[Federal Register Volume 78, Number 85 (Thursday, May 2, 2013)]
[Proposed Rules]
[Pages 25638-25662]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-09750]


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BUREAU OF CONSUMER FINANCIAL PROTECTION

12 CFR Parts 1024 and 1026

[Docket No. CFPB-2013-0010]
RIN 3170-AA37


Amendments to the 2013 Mortgage Rules Under the Real Estate 
Settlement Procedure Act (Regulation X) and the Truth in Lending Act 
(Regulation Z)

AGENCY: Bureau of Consumer Financial Protection.

ACTION: Proposed rule with request for public comment.

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SUMMARY: This rule proposes amendments to some of the final mortgage 
rules issued by the Bureau of Consumer Financial Protection (Bureau) in 
January of 2013. These amendments clarify or correct provisions on the 
relation to State law of Regulation X's servicing provisions; the small 
servicer exemption from certain servicing rules; the use of government-
sponsored enterprise and Federal agency purchase, guarantee or 
insurance eligibility for determining qualified mortgage status; and 
the determination of debt and income for purposes of originating 
qualified mortgages.

DATES: Comments must be received on or before June 3, 2013.

ADDRESSES: You may submit comments, identified by Docket No. CFPB-2013-
0010 or RIN 3170-AA37, by any of the following methods:
     Electronic: http://www.regulations.gov. Follow the 
instructions for submitting comments.
     Mail/Hand Delivery/Courier: Monica Jackson, Office of the 
Executive Secretary, Consumer Financial Protection Bureau, 1700 G 
Street NW., Washington, DC 20552.
    Instructions: All submissions should include the agency name and 
docket number or Regulatory Information Number (RIN) for this 
rulemaking. Because paper mail in the Washington, DC area and at the 
Bureau is subject to delay, commenters are encouraged to submit 
comments electronically. 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.

[[Page 25639]]

    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: Whitney Patross, Attorney; Joseph 
Devlin and Richard Arculin, Counsels; Marta Tanenhaus and R. Colgate 
Selden, Senior Counsels; Office of Regulations, at (202) 435-7700.

SUPPLEMENTARY INFORMATION:

I. Summary of Proposed Rule

    In January 2013, the Bureau issued several final rules concerning 
mortgage markets in the United States, pursuant to the Dodd-Frank Wall 
Street Reform and Consumer Protection Act (Dodd-Frank Act). Public Law 
111-203, 124 Stat. 1376 (2010) (2013 Title XIV Final Rules). On January 
10, 2013, the Bureau issued Ability-to-Repay and Qualified Mortgage 
Standards Under the Truth in Lending Act (Regulation Z) (2013 ATR Final 
Rule).\1\ On January 17, 2013, the Bureau issued Mortgage Servicing 
Rules Under the Real Estate Settlement Procedures Act (Regulation X) 
(2013 RESPA Servicing Final Rule) and Mortgage Servicing Rules Under 
the Truth in Lending Act (Regulation Z) (2013 TILA Servicing Final 
Rule) (together, 2013 Mortgage Servicing Final Rules).\2\ This 
publication proposes several amendments to those rules. These 
amendments clarify or correct provisions on (1) The relation to State 
law of Regulation X's servicing provisions; (2) the small servicer 
exemption from certain of the new servicing rules; (3) the use of 
government-sponsored enterprise (GSE) and Federal agency purchase, 
guarantee or insurance eligibility for determining qualified mortgage 
(QM) status; and (4) the determination of debt and income for purposes 
of originating QMs. In addition to these four proposed revisions, which 
are discussed more fully below, the Bureau is also proposing certain 
technical corrections to the regulations with no substantive change 
intended.
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    \1\ 78 FR 6407 (Jan. 30, 2013).
    \2\ 78 FR 10695 (Feb. 14, 2013) (Regulation X), 78 FR 10901 
(Feb. 14, 2013) (Regulation Z).
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    First, the Bureau is proposing to amend the commentary to 
Regulation X to clarify that under the preemption provisions, that 
regulation does not occupy the field of regulation of the practices 
covered by RESPA or Regulation X, including with respect to mortgage 
servicers or mortgage servicing. The proposal would also redesignate 
Sec.  1024.13, the Regulation X preemption provision, as Sec.  
1024.5(c).
    Second, the Bureau is proposing to clarify the scope and 
application of an exemption for small servicers that is set forth in 
Sec.  1026.41, the periodic statement provision, and incorporated by 
cross-reference in certain provisions of Regulation X. The proposal 
would clarify which mortgage loans to consider in determining small 
servicer status and the application of the small servicer exemption 
with regard to servicer/affiliate and master servicer/subservicer 
relationships. Further, the Bureau is proposing that three types of 
mortgage loan not be considered in determining small servicer status: 
mortgage loans voluntarily serviced for an unaffiliated entity without 
remuneration, reverse mortgages, and mortgage loans secured by a 
consumer's interest in timeshare plans. The Bureau is also proposing 
other minor changes involving the small servicer exemption.
    Third, the Bureau is proposing to revise comment 43(e)(4)-4 to 
clarify what standards a creditor must meet when relying on a written 
guide or the automated underwriting system of one of the GSEs, U.S. 
Department of Housing and Urban Development (HUD), Veterans 
Administration (VA), U.S. Department of Agriculture (USDA), or Rural 
Housing Service (RHS) to determine qualified mortgage status under 
Sec.  1026.43(e)(4). The proposed comment clarifies that a creditor is 
not required to satisfy certain mandates concerning loan delivery to 
the entities and other requirements that are wholly unrelated to 
assessing a consumer's ability to repay the loan. The proposed comment 
also specifies that a creditor relying on approval through an entity's 
automated underwriting system to establish qualified mortgage status 
must also meet the conditions on approval that are generated by that 
same system.
    The Bureau further is proposing revisions to comment 43(e)(4)-4 to 
clarify that a loan meeting eligibility requirements provided in a 
written agreement between the creditor and one of the GSEs, HUD, VA, 
USDA, or RHS is also eligible for purchase or guarantee by the GSEs or 
insured or guaranteed by the agencies for the purposes of Sec.  
1026.43(e)(4). Thus, such loans could be qualified mortgages.
    The Bureau is also proposing new comment 43(e)(4)-5, which provides 
that a repurchase or indemnification demand by the GSEs, HUD, VA, USDA, 
or RHS is not dispositive for ascertaining qualified mortgage status. 
The comment provides two examples to illustrate the application of this 
guidance.
    Fourth, the Bureau is proposing changes to appendix Q of Regulation 
Z to facilitate compliance and ensure access to credit by assisting 
creditors in determining a consumer's debt-to-income ratio (DTI) for 
the purposes of Sec.  1026.43(e)(2), the primary qualified mortgage 
provision. The Bureau is proposing changes to address compliance 
challenges raised by stakeholders, as well as technical and wording 
changes for clarification purposes.

II. Background

A. Title XIV Rulemakings Under the Dodd-Frank Act

    In response to an unprecedented cycle of expansion and contraction 
in the mortgage market that sparked the most severe U.S. recession 
since the Great Depression, Congress passed the Dodd-Frank Act, which 
was signed into law on July 21, 2010. In the Dodd-Frank Act, Congress 
established the Bureau and, under sections 1061 and 1100A, generally 
consolidated the rulemaking authority for Federal consumer financial 
laws, including TILA and RESPA, in the Bureau.\3\ At the same time, 
Congress significantly amended the statutory requirements governing 
mortgage practices with the intent to restrict the practices that 
contributed to and exacerbated the crisis. Under the statute, most of 
these new requirements would have taken effect automatically on January 
21, 2013, if the Bureau had not issued implementing regulations by that 
date.\4\ To avoid uncertainty and potential disruption in the national 
mortgage market at a time of economic vulnerability, the Bureau issued 
several final rules in a span of less than two weeks in January 2013 to 
implement these new statutory provisions and provide for an orderly 
transition.
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    \3\ Sections 1011 and 1021 of the Dodd-Frank Act, in title X, 
the ``Consumer Financial Protection Act,'' Public Law 111-203, 
sections 1001-1100H, codified at 12 U.S.C. 5491, 5511. The Consumer 
Financial Protection Act is substantially codified at 12 U.S.C. 
5481-5603. Section 1029 of the Dodd-Frank Act excludes from this 
transfer of authority, subject to certain exceptions, any rulemaking 
authority over a motor vehicle dealer that is predominantly engaged 
in the sale and servicing of motor vehicles, the leasing and 
servicing of motor vehicles, or both. 12 U.S.C. 5519.
    \4\ Dodd-Frank Act section 1400(c), 15 U.S.C. 1601 note.
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    On January 10, 2013, the Bureau issued the 2013 ATR Final Rule, 
Escrow Requirements Under the Truth in Lending Act (Regulation Z) (2013 
Escrows Final Rule),\5\ and High-Cost

[[Page 25640]]

