[House Report 115-578]
[From the U.S. Government Publishing Office]


115th Congress    }                                   {        Report
                        HOUSE OF REPRESENTATIVES
 2d Session       }                                   {       115-578

======================================================================



 
               PORTFOLIO LENDING AND MORTGAGE ACCESS ACT

                                _______
                                

 February 23, 2018.--Committed to the Committee of the Whole House on 
            the State of the Union and ordered to be printed

                                _______
                                

Mr. Hensarling, from the Committee on Financial Services, submitted the 
                               following

                              R E P O R T

                        [To accompany H.R. 2226]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Financial Services, to whom was referred 
the bill (H.R. 2226) to amend the Truth in Lending Act to 
provide a safe harbor from certain requirements related to 
qualified mortgages for residential mortgage loans held on an 
originating depository institution's portfolio, and for other 
purposes, having considered the same, report favorably thereon 
with an amendment and recommend that the bill as amended do 
pass.
    The amendment is as follows:
  Strike all after the enacting clause and insert the 
following:

SECTION 1. SHORT TITLE.

  This Act may be cited as the ``Portfolio Lending and Mortgage Access 
Act''.

SEC. 2. MINIMUM STANDARDS FOR RESIDENTIAL MORTGAGE LOANS.

  Section 129C(b) of the Truth in Lending Act (15 U.S.C. 1639c(b)) is 
amended by adding at the end the following:
          ``(4) Safe harbor.--
                  ``(A) In general.--A residential mortgage loan shall 
                be deemed a qualified mortgage loan for purposes of 
                this subsection if the loan--
                          ``(i) is originated by, and continuously 
                        retained in the portfolio of, a covered 
                        institution;
                          ``(ii) is in compliance with the limitations 
                        with respect to prepayment penalties described 
                        in subsections (c)(1) and (c)(3);
                          ``(iii) is in compliance with the 
                        requirements related to points and fees under 
                        paragraph (2)(A)(vii);
                          ``(iv) does not have negative amortization 
                        terms or interest-only terms; and
                          ``(v) is a loan for which the covered 
                        institution considers, documents, and verifies 
                        the debt, income, and financial resources of 
                        the consumer in accordance with subparagraph 
                        (C).
                  ``(B) Exception for certain transfers.--Subparagraph 
                (A) shall not apply to a residential mortgage loan if 
                the legal title to such residential mortgage loan is 
                sold, assigned, or otherwise transferred to another 
                person unless the legal title to such residential 
                mortgage loan is sold, assigned, or otherwise 
                transferred--
                          ``(i) to another person by reason of the 
                        bankruptcy or failure of the covered 
                        institution that originated such loan;
                          ``(ii) to an insured depository institution 
                        or insured credit union that has less than 
                        $10,000,000,000 in total consolidated assets on 
                        the date of such sale, assignment, or transfer, 
                        if the loan is retained in portfolio by such 
                        insured depository institution or insured 
                        credit union;
                          ``(iii) pursuant to a merger of the covered 
                        institution that originated such loan with 
                        another person or the acquisition of a the 
                        covered institution that originated such loan 
                        by another person or of another person by a 
                        covered institution, if the loan is retained in 
                        portfolio by the person to whom the loan is 
                        sold, assigned, or otherwise transferred; or
                          ``(iv) to a wholly owned subsidiary of the 
                        covered institution that originated such loan 
                        if the loan is considered to be an asset of 
                        such covered institution for regulatory 
                        accounting purposes. 
                  ``(C) Consideration and documentation requirements.--
                The consideration and documentation requirements 
                described in subparagraph (A)(v) shall--
                          ``(i) not be construed to require compliance 
                        with, or documentation in accordance with, 
                        appendix Q to part 1026 of title 12, Code of 
                        Federal Regulations, or any successor 
                        regulation; and
                          ``(ii) be construed to permit multiple 
                        methods of documentation.
                  ``(D) Definitions.--In this paragraph--
                          ``(i) the term `covered institution' means an 
                        insured depository institution or an insured 
                        credit union that, together with its 
                        affiliates, has less than $10,000,000,000 in 
                        total consolidated assets on the date on the 
                        origination of a residential mortgage loan;
                          ``(ii) the term `insured credit union' has 
                        the meaning given the term in section 101 of 
                        the Federal Credit Union Act (12 U.S.C. 1752);
                          ``(iii) the term `insured depository 
                        institution' has the meaning given the term in 
                        section 3 of the Federal Deposit Insurance Act 
                        (12 U.S.C. 1813);
                          ``(iv) the term `interest-only term' means a 
                        term of a residential mortgage loan that allows 
                        one or more of the periodic payments made under 
                        the loan to be applied solely to accrued 
                        interest and not to the principal of the loan; 
                        and
                          ``(v) the term `negative amortization term' 
                        means a term of a residential mortgage loan 
                        under which the payment of periodic payments 
                        will result in an increase in the principal of 
                        the loan.

