H. R. 4173—771 
‘‘(i) for which the regular periodic payments for 
the loan may not— 
‘‘(I) result in an increase of the principal bal-
ance; or 
‘‘(II) except as provided in subparagraph (E), 
allow the consumer to defer repayment of prin-
cipal; 
‘‘(ii) except as provided in subparagraph (E), the 
terms of which do not result in a balloon payment, 
where a ‘balloon payment’ is a scheduled payment 
that is more than twice as large as the average of 
earlier scheduled payments; 
‘‘(iii) for which the income and financial resources 
relied upon to qualify the obligors on the loan are 
verified and documented; 
‘‘(iv) in the case of a fixed rate loan, for which 
the underwriting process is based on a payment 
schedule that fully amortizes the loan over the loan 
term and takes into account all applicable taxes, insur-
ance, and assessments; 
‘‘(v) in the case of an adjustable rate loan, for 
which the underwriting is based on the maximum rate 
permitted under the loan during the first 5 years, 
and a payment schedule that fully amortizes the loan 
over the loan term and takes into account all applicable 
taxes, insurance, and assessments; 
‘‘(vi) that complies with any guidelines or regula-
tions established by the Board relating to ratios of 
total monthly debt to monthly income or alternative 
measures of ability to pay regular expenses after pay-
ment of total monthly debt, taking into account the 
income levels of the borrower and such other factors 
as the Board may determine relevant and consistent 
with the purposes described in paragraph (3)(B)(i); 
‘‘(vii) for which the total points and fees (as defined 
in subparagraph (C)) payable in connection with the 
loan do not exceed 3 percent of the total loan amount; 
‘‘(viii) for which the term of the loan does not 
exceed 30 years, except as such term may be extended 
under paragraph (3), such as in high-cost areas; and 
‘‘(ix) in the case of a reverse mortgage (except 
for the purposes of subsection (a) of section 129C, 
to the extent that such mortgages are exempt 
altogether from those requirements), a reverse mort-
gage which meets the standards for a qualified mort-
gage, as set by the Board in rules that are consistent 
with the purposes of this subsection. 
‘‘(B) AVERAGE PRIME OFFER RATE.—The term ‘average 
prime offer rate’ means the average prime offer rate for 
a comparable transaction as of the date on which the 
interest rate for the transaction is set, as published by 
the Board.. 
‘‘(C) POINTS AND FEES.— 
‘‘(i) IN GENERAL.—For purposes of subparagraph 
(A), the term ‘points and fees’ means points and fees 
as defined by section 103(aa)(4) (other than bona fide
H. R. 4173—772 
third party charges not retained by the mortgage origi-
nator, creditor, or an affiliate of the creditor or mort-
gage originator). 
‘‘(ii) COMPUTATION.—For purposes of computing 
the total points and fees under this subparagraph, 
the total points and fees shall exclude either of the 
amounts described in the following subclauses, but not 
both: 
‘‘(I) Up to and including 2 bona fide discount 
points payable by the consumer in connection with 
the mortgage, but only if the interest rate from 
which the mortgage’s interest rate will be dis-
counted does not exceed by more than 1 percentage 
point the average prime offer rate. 
‘‘(II) Unless 2 bona fide discount points have 
been excluded under subclause (I), up to and 
including 1 bona fide discount point payable by 
the consumer in connection with the mortgage, 
but only if the interest rate from which the mort-
gage’s interest rate will be discounted does not 
exceed by more than 2 percentage points the aver-
age prime offer rate. 
‘‘(iii) BONA FIDE DISCOUNT POINTS DEFINED.—For 
purposes of clause (ii), the term ‘bona fide discount 
points’ means loan discount points which are knowingly 
paid by the consumer for the purpose of reducing, 
and which in fact result in a bona fide reduction of, 
the interest rate or time-price differential applicable 
to the mortgage. 
‘‘(iv) INTEREST
RATE
REDUCTION.—Subclauses (I) 
and (II) of clause (ii) shall not apply to discount points 
used to purchase an interest rate reduction unless 
the amount of the interest rate reduction purchased 
is reasonably consistent with established industry 
norms and practices for secondary mortgage market 
transactions. 
‘‘(D) SMALLER LOANS.—The Board shall prescribe rules 
adjusting the criteria under subparagraph (A)(vii) in order 
to permit lenders that extend smaller loans to meet the 
requirements of the presumption of compliance under para-
graph (1). In prescribing such rules, the Board shall con-
sider the potential impact of such rules on rural areas 
and other areas where home values are lower. 
‘‘(E) BALLOON LOANS.—The Board may, by regulation, 
provide that the term ‘qualified mortgage’ includes a bal-
loon loan— 
‘‘(i) that meets all of the criteria for a qualified 
mortgage under subparagraph (A) (except clauses 
(i)(II), (ii), (iv), and (v) of such subparagraph); 
‘‘(ii) for which the creditor makes a determination 
that the consumer is able to make all scheduled pay-
ments, except the balloon payment, out of income or 
assets other than the collateral; 
‘‘(iii) for which the underwriting is based on a 
payment schedule that fully amortizes the loan over 
a period of not more than 30 years and takes into
H. R. 4173—773 
account all applicable taxes, insurance, and assess-
ments; and 
‘‘(iv) that is extended by a creditor that— 
‘‘(I) operates predominantly in rural or under-
served areas; 
‘‘(II) together with all affiliates, has total 
annual residential mortgage loan originations that 
do not exceed a limit set by the Board; 
‘‘(III) retains the balloon loans in portfolio; 
and 
‘‘(IV) meets any asset size threshold and any 
other criteria as the Board may establish, con-
sistent with the purposes of this subtitle. 