Mortgages and Homeownership Counseling Amendments to the Truth in 
Lending Act (Regulation Z) and Homeownership Counseling Amendments to 
the Real Estate Settlement Procedures Act (Regulation X) (2013 HOEPA 
Final Rule).\6\ On January 17, 2013, the Bureau issued the 2013 
Mortgage Servicing Final Rules. On January 18, 2013, the Bureau issued 
Appraisals for Higher-Priced Mortgage Loans (Regulation Z) \7\ (issued 
jointly with other agencies) and Disclosure and Delivery Requirements 
for Copies of Appraisals and Other Written Valuations Under the Equal 
Credit Opportunity Act (Regulation B) (2013 Appraisals Final Rule).\8\ 
On January 20, 2013, the Bureau issued Loan Originator Compensation 
Requirements Under the Truth in Lending Act (Regulation Z) (2013 Loan 
Originator Final Rule).\9\ Most of these rules will become effective on 
January 10, 2014.
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    \5\ 78 FR 4726.
    \6\ 78 FR 6855.
    \7\ 78 FR 10367.
    \8\ 78 FR 7215.
    \9\ 78 FR 11279.
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    Concurrent with the 2013 ATR Final Rule, on January 10, 2013, the 
Bureau issued Proposed Amendments to the Ability-to-Repay Standards 
Under the Truth in Lending Act (Regulation Z) (2013 ATR Concurrent 
Proposal).\10\ The 2013 ATR Concurrent Proposal would provide 
exemptions for certain nonprofit creditors and certain homeownership 
stabilization programs, an additional definition of a qualified 
mortgage for certain loans made and held in portfolio by small 
creditors, and specific rules for the inclusion of loan originator 
compensation in the points and fees calculation for QMs. The Bureau is 
currently in the process of considering comments received and 
finalizing this proposal.
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    \10\ 78 FR 6622.
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B. Implementation Initiative for New Mortgage Rules

    On February 13, 2013, the Bureau announced an initiative to support 
implementation of its new mortgage rules (Implementation Plan),\11\ 
under which the Bureau would work with the mortgage industry to ensure 
that the new rules can be implemented accurately and expeditiously. The 
Implementation Plan included (1) Coordination with other agencies; (2) 
publication of plain-language guides to the new rules; (3) publication 
of additional corrections and clarifications of the new rules, as 
needed; (4) publication of readiness guides for the new rules; and (5) 
education of consumers on the new rules.
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    \11\ Consumer Financial Protection Bureau Lays Out 
Implementation Plan for New Mortgage Rules. Press Release. Feb. 13, 
2013.
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    This proposal is the second issuance of additional corrections and 
clarifications of the new rules. The purpose of these updates is to 
address important questions raised by industry, consumer groups, or 
other agencies. Priority for this second set of updates has been given 
to issues that are important to a large number of stakeholders and that 
critically affect mortgage companies' implementation decisions. In 
June, the Bureau plans to issue additional proposed clarifications to 
the new mortgage rules, including the servicing rules touched on here 
and the 2013 Loan Originator Final Rule. We will also be issuing final 
versions of the recently published Escrows proposal and this issuance, 
after considering the comments we receive.\12\
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    \12\ The Bureau also has received some questions that it does 
not intend to address through further rulemaking because they are 
answered by the final rules as adopted. For example, the Bureau has 
been asked whether residual income considerations can have any 
impact on the status of a qualified mortgage, specifically, whether 
a creditor's failure to verify adequate residual income can be 
raised to refute the safe harbor for qualified mortgages that are 
not higher-priced covered transactions, under Sec.  
1026.43(e)(1)(i). The Bureau believes the rule is already clear that 
residual income is relevant only to rebutting the presumption of 
compliance for qualified mortgages that are higher-priced covered 
transactions, under Sec.  1026.43(e)(1)(ii)(B), and therefore has no 
effect on the safe harbor status of qualified mortgages that are not 
higher-priced covered transactions.
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III. Legal Authority

    The Bureau is issuing this proposed rule pursuant to its authority 
under RESPA, TILA, and the Dodd-Frank Act. Section 1061 of the Dodd-
Frank Act transferred to the Bureau the ``consumer financial protection 
functions'' previously vested in certain other Federal agencies, 
including the Federal Reserve Board (Board). The term ``consumer 
financial protection function'' is defined to include ``all authority 
to prescribe rules or issue orders or guidelines pursuant to any 
Federal consumer financial law, including performing appropriate 
functions to promulgate and review such rules, orders, and 
guidelines.'' \13\ Section 1061 of the Dodd-Frank Act also transferred 
to the Bureau all of HUD's consumer protections functions relating to 
RESPA.\14\ Title X of the Dodd-Frank Act, including section 1061 of the 
Dodd-Frank Act, along with RESPA, TILA, and certain subtitles and 
provisions of title XIV of the Dodd-Frank Act, are Federal consumer 
financial laws.\15\
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    \13\ 12 U.S.C. 5581(a)(1).
    \14\ Public Law 111-203, 124 Stat. 1376, section 1061(b)(7); 12 
U.S.C. 5581(b)(7).
    \15\ Dodd-Frank Act section 1002(14), 12 U.S.C. 5481(14) 
(defining ``Federal consumer financial law'' to include the 
``enumerated consumer laws'' and the provisions of title X of the 
Dodd-Frank Act); Dodd-Frank Act section 1002(12), 12 U.S.C. 5481(12) 
(defining ``enumerated consumer laws'' to include TILA), Dodd-Frank 
section 1400(b), 15 U.S.C. 1601 note (defining ``enumerated consumer 
laws'' to certain subtitles and provisions of Title XIV).
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    Section 19(a) of RESPA, 12 U.S.C. 2617(a), authorizes the Bureau to 
prescribe such rules and regulations, to make such interpretations, and 
to grant such reasonable exemptions for classes of transactions, as may 
be necessary to achieve the purposes of RESPA, which includes its 
consumer protection purposes. In addition, section 6(j)(3) of RESPA, 12 
U.S.C. 2605(j)(3), authorizes the Bureau to establish any requirements 
necessary to carry out section 6 of RESPA and section 6(k)(1)(E) of 
RESPA, 12 U.S.C. 2605(k)(1)(E), authorizes the Bureau to prescribe 
regulations that are appropriate to carry out RESPA's consumer 
protection purposes. As identified in the 2013 RESPA Servicing Final 
Rule, the consumer protection purposes of RESPA include responding to 
borrower requests and complaints in a timely manner, maintaining and 
providing accurate information, helping borrowers avoid unwarranted or 
unnecessary costs and fees, and facilitating review for foreclosure 
avoidance options.
    Section 105(a) of TILA, 15 U.S.C. 1604(a), authorizes the Bureau to 
prescribe regulations to carry out the purposes of TILA. Under 105(a) 
such regulations may contain such additional requirements, 
classifications, differentiations, or other provisions, and may provide 
for such adjustments and exceptions for all or any class of 
transactions, as in the judgment of the Bureau are necessary or proper 
to effectuate the purposes of TILA, to prevent circumvention or evasion 
thereof, or to facilitate compliance therewith. A purpose of TILA is 
``to assure a meaningful disclosure of credit terms so that the 
consumer will be able to compare more readily the various credit terms 
available to him and avoid the uninformed use of credit.'' TILA section 
102(a), 15 U.S.C. 1601(a). In particular, it is the purpose of TILA 
section 129C, as amended by the Dodd-Frank Act, to assure that 
consumers are offered and receive residential mortgage loans on terms 
that reasonably reflect their ability to repay the loans and that are 
understandable and not unfair, deceptive, and abusive. Section 105(f) 
of TILA, 15 U.S.C. 1604(f), authorizes the

[[Page 25641]]

Bureau to exempt from all or part of TILA any class of transactions if 
the Bureau determines that TILA coverage does not provide a meaningful 
benefit to consumers in the form of useful information or protection. 
Accordingly, the Bureau has authority to issue regulations pursuant to 
RESPA, TILA, title X, and the enumerated subtitles and provisions of 
title XIV.
    In addition to constitute a qualified mortgage a loan must meet 
``any guidelines or regulations established by the Bureau relating to 
ratios of total monthly debt to monthly income or alternative measures 
of ability to pay regular expenses after payment of total monthly debt, 
taking into account the income levels of the borrower and such other 
factors as the Bureau may determine are relevant and consistent with 
the purposes described in [TILA section 129C(b)(3)(B)(i).]'' The Dodd 
Frank Act also provides the Bureau with authority to prescribe 
regulations that revise, add to, or subtract from the criteria that 
define a qualified mortgage upon a finding that such regulations are 
necessary or proper to ensure that responsible, affordable mortgage 
credit remains available to consumers in a manner consistent with the 
purposes of the ability-to-repay requirements; or are necessary and 
appropriate to effectuate the purposes of the ability-to-repay 
requirements, to prevent circumvention or evasion thereof, or to 
facilitate compliance with TILA sections 129B and 129C. TILA section 
129C(b)(3)(B)(i), 15 U.S.C. 1639c(b)(3)(B)(i). In addition, TILA 
section 129C(b)(3)(A) provides the Bureau authority to prescribe 
regulations to carry out the purposes of the qualified mortgage 
provisions, such as to ensure that responsible m affordable mortgage 
credit remains available to consumers in a manner consistent with the 
purposes of TILA section 128C. TILA section 129C(b)(3)(A), 15 U.S.C. 
1639c(b)(3)(A).
    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). Title X of the Dodd-Frank Act is a Federal consumer 
financial law. Accordingly, the Bureau is exercising its authority 
under the Dodd-Frank Act section 1022(b) to prescribe rules that carry 
out the purposes and objectives of RESPA, TILA, title X, and the 
enumerated subtitles and provisions of title XIV of the Dodd-Frank Act, 
and prevent evasion of those laws.
    The Bureau is proposing to amend certain rules finalized in 
January, 2013 that implement a number of Dodd-Frank Act provisions. In 
particular, the Bureau is proposing to clarify or amend regulatory 
provisions and associated commentary adopted by the 2013 ATR Final 
Rule,\16\ the 2013 TILA Servicing Final Rule,\17\ and the 2013 RESPA 
Servicing Final Rule.\18\ This proposed rule relies on the broad 
rulemaking and exception authorities specifically granted to the Bureau 
by RESPA, TILA, and title X of the Dodd-Frank Act.
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    \16\ 78 FR 6408 (January 30, 2013).
    \17\ 78 FR 10902 (February 14, 2013).
    \18\ 78 FR 10696 (February 14, 2013).
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IV. Section-by-Section Analysis