                          Purpose and Summary

    Introduced by Representative Andy Barr on April 28, 2017, 
H.R. 2226, the Portfolio Lending and Mortgage Access Act amends 
Section 129C of the Truth in Lending Act (TILA) [15 U.S.C. 
1639c] to extend the ``Qualified Mortgage'' safe harbor for 
loans held in portfolio by certain depository institutions with 
less than $10 billion in assets. The legislation also imposes 
additional requirements for safe harbor treatment: loans cannot 
have negative amortization, interest-only features, and would 
need to comply with limits on prepayment penalties. Finally, 
H.R. 2226 requires that the creditor must document and 
continually verify a consumer's income, employment, assets, and 
credit history.

                  Background and Need for Legislation

    The Dodd-Frank Wall Street Reform and Consumer Protection 
Act (P.L. 111-203) (Dodd-Frank Act) made significant changes to 
the mortgage lending market place. Section 1411 of the Dodd-
Frank Act amends TILA to require that mortgage lenders 
determine at the time a loan is made that the borrower has a 
reasonable ability to repay it. The ability-to-repay 
requirements are designed to ensure that a lender takes into 
account the borrower's capacity to pay back the mortgage prior 
to consummation of the loan. Section 1412 of the Dodd-Frank Act 
creates a statutory category of mortgages known as `qualified 
mortgages' (QM) that are deemed to comply with Section 1411's 
ability-to-repay requirements and are therefore subject to a 
safe harbor from lawsuit, provided that the loans meet certain 
characteristics and underwriting criteria. The Bureau of 
Consumer Financial Protection (CFPB) has the authority to 
prescribe regulations to implement the Dodd-Frank Act's 
qualified mortgage requirements.
    Under the CFPB's qualified mortgage regulations, there are 
concerns that mortgages have been made `safer' by effectively 
making them unavailable to a substantial number of would-be 
homeowners. According to the Federal Reserve Board, 22% of 
those who borrowed to buy a home in 2010--one out of every five 
borrowers--would not have met the 43 percent debt-to-income 
ratio (DTI) underwriting requirements for a Qualified 
Mortgage.\1\
---------------------------------------------------------------------------
    \1\http://www.federalreserve.gov/boarddocs/snloansurvey/201408/
fullreport.pdf.
---------------------------------------------------------------------------
    The CFPB's mortgage rules also include special `automatic 
QM' designations for certain types of mortgages. For instance, 
for a period of seven years, any loan that qualifies for 
purchase by Fannie Mae and Freddie Mac (provided they are not 
removed from conservatorship sooner) automatically qualifies 
for QM status even if a borrower's DTI exceeds 43% DTI. Because 
of the exemptions, the QM rule does not affect the roughly 95% 
of loans originated that the federal government insures or 
guarantees, explicitly or implicitly.\2\
---------------------------------------------------------------------------
    \2\CFPB, `Ability-to-Repay and Qualified Mortgage Standards Under 
the Truth in Lending Act,' 78 Federal Register 6569, January 30, 2013.
---------------------------------------------------------------------------
    Additionally, the CFPB gave special treatment to certain 
institutions that operate in predominantly rural or underserved 
areas, have less than $2 billion in assets, and originate 500 
or fewer mortgages per year. The CFPB extended QM status to 
loans made by these small creditors and held in their own 
portfolios, even if the debtor has a DTI in excess of 43%. 
Small creditors in rural or underserved areas can also 
originate mortgage loans with balloon payments, despite the QM 
rule's general prohibition on balloon payment loans, and have 
those loans qualify for safe harbor treatment.
    These special exemptions effectively, but only temporarily, 
minimize the impact of the CFPB's QM rule. In order to ensure 
that community financial institutions are able to continue 
providing mortgage credit to consumers, a commonsense yet 
flexible approach needs to be taken with mortgage lending. 
Allowing residential mortgage loans held in portfolio to 
qualify for a safe harbor equivalent to that of QM will allow 
these institutions to meet the credit demands of consumers, 
while incentivizing such institutions to ensure the borrower 
can meet the monthly obligations of a mortgage. When a 
community financial institution keeps a loan that it originates 
in its portfolio--rather than sell the loan--it keeps the risk 
of a borrower's default on its balance sheet. Therefore, the 
lender should benefit from the presumption that the borrower 
has the ability to repay, and receive the legal benefits of the 
safe harbor so long as the loan appears on the institution's 
balance sheet.
    H.R. 2226, introduced by Congressman Barr, and amended by 
Congressman Michael Capuano during the Committee's markup on 
January 17, 2018, (D-MA), will treat mortgage loans that are 
kept on a balance sheet as having met the Qualified Mortgage 
requirements and grant them a legal safe harbor from Dodd-
Frank's ability to repay requirements. Doing so will encourage 
private sector risk retention, encourage small institutions to 
make more mortgage loans, and improve the business environment 
for small banks.

                                Hearings

    The Committee on Financial Services held a hearing 
examining matters relating to H.R. 2226 on April 26, 2017 and 
April 28, 2017.

                        Committee Consideration

    The Committee on Financial Services met in open session on 
January 18, 2018 and ordered H.R. 2226 to be reported favorably 
by a recorded vote of 55 yeas to 0 nays (Record vote no. FC-
140), a quorum being present. Before the motion to report was 
offered, the Committee adopted an amendment offered by Mr. 
Barr. Before the motion to report was offered, the Committee 
adopted an amendment offered by Mr. Capuano by voice vote.

