[Federal Register Volume 77, Number 158 (Wednesday, August 15, 2012)]
[Proposed Rules]
[Pages 49090-49166]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-17059]



[[Page 49089]]

Vol. 77

Wednesday,

No. 158

August 15, 2012

Part III





Bureau of Consumer Financial Protection





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12 CFR Parts 1024 and 1026





 High-Cost Mortgage and Homeownership Counseling Amendments to the 
Truth in Lending Act (Regulation Z) and Homeownership Counseling 
Amendments to the Real Estate Settlement Procedures Act (Regulation X); 
Proposed Rule

  Federal Register / Vol. 77, No. 158 / Wednesday, August 15, 2012 / 
Proposed Rules  

[[Page 49090]]


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BUREAU OF CONSUMER FINANCIAL PROTECTION

12 CFR Parts 1024 and 1026

[Docket No. CFPB-2012-0029]
RIN 3170-AA12


High-Cost Mortgage and Homeownership Counseling Amendments to the 
Truth in Lending Act (Regulation Z) and Homeownership Counseling 
Amendments to the Real Estate Settlement Procedures Act (Regulation X)

AGENCY: Bureau of Consumer Financial Protection.

ACTION: Proposed rule; request for public comment.

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SUMMARY: The Dodd-Frank Wall Street Reform and Consumer Protection Act 
(Dodd-Frank Act) amends the Truth in Lending Act by expanding the types 
of mortgage loans that are subject to the protections of the Home 
Ownership and Equity Protection Act of 1994 (HOEPA), by revising and 
expanding the triggers for coverage under HOEPA, and by imposing 
additional restrictions on HOEPA mortgage loans, including a pre-loan 
counseling requirement. The Dodd-Frank Act also amends the Truth in 
Lending Act and the Real Estate Settlement Procedures Act by imposing 
certain other requirements related to homeownership counseling. The 
Bureau of Consumer Financial Protection (Bureau) is proposing to amend 
Regulation Z (Truth in Lending) and Regulation X (Real Estate 
Settlement Procedures Act) to implement the Dodd-Frank Act's amendments 
to the Truth in Lending Act and the Real Estate Settlement Procedures 
Act.

DATES: Comments must be received on or before September 7, 2012, except 
that comments on the Paperwork Reduction Act analysis in part VIII of 
this Federal Register notice must be received on or before October 15, 
2012.

ADDRESSES: You may submit comments, identified by Docket No. CFPB-2012-
0029 or RIN 3170-AA12, by any of the following methods:
     Electronic: http://www.regulations.gov. Follow the 
instructions for submitting comments.
     Mail: Monica Jackson, Office of the Executive Secretary, 
Bureau of Consumer Financial Protection, 1700 G Street NW., Washington, 
DC 20552.
     Hand Delivery/Courier in Lieu of Mail: Monica Jackson, 
Office of the Executive Secretary, Bureau of Consumer Financial 
Protection, 1700 G Street NW., Washington, DC 20552.
    All submissions must include the agency name and docket number or 
Regulatory Information Number (RIN) for this rulemaking. In general, 
all comments received will be posted without change to http://www.regulations.gov. In addition, comments will be available for public 
inspection and copying at 1700 G Street NW., Washington, DC 20552, on 
official business days between the hours of 10 a.m. and 5 p.m. Eastern 
Time. You can make an appointment to inspect the documents by 
telephoning (202) 435-7275.
    All comments, including attachments and other supporting materials, 
will become part of the public record and subject to public disclosure. 
Sensitive personal information, such as account numbers or Social 
Security numbers, should not be included. Comments will not be edited 
to remove any identifying or contact information.

FOR FURTHER INFORMATION CONTACT: Paul Ceja, Senior Counsel & Special 
Advisor; Stephen Shin and Pavneet Singh, Senior Counsels; and Courtney 
Jean, Counsel, Office of Regulations, at (202) 435-7700.

SUPPLEMENTARY INFORMATION:

I. Summary of Proposed Rule

Background

    The Home Ownership and Equity Protection Act (HOEPA) was enacted in 
1994 as an amendment to the Truth in Lending Act (TILA) to address 
abusive practices in refinancing and home-equity mortgage loans with 
high interest rates or high fees. Loans that meet HOEPA's high-cost 
triggers are subject to special disclosure requirements and 
restrictions on loan terms, and borrowers in high-cost mortgages have 
enhanced remedies for violations of the law.\1\ The provisions of TILA, 
including HOEPA, are implemented in the Bureau's Regulation Z.\2\
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    \1\ For purposes of this notice of proposed rulemaking, the 
terms ``high-cost mortgage,'' ``HOEPA-covered loan'' or ``HOEPA 
loan'' refer interchangeably to mortgages that meet HOEPA's high-
cost triggers.
    \2\ 12 CFR part 1026.
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    In response to the recent mortgage crisis, Congress through the 
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank 
Act) expanded HOEPA to apply to more types of mortgage transactions, 
including to purchase money mortgage loans and home-equity lines of 
credit. Congress also amended HOEPA's existing high-cost triggers, 
added a prepayment penalty trigger, and expanded the protections 
associated with high-cost mortgages. The Bureau is now proposing to 
amend Regulation Z to implement the Dodd-Frank Act amendments to HOEPA.
    The proposal also would implement other homeownership counseling-
related requirements that Congress adopted in the Dodd-Frank Act, that 
are not amendments to HOEPA. The proposal would generally require 
lenders to distribute a list of homeownership counselors or counseling 
organizations to consumers within a few days after applying for any 
mortgage loan. The proposal also would implement a requirement that 
first-time borrowers receive homeownership counseling before taking out 
a negatively amortizing loan.

Scope of HOEPA coverage

    The proposed rule would implement the Dodd-Frank Act's amendments 
that expanded the universe of loans potentially covered by HOEPA. Under 
the proposed rule, most types of mortgage loans secured by a consumer's 
principal dwelling, including purchase money mortgage loans, 
refinances, closed-end home-equity loans, and open-end credit plans 
(i.e., home-equity lines of credit, or HELOCs) are potentially subject 
to HOEPA coverage. Reverse mortgages would still be excluded.

Revised HOEPA thresholds

    Under the Dodd-Frank Act, HOEPA protections would be triggered 
where:
     A loan's annual percentage rate (APR) exceeds the average 
prime offer rate by 6.5 percentage points for most first-lien mortgages 
and 8.5 percentage points for subordinate lien mortgages;
     A loan's points and fees exceed 5 percent of the total 
transaction amount, or a higher threshold for loans below $20,000; or
     The creditor may charge a prepayment penalty more than 36 
months after loan consummation or account opening, or penalties that 
exceed more than 2 percent of the amount prepaid.
    The proposed rule would implement the Dodd-Frank Act's amendments 
to HOEPA's triggers for determining coverage and would provide guidance 
on how to apply the triggers. For instance, for purposes of the APR 
trigger, the interest rate used to determine HOEPA coverage for 
variable-rate loans or plans would generally be based on the maximum 
margin permitted at any time during the loan or plan, added to the 
index rate in effect at consummation or account opening. The average 
prime offer rate for open-end credit plans would be determined based on 
the average prime offer rate for the most closely comparable closed-end

[[Page 49091]]

mortgage loan. The definition of ``points and fees'' would conform 
closely to what has previously been proposed to implement requirements 
of the Dodd-Frank Act concerning assessment of consumers' ability to 
repay mortgage loans, such as by including loan originator compensation 
for closed-end mortgage loans.
    The Bureau is also seeking comment on whether to adopt certain 
adjustments or accommodations in its HOEPA implementing regulations if 
it adopts a broader definition of ``finance charge'' under Regulation 
Z. That change, which the Bureau is proposing in connection with its 
proposal to integrate mortgage disclosures,\3\ would otherwise cause 
more loans to exceed the APR and points and fees triggers and be 
classified as high-cost mortgages under HOEPA.
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    \3\ See the Bureau's 2012 TILA-RESPA Proposal, available at 
http://www.consumerfinance.gov/notice-and-comment/.
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Restrictions on loan terms

    The proposed rule also would implement new Dodd-Frank Act 
restrictions and requirements concerning loan terms and origination 
practices for high-cost mortgages. For example:
     Balloon payments would largely be banned, and creditors 
would be prohibited from charging prepayment penalties and financing 
points and fees.
     Late fees would be restricted to four percent of the 
payment that is past due, fees for providing payoff statements would be 
restricted, and fees for loan modification or loan deferral would be 
banned.
     Creditors originating open-end credit plans would be 
required to assess consumers' ability to repay the loans. (Creditors 
originating high-cost, closed-end mortgage loans already are required 
to assess consumers' ability to repay.)
     Creditors and mortgage brokers would be prohibited from 
recommending or encouraging a consumer to default on a loan or debt to 
be refinanced by a high-cost mortgage.
     Before making a high-cost mortgage, creditors would be 
required to obtain confirmation from a federally certified or approved 
homeownership counselor that the consumer has received counseling on 
the advisability of the loan.

Other counseling-related requirements

    In addition to the proposed changes discussed above, the Bureau's 
proposal would implement two Dodd-Frank Act homeownership counseling-
related provisions that are not amendments to HOEPA.
     The proposed rule would amend Regulation X \4\ to 
implement a requirement under the Real Estate Settlement Procedures Act 
(RESPA) that lenders provide a list of federally certified or approved 
homeownership counselors or organizations to consumers within three 
business days of applying for any mortgage loan. The Bureau expects to 
create a Web site portal to make it easy for lenders and consumers to 
obtain lists of homeownership counselors in their areas.
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    \4\ 12 CFR part 1024.
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     The proposed rule would amend Regulation Z to implement a 
requirement under TILA that creditors obtain confirmation that a first-
time borrower has received homeownership counseling from a federally 
certified or approved homeownership counselor or counseling 
organization before making a negative amortization loan to the 
borrower. (A negative amortization loan is one in which the payment 
schedule can cause the loan's principal balance to increase over time.)

Effective date

    The Bureau's proposal seeks comment on when a final rule should be 
effective. Because the final rule will provide important benefits to 
consumers, the Bureau seeks to make it effective as soon as possible. 
However, the Bureau understands that the final rule will require 
lenders and brokers to make systems changes and to retrain their staff. 
In addition, industry will at approximately the same time be 
implementing a number of other changes relating to other Dodd-Frank Act 
provisions, some of which will take effect within one year after 
issuance of final implementing rules. Therefore, the Bureau is seeking 
comment on how much time industry needs to make these changes.

II. Background

A. HOEPA

    HOEPA was enacted as part of the Riegle Community Development and 
Regulatory Improvement Act of 1994, Public Law 103-325, 108 Stat. 2160, 
in response to evidence concerning abusive practices in mortgage loan 
refinancing and home-equity lending.\5\ The statute applied generally 
to closed-end mortgage credit, but excluded purchase money mortgage 
loans and reverse mortgages. Coverage was triggered where a loan's APR 
exceeded comparable Treasury securities by specified thresholds for 
particular loan types, or where points and fees exceeded eight percent 
of the total loan amount or a dollar threshold.
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    \5\ HOEPA amended TILA by adding new sections 103(aa) and 129, 
15 U.S.C. 1602(aa) and 1639.
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    For high-cost loans meeting either of those thresholds, HOEPA 
required lenders to provide special pre-closing disclosures, restricted 
prepayment penalties and certain other loan terms, and regulated 
various lender practices, such as extending credit without regard to a 
consumer's ability to repay the loan. HOEPA also provided a mechanism 
for consumers to rescind covered loans that included certain prohibited 
terms and to obtain higher damages than are allowed for other types of 
TILA violations. Finally, HOEPA amended TILA section 131, 15 U.S.C. 
1641, to provide for increased liability to purchasers of HOEPA loans. 
Purchasers and assignees of loans not covered by HOEPA generally are 
liable only for legal violations apparent on the face of the disclosure 
statements, whereas purchasers of HOEPA loans generally are subject to 
all claims and defenses against the original creditor with respect to 
the mortgage.
    The Board of Governors of the Federal Reserve System (Board) first 
issued regulations implementing HOEPA in 1995. 60 FR 15463 (March 24, 
1995). The Board published additional significant changes in 2001 that 
lowered HOEPA's APR trigger for first-lien mortgage loans, expanded the 
definition of points and fees to include the cost of optional credit 
insurance and debt cancellation premiums, and enhanced the restrictions 
associated with HOEPA loans. See 66 FR 65604 (Dec. 20, 2001). In 2008, 
the Board exercised its authority under HOEPA to extend certain 
consumer protections concerning a consumer's ability to repay and 
prepayment penalties to a new category of ``higher-priced mortgage 
loans'' with APRs that are lower than those prescribed for HOEPA loans 
but that nevertheless exceed the average prime offer rate by prescribed 
amounts. 73 FR 44522 (July 30, 2008).
    With the enactment of the Dodd-Frank Act, general rulemaking 
authority for TILA, including HOEPA, transferred from the 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 the Bureau's rulemaking 
authority by section 1029 of the Dodd-Frank Act). 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

[[Page 49092]]

certain other changes made by the Dodd-Frank Act. The Bureau's 
Regulation Z took effect on December 30, 2011. Sections 1026.31, 32 and 
34 of the Bureau's Regulation Z implement the HOEPA provisions of TILA.

B. RESPA

    Congress enacted RESPA, 12 U.S.C. 2601 et seq., in 1974 to provide 
consumers with greater and more timely information on the nature and 
costs of the residential real estate settlement process and to protect 
consumers from unnecessarily high settlement charges, including through 
the use of disclosures and the prohibition of kickbacks and referral 
fees. RESPA's disclosure requirements generally apply to ``settlement 
services'' for ``federally related mortgage loans,'' a term that 
includes virtually any purchase money or refinance loan secured by a 
first or subordinate lien on one-to-four family residential real 
property. 12 U.S.C. 2602(1). Section 5 of RESPA generally requires that 
lenders provide potential borrowers of federally related mortgage loans 
a home buying information booklet containing information about the 
nature and costs of real estate settlement services, a good faith 
estimate of charges the borrower is likely to incur during the 
settlement process, and, as a new requirement pursuant to the Dodd-
Frank Act, a list of certified homeownership counselors. Id. 2604. The 
booklet, good faith estimate, and list of homeownership counselors must 
be provided not later than three business days after the lender 
receives an application, unless the lender denies the application for 
credit before the end of the three-day period. Id. 2604(d).
    Historically, Regulation X of the Department of Housing and Urban 
Development (HUD), 24 CFR part 3500, has implemented RESPA. The Dodd-
Frank Act transferred rulemaking authority for RESPA to the Bureau, 
effective July 21, 2011. See sections 1061 and 1098 of the Dodd-Frank 
Act. Pursuant to the Dodd-Frank Act and RESPA, as amended, the Bureau 
published for public comment an interim final rule establishing a new 
Regulation X, 12 CFR part 1024, implementing RESPA. 76 FR 78978 (Dec. 
20, 2011). This rule did not impose any new substantive obligations but 
did make certain technical, conforming, and stylistic changes to 
reflect the transfer of authority and certain other changes made by the 
Dodd-Frank Act. The Bureau's Regulation X took effect on December 30, 
2011.

C. The Dodd-Frank Act

    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.\6\ The Dodd-Frank Act 
created the Bureau and consolidated various rulemaking and supervisory 
authorities in the new agency, including the authority to implement 
HOEPA, TILA, and RESPA.\7\ 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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    \6\ For more discussion of the mortgage market, the financial 
crisis, and mortgage origination generally, see the Bureau's 2012 
TILA-RESPA Proposal.
    \7\ Sections 1011 and 1021 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. The Consumer Financial 
Protection Act is substantially codified at 12 U.S.C. 5481-5603.
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    As part of these changes, sections 1431 through 1433 of the Dodd-
Frank Act significantly amended HOEPA to expand the types of loans 
potentially subject to HOEPA coverage, to revise the triggers for HOEPA 
coverage, and to strengthen and expand the restrictions that HOEPA 
imposes on those mortgages.\8\ Several provisions of the Dodd-Frank Act 
also require and encourage consumers to obtain homeownership 
counseling. Sections 1433(e) and 1414 require creditors to obtain 
confirmation that a borrower has obtained counseling from a federally 
approved counselor prior to extending a high-cost mortgage under HOEPA 
or (in the case of first-time borrowers) a negatively amortizing loan. 
The Dodd-Frank Act also amended RESPA to require distribution of a 
housing counselor list as part of the general mortgage application 
process. The Bureau is proposing this rule to implement the HOEPA and 
counseling requirements.\9\
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    \8\ As amended, the HOEPA provisions of TILA will be codified at 
15 U.S.C. 1602(bb) and 1639. See Sec.  1100A(1)(A) of the Dodd-Frank 
Act.
    \9\ The Bureau notes that the Dodd-Frank Act renumbered existing 
TILA section 103(aa) concerning HOEPA's triggers as section 103(bb), 
15 U.S.C. 1602(bb). See Sec.  1100A(1)(A) of the Dodd-Frank Act. 
This proposal generally references TILA section 103(aa) to refer to 
the pre-Dodd-Frank provision, which is in effect until the Dodd-
Frank Act's amendments take effect, and TILA section 103(bb) to 
refer to the provision as amended.
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D. The Market for High-Cost Mortgages

    Historically, originations of high-cost mortgages have accounted 
for an extremely small percentage of the market. This may be due to a 
variety of factors, including the fact that HOEPA's assignee liability 
provisions make the loans relatively unattractive to secondary market 
investors, as well as general compliance burden and stigma. Data 
collected under the Home Mortgage Disclosure Act (HMDA) further 
indicate that the percentage share of HOEPA loans has generally been 
declining since 2004, the first year that HMDA reporters were required 
to identify HOEPA loans. Between 2004 and 2010, HOEPA loans typically 
comprised about 0.2 percent of originations of home-secured refinance 
or home-improvement loans made by lenders that report in HMDA. This 
percentage peaked at 0.44 percent in 2005 when, of about 8.2 million 
originations potentially covered by HOEPA, approximately 36,000 HOEPA 
loans were made. The percentage fell to 0.06 percent by 2010 when, of 
5.3 million originations potentially covered by HOEPA, about 3,400 
HOEPA loans were made. Similarly, the number of HMDA-reporting lenders 
that originate HOEPA loans is relatively small. From 2004 through 2009, 
about 1,000 to 2,300 (roughly 12 to 24 percent) of such lenders 
extended HOEPA loans. The vast majority (i.e., 97 percent or more) of 
those lenders made fewer than ten HOEPA loans in each year between 2004 
and 2009. In 2010, only about 650 lenders (roughly 8 percent of HMDA 
filers) reported any HOEPA loans, with just under 60 lenders accounting 
for about 60 percent of HOEPA lending.\10\ As discussed above, the 
Dodd-Frank Act expanded the types of loans potentially covered by HOEPA 
by including purchase money mortgage loans and HELOCs. Notwithstanding 
this expansion, the Bureau believes that HOEPA lending will continue to 
constitute a small percentage of the mortgage lending market. See part 
VII, below, for a detailed discussion of the likely impact of the Dodd-
Frank Act's amendments on HOEPA lending.
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    \10\ These statistics are drawn from Federal Reserve Bulletin 
articles that summarize the HMDA data each year. For the most recent 
of these annual articles, see www.federalreserve.gov/pubs/bulletin/2011/pdf/2010_HMDA_final.pdf.
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E. Other Rulemakings

    In addition to this proposal, the Bureau currently is engaged in 
six other rulemakings relating to mortgage credit to implement 
requirements of the Dodd-Frank Act:
     TILA-RESPA Integration: On the same day that this proposal 
is released by the Bureau, the Bureau is releasing a proposed rule and 
forms combining the TILA mortgage loan disclosures with the Good Faith 
Estimate (GFE) and settlement statement required under

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RESPA pursuant to Dodd-Frank Act section 1032(f) as well as sections 
4(a) of RESPA and 105(b) of TILA, as amended by Dodd-Frank Act sections 
1098 and 1100A, respectively (2012 TILA-RESPA Proposal). 12 U.S.C. 
2603(a); 15 U.S.C. 1604(b).
     Servicing: The Bureau is in the process of developing a 
proposal to implement Dodd-Frank Act requirements regarding force-
placed insurance, error resolution, and payment crediting, as well as 
forms for mortgage loan periodic statements and ``hybrid'' adjustable-
rate mortgage reset disclosures, pursuant to sections 6 of RESPA and 
128, 128A, 129F, and 129G of TILA, as amended or established by Dodd-
Frank Act sections 1418, 1420, 1463, and 1464. The Bureau has publicly 
stated that in connection with the servicing rulemaking the Bureau is 
considering proposing rules on reasonable information management, early 
intervention for troubled and delinquent borrowers, and continuity of 
contact, pursuant to the Bureau's authority to carry out the consumer 
protection purposes of RESPA in section 6 of RESPA, as amended by Dodd-
Frank Act section 1463. 12 U.S.C. 2605; 15 U.S.C. 1638, 1638a, 1639f, 
and 1639g.
     Loan Originator Compensation: The Bureau is in the process 
of developing a proposal to implement provisions of the Dodd-Frank Act 
requiring certain creditors and mortgage loan originators to meet duty 
of care qualifications and prohibiting mortgage 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, 
pursuant to TILA section 129B as established by Dodd-Frank Act sections 
1402 and 1403. 15 U.S.C. 1639b.
     Appraisals: The Bureau, jointly with Federal prudential 
regulators and other Federal agencies, is in the process of developing 
a proposal to implement Dodd-Frank Act requirements concerning 
appraisals for higher-risk mortgages, appraisal management companies, 
and automated valuation models, pursuant to TILA section 129H as 
established by Dodd-Frank Act section 1471, 15 U.S.C. 1639h, and 
sections 1124 and 1125 of the Financial Institutions Reform, Recovery, 
and Enforcement Act of 1989 (FIRREA) as established by Dodd-Frank Act 
sections 1473(f), 12 U.S.C. 3353, and 1473(q), 12 U.S.C. 3354, 
respectively. In addition, the Bureau is developing rules to implement 
section 701(e) of the Equal Credit Opportunity Act (ECOA), as amended 
by Dodd-Frank Act section 1474, to require that creditors provide 
applicants with a free copy of written appraisals and valuations 
developed in connection with applications for loans secured by a first 
lien on a dwelling (collectively, Appraisals Rulemaking). 15 U.S.C. 
1691(e).
     Ability to Repay: The Bureau is in the process of 
finalizing a proposal issued by the Board to implement provisions of 
the Dodd-Frank Act requiring creditors to determine that a consumer can 
repay a mortgage loan and establishing standards for compliance, such 
as by making a ``qualified mortgage,'' pursuant to TILA section 129C as 
established by Dodd-Frank Act sections 1411 and 1412 (Ability to Repay 
Rulemaking). 15 U.S.C. 1639c.
     Escrows: The Bureau is in the process of finalizing a 
proposal issued by the Board to implement provisions of the Dodd-Frank 
Act requiring certain escrow account disclosures and exempting from the 
higher-priced mortgage loan escrow requirement loans made by certain 
small creditors, among other provisions, pursuant to TILA section 129D 
as established by Dodd-Frank Act sections 1461 and 1462 (Escrow 
Rulemaking). 15 U.S.C. 1639d.

With the exception of the requirements being implemented in the TILA-
RESPA rulemaking, the Dodd-Frank Act requirements referenced above 
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. To provide an orderly, 
coordinated, and efficient comment process for these rulemakings, the 
Bureau is setting the deadline for comments on this proposed rule 60 
days after the date the proposal is issued (September 7, 2012), instead 
of 60 days after this notice is published in the Federal Register. 
Because the precise date of publication cannot be predicted in advance, 
this method will allow interested parties that intend to comment on 
multiple proposals to plan accordingly and will ensure that the Bureau 
receives comments with sufficient time remaining to issue final rules 
by January 21, 2013. However, consistent with the requirements of the 
Paperwork Reduction Act, the comment period for the proposed analysis 
under that Act will end 60 days after publication of this notice in the 
Federal Register.

    The Bureau regards the foregoing rulemakings as components of a 
larger undertaking; many of them intersect with one or more of the 
others. Accordingly, the Bureau is coordinating carefully the 
development of the proposals and final rules identified above. Each 
rulemaking will adopt new regulatory provisions to implement the 
various Dodd-Frank Act mandates described above. In addition, each of 
them may include other provisions the Bureau considers necessary or 
appropriate to ensure that the overall undertaking is accomplished 
efficiently and that it ultimately yields a comprehensive regulatory 
scheme for mortgage credit that achieves the statutory purposes set 
forth by Congress, while avoiding unnecessary burdens on industry. 
Thus, many of the rulemakings listed above involve issues that extend 
across two or more rulemakings. In this context, each rulemaking may 
raise concerns that might appear unaddressed if that rulemaking were 
viewed in isolation. For efficiency's sake, however, the Bureau is 
publishing and soliciting comment on proposed answers to certain issues 
raised by two or more of its mortgage rulemakings in whichever 
rulemaking is most appropriate, in the Bureau's judgment, for 
addressing each specific issue. Accordingly, the Bureau urges the 
public to review this and the other mortgage proposals identified 
above, including those previously published by the Board, together. 
Such a review will ensure a more complete understanding of the Bureau's 
overall approach and will foster more comprehensive and informed public 
comment on the Bureau's several proposals, including provisions that 
may have some relation to more than one rulemaking but are being 
proposed for comment in only one of them.
    For example, as discussed in detail in the section-by-section 
analysis under proposed Sec.  1026.32(a) and (b) below, the Bureau's 
2012 TILA-RESPA Proposal is proposing a simpler, more inclusive 
definition of the finance charge for closed-end, dwelling-secured 
credit transactions, similar to the definition that the Board proposed 
in its August 2009 proposed rulemaking concerning closed-end credit. 
See 74 FR 43232, 43241-45 (Aug. 26, 2009) (2009 Closed-End Proposal). 
The Board recognized at that time that the more inclusive finance 
charge would expand the coverage of HOEPA and similar State laws. Id. 
at 43244-45. To address that issue, among others, the Board in 2010 
proposed to retain the existing treatment of third-party charges in the 
points and fees definition for HOEPA, notwithstanding the proposed 
expansion of the finance charge for disclosure purposes. See 75 FR 
58539, 58637-38 (Sept. 24, 2010) (2010 Mortgage Proposal). Similarly, 
the

[[Page 49094]]

Board's 2010 Mortgage Proposal introduced a new metric for determining 
coverage of the ``higher-priced mortgage loan'' protections of 
Regulation Z \11\ to be used in place of a transaction's APR, known as 
the ``transaction coverage rate'' (TCR), which does not reflect the 
additional charges that are reflected in the disclosed APR under the 
more inclusive finance charge definition. Id. at 58660-62.
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    \11\ 12 CFR 1026.35.
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    The Bureau recognizes, as did the Board, that the proposed more 
inclusive finance charge could affect the coverage of higher-priced 
mortgage loan and HOEPA protections. The Bureau is also aware that, 
consequently, a more inclusive finance charge has implications for the 
HOEPA, Appraisals, Ability to Repay, and Escrows rulemakings identified 
above. Those impacts are analyzed in the 2012 TILA-RESPA Proposal, but 
the Bureau believes that it is also helpful to analyze potential 
impacts and modifications to particular regulatory triggers on a rule-
by-rule basis. Accordingly, this proposal seeks comment on whether and 
how to account for the implications of the more inclusive finance 
charge on the scope of HOEPA coverage. See the section-by-section 
analysis to proposed Sec.  1026.32(a) and (b), below.

F. The Board's Proposals

    As noted above, the Bureau inherited rulemaking authority for 
Regulation Z from the Board in July 2011, including the authority to 
finalize several mortgage-related rulemakings that the Board proposed 
between 2009 and 2011 in part to respond to the mortgage crisis and to 
begin implementing new Dodd-Frank Act requirements. Several of the 
Board's pending mortgage-related proposals relate directly to 
provisions addressed in this proposal. As discussed in detail in the 
section-by-section analysis, below, this proposal re-publishes or 
otherwise incorporates certain portions of the Board's proposals.
    2009 Closed-End Proposal. On August 26, 2009, the Board published 
proposed amendments to Regulation Z containing comprehensive changes to 
the disclosures for closed-end credit secured by real property or a 
consumer's dwelling. 74 FR 43232 (Aug. 26, 2009) (2009 Closed-End 
Proposal). In addition to the simpler, more inclusive definition of the 
finance charge discussed above, the Board's 2009 Closed-End Proposal 
proposed to establish a new Sec.  1026.38(a)(5) for disclosure of 
prepayment penalties for closed-end mortgage loans. See id. at 43334, 
43413. In doing so, the Board proposed several examples of prepayment 
penalties, including charges determined by treating the loan balance as 
outstanding for a period after prepayment in full and applying the 
interest rate to such ``balance,'' a minimum finance charge in a 
simple-interest transaction, and charges that a creditor waives unless 
the consumer prepays the obligation. The Board also proposed loan 
guarantee fees and fees imposed for preparing a payoff statement or 
other documents in connection with a prepayment as examples of charges 
that are not prepayment penalties.
    2009 Open-End Proposal. On August 26, 2009, the Board published 
proposed amendments to Regulation Z containing comprehensive changes to 
the disclosures for HELOCs. 74 FR 43428 (Aug. 26, 2009) (2009 Open-End 
Proposal). Among other things, the Board's 2009 Open-End Proposal 
addressed the types of charges that should be disclosed as prepayment 
penalties for home equity lines of credit.
    2010 Mortgage Proposal. On September 24, 2010, the Board proposed 
further amendments to Regulation Z regarding rescission rights, 
disclosure requirements in connection with modifications of existing 
mortgage loans, escrow requirements for higher-priced mortgage loans, 
and disclosures and requirements for reverse mortgage loans. This 
proposal was the second stage of the comprehensive review conducted by 
the Board of TILA's rules for home-secured credit. 75 FR 58539 (Sept. 
24, 2010) (2010 Mortgage Proposal). As discussed above, the Board 
revisited in the 2010 Mortgage Proposal the effect of adopting a 
simpler, more inclusive definition of the finance charge for purposes 
of disclosing the APR to consumers. To ensure that loans would not be 
inappropriately classified as higher-priced mortgage loans under 
Regulation Z, the Board proposed to adopt the TCR. Under the proposal, 
the TCR would have been calculated solely to determine coverage under 
the Board's higher-priced mortgage rule.\12\ As proposed, the TCR would 
have been calculated consistently with how the current APR is 
calculated, except that prepaid finance charges not paid to the 
creditor, its affiliate, or a mortgage broker would not have been 
included. Id. at 58660-62.
---------------------------------------------------------------------------

    \12\ 12 CFR 1026.35.
---------------------------------------------------------------------------

    The Board's 2010 Mortgage Proposal also revisited the definition of 
prepayment penalty. The Board proposed to amend commentary to 
Regulation Z to clarify that, on a closed-end transaction, assessing 
interest for a period after the loan balance has been paid in full is a 
prepayment penalty, even if the charge results from the normal interest 
accrual amortization method used on the transaction. The amendment was 
intended to clarify a question that had been raised in connection with 
FHA loans and other lending programs, which, for purposes of allocating 
a consumer's payment to accrued interest and principal, treated all 
loan payments as being made on the scheduled due date even if payment 
was made prior to its scheduled due date. The amendment clarified that, 
in the case of a prepayment in full of any outstanding loan balance, 
such an interest accrual amortization method would be considered a 
prepayment penalty, even if it was the normal method for other payments 
on the transaction. See id. at 58586, 58756, 58781.
    2011 Escrow Proposal. On March 2, 2011, the Board proposed to amend 
Regulation Z to implement amendments made by sections 1461 and 1462 of 
the Dodd-Frank Act to TILA relating to escrow accounts. 76 FR 11598 
(March 2, 2011) (2011 Escrow Proposal). Among other things, the Board's 
2011 Escrow Proposal proposed escrow-related disclosure requirements 
for higher-priced mortgage loans. In doing so, the Board proposed to 
use the TCR proposed in the 2010 Mortgage Proposal to determine whether 
a transaction is a higher-priced mortgage loan. The Board also proposed 
to use the ``average prime offer rate,'' as defined in current Sec.  
1026.35(a)(2), as the benchmark rate for higher-priced mortgage loan 
coverage See id. at 11609.
    2011 ATR Proposal. On May 11, 2011, the Board proposed amendments 
to Regulation Z to implement section 1411 of the Dodd-Frank Act, which 
amended TILA to prohibit creditors from making mortgage loans without 
regard to the consumer's ability to repay. 76 FR 27390 (May 11, 2011) 
(2011 ATR Proposal). Section 1411 of the Dodd-Frank Act added section 
129C to TILA, codified at 15 U.S.C. 1639c, which prohibits a creditor 
from making a mortgage loan unless the creditor makes a reasonable and 
good faith determination, based on verified and documented information, 
that the consumer will have a reasonable ability to repay the loan, 
including any mortgage-related obligations (such as property taxes). 
The Board's 2011 ATR Proposal also proposed to implement section 1412 
of the Dodd-Frank Act, which created a new type of closed-end, 
dwelling-secured mortgage--a

[[Page 49095]]

``qualified mortgage''--to which, among other things, certain 
restrictions on points and fees and prepayment penalties apply. The 
Board's 2011 ATR Proposal also enumerated examples of prepayment 
penalties, drawing from both the 2009 Closed-End Proposal and the 2010 
Mortgage Proposal. See id. at 27415-16. The proposal also proposed to 
implement the statutory definition of points and fees to be used in 
determining whether a mortgage is a qualified mortgage, which in turn 
incorporates the definition of points and fees in HOEPA. Id. at 27398-
406.\13\
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 1639c(b)(2)(C).
---------------------------------------------------------------------------

    As discussed in detail throughout the section-by-section analysis 
below, the current proposal of the Bureau to implement the Dodd-Frank 
HOEPA amendments draws on the Board's 2009 Closed-End Proposal, 2009 
Open-End Proposal, 2010 Mortgage Proposal, 2011 Escrow Proposal, and 
2011 ATR Proposal.

III. Legal Authority

    The Bureau is issuing this proposed rule pursuant to its authority 
under TILA, RESPA, and the Dodd-Frank Act. On July 21, 2011, section 
1061 of the Dodd-Frank Act transferred to the Bureau all of the HUD 
Secretary's consumer protection functions relating to RESPA.\14\ 
Accordingly, effective July 21, 2011 the authority of HUD to issue 
regulations pursuant to RESPA transferred to the Bureau. Section 1061 
of the Dodd-Frank Act also 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.''\15\ TILA, 
HOEPA (which is codified as part of TILA), RESPA, and title X of the 
Dodd-Frank Act are Federal consumer financial laws.\16\ Accordingly, 
the Bureau has authority to issue regulations pursuant to TILA, RESPA, 
and title X of the Dodd-Frank Act.
---------------------------------------------------------------------------

    \14\ Dodd-Frank Act section 1061(b)(7); 12 U.S.C. 5581(b)(7).
    \15\ 12 U.S.C. 5581(a)(1).
    \16\ 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, HOEPA, and 
RESPA).
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A. RESPA

    Section 19(a) of RESPA, 12 U.S.C. 2617(a), authorizes the Bureau to 
prescribe such rules and regulations and to make such interpretations 
and grant such reasonable exemptions for classes of transactions as may 
be necessary to achieve the purposes of RESPA. One purpose of RESPA is 
to effect certain changes in the settlement process for residential 
real estate that will result in more effective advance disclosure to 
home buyers and sellers of settlement costs. RESPA section 2(b), 12 
U.S.C. 2601(b). In addition, in enacting RESPA, Congress found that 
consumers are entitled to be ``provided with greater and more timely 
information on the nature and costs of the settlement process and [to 
be] protected from unnecessarily high settlement charges caused by 
certain abusive practices * * * .'' RESPA section 2(a), 12 U.S.C. 
2601(a). In the past, section 19(a) has served as a broad source of 
authority to prescribe disclosures and substantive requirements to 
carry out the purposes of RESPA.

B. TILA

    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 the Act. Except with respect to the substantive 
restrictions on high-cost mortgages provided in TILA section 129, TILA 
section 105(a) authorizes the Bureau to prescribe regulations that 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 determines 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).
    Historically, TILA section 105(a) has served as a broad source of 
authority for rules that promote the informed use of credit through 
required disclosures and substantive regulation of certain practices. 
However, Dodd-Frank Act section 1100A clarified the Bureau's section 
105(a) authority by amending that section to provide express authority 
to prescribe regulations that contain ``additional requirements'' that 
the Bureau finds are necessary or proper to effectuate the purposes of 
TILA, to prevent circumvention or evasion thereof, or to facilitate 
compliance. This amendment clarified the authority to exercise TILA 
section 105(a) to prescribe requirements beyond those specifically 
listed in the statute that meet the standards outlined in section 
105(a). The Dodd-Frank Act also clarified the Bureau's rulemaking 
authority over high-cost mortgages pursuant to section 105(a). As 
amended by the Dodd-Frank Act, TILA section 105(a) authority to make 
adjustments and exceptions to the requirements of TILA applies to all 
transactions subject to TILA, except with respect to the provisions of 
the TILA section 129 that apply to high-cost mortgages, as noted above. 
For the reasons discussed in this notice, the Bureau is proposing 
regulations to carry out TILA's purposes and is proposing 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.
    Pursuant to TILA section 103(bb)(2), 15 U.S.C. 1602(bb)(2), the 
Bureau may prescribe regulations to adjust the statutory percentage 
points for the APR threshold to determine whether a transaction is 
covered as a high-cost mortgage, if the Bureau determines that such an 
increase or decrease is consistent with the statutory consumer 
protections for high-cost mortgages and is warranted by the need for 
credit. Under TILA section 103(bb)(4), the Bureau may adjust the 
definition of points and fees for purposes of that threshold to include 
such charges that the Bureau determines to be appropriate.
    With respect to the high-cost mortgage provisions of TILA section 
129, TILA section 129(p), 15 U.S.C. 1639(p), as amended by the Dodd-
Frank Act, grants the Bureau authority to create exemptions to the 
restrictions on high-cost mortgages and expand the protections that 
apply to high-cost mortgages. Under TILA section 129(p)(1), the Bureau 
may exempt specific mortgage products or categories from any or all of 
the prohibitions specified in subsections (c) through (i) of TILA 
section 129,\17\ if the Bureau finds that the exemption is in the 
interest of the borrowing public and will

[[Page 49096]]

apply only to products that maintain and strengthen home ownership and 
equity protections.
---------------------------------------------------------------------------

    \17\ These subsections are: Sec.  129(c) (No prepayment 
penalty); Sec.  129(d) (Limitations after default); Sec.  129(e) (No 
balloon payments); Sec.  129(f) (No negative amortization); Sec.  
129(g) (No prepaid payments); Sec.  129(h) (Prohibition on extending 
credit without regard to payment ability of consumer); and Sec.  
129(i) (Requirements for payments under home improvement contracts).
---------------------------------------------------------------------------

    TILA section 129(p)(2) grants the Bureau the authority to prohibit 
acts or practices in connection with:
     Mortgage loans that the Bureau finds to be unfair, 
deceptive, or designed to evade the provisions of HOEPA; and
     Refinancing of mortgage loans the Bureau finds to be 
associated with abusive lending practices or that are otherwise not in 
the interest of the borrower.
    The authority granted to the Bureau under TILA section 129(p)(2) is 
broad. The provision is not limited to acts or practices by creditors. 
TILA section 129(p)(2) authorizes protections against unfair or 
deceptive practices ``in connection with mortgage loans,'' and it 
authorizes protections against abusive practices ``in connection with * 
* * refinancing of mortgage loans.'' Thus, the Bureau's authority is 
not limited to regulating specific contractual terms of mortgage loan 
agreements; it extends to regulating loan-related practices generally, 
within the standards set forth in the statute. The Bureau notes that 
TILA does not set forth a standard for what is unfair or deceptive, but 
those terms have settled meanings under other Federal and State 
consumer protection laws. The Conference Report for HOEPA indicates 
that, in determining whether a practice in connection with mortgage 
loans is unfair or deceptive, the Bureau should look to the standards 
employed for interpreting State unfair and deceptive trade practices 
statutes and the Federal Trade Commission Act, section 5(a), 15 U.S.C. 
45(a).\18\
---------------------------------------------------------------------------

    \18\ H.R. Rep. 103-652, at 162 (1994) (Conf. Rep.).
---------------------------------------------------------------------------

    In addition, section 1433(e) of the Dodd-Frank Act created a new 
TILA section 129(u)(3), which authorizes the Bureau to implement pre-
loan counseling requirements mandated by the Dodd-Frank Act for high-
cost mortgages. Specifically, under TILA section 129(u)(3), the Bureau 
may prescribe regulations as the Bureau determines to be appropriate to 
implement TILA section 129(u)(1), which provides the Dodd-Frank Act's 
pre-loan counseling requirement for high-cost mortgages.

C. The Dodd-Frank Act

    Section 1405(b) of the Dodd-Frank Act provides that, 
``[n]otwithstanding any other provision of [title XIV of the Dodd-Frank 
Act], in order to improve consumer awareness and understanding of 
transactions involving residential mortgage loans through the use of 
disclosures, the [Bureau] may, by rule, exempt from or modify 
disclosure requirements, in whole or in part, for any class of 
residential mortgage loans if the [Bureau] determines that such 
exemption or modification is in the interest of consumers and in the 
public interest.'' 15 U.S.C. 1601 note. Section 1401 of the Dodd-Frank 
Act, which amended TILA section 103(cc), 15 U.S.C. 1602(cc), generally 
defines residential mortgage loan as any consumer credit transaction 
that is secured by a mortgage on a dwelling or on residential real 
property that includes a dwelling other than an open-end credit plan or 
an extension of credit secured by a consumer's interest in a timeshare 
plan. Notably, the authority granted by section 1405(b) applies to 
``disclosure requirements'' generally, and is not limited to a specific 
statute or statutes. Accordingly, Dodd-Frank Act section 1405(b) is a 
broad source of authority to modify the disclosure requirements of TILA 
and RESPA.
    Section 1022(b)(1) of the Dodd-Frank Act authorizes the Bureau to 
prescribe rules ``as may be necessary or appropriate to enable the 
Bureau to administer and carry out the purposes and objectives of the 
Federal consumer financial laws, and to prevent evasions thereof.'' 12 
U.S.C. 5512(b)(1). Section 1022(b)(2) of the Dodd-Frank Act prescribes 
certain standards for rulemaking that the Bureau must follow in 
exercising its authority under section 1022(b)(1). 12 U.S.C. 
5512(b)(2). As discussed above, TILA and RESPA are Federal consumer 
financial laws. Accordingly, the Bureau proposes to exercise its 
authority under Dodd-Frank Act section 1022(b) to prescribe rules under 
TILA and RESPA that carry out the purposes and prevent evasion of those 
laws. See part VI for a discussion of the Bureau's standards for 
rulemaking under Dodd-Frank Act section 1022(b)(2).
    For the reasons discussed below in the section-by-section analysis, 
the Bureau is proposing regulations pursuant to its authority under 
TILA, RESPA, and title X of the Dodd-Frank Act.

IV. Compliance Issues

A. Implementation Period

    The Bureau expects to issue a final rule implementing the Dodd-
Frank Act amendments addressed in the Bureau's proposal by January 21, 
2013. As discussed above, the Bureau is seeking comment on when a final 
rule should be effective.
    Under section 1400(c)(1) of the Dodd-Frank Act, regulations that 
are required to be issued to implement amendments under Title XIV by 
the Dodd-Frank Act take effect not later than one year from the date of 
the issuance of the final implementing regulations. The regulations 
proposed in this notice, while implementing amendments under Title XIV 
of the Dodd-Frank Act, are not regulations required to be issued by the 
Act. Therefore, the Dodd-Frank Act does not require the final 
regulation to be effective within one year from issuance of that final 
regulation. Title XIV amendments that are not required by the Dodd-
Frank Act to be implemented by regulation take effect on the effective 
date established by the final regulations implementing the 
amendments.\19\
---------------------------------------------------------------------------

    \19\ See section 1400(c)(2) of the Dodd-Frank Act. Where 
regulations have not been issued by January 21, 2013 (i.e., the date 
that is 18 months after the ``designated transfer date''), the 
effective date of the Dodd-Frank Act amendments is generally January 
21, 2013. See id. Sec.  1400(c)(3).
---------------------------------------------------------------------------

    The Bureau recognizes the importance of the changes to be made by 
the Bureau's final rule for consumer protection, and the need to put 
these changes into place for consumers. For example, including within 
HOEPA's definition of ``high-cost mortgage'' high cost purchase money 
mortgages and HELOCs, will ensure that borrowers who obtain such high-
cost mortgages will have the full benefit of the protections and 
enhanced remedies provided by HOEPA. In addition, for consumers 
applying for a high-cost mortgage, having the benefit of the advice of 
a homeownership counselor to assist them in understanding the terms of 
the mortgage, and how such a mortgage will fit in with their existing 
budget, will help consumers in fully assessing the possible 
consequences of such a mortgage. The Bureau believes consumers should 
have the benefit of the Dodd-Frank Act additional protections and 
requirements as soon as possible.
    The Bureau also recognizes, however, that lenders, brokers, and 
(where applicable) servicers will need time to make systems changes and 
to retrain their staff, in order to address the Dodd-Frank Act changes 
implemented through the Bureau's final rule. In addition, the Bureau 
recognizes that industry will need to make changes to address a number 
of other requirements relating to other Dodd-Frank Act provisions, some 
of which, unlike the Bureau's HOEPA rulemaking, are required by the 
Dodd-Frank Act to take effect within one year after issuance of final 
implementing rules. The Bureau believes that ensuring that industry has 
sufficient time to make the necessary changes will ultimately benefit

[[Page 49097]]

consumers through better industry compliance.
    The Bureau therefore seeks public comment on the time period that 
should be provided to implement the changes that will be required by 
the final rule, taking into account the factors discussed above. As 
discussed in the section-by-section analysis to proposed Sec.  
1026.32(a)(1)(i) below, the Bureau also seeks comment on potential 
implementation periods relating to certain changes being proposed in 
the 2012 TILA-RESPA Proposal to the definition of finance charge under 
Regulation Z, and related mitigation measures that the Bureau is 
proposing in this rule to address the impacts on HOEPA coverage.

B. Corrections and Unintentional Violations of HOEPA

    Section 1433(f) of the Dodd-Frank Act added new section 129(v) to 
TILA, 15 U.S.C. 1639(v), which allows a creditor or assignee of a high-
cost mortgage in certain circumstances to correct a failure to comply, 
when acting in good faith, with HOEPA requirements. At this time the 
Bureau is not proposing to issue regulatory guidance concerning this 
provision. The Bureau solicits comment on the extent to which creditors 
or assignees are likely to invoke this provision, whether regulatory 
guidance would be useful, and if so what issues would be most important 
to address.

V. Section-by-Section Analysis

A. Regulation X

Section 1024.20 List of Homeownership Counselors
    The Bureau is proposing a new Sec.  1024.20 to implement an 
amendment made by section 1450 of the Dodd-Frank Act to section 5 of 
RESPA, 12 U.S.C. 2604. The amendment requires lenders to provide a list 
of homeownership counselors to potential borrowers of federally related 
mortgage loans. Specifically, the Dodd-Frank Act amended RESPA section 
5(c) to require lenders to provide potential borrowers with a 
``reasonably complete or updated list of homeownership counselors who 
are certified pursuant to section 106(e) of the Housing and Urban 
Development Act of 1968 (12 U.S.C. 1701x(e)) and located in the area of 
the lender.'' \20\
---------------------------------------------------------------------------

    \20\ Section 106(e) of the Housing and Urban Development Act of 
1968 (12 U.S.C. 1701x(e)) requires that homeownership counseling 
provided under programs administered by the U.S. Department of 
Housing and Urban Development (HUD) can only be provided by 
organizations or individuals certified by HUD as competent to 
provide homeownership counseling. Section 106(e) also requires HUD 
to establish standards and procedures for testing and certifying 
counselors.
---------------------------------------------------------------------------

    The list of homeownership counselors is to be included with a 
``home buying information booklet'' that the Bureau is directed to 
prepare ``to help consumers applying for federally related mortgage 
loans to understand the nature and costs of real estate settlement 
services.'' \21\ The Dodd-Frank Act amended RESPA section 5(a) to 
direct the Bureau to distribute the booklet to all lenders that make 
federally related mortgage loans. The Dodd-Frank Act also amended 
section 5(a) to require the Bureau to distribute lists of homeownership 
counselors to such lenders.
---------------------------------------------------------------------------

    \21\ The Dodd-Frank Act also amends RESPA section 5(b) (12 
U.S.C. 2604(b)) to require that the ``home buying information 
booklet'' (the RESPA ``special information booklet,'' prior to the 
Dodd-Frank Act), include ``[i]nformation about homeownership 
counseling services made available pursuant to section 106(a)(4) of 
the Housing and Urban Development Act of 1968 (12 U.S.C. 
1701x(a)(4)), a recommendation that the consumer use such services, 
and notification that a list of certified providers of homeownership 
counseling in the area, and their contact information, is 
available.''
---------------------------------------------------------------------------

    Under RESPA and its implementing regulations, a federally related 
mortgage loan includes purchase money mortgage loans, subordinate 
mortgages, refinancings, closed-end home-equity mortgage loans, home-
equity lines of credit, and reverse mortgages.\22\ Under RESPA section 
5(b), as amended by the Dodd-Frank Act, the prescribed contents of the 
booklets include information specific to refinancings and home-equity 
lines of credit, as well as ``the costs incident to a real estate 
settlement or a federally related mortgage loan.''
---------------------------------------------------------------------------

    \22\ 12 U.S.C. 2602(1), 12 CFR 1024.2.
---------------------------------------------------------------------------

    RESPA sections 5(a) and (b), as amended, indicate that Congress 
intended the booklet and list of counselors to be provided to all 
applicants for federally related mortgage loans. However, section 5(d) 
of RESPA, in language that was not amended by the Dodd-Frank Act, 
requires lenders to provide the home buying information booklet ``to 
each person from whom [the lender] receives or for whom it prepares a 
written application to borrow money to finance the purchase of 
residential real estate.'' The information booklet mandated by section 
5 of RESPA before its amendment by the Dodd-Frank Act is only required 
by current Regulation X to be provided to applicants for purchase money 
mortgages.\23\
---------------------------------------------------------------------------

    \23\ Currently, under Regulation X, the ``special information 
booklet'' must only be provided to applicants for first-lien 
purchase money mortgages, and not to applicants for refinancings, 
closed-end subordinate and home-equity loans, reverse mortgages, or 
open-end lines of credit (as long as a brochure issued by the Bureau 
regarding home-equity lines of credit is provided to the borrower). 
12 CFR 1024.2, 1024.6. For open-end credit plans, Regulation X 
provides that a lender or mortgage broker that provides the borrower 
with a copy of the brochure entitled ``When Your Home is On the 
Line: What You Should Know About Home Equity Lines of Credit,'' or a 
successor brochure issued by the Bureau, is deemed to be in 
compliance with the booklet requirement of Regulation X. See id. 
1024.6(a)(2).
---------------------------------------------------------------------------

    Section 19(a) of RESPA provides the Bureau with the authority to 
``prescribe such rules and regulations, to make such interpretations, 
and to grant such reasonable exemptions for classes of transactions, as 
may be necessary to achieve the purposes of the [RESPA].'' Based on its 
reading of section 5 as a whole, and its understanding of the purposes 
of that section, the Bureau is proposing that the list of homeownership 
counselors be provided to all applicants for federally related mortgage 
loans (except for applicants for Home Equity Conversion Mortgages 
(HECMs), as discussed further below).
    Section 5(a) as amended: (1) Specifically references helping 
consumers applying for federally related mortgage loans understand the 
nature and costs of real estate settlement services; and (2) directs 
the Bureau to distribute the booklet and the lists of housing 
counselors to lenders that make federally related mortgage loans. 
Moreover, the prescribed content of the booklet is not limited to 
information on purchase money mortgage loans. Additionally, the Bureau 
believes that a trained counselor can be useful to any consumer 
considering any type of mortgage loan. Mortgage transactions beyond 
purchase money transactions, such as refinancings and open-end home-
secured credit transactions, can entail significant risks and costs for 
consumers--risks and costs that a trained homeownership counselor can 
assist consumers in fully understanding. Therefore, the Bureau's 
proposal would require the homeownership counselor list to be provided 
to applicants for refinancings and home-equity lines of credit, in 
addition to purchase money mortgages. The Bureau seeks comment from the 
public on the costs and benefits of the provision of the list of 
homeownership counselors to consumers who are applicants for refinances 
and home-equity lines of credit. The Bureau also solicits comment on 
the potential effect of the Bureau's proposal on access to 
homeownership counseling generally by consumers, and the effect of 
increased consumer demand for counseling on existing counseling 
resources. In particular, the Bureau solicits comment on the effect on 
counseling resources of providing the list beyond applicants for 
purchase money mortgages.

[[Page 49098]]

    Proposed Sec.  1024.20(a) requires a lender to provide to an 
applicant for a federally related mortgage loan a clear and conspicuous 
written list of five homeownership counselors or counseling 
organizations. The list provided by the lender pursuant to this 
requirement must include only homeownership counselors or counseling 
organizations from either the most current list of homeownership 
counselors or counseling organizations made available by the Bureau for 
use by lenders in complying with Sec.  1024.20, or the most current 
list maintained by HUD of homeownership counselors or counseling 
organizations certified by HUD, or otherwise approved by HUD.\24\
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    \24\ The Bureau proposes to exercise its exemption authority 
under section 19(a) of RESPA and its modification authority under 
section 1405(b) of the Dodd-Frank Act to allow the list to include, 
in addition to HUD-certified homeownership counselors required by 
section 1450 of the Dodd-Frank Act, HUD-certified ``counseling 
organizations'' and counselors and counseling organizations 
``otherwise approved by HUD.'' It is the Bureau's understanding that 
HUD, other than for its counseling program for HECMs, currently only 
approves housing counseling agencies and not individual counselors. 
However, the Bureau understands that HUD intends in the future to 
undertake a rulemaking to put requirements into place to certify 
individual counselors as competent to provide housing counseling in 
accordance with amendments to section 106 of the Housing and Urban 
Development Act of 1968 made by section 1445 of the Dodd-Frank Act. 
The Bureau is proposing to exercise its exemption or modification 
authority to provide flexibility in order to facilitate the 
availability of competent housing counselors for placement on the 
list. Permitting the list to include HUD-certified counseling 
organizations and homeownership counselors and counseling 
organizations ``otherwise approved by HUD'' may help facilitate the 
effective functioning of this new RESPA disclosure. It may also, 
therefore, help carry out the purposes of RESPA for more effective 
advance cost disclosure for consumers, by informing loan applicants 
of counseling resources available for assisting them in 
understanding their prospective mortgage loans and settlement costs. 
For the same reason, the Bureau believes this proposed modification 
of the types of counselors and organizations that may be included in 
the list is in the interests of consumers and the public. The Bureau 
intends to work closely with HUD to facilitate operational 
coordination and consistency between the counseling and 
certification requirements HUD puts into place and the Bureau's 
final rule.
---------------------------------------------------------------------------

    Proposed Sec.  1024.20(a) provides that the required list include 
five homeownership counselors or counseling organizations located in 
the zip code of the loan applicant's current address, or, if there are 
not the requisite five counselors or counseling organizations in that 
zip code, then counselors or organizations within the zip code or zip 
codes closest to the loan applicant's current address. The Bureau 
invites comment on this requirement and whether there are alternative 
methods of listing homeownership counselors or counseling organizations 
available to consumers that would serve the purposes of the statutory 
requirement and RESPA, in general.
    To facilitate compliance with the proposed list requirement, the 
Bureau is expecting to develop a Web site portal that would allow 
lenders to type in the loan applicant's zip code to generate the 
requisite list, which could then be printed for distribution to the 
loan applicant. The Bureau believes that such an approach: (1) Could 
significantly mitigate any paperwork burden associated with requiring 
that the list be distributed to applicants for federally related 
mortgage loans; and (2) is consistent with the Dodd-Frank Act's 
amendment to section 5(a) of RESPA requiring the Bureau to distribute 
to lenders ``lists, organized by location, of homeownership counselors 
certified under section 106(e) of the Housing and Urban Development Act 
of 1968 (12 U.S.C. 1701x(e)) for use in complying with the requirement 
under [section 5(c)].'' The Bureau solicits comment on whether such a 
portal would be useful and whether there are other mechanisms through 
which the Bureau can help facilitate compliance and provide lists to 
lenders and consumers.
    The Bureau also solicits comment on whether ``five'' is the 
appropriate number of counselors or organizations to be included on the 
list. The Bureau is aware that several State laws that impose 
requirements on creditors to provide consumers lists of housing 
counselors specify a list of five. See, e.g., NY Real Property Actions 
and Proceedings Law Sec.  1304(2); Arizona Revised Statute Sec.  6-
1703(A)(1). The Bureau is concerned that requiring a list of too few 
counselors or organizations would provide inadequate options to 
consumers and could increase the risk for steering by lenders to 
particular counselors. The Bureau is also concerned, however, that 
requiring a list of too many counselors or organizations could be 
overwhelming for consumers. In addition, the Bureau solicits comment on 
whether there should be a limitation on the number of listed counselors 
from the same counseling organization.
    Proposed Sec.  1024.20(a) requires that the list include: (1) each 
counselor's or organization's name, business address, telephone number 
and, if available from the Bureau or HUD, other contact information; 
and (2) contact information for the Bureau and HUD.
    Proposed Sec.  1024.20(a) requires the lender to provide the list 
no later than three business days after the lender, mortgage broker or 
dealer receives a loan application (or information sufficient to 
complete an application), but allows a mortgage broker or dealer to 
provide the list to those applicants from whom it receives or for whom 
it prepares applications. Where a mortgage broker or dealer provides 
the list, the lender is not required to provide an additional list but 
remains responsible for ensuring that the list has been provided to the 
loan applicant and satisfies the requirements of proposed Sec.  
1024.20. Proposed Sec.  1024.20(a) sets out the requirements for 
providing the list to the loan applicant, i.e., in person, by mail, or 
by other means of delivery. The list may be provided to the loan 
applicant in electronic form, subject to the consumer consent and other 
applicable provisions of the Electronic Signatures in Global and 
National Commerce Act (ESIGN), 15 U.S.C. 7001 et seq. The lender is not 
required to provide the list if, before the end of the three business 
day period, the lender denies the loan application or the loan 
applicant withdraws the application. For applications for open-end 
home-secured lines of credit covered under TILA, the timing and methods 
of delivery set out in Regulation Z, 12 CFR 1026.40, for disclosures 
involving such loans may be used instead of the requirements in 
proposed Sec.  1024.20. Proposed Sec.  1024.20(a) also provides 
flexibility in the requirements for providing the list when there are 
multiple lenders and multiple applicants in a mortgage loan 
transaction.
    Proposed Sec.  1024.20(c) would not require a lender to provide an 
applicant for a HECM, as that type of reverse mortgage is defined in 12 
U.S.C. 1715z-20(b)(3), with the list required under proposed Sec.  
1024.20 if the lender is otherwise required by HUD to provide a list, 
and does provide a list, of HECM counselors or counseling agencies to 
the loan applicant. As discussed further in the section-by-section 
analysis below on the Bureau's proposed pre-loan counseling requirement 
for high-cost mortgages, Federal law currently requires homeowners to 
receive counseling before obtaining a HECM reverse mortgage insured by 
the Federal Housing Administration (FHA),\25\ which is a part of HUD. 
HUD imposes various requirements related to HECM counseling, including 
requiring FHA-approved HECM mortgagees to provide prospective HECM 
borrowers with a list of HUD-approved HECM counseling agencies. The 
Bureau is concerned that a duplicative list requirement could cause 
confusion for consumers and unnecessary burden for lenders. 
Accordingly, the Bureau is proposing to

[[Page 49099]]

exercise its exemption authority under RESPA section 19(a) to allow 
lenders that provide a list under HUD's HECM program to satisfy the 
requirements of proposed Sec.  1024.20.
---------------------------------------------------------------------------

    \25\ 12 U.S.C. 1715z-20(d)(2)(B).
---------------------------------------------------------------------------

    In its 2012 TILA-RESPA Proposal, the Bureau proposes to adopt a new 
definition of ``application'' in 12 CFR 1026.2(a)(3). The 2012 TILA-
RESPA Proposal would create a new Loan Estimate to replace the RESPA 
Good-Faith Estimate (GFE) and the initial Truth in Lending Act 
disclosure. Like those disclosures and the list of homeownership 
counselors or counseling organizations, the Loan Estimate would be 
provided three business days after the lender's receipt of an 
application. However, to encourage lenders to provide the loan term and 
cost information in the Loan Estimate earlier in the loan process, the 
2012 TILA-RESPA Proposal would propose to adopt a definition of 
application that differs from the definition of application in Sec.  
1024.2(b) of Regulation X by removing ``any other information deemed 
necessary by the loan originator'' from the Sec.  1024.2(b) list of 
application elements. Thus, a lender would no longer be able to delay 
providing the statutorily required estimates by waiting to collect 
``other information.'' Because consumers could benefit from receiving 
the list of homeownership counselors or counseling organizations at the 
same time as the Loan Estimate, the Bureau requests comment on whether 
to tie provision of the list to the definition of application in 
proposed Sec.  1026.2(a)(3) instead of the definition in Sec.  
1024.2(b).