A. Regulation X

Subpart A--General Provisions
    The Bureau is proposing a technical amendment to the heading for 
Subpart A of Regulation X from ``Subpart A--General'' to ``Subpart A--
General Provisions'' to conform the heading in the text of the 
regulation to the heading set forth in the corresponding commentary.
Section 1024.5 Coverage of RESPA
    The Bureau is proposing to redesignate Sec.  1024.13 as Sec.  
1024.5(c). Section 1024.13, ``Relation to State laws,'' sets forth 
rules regarding the relationship of the requirements in RESPA and 
Regulation X to requirements established pursuant to State law. In the 
2013 RESPA Servicing Final Rule, the Bureau divided Regulation X into 
subparts and Sec.  1024.13 is located in new ``Subpart B--Mortgage 
Settlement and Escrow Accounts.'' The provisions of Sec.  1024.13(a) 
are intended to apply with respect to all of Regulation X. Because 
Sec.  1024.13 applies for all sections of Regulation X, the Bureau is 
redesignating Sec.  1024.13 as Sec.  1024.5(c), located within 
``Subpart A--General Provisions.'' Further, the Bureau is proposing to 
remove and reserve Sec.  1024.13.
    The Bureau is further proposing to add commentary for proposed 
Sec.  1024.5(c) to make clear that Regulation X does not create field 
preemption. Since the Bureau issued the 2013 RESPA Servicing Final 
Rule, it has received inquiries as to whether the Bureau's mortgage 
servicing rules result in preemption of the field of mortgage servicing 
regulation. The Bureau addressed this question in the preamble to the 
final rule, stating that ``the Final Servicing Rules generally do not 
have the effect of prohibiting State law from affording borrowers 
broader consumer protection relating to mortgage servicing than those 
conferred under the Final Servicing Rules.'' \19\ The preamble further 
stated that, although ``in certain circumstances, the effect of 
specific requirements of the Final Servicing Rules is to preempt 
certain limited aspects of state law'' in general, ``the Bureau 
explicitly took into account existing standards (both State and 
Federal) and either built in flexibility or designed its rules to 
coexist with those standards.'' \20\
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    \19\ 78 FR 10706.
    \20\ Id. (specifically identifying the National Mortgage 
Settlement and the California Homeowner Bill of Rights).
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    Because the Bureau has continued to receive questions on this 
issue, the Bureau believes it is appropriate to propose commentary to 
clarify the scope of proposed Sec.  1024.5(c) and expressly address 
concerns about field preemption. Consistent with the preamble to the 
2013 RESPA Servicing Final Rule, proposed comment 5(c)(1)-1 would state 
that State laws that are in conflict with the requirements of RESPA or 
Regulation X may be preempted by RESPA and Regulation X. Proposed 
comment 5(c)(1)-1 would state further that nothing in RESPA or 
Regulation X, including the provisions in subpart C with respect to 
mortgage servicers or mortgage servicing, should be construed to 
preempt the entire field of regulation of the covered practices. The 
Bureau believes that this proposed addition to the commentary would 
clarify that RESPA and Regulation X do not effectuate field preemption 
of States' regulation of mortgage servicers or mortgage servicing. The 
comment also makes clear that RESPA and Regulation X do not preempt 
State laws that give greater protection to consumers than they do.
    The Bureau requests comment regarding the addition of the proposed 
commentary, including whether further clarification regarding the 
preemption effects of RESPA and Regulation X is necessary or 
appropriate.

B. Regulation Z

Section 1026.41 Periodic Statements for Residential Mortgage Loans
41(a) In General
41(a)(1) Scope
    Section 1026.41(a)(1), which was established by the 2013 TILA 
Servicing Final Rule, sets forth the scope of mortgage loans subject to 
the periodic statement requirements. The mortgage loans covered by the 
rule are closed-end consumer credit transactions secured by

[[Page 25642]]

a dwelling, subject to certain exemptions set forth in Sec.  
1026.41(e). Section 1026.41(a)(1) further states that, for purposes of 
Sec.  1026.41, ``[s]uch transactions are referred to as mortgage 
loans.''
    The proposed revision would clarify the rule by replacing the 
indefinite reference ``such transactions'' in Sec.  1026.41(a)(1) with 
a reiteration of the loans to which the rule applies, that is, closed-
end consumer credit transactions secured by a dwelling. This revision 
clarifies which transactions are considered ``mortgage loans'' for 
purposes of Sec.  1026.41.
    The Bureau believes that this change also would reduce uncertainty 
about which loans to consider in determining a servicer's eligibility 
for one of the exemptions under Sec.  1026.41(e), the small servicer 
exemption. Section 1026.41(e)(4)(ii) defines a small servicer as a 
servicer that services 5,000 or fewer mortgage loans, for all of which 
the servicer (or an affiliate) is the creditor or assignee.\21\ The 
proposed text clarifies that, in general, a servicer determines whether 
it is a small servicer by considering the closed-end consumer credit 
transactions secured by a dwelling that it services. This includes 
coupon book loans, which are exempt from some of the requirements of 
the periodic statement rule. However, pursuant to proposed Sec.  
1026.41(e)(4)(iii), reverse mortgages and transactions secured by 
consumers' interests in timeshares, which are exempt from the periodic 
statement requirements, are excluded from consideration for purposes of 
determining small servicer status.
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    \21\ Housing Finance Agencies are deemed small servicers under 
Sec.  1026.41(e)(4)(ii)(B) regardless of loan count and loan 
ownership status.
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41(e) Exemptions
41(e)(4) Small Servicers
41(e)(4)(ii) Small Servicer Defined
    For the reasons set forth in the 2013 Servicing Final Rules,\22\ 
the Bureau determined that it was appropriate to exempt small servicers 
from certain mortgage servicing requirements. Specifically, small 
servicers, as defined by Sec.  1026.41(e)(4), are exempt from the 
Regulation Z requirement to provide periodic statements for residential 
mortgage loans \23\ and, in Regulation X, from (1) Certain requirements 
relating to obtaining force-placed insurance,\24\ (2) the general 
servicing policies, procedures, and requirements,\25\ and (3) certain 
requirements and restrictions relating to communicating with borrowers 
about, and evaluation of applications for, loss mitigation options.\26\
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    \22\ See, e.g., 78 FR 10718-10720.
    \23\ 12 CFR 1026.41(e).
    \24\ 12 CFR 1024.17(k)(5).
    \25\ 12 CFR 1024.30(b)(1).
    \26\ Id.
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    The Bureau is proposing to clarify the scope and application of the 
small servicer exemption. Determination of a servicer's status as a 
small servicer, and thus its eligibility for the small servicer 
exemption, is set forth in Sec.  1026.41(e)(4). As set forth above, 
this standard is applicable by cross-reference to certain provisions of 
Regulation X. Regulation X applies to ``federally related mortgage 
loans,'' which excludes certain loans that are ``mortgage loans'' as 
defined by Regulation Z Sec.  1026.41(a)(1). The proposed revision 
would clarify that, to qualify for the small servicer exemption 
applicable to either rule, the servicer must first qualify as a small 
servicer under Sec.  1026.41(a)(1)--and that determination is based on 
closed-end consumer credit transactions secured by a dwelling. This 
Regulation Z standard applies regardless of whether or not the loans 
considered are subject to the requirements of Regulation X. The Bureau 
notes that, although some mortgage loans not subject to coverage under 
Regulation X count for purposes of determining eligibility as a small 
servicer, servicing such loans under Regulation X rules would not be 
required. Thus, a servicer that services 5,000 federally related 
mortgage loans, as defined by Regulation X, may service more than 5,000 
mortgage loans, as defined by Regulation Z Sec.  1026.41(a)(1). In this 
case, because the servicer's loans exceed the 5,000 mortgage loan 
limit, the servicer is not a small servicer and, thus, would not 
qualify for the small servicer exemption with regard to Regulation Z 
and Regulation X. However, the servicer would not have to comply with 
Regulation X requirements for those mortgage loans counted for purposes 
of determining small servicer eligibility but which are not federally 
related mortgage loans. Accordingly, by clarifying how a servicer 
determines whether it qualifies as a small servicer with regard to 
Regulation Z, this proposal also would clarify how a servicer 
determines whether it qualifies for the small servicer exemptions from 
the mortgage servicing requirements in Regulation X.
    The Bureau is proposing to amend the commentary to Sec.  
1026.41(e)(4)(ii) to identify specifically which mortgage loans are 
considered for purposes of determining eligibility for the small 
servicer exemption. Specifically, the Bureau proposes to add comment 
41(e)(4)(ii)-1 to clarify that, in general and pursuant to Sec.  
1026.41(a)(1), the mortgage loans considered in determining 
qualification for the small servicer exemption are closed-end consumer 
credit transactions secured by a dwelling. Proposed comment 
41(e)(4)(ii)-1 highlights that, pursuant to Sec.  1026.41(e)(4)(iii), 
certain closed-end consumer credit transactions secured by a dwelling 
are not considered in determining status as a small servicer, as 
discussed further below in connection with proposed Sec.  
1026.41(e)(4)(iii).
    The Bureau requests comments and data regarding whether proposed 
comment 41(e)(4)(ii)-1 appropriately clarifies the scope of mortgage 
loans that must be considered for determining if a servicer qualifies 
as a small servicer. The Bureau specifically requests comment and data 
regarding whether any servicers service a significant number of closed-
end consumer credit transactions secured by a dwelling, which are 
subject to Regulation Z, but service significantly fewer ``federally 
related mortgage loans,'' which are subject to Regulation X. For 
example, the Bureau requests comment and data regarding whether any 
servicers would not be considered a small servicer if the small 
servicer exemption is based on whether a servicer services 5,000 or 
fewer closed end consumer credit transactions secured by a dwelling, 
but would be a small servicer if the small servicer exemption is based 
on whether a servicer services 5,000 or fewer ``federally related 
mortgage loan[s],'' as that term is defined in 12 CFR 1024.2.\27\
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    \27\ One example of such a servicer would be a servicer that 
services 10,000 construction loans, which are not considered 
``federally related mortgage loans'' pursuant to 12 CFR 1024.2, and 
100 mortgage loans that are considered ``federally related mortgage 
loans'' pursuant to 12 CFR 1024.2. Such servicer would be considered 
to service 10,100 closed-end consumer credit transactions secured by 
a dwelling and would not qualify for the small servicer exemption. 
However, only the 100 federally related mortgage loans serviced by 
the servicer would be subject to the mortgage servicing requirements 
set forth in Regulation X pursuant to 12 CFR 1024.31.
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    The Bureau also is proposing to amend Sec.  1026.41(e)(4)(ii)(A). 
Proposed Sec.  1026.41(e)(4)(ii)(A) would clarify that, for purposes of 
determining small servicer status, a servicer considers the mortgage 
loans serviced by the servicer together with any mortgage loans 
serviced by any affiliates. Section 1026.41(e)(4)(iii) states that 
small servicer status is determined by counting ``the number of 
mortgage loans serviced by the servicer and any affiliates as of 
January 1 for the

