retains its mortgage loan originations in 
portfolio'' and meets the other statutory requirements. Because the 
escrow requirements must be applied at the time that a transaction is 
consummated, while qualified mortgage status may continue for the life 
of the mortgage obligation, the Board did not propose to implement this 
requirement consistently with the 2011 ATR Proposal. The Board's 
proposed Sec.  226.45(b)(2)(v) would have provided that the escrow 
exemption is not available for certain transactions that, at 
consummation, are subject to ``forward commitments.'' Forward 
commitments are agreements entered into at or before consummation of a 
transaction under which a purchaser is committed to acquire the 
mortgage obligation from the creditor after consummation. In addition, 
the Board included a proposed comment to Sec.  226.45(b)(2)(v) which 
would have clarified that the forward commitment provision would have 
applied whether the forward commitment refers to the specific 
transaction or the higher-priced mortgage loan meets prescribed 
criteria of the forward commitment in order to address a potential 
method to avoid compliance. The Board's 2011 ATR Proposal, in contrast, 
proposed two alternatives for comment, either prohibiting a creditor to 
qualify if it has sold any balloon-payment qualified mortgages at any 
time or prohibiting a creditor to qualify if it has sold any balloon-
payment qualified mortgages in the current or prior calendar year.
    The Board considered requiring that a transaction be held in 
portfolio after consummation as a condition of the escrows exemption, 
but concluded that this approach would have raised operational 
problems. Whether a mortgage obligation is held in portfolio can be 
determined only after consummation, but a creditor making a higher-
priced mortgage loan must know by consummation whether it is subject to 
the escrow requirement. The Board expressed concern that requiring an 
escrow account to be established sometime after consummation if the 
creditor in fact sells the mortgage obligation could put a significant 
burden on consumers, who may not have the money available to make a 
significant advance payment. In contrast, the Board reasoned that the 
forward commitment test would be easy to apply at consummation, and 
would be unlikely to be circumvented by small creditors because they 
would be reluctant to extend credit for transactions they do not intend 
to keep in portfolio unless they have the assurance of a committed 
buyer before extending the credit. Thus, proposed Sec.  226.45(b)(2)(v) 
would have served as a means of indirectly limiting the exemption to 
mortgage obligations that are to be held in portfolio. The Board sought 
comment, however, on whether institutions could easily evade the escrow 
requirement by making higher-priced mortgage loans without a forward 
commitment in place and thereafter selling them to non-exempt 
purchasers and how to address this possibility without relying on post-
consummation events.
    Among the commenters, there was a divergence of opinion on how this 
provision would work in practice. One trade association commenter 
stated that the forward commitment requirement would prevent creditors 
from selling portfolio mortgage obligations in the future. This appears 
to be a misreading of the Board's proposal, as it would not have 
restricted the sale of higher-priced mortgage loans. The Board's 
proposed Sec.  226.45(b)(2)(v) instead merely provided that, so long as 
the higher-priced mortgage loan was not subject to a forward commitment 
at the time of consummation, the higher-priced mortgage loan could 
later be sold on the secondary market without requiring an escrow 
account to be established at that time. One consumer advocacy group, 
concerned about the possibility that creditors would use the provision 
to skirt the escrow requirements, suggested a blanket rule that higher-
priced mortgage loans that are exempt must be maintained in the 
portfolio of the creditor or, alternatively, that upon sale secondary 
market purchasers be required to establish escrow accounts for such 
mortgage obligations.
    After reviewing the comments received, the Bureau believes that the 
Board's proposal is an appropriate method to implement the requirements 
of TILA section 129D(c)(3), as both creditor and consumer benefit if an 
escrow account is established at consummation of the transaction, 
rather than months or years later. Indeed, allowing a consumer to avoid 
having to make a single large lump-sum payment after consummation is 
part of the basic purpose of establishing an escrow account. 
Accordingly, the Bureau is following the approach in the Board's 
proposal by adopting Sec.  1026.35(b)(2)(v) to require that for a 
higher-priced mortgage loan to be exempt from the requirements under 
Sec.  1026.35(b)(1), the higher-priced mortgage loan must not be 
subject to a forward commitment to be acquired by a creditor that does 
not satisfy the conditions of Sec.  1026.35(b)(2)(iii). Comment 
35(b)(2)(v)-1 clarifies that a higher-priced mortgage loan that is 
subject to a forward commitment is subject to the escrow requirement 
under Sec.  1026.35(b)(1), whether the forward commitment refers to the 
specific transaction or the higher-priced

[[Page 4742]]

mortgage loan meets prescribed criteria of the forward commitment, 
along with an example. As discussed separately in the Bureau's 2013 ATR 
Final Rule, the Bureau is also adopting language in Sec.  1026.43(f) to 
provide that qualified mortgage status is not available to balloon-
payment mortgages that would otherwise qualify for the exemption if the 
transactions are subject to a forward commitment at the time of 
consummation.
35(b)(3) Cancellation
    Under TILA section 129D(d), a creditor or servicer of a higher-
priced mortgage loan must maintain an escrow account for a minimum of 
five years following consummation, unless the underlying debt 
obligation is terminated earlier under certain prescribed 
circumstances. In addition, even after five years have elapsed, TILA 
section 129D(d) provides that an escrow account shall remain in 
existence unless and until the consumer is current on the obligation 
and has accrued sufficient equity in the dwelling securing the consumer 
credit transaction ``so as to no longer be required to maintain private 
mortgage insurance.''
    The Board's proposed Sec.  226.45(b)(3) would have implemented TILA 
section 129D(d) by permitting cancellation of the escrow account only 
upon the earlier of termination of the legal obligation or five years 
after consummation, provided that at least 20 percent of the original 
value of the property securing the underlying debt obligation is 
unencumbered and the consumer currently is not delinquent or in default 
on the underlying debt obligation. The Board modeled its proposal after 
the prerequisites for cancellation of private mortgage insurance 
coverage under the Homeowners Protection Act of 1998 (HPA), 12 U.S.C. 
4901-4910. Under the HPA, the consumer may initiate cancellation of 
private mortgage insurance (PMI) once the outstanding balance of the 
mortgage obligation is first scheduled to reach 80 percent of the 
original value of the property, regardless of the outstanding balance, 
based on the amortization schedule or actual payments. In addition, 
servicers must automatically terminate PMI for residential mortgage 
transactions on the earliest date that the principal balance of the 
mortgage is first scheduled to reach 78 percent of the original value 
of the secured property securing the mortgage obligation, where the 
consumer is current. The Board sought comment on this proposal, as well 
as whether TILA section 129D(d)(1) should be interpreted narrowly to 
mean that, among consumers with escrow accounts required pursuant to 
proposed Sec.  226.45(b)(1), only those that in fact have private 
mortgage insurance must meet the minimum equity requirement under the 
HPA as a prerequisite for cancelling their escrow accounts.
    Commenters generally agreed with the Board's approach of requiring 
the 80 percent loan-to-value (LTV) ratio for consumer-requested PMI 
termination, rather than the 78 percent LTV ratio for automatic PMI 
termination. Several commenters remarked, however, that the proposed 
language defining the equity cancellation requirement as ``at least 20% 
of the original value of the property securing the underlying debt 
obligation is unencumbered'' was confusing, if not misleading.
    The final rule follows the general approach in the Board's proposal 
by adopting Sec.  1026.35(b)(3) to establish the cancellation criteria 
for escrow accounts as provided by TILA section 129D(d). In response to 
comments, Sec.  1026.35(b)(3) contains revised language describing the 
equity necessary for cancellation as an unpaid principal balance that 
is less than 80 percent of the original value of the property securing 
the underlying debt obligation. Additionally, the Bureau is adopting 
the Board's proposed comment 45(b)(3)-1 as comment 35(b)(3)-1 to 
clarify that termination of the underlying credit obligation could 
include, among other things, repayment, refinancing, rescission, and 
foreclosure. Comment 35(b)(3)-2 clarifies that Sec.  1026.35(b)(3) does 
not affect the right or obligation of a creditor or servicer, pursuant 
to the terms of the legal obligation or applicable law, to offer or 
require an escrow account after the minimum period dictated by Sec.  
1026.35(b)(3). Finally, comment 35(b)(3)-3 notes that the term 
``original value'' in Sec.  1026.35(b)(3)(ii)(A), as adopted from 
section 2(12) of the HPA, 12 U.S.C. 4901(12), means the lesser of the 
sales price reflected in the sales contract for the property, if any, 
or the appraised value of the property at the time the transaction was 
consummated.
35(c)
    The Board proposed to reserve Sec.  226.45(c) for future use in 
implementing section 1471 of the Dodd- Frank Act, which creates new 
TILA section 129H to establish certain appraisal requirements 
applicable to ``higher-risk mortgages.'' Consistent with that proposal, 
the Bureau is reserving Sec.  1026.35(c) in this final rule, thus 
permitting that section to be finalized separately in the 2013 
Interagency Appraisals Final Rule, discussed above. As discussed in 
part III.C, the 2013 Interagency Appraisals Final Rule will take effect 
subsequent to this final rule.
35(d) Evasion; Open-End Credit
    The Board's proposed Sec.  226.45(d) would have paralleled existing 
Sec.  1026.35(b)(4) in prohibiting a creditor from structuring a home-
secured transaction as an open-end plan to evade the requirements of 
proposed Sec.  226.45 in connection with credit secured by a consumer's 
principal dwelling that does not meet the definition of open-end credit 
in Sec.  226.2(a)(20). No comments were received regarding the scope or 
substance of this proposal. The Bureau has adopted the Board's proposal 
in Sec.  1026.35(d), with certain technical edits.

VI. Effective Date

    As indicated above, this final rule is effective June 1, 2013. 
Thus, compliance with this final rule will be mandatory over eight 
months earlier than the January 21, 2014 baseline mandatory compliance 
date that the Bureau is adopting for most of the Title XIV Rulemakings, 
as discussed above in part III.C. As that discussion notes, the Bureau 
is carefully coordinating the implementation of the Title XIV 
Rulemakings, including their effective dates. The Bureau is including 
this final rule, however, among a subset of the new requirements of the 
Title XIV Rulemakings that will have earlier effective dates because 
they do not present significant implementation burdens for industry. 
For the following reasons, the Bureau believes that this final rule 
presents little or no compliance burden for creditors and therefore 
that an accelerated implementation period is appropriate.
    Although the Board's 2011 Escrows Proposal did not expressly 
solicit comment on an appropriate implementation period, four industry 
trade associations commented on this question. Of the four, one 
represents financial services companies, and three represent credit 
unions. All four expressed concern that sufficient time be afforded 
industry to implement the new requirements when finalized, either as a 
general matter or specifically because of system changes that would be 
required. The trade association representing financial services 
companies merely stated that sufficient time to implement the final 
rule would be necessary without stating any specific period. Of the 
other three trade associations, one recommended an implementation 
period of one year and two recommend 6 to 12 months. The

[[Page 4743]]

Bureau notes, however, that these commenters' concerns regarding the 
implementation period, particularly those relating to necessary system 
changes, were largely centered around two aspects of the Board's 
proposal: (1) The proposed new disclosures, and (2) the new 
``transaction coverage rate'' proposed to be used instead of the annual 
percentage rate for determining whether a transaction is a higher-
priced mortgage loan subject to the escrow requirements. As discussed 
above in the applicable section-by-section analyses, the Bureau is not 
adopting either of those aspects of the Board's proposal in this final 
rule.
    The final rule does not expand either the universe of transactions 
to which the escrow requirements apply or the universe of creditors 
subject to them. Indeed, the new exemption adopted by this final rule 
for higher-priced mortgage loans extended by small creditors that 
operate in rural or underserved areas represents a reduction in 
compliance burden for creditors that meet the exemption's 
prerequisites. Moreover, the expansion of the partial exemption for 
condominiums to other property types where the governing association 
has an obligation to maintain a master policy insuring all dwellings, 
such as planned unit developments, also represents additional 
compliance burden relief for creditors.
    The only expansion of substantive requirements under this final 
rule is the extension from one to five years of the minimum duration 
generally applicable to escrow accounts required by the rule. The 
Bureau believes that even this expansion of the protection afforded 
consumers by escrow accounts will impose at most a modest increase in 
compliance burden for creditors because it simply extends an otherwise 
already applicable requirement by four additional years. Even this 
minimal additional burden will not be encountered by any creditor until 
at least one year after the rule's effective date, when cancellation of 
mandatory escrow accounts otherwise first would have become permissible 
for the earliest higher-priced mortgage loans to be made after this 
final rule takes effect.
    The Bureau believes that both the burden relief for certain small 
creditors and the expanded protection for consumers of maintaining 
escrows for four additional years warrant expedited implementation to 
avoid any unnecessary delay of either. Such expedited implementation 
especially is warranted given that, in particular where the Bureau is 
not adopting the two aspects of the Board's proposal that commenters 
identified as requiring significant time to implement, little or no new 
compliance burden accompanies such implementation. For these reasons, 
the Bureau is limiting the implementation period for this final rule by 
making it effective on June 1, 2013.