B. Regulation Z

Section 1026.1 Authority, Purpose, Coverage, Organization, Enforcement, 
and Liability
1(d) Organization
1(d)(5)
    Section 1026.1(d)(5) describes the organization of Subpart E of 
Regulation Z, which contains special rules for mortgage transactions. 
The Bureau proposes to revise Sec.  1026.1(d)(5) to reflect the 
proposed amendments to Sec. Sec.  1026.32 and 1026.34, which are 
discussed in detail below. Specifically, the Bureau proposes to revise 
Sec.  1026.1(d)(5) to include the term ``open-end credit plan'' and 
remove the term ``closed-end'' where appropriate. In addition, the 
Bureau proposes to include a reference to the new prepayment penalties 
trigger for high-cost mortgages added by the Dodd-Frank Act.
Section 1026.31 General Rules
31(c) Timing of Disclosure
    Section 1026.31(c) provides additional disclosure requirements for 
high-cost mortgages. As discussed in detail below, the Dodd-Frank Act 
expanded the types of loans potentially subject to HOEPA coverage. 
Therefore, the Bureau proposes to revise Sec.  1026.31(c) and related 
commentary for clarity and consistency. Specifically, the Bureau 
proposes to include the term ``account opening'' in addition to 
``consummation'' to reflect the fact that the Dodd-Frank Act expanded 
the requirements for high-cost mortgages to open-end credit plans.
Section 1026.32 Requirements for High-Cost Mortgages
32(a)(1) Coverage
    The Bureau proposes to revise Sec.  1026.32(a)(1) to implement the 
definition of ``high-cost mortgage'' under TILA section 103(bb)(1), as 
amended by the Dodd-Frank Act. As discussed below, TILA section 
103(bb)(1) generally provides that the term ``high-cost mortgage'' 
means a consumer credit transaction that is secured by the consumer's 
principal dwelling, other than a reverse mortgage transaction, if any 
of the prescribed thresholds are met.
    The Dodd-Frank Act amended existing TILA section 103(aa)(1) by 
removing the exclusion of a residential mortgage transaction and an 
open-end credit plan from HOEPA coverage. Under TILA section 
103(bb)(1)(A), reverse mortgage transactions remain excluded from the 
definition of a high-cost mortgage. Previously, the statutory 
protections for HOEPA loans were generally limited to closed-end 
refinancings and home-equity mortgage loans. The proposal, among other 
things, extends the statutory protections for high-cost mortgages to 
residential mortgage transactions, such as purchase money mortgage 
loans, and to open-end credit plans secured by the consumer's principal 
dwelling, i.e., home-equity lines of credit. Accordingly, the Bureau 
proposes to reflect the revised scope of coverage and remaining 
statutory exclusion of reverse mortgage transactions in proposed Sec.  
1026.32(a)(1), to remove the list of exclusions provided in current 
Sec.  1026.32(a)(2), and to amend Sec.  1026.32(a)(2) for other 
purposes as discussed below.
    Accordingly, proposed Sec.  1026.32(a)(1) defines ``high-cost 
mortgage'' to mean any consumer credit transaction, other than a 
reverse mortgage transaction as defined in Sec.  1026.33(a), that is 
secured by the consumer's principal dwelling and in which any one of 
the prescribed thresholds is met. Proposed comment 32(a)(1)-1 clarifies 
that a high-cost mortgage includes both a closed-end mortgage loan and 
an open-end credit plan secured by the consumer's principal dwelling. 
In particular, the comment further clarifies that with regard to 
determining coverage under Sec.  1026.32, an open-end transaction is 
the account opening of an open-end credit plan. Under the proposal, an 
individual advance of funds or a draw on the credit line under an open-
end credit plan subsequent to account opening does not constitute a 
``transaction.'' Because HELOCs are open-end (revolving) lines of 
credit and the rate applicable to any advance of funds may vary under 
the plan, the Bureau believes this clarification is appropriate to 
permit creditors to determine coverage of an open-end credit plan as a 
high-cost mortgage at account opening.
Threshold Triggers
    Prior to enactment of the Dodd-Frank Act, HOEPA coverage was 
triggered when a loan's annual percentage rate (APR) or its points and 
fees exceeded certain thresholds as prescribed by current TILA section 
103(aa), which is implemented by current Sec.  1026.32(a)(1). The Dodd-
Frank Act adjusted the two existing thresholds and added a third 
threshold based on the inclusion of certain prepayment penalties. Under 
TILA section 103(bb)(1)(A), the revised thresholds generally provide 
that a consumer credit transaction is a high-cost mortgage if:
     The annual percentage rate at consummation of the 
transaction exceeds the average prime offer rate (APOR) for a 
comparable transaction by (1) more than 6.5 percentage points for 
transactions secured by a first mortgage on the consumer's principal 
dwelling or 8.5 percentage points, if the dwelling is personal property 
and the total transaction amount is less than $50,000; or (2) 8.5 
percentage points for transactions secured by a subordinate mortgage on 
the consumer's principal dwelling;
     The total points and fees payable in connection with the 
transaction, other than bona fide third party charges not retained by 
the mortgage originator, creditor, or an affiliate of either, exceed: 
(1) In the case of a transaction for $20,000 or more, 5 percent of the 
total transaction amount; or (2) in the case of a loan for less than 
$20,000, the lesser of 8 percent of the total transaction amount or 
$1,000 (adjusted for inflation); or

[[Page 49100]]

     The transaction provides for prepayment fees and penalties 
that (1) may be imposed more than 36 months after consummation or 
account opening or (2) exceed, in the aggregate, more than 2 percent of 
the amount prepaid.
    The Bureau proposes to revise the existing APR and points and fees 
thresholds in proposed Sec.  1026.32(a)(1)(i) and (ii) and to add the 
new prepayment penalty threshold in proposed Sec.  1026.32(a)(1)(iii). 
These amendments are discussed in detail below.
32(a)(1)(i)
Implementation of Dodd-Frank Act Amendments
    Section 1431 of the Dodd-Frank Act amended the existing APR trigger 
in current TILA section 103(aa) by lowering the percentage point 
trigger and changing the APR benchmark. As noted above, amended TILA 
section 103(bb)(1)(A)(i) generally provides that a consumer credit 
transaction is a high-cost mortgage if the APR at consummation of the 
transaction exceeds the APOR for a comparable transaction by (1) more 
than 6.5 percentage points for transactions secured by a first mortgage 
on the consumer's principal dwelling or 8.5 percentage points, if the 
dwelling is personal property and the total loan amount is less than 
$50,000; or (2) 8.5 percentage points for transactions secured by a 
subordinate mortgage on the consumer's principal dwelling.
    In addition to adjusting the percentage point triggers, TILA 
section 103(bb)(1)(A), as added by section 1431 of Dodd-Frank, also 
amends the benchmark for the APR trigger. The existing APR benchmark is 
the yield on Treasury securities having comparable periods of maturity. 
Under TILA section 103(bb)(1)(A)(i), the APR benchmark is the ``average 
prime offer rate,'' as defined in TILA section 129C(b)(2)(B). This 
definition essentially codifies Regulation Z's existing definition of 
``average prime offer rate'' in Sec.  1026.35(a)(2), which would become 
Sec.  1026.35(a)(2)(ii) in the Bureau's rules.
    The Bureau is proposing two alternatives in proposed Sec.  
1026.32(a)(1)(i) to implement the APR threshold for a high-cost 
mortgage under amended TILA section 103(bb)(1)(A)(i). Alternative 1 
uses the APR as the rate to be compared to the APOR for determining 
HOEPA coverage for closed-end mortgage loans. Alternative 2 is 
substantially identical except that it would substitute a ``transaction 
coverage rate'' for the ``annual percentage rate'' as the rate to be 
compared to the APOR for closed-end mortgage loans. As discussed 
further below, the Bureau is proposing Alternative 2 in connection with 
its proposal to simplify and broaden the general definition of finance 
charge under Regulation Z. See 2012 TILA-RESPA Proposal. The Bureau 
would not adopt Alternative 2 if it does not change the definition of 
finance charge. As discussed below, the Bureau is seeking comment on 
whether to adopt Alternative 2 if it does expand the definition of 
finance charge. Because the proposal to broaden the definition of 
finance charge does not apply to open-end transactions, the Bureau 
proposes to retain the APR as the rate that will be compared to the 
APOR to determine whether an open-end credit plan is a high-cost 
mortgage under HOEPA.
    Both alternatives otherwise generally mirror the statutory language 
with some exceptions for clarity, organization, or consistency with 
existing Regulation Z and the Bureau's other mortgage rulemakings as 
mandated by the Dodd-Frank Act. For example, the proposal refers to a 
``first-lien'' or ``subordinate-lien'' transaction, instead of a 
``first mortgage'' or ``subordinate or junior mortgage.'' Further, for 
the reasons stated in the section-by-section analysis to proposed Sec.  
1026.32(a)(1)(ii) below, the proposal refers to ``total loan amount'' 
rather than ``total transaction amount.''
    TILA section 103(bb)(2)(A) and (B) provides the Bureau with 
authority to adjust the percentage points referenced in the APR 
threshold if the Bureau determines that the increase or decrease is 
consistent with the statutory protections for high-cost mortgages and 
is warranted by the need for credit. The Bureau does not propose to 
make such a determination at this time, either in conjunction with 
general implementation of the Dodd-Frank Act or, as discussed further 
below, in conjunction with the proposed expansion of the definition of 
finance charge. Therefore, both alternatives retain the numeric 
triggers in the statute for both closed-end and open-end credit 
transactions. However, the Bureau seeks comment and data on whether any 
adjustments to the numeric triggers generally, and in particular for 
open-end credit transactions, would better protect consumers from the 
risks associated with high-cost mortgages or are warranted by the need 
for credit.
    In addition, the Bureau notes that the statute sets forth different 
threshold triggers for first-lien transactions depending on whether the 
transaction is secured by a dwelling that is personal property and the 
total loan amount is less than $50,000. The Bureau understands that 
first-lien transactions that are secured by a dwelling that is personal 
property, such as certain manufactured housing loans, often have higher 
APRs than other first-lien transactions secured by a dwelling that is 
not personal property. Accordingly, the Bureau also seeks comment or 
data specifically on the separate percentage point trigger for first-
lien transactions that are secured by a dwelling that is personal 
property and for which the total loan amount is less than $50,000, and 
whether any adjustment to the percentage point or the total loan amount 
for such first-lien transactions would better protect consumers or is 
warranted by the need for credit.
Potential Expansion of the Definition of Finance Charge
    Alternative 2 for proposed Sec.  1026.32(a)(1)(i) would account for 
the changes in the calculation of the finance charge (and thus APR) 
that the Bureau is separately considering in the 2012 TILA-RESPA 
Proposal. Under that proposal, creditors would use a simpler, more 
inclusive definition of the finance charge for closed-end credit 
secured by real property or a dwelling, which is in turn used to 
compute the APR that is disclosed to consumers. As discussed in that 
proposal, the Bureau believes that the expanded definition could have 
significant benefits to consumers by making the APR a more useful and 
accurate tool for comparing the overall cost of credit. At the same 
time, the proposal could benefit creditors by reducing compliance 
burden and litigation risk because the finance charge calculation would 
be easier to perform. However, the Bureau recognizes that a more 
inclusive definition of the finance charge could expand the coverage of 
HOEPA because closed-end mortgage loans would have higher APRs, which 
would result in some additional loans being covered as high-cost 
mortgages.\26\ The Bureau is therefore seeking comment in this proposal 
on whether, if it adopts the broader definition of finance charge in 
the TILA-RESPA rulemaking, it should compensate for that change to 
approximately offset the impact of a broader definition of finance 
charge on HOEPA coverage levels.
---------------------------------------------------------------------------

    \26\ The revised definition would also affect calculation of 
HOEPA's threshold based on points and fees. Those effects and 
potential accommodations are discussed further below.
---------------------------------------------------------------------------

    Currently, TILA and Regulation Z permit creditors to exclude 
several fees or charges from the finance charge, including most fees or 
charges imposed by third parties. Consumer groups,

[[Page 49101]]

creditors, and government agencies have long been dissatisfied with the 
``some fees in, some fees out'' approach to the finance charge. The 
Board therefore proposed expanding the definition of finance charge in 
its 2009 Closed-End Proposal, see 74 FR 43232, 43243-45 (Aug. 26, 
2009), and the Bureau has after careful consideration decided to 
propose a similar change. Specifically, the 2012 TILA-RESPA Proposal 
would maintain TILA's definition of a finance charge as a fee or charge 
payable directly or indirectly by the consumer and imposed directly or 
indirectly by the creditor. However, the proposal would require the 
finance charge to include additional creditor charges and most charges 
by third parties. The Bureau is proposing a revised definition of the 
finance charge pursuant to its authority under TILA sections 105(a) and 
(f), as well as other applicable statutory authority, because the 
Bureau believes that the simpler finance charge could effectuate the 
purposes of TILA and facilitate compliance by enhancing consumer 
understanding and reducing compliance costs.
    One effect of the expansion of the definition of finance charge, 
however, would be to expand the number of loans exceeding HOEPA's APR 
trigger and other statutory and regulatory provisions that incorporate 
an APR threshold for coverage. As discussed in detail in the Board's 
2010 Mortgage Proposal, there are currently some differences between 
the APR and the APOR, which is the benchmark rate under the Dodd-Frank 
Act for determining HOEPA coverage. The APOR is generally calculated 
using data that includes only contract interest rate and points, but 
not other origination fees. See 75 FR 58539, 58660-62 (Sept. 24, 2010). 
The current APR includes not only discount points and origination fees 
but also other charges the creditor retains and certain third-party 
charges. The proposed simpler, more inclusive finance charge, which 
would also include most third-party charges, would widen the disparity 
between the APR and the APOR and expand coverage of HOEPA.
    The Bureau notes that, in response to the Board's 2009 Closed-End 
Proposal, most industry commenters raised significant concerns about 
loans being inappropriately covered by HOEPA and potential negative 
impacts on consumer access to credit. Consumer advocates and some other 
commenters, however, supported the more inclusive finance charge and 
the expanded coverage of HOEPA. They maintained that expanded HOEPA 
coverage was warranted because the more inclusive finance charge would 
be a more accurate measure of the cost of credit and, therefore, would 
render HOEPA coverage more accurate as well.
    During outreach conducted in conjunction with the Bureau's 2012 
TILA-RESPA Proposal, similar concerns were expressed by both industry 
and consumer advocates. Participants in a Small Business Review Panel 
and other industry stakeholders expressed concerns that one unintended 
consequence of a more inclusive definition of finance charge could be 
that more loans would qualify as high-cost loans subject to additional 
requirements under TILA section 129 and under similar State laws. 
Industry stakeholders urged that the proposed revisions to the finance 
charge be viewed in the context of Dodd-Frank Act rulemakings revising 
the thresholds for HOEPA and other statutory regimes because of the 
relationship between the APR and those thresholds. Specifically, they 
noted that those thresholds are tied to the APR, such that any changes 
to the APR calculation could be costly to implement and should be done 
in conjunction with other related changes. Consumer advocates asserted 
that expanded HOEPA coverage is warranted because the more inclusive 
definition would provide a more accurate measure of the cost of credit.
    The Bureau does not currently have sufficient data to model the 
impact of the more expansive definition of finance charge on coverage 
under HOEPA or the impact of potential modifications that the Bureau 
could make to the triggers to more closely approximate existing 
coverage levels. As described in the Dodd-Frank Act section 1022 
analysis below, the Bureau is working to secure data to assist in 
analyzing potential impacts. The Bureau seeks comment on its plans for 
data analysis as described below, as well as additional data and 
comment on the potential impacts of a broader finance charge definition 
on coverage under HOEPA and potential modifications to the triggers.
    In conjunction with its efforts to quantify the effect of an 
expanded definition of finance charge, the Bureau is carefully weighing 
whether modifications may be warranted to approximate coverage levels 
under the current definition. It is not clear from the legislative 
history of the Dodd-Frank Act whether Congress was aware of the Board's 
2009 Closed-End Proposal to expand the current definition of finance 
charge or whether Congress considered the interplay between an expanded 
definition and coverage under the high-cost mortgage provision. In 
light of this fact and the concerns raised by commenters on the Board's 
2009 Closed-End Proposal regarding effects on access to credit, the 
Bureau believes that it is appropriate to explore alternatives to 
implementation of the expanded finance charge definition for purposes 
of HOEPA coverage.
    As discussed below, the Bureau has considered two such 
modifications and is proposing one of them, the TCR, as Alternative 2 
to proposed Sec.  1026.32(a)(1)(i). The Bureau seeks comments and data 
on these and any other potential modifications to HOEPA's APR coverage 
thresholds. The Bureau also seeks comment on the timing of 
implementation for any change to the definition of finance charge and 
any related change to the HOEPA APR threshold, as discussed further 
below.
    Adjustment to numeric APR triggers. One method of modifying the 
triggers to maintain approximate current coverage would be to exercise 
the Bureau's authority under TILA section 103(bb)(2)(A) and (B) to 
adjust the percentage point triggers. As discussed above, TILA section 
103(bb)(2)(A) and (B) permits certain adjustments to the percentage 
point triggers if the Bureau determines that the increase or decrease 
is consistent with the statutory protections for high-cost mortgages 
and is warranted by the need for credit. In determining whether to 
increase or decrease the number of percentage points in the high-cost 
mortgage trigger, the Bureau must consult with representatives of 
consumers, including low-income consumers, and lenders.
    Due to data limitations, however, the Bureau does not currently 
have sufficient information to propose a specific numeric adjustment to 
the percentage point triggers as a means of approximating current 
coverage levels in the event that the Bureau adopts the broader 
definition of finance charge. The Bureau also notes that the Board 
previously proposed and sought comment on use of the TCR, rather than 
adjustments to numeric thresholds.\27\ The Bureau therefore seeks 
comment on the advisability and grounds for using the percentage point 
mechanism to adjust for the adoption of a broader definition of finance 
charge, particularly if different types of modifications were adopted 
for other mortgage rulemakings involving APR thresholds.
---------------------------------------------------------------------------

    \27\ See, e.g., 75 FR 58660-62 and 76 FR 11609.
---------------------------------------------------------------------------

    Transaction coverage rate. As discussed above, another alternative 
method of compensating for the broader definition of finance charge 
would be to replace the APR benchmark for closed-end mortgage loans 
with the transaction

[[Page 49102]]

coverage rate (TCR). The Bureau has proposed this as Alternative 2 for 
proposed Sec.  1026.32(a)(1)(i), for substantially the same reasons 
that the Board proposed adopting the TCR to address the impact of the 
expanded definition of finance charge upon other regulatory 
triggers.\28\ Specifically, the ``transaction coverage rate'' would be 
defined as the rate used to determine whether a closed-end mortgage 
loan is a high-cost mortgage subject to Sec.  1026.32. (As discussed 
below, the Bureau does not propose to change the coverage metric for 
open-end credit plans.) As previously proposed by the Board in Sec.  
226.45(a)(2)(i) under the 2011 Escrow Proposal (which would become 
Sec.  1026.35(a)(2)(i) in the Bureau's rules), the TCR would be 
determined in accordance with the applicable rules of Regulation Z for 
the calculation of the APR for a closed-end transaction, except that 
the prepaid finance charge would include only charges that will be 
retained by the creditor, a mortgage broker, or any affiliate of 
either.\29\
---------------------------------------------------------------------------

    \28\ The Board proposed the TCR in the 2010 Mortgage Proposal, 
see 75 FR 58660-62, and the 2011 Escrow Proposal, see 76 FR 11609. 
The Board's proposals would substitute the TCR for the APR for 
purposes of determining thresholds for higher-priced mortgage loans.
    \29\ The wording of the Board's proposed definition of 
``transaction coverage rate'' varied slightly between the 2010 
Mortgage Proposal and the 2011 Escrow Proposal as to treatment of 
charges retained by mortgage broker affiliates. The Bureau proposes 
to use the 2011 Escrow Proposal version, which would apply to 
charges that will be retained by the creditor, a mortgage broker, or 
any affiliate of either. The Bureau believes that this approach is 
consistent with the rationale articulated by the Board in its 
earlier proposals and with certain other parts of the Dodd-Frank Act 
that distinguish between charges retained by the creditor, mortgage 
broker, or affiliates of either company. See, e.g., Dodd-Frank Act 
section 1403.
---------------------------------------------------------------------------

    The TCR would not reflect certain costs paid to third parties that 
would be disclosed to consumers as part of the finance charge under the 
current and proposed definitions. For example, the current finance 
charge reflects mandatory credit life insurance, and the proposed more 
inclusive finance charge would reflect such additional third-party 
charges as title insurance premiums. However, the TCR would not include 
either amount. See 75 FR 58539, 58661 (Sept. 24, 2010); 76 FR 11598, 
11626 (Mar. 2, 2011). Thus, the TCR might result in some loans not 
being classified as high-cost mortgages that would otherwise qualify 
under an APR threshold.
    The Bureau is considering ways to supplement the data analysis 
described below to better assess this issue, and specifically seeks 
comment and data on the potential effect of the TCR relative to the APR 
calculated using both the current and proposed definitions of finance 
charge. While the Bureau is seeking data to assist it in evaluating 
alternatives, the Bureau expects that the margin of difference between 
the TCR and the current APR would be significantly smaller than the 
margin between the current APR and the APR calculated using the 
expanded finance charge definition. This expectation is due to the fact 
that the expanded finance charge definition would add in such large 
third-party charges as lender's title insurance, whereas relatively few 
third-party fees would be excluded by the TCR approach that are not 
already excluded under current rules; mandatory credit life and 
disability insurance premiums would be in this category, for example, 
but such insurance typically is offered as voluntary coverage, which is 
already excluded under current rules. The Bureau consequently expects 
that, relative to current rules, the TCR would remove from HOEPA 
coverage fewer overall transactions than the expanded finance charge 
would add.
    Thus, the Bureau believes that the TCR may maintain the primary 
benefits of HOEPA while also offering other significant benefits. 
First, the Bureau believes that the TCR would be easier to calculate 
than the current APR, and could therefore result in reduced compliance 
burden and litigation costs for creditors. Second, the TCR has been 
proposed in two prior proposals of the Board relating to higher-priced 
mortgage loans. Thus, the TCR could provide an efficacious way of 
achieving a common framework for application of various regulatory 
thresholds.
    At the same time, the Bureau also seeks comment on the potential 
advantages and disadvantages to both consumers and creditors of using 
different metrics for purposes of disclosures and for purposes of 
determining coverage of various regulatory regimes. As discussed above, 
the Bureau believes that the potential compliance burden is mitigated 
with regard to TCR because both TCR and APR under the expanded 
definition of finance charge would be easier to compute than the APR 
today using the current definition. However, the Bureau seeks comment 
on the issue generally and in particular on whether use of the TCR or 
other modifications should be optional, so that creditors could use the 
broader definition of finance charge to calculate the APR and points 
and fees triggers if they would prefer. The Board's 2010 Mortgage 
Proposal structured the TCR as a mandatory requirement out of concern 
that identical transactions extended by two different creditors could 
have inconsistent coverage under regulations governing higher-priced 
mortgage loans, but similarly sought comment on the issue.
    The Bureau has authority to modify the APR test in Sec.  
1026.32(a)(1)(i) under TILA section 105(a) to carry out the purposes of 
TILA. In its 2012 TILA-RESPA Proposal, the Bureau is proposing to amend 
the definition of finance charge to promote the informed use of credit 
and to facilitate creditors' compliance with disclosure requirements 
under TILA. Should the Bureau finalize that aspect of the proposal, 
adoption of the TCR may ensure that the special protections provided 
under HOEPA are not expanded in a manner that Congress may not have 
intended or that could impair access to credit.
    Furthermore, the Bureau has authority pursuant to TILA section 
105(a) to provide additional requirements, classifications, 
differentiations, or other provisions, and to provide for such 
adjustments and exceptions for all or any class of transactions as are 
necessary, in the Bureau's judgment, to effectuate the purposes of TILA 
and facilitate compliance.\30\ The Bureau understands that most lenders 
currently do not make HOEPA loans, and previous comments received on 
the Board's proposal suggest that some lenders may cease making loans 
that are defined as high-cost mortgages solely as a result of the 
proposed more inclusive finance charge. The Bureau is therefore 
evaluating whether the proposed use of the TCR could maintain the 
special protections for consumers of high-cost mortgages while ensuring 
that the effects of a more inclusive finance charge would not restrict 
the availability of credit. In addition, the Bureau believes that the 
proposal to use the TCR would facilitate compliance by substituting a 
simpler calculation for the finance charge for purposes of determining 
whether a transaction is a high-cost mortgage. Creditors would 
therefore have more certainty about the calculation for purposes of 
determining coverage of closed-end mortgage loans. Therefore, the 
Bureau believes that the proposed adjustment may effectuate the

[[Page 49103]]

purposes of TILA, as amended by HOEPA, and facilitate compliance 
without undermining consumer protections against abusive practices, the 
availability of credit, or the interest of the borrowing public.
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    \30\ The Bureau's authority under section 105(a) does not extend 
to the substantive protections contained in TILA section 129 that 
apply to high-cost mortgages, but applies to all other provisions of 
TILA including the section that defines high-cost mortgages and APR. 
The Bureau is striving to develop a coverage framework across 
various rulemakings that is consistent with Congress' intent in 
identifying specific, limited categories of covered transactions 
that are subject to various substantive protections, including the 
protections for high-cost mortgages.
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    Open-end transactions. The proposal for a more inclusive finance 
charge applies only to closed-end transactions. Therefore, for purposes 
of the coverage trigger in Sec.  1026.32(a)(1)(i), the Bureau proposes 
to use the TCR for closed-end transactions only. The Bureau believes 
that an adjustment for open-end transactions would not be necessary or 
appropriate because the APR for open-end credit plans solely includes 
interest and not other fees or charges. Accordingly, the annual 
percentage rate would be used for open-end transactions.
    Effective dates. In addition to seeking comment on the issues 
raised above concerning potential modifications to the HOEPA APR 
triggers if the Bureau adopts a broader definition of finance charge, 
the Bureau seeks comment on the timing of implementation. As discussed 
above, the Bureau has proposed to expand the definition of finance 
charge as part of the 2012 TILA-RESPA Proposal, which has no statutory 
deadline for final rules. The Bureau expects that it may take some time 
to finalize the disclosures proposed in that rule, since it anticipates 
conducting quantitative testing of the forms. The Bureau does not 
necessarily have to wait until the disclosures are finalized to issue a 
final rule about whether to expand the definition of finance charge, 
and is specifically seeking comment in connection with that proposal 
about whether it should decide the finance charge issue (and finalize 
that aspect of the proposal) earlier in light of the potential impact 
on other rulemakings.
    The Bureau also seeks comment on effective dates as part of this 
rulemaking. The Bureau expects to issue a final rule regarding 
implementation of the Dodd-Frank Act amendments to HOEPA by January 21, 
2013, since the statute will otherwise automatically take effect on 
that date. The Bureau also expects to issue several other final rules 
by January 21, 2013, to implement other provisions of title XIV of the 
Dodd-Frank Act that set similar thresholds for compliance based on 
mortgage loans' APRs or points and fees. The Bureau is seeking comment 
on an appropriate implementation period for the final rules.
    The Bureau believes that it would be preferable for any change to 
the definition of finance charge and any related changes to regulatory 
thresholds to take effect at the same time, in order to provide for 
consistency and efficient systems modification. The Bureau also 
believes that it may be advantageous to consumers and creditors for 
these changes to occur at the same time that creditors are implementing 
new title XIV requirements involving APR and points and fees 
thresholds, rather than waiting until the Bureau finalizes other 
aspects of the 2012 TILA-RESPA final rule relating to disclosures. If 
the Bureau expands the definition of finance charge, this approach 
would likely provide the benefits to consumers of the final rule at an 
earlier date as well as avoid requiring creditors to make two sets of 
systems and procedures changes focused on determining which loans 
trigger particular regulatory requirements (e.g., one set of changes to 
implement amendments to the HOEPA triggers generally and another set of 
changes associated with any modifications related to the more inclusive 
finance charge). However, given that implementation of the disclosure-
related elements of the 2012 TILA-RESPA Proposal will also require 
systems and procedures changes, there may be advantages to delaying any 
change in the definition of finance charge and related adjustments to 
regulatory triggers until those changes occur. The Bureau therefore 
seeks comment on the benefits and costs to both consumers and industry 
of both approaches.
    Related commentary. Under Alternative 2, as discussed above, 
proposed comment 32(a)(1)(i)-1 clarifies the determination of the TCR 
for closed-end mortgage loans. For consistency within Regulation Z 
regarding the determination of the TCR, the proposal cross-references 
guidance proposed under Sec.  226.45(a)(2)(i) in the 2011 Escrow 
Proposal, which would be renumbered as Sec.  1026.35(a)(2)(i) for 
organizational purposes. Under Alternative 1, the Bureau notes that 
this proposed comment would be removed and proposed comments 
32(a)(1)(i)-2 and -3 below would be renumbered as comments 32(a)(1)(i)-
1 and -2.
    Proposed comment 32(a)(1)(i)-2 clarifies the determination of the 
average prime offer rate for closed-end mortgage loans. For consistency 
within Regulation Z regarding the determination of the average prime 
offer rate for closed-end credit, the proposal cross-references the 
guidance in current comments 35(a)(2)-1 through -4, which would be 
renumbered as comments 35(a)(2)(ii)-1 through -4 for organizational 
purposes.
    Proposed comment 32(a)(1)(i)-3 provides guidance on the 
determination of the average prime offer rate for open-end credit plans 
by clarifying that creditors use the average prime offer rate for the 
most closely comparable closed-end mortgage loan based on applicable 
loan characteristics and other loan pricing terms. The proposal also 
provides illustrative examples to facilitate compliance.
    The Bureau believes this approach is consistent with TILA section 
103(bb)(1)(A)(i), which requires a comparison of mortgage transactions' 
APRs to the average prime offer rate without distinguishing between 
closed-end and open-end credit. The APOR is currently calculated only 
for closed-end mortgage products, and the Bureau is unaware of any 
publicly-available surveys of pricing data for open-end credit plans on 
which to calculate a separate APOR for open-end credit.\31\
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    \31\ The methodology for deriving the APOR is based on Freddie 
Mac's Primary Mortgage Market Survey, which does not provide any 
data on open-end mortgage products, such as home-equity lines of 
credit. More detailed discussions of the determination of the APOR 
are provided in the Board's 2008 HOEPA Final Rule, see 73 FR at 
44533-44536, and other publicly-available sources, see, e.g., http://www.ffiec.gov/ratespread/default.aspx.
---------------------------------------------------------------------------

    Home-equity lines of credit with a variable rate feature reference 
an index to determine the interest rate, such as the average prime rate 
from a consensus of certain lenders as published by the Wall Street 
Journal (the ``prime rate''). Based on historical data, the Bureau 
understands that the average prime offer rate for one-year adjustable 
rate mortgages and the prime rate generally have been comparable. The 
Bureau further understands that many lenders use the prime rate as a 
reference index. Therefore, the Bureau believes that reliance on the 
APOR for the most closely comparable closed-end mortgage loan will 
provide a reasonable benchmark and facilitate compliance, since the 
tables for average prime offer rates are readily available and any rate 
spread calculators developed for closed-end mortgages may be adapted to 
open-end transactions as well. However, the Bureau solicits data or 
comment on any aspect of determining the average prime offer rate for 
open-end credit plans. In particular, the Bureau solicits comment on 
whether an alternative reference rate would better meet the objectives 
of the APR trigger for open-end credit and would facilitate compliance.
    As noted above, proposed Sec.  1026.32(a)(1)(i)(B) provides that 
the annual percentage rate threshold trigger is 8.5 percentage points 
over average prime offer rate for first-lien mortgages if the dwelling 
is personal property and the total loan amount is less than $50,000. 
Proposed comment 32(a)(1)(i)-

[[Page 49104]]

4 clarifies that the guidance for total loan amount under proposed 
Sec.  1026.32(a)(1)(i)(B) is consistent with the guidance addressing 
total loan amount that is provided in proposed Sec.  1026.32(b)(6) and 
comment 32(b)(6)-1.
32(a)(1)(ii)
    Existing TILA section 103(aa)(1)(B) provides that a mortgage is 
subject to the restrictions and requirements of HOEPA if the total 
points and fees payable by the consumer at or before loan closing 
exceed the greater of eight percent of the total loan amount or $400. 
See 15 U.S.C. 1602(aa)(1)(B); Sec.  1026.32(a)(1)(ii). Prior to the 
transfer date under the Dodd-Frank Act, the Board adjusted the $400 
figure annually for inflation since 1996. TILA section 103(aa)(3), 15 
U.S.C. 1602(aa)(3). For 2012, the Board adjusted the $400 figure to 
$611 from $592, where it had been set for 2011. See 76 FR 35723, 35723-
24 (June 20, 2011); comment 32(a)(1)(ii)-2.xvii.
    Section 1431(a) of the Dodd-Frank Act amended TILA section 
103(aa)(1)(B) to provide that a mortgage is a high-cost mortgage 
subject to HOEPA if the total points and fees payable in connection 
with the transaction exceed either five percent or eight percent of the 
total transaction amount, depending on the transaction. Specifically, 
under TILA section 103(bb)(1)(A)(ii)(I), a transaction with a total 
transaction amount of $20,000 or more is a high-cost mortgage if the 
total points and fees payable in connection with the transaction exceed 
five percent of the total transaction amount. Under TILA section 
103(bb)(1)(A)(ii)(II), a transaction with a total transaction amount of 
less than $20,000 is a high-cost mortgage if the total points and fees 
payable in connection with the transaction exceed eight percent of the 
total transaction amount or $1,000, whichever is less. The proposal 
implements the Dodd-Frank Act's amendments to TILA's points and fees 
trigger for high-cost mortgages in proposed Sec.  1026.32(a)(1)(ii)(A)-
(B).
Payable in Connection With the Transaction
    Section 1431(a) of the Dodd-Frank Act amended the high-cost 
mortgage points and fees trigger in TILA section 103(aa)(1)(B), 15 
U.S.C. 1602(aa)(1)(B), by providing for the inclusion in points and 
fees of ``the total points and fees payable in connection with the 
transaction,'' as opposed to ``the total points and fees payable by the 
consumer at or before closing'' (emphases added). The proposal 
implements this statutory change in proposed Sec.  1026.32(a)(1)(ii). 
The Bureau notes that the practical result of this change is that any 
item listed in the points and fees definition under proposed Sec.  
1026.32(b)(1) and (3) must, unless otherwise specified, be counted 
toward the points and fees threshold for high-cost mortgages even if it 
is payable after consummation or account opening.\32\ See the section-
by-section analysis to proposed Sec.  1026.32(b)(1) and (3), below, for 
further details concerning the definition of points and fees for high-
cost mortgages.
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    \32\ The Bureau's proposed inclusion in points and fees for 
high-cost mortgages of ``the total points and fees payable in 
connection with the transaction'' is consistent with the proposed 
inclusion in points and fees for qualified mortgages of ``the total 
points and fees * * * payable in connection with the loan'' in the 
Board's 2011 ATR Proposal. See 76 FR 27390, 27456 (May 11, 2011) 
(implementing TILA section 129C(b)(2)(A)(vii)).
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Total Transaction Amount
    Section 1431(a) of the Dodd-Frank Act amended TILA section 
103(aa)(1)(B), 15 U.S.C. 1602(aa)(1)(B), to provide that a mortgage is 
a high-cost mortgage if its total points and fees exceed a certain 
percentage of the ``total transaction amount,'' rather than the ``total 
loan amount.'' TILA section 103(bb)(1)(A)(ii). The Dodd-Frank Act did 
not define the term ``total transaction amount.'' However, the Bureau 
believes that the phrase reflects the fact that HOEPA, as amended, 
applies to both closed- and open-end credit transactions secured by a 
consumer's principal dwelling.\33\ Notwithstanding the statutory 
change, for consistency with existing Regulation Z terminology, 
proposed Sec.  1026.32(a)(1)(ii) provides that a high-cost mortgage is 
one for which the total points and fees exceed a certain percentage of 
the ``total loan amount.'' For organizational purposes, the Bureau 
proposes to move the definition of ``total loan amount'' in existing 
comment 32(a)(1)(ii)-1 into proposed Sec.  1026.32(b)(6) and comment 
32(b)(6)(i)-1. As discussed below in the section-by-section analysis to 
proposed Sec.  1026.32(b)(6), the Bureau also proposes to amend the 
definition of ``total loan amount'' for closed-end mortgage loans and 
to clarify the meaning of ``total loan amount'' for open-end credit 
plans.
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    \33\ In this regard, the Bureau notes that section 1412 of the 
Dodd-Frank Act retained the phrase ``total loan amount'' for 
purposes of determining whether a closed-end mortgage complies with 
the points and fees restrictions applicable to qualified mortgages. 
See TILA section 129C(b)(2)(A)(vii).
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Annual Adjustment of $1,000 Amount
    The Bureau proposes to re-number existing comment 32(a)(1)(ii)-2 as 
proposed comment 32(a)(1)(ii)-1 for organizational purposes, as well as 
to revise it in several respects to reflect proposed revisions to Sec.  
1026.32(a)(1)(ii). First, proposed comment 32(a)(1)(ii)-1 replaces 
references to the pre-Dodd-Frank statutory figure of $400 with 
references to the new statutory figure of $1,000.\34\ In addition, 
consistent with the Dodd-Frank Act's transfer of rulemaking authority 
for HOEPA from the Board to the Bureau, proposed comment 32(a)(1)(ii)-1 
states that the Bureau will publish and incorporate into commentary the 
required annual adjustments to the $1,000 figure after the June figures 
become available each year. Finally, the proposal retains in proposed 
comment 32(a)(1)(ii)-2 the paragraphs in existing comment 32(a)(1)(ii)-
2 enumerating the $400 figure as adjusted for inflation from 1996 
through 2012. The Bureau believes that it is useful to retain the list 
of historical adjustments to the $400 figure for reference, 
notwithstanding that TILA section 103(bb)(1)(A)(ii)(II) increases the 
dollar figure from $400 to $1,000.
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    \34\ The Dodd-Frank Act renumbered TILA section 
103(aa)(1)(B)(i)-(ii) concerning points and fees for high-cost 
mortgages as 103(bb)(1)(A)(ii)(I)-(II). However, the Dodd-Frank Act 
did not amend TILA section 103(aa)(3) (the provision that directs 
the points and fees dollar figure to be adjusted annually for 
inflation) to reflect this new numbering. To give meaning to the 
statute as amended, the Bureau interprets the authority provided to 
it in amended TILA section 103(bb)(3) as authority to adjust 
annually for inflation the dollar figure prescribed in amended TILA 
section 103(bb)(1)(A)(ii)(II).
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32(a)(1)(iii)
    Existing TILA section 103(aa)(1), 15 U.S.C. 1602(aa)(1), provides 
that a mortgage is a high-cost mortgage if either its APR or its total 
points and fees exceed certain statutorily prescribed thresholds. 
Section 1431(a) of the Dodd-Frank Act amended TILA to add that a 
transaction is also a high-cost mortgage if the credit transaction 
documents permit the creditor to charge or collect prepayment fees or 
penalties more than 36 months after the transaction closing, or if such 
fees or penalties exceed, in the aggregate, more than two percent of 
the amount prepaid. TILA section 103(bb)(1)(A)(iii). Proposed Sec.  
1026.32(a)(1)(iii) implements TILA section 103(bb)(1)(A)(iii) with 
several minor clarifications.
    First, proposed Sec.  1026.32(a)(1)(iii) provides that the 
determination as to whether the creditor can charge the specified 
prepayment penalty is to be made under the ``terms of the loan contract 
or open-end credit agreement,'' rather than under the ``credit 
transaction documents.'' This phrasing is proposed to reflect the 
application of proposed Sec.  1026.32(a)(1)(iii) to both closed- and

[[Page 49105]]

open-end transactions, and for consistency with Regulation Z. Proposed 
Sec.  1026.32(a)(1)(iii) also cross-references the definition of 
prepayment penalty in proposed Sec.  1026.32(b)(8). Finally, proposed 
Sec.  1026.32(a)(1)(iii) clarifies that the creditor must include any 
prepayment penalty that is permitted to be charged more than 36 months 
``after consummation or account opening,'' rather than after 
``transaction closing.'' For consistency and clarity, the Bureau 
proposes using the terms ``consummation'' and ``account opening'' 
instead of ``transaction closing'' for closed- and open-end 
transactions, respectively.
    Proposed comment 32(a)(1)(iii)-1 explains how the prepayment 
penalty trigger for high-cost mortgages in proposed Sec.  
1026.32(a)(1)(iii) interacts with the ban on prepayment penalties for 
high-cost mortgages in amended TILA section 129(c), 15 U.S.C. 1639(c), 
which the Bureau proposes to implement in Sec.  1026.32(d)(6). 
Specifically, proposed comment 32(a)(1)(iii)-1 explains that Sec.  
1026.32 implicates prepayment penalties in two main ways. First, under 
proposed Sec.  1026.32(a)(1)(iii), a closed- or open-end transaction is 
a high-cost mortgage if, under the terms of the loan contract or credit 
agreement, a creditor can charge either (i) a prepayment penalty more 
than 36 months after consummation or account opening, or (ii) total 
prepayment penalties that exceed two percent of any amount prepaid. 
Second, if a transaction is a high-cost mortgage by operation of any of 
the triggers in proposed Sec.  1026.32(a)(1) (i.e., the APR, points and 
fees, or prepayment penalty triggers), then under proposed Sec.  
1026.32(d)(6), the transaction may not include a prepayment penalty. 
Proposed comment 32(a)(1)(iii)-1 clarifies that proposed Sec.  
1026.32(a)(1)(iii) thus effectively establishes a maximum period during 
which a prepayment penalty may be imposed, and a maximum prepayment 
penalty amount that may be imposed, on a transaction that may be 
subject to HOEPA coverage (i.e., a closed- or open-end transaction 
secured by a consumer's principal dwelling, other than a reverse 
mortgage transaction).
    Proposed comment 32(a)(1)(iii)-1 also cross-references proposed 
Sec.  1026.43(g) (proposed Sec.  226.43(g) in the Board's 2011 ATR 
Proposal), which proposes to implement new TILA section 129C(c) by (1) 
prohibiting prepayment penalties for most closed-end mortgages unless 
the transaction is a fixed-rate, qualified mortgage with an annual 
percentage rate that meets certain statutorily prescribed thresholds, 
and (2) restricting prepayment penalties even for such qualified 
mortgages to three percent, two percent and one percent of the amount 
prepaid during the first, second, and third years following 
consummation, respectively. See 76 FR 27390, 27472-78 (May 11, 2011). 
As discussed further below in the section-by-section analysis to 
proposed Sec.  1026.32(b)(8), the Bureau believes that the cumulative 
effect of the Dodd-Frank Act's amendments to TILA concerning prepayment 
penalties may be to limit the amount of prepayment penalties that may 
be charged in connection with most closed-end mortgage loans to amounts 
that would be unlikely to reach the high-cost mortgage prepayment 
penalty trigger.\35\ The Bureau nonetheless requests comment on whether 
additional guidance concerning the calculation of prepayment penalties 
for purposes of proposed Sec.  1026.32(b)(1)(iii) is needed.
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    \35\ The Dodd-Frank Act's amendments include adding a prepayment 
penalty trigger for high-cost mortgages and prohibiting prepayment 
penalties for such mortgages (TILA sections 103(bb)(1)(A)(iii) and 
129(c)), restricting or prohibiting prepayment penalties for most 
closed-end mortgage loans (TILA section 129C(c)), and including 
prepayment penalties in the points and fees calculations for high-
cost mortgages and qualified mortgages (TILA sections 103(bb)(4) and 
129C(b)(2)(C), respectively). See also the section-by-section 
analysis to proposed Sec.  1026.32(b)(1) and (3) and proposed Sec.  
1026.32(b)(8), below.
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    Proposed comment 32(a)(1)(iii)-2 illustrates how to apply proposed 
Sec.  1026.32(a)(1)(iii) in the case of an open-end credit plan. To 
begin, proposed comment 32(a)(1)(iii)-2 clarifies that, if the terms of 
an open-end credit agreement allow for a prepayment penalty that 
exceeds two percent of the initial credit limit for the plan, the 
agreement will be deemed to permit a creditor to charge a prepayment 
penalty that exceeds two percent of the ``amount prepaid'' within the 
meaning of proposed Sec.  1026.32(a)(1)(iii). The comment provides 
three examples to illustrate the rule.
    Proposed comment 32(a)(1)(iii)-2.i explains that a home-equity line 
of credit with an initial credit limit of $10,000 is a high-cost 
mortgage under proposed Sec.  1026.32(a)(1)(iii) if the terms of the 
plan permit the creditor to charge the consumer a flat fee of $500 if 
the consumer terminates the plan sooner than three years after opening 
the account. The $500 flat fee is a prepayment penalty (see proposed 
Sec.  1026.32(b)(8)(ii), below) that exceeds two percent of the total 
amount of the initial credit limit of $10,000, which is $200.
    Proposed comment 32(a)(1)(iii)-3.ii sets forth a second example. 
This example assumes a home-equity line of credit with an initial 
credit limit of $10,000 and a ten-year term. The terms of the plan 
permit the creditor to charge the consumer a $200 fee if the consumer 
terminates the plan prior to the expiration of the ten-year term. Even 
though the $200 prepayment penalty is less than two percent of the 
initial $10,000 credit limit, the home-equity line of credit is a high-
cost mortgage under proposed Sec.  1026.32(a)(1)(iii) because the terms 
of the plan permit the creditor to charge the penalty longer than three 
years after the consumer opens the account.
    Finally, proposed comment 32(a)(1)(iii)-3.iii assumes that the 
terms of an open-end credit plan with an initial credit limit of 
$150,000 permit the creditor to charge the consumer for any closing 
costs paid by the creditor if the consumer terminates the plan less 
than 36 months after account opening. In the example, the creditor pays 
$1,000 in closing costs. Of the $1,000, the creditor pays $800 to cover 
bona fide third-party charges and $200 to cover origination costs 
incurred by the creditor or its affiliates. Under proposed Sec.  
1026.32(b)(8)(ii), the ability to charge the consumer $800 upon early 
termination to cover bona fide third-party charges is not a prepayment 
penalty, but the ability to charge $200 for the creditor's or its 
affiliate's origination costs is a prepayment penalty. The total 
prepayment penalty of $200 is less than two percent of the plan's 
initial $150,000 credit limit, and under the terms of the plan the 
penalty does not apply if the consumer terminates the plan more than 36 
months after account opening. Thus, the plan is not a high-cost 
mortgage under Sec.  1026.32(a)(1)(iii).
32(a)(2) Determination of Transaction Coverage Rate or Annual 
Percentage Rate
    TILA section 103(bb)(1)(B) specifies the interest rate used to 
determine the annual percentage rate for purposes of the APR threshold 
under TILA section 103(bb)(1)(A)(i). TILA section 103(bb)(1)(B) 
requires that: (1) In connection with a fixed-rate transaction, the 
annual percentage rate must be based on the interest rate in effect on 
the date of consummation; (2) in connection with a transaction with a 
rate that varies solely in accordance with an index, the annual 
percentage rate must be based on the interest rate determined by adding 
the maximum margin permitted at any time during the loan agreement to 
the index rate in effect on the date of consummation; and (3) in 
connection with any other transaction in which the

[[Page 49106]]

rate may vary at any time during the term of the loan for any reason, 
the annual percentage rate must be based on the maximum interest rate 
that may be charged during the term of the loan.
    The Bureau proposes to implement these provisions in proposed Sec.  
1026.32(a)(2). Specifically, proposed Sec.  1026.32(a)(2)(i) requires 
that for purposes of the APR trigger, the calculation of the 
transaction coverage rate or annual percentage rate, as applicable, for 
a fixed-rate transaction must be based on the interest rate in effect 
on the date of consummation or account opening. Proposed Sec.  
1026.32(a)(2)(ii) requires that for a variable-rate transaction in 
which the interest rate may vary during the term of the loan or plan in 
accordance with an index outside the creditor's control, the 
transaction coverage rate or annual percentage rate, as applicable, 
must be based on an interest rate that is determined by adding the 
maximum margin permitted at any time during the term of the loan or 
plan to the index rate in effect on the date of consummation or account 
opening. Proposed Sec.  1026.32(a)(2)(iii) requires that for a loan in 
which the interest rate may vary during the term of the loan, other 
than a loan as described in Sec.  1026.32(a)(2)(ii), the transaction 
coverage rate or annual percentage rate, as applicable, must be based 
on the maximum interest rate that may be imposed during the term of the 
loan.
    As noted above, the Bureau proposes to reference in proposed Sec.  
1026.32(a)(2) the ``transaction coverage rate'' for consistency with 
Alternative 2 to proposed Sec.  1026.32(a)(1)(i). The Bureau also notes 
that if the Bureau does not adopt Alternative 2, the references to 
``transaction coverage rate'' in proposed Sec.  1026.32(a)(2) would be 
removed accordingly. In addition, the Bureau proposes to incorporate 
references to ``account opening'' in proposed Sec.  1026.32(a)(2) to 
clarify that the requirement is also applicable to open-end credit 
plans. Furthermore, the Bureau proposes to clarify in proposed Sec.  
1026.32(a)(2)(ii) that if an interest rate varies in accordance with an 
index, the index must be outside the creditor's control. The Bureau 
believes this clarification is necessary and appropriate to effectuate 
the statutory distinction in treatment between rates that vary with an 
index and those that ``may vary at any time during the term of the loan 
for any reason.'' Additionally, the Bureau is proposing to adopt this 
clarification pursuant to its authority under TILA 105(a) to prevent 
circumvention of coverage under HOEPA. The Bureau notes that if the 
index were in the creditor's control, such as the creditor's own prime 
lending rate, a creditor could set a low index rate for purposes of 
Sec.  1026.32(a)(2)(ii), which would not trigger coverage as a high-
cost mortgage. However, subsequent to consummation, the creditor could 
set a higher index rate, at any time, which would have triggered 
coverage as a high-cost mortgage under Sec.  1026.32(a)(2)(ii). 
Accordingly, the Bureau notes that if the interest rate varies in 
accordance with an index that is under the creditor's control, the 
creditor would determine the annual percentage rate under Sec.  
1026.32(a)(2)(iii), not Sec.  1026.32(a)(2)(ii).
    Proposed comment 32(a)(2)-1 clarifies that, notwithstanding the 
existing guidance in comment 17(c)-1 regarding the calculation of the 
annual percentage rate for discounted and premium variable-rate loans, 
Sec.  1026.32(a)(2) requires a different calculation of the transaction 
coverage rate or annual percentage rate, as applicable, for purposes of 
the high-cost mortgage APR threshold.
    Proposed comment 32(a)(2)-2 clarifies that for purposes of Sec.  
1026.32(a)(2), the annual percentage rate for an open-end transaction 
must be determined in accordance with Sec.  1026.32(a)(2), regardless 
of whether there is an advance of funds at account opening. Proposed 
comment 32(a)(2)-2 further clarifies that Sec.  1026.32(a)(2) does not 
require the determination of the annual percentage rate for any 
extensions of credit subsequent to account opening. In other words, any 
draw on the credit line subsequent to account opening is not considered 
to be a separate open-end ``transaction'' for purposes of determining 
annual percentage rate threshold coverage.
    Proposed comment 32(a)(2)-3 provides additional guidance on the 
application of Sec.  1026.32(a)(2)(ii) and (iii) to mortgage 
transactions with interest rates that vary. Specifically, proposed 
comment 32(a)(2)-3.i provides that Sec.  1026.32(a)(2)(ii) applies when 
the interest rate is determined by an index that is outside the 
creditor's control. In addition, proposed comment 32(a)(2)-3.i 
clarifies that even if the transaction has a fixed-rate discounted 
introductory or initial interest rate, Sec.  1026.32(a)(2)(ii) requires 
adding the contractual maximum margin to the fully indexed interest 
rate, and not the introductory rate. Furthermore, for purposes of 
determining the maximum margin, proposed comment 32(a)(2)-3.i clarifies 
that margins that might apply if a preferred rate is terminated must be 
used, such as where a specified higher margin will apply if the 
borrower's employment with the creditor ends.
    Proposed comment 32(a)(2)-3.ii clarifies that Sec.  
1026.32(a)(2)(iii) applies when the interest rates applicable to a 
transaction may vary, except as described in Sec.  1026.32(a)(2)(ii). 
Proposed comment 32(a)(2)-3.ii thus specifies that Sec.  
1026.32(a)(2)(iii) applies, for example, to a closed-end mortgage loan 
when interest rate changes are at the creditor's discretion, or where 
multiple fixed rates apply to a transaction, such as a stepped-rate 
mortgage.
    Proposed comment 32(a)(2)-4 clarifies the application of Sec.  
1026.32(a)(2) for home-equity plans that offer fixed-rate and term 
payment options. The Bureau understands that some variable-rate HELOC 
plans may permit borrowers to repay a portion or all of the balance at 
a fixed-rate and over a specified period of time. Proposed comment 
32(a)(2)-4 thus provides that, if a HELOC has only a fixed rate during 
the draw period, a creditor must use that fixed rate to determine the 
plan's APR, as required by proposed Sec.  1026.32(a)(2)(i). If during 
the draw period, however, a HELOC has a variable rate but also offers a 
fixed-rate and -term payment option, a creditor must use the terms 
applicable to the variable-rate feature to determine the plan's APR, as 
described in proposed Sec.  1026.32(a)(2)(ii).
    The Bureau seeks comment on its proposed rules for determining the 
APR for HOEPA coverage, including on whether any aspect of the proposal 
could result in unwarranted, over-inclusive HOEPA coverage of HELOCs. 
In particular, the Bureau notes that Sec.  1026.40(f) and its 
commentary generally prohibit creditors from changing the APR on a 
HELOC unless the change is based on a publicly-available index outside 
the creditor's control or unless the rate change is specifically set 
forth in the agreement, such as stepped-rate plans, in which specified 
fixed rates are imposed for specified periods. Therefore, the Bureau 
understands that these HELOC restrictions effectively limit the 
application of proposed Sec.  1026.32(a)(2)(iii) primarily to certain 
types of closed-end mortgage loans. The Bureau notes that applying 
proposed Sec.  1026.32(a)(2)(iii) to determine the APR for a variable-
rate HELOC could result in over-inclusive coverage of HELOCs under 
HOEPA because the maximum possible interest rate for many variable-rate 
HELOCs is pegged to the maximum interest rate permissible under State 
law. That interest rate, in turn, likely would cause the plan's APR to 
exceed HOEPA's APR threshold. Therefore, the

[[Page 49107]]

Bureau solicits comment on whether there are any circumstances pursuant 
to which the terms of a variable-rate HELOC might warrant application 
of proposed Sec.  1026.32(a)(2)(iii) and, if so, whether additional 
clarification is necessary to avoid unwarranted coverage of HELOCs 
under HOEPA.
32(b) Definitions
32(b)(1)
Background
    Existing TILA section 103(aa)(4), 15 U.S.C. 1602(aa)(4), defines 
the charges that must be included in points and fees for purposes of 
determining whether a transaction exceeds the HOEPA points and fees 
threshold. Section 1431(c)(1) of the Dodd-Frank Act revised and added 
certain items to this definition. See TILA section 103(bb)(4).\36\ At 
the same time, as noted above in part I.E, section 1412 of the Dodd-
Frank Act amended TILA to require creditors to consider consumers' 
ability to repay and to create a new type of closed-end mortgage--a 
``qualified mortgage.'' Among other requirements, in order to be 
considered a qualified mortgage, points and fees payable in connection 
with the loan may not exceed 3 percent of the total loan amount.\37\ In 
turn, ``points and fees'' for purposes of qualified mortgages means 
``points and fees'' as defined by HOEPA in existing TILA section 
103(aa)(4). See TILA section 129C(b)(2)(A)(vii) and (C)(i).\38\
---------------------------------------------------------------------------

    \36\ The Dodd-Frank Act renumbered TILA section 103(aa)(1)(B) 
concerning points and fees for high-cost mortgages as 
103(bb)(1)(A)(ii). However, the Dodd-Frank Act did not amend 
existing TILA section 103(aa)(4) (the provision that defines points 
and fees) to reflect this new numbering. Thus, as amended, TILA 
section 103(bb)(4) provides that ``[f]or purposes of paragraph 
(1)(B), points and fees shall include * * *'' Amended TILA section 
103(bb)(1)(B), however, concerns the calculation of the annual 
percentage rate. To give meaning to the statute as amended, the 
Bureau interprets amended TILA section 103(bb)(4) as cross-
referencing the points and fees trigger in amended TILA section 
103(bb)(1)(A)(ii)(II).
    \37\ TILA section 129C(b)(2)(A)(vii).
    \38\ More specifically, TILA section 129C(b)(2)(C)(i) cross-
references the definition of points and fees in 15 U.S.C. 
1602(aa)(4), which the Dodd-Frank Act re-numbered as TILA section 
103(bb)(4), 15 U.S.C. 1602(bb)(4).
---------------------------------------------------------------------------

    As part of its 2011 ATR Proposal to implement new TILA section 
129C(b)(2)(C)(i) defining points and fees for qualified mortgages, the 
Board also proposed to implement the Dodd-Frank Act's amendments to the 
definition of points and fees in existing TILA section 103(aa)(4). 
Specifically, the Board proposed to amend Sec.  226.32(b)(1) and (2) 
and to revise and add corresponding commentary. See 76 FR 27390, 27398-
06, 27481-82, 27487-27489 (May 11, 2011).\39\
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    \39\ The Board noted that its proposed amendments to Sec.  
1026.32(b)(1) and (2) were limited to the definition of points and 
fees and that the 2011 ATR Proposal was not proposing to implement 
any of the other high-cost mortgage amendments in TILA. See id. at 
27398. Thus, the Board noted that, if its ATR Proposal were 
finalized prior to the rule on high-cost mortgages, the calculation 
of the points and fees threshold for qualified mortgages and high-
cost mortgages would be different, but the baseline definition of 
points and fees would be the same. See id. at 27399. For example, 
the Board's 2011 ATR Proposal did not propose to implement the 
statutory changes to the points and fees threshold for high-cost 
mortgages that exclude from the threshold calculation ``bona fide 
third-party charges not retained by the mortgage originator, 
creditor, or an affiliate of the creditor or mortgage originator'' 
and that permit creditors to exclude certain ``bona fide discount 
points,'' even though the Board proposed to implement identical 
provisions in the Dodd-Frank Act defining the points and fees 
threshold for qualified mortgages. See 76 FR 27390, 27398-99.
---------------------------------------------------------------------------

    The Board's 2011 ATR Proposal transferred to the Bureau on July 21, 
2011 and its comment period closed on July 22, 2011. As noted above in 
part I.E, ``Other Rulemakings,'' the Bureau is in the process of 
finalizing the Board's 2011 ATR Proposal, including evaluating comments 
received concerning the Board's proposed amendments to Sec.  
226.32(b)(1) and (2). The Bureau believes that issuing multiple, 
concurrent proposals to implement the Dodd-Frank Act's amendments to 
existing TILA section 103(aa)(4) concerning the definition of points 
and fees for high-cost mortgages and qualified mortgages has the 
potential to cause confusion. In order to minimize such confusion and 
for ease of reference, the Bureau republishes in this proposal the 
Board's proposed amendments to Sec.  226.32(b)(1) and (2) substantially 
as set forth in the Board's 2011 ATR Proposal, with adjustments only to 
reflect the application of the proposed provisions to high-cost 
mortgages, to coordinate this proposal with the other mortgage-related 
rulemakings currently underway at the Bureau, and to conform 
terminology to existing Regulation Z provisions. These adjustments are 
noted in the section-by-section analysis to proposed Sec.  
1026.32(b)(1) and (2), below. The Bureau is particularly interested in 
comments concerning newly-proposed language and the application of the 
definitions in proposed Sec.  1026.32(b)(1) and (2) to the high-cost 
mortgage context.
Limitation to Closed-End Mortgage Loans
    The proposal proposes to amend existing Sec.  1026.32(b)(1) to 
clarify that the charges listed in proposed Sec.  1026.32(b)(1)(i) 
through (vi) are the charges that must be included in the points and 
fees calculation for closed-end mortgage loans. Proposed Sec.  
1026.32(b)(3) sets forth a separate definition of points and fees for 
home equity lines of credit. See the section-by-section analysis to 
proposed Sec.  1026.32(b)(3), below.
32(b)(1)(i)
    Existing TILA section 103(aa)(4)(A), 15 U.S.C. 1602(aa)(4)(A), 
provides that points and fees include all items included in the finance 
charge, except interest or the time-price differential. Existing TILA 
section 103(aa)(4)(A) is implemented in Sec.  1026.32(b)(1)(i). The 
Dodd-Frank Act did not amend TILA section 103(aa)(4)(A), but the Board 
nevertheless proposed certain clarifying revisions to Sec.  
226.32(b)(1)(i) in its 2011 ATR Proposal. See 76 FR 27390, 27400, 
27481, 27487-88 (May 11, 2011). In addition, the Board proposed to 
implement in new Sec.  226.32(b)(1)(i)(B) new TILA section 
103(bb)(1)(C), which excludes from the calculation of points and fees 
certain types and amounts of third-party insurance premiums. Id. at 
27400-02, 27481, 27487-88. The Bureau's proposed Sec.  1026.32(b)(1)(i) 
and comments 32(b)(1)(i)-1 through -4 republish the Board's proposed 
revisions and additions, with the changes discussed below.
Changes To Accommodate the Bureau's Proposed Simpler, More Inclusive 
Finance Charge
    As noted above in part I.E, ``Other Rulemakings,'' and the section-
by-section analysis to proposed Sec.  1026.32(a)(1)(i), the Bureau's 
2012 TILA-RESPA Proposal proposes to adopt a simpler, more inclusive 
definition of the finance charge for closed-end transactions secured by 
real property or a dwelling, similar to what the Board proposed in its 
2009 Closed-End Proposal. See 74 FR 43232, 43241-45 (Aug. 26, 2009). 
Under the Bureau's 2012 TILA-RESPA Proposal, the following fees that 
currently are specifically excluded from the finance charge would be 
included for closed-end credit transactions secured by real property or 
a dwelling: Closing agent charges, application fees charged to all 
applicants for credit (whether or not credit was extended), taxes or 
fees required by law and paid to public officials relating to security 
interests, premiums for insurance obtained in lieu of perfecting a 
security interest, taxes imposed as a condition of recording the 
instruments securing the evidence of indebtedness, and various real-
estate related fees. Because the definition of

[[Page 49108]]

points and fees includes, as its starting point, all items included in 
the finance charge, a potential consequence of adopting the more 
inclusive test for determining the finance charge is that more loans 
might exceed HOEPA's points and fees threshold. See the Board's 2009 
Closed-End Proposal, 74 FR 43232, 43241-45 (Aug. 26, 2009).\40\
---------------------------------------------------------------------------

    \40\ Voluntary credit insurance premiums and voluntary debt 
cancellation charges or premiums are additional charges that are not 
currently included in the finance charge, but that would be included 
for closed-end credit transactions secured by real property or a 
dwelling under the more inclusive finance charge. Such premiums, 
however, are already expressly included in points and fees pursuant 
to Sec.  1026.32(b)(1)(iv).
---------------------------------------------------------------------------

    In its 2010 Mortgage Proposal, 75 FR 58539 (Sept. 24, 2010), the 
Board analyzed the potential impact that a more inclusive definition of 
finance charge might have on, among other things, the number of loans 
meeting HOEPA's thresholds. After having reviewed comments received and 
other market data obtained following publication of the 2009 Closed-End 
Proposal, the Board in its 2010 Mortgage Proposal proposed to preserve 
existing HOEPA coverage, notwithstanding the proposed use of the more 
inclusive finance charge for disclosure purposes. See id. at 58637-38. 
For example, the Board proposed to retain the existing exclusion of 
certain reasonable third-party charges in the points and fees 
definition for purposes of determining HOEPA coverage, even though such 
fees would be included in the expanded finance charge for disclosure 
purposes. See id.
    For the reasons set forth in the Board's 2010 Mortgage Proposal, 
the Bureau acknowledges that the more inclusive finance charge proposed 
in the Bureau's 2012 TILA-RESPA Proposal could expand the number of 
closed-end transactions subject to HOEPA because of points and fees. As 
noted above, very few HOEPA loans are made, in part because assignees 
of HOEPA loans are subject to all claims and defenses a consumer could 
bring against the original creditor. The Bureau therefore seeks comment 
on whether to amend Sec.  1026.32(b)(1)(i) and comment 32(b)(1)(i)-1 as 
proposed to prevent expansion of the types of charges included within 
the definition of points and fees for HOEPA coverage in the event that 
the Bureau adopts the more inclusive finance charge.
    Accordingly, as a starting point, proposed Sec.  1026.32(b)(1)(i) 
includes in points and fees for closed-end mortgage loans all items 
included in the finance charge under Sec.  1026.4(a) and (b). However, 
proposed Sec.  1026.32(b)(1)(i) then expressly excludes from closed-end 
points and fees the charges that would be brought into points and fees 
solely by operation of the more inclusive finance charge. Specifically, 
proposed Sec.  1026.32(b)(1)(i) expressly excludes from points and fees 
the items described in Sec.  1026.4(c) through (e), except to the 
extent that other paragraphs of Sec.  1026.32(b)(1) specifically 
require those items to be included in points and fees. Proposed Sec.  
1026.32(b)(1)(i)(A) and (B) retain the statutory exclusion from points 
and fees of interest or the time-price differential and premiums or 
other charges for certain mortgage insurance. Proposed comment 
32(b)(1)(i)-1 clarifies that charges must be included in points and 
fees only if they are included in the finance charge under Sec.  
1026.4(a) and (b), without reference to any other provision of Sec.  
1026.4.
    The Bureau does not believe that this proposed amendment to the 
definition of points and fees for closed-end mortgage loans constitutes 
an adjustment or exemption requiring the Bureau to invoke its statutory 
authority under TILA section 105(a). Rather, it is the more inclusive 
finance charge proposal itself that amounts to an adjustment to TILA. 
Preserving Regulation Z's existing treatment of points and fees for 
HOEPA coverage purposes would merely keep the regulation consistent 
with TILA in that regard, in spite of the adjustment to the finance 
charge that would be made for disclosure purposes. Indeed, the Bureau 
notes that the proposed amendment is consistent with the Dodd-Frank 
Act, which amended TILA section 103(aa)(1) to exclude ``bona fide third 
party charges'' from the points and fees calculation. The Bureau seeks 
comment on its proposed approach. The Bureau is considering and seeks 
comment on whether, if the proposed amendment were not adopted, the 
general exclusion of bona fide third-party charges from points and fees 
(see the section-by-section analysis to proposed Sec.  1026.32(b)(5), 
below) would be sufficient to retain the current scope of points and 
fees coverage for high-cost mortgages notwithstanding the Bureau's 
proposed more inclusive finance charge.
Proposed Amendments for Clarity and Consistency
    The Bureau proposes several additional changes to Sec.  
1026.32(b)(1)(i) and comments 32(b)(1)(i)-1 through -4 for clarity and 
consistency. Among other non-substantive changes, the Bureau replaces a 
reference to loan ``closing'' with a reference to ``consummation'' in 
proposed Sec.  1026.32(b)(1)(i)(B)(3) for consistency with Regulation 
Z. In addition, proposed comment 32(b)(1)(i)-3.iii, which sets forth an 
example to clarify the types and amounts of upfront private mortgage 
insurance premiums that are excluded from points and fees under Sec.  
1026.32(b)(1)(i)(B), is amended to replace a reference to ``covered 
transaction'' proposed in the Board's 2011 ATR Proposal with a 
reference to ``closed-end mortgage loan.'' This change reflects the 
fact that the phrase ``covered transaction'' refers to those categories 
of closed-end transactions covered by the Board's 2011 ATR Proposal, 
and it is not a defined term for purposes of Sec.  1026.32.\41\
---------------------------------------------------------------------------

    \41\ As discussed in the section-by-section analysis to proposed 
Sec.  1026.32(b)(3), below, the Bureau does not propose to 
incorporate the exclusion of mortgage insurance premiums into the 
definition of points and fees for open-end credit plans.
---------------------------------------------------------------------------

32(b)(1)(ii)
    Section 1431(c) of the Dodd-Frank Act amended TILA section 
103(aa)(4)(B), 15 U.S.C. 1602(aa)(4)(B), to provide that points and 
fees includes ``all compensation paid directly or indirectly by a 
consumer or creditor to a mortgage originator from any source, 
including a mortgage originator that is also the creditor in a table-
funded transaction.'' This language replaced the phrase ``all 
compensation paid to mortgage brokers.'' The Board's 2011 ATR Proposal 
proposed to implement this statutory change by revising existing Sec.  
226.32(b)(1)(ii) and comment 32(b)(1)(ii)-1 and by adding new comments 
32(b)(1)(ii)-2 and -3. See 76 FR 27390, 27402-04, 27481, 27488-89 (May 
11, 2011). The Bureau republishes the Board's proposed revisions and 
additions substantially as proposed in the Board's 2011 ATR Proposal. 
However, the Bureau's proposed comment 32(b)(1)(ii)-2 replaces 
references to ``covered transaction(s)'' with references to ``closed-
end mortgage loan(s)'' for the reasons discussed in the section-by-
section analysis to proposed Sec.  1026.32(b)(1)(i), above. The 
Bureau's proposal makes certain other, non-substantive edits for 
clarity and consistency.
32(b)(1)(iii)
    TILA section 103(aa)(4)(C), 15 U.S.C. 1602(aa)(4)(C), provides that 
points and fees include certain real estate-related charges listed in 
TILA section 106(e), 15 U.S.C. 1605(e). TILA section 103(aa)(4)(C) is 
implemented in existing Sec.  1026.32(b)(1)(iii). The Dodd-Frank Act 
did not amend TILA section 103(aa)(4)(C), but the Board nevertheless 
proposed certain clarifying revisions to

[[Page 49109]]

Sec.  226.32(b)(1)(iii) in its 2011 ATR Proposal. See 76 FR 27390, 
27404, 27481, 27489 (May 11, 2011). The Bureau's proposed Sec.  
1026.32(b)(1)(iii) and comment 32(b)(1)(iii)-1 republish the Board's 
proposed revisions and make two other, minor changes. First, proposed 
Sec.  1026.32(b)(1)(iii) replaces the term ``closing'' as proposed in 
the Board's 2011 ATR Proposal with the term ``consummation'' for 
consistency with Regulation Z. Second, proposed comment 32(b)(1)(iii)-1 
clarifies that a fee paid by the consumer for an appraisal performed by 
the creditor must be included in points and fees, but removes the 
phrase ``even though the fee may be excludable from the finance charge 
if it is bona fide and reasonable in amount'' to conform with the 
Bureau's proposed simpler, more inclusive definition of the finance 
charge. A charge for an appraisal conducted by the creditor would be 
included in the simpler, more inclusive finance charge even if it is 
bona fide and reasonable in amount. See the section-by-section analysis 
to proposed Sec.  1026.32(b)(1)(i), above.
32(b)(1)(iv)
    Section 1431(c) of the Dodd-Frank Act amended TILA section 
103(aa)(4), 15 U.S.C. 1602(aa)(4), to provide that points and fees 
include certain credit insurance and debt cancellation or suspension 
coverage premiums payable at or before closing. See TILA section 
103(bb)(4)(D). In its 2011 ATR Proposal, the Board proposed to amend 
Sec.  226.32(b)(1)(iv), which already requires certain such charges to 
be included in points and fees, to reflect the statutory changes under 
the Dodd-Frank Act. See 76 FR 27390, 27404-05, 27481, 27489 (May 11, 
2011). The Bureau republishes the Board's proposed revisions and 
additions to Sec.  226.32(b)(1)(iv) and comment 32(b)(1)(iv)-1, as well 
as the Board's new proposed comment 32(b)(1)(iv)-2, substantially as 
proposed in the Board's 2011 ATR Proposal.\42\ The Bureau's proposed 
Sec.  1026.32(b)(1)(iv) and proposed comment 32(b)(1)(iv)-1, however, 
replace the term ``closing'' with the term ``consummation'' for 
consistency with existing provisions of Regulation Z. In addition, 
proposed comment 32(b)(1)(iv)-1 clarifies that credit insurance 
premiums must be included in points and fees if they are paid at 
consummation, whether they are paid in cash or, if permitted by 
applicable law, financed. The Bureau believes the clarifying phrase 
``if permitted by applicable law'' is necessary because section 1414 of 
the Dodd-Frank Act added to TILA new section 129C(d) prohibiting the 
financing of most types of credit insurance. See also the section-by-
section analysis to proposed Sec.  1026.32(b)(6), below.
---------------------------------------------------------------------------