[[Page 25643]]

remainder of the calendar year.'' To avoid any risk of inconsistency, 
the Bureau believes it is appropriate to amend Sec.  
1026.41(e)(4)(ii)(A) to conform the language to Sec.  
1026.41(e)(4)(iii) by adding the clause ``together with any 
affiliates'' such that a small servicer is a servicer that ``services, 
together with any affiliates, 5,000 or fewer mortgage loans, for all of 
which the servicer (or an affiliate) is the creditor or assignee.'' 
This change more fully conforms the language of Sec.  
1026.41(e)(4)(ii)(A) with the language of Sec.  1026.41(e)(4)(iii) but 
does not change the meaning of the small servicer exemption.
    The Bureau also is proposing to amend the comments to Sec.  
1026.41(e)(4)(ii)(A). Specifically, comment 41(e)(4)(ii)-1 would be 
redesignated as comment 41(e)(4)(ii)-2 and would be amended to clarify 
several elements set forth in the 2013 TILA Servicing Final Rule. 
First, it would clarify that there are two concurrent requirements for 
determining whether a servicer is a small servicer. Second, it would 
explain that the mortgage loans considered in making this determination 
are those serviced by the servicer as well as by its affiliates. 
Finally, it would clarify that the second requirement of the small 
servicer test, that a servicer must be either the ``creditor or 
assignee'' of the mortgage loans it services, means that the servicer 
must either currently own or have originated the mortgage loans. The 
comment also would provide examples to illustrate these points.
    Proposed comment 41(e)(4)(ii)-1 would set forth the two 
requirements for determining if a servicer is a small servicer and 
would clarify that both requirements apply to the mortgage loans 
serviced by the servicer as well as by its affiliates. The comment 
would set forth both requirements: (1) A servicer, together with its 
affiliates, must service 5,000 or fewer mortgage loans, and (2) the 
servicer must only service mortgage loans for which the servicer (or an 
affiliate) is the creditor or assignee. Proposed comment 41(e)(4)(ii)-2 
would further clarify that to be the ``creditor or assignee'' of a 
mortgage loan, the servicer (or an affiliate) must either currently own 
the mortgage loan or must have been the entity to which the mortgage 
loan was initially payable (that is, the originator of the mortgage 
loan). A servicer that only services such mortgage loans may qualify as 
a small servicer so long as the servicer also only services 5,000 or 
fewer mortgage loans. The Bureau believes that this clarification 
provides a helpful alternative way of expressing the requirement stated 
in the rule that the servicer or affiliate must also be the creditor or 
assignee of a mortgage loan.
    Proposed comment 41(e)(4)(ii)-2 further would provide examples of 
specific circumstances demonstrating these requirements. The first 
example illustrates the loan count requirement of the small servicer 
test and the effect affiliation has on that requirement. Proposed 
comment 41(e)(4)(ii)-2.i states that if a servicer services 3,000 
mortgage loans, but is affiliated (as defined at Sec.  1026.32(b)(2)) 
\28\ with another servicer that services 4,000 other mortgage loans, 
both servicers are considered to service 7,000 mortgage loans and 
neither servicer is considered a small servicer. The second example 
illustrates the ownership requirement of the small servicer test. 
Proposed comment 41(e)(4)(ii)-2.ii states that if a servicer services 
3,100 mortgage loans, including 100 mortgage loans it neither owns nor 
originated but for which it owns the mortgage servicing rights, the 
servicer is not a small servicer. This is because the servicer services 
some mortgage loans for which the servicer (or an affiliate) is not the 
creditor or assignee, notwithstanding that the total number of mortgage 
loans serviced is fewer than 5,000.
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    \28\ The definition of ``affiliate'' for purposes of subpart E 
of Regulation Z, which includes Sec.  1026.41, is set forth in Sec.  
1026.32(b)(2) and applies to all of subpart E, including the small 
servicer exemption. Affiliate, as defined in Sec.  1026.32(b)(2), 
``means any company that is controlled by, or is under common 
control with another company, as set forth in the Bank Holding 
Company Act of 1956 (12 USC 1841 et seq.).'' Sec.  1026.32(b)(2).
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    Finally, the Bureau proposes to redesignate comment 41(e)(4)(ii)-2 
as 41(e)(4)(ii)-3 and to revise the comment to provide further 
clarification regarding the application of the small servicer exemption 
in certain master servicer/subservicer relationships. Under the 2013 
TILA Servicing Final Rule, comment 41(e)(4)(ii)-2 references Regulation 
X, 12 CFR 1024.31, for the definitions of ``master servicer'' and 
``subservicer'' that apply to the rule. It also provides the example 
that, even though a master servicer meets the definition of a small 
servicer, a subservicer retained by that master servicer that does not 
meet the definition does not qualify for the small servicer exemption.
    The proposed comment would clarify that a small servicer does not 
lose its small servicer status because it retains a subservicer, as 
that term is defined in 12 CFR 1024.31, to service any of its mortgage 
loans. The comment would also clarify that, for a subservicer, as that 
term is defined in 12 CFR 1024.31, to gain the benefit of the small 
servicer exemption, both the master servicer and the subservicer must 
be small servicers. The comment points out that, generally, a 
subservicer will not qualify as a small servicer because it does not 
own or did not originate the mortgage loans it subservices. However, a 
subservicer would qualify as a small servicer if it is an affiliate of 
a master servicer that qualifies as a small servicer.
    Proposed comment 41(e)(4)(ii)-3 also removes the previous example 
described above in favor of three other examples that demonstrate the 
implication of a master servicer/subservicer relationship for purposes 
of qualifying for the small servicer exemption. In the first example, a 
credit union services 4,000 mortgage loans--all of which it originated 
or owns. The credit union retains a credit union service organization 
to subservice 1,000 of the mortgage loans and the credit union services 
the remaining 3,000 mortgage loans itself. The credit union has no 
affiliation relationship with the credit union service. The credit 
union is a small servicer and, thus, the small servicer exemption 
applies to the 3,000 mortgage loans the credit union services itself. 
The credit union service organization is not a small servicer because 
it services mortgage loans it does not own or did not originate. 
Accordingly, the credit union service organization does not gain the 
benefit of the small servicer exemption and, thus, must comply with any 
applicable mortgage servicing requirements for the 1,000 mortgage loans 
it subservices.
    Proposed comment 41(e)(4)(ii)-3.ii posits the example of a bank 
holding company that, through a lender subsidiary, owns or originated 
4,000 mortgage loans. All mortgage servicing rights for the 4,000 
mortgage loans are owned by a wholly owned master servicer subsidiary. 
Servicing for the 4,000 mortgage loans is conducted by a wholly owned 
subservicer subsidiary. The bank holding company controls all of these 
subsidiaries and, thus, they are affiliates of the bank holding company 
pursuant Sec.  1026.32(b)(2). Because the master servicer and 
subservicer service 5,000 or fewer mortgage loans and because the 
mortgage loans are owned or originated by an affiliate of each, the 
master servicer and the subservicer are each considered a small 
servicer and qualify for the small servicer exemption for all 4,000 
mortgage loans.
    Proposed comment 41(e)(4)(ii)-3.iii posits the example of a nonbank 
servicer that services 4,000 mortgage loans, all of which it originated 
or owns. The servicer retains a ``component servicer'' to assist it 
with servicing functions. The component servicer is