VII. Dodd-Frank Act Section 1022(b)(2)

A. Overview

    In developing the final rule, the Bureau has considered potential 
benefits, costs, and impacts,\38\ and has consulted or offered to 
consult with the prudential regulators, the U.S. Department of Housing 
and Urban Development, and the Federal Trade Commission (FTC), 
including with respect to consistency with any prudential, market, or 
systemic objectives that may be administered by such agencies. The 
Bureau is issuing this final rule to finalize the Board's 2011 Escrows 
Proposal, which the Board issued prior to the transfer of rulemaking 
authority to the Bureau. As the Board was not subject to Dodd-Frank Act 
section 1022(b)(2)(B), the Board's 2011 Escrows Proposal did not 
contain a proposed Dodd-Frank Act section 1022 analysis. The Board did 
generally request comment on projected implementation and compliance 
costs, although commenters provided little information in response. As 
discussed above, the Bureau's final rule implements certain amendments 
to the Truth in Lending Act made by the Dodd-Frank Act. Specifically, 
the final rule lengthens the time for which a mandatory escrow account 
established for a higher-priced mortgage loan must be maintained from a 
minimum period of one year to five years. In addition, the final rule 
creates an exemption from the escrow requirement for certain 
transactions extended by a creditor that meets four conditions. Those 
conditions are that the creditor: (1) Makes most of its first-lien 
covered transactions in rural or underserved counties; (2) during the 
preceding calendar year, together with its affiliates, originated 500 
or fewer first-lien covered transactions; (3) has an asset size less 
than $2 billion; and (4) together with its affiliates, generally does 
not escrow for any mortgage obligation that it or its affiliates 
currently services, except in limited circumstances. For eligible 
creditors, the final rule provides the exemption from the escrow 
requirements for transactions held in portfolio, but not for 
transactions that, at consummation, are subject to a forward commitment 
to be purchased by an investor that does not itself qualify for the 
exemption.
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    \38\ Section 1022(b)(2) of the Dodd-Frank Act calls for the 
Bureau to consider the potential benefits and costs of a regulation 
to consumers and covered persons, including the potential reduction 
of access by consumers to consumer financial products and 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.
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    The analysis below considers the benefits, costs, and impacts of 
key provisions of the final rule. With respect to these provisions, the 
analysis considers costs and benefits to consumers and costs and 
benefits to covered persons. The analysis also considers certain 
alternative provisions that were considered by the Bureau in the 
development of the final rule.
    Because the Bureau's final rule implements certain self-
effectuating amendments to TILA, the costs and benefits of the final 
rule will arise largely from the statute and not from the final rule 
that implements them. The Bureau's final rule would provide benefits 
compared to allowing these TILA amendments to take effect alone, 
however, by clarifying parts of the statute that call for 
interpretation and using the Bureau's exemption authority to exempt 
certain creditors who would otherwise be required to implement the 
escrow provisions. Greater clarity on these amendments, as provided by 
the final rule, should reduce the compliance burdens on covered persons 
by, for example, reducing costs for attorneys and compliance officers 
as well as potential costs of over-compliance and unnecessary 
litigation.\39\ Exempting certain financial institutions from the 
escrow requirement should reduce compliance costs and regulatory 
burdens for such institutions as well as provide greater access to 
credit for consumers in rural and underserved areas. The Bureau notes 
that any costs that these provisions impose beyond the statute itself 
are likely to be minimal.
---------------------------------------------------------------------------

    \39\ The Bureau notes that it is focused here on the fact that 
regulatory provisions that clarify statutory provisions mitigate 
certain compliance costs associated with uncertainty over what the 
statutory provisions require. While it is possible that some 
clarifications would put greater burdens on creditors as compared to 
what the statute would ultimately be found to mandate, the Bureau 
believes that the rule's clarifying provisions generally mitigate 
burden.
---------------------------------------------------------------------------

    Section 1022 of the Dodd-Frank Act permits the Bureau to consider 
the benefits, costs and impacts of the final rule solely compared the 
effects of the statute taking effect without an implementing 
regulation. To provide the public better information about the benefits 
and costs of the statute, however, the Bureau has chosen to consider 
the benefits, costs, and impacts of these major provisions of the

[[Page 4744]]

proposed rule against a pre-statutory baseline (i.e., the benefits, 
costs, and impacts of the statute and the regulation combined). The 
Bureau notes at the outset that there are only limited data that are 
publicly available and representative of the full universe of mortgage 
credit, including in particular with respect to rural and underserved 
communities. Additionally, there are limited data regarding the use of 
escrow accounts subsequent to the Board's 2008 HOEPA Final Rule.

B. Potential Benefits and Costs to Consumers and Covered Persons

    Congress enacted sections 1461 and 1462 of the Dodd-Frank Act as 
amendments to TILA. As amended, TILA requires the establishment of 
escrow accounts for certain transactions, establishes minimum periods 
for which such required escrow accounts must be maintained, and 
requires certain disclosures relating to escrow accounts. The Bureau's 
final rule implements certain of these requirements. In addition, the 
amendments authorize the Board, and now the Bureau, to create certain 
exemptions from the escrow requirements for transactions originated by 
creditors meeting certain prescribed criteria. These amendments are 
being adopted in furtherance of the Bureau's charge to prescribe 
regulations to carry out the purposes of TILA, including promoting 
consumers' awareness of the cost of credit and their informed use 
thereof.
    The Bureau has relied on a variety of data sources to analyze the 
potential benefits, costs, and impacts of the final rule. However, in 
some instances, the requisite data are not available or are quite 
limited. Data with which to quantify the benefits of the final rule are 
particularly limited. As a result, portions of this analysis rely in 
part on general economic principles to provide a qualitative discussion 
of the benefits, costs, and impacts of the final rule. The primary 
source of data used in this analysis is HMDA.\40\ Because the latest 
data available are for originations made in calendar year 2011, the 
empirical analysis generally uses the 2011 market as the baseline. Data 
from the fourth quarter 2011 bank and thrift Call Reports,\41\ the 
fourth quarter 2011 credit union call reports from the National Credit 
Union Administration (NCUA), and de-identified data from the National 
Mortgage Licensing System (NMLS) Mortgage Call Reports (MCR) \42\ for 
the fourth quarter of 2011 were also used to identify financial 
institutions and their characteristics. The unit of observation in this 
analysis is the entity: If there are multiple subsidiaries of a parent 
company, then their originations are summed, and revenues are total 
revenues for all subsidiaries.
---------------------------------------------------------------------------

    \40\ The Home Mortgage Disclosure Act (HMDA), enacted by 
Congress in 1975, as implemented by the Bureau's Regulation C 
requires lending institutions annually to report public loan-level 
data regarding mortgage originations. For more information, see 
http://www.ffiec.gov/hmda. It should be noted that not all mortgage 
creditors report HMDA data. The HMDA data capture roughly 90-95 
percent of lending by the Federal Housing Administration and 75-85 
percent of other first-lien home loan originations, in both cases 
including first liens on manufactured homes (transactions which also 
are subject to the final rule). U.S. Department of Housing and Urban 
Development, Office of Policy Development and Research (2011), A 
Look at the FHA's Evolving Market Shares by Race and Ethnicity, U.S. 
Housing Market Conditions (May), pp. 6-12, Depository institutions 
(including credit unions) with assets less than $40 million (in 
2011), for example, and those with branches exclusively in non-
metropolitan areas and those that make no home purchase originations 
or originations refinancing a home purchase obligations secured by a 
first lien on a dwelling are not required to report under HMDA. 
Reporting requirements for non-depository institutions depend on 
several factors, including whether the company made fewer than 100 
home purchase loans or refinancings of home purchase loans, the 
dollar volume of mortgage lending as share of total lending, and 
whether the institution had at least five applications, 
originations, or purchased loans from metropolitan areas. Robert B. 
Avery, Neil Bhutta, Kenneth P. Brevoort & Glenn B. Canner, The 
Mortgage Market in 2011: Highlights from the Data Reported under the 
Home Mortgage Disclosure Act, 98 Fed. Res. Bull., December 2012, 
n.6.
    \41\ Every national bank, State member bank, and insured 
nonmember bank is required by its primary Federal regulator to file 
consolidated Reports of Condition and Income, also known as Call 
Reports, for each quarter as of the close of business on the last 
day of each calendar quarter (the report date). The specific 
reporting requirements depend upon the size of the bank and whether 
it has any foreign offices. For more information, see http://www2.fdic.gov/call_tfr_rpts/.
    \42\ The Nationwide Mortgage Licensing System is a national 
registry of non-depository financial institutions including mortgage 
loan originators. Portions of the registration information are 
public. The Mortgage Call Report data are reported at the 
institution level and include information on the number and dollar 
amount of loans originated, and the number and dollar amount of 
loans brokered.
---------------------------------------------------------------------------

    The estimates in this analysis are based upon data and statistical 
analyses performed by the Bureau. To estimate counts and properties of 
mortgages for entities that do not report under HMDA, the Bureau has 
matched HMDA data to Call Report data and MCR data and has 
statistically projected estimated transaction counts for those 
depository institutions that do not report these data either under HMDA 
or on the NCUA call report. The Bureau has projected originations of 
higher-priced mortgage loans for depositories that do not report HMDA 
in a similar fashion. These projections use Poisson regressions that 
estimate transaction volumes as a function of an institution's total 
assets, employment, mortgage holdings and geographic presence.
    The discussion below describes four categories of benefits and 
costs. First, the Bureau reviews the benefits and costs to consumers 
whose creditors are subject to the escrow requirement. Second, the 
Bureau reviews the potential benefits and costs to those consumers 
whose creditors are exempt from the escrow requirements. Third, the 
Bureau analyzes the benefits and costs to creditors subject to the 
Bureau's escrow requirements. Fourth, the Bureau outlines the benefits 
and costs to creditors exempt from the Bureau's escrow requirements.
1. Potential Costs and Benefits to Consumers of Non-Exempt Creditors
    For consumers whose mortgage transactions are originated by non-
exempt creditors, the main effect of this final rule is that the 
creditor generally must provide an escrow account for four additional 
years, i.e., for five years instead of for one year. The Bureau 
estimates that these creditors originated 217,260 first-lien higher-
priced mortgage loans in 2011. The Bureau believes that the benefits 
for consumers of having mandatory escrow accounts established include: 
(1) The convenience of paying one bill instead of several; (2) a 
budgeting device to enable consumers not to incur a major expense 
later; and (3) a lower probability of default and possible foreclosure. 
Mandatory escrow accounts already must be established for higher-priced 
mortgage loans pursuant to existing Regulation Z requirements adopted 
in the Board's 2008 HOEPA Final Rule, but to the extent such accounts 
are beneficial to consumers the extension of the accounts' minimum 
durations enhances and extends those benefits.
    Consumers may find it more convenient to pay one mortgage bill 
instead of paying a mortgage bill, an insurance bill, and potentially 
several tax bills. Consumers then can address any questions or concerns 
about payment to a single company, the mortgage servicer, thus reducing 
transaction costs, and having a single bill to pay reduces the 
likelihood that the consumer forget to pay either the insurance or the 
tax bill. The servicer effectively assumes the burden of tracking whom 
to pay, how much, and when, across multiple payees. These benefits, and 
all the benefits and costs listed below unless specified otherwise, 
last for as long as the escrow account exists. Thus, the final rule 
simply extends the duration of these benefits and costs from one year 
to five. The

[[Page 4745]]

value of this benefit will vary across consumers, and there is no 
current research to estimate it. An approximation may be found, 
however, in a recent estimate of around $20 per month per consumer, 
depending on the household's income, coming from the value of paying 
the same bill for phone, cable television, and Internet services (the 
``Bundle Study'').\43\
---------------------------------------------------------------------------

    \43\ H. Liu, P. Chintagunta, & T. Zhu, Complementarities and the 
Demand for Home Broadband Internet Services, Marketing Science, 
29(4), 701-720 (2010).
---------------------------------------------------------------------------

    Additionally, extending the duration of the mandatory escrow period 
ensures that the consumer does not face a sizable, unanticipated fee 
later, for the four additional years of escrow account provision. 
Recent research suggests that many consumers value the over-withholding 
of personal income taxes through periodic payroll deductions and 
receiving a check from the IRS in the spring despite foregoing the 
interest on the overpaid taxes throughout the previous year.\44\ A 
mortgage escrow account works in a similar fashion; consumers pay the 
same fixed amount, sometimes interest-free, throughout the year in 
return for not having to pay a large lump-sum payment in the end. 
Consequently, consumers with an escrow account are much less likely to 
experience potentially unexpected cost shocks associated with paying a 
large property tax and/or home insurance bills, that could lead other 
consumers to default on their mortgage. Based on recent research on the 
value of receiving a refund check from the IRS in the spring,\45\ the 
Bureau estimates that the average value of the benefit of over-
withholding resulting from the extension of the escrow period for low- 
to moderate-income households is 2.65 percent of the yearly amount paid 
for property taxes and insurance. The analogy is not exact because a 
tax refund can be used for other purposes whereas an escrow account is 
calibrated to meet only the consumer's insurance and property tax 
obligations. However, the Bureau believes consumers may experience 
similar benefit from this forced-savings method because they are likely 
to use any forced savings from the tax refund for the most pressing 
needs first, and not paying property taxes on one's dwelling can result 
in foreclosure. The Bureau recognizes that any benefit may not be the 
same for all consumers and that some consumers may prefer to manage 
their own payments.
---------------------------------------------------------------------------