    \42\ In its 2011 ATR Proposal, the Board did not propose to 
implement in the definition of points and fees the provision in 
section 1431(c) of the Dodd-Frank Act that specifies that 
``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.'' The Bureau proposes to 
implement this provision in proposed Sec.  1026.34(a)(10) 
prohibiting the financing of points and fees for high-cost 
mortgages. See the section-by-section analysis to proposed Sec.  
1026.34(a)(10), below.
---------------------------------------------------------------------------

32(b)(1)(v)
    Section 1431(c) of the Dodd-Frank Act amended TILA section 
103(aa)(4), 15 U.S.C. 1602(aa)(4), to require the inclusion in points 
and fees of the maximum prepayment fees and penalties which may be 
charged or collected under the terms of the credit transaction. See 
TILA section 103(bb)(4)(E). The Board's 2011 ATR Proposal proposed to 
implement this statutory change in new Sec.  226.32(b)(1)(v). See 76 FR 
27390, 27405, 27481 (May 11, 2011). The Bureau's proposed Sec.  
1026.32(b)(1)(v) republishes the Board's proposed Sec.  
226.32(b)(1)(v), except that it replaces a cross-reference to the 
Board's proposed definition of prepayment penalty for qualified 
mortgages (i.e., the Board's proposed Sec.  226.43(b)(10)) with a 
cross-reference to the definition of prepayment penalty for closed-end 
mortgage loans in proposed Sec.  1026.32(b)(8)(i). See the section-by-
section analysis to proposed Sec.  1026.32(b)(8)(i), below.
32(b)(1)(vi)
    Section 1431(c) of the Dodd-Frank Act amended TILA section 
103(aa)(4), 15 U.S.C. 1602(aa)(4), to require the inclusion in points 
and fees of all prepayment fees or penalties that are incurred by the 
consumer if the loan refinances a previous loan made or currently held 
by the same creditor or an affiliate of the creditor. See TILA section 
103(bb)(4)(F). The Board's 2011 ATR Proposal proposed to implement this 
statutory change in new Sec.  226.32(b)(1)(vi). See 76 FR 27390, 27405, 
27481 (May 11, 2011). The Bureau's proposed Sec.  1026.32(b)(1)(vi) 
republishes the Board's proposed Sec.  226.32(b)(1)(vi), except that it 
replaces a cross-reference to the Board's proposed definition of 
prepayment penalty for qualified mortgages (i.e., the Board's proposed 
Sec.  226.43(b)(10)) with a cross-reference to the definition of 
prepayment penalty for closed-end mortgage loans in proposed Sec.  
1026.32(b)(8)(i). See the section-by-section analysis for proposed 
Sec.  1026.32(b)(8)(i), below.
32(b)(2)
    As noted in the section-by-section analysis to proposed Sec.  
1026.32(b)(1)(ii), above, section 1431(c) of the Dodd-Frank Act amended 
TILA section 103(aa)(4)(B) to replace the term ``mortgage brokers'' 
with ``mortgage originators.'' See TILA section 103(bb)(4)(B). The 
Board's 2011 ATR Proposal proposed to implement this statutory change 
in proposed Sec.  226.32(b)(1)(ii) utilizing the term ``loan 
originator,'' as defined in existing Sec.  1026.36(a)(1), rather than 
the statutory term ``mortgage originator.'' See 76 FR 27390, 27402-04, 
27481, 27488-89 (May 11, 2011). In turn, the Board proposed new Sec.  
226.32(b)(2) to exclude from points and fees compensation paid to 
certain categories of persons specifically excluded from the definition 
of ``mortgage originator'' in amended TILA section 103. See id. at 
27405-06, 27481. The Bureau's proposed Sec.  1026.32(b)(2) republishes 
the Board's proposed Sec.  226.32(b)(2), except that the Bureau 
replaces a reference to ``covered transaction'' with a reference to 
``closed-end mortgage loan'' for the reasons set forth in the section-
by-section analysis to proposed Sec.  1026.32(b)(1)(i), above.
32(b)(3)
Points and Fees; Open-End Credit Plans
    As discussed above in the section-by-section analysis to proposed 
Sec.  1026.32(a), section 1431(a) of the Dodd-Frank Act amended TILA to 
provide that a ``high-cost mortgage'' may include an open-end credit 
plan secured by a consumer's principal dwelling. See TILA section 
103(bb)(1)(A). Section 1431(c) of the Dodd-Frank Act, in turn, amended 
TILA by adding new section 103(bb)(5), which specifies how to calculate 
points and fees for open-end credit plans. Unlike TILA's pre-existing 
points and fees definition for closed-end mortgage loans, which 
enumerates six specific categories of items that creditors must include 
in points and fees, the new open-end points and fees provision simply 
provides that points and fees for open-end credit plans are calculated 
by adding ``the total points and fees known at or before closing, 
including the maximum prepayment penalties that may be charged or 
collected under the terms of the credit transaction, plus the minimum 
additional fees the consumer would be required to pay to draw down an

[[Page 49110]]

amount equal to the total credit line.'' Thus, apart from identifying 
(1) maximum prepayment penalties and (2) fees to draw down an amount 
equal to the total credit line, the Dodd-Frank Act did not enumerate 
the specific items that should be included in ``total points and fees'' 
for open-end credit plans. For clarity and to facilitate compliance, 
the Bureau proposes to implement TILA section 103(bb)(5) in Sec.  
1026.32(b)(3) by defining points and fees for open-end credit plans to 
include the following categories of charges: (1) Each item required to 
be included in points and fees for closed-end mortgages under Sec.  
1026.32(b)(1), to the extent applicable in the open-end credit context; 
(2) certain participation fees that the creditor may impose on a 
consumer in connection with an open-end credit plan; and (3) the 
minimum fee the creditor would require the consumer to pay to draw down 
an amount equal to the total credit line. Each of these items is 
discussed further below.
32(b)(3)(i)
    Proposed Sec.  1026.32(b)(3)(i) provides that all items included in 
the finance charge under Sec.  1026.4(a) and (b), except interest or 
the time-price differential, must be included in points and fees for 
open-end credit plans, to the extent such items are payable at or 
before account opening. This provision generally mirrors proposed Sec.  
1026.32(b)(1)(i) by providing for the inclusion of such charges in 
points and fees for closed-end mortgage loans, with the following 
differences.
    First, proposed Sec.  1026.32(b)(3)(i) specifies that the items 
included in the finance charge under Sec.  1026.4(a) and (b) must be 
included in points and fees only if they are payable at or before 
account opening. Proposed comment 32(b)(3)(i)-1 clarifies this 
provision, which is intended to address the potential confusion that 
could arise from the fact that certain charges included in the finance 
charge under Sec.  1026.4(a) and (b) are transaction costs unique to 
open-end credit plans that often may not be known at account opening. 
Proposed comment 32(b)(3)(i)-1 thus explains that charges payable after 
the opening of an open-end credit plan, for example minimum monthly 
finance charges and service charges based either on account activity or 
inactivity, need not be included in points and fees for open-end credit 
plans, even if they are included in the finance charge under Sec.  
1026.4(a) and (b). Transaction fees generally are also not included in 
points and fees for open-end credit plans, except as provided in 
proposed Sec.  1026.32(b)(3)(vi).
    Second, in contrast to proposed Sec.  1026.32(b)(1)(i) for closed-
end mortgage loans, proposed Sec.  1026.32(b)(3)(i) for open-end credit 
plans does not include any language to accommodate the simpler, more 
inclusive definition of the finance charge proposed in the Board's 2009 
Closed-End Proposal. See the section-by-section analysis to proposed 
Sec.  1026.32(b)(1)(i), above. Such language currently is unnecessary 
in the open-end credit context, because the Bureau's 2012 TILA-RESPA 
Proposal proposes the more inclusive finance charge only for closed-end 
mortgage loans.
    Finally, the Bureau omits from proposed Sec.  1026.32(b)(3)(i) as 
unnecessary the exclusion from points and fees set forth in amended 
TILA section 103(bb)(C) for premiums or guaranties for government-
provided or certain private mortgage insurance. The statute provides 
that the specified charges shall be excluded from total points and fees 
``under paragraph (4)'' (i.e., TILA section 103(bb)(4), not TILA 
section 103(bb)(5) concerning open-end points and fees), and the Bureau 
understands that such insurance products, which are designed to protect 
creditors originating high loan-to-value ratio loans, are inapplicable 
in the context of open-end credit plans.
32(b)(3)(ii)
    Proposed Sec.  1026.32(b)(3)(ii) provides for the inclusion in 
points and fees for open-end credit plans of all items listed in Sec.  
1026.4(c)(7) (other than amounts held for future payment of taxes) 
payable at or before account opening. However, any such charge may be 
excluded from points and fees if it is reasonable, the creditor 
receives no direct or indirect compensation in connection with the 
charge, and the charge is not paid to an affiliate of the creditor. 
Proposed Sec.  1026.32(b)(3)(ii) mirrors proposed Sec.  
1026.32(b)(1)(iii) concerning the inclusion of such charges in points 
and fees for closed-end mortgage loans. Proposed comment 32(b)(3)(ii)-1 
cross-references proposed comment 32(b)(1)(iii)-1 for guidance 
concerning the inclusion in points and fees of items listed in Sec.  
1026.4(c)(7).
32(b)(3)(iii)
    Proposed Sec.  1026.32(b)(3)(iii) provides for the inclusion in 
points and fees for open-end credit plans of premiums or other charges 
payable at or before account opening for any credit life, credit 
disability, credit unemployment, or credit property insurance, or any 
other life, accident, health, or loss-of-income insurance, or any 
payments directly or indirectly for any debt cancellation or suspension 
agreement or contract. Proposed Sec.  1026.32(b)(3)(iii) mirrors 
proposed Sec.  1026.32(b)(1)(iv) concerning the inclusion of such 
charges for closed-end mortgage loans. Proposed comment 32(b)(3)(iii)-1 
cross-references proposed comments 32(b)(1)(iv)-1 and -2 for guidance 
concerning the inclusion in points and fees of premiums for credit 
insurance and debt cancellation or suspension coverage.
32(b)(3)(iv)
    Proposed Sec.  1026.32(b)(3)(iv) provides for the inclusion in 
points and fees for open-end credit plans of the maximum prepayment 
penalty that may be charged or collected under the terms of the plan. 
This provision mirrors proposed Sec.  1026.32(b)(1)(v) concerning the 
inclusion of maximum prepayment penalties for closed-end mortgage 
loans, except that proposed Sec.  1026.32(b)(3)(iv) cross-references 
the definition of prepayment penalty provided for open-end credit plans 
in proposed Sec.  1026.32(b)(8)(ii).
32(b)(3)(v)
    Proposed Sec.  1026.32(b)(3)(v) provides for the inclusion in 
points and fees for open-end credit plans of ``any fees charged for 
participation in an open-end credit plan, as described in Sec.  
1026.4(c)(4), whether assessed on an annual or other periodic basis.'' 
The Bureau notes that the fees described in Sec.  1026.4(c)(4) (i.e., 
fees charged for participation in a credit plan) are excluded from the 
finance charge, and thus are not otherwise included in points and fees 
under proposed Sec.  1026.32(b)(3)(i). The Bureau believes, however, 
that such fees should be included in points and fees for open-end 
credit plans because creditors extending open-end credit plans may 
commonly impose such fees on consumers as a pre-condition to 
maintaining access to their plans, and because creditors can calculate 
at account opening the amount of participation charges that the 
consumer will be required to pay to maintain access for the life of the 
plan.
    Proposed comment 32(b)(3)(v)-1 thus clarifies that proposed Sec.  
1026.32(b)(3)(v) requires the inclusion in points and fees of annual 
fees or other periodic maintenance fees that the consumer must pay to 
retain access to the open-end credit plan. The comment clarifies that, 
for purposes of the points and fees test, a creditor should assume that 
any annual fee is charged each year for the original term of the plan. 
Thus, for example, if the terms of a home-equity line of credit with a 
ten-year term

[[Page 49111]]

require the consumer to pay an annual fee of $50, the creditor must 
include $500 in participation fees in its calculation of points and 
fees.
    The Bureau requests comment on the inclusion of fees described in 
Sec.  1026.4(c)(4) in points and fees for open-end credit plans, 
including on whether additional guidance is needed concerning how to 
calculate such fees for plans that do not have a definite plan length.
32(b)(3)(vi)
    As noted above, new TILA section 103(bb)(5) specifies, in part, 
that the calculation of points and fees for open-end credit plans must 
include ``the minimum additional fees the consumer would be required to 
pay to draw down an amount equal to the total credit line.'' The Bureau 
proposes to implement this requirement in Sec.  1026.32(b)(3)(vi). 
Specifically, proposed Sec.  1026.32(b)(3)(vi) provides for inclusion 
in the calculation of points and fees for open-end credit plans of any 
transaction fee, including any minimum fee or per-transaction fee, that 
will be charged for a draw on the credit line. Proposed Sec.  
1026.32(b)(3)(vi) clarifies that a transaction fee that is assessed 
when a consumer draws on the credit line must be included in points and 
fees whether or not the consumer draws the entire credit line. The 
Bureau believes that any transaction fee that would be charged for a 
draw on the credit line would include any transaction fee that would be 
charged to draw down an amount equal to the total credit line.
    The Bureau interprets the requirement in amended TILA section 
103(bb)(5) to include the ``minimum additional fees'' that will be 
imposed on the consumer to draw an amount of credit equal to the total 
credit line as requiring creditors to assume that a consumer will make 
at least one such draw during the term of the credit plan. The Bureau 
recognizes that creditors will not know at account opening how many 
times (if ever) a consumer will draw the entire amount of the credit 
line. For clarity and ease of compliance, the Bureau interprets the 
statute to require the creditor to assume one such draw. Proposed 
comment 32(b)(3)(vi)-1 clarifies this requirement by providing the 
following example: if the terms of the open-end credit plan permit the 
creditor to charge a $10 transaction fee each time the consumer draws 
on the credit line, the creditor must include one $10 charge in the 
points and fees calculation. The Bureau solicits comment on the 
requirement to include in points and fees the charge assessed for one 
draw of the total credit line and on whether additional guidance is 
needed in the case of an open-end credit plan that sets a maximum 
amount per draw.
    Proposed comment 32(b)(3)(vi)-2 clarifies that, if the terms of the 
open-end credit plan permit a consumer to draw on the credit line using 
either a variable-rate feature or a fixed-rate feature, proposed Sec.  
1026.32(b)(3)(vi) requires the creditor to use the terms applicable to 
the variable-rate feature for determining the transaction fee that must 
be included in the points and fees calculation.
Compensation Paid to Originators of Open-End Credit Plans
    The Bureau does not at this time propose to include in the 
calculation of points and fees for open-end credit plans compensation 
paid to originators of open-end plans.
    As discussed above in the section-by-section analysis to proposed 
Sec.  1026.32(b)(1)(ii), section 1431(c) of the Dodd-Frank Act amended 
TILA section 103(aa)(4)(B) to require mortgage originator compensation 
to be included in the existing calculation of points and fees. At the 
same time, however, section 1401 of the Dodd-Frank Act amended TILA 
section 103 to define a ``mortgage originator'' as a person who 
undertakes specified actions with respect to a ``residential mortgage 
loan application'' or in connection with a ``residential mortgage 
loan.'' Section 1401 further defined the term ``residential mortgage 
loan'' to exclude a consumer credit transaction under an open-end 
credit plan.
    Given that the Dodd-Frank Act does not specify in amended TILA 
section 103(bb)(5) concerning open-end points and fees that 
compensation paid to originators of open-end credit plans be included 
in the calculation of points and fees, the Bureau believes that it is 
reasonable to conclude that Congress did not intend for such 
compensation to be included. Accordingly, the Bureau is not proposing 
at this time to include in the calculation of points and fees for open-
end credit plans compensation paid to originators of open-end credit 
plans. The Bureau believes that any incentive to evade the closed-end, 
high-cost mortgage points and fees threshold by structuring a 
transaction as an open-end credit plan can be addressed through the 
prohibition in TILA against structuring a transaction as an open-end 
credit plan to evade HOEPA. See TILA section 129(r). See also the 
section-by-section analysis to proposed Sec.  1026.34(b), below.
    The Bureau notes that amended TILA section 103(bb)(4)(G) grants the 
Bureau authority to include in points and fees such other charges that 
it determines to be appropriate. The Bureau thus requests comment on 
the proposed definition of points and fees for open-end credit plans, 
including on whether any additional fees should be included in the 
definition. In particular, the Bureau requests comment on whether 
compensation paid to originators should be included in the calculation 
of points and fees from open-end credit plans. The Bureau recognizes 
that neither TILA nor Regulation Z currently addresses compensation 
paid to originators of open-end credit plans and accordingly requests 
comment on the operational issues that would be entailed in tracking 
such compensation for inclusion in the points and fees calculation. The 
Bureau also requests comment on whether the guidance and examples set 
forth in proposed Sec.  1026.32(b)(1)(ii) and comments 32(b)(1)(ii)-1 
and -2 concerning closed-end loan originator compensation would provide 
sufficient guidance to creditors in open-end credit plans, or whether 
additional or different guidance would be of assistance in the open-end 
context.
32(b)(4)
    Proposed Sec.  1026.32(b)(4) excludes from points and fees for 
open-end credit plans any charge that would otherwise be included if 
the creditor waives the charge at or before account opening, unless the 
creditor may assess the charge after account opening. Proposed comment 
32(b)(4)-1 provides an example of the rule. The example explains that a 
creditor that waives a $300 processing fee at the opening of an open-
end credit plan with a ten-year term must include the $300 fee in 
points and fees if the terms of the open-end credit plan provide that 
the consumer must repay the fee if the consumer terminates the plan, 
e.g., within three years after account opening. The waived processing 
fee is a prepayment penalty as defined in proposed Sec.  
1026.32(b)(8)(ii), because it is a fee that the creditor may impose and 
retain if the consumer terminates the plan prior to the expiration of 
its term. Proposed Sec.  1026.32(b)(4) thus provides that the creditor 
must include the waived processing fee in points and fees under Sec.  
1026.32(b)(3)(iv).
    Proposed Sec.  1026.32(b)(5)(i)-(ii) implements amended TILA 
section 103(bb)(1)(A)(ii) and (ee), which excludes two categories of 
charges from points and fees for purposes of determining whether a 
transaction is a high-cost mortgage. The charges, discussed in turn 
below, are: (1) any

[[Page 49112]]

bona fide third-party charge not retained by the creditor, loan 
originator, or an affiliate of either, subject to the limitation that 
premiums for private mortgage insurance must sometimes be included in 
points and fees for closed-end mortgage loans pursuant to proposed 
Sec.  1026.32(b)(1)(i)(B); and (2) up to one or two bona fide discount 
points paid by the consumer in connection with the transaction, but 
only if certain conditions are met. As noted below, the bona fide 
third-party charge and bona fide discount point exclusions from points 
and fees for high-cost mortgages under TILA section 103(bb)(1)(A)(ii) 
and (ee) are nearly identical to the exclusion of such charges from 
points and fees for qualified mortgages under TILA section 
129C(b)(2)(C)(i) through (iv). For consistency and to ease compliance, 
proposed Sec.  1026.32(b)(5)(i)-(ii) thus largely mirrors proposed 
Sec.  226.43(e)(3)(ii)(A) through (C) concerning bona fide third-party 
charges and bona fide discount points as set forth in the Board's 2011 
ATR Proposal. As discussed above in the section-by-section analysis to 
proposed Sec.  1026.32(b)(1) and (2), the Bureau currently is reviewing 
comments received in connection with the Board's 2011 ATR Proposal. In 
response to such comments, the Bureau may revise and provide further 
guidance concerning certain aspects of the Board's proposed Sec.  
226.43(e)(3)(ii)(A) through (C).
32(b)(5)(i) Bona Fide Third-Party Charges
    Proposed Sec.  1026.32(b)(5)(i) excludes from the points and fees 
calculation any bona fide third-party charge not retained by the 
creditor, loan originator, or an affiliate of either, unless the charge 
is a premium for private mortgage insurance that is required to be 
included in points and fees for closed-end mortgage loans under 
proposed Sec.  1026.32(b)(1)(i)(B). Proposed Sec.  1026.32(b)(5)(i) 
implements TILA section 103(bb)(1)(A)(ii), which specifically excludes 
from the high-cost mortgage points and fees calculation any bona fide 
third party charges not retained by the mortgage originator, creditor, 
or an affiliate of the creditor or mortgage originator. 15 U.S.C. 
1602(bb)(1)(A)(ii).
    For consistency and to facilitate compliance, proposed Sec.  
1026.32(b)(5)(i) mirrors, with one exception, proposed Sec.  
226.43(e)(3)(ii)(A) as set forth in the Board's 2011 ATR Proposal. The 
Board's proposed Sec.  226.43(e)(3)(ii)(A) would implement TILA section 
129C(b)(2)(C), which excludes the same categories of bona fide third 
party charges from points and fees for qualified mortgages that TILA 
section 103(bb)(1)(A)(ii) excludes from points and fees for high-cost 
mortgages. See 76 FR 27390, 27465 (May 11, 2011). See also 15 U.S.C. 
1602(bb) and 15 U.S.C. 1639c(b)(2)(C) (providing for the exclusion of 
identical bona fide third-party charges from total points and fees in 
the high-cost mortgage and qualified mortgage contexts).
    Proposed Sec.  1026.32(b)(5)(i) differs from the Board's proposed 
Sec.  226.43(e)(3)(ii)(A) in one minor respect to address the 
application of HOEPA to open-end credit plans. Specifically, amended 
TILA section 103(bb)(1)(A)(ii) excludes from points and fees for high-
cost mortgages bona fide third-party charges ``not retained by the 
creditor, mortgage originator,'' or an affiliate of either. However, as 
discussed above in the section-by-section analysis to proposed Sec.  
1026.32(b)(3), originators of open-end credit plans are not ``mortgage 
originators'' as that term is defined in amended TILA section 103. 
Thus, TILA section 103(bb)(1)(A)(ii) does not by its terms exclude from 
points and fees bona fide third-party charges not retained by an 
originator of an open-end credit plan. The Bureau believes bona fide 
third-party charges not retained by a loan originator should be 
excluded from points and fees whether the originator is originating a 
closed-end mortgage or an open-end credit plan. Accordingly, proposed 
Sec.  1026.32(b)(5)(i) states that, for purposes of Sec.  
1026.32(b)(5)(i), the term ``loan originator'' means a loan originator 
as that term is defined in Sec.  1026.36(a)(1) (i.e., in general, an 
originator of any consumer credit transaction) and notwithstanding 
Sec.  1026.36(f), which otherwise limits the term ``loan originator'' 
to closed-end transactions.\43\
---------------------------------------------------------------------------

    \43\ Like the Board's proposed Sec.  1026.43(e)(3)(ii), 76 FR 
27390, 27465, 27485 (May 11, 2011), the Bureau's proposed Sec.  
1026.32(b)(5)(i) uses the term ``loan originator'' rather than 
``mortgage originator'' for consistency with Regulation Z.
---------------------------------------------------------------------------

    Proposed comment 32(b)(5)(i)-1 clarifies that Sec.  1026.36(a)(1) 
and comment 36(a)-1 provide additional guidance concerning the meaning 
of the term ``loan originator'' for purposes of Sec.  1026.32(b)(5)(i). 
Proposed comment 32(b)(5)(i)-2 provides an example for purposes of 
determining whether a charge may be excluded from points and fees as a 
bona fide third-party charge. Proposed comment 32(b)(5)(i)-2 assumes 
that, prior to loan consummation, a creditor pays $400 for an appraisal 
conducted by a third-party not affiliated with the creditor. At 
consummation, the creditor charges the consumer $400 and retains that 
amount as reimbursement for the fee that the creditor paid to the 
third-party appraiser. For purposes of determining whether the 
transaction is a high-cost mortgage, the creditor need not include in 
points and fees the $400 that it retains as reimbursement.
Private Mortgage Insurance Premiums
    As discussed above in the section-by-section analysis to proposed 
Sec.  1026.32(b)(1)(i)(B), the Dodd-Frank Act amended TILA to add 
section 103(bb)(1)(C)(ii), which excludes private mortgage insurance 
premiums that meet certain conditions from the closed-end points and 
fees calculation for high-cost mortgages. For consistency with TILA 
section 103(bb)(1)(C)(ii), as implemented by proposed Sec.  
1026.32(b)(1)(i)(B), the Bureau proposes to implement TILA's general 
exclusion of bona fide third-party charges from the points and fees 
calculation for high-cost mortgages in proposed Sec.  1026.32(b)(5)(i) 
with the caveat that certain private mortgage insurance premiums must 
be included in points and fees for closed-end mortgage loans as set 
forth in proposed Sec.  1026.32(b)(1)(i)(B). See also the Board's 2011 
ATR Proposal, 76 FR 27390, 27465 (May 11, 2011) (proposing the same 
caveat to bona fide third-party charges for qualified mortgages).
    Proposed comment 32(b)(5)(i)-3 addressing private mortgage 
insurance premiums mirrors proposed comment 43(e)(3)(ii)-2 in the 
Board's 2011 ATR Proposal, except that proposed comment 32(b)(5)(i)-3 
states that it applies for purposes of determining whether a mortgage 
is a high-cost mortgage, rather than a qualified mortgage. Proposed 
comment 32(b)(5)(i)-3 also specifies that this approach to private 
mortgage insurance premiums is relevant only for closed-end 
transactions, for the reasons discussed in the section-by-section 
analysis to proposed Sec.  1026.32(b)(1)(i)(B), above.
32(b)(5)(ii) Bona Fide Discount Points
    Section 1431(d) of the Dodd-Frank Act added new section 103(dd) to 
TILA, which permits a creditor to exclude, under certain circumstances, 
up to two bona fide discount points from the calculation of points and 
fees for purposes of determining whether a transaction is a high-cost 
mortgage. Proposed Sec.  1026.32(b)(5)(ii)(A) through (C) implement 
TILA section 103(dd), with certain clarifications discussed below. The 
Bureau notes that new TILA section 103(dd) is substantially similar to 
new TILA section 129C(b)(2)(C)(ii)-(iv), which provides for the 
exclusion of

[[Page 49113]]

certain bona fide discount points from points and fees for qualified 
mortgages, and which the Board's 2011 ATR Proposal proposed to 
implement in Sec.  226.43(e)(3)(ii)(B) and (C) and Sec.  
226.43(e)(3)(iv). See 76 FR 27465-67, 27485. Generally, except for the 
differences noted below, proposed Sec.  1026.32(b)(5)(ii)(A) and (B) 
concerning the exclusion of up to one or two discount points for high-
cost mortgages are consistent with the Board's proposed Sec.  
226.43(e)(3)(ii)(B) and (C) for qualified mortgages. Likewise, proposed 
Sec.  1026.32(b)(5)(ii)(C), which describes how to determine whether a 
discount point is ``bona fide,'' cross-references proposed Sec.  
1026.43(e)(3)(iv) (i.e., the Board's proposed Sec.  226.43(e)(3)(iv)), 
which describes the same term for qualified mortgages.
Exclusion of Up to Two Bona Fide Discount Points
    Proposed Sec.  1026.32(b)(5)(ii)(A)(1) and (2) implements TILA 
section 103(dd)(1), which permits a creditor to exclude from the high-
cost mortgage points and fees calculation up to two bona fide discount 
points payable by the consumer in connection with the transaction.
    Under proposed Sec.  1026.32(b)(5)(ii)(A)(1), a creditor generally 
may exclude from points and fees up to two bona fide discount points 
payable by the consumer, provided that the interest rate for the 
mortgage loan or open-end credit plan without such discount points does 
not exceed by more than one percentage point the ``average prime offer 
rate,'' as defined in Sec.  1026.35(a)(2)(ii). Proposed Sec.  
1026.32(b)(5)(ii)(A)(1) mirrors proposed Sec.  226.43(e)(3)(ii)(B) for 
qualified mortgages as set forth in the Board's 2011 ATR Proposal. See 
76 FR at 27465-66, 27485, 27504.
    Under proposed Sec.  1026.32(b)(5)(ii)(A)(2), a creditor extending 
a mortgage loan or open-end credit plan secured by personal property 
may exclude from points and fees up to two bona fide discount points 
payable by the consumer, provided that the interest rate for the 
mortgage loan or open-end credit plan without such discount points does 
not exceed by more than one percentage point the average rate on loans 
insured under Title I of the National Housing Act (12 U.S.C. 1702 et 
seq.). The Bureau requests comment on whether additional guidance is 
needed concerning the calculation of the average rate for loans insured 
under Title I of the National Housing Act.
Exclusion of Up to One Bona Fide Discount Point
    Proposed Sec.  1026.32(b)(5)(ii)(B) implements TILA section 
103(dd)(2), which permits a creditor to exclude from the high-cost 
mortgage points and fees calculation up to one bona fide discount point 
payable by the consumer in connection with the transaction.
    Under proposed Sec.  1026.32(b)(5)(ii)(B)(1), a creditor generally 
may exclude from points and fees up to one bona fide discount point 
payable by the consumer, provided that interest rate for the mortgage 
loan or open-end credit plan without such discount points does not 
exceed by more than two percentage points the average prime offer rate, 
as defined in Sec.  1026.35(a)(2)(ii). Proposed Sec.  
1026.32(b)(5)(ii)(B)(1) mirrors proposed Sec.  226.43(e)(3)(ii)(C) for 
qualified mortgages as set forth in the Board's 2011 ATR Proposal. See 
76 FR at 27465-66, 27485, 27504.
    Under proposed Sec.  1026.32(b)(5)(ii)(B)(2), a creditor extending 
a mortgage loan or open-end credit plan secured by personal property 
may exclude from points and fees up to one bona fide discount point 
payable by the consumer, provided that interest rate for the mortgage 
loan or open-end credit plan without such discount points does not 
exceed by more than two percentage points the average rate on loans 
insured under Title I of the National Housing Act (12 U.S.C. 1702 et 
seq.). As for proposed Sec.  1026.32(b)(5)(ii)(A)(2), the Bureau 
requests comment on whether additional guidance is needed concerning 
the calculation of the average rate for loans insured under Title I of 
the National Housing Act.
Average Prime Offer Rate
    Proposed comment 32(b)(5)(ii)-1 clarifies how to determine, for 
purposes of the bona fide discount point exclusion in proposed Sec.  
1026.32(b)(5)(ii)(A)(1) and (B)(1), whether a transaction's interest 
rate meets the requirement not to exceed the average prime offer rate 
by more than one or two percentage points, respectively. Specifically, 
proposed comment 32(b)(5)(ii)-1 provides that the average prime offer 
rate for proposed Sec.  1026.32(b)(5)(ii)(A)(1) and (B)(1) is the 
average prime offer rate that applies to a comparable transaction as of 
the date the interest rate for the transaction is set. Proposed comment 
32(b)(5)(ii)-1 cross-references proposed comments 32(a)(1)(i)-1 and -2 
for closed- and open-end transactions, respectively, for guidance as to 
determining the applicable average prime offer rate. See also the 
section-by-section analysis to proposed Sec.  1026.32(a)(1)(i), above.
``Bona Fide'' Discount Point
    Proposed Sec.  1026.32(b)(5)(ii)(C) cross-references proposed Sec.  
1026.43(e)(3)(iv) (proposed Sec.  1026.43(e)(3)(iv) as set forth in the 
Board's 2011 ATR Proposal) for purposes of determining whether a 
discount point is ``bona fide'' and excludable from the high-cost 
mortgage points and fees calculation. See 76 FR 27390, 27485 (May 11, 
2011). Amended TILA sections 103(dd)(3) and (4) and 129C(b)(2)(C)(iii) 
and (iv) provide the same methodology for high-cost mortgages and 
qualified mortgages, respectively, for determining whether a discount 
point is ``bona fide.'' Thus, under both the Board's proposed Sec.  
226.43(e)(3)(iv) for qualified mortgages and the Bureau's proposed 
Sec.  1026.32(b)(5)(ii) for high-cost mortgages, a discount point is 
``bona fide'' if it both (1) reduces the interest rate or time-price 
differential applicable to transaction based on a calculation that is 
consistent with established industry practices for determining the 
amount of reduction in the interest rate or time-price differential 
appropriate for the amount of discount points paid by the consumer and 
(2) accounts for the amount of compensation that the creditor can 
reasonably expect to receive from secondary market investors in return 
for the transaction. As noted above, the Bureau currently is developing 
a final rule to implement the Dodd-Frank Act's provisions concerning 
qualified mortgages, including the provisions relating to bona fide 
discount points. The Bureau expects to provide further clarification 
concerning the exclusion of bona fide discount points from points and 
fees for qualified mortgages when it finalizes the Board's 2011 ATR 
Proposal. The Bureau will coordinate any such clarification 
appropriately across the ATR (qualified mortgage) and high-cost 
mortgage rulemakings.
32(b)(6)
    As noted above in the section-by-section analysis to proposed Sec.  
1026.32(a)(1)(ii), the Bureau proposes for organizational purposes (1) 
to move the existing definition of ``total loan amount'' for closed-end 
mortgage loans from comment 32(a)(1)(ii)-1 to proposed Sec.  
1026.32(b)(6)(i), and (2) to move the examples showing how to calculate 
the total loan amount for closed-end mortgage loans from existing 
comment 32(a)(1)(ii)-1 to proposed comment 32(b)(6)(i)-1. The Bureau 
also proposes certain changes to the total loan amount

[[Page 49114]]

definition and commentary for closed-end mortgage loans, below. 
Finally, the Bureau proposes to define ``total loan amount'' for open-
end credit plans in proposed Sec.  1026.32(b)(6)(ii).
32(b)(6)(i) Closed-End Mortgage Loans
    The Bureau proposes to move existing comment 32(a)(1)(ii)-1 
concerning calculation of the ``total loan amount'' to proposed Sec.  
1026.32(b)(6)(i) and comment 32(b)(6)(i)-1 and to specify that the 
calculation applies to closed-end mortgage loans. The Bureau also 
proposes to amend the definition of ``total loan amount'' so that the 
``amount financed,'' as calculated pursuant to Sec.  1026.18(b), is no 
longer the starting point for the total loan amount calculation. The 
Bureau believes this amendment both streamlines the total loan amount 
calculation to facilitate compliance and is sensible in light of the 
more inclusive definition of the finance charge proposed in the 
Bureau's 2012 TILA-RESPA Proposal. One effect of the proposed more 
inclusive finance charge generally could be to reduce the ``amount 
financed'' for many transactions. The Bureau thus proposes no longer to 
rely on the ``amount financed'' calculation as the starting point for 
the ``total loan amount'' in HOEPA. The Bureau instead proposes to 
define ``total loan amount'' as the amount of credit extended at 
consummation that the consumer is legally obligated to repay, as 
reflected in the loan contract, less any cost that is both included in 
points and fees under Sec.  1026.32(b)(1) and financed by the creditor. 
Proposed comment 32(b)(6)(i)-1 provides an example of the Bureau's 
proposed ``total loan amount'' calculation.
    The Bureau requests comment on the appropriateness of its revised 
definition of ``total loan amount,'' particularly on whether additional 
guidance is needed in light of the prohibition against financing of 
points and fees for high-cost mortgages. Specifically, the Bureau notes 
that, under this proposal, financed points are relevant for two 
purposes. First, financed points and fees must be excluded from the 
total loan amount for purposes of determining whether the closed-end 
mortgage loan is covered by HOEPA under the points and fees trigger. 
Second, if a mortgage loan is a high-cost mortgage through operation of 
any of the HOEPA triggers, the creditor is prohibited from financing 
points and fees by, for example, including points and fees in the note 
amount or financing them through a separate note. See the section-by-
section analysis to proposed Sec.  1026.34(a)(10), below.
    Notwithstanding that the proposal bans the financing of points and 
fees for high-cost mortgages, the Bureau believes that, for purposes of 
determining HOEPA coverage (and thus whether the ban applies) creditors 
should be required to deduct from the amount of credit extended to the 
consumer any points and fees that the creditor would finance if the 
transaction were not subject to HOEPA.\44\ In this way, the percent 
limit on points and fees for determining HOEPA coverage will be based 
on the amount of credit extended to the borrower without taking into 
account any points and fees that would (if permitted) be financed.
---------------------------------------------------------------------------

    \44\ Calculating the total loan amount by deducting financed 
points and fees from the amount of credit extended to the consumer 
is consistent with the existing total loan amount calculation in 
current comment 32(a)(1)(ii)-1.
---------------------------------------------------------------------------

    The following example illustrates how the provisions concerning 
financed points and fees in proposed Sec. Sec.  1026.32(b)(6)(i) and 
1026.34(a)(10) would work together. First, assume that, under the terms 
of the mortgage loan contract, the consumer is legally obligated to 
repay $50,000. A portion of that amount, $2,450, represents the total 
amount of points and fees (as defined under proposed Sec.  
1026.32(b)(1)) payable in connection with the transaction. If the 
$2,450 in financed points and fees were not excluded from the total 
loan amount, then the transaction would fall below the five percent 
points and fees threshold for high-cost mortgages ($2,450 divided by 
$50,000 equals 4.9 percent of the total loan amount) and none of 
HOEPA's protections, including the ban on financing of points and fees, 
would apply. In contrast, under the Bureau's proposal, the $2,450 in 
points and fees is deducted from the total amount of credit extended to 
the consumer to arrive at a total loan amount of $47,550, and the 
transaction is a high-cost mortgage pursuant to proposed Sec.  
1026.32(a)(1)(ii) ($2,450 divided by $47,550 equals 5.15 percent of the 
total loan amount). Pursuant to proposed Sec.  1026.34(a)(10), then, 
the creditor would be prohibited from including the points and fees in 
the note amount, or financing them through a separate note. See also 
proposed comment 34(a)(10)-2.
32(b)(6)(ii) Open-End Credit Plans
    Proposed Sec.  1026.32(b)(6)(ii) provides that the ``total loan 
amount'' for an open-end credit plan is the credit limit for the plan 
when the account is opened. The Bureau requests comment as to whether 
additional guidance is needed concerning the ``total loan amount'' for 
open-end credit plans.
32(b)(7)
    The proposal re-numbers existing Sec.  1026.32(b)(2) defining the 
term ``affiliate'' as proposed Sec.  1026.32(b)(7) for organizational 
purposes.
32(b)(8)
HOEPA's Current Approach to Prepayment Penalties
    Section 1026.32 currently addresses prepayment penalties in Sec.  
1026.32(d)(6) and (7). Existing Sec.  1026.32(d)(6) implements existing 
TILA section 129(c)(1) by defining the term ``prepayment penalty'' for 
high-cost mortgages as a penalty for paying all or part of the 
principal before the date on which the principal is due, including by 
computing a refund of unearned scheduled interest in a manner less 
favorable than the actuarial method, as defined by section 933(d) of 
the Housing and Community Development Act of 1992. 15 U.S.C. 
1639(c)(1). Existing Sec.  1026.32(d)(7) implements TILA section 
129(c)(2), 15 U.S.C. 1639(c)(2), by specifying when a creditor may 
impose a prepayment penalty in connection with a high-cost mortgage. 
Prior to the Dodd-Frank Act, the substantive limitations on prepayment 
penalties in TILA section 129(c)(1) and (2) were the only statutorily-
prescribed limitations on prepayment penalties, other than certain 
disclosure requirements set forth in TILA section 128(a)(11) and 
(12).\45\
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    \45\ Current Sec.  1026.35(b)(2) restricts prepayment penalties 
for ``higher-priced'' mortgage loans in much the same way that 
current Sec.  1026.32(d)(6) and (7) restricts such penalties for 
HOEPA loans.
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The Dodd-Frank Act's Amendments to TILA Relating to Prepayment 
Penalties
    Sections 1431 and 1432 of the Dodd-Frank Act (relating to high-cost 
mortgages) and section 1414 of the Dodd-Frank Act (relating to 
qualified mortgages) amended TILA to further restrict and, in many 
cases, prohibit the imposition of prepayment penalties in dwelling-
secured credit transactions. The Dodd-Frank Act restricted prepayment 
penalties in three main ways.
    Qualified Mortgages. First, as the Board discussed in its 2011 ATR 
Proposal, the Dodd-Frank Act added new TILA section 129C(c)(1) relating 
to qualified mortgages, which generally provides that a covered 
transaction (i.e., in general, a closed-end, dwelling-secured credit 
transaction) may include a prepayment penalty only if it: (1) Is a 
qualified mortgage (as the Board defined that term in its proposed 
Sec.  226.43(e)(2) or (f)), (2) has an APR that cannot increase after 
consummation, and (3) is

[[Page 49115]]

not a higher-priced mortgage loan as defined in Sec.  1026.35(a). The 
Board proposed to implement TILA section 129C(c)(1) in Sec.  
226.43(g)(1). See 76 FR 27390, 27486 (May 11, 2011). Under new TILA 
section 129C(c)(3), moreover, even loans that meet the statutorily 
prescribed criteria (i.e., fixed-rate, non-higher-priced qualified 
mortgages) may not include prepayment penalties that exceed three 
percent, two percent, and one percent of the amount prepaid during the 
first, second, and third years following consummation, respectively (or 
any prepayment penalty after the third year following consummation). 
The Board proposed to implement TILA section 129C(c)(3) in Sec.  
226.43(g)(2). See id.
    High-Cost Mortgage Prepayment Penalty Trigger and Prohibition. 
Second, as discussed above in the section-by-section analysis to 
proposed Sec.  1026.32(a)(1)(iii), amended TILA section 
103(bb)(1)(A)(iii) provides that any closed- or open-end consumer 
credit transaction secured by a consumer's principal dwelling (other 
than a reverse mortgage transaction) with a prepayment penalty in 
excess of two percent of the amount prepaid or payable more than 36 
months after consummation or account opening is a high-cost mortgage 
subject to Sec. Sec.  1026.32 and 1026.34. Under amended TILA section 
129(c)(1), in turn, high-cost mortgages are prohibited from having a 
prepayment penalty.
    Prepayment Penalty Inclusion in Points and Fees. Third, both 
qualified mortgages and most closed-end mortgage loans and open-end 
credit plans secured by a consumer's principal dwelling are subject to 
additional limitations on prepayment penalties through the inclusion of 
prepayment penalties in the definition of points and fees for qualified 
mortgages and high-cost mortgages. See the section-by-section analysis 
to proposed Sec.  1026.32(b)(1)(v)-(vi) and (3)(iv) above. See also 76 
FR 27390, 27474-75 (May 11, 2011) (discussing the inclusion of 
prepayment penalties in the points and fees calculation for qualified 
mortgages pursuant to TILA section 129C(b)(2)(A)(vii) and noting that 
most qualified mortgage transactions may not have total points and fees 
that exceed three percent of the total loan amount).
    Taken together, the Dodd-Frank Act's amendments to TILA relating to 
prepayment penalties mean that most closed-end, dwelling-secured 
transactions (1) May provide for a prepayment penalty only if they are 
fixed-rate, qualified mortgages that are neither high-cost nor higher-
priced under Sec. Sec.  1026.32 and 1026.35; (2) may not, even if 
permitted to provide for a prepayment penalty, charge the penalty more 
than three years following consummation or in an amount that exceeds 
two percent of the amount prepaid;\46\ and (3) may be required to limit 
any penalty even further to comply with the points and fees limitations 
for qualified mortgages, or to stay below the points and fees trigger 
for high-cost mortgages. In the open-end credit context, no open-end 
credit plan secured by a consumer's principal dwelling may provide for 
a prepayment penalty more than 3 years following account opening or in 
an amount that exceeds two percent of the initial credit limit under 
the plan.
---------------------------------------------------------------------------

    \46\ New TILA section 129C(c)(3) limits prepayment penalties for 
fixed-rate, non-higher-priced qualified mortgages to three percent, 
two percent, and one percent of the amount prepaid during the first, 
second, and third years following consummation, respectively. 
However, amended TILA sections 103(bb)(1)(A)(iii) and 129(c)(1) for 
high-cost mortgages effectively prohibit prepayment penalties in 
excess of two percent of the amount prepaid at any time following 
consummation for most credit transactions secured by a consumer's 
principal dwelling by providing that HOEPA protections (including a 
ban on prepayment penalties) apply to mortgage loans with prepayment 
penalties that exceed two percent of the amount prepaid. In order to 
comply with both the high-cost mortgage provisions and the qualified 
mortgage provisions, creditors originating most closed-end mortgage 
loans secured by a consumer's principal dwelling would need to limit 
the prepayment penalty on the transaction to (1) No more than two 
percent of the amount prepaid during the first and second years 
following consummation, (2) no more than one percent of the amount 
prepaid during the third year following consummation, and (3) zero 
thereafter.
---------------------------------------------------------------------------

The Board's Proposals Relating to Prepayment Penalties
    In its 2009 Closed-End Proposal, the Board proposed to establish a 
new Sec.  226.38(a)(5) for disclosure of prepayment penalties for 
closed-end mortgage transactions. See 74 FR 43232, 43334, 43413 (Aug. 
26, 2009). In proposed comment 38(a)(5)-2, the Board stated that 
examples of prepayment penalties include charges determined by treating 
the loan balance as outstanding for a period after prepayment in full 
and applying the interest rate to such ``balance,'' a minimum finance 
charge in a simple-interest transaction, and charges that a creditor 
waives unless the consumer prepays the obligation. In addition, the 
Board's proposed comment 38(a)(5)-3 listed loan guarantee fees and fees 
imposed for preparing a payoff statement or other documents in 
connection with the prepayment as examples of charges that are not 
prepayment penalties. The Board's 2010 Mortgage Proposal included 
amendments to existing comment 18(k)(1)-1 and proposed comment 
38(a)(5)-2 stating that prepayment penalties include ``interest'' 
charges after prepayment in full even if the charge results from 
interest accrual amortization used for other payments in the 
transaction. See 75 FR 58539, 58756, 58781 (Sept. 24, 2010).\47\
---------------------------------------------------------------------------

    \47\ The preamble to the Board's 2010 Mortgage Proposal 
explained that the proposed revisions to current Regulation Z 
commentary and the proposed comment 38(a)(5) from the Board's 2009 
Closed-End Proposal regarding interest accrual amortization were in 
response to concerns about the application of prepayment penalties 
to certain Federal Housing Administration (FHA) and other loans 
(i.e., when a consumer prepays an FHA loan in full, the consumer 
must pay interest through the end of the month in which prepayment 
is made).
---------------------------------------------------------------------------

    The Board's 2011 ATR Proposal proposed to implement the Dodd-Frank 
Act's prepayment penalty-related amendments to TILA for qualified 
mortgages by defining ``prepayment penalty'' for most closed-end, 
dwelling-secured transactions in new Sec.  226.43(b)(10), and by cross-
referencing proposed Sec.  226.43(b)(10) in the proposed joint 
definition of points and fees for qualified and high-cost mortgages in 
Sec.  226.32(b)(1)(v) and (vi). See 76 FR 27390, 27481-82 (May 11, 
2011). The definition of prepayment penalty proposed in the Board's 
2011 ATR Proposal differed from the Board's prior proposals and current 
guidance in the following respects: (1) Proposed Sec.  226.43(b)(10) 
defined prepayment penalty with reference to a payment of ``all or part 
of'' the principal in a transaction covered by the provision, while 
Sec.  1026.18(k) and associated commentary and the Board's 2009 Closed-
End Proposal and 2010 Mortgage Proposal referred to payment ``in 
full,'' (2) the examples provided omitted reference to a minimum 
finance charge and loan guarantee fees,\48\ and (3) proposed Sec.  
226.43(b)(10) did not incorporate, and the Board's 2011 ATR Proposal 
did not otherwise address, the language in Sec.  1026.18(k)(2) and 
associated commentary regarding disclosure of a rebate of a precomputed 
finance charge, or the language in Sec.  1026.32(b)(6) and associated 
commentary concerning prepayment penalties for high-cost mortgages.
---------------------------------------------------------------------------

    \48\ The preamble to the Board's 2011 ATR Proposal addressed why 
the Board chose to omit these two items. The Board reasoned that a 
minimum finance charge need not be included as an example of a 
prepayment penalty because such a charge typically is imposed with 
open-end, rather than closed-end, transactions. The Board stated 
that loan guarantee fees are not prepayment penalties because they 
are not charges imposed for paying all or part of a loan's principal 
before the date on which the principal is due. See 76 FR 27390, 
27416 (May 11, 2011).

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[[Page 49116]]

The Bureau's Proposal
    To provide guidance as to the meaning of ``prepayment penalty'' for 
Sec.  1026.32 that is consistent with the definition proposed in the 
Bureau's 2012 TILA-RESPA Proposal (which itself draws from the 
definitions proposed in the Board's 2009 Closed-End Proposal, 2010 
Mortgage Proposal, and 2011 ATR Proposal), as well as to provide 
guidance in the context of open-end credit plans, the Bureau proposes 
new Sec.  1026.32(b)(8) to define the term ``prepayment penalty'' for 
purposes of Sec.  1026.32.
32(b)(8)(i)
Prepayment Penalty; Closed-End Mortgage Loans
    Consistent with TILA section 129(c)(1), existing Sec.  
1026.32(d)(6), and the Board's proposed Sec.  226.43(b)(10) for 
qualified mortgages, proposed Sec.  1026.32(b)(8)(i) provides that, for 
a closed-end mortgage loan, a ``prepayment penalty'' means a charge 
imposed for paying all or part of the transaction's principal before 
the date on which the principal is due.
    Proposed comment 32(b)(8)-1.i through -1.iv gives the following 
examples of prepayment penalties: (1) A charge determined by treating 
the loan balance as outstanding for a period of time after prepayment 
in full and applying the interest rate to such ``balance,'' even if the 
charge results from interest accrual amortization used for other 
payments in the transaction under the terms of the loan contract; (2) a 
fee, such as an origination or other loan closing cost, that is waived 
by the creditor on the condition that the consumer does not prepay the 
loan; (3) a minimum finance charge in a simple interest transaction; 
and (4) computing a refund of unearned interest by a method that is 
less favorable to the consumer than the actuarial method, as defined by 
section 933(d) of the Housing and Community Development Act of 1992, 15 
U.S.C. 1615(d). Proposed comment 32(b)(8)-1.i further clarifies that 
``interest accrual amortization'' refers to the method by which the 
amount of interest due for each period (e.g., month) in a transaction's 
term is determined and notes, for example, that ``monthly interest 
accrual amortization'' treats each payment as made on the scheduled, 
monthly due date even if it is actually paid early or late (until the 
expiration of any grace period). The proposed comment also provides an 
example where a prepayment penalty of $1,000 is imposed because a full 
month's interest of $3,000 is charged even though only $2,000 in 
interest was earned in the month during which the consumer prepaid.
    Proposed comment 32(b)(8)-3.i through -3.ii clarifies that a 
prepayment penalty does not include: (1) Fees imposed for preparing and 
providing documents when a loan is paid in full, or when an open-end 
credit plan is terminated, if the fees apply whether or not the loan is 
prepaid or the plan is terminated prior to the expiration of its term, 
such as a loan payoff statement, a reconveyance document, or another 
document releasing the creditor's security interest in the dwelling 
that secures the loan; or (2) loan guarantee fees.
    The definition of prepayment penalty in proposed Sec.  
1026.32(b)(8)(i) and comments 32(b)(8)-1 and 32(b)(8)-3.i and .ii 
substantially incorporates the definitions of and guidance on 
prepayment penalties from the Board's 2009 Closed-End Proposal, 2010 
Mortgage Proposal, and 2011 ATR Proposal and, as necessary, reconciles 
their differences. For example, the Bureau is proposing to incorporate 
the language from the Board's 2009 Closed-End Proposal and 2010 
Mortgage Proposal but omitted in the Board's 2011 ATR Proposal listing 
a minimum finance charge as an example of a prepayment penalty and 
stating that loan guarantee fees are not prepayment penalties, because 
similar language is found in longstanding Regulation Z commentary. 
Based on the differing approaches taken by the Board in its recent 
mortgage proposals, however, the Bureau seeks comment on whether a 
minimum finance charge should be listed as an example of a prepayment 
penalty and whether loan guarantee fees should be excluded from the 
definition of prepayment penalty.
    The Bureau expects to coordinate the definition of prepayment 
penalty in proposed Sec.  1026.32(b)(8)(i) with the definitions in the 
Bureau's other pending rulemakings mandated by the Dodd-Frank Act 
concerning ability-to-repay, TILA-RESPA mortgage disclosure 
integration, and mortgage servicing. To the extent consistent with 
consumer protection objectives, the Bureau believes that adopting a 
consistent definition of ``prepayment penalty'' across its various 
pending rulemakings affecting closed-end mortgages will facilitate 
compliance.
32(b)(8)(ii)
Prepayment Penalties; Open-End Credit Plans
    Proposed Sec.  1026.32(b)(8)(ii) defines the term ``prepayment 
penalty'' for open-end credit plans. Specifically, proposed Sec.  
1026.32(b)(8)(ii) provides that, in connection with an open-end credit 
plan, the term ``prepayment penalty'' means any fee that may be imposed 
by the creditor if the consumer terminates the plan prior to the 
expiration of its term.
    Proposed comment 32(b)(8)-2 clarifies that, for an open-end credit 
plan, the term ``prepayment penalty'' includes any charge imposed if 
the consumer terminates the plan prior to the expiration of its term, 
including, for example, if the consumer terminates the plan in 
connection with obtaining a new loan or plan with the current holder of 
the existing plan, a servicer acting on behalf of the current holder, 
or an affiliate of either. Proposed comment 32(b)(8)-2 further 
clarifies that the term ``prepayment penalty'' includes a waived 
closing cost that must be repaid if the consumer terminates the plan 
prior to the end of its term, except that the repayment of waived bona 
fide third-party charges if the consumer terminates the credit plan 
within 36 months after account opening is not considered a prepayment 
penalty. The Bureau's proposal provides for a threshold of 36 months to 
clarify that, if the terms of an open-end credit plan permit a creditor 
to charge a consumer for waived third-part closing costs when, for 
example, the consumer terminates the plan in year nine of a ten-year 
plan, such charges would be considered prepayment penalties and would 
cause the open-end credit plan to be classified as a high-cost 
mortgage. The Bureau believes that the 36-month time limit is 
consistent both with the prepayment penalty trigger and with industry 
practice in the open-end credit context.
    The Bureau notes that the proposal distinguishes the inclusion of 
waived closing costs in the open- and closed-end credit contexts. In 
the open-end credit context, the Bureau's proposal provides that waived 
third-party closing costs that must be repaid if the consumer 
terminates the open-end credit plan sooner than three years after 
account opening are not considered prepayment penalties for purposes of 
triggering HOEPA coverage, whereas such charges would be considered 
prepayment penalties for closed-end mortgage loans. The Bureau believes 
that a different treatment of such charges is an appropriate use of its 
authority under TILA section 105(a) to prescribe regulations that 
contain such differentiations as are necessary to facilitate compliance 
with the regulation. Specifically, the Bureau understands that, unlike 
for closed-end mortgage loans, waived closing costs are

[[Page 49117]]

a common feature of open-end credit plans and, in addition, that such 
plans with waived closing costs are beneficial to consumers because 
they lower the cost of opening an account. The Bureau also understands 
that, in the case of an open-end credit plan, a waived third-party 
closing cost would only be recouped by the creditor if the consumer 
terminated the plan in its entirety within three years after account 
opening. This is in contrast to a closed-end mortgage loan, where a 
creditor potentially could provide that even a partial prepayment of 
the principal balance triggers a requirement to repay waived closing 
costs.
    Proposed comment 32(b)(8)-3.iii specifies that, in the case of an 
open-end transaction, the term ``prepayment penalty'' does not include 
fees that the creditor may impose on the consumer to maintain the open-
end credit plan, when an event has occurred that otherwise would permit 
the creditor to terminate and accelerate the plan. The exclusion from 
prepayment penalties of fees that a creditor in an open-end transaction 
may impose in lieu of terminating and accelerating a plan mirrors the 
exclusion of such fees as prepayment penalties required to be disclosed 
to the consumer as proposed in the Board's 2009 Open-End Proposal. See 
74 FR 43428, 43481 (Aug. 26, 2009).
    The Bureau requests comment on its proposed definition of 
``prepayment penalty'' for open-end credit plans and on whether any 
additional charges should be included in or excluded from the 
definition.
32(c) Disclosures
    TILA section 129(a) requires additional disclosures for high-cost 
mortgages, and these requirements are implemented in Sec.  1026.32(c). 
The Bureau proposes to amend Sec.  1026.32(c) to provide clarification 
and further guidance on the application of these disclosure 
requirements to open-end credit plans.
    The Bureau proposes comment 32(c)(2)-1 to clarify how to disclose 
the annual percentage rate for an open-end high-cost mortgage. 
Specifically, proposed comment 32(c)(2)-1 clarifies that creditors must 
comply with Sec.  1026.6(a)(1). In addition, the proposed comment 
states that if the transaction offers a fixed-rate for a period of 
time, such as a discounted initial interest rate, Sec.  1026.32(c)(2) 
requires a creditor to disclose the annual percentage rate of the 
fixed-rate discounted initial interest rate, and the rate that would 
apply when the feature expires.
    The Bureau proposes to clarify Sec.  1026.32(c)(3), which requires 
disclosure of the regular payment and the amount of any balloon 
payment. Balloon payments generally are no longer permitted for high-
cost mortgages, except in certain narrow circumstances, as discussed 
below. Proposed Sec.  1026.32(c)(3)(i) incorporates the requirement in 
current Sec.  1026.32(c)(3) for closed-end mortgage loans and clarifies 
that the balloon payment disclosure is required to the extent a balloon 
payment is specifically permitted under Sec.  1026.32(d)(1).
    For open-end credit plans, a creditor may not be able to provide a 
disclosure on the ``regular'' payment applicable to the plan because 
the regular monthly (or other periodic) payment will depend on factors 
that will not be known at the time the disclosure is required, such as 
the amount of the extension(s) of credit on the line and the rate 
applicable at the time of the draw or the time of the payment. In order 
to facilitate compliance and to provide consumers with meaningful 
disclosures, the Bureau proposes Sec.  1026.32(c)(3)(ii) to require 
creditors to disclose an example of a minimum periodic payment for 
open-end high-cost mortgages. Accordingly, proposed Sec.  
1026.32(c)(3)(ii)(A) provides that for open-end credit plans, a 
creditor must disclose payment examples showing the first minimum 
periodic payment for the draw period, and if applicable, any repayment 
period and the balance outstanding at the beginning of any repayment 
period. Furthermore, this example must be must be based on the 
following assumptions: (1) The consumer borrows the full credit line, 
as disclosed in Sec.  1026.32(c)(5)(B) at account opening and does not 
obtain any additional extensions of credit; (2) the consumer makes only 
minimum periodic payments during the draw period and any repayment 
period; and (3) the annual percentage rate used to calculate the sample 
payments will remain the same during the draw period and any repayment 
period. Proposed Sec.  1026.32(c)(3)(ii)(A)(3) further requires that 
the creditor provide the minimum periodic payment example based on the 
annual percentage rate for the plan, as described in Sec.  
1026.32(c)(2), except that if an introductory annual percentage rate 
applies, the creditor must use the rate that would otherwise apply to 
the plan after the introductory rate expires.
    As discussed in detail below, the Bureau is proposing Sec.  
1026.32(d)(1)(iii) to provide an exemption to the prohibition on 
balloon payments for certain open-end credit plans. Accordingly, to the 
extent permitted under Sec.  1026.32(d)(1), proposed Sec.  
1026.32(c)(3)(ii)(B) requires disclosure of that fact and the amount of 
the balloon payment based on the assumptions described in Sec.  
1026.32(c)(3)(ii)(A).
    To reduce potential consumer confusion, proposed Sec.  
1026.32(c)(3)(ii)(C) requires that a creditor provide a statement 
explaining the assumptions upon which the Sec.  1026.32(c)(3)(ii)(A) 
payment examples are based. Furthermore, for the same reason, proposed 
Sec.  1026.32(c)(3)(ii)(D) requires a statement that the examples are 
not the consumer's actual payments and that the consumer's actual 
periodic payments will depend on the amount the consumer has borrowed 
and interest rate applicable to that period. The Bureau believes that 
without such statements, consumers could misunderstand the minimum 
payment examples. However, the Bureau solicits comment on these 
proposed statements and whether other language would be appropriate and 
beneficial to consumer.
    The Bureau proposes to revise comment 32(c)(3)-1 to reflect the 
expanded statutory restriction on balloon payments and to clarify that 
to the extent a balloon payment is permitted under Sec.  1026.32(d)(1), 
the balloon payment must be disclosed under Sec.  1026.32(c)(3)(i). In 
addition, the Bureau proposes to renumber current comment 32(c)(3)-1 as 
proposed comment 32(c)(3)(i)-1 for organizational purposes.
    In order to provide additional guidance on the application of Sec.  
1026.32(c)(4) to open-end credit plans, the Bureau proposes to revise 
comment 32(c)(4)-1. For an open-end credit plan, proposed comment 
32(c)(4)-1 provides that the disclosure of the maximum monthly payment, 
as required under Sec.  1026.32(c)(4), must be based on the following 
assumptions: (1) The consumer borrows the full credit line at account 
opening with no additional extensions of credit; (2) the consumer makes 
only minimum periodic payments during the draw period and any repayment 
period; and (3) the maximum annual percentage rate that may apply under 
the payment plan, as required by Sec.  1026.30, applies to the plan at 
account opening. Although actual payments on the plan may depend on 
various factors, such as the amount of the draw and the rate applicable 
at that time, the Bureau believes this approach is consistent with 
existing guidance to calculate the ``worst-case'' payment example.
    The Bureau proposes to amend Sec.  1026.32(c)(5) to clarify the 
disclosure requirements for open-end credit plans. The Bureau notes 
that the amount borrowed can be ascertained in a closed-end mortgage 
loan but typically is not

[[Page 49118]]

known at account opening for an open-end credit plan. Specifically, 
proposed Sec.  1026.32(c)(5)(ii) provides that for open-end 
transactions, a creditor must disclose the credit limit applicable to 
the plan. Because HELOCs are open-end (revolving) lines of credit, the 
amount borrowed depends on the amount drawn on the plan at any time. 
Thus, the Bureau believes that disclosing the credit limit is a more 
appropriate and meaningful disclosure to the consumer than the total 
amount borrowed. The Bureau also proposes technical revisions to the 
existing requirements for closed-end mortgage loans under Sec.  
1026.32(c)(5) and to the guidance under comment 32(c)(5)-1.
32(d) Limitations
32(d)(1)
    The Dodd-Frank Act amended the restrictions on balloon payments 
under TILA section 129(e). Specifically, amended TILA section 129(e) 
provides that no high-cost mortgage may contain a scheduled payment 
that is more than twice as large as the average of earlier scheduled 
payments, except when the payment schedule is adjusted to the seasonal 
or irregular income of the consumer. The Bureau is proposing two 
alternatives in proposed Sec.  1026.32(d)(1)(i) to implement the 
balloon payment restriction under amended TILA section 129(e). Under 
Alternative 1, proposed Sec.  1026.32(d)(1)(i) incorporates the 
statutory language and defines balloon payment as a scheduled payment 
that is more than twice as large as the average of regular periodic 
payments. Under Alternative 2, the Bureau mirrors Regulation Z's 
existing definition of ``balloon payment'' in Sec.  1026.18(s)(5)(i). 
Accordingly, proposed Sec.  1026.32(d)(1)(i) provides that a balloon 
payment is ``a payment schedule that is more than two times a regular 
periodic payment.'' This definition is similar to the statutory 
definition under the Dodd-Frank Act, except that it uses as its 
benchmark any regular periodic payment, rather than the average of 
earlier scheduled payments.
    Because the existing regulatory definition is narrower than the 
statutory definition, the Bureau believes that a payment that is twice 
any one regular periodic payment would be equal to or less than a 
payment that is twice the average of earlier scheduled payments. The 
Bureau notes that the range of scheduled payment amounts under 
Alternative 2 is more limited and defined. For example, if the regular 
periodic payment on a high-cost mortgage is $200, a payment of greater 
than $400 would constitute a balloon payment. Under Alternative 1, 
however, the balloon payment amount could be greater than $400 if, for 
example, the regular periodic payments were increased by $100 each 
year. Under Alternative 1, the amount constituting a balloon payment 
could increase with the incremental increase of the average of earlier 
scheduled payments.
    The Bureau proposes Alternative 2 pursuant to its authority under 
TILA section 129(p)(1). The Bureau may exempt specific mortgage 
products or categories of mortgages from certain prohibitions under 
TILA section 129 if the Bureau finds that the exemption is in the 
interest of the borrowing public and will apply only to products that 
maintain and strengthen home ownership and equity protection. The 
Bureau believes that under Alternative 2, consumers would have a better 
understanding of the highest possible regular periodic payment in a 
repayment schedule and may experience less ``payment shock'' as a 
result. Therefore, the Bureau believes that Alternative 2 would better 
protect consumers and be in their interest. In addition, the Bureau 
believes that the definition of balloon payment under Alternative 2 
would facilitate and simplify compliance by providing creditors with a 
single definition within Regulation Z and alleviating the need to 
average earlier scheduled payments. The Bureau notes that a similar 
adjustment is proposed in the 2012 TILA-RESPA Proposal.
    The Bureau solicits comment on both alternatives. Under either 
alternative, a high-cost mortgage generally must provide for fully 
amortizing payments. Therefore, for similar reasons as stated in the 
Board's 2011 ATR Proposal, see 76 FR 27390, 27455-56 (May 11, 2011), 
the Bureau solicits comment on whether the difference in wording 
between the statutory definition and the existing regulatory 
definition, as a practical matter, would yield a significant difference 
in what constitutes a ``balloon payment'' in the high-cost mortgage 
context.
    Proposed comment 32(d)(1)(i)-1 provides further guidance on the 
application of Sec.  1026.32(d)(1)(i) under both proposed alternatives. 
Specifically, the Bureau proposes clarifying that for purposes of open-
end transactions, the term ``regular periodic payment'' or ``periodic 
payment'' means the required minimum periodic payment.
    The Bureau proposes to revise Sec.  1026.32(d)(1)(ii) consistent 
with the statutory exception under amended TILA section 129(e). 
Accordingly, proposed Sec.  1026.32(d)(1)(ii) provides an exception to 
the balloon payment restrictions under Sec.  1026.32(d)(1)(i) if the 
payment schedule is adjusted to the seasonal or irregular income of the 
consumer.
    The Bureau is proposing to exercise its authority pursuant to TILA 
section 129(p)(1) to provide an exception to the balloon payment 
restrictions for HELOCs with a repayment period. The Bureau understands 
that HELOC plans may have a draw period, or borrowing period, during 
which a consumer may obtain funds and a repayment period during which 
no further draws may be taken and the consumer is required to pay the 
balance on the account. Depending on the payment terms applicable to 
the draw period and the repayment period, an increase in scheduled 
payments that occurs as a result of the transition to the repayment 
period could be considered a balloon payment under a literal reading of 
TILA section 129(e). In most cases, the balloon payment restrictions 
would generally require that the payment schedule during the draw 
period be fully amortizing in order to avoid a balloon payment. 
However, the Bureau understands that some HELOC plans offer flexible 
payment features during the draw period. For example, some HELOC plans 
offer a payment plan where a consumer would only be required to pay 
interest during the draw period or offer a fixed-rate or -term feature. 
Therefore, pursuant to TILA section 129(p)(1), the Bureau believes that 
it is appropriate to provide creditors and consumers with flexibility 
during the draw period of a high-cost HELOC plan and that the continued 
availability of certain product features would be beneficial to 
consumers.
    Accordingly, the Bureau is proposing Sec.  1026.32(d)(1)(iii) to 
provide that if the terms of an open-end transaction provide for any 
repayment period during which no further draws may be taken, the 
balloon payment limitations in Sec.  1026.32(d)(1)(i) apply only to the 
payment features within the repayment period. Proposed Sec.  
1026.32(d)(1)(iii) also provides that if the terms of an open-end 
transaction do not provide for any repayment period, the balloon 
payment limitations apply to the draw period. Proposed comment 
32(d)(1)(i)-2 clarifies that if the terms of a high-cost HELOC plan do 
not provide for any repayment period, then the repayment schedule must 
fully amortize any outstanding principal balance in the draw period 
through regular periodic payments. However, the limitation on balloon 
payments in Sec.  1026.32(d)(1)(i) does not preclude increases in 
regular periodic payments that result solely