                            Committee Votes

    Clause 3(b) of rule XIII of the Rules of the House of 
Representatives requires the Committee to list the record votes 
on the motion to report legislation and amendments thereto. The 
sole recorded vote was on a motion by Chairman Hensarling to 
report the bill favorably to the House with amendment. The 
motion was agreed to by a recorded vote of 55 yeas to 0 nays 
(Record vote no. FC-140), a quorum being present.


                      Committee Oversight Findings

    Pursuant to clause 3(c)(1) of rule XIII of the Rules of the 
House of Representatives, the findings and recommendations of 
the Committee based on oversight activities under clause 
2(b)(1) of rule X of the Rules of the House of Representatives, 
are incorporated in the descriptive portions of this report.

                    Performance Goals and Objectives

    Pursuant to clause 3(c)(4) of rule XIII of the Rules of the 
House of Representatives, the Committee states that H.R. 2226 
will ensure that mortgage loans remain available to 
creditworthy borrowers by providing that loans retained on the 
balance sheet are deemed qualified mortgages.

   New Budget Authority, Entitlement Authority, and Tax Expenditures

    In compliance with clause 3(c)(2) of rule XIII of the Rules 
of the House of Representatives, the Committee adopts as its 
own the estimate of new budget authority, entitlement 
authority, or tax expenditures or revenues contained in the 
cost estimate prepared by the Director of the Congressional 
Budget Office pursuant to section 402 of the Congressional 
Budget Act of 1974.

                 Congressional Budget Office Estimates

    Pursuant to clause 3(c)(3) of rule XIII of the Rules of the 
House of Representatives, the following is the cost estimate 
provided by the Congressional Budget Office pursuant to section 
402 of the Congressional Budget Act of 1974:

                                      U.S.Congress,
                               Congressional Budget Office,
                                  Washington, DC, February 9, 2018.
Hon. Jeb Hensarling,
Chairman, Committee on Financial Services, House of Representatives, 
        Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 2226, the 
Portfolio Lending and Mortgage Access Act.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Stephen 
Rabent.
            Sincerely,
                                                Keith Hall,
                                                          Director.
    Enclosure.

H.R. 2226--Portfolio Lending and Mortgage Access Act

    Under current law, a ``qualified mortgage'' has certain 
characteristics designed to make it more affordable than some 
other types of loans. Eligible borrowers are presumed to be 
able to repay amounts owed, and lenders are provided certain 
legal protections when issuing such mortgages. H.R. 2226 would 
amend the Truth in Lending Act to deem residential mortgages 
qualified mortgages if certain criteria are met regarding the 
financial institution that originates and retains them, the 
terms of the loans, and the interest and fees charged for those 
loans.
    Using information from the Consumer Financial Protection 
Bureau (CFPB), CBO estimates that enacting H.R. 2226 would 
increase direct spending by $1 million in 2019 for the agency 
to issue rules to implement the changes required under the 
bill. Because enacting H.R. 2226 would affect direct spending, 
pay-as-you-go procedures apply. Enacting the bill would not 
affect revenues.
    CBO estimates that enacting H.R. 2226 would not increase 
net direct spending or on-budget deficits in any of the four 
consecutive 10-year periods beginning in 2028.
    H.R. 2226 contains no intergovernmental mandates as defined 
in the Unfunded Mandates Reform Act (UMRA).
    The bill would impose a private-sector mandate by 
eliminating an existing right of action against lenders that 
hold residential mortgages on their balance sheets and against 
mortgage originators that direct consumers to such loans. Under 
current law, lenders of mortgages that meet the standards for 
qualified mortgages are granted legal protection from civil 
actions based on a claim that the lender failed to comply with 
ability-to-repay requirements. Mortgage originators who direct 
consumers to qualified mortgages are also granted such legal 
protections. By broadening the definition of qualified 
mortgages to include loans held on a lender's balance sheet, 
the bill would limit the right of borrowers to file claims 
against holders of such loans and against mortgage originators 
who directed them to the loans, as long as the originator 
provided certain disclosures. The cost of the mandate would be 
the forgone value of the awards and settlements in such claims. 
Using information from the CFPB, CBO expects that the number of 
such claims and the awards in such cases would be small. 
Therefore, CBO estimates that the cost of the mandate would 
probably fall below the annual threshold established in UMRA 
for private-sector mandates ($156 million in 2017, adjusted 
annually for inflation).
    The CBO staff contacts for this estimate are Stephen Rabent 
(for federal costs) and Jon Sperl (for mandates). The estimate 
was approved by H. Samuel Papenfuss, Deputy Assistant Director 
for Budget Analysis.

                       Federal Mandates Statement

    This information is provided in accordance with section 423 
of the Unfunded Mandates Reform Act of 1995.
    The Committee has determined that the bill does not impose 
a Federal intergovernmental mandate on State, local, or tribal 
governments.
    The Committee has determined that the bill would impose a 
private-sector mandate by eliminating an existing right of 
action against lenders that hold mortgages on their balance 
sheets and mortgage originators who direct consumers to such 
loans. Under current law, lenders of mortgages that meet the 
standards for qualified mortgages are granted legal protection 
from civil actions based on a claim that the lender failed to 
comply with ability-to-repay requirements. Mortgage originators 
who direct consumers to qualified mortgages are also granted 
such legal protections. By broadening the definition of 
qualified mortgages to include mortgages held on a lender's 
balance sheet, the bill would limit the right of borrowers to 
file claims against holders of such loans and against mortgage 
originators who directed them to the loans, as long as the 
originator provided certain disclosures. The cost of the 
mandate would be the forgone value of the awards and 
settlements in such claims. Based on information from the CFPB, 
CBO expects that the number of such claims and the awards in 
such cases would be small. Therefore, CBO estimates that the 
cost of the mandate would probably fall below the annual 
threshold established in UMRA for private-sector mandates ($156 
million in 2017, adjusted annually for inflation).