[[Page 25644]]

not engaged in ``servicing'' as defined in 12 CFR 1024.2; that is, the 
component servicer does not receive any scheduled periodic payments 
from a borrower pursuant to the terms of any mortgage loan, including 
amounts for escrow accounts, and does not make the payments to the 
owner of the loan or other third parties of principal and interest and 
such other payments with respect to the amounts received from the 
borrower as may be required pursuant to the terms of the mortgage 
servicing loan documents or servicing contract. The component servicer 
is not a subservicer pursuant to 12 CFR 1024.31 because it is not 
engaged in servicing, as that term is defined in 12 CFR 1024.2. The 
nonbank servicer is a small servicer and the small servicer exemption 
applies to all 4,000 mortgage loans it services.
41(e)(4)(iii) Small Servicer Determination
    Under the 2013 TILA Servicing Final Rule, Sec.  1026.41(e)(4)(iii) 
sets forth certain criteria regarding how to determine if a servicer 
qualifies as a small servicer. Section 1026.41(e)(4)(iii) explains that 
the small servicer determination is based on the number of mortgage 
loans serviced by the servicer and any affiliates as of January 1 for 
the remainder of the calendar year. It also states that a servicer that 
``crosses the threshold,'' and thus loses its small servicer status and 
its small servicer exemption, has six months after crossing the 
threshold or until the next January 1, whichever is later, to comply 
with any requirements from which the servicer is no longer exempt.
    Proposed Sec.  1026.41(e)(4)(iii) includes a number of revisions to 
Sec.  1026.41(e)(4)(iii) as adopted by the 2013 TILA Servicing Final 
Rule. First, proposed Sec.  1026.41(e)(4)(iii) would replace the 
reference to a servicer that ``crosses the threshold'' for determining 
if the servicer qualifies a small servicer with broader language 
indicating that a servicer that ``ceases to qualify'' as a small 
servicer will have six months or until the next January 1, whichever is 
later, to comply with any requirements for which a servicer is no 
longer exempt as a small servicer. The broader phrase ``ceases to 
qualify'' more accurately reflects the fact that there are two elements 
to determining if a servicer qualifies as a small servicer, as 
discussed above, either one of which could cause a servicer to lose 
exempt status.
    Proposed Sec.  1026.41(e)(4)(iii) thus would apply the transition 
period set out in the rule to situations in which a servicer no longer 
meets the loan count requirement as well as to situations in which the 
servicer no longer meets the requirement that the servicer is the 
creditor or assignee of all mortgage loans it services. Thus, if a 
servicer exceeds the 5,000 mortgage loan limit or begins to service 
mortgage loans it does not own or did not originate, it must comply 
with any requirements from which it is no longer exempt by either the 
following January 1 or six months after the change in operations that 
disqualifies it as a small servicer, whichever is later. For example, 
if on September 1 a servicer that previously qualified as a small 
servicer begins to service a mortgage loan that it does not own and did 
not originate, the servicer has until March 1 of the following year to 
comply with the requirements from which it was previously exempt as a 
small servicer.
    The proposal also would add language to specify which mortgage 
loans should not be considered in determining small servicer status. 
Proposed Sec.  1026.41(e)(4)(iii) would clarify that certain closed-end 
consumer credit transactions secured by a dwelling would not be 
considered for purposes of determining whether a servicer qualifies as 
a small servicer. Specifically, because such loans are exempt from 
Sec.  1026.41, reverse mortgage transactions and mortgage loans secured 
by a consumer's interest in timeshare plans are not considered when 
determining if a servicer is a small servicer. (Because coupon book 
loans are exempt only from some requirements of Sec.  1026.41, such 
loans are considered in determining whether a servicer is a small 
servicer.)
    The Bureau also is proposing to exclude from consideration any 
mortgage loan voluntarily serviced by a small servicer for a creditor 
or assignee that is not an affiliate of the servicer and for which the 
servicer does not receive any compensation or fees (``charitably 
serviced'' mortgage loans). The Bureau has received feedback that 
certain servicers that would otherwise be considered small servicers, 
voluntarily service mortgage loans for unaffiliated non-profit entities 
for charitable purposes and do not receive compensation or fees from 
engaging in that servicing. If such charitably serviced mortgage loans 
are considered in connection with determining whether a servicer 
qualifies as a small servicer, a servicer engaging in this practice 
would not qualify for the small servicer exemption because the servicer 
would be servicing a mortgage loan it does not own or did not 
originate, notwithstanding that such servicer undertook to service 
those mortgage loans for charitable purposes.
    The Bureau is concerned that including charitably serviced mortgage 
loans in determining status as a small servicer would cause servicers 
to refrain from charitable servicing rather than lose the benefits of a 
small servicer exemption. The Bureau believes such a result would not 
further the goal of consumer protection for the affected consumers and 
may instead negatively affect the availability and costs of credit for 
consumers whose mortgage loans would otherwise be serviced pursuant to 
such charitable arrangements. Further, the Bureau believes consumers 
more likely would receive superior service from an entity in the 
business of servicing that is willing to donate its services than from 
a non-profit entity that owns the mortgage servicing rights but is not 
experienced in the business of servicing. The Bureau believes that the 
benefits of excluding charitably serviced mortgage loans from small 
servicer determination outweigh the potential risks to consumers that 
exclusion may pose.
    For the reasons set forth above, pursuant to the Bureau's exemption 
authority and authority to provide for adjustments and exceptions for 
any class of transactions as may be necessary or proper to effectuate 
the purposes of TILA, under TILA sections 105(a) and (f), the Bureau 
proposes that mortgage loans voluntarily serviced by a servicer for a 
creditor or assignee that is not an affiliate of the servicer and for 
which the servicer does not receive any compensation or fees are not 
considered in determining a servicer's qualification as a small 
servicer. As discussed, the Bureau believes that considering such loans 
in determining if a servicer is a small servicer would defeat the 
purposes of TILA by penalizing charitable servicers, thereby dissuading 
them from engaging in charitable servicing to the detriment of the 
consumers that otherwise would benefit from this activity. The Bureau 
requests comment regarding whether it is appropriate not to consider 
such mortgage loans when determining if a servicer qualifies for a 
small servicer exemption. The Bureau further requests comment on 
whether other mortgage loans serviced through similar limited 
arrangements should not be considered in determining whether a servicer 
is a small servicer. However, the Bureau emphasizes that, in this 
proposed rulemaking, it is neither reexamining nor seeking comment on 
the issue of exempting nonprofit entities engaged in mortgage servicing 
from the

[[Page 25645]]

requirements of the periodic statement or any other mortgage servicing 
rule.
    Finally, the Bureau proposes to add comment 41(e)(4)(iii)-3. 
Proposed comment 41(e)(4)(iii)-3 would clarify that mortgage loans that 
are not considered for purposes of determining small servicer 
qualification pursuant to Sec.  1026.41(e)(4)(iii), are not considered 
for determining either whether a servicer services, together with any 
affiliates, 5,000 or fewer mortgage loans or whether a servicer is 
servicing mortgage loans that it does not own or did not originate. 
Proposed comment 41(e)(4)(iii)-3 would further posit the example of a 
servicer that services 5,400 mortgage loans. Of these mortgage loans, 
the servicer owns or originated 4,800 mortgage loans, services 300 
reverse mortgage transactions that it does not own or did not 
originate, and voluntarily services 300 mortgage loans that it does not 
own or did not originate for an unaffiliated non-profit organization 
for which the servicer does not receive any compensation or fees. 
Neither the reverse mortgage transactions nor the mortgage loans 
voluntarily serviced by the servicer are considered for purposes of 
determining if the servicer is a small servicer. Thus, because the only 
mortgage loans considered are the 4,800 other mortgage loans serviced 
by the servicer, and the servicer owns or originated each of those 
mortgage loans, the servicer is considered a small servicer and 
qualifies for the small servicer exemption with regard to all 5,400 
mortgage loans it services. The comment also notes that reverse 
mortgages and transactions secured by a consumer's in timeshare plans, 
in addition to not being considered in determining small servicer 
qualification, also are exempt from the requirements of Sec.  1026.41. 
In contrast, although charitably serviced mortgage loans, as defined by 
Sec.  1026.41(e)(4)(iii), are likewise not considered in determining 
small servicer qualification, they are not exempt from the requirements 
of Sec.  1026.41. Thus, a servicer that does not qualify as a small 
servicer would not be required to provide periodic statements for 
reverse mortgages and timeshare plans because they are exempt from the 
rule, but would be required to provide periodic statements for the 
mortgage loans it charitably services.
    Legal authority. The Bureau is proposing to exclude charitably 
serviced mortgage loans and reverse mortgage transactions from 
consideration in determining a servicer's status as a small servicer 
for purposes of the small servicer exemption in Sec.  1024.41(e)(4) 
pursuant to its authority to provide for adjustments and exceptions 
under TILA section 105(a) and (f).\29\ With respect to charitably 
serviced mortgage loans, the Bureau believes, for the reasons described 
above, that declining to consider such mortgage loans for purposes of 
determining eligibility as a small servicer effectuates the purposes 
of, and facilitates compliance with TILA and Regulation Z. Further, 
consistent with TILA section 105(f) and in light of the factors in that 
provision, the Bureau believes that requiring servicers to consider 
mortgage loans they charitably service for purposes of determining 
eligibility as a small servicer would cause mortgage servicers to 
withdraw from such charitable relationships and will not provide a 
meaningful benefit to consumers in the form of useful information or 
protection. In addition, the Bureau is concerned regarding the extent 
to which any requirement to consider such loans will complicate, 
hinder, or make more expensive the credit process for such mortgage 
loan transactions, especially considering the status of the borrowers 
that typically secure mortgage loans that are charitably serviced. 
Ultimately, the Bureau believes the goal of consumer protection would 
be undermined if it considers for purposes of small servicer 
qualification, mortgage loans voluntarily serviced by a servicer for a 
creditor or assignee that is not an affiliate of the servicer and for 
which the servicer does not receive any compensation or fees.
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    \29\ TILA section 128(f) requires periodic statements for 
``residential mortgage loans,'' which, pursuant to TILA section 
103(cc)(5), excludes transactions secured by consumers' interests in 
timeshare plans. For this reason, exception authority is not 
required to exclude such loans from consideration in determining if 
a servicer is a small servicer.
---------------------------------------------------------------------------