[[Page 49119]]

from the initial or additional draws on the credit line during the draw 
period.
    Under the Bureau's proposal, a creditor would have to fully 
amortize the outstanding balance during the draw period if there is no 
repayment period in order to satisfy the requirements of proposed Sec.  
1026.32(d)(1)(i). The Bureau believes that this restriction on a high-
cost HELOC plan may curtail the flexibility or availability of products 
without a fully-amortizing repayment period. For example, a creditor 
may no longer be able to offer flexible payment features for a plan. 
The Bureau solicits comment on this aspect of the proposal.
32(d)(6) Prepayment Penalties
    As discussed in the section-by-section analysis to proposed Sec.  
1026.32(b)(8), above, TILA currently permits prepayment penalties for 
high-cost mortgages in certain circumstances. In particular, under 
section TILA 129(c)(2), which is implemented in existing Sec.  
1026.32(d)(7), a high-cost mortgage may provide for a prepayment 
penalty so long as the penalty otherwise is permitted by law and, under 
the terms of the loan, the penalty does not apply: (1) To a prepayment 
made more than 24 months after consummation, (2) if the source of the 
prepayment is a refinancing of the current mortgage by the creditor or 
an affiliate of the creditor, (3) if the consumer's debt-to-income 
ratio exceeds fifty percent, or (4) if the amount of the periodic 
payment of principal or interest (or both) can change during the first 
four years after consummation of the loan.
    Section 1432(a) of the Dodd-Frank Act repealed TILA section 
129(c)(2). Thus, prepayment penalties are no longer permitted for high-
cost mortgages. The proposal implements this change consistent with the 
statute by removing and reserving existing Sec.  1026.32(d)(7) and 
comment 32(d)(7). The proposal also amends existing Sec.  1026.32(d)(6) 
to clarify that prepayment penalties are a prohibited term for high-
cost mortgages. As already discussed, the proposal retains in proposed 
Sec.  1026.32(b)(8)(i) and proposed comment 32(b)(8)-1.iv the 
definition of prepayment penalty contained in existing Sec.  
1026.32(d)(6) and comment 32(d)(6)-1. See the section-by-section 
analysis to proposed Sec.  1026.32(b)(8)(i), above.
32(d)(8) Acceleration of Debt
    The Bureau is proposing a new Sec.  1026.32(d)(8) to implement the 
prohibition in new section 129(l) of TILA added by section 1433(a) of 
the Dodd-Frank Act. New section 129(l) of TILA prohibits a high-cost 
mortgage from containing a provision which permits the creditor to 
accelerate the loan debt, except when repayment has been accelerated: 
(1) In response to a default in payment; (2) ``pursuant to a due-on-
sale provision''; or (3) ``pursuant to a material violation of some 
other provision of the loan document unrelated to payment schedule.''
    Proposed Sec.  1026.32(d)(8) replaces current Sec.  1026.32(d)(8) 
which similarly prohibited due-on-demand clauses for high-cost 
mortgages except in cases of fraud or material misrepresentation in 
connection with the loan, a consumer's failure to meet the repayment 
terms of the loan agreement for any outstanding balance, or a 
consumer's action or inaction that adversely affects the creditor's 
security for the loan or any right of the creditor in such security.
    Proposed Sec.  1026.32(d)(8) prohibits an acceleration feature in 
the loan or open-end credit agreement for a high-cost mortgage unless 
there is a default in payment under the agreement; the acceleration is 
pursuant to a due-on-sale clause; or there is a material violation of a 
provision of the agreement unrelated to the payment schedule. Proposed 
comments 32(d)(8)(i) and (iii), are similar to the commentary for 
current Sec.  1026.32(d)(8) and provide examples of when acceleration 
under proposed Sec.  1026.32(d)(8) is permitted. For example, proposed 
comment 32(d)(8)(i) makes clear that a creditor can accelerate the debt 
for a default in payment only if the consumer actually fails to make 
payments that result in a default under the agreement, and not where 
the consumer fails to make payments in error, such as sending the 
payment to the wrong office of the creditor. Proposed comment 
32(d)(8)(iii) provides examples where the creditor may accelerate the 
debt based on a material violation, by the consumer, of some other 
provision of the agreement unrelated to the payment schedule, for 
example where: (1) The consumer's action or inaction adversely affects 
the creditor's security for the loan or open-end credit plan, or any 
right of the creditor in the security; or (2) the consumer violates the 
agreement through fraud or material misrepresentation in connection 
with the loan or open-end credit plan. The Bureau seeks comment from 
the public on possible additional examples where a consumer's material 
violation of the loan or open-end credit agreement, unrelated to the 
payment schedule, may warrant acceleration of the debt, and examples of 
when a consumer's action or inaction does not warrant acceleration.
Section 1026.34 Prohibited Acts or Practices in Connection With High-
Cost Mortgages
34(a) Prohibited Acts or Practices for High-Cost Mortgages
    The Bureau generally proposes clarifying revisions in proposed 
Sec.  1026.34(a)(1) through (3) and comment 34(a)(3)-2 for consistency 
and clarity.
34(a)(4) Repayment Ability for High-Cost Mortgages
    TILA section 129(h) generally prohibits a creditor from engaging in 
a pattern or practice of extending credit to consumers under high-cost 
mortgages based on the consumers' collateral without regard to the 
consumers' repayment ability, including the consumers' current and 
expected income, current obligations, and employment. TILA section 
129(h) is implemented in current Sec.  1026.34(a)(4).
    The Dodd-Frank Act did not amend TILA section 129(h); however, 
sections 1411, 1412, and 1414 of Dodd-Frank, among other things, 
established new ability-to-repay requirements for any residential 
mortgage loan under new TILA section 129C. Specifically, TILA section 
129C expands coverage of the ability-to-repay requirements to any 
consumer credit transaction secured by a dwelling, except an open-end 
credit plan, timeshare plan, reverse mortgage, or temporary loan. 
Residential mortgage loans that are high-cost mortgages, as defined in 
TILA section 103(bb), will be subject to the ability-to-repay 
requirements pursuant to TILA section 129C and the Bureau's forthcoming 
implementing regulations. Therefore, the existing requirements under 
Sec.  1026.34(a)(4) will no longer be necessary for closed-end mortgage 
loans. For consistency with TILA section 129C, proposed Sec.  
1026.34(a)(4) requires that, in connection with a closed-end high-cost 
mortgage, a creditor must comply with the repayment ability 
requirements to be set forth in Sec.  1026.43. The Bureau, however, 
solicits comment on this aspect of the proposal.
    Because open-end credit plans are excluded from coverage of TILA 
section 129C, the existing ability-to-repay requirements of TILA 
section 129(h) would still apply to open-end credit plans that are 
high-cost mortgages. To facilitate compliance, the Bureau proposes to 
implement TILA section 129(h) as it applies to open-end credit plans in 
proposed Sec.  1026.34(a)(4) by amending the existing mortgage 
repayment ability requirements in current Sec.  1026.34(a)(4) to apply 
specifically to high-cost open-end credit

[[Page 49120]]

plans. The Bureau notes that in the 2008 Higher-Priced Mortgage Rule, 
73 FR 44522 (July 30, 2008), the Board adopted a rule prohibiting 
individual HOEPA loans or higher-priced mortgage loans from being 
extended based on the collateral without regard to repayment ability, 
rather than simply prohibiting a pattern or practice of making 
extensions based on the collateral without regard to ability to repay. 
The existing requirements further create a presumption of compliance 
under certain conditions to provide creditors with more certainty about 
compliance and to mitigate potential increased litigation risk.
    The Board concluded that this regulatory structure was warranted 
based on the comments the Board received and additional information. 
Specifically, the Board exercised its authority under TILA section 
129(l)(2) (renumbered as TILA section 129(p)(2) by the Dodd-Frank Act) 
to revise HOEPA's restrictions on HOEPA loans based on a conclusion 
that the revisions were necessary to prevent unfair and deceptive acts 
or practices in connection with mortgage loans. See 73 FR 44545 (July 
30, 2008). In particular, the Board concluded a prohibition on making 
individual loans without regard for repayment ability was necessary to 
ensure a remedy for consumers who are given unaffordable loans and to 
deter irresponsible lending, which injures individual borrowers. The 
Board determined that imposing the burden to prove ``pattern or 
practice'' on an individual borrower would leave many borrowers with a 
lesser remedy, such as those provided under some State laws, or without 
any remedy, for loans made without regard to repayment ability. The 
Board further determined that removing this burden would not only 
improve remedies for individual borrowers, it would also increase 
deterrence of irresponsible lending. The Board concluded that the 
structure of its rule would also have advantages for creditors over a 
``pattern or practice'' standard, which can create substantial 
uncertainty and litigation risk. In contrast, the Board rule provided a 
presumption of compliance where creditors follow the specified 
requirements for individual loans.
    For substantially the same reasons detailed in the 2008 Higher-
Priced Mortgage Rule, the Bureau believes that it is necessary and 
proper to use its authority under TILA section 129(p)(2), as amended, 
to retain the existing Sec.  1026.34(a)(4) repayment ability 
requirements with respect to individual open-end credit plans that are 
high-cost mortgages, with a presumption of compliance as specified in 
the regulation, rather than merely prohibiting a ``pattern or 
practice'' of engaging in such transactions without regard for 
consumers' ability to repay the loans. The Bureau believes that the 
concerns discussed in the 2008 Higher-Priced Mortgage Rule, such as 
preventing unfair practices, providing remedies for individual 
borrowers, and providing more certainty to creditors, are equally 
applicable to open-end transactions that are high-cost mortgages. 
Furthermore, in light of the Board's prior determination, the Bureau 
believes it would not be in creditors' and borrowers' interest if the 
proposal inserted the ``pattern or practice'' language or removed the 
presumption of compliance in existing Sec.  1026.34(a)(4). Therefore, 
the Bureau believes that applying the existing repayment ability 
requirement in current Sec.  1026.34(a)(4) to open-end high-cost 
mortgages is necessary to prevent unfair or deceptive acts or practices 
in connection with mortgage loans. See TILA section 129(p)(2).
    Accordingly, the Bureau proposes to revise Sec.  1026.34(a)(4) to 
provide that in connection with an open-end credit plan subject to 
Sec.  1026.32, a creditor shall not open a plan for a consumer where 
credit is or will be extended based on the value of the consumer's 
collateral without regard to the consumer's repayment ability as of 
account opening, including the consumer's current and reasonably 
expected income, employment, assets other than the collateral, current 
obligations, and mortgage-related obligations. In addition, the Bureau 
generally proposes additional clarifying revisions in proposed Sec.  
1026.32(a)(4) and its associated commentary for consistency, clarity, 
or organizational purposes. The Bureau discusses specific proposed 
revisions below.
34(a)(4)(iii)(B)
    The Bureau proposes to revise current Sec.  1026.34(a)(4)(iii) to 
clarify the criteria that a creditor must satisfy in order to obtain a 
presumption of compliance with the repayment ability requirements for 
high-cost mortgages that are open-end credit plans. In particular, 
current Sec.  1026.34(a)(4)(iii)(B) requires that a creditor determine 
the consumer's repayment ability using the largest payment of principal 
and interest scheduled in the first seven years following consummation 
and taking into account current obligations and mortgage-related 
obligations. The Bureau believes that it is appropriate to determine 
the consumer's repayment ability based on the largest periodic payment 
amount a consumer would be required to pay under the payment schedule. 
However, applying this requirement to open-end credit plans requires 
additional assumptions because a creditor may not know certain factors 
required to determine the largest required minimum periodic payment, 
such as the amount a consumer will borrow and the applicable annual 
percentage rate. Accordingly, the Bureau proposes revised Sec.  
1026.34(a)(4)(iii)(B) to require a creditor to determine the consumer's 
repayment ability taking into account current obligations and mortgage-
related obligations as defined in Sec.  1026.34(a)(4)(i), and using the 
largest required minimum periodic payment. Furthermore, proposed Sec.  
1026.34(a)(4)(iii)(B) requires a creditor to determine the largest 
required minimum periodic payment based on the following assumptions: 
(1) The consumer borrows the full credit line at account opening with 
no additional extensions of credit; (2) the consumer makes only 
required minimum periodic payments during the draw period and any 
repayment period; and (3) the maximum annual percentage rate that may 
apply under the payment plan, as required by Sec.  1026.30, applies to 
the plan at account opening and will apply during the draw period and 
any repayment period.
    The proposal generally incorporates guidance in current comment 
34(a)(4), with revisions for clarity and consistency. In addition, the 
proposal provides revisions for clarification, as discussed in detail 
below.
    Proposed comment 34(a)(4)-1 clarifies that the repayment ability 
requirement under Sec.  1026.34(a)(4) applies to open-end credit plans 
subject to Sec.  1026.32; however, the repayment ability provisions of 
Sec.  1026.43 apply to closed-end credit transactions subject to Sec.  
1026.32. Proposed comment 34(a)(4)-3 clarifies the current commentary 
to conform with proposed revisions and removes the current example. 
Proposed comment 34(a)(4)(iii)(B)-1 removes the examples in current 
comment 34(a)(4)(iii)(B) as unnecessary or inapplicable.
34(a)(5) Pre-Loan Counseling
    Section 1433(e) of the Dodd-Frank Act added new TILA section 
129(u), which creates a counseling requirement for high-cost mortgages. 
Prior to extending a high-cost mortgage, TILA section 129(u)(1) 
requires that a creditor receive certification that a consumer has 
obtained counseling on the advisability of the mortgage from a HUD-
approved counselor, or at the discretion of HUD's

[[Page 49121]]

Secretary, a State housing finance authority. TILA section 129(u)(3) 
specifically authorizes the Bureau to prescribe regulations that it 
determines are appropriate to implement the counseling requirement. In 
addition to the counseling requirement, TILA section 129(u)(2) requires 
that a counselor verify prior to certifying that a consumer has 
received counseling on the advisability of the high-cost mortgage that 
the consumer has received each statement required by TILA section 129 
(implemented in Sec.  1026.32(c)) or each statement required by RESPA 
with respect to the transaction.\49\ The Bureau is exercising its 
authority under TILA section 129(u)(3) to implement the counseling 
requirement in a way that ensures that borrowers will receive 
meaningful counseling, and at the same time that the required 
counseling can be provided in a manner that minimizes operational 
challenges.
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    \49\ In addition to the housing counseling requirement for high-
cost mortgages, the Dodd-Frank Act now requires housing counseling 
for first-time borrowers of negative amortization loans. Section 
1414(a) of the Dodd-Frank Act requires creditors to receive 
documentation from a first-time borrower demonstrating that the 
borrower has received homeownership counseling prior to extending a 
mortgage to the borrower that may result in negative amortization. 
This requirement is further discussed in the section-by-section 
analysis for proposed Sec.  1026.36(k) below.
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Background
    HUD's housing counseling program is authorized by section 106 of 
the Housing and Urban Development Act of 1968 (12 U.S.C. 1701w and 
1701x) and the regulations for the program are found in 24 CFR part 
214. This program provides counseling to consumers on a broad array of 
topics, including seeking, financing, maintaining, renting, and owning 
a home. According to HUD, the purpose of the program is to provide a 
broad range of housing counseling services to homeowners and tenants to 
assist them in improving their housing conditions and in meeting the 
responsibilities of tenancy or homeownership. Counselors can also help 
borrowers evaluate whether interest rates may be unreasonably high or 
repayment terms unaffordable, and thus may help reduce the risk of 
defaults and foreclosures.
    HUD historically has implemented its housing counseling program by 
approving nonprofit agencies and monitoring and funding government 
agencies that provide counseling services. HUD has required counseling 
agencies to meet various program requirements and comply with program 
policies and regulations to participate in HUD's housing counseling 
program.\50\ While HUD' regulations establish training and experience 
requirements for the individual counselors employed by the counseling 
agency, to date, HUD has not approved individual counselors. Pursuant 
to amendments made to the housing counseling statute by section 1445 of 
the Dodd-Frank Act, HUD must provide for the certification of 
individual housing counselors. Section 106(e) of the housing counseling 
statute (12 U.S.C. 1701x(e)) provides that the standards and procedures 
for testing and certifying counselors must be established by 
regulation. The Bureau understands that HUD is undertaking a rulemaking 
to put these standards and procedures in place for individual 
counselors.
---------------------------------------------------------------------------

    \50\ In addition to the regulations in 24 CFR part 214, HUD's 
Housing Counseling Program is governed by the provisions of the HUD 
Housing Counseling Program Handbook 7610.1 and applicable Mortgagee 
letters.
---------------------------------------------------------------------------

    Pre-loan housing counseling is available generally to prospective 
borrowers planning to purchase or refinance a home, but Federal and 
State laws specifically require that it be provided prior to 
origination of certain types of loans. For example, Federal law 
requires homeowners to receive counseling before obtaining a reverse 
mortgage insured by the Federal Housing Administration (FHA), known as 
a Home Equity Conversion Mortgage (HECM).\51\ HUD imposes various 
requirements related to HECM counseling, including, for example: 
requiring FHA-approved HECM mortgagees to provide prospective HECM 
borrowers with contact information for HUD-approved counseling 
agencies; delineating particular topics that need to be addressed 
through HECM counseling; and preventing HECM lenders from steering a 
prospective borrower to a particular counseling agency.\52\ The Dodd-
Frank Act added similar counseling requirements prior to origination of 
high-cost mortgages and loans involving negative amortization.
---------------------------------------------------------------------------

    \51\ 12 U.S.C. 1715z-20(d)(2)(B).
    \52\ See HUD Housing Counseling Handbook 7610.1 (05/2010), 
Chapter 4, available at http://www.hud.gov/offices/adm/hudclips/handbooks/hsgh/7610.1/76101HSGH.pdf (visited June 16, 2012) (HUD 
Handbook).
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The Bureau's Proposal
    The Bureau is proposing to implement the counseling requirement for 
high-cost mortgages contained in new TILA section 129(u) in proposed 
Sec.  1026.34(a)(5). Specifically, proposed Sec.  1026.34(a)(5)(i) 
requires certification of counseling, proposed Sec.  1026.34(a)(5)(ii) 
addresses the timing of counseling, and proposed Sec.  1026(a)(5)(iv) 
sets forth requirements for the content of certification. The Bureau's 
proposal also sets forth several provisions concerning potential 
conflicts of interest. Proposed Sec.  1026(a)(5)(iii) prohibits the 
affiliation of the counselor with the creditor, proposed Sec.  
1026(a)(5)(v) addresses the payment of counseling fees, and proposed 
Sec.  1026(a)(5)(vi) prohibits a creditor from steering a consumer to a 
particular counselor or counseling organization. Finally, proposed 
Sec.  1026(a)(5)(vii) requires creditors to provide a list of 
counselors to consumers for whom counseling is required.
34(a)(5)(i) Certification of Counseling Required
    The Bureau proposes to implement the requirement of new TILA 
section 129(u)(1) for certification of counseling in proposed Sec.  
1026.34(a)(5)(i). Specifically, proposed Sec.  1026.34(a)(5)(i) 
provides that a creditor shall not extend a high-cost mortgage unless 
the creditor receives written certification that the consumer has 
obtained counseling on the advisability of the mortgage from a HUD-
approved counselor, or a State housing finance authority, if permitted 
by HUD. The Bureau is proposing commentary related to proposed Sec.  
1026.34(a)(5)(i) to provide creditors additional compliance guidance.
State Housing Finance Authority
    Proposed comment 34(a)(5)-1 clarifies that for the purposes of this 
section, a State housing finance authority has the same meaning as a 
``State housing finance agency'' provided in 24 CFR 214.3 of HUD's 
regulations implementing the housing counseling program. The Bureau is 
aware that similar definitions of ``State housing finance authority'' 
are referenced in new section 128 of TILA and in section 1448 of the 
Dodd-Frank Act. The Bureau does not believe that the minor differences 
among these three definitions are substantive, but in order to provide 
clarity, the Bureau is proposing to use the definition contained in 24 
CFR 214.3 because it specifically addresses the ability of State 
housing finance authorities to provide or fund counseling, either 
directly or through an affiliate. However, the Bureau requests comment 
on whether either of the other definitions of a State housing finance 
authority would be more appropriate in this context.
HUD-Approved Counselor
    The Bureau understands that other than for its HECM counseling 
program,

[[Page 49122]]

HUD currently approves housing counseling agencies and not individual 
housing counselors, but will be certifying housing counselors in the 
future to implement section 1445 of the Dodd-Frank Act. Proposed 
comment 34(a)(5)(i)-1 clarifies that counselors approved by the 
Secretary of HUD are homeownership counselors that are certified 
pursuant to section 106(e) of the Housing and Urban Development Act of 
1968 (12 U.S.C. 1701x(e)), or as otherwise determined by the Secretary 
of HUD. Although the Bureau believes that it is unclear whether any 
counselors currently would be considered as certified to provide 
counseling pursuant to section 106(e), the Bureau has alerted HUD to 
this requirement and continues to consult with HUD to address it. The 
proposed comment is intended to ensure that the Bureau's regulations do 
not impede HUD from determining which counselors qualify as HUD-
approved and to account for future decisions of HUD with respect to the 
approval of counselors.\53\
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    \53\ HUD has stated that it ``may require specialized training 
or certifications prior to approving certain housing counseling 
services, such as HECM counseling.'' HUD Handbook at 3-2.
---------------------------------------------------------------------------

Processing Applications
    Proposed comment 34(a)(5)(i)-2 addresses when a creditor may begin 
to process an application that will result in the extension of a high-
cost mortgage. The proposed comment states that prior to receiving 
certification of counseling, a creditor may not extend a high-cost 
mortgage, but may engage in other activities, such as processing an 
application that will result in the extension of a high-cost mortgage 
(by, for example, ordering an appraisal or title search). The Bureau 
notes that nothing in the statutory requirement restricts a creditor 
from processing an application that will result in the extension of a 
high-cost mortgage prior to obtaining certification of counseling. 
Moreover, the Bureau believes this interpretation is consistent with 
the HOEPA counseling requirements as a whole.\54\ As discussed in 
greater detail below in the section-by section analysis addressing the 
timing of counseling, new TILA section 129(u)(2) requires a counselor 
to verify the consumer's receipt of each statement required by either 
TILA section 129 (which sets forth the requirement for additional 
disclosures for high-cost mortgages and is implemented in Sec.  
1026.32(c)) or by RESPA prior to issuing certification of counseling. 
The additional disclosures for high-cost mortgages required under Sec.  
1026.32(c) may be provided by the creditor up to three business days 
prior to consummation of the mortgage. RESPA requires lenders to 
provide borrowers several disclosures over the course of the mortgage 
transaction, such as the good faith estimate and the HUD-1. Currently, 
the HUD-1 may be provided by the creditor at settlement.\55\ The Bureau 
believes that proposed comment 34(a)(5)(i)-2 is necessary to address 
both the ability of a creditor to provide the required disclosures to 
the consumer to permit certification of counseling, and to address the 
likelihood that a creditor may receive the required certification of 
counseling only days before the consummation of the loan, at the 
earliest.
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    \54\ The HECM program requires counseling to occur before a HECM 
lender may ``process'' an application, meaning that the creditor may 
accept an application, but ``may not order an appraisal, title 
search, or an FHA case number or in any other way begin the process 
of originating a HECM loan'' before the consumer has received 
counseling. HUD Mortgagee Letter 2004-25 (June 23, 2004). However, 
the Bureau notes that HECM counselors are not required to verify the 
receipt of transaction-specific disclosures prior to issuing a 
certification of counseling.
    \55\ The Bureau notes that as part of its 2012 TILA-RESPA 
Proposal, the Bureau is proposing requiring that a settlement 
disclosure combining the HUD-1 and the final TILA disclosure be 
provided to a consumer prior to settlement. However, any such 
requirement likely would not take effect until after the effective 
date for the requirements for high-cost mortgages.
---------------------------------------------------------------------------

    The Bureau recognizes that some creditors may wish to receive an 
indication that a consumer has obtained counseling prior to taking 
certain steps to continue processing an application. As discussed in 
the section-by-section analysis for proposed Sec.  1026.34(a)(5)(ii), 
the Bureau proposes that counseling on the advisability of the loan may 
occur separately from and prior to the verification of the required 
disclosures and issuance of the certification of counseling. The Bureau 
notes that nothing in the proposed regulation or commentary precludes a 
creditor from requesting evidence from a counselor or consumer that the 
consumer has received counseling on the advisability of the mortgage 
before the consumer receives the required high-cost mortgage disclosure 
or the disclosures required under RESPA and before the counselor has 
issued certification of the counseling, if the creditor prefers to 
receive such information prior to taking certain steps to process the 
high-cost mortgage.
Form of Certification
    Proposed comment 34(a)(5)(i)-3 sets forth the methods whereby a 
certification form may be received by the creditor. The proposed 
comment clarifies that the written certification of counseling may be 
received by any method, such as mail, email, or facsimile, so long as 
the certification is in a retainable form. This would permit creditors 
to comply with the existing record retention requirements of Sec.  
1026.25.
34(a)(5)(ii) Timing of Counseling
    Proposed Sec.  1026.34(a)(5)(ii) provides that the required 
counseling must occur after the consumer receives either the good faith 
estimate required under RESPA, or the disclosures required under Sec.  
1026.40 for open-end credit. The Bureau believes that permitting 
counseling to occur as early as possible allows consumers more time to 
consider whether to proceed with a high-cost mortgage and to shop for 
different mortgage terms. However, the Bureau believes that it is also 
important that counseling on a high-cost mortgage address the specific 
loan terms being offered to a consumer. Therefore, requiring the 
receipt of either of these transaction-specific documents prior to the 
consumer's receipt of counseling on the advisability of the high-cost 
mortgage will best ensure that the counseling session can address the 
specific features of the high-cost mortgage, and that consumers will 
have an opportunity to ask questions about the loan terms offered. At 
the same time, given that these documents are provided to the consumer 
within a few days following application, the Bureau believes that the 
proposal permits counseling to occur early enough to give consumers 
sufficient time after counseling to consider whether to proceed with 
the high-cost mortgage transaction and to consider alternative 
options.\56\
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    \56\ The Bureau notes that as part of its 2012 TILA-RESPA 
Proposal, the Bureau is proposing that the good faith estimate 
required by RESPA be combined with the early TILA disclosure. 
Proposed Sec.  1026.34(a)(5)(ii) is intended to permit both the 
current good faith estimate or a future combined disclosure to 
satisfy the requirement in order to trigger counseling.
---------------------------------------------------------------------------

    Despite the verification requirement, the Bureau does not believe 
that it would make sense to wait until receipt of all disclosures 
referenced in the statute to permit counseling to occur. Accordingly, 
nothing in proposed Sec.  1026.34(a)(5)(ii) requires a counselor to 
wait for the receipt of either the Sec.  1026.32(c) or RESPA 
disclosures that must be verified prior to certification to provide 
counseling. As noted above, the Sec.  1026.32(c) high-cost mortgage 
disclosure is generally required to be provided to the consumer no 
later than three business days prior to

[[Page 49123]]

consummation of the loan, and one of the disclosures required under 
RESPA, the HUD-1, currently may be provided to the consumer at 
settlement. As a practical matter, this means that certification would 
not happen until right before closing. The Bureau does not believe that 
delaying counseling pending receipt of all disclosure would benefit 
consumers, because consumers may not be able to walk away from the 
transaction or seek better loan terms so late in the process. 
Accordingly, the Bureau believes that the best approach is a two stage 
process in which counseling would occur prior to and separately from 
the receipt of the high-cost mortgage disclosures, after which the 
counselor would confirm receipt of the disclosures, answer any 
additional questions from the consumer, and issue the certification. 
Under these circumstances, a consumer obtaining a high-cost mortgage 
would have at least two separate contacts with his housing counselor, 
the first to receive counseling on the advisability of the high-cost 
mortgage, and the second to verify with the counselor that the consumer 
has received the applicable disclosure. The Bureau believes that a 
second contact may be beneficial to consumers because it gives 
consumers an opportunity to request that the counselor explain the 
disclosure, and to raise any additional questions or concerns they 
have, just prior to consummation. The Bureau solicits comment on this 
aspect of the proposal and whether a second contact helps facilitate 
compliance with the requirement for certification of counseling.
    Proposed comment 34(a)(5)(ii)-1 clarifies that for open-end credit 
plans subject to Sec.  1026.32, proposed Sec.  1026.34(a)(5)(ii) 
permits receipt of either the good faith estimate required by RESPA or 
the disclosures required under Sec.  1026.40 to allow counseling to 
occur, because 12 CFR 1024.7(h) permits the disclosures required by 
Sec.  1026.40 to be provided in lieu of a good faith estimate, in the 
case of an open-end credit plan. The Bureau requests comment on whether 
it is appropriate to trigger the counseling period based on receipt of 
the disclosure under Sec.  1026.40 for open-end credit plans.
    Proposed comment 34(a)(5)(ii)-2 clarifies that counseling may occur 
after the consumer receives either an initial good faith estimate or a 
disclosure under Sec.  1026.40, regardless of whether a revised 
disclosure is subsequently provided to the consumer.
34(a)(5)(iii) Affiliation Prohibited
    Proposed Sec.  1026.34(a)(5)(iii)(A) implements the general 
prohibition in new TILA section 129(u) that the counseling required for 
a high-cost mortgage shall not be provided by a counselor who is 
employed by or affiliated \57\ with the creditor extending the high-
cost mortgage.
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    \57\ ``Affiliate'' is defined in Sec.  1026.32(b)(2) to mean 
``any company that controls, is controlled by, or is under common 
control with another company, as set forth in the Bank Holding 
Company Act of 1956 (12 U.S.C. 1841 et seq.).''
---------------------------------------------------------------------------

    Pursuant to the Bureau's authority under TILA 129(u)(3), proposed 
Sec.  1026.34(a)(5)(iii)(B) creates an exception from this general 
prohibition for a State housing finance authority that both extends a 
high-cost mortgage and provides counseling to a consumer, either itself 
or through an affiliate, for the same high-cost mortgage transaction. 
The Bureau understands that State housing finance authorities may make 
mortgage funds directly available to consumers for purposes such as 
emergency home repairs through programs for which counseling is 
required, and that such loans could be classified as high-cost 
mortgages based on their fees. At the same time, State housing finance 
authorities may provide direct counseling services or distribute 
housing counseling funds to affiliated counseling agencies.\58\ These 
programs can provide benefits to consumers, and the Bureau does not 
believe that allowing a State housing finance authority to both extend 
such mortgages and counsel the recipients of such mortgages, either 
itself or through an affiliate, should be prohibited. Accordingly, the 
Bureau is proposing to allow State housing finance authorities to 
continue lending activities including extending credit that may be 
classified as a high-cost mortgage without requiring consumers to 
obtain counseling from an unaffiliated counseling agency. The Bureau 
requests comment on the proposed general affiliation prohibition, and 
the exception provided for State housing finance authorities. The 
Bureau also requests comment on whether it should consider any other 
exceptions from the general affiliation prohibition, and specifically 
on whether nonprofit counseling agencies extend mortgages to consumers 
that could be classified as high-cost, either themselves or through 
nonprofit affiliates.
---------------------------------------------------------------------------

    \58\ State housing finance agencies ``may provide direct 
counseling services or subgrant housing counseling funds, or both, 
to affiliated housing counseling agencies within the SHFA's state.'' 
24 CFR 214.3.
---------------------------------------------------------------------------

34(a)(5)(iv) Content of Certification
    Proposed Sec.  1026.34(a)(5)(iv) sets forth requirements for the 
certification form that is provided to the creditor. Specifically, 
proposed Sec.  1026.34(a)(5)(iv) provides that the certification form 
must include the name(s) of the consumer(s) who obtained counseling; 
the date(s) of counseling; the name and address of the counselor; a 
statement that the consumer(s) received counseling on the advisability 
of the high-cost mortgage based on the terms provided in either the 
good faith estimate or the disclosures required by Sec.  1026.40; and a 
statement that the counselor has verified that the consumer(s) received 
the Sec.  1026.32(c) disclosures or the disclosures required by RESPA 
with respect to the transaction.
    In new comment 34(a)(5)(iv)-1, the Bureau proposes guidance 
addressing the meaning of the statement that a consumer has received 
counseling on the advisability of the high-cost mortgage. Specifically, 
the comment provides that a statement that a consumer has received 
counseling on the advisability of a high-cost mortgage means that the 
consumer has received counseling about key terms of the mortgage 
transaction, as set out in the disclosures provided to the consumer 
pursuant to RESPA or Sec.  1026.40; the consumer's budget, including 
the consumer's income, assets, financial obligations, and expenses; and 
the affordability of the loan for the consumer. The comment further 
provides some examples of such key terms of the mortgage transaction 
that are included in the good faith estimate or the disclosures 
required under Sec.  1026.40 are provided to the consumer. The Bureau 
believes that requiring counseling on the high-cost mortgage to address 
terms of the specific high-cost mortgage transaction is consistent with 
both the language and purpose of the statute. The Bureau also believes 
that a requirement that counseling address the consumer's budget and 
the affordability of the loan is appropriate, since these are factors 
that are relevant to the advisability of a mortgage transaction for the 
consumer. Moreover, HUD already requires counselors to analyze the 
financial situation of their clients and establish a household budget 
for their clients when providing housing counseling.\59\
---------------------------------------------------------------------------

    \59\ HUD Handbook at 3-5.
---------------------------------------------------------------------------

    New comment 34(a)(5)(iv)-1 further explains, however, that a 
statement that a consumer has received counseling on the advisability 
of the high-cost

[[Page 49124]]

mortgage does not require the counselor to have made a judgment or 
determination as to the appropriateness of the loan for the consumer. 
The proposal provides that such a statement means the counseling has 
addressed the affordability of the high-cost mortgage for the consumer, 
not that the counselor is required to have determined whether a 
specific loan is appropriate for a consumer or whether a consumer is 
able to repay the loan.\60\
---------------------------------------------------------------------------

    \60\ This is consistent with HUD's guidance related to the 
certification of counseling provided for the HECM program, which 
indicates that the issuance of a HECM counseling certificate 
``attests ONLY to the fact that the client attended and participated 
in the required counseling and that the statutorily required 
counseling for a HECM was provided'' and ``does NOT indicate whether 
the counseling agency recommends or does not recommend the client 
for a reverse mortgage.'' HUD Handbook at 4-18 (emphases in 
original).
---------------------------------------------------------------------------

    Proposed comment 34(a)(5)(iv)-2 clarifies that a counselor's 
verification of either the Sec.  1026.32(c) disclosures or the 
disclosures required by RESPA means that a counselor has confirmed, 
orally, in writing, or by some other means, receipt of such disclosures 
with the consumer. The Bureau notes that a counselor's verification of 
receipt of the applicable disclosures would not indicate that the 
applicable disclosures provided to the consumer with respect to the 
transaction were complete, accurate, or properly provided by the 
creditor.
34(a)(5)(v) Counseling Fees
    The Bureau notes that HUD generally permits housing counselors to 
charge reasonable fees to consumers for counseling services, if the 
fees do not create a financial hardship for the consumer.\61\ For most 
of its counseling programs, HUD also permits creditors to pay for 
counseling services, either through a lump sum or on a per case basis, 
but imposes certain requirements on this funding to minimize potential 
conflicts of interest. For example, HUD requires that the payment be 
commensurate with the services provided and be reasonable and customary 
for the area, the payment not violate the requirements of RESPA, and 
the payment and the funding relationship be disclosed to the 
consumer.\62\ In the HECM program, however, creditor funding of 
counseling is prohibited. Due to concerns that counselors may not be 
independent of creditors and may present biased information to 
consumers, section 255(d)(2)(B) of the National Housing Act, as amended 
by section 2122 of the Housing and Economic Recovery Act of 2008, 
prohibits mortgagees from paying for HECM counseling on behalf of 
mortgagors.
---------------------------------------------------------------------------

    \61\ 24 CFR 214.313(a), (b).
    \62\ 24 CFR 214.313(e); 214.303.
---------------------------------------------------------------------------

    The Bureau believes that counselor impartiality is essential to 
ensuring that counseling affords meaningful consumer protection. 
Without counselor impartiality, the counseling a consumer receives on 
the advisability of a high-cost mortgage could be of limited value. 
However, the Bureau is also aware of concerns that housing counseling 
resources are limited, and that funding for counseling may not be 
adequate.\63\ Prohibiting creditor funding of counseling may make it 
more difficult for counseling agencies to maintain their programs and 
provide services so that consumers may meet the legal requirement to 
receive counseling prior to obtaining a high-cost mortgage. It may also 
create financial hardships for borrowers of high-cost mortgages who 
would otherwise be obligated to pay the counseling fee upfront or 
finance the counseling fee.
---------------------------------------------------------------------------

    \63\ See 75 FR 58539, 58670 (Sept. 24, 2010).
---------------------------------------------------------------------------

    Proposed Sec.  1026.34(a)(5)(v) addresses the funding of counseling 
fees by permitting a creditor to pay the fees of a counselor or 
counseling organization for high-cost mortgage counseling. However, to 
address potential conflicts of interest, the Bureau is also proposing 
that a creditor may not condition the payment of these fees on the 
consummation of the high-cost mortgage. Moreover, the Bureau is 
proposing that if the consumer withdraws the application that would 
result in the extension of a high-cost mortgage after receiving 
counseling, a creditor may not condition payment of counseling fees on 
the receipt of certification from the counselor required by proposed 
Sec.  1026.34(a)(5)(i). If a counseling agency's collection of fees 
were contingent upon the consummation of the mortgage, or receipt of a 
certification, a counselor might have an incentive to counsel a 
consumer to accept a loan that is not in the consumer's best interest. 
The Bureau recognizes, however, that a creditor may wish to confirm 
that a counselor has provided services to a consumer, prior to paying a 
counseling fee. Accordingly, proposed Sec.  1026.34(a)(5)(v) also 
provides that a creditor may otherwise confirm that a counselor has 
provided counseling to a consumer prior to paying counseling fees. The 
Bureau believes that proposed Sec.  1026.34(a)(5)(v) will help preserve 
the availability of counseling for high-cost mortgages, and at the same 
time help ensure counselor independence and prevent conflicts of 
interest that may otherwise arise from creditor funding of counseling.
    Proposed comment 34(a)(5)(v)-1 addresses the financing of 
counseling fees. As noted above, the Bureau intends to preserve the 
availability of counseling for high-cost mortgages. The proposed 
comment clarifies that proposed Sec.  1026.34(a)(5)(v) does not 
prohibit a creditor from financing the counseling fee as part of the 
mortgage transaction, provided that the fee is a bona fide third party 
charge as defined by proposed Sec.  1026.32(b)(5)(i). The Bureau 
believes that the proposal would ensure that several options are 
available for the payment of any counseling fees, such as a consumer 
paying the fee directly to the counseling agency, the creditor paying 
the fee to the counseling agency, or the creditor financing the 
counseling fee for the consumer.
    The Bureau requests comment on whether to adopt additional or 
alternative restrictions on the compensation of counselors or 
counseling organizations for high-cost mortgage counseling services.
34(a)(5)(vi) Steering Prohibited
    Proposed Sec.  1026.34(a)(5)(vi) provides that a creditor that 
extends a high-cost mortgage shall not steer or otherwise direct a 
consumer to choose a particular counselor or counseling organization 
for the required counseling. The proposal is intended to help preserve 
counselor independence and prevent conflicts of interest that may arise 
when creditors refer consumers to particular counselors or counseling 
organizations. The Bureau notes that under the HECM program, lenders 
providing HECMs are prohibited from steering consumers to any 
particular counselor or counseling agency.\64\
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    \64\ HUD Handbook at 4-11.
---------------------------------------------------------------------------

    The Bureau is similarly proposing to prohibit a creditor that 
extends high-cost mortgages from steering or otherwise directing a 
consumer to choose a particular counselor or counseling organization 
for the required counseling on the high-cost mortgage. The Bureau 
believes that absent a steering prohibition, a creditor could direct 
the consumer to a counselor with whom the creditor has a tacit or 
express agreement to refer customers in exchange for favorable advice 
on the creditor's products in the counseling session.
    Whether steering of this type has occurred is a case-by-case 
determination and may be difficult to discern. Accordingly, the Bureau 
is proposing comment 34(a)(5)(vi)-1 and 2, which provide an example of 
an action that

[[Page 49125]]

constitutes steering, as well as an example of an action that does not 
constitute steering. The comment indicates that a creditor is engaged 
in steering if the creditor repeatedly highlights or otherwise 
distinguishes the same counselor in the notices it provides to 
consumers pursuant to proposed Sec.  1026.34(a)(5)(vii), discussed 
below. In contrast, the comment clarifies that the rule would not 
prohibit a creditor from providing a consumer with objective 
information about a counselor, such as fees charged by the counselor.
    The Bureau solicits comment on the proposed approach to prevent 
steering of consumers to particular counselors or counseling 
organizations. The Bureau also requests comment on the usefulness of 
the illustrations in proposed comment 34(a)(5)(vi)-1 and 2, and on 
whether any additional examples of activities that would or would not 
constitute steering should be included.
34(a)(5)(vii) List of Counselors
    In order to help consumers obtain information about resources for 
counseling, the Bureau is proposing to require creditors to provide 
consumers who will receive a high-cost mortgage with information about 
housing counseling resources. Proposed Sec.  1026.34(a)(5)(vii)(A) 
requires a creditor to provide to a consumer for whom counseling is 
required, a notice containing the Web site addresses and telephone 
numbers of the Bureau and HUD for access to information about housing 
counseling, and a list of five counselors or counseling organizations 
approved by HUD to provide high-cost mortgage counseling. Proposed 
Sec.  1026.34(a)(5)(vii)(A) also requires the notice to be provided to 
the consumer no later than the time when either the RESPA good faith 
estimate or the disclosure required by Sec.  1026.40 in lieu of a good 
faith estimate, as applicable, must be provided.
    As discussed in the section-by-section analysis of proposed Sec.  
1024.20 in Regulation X, the Bureau is proposing that creditors will be 
required to provide a list of homeownership counselors to mortgage loan 
applicants generally. In order to facilitate compliance with proposed 
Sec.  1026.34(a)(5)(vii)(A), the Bureau is proposing a safe harbor in 
Sec.  1026.34(a)(5)(vii)(B) that provides that a creditor will be 
deemed to have complied with the requirements of paragraph 
(a)(5)(vii)(A) if the creditor provides the list of homeownership 
counselors or organizations required by 12 CFR 1024.20 to a consumer 
for whom high-cost mortgage counseling is required.
    Proposed comment 34(a)(5)(vii)-1 addresses the provision of the 
list of homeownership counselors in situations in which there may be 
multiple creditors or multiple consumers involved in a high-cost 
mortgage transaction by providing a cross-reference to Sec. Sec.  
1026.5(d) and 1026.17(d) and their related commentary, which provide 
guidance on the provision of disclosures for open- and closed-end 
credit in such situations.
    The Bureau seeks comment on whether the requirement to provide 
Bureau, HUD, and counselor contact information is necessary or helpful. 
In addition, the Bureau solicits comment on whether requiring a list of 
five counseling organizations or counselors is appropriate. The Bureau 
is aware that several State laws that impose requirements on creditors 
to provide consumers lists of housing counselors specify a list of five 
as well.\65\ The Bureau is concerned that requiring a list of too few 
counselors or organizations would provide inadequate options to 
consumers, and could increase the risk for steering by creditors. The 
Bureau is also concerned, however, that requiring a list of too many 
counselors or organizations could be overwhelming to consumers, and 
could also create compliance challenges in certain geographic regions 
where there may be fewer counseling organizations.
---------------------------------------------------------------------------

    \65\ See, e.g., NY Real Prop. Acts Law Sec.  1304(2); Ariz. Rev. 
Stat. Sec.  6-1703(A)(1).
---------------------------------------------------------------------------

    The Bureau also requests comment on whether the safe harbor 
proposed in Sec.  1026.24(a)(5)(vii)(B) is appropriate. The Bureau 
believes that most creditors will comply with the requirement to 
provide a list of counselors by fulfilling their obligations under 12 
CFR 1024.20. However, the Bureau seeks comment on whether some 
creditors are likely to comply with this requirement independent of 
their obligations under RESPA, and if so, whether additional guidance 
would be helpful.
34(a)(6) Recommended Default
    The Bureau is proposing a new Sec.  1026.34(a)(6) to implement the 
prohibition on a creditor recommending a consumer default in connection 
with a high cost mortgage in new section 129(j) of TILA, which was 
added by section 1433(a) of the Dodd-Frank Act. Specifically, section 
129(j) of TILA prohibits creditors from recommending or encouraging a 
consumer to default on an ``existing loan or other debt prior to and in 
connection with the closing or planned closing of a high-cost mortgage 
that refinances all or any portion of such existing loan.'' The Bureau, 
however, is proposing to use its authority under section 129(p)(2) of 
TILA to extend this prohibition in proposed Sec.  1026.34(a)(6) to 
mortgage brokers, in addition to creditors. Section 129(p)(2) provides 
that the ``Bureau by regulation * * * shall prohibit acts or practices 
in connection with--* * *(B) refinancing of mortgage loans the Bureau 
finds to be associated with abusive lending practices, or that are 
otherwise not in the interest of the borrower.''
    Section 129(j) prohibits a practice--in connection with a 
refinancing--that is abusive or ``otherwise not in the interest of the 
borrower'' whereby a creditor advises a consumer to stop making 
payments on an existing loan with the creditor knowing that the 
consumer, by taking that advice, will default on that loan. Following 
the creditor's advice could therefore leave the consumer with no choice 
but to accept a high-cost mortgage originated by that creditor, with 
terms that are likely less favorable to the consumer, in order to 
refinance, and eliminate the default, on that existing loan. The Bureau 
believes that it is appropriate to extend the same prohibition against 
such creditor actions to mortgage brokers who often have significant 
interaction with consumers with regard to the refinancing of mortgage 
loans and could have similar incentives to encourage defaults that are 
not in the interest of the consumer. As stated by the Board in its 
final rule on higher-priced mortgage loans, 73 FR 44522, 44529 (July 
30, 2008), ``[t]he authority granted to the Board under TILA [section 
129(p)(2)] is broad * * *. [W]hile HOEPA's statutory restrictions apply 
only to creditors and only to loan terms or lending practices, [section 
129(p)(2)] is not limited to creditors and only to loan terms or 
lending practices.'' Proposed Sec.  1026.34(a)(6) therefore prohibits 
this practice for both creditors and mortgage brokers.\66\
---------------------------------------------------------------------------

    \66\ An additional statutory basis for extending this 
prohibition to mortgage brokers is the authority provided under 
Section 129(p)(2)(A) of TILA, which requires the Bureau to ``by 
regulation * * * prohibit acts or practices in connection with--(A) 
mortgage loans that the Bureau finds to be unfair, deceptive, or 
designed to evade the provisions of this section.'' Under the 
practice prohibited by Section 129(j), the borrower may be deceived 
into stopping payment on their existing loan due to a 
misrepresentation made by a mortgage broker that to do so will be of 
no consequence to the borrower--even though the nonpayment will 
result in a default by that borrower, in effect forcing the borrower 
to take the high-cost loan offered by the mortgage broker to 
eliminate that default. This scenario would likely meet the basic 
elements of a deceptive act or practice: (1) A representation, 
omission or practice that is likely to mislead the consumer; (2) the 
consumer acted reasonably in the circumstances; and (3) the 
representation, omission, or practice is ``material,'' i.e., is 
likely to affect the consumer's conduct or decision with regard to a 
product or service (i.e., the accepting of a high-cost mortgage). 
See Board's final rule on higher-priced mortgage loans, 73 FR 44522, 
44528-29 (July 30, 2008), citing to a letter from James C. Miller 
III, Chairman, Federal Trade Commission to Hon. John D. Dingell, 
Chairman, H. Comm. on Energy and Commerce (Oct. 14, 1983), in 
explaining the Board's authority to prohibit unfair and deceptive 
practices under then Section 129(l)(2) of TILA.

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[[Page 49126]]

    Proposed comment 34(a)(6) clarifies that whether a creditor or 
mortgage broker ``recommends or encourages'' a consumer to default on 
an existing loan depends on the relevant facts and circumstances, and 
provides examples. The Bureau solicits comment on the proposed examples 
and on additional possible examples where a creditor or mortgage broker 
may or may not be recommending or encouraging a consumer's default.
34(a)(7) Modification and Deferral Fees
    The Bureau is proposing a new Sec.  1026.34(a)(7) to implement the 
prohibition on modification and deferral fees for high-cost mortgages 
in new section 129(s) of TILA, as added by section 1433(b) of the Dodd-
Frank Act. Specifically, section 129(s) of TILA prohibits a ``creditor, 
successor in interest, assignee, or any agent'' of these parties from 
charging a consumer ``any fee to modify, renew, extend, or amend a 
high-cost mortgage, or to defer any payment due under the terms of such 
mortgage.'' As proposed, Sec.  1026.34(a)(7) closely follows the 
statutory language in its implementation of section 129(s).
    The Bureau seeks comment on the applicability of the prohibition to 
a refinancing of a high-cost mortgage, including where the refinancing 
would place the consumer in a non-high-cost mortgage.
    In order to ensure that the Bureau's final rule, within the scope 
of the Bureau's authorities, effectively protects and benefits 
consumers, the Bureau also seeks comment, in general, on the specific 
circumstances, including examples, under which the prohibition on 
modification and deferral fees is particularly needed to protect 
consumers. The Bureau further seeks information on the implications of 
the Bureau's proposal on practices for open-end credit, and 
specifically on the extent to which fees are charged for a consumer's 
renewal or extension of the draw period under such open-end credit 
plans.
34(a)(8) Late Fees
    Section 1433(a) of the Dodd-Frank Act added to TILA a new section 
129(k) establishing limitations on late fees on high-cost mortgages. 
The proposal implements these limitations, with minor modifications for 
clarity, in proposed Sec.  1026.34(a)(8).
    New TILA section 129(k)(1) generally provides that any late payment 
charge in connection with a high-cost mortgage must be specifically 
permitted by the terms of the loan contract or open-end credit 
agreement and must not exceed 4 percent of the ``amount of the payment 
past due.'' No such late payment charge may be imposed more than once 
with respect to a single late payment, or prior to the expiration of 
certain statutorily prescribed grace periods (i.e., for transactions in 
which interest is paid in advance, no fee may be imposed until 30 days 
after the date the payment is due; for all other transactions, no fee 
may be imposed until 15 days after the date the payment is due). 
Proposed Sec.  1026.34(a)(8)(i) and (ii) implements new TILA section 
129(k)(1) consistent with the statute.
    New TILA section 129(k)(1) does not define the phrase ``amount of 
the payment past due.'' Proposed comment 34(a)(8)(i)-1 explains that, 
for purposes of proposed Sec.  1026.34(a)(8)(i), the ``payment past 
due'' in an open-end credit plan is the required minimum periodic 
payment, as provided under the terms of the plan. This comment is 
intended to clarify that, for open-end credit plans, where monthly 
payment amounts can vary depending on the consumer's use of the credit 
line, the ``payment past due'' is the required minimum periodic payment 
that was due immediately prior to the assessment of the late payment 
fee. The Bureau seeks comment on the appropriateness of this 
definition. The Bureau also seeks comment on whether additional 
guidance is needed concerning the meaning of the phrase ``amount of the 
payment past due'' in the context either of closed-end mortgages or in 
the case of partial mortgage payments.
34(a)(8)(iii) Multiple Late Charges Assessed on Payment Subsequently 
Paid
    New TILA section 129(k)(2) prohibits the imposition of a late 
charge in connection with a high-cost mortgage payment, when the only 
delinquency is attributable to late charges assessed on an earlier 
payment, and the payment is otherwise a full payment for the applicable 
period and is paid by its due date or within any applicable grace 
period. The Bureau proposes to implement this prohibition on late-fee 
pyramiding consistent with statutory language in Sec.  
1026.34(a)(8)(iii). The Bureau notes that proposed Sec.  
1026.34(a)(8)(iii) is consistent with Sec.  1026.36(c)(1)(ii), which 
similarly prohibits late-fee pyramiding by servicers in connection with 
a consumer credit transaction secured by a consumer's principal 
dwelling.
    Proposed comment 34(a)(8)(iii)-1 illustrates the rule for a high-
cost mortgage with regular periodic payments of $500 due by the 1st of 
each month (or before the expiration of a 15-day grace period), where a 
consumer makes a $500 payment on August 25 and another $500 payment on 
September 1. Under proposed Sec.  1026.34(h)(2), it is impermissible to 
allocate any portion of the payment made on September 1 to cover a $10 
late charge assessed on the payment made on August 25, such that the 
September 1 payment, which otherwise complies with the terms of the 
loan contract, becomes delinquent. The Bureau requests comment as to 
whether additional guidance is needed concerning the application of 
proposed Sec.  1026.34(a)(8)(iii) to open-end credit plans.
34(a)(8)(iv) Failure To Make Required Payment
    New TILA section 129(k)(3) provides that, if a past due principal 
balance exists on a high-cost mortgage as a result of a consumer's 
failure to make one or more required payments, and if permitted by the 
terms of the loan contract or open-end credit agreement permit, 
subsequent payments may be applied first to the past due principal 
balance (without deduction due to late fees or related fees) until the 
default is cured. The Bureau generally proposes to implement new TILA 
section 129(k)(3) consistent with statutory language in Sec.  
1026.34(a)(8)(iv), with modifications to clarify the application of the 
provision to open-end credit plans.
    Proposed comment 34(a)(8)(iv)-1 illustrates the rule for a high-
cost mortgage with regular periodic payments of $500 due by the 1st of 
each month (or before the expiration of a 15-day grace period), where a 
creditor imposes a $10 late fee after a consumer fails to make a timely 
payment on August 1 (or within the applicable grace period). If the 
consumer makes no payment until September 1, at which time the consumer 
makes a $500 payment, then under proposed Sec.  1026.34(a)(8)(iv) (and 
if permitted by the terms of the loan contract), the creditor may apply 
that payment to satisfy the missed $500 payment that was due on August 
1. The creditor may also impose a $10 late fee for the payment that was 
due on September 1 (assuming that the consumer makes no other payment 
prior to the expiration of

[[Page 49127]]

any applicable grace period for the payment that was due on September 
1). The Bureau requests comment on this example, including on whether 
additional guidance is needed concerning the application of proposed 
Sec.  1026.34(a)(8)(iv) to open-end credit plans.
34(a)(9) Payoff Statements
    The Bureau is proposing a new Sec.  1026.34(a)(9) to implement new 
section 129(t) of TILA, added by section 1433(d) of the Dodd-Frank Act, 
which: (1) specifically prohibits, with certain exceptions, a creditor 
or servicer from charging a fee for ``informing or transmitting to any 
person the balance due to pay off the outstanding balance on a high-
cost mortgage''; and (2) requires payoff balances for high-cost 
mortgages to be provided within five business days of a request by a 
consumer or a person authorized by the consumer to obtain such 
information.
    Proposed Sec.  1026.34(a)(9), in implementing section 129(t), 
prohibits a creditor or servicer from charging a fee to a consumer (or 
a person authorized by the consumer to receive such information) for 
providing a statement of an outstanding pay off balance due on a high-
cost mortgage. It allows, however, as provided by section 129(t), the 
charging of a processing fee to cover the cost of providing a payoff 
statement by fax or courier, so long as such fees do not exceed an 
amount that is comparable to fees imposed for similar services provided 
in connection with a non-high-cost mortgage. The creditor or servicer 
is required to make the payoff statement available to a consumer by a 
method other than by fax or courier and without charge. Prior to 
charging a fax or courier processing fee, the creditor or servicer is 
required to disclose to the consumer (or a person authorized by the 
consumer to receive the consumer's payoff information) that payoff 
statements are otherwise available for free. The proposal allows a 
creditor or servicer who has provided payoff statements on a high-cost 
mortgage to a consumer without charge (other than a processing fee for 
faxes or courier services) for four times during a calendar year to 
charge a reasonable fee for providing payoff statements during the 
remainder of the calendar year. Finally, the proposal requires payoff 
statements to be provided by a creditor or servicer within five 
business days after receiving a request by a consumer for such a 
statement (or a person authorized by the consumer to obtain such 
information).\67\
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    \67\ See current Sec.  1026.36(c)(1)(iii), which prohibits a 
servicer ``[i]n connection with a consumer credit transaction 
secured by a consumer's principal dwelling'' from failing ``to 
provide within a reasonable period of time after receiving a request 
from the consumer * * * an accurate statement of the total 
outstanding balance * * *.'' The commentary related to this section 
states that ``it would be reasonable under most circumstances to 
provide the statement within five business days of receipt of a 
consumer's request, and that ``[t]his time frame might be longer, 
for example, when the servicer is experiencing an unusually high 
volume of refinancing requests.'' See also new Section 129G of TILA 
added by section 1464 of the Dodd-Frank Act, which sets new timing 
requirements for the delivery of payoff statements for ``home 
loans'' but does not specifically address high-cost mortgages. It 
requires a ``creditor or servicer of a home loan'' to ``send an 
accurate payoff balance within a reasonable time, but in no case 
more than 7 business days, after the receipt of a written request 
for such balance from or on behalf of the borrower.'' The Bureau is 
implementing this provision in its rulemaking on mortgage servicing.
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    The Bureau seeks public comment on what additional guidance may be 
needed with regard to the fee and timing requirements for the provision 
of payoff statements for high-cost mortgages under proposed Sec.  
1026.34(a)(9).
34(a)(10) Financing of Points and Fees
    Section 1433 of the Dodd-Frank Act added to TILA a new section 
129(m) prohibiting the direct or indirect financing of (1) any points 
and fees; and (2) any prepayment penalty payable by the consumer in a 
refinancing transaction if the creditor or an affiliate of the creditor 
is the holder of the note being refinanced. The Bureau implements new 
TILA section 129(m) in proposed Sec.  1026.34(a)(10). Proposed Sec.  
1026.34(a)(10) implements all aspects of the statute, except that the 
Bureau omits from the proposal statutory language concerning the 
financing of prepayment penalties payable by the consumer in a 
refinancing transaction. The Bureau notes that such penalties are 
subsumed in the definition of points and fees for Sec.  1026.32 in 
proposed Sec.  1026.32(b)(1)(vi) and (3)(iv). Thus, the prohibition 
against financing of ``points and fees'' necessarily captures the 
prohibition against financing of prepayment penalties payable in a 
refinancing transaction if the creditor or an affiliate of the creditor 
is the holder of the note being refinanced. Consistent with amended 
TILA section 103(bb)(4)(D) concerning the financing of credit insurance 
premiums (which new TILA section 129C(d) generally bans), proposed 
Sec.  1026.34(a)(10) specifies that credit insurance premiums are not 
considered financed when they are calculated and paid in full on a 
monthly basis.
    Proposed comment 34(a)(10)-1 clarifies that ``points and fees'' for 
proposed Sec.  1026.34(a)(10) means those items that are required to be 
included in the calculation of points and fees under proposed Sec.  
1026.32(b)(1) through (5). Proposed comment 34(a)(10)-1 specifies that, 
for example, in connection with the extension of credit under a high-
cost mortgage, a creditor may finance a fee charged in connection with 
the consumer's receipt of pre-loan counseling under Sec.  
1026.34(a)(5), because such a fee would be excluded from points and 
fees as a bona fide third-party charge pursuant to proposed Sec.  
1026.32(b)(5)(i).
    Proposed comment 34(a)(10)-2 provides examples of the prohibition 
on financing of points and fees. Proposed comment 34(a)(10)-2 explains 
that a creditor directly or indirectly finances points and fees in 
connection with a high-cost mortgage if, for example, such points or 
fees are added to the loan balance or financed through a separate note, 
if the note is payable to the creditor or to an affiliate of the 
creditor. In the case of an open-end credit plan, a creditor also 
finances points and fees if the creditor advances funds from the credit 
line to cover the fees.
    The Bureau requests comment on its proposed implementation of new 
TILA section 129(m). In particular, the Bureau requests comment on 
whether Sec.  1026.34(a)(10) should prohibit the financing of charges 
that are not included in the calculation of points and fees, such as 
bona-fide third party charges (including certain amounts of private 
mortgage insurance premiums).
34(b) Prohibited Acts or Practices for Dwelling-Secured Loans; 
Structuring Loans To Evade High-Cost Mortgage Requirements
    The Bureau is proposing a new Sec.  1026.34(b) to implement the 
prohibition on structuring a loan transaction ``for the purpose and 
with the intent'' to evade the requirements for high-cost mortgages in 
new section 129(r) of TILA, which was added by section 1433(b) of the 
Dodd-Frank Act. Section 129(r) of TILA specifically prohibits a 
creditor from taking ``any action in connection with a high-cost 
mortgage'' to: (1) ``structure a loan as an open-end credit plan or 
another form of loan for the purpose and with the intent of evading the 
provisions of this title'' which include the high-cost mortgage 
requirements; or (2) divide a loan into separate parts ``for the 
purpose and with the intent'' to evade the same provisions.
    Prior to the Dodd-Frank Act, open-end credit plans were not within 
the

[[Page 49128]]

scope of HOEPA's coverage. Current Sec.  1026.34(b) prohibits 
structuring a home-secured loan as an open-end plan to evade the 
requirements of HOEPA. The Dodd-Frank Act amended TILA, however, to 
include open-end credit plans within the scope of coverage of HOEPA 
(see Section 1431(a) of the Dodd-Frank Act amending section 103(aa) of 
TILA). Nevertheless, as noted, new section 129(r) prohibits the 
structuring of what would otherwise be a high-cost mortgage in the form 
of an open-end credit plan, or another loan form of loan, including 
dividing the loan into separate parts. Proposed Sec.  1026.34(b) 
implements this new section by prohibiting the structuring of a 
transaction that is otherwise a high-cost mortgage as another form of 
loan, including dividing any loan transaction into separate parts, for 
the purpose and intent to evade the requirements of HOEPA.
    New proposed comment 34(b)-1 provides examples of violations of 
proposed Sec.  1026.34(b): (1) a loan that has been divided into two 
separate loans, thereby dividing the points and fees for each loan so 
that the HOEPA thresholds are not met, with the specific intent to 
evade the requirements of HOEPA; and (2) the structuring of a high-cost 
mortgage as an open-end home-equity line of credit that is in fact a 
closed-end home-equity loan in order to evade the requirement to 
include loan originator compensation in points and fees for closed-end 
mortgages under proposed Sec.  1026.32(b)(1).
    The proposal re-numbers existing comment 34(b)-1 as comment 34(b)-2 
for organizational purposes. Notwithstanding the Dodd-Frank Act's 
expansion of coverage under HOEPA to include open-end credit plans, the 
Bureau believes that the guidance set forth in proposed comment 34(b)-2 
remains useful for situations where it appears that a closed-end 
mortgage loan has been structured as an open-end credit plan to evade 
the closed-end HOEPA triggers. The Bureau proposes certain conforming 
amendments to proposed comment 34(b)-2, however, for consistency with 
the Bureau's proposed amendment to the definition of ``total loan 
amount'' for closed-end mortgage loans. See the section-by-section 
analysis to proposed Sec.  1026.32(b)(6)(i), above.
Section 1026.36 Prohibited Acts or Practices in Connection With Credit 
Secured by a Dwelling 36(k) Negative Amortization Counseling
    Section 1414 of the Dodd-Frank Act added new TILA section 
129C(f)(2), which creates a counseling requirement for certain 
mortgages that may result in negative amortization. TILA section 
129C(f)(2) requires creditors to obtain documentation from a first-time 
borrower sufficient to demonstrate that the borrower has obtained 
homeownership counseling from a HUD-certified organization or counselor 
prior to extending credit to the borrower in connection with a closed-
end transaction secured by a dwelling (other than a reverse mortgage 
subject to Sec.  1026.33 or a transaction secured by a consumer's 
interest in a timeshare plan described in 11 U.S.C. 101(53D)) that may 
result in negative amortization.
Background
    The Dodd-Frank Act added two general requirements that creditors 
must fulfill prior to extending credit to a consumer secured by a 
dwelling or residential real property that includes a dwelling, other 
than a reverse mortgage, that may result in negative amortization. The 
first, found in new TILA 129C(f)(1), requires creditors to provide 
consumers with a disclosure that, among other things, describes 
negative amortization and states that negative amortization increases 
the outstanding principal balance of the account and reduces a 
consumer's equity in the property. The Bureau is not implementing this 
requirement in the current proposal, but is planning to implement it as 
part of its 2012 TILA-RESPA proposal. The second provision, found in 
new TILA 129C(f)(2), requires creditors to obtain sufficient 
documentation demonstrating that a first-time borrower has received 
homeownership counseling from a HUD-certified organization or 
counselor, prior to extending credit in connection with a residential 
mortgage loan that may result in negative amortization.
    Because of the similarity of the second provision to the counseling 
requirement for high-cost mortgages, the Bureau is including the 
implementation of this counseling provision as part of this proposal. 
General background regarding HUD's housing counseling program can be 
found in the section-by-section analysis addressing high-cost mortgage 
counseling above.
The Bureau's Proposal
    The Bureau is proposing to implement the counseling requirement for 
mortgages that may result in negative amortization created by new TILA 
section 129C(f)(1) in proposed Sec.  1026.36(k). The Bureau is 
proposing to implement the general counseling requirement for first-
time borrowers of mortgages that may result in negative amortization 
consistent with the statutory language. In addition to the general 
counseling requirement, pursuant to its authority under TILA section 
105(a), the Bureau is proposing to include two additional provisions, 
the first to address steering by creditors to particular counselors or 
counseling organizations and the second to require the provision of a 
list of counselors to consumers. Both of these provisions are 
consistent with the requirements proposed for high-cost mortgage 
counseling discussed above. The Bureau notes, however, that it is not 
including certain additional provisions that the Bureau is proposing 
for high-cost mortgage counseling, due to differences in statutory 
language between the two counseling requirements. In addition to 
seeking comments on the proposed provisions below, the Bureau is also 
requesting comment on whether it would minimize compliance burdens if 
the Bureau conformed the counseling requirements for mortgages that may 
result in negative amortization with the counseling requirements for 
high-cost mortgages, despite differences in the statutory language.
36(k)(1) Counseling Required
    The proposal implements the counseling requirement for negative 
amortization loans from TILA section 129C(f)(2) through Sec.  
1026.36(k)(1). Specifically, proposed Sec.  1026.36(k)(1) provides that 
a creditor shall not extend credit to a first-time borrower in 
connection with a residential transaction secured by a dwelling (with 
exceptions for reverse mortgages and mortgages related to timeshare 
plans) that may result in negative amortization, unless the creditor 
receives documentation that the consumer has obtained counseling from a 
HUD-certified or approved counselor or counseling organization.\68\ The 
Bureau is omitting from the proposal the statutory language limiting 
the requirement for counseling to a residential mortgage loan that may 
result in negative amortization ``that is not a qualified mortgage.'' 
The Bureau believes this language is unnecessary because a qualified 
mortgage by definition does not permit a payment schedule that results 
in an increase of

[[Page 49129]]

the principal balance under new TILA 129C(b)(2)(A).
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    \68\ The Bureau proposes to exercise its authority under section 
105(a) of TILA and section 1405(b) of the Dodd-Frank Act to allow 
the list to include, in addition to HUD-certified counselors or 
organizations required by section 1414(a) of the Dodd-Frank Act, 
HUD-approved counselors and organizations. The Bureau is proposing 
to exercise its authority to provide flexibility in order to 
facilitate the availability of competent housing counselors for 
placement on the list. See supra note 24.
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    Proposed comment 36(k)(1)-1 provides that counseling organizations 
or counselors certified or approved by HUD to provide the counseling 
required by proposed Sec.  1026.36(k)(1) include organizations and 
counselors that are certified or approved by HUD pursuant to section 
106(e) of the Housing and Urban Development Act of 1968 (12 U.S.C. 
1701x(e)) or 24 CFR part 214, unless HUD determines otherwise. This 
provision would allow currently approved counseling organizations to 
provide the counseling required by proposed Sec.  1026.36(k)(1), but 
would be broad enough to account for future changes in HUD policy 
concerning eligibility to provide the required counseling.
    The next proposed comment, comment 36(k)(1)-2, addresses the 
content of counseling to ensure that the counseling is useful and 
meaningful to the consumer with regard to the negative amortization 
feature of the loan. Specifically, comment 36(k)(1)-2 states that the 
homeownership counseling required pursuant to proposed Sec.  
1026.36(k)(1) must include information regarding the risks and 
consequences of negative amortization. The Bureau believes that a 
requirement that the counseling address the negative amortization 
feature of a loan is consistent the purpose of the statute. Absent any 
discussion of negative amortization, the particular concern reflected 
in the requirement that first-time borrowers of a mortgage that may 
result in negative amortization receive homeownership counseling would 
not necessarily be addressed.
    To help facilitate creditor compliance with proposed Sec.  
1026.36(k)(1), proposed comment 36(k)(1)-3 provides examples of 
documentation that demonstrate that a consumer has received the 
required counseling, such as a certificate, letter, or email from a 
HUD-certified or approved organization or counselor indicating the 
consumer has received counseling.
    Proposed comment 36(k)(1)-4 addresses when a creditor may begin to 
process the application for a mortgage that may result in negative 
amortization. As with high-cost mortgage counseling, the Bureau 
proposes that prior to receiving documentation of counseling, a 
creditor may not extend a mortgage to a consumer that may result in 
negative amortization, but may engage in other activities, such as 
processing an application for such a mortgage.
    The Bureau solicits comment on the proposed general requirement and 
proposed comments, including whether the proposed guidance is adequate, 
or whether any additional guidance is needed.
36(k)(2) Definitions
    Proposed Sec.  1026(k)(2) provides guidance on the meanings of two 
key terms used in proposed Sec.  1026.36(k)(1), ``first-time borrower'' 
and ``negative amortization.'' Specifically, proposed Sec.  
1026.36(k)(2)(i) provides that a first-time borrower means a consumer 
who has not previously received a closed-end mortgage loan or open-end 
credit plan secured by a dwelling. Proposed Sec.  1026.36(k)(2)(ii) 
provides that negative amortization means a payment schedule with 
regular periodic payments that cause the principal balance to increase. 
The Bureau solicits comment on both of these definitions, and whether 
any changes to these definitions would be appropriate.
36(k)(3) Steering Prohibited
    Consistent with its proposal to prohibit steering for high-cost 
mortgage counseling, the Bureau is proposing in Sec.  1026.36(k)(3) to 
prohibit a creditor that extends mortgage credit that may result in 
negative amortization from steering or otherwise directing a consumer 
to choose a particular counselor or counseling organization for the 
counseling required by proposed Sec.  1026.36(k). Proposed comment 
36(k)(3)-1 references the proposed comments in 34(a)(5)(vi)-1 and -2, 
which provide an example of an action that constitutes steering, as 
well as an example of an action that does not constitute steering. The 
Bureau again solicits comment on whether any additional examples of 
activities that do or do not constitute steering should be included in 
the proposed comment.
36(k)(4) List of Counselors
    Also consistent with its proposal for high-cost mortgage 
counseling, the Bureau is proposing in Sec.  1026.36(k)(4)(i) to 
require a creditor to provide to a consumer for whom counseling is 
required under proposed Sec.  1026.36(k), a notice containing the Web 
site addresses and phone numbers of the Bureau and HUD for access to 
information about homeownership counseling, and a list of five 
counselors or counseling organizations certified or approved by HUD to 
provide the required counseling. Proposed Sec.  1026.36(k)(4)(i) also 
requires the notice to be provided to the consumer no later than the 
time that the RESPA good faith estimate must be provided. Consistent 
with the safe harbor proposed for the provision of a list of counselors 
for consumers required to receive high-cost mortgage counseling, 
proposed Sec.  1026.36(k)(4)(ii) creates a safe harbor for compliance 
with the requirement to provide a list of counselors or counseling 
organizations if creditors provide the list of homeownership counselors 
or organizations required by 12 CFR 1024.20 to consumers for whom 
counseling is required under Sec.  1026.36(k).
    Proposed comment 36(k)(4)-1 addresses the provision of the list of 
homeownership counselors in situations in which there may be multiple 
creditors or multiple consumers involved in a mortgage transaction that 
may result in negative amortization, consistent with the comment 
proposed for high-cost mortgage counseling.
    The Bureau seeks comment on whether the requirement to provide 
Bureau, HUD, and counselor contact information is appropriate, and 
whether it is appropriate to require the list to contain contact 
information for five counselors or counseling organizations. The Bureau 
also requests comment on whether the safe harbor for complying with the 
similar notice obligation under RESPA is appropriate. As with the 
requirement related to high-cost mortgages, the Bureau believes that 
most creditors will comply with this requirement to provide a list of 
counselors by fulfilling their obligations under proposed 12 CFR 
1024.20. However, the Bureau again seeks comment on whether some 
creditors are likely to comply with this requirement independent of 
their obligations under RESPA, and if so, whether additional guidance 
would be helpful.