                      Advisory Committee Statement

    No advisory committees within the meaning of section 5(b) 
of the Federal Advisory Committee Act were created by this 
legislation.

                  Applicability to Legislative Branch

    The Committee finds that the legislation does not relate to 
the terms and conditions of employment or access to public 
services or accommodations within the meaning of the section 
102(b)(3) of the Congressional Accountability Act.

                         Earmark Identification

    With respect to clause 9 of rule XXI of the Rules of the 
House of Representatives, the Committee has carefully reviewed 
the provisions of the bill and states that the provisions of 
the bill do not contain any congressional earmarks, limited tax 
benefits, or limited tariff benefits within the meaning of the 
rule.

                    Duplication of Federal Programs

    In compliance with clause 3(c)(5) of rule XIII of the Rules 
of the House of Representatives, the Committee states that no 
provision of the bill establishes or reauthorizes: (1) a 
program of the Federal Government known to be duplicative of 
another Federal program; (2) a program included in any report 
from the Government Accountability Office to Congress pursuant 
to section 21 of Public Law 111-139; or (3) a program related 
to a program identified in the most recent Catalog of Federal 
Domestic Assistance, published pursuant to the Federal Program 
Information Act (Pub. L. No. 95-220, as amended by Pub. L. No. 
98-169).

                   Disclosure of Directed Rulemaking

    Pursuant to section 3(i) of H. Res. 5, (115th Congress), 
the following statement is made concerning directed 
rulemakings: The Committee estimates that the bill requires no 
directed rulemakings within the meaning of such section.

             Section-by-Section Analysis of the Legislation


Section 1. Short title

    This section cites H.R. 2226 as the ``Portfolio Lending and 
Mortgage Access Act.''

Section 2. Minimum standards for residential mortgage loans

    This section provides that a residential mortgage loan 
shall be deemed a qualified mortgage loan, if the loan is 
originated by and continuously retained on the portfolio of an 
insured depository institution or insured credit union that has 
less than $10,000,000,000 in total consolidated assets. The 
section also imposes additional requirements for safe harbor 
treatment: loans cannot have negative amortization, interest-
only features, and would need to comply with limits on 
prepayment penalties. In addition the creditor must consider, 
document, and verify a consumer's income, employment, assets, 
and credit history. This section also provides that the loans 
may be transferred to another depository institution in certain 
circumstances.

         Changes in Existing Law Made by the Bill, as Reported

    In compliance with clause 3(e) of rule XIII of the Rules of 
the House of Representatives, changes in existing law made by 
the bill, as reported, are shown as follows (existing law 
proposed to be omitted is enclosed in black brackets, new 
matter is printed in italic, and existing law in which no 
change is proposed is shown in roman):

         Changes in Existing Law Made by the Bill, as Reported

  In compliance with clause 3(e) of rule XIII of the Rules of 
the House of Representatives, changes in existing law made by 
the bill, as reported, are shown as follows (new matter is 
printed in italic and existing law in which no change is 
proposed is shown in roman):