    \44\ Michael A. Barr & Jane B. Dokko, Paying to Save: Tax 
Withholding and Asset Allocation Among Low- and Moderate-Income 
Taxpayers, Finance and Economics Discussion Series, Federal Reserve 
Board (2008), available at: http://www.federalreserve.gov/pubs/feds/2008/200811/200811pap.pdf.
    \45\ Id.
---------------------------------------------------------------------------

    Finally, the final rule may lead to a lower probability of default 
(on average) resulting from the budgeting benefits of escrow accounts. 
However, based on recent research,\46\ this benefit may be most 
valuable in the first year after originating the mortgage and thus is 
already provided by the existing escrow requirement. The Bureau 
nevertheless believes that, although difficult to quantify, some 
further benefit of default and foreclosure avoidance extending into the 
second through fifth years exists for at least some consumers.
---------------------------------------------------------------------------

    \46\ Nathan B. Anderson and Jane B. Dokko, Liquidity Problems 
and Early Payment Default Among Subprime Mortgages, Finance and 
Economics Discussion Series, Federal Reserve Board (2011), available 
at: http://www.federalreserve.gov/pubs/feds/2011/201109/201109pap.pdf.
---------------------------------------------------------------------------

    At least for some consumers, the lengthening of the minimum period 
under which an escrow must be maintained may have certain costs. The 
Bureau believes these costs may include (1) foregone interest; (2) 
increased prices resulting from creditors passing-through their costs; 
and (3) potentially less access to credit.
    Under some State regulations, creditors are not required to pay 
interest on consumers' funds held in escrow accounts. Therefore, 
consumers may be foregoing interest on such amounts. While, on average, 
consumers value the budgeting device described above, it is likely that 
at least some consumers would rather invest their funds and make their 
tax and insurance payments on their own. The Bureau, however, believes 
that any returns on amounts that would have been foregone under the 
escrow requirements are likely to be modest.
    The Bureau additionally notes that the servicing costs of 
maintaining an escrow account may be passed on to consumers, resulting 
in a greater overall cost to consumers of effecting the proper and 
timely payment of their tax and insurance obligations. The magnitude of 
this pass-through should be small, however, because the marginal 
increase in overall servicing costs resulting specifically from the 
escrow requirement is likely to be minor compared to those overall 
servicing costs. Some creditors might mistakenly allocate the fixed 
costs of escrow provisions (software changes, personnel training, and 
so on), to each consumer getting an escrow account, even though these 
costs should not affect the creditor's profit-maximizing price. This 
results in a less-profitable pricing scheme, hurting both the creditor 
and the consumers.\47\
---------------------------------------------------------------------------

    \47\ Nabil Al-Najjar, Sandeep Baliga, & David Besanko. Market 
forces meet behavioral biases: cost misallocation and irrational 
pricing, RAND Journal of Economics, 39(1), 214-237 (2008), available 
at: http://www.kellogg.northwestern.edu/faculty/baliga/htm/sunkcost.pdf.
---------------------------------------------------------------------------

    Finally, it is possible that some creditors might consider the 
additional four years for which escrow accounts must be maintained a 
sufficiently high burden to exit the market for higher-priced mortgage 
loans altogether. However, given that these creditors already provide 
escrows for the first year of a higher-priced mortgage loan, the Bureau 
believes it is unlikely that a significant number of creditors will 
exit the market for this reason and that, even if a creditor exits the 
market, consumers generally should be able to find other creditors. The 
Bureau believes that, overall, the final rule will not materially 
reduce consumers' access to consumer financial products or services.
2. Potential Costs and Benefits to Consumers of Exempt Creditors
    For consumers who get a higher-priced mortgage loan from an exempt 
creditor, the final rule will result in no escrow account being 
required, as opposed to the creditor being required to escrow for a 
year. The Bureau estimates that these creditors originated 50,468 
first-lien higher-priced mortgage loans in 2011. The Bureau 
acknowledges that it is likely some of these transactions were not 
eligible for the exemption, because they were subject to a forward 
commitment to be sold. To further its analysis, however, the Bureau 
conservatively assumes that none of the transactions were subject to a 
forward commitment.\48\
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    \48\ While small creditors operating predominantly in rural or 
underserved areas originate some higher-priced mortgage loans 
subject to a forward commitment, based on HMDA 2011 the Bureau 
believes that the magnitude of these transactions is small, relative 
to the overall higher-priced mortgage loan market. Moreover, if the 
transaction is subject to a forward commitment, then the creditor is 
likely to pass-through the escrow cost to the (eventual) buyer, and 
thus the creditor's cost is not going to be affected significantly. 
On the other hand, for consumer benefits this is an unambiguously 
conservative assumption, see below.
---------------------------------------------------------------------------

    The Bureau believes these consumers may benefit from less 
restricted access to credit; lower prices resulting from creditors not 
passing through the cost of escrowing to the consumers; and the ability 
to invest their money and earn a return. As noted earlier, a small 
mortgage originator operating predominantly in rural or underserved 
areas may be better able to compete with incumbent originators who 
escrow because it will not have to incur the

[[Page 4746]]

costs of establishing and maintaining an escrow account. This may 
provide an extra incentive for small originators to enter the market, 
creating greater access to credit for consumers living in rural and 
underserved areas. The Bureau does not have the data to be able to 
estimate the magnitude of this effect.
    Additionally, the price for such consumers may be reduced as 
mortgage providers would not pass the costs of providing escrows to 
consumers. The magnitude of this pass-through should be small, because 
firms should optimally pass through only the increase in marginal costs 
that tend to be small for escrow provision, as opposed to the fixed 
(overhead) costs. However, some creditors might mistakenly spread the 
overhead costs of escrow provision over all consumers, resulting in 
higher prices to such consumers, lower mortgage transaction volume for 
the creditor, and lower creditor profit overall.
    Another benefit for consumers may be the ability to invest their 
money and earn a return on amounts that might, depending on State 
regulations, be forgone under an escrow. While, as discussed above, on 
average, consumers value the budgeting device that the escrow provides, 
it is likely that at least some consumers would rather have flexibility 
with regard to payment terms. The Bureau believes that any returns on 
amounts that would have been foregone under the escrow requirements are 
likely to be modest. The exemption allows certain creditors not to 
escrow for the first year after mortgage origination, thus the 
magnitude of this benefit is even smaller because the creditors would 
have cancelled the escrow right after one year otherwise.
    For some consumers, providing an exemption for creditors operating 
in rural or underserved communities would create certain costs. These 
costs include: The inconvenience of paying several bills instead of 
one; the lack of a budgeting device to enable consumers not to incur a 
major expense later; a higher probability of foreclosure; and the 
possibility of underestimating the overall cost of maintaining their 
residence.
    Because the consumer must pay not only a mortgage bill, but also an 
insurance bill and, potentially, several tax bills, there is a higher 
probability that the consumer may forget or neglect to pay one or more 
of the bills. Moreover, there may be higher transaction costs for the 
consumer who no longer has a single organization to consult regarding 
payments, but rather must deal with several organizations as payment 
questions arise. The value of this cost will vary across consumers, and 
there is no current research to estimate it. An approximation is a 
recent estimate of around $20 per month per consumer, depending on the 
household's income, coming from the value of paying the same bill for 
phone, cable television, and Internet services as described in the 
Bundle Study, noted above.
    Additionally, without a budgeting device, consumers will need to 
self-manage the payment of intermittent large bills. As described 
above, recent research suggests that many consumers value the over-
withholding of personal income taxes through periodic payroll 
deductions and receiving a check from the IRS in the spring despite 
foregoing the interest on the overpaid taxes throughout the previous 
year. A mortgage escrow works in a similar fashion; consumers pay the 
same fixed amount, sometimes interest-free, throughout the year, 
without having to pay a large lump-sum payment in the end. Based on the 
recent research of the value of receiving a refund check from the IRS 
in the spring, the Bureau estimates the average value of having an 
escrow for low to moderate income households to be 2.65 percent of the 
yearly amount paid for property taxes and insurance. The cost will not 
be the same for all consumers as some consumers could find cost savings 
in managing payments on their own.
    However, for those consumers who do struggle with payments, there 
is a higher probability of foreclosure (on average) resulting from the 
lack of a budgeting device. Based on the recent research,\49\ consumers 
not having an escrow account in the first year after mortgage 
originations will result in 0.35 percent more foreclosures per year for 
the first-lien higher-priced mortgage loans. Having an escrow account 
for the first year of the mortgage obligation's term appears to be 
particularly important for consumer protection considerations because 
often the consumer has depleted savings as a part of the mortgage 
origination process and may not have prepared adequately for the 
upcoming semi-annual or annual property tax and home insurance bills. 
Both of these effects, and thus the benefits of having (or the costs of 
not having) an escrow account, appear to diminish after the first year. 
As noted above, some consumers might be unaware of the amount of the 
property tax and home insurance that they will have to pay every year. 
Having an escrow illustrates to consumers exactly how much they have to 
pay per month for the mortgage, property tax, and home insurance. If 
consumers underestimate the cost of the property tax and the home 
insurance, then some consumers will buy a house that they cannot 
afford, or buy a more expensive house than they would ideally want. The 
Bureau does not have the data to estimate the magnitude of this cost.
---------------------------------------------------------------------------

    \49\ Nathan B. Anderson and Jane B. Dokko, Liquidity Problems 
and Early Payment Default Among Subprime Mortgages, Finance and 
Economics Discussion Series, Federal Reserve Board (2011), available 
at: http://www.federalreserve.gov/pubs/feds/2011/201109/201109pap.pdf.
---------------------------------------------------------------------------

3. Potential Costs and Benefits for Non-Exempt Creditors
    For the non-exempt creditors, the main effect of the final rule is 
that creditors need to provide an escrow account for four additional 
years: for five years instead of for one year. The Bureau does not have 
the data on how many creditors do not already provide escrow accounts 
up to the fifth year after a mortgage origination. The Bureau estimates 
that there are 7,434 non-exempt creditors who originated any first-lien 
higher-priced mortgage loans in 2011.\50\ A median creditor in this 
group originated six first-lien higher-priced mortgage loans in 
2011.\51\ The Bureau notes that some creditors who might otherwise 
qualify for the Bureau's exemption may decide to continue to provide 
escrows for first-lien higher-priced mortgage loans. The Bureau cannot 
estimate the number of these creditors, and conservatively estimates 
this number to be insignificant. The benefits and costs described in 
this part of the analysis would also apply to these creditors.
---------------------------------------------------------------------------

    \50\ Out of those, there are 3,235banks, 562 thrifts, 1,372 
credit unions, and 2,265 non-depository institutions.
    \51\ A median bank or thrift originated 7 first lien higher-
priced mortgage loans, a median credit union originated 3 first lien 
higher-priced mortgage loans, and a median non-depository 
institution originated 13 first lien higher-priced mortgage loans.
---------------------------------------------------------------------------

    The two main benefits for this group of creditors are: Assurance 
that consumers have met their obligations; and the potential for 
interest earnings in the escrow account subject to State regulations. 
If consumers are late on their property taxes, the government often has 
the first claim on the dwelling that secures the transaction in case of 
consumer default. If consumers do not pay their home insurance 
premiums, then the creditor might end up with nothing if something 
happens to the dwelling that secures the transaction. Because of this 
potential, many creditors currently verify whether or not the consumer 
made the requisite

[[Page 4747]]

insurance premiums and tax payments every year even where the consumer 
did not set up an escrow account. The final rule will allow creditors 
to forego this verification process as the funds would be escrowed.
    Moreover, the creditor may be able to gain returns on the money 
that the consumers keep in their escrow account. Depending on the 
State, the creditor might not be required to pay interest on the money 
in the escrow account. The amount that the consumer is required to have 
in the consumer's escrow account is generally limited to two months' 
worth of property taxes and home insurance. However, some States 
require a fixed interest rate to be paid on escrow accounts, resulting 
in an additional cost to the creditors. This cost is higher if the 
required interest rate is not updated frequently and current interest 
rates are low compared to the rate set by the State.
    There are startup and operational costs of providing escrow 
accounts. Creditors are already required to provide the escrow account 
for a year, and thus the Bureau believes that there are few startup 
costs implicated by the final rule or that any startup costs are 
relatively minor given that these creditors probably have already set 
up a system capable of escrowing in response to the current regulation. 
There are, however, operating costs implicated in maintaining an escrow 
account for an additional four years. These costs vary widely with the 
size of the institution and the local jurisdictions served. For the 
bigger creditors, with up-to-date information technology systems, the 
Bureau believes the cost of maintaining escrows for four additional 
years is negligible, and that many of these creditors may already do 
so. For a small creditor, that does not invest as much in technology, 
and serves a jurisdiction that does not process taxes automatically, 
the cost of providing the escrow account could be larger.\52\ However, 
the Bureau believes that escrow accounts become cost-effective once 
operations reach a certain scale, and thus even this operating cost is 
relatively minor. The Board's calculation and the Bureau's subsequent 
adjustments to the minimal portfolio size necessary to escrow ensure 
that the non-exempt creditors with over 500 originations per year can 
achieve the scale necessary for cost-efficient escrow provision. 
Additionally, the creditors can outsource escrowing to servicing firms 
and pass through at least some of these costs to the consumer.
---------------------------------------------------------------------------