VI. Section 1022(b)(2) Analysis

    In developing the proposed rule, the Bureau has considered 
potential benefits, costs, and impacts, and has consulted or offered to 
consult with the prudential regulators, the Federal Trade Commission, 
and HUD, including regarding consistency with any prudential, market, 
or systemic objectives administered by such agencies.\69\
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    \69\ Specifically, section 1022(b)(2)(A) of the Dodd-Frank Act 
calls for the Bureau to consider the potential benefits and costs of 
a regulation to consumers and covered persons, including the 
potential reduction of access by consumers to consumer financial 
products or services; the impact on depository institutions and 
credit unions with $10 billion or less in total assets as described 
in section 1026 of the Act; and the impact on consumers in rural 
areas.
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    As discussed above, HOEPA currently addresses potentially harmful 
practices in refinancing and closed-end home-equity mortgage loans. 
Loans that meet HOEPA's triggers are subject to restrictions on loan 
terms as well as to

[[Page 49130]]

special disclosure requirements intended to ensure that borrowers in 
high-cost mortgages understand the features and implications of such 
loans. Borrowers with HOEPA loans also have enhanced remedies for 
violations of the law. The Dodd-Frank Act expanded the types of loans 
potentially covered by HOEPA to include purchase money mortgage loans 
and home-equity lines of credit secured by a consumer's principal 
dwelling. The Dodd-Frank Act also expanded the protections associated 
with HOEPA loans, including by adding new restrictions on loan terms, 
extending the requirement that a creditor verify a consumer's ability 
to repay to a home equity line of credit, and adding a requirement that 
consumers receive homeownership counseling before high-cost mortgages 
may be extended.
    In addition to the amendments related to high-cost mortgages, the 
Bureau is also proposing an amendment to Regulation Z and an amendment 
to Regulation X to implement amendments made by Sections 1414(a) and 
1450 of the Dodd-Frank Act to TILA and to RESPA related to 
homeownership counseling for other types of mortgage loans, 
respectively.

A. Provisions To Be Analyzed

    The discussion below considers the potential benefits, costs, and 
impacts to consumers and covered persons of key provisions of the 
proposed rule, as well as certain alternatives proposed, which include:
    1. Expanding the types of loans potentially covered by HOEPA to 
include purchase money mortgage loans and HELOCs;
    2. Revising the existing HOEPA APR and points-and-fees triggers to 
implement Dodd-Frank Act requirements, as well as modifying the APR and 
points-and-fees calculations to determine whether a closed-end mortgage 
loan is a HOEPA loan;
    3. Adding a prepayment penalty trigger;
    4. Adding and revising several restrictions and requirements on 
loan terms and origination practices for HOEPA loans; \70\ and
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    \70\ These restrictions and requirements include requiring that 
a creditor receive certification that a HOEPA borrower has received 
pre-loan counseling from an approved homeownership counselor; 
prohibiting creditors and brokers from recommending default on a 
loan to be refinanced with a high-cost mortgage; prohibiting 
creditors, servicers, and assignees from charging a fee to modify, 
defer, renew, extend, or amend a high-cost mortgage; limiting the 
fees that can be charged for a payoff statement; banning prepayment 
penalties; substantially limiting balloon payments; and requiring 
that a creditor assess a borrower's ability to repay a home equity 
line of credit.
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    5. Implementing two separate homeownership counseling-related 
provisions mandated by the Dodd-Frank Act, namely, requiring lenders to 
provide a list of homeownership counselors or counseling organizations 
to applicants for loans covered by RESPA, and requiring creditors to 
obtain documentation that a first-time borrower of a negatively 
amortizing loan has received homeownership counseling.

The analysis considers the benefits and costs of certain provisions 
together where there are substantially similar benefits and costs. For 
example, expanding the types of loans potentially subject to HOEPA 
coverage to include purchase money mortgage loans and HELOCs would 
likely expand the number of high-cost mortgages. The overall impact of 
this expansion of coverage is generally discussed in the aggregate. In 
other cases, the analysis considers the costs and benefits of each 
provision separately.
    The analysis also addresses certain alternative provisions in the 
proposed rule. As discussed in the section-by-section analysis, the 
Bureau requests comment on these proposed alternatives. The Bureau also 
seeks comment on the benefits, costs, and impacts of these alternatives 
for purposes of this analysis.
    The analysis relies on data that the Bureau has obtained. The 
analysis also draws on evidence of the impact of State anti-predatory 
lending statutes that often place additional or tighter restrictions on 
mortgage loans than those required by HOEPA prior to the Dodd-Frank Act 
amendments. However, the Bureau notes that, in some instances, there 
are limited data that are publicly available with which to quantify the 
potential costs, benefits, and impacts of the proposed rule. For 
example, data on the terms and features of HELOCs are more limited and 
less available than data on closed-end mortgage loans, and the Bureau 
is not aware of any systematic and representative data on the 
prevalence of prepayment penalties or on points and fees on either 
closed-end mortgage loans or HELOCs. Moreover, some potential costs and 
benefits, such as the value of homeownership counseling, or reduced 
odds of an unanticipated fee or change in payments, are difficult to 
quantify. Therefore, the analysis generally provides a qualitative 
discussion of the benefits, costs, and impacts of the proposed rule.

B. Baseline for Analysis

    The HOEPA amendments are self-effectuating, and the Dodd-Frank Act 
does not require the Bureau to adopt a regulation to implement these 
amendments. Thus, many costs and benefits of the proposed rule 
considered below would arise largely or entirely from the statute, not 
from the proposed rule. The proposed rule would provide substantial 
benefits compared to allowing the HOEPA amendments to take effect alone 
by clarifying parts of the statute that are ambiguous, such as how to 
determine whether a HELOC is a high-cost mortgage. Greater clarity on 
these issues should reduce the compliance burdens on covered persons by 
reducing costs for attorneys and compliance officers as well as 
potential costs of over-compliance and unnecessary litigation. 
Moreover, the costs that the regulation would impose beyond those 
imposed by the statute itself are likely to be minimal.
    Section 1022 of the Dodd-Frank Act permits the Bureau to consider 
the benefits and costs of the rule solely compared to the state of the 
world in which the statute takes effect without an implementing 
regulation. To provide the public better information about the benefits 
and costs of the statute, however, the Bureau has nonetheless chosen to 
consider the benefits, costs, and impacts of the major provisions of 
the proposed rule against a pre-statutory baseline (i.e., the benefits, 
costs, and impacts of the relevant provisions of the Dodd-Frank Act and 
the regulation combined).\71\ There is one exception: the Bureau does 
not discuss below the benefits and costs of determining whether a loan 
is a high-cost mortgage, e.g., the costs of computer systems and 
software, employee training, outside legal advice, and similar costs 
potentially necessary to determine whether a loan is defined as a high-
cost mortgage.\72\ The discussion does not consider these benefits and 
costs because these changes are required by the Dodd-Frank Act and the 
Bureau lacks discretion to waive these requirements. The Bureau has 
discretion in future rulemakings to choose the most appropriate 
baseline for that particular rulemaking.
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    \71\ The Bureau chose as a matter of discretion to consider 
costs and benefits of provisions that are required by the Dodd-Frank 
Act to better inform the rulemaking.
    \72\ Some states have anti-predatory lending statutes that 
provide additional restrictions on mortgage terms and features 
beyond those under HOEPA. See 74 FR 43232, 43244 (Aug. 26, 2009) 
(surveying State laws that are coextensive with HOEPA). In general, 
State statutes that overlap and/or extend beyond the proposed rule 
would be expected to reduce both the costs and benefits.

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[[Page 49131]]

C. Coverage of the Proposal

    HOEPA. The provisions of the proposed rule that relate to high-cost 
mortgages apply to any consumer credit transaction that meets one of 
the HOEPA thresholds and that is secured by the consumer's principal 
dwelling, including both closed-end mortgage loans (including purchase 
money mortgages) and open-end credit plans (i.e., home-equity lines of 
credit, or HELOCs), but not reverse mortgages.
    In general in this section, the term ``creditor'' is used to 
describe depository institutions, credit unions, and independent 
mortgage companies that extend mortgage loans, though in places the 
discussion distinguishes between these types of creditors. When 
appropriate, this section discusses covered persons other than 
creditors or lenders, such as mortgage brokers and servicers. For 
example, as required by the Dodd-Frank Act, the restrictions on loan 
modification or deferral fees and fees for payoff statements would 
apply to mortgage servicers. In addition, the Bureau is proposing to 
extend the prohibition on recommended default to mortgage brokers.
    Additional Counseling Provisions. The proposed requirement that 
lenders provide mortgage applicants a list of homeownership counselors 
applies to applications for a loan covered by RESPA (i.e., purchase 
money mortgages, subordinate mortgages, refinancings, closed-end home-
equity mortgages, open-end credit plans and reverse mortgages) except 
for lenders who comply with the similar list requirement under the HECM 
program. The negative amortization counseling provision applies only to 
closed-end mortgage loans that are made to first-time borrowers, that 
may result in negative amortization, and that are secured by a dwelling 
(other than a reverse mortgage or a transaction secured by a consumer's 
interest in a timeshare plan described in 11 U.S.C. 101(53D)).

D. Potential Benefits and Costs to Consumers and Covered Persons

1. Expanding the Types of Loans Potentially Subject to HOEPA Coverage
    Expanding the types of loans potentially subject to HOEPA coverage 
to include purchase money mortgage loans and HELOCs would increase the 
number of loans potentially subject to HOEPA coverage and as a result, 
almost certainly, the number of closed-end mortgage loans and HELOCs 
classified as high-cost mortgages. Data collected under the Home 
Mortgage Disclosure Act (HMDA) offer a rough illustration of the scope 
of the expansion of loans potentially covered by HOEPA.\73\ Home-
improvement and refinance loans accounted for 68 percent of closed-end 
mortgage loans secured by a principal dwelling reported in the 2010 
HMDA data. Put differently, the data suggest that about 32 percent of 
home-secured closed-end mortgage loans in 2010 were not potentially 
subject to HOEPA coverage because they were purchase money mortgage 
loans.\74\ If one additionally considers HELOCs, it is likely that 
closer to 40 percent of closed-end mortgage loans and HELOCs in 2010 
were not eligible for HOEPA coverage.\75\ The proposed rule would 
expand the types of loans potentially subject to HOEPA coverage to 
essentially all closed-end mortgage loans and open-end credit plans 
secured by a principal dwelling, except reverse mortgage transactions.
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    \73\ 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. The illustration is not exact because not 
all mortgage lenders report in HMDA. The HMDA data capture roughly 
90-95 percent of lending by the Federal Housing Administration and 
75-85 percent of other first-lien home loans. Robert B. Avery, Neil 
Bhutta, Kenneth P. Brevoort & Glenn B. Canner, The Mortgage Market 
in 2010: Highlights from the Data Reported under the Home Mortgage 
Disclosure Act, 97 Fed. Res. Bull., December 2011, at 1, 1 n.2.
    \74\ The share of closed-end originations that were purchase 
money mortgages was lower in 2010 than in most preceding years. The 
share ranged between 42 percent and 47 percent of originations over 
the 2004-2008 period before it fell to 31 percent in 2009.
    \75\ Experian-Oliver Wyman's analysis of credit bureau data 
indicates that there were roughly 12 percent as many HELOC 
originations in 2010 as there were originations of closed-end 
mortgage or home equity loans. Specifically, Experian-Oliver Wyman 
estimated that there were roughly 7.6 million mortgages and 434,000 
home equity loans originated in 2010 compared with about 948,000 
HELOC originations. The estimate of 40 percent assumes that the 
fraction of closed-end originations that were purchase money 
mortgages among lenders that did not report in HMDA was comparable 
to the estimated 32 percent for HMDA reporters. More information 
about the Experian-Oliver Wyman quarterly Market Intelligence Report 
is available at http://www.marketintelligencereports.com.
---------------------------------------------------------------------------

    The Bureau expects, however, that only a small fraction of loans 
under the proposed rule would qualify as HOEPA loans and that few 
lenders would make a large number of HOEPA loans. The Bureau's analysis 
of loans reported in HMDA suggests that the share of all closed-end 
mortgage loans for lenders that report in HMDA might increase from 
roughly 0.04 percent under the current triggers to about 0.3 percent of 
loans under the revised triggers. Based on analysis of data from HMDA 
and Call Reports and statistical extrapolation to non-reporting 
entities, the Bureau estimates that the number of depository 
institutions that make any closed-end HOEPA loans would increase from 
about 6-7 percent of depository institutions to approximately 10-11 
percent.\76\ Many of these creditors are predicted to make few HOEPA 
loans: The share of depository institutions that make ten or more HOEPA 
loans is estimated to increase from about 0.5 percent under the current 
triggers to about 1.5 percent under the proposed rule. Similarly, the 
share of non-depository creditors for which HOEPA loans comprise more 
than three percent of all closed-end originations is estimated to rise 
from under five percent to just over seven percent.\77\ Finally, 
although it is difficult to precisely estimate the share of HELOCs that 
will meet the HOEPA triggers, the effect of the proposed rule on 
creditors' business is likely limited because open-end lending 
generally comprises a small fraction of creditors' lending portfolio. 
The Bureau's analysis of Call Report data suggest that HELOCs comprise 
more than half of all home-secured loans for only about 5-6 percent of 
depository institutions, and those meeting the HOEPA triggers would be 
a small fraction of those portfolios. Taken together, these estimates 
suggest that the effect of the proposed rule would be minor for the 
vast majority of lenders.
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    \76\ 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 
Report data, 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/.
    \77\ These estimates are based on the Bureau's analysis of 
mortgage lending by non-depository institutions based on HMDA data 
and data from the National Mortgage Licensing System.
---------------------------------------------------------------------------

a. Benefits and Costs to Consumers
    The Bureau believes that the benefits and costs of expanding the 
types of loans potentially subject to HOEPA coverage, and in turn the 
likely number of HOEPA loans, should be similar qualitatively to the 
benefits and costs of current HOEPA provisions.\78\
---------------------------------------------------------------------------

    \78\ The Bureau is not aware of in-depth empirical analyses of 
the benefits or costs to consumers of the current HOEPA provisions 
specifically. In contrast, several studies have assessed the impacts 
of State anti-predatory lending laws, and, where relevant, findings 
of these studies are discussed below.
---------------------------------------------------------------------------

    These benefits may include improving applicants' and borrowers' 
understanding of the terms and features of a given high-cost mortgage 
and, in turn, facilitating their ability to shop for mortgages. The 
rule would also restrict or prohibit loan terms such as prepayment 
penalties and balloon

[[Page 49132]]

payments whose risks may be difficult for some borrowers to evaluate. 
Both of these factors could reduce the likelihood that a HOEPA borrower 
faces a sizable, unanticipated fee or increase in payments.
    Improving borrowers' understanding of a given loan may increase 
borrowers' ability to shop, which could have additional benefits to 
consumers if, as a consequence, borrowers select a more favorable loan 
(which may be a loan that does not meet the HOEPA triggers) or if 
borrowers forgo taking out any mortgage, if none would likely be 
affordable. At least for some borrowers, obtaining information in the 
process of choosing a mortgage loan may be costly. These costs could 
include the time and effort of obtaining additional mortgage offers, 
trying to understand a large number of loan terms, and--particularly 
for an adjustable-rate loan--assessing the likelihood of various future 
contingencies.
    A borrower who finds shopping for and understanding loan terms 
difficult or who needs to make a decision in a short timeframe, for 
example, may select a mortgage with less favorable loan terms than he 
or she could qualify for because the costs of shopping exceed the 
expected savings, reduced risk, or other benefits from another 
mortgage. The proposed rule would reduce the costs of understanding the 
loan terms. In doing so, the proposed rule would benefit not only 
applicants who opt, based on better information, not to take out a 
high-cost mortgage, but also high-cost mortgage borrowers, since these 
borrowers will have incurred lower costs in choosing a mortgage.
    It appears that many consumers do not shop extensively when 
selecting a mortgage. Surveys of mortgage borrowers suggest that 
roughly 20-30 percent of borrowers contact one lender and a similar 
fraction consider only two lenders.\79\ Given the estimated benefits to 
a consumer from shopping, this suggests that borrowers find the time 
and effort of additional shopping costly, they underestimate the 
potential value from shopping, or both.\80\
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    \79\ See, e.g., Jinkook Lee & Jeanne M. Hogarth, Consumer 
Information Search for Home Mortgages: Who, What, How Much, and What 
Else?, 9 Fin. Serv. Rev. 277 (2000) and James M. Lacko & Janis K. 
Pappalardo, The Effect of Mortgage Broker Compensation Disclosures 
on Consumers and Competition: A Controlled Experiment (Federal Trade 
Commission Bureau of Economics Staff report, February 2004), http://www.ftc.gov/be/workshops/mortgage/articles/lackopappalardo2004.pdf. 
This survey evidence is broadly consistent with information obtained 
from lenders through outreach.
    \80\ Susan E. Woodward & Robert E. Hall, Diagnosing Consumer 
Confusion and Sub-Optimal Shopping Effort: Theory and Mortgage-
Market Evidence (Nat'l Bureau of Econ. Research, Working Paper No. 
16007, 2010), available at www.nber.org/papers/w16007.
---------------------------------------------------------------------------

    Some mortgage borrowers appear to have difficulty understanding or 
at least recalling details of their mortgage, particularly the terms 
and features of adjustable-rate mortgages.\81\ Improved information 
about loan terms may be especially beneficial in the case of high-cost 
mortgages. At least along some dimensions, the types of borrowers who 
may be less certain about their mortgage terms are also the types of 
borrowers who are more likely to have taken out a subprime loan.\82\ In 
addition, focus groups suggest that many subprime borrowers perceive 
their choice set as limited or experience a sense of desperation.\83\ 
Borrowers with this perspective might be expected to focus on near-term 
features of the mortgage, rather than on the risk of, for example, a 
large payment increase due to a teaser rate expiring or to fluctuations 
in interest rates.
---------------------------------------------------------------------------

    \81\ See Brian Bucks & Karen Pence, Do Borrowers Know Their 
Mortgage Terms?, 64 J. Urb. Econ. 218 (2008) and James M. Lacko & 
Janis K. Pappalardo, Improving Consumer Mortgage Disclosures: An 
Empirical Assessment of Current and Prototype Disclosure Forms 
(Federal Trade Commission Bureau of Economics Staff Report, June 
2007), http://www.ftc.gov/os/2007/06/P025505MortgageDisclosureReport.pdf.
    \82\ See Brian Bucks & Karen Pence, Do Borrowers Know Their 
Mortgage Terms?, 64 J. Urb. Econ. 218 (2008).
    \83\ See James M. Lacko & Janis K. Pappalardo, Improving 
Consumer Mortgage Disclosures: An Empirical Assessment of Current 
and Prototype Disclosure Forms (Federal Trade Commission Bureau of 
Economics Staff Report, June 2007), http://www.ftc.gov/os/2007/06/P025505MortgageDisclosureReport.pdf and Danna Moore, Survey of 
Financial Literacy in Washington State: Knowledge, Behavior, 
Attitudes, and Experiences (Washington State University, Social and 
Economic Sciences Research Center, Technical Report 03-39, 2003), 
http://www.dfi.wa.gov/news/finlitsurvey.pdf.
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    These benefits to consumers arise from making information less 
costly, but the potential benefits to consumers may be even greater if 
at least some borrowers make systematic errors in processing 
information. For example, consumers may not accurately gauge the 
probability of uncertain events.\84\ Thus, it is possible that, in 
assessing the expected costs of a mortgage offer, some borrowers 
underestimate the likelihood of circumstances that lead, for example, 
to incurring a late-payment fee or the likelihood of moving or 
refinancing and thus of incurring a prepayment penalty.
---------------------------------------------------------------------------

    \84\ See, e.g., Colin Camerer, Samuel Issacharoff, George 
Loewenstein, Ted O'Donoghue, & Matthew Rabin, Regulation for 
Conservatives: Behavioral Economics and the Case for ``Asymmetric 
Paternalism,'' 151 U. Pa. L. Rev. 1211 (2003).
---------------------------------------------------------------------------

    The proposed rule could increase the cost of credit or curtail 
access to credit for a small share of HELOC borrowers and purchase 
money borrowers because, as detailed below, creditors may be reluctant 
to make HOEPA loans and may no longer offer loans that they currently 
make but that would meet the new HOEPA triggers. Studies of State anti-
predatory mortgage lending laws, however, indicate these impacts of 
extending HOEPA coverage may be limited, as the State laws typically 
have only modest effects on the volume of subprime lending overall and 
on interest rates for loans that meet the State-law triggers.\85\
---------------------------------------------------------------------------

    \85\ These studies have generally found that State laws 
typically have only small effects on the volume of subprime lending 
overall. Similarly, more restrictive State laws are associated with 
higher interest rates, but the evidence suggests this is the case 
only for fixed-rate loans and that the effect is modest. 
Nevertheless, the stronger laws were associated with a clearer 
reduction on the amount of subprime lending, and prohibitions of 
specific loan features such as prepayment penalties appear to reduce 
the prevalence of the prohibited feature. See Raphael W. Bostic, 
Souphala Chomsisengphet, Kathleen C. Engel, Patricia A. McCoy, 
Anthony Pennington-Cross, & Susan M. Wachter, Mortgage Product 
Substitution and State Anti-Predatory Lending Laws: Better Loans and 
Better Borrowers? (U. Pa. Inst. L. Econ., Research Paper No. 09-27, 
2009), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1460871; Lei Ding, Roberto G. Quercia, 
Carolina K. Reid, and Alan M. White (2011), ``State Anti-Predatory 
Lending Laws and Neighborhood Foreclosure Rates,'' Journal of Urban 
Affairs, Volume 33, Number 4, pages 451-467.

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[[Page 49133]]

    The arguably muted response of origination volume to passage of 
State anti-predatory lending laws appears to reflect, in part, the fact 
that the market substituted other products that did not trigger 
restrictions or requirements of the statute, for example, loans with 
lower initial promotional interest rates and longer promotional-rate 
periods.\86\ It is possible that some borrowers would receive a more 
favorable loan if creditors respond to the expansion of the types of 
loans potentially subject to HOEPA coverage by substituting mortgage 
products that would not trigger HOEPA coverage, but it is also possible 
that some borrowers would receive less favorable loans or no loan at 
all.
---------------------------------------------------------------------------

    \86\ See Raphael W. Bostic, Souphala Chomsisengphet, Kathleen C. 
Engel, Patricia A. McCoy, Anthony Pennington-Cross, & Susan M. 
Wachter, Mortgage Product Substitution and State Anti-Predatory 
Lending Laws: Better Loans and Better Borrowers? (U. Pa. Inst. L. 
Econ., Research Paper No. 09-27, 2009), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1460871.
    87 Lei Ding, Roberto G. Quercia, Carolina K. Reid, and Alan M. 
White (2011), ``State Anti-Predatory Lending Laws and Neighborhood 
Foreclosure Rates,'' Journal of Urban Affairs, Volume 33, Number 4, 
pages 451-467.
---------------------------------------------------------------------------

    The Bureau is unaware of data that would allow for strong 
inferences regarding the extent to which such substitution in 
creditors' mortgage product offerings leads to borrowers taking out 
more favorable loans. Studies of State anti-predatory mortgage lending 
statutes, however, suggest that stronger State statutes are associated 
with lower neighborhood-level mortgage default rates.\87\ On the one 
hand, this finding might be seen as consistent with the possibility 
that at least some borrowers receive more beneficial loans. On the 
other hand, it might also reflect that access to credit is more limited 
in States with comparatively strong anti-predatory statutes, i.e., that 
borrowers that are more likely to default may be less likely to receive 
a mortgage in these states. This latter interpretation, however, is 
arguably more difficult to reconcile with the finding that strong State 
statutes are estimated to have only a limited effect on the volume of 
subprime lending.
---------------------------------------------------------------------------

    \87\ Lei Ding, Roberto G. Quercia, Carolina K. Reid, and Alan M. 
White (2011), ``State Anti-Predatory Lending Laws and Neighborhood 
Foreclosure Rates,'' Journal of Urban Affairs, Volume 33, Number 4, 
pages 451-467.
---------------------------------------------------------------------------

b. Benefits and Costs to Covered Persons
    Expanding the types of loans potentially subject to HOEPA coverage 
to include purchase money mortgage loans and HELOCs would likely 
require creditors to generate and to provide HOEPA disclosures to a 
greater number of borrowers than today. It is difficult to predict the 
extent to which lenders may avoid making newly eligible loans under the 
proposed rule. However, the Bureau's estimation methodology in 
analyzing the paperwork burden associated with the proposed rule 
implies that on the order of 24,000 loans might qualify as high-cost 
mortgages or high-cost HELOCs. Nevertheless, the Bureau expects that 
the share of borrowers that receive a high-cost mortgage would remain a 
small fraction of all mortgage borrowers (by the Bureau's estimates, 
likely about 0.3 percent of all closed-end and open-end originations). 
Creditors would likely also incur costs to comply with the proposed 
rule that a creditor obtain certification that a HOEPA borrower has 
received homeownership counseling.
    A small number of creditors may also lose a small fraction of 
revenue as a greater number of loans are subject to HOEPA. Based on 
outreach, the Bureau understands that some lenders have a negative 
perception of HOEPA loans. This perception coupled with the 
restrictions and liability provisions associated with HOEPA loans may 
reduce creditors' ability or willingness to make high-cost purchase 
money mortgage loans and HELOCs. Creditors may also be reluctant to 
make high-cost purchase money mortgage loans that they previously would 
have extended because of the general inability to sell HOEPA loans in 
the current market, primarily due to assignee liability.
    If creditors were indeed unwilling to make the likely small 
fraction of loans that meet the revised HOEPA triggers and did not 
substitute other loan products, they would lose the full revenue from 
any loans that they choose to no longer originate. A second possibility 
is that creditors restrict high-cost mortgage lending in part by 
substituting alternative products that do not meet the HOEPA triggers. 
Even if all potential HOEPA loans were modified in this way so that the 
number of originations was unaffected, the alternative loans would 
presumably be less profitable (or at most equally profitable), since a 
creditor could have offered the same loan contract prior to the 
expansion of HOEPA. Thus, even when creditors substitute alternative 
loan products, creditors likely would incur some revenue loss.
    The Bureau believes that expanding the types of loans potentially 
subject to HOEPA coverage to include purchase money mortgage loans and 
HELOCs could benefit covered persons that currently provide effective 
disclosures by leveling the playing field with competitors that fail to 
do so. It is possible that some creditors that currently originate 
purchase money mortgage loans or HELOCs that would be covered by 
expanded HOEPA do not currently provide applicants with clear 
information regarding the terms and features of those loans. By 
extending HOEPA to cover such transactions, borrowers will receive 
additional disclosures and homeownership counseling that may improve 
their understanding of the loan offer. This could allow creditors that 
currently provide effective disclosures to compete on more equal 
footing.
c. Scale of Affected Consumers and Covered Persons
    Despite expanding the types of loans potentially subject to HOEPA 
coverage, which likely would result in an increase in the number and 
share of loans that are classified as HOEPA loans, HOEPA loans are 
expected to continue to account for a small fraction of both closed-end 
mortgage loans and HELOCs. Thus, the proposed rule would be expected to 
have no direct impact on the vast majority of creditors, since, as 
noted above, at most about ten percent of creditors are predicted to 
make HOEPA loans under the proposed rule, and few creditors are 
expected to make significant numbers of HOEPA loans. Similarly, the 
proposed rule would not be expected to directly affect the vast 
majority of borrowers--those who do not apply for or obtain a high-cost 
mortgage. As noted above, the Bureau estimates that the share of all 
closed-end mortgage loans for lenders that report in HMDA might 
increase from roughly 0.04 percent under the current triggers to about 
0.3 percent of loans under the revised triggers. The estimated 
proportion of purchase-money mortgage loans that would qualify as high-
cost mortgages is a bit higher, 0.4 percent, but still a small fraction 
of all such loans.
2. Revised APR and Points-and-Fees Triggers and Potential Use of 
Transaction Coverage Rate
    The statute, and therefore the proposed rule, revise the APR and 
points-and-fees triggers, which would likely result in an increase in 
the number of high-cost mortgages. The Bureau estimates, for example, 
that these changes in the triggers would increase the fraction of 
refinance and home improvement loans that are high-cost mortgages made 
by lenders that reported in the 2010 HMDA data from about 0.06 percent 
of loans to 0.24 percent of loans. The Dodd-Frank Act also expanded the 
definition of points

[[Page 49134]]

and fees to include new charges, including some costs that may be 
payable after consummation or account opening. The expanded definition 
of points and fees is expected to reinforce the effect of the revised 
points-and-fees trigger and to result in a greater number of loans that 
meet the new points-and-fees threshold.
    In addition, as noted in the section-by-section analysis above, the 
Bureau is proposing in its 2012 TILA-RESPA Proposal a simpler, more 
inclusive definition of the finance charge. Because the APR and the 
calculation of points and fees both depend in part on the finance 
charge, the broader definition of finance charge would likely increase 
the number of closed-end mortgage loans that would meet the two 
triggers. The Bureau is seeking comment on whether to adopt 
modifications to approximately offset this increase, and has proposed 
two such measures specifically. One would use a transaction coverage 
rate (TCR) instead of the APR to determine whether a closed-end 
mortgage loan is a high-cost mortgage. The other would exclude the 
additional fees that would be captured by the broader definition of 
finance charge from being counted toward the points and fees trigger 
for high-cost mortgages.
    As discussed in the Bureau's 2012 TILA-RESPA Proposal, in the 
section-by-section analysis above for proposed Sec.  1026.32(a)(1)(i) 
and (b)(1)(i), and below in part VII, the Bureau does not currently 
have sufficient data to model the impact of the more expansive 
definition of finance charge on HOEPA and other affected regulatory 
regimes or the impact of potential modifications that the Bureau could 
make to the triggers to more closely approximate existing coverage 
levels.\88\ The Bureau is working to obtain such data prior to issuing 
a final rule and is seeking comment on its plans for data analysis, as 
well as additional data and comment on the potential impacts of a 
broader finance charge definition and potential modifications to the 
triggers. The 2012 TILA-RESPA Proposal provides a qualitative 
assessment of the benefits and costs of expanding the finance charge 
definition, if the Bureau made no modifications to the triggers for 
HOEPA or other regimes. In order to facilitate rule-by-rule 
consideration of potential modifications, this notice provides a 
qualitative assessment of the impact of potential changes to the APR 
and points-and-fees calculations for HOEPA.
---------------------------------------------------------------------------

    \88\ In its 2009 Closed-End Proposal, the Board relied on a 2008 
survey of closing costs conducted by Bankrate.com that contains data 
for hypothetical $200,000 loans in urban areas. Based on that data, 
the Board estimated that the share of first-lien refinance and home 
improvement loans that are subject to HOEPA would increase by .6 
percent if the definition of finance charge was expanded. The Board 
also looked at the impact on two states and the District of Columbia 
because their anti-predatory lending laws had triggers below the 
level of the historical HOEPA APR threshold, which is benchmarked to 
U.S. Treasury securities. The Board concluded that the percentage of 
first-lien loans subject to those laws would increase by 2.5% in the 
District of Columbia and 4.0% in Illinois, but would not increase in 
Maryland. The Bureau is considering the 2010 version of the 
Bankrate.com survey, but as described in this notice the Bureau is 
also seeking additional data that would provide more representative 
information regarding closing and settlement costs that would allow 
for a more refined analysis of the proposals.
---------------------------------------------------------------------------

a. Benefits and Costs to Consumers
    The Dodd-Frank Act revisions to the triggers may benefit consumers 
by increasing the number of loans classified as high-cost mortgages. As 
a result, the benefits and costs to consumers discussed above in the 
context of expanding HOEPA coverage are likely similar, at least 
qualitatively, to the benefits and costs of revising the triggers to 
capture a greater share of loans. As a result of the revised triggers, 
these benefits and costs would apply to a larger set of loans, although 
as noted above, the Bureau believes that high-cost loans would likely 
remain a small fraction of all loans. These benefits could include a 
better understanding of the risks associated with the loan which, in 
turn, may reduce the likelihood that a borrower takes out a mortgage he 
or she cannot afford; better loan terms due to increased shopping and 
an absence of loan features whose associated risks may be difficult for 
borrowers to understand.
    Nonetheless, the proposed rule could impose costs on a small number 
of borrowers by raising the cost of credit or curtailing access to 
credit if creditors choose not to make loans that meet the revised 
triggers. As discussed above, however, available evidence based on 
State anti-predatory lending statutes suggests that tighter 
restrictions and more expansive definitions of high-cost mortgages 
typically have only a limited impact on the cost of credit and on 
originations.
    With regard to the Bureau's separate proposal to expand the 
definition of finance charge, that change would also be expected to 
increase the number of loans classified as high-cost mortgages, as 
discussed in the 2012 TILA-RESPA Proposal. The Bureau is seeking 
comment in this proposal on whether to adopt specific measures that 
would approximately offset the impact on HOEPA coverage levels of an 
expanded definition of finance charge. Were the Bureau to adopt the 
proposed changes, the additional benefits and costs to consumers from 
further increasing the number of loans classified as high-cost 
mortgages would not occur. In addition, because the TCR excludes fees 
to non-affiliated third-parties, the TCR might result in some loans not 
being classified as high-cost mortgages that would qualify under an APR 
threshold using the current definition of finance charge.\89\ The 
benefits and costs to consumers with such loans would be the inverse of 
those described above; the consumers would not receive the benefits of 
the additional disclosures, the limitations on certain terms and 
practices for high-cost mortgages, or enhanced remedies under HOEPA. 
However, consumers would also not face the potential increases in the 
cost of credit or potential restrictions on access to credit that may 
accompany expanded HOEPA coverage.
---------------------------------------------------------------------------

    \89\ As discussed above, the Bureau believes that the margin of 
differences between the TCR and current APR is significantly smaller 
than the margin between the current APR and the APR calculated using 
the expanded finance charge definition because relatively few third-
party fees would be excluded by the TCR that are not already 
excluded under current rules. The Bureau is considering ways to 
supplement the data analysis described above to better assess this 
issue, and seeks comment and data regarding the potential impacts of 
the TCR relative to APR calculated using the current and proposed 
definitions of finance charge.
---------------------------------------------------------------------------

b. Benefits and Costs to Covered Persons
    The benefits and costs to covered persons of revising the statutory 
HOEPA triggers would likely be expected to be similar, at least 
qualitatively, to those that would result from expanding the types of 
loans potentially subject to HOEPA coverage to purchase money mortgages 
and HELOCs. For example, creditors would likely incur costs associated 
with generating and providing HOEPA disclosures for additional loans 
that would be covered by the revised HOEPA triggers, as well as costs 
associated with obtaining certification that a HOEPA borrower has 
received homeownership counseling. As discussed above, a small number 
of creditors may also lose a very small fraction of revenue if they are 
reluctant to make high-cost mortgages and cannot offer alternatives 
that are as profitable as a HOEPA loan.
    As discussed in connection with expanding the types of loans 
potentially subject to HOEPA coverage to include purchase money 
mortgages and HELOCs, revising the interest rate and points-and-fees 
triggers could benefit some covered persons by restricting practices of 
their competitors to obfuscate product costs. Some creditors may gain 
market share from competitors that do not currently provide complete

[[Page 49135]]

or clear information on loan terms if the HOEPA disclosures and 
counseling requirements, discussed below, allow applicants to better 
understand the costs and risks of their mortgages and thus allow 
creditors that successfully provide more effective disclosures to 
compete on more equal footing.
    Again, as discussed in the 2012 TILA-RESPA Proposal, expanding the 
definition of finance charge would be expected to increase the number 
of loans classified as high-cost mortgages, with similar benefits and 
costs to covered persons as described above. The Bureau has proposed 
two modifications to approximately offset the impact of an expanded 
definition of finance charge. Were the Bureau to adopt the measures 
proposed in this rule, the benefits and costs of coverage under Federal 
regulatory regimes described above would likely not occur although 
there might still be effects on the coverage of various State mortgage 
laws and regulations. Using the TCR for the HOEPA APR test might also 
result in some loans not being classified as high-cost mortgages that 
would qualify under an APR threshold using the current definition of 
finance charge. The benefits and costs to providers of such loans would 
be the inverse of those described above; creditors would not incur the 
costs of compliance with the high-cost mortgage requirements or impact 
on revenue from offering alternative loans, or the potential benefits 
of restrictions on competitors that offer loans that would be excluded 
from HOEPA coverage using the TCR for the HOEPA APR test.
    To adopt the proposed modifications, creditors might be required to 
update compliance systems to reflect changes to the finance charge 
calculation. These updates might involve one-time costs associated with 
software updates, legal expenses, and personnel training time. As 
discussed above, if the Bureau adopts the proposal, it expects to 
provide an implementation period that would coincide either with 
implementation of the disclosure modifications or with implementation 
of certain changes to coverage of HOEPA and other regulatory regimes 
that would be affected by the change in definition. Accordingly, the 
Bureau believes that software changes and other expenses would be 
incurred as part of the overall software and compliance system 
revisions required to comply with the other simultaneous changes, and 
therefore would not impose a substantial additional burden.
    Using different metrics for purposes of disclosures and determining 
coverage of various regulatory regimes may also impose some ongoing 
complexity and compliance burden. As discussed above, the Bureau 
believes that any such effects with regard to transaction coverage rate 
would be mitigated by the fact that both TCR and APR would be easier to 
compute under the expanded definition of finance charge than the APR 
today using the current definition. In addition, the Bureau is seeking 
comment on whether use of the TCR or other trigger modifications should 
be optional, so that creditors could use the broader definition of 
finance charge to calculate APR and points and fees triggers if they 
would prefer.
    The Bureau believes adoption of the proposed modifications would as 
a whole reduce the economic impacts on creditors of the more expansive 
definition of finance charge proposed in the 2012 TILA-RESPA Proposal.
3. New Prepayment-Penalty Trigger
    The Dodd-Frank Act added a new HOEPA trigger for loans with a 
prepayment penalty. Under the Dodd-Frank Act, HOEPA protections would 
be triggered where the creditor may charge a prepayment penalty more 
than 36 months after consummation, or if the penalty is greater than 2 
percent of the amount prepaid. High-cost mortgages, in turn, are 
prohibited from having prepayment penalties, so the prepayment penalty 
trigger effectively caps both the time period after consummation during 
which such a penalty may be charged and the amount of any such penalty.
a. Benefits and Costs to Consumers
    The proposed rule would potentially benefit a small number of 
consumers by potentially making it easier to refinance a high-cost 
mortgage. Prepayment penalties can prevent consumers from refinancing 
in circumstances where it would be advantageous for the consumer to do 
so as would be true if, for example, interest rates fall or the 
borrowers' credit score improves. The prepayment penalty trigger 
coupled with the prohibition on prepayment penalties would remove this 
barrier to obtaining a more favorable loan.
    The proposed rule may be particularly beneficial to borrowers that, 
in taking out a mortgage, under-estimate the likelihood that they will 
move or that more favorable terms might be available in the future so 
that refinancing would be advantageous. Likewise, eliminating 
prepayment penalties could benefit borrowers that select a loan based 
on terms that are immediately relevant or certain rather than costs and 
benefits of the loan terms that are uncertain or in the future.
    Nevertheless, the proposed rules regarding prepayment penalties 
would potentially result in some borrowers taking out a mortgage that 
is less favorable than they would if the proposed rule were not 
implemented. For example, this would be true for a borrower who is 
unlikely to move or refinance and may be willing to accept a prepayment 
penalty in exchange for a lower interest rate if a lender offered 
mortgage products with such a trade-off.\90\ The proposed rules 
regarding prepayment penalties could, more generally, reduce access to 
credit for some potential applicants if creditors that previously used 
such penalties to manage prepayment and interest-rate risk reduce 
lending or increase interest rates or fees as a result of the proposed 
rule.
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    \90\ At least for subprime loans, loans with a prepayment 
penalty tend to have lower interest rates. See, e.g., Oren Bar-Gill, 
The Law, Economics and Psychology of Subprime Mortgage Contracts, 94 
Cornell L. Rev. 1073-1152 (2009).
---------------------------------------------------------------------------

    At this time, the Bureau cannot quantify the extent to which 
lenders may restrict lending or increase fees or interest rates as a 
result of the proposed rule. To do so would require, among other 
information, comprehensive data on the terms and features--including 
details of any prepayment penalties--of mortgage contracts that 
creditors offer. The Bureau does not currently have such data. 
Similarly, the Bureau cannot quantify the share of borrowers or the 
costs to borrowers who may receive a less-favorable mortgage than if 
the proposed rule did not restrict prepayment penalties. Estimating 
these quantities would require not only data on the alternative 
mortgage contracts that borrowers might be offered but also information 
on how consumers value each of the alternative contracts.
    The Bureau believes that the potential benefits and costs to 
consumers of the high-cost mortgage prepayment penalty trigger, 
however, could be muted by other Dodd-Frank Act provisions related to 
ability-to-repay requirements that separately restrict such penalties 
for closed-end mortgage loans that are not qualified mortgages.\91\ For 
example, under the Dodd-Frank Act, most closed-end, dwelling-secured 
mortgage loans will generally be prohibited from having a prepayment 
penalty unless they are fixed-rate, non-higher-priced, qualified 
mortgages. Moreover, under the Dodd-Frank Act, even such qualifying 
closed-end mortgage loans may not have a prepayment penalty that 
exceeds three percent, two percent, or one percent of the amount 
prepaid during the first, second, and third years following

[[Page 49136]]

consummation, respectively (and no prepayment penalty thereafter). 
Finally, under the Dodd-Frank Act, prepayment penalties are included in 
the points and fees calculation for qualified mortgages. For qualified 
mortgages, points and fees are capped at three percent of the total 
loan amount, so unless a creditor originating a qualified mortgage can 
forgo some or all of the other charges that are included in the 
definition of points and fees, it necessarily will need to limit the 
amount of prepayment penalties that may be charged in connection with 
the loan.
---------------------------------------------------------------------------

    \91\ See 15 U.S.C. 1639c.
---------------------------------------------------------------------------

b. Costs to Covered Persons
    The proposed rule could increase the risk and, in turn, the costs 
that the likely small number of creditors that would make high-cost 
mortgages would assume in making such a loan. Prepayment penalties are 
one tool that creditors can use to manage prepayment and interest rate 
risk and to increase the likelihood that creditors recoup the costs of 
making the loan. The proposed rule would limit creditors' ability to 
manage prepayment and interest rate risk in this way, although 
creditors might be expected to adjust the contracts that they offer to 
at least partially offset any associated revenue loss. The Bureau notes 
that the costs to creditors associated with this component of the 
proposed rule could be muted by the effect of the other provisions of 
the Dodd-Frank Act that limit prepayment penalties, as discussed above.
4. New and Revised Restrictions and Requirements for High-Cost 
Mortgages
    The proposed rule also tightens existing restrictions for high-cost 
mortgages, including on balloon payments, acceleration clauses, and 
loan structuring to evade HOEPA and, as discussed above, bans 
prepayment penalties for high-cost mortgages. Further, the proposed 
rule adds new restrictions including limiting fees for late payments 
and fees for transmission of payoff statements; prohibiting fees for 
loan modification, payment deferral, renewal, or extension; prohibiting 
financing of prepayment penalties in a refinancing or of points and 
fees; and prohibiting recommended default. Finally, the rule provides 
for an expansion of the existing ability-to-repay requirement to open-
end credit plans and adds a requirement that a creditor receive 
certification that a borrower with a high-cost mortgage has received 
pre-loan homeownership counseling.
a. Benefits and Costs to Consumers
    Taken together, the proposed rules' requirements and restrictions 
would potentially have a variety of benefits to the likely small number 
of borrowers with a high-cost mortgage. These potential benefits 
include reducing the likelihood that a borrower would face unexpected 
payment increases, increasing the likelihood a borrower can refinance, 
and improving a borrower's ability to obtain a mortgage that is 
affordable and otherwise meets their needs.
    The restrictions on acceleration clauses, late fees, and fees for 
loan modification, payment deferral, renewal, or similar actions each 
reduce the likelihood of unanticipated payment increases. Steady, 
predictable payments may simplify consumers' budgeting and may 
particularly benefit borrowers with high-cost mortgages if, as might be 
expected, these borrowers tend to have fewer resources to draw upon to 
meet unanticipated payment increases. Although scheduled balloon 
payments may be more predictable than, say, a late fee, balloon 
payments may typically be much larger. The proposed rule's limits on 
balloon payments may reduce the likelihood that a borrower with 
insufficient financial assets to make the balloon payment feels 
pressure to refinance the loan, potentially at a higher interest rate 
or with new fees.
    Several of the requirements and restrictions may help borrowers to 
select the mortgage that best suits their needs. First, the requirement 
that the creditor assess the repayment ability of an applicant for a 
high-cost HELOC may help to ensure that the HELOC is affordable for the 
borrower. Second, the provision that prohibits a creditor from 
recommending that a consumer default on an existing loan in connection 
with closing a high-cost mortgage that refinances the existing loan 
would make it less likely that, because of a pending default, a 
borrower is pressured or constrained to consummate a mortgage, 
particularly one whose terms had changed unfavorably after the initial 
application. Third, by prohibiting financing of points and fees or a 
prepayment penalty as part of a refinance, the proposed rule could 
improve borrowers' ability to assess the costs of a given mortgage. In 
particular, the costs of points and fees or of a prepayment penalty may 
be less salient to borrowers if they are financed, because the cost is 
spread out over many years. When points and fees are instead paid up 
front, the costs may be more transparent for some borrowers, and 
consequently the borrower may more readily recognize a relatively high 
fee. Fourth, pre-loan counseling would potentially improve applicants' 
mortgage decision-making by improving applicants' understanding of loan 
terms. This benefit is qualitatively similar to the benefits of the 
HOEPA disclosure. Moreover, counseling may benefit a borrower by, for 
example, improving the borrower's assessment of his or her ability to 
meet the scheduled loan payments and by making the borrower aware of 
other alternatives (such as purchasing a different home or a different 
mortgage product). Finally, some applicants may find information on 
loan terms and features to be more useful or effective when delivered 
in a counseling setting rather than in paper form. Counseling could 
also complement the HOEPA disclosure by providing applicants an 
opportunity to resolve questions regarding information on the 
disclosure itself. In addition, in weighing the feasibility or merits 
of a loan, applicants may focus on the loan features that are most 
easily understood, most immediately relevant, or most certain; 
homeownership counseling could mitigate any bias in an applicant's 
decision-making by focusing either on less understood or less 
immediate, but still important, provisions.
    It is possible, however, that creditors would respond to the 
tighter restrictions on high-cost mortgages by increasing the cost of 
credit or even no longer extending loans to these borrowers. As noted 
above, however, to date the evidence suggests that restricting high-
cost lending may have only modest effects on the cost of credit and on 
the supply of credit, at least as measured by mortgage originations. 
Further, the pre-loan counseling requirement could impose costs on 
borrowers. Not only might the borrower have to pay for counseling, but 
the need to obtain counseling could conceivably delay the closing 
process, and such delay may be costly for some borrowers.
b. Benefits and Costs to Covered Persons
    Creditors that already assess a HELOC-borrower's ability to repay 
may benefit from the proposed rule's requirement that all creditors do 
so if creditors that currently do so gain market share as their 
competitors incur costs to meet this requirement. The requirement that 
a creditor receive certification that a borrower with a high-cost 
mortgage has received pre-loan homeownership counseling may benefit 
creditors by reducing the time that a creditor would need to spend to 
help a borrower select a mortgage or to answer a borrower's questions.

[[Page 49137]]

    In light of the tighter restrictions and requirements on high-cost 
mortgages, lenders may be less willing to make HOEPA loans. If so, then 
some creditors' revenues may decline by a likely small proportion 
either because they do not extend any credit to a borrower to whom they 
would have previously made a high-cost loan, or because they extend an 
alternative loan that does not qualify as a high-cost loan but that 
results in lower revenue.
    The Bureau seeks comment on the two proposed alternative 
definitions of balloon payments. Information provided by interested 
parties may inform the analysis of the impacts of this provision under 
the finalized rule.
    In some instances the potential impacts of these restrictions may 
extend beyond creditors. The proposed rule would extend the prohibition 
on recommended default to brokers as well as creditors, for example. 
This prohibition is expected to have little impact on covered persons 
because the Bureau believes that few, if any, creditors or brokers have 
a business model premised on recommending default on a loan to be 
refinanced as a HOEPA loan. The limits on various fees, detailed above, 
apply to servicers as well as creditors. Both of these sets of covered 
persons could incur revenue losses or greater costs if such fees are 
important risk management tools.
    The Bureau believes creditors would incur recordkeeping and data 
retention costs due to the proposed requirement that a creditor receive 
certification that a borrower received pre-loan counseling. Based on 
the estimation methodology for analyzing the paperwork burden 
associated with the proposed rule, the Bureau estimates that these 
costs to be roughly $600 in total for all creditors that make any high-
cost mortgages. These costs may be small relative to the quantity of 
other information that must be retained and that, under the proposed 
2012 TILA-RESPA rule, would generally be required to be retained in 
machine-readable format.
5. Counseling-Related Provisions for RESPA-Covered Loans and Negative-
Amortization Loans
    The proposed rule would include two additional provisions required 
by the Dodd-Frank Act related to homeownership counseling that apply to 
loans with negative amortization and loans covered by RESPA. First, the 
proposed rule would require lenders to provide a list of HUD-certified 
or -approved homeownership counselors or counseling organizations to 
applicants for all mortgages covered by RESPA, except where the lender 
has provided a list under HUD's HECM program. HECMs are currently 
subject to counseling and counselor-list requirements, so to avoid 
duplication and potential borrower confusion, the proposed rule's 
counselor-list requirement would not be applied to these mortgages.
    The proposed rule would also require that both HOEPA borrowers as 
well as first-time borrowers of loans that may result in negative 
amortization similarly receive a counselor list. However, HOEPA loans 
and negative-amortization loans are a subset of loans covered by RESPA, 
and the proposed counselor-list requirement for these types of loans 
would be satisfied by complying with the RESPA requirement. Therefore, 
there are no additional costs and benefits from the counselor-list 
requirements for either HOEPA loans or negative-amortization loans for 
first-time borrowers.
    With respect to first-time borrowers with a loan that could have 
negative amortization, the proposed rule would require that a creditor 
receive documentation that the borrower received homeownership 
counseling. The proposed rule would not specify any particular elements 
that must be included in the documentation.
a. Benefits and Costs to Consumers
    The two non-HOEPA homeownership counseling provisions included in 
the proposed rule would generally have benefits to consumers that are 
similar in nature to those of requiring that creditors receive 
certification that a borrower with a high-cost mortgage has received 
homeownership counseling. In particular, as discussed above, 
homeownership counseling may improve borrowers' understanding of their 
mortgages, it may complement the information provided in disclosures, 
and it could counteract any tendency among borrowers to consider only 
loan features that are most easily understood, most immediately 
relevant, or most certain.
    The proposed rule would not mandate counseling for potential 
borrowers of mortgages covered by RESPA, but requiring lenders to 
provide the list of homeownership counselors or counseling 
organizations may prompt some borrowers who were unaware of these 
resources (or of their geographic proximity) to seek homeownership 
counseling. This may especially be the case for borrowers who feel 
confused or overwhelmed by the information and disclosures provided by 
the lender.
    In contrast, the proposed rule would require that a creditor 
receive documentation that a first-time borrower that has applied for a 
loan that could have negative amortization has received homeownership 
counseling. First-time borrowers may particularly benefit from 
homeownership counseling if they have greater difficulty, relative to 
other borrowers, in understanding or assessing loan terms and features 
because they do not have experience with obtaining or paying on a 
mortgage.
    The Bureau believes that requiring applicants of loans covered by 
RESPA to receive a list of HUD-certified or -approved homeownership 
counselors or counseling organizations should not result in costs to 
consumers beyond those passed on by creditors. More specifically, the 
information contained on the list should be readily understandable, the 
time required of the borrower to receive the disclosure should be 
minimal, and borrowers may choose to not follow up on this information.
    First-time borrowers with a loan that may have negative 
amortization will likely have to pay for the counseling, either upfront 
or by financing the fee. In addition, counseling may be costly, at 
least in terms of time, for borrowers who do not find it helpful. In 
addition, the counseling requirement may impose delays on loan closing, 
which could be costly, for example, for a borrower who is contractually 
obligated to close on a home by a certain date.
b. Benefits and Costs to Covered Persons
    The Bureau believes that covered persons would incur costs from 
providing potential borrowers of loans covered by RESPA with a list of 
HUD-certified or approved homeownership counselors or counseling 
organizations but that these costs are likely less than one dollar per 
application. The Bureau expects that the list would be a single page 
and that it would be provided with other materials that the lender is 
required to provide. In addition, the Bureau expects to create a Web 
site portal to make it easy for lenders and consumers to obtain lists 
of homeownership counselors in their areas, and the Bureau solicits 
comments on alternative measures that the Bureau could take to minimize 
the compliance burden associated with producing and providing the 
counselor list.
    The Bureau also believes that the costs of obtaining documentation 
that a first-time borrower with a negative-amortization loan has 
obtained counseling are likely small because such loans should be quite 
rare. Not only are loans with negative-amortization features uncommon, 
but also the provision would apply only to first-time

[[Page 49138]]

borrowers for such loans.\92\ Further, the creditor would only be 
required to receive the documentation of counseling. For these reasons, 
the Bureau believes that the burden to creditors would be minimal.
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    \92\ Data from the 2007 Survey of Consumer Finances (SCF), the 
most recent survey year available at the time this analysis was 
conducted, indicate that only 0.3 percent of mortgages in 2007 
reportedly had negative-amortization features. This estimate is only 
suggestive because it is an estimate of the stock, rather than the 
flow, of mortgages with such features. That said, given changes in 
the mortgage market since 2007, the Bureau believes it is likely the 
case that mortgages that may potentially negatively amortize likely 
have become even rarer since 2007. The 2007 estimate is lower than 
estimates from the prior six waves of the SCF, which ranged from 1.3 
to 2.3 percent.
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    As discussed in the section-by-section analysis above, the proposed 
counseling requirements for high-cost mortgage borrowers differ from 
the counseling requirements for mortgages that may result in negative 
amortization. For creditors that extend both high-cost mortgages and 
loans that may negatively amortize, the Bureau recognizes that 
creditors may incur costs from having to ensure compliance with 
differing counseling requirements. These costs may include requiring 
additional staff training. The Bureau solicits comment on whether 
conforming the counseling requirements for mortgages that may result in 
negative amortization with the counseling requirements for high-cost 
mortgages would help ease compliance burdens on creditors.
    Creditors may benefit from these two counseling-related provisions 
by gaining market share relative to creditors that do not provide clear 
and complete information to borrowers regarding loan terms. This could 
occur if, as a result of counseling, applicants to such a creditor 
obtained a better understanding of the loan offer and were less likely 
to accept it.

E. Potential Specific Impacts of the Proposed Rule

1. Depository Institutions and Credit Unions with $10 Billion or Less 
in Total Assets, As Described in Section 1026
    The Bureau does not expect the proposed rule to have a unique 
impact on depository institutions and credit unions with $10 billion or 
less in total assets as described in Section 1026. As noted above, 
although not all creditors report in HMDA, those data suggest that the 
vast majority of creditors do not make any HOEPA loans. The Bureau 
expects this would be the case under the proposed rule as well, so few 
institutions would likely be directly impacted by the proposed rule. As 
might be expected given the fact that most depository institutions that 
make mortgage loans (almost 99 percent of the universe of depository 
institutions that make any closed-end mortgage loans or HELOCs) are 
estimated to have less than $10 billion in total assets, the estimated 
share of these lenders that currently make any closed-end HOEPA loans 
of 6-7 percent is essentially identical to the estimate for all 
depository institutions. Likewise, about 9-10 percent of depository 
institutions and credit unions with $10 billion or less in total assets 
are predicted to make any HOEPA loans under the proposed rule, a 
fraction just a bit below the estimated 10-11 percent for all 
depository institutions and credit unions. The impact of the proposed 
rule on depository institutions and credit unions may vary based on the 
types of loans that an institution makes currently including, for 
example, the share of mortgage lending comprised of purchase money 
mortgages and HELOCs relative to closed-end refinance and home-
improvement loans.
2. Impact of the Proposed Provisions on Consumers in Rural Areas
    The impact of the proposed rule on consumers in rural areas may 
differ from those for consumers located in urban areas for several 
reasons. First, rural borrowers may have fewer creditors that they 
readily comparison shop among. A potential reduction in lending for 
newly classified HOEPA loans may therefore have a greater impact in 
rural areas, and a rural borrower that is offered a high-cost mortgage 
may be less able to obtain a non-HOEPA loan from a different lender. 
Moreover, mobile homes are more common in rural areas; nearly 16 
percent of housing units in rural areas are mobile homes compared to 
less than four percent of housing units in urban areas.\93\ From 
outreach, the Bureau understands that loans for manufactured housing 
typically have higher interest rates and therefore may be more likely 
than other mortgages to exceed the revised interest rate trigger. HMDA 
data suggest this is likely to be the case, since the share of home 
improvement or refinance loans (those types of loans currently covered 
by HOEPA) that are identified as HOEPA loans in those data is about 2-3 
percent for loans secured by a manufactured home compared with about 
0.05 percent of loans secured by other types of 1-4 family homes, for 
example. In addition, the HMDA data do not include lenders that do not 
have a branch in a metropolitan statistical area. These data, which 
inform the analysis of the proposed rule, are therefore unlikely to be 
representative of rural mortgage transactions. For these reasons, the 
Bureau requests that interested parties provide data or information on 
the impact of the proposed rule on consumers in rural areas.
---------------------------------------------------------------------------

    \93\ Estimates are five-year estimates from the 2006-2010 
American Community Surveys (http://factfinder2.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ACS_10_5YR_GCT2501.US26&prodType=table).
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F. Additional Analysis Being Considered and Request for Information

    The Bureau will further consider the benefits, costs and impacts of 
the proposed provisions and additional proposed modifications before 
finalizing the proposal. As noted above, there are a number of areas 
where additional information would allow the Bureau to better estimate 
the benefits, costs, and impacts of this proposal and more fully inform 
the rulemaking. The Bureau asks interested parties to provide comment 
or data on various aspects of the proposed rule, as detailed in the 
section-by-section analysis. The most significant of these include 
information or data addressing:
     Measures to account for potential adoption of a broader 
definition of finance charge, as separately proposed in the Bureau's 
2012 TILA-RESPA Proposal;
     The two proposed alternative definitions of a balloon 
payment;
     Whether conforming the counseling requirements for 
negative-amortization loans with those for high-cost mortgages would 
reduce compliance burdens;
     Whether data speak to the distribution of loan terms and 
features of HELOCs as well as information or data on how provisions in 
the proposed rule may affect the share of HELOCs that meet the post-
Dodd-Frank Act triggers compared to the share of closed-end mortgage 
loans that meet these triggers;
     Whether certain types of compensation paid to originators 
of open-end credit plans should be included in the definition of points 
and fees for open-end credit plans; and
     Whether the homeownership counselor list for loans covered 
by Regulation X should be required to be given to applicants for all 
federally related mortgage loans, i.e., including refinances and home-
equity lines of credit, in addition to applicants for purchase money 
mortgages.

Information provided by interested parties regarding these and other 
aspects of the proposed rule may be considered in the analysis of the 
costs and benefits of the final rule.