                          TRUTH IN LENDING ACT




           *       *       *       *       *       *       *
TITLE I--CONSUMER CREDIT COST DISCLOSURE

           *       *       *       *       *       *       *


CHAPTER 2--CREDIT TRANSACTIONS

           *       *       *       *       *       *       *



Sec. 129C. Minimum standards for residential mortgage loans

  (a) Ability To Repay.--
          (1) In general.--In accordance with regulations 
        prescribed by the Board, no creditor may make a 
        residential mortgage loan unless the creditor makes a 
        reasonable and good faith determination based on 
        verified and documented information that, at the time 
        the loan is consummated, the consumer has a reasonable 
        ability to repay the loan, according to its terms, and 
        all applicable taxes, insurance (including mortgage 
        guarantee insurance), and assessments.
          (2) Multiple loans.--If the creditor knows, or has 
        reason to know, that 1 or more residential mortgage 
        loans secured by the same dwelling will be made to the 
        same consumer, the creditor shall make a reasonable and 
        good faith determination, based on verified and 
        documented information, that the consumer has a 
        reasonable ability to repay the combined payments of 
        all loans on the same dwelling according to the terms 
        of those loans and all applicable taxes, insurance 
        (including mortgage guarantee insurance), and 
        assessments.
          (3) Basis for determination.--A determination under 
        this subsection of a consumer's ability to repay a 
        residential mortgage loan shall include consideration 
        of the consumer's credit history, current income, 
        expected income the consumer is reasonably assured of 
        receiving, current obligations, debt-to-income ratio or 
        the residual income the consumer will have after paying 
        non-mortgage debt and mortgage-related obligations, 
        employment status, and other financial resources other 
        than the consumer's equity in the dwelling or real 
        property that secures repayment of the loan. A creditor 
        shall determine the ability of the consumer to repay 
        using a payment schedule that fully amortizes the loan 
        over the term of the loan.
          (4) Income verification.--A creditor making a 
        residential mortgage loan shall verify amounts of 
        income or assets that such creditor relies on to 
        determine repayment ability, including expected income 
        or assets, by reviewing the consumer's Internal Revenue 
        Service Form W-2, tax returns, payroll receipts, 
        financial institution records, or other third-party 
        documents that provide reasonably reliable evidence of 
        the consumer's income or assets. In order to safeguard 
        against fraudulent reporting, any consideration of a 
        consumer's income history in making a determination 
        under this subsection shall include the verification of 
        such income by the use of--
                  (A) Internal Revenue Service transcripts of 
                tax returns; or
                  (B) a method that quickly and effectively 
                verifies income documentation by a third party 
                subject to rules prescribed by the Board.
          (5) Exemption.--With respect to loans made, 
        guaranteed, or insured by Federal departments or 
        agencies identified in subsection (b)(3)(B)(ii), such 
        departments or agencies may exempt refinancings under a 
        streamlined refinancing from this income verification 
        requirement as long as the following conditions are 
        met:
                  (A) The consumer is not 30 days or more past 
                due on the prior existing residential mortgage 
                loan.
                  (B) The refinancing does not increase the 
                principal balance outstanding on the prior 
                existing residential mortgage loan, except to 
                the extent of fees and charges allowed by the 
                department or agency making, guaranteeing, or 
                insuring the refinancing.
                  (C) Total points and fees (as defined in 
                section 103(aa)(4), other than bona fide third 
                party charges not retained by the mortgage 
                originator, creditor, or an affiliate of the 
                creditor or mortgage originator) payable in 
                connection with the refinancing do not exceed 3 
                percent of the total new loan amount.
                  (D) The interest rate on the refinanced loan 
                is lower than the interest rate of the original 
                loan, unless the borrower is refinancing from 
                an adjustable rate to a fixed-rate loan, under 
                guidelines that the department or agency shall 
                establish for loans they make, guarantee, or 
                issue.
                  (E) The refinancing is subject to a payment 
                schedule that will fully amortize the 
                refinancing in accordance with the regulations 
                prescribed by the department or agency making, 
                guaranteeing, or insuring the refinancing.
                  (F) The terms of the refinancing do not 
                result in a balloon payment, as defined in 
                subsection (b)(2)(A)(ii).
                  (G) Both the residential mortgage loan being 
                refinanced and the refinancing satisfy all 
                requirements of the department or agency 
                making, guaranteeing, or insuring the 
                refinancing.
          (6) Nonstandard loans.--
                  (A) Variable rate loans that defer repayment 
                of any principal or interest.--For purposes of 
                determining, under this subsection, a 
                consumer's ability to repay a variable rate 
                residential mortgage loan that allows or 
                requires the consumer to defer the repayment of 
                any principal or interest, the creditor shall 
                use a fully amortizing repayment schedule.
                  (B) Interest-only loans.--For purposes of 
                determining, under this subsection, a 
                consumer's ability to repay a residential 
                mortgage loan that permits or requires the 
                payment of interest only, the creditor shall 
                use the payment amount required to amortize the 
                loan by its final maturity.
                  (C) Calculation for negative amortization.--
                In making any determination under this 
                subsection, a creditor shall also take into 
                consideration any balance increase that may 
                accrue from any negative amortization 
                provision.
                  (D) Calculation process.--For purposes of 
                making any determination under this subsection, 
                a creditor shall calculate the monthly payment 
                amount for principal and interest on any 
                residential mortgage loan by assuming--
                          (i) the loan proceeds are fully 
                        disbursed on the date of the 
                        consummation of the loan;
                          (ii) the loan is to be repaid in 
                        substantially equal monthly amortizing 
                        payments for principal and interest 
                        over the entire term of the loan with 
                        no balloon payment, unless the loan 
                        contract requires more rapid repayment 
                        (including balloon payment), in which 
                        case the calculation shall be made (I) 
                        in accordance with regulations 
                        prescribed by the Board, with respect 
                        to any loan which has an annual 