    The Bureau similarly believes that not considering reverse mortgage 
in determining whether a servicer is a small servicer effectuates the 
purposes of, and facilitates compliance with, TILA and Regulation Z. 
The Bureau believes this for the same reasons set forth in the 2013 
TILA Servicing Final Rule \30\ exempting reverse mortgages from the 
requirements of Sec.  1024.41. As discussed in that Final Rule, the 
periodic statement requirements were designed for a traditional 
mortgage product such that information relevant and useful for 
consumers with reverse mortgages differs substantially from the 
information required on the periodic statement and, thus, would not 
provide a meaningful benefit to consumers of reverse mortgages. The 
Bureau believes that not considering reverse mortgages in determining 
whether a servicer is a small servicer is proper irrespective of the 
amount of the loan, the status of the consumer (including related 
financial arrangements, financial sophistication, and the importance to 
the consumer of the loan), or whether the loan is secured by the 
principal residence of the consumer.
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    \30\ See 78 FR 10973.
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Section 1026.43 Minimum Standards for Transactions Secured by a 
Dwelling
43(e) Qualified Mortgages
43(e)(4) Qualified Mortgage Defined--Special Rules
    The 2013 ATR Final Rule generally requires creditors to make a 
reasonable, good faith determination of a consumer's ability to repay 
any consumer credit transaction secured by a dwelling (excluding an 
open-end credit plan, timeshare plan, reverse mortgage, or temporary 
loan) and establishes certain protections from liability under this 
requirement for ``qualified mortgages.'' These provisions, in Sec.  
1026.43(c), (e)(2) and (4), and (f), implement the baseline requirement 
of TILA section 129C(a)(1) and the qualified mortgage provisions of 
TILA section 129C(b).
    To determine the qualified mortgage status of a loan, creditors 
must analyze whether the loan meets one of the definitions of 
``qualified mortgage'' in Sec.  1026.43(e)(2), (e)(4), or (f). Section 
1026.43(e)(4) provides a definition of qualified mortgage for loans 
that (1) meet the prohibitions on certain risky loan features (e.g., 
negative amortization and interest only features); (2) do not exceed 
certain limitations on points and fees under Sec.  1026.43(e)(2); and 
(3) either are eligible for purchase or guarantee by the GSEs, while 
under the conservatorship of the Federal Housing Finance Agency, or are 
eligible to be insured or guaranteed by HUD under the National Housing 
Act (12 U.S.C. 1707 et seq.), the VA, the USDA, or RHS.\31\ HUD, VA, 
USDA, and RHS have authority under the Dodd-Frank Act to define 
qualified mortgage standards for their own loans. See TILA section 
129C(b)(3)(B)(ii). Coverage under Sec.  1026.43(e)(4) for such loans 
will

[[Page 25646]]

sunset once each agency promulgates its own qualified mortgage 
standards and such rules take effect. Coverage of GSE-eligible loans 
will sunset when conservatorship ends.
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    \31\ Eligibility standards for the GSEs and Federal agencies are 
available at: Fannie Mae, Single Family Selling Guide, https://www.fanniemae.com/content/guide/sel111312.pdf; Freddie Mac, Single-
Family Seller/Servicer Guide, http://www.freddiemac.com/sell/guide/; 
HUD Handbook 4155.1, http://www.hud.gov/offices/adm/hudclips/handbooks/hsgh/4155.1/41551HSGH.pdf; Lenders Handbook--VA Pamphlet 
26-7, Web Automated Reference Material System (WARMS), http://www.benefits.va.gov/warms/pam26_7.asp; Underwriting Guidelines: 
USDA Rural Development Guaranteed Rural Housing Loan Program, http://www.rurdev.usda.gov/SupportDocuments/CA-SFH-GRHUnderwritingGuide.pdf.
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    Even if the Federal agencies do not issue additional rules or 
conservatorship does not end, the temporary qualified mortgage 
definition in Sec.  1026.43(e)(4) will expire seven years after the 
effective date of the rule.\32\ Covered transactions that satisfy the 
requirements of Sec.  1026.43(e)(4) that are consummated before the 
sunset of Sec.  1026.43(e)(4) will retain their qualified mortgage 
status after the temporary definition expires. However, a loan 
consummated after the sunset of Sec.  1026.43(e)(4) may be a qualified 
mortgage only if it satisfies the requirements of Sec.  1026.43(e)(2) 
or (f), under the final rule.\33\
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    \32\ The rule's effective date is January 10, 2014, thus the 
Sec.  1026.43(e)(4) qualified mortgage definition expires at the 
latest on January 10, 2021.
    \33\ The Bureau issued a concurrent proposed rule after January 
10, 2013 when the 2013 ATR Final Rule was issued. The proposed 
Amendments to the Ability to Repay Standards under the Truth in 
Lending Act amend the 2013 ATR Final Rule by providing exemptions 
for certain nonprofit creditors and certain homeownership 
stabilization programs and an additional definition of a qualified 
mortgage for certain loans made and held in portfolio by small 
creditors. The Bureau also seeks feedback in the proposal on whether 
additional clarification is needed regarding the inclusion of loan 
originator compensation in the points and fees calculation. The 
concurrent proposal is available at: http://files.consumerfinance.gov/f/201301_cfpb_concurrent-proposal_ability-to-repay.pdf.
---------------------------------------------------------------------------

Eligibility Under GSE/Agency Guides and Automated Underwriting Systems
    As adopted by the 2013 ATR Final Rule, comment 43(e)(4)-4 clarifies 
that, to satisfy Sec.  1026.43(e)(4)(ii), a loan need not be actually 
purchased or guaranteed by a GSE or insured or guaranteed by HUD, VA, 
USDA, or RHS. Rather, Sec.  1026.43(e)(4)(ii) requires only that the 
loan be eligible for such purchase, guarantee, or insurance. For 
example, the comment provides that, for purposes of Sec.  
1026.43(e)(4), a creditor is not required to sell a loan to the GSEs 
for that loan to be a qualified mortgage. Rather, the loan must be 
eligible for purchase or guarantee by the GSEs. To determine 
eligibility, a creditor may rely on an underwriting recommendation 
provided by one of the GSEs' or agencies' automated underwriting 
systems (AUSs) or their written guides. Accordingly, with regard to the 
GSEs, the comment states that a covered transaction is eligible for 
purchase or guarantee by Fannie Mae or Freddie Mac (and therefore a 
qualified mortgage under Sec.  1026.43(e)(4)) if: (i) the loan conforms 
to the standards set forth in the Fannie Mae Single-Family Selling 
Guide or the Freddie Mac Single-Family Seller/Servicer Guide; or (ii) 
the loan receives an ``Approve/Eligible'' recommendation from Desktop 
Underwriter (DU); or an ``Accept and Eligible to Purchase'' 
recommendation from Loan Prospector (LP).
    The Bureau is proposing to revise comment 43(e)(4)-4 in a number of 
ways as discussed here and below. First, the proposal would clarify 
that a creditor is not required to comply with all GSE or agency 
requirements to show qualified mortgage status. Specifically, the 
proposed revision specifies that the creditor need not comply with 
certain requirements that are wholly unrelated to a consumer's ability 
to repay, including activities related to selling, securitizing, or 
delivering consummated loans and any requirement the creditor is 
required to perform after the consummated loan is sold, guaranteed, or 
endorsed for insurance (in the case of agency loans) such as document 
custody, quality control, and servicing. These requirements are spelled 
out in the most depth in the GSE and agency written guides, but may 
also be referenced in automated underwriting system conditions and 
written agreements with individual creditors, as discussed further 
below.
    The Bureau believes that the proposed comment will clarify the 
intended scope of the temporary category of qualified mortgage created 
in Sec.  1026.43(e)(4) and facilitate compliance with the provisions of 
Regulation Z adopted in the 2013 ATR Final Rule. As the Bureau 
explained in the preamble to the final rule, the Bureau established 
Sec.  1026.43(e)(4) as a temporary transition measure designed to 
ensure access to responsible, affordable credit for consumers with 
debt-to-income ratios that exceed the 43% threshold that the Bureau 
adopted as a bright-line standard in the permanent general definition 
of qualified mortgage under Sec.  1026.43(e)(2) while creditors adapted 
to the new ATR rules and other changes in economic and regulatory 
conditions. The Bureau believed that using widely recognized, federally 
related underwriting standards to define qualified mortgages during 
this interim period would both facilitate compliance and ensure 
responsible lending practices. The temporary provision therefore bases 
qualified mortgage status on eligibility for purchase, insurance, or 
guarantee, but does not require actual sale, guarantee, or insurance 
endorsement. Furthermore, the temporary provision requires that a 
qualified mortgage must be eligible at consummation.
    However, the Bureau recognizes that the GSEs and agencies impose a 
wide variety of requirements relating not only to underwriting of 
potentially eligible loans, but also to the mechanics of sale, 
guarantee, or insurance and post-consummation activities. Because 
underwriting is a complex process that involves assessment of the 
consumer's ability to repay the loan as well as other credit risk 
factors, the Bureau continues to believe that it is appropriate to base 
qualified mortgage status under Sec.  1026.43(e)(4) on the GSEs' and 
agencies' general standards concerning borrower, product, and mortgage 
eligibility and underwriting. While some of these underwriting 
requirements may be more closely related to assessing a consumer's 
ability to repay than others, the Bureau believes that attempting to 
disaggregate them would be an extraordinarily complex task that would 
defeat the purposes of the temporary definition in adopting widely 
recognized standards to facilitate compliance and access to responsible 
credit. Where groups of requirements are wholly unrelated to 
underwriting (i.e., wholly unrelated to assessing ability to repay and 
other risk-related factors), however, the Bureau believes that it is 
appropriate to specify that such requirements do not affect qualified 
mortgage status.
    The Bureau believes that the items specified in the comment meet 
this test and provide greater clarity to the temporary definition of 
qualified mortgage. Because TILA requires assessment of a consumer's 
ability to repay a loan as of the time of consummation, the Bureau 
believes that GSE and agency requirements relating to post-consummation 
activity should not be relevant to qualified mortgage status. And 
because the temporary definition does not require actual purchase, 
guarantee, or insurance, the Bureau believes that it would not be 
appropriate to base qualified mortgage status on elements of the guides 
relating to the mechanics of actual delivery, purchase, guarantee, and 
endorsement. The Bureau recognizes that most requirements wholly 
unrelated to underwriting involve post-consummation activity, however, 
pre-consummation GSE and agency requirements could also be wholly 
unrelated to underwriting. For example, the status of a creditor's 
approval or eligibility to do business with a GSE is not relevant for 
ascertaining qualified mortgage status. The Bureau invites comment on 
this proposed clarification generally and on whether other GSE or