    To supplement the information discussed in in this preamble and any

[[Page 49139]]

information that the Bureau may receive from commenters, the Bureau is 
currently working to gather additional data that may be relevant to 
this and other mortgage related rulemakings. These data may include 
additional data from the National Mortgage License System (NMLS) and 
the NMLS Mortgage Call Report, loan file extracts from various lenders, 
and data from the pilot phases of the National Mortgage Database. The 
Bureau expects that each of these datasets will be confidential. This 
section now describes each dataset in turn.
    First, as the sole system supporting licensure/registration of 
mortgage companies for 53 agencies for states and territories and 
mortgage loan originators under the Secure and Fair Enforcement for 
Mortgage Licensing Act of 2008 (SAFE Act), NMLS contains basic 
identifying information for non-depository mortgage loan origination 
companies. Firms that hold a State license or State registration 
through NMLS are required to complete either a standard or expanded 
Mortgage Call Report (MCR). The Standard MCR includes data on each 
firm's residential mortgage loan activity including applications, 
closed loans, individual mortgage loan originator activity, line of 
credit and other data repurchase information by state. It also includes 
financial information at the company level. The expanded report 
collects more detailed information in each of these areas for those 
firms that sell to Fannie Mae or Freddie Mac.\94\ To date, the Bureau 
has received basic data on the firms in the NMLS and de-identified data 
and tabulations of data from the Mortgage Call Report. These data were 
used, along with data from HMDA, to help estimate the number and 
characteristics of non-depository institutions active in various 
mortgage activities. In the near future, the Bureau may receive 
additional data on loan activity and financial information from the 
NMLS including loan activity and financial information for identified 
lenders. The Bureau anticipates that these data will provide additional 
information about the number, size, type, and level of activity for 
non-depository lenders engaging in various mortgage origination and 
servicing activities. As such, it supplements the Bureau's current data 
for non-depository institutions reported in HMDA and the data already 
received from NMLS. For example, these new data will include 
information about the number and size of closed-end first and second 
loans originated, fees earned from origination activity, levels of 
servicing, revenue estimates for each firm and other information. The 
Bureau may compile some simple counts and tabulations and conduct some 
basic statistical modeling to better model the levels of various 
activities at various types of firms. In particular, the information 
from the NMLS and the MCR may help the Bureau refine its estimates of 
benefits, costs, and impacts for each of the revisions to the GFE and 
HUD-1 disclosure forms, changes to the HOEPA thresholds, changes to 
requirements for appraisals, updates to loan originator compensation 
rules, proposed new servicing requirements and the new ability to pay 
standards.
---------------------------------------------------------------------------

    \94\ More information about the Mortgage Call Report can be 
found at http://mortgage.nationwidelicensingsystem.org/slr/common/mcr/Pages/default.aspx.
---------------------------------------------------------------------------

    Second, the Bureau is working to obtain a random selection of loan-
level data from a handful of lenders. The Bureau intends to request 
loan file data from lenders of various sizes and geographic locations 
to construct a representative dataset. In particular, the Bureau will 
request a random sample of ``GFEs'' and ``HUD-1'' forms from loan files 
for closed-end mortgage loans. These forms include data on some or all 
loan characteristics including settlement charges, origination charges, 
appraisal fees, flood certifications, mortgage insurance premiums, 
homeowner's insurance, title charges, balloon payment, prepayment 
penalties, origination charges, and credit charges or points. Through 
conversations with industry, the Bureau believes that such loan files 
exist in standard electronic formats allowing for the creation of a 
representative sample for analysis. The Bureau may use these data to 
further measure the impacts of certain proposed changes. Calculations 
of various categories of settlement and origination charges may help 
the Bureau calculate the various impacts of proposed changes to the 
definitions of finance charges and other aspects of the proposal, 
including proposed changes in the number and characteristics of loans 
that exceed the HOEPA thresholds, loans that would meet the high rate 
or high risk definitions mandating additional consumer protections, and 
loans that meet the points and fees thresholds contained in the 
ability-to-repay provisions of the Dodd-Frank Act.
    Third, the Bureau may also use data from the pilot phases of the 
National Mortgage Database (NMDB) to refine its proposals and/or its 
assessments of the benefits costs and impacts of these proposals. The 
NMDB is a comprehensive database, currently under development, of loan-
level information on first lien single-family mortgages. It is designed 
to be a nationally representative sample (1 percent) and contains data 
derived from credit reporting agency data and other administrative 
sources along with data from surveys of mortgage borrowers. The first 
two pilot phases, conducted over the past two years, vetted the data 
development process, successfully pretested the survey component and 
produced a prototype dataset. The initial pilot phases validated that 
credit repository data are both accurate and comprehensive and that the 
survey component yields a representative sample and a sufficient 
response rate. A third pilot is currently being conducted with the 
survey being mailed to holders of five thousand newly originated 
mortgages sampled from the prototype NMDB. Based on the 2011 pilot, a 
response rate of fifty percent or higher is expected. These survey data 
will be combined with the credit repository information of non-
respondents, and then deidentified. Credit repository data will be used 
to minimize non-response bias, and attempts will be made to impute 
missing values. The data from the third pilot will not be made public. 
However, to the extent possible, the data may be analyzed to assist the 
CFPB in its regulatory activities and these analyses will be made 
publically available.
    The survey data from the pilots may be used by the Bureau to 
analyze consumers shopping behavior regarding mortgages. For instance, 
the Bureau may calculate the number of consumers who use brokers, the 
number of lenders contacted by borrowers, how often and with what 
patterns potential borrowers switch lenders, and other behaviors. 
Questions may also assess borrowers understanding of their loan terms 
and the various charges involved with origination. Tabulations of the 
survey data for various populations and simple regression techniques 
may be used to help the Bureau with its analysis.
    In addition to the comment solicited elsewhere in this proposed 
rule, the Bureau requests commenters to submit data and to provide 
suggestions for additional data to assess the issues discussed above 
and other potential benefits, costs, and impacts of the proposed rule. 
The Bureau also requests comment on the use of the data described 
above. Further, the Bureau seeks information or data on the proposed 
rule's potential impact on consumers in rural areas as compared to 
consumers in urban areas. The Bureau also seeks information or data on 
the potential impact of the proposed rule on depository institutions 
and credit

[[Page 49140]]

unions with total assets of $10 billion or less as described in Dodd-
Frank Act section 1026 as compared to depository institutions and 
credit unions with assets that exceed this threshold and their 
affiliates.

VII. Regulatory Flexibility Analysis

    The Regulatory Flexibility Act (RFA) generally requires an agency 
to conduct an initial regulatory flexibility analysis (IRFA) and a 
final regulatory flexibility analysis (FRFA) of any rule subject to 
notice-and-comment rulemaking requirements, unless the agency certifies 
that the rule will not have a significant economic impact on a 
substantial number of small entities.\95\ 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.\96\
---------------------------------------------------------------------------

    \95\ 5 U.S.C. 601 et seq.
    \96\ 5 U.S.C. 609.
---------------------------------------------------------------------------

    An IRFA is not required for this proposal because the proposal, if 
adopted, would not have a significant economic impact on a substantial 
number of small entities.

A. Overview of Analysis and Data

    The analysis below evaluates the potential economic impact of the 
proposed rule on small entities as defined by the RFA.\97\ It considers 
effects of the revised APR and points-and-fees triggers and of the 
extension of HOEPA coverage to purchase money mortgages and HELOCs. In 
addition, the analysis considers the impact of the two non-HOEPA 
counseling-related provisions which would be implemented as part of the 
proposed rule. The analysis does not consider the interaction between 
State anti-predatory lending laws and HOEPA. The Bureau notes that 
State statutes that place tighter restrictions on high-cost mortgages 
than either current or amended HOPEA may reduce the economic impact of 
the proposed rule.\98\
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    \97\ For purposes of assessing the impacts of the proposed rule 
on small entities, ``small entities'' is defined in the RFA to 
include small businesses, small not-for-profit organizations, and 
small government jurisdictions. 5 U.S.C. 601(6). A ``small 
business'' is determined by application of Small Business 
Administration regulations and reference to the North American 
Industry Classification System (``NAICS'') classifications and size 
standards. 5 U.S.C. 601(3). A ``small organization'' is any ``not-
for-profit enterprise which is independently owned and operated and 
is not dominant in its field.'' 5 U.S.C. 601(4). A ``small 
governmental jurisdiction'' is the government of a city, county, 
town, township, village, school district, or special district with a 
population of less than 50,000. 5 U.S.C. 601(5).
    \98\ In its analysis of a proposed change to the definition of 
finance charge, the Board noted that, at least as of 2009, only 
Illinois, Maryland, and Washington, DC had APR triggers below the 
then-existing HOEPA APR trigger for first-lien mortgage loans. 74 FR 
43232, 43244 (Aug. 26, 2009).
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    The analysis below uses a pre-statute baseline--except for one of 
the aspects of the rule over which the Bureau lacks discretion.\99\ The 
Bureau does not have discretion over whether to extend HOEPA to 
purchase money mortgage loans and HELOCs. Lenders today generally have 
processes and often software systems to determine whether a loan is a 
HOEPA loan. Lenders will have to update these processes and systems to 
determine whether a purchase money mortgage loan or HELOC is a HOEPA 
loan. The cost of determining whether a loan is a HOEPA loan is 
therefore unavoidable under the statute.
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    \99\ The Bureau notes that the HOEPA amendments of the Dodd-
Frank Act are self-effectuating and that the Dodd-Frank Act does not 
require the Bureau to promulgate a regulation. Viewed from this 
perspective, the proposal reduces burdens by clarifying statutory 
ambiguities that may impose costs such as increased costs for 
attorneys and compliance officers, over-compliance, and unnecessary 
litigation.
---------------------------------------------------------------------------

    The analysis considers the impact of the proposed rule's revisions 
to HOEPA on closed-end lending by depository institutions (DIs), 
closed-end lending by non-depositories (non-DIs), and home equity lines 
of credit separately because these components of the analysis 
necessarily rely on different data sources. The starting point for much 
of the analysis of closed-end lending is loan-level data reported under 
the Home Mortgage Disclosure Act (HMDA).\100\ The HMDA data include 
information on high-cost mortgage lending under the current HOEPA 
triggers, but some creditors are exempt from reporting to HMDA.\101\ 
For exempt DIs, the Bureau estimates the extent of creditors' high-
cost, closed-end lending under the current and post-Dodd Frank Act 
triggers based on Call Report data (which are available for all DIs). 
For exempt non-DIs, the Bureau supplements data on non-depositories 
that report in HMDA with data from the Nationwide Mortgage Licensing 
System and Registry Mortgage Call Report (NMLS/MCR).\102\ The Bureau 
does not have comprehensive loan-level data for HELOCs comparable to 
the HMDA data for closed-end mortgage loans, and this portion of the 
analysis draws on Call Report data as well as data from the 2007 Survey 
of Consumer Finances (SCF).\103\ Finally, in all cases the Bureau notes 
that it is not aware of representative quantitative data on prepayment 
penalties, but available evidence suggests that this new trigger would 
have little impact on HOPEA coverage.\104\
---------------------------------------------------------------------------

    \100\ 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.
    \101\ Depository institutions with assets less than $39 million 
(in 2010), for example, and those with branches exclusively in non-
metropolitan areas and those that make no purchase money mortgage 
loans are not required to report to HMDA. Reporting requirements for 
non-depository institutions depend on several factors, including 
whether the company made fewer than 100 purchase money or refinance 
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.
    \102\ 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, the number and dollar amount of loans 
brokered, and on HOEPA originations. The analysis in this part draws 
on HMDA and NMLS/MCR data by classifying non-depository institutions 
with similar reported amounts of originations and of HOEPA lending 
in the two data sets.
    \103\ The Bureau assumes that few, if any, non-DIs originate 
HELOCs due to lack of funding for lines of credit and lack of access 
to the payment system. Data from the 2010 SCF will be available for 
analysis in connection with the final rule.
    \104\ Trends and aggregate statistics suggest that loans 
originated in recent years are very unlikely to have prepayment 
penalties for two reasons. First, prepayment penalties were most 
common on subprime and near-prime loans, a market that has 
disappeared. Second, by one estimate, nearly 90 percent of 2010 
originations were purchased by Fannie Mae or Freddie Mac or were FHA 
or VA loans (Tamara Keith, ``What's Next for Fannie, Freddie? Hard 
to Say,'' February 10, 2011, available at http://www.npr.org/2011/02/10/133636987/whats-next-for-fannie-freddie-hard-to-say). Fannie 
Mae and Freddie Mac purchase very few loans with prepayment 
penalties--in a random sample of loans from the FHFA's Historical 
Loan Performance data, a very small percentage of loans originated 
between 1997 and 2011 had a prepayment penalty. Finally, the Bureau 
believes that prepayment penalties that would trigger HOEPA coverage 
would be rare, because other Dodd-Frank Act provisions concerning 
ability to repay requirements and ``qualified mortgages'' will 
separately restrict such penalties.
---------------------------------------------------------------------------

    As a measure of the potential impact of the proposed rule, the 
analysis considers the potential share of revenue a creditor may forgo 
if it were to make no high-cost mortgages.\105\ The Bureau believes 
that this approach very likely provides a conservative upper bound on 
the effects on creditors' revenues, since some of the new loans 
potentially subject to HOEPA coverage might still be made (either as 
high-cost mortgages or with alternative terms to avoid the HOEPA 
triggers). The Bureau notes that

[[Page 49141]]

at least some creditors currently extend HOEPA loans. Further, 
creditors may still make some loans that might otherwise meet the new 
HOEPA triggers by changing the loan terms to avoid being a high-cost 
mortgage (though perhaps with a partial revenue loss).\106\ Moreover, 
this approach is consistent with the possibility that some creditors 
may be less willing to make high-cost mortgages in the future due to 
new and revised restrictions on HOEPA loans, but the Bureau believes 
that any such effect on creditors' willingness to extend HOEPA loans 
likely is small.\107\
---------------------------------------------------------------------------

    \105\ 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 a feasible alternative numerical 
measure would be more appropriate for financial firms.
    \106\ By the same token, the analysis also implicitly assumes 
that creditors that do not currently make HOEPA loans will not 
rethink their policies and make HOEPA loans in the future. Although 
it seems the less likely concern, the Bureau notes that creditors 
could change their policies if a large share of creditors' 
originations would now meet the HOEPA thresholds.
    \107\ The Bureau has proposed separately in the 2012 TILA-RESPA 
Proposal to expand the definition of the finance charge. If that 
change is adopted, it would be expected to increase the number of 
loans classified as high-cost mortgages under HOEPA's APR and 
points-and-fees tests separate and independent from the statutory 
changes to the APR triggers. The Bureau notes that it has accounted 
for the impacts of this potential change in the 2012 TILA-RESPA 
Proposal, including in that Proposal's Initial Regulatory 
Flexibility Analysis and Small Business Review Panel Process. In 
connection with the proposed definition change, the Bureau seeks 
comment in this proposal on whether to modify the triggers, 
including by using the TCR in place of the APR, to approximately 
offset the impact of a broader definition of finance charge on HOEPA 
coverage levels. As discussed in the Dodd-Frank Act section 1022 
analysis, adoption of those adjustments might impose some one-time 
implementation costs and compliance complexity, but the Bureau 
believes adoption of the proposed modifications would as a whole 
reduce the economic impacts on creditors of the more expansive 
definition of finance charge proposed in the 2012 TILA-RESPA 
Proposal.
---------------------------------------------------------------------------

B. Overview of Market for High-Cost Mortgages

    HOEPA loans comprise a small share of total mortgage loans. HMDA 
data indicate that less than one percent of loans meet the current 
HOEPA triggers and that this share has generally declined over 
time.\108\ Between 2004 and 2010, HOEPA loans typically comprised about 
0.2 percent of originations of home-secured refinance or home-
improvement loans made by creditors that report in HMDA. This fraction 
peaked at 0.44 percent in 2005 and fell to 0.06 percent by 2010.\109\ 
Similarly, few creditors originate HOEPA loans. The number of creditors 
extending HOEPA loans ranged between about 1,000 and 2,300 over the 
2004 and 2009 period, or between 12 and 27 percent of creditors. 
However, only about 650 creditors in HMDA, or roughly eight percent of 
creditors in HMDA, reported any HOEPA loans in 2010.\110\
---------------------------------------------------------------------------

    \108\ The information on whether a loan was a HOEPA loan has 
been collected in HMDA since 2004.
    \109\ These percentages correspond to nearly 36,000 loans in 
2005 and roughly 3,400 loans in 2010.
    \110\ The statistics for 2004-2009 are drawn from Federal 
Reserve Bulletin articles that summarize the HMDA data each year. In 
contrast, the 2010 numbers are based on the analysis of 2010 HMDA 
data and may differ slightly from those presented in the Bulletin 
article that summarizes the 2010 HMDA data due to subsequent data 
revisions and small differences in definitions (e.g., not counting a 
loan as a HOEPA loan even if it is flagged as a HOEPA loan if it 
appears ineligible to be a HOEPA loan because the property is not 
owner-occupied.)
---------------------------------------------------------------------------

C. Number and Classes of Affected Entities

    Around half of commercial banks and thrifts meet the Small Business 
Administration's definition of small entities, and the large majority 
of these institutions originate mortgages (Table 1). By comparison, 
almost 90 percent of credit unions are small entities, but about 40 
percent of credit unions have no closed-end mortgage originations. 
About 90 percent of non-DI mortgage originators have revenues below the 
relevant Small Business Administration threshold.\111\
---------------------------------------------------------------------------

    \111\ The Bureau expects that the economic impact of the 
proposed rule on mortgage brokers that are small entities (for 
example, from prohibiting brokers from recommending default) would 
not be significant.

                                     Table 1--Estimated Number of Affected Entities and Small Entities by NAICS Code
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                          Entities that originate closed-
                                                                                               Total           Small               end mortgages
                                                NAICS         Small entity threshold         entities        entities    -------------------------------
                                                                                                                               Total           Small
--------------------------------------------------------------------------------------------------------------------------------------------------------
Depository institutions                      ...........  ..............................  ..............  ..............  ..............  ..............
    Commercial banks.......................       522110  $175M assets..................           6,596           3,764           6,362           3,597
    Savings institutions \a\...............       522120  $175M assets..................           1,145             491            1138             487
    Credit unions \b\......................       522130  $175M assets..................           7,491           6,569           4,359           3,441
Non-depository institutions                  ...........  ..............................  ..............  ..............  ..............  ..............
    Mortgage companies \c\.................       522292  $7M revenues..................           2,515           2,282           2,515           2,282
--------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ Asset size obtained from December 2010 Call Report data as compiled by SNL Financial. Savings institutions include thrifts, savings banks, mutual
  banks, and similar institutions. Estimated number of creditors originating any closed-end mortgages based on 2010 HMDA data and, for entities that do
  not report to HMDA, loan counts are projected based on Call Report data.
\b\ Asset size and engagement in closed-end mortgage loans obtained from December 2010 National Credit Union Administration Call Report. Count of credit
  unions engaged in closed-end mortgage transactions may include some institutions that make only first-lien open-end loans.
\c\ Estimates are based on the NMLS/MCR data for Q2 and Q3 of 2011. Entities that report to MCR are considered to originate mortgages if they report
  either: (1) Originating at least one closed-end mortgage; or (2) a positive dollar value of originated loans. To estimate the number of small
  entities, revenue for entities that did not report revenue is estimated based on the dollar value and number of loans originated and the dollar value
  and number of loans brokered. Revenue is not reported for 78 percent of mortgage companies in the MCR data, so the estimated number of small entities
  may contain substantial estimation uncertainty and may be more sensitive to model specification than if revenue were available for a larger fraction
  of entities.

D. Impact of Revised Triggers on Depository Institutions

1. Closed-End HOEPA Lending by Small Depository Institutions
    To assess the proposed rule's impacts, the analysis aims to 
estimate the counterfactual set of loans that would have met the 
definition of a HOEPA loan if the revised triggers had been in effect 
in 2010.\112\ One can readily

[[Page 49142]]

identify 2010 HMDA loans that would have met the revised APR triggers 
based on information in the HMDA data. In contrast, the Bureau is not 
aware of an approach to directly determine whether a loan in the 2010 
HMDA data would meet the revised points-and-fees trigger and, hence, 
whether the loan would have been flagged as a HOEPA loan. To overcome 
this data limitation, the Bureau modeled the probability that a loan 
would have been flagged as a HOEPA loan in HMDA as a function of: (i) 
the loan amount and (ii) the difference between the loan's APR and the 
APR trigger.\113\
---------------------------------------------------------------------------

    \112\ The HMDA data contain a flag which indicates whether a 
loan was classified as a HOEPA loan as well as a variable that 
reports the spread between the loan's APR and the APOR for higher-
priced mortgage loans. Higher-priced mortgage loans are first-liens 
for which this spread is at least 1.5 percentage points and 
subordinate liens with a spread of 3.5 percentage points or greater. 
Importantly, the ``higher-priced'' mortgage loan thresholds are well 
below the APR triggers for HOEPA. The spread is calculated as of the 
date the loan's rate was set. Based on these variables, the analysis 
defines as a high-cost mortgage any HMDA loan that is either flagged 
as a HOEPA loan or that has an estimated APR spread that exceeds the 
relevant HOEPA trigger. The current HOEPA APR trigger is relative to 
a comparable Treasury security, but the reported spread in HMDA is 
relative to APOR, so it is not possible to determine with certainty 
whether a HMDA loan meets the current APR trigger, and not all loans 
that are estimated to be above the APR trigger are flagged as HOEPA 
loans. The Bureau also considered a narrower definition of a high-
cost mortgage, namely, any loan that was identified as a HOEPA loan 
in the HMDA data. Conclusions based on this alternative definition 
are qualitatively similar to those under the primary, more 
conservative definition described above.
    \113\ The statistical model also includes creditor-specific 
fixed effects, which are intended to capture systematic unobserved 
differences across creditors that affect the share of a creditor's 
total loans that are HOEPA loans. The model captures the effect of 
the changes in the APR triggers through the fact that the gap 
between the triggers and APR would generally narrow, which increases 
the estimated probability that a loan would have been flagged as a 
high-cost loan. Modeling the probability as a function of loan size 
indirectly approximates the effect of the Dodd-Frank Act revisions 
to the points-and-fees triggers. More specifically, the points-and-
fees trigger is defined, in part, based on points and fees as a 
percentage of the loan amount, so that, given two loans with 
identical points and fees, the loan with a smaller loan amount 
should be more likely to be flagged as a HOEPA loan. Indeed, HOEPA 
loans are more prevalent for loans with smaller loan amounts in 
HMDA. Thus, this appears to provide a reasonable approach to 
capturing variation in the likelihood that a loan is a HOEPA loan. 
Nonetheless, the Bureau solicits information or data (including data 
on points and fees or on prepayment penalties) from interested 
parties that could be used to refine or evaluate this approximation.
---------------------------------------------------------------------------

    The changes to the APR and points-and-fees triggers are estimated 
to increase the share of loans made by HMDA-reporters and potentially 
subject to HOEPA that are classified as high-cost mortgages from 0.06 
percent of loans to 0.3 percent.\114\ Under the current HOEPA 
regulations, fewer than five percent of small depository institutions 
are estimated to make any HOEPA loans, and only about 0.2 percent of 
small DIs are estimated to have made at least 10 HOEPA loans in 2010 
(Table 2). As expected, the estimates imply that the shares of lenders 
would have been larger if the revised triggers had been in place. 
Nevertheless, by these estimates, HOEPA loans would have remained a 
small fraction of closed-end originations by small DIs, and the vast 
majority of small DIs would have made no HOEPA loans under the revised 
triggers.
---------------------------------------------------------------------------

    \114\ Loans potentially subject to HOEPA coverage in this 
context are loans for non-business purposes secured by a lien on an 
owner-occupied 1-4 family property, including manufactured homes. In 
addition, the estimate of the share of loans subject to HOEPA 
coverage currently excludes purchase money mortgages, which are 
included in the estimate of this share under the proposed rule.

    Table 2--Estimated Number of Small DIs That Originate Any HOEPA Loans or 10 or More HOEPA Loans Under the
                                       Current and Revised HOEPA Triggers
----------------------------------------------------------------------------------------------------------------
                                                                  Pre-Dodd- Frank Act      Post-Dodd- Frank Act
----------------------------------------------------------------------------------------------------------------
Estimated number that make any HOEPA loans....................                      505                      655
    Percent of small depository institutions..................                     4.7%                     6.1%
Estimated number that make 10 or more HOEPA loans.............                       24                       50
    Percent of small depository institutions..................                     0.2%                     0.5%
----------------------------------------------------------------------------------------------------------------

2. Costs to Small Depository Institutions From Changes in Closed-End 
Originations
    To gauge the potential effect of the Dodd-Frank Act amendments to 
HOEPA related to high-cost, closed-end mortgage loans, the Bureau 
approximates the potential revenue loss to DIs that report in HMDA 
based on the estimated share, from HMDA, of home-secured loan 
originations that would be high-cost mortgage loans and the share of 
total income (for banks and
    thrifts) or total outstanding balances (for credit unions) 
accounted for by mortgage loans based on Call Report data.\115\
---------------------------------------------------------------------------

    \115\ Data on interest and fee income are not available in the 
credit union Call Report data. This calculation assumes that 
interest and fee income for HOEPA and non-HOEPA loans are comparable 
at banks and thrifts and assumes that the share of outstanding 
balances accounted for by mortgages is a reasonable proxy for the 
share of mortgage revenue for a given credit union.
---------------------------------------------------------------------------

    The Bureau estimates that high-cost closed-end mortgage loans 
account for just a fraction of revenue for most small DIs under both 
the current and revised triggers (Table 3). The Bureau estimates that, 
post-Dodd-Frank Act, four percent of small DIs might lose more than one 
percent of revenue, compared with 1.5 percent of small DIs under the 
current triggers. At most, about one percent of small DIs would have 
revenue losses greater than three percent if these creditors chose to 
make no high-cost, closed-end mortgage loans.

 Table 3--Estimated Revenue Shares Attributable to High-Cost, Closed-End Mortgage Lending for Small DIs Pre- and
                                               Post-Dodd-Frank Act
----------------------------------------------------------------------------------------------------------------
                                                                  Pre-Dodd- Frank Act      Post-Dodd- Frank Act
----------------------------------------------------------------------------------------------------------------
Number with HOEPA revenue share >1% \a\.......................                      162                      429
    Percent of small depositories.............................                     1.5%                     4.0%
Number with HOEPA revenue share >3% \a\.......................                       36                      102

[[Page 49143]]

 
    Percent of small depositories.............................                     0.3%                     0.9%
----------------------------------------------------------------------------------------------------------------
\a\ Revenue shares for commercial banks and savings institutions are based on interest and fee income from loans
  secured by 1-4 family homes (including home equity lines of credit, which cannot be distinguished) as a share
  of total interest and non-interest income. NCUA Call Report data for credit unions do not contain direct
  measures of income from mortgages and other sources, so the mortgage revenue share is assumed to be
  proportional to the dollar value of closed- and open-end real-estate loans and lines of credit as a share of
  total outstanding balances on loans and leases.

3. Open-End HOEPA Lending by Small Depository Institutions
    Call Report data for banks and thrifts indicate that nearly all 
banks and thrifts that make home-equity lines of credit also make 
closed-end mortgage loans, so the estimated numbers of affected 
entities are essentially identical to those shown in the first two rows 
of Table 1.\116\ Based on the credit union Call Report data, the Bureau 
estimates that 268 credit unions--all of which were small entities--
originated HELOCs but no closed-end mortgage loans in 2010. Thus, the 
Bureau estimates that 4,627 credit unions and 3,709 small credit unions 
would potentially be affected by either the changes to closed-end 
triggers or the extension of HOEPA to home equity lines of credit. With 
regard to non-DIs, the Bureau estimates that few, if any, non-DIs that 
are small entities make HELOCs because non-DIs generally are less 
likely to be able to fund lines of credit and to have access to the 
payment system.
---------------------------------------------------------------------------

    \116\ Nine of the 5,512 commercial banks and savings 
institutions with outstanding revolving mortgage receivables 
reported no outstanding closed-end receivables and are estimated to 
have made no closed-end loans. Five of these were small 
depositories.
---------------------------------------------------------------------------

4. Effect of the Dodd-Frank Act on Open-End HOEPA Lending
    HELOCs account for more than ten percent of the value of 
outstanding loans and leases for about 12-13 percent of small DIs, and 
they comprise more than one-quarter of outstanding balances on loans 
and leases for only about 2-3 percent of small DIs (Table 4).

 Table 4--HELOCs Represent a Modest Portion of Most Small Depositories'
                                 Lending
------------------------------------------------------------------------
                                      Percent of DIs
                                           \a\         Number of DIs \a\
------------------------------------------------------------------------
HELOCs > 10% of all loans/leases..          11.9-13.4        1,286-1,451
HELOCs > 25% of all loans/leases..            2.3-2.9            251-319
------------------------------------------------------------------------
\a\ First-lien HELOCs cannot be distinguished from other first liens in
  the credit union Call Report data. The ranges reflect alternative
  assumptions on the value of credit union's HELOC receivables: the
  lower bound assumes that no first liens are HELOCs, and the upper
  bound assumes that all adjustable-rate first liens with an adjustment
  period of one year or less are HELOCs.

5. Direct Costs Associated With the Dodd-Frank Act for Open-End HOEPA 
Loans
    Data from SCF indicate that an estimated 1.2 percent of outstanding 
HELOCs would potentially meet the proposed APR triggers. The analysis 
of closed-end mortgage loans for HMDA reporters imply that roughly half 
of loans that meet any HOEPA trigger meet the APR trigger. Thus, 
combining these estimates suggests that about 2.4 percent of HELOCs 
might meet the HOEPA triggers.\117\
---------------------------------------------------------------------------

    \117\ The share of high-cost, HELOCs that meet the APR trigger 
arguably might be greater or less than the share for high-cost, 
closed-end mortgage loans. On the one hand, HELOCs tend to be for 
smaller amounts, so points and fees may tend to be a larger percent 
of loan size. On the other hand, based on outreach, the Bureau 
believes that points and fees may be less prevalent for HELOCs than 
for closed-end mortgage loans.
---------------------------------------------------------------------------

    The SCF is the only source of nationally representative data on 
interest rates on consummated HELOCs that the Bureau is aware of, but 
the Bureau acknowledges that the SCF provides a small sample of 
HELOCs.\118\ Thus, in addition to the approximation error in 
extrapolating from closed-end mortgage loans to HELOCs due to data 
limitations, the SCF-based estimate of 1.2 percent is likely 
imprecisely estimated but reflects the best available estimate given 
existing data. Given these caveats, the analysis considers how the 
conclusions would differ if one assumed that a greater fraction of 
HELOCs would meet the HOEPA triggers. For context, as noted above, the 
Bureau estimates that roughly 0.3 percent of closed-end mortgage loans 
would be high-cost mortgages, a percentage one-eighth the estimate for 
HELOCs, which might suggest that the HELOC estimate is conservative.
---------------------------------------------------------------------------

    \118\ The Bureau solicits information or data from interested 
parties on interest rates on home-equity lines of credit, 
particularly information on interest rates for HELOC originations.
---------------------------------------------------------------------------

    The Bureau estimates that, if the rough estimate of 2.4 percent 
described above were accurate, fewer than 100 small DIs (less than one 
percent of small DIs) would experience a revenue loss that exceeds one 
percent (Table 5). If the actual proportion of high-cost HELOCs were a 
bit more than twice as high as the Bureau estimates, i.e., at five 
percent, then the estimated share of small depositories that might 
experience a one percent revenue loss increases to not quite five 
percent, and about 0.1 percent of small DIs might experience a loss 
greater than three percent of revenue by these estimates. Under the 
relatively conservative assumption that ten percent of HELOCs are high-
cost mortgages (i.e., over four times the SCF-based estimate), about 13 
percent of small DIs might be expected to lose greater than one percent 
of revenue, and less than two percent of DIs would have estimated 
losses that exceed three percent of revenue.

[[Page 49144]]



Table 5--Estimated Shares of Revenue From Post-Dodd-Frank Act High-Cost HELOCs for Small Depository Institutions
----------------------------------------------------------------------------------------------------------------
                                                                    Assumed share of post-DFA high-cost HELOCS
                                                                 -----------------------------------------------
                                                                    2.4 percent      5 percent      10 percent
----------------------------------------------------------------------------------------------------------------
Number with HOEPA revenue share >1%\a\..........................              80             507           1,390
    Percent of small depository institutions....................            0.7%            4.7%           12.8%
Number with HOEPA revenue share >3%\a\..........................               0              15             200
    Percent of small depository institutions....................              0%            0.1%            1.8%
----------------------------------------------------------------------------------------------------------------
\a\ First-lien HELOCs cannot be distinguished from other first liens in the credit union Call Report data. The
  estimated revenue shares assume all adjustable-rate first liens with an adjustment period of one year or less
  are HELOCs (corresponding to the upper bound estimates in Table 4).

    For depository institutions, the potential loss in revenue due to 
the Dodd-Frank Act revisions to HOEPA comprises the losses from both 
closed- and open-end lending. To assess the potential revenues losses 
for DIs from both sources, the Bureau first estimates the combined loss 
based on the assumption that ten percent of HELOCs would be HOEPA 
loans.\119\ Under this conservative assumption, the Bureau estimates 
that roughly 17 percent of small DIs would lose more than one percent 
of revenue if these creditors made neither closed-end nor open-end 
HOEPA loans, and about three percent of small DIs would lose three 
percent of revenue under this scenario. If instead five percent of 
HELOCs were HOEPA loans--a proportion more than twice the estimate 
based on the SCF and therefore still conservative--the Bureau estimates 
approximately ten percent of small DIs would have combined losses that 
exceed one percent of revenue, and about one percent of small DIs would 
lose more than three percent of revenue.\120\
---------------------------------------------------------------------------

    \119\ This calculation is based on combining the estimated 
revenue loss on closed-end mortgage loans for HMDA-reporters and the 
estimated loss on HELOCs, which is available for all DIs (since it 
draws only on the Call Report data). The Bureau then estimates the 
probability that a DI that does not report in HMDA would have a 
combined revenue loss of more than one percent based on the 
institution type, assets, and estimated percentage revenue loss on 
HELOCs.
    \120\ The corresponding estimates for all DIs are comparable.
---------------------------------------------------------------------------

E. Impact of Revised Triggers on Non-Depository Institutions

Closed-End HOEPA Lending by Small Non-Depository Institutions
    The Bureau estimates based on the NMLS/MCR data that 2,282 out of 
2,515 total non-depository mortgage originators are small entities 
(Table 1). According to the NMLS/MCR data, many non-DI creditors 
originate just a few loans. Just less than one-quarter of nonbank 
creditors are estimated to have originated ten or fewer loans, for 
example, and about 40 percent of non-DIs made at most 25 loans. These 
fractions are similar for small non-DIs as well.\121\
---------------------------------------------------------------------------

    \121\ Over half of non-DI originators also broker loans. Revenue 
from brokering or other sources may mitigate the potential revenue 
losses of the Dodd-Frank Act amendments on those creditors.
---------------------------------------------------------------------------

    The Bureau estimates that the number of HOEPA loans originated by 
non-DIs that report in HMDA would increase from fewer than 100 loans 
under the current triggers to over 7,000 under the post-Dodd-Frank Act 
triggers.\122\ The Bureau notes that this is a substantial increase. 
However, even with this large estimated increase in the absolute number 
of HOEPA loans, the Bureau estimates that less than 0.4 percent of all 
closed-end mortgage loans originated by non-DIs that report in HMDA 
would be HOEPA loans. Moreover, over three-quarters of the estimated 
increase is driven by two creditors that made no loans in 2010 that 
were flagged as HOEPA loans in HMDA but that account for the majority 
of the new HOEPA loans. Two additional creditors account for another 
roughly nine percent of the new HOEPA loans. The vast majority of 
originations by these four creditors were mortgages on manufactured 
homes, particularly purchase money mortgage loans. Based on the number 
of originations and revenue, the Bureau believes that the largest 
creditors for manufactured homes are not small entities. The increase 
in the number of loans covered therefore very likely overstates the 
impact on small entities.
---------------------------------------------------------------------------

    \122\ Unlike the Call Report data for DIs, however, the Bureau 
cannot currently match the NMLS/MCR data to HMDA to project HOEPA 
lending under the post-Dodd-Frank Act triggers by non-DIs that do 
not report in HMDA.
---------------------------------------------------------------------------

    In estimating the effects of the Dodd-Frank Act revisions to HOEPA 
on non-DIs' revenues, the Bureau assumes that the share of revenue from 
HOEPA lending is the same as the share of HOEPA originations for a 
given creditor. Thus, to examine the impact of the proposed rule on 
revenue for non-DIs, the Bureau estimates the probability that HOEPA 
loans comprise more than one percent or three percent of all 
originations for non-DIs that report in the 2010 HMDA data and 
extrapolates these estimates for non-DIs that do not report in 
HMDA.\123\
---------------------------------------------------------------------------

    \123\ The extrapolation is done based on the number of 
originations and whether HOEPA loans accounted for more than one or 
three percent of 2010 originations under the current HOEPA triggers.
---------------------------------------------------------------------------

    Under this assumption, the NMLS/MCR data indicate that HOEPA loans 
accounted for more than one percent of revenue for about five percent 
of small non-DIs in 2010 (Table 6) and for more than three percent of 
revenue for a slightly smaller fraction.\124\ Less than ten percent of 
small non-DIs are estimated to have more than one percent of revenue 
from HOEPA loans under the new APR and points-and-fees triggers, and 
roughly seven percent of small non-DIs are estimated to have more than 
three percent of revenue from HOEPA loans.\125\
---------------------------------------------------------------------------

    \124\ These estimates are based in part on modeling revenue, and 
therefore the likelihood that a non-DI is a small entity, because 
data on revenue are missing for the majority of originators in NMLS/
MCR.
    \125\ The extrapolation from non-DIs that report in HMDA to non-
DIs that do not report in HMDA assumes that patterns of lending 
among non-reporters are similar to patterns at reporters that have 
comparable originations and similar pre-Dodd-Frank Act HOEPA shares. 
This extrapolation for creditors that specialize in manufactured-
housing mortgages is subject to two caveats. First, as noted, the 
post-Dodd-Frank Act revisions to HOEPA may particularly increase the 
share of HOEPA loans among creditors that specialize in loans on 
manufactured homes, particularly for home purchase. Second, the 
NMLS/MCR data do not include information on the extent of 
manufactured-home lending, so the Bureau cannot directly estimate 
how many non-DI manufactured-housing specialists do not report in 
HMDA.

[[Page 49145]]



      Table 6--Estimated Shares of HOEPA Loan Originations for Small Non-DIs Pre- and Post-Dodd-Frank Act a
----------------------------------------------------------------------------------------------------------------
                                                                       Pre-DFA                  Post-DFA
                                                             ---------------------------------------------------
                                                                 Number      Percent       Number      Percent
----------------------------------------------------------------------------------------------------------------
HOEPA loans > 1% of all loans...............................          121          5.3          207          9.1
HOEPA loans > 3% of all loans...............................          113          5.0          170          7.4
----------------------------------------------------------------------------------------------------------------
\a\ Number and percent of post-Dodd-Frank Act HOEPA originations are projected based on estimated post-Dodd-
  Frank Act originations of HOEPA loans by HMDA-reporting non-DIs, conditional on total originations in 2010 and
  on pre-Dodd-Frank Act HOEPA loans as a share of 2010 originations. In particular, in projecting the
  probability that a creditor made more than one (three) percent HOEPA loans post-Dodd-Frank Act, the Bureau
  controls for whether pre-Dodd-Frank Act HOEPA loans comprised more than one (three) percent of originations.
  To estimate the number of small entities, revenue for entities that did not report revenue is estimated based
  on the dollar value and number of loans originated and the dollar value and number of loans brokered. The
  estimated probability that a non-DI that reports to HMDA is a small entity is projected from the MCR data
  based on the number of originations.

F. TILA and RESPA Counseling-Related Provisions

    The proposed rule would also implement two Dodd-Frank Act 
provisions related to homeownership counseling. The Bureau expects that 
neither of these provisions would result in a sizable revenue loss for 
small creditors. The first requires that a creditor obtain sufficient 
documentation to demonstrate that a borrower received homeownership 
counseling before extending a negative-amortization mortgage to a 
first-time borrower. This requirement will likely apply to only a small 
fraction of mortgages: only 0.3 percent of mortgages in the 2007 SCF 
reportedly had negative-amortization features, and by definition this 
is an upper bound on the share of negative-amortization mortgages held 
by first-time borrowers.\126\ Moreover, the provision only requires a 
creditor to obtain documentation, which the Bureau expects to be a 
comparatively low burden. For these reasons, the Bureau believes that 
the burden to creditors would be minimal, as noted in parts VI and 
VIII.
---------------------------------------------------------------------------

    \126\ For context, the comparable shares of loans that allowed 
for negative amortization in the 1989-2004 SCFs varied between 1.3-
2.3 percent of loans. These percentages are based on the share of 
mortgage borrowers who said their payment did not change when the 
interest rate on their adjustable-rate mortgage changed.
---------------------------------------------------------------------------

    The second provision is a new requirement that lenders provide loan 
applicants a list of HUD-certified or -approved homeownership 
counselors or counseling agencies located in the area of the lender. 
Under the proposed rule, this requirement would apply to all applicants 
for a federally related mortgage loan (except for HECM applicants where 
the lender complies with the similar HECM list requirement) and so 
would apply to a large number of applications--under the Bureau's 
estimation methodology in analyzing the paper work burden, nearly 16 
million applications for mortgages and HELOCs. Nevertheless, the Bureau 
believes the burden is likely to be minimal--less than 1 dollar per 
application--because it should be straightforward to obtain and to 
provide the geographically specific information on certified or 
approved homeownership counselors or counseling organizations. Further, 
the list will likely be provided with other documents that the 
applicant must receive from the lender.

G. Conclusion

    The Bureau estimates that, under the proposed rule, only a small 
fraction of depository institutions would be expected to lose more than 
three or even more than one percent of revenue even under the 
conservative assumption that lenders forgo making any HOEPA loans. For 
example, under the assumption that five percent of HELOCs fell within 
the HOEPA triggers--a proportion more than twice the estimate based on 
the SCF and therefore still conservative--the Bureau estimates that 
about ten percent of small DIs would have combined losses that exceed 
one percent of revenue, and roughly one percent of small DIs would lose 
more than three percent of revenue. In all cases, the TILA and RESPA 
counseling provisions noted above would have little impact on these 
impact estimates.
    For non-depository institutions, less than ten percent of small 
non-DIs are estimated to have more than one percent of revenue from 
HOEPA loans under the new APR and points-and-fees triggers, and about 
seven percent of small non-DIs are estimated to have more than three 
percent of revenue from HOEPA loans.\127\ In all cases, the TILA and 
RESPA counseling provisions noted above would have little impact on 
these impact estimates.
---------------------------------------------------------------------------

    \127\ See Table 6, supra.
---------------------------------------------------------------------------

Certification
    Accordingly, the undersigned certifies that this proposal, if 
adopted, would not have a significant economic impact on a substantial 
number of small entities. The Bureau requests comment on the analysis 
above and requests any relevant data.

VIII. Paperwork Reduction Act

    The collection of information contained in this notice of proposed 
rulemaking, and identified as such, has been submitted to the Office of 
Management and Budget (OMB) for review under section 3507(d) of the 
Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.) (Paperwork 
Reduction Act or PRA). Under the PRA, the Bureau may not conduct or 
sponsor, and a person is not required to respond to, this information 
collection unless the information collection displays a currently valid 
control number.
    This proposed rule would amend 12 CFR part 1024 (Regulation X) and 
12 CFR part 1026 (Regulation Z). Both Regulations X and Z currently 
contain collections of information approved by OMB. The Bureau's OMB 
control number for Regulation X is 3170-0016 and for Regulation Z is 
3170-0015.
    As described below, the proposed rule would amend the collections 
of information currently in Regulation X and Regulation Z. RESPA and 
Regulation X are intended to provide consumers with greater and more 
timely information on the nature and costs of the residential real 
estate settlement process. As previously discussed, the proposed rule 
would amend the information collections currently required by 
Regulation X by requiring that lenders distribute to prospective 
borrowers of virtually all federally related mortgage loans a list of 
federally certified or approved homeownership counselors or counseling 
organizations located in the area of the lender. See the section-by-
section analysis to proposed Sec.  1024.20, above. TILA and Regulation 
Z are intended to ensure effective disclosure of the costs and terms of 
credit to consumers. As previously discussed, the proposed rule would 
amend the information collections currently required by Regulation Z by

[[Page 49146]]

(1) Expanding the categories of loans for which a special HOEPA 
disclosure is required, (2) requiring that creditors distribute a list 
of federally approved housing counselors to prospective borrowers of 
high-cost mortgages and (in the case of first-time borrowers) 
negatively amortizing mortgage loans, and (3) requiring creditors to 
receive and review confirmation that prospective borrowers of high-cost 
mortgages and (in the case of first-time borrowers) negatively 
amortizing mortgage loans have received required pre-loan counseling. 
See generally the section-by-section analysis to proposed Sec.  
1026.32(a)(1) and (c), Sec.  1026.34(a)(5), and Sec.  1026.36(k), 
above.
    The information collection in the proposed rule is required to 
provide benefits for consumers and would be mandatory. See 15 U.S.C. 
1601 et seq.; 12 U.S.C. 2601 et seq. Because the Bureau does not 
collect any information under the proposed rule, no issue of 
confidentiality arises. The likely respondents would be depository 
institutions (i.e., commercial banks/savings institutions and credit 
unions) and non-depository institutions (i.e., mortgage companies or 
other non-bank lenders) subject to Regulation X or the high-cost 
mortgage requirements or negative amortization loan counseling 
requirements of Regulation Z.\128\
---------------------------------------------------------------------------

    \128\ For purposes of this PRA analysis, references to 
``creditors'' or ``lenders'' shall be deemed to refer collectively 
to commercial banks, savings institutions, credit unions, and 
mortgage companies (i.e., non-depository lenders), unless otherwise 
stated. Moreover, reference to ``respondents'' shall generally mean 
all categories of entities identified in the sentence to which this 
footnote is appended, except as otherwise stated or if the context 
indicates otherwise.
---------------------------------------------------------------------------

    Under the proposed rule, the Bureau would account for the entire 
paperwork burden for respondents under Regulation X. The Bureau 
generally would also account for the paperwork burden associated with 
Regulation Z for the following respondents pursuant to its 
administrative enforcement authority: insured depository institutions 
with more than $10 billion in total assets, their depository 
institution affiliates, and certain non-depository lenders. The Bureau 
and the FTC generally both have enforcement authority over non-
depository institutions for Regulation Z. Accordingly, the Bureau has 
allocated to itself half of the estimated burden to non-depository 
institutions. Other Federal agencies are responsible for estimating and 
reporting to OMB the total paperwork burden for the institutions for 
which they have administrative enforcement authority. They may, but are 
not required to, use the Bureau's burden estimation methodology.
    Using the Bureau's burden estimation methodology, the total 
estimated burden under the proposed changes to Regulation X for all of 
the nearly 15,000 institutions subject to the proposed rule, would be 
approximately 16,400 hours for one-time changes and 260,000 hours 
annually. Using the Bureau's burden estimation methodology, the total 
estimated burden under the proposed changes to Regulation Z for the 
roughly 5,200 institutions, including Bureau respondents,\129\ that are 
estimated to make high-cost mortgages subject to the proposed rule 
would be approximately 38,300 hours of one-time costs and about 1,600 
hours annually.
---------------------------------------------------------------------------

    \129\ There are 154 depository institutions (and their 
depository affiliates) that are subject to the Bureau's 
administrative enforcement authority. For purposes of this PRA 
analysis, the Bureau's respondents under Regulation Z are 130 
depository institutions that originate either open or closed-end 
mortgages and an estimated 2,515 non-depository institutions that 
are subject to the Bureau's administrative enforcement authority. 
Unless otherwise specified, all references to burden hours and costs 
for the Bureau respondents for the collection under Regulation Z are 
based on a calculation of half of the estimated 2,515 non-depository 
institutions.
---------------------------------------------------------------------------

    The aggregate estimates of total burdens presented in this part 
VIII are based on estimated costs that are weighted averages across 
respondents. The Bureau expects that the amount of time required to 
implement each of the proposed changes for a given institution may vary 
based on the size, complexity, and practices of the respondent.

A. Information Collection Requirements

    The Bureau believes the following aspects of the proposed rule 
would be information collection requirements under the PRA.
1. Provision of List of Federally Approved Housing Counselors
    The Bureau estimates one-time and ongoing costs to respondents of 
complying with the housing counselor disclosure requirements in 
proposed Sec. Sec.  1024.20, 1026.34(a)(5)(vii), 1026.36(k)(4) as 
follows. First, the Bureau assumes that lenders who are required to 
comply with proposed Sec.  1026.34(a)(5)(vii) and Sec.  1026.36(k)(4) 
would comply with those provisions by satisfying the disclosure 
obligation in proposed Sec.  1024.20, as permitted by the proposed 
rule. Thus, the Bureau does not aggregate the burden to respondents of 
providing the counselor list disclosures in proposed Sec.  
1026.34(a)(5)(vii) (high-cost mortgages) and Sec.  1026.36(k)(4) 
(negative amortization loans to first-time borrowers). However, the 
Bureau does aggregate burden for reviewing the relevant portions of the 
regulations and training relevant employees.
    One-time costs. The Bureau estimates that covered persons would 
incur one-time costs associated with reviewing the regulation and 
training relevant employees. Specifically, the Bureau estimates that, 
for each covered person, one attorney and one compliance officer would 
each take 7.5 minutes (15 minutes in total) to read and review the 
sections of the proposed regulation that describe the housing 
counseling disclosures, based on the length of the sections. The Bureau 
also estimates that each loan officer or other loan originator will 
need to receive 7.5 minutes of training concerning the 
disclosures.\130\ The Bureau estimates the total one-time costs across 
all relevant providers of reviewing the relevant portions of the 
proposed regulation and conducting training to be about 16,400 hours 
and roughly $869,000, or about $174,000 per year if annualized over 
five years. Table 1, below, shows the Bureau's estimate of the total 
one-time paperwork burden to all respondents to comply with the housing 
counselor disclosure requirements in proposed Sec. Sec.  1024.20, 
1026.34(a)(5)(vii), and Sec.  1026.36(k)(4).
---------------------------------------------------------------------------

    \130\ The burden-hour estimate of training assumes that a total 
of 30 minutes is required for training on all aspects of the 
proposed rule. For simplicity, these time estimates assume that an 
equal amount of time is spent on each of the four provisions, but 
the Bureau expects the proportion of time allocated to each topic in 
the 30 minute total training time may vary. The estimation 
methodology also assumes that a trainer will spend an hour for every 
ten hours of trainee time.
---------------------------------------------------------------------------

    Ongoing costs. On an ongoing basis, the Bureau estimates that 
producing and providing the required housing counselor disclosures to 
an applicant will take approximately one minute and that the cost of 
producing the required disclosures will be $0.10 per disclosure. The 
estimated ongoing paperwork burden to all Bureau respondents taken 
together is approximately 258,700 burden hours and about $13.4 million 
annually, or less than 1 dollar per loan application. Table 2, below, 
shows the Bureau's estimates of the total ongoing annual paperwork 
burden to all Bureau respondents to comply with the requirement to 
provide mortgage loan applicants with a list of federally approved 
housing counselors.
2. Receipt of Certification of Counseling for High-Cost Mortgages
    The Bureau estimates one-time and ongoing costs to respondents of 
complying with the requirement to receive the high-cost mortgage 
counseling certification, as required by proposed Sec.  
1026.34(a)(5)(i) and (v), as

[[Page 49147]]

follows. The Bureau estimates that 54 depository institutions and 354 
non-depository institutions subject to the Bureau's administrative 
enforcement authority would originate high-cost mortgages.\131\ The 
Bureau estimates that this universe of relevant providers would each 
incur a one-time burden of 24 minutes for compliance or legal staff to 
read and review the relevant sections of the regulation (12 minutes for 
each of two compliance or legal staff members). The Bureau also 
estimates that this universe of relevant providers would incur a one-
time burden of 7.5 minutes each to conduct initial training for each 
loan officer or other loan originator concerning the receipt of 
certification of counseling. The Bureau estimates that the total one-
time burden across all relevant providers of complying with the high-
cost mortgage housing counseling certification requirement would be 
about 2,100 hours and roughly $98,000.
---------------------------------------------------------------------------

    \131\ In the case of high-cost mortgages, TILA defines 
``creditor'' as a person that, in any 12 month period, originates 
two or more high-cost mortgages, or one or more high-cost mortgage 
through a broker. For purposes of determining the universe of 
relevant providers for this provision, the Bureau does not attempt 
to calculate how many of the respondents that have made HOEPA loans 
in the past made only one HOEPA loan. Thus, the number of relevant 
providers used to calculate the paperwork burden for this provision 
may be an overestimate.
---------------------------------------------------------------------------

    On an ongoing basis, the Bureau estimates that respondents would 
incur a burden of 2 minutes per origination to receive and review the 
certification form. In addition, the Bureau estimates that, on average, 
a creditor would incur a cost of $0.025 to retain the certification 
form. The Bureau estimates that the total ongoing burden across all 
relevant providers of complying with the high-cost mortgage housing 
counseling certification requirement would be about 400 hours and 
$20,000 annually. The Bureau's estimates of the total one-time and 
ongoing annual paperwork burden to all Bureau respondents to comply 
with the requirement to receive certification of high-cost mortgage 
counseling are set forth in Tables 1 and 2, below.
3. Receipt of Documentation of Counseling for Negative Amortization 
Loans
    The Bureau does not separately estimate the paperwork burden to 
respondents of complying with the requirement to receive documentation 
that first-time borrowers in negatively amortizing loans have received 
pre-loan homeownership counseling, as required by proposed Sec.  
1026.36(k). The Bureau believes that any such burden will be minimal. 
The universe of respondents for this provision is negligible. Based on 
data from the 2007 Survey of Consumer Finances, the Bureau estimates 
that only 0.3 percent of all outstanding mortgages in 2007 had negative 
amortization features. This estimate is an upper bound on the share of 
negatively amortizing loans held by first-time borrowers. Further, the 
Bureau believes that few if any mortgages originated currently could 
potentially negatively amortize. Moreover, the Bureau believes that the 
burden to respondents of complying with the provision would be de 
minimis since the required elements of the documentation are minimal, 
and the provision would require creditors only to receive and retain 
this documentation as part of the loan file.
4. HOEPA Disclosure Form
    The Bureau believes that respondents will incur certain one-time 
and ongoing paperwork burden pursuant to proposed Sec.  1026.32(a)(1), 
which implements Dodd-Frank's extension of HOEPA coverage to purchase 
money mortgage loans and open-end credit plans. As a result of proposed 
Sec.  1026.32(a)(1), respondents that extend purchase money mortgage 
loans or open-end credit plans that are high-cost mortgages would be 
required to provide borrowers the special HOEPA disclosure required by 
Sec.  1026.32(c). The Bureau has identified the following paperwork 
burdens in connection with proposed Sec.  1026.32(a)(1).
a. Revising the HOEPA Disclosure Form
    First, the Bureau estimates the burden to creditors originating 
high-cost purchase money mortgage loans and high-cost HELOCs of 
revising the HOEPA disclosure required by Sec.  1026.32(c). The Bureau 
believes that respondents making high-cost purchase money mortgage 
loans would incur minimal or no additional burden, because the Bureau 
expects that these respondents would provide the same HOEPA disclosures 
used for refinance and closed-end home-equity loans subject to Sec.  
1026.32.
    As discussed in the section-by-section analysis to proposed Sec.  
1026.32(c), however, the calculation of certain of the required 
disclosures differs between the open-end and closed-end credit 
contexts. Therefore, the Bureau separately estimates the burden for 
revising the HOEPA disclosure for respondents likely to make high-cost 
HELOCs. The Bureau estimates that 45 depository institutions for which 
it has administrative enforcement authority would be likely to 
originate a high-cost HELOC. Because non-depository institutions are 
generally less able to fund lines of credit and to have access to the 
payment system, the Bureau believes that few, if any, non-depository 
institutions originate open-end credit plans.
    The Bureau believes that respondents that are likely to make high-
cost HELOCs would incur a one-time burden, but no ongoing burden, in 
connection with revising the HOEPA disclosure. The one-time burden 
includes a total estimated burden of less than 1,900 hours across all 
relevant providers to update their software and information technology 
systems to generate the HOEPA disclosure form appropriate for open-end 
credit plans. This estimate combines the burdens for large creditors 
and a fraction of smaller creditors whom the Bureau assumes would 
develop the necessary software and systems internally. The Bureau 
assumes that the remainder of smaller creditors would rely on third-
party vendors to obtain a revised disclosure form for high-cost HELOCs; 
these small creditors are assumed to incur the dollar costs passed on 
from a vendor that offers the product but no hours burden. In addition, 
the Bureau assumes that respondents that are likely to make high-cost 
HELOCs would spend 7.5 minutes each training a subset of loan officers 
or other loan originators that may make such loans. The Bureau 
estimates that the training burden across all relevant providers would 
total nearly 1,300 hours. The total one-time burden across all relevant 
providers to revise the HOEPA disclosure is therefore about 3,100 
hours. The Bureau estimates the corresponding dollar-cost burden is 
roughly $169,000, corresponding to about $34,000 per year for all 
respondents if this one-time cost were annualized over five years. The 
estimated total one-time burden is summarized in Table 1, below.
b. Providing the HOEPA Disclosure Form
    Respondents that make any high-cost mortgage would incur costs to 
review the provisions of the regulation related to the HOEPA 
disclosure. These costs could vary considerably across creditors. A 
creditor that currently makes high-cost mortgages might be expected to 
have lower costs to review the relevant section of the regulation than 
would a creditor that has not previously made high-cost mortgages but 
now expects to make such loans as a result of, for example, the revised 
triggers and extension of HOEPA to purchase money mortgage loans and 
HELOCs. The Bureau's estimates are averages of these costs across 
lenders.

[[Page 49148]]

    One-time costs. Based on the length of the proposed section, the 
Bureau estimates the one-time burden across all relevant providers to 
read and review the HOEPA disclosure provision and to obtain any 
necessary legal guidance would be slightly more than 30 minutes for 
each of two legal or compliance staff members. Across all relevant 
providers, the Bureau assumes an average one-time burden of 7.5 minutes 
each per loan officer or other loan originator for initial training 
concerning the disclosure. Under these assumptions, the total one-time 
burden across all relevant providers is estimated to be about 2,200 
hours and approximately $110,000, or about $22,000 annually if the 
costs were divided equally over five years.
    Ongoing costs. On an ongoing basis, the Bureau estimates that 
producing and providing the required disclosures to an applicant will 
take approximately 2 minutes and that the cost of producing the 
required disclosures will be $0.10 per disclosure. The Bureau assumes 
that, on average, the cost of retaining a copy of the disclosure for 
recordkeeping will cost $0.025 per disclosure. The Bureau estimates 
that, taken together, the production, provision, and record-retention 
costs for across all relevant providers would total approximately 400 
hours and nearly $21,000 annually.

            Table 1--One-Time Costs for All CFPB Respondents
------------------------------------------------------------------------
         Information collection                Hours          Dollars
------------------------------------------------------------------------
Provision of list of Federally approved           16,400         869,000
 housing counselors.....................
Receipt of certification of counseling             2,100          98,000
 for high-cost mortgages................
Revision of HOEPA disclosure for                   3,100         169,000
 applicability to open-end credit.......
Provision of HOEPA disclosure...........           2,200         110,000
                                         -------------------------------
    Total burden, All Respondents.......          23,900       1,246,000
------------------------------------------------------------------------


             Table 2--Ongoing Costs for All CFPB Respondents
------------------------------------------------------------------------
         Information collection                Hours          Dollars
------------------------------------------------------------------------
Provision of list of Federally approved          258,700      13,406,000
 housing counselors.....................
Receipt of certification of counseling               400          20,000
 for high-cost mortgages................
Revision of HOEPA disclosure for                      --              --
 applicability to open-end credit.......
Provision of special HOEPA disclosure...             400          21,000
                                         -------------------------------
    Total annual burden, All Respondents         259,600      13,447,000
------------------------------------------------------------------------

B. Comments

    Comments are specifically requested concerning: (i) Whether the 
proposed collections of information are necessary for the proper 
performance of the functions of the Bureau, including whether the 
information will have practical utility; (ii) the accuracy of the 
estimated burden associated with the proposed collections of 
information; (iii) how to enhance the quality, utility, and clarity of 
the information to be collected; and (iv) how to minimize the burden of 
complying with the proposed collections of information, including the 
application of automated collection techniques or other forms of 
information technology. Comments on the collection of information 
requirements should be sent to the Office of Management and Budget 
(OMB), Attention: Desk Officer for the Consumer Financial Protection 
Bureau, Office of Information and Regulatory Affairs, Washington, DC, 
20503, or by the internet to http://[email protected], with 
copies to the Bureau at the Consumer Financial Protection Bureau 
(Attention: PRA Office), 1700 G Street NW., Washington, DC 20552, or by 
the internet to [email protected].

List of Subjects

12 CFR Part 1024

    Condominiums, Consumer protection, Housing, Mortgagees, Mortgages, 
Mortgage servicing, Recordkeeping requirements, Reporting.

12 CFR Part 1026

    Advertising, Consumer protection, Credit, Credit unions, Mortgages, 
National banks, Reporting and recordkeeping requirements, Savings 
associations, Truth in lending.

Text of Proposed Revisions

    Certain conventions have been used to highlight the proposed 
revisions. New language is shown inside bold arrows, and language that 
would be deleted is shown inside bold brackets.

Authority and Issuance

    For the reasons set forth in the preamble, the Bureau proposes to 
amend Regulation X, 12 CFR part 1024, and Regulation Z, 12 CFR part 
1026, as set forth below.

PART 1024--REAL ESTATE SETTLEMENT PROCEDURES ACT (REGULATION X)

    1. The authority citation for part 1024 continues to read as 
follows:

    Authority:  12 U.S.C. 2603-2605, 2607, 2609, 2617, 5512, 5581.
    2. A new Sec.  1024.20 is added to read as follows:


[rtrif]Sec.  1024.20  List of homeownership counselors.

    (a) Provision of list. (1) Except as otherwise provided in this 
section, not later than three business days after a lender, mortgage 
broker, or dealer receives an application, or information sufficient to 
complete an application, the lender must provide the loan applicant 
with a clear and conspicuous written list of five homeownership 
counselors or counseling organizations located:
    (i) Within the zip code of the loan applicant's current address; or
    (ii) If five counselors or counseling organizations are not within 
the zip code of the loan applicant's current address, then within the 
zip code or zip codes closest to the loan applicant's current address.
    (2) The list of homeownership counselors or counseling 
organizations distributed to each loan applicant under this section 
shall include only homeownership counselors and counseling 
organizations listed on either:

[[Page 49149]]

    (i) The most current list of homeownership counselors or counseling 
organizations made available by the Bureau to lenders for use in 
complying with the requirements of this section; or
    (ii) The most current list maintained by HUD of homeownership 
counselors or counseling organizations who are certified by the 
Secretary of HUD pursuant to section 106(e) of the Housing and Urban 
Development Act of 1968 (12 U.S.C. 1701x(e)), or are otherwise approved 
by HUD.
    (3) The list of homeownership counselors or counseling 
organizations provided under this section must include:
    (i) The name, business address, telephone number, and, if available 
from the Bureau or HUD, the email address and Web site of each listed 
homeownership counselor or counseling organization; and
    (ii) The Web site addresses and telephone numbers of the Bureau and 
HUD where applicants can access information on homeownership 
counseling.
    (4) The list of homeownership counselors or counseling 
organizations provided under this section may be combined and provided 
with other mortgage loan disclosures required pursuant to Regulation Z 
or this part unless prohibited by Regulation Z or this part.
    (5) A mortgage broker or dealer may provide the list of 
homeownership counselors or counseling organizations required under 
this section to any loan applicant from whom it receives or for whom it 
prepares an application. If the mortgage broker or dealer has provided 
the required list of homeownership counselors or counseling 
organizations, the lender is not required to provide an additional 
list. The lender is responsible for ensuring that the list of 
homeownership counselors or counseling organizations is provided to a 
loan applicant in accordance with this section.
    (6) If the lender, mortgage broker, or dealer does not provide the 
list of homeownership counselors or counseling organizations required 
under this section to the loan applicant in person, the lender must 
mail or deliver the list to the loan applicant by other means. The list 
may be provided in electronic form, subject to compliance with the 
consumer consent and other applicable provisions of the Electronic 
Signatures in Global and National Commerce Act (ESIGN) (15 U.S.C. 7001 
et seq.).
    (7) The lender is not required to provide the list of homeownership 
counselors or counseling organizations required under this section if, 
before the end of the three-business-day period provided in paragraph 
(a)(1) of this section, the lender denies the application or the loan 
applicant withdraws the application.
    (8) If a mortgage loan transaction involves more than one lender, 
only one list of homeownership counselors or counseling organizations 
required under this section must be given to the loan applicant and the 
lenders shall agree among themselves which lender must comply with the 
requirements that this section imposes on any or all of them. If there 
is more than one loan applicant, the required list of homeownership 
counselors or counseling organizations may be provided to any loan 
applicant with primary liability on the mortgage loan obligation.
    (b) Open-end lines of credit (home-equity plans) under Regulation 
Z. For a federally related mortgage loan that is a home-equity line of 
credit under Regulation Z, a lender or mortgage broker that provides 
the loan applicant with the list of homeownership counselors or 
counseling organizations required under this section may comply with 
the timing and delivery requirements set out in either paragraph (a) of 
this section or 12 CFR 1026.40(b).
    (c) Home Equity Conversion Mortgages. A lender is not required to 
provide an applicant for a Home Equity Conversion Mortgage, as defined 
in 12 U.S.C. 1715z-20(b)(3), the list of homeownership counselors or 
counseling organizations required under this section, if the lender is 
required by HUD to provide, and does provide, a list of counselors or 
counseling agencies specializing in counseling on such mortgages to the 
applicant.[ltrif]

PART 1026--TRUTH IN LENDING (REGULATION Z)

    3. The authority citation for part 1026 is revised to read as 
follows:

    Authority:  12 U.S.C. [rtrif]2601; 2603-2605, 2607, 2609, 2617, 
5511,[ltrif] 5512, [rtrif]5532,[ltrif] 5581; 15 U.S.C. 1601 et seq.

Subpart A--General

    4. Section 1026.1 is amended by revising paragraph (d)(5) to read 
as follows:


Sec.  1026.1  Authority, purpose, coverage, organization, enforcement, 
and liability.