                        percentage rate that does not exceed 
                        the average prime offer rate for a 
                        comparable transaction, as of the date 
                        the interest rate is set, by 1.5 or 
                        more percentage points for a first lien 
                        residential mortgage loan; and by 3.5 
                        or more percentage points for a 
                        subordinate lien residential mortgage 
                        loan; or (II) using the contract's 
                        repayment schedule, with respect to a 
                        loan which has an annual percentage 
                        rate, as of the date the interest rate 
                        is set, that is at least 1.5 percentage 
                        points above the average prime offer 
                        rate for a first lien residential 
                        mortgage loan; and 3.5 percentage 
                        points above the average prime offer 
                        rate for a subordinate lien residential 
                        mortgage loan; and
                          (iii) the interest rate over the 
                        entire term of the loan is a fixed rate 
                        equal to the fully indexed rate at the 
                        time of the loan closing, without 
                        considering the introductory rate.
                  (E) Refinance of hybrid loans with current 
                lender.--In considering any application for 
                refinancing an existing hybrid loan by the 
                creditor into a standard loan to be made by the 
                same creditor in any case in which there would 
                be a reduction in monthly payment and the 
                mortgagor has not been delinquent on any 
                payment on the existing hybrid loan, the 
                creditor may--
                          (i) consider the mortgagor's good 
                        standing on the existing mortgage;
                          (ii) consider if the extension of new 
                        credit would prevent a likely default 
                        should the original mortgage reset and 
                        give such concerns a higher priority as 
                        an acceptable underwriting practice; 
                        and
                          (iii) offer rate discounts and other 
                        favorable terms to such mortgagor that 
                        would be available to new customers 
                        with high credit ratings based on such 
                        underwriting practice.
          (7) Fully-indexed rate defined.--For purposes of this 
        subsection, the term ``fully indexed rate'' means the 
        index rate prevailing on a residential mortgage loan at 
        the time the loan is made plus the margin that will 
        apply after the expiration of any introductory interest 
        rates.
          (8) Reverse mortgages and bridge loans.--This 
        subsection shall not apply with respect to any reverse 
        mortgage or temporary or bridge loan with a term of 12 
        months or less, including to any loan to purchase a new 
        dwelling where the consumer plans to sell a different 
        dwelling within 12 months.
          (9) Seasonal income.--If documented income, including 
        income from a small business, is a repayment source for 
        a residential mortgage loan, a creditor may consider 
        the seasonality and irregularity of such income in the 
        underwriting of and scheduling of payments for such 
        credit.
  (b) Presumption of Ability To Repay.--
          (1) In general.--Any creditor with respect to any 
        residential mortgage loan, and any assignee of such 
        loan subject to liability under this title, may presume 
        that the loan has met the requirements of subsection 
        (a), if the loan is a qualified mortgage.
          (2) Definitions.--For purposes of this subsection, 
        the following definitions shall apply:
                  (A) Qualified mortgage.--The term ``qualified 
                mortgage'' means any residential mortgage 
                loan--
                          (i) for which the regular periodic 
                        payments for the loan may not--
                                  (I) result in an increase of 
                                the principal balance; or
                                  (II) except as provided in 
                                subparagraph (E), allow the 
                                consumer to defer repayment of 
                                principal;
                          (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, insurance, 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 regulations established 
                        by the Board relating to ratios of 
                        total monthly debt to monthly income or 
                        alternative measures of ability to pay 
                        regular expenses after payment of total 
                        monthly debt, taking into account the 
                        income levels of the borrower and such 
                        other factors as the 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 mortgage which meets the 
                        standards for a qualified mortgage, 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 third party charges not retained 
                        by the mortgage originator, creditor, 
                        or an affiliate of the creditor or 
                        mortgage 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 
                                discounted 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 
                                mortgage's interest rate will 
                                be discounted does not exceed 
                                by more than 2 percentage 
                                points the average 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 paragraph (1). 
                In prescribing such rules, the Board shall 
                consider 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 balloon 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 payments, 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 
                        account all applicable taxes, 
                        insurance, and assessments; and
                          (iv) that is extended by a creditor 
                        that--
                                  (I) operates in rural or 
                                underserved 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, consistent with the 
                                purposes of this subtitle.
          (3) Regulations.--
                  (A) In general.--The Board shall prescribe 
                regulations to carry out the purposes of this 
                subsection.
                  (B) Revision of safe harbor criteria.--
                          (i) In general.--The Board may 
                        prescribe regulations that revise, add 
                        to, or subtract from the criteria that 
                        define a qualified mortgage upon a 
                        finding that such regulations are 
                        necessary or proper to ensure that 
                        responsible, affordable mortgage credit 
                        remains available to consumers in a 
                        manner consistent with the purposes of 
                        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 facilitate 
                        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 Secretary of Veterans 
                                Affairs.
                                  (III) The Department of 
                                Agriculture, with regard loans 
                                guaranteed by the Secretary of 
                                Agriculture pursuant to 42 
                                U.S.C. 1472(h).
                                  (IV) The Rural Housing 