    \52\ The Bureau is aware that some jurisdictions still process 
taxes by hand and/or impose fees on the creditors seeking access to 
the tax information, significantly adding to the burden of 
establishing escrow accounts in these jurisdictions.
---------------------------------------------------------------------------

4. Potential Costs and Benefits for Exempt Creditors
    For the exempt creditors, the main effect of the final rule is that 
the creditor does not need to provide an escrow account at all for the 
first year after mortgage origination. The Bureau estimates that there 
are 2,612 exempt creditors who originated any first-lien higher-priced 
mortgage loans in 2011.\53\ A median creditor in this group originated 
13 first-lien higher-priced mortgage loans in 2011. A median bank or 
thrift originated 13, a median credit union originated 10, and a median 
non-depository institution originated 6 mortgage obligations.\54\
---------------------------------------------------------------------------

    \53\ Out of those, there are 2,112 banks, 141 thrifts, 355 
credit unions, and 4 non-depository institutions. The Bureau does 
not possess the information on whether HMDA non-reporting non-
depository institutions are rural, and conservatively assumes that 
they are not.
    \54\ A median bank or thrift originated 13, a median credit 
union originated 10, and a median non-depository institution 
originated 6 mortgage obligations.
---------------------------------------------------------------------------

    The main benefit for this group of creditors is in eliminating or 
greatly reducing the accounting and compliance costs of providing the 
escrow accounts. It is not clear whether this saving is significant, 
resulting from the fact that these creditors already provide escrows 
for the first year, and thus have already undertaken the effort to set 
up a system capable of escrowing. The exemption from the final rule is 
likely to lead to less employee time being devoted to complying with 
the regulation; however, the Bureau believes that benefit is likely to 
be negligible resulting from the number of first-lien higher-priced 
mortgage loans originated at a median institution.
    Because the creditors in this group who currently extend higher-
priced mortgage loans have already expended the start-up costs of 
providing escrows, many of these creditors might be willing to continue 
providing escrows to their consumers if the ongoing costs of providing 
escrows are low. For these creditors the costs and benefits are akin to 
those described above for the non-exempt creditors, with the 
stipulation that the benefits of providing escrows for five years 
clearly outweigh the costs.
    However, there are several costs associated with this group of 
creditors, including: The uncertainty over whether a consumer has met 
his obligations, a higher probability of foreclosure, and foregoing the 
additional funds that escrows may provide. Because creditors that do 
not provide escrow accounts are not certain whether consumers have paid 
their property taxes and home insurance, they carry a considerable 
amount of risk. As noted previously, if consumers are late on their 
property taxes, the government often has the first claim on the 
dwelling that secures the transaction in case of consumer default. If 
consumers do not pay their home insurance premiums, then the creditor 
might end up with nothing if something happens to the dwelling that 
secures the transaction.
    Moreover, all else being equal, these consumers have a higher 
probability of defaulting. Consumers, on average, value a budgeting 
device to enable consumers not to incur a major expense later. As noted 
above, recent research suggests that many consumers value the over-
withholding of personal income taxes through periodic payroll 
deductions and receiving a check from the IRS in the spring despite 
foregoing the interest on the overpaid taxes throughout the previous 
year. A mortgage escrow works in a similar fashion; consumers pay the 
same fixed amount, sometimes interest-free, throughout the year, 
without having to pay a large lump-sum payment in the end. As 
previously noted, research suggests that consumers not having an escrow 
in the first year after mortgage originations will result in 0.35 
percent more foreclosures per year for first-lien higher-priced 
mortgage loans.
    Finally, creditors who do not escrow forego the opportunity to 
invest the money in the consumers' escrow accounts. Depending on the 
State, the creditor might not have to pay interest on the money in the 
escrow account. The excess amount that the consumer is required to have 
in the consumer's escrow account is generally limited to two months' 
worth of property taxes and home insurance. However, some States 
require a fixed interest rate to be paid on escrow accounts. Laws 
setting rates may not be updated frequently enough, resulting in an 
additional cost to creditors, especially when the interest rates are 
exceptionally low.\55\
---------------------------------------------------------------------------

    \55\ The Bureau acknowledges that this creditor cost is also a 
consumer benefit. However, as described above, the Bureau believes 
the benefit per consumer is fairly modest.
---------------------------------------------------------------------------

C. Impact of the Final Rule on Depository Institutions and Credit 
Unions With $10 Billion or Less in Total Assets, as Described in 
Section 1026

    The discussion below describes certain consequences of the final 
rule based on the particular characteristics of the creditor. First, 
the Bureau analyzes the impact of the final rule on creditors with $10 
billion or less in total assets,

[[Page 4748]]

which are subject to the Bureau's escrow requirements. Then, the Bureau 
outlines the impact of the final rule on creditors with $10 billion or 
less in total assets, which are exempt from the Bureau's escrow 
requirements. For both of these groups the benefits, the costs, and the 
median origination counts are identical to the discussion above.
    For the non-exempt creditors, the main effect of the final rule is 
that the creditor needs to provide an escrow account for four 
additional years: For five years instead of for one year. The Bureau 
estimates that there are 5,087 non-exempt creditors with $10 billion or 
less in total assets, who originated any first-lien higher-priced 
mortgage loans in 2011.\56\ These creditors originated 91,142 first-
lien higher-price mortgage loans in 2011. The Bureau additionally notes 
that some creditors who might otherwise qualify for the Bureau's 
exemption may decide to continue to provide escrows for first-lien 
higher-priced mortgage loans. The Bureau cannot estimate the number of 
these creditors, and conservatively estimates this number to be 
insignificant. The benefits and costs described in this part of the 
analysis would also apply to these creditors. The impact described 
below would also apply to these creditors.
---------------------------------------------------------------------------

    \56\ These include 3,170 banks, 548 thrifts, and 1,369 credit 
unions.
---------------------------------------------------------------------------

    For creditors that qualify for the new exemption for creditors that 
operate predominantly in rural or underserved areas, the regulation 
will allow them, post-effective date, to avoid having to comply with 
both the existing requirement to establish escrow accounts for covered 
higher-priced mortgage loans for at least one year and the new general 
requirement to establish accounts for at least five years for new 
consumer transactions if the creditors determine that it is in their 
best interest to do so. A creditor in this group could voluntarily 
require an escrow account for five years if they choose to, and thus 
this rule does not impose any significant costs on this group of 
creditors. These creditors originated 50,468 first-lien higher-priced 
mortgage loans in 2011.

D. Impact of the Final Rule on Consumers in Rural Areas

    The Bureau expects that for the consumers in rural areas, the costs 
and benefits are largely the same as for the consumers in the not 
necessarily rural areas described above. The single biggest difference 
is the availability of credit; rural consumers have significantly fewer 
options for getting a higher-priced mortgage loan. Even for the densest 
counties included in the rural definition (UIC code 8 counties with 
micropolitans), the median county has only 10 creditors making higher-
priced mortgage loans, as opposed to 16 for the least dense UIC code 
not included in the rural definition (UIC 5). Given the scope of the 
rural and underserved exemption, the Bureau believes that any rural 
consumer can, but need not, get a mortgage transaction from an exempt 
creditor as opposed to getting a mortgage transaction from a non-exempt 
creditor, and that there will be sufficiently many creditors left in 
any given market to ensure a proper competitive process. As a result of 
the final rule, the Bureau believes that consumers in rural areas may 
benefit from greater access to credit, because there may be more 
competition between incumbent originators who escrow and smaller 
mortgage originators who may benefit from the Bureau's exemption 
requirement. Some consumers might prefer to get a mortgage with an 
escrow, for all the benefits described above. However, the Bureau 
conservatively estimates that all rural consumers will choose to get 
their mortgages from an exempt creditor and that none of these 
consumers' transactions will be subject to forward commitment.
    For these consumers, the final rule will result in no escrow 
account being required, as opposed to the creditor being required to 
escrow for a year. The Bureau estimates that there were 50,468 first-
lien higher-priced mortgage loans originated in rural areas in 2011.
    The Bureau believes these consumers may benefit from less 
restricted access to credit; lower prices resulting from creditors not 
passing through the cost of escrowing to the consumers; and the ability 
to invest their money and earn a return. Because a small mortgage 
originator operating predominantly in rural or underserved areas will 
not have to incur the costs of establishing and maintaining escrow 
accounts for higher-priced mortgage loans, it may be willing to keep 
making such transactions where it is not willing to do so under the 
current regulation. This may provide stronger incentives for small 
originators to continue making higher-priced mortgage loans (or to 
resume doing so where they have previously decided to stop), creating 
greater access to credit for consumers living in rural and underserved 
areas. The Bureau does not have the data to be able to estimate the 
magnitude of this effect.

E. Consideration of Alternatives

    To implement the statutory changes the Bureau considered different 
definitions of rural and the size exemption, both for the asset size 
and for the number of originations. As described above, the definition 
of rural proposed in the Board's 2011 Escrows Proposal included 
counties with USDA's urban influence codes of 7, 10, 11, and 12. Taking 
into account the comments received on the proposal, the Bureau believed 
this definition was too narrow to capture fully Congress's apparent 
concern regarding access to credit.
    In finalizing the rule the Bureau considered using an alternative 
definition of rural that would have used the same definition as 
provided under USDA's section 502 Rural Housing program. Under the USDA 
section 502 Rural Housing definition of ``rural'', approximately 37 
percent of the U.S. population lives in an area considered to be rural, 
compared to approximately 10 percent according to the definition used 
in the final rule, which defines rural as counties with UICs 4, 6, 7, 
8, 9, 10, 11, and 12. The Bureau considered the trade-off of exempting 
more creditors and thus potentially mitigating consumer access to 
credit issues versus exempting fewer creditors and providing more 
consumers with the consumer protections represented by escrow accounts. 
The Bureau's analysis of the 2011 HMDA data showed that, even with the 
definition of rural in the final rule that includes counties with codes 
of 4, 6, 7, 8, 9, 10, 11, and 12, a median county in the least dense 
county code that is not exempt (code 5) had 16 creditors that extended 
any higher-priced mortgage loans in 2011. In light of these data, the 
Bureau believes that, even if some of these creditors exit the higher-
priced mortgage loan market for lack of an exemption, there will still 
be enough competition in those counties, and therefore the risk of 
potential access to credit issues for consumers in these areas is 
mitigated. Consequently, the Bureau believes that expanding the 
definition of rural in the final rule to the USDA section 502 Rural 
Housing definition would have allowed creditors to originate mortgage 
obligations without the escrow protections mandated by the Congress, 
while access to credit would not be significantly improved. In light of 
these considerations, the Bureau believes the final rule reflects the 
Bureau's judgment based upon all of the evidence it has obtained 
regarding the areas included, such as the urban influence, density of 
the population, and the number of higher-priced mortgage loan creditors 
in the county, in how best to effectuate the purposes of the law 
Congress enacted.
    In addition, the Bureau considered alternative origination 
thresholds. The

[[Page 4749]]

Board's proposal extended the exemption to creditors that, together 
with their affiliates, originate and retain servicing rights to 100 or 
fewer first-lien mortgage obligations in either of the preceding two 
years. As discussed more fully above, the Board noted its belief from 
the available information that the economies of scale necessary to 
escrow cost-effectively, or else to satisfy the escrow requirement by 
outsourcing to a sub-servicer, generally exist when a mortgage servicer 
has a portfolio of at least 500 mortgage obligations. Consequently, the 
Board proposed setting the cut-off at 100 or fewer first-lien mortgage 
obligations originated and for which servicing rights are retained, 
assuming an average of five years until an institution's mortgage 
obligations are paid off. After reviewing the comments submitted by 
many creditors in rural areas regarding the adverse conditions they 
face, such as idiosyncratic accounting systems (including calculations 
by hand) employed by some of the jurisdictions, the Bureau believes 
that many such creditors may need a larger number of mortgage 
obligations in portfolio to be able to provide escrow accounts cost-
effectively. The Bureau has expanded the exemption to include creditors 
that, together with their affiliates, originate 500 or fewer first-lien 
covered transactions. The Bureau believes that defining the limit in 
terms of originated transactions, as opposed to transactions originated 
and serviced, facilitates compliance by not requiring institutions to 
track multiple metrics for purposes of this final rule and the 2013 ATR 
Final Rule and to promote consistent application of the two exemptions. 
However, this change by itself would have severely restricted the scope 
of the exemption, as there are more creditors that originate and 
service 100 or fewer transactions than there are creditors that simply 
originate 100 or fewer.\57\ Based on 2011 HMDA data, setting the annual 
originations limit at 500 ensures that 89.5% of the creditors that 
originated and serviced 100 transactions are also under the 500 first-
lien origination limit.
---------------------------------------------------------------------------

    \57\ Consider, for example, a creditor that originates 300 
mortgage obligations, but services only 80 of them.
---------------------------------------------------------------------------

    Because of the changes in the originations limit, the Bureau 
considered whether an asset-size limit would be appropriate, to prevent 
larger creditors with sophisticated information technology systems and 
the capacity to escrow from taking unintended advantage of the 
exemption. As noted above, in the Board's 2011 Escrows Proposal, no 
asset-size limit was proposed, although the Board solicited comment on 
whether such a limit was appropriate. The Bureau initially considered a 
$1 billion asset-size limit, believing organizations of at least that 
size had the capacity to implement the escrow requirements. However, in 
accordance with its goal to harmonize the final rule as much as 
practicable with the 2013 ATR Final Rule, discussed above, the Bureau 
has adopted a $2 billion asset-size limit. Based on a review of HMDA 
data, the Bureau believes that there is an insignificant number of 
creditors that operate predominantly in rural or underserved areas, 
have fewer than 500 first-lien originations, and have between $1 and $2 
billion in assets. Consequently, the Bureau believes that harmonizing 
the approaches between the two final rules will simplify compliance and 
reduce associated compliance costs, while having a negligible impact on 
the scope of the exemptions.