[[Page 25647]]

agency requirements should be excluded.
    The Bureau is also proposing to revise comment 43(e)(4)-4 to 
clarify eligibility as determined by an automated underwriting system 
of a GSE, or one of the agencies. Thus, the AUSs and the written guides 
of the GSEs as well as the agencies can be used for eligibility 
purposes. The proposed language would explain that to rely upon an AUS 
recommendation to demonstrate qualified mortgage status a creditor must 
have (1) accurately input the loan information into the automated 
system, and (2) satisfied any accompanying requirements or conditions 
to the AUS approval that would otherwise invalidate the recommendation, 
unless the conditions concern activities related to selling, 
securitizing, or delivering consummated loans or post-consummation 
requirements as discussed above. The comment as adopted in the 2013 ATR 
Final Rule assumed that any recommendation used for compliance would be 
valid, and these clarifications merely list two criteria that should be 
monitored to ensure that validity. In particular, because the AUSs 
generate a list of conditions that must be met in support of the 
approval designation, the Bureau believes that those conditions must be 
satisfied to show eligibility for purchase, guarantee, or insurance. 
The Bureau seeks comment on these revisions as well and is also 
proposing technical edits to comment 43(e)(4)-4 for clarity and 
accuracy.
Effect of Written Contract Variances
    The Bureau also is proposing to revise comment 43(e)(4)-4 in a 
third way to clarify further that a loan meeting eligibility 
requirements provided in a written agreement between the creditor and a 
GSE or agency that permits variation from the standards of the written 
guides and/or AUSs in effect at the time of consummation is also 
eligible for purchase or guarantee by the GSEs or insurance or 
guarantee by the agencies for the purposes of Sec.  1026.43(e)(4). 
Thus, such loans would be qualified mortgages. The Bureau recognizes 
that these agreements between creditors and the GSEs or agencies 
effectively constitute modification of, or substitutes for, the general 
manuals or AUSs with regard to these creditors. In many cases, the 
agreements allow the creditors to use other automated underwriting 
systems rather than the GSE or agency systems, subject to certain 
conditions or limitations on which loans the GSE or agency will accept 
as eligible for purchase, guarantee, or insurance. The Bureau believes 
that it is therefore appropriate for the purposes of Sec.  
1026.43(e)(4) to consider the agreements to be equivalent to the 
standard written guides for purposes of the specific creditor to which 
the agreement applies. Many of these agreements are necessary to 
accommodate local and regional market variations and other 
considerations that do not substantially relate to ATR-related 
underwriting criteria and therefore are generally consistent with the 
consumer protection and other purposes of the rule. However, the Bureau 
does not believe that it would be appropriate to allow one creditor to 
rely on the terms specified in another creditor's written agreement 
with a GSE or agency to establish qualified mortgage status, as the 
written agreements are individually negotiated and monitored. The 
Bureau seeks comment on this proposed clarification generally and on 
whether other variations on standard guides and eligibility criteria 
should be considered.
Repurchase and Indemnification Demands
    The Bureau is also proposing new comment 43(e)(4)-5 to provide 
additional clarification on how repurchase and indemnification demands 
by the GSEs and agencies may affect the qualified mortgage status of a 
loan. The proposed comment does not amend the meaning of the current 
rule but clarifies how a determination of the qualified mortgage status 
of a loan should be understood in relation to claims that the loan was 
not eligible for purchase or insurance and therefore not a qualified 
mortgage. The Bureau understands that facts upon which eligibility 
status was determined at or before consummation could later be found to 
be incorrect. Often, a repurchase or indemnification demand by a GSE or 
an agency involves such issues. However, the mere occurrence of a GSE 
or agency demand that a creditor repurchase a loan or indemnify the 
agency for an insurance claim does not necessarily mean that the loan 
is not a qualified mortgage.
    Proposed comment 43(e)(4)-5 specifically provides that a repurchase 
or indemnification demand by the GSEs, HUD, VA, USDA, or RHS is not 
dispositive in ascertaining qualified mortgage status. Much as 
qualified mortgage status under the general definition in Sec.  
1026.43(e)(2) may typically turn on whether the consumer's debt-to-
income ratio at the time of consummation was equal to or less than 43%, 
qualified mortgage status under Sec.  1026.43(e)(4) may typically turn 
on whether the loan was eligible for purchase, guarantee, or insurance 
at the time of consummation. Thus, for example, a demand for repurchase 
or indemnification based on post-consummation GSE or agency 
requirements would therefore not be relevant to qualified mortgage 
status. Rather, only reasons for a repurchase or indemnification demand 
that specifically apply to the qualified mortgage status of the loan 
under Sec.  1026.43(e)(4) would be relevant, as discussed above in 
connection with proposed comment 43(e)(4)-4. Moreover, the mere fact 
that a demand has been made, or even resolved, as between a creditor 
and GSE or agency is not dispositive with regard to eligibility for 
purposes of Sec.  1026.43(e)(4), as those parties are involved in an 
ongoing business relationship rather than an adjudicatory process. 
However, evidence of whether a particular loan satisfied the Sec.  
1026.43(e)(4) eligibility criteria at consummation may be brought to 
light in the course of dealings over a particular demand, depending on 
the facts and circumstances. Such evidence--like any evidence 
discovered after consummation that relates to the facts as of the time 
of consummation--may be relevant in assessing whether a particular loan 
is a qualified mortgage.
    To clarify this point further, proposed comment 43(e)(4)-5 also 
includes two examples of relevant evidence discovered after 
consummation. In the first example, assume eligibility to purchase a 
loan was based in part on the consumer's employment income of $50,000 
per year. The creditor uses the income figure in obtaining an approve/
eligible recommendation from DU. A quality control review, however, 
later determines that the documentation provided and verified by the 
creditor to comply with Fannie Mae requirements did not support the 
reported income of $50,000 per year. As a result, Fannie Mae demands 
that the creditor repurchase the loan. Assume that the quality control 
review is accurate, and that DU would not have issued an approve/
eligible recommendation if it had been provided the accurate income 
figure. The Bureau believes that, given the facts and circumstances of 
this example, the DU determination at the time of consummation was 
invalid because it was based on inaccurate information provided by the 
creditor; therefore, the loan was never a qualified mortgage.
    For the second example, assume a creditor delivered a loan, that 
the creditor determined was a qualified mortgage at the time of 
consummation,

[[Page 25648]]