                                Service, with regard to loans 
                                insured by the Rural Housing 
                                Service.
          (4) Safe harbor.--
                  (A) In general.--A residential mortgage loan 
                shall be deemed a qualified mortgage loan for 
                purposes of this subsection if the loan--
                          (i) is originated by, and 
                        continuously retained in the portfolio 
                        of, a covered institution;
                          (ii) is in compliance with the 
                        limitations with respect to prepayment 
                        penalties described in subsections 
                        (c)(1) and (c)(3);
                          (iii) is in compliance with the 
                        requirements related to points and fees 
                        under paragraph (2)(A)(vii);
                          (iv) does not have negative 
                        amortization terms or interest-only 
                        terms; and
                          (v) is a loan for which the covered 
                        institution considers, documents, and 
                        verifies the debt, income, and 
                        financial resources of the consumer in 
                        accordance with subparagraph (C).
                  (B) Exception for certain transfers.--
                Subparagraph (A) shall not apply to a 
                residential mortgage loan if the legal title to 
                such residential mortgage loan is sold, 
                assigned, or otherwise transferred to another 
                person unless the legal title to such 
                residential mortgage loan is sold, assigned, or 
                otherwise transferred--
                          (i) to another person by reason of 
                        the bankruptcy or failure of the 
                        covered institution that originated 
                        such loan;
                          (ii) to an insured depository 
                        institution or insured credit union 
                        that has less than $10,000,000,000 in 
                        total consolidated assets on the date 
                        of such sale, assignment, or transfer, 
                        if the loan is retained in portfolio by 
                        such insured depository institution or 
                        insured credit union;
                          (iii) pursuant to a merger of the 
                        covered institution that originated 
                        such loan with another person or the 
                        acquisition of a the covered 
                        institution that originated such loan 
                        by another person or of another person 
                        by a covered institution, if the loan 
                        is retained in portfolio by the person 
                        to whom the loan is sold, assigned, or 
                        otherwise transferred; or
                          (iv) to a wholly owned subsidiary of 
                        the covered institution that originated 
                        such loan if the loan is considered to 
                        be an asset of such covered institution 
                        for regulatory accounting purposes.
                  (C) Consideration and documentation 
                requirements.--The consideration and 
                documentation requirements described in 
                subparagraph (A)(v) shall--
                          (i) not be construed to require 
                        compliance with, or documentation in 
                        accordance with, appendix Q to part 
                        1026 of title 12, Code of Federal 
                        Regulations, or any successor 
                        regulation; and
                          (ii) be construed to permit multiple 
                        methods of documentation.
                  (D) Definitions.--In this paragraph--
                          (i) the term ``covered institution'' 
                        means an insured depository institution 
                        or an insured credit union that, 
                        together with its affiliates, has less 
                        than $10,000,000,000 in total 
                        consolidated assets on the date on the 
                        origination of a residential mortgage 
                        loan;
                          (ii) the term ``insured credit 
                        union'' has the meaning given the term 
                        in section 101 of the Federal Credit 
                        Union Act (12 U.S.C. 1752);
                          (iii) the term ``insured depository 
                        institution'' has the meaning given the 
                        term in section 3 of the Federal 
                        Deposit Insurance Act (12 U.S.C. 1813);
                          (iv) the term ``interest-only term'' 
                        means a term of a residential mortgage 
                        loan that allows one or more of the 
                        periodic payments made under the loan 
                        to be applied solely to accrued 
                        interest and not to the principal of 
                        the loan; and
                          (v) the term ``negative amortization 
                        term'' means a term of a residential 
                        mortgage loan under which the payment 
                        of periodic payments will result in an 
                        increase in the principal of the loan.
  (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 transaction, 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 limitation on the 
                                original principal obligation 
                                of mortgage in effect for a 
                                residence of the applicable 
                                size, as of the date of such 
                                interest rate set, pursuant 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 effect for a 
                                residence of the applicable 
                                size, as of the date of such 
                                interest rate set, pursuant to 
                                the 6th sentence of section 
                                305(a)(2) the Federal Home Loan 
                                Mortgage Corporation Act (12 
                                U.S.C. 1454(a)(2)); and
                                  (III) by 3.5 or more 
                                percentage points, in the case 
                                of a subordinate lien 
                                residential mortgage loan.
          (2) Publication of average prime offer rate and apr 
        thresholds.--The Board--
                  (A) shall publish, and update at least 
                weekly, average prime offer rates;
                  (B) may publish multiple rates based on 
                varying types of mortgage transactions; and
                  (C) shall adjust the thresholds established 
                under subclause (I), (II), and (III) of 
                paragraph (1)(B)(ii) as necessary to reflect 
                significant changes in market conditions and to 
                effectuate the purposes of the Mortgage Reform 
                and Anti-Predatory Lending Act.
          (3) Phased-out penalties on qualified mortgages.--A 
        qualified mortgage (as defined in 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 in excess of 
        the following limitations:
                  (A) During the 1-year period beginning on the 
                date the loan is consummated, the prepayment 
                penalty shall not exceed an amount equal to 3 
                percent of the outstanding balance on the loan.
                  (B) During the 1-year period beginning after 
                the period described in subparagraph (A), the 