VIII. Regulatory Flexibility Act

    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, unless the agency certifies 
that the rule will not have a significant economic impact on a 
substantial number of small entities.\58\ 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.\59\ An entity is 
considered ``small'' if it has $175 million or less in assets for the 
banks, and $7 million or less in revenue for non-bank mortgage 
creditors, mortgage brokers, and mortgage servicers.\60\ In the Board's 
2011 Escrows Proposal, the Board conducted an initial regulatory 
flexibility analysis (IRFA) and concluded that the proposed rule would 
have a significant economic impact on a substantial number of small 
entities. The Board solicited comments on the number of small entities 
likely to be affected by the proposal, as well as the costs, compliance 
requirements, and any changes in operating procedures arising from the 
application of the proposed rules to small businesses. The Board 
additionally solicited comments regarding a number of proposed 
provisions that could minimize compliance burdens on small entities by 
relying on other disclosure requirements with which they already must 
comply and/or exempting certain classes of small creditors from the 
proposed regulations. The Board also welcomed comment on any 
significant alternatives that would minimize the impact of the proposed 
rules on small entities.
---------------------------------------------------------------------------

    \58\ For purposes of assessing the impacts of the final rule on 
small entities, ``small entities'' is defined in the RFA to include 
small businesses, small not-for-profit organizations, and small 
government jurisdictions. 5 U.S.C. 601(6). A ``small business'' is 
determined by application of Small Business Administration 
regulations and reference to the North American Industry 
Classification System (NAICS) classifications and size standards. 5 
U.S.C. 601(3). A ``small organization'' is any ``not-for-profit 
enterprise which is independently owned and operated and is not 
dominant in its field.'' 5 U.S.C. 601(4). A ``small governmental 
jurisdiction'' is the government of a city, county, town, township, 
village, school district, or special district with a population of 
less than 50,000. 5 U.S.C. 601(5).
    \59\ 5 U.S.C. 609.
    \60\ The current SBA size standards are found on SBA's Web site 
at http://www.sba.gov/content/table-small-business-size-standards.
---------------------------------------------------------------------------

    The Bureau has reviewed the comments on the Board's IRFA and the 
broader Notice of Proposed Rulemaking addressing the burden imposed by 
the proposed rule and potential mitigation measures and alternatives. 
As described further below, the Bureau carefully considered the 
comments received and performed its own independent analysis of the 
potential impacts of the final rule on small entities and alternatives 
to the final rule. Based on the comments received, the Bureau's own 
analysis, and for the reasons stated in section 4 below, the 
undersigned certifies that this final rule will not have a significant 
economic impact on a substantial number of small entities. 
Nevertheless, to better inform the rulemaking, the Bureau has prepared 
the following final regulatory flexibility analysis.
1. Statement of the Need for, and Objectives of, the Final Rule
    The Bureau is publishing final rules to implement certain 
amendments to TILA made by the Dodd-Frank Act. Congress enacted TILA 
based on findings that economic stability would be enhanced and 
competition among consumer credit providers would be strengthened by 
the informed use of credit resulting from consumers' awareness of the 
cost of credit. The Bureau's final rule requires creditors to establish 
escrow accounts for taxes and insurance for at least five years after 
consummation. The final rule also creates an exemption from the escrow 
requirement for certain mortgage transactions extended by a creditor 
that meets four conditions. Those conditions are that the creditor: (1) 
Makes most of its first-lien covered transactions in rural or 
underserved counties; (2)

[[Page 4750]]

together with all affiliates, has annual originations of 500 or fewer 
first-lien covered transactions; (3) has an asset size less than $2 
billion; and (4) together with its affiliates, does not escrow for any 
mortgage that it or its affiliates currently services, except in 
limited instances.
    These amendments are intended to improve consumers' understanding 
of the overall costs of a given higher-priced mortgage loan and, in 
turn, facilitate their ability to shop for mortgages. Moreover, 
requiring escrow accounts for certain higher-priced mortgage loans may 
reduce the likelihood that a consumer faces a sizable, unanticipated 
fee or increase in payments.
2. Summary of Significant Issues Raised by Comments in Response to the 
Initial Regulatory Flexibility Analysis
    In accordance with section 3(a) of the RFA, 5 U.S.C. 603(a), the 
Board prepared an IRFA in connection with the proposed rule, and 
acknowledged that the projected reporting, recordkeeping, and other 
compliance requirements of the proposed rule on the whole would have a 
significant economic impact on a substantial number of small entities, 
including small mortgage creditors and servicers. In addition, the 
Board recognized that the precise compliance costs would be difficult 
to ascertain because they would depend on a number of unknown factors, 
including, among other things, the specifications of the current 
systems used by small entities to prepare and provide disclosures and/
or solicitations and to administer and maintain accounts. The Board 
sought information and comment on any costs, compliance requirements, 
or changes in operating procedures arising from the application of the 
proposed rule to small businesses.
    The Bureau reviewed comments submitted by various financial 
institutions and trade organizations in order to ascertain the economic 
impact of the proposed rule on small entities. Although only a few 
commenters focused on the Board's IRFA analysis, such commenters 
expressed concern that the Board had underestimated the costs of 
compliance. In one comment letter a trade organization noted that one 
large creditor implementing the Regulation Z amendments that became 
effective October 1, 2009, indicated that it required over 70,000 hours 
to change its systems. Smaller financial institutions also suggested 
that compliance costs would be significant given the need to change 
systems and train personnel. In addition, the Office of Advocacy of the 
U.S. Small Business Administration (Advocacy) submitted a comment on 
the Board's IRFA.
    Advocacy expressed concern about the level of information the Board 
provided in its IRFA regarding the impact of the proposed rule on small 
entities and it encouraged the Board to provide additional information. 
Advocacy also raised concerns concerning the scope of the exception and 
made suggestions to ease burdens in connection with the proposed 
disclosures. For the reasons stated below, the Bureau believes that the 
Board's IRFA complied with the requirements of the RFA and the Bureau 
has modified certain aspects of the proposal in order to mitigate some 
of the impact on small entities, including some identified by Advocacy.
    Section 3(a) of the RFA requires agencies to publish for comment an 
IRFA which shall describe the impact of the proposed rule on small 
entities. See 5 U.S.C. 603(a). In addition, section 3(b) requires the 
IRFA to contain certain information including a description of the 
projected reporting, recordkeeping and other compliance requirements of 
the proposed rule, including an estimate of the classes of small 
entities which will be subject to the requirement and the type of 
professional skills necessary for preparation of the report or record. 
See 5 U.S.C. 603(b). The Bureau believes that the Board's IRFA complied 
with the requirements of the RFA. The Board described the impact of the 
proposed rule on small entities by describing the rule's proposed 
requirements in detail throughout the supplementary information for the 
proposed rule. Additionally, the Board described the projected 
compliance requirements of the rule in its IRFA, noting the need for 
small entities to update systems, operating procedures, and disclosures 
under the proposed rule. In the proposal, the Board described the 
projected impact of the proposed rule and sought comments from small 
entities specifically regarding the effect the proposed rule would have 
on their activities. In their comments, small entities have described 
to varying degrees the increased costs associated with the Board's 
proposed rules particularly with respect to the proposed disclosure 
requirements concerning escrow accounts.
    As a result of the Bureau's review of Advocacy's and other comments 
regarding the potential compliance burdens of adopting the disclosure 
portions of the Board's 2011 Escrows Proposal before resolution of the 
Bureau's TILA-RESPA integration rulemaking, the final rule does not 
adopt the Board's proposed disclosures provisions. In addition, as 
discussed further below, the Bureau has also considered additional 
measures as suggested by Advocacy to broaden the proposed exemption so 
that more small entities can qualify.
3. Description and Estimate of Small Entities to Which the Final Rule 
Would Apply
    The final rule applies generally to institutions and entities that 
engage in originating or extending home-secured credit, as well as 
servicers of these mortgage obligations. The Board acknowledged in its 
IRFA the lack of a reliable source for the total number of small 
entities likely to be affected by the proposal, because the credit 
provisions of TILA and Regulation Z have broad applicability to 
individuals and businesses that originate, extend and service even 
small numbers of home-secured transactions. The Board identified 
through data from Reports of Condition and Income (Call Reports) 
approximate numbers of small entities that would be subject to the 
proposed rules. The summary of institutions considered small according 
to the criteria described above, regardless of whether they are exempt 
from the rule, is in the table below.

[[Page 4751]]

[GRAPHIC] [TIFF OMITTED] TR22JA13.000

    The Bureau estimates that there are 3,777 non-exempt creditors who 
originated any first-lien higher-priced mortgage loans in 2011.\61\ A 
median creditor in this group originated four first-lien higher-priced 
mortgage loans in 2011.\62\ The Bureau does not have data on how many 
creditors do not already provide escrow accounts up to the fifth year 
after a mortgage origination. Moreover, no commenters submitted 
nationally-representative data including this information. The Bureau 
additionally notes that some creditors who might otherwise qualify for 
the Bureau's exemption may decide voluntarily to continue to provide 
escrows for first-lien higher-priced mortgage loans. The Bureau cannot 
estimate the number of these creditors, and conservatively estimates 
this number to be insignificant, but notes that the impacts described 
in this part of the analysis would also apply to these creditors.
---------------------------------------------------------------------------

    \61\ This figure includes 1,432 banks, 203 thrifts, 817 credit 
unions, and 1,325 non-depository institutions.
    \62\ The median first-lien higher-priced mortgage loan by 
institution is as follows: 5 for banks and thrifts; 2 for credit 
unions; and 5 for non-depository institutions.
---------------------------------------------------------------------------

4. Reporting, Recordkeeping, and Other Compliance Requirements
    The costs to the non-exempt creditors are described in the section 
1022 analysis above, and mainly include the ongoing operating costs of 
extending the escrow account provision from one to four years. For the 
creditors who are processing escrows in-house, this cost is negligible, 
given that these creditors probably have already set up a system 
capable of escrowing in response to the current regulation. For the 
creditors that outsource escrowing, the fixed cost of contracting has 
already been incurred. The creditors that operate predominantly in 
rural or underserved areas are exempted, unless they have reached the 
scale at which the Bureau believes that it is cost-efficient to set up 
escrow accounts.
    The Bureau does not possess nationally representative information 
regarding this cost. However, the cost of escrowing is a part of the 
overall servicing cost of a mortgage obligation. The most recent 
estimate of the servicing cost of a mortgage obligation is $100 per 
transaction per year, if the servicing is outsourced.\63\ The Bureau 
does not possess reliable information on what fraction of the $100 is 
attributable to maintaining escrow accounts. However, none of the 
several examined industry, regulatory, and academic studies of 
servicing singled out escrowing as the first or the main component of 
the overall servicing costs.\64\ Thus, the Bureau conservatively 
assumes that the cost of this rule per transaction is at most $50, and 
over the four years is at most $200. According to the Bureau's 
projections, 85 percent of the affected non-exempt small institutions 
originate less than 14 higher-priced mortgage loans, resulting in an at 
most a $2800 cost per institution.\65\ Therefore, the Bureau believes 
that the rule will not have a significant impact on small entities. 
Examining the ratios of these costs to the revenues \66\ of the 
institutions, for 85% of small creditors these costs represent less 
than 0.3% of their revenues.\67\
---------------------------------------------------------------------------