* * * * *
    (d) * * *
    (5) Subpart E contains special rules for mortgage transactions. 
Section 1026.32 requires certain disclosures and provides limitations 
for closed-end loans [rtrif]and open-end credit plans[ltrif] that have 
rates or fees above specified amounts [rtrif]or certain prepayment 
penalties[ltrif]. Section 1026.33 requires special disclosures, 
including the total annual loan cost rate, for reverse mortgage 
transactions. Section 1026.34 prohibits specific acts and practices in 
connection with [closed-end] mortgage transactions that are subject to 
Sec.  1026.32. Section 1026.35 prohibits specific acts and practices in 
connection with closed-end higher-priced mortgage loans, as defined in 
Sec.  1026.35(a). Section 1026.36 prohibits specific acts and practices 
in connection with an extension of credit secured by a dwelling.
* * * * *

Subpart E--Special Rules for Certain Home Mortgage Transactions

    5. Section 1026.31 is amended by revising paragraph (c)(1) to read 
as follows:


Sec.  1026.31  General rules.

* * * * *
    (c) Timing of disclosure. (1) Disclosures for certain 
[lsqbb]closed-end[rsqbb] home mortgages. The creditor shall furnish the 
disclosures required by Sec.  1026.32 at least three business days 
prior to consummation [rtrif]or account opening[ltrif] of a 
[rtrif]high-cost mortgage as defined in Sec.  1026.32(a)[ltrif] 
[lsqbb]mortgage transaction covered by Sec.  1026.32[rsqbb].
    (i) Change in terms. After complying with paragraph (c)(1) of this 
section and prior to consummation [rtrif]or account opening[ltrif], if 
the creditor changes any term that makes the disclosures inaccurate, 
new disclosures shall be provided in accordance with the requirements 
of this subpart.
    (ii) Telephone disclosures. A creditor may provide new disclosures 
by telephone if the consumer initiates the change and if, [rtrif]prior 
to or[ltrif] at consummation [rtrif]or account opening[ltrif]:
    (A) The creditor provides new written disclosures; and
    (B) The consumer and creditor sign a statement that the new 
disclosures were provided by telephone at least three days prior to 
consummation [rtrif]or prior to account opening, as applicable[ltrif].
    (iii) Consumer's waiver of waiting period before consummation 
[rtrif]or account opening[ltrif]. The consumer may, after receiving the 
disclosures required by paragraph (c)(1) of this section, modify or 
waive the three-day waiting period between delivery of those 
disclosures and consummation [rtrif]or account opening[ltrif] if the 
consumer determines that the extension of credit is needed to meet a 
bona fide personal

[[Page 49150]]

financial emergency. To modify or waive the right, the consumer shall 
give the creditor a dated written statement that describes the 
emergency, specifically modifies or waives the waiting period, and 
bears the signature of all the consumers entitled to the waiting 
period. Printed forms for this purpose are prohibited, except when 
creditors are permitted to use printed forms pursuant to Sec.  
1026.23(e)(2).
* * * * *
    6. Section 1026.32 is amended by:
    A. Revising the section heading;
    B. Revising paragraph (a);
    C. Revising paragraph (b);
    D. Revising paragraphs (c)(3), (4) and (5);
    E. Revising paragraph (d) introductory text, paragraph (d)(1), and 
paragraphs (d)(6) through (8).
    The additions and revisions read as follows:


Sec.  1026.32  Requirements for [rtrif]high-cost[ltrif] [lsqbb]certain 
closed-end] home mortgages.

    (a) [rtrif]High-cost mortgages[ltrif] [lsqbb]Coverage.[rsqbb] (1) 
[rtrif]Coverage. For purposes of this subpart, high-cost mortgage means 
any consumer credit transaction, other than a reverse-mortgage 
transaction as defined in Sec.  1026.33(a), that is secured by the 
consumer's principal dwelling, and in which:[ltrif] [lsqbb]Except as 
provided in paragraph (a)(2) of this section, the requirements of this 
section apply to a consumer credit transaction that is secured by the 
consumer's principal dwelling, and in which either:[rsqbb]
    Alternative 1--Paragraph (a)(1)(i)
    (i) [rtrif]The annual percentage rate applicable to the 
transaction, as described in paragraph (a)(2) of this section, will 
exceed the average prime offer rate, as defined in Sec.  
1026.35(a)(2)(ii), for a comparable transaction by more than:
    (A) 6.5 percentage points for a first-lien transaction, other than 
as described in paragraph (a)(1)(i)(B) of this section;
    (B) 8.5 percentage points for a first-lien transaction if the 
dwelling is personal property and the total loan amount is less than 
$50,000; or
    (C) 8.5 percentage points for a subordinate-lien transaction; 
or[ltrif] [lsqbb]The annual percentage rate at consummation will exceed 
by more than 8 percentage points for first-lien loans, or by more than 
10 percentage points for subordinate-lien loans, the yield on Treasury 
securities having comparable periods of maturity to the loan maturity 
as of the fifteenth day of the month immediately preceding the month in 
which the application for the extension of credit is received by the 
creditor; or[rsqbb]
    Alternative 2--Paragraph (a)(1)(i)
    (i) [rtrif]The transaction coverage rate, as defined in Sec.  
1026.35(a)(2)(i), applicable to the closed-end mortgage loan or the 
annual percentage rate applicable to the open-end credit plan, as 
provided in paragraph (a)(2) of this section, will exceed the average 
prime offer rate, as defined in Sec.  1026.35(a)(2)(ii), for a 
comparable transaction by more than:
    (A) 6.5 percentage points for a first-lien transaction, other than 
as described in paragraph (a)(1)(i)(B) of this section;
    (B) 8.5 percentage points for a first-lien transaction if the 
dwelling is personal property and the total loan amount is less than 
$50,000; or
    (C) 8.5 percentage points for a subordinate-lien transaction; 
or[ltrif] [lsqbb]The annual percentage rate at consummation will exceed 
by more than 8 percentage points for first-lien loans, or by more than 
10 percentage points for subordinate-lien loans, the yield on Treasury 
securities having comparable periods of maturity to the loan maturity 
as of the fifteenth day of the month immediately preceding the month in 
which the application for the extension of credit is received by the 
creditor; or[rsqbb]
    (ii) The total points and fees payable [lsqbb]by the consumer at or 
before loan closing will exceed[rsqbb] [rtrif]in connection with the 
transaction, as described in paragraphs (b)(1) through (5) of this 
section, will exceed:
    (A) 5 percent of the total loan amount for a transaction with a 
total loan amount of $20,000 or more; or
    (B) The lesser of 8 percent of the total loan amount or $1,000 for 
a transaction with a total loan amount of less than $20,000[ltrif] 
[lsqbb]the greater of 8 percent of the total loan amount, or 
$400[rsqbb]; the [rtrif]$1,000[ltrif] [lsqbb]$400[rsqbb] figure shall 
be adjusted annually on January 1 by the annual percentage change in 
the Consumer Price Index that was reported on the preceding June 
1[lsqbb].[rsqbb] [rtrif]; or
    (iii) Under the terms of the loan contract or open-end credit 
agreement, the creditor can charge a prepayment penalty, as defined in 
paragraph (b)(8) of this section, more than 36 months after 
consummation or account opening, or prepayment penalties that can 
exceed, in total, more than two percent of the amount prepaid.[ltrif]
    (2) [rtrif]Determination of transaction coverage rate or annual 
percentage rate. For purposes of paragraph (a)(1)(i) of this section, a 
creditor shall determine the transaction coverage rate or annual 
percentage rate, as applicable, for a transaction based on the 
following:
    (i) For a fixed-rate transaction in which the annual percentage 
rate will not vary during the term of the loan or plan, the interest 
rate in effect on the date of consummation or account opening of the 
transaction;
    (ii) For a variable-rate transaction in which the interest rate may 
vary during the term of the loan or plan in accordance with an index 
that is not under the creditor's control, the interest rate that 
results from adding the maximum margin permitted at any time during the 
term of the loan or plan to the value of the index rate in effect on 
the date of the consummation or account opening of the transaction; and
    (iii) For a transaction in which the interest rate may vary during 
the term of the loan or plan, other than a transaction described in 
paragraph (a)(2)(ii) of this section, the maximum interest rate that 
may be imposed during the term of the loan or plan.[ltrif] [lsqbb]This 
section does not apply to the following:
    (i) A residential mortgage transaction.
    (ii) A reverse mortgage transaction subject to Sec.  1026.33.
    (iii) An open-end credit plan subject to subpart B of this 
part.[rsqbb]
    (b) Definitions. For purposes of this subpart, the following 
definitions apply:
    (1) For purposes of paragraph (a)(1)(ii) of this section, [rtrif]in 
connection with a closed-end mortgage loan,[ltrif] points and fees 
means:
    (i) All items [lsqbb]required to be disclosed under Sec.  1026.4(a) 
and 1026.4(b), except interest or the time-price differential;[rsqbb] 
[rtrif]included in the finance charge under Sec.  1026.4(a) and (b), 
but excluding items described in Sec.  1026.4(c) through (e) (except to 
the extent otherwise included by this paragraph (b)(1)) and also 
excluding:
    (A) Interest or the time-price differential;
    (B) Any premium or other charge for any guaranty or insurance 
protecting the creditor against the consumer's default or other credit 
loss to the extent that the premium or charge is:
    (1) Assessed in connection with any Federal or State agency 
program;
    (2) Not in excess of the amount payable under policies in effect at 
the time of origination under section 203(c)(2)(A) of the National 
Housing Act (12 U.S.C. 1709(c)(2)(A)), provided that the premium or 
charge is required to be refundable on a pro rata basis and the refund 
is automatically issued upon notification of the satisfaction of the 
underlying mortgage loan; or
    (3) Payable after consummation.[ltrif]
    (ii) All compensation paid [rtrif]directly or indirectly by a 
consumer or creditor to a loan originator, as defined in Sec.  
1026.36(a)(1), including a loan originator that is also the creditor in 
a table-funded transaction[ltrif] [lsqbb]to mortgage brokers[rsqbb];

[[Page 49151]]

    (iii) All items listed in Sec.  1026.4(c)(7) (other than amounts 
held for future payment of taxes) [rtrif]payable at or before 
consummation, unless:[ltrif] [lsqbb]unless the charge is reasonable, 
the creditor receives no direct or indirect compensation in connection 
with the charge, and the charge is not paid to an affiliate of the 
creditor; and[rsqbb]
    (A) The charge is reasonable;
    (B) The creditor receives no direct or indirect compensation in 
connection with the charge; and
    (C) The charge is not paid to an affiliate of the creditor;[ltrif]
    (iv) [rtrif]Premiums or other charges payable at or before 
consummation for any credit life, credit disability, credit 
unemployment, or credit property insurance, or any other life, 
accident, health, or loss-of-income insurance, or any payments directly 
or indirectly for any debt cancellation or suspension agreement or 
contract;[ltrif] [lsqbb]Premiums or other charges for credit life, 
accident, health, or loss-of-income insurance, or debt-cancellation 
coverage (whether or not the debt-cancellation coverage is insurance 
under applicable law) that provides for cancellation of all or part of 
the consumer's liability in the event of the loss of life, health, or 
income or in the case of accident, written in connection with the 
credit transaction.[rsqbb]
    [rtrif](v) The maximum prepayment penalty, as defined in paragraph 
(b)(8)(i) of this section, that may be charged or collected under the 
terms of the mortgage loan; and
    (vi) The total prepayment penalty, as defined in paragraph 
(b)(8)(i) of this section, incurred by the consumer if the consumer 
refinances the existing mortgage loan with the current holder of the 
existing loan, a servicer acting on behalf of the current holder, or an 
affiliate of either.[ltrif]
    (2) [rtrif]For purposes of paragraph (b)(1)(ii) of this section, 
the term points and fees does not include compensation paid to:
    (i) An employee of a retailer of manufactured homes who does not 
take a residential mortgage loan application, offer or negotiate terms 
of a residential mortgage loan, or advise a consumer on loan terms 
(including rates, fees, and other costs) but who, for compensation or 
other monetary gain, or in expectation of compensation or other 
monetary gain, assists a consumer in obtaining or applying to obtain a 
residential mortgage loan;
    (ii) A person that only performs real estate brokerage activities 
and is licensed or registered in accordance with applicable State law, 
unless such person is compensated by a creditor or loan originator, as 
defined in Sec.  1026.36(a)(1), or by any agent of the creditor or loan 
originator; or
    (iii) A servicer or servicer employees, agents, and contractors, 
including but not limited to those who offer or negotiate terms of a 
transaction for purposes of renegotiating, modifying, replacing, and 
subordinating principal of existing mortgages where borrowers are 
behind in their payments, in default, or have a reasonable likelihood 
of being in default or falling behind.
    (3) For purposes of paragraph (a)(1)(ii) of this section, in 
connection with an open-end credit plan, points and fees means:
    (i) All items included in the finance charge under Sec.  1026.4(a) 
and (b) and payable at or before account opening, except interest or 
the time-price differential;
    (ii) All items listed in Sec.  1026.4(c)(7) (other than amounts 
held for future payment of taxes) payable at or before account opening, 
unless:
    (A) The charge is reasonable;
    (B) The creditor receives no direct or indirect compensation in 
connection with the charge; and
    (C) The charge is not paid to an affiliate of the creditor;
    (iii) Premiums or other charges payable at or before account 
opening for any credit life, credit disability, credit unemployment, or 
credit property insurance, or any other life, accident, health, or 
loss-of-income insurance, or any payments directly or indirectly for 
any debt cancellation or suspension agreement or contract;
    (iv) The maximum prepayment penalty, as defined in paragraph 
(b)(8)(ii) of this section, that may be charged or collected under the 
terms of the open-end credit plan;
    (v) Any fees charged for participation in an open-end credit plan, 
as described in Sec.  1026.4(c)(4), whether assessed on an annual or 
other periodic basis; and
    (vi) Any transaction fee, including any minimum fee or per-
transaction fee, that will be charged for a draw on the credit line.
    (4) For purposes of paragraph (b)(3) of this section, the term 
points and fees does not include any fees or charges that the creditor 
waives at or before account opening unless such fees or charges may be 
imposed on the consumer after account opening.
    (5) For purposes of paragraphs (b)(1) and (3) of this section, the 
term points and fees does not include:
    (i) Bona fide third-party charges. Any bona fide third-party charge 
not retained by the creditor, loan originator, or an affiliate of 
either, except to the extent that the charge is required to be included 
in points and fees under paragraph (b)(1)(i)(B) of this section. For 
purposes of this paragraph (b)(5)(i), the term loan originator means a 
loan originator as that term is defined in Sec.  1026.36(a)(1), 
notwithstanding Sec.  1026.36(f).
    (ii) Bona fide discount points. (A) Up to two bona fide discount 
points paid by the consumer in connection with the transaction if the 
interest rate for the loan or plan without such points does not exceed:
    (1) The average prime offer rate, as defined in Sec.  
1026.35(a)(2)(ii), by more than one percentage point; or
    (2) In the case of a transaction secured by personal property, the 
average rate for a loan insured under Title I of the National Housing 
Act (12 U.S.C. 1702 et seq.) by more than one percentage point.
    (B) If two bona fide discount points have not been excluded under 
paragraph (b)(5)(ii)(A) of this section, up to one bona fide discount 
point paid by the consumer in connection with the transaction if the 
interest rate for the loan or plan without such points does not exceed:
    (1) The average prime offer rate, as defined in Sec.  
1026.35(a)(2)(ii), by more than two percentage points; or
    (2) In the case of a transaction secured by personal property, the 
average rate for a loan insured under Title I of the National Housing 
Act (12 U.S.C. 1702 et seq.) by more than two percentage points.
    (C) For purposes of this paragraph (b)(5)(ii), the term bona fide 
discount point has the same meaning as in Sec.  1026.43(e)(3)(iv).
    (6) Total loan amount. (i) Closed-end mortgage loans. The total 
loan amount for a closed-end mortgage loan is calculated by taking the 
amount of credit extended at consummation that the consumer is legally 
obligated to repay, as reflected in the loan contract, and deducting 
any cost that is both included in points and fees under Sec.  
1026.32(b)(1) and financed by the creditor.
    (ii) Open-end credit plan. The total loan amount for an open-end 
credit plan is the credit limit for the plan when the account is 
opened.
    (7)[ltrif] Affiliate means any company that controls, is controlled 
by, or is under common control with another company, as set forth in 
the Bank Holding Company Act of 1956 (12 U.S.C. 1841 et seq.).
    [rtrif](8) Prepayment penalty. (i) Closed-end mortgage loans. For a 
closed-end mortgage loan, prepayment penalty means a charge imposed for 
paying all or part of the transaction's principal before the date on 
which the principal is due.

[[Page 49152]]

    (ii) Open-end credit plans. For an open-end credit plan, prepayment 
penalty means a charge imposed by the creditor if the consumer 
terminates the open-end credit plan prior to the end of its 
term.[ltrif]
    (c) * * *
    (3) Regular payment; [rtrif]minimum periodic payment 
example;[ltrif] balloon payment. [rtrif](i) For a closed-end loan, 
the[ltrif][lsqbb] The[rsqbb] amount of the regular monthly (or other 
periodic) payment and the amount of any balloon payment [rtrif]provided 
in the credit contract, if permitted under paragraph (d)(1) of this 
section[ltrif]. The regular payment disclosed under this paragraph 
shall be treated as accurate if it is based on an amount borrowed that 
is deemed accurate and is disclosed under paragraph (c)(5) of this 
section.
    [rtrif](ii) For an open-end credit plan:
    (A) An example showing the first minimum periodic payment for the 
draw period, the first minimum periodic payment for any repayment 
period, and the balance outstanding at the beginning of any repayment 
period. The example must be based on the following assumptions:
    (1) The consumer borrows the full credit line, as disclosed in 
paragraph (c)(5) of this section, at account opening and does not 
obtain any additional extensions of credit;
    (2) The consumer makes only minimum periodic payments during the 
draw period and any repayment period; and
    (3) The annual percentage rate used to calculate the example 
payments remains the same during the draw period and any repayment 
period. The creditor must provide the minimum periodic payment example 
based on the annual percentage rate for the plan, as described in 
paragraph (c)(2) of this section, except that if an introductory annual 
percentage rate applies, the creditor must use the rate that will apply 
to the plan after the introductory rate expires.
    (B) If the credit contract provides for a balloon payment under the 
plan as permitted under paragraph (d)(1) of this section, a disclosure 
of that fact and an example showing the amount of the balloon payment 
based on the assumptions described in paragraph (c)(3)(ii)(A) of this 
section.
    (C) A statement that the example payments show the first minimum 
periodic payments at the current annual percentage rate if the consumer 
borrows the maximum credit available when the account is opened and 
does not obtain any additional extensions of credit, or a substantially 
similar statement.
    (D) A statement that the example payments are not the consumer's 
actual payments and that the actual minimum periodic payments will 
depend on the amount the consumer borrows, the interest rate applicable 
to that period, and whether the consumer pays more than the required 
minimum periodic payment, or a substantially similar statement.[ltrif]
    (4) Variable-rate. For variable-rate transactions, a statement that 
the interest rate and monthly payment may increase, and the amount of 
the single maximum monthly payment, based on the maximum interest rate 
required to be [rtrif]included in the contract by[ltrif] 
[lsqbb]disclosed under[rsqbb]Sec.  1026.30.
    (5) Amount borrowed [rtrif]; credit limit. (i) For a closed-end 
mortgage loan[ltrif] [lsqbb]For a mortgage refinancing[rsqbb], the 
total amount the consumer will borrow, as reflected by the face amount 
of the note; and where the amount borrowed includes premiums or other 
charges for optional credit insurance or debt-cancellation coverage, 
that fact shall be stated, grouped together with the disclosure of the 
amount borrowed. The disclosure of the amount borrowed shall be treated 
as accurate if it is not more than $100 above or below the amount 
required to be disclosed.
    [rtrif](ii) For an open-end credit plan, the credit limit for the 
plan when the account is opened.[ltrif]
    (d) Limitations. A [rtrif]high-cost mortgage[ltrif] [lsqbb]mortgage 
transaction subject to this section[rsqbb] shall not include the 
following terms:
    Alternative 1--Paragraph (d)(1)(i)
    (1)(i) Balloon payment. [rtrif]Except as provided by paragraphs 
(d)(1)(ii) and (iii) of this section, a payment schedule with a payment 
that is more than twice as large as the average of regular periodic 
payments.[ltrif] [lsqbb]For a loan with a term of less than five years, 
a payment schedule with regular periodic payments that when aggregated 
do not fully amortize the outstanding principal balance.[rsqbb]
    Alternative 2--Paragraph (d)(1)(i)
    (1)(i) Balloon payment. [rtrif]Except as provided by paragraphs 
(d)(1)(ii) and (iii) of this section, a payment schedule with a payment 
that is more than two times a regular periodic payment.[ltrif] 
[lsqbb]For a loan with a term of less than five years, a payment 
schedule with regular periodic payments that when aggregated do not 
fully amortize the outstanding principal balance.[rsqbb]
    (ii) Exception. The limitations in paragraph (d)(1)(i) of this 
section do not apply to [rtrif]a mortgage transaction with a payment 
schedule that is adjusted to the seasonal or irregular income of the 
consumer.
    (iii) Open-end credit plans. If the terms of an open-end credit 
plan provide for a repayment period during which no further draws may 
be taken, the limitations in paragraph (d)(1)(i) of this section apply 
only to the repayment period. If the terms of an open-end credit plan 
do not provide for any repayment period, the limitations in paragraph 
(d)(1)(i) of this section apply to the draw period.[ltrif] [lsqbb]loans 
with maturities of less than one year, if the purpose of the loan is a 
``bridge'' loan connected with the acquisition or construction of a 
dwelling intended to become the consumer's principal dwelling.[rsqbb]
* * * * *
    (6) Prepayment penalties. [rtrif]A prepayment penalty, as defined 
in paragraph (b)(8) of this section.[ltrif] [lsqbb]Except as allowed 
under paragraph (d)(7) of this section, a penalty for paying all or 
part of the principal before the date on which the principal is due. A 
prepayment penalty includes computing a refund of unearned interest by 
a method that is less favorable to the consumer than the actuarial 
method, as defined by section 933(d) of the Housing and Community 
Development Act of 1992, 15 U.S.C. 1615(d).[rsqbb]
    (7) [rtrif][Reserved.][ltrif] [lsqbb]Prepayment penalty exception. 
A mortgage transaction subject to this section may provide for a 
prepayment penalty (including a refund calculated according to the rule 
of 78s) otherwise permitted by law if, under the terms of the loan:
    (i) The penalty will not apply after the two-year period following 
consummation;
    (ii) The penalty will not apply if the source of the prepayment 
funds is a refinancing by the creditor or an affiliate of the creditor;
    (iii) At consummation, the consumer's total monthly debt payments 
(including amounts owed under the mortgage) do not exceed 50 percent of 
the consumer's monthly gross income, as verified in accordance with 
Sec.  1026.34(a)(4)(ii); and
    (iv) The amount of the periodic payment of principal or interest or 
both may not change during the four-year period following 
consummation.[rsqbb]
    (8)[rtrif]Acceleration of debt.[ltrif] [lsqbb]Due-on-demand 
clause.[rsqbb] A demand feature that permits the creditor to 
[rtrif]accelerate the indebtedness by terminating the high-cost 
mortgage[ltrif] [lsqbb]terminate the loan[rsqbb] in advance of the 
original maturity date and to demand repayment of the entire 
outstanding balance, except in the following circumstances:
    [rtrif](i) The consumer fails to meet the repayment terms for any 
outstanding balance that results in a default in

[[Page 49153]]

payment under the loan or open-end credit agreement;
    (ii) The acceleration is pursuant to a due-on-sale clause in the 
loan or open-end credit agreement; or
    (iii) The consumer materially violates some other provision of the 
loan or open-end credit agreement unrelated to the payment 
schedule.[ltrif]
    [lsqbb](i) There is fraud or material misrepresentation by the 
consumer in connection with the loan;
    (ii) The consumer fails to meet the repayment terms of the 
agreement for any outstanding balance; or
    (iii) There is any action or inaction by the consumer that 
adversely affects the creditor's security for the loan, or any right of 
the creditor in such security.[rsqbb]
    7. Section 1026.34 is amended by revising paragraphs (a) and (b) to 
read as follows:


Sec.  1026.34  Prohibited acts or practices in connection with high-
cost mortgages.

    (a) Prohibited acts or practices for high-cost mortgages. [lsqbb]A 
creditor extending mortgage credit subject to Sec.  1026.32 shall 
not:[rsqbb] (1) Home improvement contracts. [rtrif]A creditor shall not 
pay[ltrif] [lsqbb]Pay[rsqbb] a contractor under a home improvement 
contract from the proceeds of a [rtrif]high-cost mortgage[ltrif] 
[lsqbb]mortgage covered by Sec.  1026.32[rsqbb], other than:
    (i) By an instrument payable to the consumer or jointly to the 
consumer and the contractor; or
    (ii) At the election of the consumer, through a third-party escrow 
agent in accordance with terms established in a written agreement 
signed by the consumer, the creditor, and the contractor prior to the 
disbursement.
    (2) Notice to assignee. [rtrif]A creditor may not sell[ltrif] 
[lsqbb]Sell[rsqbb] or otherwise assign a [rtrif]high-cost 
mortgage[ltrif] [lsqbb]mortgage subject to Sec.  1026.32[rsqbb] without 
furnishing the following statement to the purchaser or assignee: 
``Notice: This is a mortgage subject to special rules under the Federal 
Truth in Lending Act. Purchasers or assignees of this mortgage could be 
liable for all claims and defenses with respect to the mortgage that 
the borrower could assert against the creditor.''
    (3) Refinancings within one-year period. Within one year of having 
extended [rtrif]a high-cost mortgage, a creditor shall not refinance 
any high-cost mortgage to the same borrower into another high-cost 
mortgage[ltrif] [lsqbb]credit subject to Sec.  1026.32, refinance any 
loan subject to Sec.  1026.32 to the same borrower into another loan 
subject to Sec.  1026.32[rsqbb], unless the refinancing is in the 
borrower's interest. An assignee holding or servicing [rtrif]a high-
cost mortgage[ltrif] [lsqbb]an extension of mortgage credit subject to 
Sec.  1026.32,- shall not, for the remainder of the one-year period 
following the date of origination of the credit, refinance any 
[rtrif]high-cost mortgage[ltrif] [lsqbb]loan subject to Sec.  
1026.32[rsqbb] to the same borrower into another [rtrif]high-cost 
mortgage[ltrif] [lsqbb]loan subject to Sec.  1026.32[rsqbb], unless the 
refinancing is in the borrower's interest. A creditor (or assignee) is 
prohibited from engaging in acts or practices to evade this provision, 
including a pattern or practice of arranging for the refinancing of its 
own loans by affiliated or unaffiliated creditors[rtrif].[ltrif] 
[lsqbb], or modifying a loan agreement (whether or not the existing 
loan is satisfied and replaced by the new loan) and charging a 
fee,[rsqbb]
    (4) Repayment ability [rtrif]for high-cost mortgages. In connection 
with a closed-end, high-cost mortgage, a creditor must comply with the 
repayment ability requirements set forth in Sec.  1026.43. In 
connection with an open-end, high-cost mortgage, a creditor shall not 
open a plan for a consumer where credit is or will be extended[ltrif] 
[lsqbb]Extend credit subject to Sec.  1026.32 to a consumer[rsqbb] 
based on the value of the consumer's collateral without regard to the 
consumer's repayment ability as of [rtrif]account opening[ltrif] 
[lsqbb]consummation[rsqbb], including the consumer's current and 
reasonably expected income, employment, assets other than the 
collateral, current obligations, and mortgage-related obligations.
    (i) Mortgage-related obligations. For purposes of this paragraph 
(a)(4), mortgage-related obligations are expected property taxes, 
premiums for mortgage-related insurance required by the creditor as set 
forth in Sec.  1026.35(b)(3)(i), and similar expenses.
    (ii) Verification of repayment ability. Under this paragraph (a)(4) 
a creditor must verify the consumer's repayment ability as follows:
    (A) A creditor must verify amounts of income or assets that it 
relies on to determine repayment ability, including expected income or 
assets, by 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.
    (B) Notwithstanding paragraph (a)(4)(ii)(A), a creditor has not 
violated paragraph (a)(4)(ii) if the amounts of income and assets that 
the creditor relied upon in determining repayment ability are not 
materially greater than the amounts of the consumer's income or assets 
that the creditor could have verified pursuant to paragraph 
(a)(4)(ii)(A) at the time [rtrif]of account opening[ltrif] [lsqbb]the 
loan was consummated[rsqbb].
    (C) A creditor must verify the consumer's current obligations.
    (iii) Presumption of compliance. A creditor is presumed to have 
complied with this paragraph (a)(4) with respect to a transaction if 
the creditor:
    (A) Verifies the consumer's repayment ability as provided in 
paragraph (a)(4)(ii);
    (B) [rtrif]Determines the consumer's repayment ability taking into 
account current obligations and mortgage-related obligations as defined 
in paragraph (a)(4)(i) of this section, and using the largest required 
minimum periodic payment based on the following assumptions:
    (1) The consumer borrows the full credit line at account opening 
with no additional extensions of credit;
    (2) The consumer makes only required minimum periodic payments 
during the draw period and any repayment period;
    (3) If the annual percentage rate may increase during the plan, the 
maximum annual percentage rate that is included in the contract, as 
required by Sec.  1026.30, applies to the plan at account opening and 
will apply during the draw period and any repayment period.[ltrif] 
[lsqbb]Determines the consumer's repayment ability using the largest 
payment of principal and interest scheduled in the first seven years 
following consummation and taking into account current obligations and 
mortgage-related obligations as defined in paragraph (a)(4)(i); 
and[rsqbb]
    (C) Assesses the consumer's repayment ability taking into account 
at least one of the following: The ratio of total debt obligations to 
income, or the income the consumer will have after paying debt 
obligations.
    (iv) Exclusions from presumption of compliance. Notwithstanding the 
previous paragraph, no presumption of compliance is available for a 
transaction for which:
    (A) The regular periodic payments [for the first seven years] would 
cause the principal balance to increase; or
    (B) The [term of the loan is less than seven years and the] regular 
periodic payments when aggregated do not fully amortize the outstanding 
principal balance [rtrif]except as otherwise provided by Sec.  
1026.32(d)(1)(ii)[ltrif].
    (v) Exemption. This paragraph (a)(4) does not apply to temporary or 
``bridge'' loans with terms of twelve months or less, such as a loan to 
purchase a new dwelling where the consumer plans to sell a current 
dwelling within twelve months.

[[Page 49154]]

    [rtrif](5) Pre-loan counseling. (i) Certification of counseling 
required. A creditor shall not extend a high-cost mortgage to a 
consumer unless the creditor receives written certification that the 
consumer has obtained counseling on the advisability of the mortgage 
from a counselor that is approved to provide such counseling by the 
Secretary of the U.S. Department of Housing and Urban Development or, 
if permitted by the Secretary, by a State housing finance authority.
    (ii) Timing of counseling. The counseling required under this 
paragraph (a)(5) must occur after the consumer receives either the good 
faith estimate required by the Real Estate Settlement Procedures Act of 
1974 (12 U.S.C. 2601 et seq.) or the disclosures required by Sec.  
1026.40.
    (iii) Affiliation prohibited. (A) General. The counseling required 
under this paragraph (a)(5) shall not be provided by a counselor who is 
employed by or affiliated with the creditor.
    (B) Exception. The prohibition under paragraph (a)(5)(iii)(A) does 
not apply to a State housing finance authority that both extends a 
high-cost mortgage to a consumer and provides, either itself or through 
an affiliate, counseling to the consumer on the high-cost mortgage.
    (iv) Content of certification. The certification of counseling 
required under paragraph (a)(5)(i) must include:
    (A) The name(s) of the consumer(s) who obtained counseling;
    (B) The date(s) of counseling;
    (C) The name and address of the counselor;
    (D) A statement that the consumer(s) received counseling on the 
advisability of the high-cost mortgage based on the terms provided in 
either the good faith estimate or the disclosures required by Sec.  
1026.40; and
    (E) A statement that the counselor has verified that the 
consumer(s) received the disclosures required by either Sec.  
1026.32(c) or the Real Estate Settlement Procedures Act of 1974 (12 
U.S.C. 2601 et seq.) with respect to the transaction.
    (v) Counseling fees. A creditor may pay the fees of a counselor or 
counseling organization for providing counseling required under this 
paragraph (a)(5) but may not condition the payment of such fees on the 
consummation or account-opening of a mortgage transaction. If the 
consumer withdraws the application that would result in the extension 
of a high-cost mortgage, a creditor may not condition the payment of 
such fees on the receipt of certification from the counselor required 
by paragraph (a)(5)(i) of this section. A creditor may, however, 
confirm that a counselor has provided counseling to the consumer 
pursuant to this paragraph (a)(5) prior to paying the fee of a 
counselor or counseling organization.
    (vi) Steering prohibited. A creditor that extends a high-cost 
mortgage shall not steer or otherwise direct a consumer to choose a 
particular counselor or counseling organization for the counseling 
required under this paragraph (a)(5).
    (vii) List of counselors. (A) General. A creditor must provide to a 
consumer for whom counseling is required under this paragraph (a)(5), a 
notice containing the Web site addresses and telephone numbers of the 
Bureau and the U.S. Department of Housing and Urban Development for 
access to information about housing counseling, and a list of five 
counselors or counseling organizations approved by the Secretary of the 
U.S. Department of Housing and Urban Development to provide the 
counseling required under paragraph (a)(5) of this section. The notice 
must be provided no later than the time when either the good faith 
estimate required by the Real Estate Settlement Procedures Act of 1974 
(12 U.S.C. 2601 et seq.) or the disclosures required by Sec.  1026.40, 
as applicable, must be provided.
    (B) Safe harbor. A creditor is deemed to have complied with the 
requirements of paragraph (a)(5)(vii)(A) if the creditor provides the 
list of homeownership counselors required by 12 CFR 1024.20 to a 
consumer for whom counseling is required under this paragraph (a)(5).
    (6) Recommended default. A creditor or mortgage broker, as defined 
in section 1026.36(a)(2), may not recommend or encourage default on an 
existing loan or other debt prior to and in connection with the 
consummation or account opening of a high-cost mortgage that refinances 
all or any portion of such existing loan or debt.
    (7) Modification and deferral fees. A creditor, successor-in-
interest, assignee, or any agent of such parties may not charge a 
consumer any fee to modify, renew, extend or amend a high-cost 
mortgage, or to defer any payment due under the terms of such mortgage.
    (8) Late fees. (i) General. Any late payment charge imposed in 
connection with a high-cost mortgage must be specifically permitted by 
the terms of the loan contract or open-end credit agreement and may not 
exceed four percent of the amount of the payment past due. No such 
charge may be imposed more than once for a single late payment.
    (ii) Timing. A late payment charge may be imposed in connection 
with a high-cost mortgage only if the payment is not received by the 
end of the 15-day period beginning on the date the payment is due or, 
in the case of a high-cost mortgage on which interest on each 
installment is paid in advance, the end of the 30-day period beginning 
on the date the payment is due.
    (iii) Multiple late charges assessed on payment subsequently paid. 
A late payment charge may not be imposed in connection with a high-cost 
mortgage payment if any delinquency is attributable only to a late 
payment charge imposed on an earlier payment, and the payment otherwise 
is a full payment for the applicable period and is paid by the due date 
or within any applicable grace period.
    (iv) Failure to make required payment. The terms of a high-cost 
mortgage agreement may provide that any payment shall first be applied 
to any past due balance. If the consumer fails to make a timely payment 
by the due date and subsequently resumes making payments but has not 
paid all past due payments, the creditor may impose a separate late 
payment charge for any payment(s) outstanding (without deduction due to 
late fees or related fees) until the default is cured.
    (9) Payoff statements. (i) Fee prohibition. In general, a creditor 
or servicer (as defined in 12 CFR 1024.2(b)) may not charge a fee for 
providing to a consumer, or a person authorized by the consumer to 
obtain such information, a statement of the amount due to pay off the 
outstanding balance of a high-cost mortgage.
    (ii) Processing fee. A creditor or servicer may charge a processing 
fee to cover the cost of providing a payoff statement, as described in 
paragraph (a)(9)(i) of this section, by fax or courier, provided that 
such fee may not exceed an amount that is comparable to fees imposed 
for similar services provided in connection with consumer credit 
transactions that are secured by the consumer's principal dwelling and 
are not high-cost mortgages. A creditor or servicer shall make a payoff 
statement available to a consumer, or a person authorized by the 
consumer to obtain such information, by a method other than by fax or 
courier and without charge pursuant to paragraph (a)(9)(i) of this 
section.
    (iii) Processing fee disclosure. Prior to charging a processing fee 
for provision of a payoff statement by fax or courier, as permitted 
pursuant to paragraph (a)(9)(ii) of this section, a creditor or 
servicer shall disclose to a consumer or a person authorized by the 
consumer to obtain the consumer's payoff statement that payoff 
statements, as described in

[[Page 49155]]

paragraph (a)(9)(i) of this section, are available for free pursuant to 
paragraph (a)(9)(i) of this section.
    (iv) Fees permitted after multiple requests. A creditor or servicer 
that has provided a payoff statement, as described in paragraph 
(a)(9)(i) of this section, to a consumer, or a person authorized by the 
consumer to obtain such information, without charge, other than the 
processing fee permitted under paragraph (a)(9)(ii) of this section, 
four times during a calendar year, may thereafter charge a reasonable 
fee for providing such statements during the remainder of the calendar 
year. Fees for payoff statements provided to a consumer in a subsequent 
calendar year are subject to the requirements of this section.
    (v) Timing of delivery of payoff statements. A payoff statement, as 
described in paragraph (a)(9)(i) of this section, for a high-cost 
mortgage shall be provided by a creditor or servicer within five 
business days after receiving a request for such statement by a 
consumer or a person authorized by the consumer to obtain such 
statement.
    (10) Financing of points and fees. A creditor that extends credit 
under a high-cost mortgage may not finance any points and fees, as that 
term is defined in Sec.  1026.32(b)(1) through (5). Credit insurance 
premiums or debt cancellation or suspension fees that are required to 
be included in points and fees under Sec.  1026.32(b)(1)(iv) or 
(3)(iii) shall not be considered financed by the creditor when they are 
calculated and paid in full on a monthly basis.[ltrif]
    (b) Prohibited acts or practices for dwelling-secured loans; 
[lsqbb]open-end credit. In connection with credit secured by the 
consumer's dwelling that does not meet the definition 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 Sec.  
1026.32.[rsqbb][rtrif]structuring loans to evade high-cost mortgage 
requirements. A creditor shall not structure any transaction that is 
otherwise a high-cost mortgage in a form, for the purpose, and with the 
intent to evade the requirements of a high-cost mortgage subject to 
this subpart, including by dividing any loan transaction into separate 
parts.[ltrif]
    8. Section 1026.36 is revised to add new paragraphs (g), (h), (i), 
(j), and (k) as follows:


Sec.  1026.36  Prohibited acts or practices in connection with credit 
secured by a dwelling.

* * * * *
    [rtrif](g) [Reserved.]
    (h) [Reserved.]
    (i) [Reserved.]
    (j) [Reserved.]
    (k) Negative amortization counseling. (1) Counseling required. A 
creditor shall not extend credit to a first-time borrower in connection 
with a closed-end transaction secured by a dwelling, other than a 
reverse mortgage transaction subject to Sec.  1026.33 or a transaction 
secured by a consumer's interest in a timeshare plan described in 11 
U.S.C. 101(53D), that may result in negative amortization for the loan, 
unless the creditor receives documentation that the consumer has 
obtained homeownership counseling from a counseling organization or 
counselor certified or approved by the U.S. Department of Housing and 
Urban Development to provide such counseling.
    (2) Definitions. For the purposes of this paragraph (k), the 
following definitions apply:
    (i) A ``first-time borrower'' means a consumer who has not 
previously received a closed-end mortgage loan or open-end credit plan 
secured by a dwelling.
    (ii) ``Negative amortization'' means a payment schedule with 
regular periodic payments that cause the principal balance to increase.
    (3) Steering prohibited. A creditor that extends credit to a first-
time borrower in connection with a closed-end transaction secured by a 
dwelling, other than a reverse mortgage transaction subject to Sec.  
1026.33 or a transaction secured by a consumer's interest in a 
timeshare plan described in 11 U.S.C. 101(53D), that may result in 
negative amortization shall not steer or otherwise direct a consumer to 
choose a particular counselor or counseling organization for the 
counseling required under this paragraph (k).
    (4) List of counselors. (i) General. A creditor must provide to a 
consumer for whom counseling is required under this paragraph (k), a 
notice containing the Web site addresses and telephone numbers of the 
Bureau and the U.S. Department of Housing and Urban Development for 
access to information about homeownership counseling, and a list of 
five counselors or counseling organizations certified or approved by 
the U.S. Department of Housing and Urban Development to provide 
homeownership counseling. The notice must be provided no later than the 
time when the good faith estimate required by the Real Estate 
Settlement Procedures Act of 1974 (12 U.S.C. 2601 et seq.) must be 
provided.
    (ii) Safe harbor. A creditor is deemed to have complied with the 
requirements of paragraph (k)(4)(i) of this section if the creditor 
provides the list of homeownership counselors required by 12 CFR 
1024.20 to a consumer for whom counseling is required under this 
paragraph (k).[ltrif]
    9. In Supplement I to Part 1026--Official Interpretations:
    A. Under Section 1026.31--General Rules:
    i. The subheading 31(c)(1) Disclosures for certain closed-end home 
mortgages and paragraph 1. under that subheading are revised.
    ii. Under subheading 31(c)(1)(i) Change in terms, paragraph 2. is 
revised.
    iii. Under subheading 31(c)(1)(ii) Telephone disclosures, paragraph 
1. is revised.
    iv. The subheading 31(c)(1)(iii) Consumer's waiver of waiting 
period before consummation is revised.
    B. Under Section 1026.32--Requirements for Certain Closed-End Home 
Mortgages:
    i. The heading Section 1026.32--Requirements for Certain Closed-End 
Home Mortgages is revised.
    ii. The subheading 32(a) Coverage is revised.
    iii. The subheading 32(a)(1) Coverage and paragraph 1. under that 
subheading are added.
    iv. Under new subheading 32(a)(1) Coverage:
    a. Under subheading Paragraph 32(a)(1)(i), paragraphs 1., 2., 3., 
and 4. are revised.
    b. Under subheading Paragraph 32(a)(1)(ii), paragraph 1. is re-
designated and revised as paragraph 1. under subheading 32(b)(6) Total 
loan amount, subheading 32(b)(6)(i) Closed-end mortgage loans, 
paragraph 2. is re-designated as paragraph 1. under subheading 
Paragraph 32(a)(1)(ii) and new paragraph 2. is added.
    c. The subheading Paragraph 32(a)(1)(iii) and paragraphs 1. and 2. 
under that subheading are added.
    v. The subheading Paragraph 32(a)(2) and paragraph 1. under that 
subheading are revised and paragraphs 2., 3., and 4. are added.
    vi. Under subheading 32(b) Definitions:
    a. Under subheading Paragraph 32(b)(1)(i), paragraph 1. is revised 
and paragraphs 2., 3., and 4. are added.
    b. Under subheading Paragraph 32(b)(1)(ii), paragraph 1. is 
revised, paragraph 2. is re-designated and revised under subheading 
Paragraph 32(b)(1)(iii), paragraph 1. and new paragraphs 2. and 3. are 
added under subheading Paragraph 32(b)(1)(ii).
    c. Under subheading Paragraph 32(b)(1)(iv), paragraph 1. is revised 
and paragraph 2. is added.

[[Page 49156]]

    d. The subheading Paragraph 32(b)(3)(i) and paragraph 1. under that 
subheading are added.
    e. The subheading Paragraph 32(b)(3)(ii) and paragraph 1. under 
that subheading are added.
    f. The subheading Paragraph 32(b)(3)(iii) and paragraph 1. under 
that subheading are added.
    g. The subheading Paragraph 32(b)(3)(v) and paragraph 1. under that 
subheading are added.
    h. The subheading Paragraph 32(b)(3)(vi) and paragraphs 1. and 2. 
under that subheading are added.
    i. The subheading Paragraph 32(b)(4) and paragraph 1. under that 
subheading are added.
    j. The subheading Paragraph 32(b)(5), the subheading 32(b)(5)(i) 
Bona fide third-party charges and paragraphs 1., 2., and 3. under that 
subheading, and the subheading 32(b)(5)(ii) Bona fide discount points 
and paragraph 1. under that subheading are added.
    k. The subheading 32(b)(8) Prepayment penalty and paragraphs 1., 
2., and 3. under that subheading are added.
    vii. Under subheading 32(c) Disclosures:
    a. The subheading 32(c)(2) Annual percentage rate and paragraph 1. 
under that subheading are added.
    b. The subheading 32(c)(3) Regular payment; balloon payment is 
revised, paragraph 1. is re-designated as subheading Paragraph 
32(c)(3)(i), paragraph 1., and new paragraph 1. is added under 
subheading 32(c)(3) Regular payment; balloon payment.
    c. Under subheading 32(c)(4) Variable-rate, paragraph 1. is 
revised.
    d. The subheading 32(c)(5) Amount borrowed and paragraph 1. under 
that subheading are revised.
    viii. Under subheading 32(d) Limitations:
    a. Paragraph 1. is revised.
    b. Under subheading 32(d)(1)(i) Balloon payment, paragraph 1. is 
revised and paragraph 2. is added.
    c. Under subheading 32(d)(2) Negative amortization, paragraph 1. is 
revised.
    d. Under subheading 32(d)(6) Prepayment penalties, paragraph 1. is 
removed and reserved.
    e. The subheading 32(d)(7) Prepayment penalty exception and 
paragraph 1. under that subheading are removed and reserved.
    f. Under the subheading 32(d)(7) Prepayment penalty exception, the 
subheading Paragraph 32(d)(7)(iii) and paragraphs 1., 2., and 3. under 
that subheading are removed, and the subheading Paragraph 32(d)(7)(iv) 
and paragraphs 1. and 2. under that subheading are removed.
    g. The subheading 32(d)(8) Due-on-demand clause is revised.
    h. The subheading Paragraph 32(d)(8)(ii) and paragraph 1. under 
that subheading are revised.
    i. Under the subheading Paragraph 32(d)(8)(iii), paragraphs 1. and 
2. are revised and paragraph 3. is added.
    C. Under Section 1026.34--Prohibited Acts or Practices in 
Connection with High-Cost Mortgages:
    i. The subheading 34(a)(2) Notice to Assignee is revised.
    ii. Under the subheading 34(a)(3) Refinancings within one-year 
period, paragraph 2. is revised.
    iii. Under the subheading 34(a)(4) Repayment ability:
    a. Paragraphs 1., 2., 3., 4., and 5. are revised.
    b. Under the subheading Paragraph 34(a)(4)(ii)(B), paragraph 2. is 
revised.
    c. Under the subheading Paragraph 34(a)(4)(ii)(C), paragraph 1. is 
revised.
    d. Under the subheading 34(a)(4)(iii) Presumption of compliance, 
paragraph 1. is revised.
    e. Under the subheading Paragraph 34(a)(4)(iii)(B), paragraph 1. is 
revised.
    iv. New 34(a)(5) Pre-loan counseling, 34(a)(6) Recommended default, 
34(a)(7) Modification and deferral fees, 34(a)(8) Late fees, 34(a)(9) 
Payoff statements and 34(a)(10) Financing of points and fees are added.
    v. The subheading 34(b) Prohibited acts or practices for dwelling-
secured loans; open-end credit and paragraphs 1. and 2. under that 
subheading are revised.
    D. Under Section 1026.36--Prohibited Acts or Practices in 
Connection with Credit Secured by a Dwelling:
    i. New 36(k) Negative amortization counseling is added.
    The revisions, removals, and additions read as follows:

SUPPLEMENT I TO PART 1026--OFFICIAL INTERPRETATIONS

* * * * *

Subpart E--Special Rules for Certain Home Mortgage Transactions

Section 1026.31--General Rules

* * * * *
    31(c)(1) Disclosures for certain [lsqbb]closed-end[rsqbb] home 
mortgages.
    1. Pre-consummation [rtrif]or account opening[ltrif] waiting 
period. A creditor must furnish Sec.  1026.32 disclosures at least 
three business days prior to consummation [rtrif]for a closed-end, 
high-cost mortgage and at least three business days prior to account 
opening for an open-end, high-cost mortgage[ltrif]. Under Sec.  
1026.32, ``business day'' has the same meaning as the rescission 
rule in comment 2(a)(6)-2--all calendar days except Sundays and the 
Federal legal holidays listed in 5 U.S.C. 6103(a). However, while 
the disclosure rule under Sec. Sec.  1026.15 and 1026.23 extends to 
midnight of the third business day, the rule under Sec.  1026.32 
does not. For example, under Sec.  1026.32, if disclosures were 
provided on a Friday, consummation [rtrif]or account opening[ltrif] 
could occur any time on Tuesday, the third business day following 
receipt of the disclosures. If the timing of the rescission rule 
were to be used, consummation [rtrif]or account opening[ltrif] could 
not occur until after midnight on Tuesday.
    31(c)(1)(i) Change in terms.
* * * * *
    2. Sale of optional products at consummation [rtrif]or account 
opening[ltrif]. If the consumer finances the purchase of optional 
products such as credit insurance and as a result the monthly 
payment differs from what was previously disclosed under Sec.  
1026.32, redisclosure is required and a new three-day waiting period 
applies. (See comment 32(c)(3)-1 on when optional items may be 
included in the regular payment disclosure.)
    31(c)(1)(ii) Telephone disclosures.
    1. Telephone disclosures. Disclosures by telephone must be 
furnished at least three business days prior to consummation 
[rtrif]and prior to account opening[ltrif], calculated in accord 
with the timing rules under Sec.  1026.31(c)(1).
    31(c)(1)(iii) Consumer's waiver of waiting period before 
consummation [rtrif]or account opening[ltrif].
* * * * *
    Section 1026.32--Requirements for [rtrif]High-
Cost[ltrif][lsqbb]Certain Closed-End Home[rsqbb] Mortgages
    32(a) [rtrif]High-Cost Mortgages.[ltrif][lsqbb]Coverage.[rsqbb]
    [rtrif]32(a)(1) Coverage.
    1. The term high-cost mortgage includes both a closed-end 
mortgage loan and an open-end credit plan secured by the consumer's 
principal dwelling. For purposes of determining coverage under Sec.  
1026.32, an open-end consumer credit transaction is the account 
opening of an open-end credit plan. An advance of funds or a draw on 
the credit line under an open-end credit plan subsequent to account 
opening does not constitute an open-end ``transaction.''[ltrif]
    Paragraph 32(a)(1)(i).
    1. [rtrif]Transaction coverage rate. The transaction coverage 
rate is calculated solely for purposes of determining whether a 
closed-end transaction is subject to Sec.  1026.32. The creditor is 
not required to disclose the transaction coverage rate to the 
consumer. The creditor determines the transaction coverage rate in 
the same manner as the transaction's annual percentage rate under 
Sec.  1026.32(a)(2) except that, for purposes of calculating the 
transaction coverage rate and determining coverage under Sec.  
1026.32, the amount of the prepaid finance charge is modified in 
accordance with Sec.  1026.35(a)(2)(i). For guidance on determining 
the transaction coverage rate, see commentary to Sec.  
1026.35(a)(2)(i). The transaction coverage rate that results from 
these special rules must be compared to the average prime offer rate 
to determine whether the closed-end transaction is subject to Sec.  
1026.32.[ltrif][lsqbb]Application date. An

[[Page 49157]]

application is deemed received when it reaches the creditor in any 
of the ways applications are normally transmitted. (See Sec.  
1026.19(a).) For example, if a borrower applies for a 10-year loan 
on September 30 and the creditor counteroffers with a 7-year loan on 
October 10, the application is deemed received in September and the 
creditor must measure the annual percentage rate against the 
appropriate Treasury security yield as of August 15. An application 
transmitted through an intermediary agent or broker is received when 
it reaches the creditor, rather than when it reaches the agent or 
broker. (See comment 19(b)-3 to determine whether a transaction 
involves an intermediary agent or broker.)[rsqbb]
    2. [rtrif]Average prime offer rate; closed-end credit. The term 
``average prime offer rate'' is defined in Sec.  1026.35(a)(2)(ii). 
High-cost mortgages include consumer credit transactions secured by 
the consumer's principal dwelling with a transaction coverage rate 
or an annual percentage rate, as applicable, that exceeds the 
average prime offer rate for a comparable transaction as of the date 
the interest rate is set by the specified amount. The published 
table of average prime offer rates indicates how to identify the 
comparable transaction. For guidance on determining the average 
prime offer rate for closed-end credit for purposes of this section, 
see comments 35(a)(2)(ii)-1 through -4.-- [ltrif][lsqbb]When 
fifteenth not a business day. If the 15th day of the month 
immediately preceding the application date is not a business day, 
the creditor must use the yield as of the business day immediately 
preceding the 15th.[rsqbb]
    3. [rtrif]Average prime offer rate; open-end credit plans. 
Section 1026.32(a)(1)(i) requires a creditor to identify a 
``comparable transaction'' when determining the average prime offer 
rate for an open-end credit plan. The published table of average 
prime offer rates lists average prime offer rates for a wide variety 
of types of closed-end loans. Accordingly, Sec.  1026.32(a)(1)(i) 
requires a creditor to determine the average prime offer rate for an 
open-end credit plan by reference to the average prime offer rate 
for the most closely comparable closed-end loan, based on applicable 
loan characteristics and other loan pricing terms. For example, if a 
home-equity line of credit has a variable-rate feature, a creditor 
must utilize the appropriate, corresponding rate table for 
adjustable rates for closed-end loans. If the variable-rate feature 
has a fixed-rate period (i.e., the period until the rate adjusts) 
that is not in whole years, a creditor must use the table for the 
loans using the number of whole years closest to the actual term. 
For example, if a variable-rate feature has an initial fixed-rate 
period of 20 months, a creditor must use the table for two-year 
adjustable rate loans. If the variable-rate feature has no initial 
fixed-rate period or has an initial fixed-rate period of less than 
one year, a creditor must use the applicable table for one-year 
adjustable rate loans. For example, if the initial fixed-rate period 
is six months, a creditor must use the applicable one-year annual 
percentage rate. [ltrif][lsqbb]Calculating annual percentage rates 
for variable-rate loans and discount loans. Creditors must use the 
rules set out in the commentary to Sec.  1026.17(c)(1) in 
calculating the annual percentage rate for variable-rate loans 
(assume the rate in effect at the time of disclosure remains 
unchanged) and for discount, premium, and stepped-rate transactions 
(which must reflect composite annual percentage rates).[rsqbb]
    4. [rtrif]Total loan amount less than $50,000. See Sec.  
1026.32(b)(6) and comment 32(b)(6)-1 for guidance on total loan 
amount for purposes of Sec.  1026.32(a)(1)(i).[ltrif][lsqbb]Treasury 
securities. To determine the yield on comparable Treasury securities 
for the annual percentage rate test, creditors may use the yield on 
actively traded issues adjusted to constant maturities published in 
the Federal Reserve Board's ``Selected Interest Rates'' (statistical 
release H-15). Creditors must use the yield corresponding to the 
constant maturity that is closest to the loan's maturity. If the 
loan's maturity is exactly halfway between security maturities, the 
annual percentage rate on the loan should be compared with the yield 
for Treasury securities having the lower yield. In determining the 
loan's maturity, creditors may rely on the rules in Sec.  
1026.17(c)(4) regarding irregular first payment periods. For 
example:
    i. If the H-15 contains a yield for Treasury securities with 
constant maturities of 7 years and 10 years and no maturity in 
between, the annual percentage rate for an 8-year mortgage loan is 
compared with the yield of securities having a 7-year maturity, and 
the annual percentage rate for a 9-year mortgage loan is compared 
with the yield of securities having a 10-year maturity.
    ii. If a mortgage loan has a term of 15 years, and the H-15 
contains a yield of 5.21 percent for constant maturities of 10 
years, and also contains a yield of 6.33 percent for constant 
maturities of 20 years, then the creditor compares the annual 
percentage rate for a 15-year mortgage loan with the yield for 
constant maturities of 10 years.
    iii. If a mortgage loan has a term of 30 years, and the H-15 
does not contain a yield for 30-year constant maturities, but 
contains a yield for 20-year constant maturities, and an average 
yield for securities with remaining terms to maturity of 25 years 
and over, then the annual percentage rate on the loan is compared 
with the yield for 20-year constant maturities.[rsqbb]
    Paragraph 32(a)(1)(ii).
    1. [lsqbb]Total loan amount. For purposes of the ``points and 
fees'' test, the total loan amount is calculated by taking the 
amount financed, as determined according to Sec.  1026.18(b), and 
deducting any cost listed in Sec.  1026.32(b)(1)(iii) and Sec.  
1026.32(b)(1)(iv) that is both included as points and fees under 
Sec.  1026.32(b)(1) and financed by the creditor. Some examples 
follow, each using a $10,000 amount borrowed, a $300 appraisal fee, 
and $400 in points. A $500 premium for optional credit life 
insurance is used in one example.
    i. If the consumer finances a $300 fee for a creditor-conducted 
appraisal and pays $400 in points at closing, the amount financed 
under Sec.  1026.18(b) is $9,900 ($10,000 plus the $300 appraisal 
fee that is paid to and financed by the creditor, less $400 in 
prepaid finance charges). The $300 appraisal fee paid to the 
creditor is added to other points and fees under Sec.  
1026.32(b)(1)(iii). It is deducted from the amount financed ($9,900) 
to derive a total loan amount of $9,600.
    ii. If the consumer pays the $300 fee for the creditor-conducted 
appraisal in cash at closing, the $300 is included in the points and 
fees calculation because it is paid to the creditor. However, 
because the $300 is not financed by the creditor, the fee is not 
part of the amount financed under Sec.  1026.18(b). In this case, 
the amount financed is the same as the total loan amount: $9,600 
($10,000, less $400 in prepaid finance charges).
    iii. If the consumer finances a $300 fee for an appraisal 
conducted by someone other than the creditor or an affiliate, the 
$300 fee is not included with other points and fees under Sec.  
1026.32(b)(1)(iii). The amount financed under Sec.  1026.18(b) is 
$9,900 ($10,000 plus the $300 fee for an independently-conducted 
appraisal that is financed by the creditor, less the $400 paid in 
cash and deducted as prepaid finance charges).
    iv. If the consumer finances a $300 fee for a creditor-conducted 
appraisal and a $500 single premium for optional credit life 
insurance, and pays $400 in points at closing, the amount financed 
under Sec.  1026.18(b) is $10,400 ($10,000, plus the $300 appraisal 
fee that is paid to and financed by the creditor, plus the $500 
insurance premium that is financed by the creditor, less $400 in 
prepaid finance charges). The $300 appraisal fee paid to the 
creditor is added to other points and fees under Sec.  
1026.32(b)(1)(iii), and the $500 insurance premium is added under 
1026.32(b)(1)(iv). The $300 and $500 costs are deducted from the 
amount financed ($10,400) to derive a total loan amount of $9,600.
    2.[rsqbb][rtrif]Annual adjustment of $1,000 
amount.[ltrif][lsqbb]Annual adjustment of $400 amount. A mortgage 
loan is covered by Sec.  1026.32 if the total points and fees 
payable by the consumer at or before loan consummation exceed the 
greater of $400 or 8 percent of the total loan amount. The $400 
figure[rsqbb] [rtrif]The $1,000 figure in Sec.  
1026.32(a)(1)(ii)(B)[ltrif] is adjusted annually on January 1 by the 
annual percentage change in the CPI that was in effect on the 
preceding June 1. The Bureau will publish adjustments after the June 
figures become available each year. [lsqbb]The adjustment for the 
upcoming year will be included in any proposed commentary published 
in the fall, and incorporated into the commentary the following 
spring. The adjusted figures are:[rsqbb]
    [rtrif]2. Historical adjustment of $400 amount. Prior to [DATE 
THAT THE FINAL RULE TAKES EFFECT], a mortgage loan was covered by 
Sec.  1026.32 if the total points and fees payable by the consumer 
at or before loan consummation exceeded the greater of $400 or 8 
percent of the total loan amount. The $400 figure was adjusted 
annually on January 1 by the annual percentage change in the CPI 
that was in effect on the preceding June 1, as follows:[ltrif]
    i. For 1996, $412, reflecting a 3.00 percent increase in the 
CPI-U from June 1994 to June 1995, rounded to the nearest whole 
dollar.
    ii. For 1997, $424, reflecting a 2.9 percent increase in the 
CPI-U from June 1995 to June 1996, rounded to the nearest whole 
dollar.