                prepayment penalty shall not exceed an amount 
                equal to 2 percent of the outstanding balance 
                on the loan.
                  (C) During the 1-year period beginning after 
                the 1-year period described in subparagraph 
                (B), the prepayment penalty shall not exceed an 
                amount equal to 1 percent of the outstanding 
                balance on the loan.
                  (D) After the end of the 3-year period 
                beginning on the date the loan is consummated, 
                no prepayment penalty may be imposed on a 
                qualified mortgage.
          (4) Option for no prepayment penalty required.--A 
        creditor may not offer a consumer a residential 
        mortgage loan product that has a prepayment penalty for 
        paying all or part of the principal after the loan is 
        consummated as a term of the loan without offering the 
        consumer a residential mortgage loan product that does 
        not have a prepayment penalty as a term of the loan.
  (d) Single Premium Credit Insurance Prohibited.--No creditor 
may finance, directly or indirectly, in connection with any 
residential mortgage loan or with any extension of credit under 
an open end consumer credit plan secured by the principal 
dwelling of the consumer, any credit life, credit disability, 
credit unemployment, or credit property insurance, or any other 
accident, loss-of-income, life, or health insurance, or any 
payments directly or indirectly for any debt cancellation or 
suspension agreement or contract, except that--
          (1) insurance premiums or debt cancellation or 
        suspension fees calculated and paid in full on a 
        monthly basis shall not be considered financed by the 
        creditor; and
          (2) this subsection shall not apply to credit 
        unemployment insurance for which the unemployment 
        insurance premiums are reasonable, the creditor 
        receives no direct or indirect compensation in 
        connection with the unemployment insurance premiums, 
        and the unemployment insurance premiums are paid 
        pursuant to another insurance contract and not paid to 
        an affiliate of the creditor.
  (e) Arbitration.--
          (1) In general.--No residential mortgage loan and no 
        extension of credit under an open end consumer credit 
        plan secured by the principal dwelling of the consumer 
        may include terms which require arbitration or any 
        other nonjudicial procedure as the method for resolving 
        any controversy or settling any claims arising out of 
        the transaction.
          (2) Post-controversy agreements.--Subject to 
        paragraph (3), paragraph (1) shall not be construed as 
        limiting the right of the consumer and the creditor or 
        any assignee to agree to arbitration or any other 
        nonjudicial procedure as the method for resolving any 
        controversy at any time after a dispute or claim under 
        the transaction arises.
          (3) No waiver of statutory cause of action.--No 
        provision of any residential mortgage loan or of any 
        extension of credit under an open end consumer credit 
        plan secured by the principal dwelling of the consumer, 
        and no other agreement between the consumer and the 
        creditor relating to the residential mortgage loan or 
        extension of credit referred to in paragraph (1), shall 
        be applied or interpreted so as to bar a consumer from 
        bringing an action in an appropriate district court of 
        the United States, or any other court of competent 
        jurisdiction, pursuant to section 130 or any other 
        provision of law, for damages or other relief in 
        connection with any alleged violation of this section, 
        any other provision of this title, or any other Federal 
        law.
  (f) Mortgages With Negative Amortization.--No creditor may 
extend credit to a borrower in connection with a consumer 
credit transaction under an open or closed end consumer credit 
plan secured by a dwelling or residential real property that 
includes a dwelling, other than a reverse mortgage, that 
provides or permits a payment plan that may, at any time over 
the term of the extension of credit, result in negative 
amortization unless, before such transaction is consummated--
          (1) the creditor provides the consumer with a 
        statement that--
                  (A) the pending transaction will or may, as 
                the case may be, result in negative 
                amortization;
                  (B) describes negative amortization in such 
                manner as the Board shall prescribe;
                  (C) negative amortization increases the 
                outstanding principal balance of the account; 
                and
                  (D) negative amortization reduces the 
                consumer's equity in the dwelling or real 
                property; and
          (2) in the case of a first-time borrower with respect 
        to a residential mortgage loan that is not a qualified 
        mortgage, the first-time borrower provides the creditor 
        with sufficient documentation to demonstrate that the 
        consumer received homeownership counseling from 
        organizations or counselors certified by the Secretary 
        of Housing and Urban Development as competent to 
        provide such counseling.
  (g) Protection Against Loss of Anti-deficiency Protection.--
          (1) Definition.--For purposes of this subsection, the 
        term ``anti-deficiency law'' means the law of any State 
        which provides that, in the event of foreclosure on the 
        residential property of a consumer securing a mortgage, 
        the consumer is not liable, in accordance with the 
        terms and limitations of such State law, for any 
        deficiency between the sale price obtained on such 
        property through foreclosure and the outstanding 
        balance of the mortgage.
          (2) Notice at time of consummation.--In the case of 
        any residential mortgage loan that is, or upon 
        consummation will be, subject to protection under an 
        anti-deficiency law, the creditor or mortgage 
        originator shall provide a written notice to the 
        consumer describing the protection provided by the 
        anti-deficiency law and the significance for the 
        consumer of the loss of such protection before such 
        loan is consummated.
          (3) Notice before refinancing that would cause loss 
        of protection.--In the case of any residential mortgage 
        loan that is subject to protection under an anti-
        deficiency law, if a creditor or mortgage originator 
        provides an application to a consumer, or receives an 
        application from a consumer, for any type of 
        refinancing for such loan that would cause the loan to 
        lose the protection of such anti-deficiency law, the 
        creditor or mortgage originator shall provide a written 
        notice to the consumer describing the protection 
        provided by the anti-deficiency law and the 
        significance for the consumer of the loss of such 
        protection before any agreement for any such 
        refinancing is consummated.
  (h) Policy Regarding Acceptance of Partial Payment.--In the 
case of any residential mortgage loan, a creditor shall 
disclose prior to settlement or, in the case of a person 
becoming a creditor with respect to an existing residential 
mortgage loan, at the time such person becomes a creditor--
          (1) the creditor's policy regarding the acceptance of 
        partial payments; and
          (2) if partial payments are accepted, how such 
        payments will be applied to such mortgage and if such 
        payments will be placed in escrow.
  (i) Timeshare Plans.--This section and any regulations 
promulgated under this section do not apply to an extension of 
credit relating to a plan described in section 101(53D) of 
title 11, United States Code.

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