    \63\ National Association of Federal Credit Unions, Top 10 
Questions about Mortgage Subservicing (Podcast), available at: 
http://www.nafcu.org/NSCTertiary.aspx?id=23703.
    \64\ Mortgage Bankers Association, Residential Mortgage 
Servicing for the 21st Century, May 2011. Amy Crews Cutts & Richard 
K. Green, Innovative Servicing Technology: Smart Enough to Keep 
People in Their Houses? Freddie Mac Working Paper 04-03 
(2004). Prime Alliance Loan Servicing, Re-Thinking Loan Servicing, 
(2010). Adam Levitin & Tara Twomey, Mortgage Servicing, 28 Yale J. 
on Reg. 1 (2011).
    \65\ Breaking this down by small creditor type, 85 percent of 
banks originate less than 14, and 85 percent of thrifts originate 
less than 9 higher-priced mortgage loans, 85 percent of credit 
unions originate less than 10 higher-priced mortgage loans, and 85 
percent of non-depository institutions originate less than 16 
higher-priced mortgage loans.
    \66\ Revenue has been used in other analyses of economic impacts 
under the RFA. For purposes of this analysis, the Bureau uses 
revenue as a measure of economic impact. In the future, the Bureau 
will consider whether an alternative quantifiable or numerical 
measure may be available that would be more appropriate for 
financial firms.
    \67\ The ratio is below 0.5 percent for 85 percent of the 
creditors among any of the four small creditor types.
---------------------------------------------------------------------------

    If there are creditors who have not already implemented the Board's 
2008 HOEPA Final Rule and would not be

[[Page 4752]]

eligible for the exemption for creditors who operate predominantly in 
rural or underserved areas, there may be a need for the creditors' 
staff to develop new professional skills and new recordkeeping regimes 
to comply with the revised requirements. These costs will depend on a 
number of unknown factors, including, among other things, the 
specifications of the current systems used by such entities. The Bureau 
believes that the number of such institutions would be small and does 
not affect its judgment that the rule will not impose a significant 
impact on a substantial number of small entities. Finally, as discussed 
above, the rule allows exempted creditors to stop establishing escrow 
accounts even for the first year of the mortgage obligation, which will 
allow creditors to eliminate the compliance costs of their current 
programs for new loans going forward if they decide it makes sense to 
do so.
5. Steps Taken To Minimize the Economic Impact on Small Entities
    The steps the Bureau has taken to minimize the economic impact and 
compliance burden on small entities, including the factual, policy, and 
legal reasons for selecting the alternatives adopted and why each one 
of the other significant alternatives was not accepted, are described 
above in the section-by-section analysis, in part VII, and in the 
summary of issues raised by the public comments in response to the 
proposal's IRFA. The final rule's modifications from the proposed rule 
that minimize economic impact on small entities are discussed below. 
Additionally, the Bureau considered significant alternatives to most of 
the dimensions of the small creditor exemption: the definition of 
rural, the transaction origination limit, and the asset-size threshold.
    First, the Bureau has declined to implement at this time the 
amendments to TILA concerning certain new disclosure requirements 
concerning escrows accounts. The Bureau believes that this decision to 
coordinate these disclosures with the finalization of the TILA-RESPA 
integration rulemaking will decrease the economic impact of the final 
rule on small entities by limiting their compliance costs. Moreover, 
the Bureau believes that harmonizing certain title XIV required 
disclosures may provide greater clarity to the market and better 
fulfill TILA's stated purpose of enabling consumers to better 
understand the cost of credit.
    Second, upon reviewing public comment, the Bureau has expanded the 
exemption for creditors who operate predominantly in rural or 
underserved areas to include a broader range of areas than previously 
identified in the proposal. The Bureau believes that will decrease the 
number of small entities covered by the regulation. The Bureau 
considered different definitions of ``rural'' and the size exemption, 
both for the asset size and for the number of originations.
    In finalizing the rule the Bureau considered using an alternative 
definition of rural that would have used the same definition as 
provided under USDA's section 502 Rural Housing program. Under the USDA 
section 502 Rural Housing definition of ``rural'', approximately 37 
percent of the U.S. population lives in an area considered to be rural, 
compared to approximately 10 percent according to the definition used 
in the final rule, which defines rural as counties with UICs 4, 6, 7, 
8, 9, 10, 11, 12. The Bureau considered the trade-off of exempting more 
creditors and thus potentially mitigating consumer access to credit 
issues versus exempting fewer creditors and providing consumers with 
the consumer protections represented by escrow accounts. The Bureau's 
analysis of the 2011 HMDA data showed that, even with the definition of 
rural in the final rule that includes counties with codes of 4, 6, 7, 
8, 9, 10, 11, and 12, a median county in the least dense county code 
that is not exempt (code 5) had 16 creditors that extended any higher-
priced mortgage loans in 2011. In light of these data, the Bureau 
believes that, even if some of these creditors exit the higher-priced 
mortgage loan market for lack of an exemption, there will still be 
enough competition in those counties, and therefore the risk of 
potential access to credit issues for consumers in these areas is 
mitigated. The Bureau believes that the current definition better 
reflects the intention of the statute's authorization to create a rural 
exception, and facts about the areas included, such as the urban 
influence, density of the population, and the number of higher-priced 
mortgage loan creditors in the county.
    In addition, the Bureau considered alternative origination 
thresholds. The Board's 2011 Escrows Proposal would have extended the 
exemption to creditors that, together with their affiliates, originated 
and retained servicing rights to 100 or fewer mortgage obligations 
secured by a first-lien on real property or a dwelling. In the Board's 
2011 Escrows Proposal the Board noted its belief from the available 
information that the economies of scale necessary to escrow cost-
effectively, or else to satisfy the escrow requirement by outsourcing 
to a sub-servicer, generally exist when a mortgage servicer has a 
portfolio of at least 500 mortgage obligations. Consequently, the Board 
proposed setting the cut-off at 100 or fewer first-lien mortgage 
obligations originated annually and for which servicing rights are 
retained, assuming an average of five years until an institution's 
mortgage obligations are paid off. The Bureau has expanded the 
exemption to include creditors that, together with their affiliates, 
originate 500 or fewer first-lien covered transactions annually. The 
Bureau believes that defining the limit in terms of originated 
transactions, as opposed to transactions originated and serviced, 
facilitates compliance by not requiring institutions to track multiple 
metrics for the escrow and qualified mortgage rules and to promote 
consistent application of the two exemptions. However, this change by 
itself would have severely restricted the scope of the exemption, as 
there are more creditors that originate and service less than 100 
transactions than there are creditors that simply originate 100 
transactions.\68\ From the 2011 HMDA data, setting the new limit at 500 
transactions ensures that 89.5 percent of the creditors that originated 
and serviced 100 transactions are under the new 500 first-lien 
origination limit. However, as discussed more fully above, to prevent 
larger creditors with sophisticated information technology systems from 
taking unintended advantage of this exemption and to further the 
benefits from coordinated compliance across this final rule and the 
2013 ATR Final Rule, the Bureau decided to adopt the $2 billion asset-
size limit in both final rules.
---------------------------------------------------------------------------

    \68\ Consider, for example, a creditor who originates 300 
transactions, but services only 80 of them.
---------------------------------------------------------------------------

    The Bureau notes that by expanding the exemption for certain 
transactions and deferring implementation of the escrow disclosure 
requirements the Bureau has largely addressed the areas where small 
entity commenters expressed concern about the costs of compliance. The 
Bureau believes that these changes minimize the economic impact on 
small entities while still meeting the stated objectives of TILA and 
the Dodd-Frank Act.
    The small creditor exemption is partially designed to mitigate the 
rule's costs to small creditors. Providing escrows cost-effectively 
requires a scale that small creditors do not have, and the 500 first-
lien origination limit allows the creditors to reach that scale before 
they are required to provide escrows. This scale might be much lower in 
more urban areas, but the Bureau believes that

[[Page 4753]]

because many creditors in rural areas face adverse conditions, such as 
idiosyncratic accounting systems (including calculations by hand) 
employed by some of the jurisdictions, such institutions would 
especially need this number of originations, and consequently a large 
number of mortgage obligations to be able to provide escrow accounts 
cost-effectively.
6. Impact on Small Business Credit
    The Bureau does not believe that the final rule will result in an 
increase in the cost of business credit for small entities. Instead, 
the final rule will apply only to mortgage transactions obtained by 
consumers primarily for personal, family, or household purposes and the 
final rule will not apply to transactions obtained primarily for 
business purposes. Given that the final rule does not increase the cost 
of credit for small entities, the Bureau has not taken additional steps 
to minimize the cost of credit for small entities.

IX. Paperwork Reduction Act

    The Bureau may not conduct or sponsor, and a respondent is not 
required to respond to, an information collection unless it displays a 
currently valid OMB control number. The Board's 2011 Escrows Proposal 
contained information collection requirements under the Paperwork 
Reduction Act (PRA), which have been previously approved by OMB under 
the following OMB control number issued to the Board: 7100-0199. There 
are no new information collection requirements in the Bureau's final 
rule.
    On March 2, 2011, a notice of the proposed rulemaking was published 
in the Federal Register. As discussed above, the Board proposed certain 
new disclosures for escrow accounts including format, timing, and 
content requirements as well as proposed certain model forms regarding 
escrow accounts for closed-end mortgages secured by a first lien on 
real property or a dwelling. The Board invited comment on: (1) Whether 
the proposed collection of information is necessary for the proper 
performance of agency functions, including whether the information has 
practical utility; (2) the accuracy of the estimate of the burden of 
the proposed information collection, including the cost of compliance; 
(3) ways to enhance the quality, utility, and clarity of the 
information to be collected; and (4) ways to minimize the burden of 
information collection on respondents, including through the use of 
automated collection techniques or other forms of information 
technology. The comment period for the proposed rule expired on May 2, 
2011.
    The Bureau reviewed the comments received regarding the merits of 
various aspects of the Board's 2011 Escrows Proposal, including the 
burden of compliance generally, and whether the proposed disclosure 
requirements should be finalized. Commenters in particular contended 
that the new disclosure requirements would be redundant of existing 
information collections and would likely be of limited utility given 
the Bureau's mandate to integrate the TILA-RESPA disclosures. Given the 
potential compliance burden of integrating new disclosures in piecemeal 
fashion, on November 23, 2012, the Bureau published in the Federal 
Register a rule that delays the implementation of certain disclosure 
requirements contained in title XIV of the Dodd-Frank Act, including 
those contained in sections 1461 and 1462. See 77 FR 70105 (Nov. 23, 
2012). Accordingly, because this final rule does not implement the 
disclosure amendments, the Bureau has determined that this final rule 
does not impose any new recordkeeping, reporting or disclosure 
requirements on covered entities or members of the public that would be 
collections of information requiring OMB approval under 44 U.S.C. 3501, 
et seq.

List of Subjects in 12 CFR Part 1026

    Advertising, Consumer protection, Mortgages, Recordkeeping 
requirements, Reporting, Truth in lending.

Authority and Issuance

    For the reasons set forth in the preamble, the Bureau amends 
Regulation Z, 12 CFR part 1026, as set forth below:

PART 1026--TRUTH IN LENDING (REGULATION Z)

0
1. The authority citation for part 1026 continues to read as follows:

    Authority: 12 U.S.C. 2601; 2603-2605, 2607, 2609, 2617, 5511, 
5512, 5581; 15 U.S.C. 1601 et seq.

Subpart E--Special Rules for Certain Home Mortgage Transactions

0
2. Section 1026.35 is revised to read as follows:

Sec.  1026.35  Requirements for higher-priced mortgage loans.

    (a) Definitions. For purposes of this section:
    (1) ``Higher-priced mortgage loan'' means a closed-end consumer 
credit transaction secured by the consumer's principal dwelling with an 
annual percentage rate that exceeds the average prime offer rate for a 
comparable transaction as of the date the interest rate is set:
    (i) By 1.5 or more percentage points for loans secured by a first 
lien with a principal obligation at consummation that does not exceed 
the limit in effect as of the date the transaction's interest rate is 
set for the maximum principal obligation eligible for purchase by 
Freddie Mac;
    (ii) By 2.5 or more percentage points for loans secured by a first 
lien with a principal obligation at consummation that exceeds the limit 
in effect as of the date the transaction's interest rate is set for the 
maximum principal obligation eligible for purchase by Freddie Mac; or
    (iii) By 3.5 or more percentage points for loans secured by a 
subordinate lien.
    (2) ``Average prime offer rate'' means an annual percentage rate 
that is derived from average interest rates, points, and other loan 
pricing terms currently offered to consumers by a representative sample 
of creditors for mortgage transactions that have low-risk pricing 
characteristics. The Bureau publishes average prime offer rates for a 
broad range of types of transactions in a table updated at least weekly 
as well as the methodology the Bureau uses to derive these rates.
    (b) Escrow accounts--(1) Requirement to escrow for property taxes 
and insurance. Except as provided in paragraph (b)(2) of this section, 
a creditor may not extend a higher-priced mortgage loan secured by a 
first lien on a consumer's principal dwelling unless an escrow account 
is established before consummation for payment of property taxes and 
premiums for mortgage-related insurance required by the creditor, such 
as insurance against loss of or damage to property, or against 
liability arising out of the ownership or use of the property, or 
insurance protecting the creditor against the consumer's default or 
other credit loss. For purposes of this paragraph (b), the term 
``escrow account'' has the same meaning as under Regulation X (24 CFR 
3500.17(b)), as amended.
    (2) Exemptions. Notwithstanding paragraph (b)(1) of this section:
    (i) An escrow account need not be established for:
    (A) A transaction secured by shares in a cooperative;
    (B) A transaction to finance the initial construction of a 
dwelling;
    (C) A temporary or ``bridge'' loan with a loan term of twelve 
months or less, such as a loan to purchase a new dwelling where the 
consumer plans to