[[Page 49158]]

    iii. For 1998, $435, reflecting a 2.5 percent increase in the 
CPI-U from June 1996 to June 1997, rounded to the nearest whole 
dollar.
    iv. For 1999, $441, reflecting a 1.4 percent increase in the 
CPI-U from June 1997 to June 1998, rounded to the nearest whole 
dollar.
    v. For 2000, $451, reflecting a 2.3 percent increase in the CPI-
U from June 1998 to June 1999, rounded to the nearest whole dollar.
    vi. For 2001, $465, reflecting a 3.1 percent increase in the 
CPI-U from June 1999 to June 2000, rounded to the nearest whole 
dollar.
    vii. For 2002, $480, reflecting a 3.27 percent increase in the 
CPI-U from June 2000 to June 2001, rounded to the nearest whole 
dollar.
    viii. For 2003, $488, reflecting a 1.64 percent increase in the 
CPI-U from June 2001 to June 2002, rounded to the nearest whole 
dollar.
    ix. For 2004, $499, reflecting a 2.22 percent increase in the 
CPI-U from June 2002 to June 2003, rounded to the nearest whole 
dollar.
    x. For 2005, $510, reflecting a 2.29 percent increase in the 
CPI-U from June 2003 to June 2004, rounded to the nearest whole 
dollar.
    xi. For 2006, $528, reflecting a 3.51 percent increase in the 
CPI-U from June 2004 to June 2005, rounded to the nearest whole 
dollar.
    xii. For 2007, $547, reflecting a 3.55 percent increase in the 
CPI-U from June 2005 to June 2006, rounded to the nearest whole 
dollar.
    xiii. For 2008, $561, reflecting a 2.56 percent increase in the 
CPI-U from June 2006 to June 2007, rounded to the nearest whole 
dollar.
    xiv. For 2009, $583, reflecting a 3.94 percent increase in the 
CPI-U from June 2007 to June 2008, rounded to the nearest whole 
dollar.
    xv. For 2010, $579, reflecting a 0.74 percent decrease in the 
CPI-U from June 2008 to June 2009, rounded to the nearest whole 
dollar.
    xvi. For 2011, $592, reflecting a 2.2 percent increase in the 
CPI-U from June 2009 to June 2010, rounded to the nearest whole 
dollar.
    xvii. For 2012, $611, reflecting a 3.2 percent increase in the 
CPI-U from June 2010 to June 2011, rounded to the nearest whole 
dollar.
    [rtrif]Paragraph 32(a)(1)(iii).
    1. Maximum period and amount. Section 1026.32(a)(1)(iii) 
provides that a closed-end mortgage loan or an open-end credit plan 
is a high-cost mortgage if, under the terms of the loan contract or 
open-end credit agreement, a creditor can charge either (i) a 
prepayment penalty more than 36 months after consummation or account 
opening, or (ii) total prepayment penalties that exceed two percent 
of any amount prepaid. Section 1026.32(a)(1)(iii) applies only for 
purposes of determining whether a transaction is subject to the 
high-cost mortgage requirements and restrictions in Sec.  1026.32(c) 
and (d) and Sec.  1026.34. However, if a transaction is subject to 
those requirements and restrictions by operation of any provision of 
Sec.  1026.32(a)(1), including by operation of Sec.  
1026.32(a)(1)(iii), then the transaction may not include a 
prepayment penalty. See Sec.  1026.32(d)(6). As a result, Sec.  
1026.32(a)(1)(iii) effectively establishes a maximum period during 
which a prepayment penalty may be imposed, and a maximum prepayment 
penalty amount that may be imposed, on a closed-end mortgage loan 
(other than a reverse mortgage) or open-end credit plan secured by a 
consumer's principal dwelling. Closed-end mortgage loans are subject 
to the additional prepayment penalty restrictions set forth in Sec.  
1026.43(g).
    2. Examples; open-end credit plans. If the terms of an open-end 
credit agreement allow for a prepayment penalty that exceeds two 
percent of the initial credit limit for the plan, the agreement will 
be deemed to permit a creditor to charge a prepayment penalty that 
exceeds two percent of the ``amount prepaid'' within the meaning of 
Sec.  1026.32(a)(1)(iii). The following examples illustrate how to 
calculate whether the terms of an open-end credit agreement comply 
with the maximum prepayment penalty period and amounts described in 
comment 32(a)(1)(iii).
    i. Assume that the terms of a home-equity line of credit with an 
initial credit limit of $10,000 require the consumer to pay a $500 
flat fee if the consumer terminates the plan less than 36 months 
after account opening. The $500 fee constitutes a prepayment penalty 
under Sec.  1026.32(b)(8)(ii), and the penalty is greater than two 
percent of the $10,000 initial credit limit, which is $200. Under 
Sec.  1026.32(a)(1)(iii), the plan is a high-cost mortgage subject 
to the requirements and restrictions set forth in Sec. Sec.  1026.32 
and 1026.34.
    ii. Assume that the terms of a home-equity line of credit with 
an initial credit limit of $10,000 and a ten-year term require the 
consumer to pay a $200 flat fee if the consumer terminates the plan 
prior to its normal expiration. The $200 prepayment penalty does not 
exceed two percent of the initial credit limit, but the terms of the 
agreement permit the creditor to charge the fee more than 36 months 
after account opening. Thus, under Sec.  1026.32(a)(1)(iii), the 
plan is a high-cost mortgage subject to the requirements and 
restrictions set forth in Sec. Sec.  1026.32 and 1026.34.
    iii. Assume that, under the terms of a home-equity line of 
credit with an initial credit limit of $150,000, the creditor may 
charge the consumer any closing costs waived by the creditor if the 
consumer terminates the plan less than 36 months after account 
opening. Assume also that the creditor waived closing costs of 
$1,000. Bona fide third-party charges comprised $800 of the $1,000 
in waived closing costs, and origination charges retained by the 
creditor or its affiliate comprised the remaining $200. Under Sec.  
1026.32(b)(8)(ii), the $800 in bona fide third-party charges is not 
a prepayment penalty, while the $200 for the creditor's own 
originations costs is a prepayment penalty. The total prepayment 
penalty of $200 is less than two percent of the initial $150,000 
credit limit, and the penalty does not apply if the consumer 
terminates the plan more than 36 months after account opening. Thus, 
the plan is not a high-cost mortgage under Sec.  
1026.32(a)(1)(iii).[ltrif]
    [lsqbb]Paragraph[rsqbb] 32(a)(2) [rtrif]Determination of 
transaction coverage rate or annual percentage rate.[ltrif]
    1. [lsqbb]Exemption limited. Section 1026.32(a)(2) lists certain 
transactions exempt from the provisions of Sec.  1026.32. 
Nevertheless, those transactions may be subject to the provisions of 
Sec.  1026.35, including any provisions of Sec.  1026.32 to which 
Sec.  1026.35 refers. See Sec.  1026.35(a).[rsqbb] 
[rtrif]Determining interest rate for transaction coverage rate or 
annual percentage rate. The guidance set forth in the commentary to 
Sec.  1026.17(c)(1) addresses calculation of the annual percentage 
rates disclosures for discounted and premium variable-rate loans. 
Section 1026.32(a)(2) requires a different calculation of the annual 
percentage rate or transaction coverage rate, as applicable, solely 
to determine coverage under Sec.  1026.32(a)(1)(i).
    2. Open-end credit plan. The annual percentage rate for an open-
end credit plan must be determined in accordance with Sec.  
1026.32(a)(2), regardless of whether there is an advance of funds at 
account opening. Section 1026.32(a)(2) does not require the 
calculation of the annual percentage rate for any extensions of 
credit subsequent to account opening. Any draw on the credit line 
subsequent to account opening is not treated as a separate 
transaction for purposes of determining annual percentage rate 
threshold coverage.
    3. Rates that vary. i. Section 1026.32(a)(2)(ii) applies when 
the interest rate is determined by an index that is outside the 
creditor's control and the maximum margin is set forth in the 
agreement. A creditor must use the rules that apply to variable-rate 
transactions to determine the annual percentage rate even if the 
transaction also has a discounted fixed rate for a period of time, 
such as an initial interest rate if the rate that applies after the 
expiration of the fixed rate is variable. Accordingly, in 
determining the interest rate under Sec.  1026.32(a)(2)(ii), a 
creditor must disregard the fixed initial interest rate and use the 
fully-indexed rate using the maximum margin that could apply. In 
determining the maximum margin, a creditor must consider the maximum 
margin that might apply, e.g., a specified higher margin such as 
when a preferred rate is terminated, if the borrower's employment 
with the creditor ends.
    ii. Section 1026.32(a)(2)(iii) applies when the interest rates 
applicable to a transaction may vary, except as described in Sec.  
1026.32(a)(2)(ii). For example, Sec.  1026.32(a)(2)(iii) applies to 
a closed-end mortgage loan when interest rate changes are at the 
creditor's discretion, such as when the index is internally defined 
(for example, by that creditor's prime rate). Section 
1026.32(a)(2)(iii) also applies where multiple fixed rates apply to 
a transaction, such as a stepped-rate mortgage. For example, assume 
the following rates will apply to a transaction: Three percent for 
the first six months, four percent for the next 10 years, and five 
percent for the remaining loan term. In this example, Sec.  
1026.32(a)(2)(iii) would be used to determine the interest rate and 
five percent would be the maximum interest rate applicable to the 
transaction.
    4. Fixed-rate and term-payment options. If an open-end credit 
plan only has a fixed-rate during the draw period, a creditor must 
use the interest rate applicable to that feature to determine the 
annual percentage rate, as

[[Page 49159]]

required by Sec.  1026.32(a)(2)(i). However, if an open-end credit 
plan has a variable-rate and offers a fixed-rate and term-payment 
option during the draw period, Sec.  1026.32(a)(2) requires a 
creditor to use the terms applicable to the variable-rate feature 
for determining the annual percentage rate, as described in Sec.  
1026.32(a)(2)(ii).[ltrif]
    32(b) Definitions.
    Paragraph 32(b)(1)(i).
    1. General. Section 1026.32(b)(1)(i) includes in the total 
``points and fees'' items [lsqbb]defined as finance charges under 
Sec. Sec.  1026.4(a) and 1026.(4)(b). Items excluded from the 
finance charge under other provisions of Sec.  1026.4 are not 
included in the total ``points and fees'' under paragraph 
32(b)(1)(i), but may be included in ``points and fees'' under 
paragraphs 32(b)(1)(ii) and 32(b)(1)(iii). Interest, including per-
diem interest, is excluded from ``points and fees'' under Sec.  
1026.32(b)(1).[rsqbb][rtrif]included in the finance charge under 
Sec.  1026.4(a) and (b), but excludes items described in Sec.  
1026.4(c) through (e) (except to the extent otherwise included by 
Sec.  1026.32(b)(1)); interest, including per-diem interest; and 
certain mortgage insurance premiums, as discussed in comments 
32(b)(1)(i)-2 through -4. For purposes of Sec.  1026.32(b)(1)(i), 
``items included in the finance charge under Sec.  1026.4(a) and 
(b)'' means only those items included under Sec.  1026.4(a) and (b), 
without reference to any other provisions of Sec.  1026.4, including 
Sec.  1026.4(g). To illustrate: A fee imposed by the creditor for an 
appraisal performed by an employee of the creditor meets the 
definition of ``finance charge'' under Sec.  1026.4(a) as ``any 
charge payable directly or indirectly by the consumer and imposed 
directly or indirectly by the creditor as an incident to or a 
condition of the extension of credit.'' However, Sec.  
1026.4(c)(7)(iv) lists appraisal fees. Therefore, under the general 
rule regarding the charges that must be counted as points and fees, 
a fee imposed by the creditor for an appraisal performed by an 
employee of the creditor would not be counted in points and fees. 
Section 1026.32(b)(1)(iii), however, expressly re-includes in points 
and fees items listed in Sec.  1026.4(c)(7) (including appraisal 
fees) if the creditor receives compensation in connection with the 
charge. A creditor would receive compensation for an appraisal 
performed by its own employee. Thus, the appraisal fee in this 
example must be included in the calculation of points and fees.
    2. Upfront Federal and State mortgage insurance premiums and 
guaranty fees. Under Sec.  1026.32(b)(1)(i)(B)(1) and (3), upfront 
mortgage insurance premiums or guaranty fees in connection with a 
Federal or State agency program are not ``points and fees,'' even 
though they are finance charges under Sec.  1026.4(a) and (b). For 
example, if a consumer is required to pay a $2,000 mortgage 
insurance premium before or at closing for a loan insured by the 
U.S. Federal Housing Administration, the $2,000 must be treated as a 
finance charge but is not counted in ``points and fees.''
    3. Upfront private mortgage insurance premiums. i. Under Sec.  
1026.32(b)(1)(i)(B)(2) and (3), upfront private mortgage insurance 
premiums are not ``points and fees,'' even though they are finance 
charges under Sec.  1026.4(a) and (b)--but only to the extent that 
the premium amount does not exceed the amount payable under policies 
in effect at the time of origination under section 203(c)(2)(A) of 
the National Housing Act (12 U.S.C. 1709(c)(2)(A)).
    ii. In addition, to qualify for the exclusion from points and 
fees, upfront private mortgage insurance premiums must be required 
to be refunded on a pro rata basis and the refund must be 
automatically issued upon notification of the satisfaction of the 
underlying mortgage loan.
    iii. To illustrate: Assume that a $3,000 upfront private 
mortgage insurance premium charged on a closed-end mortgage loan is 
required to be refunded on a pro rata basis and automatically issued 
upon notification of the satisfaction of the underlying mortgage 
loan. Assume also that the maximum upfront premium allowable under 
the National Housing Act is $2,000. In this case, the creditor could 
exclude $2,000 from ``points and fees'' but would have to include 
the $1,000 that exceeds the allowable premium under the National 
Housing Act. However, if the $3,000 upfront private mortgage 
insurance premium were not required to be refunded on a pro rata 
basis and automatically issued upon notification of the satisfaction 
of the underlying mortgage loan, the entire $3,000 premium must be 
included in ``points and fees.''
    4. Method of paying private mortgage insurance premiums. Upfront 
private mortgage insurance premiums that do not qualify for an 
exclusion from ``points and fees'' under Sec.  
1026.32(b)(1)(i)(B)(2) must be included in ``points and fees'' for 
purposes of this section whether paid before or at closing, in cash 
or financed, and whether the insurance is optional or required. Such 
charges are also included whether the amount represents the entire 
premium or an initial payment.[ltrif]
    Paragraph 32(b)(1)(ii).
    1. [rtrif]Loan originator compensation--
general[ltrif][lsqbb]Mortgage broker fees[rsqbb]. In determining 
``points and fees'' for purposes of [rtrif]Sec.  
1026.32[ltrif][lsqbb]this section[rsqbb], compensation paid by a 
consumer [rtrif]or creditor[ltrif] to a [rtrif]loan 
originator[ltrif][lsqbb]mortgage broker (directly or through the 
creditor for delivery to the broker)[rsqbb] is included in the 
calculation whether or not the amount is disclosed as a finance 
charge. [lsqbb]Mortgage broker fees that are not paid by the 
consumer are not included.[rsqbb] [rtrif]Loan 
originator[ltrif][lsqbb]Mortgage broker[rsqbb] fees already included 
in the [rtrif]points and fees[ltrif] calculation as finance charges 
under Sec.  1026.32(b)(1)(i) need not be counted again under Sec.  
1026.32(b)(1)(ii).
    [rtrif]2. Loan originator compensation--examples.
    i. In determining ``points and fees'' under Sec.  1026.32, loan 
originator compensation includes the dollar value of compensation 
paid to a loan originator for a closed-end mortgage loan, such as a 
bonus, commission, yield spread premium, award of merchandise, 
services, trips, or similar prizes, or hourly pay for the actual 
number of hours worked on a particular transaction. Compensation 
paid to a loan originator for a closed-end mortgage loan must be 
included in the ``points and fees'' calculation for that loan 
whenever paid, whether before, at, or after closing, as long as that 
compensation amount can be determined at the time of closing. Thus, 
loan originator compensation for a closed-end mortgage loan includes 
compensation that will be paid as part of a periodic bonus, 
commission, or gift, if a portion of the dollar value of the bonus, 
commission, or gift can be attributed to that loan. The following 
examples illustrate the rule:
    A. Assume that, according to a creditor's compensation policies, 
the creditor awards its loan officers a bonus every year based on 
the number of loan applications taken by the loan officer that 
result in consummated transactions during that year, and that each 
consummated transaction increases the bonus by $100. In this case, 
the $100 bonus must be counted in the amount of loan originator 
compensation that the creditor includes in ``points and fees.''
    B. Assume that, according to a creditor's compensation policies, 
the creditor awards its loan officers a year-end bonus equal to a 
flat dollar amount for each of the consummated transactions 
originated by the loan officer during that year. Assume also that 
the per-transaction dollar amount is determined at the end of the 
year, based on the total dollar value of consummated transactions 
originated by the loan officer. If at the time a mortgage 
transaction is consummated the loan officer has originated total 
volume that qualifies the loan officer to receive a $300 bonus per 
transaction, the $300 bonus is loan originator compensation that 
must be included in ``points and fees'' for the transaction.
    C. Assume that, according to a creditor's compensation policies, 
the creditor awards its loan officers a bonus every year based on 
the number of consummated transactions originated by the loan 
officer during that year. Assume also that for the first 10 
transactions originated by the loan officer in a given year, no 
bonus is awarded; for the next 10 transactions originated by the 
loan officer up to 20, a bonus of $100 per transaction is awarded; 
and for each transaction originated after the first 20, a bonus of 
$200 per transaction is awarded. In this case, for the first 10 
transactions originated by a loan officer during a given year, no 
amount of loan originator compensation need be included in ``points 
and fees.'' For any mortgage transaction made after the first 10, up 
to the 20th transaction, $100 must be included in ``points and 
fees.'' For any mortgage transaction made after the first 20, $200 
must be included in ``points and fees.''
    ii. In determining ``points and fees'' under this section, loan 
originator compensation excludes compensation that cannot be 
attributed to a particular transaction at the time of origination, 
including, for example:
    A. Compensation based on the long-term performance of the loan 
originator's loans.
    B. Compensation based on the overall quality of a loan 
originator's loan files.
    C. The base salary of a loan originator who is also the employee 
of the creditor, not

[[Page 49160]]

accounting for any bonuses, commissions, pay raises, or other 
financial awards based solely on a particular transaction or the 
number or amount of closed-end mortgage loans originated by the loan 
originator.
    3. Name of fee. Loan originator compensation includes amounts 
the loan originator retains and is not dependent on the label or 
name of any fee imposed in connection with the transaction. For 
example, if a loan originator imposes a ``processing fee'' and 
retains the fee, the fee is loan originator compensation under Sec.  
1026.32(b)(1)(ii) whether the originator expends the fee to process 
the consumer's application or uses it for other expenses, such as 
overhead.
    Paragraph 32(b)(1)(iii).
    1. Other charges.[ltrif][lsqbb]2. Example.[rsqbb] Section 
1026.32(b)(1)(iii) defines ``points and fees'' to include all items 
listed in Sec.  1026.4(c)(7), other than amounts held for the future 
payment of taxes. An item listed in Sec.  1026.4(c)(7) may be 
excluded from the ``points and fees'' calculation, however, if the 
charge is reasonable, the creditor receives no direct or indirect 
compensation from the charge, and the charge is not paid to an 
affiliate of the creditor. For example, a reasonable fee paid by the 
consumer to an independent, third-party appraiser may be excluded 
from the ``points and fees'' calculation (assuming no compensation 
is paid to the creditor [rtrif]or its affiliate[ltrif]). [rtrif]By 
contrast, a[ltrif][lsqbb]A[rsqbb] fee paid by the consumer for an 
appraisal performed by the creditor must be included in the 
calculation[lsqbb], even though the fee may be excluded from the 
finance charge if it is bona fide and reasonable in amount[rsqbb].
    Paragraph 32(b)(1)(iv).
    1. [rtrif]Credit insurance and debt cancellation or suspension 
coverage.[ltrif][lsqbb]Premium amount.[rsqbb] In determining 
``points and fees'' for purposes of [rtrif]Sec.  
1026.32[ltrif][lsqbb]this section[rsqbb], premiums [lsqbb]paid at or 
before closing[rsqbb] for credit insurance [rtrif]or any debt 
cancellation or suspension agreement or contract are included in 
points and fees if they are paid at or before consummation, whether 
they are paid in cash or, if permitted by applicable law, financed. 
Such charges are also included whether the amount represents the 
entire premium for the coverage or an initial 
payment.[ltrif][lsqbb]are included whether they are paid in cash or 
financed, and whether the amount represents the entire premium for 
the coverage or an initial payment.[rsqbb]
    [rtrif]2. Credit property insurance. Credit property insurance 
includes insurance against loss of or damage to personal property, 
such as a houseboat or manufactured home. Credit property insurance 
covers the creditor's security interest in the property. Credit 
property insurance does not include homeowners insurance, which, 
unlike credit property insurance, typically covers not only the 
dwelling but its contents, and designates the consumer, not the 
creditor, as the beneficiary.
    Paragraph 32(b)(3)(i).
    1. Finance charge. The points and fees calculation under Sec.  
1026.32(b)(3) generally does not include items that are included in 
the finance charge but that are payable after account opening, such 
as minimum monthly finance charges or charges based on either 
account activity or inactivity. Transaction fees also generally are 
not included in the points and fees calculation, except as provided 
in Sec.  1026.32(b)(3)(vi).
    Paragraph 32(b)(3)(ii).
    1. Other charges. See comment 32(b)(1)(iii)-1 for further 
guidance concerning the inclusion of items listed in Sec.  
1026.4(c)(7) in points and fees for open-end credit plans.
    Paragraph 32(b)(3)(iii).
    1. Credit insurance and debt cancellation or suspension 
coverage. See comments 32(b)(1)(iv)-1 and -2 for further guidance 
concerning the inclusion of premiums for credit insurance and debt 
cancellation or suspension coverage in points and fees for open-end 
credit plans.
    Paragraph 32(b)(3)(v).
    1. Participation fees. Fees charged for participation in a 
credit plan, whether assessed on an annual or other periodic basis, 
must be included in the points and fees calculation for purposes of 
Sec.  1026.32. These fees include annual fees or other periodic fees 
that must be paid as a condition of access to the plan itself. See 
commentary to Sec.  1026.4(c)(4) for a description of these fees. 
For purposes of the points and fees calculation, the creditor must 
assume that any annual fee is charged each year for the original 
term of the plan. For example, assume that the terms of an open-end 
credit plan with a ten-year term permit the creditor to impose an 
annual fee of $50 for the consumer to maintain access to the plan. 
Section 1026.32(b)(3)(v) requires the creditor to include in points 
and fees the $500 that the consumer will pay in annual fees over the 
ten-year term of the plan.
    Paragraph 32(b)(3)(vi).
    1. Transaction fees to draw down the credit line. Section 
1026.32(b)(3)(vi) requires creditors in open-end credit plans to 
include in points and fees any transaction fee, including any per-
transaction fee, that will be charged for a draw on the credit line. 
Section 1026.32(b)(3)(vi) requires the creditor to assume that the 
consumer will make at least one draw during the term of the credit 
plan. Thus, if the terms of the open-end credit plan permit the 
creditor to charge a $10 transaction fee each time the consumer 
draws on the credit line, Sec.  1026.32(b)(3)(vi) requires the 
creditor to include one $10 charge in the points and fees 
calculation.
    2. Fixed-rate loan option. If the terms of an open-end credit 
plan permit a consumer to draw on the credit line using either a 
variable-rate feature or a fixed-rate feature, Sec.  
1026.32(b)(3)(vi) requires the creditor to use the terms applicable 
to the variable-rate feature for determining the transaction fee 
that must be included in the points and fees calculation.
    Paragraph 32(b)(4).
    1. Fees or charges waived at or before account opening. Under 
Sec.  1026.32(b)(4), a charge that the creditor waives at or before 
account opening may be excluded from points and fees for an open-end 
credit plan unless the creditor may impose the charge after account 
opening. For example, a charge that a creditor waives at or before 
account opening must be included in points and fees as a prepayment 
penalty under Sec.  1026.32(b)(3)(iv) if the creditor can impose the 
charge if the consumer terminates the open-end credit plan prior to 
the end of its term. To illustrate, assume that, in opening an open-
end credit plan with a ten-year term, a creditor waives a $300 
processing fee. Also assume that the terms of the open-end credit 
plan provide that the consumer must repay the fee if the consumer 
terminates the plan within three years after account opening. The 
waived processing fee is a prepayment penalty as defined in Sec.  
1026.32(b)(8)(ii), because it is a fee that the creditor may impose 
and retain if the consumer terminates the plan prior to the end of 
its term. Under Sec.  1026.32(b)(4), the creditor must include the 
waived processing fee in points and fees under Sec.  
1026.32(b)(3)(iv).
    Paragraph 32(b)(5).
    32(b)(5)(i) Bona fide third-party charges.
    1. Section 1026.36(a)(1) and comment 36(a)-1 provide guidance 
about the term loan originator as used in Sec.  1026.32(b)(5)(i).
    2. Example. Assume that, prior to loan consummation, a creditor 
pays $400 for an appraisal conducted by a third-party not affiliated 
with the creditor. At consummation, the creditor charges the 
consumer $400 and retains that amount as reimbursement for the fee 
that the creditor paid to the third-party appraiser. For purposes of 
determining whether the transaction is a high-cost mortgage, the 
creditor need not include in points and fees the $400 it retains as 
reimbursement.
    3. Private mortgage insurance. For purposes of determining 
whether a closed-end mortgage loan is a high-cost mortgage, the 
exclusion for bona fide third party charges not retained by the 
creditor, loan originator, or an affiliate of either is limited by 
Sec.  1026.32(b)(1)(i)(B) in the general definition of points and 
fees. Section 1026.32(b)(1)(i)(B) requires inclusion in points and 
fees for closed-end mortgage loans of premiums or other charges 
payable at or before consummation for any private guaranty or 
insurance protecting the creditor against the consumer's default or 
other credit loss to the extent that the premium or charge exceeds 
the amount payable under policies in effect at the time of 
origination under section 203(c)(2)(A) of the National Housing Act 
(12 U.S.C. 1709(c)(2)(A)). These premiums or charges must also be 
included if the premiums or charges are not required to be 
refundable on a pro-rated basis, or the refund is not required to be 
automatically issued upon notification of the satisfaction of the 
underlying mortgage loan. Under these circumstances, even if the 
premiums or other charges are not retained by the creditor, loan 
originator, or an affiliate of either, they must be included in the 
points and fees calculation for purposes of determining whether a 
transaction is a high-cost mortgage. See comments 32(b)(1)(i)-3 and 
-4 for further discussion of including upfront private mortgage 
insurance premiums in the points and fees calculation for closed-end 
mortgage loans.
    32(b)(5)(ii) Bona fide discount points.
    1. Average prime offer rate. For purposes of Sec.  
1026.32(b)(5)(ii)(A)(1) and (B)(1), the

[[Page 49161]]

average prime offer rate used is the same average prime offer rate 
that applies to a comparable transaction as of the date the 
discounted interest rate for the transaction is set. See comment 
32(a)(1)(i)-1 for guidance on determining the applicable average 
prime offer rate for a comparable transaction for a closed-end 
mortgage loan. See comment 32(a)(1)(i)-2 for guidance on determining 
the applicable average prime offer rate for a comparable transaction 
for an open-end credit plan. See comments 43(e)(3)(ii)-3 and -4 for 
examples of how to calculate bona fide discount points for closed-
end mortgage loans secured by real property.
    32(b)(6) Total loan amount.
    32(b)(6)(i) Closed-end mortgage loans.
    1. Total loan amount; example. The following example illustrates 
how to calculate the total loan amount for closed-end mortgage 
loans. Assume that the face amount of a closed-end mortgage note is 
$100,000. If the consumer pays a $300 fee for a creditor-conducted 
appraisal by having it deducted from loan proceeds and pays $400 in 
points in cash at consummation, the total loan amount is $99,700. 
Because the $300 appraisal fee is paid to the creditor, it is 
included in points and fees under Sec.  1026.32(b)(1)(iii). Because 
it is included in points and fees and is financed by the creditor, 
it is deducted from the face amount of the note ($100,000) to derive 
a total loan amount of $99,700, pursuant to Sec.  1026.32(b)(6)(i).
    32(b)(8) Prepayment penalty.
    1. Examples of prepayment penalties; closed-end mortgage loans. 
For purposes of Sec.  1026.32(b)(8)(i), the following are examples 
of prepayment penalties:
    i. A charge determined by treating the loan balance as 
outstanding for a period of time after prepayment in full and 
applying the interest rate to such ``balance,'' even if the charge 
results from interest accrual amortization used for other payments 
in the transaction under the terms of the loan contract. ``Interest 
accrual amortization'' refers to the method by which the amount of 
interest due for each period (e.g., month) in a transaction's term 
is determined. For example, ``monthly interest accrual 
amortization'' treats each payment as made on the scheduled, monthly 
due date even if it is actually paid early or late (until the 
expiration of any grace period). Thus, under the terms of a loan 
contract providing for monthly interest accrual amortization, if the 
amount of interest due on May 1 for the preceding month of April is 
$3,000, the loan contract will require payment of $3,000 in interest 
for the month of April whether the payment is made on April 20, on 
May 1, or on May 10. In this example, if the consumer prepays the 
loan in full on April 20 and if the accrued interest as of that date 
is $2,000, then assessment of a charge of $3,000 constitutes a 
prepayment penalty of $1,000 because the amount of interest actually 
earned through April 20 is only $2,000.
    ii. A fee, such as an origination or other loan closing cost, 
that is waived by the creditor on the condition that the consumer 
does not prepay the loan.
    iii. A minimum finance charge in a simple interest transaction.
    iv. Computing a refund of unearned interest by a method that is 
less favorable to the consumer than the actuarial method, as defined 
by section 933(d) of the Housing and Community Development Act of 
1992, 15 U.S.C. 1615(d). For purposes of computing a refund of 
unearned interest, if using the actuarial method defined by 
applicable State law results in a refund that is greater than the 
refund calculated by using the method described in section 933(d) of 
the Housing and Community Development Act of 1992, creditors should 
use the State law definition in determining if a refund is a 
prepayment penalty.
    2. Examples of prepayment penalties; open-end credit plans. For 
purposes of Sec.  1026.32(b)(8)(ii), the term prepayment penalty 
includes a charge, including a waived closing cost, imposed by the 
creditor if the consumer terminates the open-end credit plan prior 
to the end of its term. This includes a charge imposed if the 
consumer terminates the plan outright or, for example, if the 
consumer terminates the plan in connection with obtaining a new loan 
or plan with the current holder of the existing plan, a servicer 
acting on behalf of the current holder, or an affiliate of either. 
However, the term prepayment penalty does not include a waived bona 
fide third-party charge imposed by the creditor if the consumer 
terminates the open-end credit plan during the first 36 months after 
account opening.
    3. Fees that are not prepayment penalties. For purposes of Sec.  
1026.32(b)(8)(i) and (ii), fees which are not prepayment penalties 
include, for example:
    i. Fees imposed for preparing and providing documents when a 
loan is paid in full or when an open-end credit plan is terminated, 
if such fees are imposed whether or not the loan is prepaid or the 
consumer terminates the plan prior to the end of its term. Examples 
include a loan payoff statement, a reconveyance document, or another 
document releasing the creditor's security interest in the dwelling 
that secures the loan or line of credit.
    ii. Loan guarantee fees.
    iii. In the case of an open-end credit plan, fees that are not 
prepayment penalties also include any fee that the creditor may 
impose in lieu of termination and acceleration under comment 
40(f)(2)-2.[ltrif]
    32(c) Disclosures.
* * * * *
    [rtrif]32(c)(2) Annual percentage rate.
    1. Disclosing annual percentage rate for open-end high-cost 
mortgages. In disclosing the annual percentage rate for an open-end, 
high-cost mortgage under Sec.  1026.32(c)(2), creditors must comply 
with Sec.  1026.6(a)(1). If a fixed-rate, discounted introductory or 
initial interest rate is offered on the transaction, Sec.  
1026.32(c)(2) requires a creditor to disclose the annual percentage 
rate of the fixed-rate, discounted introductory or initial interest 
rate feature, and the rate that would apply when the feature 
expires.[ltrif]
    32(c)(3) Regular payment; [rtrif]minimum periodic payment 
example;[ltrif]balloon payment.
    1. [rtrif]Balloon payment. Except as provided in Sec.  
1026.32(d)(1)(ii) and (iii), a mortgage transaction subject to this 
section may not include a payment schedule that results in a balloon 
payment.
    Paragraph 32(c)(3)(i)
    1.[ltrif] General. The regular payment is the amount due from 
the borrower at regular intervals, such as monthly, bimonthly, 
quarterly, or annually. There must be at least two payments, and the 
payments must be in an amount and at such intervals that they fully 
amortize the amount owed. In disclosing the regular payment, 
creditors may rely on the rules set forth in Sec.  1026.18(g); 
however, the amounts for voluntary items, such as credit life 
insurance, may be included in the regular payment disclosure only if 
the consumer has previously agreed to the amounts.
    i. If the loan has more than one payment level, the regular 
payment for each level must be disclosed. For example:
    A. In a 30-year graduated payment mortgage where there will be 
payments of $300 for the first 120 months, $400 for the next 120 
months, and $500 for the last 120 months, each payment amount must 
be disclosed, along with the length of time that the payment will be 
in effect.
    B. If interest and principal are paid at different times, the 
regular amount for each must be disclosed.
    C. In discounted or premium variable-rate transactions where the 
creditor sets the initial interest rate and later rate adjustments 
are determined by an index or formula, the creditor must disclose 
both the initial payment based on the discount or premium and the 
payment that will be in effect thereafter. Additional explanatory 
material which does not detract from the required disclosures may 
accompany the disclosed amounts. For example, if a monthly payment 
is $250 for the first six months and then increases based on an 
index and margin, the creditor could use language such as the 
following: ``Your regular monthly payment will be $250 for six 
months. After six months your regular monthly payment will be based 
on an index and margin, which currently would make your payment 
$350. Your actual payment at that time may be higher or lower.''
    1. Calculating ``worst-case'' payment example. [rtrif]For a 
closed-end mortgage loan, creditors[ltrif][lsqbb]Creditors[rsqbb] 
may rely on instructions in Sec.  1026.19(b)(2)(viii)(B) for 
calculating the maximum possible increases in rates in the shortest 
possible timeframe, based on the face amount of the note (not the 
hypothetical loan amount of $10,000 required by Sec.  
1026.19(b)(2)(viii)(B)). The creditor must provide a maximum payment 
for each payment level, where a payment schedule provides for more 
than one payment level and more than one maximum payment amount is 
possible. [rtrif]For an open-end credit plan, the maximum monthly 
payment must be based on the following assumptions:
    i. The consumer borrows the full credit line at account opening 
with no additional extensions of credit.
    ii. The consumer makes only minimum periodic payments during the 
draw period and any repayment period.
    iii. If the annual percentage rate may increase during the plan, 
the maximum

[[Page 49162]]

annual percentage rate that is included in the contract, as required 
by Sec.  1026.30, applies to the plan at account opening.[ltrif]
    32(c)(5) Amount borrowed [rtrif]; credit limit[ltrif].
    1. Optional insurance; debt-cancellation coverage. [rtrif]For 
closed-end mortgage loans, this[ltrif][lsqbb]This[rsqbb] disclosure 
is required when the amount borrowed in a refinancing includes 
premiums or other charges for credit life, accident, health, or 
loss-of-income insurance, or debt-cancellation coverage (whether or 
not the debt-cancellation coverage is insurance under applicable 
law) that provides for cancellation of all or part of the consumer's 
liability in the event of the loss of life, health, or income or in 
the case of accident. See comment 4(d)(3)-2 and comment app. G and 
H-2 regarding terminology for debt-cancellation coverage.
    32(d) Limitations.
    1. Additional prohibitions applicable under other sections. 
Section 1026.34 sets forth certain prohibitions in connection with 
[rtrif]high-cost mortgages[ltrif][lsqbb]mortgage credit subject to 
Sec.  1026.32[rsqbb], in addition to the limitations in Sec.  
1026.32(d). Further, Sec.  1026.35(b) prohibits certain practices in 
connection with [rtrif]closed-end[ltrif] transactions that meet the 
coverage test in Sec.  1026.35(a). Because the coverage test in 
Sec.  1026.35(a) is generally broader than the coverage test in 
Sec.  1026.32(a), most [lsqbb]Sec.  1026.32[rsqbb] [rtrif]closed-end 
high-cost mortgages[ltrif] [lsqbb]mortgage loans[rsqbb] are also 
subject to the prohibitions set forth in Sec.  1026.35(b) (such as 
escrows), in addition to the limitations in Sec.  1026.32(d).
    32(d)(1)(i) Balloon payment.
    Alternative 1--Paragraph 32(d)(1)(i)
    1. Regular periodic payments. The repayment schedule for a 
[lsqbb]Sec.  1026.32[rsqbb][rtrif]high-cost[ltrif] mortgage loan 
[lsqbb]with a term of less than five years[rsqbb] must fully 
amortize the outstanding principal balance through ``regular 
periodic payments.'' A payment is a ``regular periodic payment'' if 
it is not more than twice the [lsqbb]amount of other 
payments[rsqbb][rtrif]average of earlier scheduled payments. For 
purposes of open-end credit plans, the term ``regular periodic 
payment'' or ``periodic payment'' means the required minimum 
periodic payment.[ltrif]
    Alternative 2--Paragraph 32(d)(1)(i)
    1. Regular periodic payments. The repayment schedule for a 
[lsqbb]Sec.  1026.32[rsqbb][rtrif]high-cost[ltrif] mortgage loan 
[lsqbb]with a term of less than five years[rsqbb] must fully 
amortize the outstanding principal balance through ``regular 
periodic payments.'' A payment is a ``regular periodic payment'' if 
it is not more than [lsqbb]twice[rsqbb] [rtrif]two times[ltrif] the 
amount of other payments. [rtrif]For purposes of open-end credit 
plans, the term ``regular periodic payment'' or ``periodic payment'' 
means the required minimum periodic payment.
    2. No repayment period. If the terms of an open-end credit plan 
do not provide for a repayment period, the repayment schedule must 
fully amortize any outstanding principal balance in the draw period 
through regular periodic payments. However, the limitation on 
balloon payments in Sec.  1026.32(d)(1)(i) does not preclude 
increases in regular periodic payments that result solely from the 
initial draw or additional draws on the credit line during the draw 
period.[ltrif]
    32(d)(2) Negative amortization.
    1. Negative amortization. The prohibition against negative 
amortization in a [rtrif]high-cost mortgage[ltrif][mortgage covered 
by Sec.  1026.32] does not preclude reasonable increases in the 
principal balance that result from events permitted by the legal 
obligation unrelated to the payment schedule. For example, when a 
consumer fails to obtain property insurance and the creditor 
purchases insurance, the creditor may add a reasonable premium to 
the consumer's principal balance, to the extent permitted by the 
legal obligation.
* * * * *
    32(d)(6) [rtrif][Reserved.][ltrif][lsqbb]Prepayment penalties.
    1. State law. For purposes of computing a refund of unearned 
interest, if using the actuarial method defined by applicable state 
law results in a refund that is greater than the refund calculated 
by using the method described in section 933(d) of the Housing and 
Community Development Act of 1992, creditors should use the state 
law definition in determining if a refund is a prepayment 
penalty.[rsqbb]
    32(d)(7) [rtrif][Reserved.][ltrif][lsqbb]Prepayment penalty 
exception.
    Paragraph 32(d)(7)(iii).
    1. Calculating debt-to-income ratio. ``Debt'' does not include 
amounts paid by the borrower in cash at closing or amounts from the 
loan proceeds that directly repay an existing debt. Creditors may 
consider combined debt-to-income ratios for transactions involving 
joint applicants. For more information about obligations and inflows 
that may constitute ``debt'' or ``income'' for purposes of Sec.  
1026.32(d)(7)(iii), see comment 34(a)(4)-6 and comment 
34(a)(4)(iii)(C)-1.
    2. Verification. Creditors shall verify income in the manner 
described in Sec.  1026.34(a)(4)(ii) and the related comments. 
Creditors may verify debt with a credit report. However, a credit 
report may not reflect certain obligations undertaken just before or 
at consummation of the transaction and secured by the same dwelling 
that secures the transaction. Section 1026.34(a)(4) may require 
creditors to consider such obligations; see comment 34(a)(4)-3 and 
comment 34(a)(4)(ii)(C)-1.
    3. Interaction with Regulation B. Section 1026.32(d)(7)(iii) 
does not require or permit the creditor to make inquiries or 
verifications that would be prohibited by Regulation B, 12 CFR part 
1002.
    Paragraph 32(d)(7)(iv).
    1. Payment change. Section 1026.32(d)(7) sets forth the 
conditions under which a mortgage transaction subject to this 
section may have a prepayment penalty. Section 1026.32(d)(7)(iv) 
lists as a condition that the amount of the periodic payment of 
principal or interest or both may not change during the four-year 
period following consummation. The following examples show whether 
prepayment penalties are permitted or prohibited under Sec.  
1026.32(d)(7)(iv) in particular circumstances.
    i. Initial payments for a variable-rate transaction consummated 
on January 1, 2010 are $1,000 per month. Under the loan agreement, 
the first possible date that a payment in a different amount may be 
due is January 1, 2014. A prepayment penalty is permitted with this 
mortgage transaction provided that the other Sec.  1026.32(d)(7) 
conditions are met, that is: provided that the prepayment penalty is 
permitted by other applicable law, the penalty expires on or before 
December 31, 2011, the penalty will not apply if the source of the 
prepayment funds is a refinancing by the creditor or its affiliate, 
and at consummation the consumer's total monthly debts do not exceed 
50 percent of the consumer's monthly gross income, as verified.
    ii. Initial payments for a variable-rate transaction consummated 
on January 1, 2010 are $1,000 per month. Under the loan agreement, 
the first possible date that a payment in a different amount may be 
due is December 31, 2013. A prepayment penalty is prohibited with 
this mortgage transaction because the payment may change within the 
four-year period following consummation.
    iii. Initial payments for a graduated-payment transaction 
consummated on January 1, 2010 are $1,000 per month. Under the loan 
agreement, the first possible date that a payment in a different 
amount may be due is January 1, 2014. A prepayment penalty is 
permitted with this mortgage transaction provided that the other 
Sec.  1026.32(d)(7) conditions are met, that is: provided that the 
prepayment penalty is permitted by other applicable law, the penalty 
expires on or before December 31, 2011, the penalty will not apply 
if the source of the prepayment funds is a refinancing by the 
creditor or its affiliate, and at consummation the consumer's total 
monthly debts do not exceed 50 percent of the consumer's monthly 
gross income, as verified.
    iv. Initial payments for a step-rate transaction consummated on 
January 1, 2010 are $1,000 per month. Under the loan agreement, the 
first possible date that a payment in a different amount may be due 
is December 31, 2013. A prepayment penalty is prohibited with this 
mortgage transaction because the payment may change within the four-
year period following consummation.
    2. Payment changes excluded. Payment changes due to the 
following circumstances are not considered payment changes for 
purposes of this section:
    i. A change in the amount of a periodic payment that is 
allocated to principal or interest that does not change the total 
amount of the periodic payment.
    ii. The borrower's actual unanticipated late payment, 
delinquency, or default; and
    iii. The borrower's voluntary payment of additional amounts (for 
example when a consumer chooses to make a payment of interest and 
principal on a loan that only requires the consumer to pay 
interest).[rsqbb]
    32(d)(8) [rtrif]Acceleration of debt[ltrif][lsqbb]Due-on-demand 
clause[rsqbb].
    Paragraph [rtrif]32(d)(8)(i)[ltrif][lsqbb]32(d)(8)(ii)[rsqbb].
    1. Failure to meet repayment terms. A creditor may terminate a 
loan [rtrif]or open-end credit agreement[ltrif] and accelerate the 
balance when the consumer fails to meet the repayment terms 
[rtrif]resulting in a default in payment under the 
agreement[ltrif][lsqbb]provided for in the agreement[rsqbb]; a 
creditor may do so, however, only if the consumer actually fails

[[Page 49163]]

to make payments [rtrif]resulting in a default in the 
agreement[ltrif]. For example, a creditor may not terminate and 
accelerate if the consumer, in error, sends a payment to the wrong 
location, such as a branch rather than the main office of the 
creditor. If a consumer files for or is placed in bankruptcy, the 
creditor may terminate and accelerate under [rtrif]Sec.  
1026.32(d)(8)(i)[ltrif][lsqbb]this provision[rsqbb] if the consumer 
fails to meet the repayment terms [rtrif]resulting in a 
default[ltrif] of the agreement. Section 
[rtrif]1026.32(d)(8)(i)[ltrif][lsqbb]1026.32(d)(8)(ii)[rsqbb] does 
not override any State or other law that requires a creditor to 
notify a borrower of a right to cure, or otherwise places a duty on 
the creditor before it can terminate a loan [rtrif]or open-end 
credit agreement[ltrif] and accelerate the balance.
    Paragraph 32(d)(8)(iii).
    1. [rtrif]Material violation of agreement. A creditor may 
terminate a loan or open-end credit agreement and accelerate the 
balance based on a material violation of some other provision of the 
agreement unrelated to the payment schedule. See comments 
32(d)(8)(iii)-2 and -3 for examples of material violations of an 
agreement that would permit a creditor to terminate and 
accelerate.[ltrif][lsqbb]Impairment of security. A creditor may 
terminate a loan and accelerate the balance if the consumer's action 
or inaction adversely affects the creditor's security for the loan, 
or any right of the creditor in that security. Action or inaction by 
third parties does not, in itself, permit the creditor to terminate 
and accelerate.[rsqbb]
    2. [lsqbb]Examples.[rsqbb][rtrif]Material impairment of security 
for the loan. A creditor may terminate a loan or open-end credit 
agreement and accelerate the balance based on a material violation 
of the agreement if the consumer's action or inaction adversely 
affects the creditor's security for the loan or open-end credit 
plan, or any right of the creditor in that security. Action or 
inaction by third parties does not, in itself, permit the creditor 
to terminate a loan or open-end credit agreement and accelerate the 
balance.[ltrif]
    i. [rtrif]Examples.[ltrif] A creditor may terminate and 
accelerate, for example, if:
    A. [lsqbb]The consumer transfers title to the property or sells 
the property without the permission of the creditor.
    B.[rsqbb] The consumer fails to maintain required insurance on 
the dwelling.
    [lsqbb]C.[rsqbb][rtrif]B.[ltrif] The consumer fails to pay taxes 
on the property.
    [lsqbb]D.[rsqbb][rtrif]C.[ltrif] The consumer permits the filing 
of a lien senior to that held by the creditor.
    [lsqbb]E.[rsqbb] [rtrif]D.[ltrif] [lsqbb]The sole consumer 
obligated on the credit dies.
    F. The property is taken through eminent domain.
    G[rsqbb]. A prior lienholder forecloses.
    ii. By contrast, the filing of a judgment against the consumer 
would [rtrif]be cause for[ltrif][lsqbb]permit[rsqbb] termination and 
acceleration only if the amount of the judgment and collateral 
subject to the judgment is such that the creditor's security is 
adversely [rtrif]and materially[ltrif] affected [rtrif]in violation 
of the loan or open-end credit agreement[ltrif]. If the consumer 
commits waste or otherwise destructively uses or fails to maintain 
the property [rtrif], including demolishing or removing structures 
from the property,[ltrif] such that the action adversely affects the 
security [rtrif]in a material way[ltrif], the loan [rtrif]or open-
end credit agreement[ltrif] may be terminated and the balance 
accelerated. Illegal use of the property by the consumer would 
permit termination and acceleration if it subjects the property to 
seizure. [lsqbb]If one of two consumers obligated on a loan dies, 
the creditor may terminate the loan and accelerate the balance if 
the security is adversely affected.[rsqbb] If the consumer moves out 
of the dwelling that secures the loan and that action adversely 
affects the security [rtrif]in a material way[ltrif], the creditor 
may terminate a loan [rtrif]or open-end credit agreement[ltrif] and 
accelerate the balance.
    [rtrif]3. Fraud or material misrepresentation. A creditor may 
terminate a loan or open-end credit agreement and accelerate the 
balance based on a material violation of the agreement if the 
consumer violates the agreement through fraud or material 
misrepresentation in connection with the loan or open-end credit 
agreement. What constitutes fraud or misrepresentation is determined 
by applicable State law.[ltrif]

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)(1) Home-improvement contracts.
* * * * *
    34(a)(2) Notice to [rtrif]assignee.[ltrif][lsqbb]Assignee[rsqbb]
* * * * *
    34(a)(3) Refinancings within one-year period.
* * * * *
    2. Application of the one-year refinancing prohibition to 
creditors and assignees. The prohibition in Sec.  1026.34(a)(3) 
applies where [rtrif]a high-cost mortgage[ltrif][lsqbb]loan 
extension of credit subject to Sec.  1026.32[rsqbb] is refinanced 
into another [rtrif]high-cost mortgage[ltrif][lsqbb]loan subject to 
Sec.  1026.32[rsqbb]. The prohibition is illustrated by the 
following examples. Assume that Creditor A makes a [rtrif]high-cost 
mortgage[ltrif][lsqbb]loan subject to Sec.  1026.32[rsqbb] on 
January 15, 2003, secured by a first lien; this loan is assigned to 
Creditor B on February 15, 2003:
    i. Creditor A is prohibited from refinancing the January 2003 
loan (or any other [rtrif]high-cost mortgage[ltrif][lsqbb]loan 
subject to Sec.  1026.32[rsqbb] to the same borrower) into a 
[rtrif]high-cost mortgage[ltrif][lsqbb]loan subject to Sec.  
1026.32[rsqbb], until January 15, 2004. Creditor B is restricted 
until January 15, 2004, or such date prior to January 15, 2004 that 
Creditor B ceases to hold or service the loan. During the 
prohibition period, Creditors A and B may make a subordinate lien 
loan that does not refinance a [rtrif]high-cost 
mortgage[ltrif][lsqbb]loan subject to Sec.  1026.32[rsqbb]. Assume 
that on April 1, 2003, Creditor A makes but does not assign a 
second-lien [rtrif]high-cost mortgage[ltrif][lsqbb]loan subject to 
Sec.  1026.32[rsqbb]. In that case, Creditor A would be prohibited 
from refinancing either the first-lien or second-lien loans (or any 
other [rtrif]high-cost mortgage[ltrif] loans to that borrower 
[lsqbb]subject to Sec.  1026.32[rsqbb]) into another [rtrif]high-
cost mortgage[ltrif][lsqbb]loan subject to Sec.  1026.32[rsqbb] 
until April 1, 2004.
    ii. The loan made by Creditor A on January 15, 2003 (and 
assigned to Creditor B) may be refinanced by Creditor C at any time. 
If Creditor C refinances this loan on March 1, 2003 into a new 
[rtrif]high-cost mortgage[ltrif][lsqbb]loan subject to Sec.  
1026.32[rsqbb], Creditor A is prohibited from refinancing the loan 
made by Creditor C (or any other [rtrif]high-cost 
mortgage[ltrif][lsqbb]loan subject to Sec.  1026.32[rsqbb] to the 
same borrower) into another [rtrif]high-cost 
mortgage[ltrif][lsqbb]loan subject to Sec.  1026.32[rsqbb] until 
January 15, 2004. Creditor C is similarly prohibited from 
refinancing any [rtrif]high-cost mortgage[ltrif][lsqbb]loan subject 
to Sec.  1026.32[rsqbb] to that borrower into another until March 1, 
2004. (The limitations of Sec.  1026.34(a)(3) no longer apply to 
Creditor B after Creditor C refinanced the January 2003 loan and 
Creditor B ceased to hold or service the loan.)
    34(a)(4) Repayment ability [rtrif]for high-cost 
mortgages[ltrif].
    1. Application of repayment ability rule. The Sec.  
1026.34(a)(4) prohibition against making loans without regard to 
consumers' repayment ability applies to [rtrif]open-end, high-cost 
mortgages[ltrif][lsqbb]mortgage loans described in Sec.  
1026.32(a)[rsqbb]. [rtrif]The Sec.  1026.43 repayment ability 
provisions apply to closed-end, high-cost mortgages. Accordingly, in 
connection with a closed-end, high-cost mortgage, Sec.  
1026.34(a)(4) requires a creditor to comply with the repayment 
ability requirements set forth in Sec.  1026.43.[ltrif][lsqbb]In 
addition, the Sec.  1026.34(a)(4) prohibition applies to higher-
priced mortgage loans described in Sec.  1026.35(a). See Sec.  
1026.35(b)(1).[rsqbb]
    2. General prohibition. Section 1026.34(a)(4) prohibits a 
creditor from [rtrif]extending credit under a high-cost, open-end 
credit plan [ltrif][lsqbb]extending credit subject to Sec.  1026.32 
to a consumer[rsqbb] based on the value of the consumer's collateral 
without regard to the consumer's repayment ability as of 
[rtrif]account opening[ltrif][lsqbb]consummation[rsqbb], including 
the consumer's current and reasonably expected income, employment, 
assets other than the collateral, current obligations, and property 
tax and insurance obligations. A creditor may base its determination 
of repayment ability on current or reasonably expected income from 
employment or other sources, on assets other than the collateral, or 
both.
    3. Other dwelling-secured obligations. For purposes of Sec.  
1026.34(a)(4), current obligations include another credit obligation 
of which the creditor has knowledge undertaken prior to or at 
[rtrif]account opening[ltrif][lsqbb]consummation of the 
transaction[rsqbb] and secured by the same dwelling that secures the 
[rtrif]high-cost mortgage[ltrif] transaction[lsqbb]subject to Sec.  
1026.32 or Sec.  1026.35[rsqbb]. [lsqbb]For example, where a 
transaction subject to Sec.  1026.35 is a first-lien transaction for 
the purchase of a home, a creditor must consider a ``piggyback'' 
second-lien transaction of which it has knowledge that is used to 
finance part of the down payment on the house.[rsqbb]
    4. Discounted introductory rates and non-amortizing or 
negatively-amortizing payments. A credit agreement may determine

[[Page 49164]]

a consumer's initial payments using a temporarily discounted 
interest rate or permit the consumer to make initial payments that 
are non-amortizing [lsqbb]or negatively amortizing[rsqbb]. (Negative 
amortization is permissible for loans covered by Sec.  1026.35(a), 
but not Sec.  1026.32). In such cases the creditor may determine 
repayment ability using the assumptions provided in Sec.  
1026.34(a)(4)(iv).
    5. Repayment ability as of [rtrif]account 
opening[ltrif][lsqbb]consummation[rsqbb]. Section 1026.34(a)(4) 
prohibits a creditor from disregarding repayment ability based on 
the facts and circumstances known to the creditor as of 
[rtrif]account opening[ltrif][lsqbb]consummation[rsqbb]. In general, 
a creditor does not violate this provision if a consumer defaults 
because of a significant reduction in income (for example, a job 
loss) or a significant obligation (for example, an obligation 
arising from a major medical expense) that occurs after 
[rtrif]account opening[ltrif][lsqbb]consummation[rsqbb]. However, if 
a creditor has knowledge as of [rtrif]account 
opening[ltrif][lsqbb]consummation[rsqbb] of reductions in income, 
for example, if a consumer's written application states that the 
consumer plans to retire within twelve months without obtaining new 
employment, or states that the consumer will transition from full-
time to part-time employment, the creditor must consider that 
information.
* * * * *
    Paragraph 34(a)(4)(ii)(B).
    1. * * *
    2. Materially greater than. Amounts of income or assets relied 
on are not materially greater than amounts that could have been 
verified at [lsqbb]consummation[rsqbb][rtrif]account opening[ltrif] 
if relying on the verifiable amounts would not have altered a 
reasonable creditor's decision to extend credit or the terms of the 
credit.
    Paragraph 34(a)(4)(ii)(C).
    1. In general. A credit report may be used to verify current 
obligations. A credit report, however, might not reflect an 
obligation that a consumer has listed on an application. The 
creditor is responsible for considering such an obligation, but the 
creditor is not required to independently verify the obligation. 
Similarly, a creditor is responsible for considering certain 
obligations undertaken just before or at [rtrif]account 
opening[ltrif][lsqbb]consummation of the transaction[rsqbb] and 
secured by the same dwelling that secures the transaction (for 
example, a ``piggy back'' loan), of which the creditor knows, even 
if not reflected on a credit report. See comment 34(a)(4)-3.
    34(a)(4)(iii) Presumption of compliance.
    1. In general. A creditor is presumed to have complied with 
Sec.  1026.34(a)(4) if the creditor follows the three underwriting 
procedures specified in paragraph 34(a)(4)(iii) for verifying 
repayment ability, determining the payment obligation, and measuring 
the relationship of obligations to income. The procedures for 
verifying repayment ability are required under [rtrif]Sec.  
1026.34(a)(4)(ii)[ltrif] [lsqbb]paragraph 34(a)(4)(ii)[rsqbb]; the 
other procedures are not required but, if followed along with the 
required procedures, create a presumption that the creditor has 
complied with Sec.  1026.34(a)(4). The consumer may rebut the 
presumption with evidence that the creditor nonetheless disregarded 
repayment ability despite following these procedures. For example, 
evidence of a very high debt-to-income ratio and a very limited 
residual income could be sufficient to rebut the presumption, 
depending on all of the facts and circumstances. If a creditor fails 
to follow one of the non-required procedures set forth in 
[rtrif]Sec.  1026.34(a)(4)(iii)[ltrif] [lsqbb]paragraph 
34(a)(4)(iii)[rsqbb], then the creditor's compliance is determined 
based on all of the facts and circumstances without there being a 
presumption of either compliance or violation.
    Paragraph 34(a)(4)(iii)(B)
    1. Determination of payment schedule. To retain a presumption of 
compliance under Sec.  1026.34(a)(4)(iii), a creditor must determine 
the consumer's ability to pay the principal and interest obligation 
based on the maximum scheduled payment [lsqbb]in the first seven 
years following consummation[rsqbb]. In general, a creditor should 
determine a payment schedule for purposes of Sec.  
1026.34(a)(4)(iii)(B) based on the guidance in the commentary to 
[lsqbb]Sec.  1026.17(c)(1)[rsqbb] [rtrif]Sec.  1026.32(c)(3)[ltrif]. 
[lsqbb]Examples of how to determine the maximum scheduled payment in 
the first seven years are provided as follows (all payment amounts 
are rounded):
    i. Balloon-payment loan; fixed interest rate. A loan in an 
amount of $100,000 with a fixed interest rate of 8.0 percent (no 
points) has a 7-year term but is amortized over 30 years. The 
monthly payment scheduled for 7 years is $733 with a balloon payment 
of remaining principal due at the end of 7 years. The creditor will 
retain the presumption of compliance if it assesses repayment 
ability based on the payment of $733.
    ii. Fixed-rate loan with interest-only payment for five years. A 
loan in an amount of $100,000 with a fixed interest rate of 8.0 
percent (no points) has a 30-year term. The monthly payment of $667 
scheduled for the first 5 years would cover only the interest due. 
After the fifth year, the scheduled payment would increase to $772, 
an amount that fully amortizes the principal balance over the 
remaining 25 years. The creditor will retain the presumption of 
compliance if it assesses repayment ability based on the payment of 
$772.
    iii. Fixed-rate loan with interest-only payment for seven years. 
A loan in an amount of $100,000 with a fixed interest rate of 8.0 
percent (no points) has a 30-year term. The monthly payment of $667 
scheduled for the first 7 years would cover only the interest due. 
After the seventh year, the scheduled payment would increase to 
$793, an amount that fully amortizes the principal balance over the 
remaining 23 years. The creditor will retain the presumption of 
compliance if it assesses repayment ability based on the interest-
only payment of $667.
    iv. Variable-rate loan with discount for five years. A loan in 
an amount of $100,000 has a 30-year term. The loan agreement 
provides for a fixed interest rate of 7.0 percent for an initial 
period of 5 years. Accordingly, the payment scheduled for the first 
5 years is $665. The agreement provides that, after 5 years, the 
interest rate will adjust each year based on a specified index and 
margin. As of consummation, the sum of the index value and margin 
(the fully-indexed rate) is 8.0 percent. Accordingly, the payment 
scheduled for the remaining 25 years is $727. The creditor will 
retain the presumption of compliance if it assesses repayment 
ability based on the payment of $727.
    v. Variable-rate loan with discount for seven years. A loan in 
an amount of $100,000 has a 30-year term. The loan agreement 
provides for a fixed interest rate of 7.125 percent for an initial 
period of 7 years. Accordingly, the payment scheduled for the first 
7 years is $674. After 7 years, the agreement provides that the 
interest rate will adjust each year based on a specified index and 
margin. As of consummation, the sum of the index value and margin 
(the fully-indexed rate) is 8.0 percent. Accordingly, the payment 
scheduled for the remaining years is $725. The creditor will retain 
the presumption of compliance if it assesses repayment ability based 
on the payment of $674.
    vi. Step-rate loan. A loan in an amount of $100,000 has a 30-
year term. The agreement provides that the interest rate will be 5 
percent for two years, 6 percent for three years, and 7 percent 
thereafter. Accordingly, the payment amounts are $537 for two years, 
$597 for three years, and $654 thereafter. To retain the presumption 
of compliance, the creditor must assess repayment ability based on 
the payment of $654.[rsqbb]
* * * * *
    [rtrif]34(a)(5) Pre-loan counseling.
    1. State housing finance authority. For purposes of Sec.  
1026.34(a)(5), a ``State housing finance authority'' has the same 
meaning as ``State housing finance agency'' provided in 24 CFR 
214.3.
    34(a)(5)(i) Certification of counseling required.
    1. HUD-approved counselor. For purposes of Sec.  1026.34(a)(5), 
counselors approved by the Secretary of the U.S. Department of 
Housing and Urban Development are homeownership counselors certified 
pursuant to section 106(e) of the Housing and Urban Development Act 
of 1968 (12 U.S.C. 1701x(e)), or as otherwise determined by the 
Secretary.
    2. Processing applications. Prior to receiving certification of 
counseling, a creditor may not extend a high-cost mortgage, but may 
engage in other activities, such as processing an application that 
will result in the extension of a high-cost mortgage (by, for 
example, ordering an appraisal or title search).
    3. Form of certification. The written certification of 
counseling required by Sec.  1026.34(a)(5)(i) may be received by 
mail, email, facsimile, or any other method, so long as the 
certification is in a retainable form.
    34(a)(5)(ii) Timing of counseling.
    1. Disclosures for open-end credit plans. Section 
1026.34(a)(5)(ii) permits receipt of either the good faith estimate 
required by RESPA or the disclosures required under Sec.  1026.40 to 
allow counseling to occur. Pursuant to 12 CFR 1024.7(h), the 
disclosures required by Sec.  1026.40 can be provided in lieu of a 
good faith estimate for open-end credit plans.

[[Page 49165]]

    2. Initial disclosure. Counseling may occur after receipt of 
either an initial good faith estimate required by RESPA or a 
disclosure form pursuant to Sec.  1026.40, regardless of whether a 
revised good faith estimate or revised disclosure form pursuant to 
Sec.  1026.40 is subsequently provided to the consumer.
    34(a)(5)(iv) Content of certification.
    1. Statement of counseling on advisability. A statement that a 
consumer has received counseling on the advisability of the high-
cost mortgage means that the consumer has received counseling about 
key terms of the mortgage transaction, as set out in either the 
RESPA good faith estimate or the disclosures provided to the 
consumer pursuant to Sec.  1026.40; the consumer's budget, including 
the consumer's income, assets, financial obligations, and expenses; 
and the affordability of the mortgage transaction for the consumer. 
Examples of such terms of the mortgage transaction include the 
initial interest rate, the initial monthly payment, whether the 
payment may increase, how the minimum periodic payment will be 
determined, and fees imposed by the creditor, as may be reflected in 
the applicable disclosure. A statement that a consumer has received 
counseling on the advisability of the high-cost mortgage does not 
require the counselor to have made a judgment or determination as to 
the appropriateness of the mortgage transaction for the consumer.
    2. Statement of verification. A statement that a counselor has 
verified that the consumer has received the disclosures required by 
either Sec.  1026.32(c) or by RESPA for the high-cost mortgage means 
that a counselor has confirmed, orally, in writing, or by some other 
means, receipt of such disclosures with the consumer.
    34(a)(5)(v) Counseling fees.
    1. Financing. Section 1026.34(a)(5)(v) does not prohibit a 
creditor from financing the counseling fee as part of the 
transaction for a high-cost mortgage, if the fee is a bona fide 
third-party charge as provided by Sec.  1026.32(b)(5)(i).
    34(a)(5)(vi) Steering prohibited.
    1. An example of an action that constitutes steering would be 
when a creditor repeatedly highlights or otherwise distinguishes the 
same counselor in the notices the creditor provides to consumers 
pursuant to Sec.  1026.34(a)(5)(vii).
    2. Section 1026.34(a)(5)(vi) does not prohibit a creditor from 
providing a consumer with objective information related to 
counselors or counseling organizations in response to a consumer's 
inquiry. An example of an action that would not constitute steering 
would be when a consumer asks the creditor for information about the 
fees charged by a counselor, and the creditor responds by providing 
the consumer information about fees charged by the counselor to 
other consumers that previously obtained counseling pursuant to 
Sec.  1026.34(a)(5).
    34(a)(5)(vii) List of counselors.
    1. Multiple creditors; multiple consumers. In the event of a 
high-cost mortgage transaction that involves multiple creditors or 
multiple consumers, see Sec. Sec.  1026.5(d) and 1026.17(d) and 
related commentary for guidance.
    34(a)(6) Recommended default.
    1. Facts and circumstances. Whether a creditor or mortgage 
broker ``recommends or encourages'' default for purposes of Sec.  
1026.34(a)(6) depends on all of the relevant facts and 
circumstances.
    2. Examples. i. A creditor or mortgage broker ``recommends or 
encourages'' default when the creditor or mortgage broker advises 
the consumer to stop making payments on an existing loan knowing 
that the consumer's cessation of payments will cause the consumer to 
default on the existing loan.
    ii. A creditor or mortgage broker does not ``recommend or 
encourage'' default if the creditor or mortgage broker advises a 
consumer, in good faith, to stop payment on an existing loan that is 
intended to be paid prior to the loan entering into default by the 
proceeds of a high-cost mortgage upon the consummation of that high-
cost mortgage, if the consummation is delayed for reasons outside 
the control of the creditor or mortgage broker.
    34(a)(8) Late fees.
    34(a)(8)(i) General.
    1. For purposes of Sec.  1026.34(a)(8), in connection with an 
open-end credit plan, the amount of the payment past due is the 
required minimum periodic payment as provided under the terms of the 
open-end credit agreement.
    34(a)(8)(iii) Multiple late charges assessed on payment 
subsequently paid.
    1. Section 1026.34(a)(8)(iii) prohibits the pyramiding of late 
fees or charges in connection with a high-cost mortgage payment. For 
example, assume that a consumer's regular periodic payment of $500 
is due on the 1st of each month. On August 25, the consumer makes a 
$500 payment which was due on August 1, and as a result, a $10 late 
charge is assessed. On September 1, the consumer makes another $500 
payment for the regular periodic payment due on September 1, but 
does not pay the $10 late charge assessed on the August payment. 
Under Sec.  1026.34(a)(8)(iii), it is impermissible to allocate $10 
of the consumer's September 1 payment to cover the late charge, such 
that the September payment becomes delinquent. In short, because the 
$500 payment made on September 1 is a full payment for the 
applicable period and is paid by its due date or within any 
applicable grace period, no late charge may be imposed on the 
account in connection with the September payment.
    34(a)(8)(iv) Failure to make required payment.
    1. Under Sec.  1026.34(a)(8)(iv), if a consumer fails to make 
one or more required payments and then resumes making payments but 
fails to bring the account current, it is permissible, if permitted 
by the terms of the loan contract or open-end credit agreement, to 
apply the consumer's payments first to the past due payment(s) and 
to impose a late charge on each subsequent required payment until 
the account is brought current. To illustrate: Assume that a 
consumer's regular periodic payment of $500 is due on the 1st of 
each month, or before the expiration of a 15-day grace period. Also 
assume that the consumer fails to make a timely installment payment 
by August 1 (or within the applicable grace period), and a $10 late 
charge therefore is imposed. The consumer resumes making monthly 
payments on September 1. Under Sec.  1026.34(a)(8)(iv), if permitted 
by the terms of the loan contract, the creditor may apply the $500 
payment made on September 1 to satisfy the missed $500 payment that 
was due on August 1. If the consumer makes no other payment prior to 
the end of the grace period for the payment that was due on 
September 1, the creditor may also impose a $10 late fee for the 
payment that was due on September 1.
    34(a)(10) Financing of points and fees.
    1. Points and fees. For purposes of Sec.  1026.34(a)(10), 
``points and fees'' means those items that are required to be 
included in the calculation of points and fees under Sec.  
1026.32(b)(1) and (3). Thus, for example, in connection with the 
extension of credit under a high-cost mortgage, a creditor may 
finance a fee charged by a third-party counselor in connection with 
the consumer's receipt of pre-loan counseling under Sec.  
1026.34(a)(5), because, pursuant to Sec.  1026.32(b)(5)(i), such a 
fee is excluded from the calculation of points and fees as a bona 
fide third-party charge.
    2. Examples of financing points and fees. For purposes of Sec.  
1026.34(a)(10), points and fees are financed if, for example, they 
are added to the loan balance or financed through a separate note, 
if the note is payable to the creditor or to an affiliate of the 
creditor. In the case of an open-end credit plan, a creditor also 
finances points and fees if the creditor advances funds from the 
credit line to cover the fees.[ltrif]
    34(b) Prohibited acts or practices for dwelling-secured loans; 
[lsqbb]open-end credit[rsqbb] [rtrif]structuring loans to evade high 
cost mortgage requirements[ltrif]
    1. [rtrif]Examples. A creditor structures a transaction in 
violation of Sec.  1026.34(b) if, for example:
    i. The creditor structures a loan that would otherwise be a 
high-cost mortgage as two loans, for example, to divide the loan 
fees in order to avoid the points and fees threshold for high-cost 
mortgages in Sec.  1026.32(a)(1)(ii).
    ii. The creditor structures a high-cost mortgage as an open-end 
home-equity line of credit that is in fact a closed-end home-equity 
loan in order to evade the requirement under Sec.  1026.32(b)(1) to 
include loan originator compensation in the points and fees 
calculation for closed-end mortgage loans.
    2. [ltrif]Amount of credit extended. Where a loan is documented 
as open-end credit but the features and terms or other circumstances 
demonstrate that it does not meet the definition of open-end credit, 
the loan is subject to the rules for closed-end 
credit[rtrif].[ltrif] [lsqbb], including Sec.  1026.32 if the rate 
or fee trigger is met. In[rsqbb] [rtrif]Thus, in determining the 
``total loan amount'' for purposes of[ltrif] applying the triggers 
under Sec.  1026.32, [lsqbb]the ``amount financed,'' including the 
``principal loan amount'' must be determined. In making the 
determination[rsqbb], the amount of credit that would have been 
extended if the loan had been documented as a closed-end loan is a 
factual determination to be made in each case. Factors to be 
considered include the amount of money the consumer originally 
requested, the amount of the first advance or

[[Page 49166]]

the highest outstanding balance, or the amount of the credit line. 
The full amount of the credit line is considered only to the extent 
that it is reasonable to expect that the consumer might use the full 
amount of credit.

Section 1026.36--Prohibited Acts or Practices in Connection With 
Credit Secured by a Dwelling

* * * * *
    [rtrif]36(k) Negative amortization counseling.
    36(k)(1) Counseling required.
    1. HUD-certified or -approved counselor or counseling 
organization. For purposes of Sec.  1026.36(k), organizations or 
counselors certified or approved by the U.S. Department of Housing 
and Urban Development (HUD) to provide the homeownership counseling 
required by Sec.  1026.36(k) include counselors and counseling 
organizations that are certified or approved pursuant to section 
106(e) of the Housing and Urban Development Act of 1968 (12 U.S.C. 
1701x(e)) or 24 CFR part 214, unless HUD determines otherwise.
    2. Homeownership counseling. The counseling required under Sec.  
1026.36(k) must include information regarding the risks and 
consequences of negative amortization.
    3. Documentation. Examples of documentation that demonstrate a 
consumer has received the counseling required under Sec.  1026.36(k) 
include a certificate of counseling, letter, or email from a HUD-
certified or -approved counselor or counseling organization 
indicating that the consumer has received homeownership counseling.
    4. Processing applications. Prior to receiving documentation 
that a consumer has received the counseling required under Sec.  
1026.36(k), a creditor may not extend credit to a first-time 
borrower in connection with a closed-end transaction secured by a 
dwelling that may result in negative amortization, but may engage in 
other activities, such as processing an application for such a 
transaction (by, for example, ordering an appraisal or title 
search).
    36(k)(3) Steering prohibited.
    1. See comments 34(a)(5)(vi)-1 and -2 for guidance concerning 
steering.
    36(k)(4) List of counselors.
    1. Multiple creditors; multiple consumers. In the event of a 
closed-end transaction secured by a dwelling that may result in 
negative amortization that involves multiple creditors or multiple 
first-time borrows, see Sec.  1026.17(d) and related commentary for 
guidance.[ltrif]

    Dated: July 9, 2012.
Richard Cordray,
Director, Bureau of Consumer Financial Protection.
[FR Doc. 2012-17059 Filed 8-7-12; 4:15 pm]
BILLING CODE 4810-AM-P