‘‘(3) REGULATIONS.— 
‘‘(A) IN GENERAL.—The Board shall prescribe regula-
tions to carry out the purposes of this subsection. 
‘‘(B) REVISION OF SAFE HARBOR CRITERIA.— 
‘‘(i) IN GENERAL.—The Board may prescribe regula-
tions that revise, add to, or subtract from the criteria 
that define a qualified mortgage upon a finding that 
such regulations are necessary or proper to ensure 
that responsible, affordable mortgage credit remains 
available to consumers in a manner consistent with 
the purposes of this section, necessary and appropriate 
to effectuate the purposes of this section and section 
129B, to prevent circumvention or evasion thereof, or 
to facilitate compliance with such sections. 
‘‘(ii) LOAN
DEFINITION.—The following agencies 
shall, in consultation with the Board, prescribe rules 
defining the types of loans they insure, guarantee, 
or administer, as the case may be, that are qualified 
mortgages for purposes of paragraph (2)(A), and such 
rules may revise, add to, or subtract from the criteria 
used to define a qualified mortgage under paragraph 
(2)(A), upon a finding that such rules are consistent 
with the purposes of this section and section 129B, 
to prevent circumvention or evasion thereof, or to facili-
tate compliance with such sections: 
‘‘(I) The Department of Housing and Urban 
Development, with regard to mortgages insured 
under the National Housing Act (12 U.S.C. 1707 
et seq.). 
‘‘(II) The Department of Veterans Affairs, with 
regard to a loan made or guaranteed by the Sec-
retary of Veterans Affairs. 
‘‘(III) The Department of Agriculture, with 
regard loans guaranteed by the Secretary of Agri-
culture pursuant to 42 U.S.C. 1472(h). 
‘‘(IV) The Rural Housing Service, with regard 
to loans insured by the Rural Housing Service.’’. 
SEC. 1413. DEFENSE TO FORECLOSURE. 
Section 130 of the Truth in Lending Act (15 U.S.C. 1640) 
is amended by adding at the end the following new subsection: 
‘‘(k) DEFENSE TO FORECLOSURE.— 
‘‘(1) IN GENERAL.—Notwithstanding any other provision of 
law, when a creditor, assignee, or other holder of a residential
H. R. 4173—774 
mortgage loan or anyone acting on behalf of such creditor, 
assignee, or holder, initiates a judicial or nonjudicial foreclosure 
of the residential mortgage loan, or any other action to collect 
the debt in connection with such loan, a consumer may assert 
a violation by a creditor of paragraph (1) or (2) of section 
129B(c), or of section 129C(a), as a matter of defense by 
recoupment or set off without regard for the time limit on 
a private action for damages under subsection (e). 
‘‘(2) AMOUNT OF RECOUPMENT OR SETOFF.— 
‘‘(A) IN GENERAL.—The amount of recoupment or set- 
off under paragraph (1) shall equal the amount to which 
the consumer would be entitled under subsection (a) for 
damages for a valid claim brought in an original action 
against the creditor, plus the costs to the consumer of 
the action, including a reasonable attorney’s fee. 
‘‘(B) SPECIAL RULE.—Where such judgment is rendered 
after the expiration of the applicable time limit on a private 
action for damages under subsection (e), the amount of 
recoupment or set-off under paragraph (1) derived from 
damages under subsection (a)(4) shall not exceed the 
amount to which the consumer would have been entitled 
under subsection (a)(4) for damages computed up to the 
day preceding the expiration of the applicable time limit.’’. 
SEC. 1414. ADDITIONAL STANDARDS AND REQUIREMENTS. 
(a) IN GENERAL.—Section 129C of the Truth in Lending Act 
is amended by inserting after subsection (b) (as added by this 
title) the following new subsections: 
‘‘(c) PROHIBITION ON CERTAIN PREPAYMENT PENALTIES.— 
‘‘(1) PROHIBITED ON CERTAIN LOANS.— 
‘‘(A) IN GENERAL.—A residential mortgage loan that 
is not a ‘qualified mortgage’, as defined under subsection 
(b)(2), may not contain terms under which a consumer 
must pay a prepayment penalty for paying all or part 
of the principal after the loan is consummated. 
‘‘(B) EXCLUSIONS.—For purposes of this subsection, a 
‘qualified mortgage’ may not include a residential mortgage 
loan that— 
‘‘(i) has an adjustable rate; or 
‘‘(ii) has an annual percentage rate that exceeds 
the average prime offer rate for a comparable trans-
action, as of the date the interest rate is set— 
‘‘(I) by 1.5 or more percentage points, in the 
case of a first lien residential mortgage loan having 
a original principal obligation amount that is equal 
to or less than the amount of the maximum limita-
tion on the original principal obligation of mort-
gage in effect for a residence of the applicable 
size, as of the date of such interest rate set, pursu-
ant to the 6th sentence of section 305(a)(2) the 
Federal Home Loan Mortgage Corporation Act (12 
U.S.C. 1454(a)(2)); 
‘‘(II) by 2.5 or more percentage points, in the 
case of a first lien residential mortgage loan having 
a original principal obligation amount that is more 
than the amount of the maximum limitation on 
the original principal obligation of mortgage in