[[Page 4754]]

sell a current dwelling within twelve months; or
    (D) A reverse mortgage transaction subject to Sec.  1026.33(c).
    (ii) Insurance premiums described in paragraph (b)(1) of this 
section need not be included in escrow accounts for loans secured by 
dwellings in condominiums, planned unit developments, or other common 
interest communities in which dwelling ownership requires participation 
in a governing association, where the governing association has an 
obligation to the dwelling owners to maintain a master policy insuring 
all dwellings.
    (iii) Except as provided in paragraph (b)(2)(v) of this section, an 
escrow account need not be established for a transaction if, at the 
time of consummation:
    (A) During the preceding calendar year, the creditor extended more 
than 50 percent of its total covered transactions, as defined by Sec.  
1026.43(b)(1), secured by a first lien, on properties that are located 
in counties designated either ``rural'' or ``underserved'' by the 
Bureau, as set forth in paragraph (b)(2)(iv) of this section;
    (B) During the preceding calendar year, the creditor and its 
affiliates together originated 500 or fewer covered transactions, as 
defined by Sec.  1026.43(b)(1), secured by a first lien; and
    (C) As of the end of the preceding calendar year, the creditor had 
total assets of less than $2,000,000,000; this asset threshold shall 
adjust automatically each year, based on the year-to-year change in the 
average of the Consumer Price Index for Urban Wage Earners and Clerical 
Workers, not seasonally adjusted, for each 12-month period ending in 
November, with rounding to the nearest million dollars (see comment 
35(b)(2)(iii)-1.iii for the current threshold); and
    (D) Neither the creditor nor its affiliate maintains an escrow 
account of the type described in paragraph (b)(1) of this section for 
any extension of consumer credit secured by real property or a dwelling 
that the creditor or its affiliate currently services, other than:
    (1) Escrow accounts established for first-lien higher-priced 
mortgage loans on or after April 1, 2010, and before June 1, 2013; or
    (2) Escrow accounts established after consummation as an 
accommodation to distressed consumers to assist such consumers in 
avoiding default or foreclosure.
    (iv) For purposes of paragraph (b)(2)(iii)(A) of this section:
    (A) A county is ``rural'' during a calendar year if it is neither 
in a metropolitan statistical area nor in a micropolitan statistical 
area that is adjacent to a metropolitan statistical area, as those 
terms are defined by the U.S. Office of Management and Budget and 
applied under currently applicable Urban Influence Codes (UICs), 
established by the United States Department of Agriculture's Economic 
Research Service (USDA-ERS). A creditor may rely as a safe harbor on 
the list of counties published by the Bureau to determine whether a 
county qualifies as ``rural'' for a particular calendar year.
    (B) A county is ``underserved'' during a calendar year if, 
according to Home Mortgage Disclosure Act (HMDA) data for that year, no 
more than two creditors extend covered transactions, as defined in 
Sec.  1026.43(b)(1), secured by a first lien five or more times in the 
county. A creditor may rely as a safe harbor on the list of counties 
published by the Bureau to determine whether a county qualifies as 
``underserved'' for a particular calendar year.
    (v) Notwithstanding paragraph (b)(2)(iii) of this section, an 
escrow account must be established pursuant to paragraph (b)(1) of this 
section for any first-lien higher-priced mortgage loan that, at 
consummation, is subject to a commitment to be acquired by a person 
that does not satisfy the conditions in paragraph (b)(2)(iii) of this 
section, unless otherwise exempted by this paragraph (b)(2).
    (3) Cancellation--(i) General. Except as provided in paragraph 
(b)(3)(ii) of this section, a creditor or servicer may cancel an escrow 
account required in paragraph (b)(1) of this section only upon the 
earlier of:
    (A) Termination of the underlying debt obligation; or
    (B) Receipt no earlier than five years after consummation of a 
consumer's request to cancel the escrow account.
    (ii) Delayed cancellation. Notwithstanding paragraph (b)(3)(i) of 
this section, a creditor or servicer shall not cancel an escrow account 
pursuant to a consumer's request described in paragraph (b)(3)(i)(B) of 
this section unless the following conditions are satisfied:
    (A) The unpaid principal balance is less than 80 percent of the 
original value of the property securing the underlying debt obligation; 
and
    (B) The consumer currently is not delinquent or in default on the 
underlying debt obligation.
    (c) [Reserved]
    (d) Evasion; open-end credit. In connection with credit secured by 
a consumer's principal dwelling that does not meet the definition of 
open-end credit in Sec.  1026.2(a)(20), a creditor shall not structure 
a home-secured loan as an open-end plan to evade the requirements of 
this section.
    3. In Supplement I to Part 1026--Official Interpretations:
    A. The heading for Section 1026.35--Prohibited Acts or Practices in 
Connection with Higher-Priced Mortgage Loans is revised.
    B. Under newly designated Section 1026.35--Requirements for Higher-
Priced Mortgage Loans:
    i. Under 35(a) Higher-Priced Mortgage Loans:
    a. Paragraph 35(a)(1) and paragraphs 1, 2, and 3 are added.
    b. Under Paragraph 35(a)(2), paragraphs 2 and 3 are revised, and 
paragraph 4 is removed.
    ii. The heading for 35(b) Rules for higher-priced mortgage loans is 
revised.
    iii. Under newly designated 35(b) Escrow accounts:
    a. Paragraph 1 is revised.
    b. 35(b)(1) Requirement to escrow for property taxes and insurance 
and paragraphs 1, 2, and 3 are added.
    c. 35(b)(2) Exemptions is added.
    d. Paragraph 35(b)(2)(i) and paragraph 1 are added.
    e. Paragraph 35(b)(2)(ii) and paragraphs 1, 2, and 3 are added.
    f. Paragraph 35(b)(2)(ii)(C) and paragraphs 1 and 2 are removed.
    g. Paragraph 35(b)(2)(iii) and paragraph 1 are added.
    h. Paragraph 35(b)(2)(iii)(D)(1) and paragraph 1 are added.
    i. Paragraph 35(b)(2)(iii)(D)(2) and paragraph 1 are added.
    j. Paragraph 35(b)(2)(iv) and paragraph 1 are added.
    k. Paragraph 35(b)(2)(v) and paragraph 1 are added.
    iv. The heading for 35(b)(3) Escrows is revised.
    v. Under newly designated 35(b)(3) Cancellation:
    a. Paragraphs 1, 2, and 3 are added.
    b. 35(b)(3)(i) Failure to escrow for property taxes and insurance 
and paragraphs 1, 2, and 3 are removed.
    c. Paragraph 35(b)(3)(ii)(B) and paragraph 1 are removed.
    d. 35(b)(3)(v) ``Jumbo'' loans and paragraphs 1 and 2 are removed.
    The revisions and additions read as follows:

Supplement I to Part 1026--Official Interpretations

* * * * *

Subpart E--Special Rules for Certain Home Mortgage Transactions

* * * * *

[[Page 4755]]

Sec.  1026.35--Requirements for Higher-Priced Mortgage Loans

    35(a) Definitions.
    Paragraph 35(a)(1).
    1. Comparable transaction. A higher-priced mortgage loan is a 
consumer credit transaction secured by the consumer's principal 
dwelling with an annual percentage rate that exceeds the average prime 
offer rate for a comparable transaction as of the date the interest 
rate is set by the specified margin. The table of average prime offer 
rates published by the Bureau indicates how to identify the comparable 
transaction.
    2. Rate set. A transaction's annual percentage rate is compared to 
the average prime offer rate as of the date the transaction's interest 
rate is set (or ``locked'') before consummation. Sometimes a creditor 
sets the interest rate initially and then re-sets it at a different 
level before consummation. The creditor should use the last date the 
interest rate is set before consummation.
    3. Threshold for ``jumbo'' loans. Section 1026.35(a)(1)(ii) 
provides a separate threshold for determining whether a transaction is 
a higher-priced mortgage loan subject to Sec.  1026.35 when the 
principal balance exceeds the limit in effect as of the date the 
transaction's rate is set for the maximum principal obligation eligible 
for purchase by Freddie Mac (a ``jumbo'' loan). The Federal Housing 
Finance Agency (FHFA) establishes and adjusts the maximum principal 
obligation pursuant to rules under 12 U.S.C. 1454(a)(2) and other 
provisions of federal law. Adjustments to the maximum principal 
obligation made by FHFA apply in determining whether a mortgage loan is 
a ``jumbo'' loan to which the separate coverage threshold in Sec.  
1026.35(a)(1)(ii) applies.
    Paragraph 35(a)(2).
* * * * *
    2. Bureau table. The Bureau publishes on the Internet, in table 
form, average prime offer rates for a wide variety of transaction 
types. The Bureau calculates an annual percentage rate, consistent with 
Regulation Z (see Sec.  1026.22 and appendix J), for each transaction 
type for which pricing terms are available from a survey. The Bureau 
estimates annual percentage rates for other types of transactions for 
which direct survey data are not available based on the loan pricing 
terms available in the survey and other information. The Bureau 
publishes on the Internet the methodology it uses to arrive at these 
estimates.
    3. Additional guidance on determination of average prime offer 
rates. The average prime offer rate has the same meaning in Sec.  
1026.35 as in Regulation C, 12 CFR part 1003. See 12 CFR 
1003.4(a)(12)(ii). Guidance on the average prime offer rate under Sec.  
1026.35(a)(2), such as when a transaction's rate is set and 
determination of the comparable transaction, is provided in the 
official commentary under Regulation C, the publication entitled ``A 
Guide to HMDA Reporting: Getting it Right!'', and the relevant 
``Frequently Asked Questions'' on Home Mortgage Disclosure Act (HMDA) 
compliance posted on the FFIEC's Web site at http://www.ffiec.gov/hmda.
    35(b) Escrow Accounts.
    1. Principal dwelling. Section 1026.35(b)(1) applies to principal 
dwellings, including structures that are classified as personal 
property under State law. For example, an escrow account must be 
established on a higher-priced mortgage loan secured by a first lien on 
a manufactured home, boat, or trailer used as the consumer's principal 
dwelling. See the commentary under Sec. Sec.  1026.2(a)(19) and(24), 
1026.15, and 1026.23. Section 1026.35(b)(1) also applies to a higher-
priced mortgage loan secured by a first lien on a condominium if it is 
in fact used as the consumer's principal dwelling. But see Sec.  
1026.35(b)(2) for exemptions from the escrow requirement that may apply 
to such transactions.
    35(b)(1) Requirement to escrow for property taxes and insurance.
    1. Administration of escrow accounts. Section 1026.35(b)(1) 
requires creditors to establish an escrow account for payment of 
property taxes and premiums for mortgage-related insurance required by 
the creditor before the consummation of a higher-priced mortgage loan 
secured by a first lien on a principal dwelling. Section 6 of RESPA, 12 
U.S.C. 2605, and Regulation X, 12 CFR 1024.17, address how escrow 
accounts must be administered.
    2. Optional insurance items. Section 1026.35(b)(1) does not require 
that an escrow account be established for premiums for mortgage-related 
insurance that the creditor does not require in connection with the 
credit transaction, such as earthquake insurance or credit life 
insurance, even if the consumer voluntarily obtains such insurance.
    3. Transactions not subject to Sec.  1026.35(b)(1). Section 
1026.35(b)(1) requires a creditor to establish an escrow account before 
consummation of a first-lien higher-priced mortgage loan. This 
requirement does not affect a creditor's ability, right, or obligation, 
pursuant to the terms of the legal obligation or applicable law, to 
offer or require an escrow account for a transaction that is not 
subject to Sec.  1026.35(b)(1).
    35(b)(2) Exemptions.
    Paragraph 35(b)(2)(i).
    1. Construction-permanent loans. Under Sec.  1026.35(b)(2)(ii)(B), 
Sec.  1026.35 does not apply to a transaction to finance the initial 
construction of a dwelling. Section 1026.35 may apply, however, to 
permanent financing that replaces a construction loan, whether the 
permanent financing is extended by the same or a different creditor. 
When a construction loan may be permanently financed by the same 
creditor, Sec.  1026.17(c)(6)(ii) permits the creditor to give either 
one combined disclosure for both the construction financing and the 
permanent financing, or a separate set of disclosures for each of the 
two phases as though they were two separate transactions. See also 
comment 17(c)(6)-2. Section 1026.17(c)(6)(ii) addresses only how a 
creditor may elect to disclose a construction-permanent transaction. 
Which disclosure option a creditor elects under Sec.  1026.17(c)(6)(ii) 
does not affect the determination of whether the permanent phase of the 
transaction is subject to Sec.  1026.35. When the creditor discloses 
the two phases as separate transactions, the annual percentage rate for 
the permanent phase must be compared to the average prime offer rate 
for a transaction that is comparable to the permanent financing to 
determine whether the transaction is a higher-priced mortgage loan 
under Sec.  1026.35(a). When the creditor discloses the two phases as a 
single transaction, a single annual percentage rate, reflecting the 
appropriate charges from both phases, must be calculated for the 
transaction in accordance with Sec.  1026.22(a)(1) and appendix D to 
part 1026. This annual percentage rate must be compared to the average 
prime offer rate for a transaction that is comparable to the permanent 
financing to determine the transaction is a higher-priced mortgage loan 
under Sec.  1026.35(a). If the transaction is determined to be a 
higher-priced mortgage loan, only the permanent phase is subject to the 
requirement of Sec.  1026.35(b)(1) to establish and maintain an escrow 
account, and the period for which the escrow account must remain in 
place under Sec.  1026.35(b)(3) is measured from the time the 
conversion to the permanent phase financing occurs.
    Paragraph 35(b)(2)(ii).
    1. Limited exemption. A creditor is required to escrow for payment 
of property taxes for all first-lien higher-

[[Page 4756]]

priced mortgage loans secured by condominium, planned unit development, 
or similar dwellings or units regardless of whether the creditor 
escrows for insurance premiums for such dwellings or units.
    2. Planned unit developments. Planned unit developments (PUDs) are 
a form of property ownership often used in retirement communities, golf 
communities, and similar communities made up of homes located within a 
defined geographical area. PUDs usually have a homeowners' association 
or some other governing association, analogous to a condominium 
association and with similar authority and obligations. Thus, as with 
condominiums, PUDs often have master insurance policies that cover all 
units in the PUD. Under Sec.  1026.35(b)(2)(ii), if a PUD's governing 
association is obligated to maintain such a master insurance policy, an 
escrow account required by Sec.  1026.35(b)(1) for a transaction 
secured by a unit in the PUD need not include escrows for insurance. 
This exemption applies not only to condominiums and PUDs but also to 
any other type of property ownership arrangement that has a governing 
association with an obligation to maintain a master insurance policy.
    3. More than one governing association associated with a dwelling. 
The limited exemption provided pursuant to Sec.  1026.35(b)(2)(ii) 
applies to each master insurance policy for properties with multiple 
governing associations, to the extent each governing association has an 
obligation to maintain a master insurance policy.
    Paragraph 35(b)(2)(iii).
    1. Requirements for exemption. Under Sec.  1026.35(b)(2)(iii), 
except as provided in Sec.  1026.35(b)(2)(v), a creditor need not 
establish an escrow account for taxes and insurance for a higher-priced 
mortgage loan, provided the following four conditions are satisfied 
when the higher-priced mortgage loan is consummated:
    i. During the preceding calendar year, more than 50 percent of the 
creditor's total first-lien covered transactions, as defined in Sec.  
1026.43(b)(1), on properties located in counties that are either 
``rural'' or ``underserved,'' as set forth in Sec.  1026.35(b)(2)(iv). 
Pursuant to that section, the Bureau determines annually which counties 
in the United States are rural or underserved and publishes a list of 
those counties to enable creditors to determine whether they meet this 
condition for the exemption. Thus, for example, if a creditor 
originated 90 first-lien covered transactions, as defined by Sec.  
1026.43(b)(1), during 2013, the creditor meets this condition for an 
exemption in 2014 if at least 46 of those transactions are secured by 
first liens on properties that are located in counties that are on the 
Bureau's lists of rural or underserved counties for 2013.
    ii. The creditor and its affiliates together originated 500 or 
fewer first-lien covered transactions, as defined in Sec.  
1026.43(b)(1), during the preceding calendar year.
    iii. As of the end of the preceding calendar year, the creditor had 
total assets that are less than the asset threshold for the relevant 
calendar year. For calendar year 2013, the asset threshold is 
$2,000,000,000. Creditors that had total assets of less than 
$2,000,000,000 on December 31, 2012, satisfy this criterion for 
purposes of the exemption during 2013. This asset threshold shall 
adjust automatically each year based on the year-to-year change in the 
average of the Consumer Price Index for Urban Wage Earners and Clerical 
Workers, not seasonally adjusted, for each 12-month period ending in 
November, with rounding to the nearest million dollars. The Bureau will 
publish notice of the asset threshold each year by amending this 
comment.
    iv. The creditor and its affiliates do not maintain an escrow 
account for any mortgage transaction being serviced by the creditor or 
its affiliate at the time the transaction is consummated, except as 
provided in Sec.  1026.35(b)(2)(iii)(D)(1) and (2). Thus, the exemption 
applies, provided the other conditions of Sec.  1026.35(b)(2)(iii) are 
satisfied, even if the creditor previously maintained escrow accounts 
for mortgage loans, provided it no longer maintains any such accounts 
except as provided in Sec.  1026.35(b)(2)(iii)(D)(1) and (2). Once a 
creditor or its affiliate begins escrowing for loans currently serviced 
other than those addressed in Sec.  1026.35(b)(2)(iii)(D)(1) and (2), 
however, the creditor and its affiliate become ineligible for the 
exemption in Sec.  1026.35(b)(2)(iii) on higher-priced mortgage loans 
they make while such escrowing continues. Thus, as long as a creditor 
(or its affiliate) services and maintains escrow accounts for any 
mortgage loans, other than as provided in Sec.  
1026.35(b)(2)(iii)(D)(1) and (2), the creditor will not be eligible for 
the exemption for any higher-priced mortgage loan it may make. For 
purposes of Sec.  1026.35(b)(2)(iii), a creditor or its affiliate 
``maintains'' an escrow account only if it services a mortgage loan for 
which an escrow account has been established at least through the due 
date of the second periodic payment under the terms of the legal 
obligation.
    Paragraph 35(b)(2)(iii)(D)(1).
    1. Exception for certain accounts. Escrow accounts established for 
first-lien higher-priced mortgage loans on or after April 1, 2010, and 
before June 1, 2013, are not counted for purposes of Sec.  
1026.35(b)(2)(iii)(D). On and after June 1, 2013, creditors, together 
with their affiliates, that establish new escrow accounts, other than 
those described in Sec.  1026.35(b)(2)(iii)(D)(2), do not qualify for 
the exemption provided under Sec.  1026.35(b)(2)(iii). Creditors, 
together with their affiliates, that continue to maintain escrow 
accounts established between April 1, 2010, and June 1, 2013, still 
qualify for the exemption provided under Sec.  1026.35(b)(2)(iii) so 
long as they do not establish new escrow accounts for transactions 
consummated on or after June 1, 2013, other than those described in 
Sec.  1026.35(b)(2)(iii)(D)(2), and they otherwise qualify under Sec.  
1026.35(b)(2)(iii).
    Paragraph 35(b)(2)(iii)(D)(2).
    1. Exception for post-consummation escrow accounts for distressed 
consumers. An escrow account established after consummation for a 
distressed consumer does not count for purposes of Sec.  
1026.35(b)(2)(iii)(D). Distressed consumers are consumers who are 
working with the creditor or servicer to attempt to bring the loan into 
a current status through a modification, deferral, or other 
accommodation to the consumer. A creditor, together with its 
affiliates, that establishes escrow accounts after consummation as a 
regular business practice, regardless of whether consumers are in 
distress, does not qualify for the exception described in Sec.  
1026.35(b)(2)(iii)(D)(2).
    Paragraph 35(b)(2)(iv).
    1. Requirements for ``rural'' or ``underserved'' status. A county 
is considered to be ``rural'' or ``underserved'' for purposes of Sec.  
1026.35(b)(2)(iii)(A) if it satisfies either of the two tests in Sec.  
1026.35(b)(2)(iv). The Bureau applies both tests to each county in the 
United States and, if a county satisfies either test, the Bureau will 
include the county on a published list of ``rural'' or ``underserved'' 
counties for a particular calendar year. To facilitate compliance with 
Sec.  1026.35(c), the Bureau also creates a list of only those counties 
that are ``rural'' but not also ``underserved.'' The Bureau will post 
on its public Web site the applicable lists for each calendar year by 
the end of that year. A creditor may rely as a safe harbor, pursuant to 
section 130(f) of the Truth in Lending Act, on the lists of counties 
published by the Bureau to determine whether a county qualifies as 
``rural'' or ``underserved'' for a particular calendar year. A 
creditor's originations of

[[Page 4757]]

covered transactions, as defined by Sec.  1026.43(b)(1), in such 
counties during that year are considered in determining whether the 
creditor satisfies the condition in Sec.  1026.35(b)(2)(iii)(A) and 
therefore will be eligible for the exemption during the following 
calendar year.
    i. Under Sec.  1026.35(b)(2)(iv)(A), a county is rural during a 
calendar year if it is neither in a metropolitan statistical area nor 
in a micropolitan statistical area that is adjacent to a metropolitan 
statistical area. These areas are defined by the Office of Management 
and Budget and applied under currently applicable Urban Influence Codes 
(UICs), established by the United States Department of Agriculture's 
Economic Research Service (USDA-ERS). Specifically, the Bureau 
classifies a county as ``rural'' if the USDA-ERS categorizes the county 
under UIC 4, 6, 7, 8, 9, 10, 11, or 12. Descriptions of UICs are 
available on the USDA-ERS Web site at http://www.ers.usda.gov/data-products/urban-influence-codes/documentation.aspx.
    ii. Under Sec.  1026.35(b)(2)(iv)(B), a county is underserved 
during a calendar year if, according to Home Mortgage Disclosure Act 
(HMDA) data for that year, no more than two creditors extend first-lien 
covered transactions, as defined in Sec.  1026.43(b)(1), secured by a 
first lien five or more times in the county. These areas are defined by 
reference to the specific calendar year's HMDA data. Specifically, a 
county is ``underserved'' if, in the applicable calendar year's public 
HMDA aggregate dataset, no more than two creditors have reported five 
or more first-lien covered transactions with HMDA geocoding that places 
the properties in that county. For purposes of this determination, 
because only covered transactions are counted, all first-lien 
originations (and only first-lien originations) reported in the HMDA 
data are counted except those for which the owner-occupancy status is 
reported as ``Not owner-occupied'' (HMDA code 2), the property type is 
reported as ``Multifamily'' (HMDA code 3), the applicant's or co-
applicant's race is reported as ``Not applicable'' (HMDA code 7), or 
the applicant's or co-applicant's sex is reported as ``Not applicable'' 
(HMDA code 4). The most recent HMDA data are available at http://www.ffiec.gov/hmda.
    Paragraph 35(b)(2)(v).
    1. Forward commitments. A creditor may make a mortgage loan that 
will be transferred or sold to a purchaser pursuant to an agreement 
that has been entered into at or before the time the loan is 
consummated. Such an agreement is sometimes known as a ``forward 
commitment.'' Even if a creditor is otherwise eligible for the 
exemption in Sec.  1026.35(b)(2)(iii), a first-lien higher-priced 
mortgage loan that will be acquired by a purchaser pursuant to a 
forward commitment is subject to the requirement to establish an escrow 
account under Sec.  1026.35(b)(1) unless the purchaser is also eligible 
for the exemption in Sec.  1026.35(b)(2)(iii) or the transaction is 
otherwise exempt under Sec.  1026.35(b)(2). The escrow requirement 
applies to any such transaction, whether the forward commitment 
provides for the purchase and sale of the specific transaction or for 
the purchase and sale of mortgage obligations with certain prescribed 
criteria that the transaction meets. For example, assume a creditor 
that qualifies for the exemption in Sec.  1026.35(b)(2)(iii) makes a 
higher-priced mortgage loan that meets the purchase criteria of an 
investor with which the creditor has an agreement to sell such mortgage 
obligations after consummation. If the investor is ineligible for the 
exemption in Sec.  1026.35(b)(2)(iii), an escrow account must be 
established for the transaction before consummation in accordance with 
Sec.  1026.35(b)(1) unless the transaction is otherwise exempt (such as 
a reverse mortgage or home equity line of credit).
    35(b)(3) Cancellation.
    1. Termination of underlying debt obligation. Section 
1026.35(b)(3)(i) provides that, in general, an escrow account required 
by Sec.  1026.35(b)(1) may not be cancelled until the underlying debt 
obligation is terminated or the consumer requests cancellation at least 
five years after consummation. Methods by which an underlying debt 
obligation may be terminated include, among other things, repayment, 
refinancing, rescission, and foreclosure.
    2. Minimum durations. Section 1026.35(b)(3) establishes minimum 
durations for which escrow accounts established pursuant to Sec.  
1026.35(b)(1) must be maintained. This requirement does not affect a 
creditor's right or obligation, pursuant to the terms of the legal 
obligation or applicable law, to offer or require an escrow account 
thereafter.
    3. Less than eighty percent unpaid principal balance. The term 
``original value'' in Sec.  1026.35(b)(3)(ii)(A) means the lesser of 
the sales price reflected in the sales contract for the property, if 
any, or the appraised value of the property at the time the transaction 
was consummated. In determining whether the unpaid principal balance 
has reached less than 80 percent of the original value of the property 
securing the underlying debt, the creditor or servicer shall count any 
subordinate lien of which it has reason to know. If the consumer 
certifies in writing that the equity in the property securing the 
underlying debt obligation is unencumbered by a subordinate lien, the 
creditor or servicer may rely upon the certification in making its 
determination unless it has actual knowledge to the contrary.
* * * * *

    Dated: January 10, 2013.
Richard Cordray,
Director, Bureau of Consumer Financial Protection.
[FR Doc. 2013-00734 Filed 1-16-13; 11:15 am]
BILLING CODE 4810-AM-P
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