to Fannie Mae for inclusion in a particular To-Be-Announced Mortgage 
Backed Security (MBS) pool of loans. The data submitted by the creditor 
at the time of loan delivery indicated that the various loan terms met 
the product type, weighted-average coupon (WAC), weighted-average 
maturity (WAM), and other MBS pooling criteria, and MBS issuance 
disclosures to investors reflect this loan data. However, after 
delivery and MBS issuance, a quality control review determines that the 
loan violates the pooling criteria. The loan still meets eligibility 
requirements for other Fannie Mae products and loan terms. Fannie Mae, 
however, requires the creditor to repurchase the loan due to the 
violation of MBS pooling requirements. Assume that the quality control 
review determination is accurate. The reason the creditor repurchases 
this loan is not relevant to the loan's qualified mortgage status. The 
loan still meets other Fannie Mae eligibility requirements and 
therefore remains a qualified mortgage based on these facts and 
circumstances.
    The Bureau invites comment on proposed comment 43(e)(4)-5 in 
general. The Bureau also solicits comment on whether additional 
examples or other particular situations should be provided or whether 
alternatives for eligibility other than relationship to ability-to-
repay standards should be adopted that would determine the qualified 
mortgage status of a loan.
    Section 1026.43(e)(4) was adopted pursuant to the Bureau's 
exception and adjustment authority under TILA section 105(a) and its 
authority to revise, add to, or subtract from criteria that define a 
qualified mortgage under TILA section 129C(b)(3)(B)(i). The Bureau 
proposes these revisions to comment 43(e)(4)-4 and proposes new comment 
43(e)(4)-5 to provide additional clarity to Sec.  1026.43(e)(4) 
pursuant to that authority.
Appendix Q to Part 1026--Standards for Determining Monthly Debt and 
Income
    Section 1026.43(e)(2) defines ``qualified mortgages'' as loans that 
satisfy all of the qualified mortgage criteria required by the statute 
(including underwriting to the maximum interest rate during the first 
five years of the loan and consideration and verification of the 
consumer's income or assets), for which the creditor considers and 
verifies the consumer's current debt obligations, alimony, and child 
support, and that have a total (i.e., back-end) monthly DTI of no 
greater than 43 percent, following the standards for ``debt'' and 
``income'' set forth in appendix Q to the rule. The Bureau adopted the 
43 percent DTI requirement and other modifications to the statutory 
criteria pursuant to its authorities under TILA section 129C and 
105(a).\34\
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    \34\ The Bureau notes that the specific 43 percent debt-to-
income requirement applies only to qualified mortgages under Sec.  
1026.43(e)(2). The specific debt-to-income ratio requirement does 
not apply to loans that meet the qualified mortgage definitions in 
Sec.  1026.43(e)(4) or (f), or that are not qualified mortgages and 
instead comply with the general ability-to-repay standard.
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    The Bureau also adopted and incorporated into the rule appendix Q, 
which contains detailed requirements for determining ``debt'' and 
``income'' for the purposes of the DTI calculation based on the 
definitions of those terms set forth in HUD Handbook 4155.1, Mortgage 
Credit Analysis for Mortgage Insurance on One-to-Four-Unit Mortgage 
Loans. The standards in the Handbook are used by creditors originating 
FHA-insured residential mortgages to determine and verify a consumer's 
total monthly debt and monthly income. For the purposes of appendix Q, 
the Bureau largely codified the Handbook, but modified various portions 
of it to remove standards and references unique to the FHA underwriting 
process, such as references to the TOTAL Scorecard Instructions and 
certain borrower qualification procedures.
    As discussed in the preamble to the 2013 ATR Final Rule, the Bureau 
believes that, to the extent possible, using existing FHA underwriting 
guidelines as the foundation for determining ``debt'' and ``income'' 
for DTI purposes provides creditors with well-established standards for 
determining whether a loan is a qualified mortgage under Sec.  
1026.43(e)(2). The Bureau also believes that this approach is 
consistent with the proposed approach to defining debt and income in 
the 2011 Proposed Qualified Residential Mortgage Rule (QRM), thus 
facilitating compliance. However, the Bureau stated it would continue 
to consult with the Federal agencies responsible for the QRM rulemaking 
on possible changes to FHA guidelines that may occur over time, which 
could affect the definition of debt and income in both rules.
    Since publication of the 2013 ATR Final Rule, the Bureau has 
received numerous inquiries from industry regarding provisions of the 
appendix that they believe were intended to function as flexible 
underwriting standards used by the FHA for insurance underwriting 
purposes, but now have been codified as bright-line requirements for 
determining debt and income. For example, some provisions of the 
appendix as adopted would require creditors to assess a consumer's 
qualifications for employment, predict whether a consumer's income will 
continue for up to three years, or assess economic conditions that may 
affect future income for self-employed consumers. Stakeholders have 
raised concerns that these provisions may be properly suited for the 
purposes of a holistic and qualitative underwriting analysis--such as a 
determination of insurance eligibility where the FHA has discretion to 
grant waivers or variances based on a given set of facts or offer 
informal guidance--but are not well-suited to function as regulatory 
requirements that are not subject to discretionary variance or waiver 
on an individual basis. Stakeholders also pointed out that many of 
these provisions (such as requirements to evaluate a consumer's 
qualification for his or her job) provide little clarity or guidance 
for creditors to follow to comply with them--again a consequence of 
their original purpose to function as discretionary ``guidelines'' and 
not bright-line requirements. Similarly, stakeholders have expressed 
concerns that the broad nature of these provisions could undermine the 
presumption of compliance available to creditors who make qualified 
mortgages and expose them to significant litigation risk.
    As discussed below, the Bureau adopted these provisions of appendix 
Q largely for consistency with existing underwriting standards used by 
FHA, but in light of the concerns raised by stakeholders agrees that 
certain provisions as adopted are not properly suited to function as 
regulations. The Bureau intended appendix Q to serve as a reliable 
mechanism for creditors to evaluate income and debts for the purpose of 
determining DTI and in turn the qualified mortgage status of a loan. It 
did not intend for appendix Q to function as a general and flexible 
underwriting policy for assessing risk (as it is used by FHA in the 
context of insurance), and recognizes that the Bureau will not have the 
same level of discretion regarding the application of appendix Q. Thus, 
in light of these inquiries, the Bureau proposes the following 
revisions to appendix Q to facilitate compliance when determining DTI 
and to further the purposes of the ATR Rule.
    In addition, the Bureau proposes other revisions to clarify the 
application of appendix Q, as well as general technical and wording 
changes throughout appendix Q for consistency and clarification, 
including technical changes to conform to the specific

[[Page 25649]]

purpose that appendix Q serves in the 2013 ATR Final Rule, as opposed 
to the function that the HUD Handbook serves for FHA underwriting.
I. CONSUMER ELIGIBILITY
A. Section I.A. Stability of Income
    The Bureau proposes revising the criteria in appendix Q for 
determining whether a consumer's income is ``stable'' for the purposes 
of DTI. Appendix Q as adopted requires in section I.A.3 that creditors 
evaluate the ``probability of continued employment'' by analyzing, 
among other things, (i) The consumer's past employment record; (ii) the 
consumer's qualification for the position; (iii) the consumer's 
previous training and education; and (iv) the employer's confirmation 
of continued employment. Stakeholders have raised concerns that, beyond 
analysis of a consumer's past employment record and current employment 
status, each of these requirements is incompatible with appendix Q's 
purpose of providing clear rules for determining debt and income, and 
is likely to result in compliance difficulty and significant exposure 
to litigation risk for creditors attempting to avoid such risk by 
originating qualified mortgages and thereby taking advantage of the 
presumption of compliance. For instance, stakeholders have informed the 
Bureau that many employers are likely to be unwilling for various 
reasons (including but not limited to economic uncertainty) to confirm 
that a consumer's employment will continue into the future, and 
similarly creditors may be unqualified to evaluate a consumer's 
education, training, and job qualifications. The Bureau believes that 
requirements for a creditor to evaluate a consumer's training, 
education, and qualifications for his or her position are not well-
suited to function as regulations designed to enable creditors to 
determine debts and income and in turn calculate a DTI ratio, and may 
increase exposure to litigation risk. In the context of codified 
regulations as opposed to guidelines subject to waiver, variance, or 
other guidance, it is not entirely clear what creditors would need to 
do in order to comply with them, or how those determinations would 
affect a consumer's income for the purpose of calculating DTI. In turn 
this could increase the risk of litigation to creditors attempting to 
operate in qualified mortgage space.
    The Bureau believes that requiring creditors to obtain an 
employer's confirmation of the consumer's continued employment will not 
function properly as a regulatory requirement because employers likely 
will be unwilling to provide any confirmation of employment continuing 
beyond current, ongoing employment. Without the benefit of waiver or 
variance, such a requirement could serve to disqualify any such 
consumer's employment income from being included in the DTI 
calculation--which would frustrate access to credit.
    For these reasons, the Bureau proposes to amend appendix Q in 
section I.A.3 to remove the requirements that creditors determine the 
``probability of continued employment'' by considering a consumer's 
``qualifications for the position'' and ``previous training and 
education.'' Instead, the Bureau is proposing to amend the provision to 
require creditors to examine past and current employment. The Bureau is 
also proposing to remove the requirement that creditors obtain ``the 
employer's confirmation of continued employment'' and instead require 
only that the creditor examine a confirmation of current, ongoing 
employment.
    The Bureau believes that a confirmation of current, ongoing 
employment status is adequate to verify employment for purposes of 
determining income and is proposing to amend appendix Q accordingly. In 
addition, the Bureau is adding for clarification purposes a proposed 
note that states creditors may assume that employment is ongoing if a 
consumer's employer verifies current employment and does not indicate 
that employment has been, or is set to be terminated. The proposed note 
would make clear that creditors should not rely upon a verification of 
current employment that includes an affirmative statement that the 
employment is likely to cease, such as a statement that indicates the 
employee has given (or been given) notice of employment suspension or 
termination. The Bureau also is proposing other technical changes to 
section I.A for clarification purposes; no substantive change is 
intended by these amendments.
B. Section I.B. Salary, Wage and Other Forms of Income
    The ``General Policy on Consumer Income Analysis'' in section 
I.B.1.a of appendix Q as adopted states that creditors must analyze the 
income for each consumer who will be obligated for the mortgage debt to 
determine whether his/her income level can be reasonably expected to 
continue ``through at least the first three years of the mortgage 
loan.'' Similarly, sections I.B.2 and I.B.3 of appendix Q as adopted 
require that creditors determine whether overtime and bonus income 
``will likely continue'' and that they ``establish and document an 
earnings trend for overtime and bonus income.'' With respect to these 
provisions, the Bureau received inquiries from industry stakeholders 
similar to those discussed above, noting that these provisions codify 
general, forward-looking standards that are better suited for the 
purposes of a holistic and qualitative underwriting analysis (such as 
the FHA guidelines for determining insurance eligibility) and may not 
function properly as regulations. And, because the Bureau may not have 
the same flexibility to waive or grant variances on an individual basis 
regarding the application of appendix Q that the FHA has with respect 
to its underwriting requirements, these provisions will undermine the 
purpose of appendix Q to serve as a reliable mechanism for evaluating 
income and debts for the purpose of determining the qualified mortgage 
status of a loan, and also increase the risk of litigation.
    The Bureau believes that the intended purpose of appendix Q will 
not be served by requiring creditors to predict a consumer's employment 
status up to three years after application. As noted above, the Bureau 
largely adopted these provisions from the existing FHA underwriting 
guidelines for the purposes of consistency with existing standards used 
by industry to evaluate debts and income. However, the Bureau believes 
that these requirements are unlikely to function properly as regulatory 
requirements and may frustrate appendix Q's purpose of providing clear 
and reliable standards for determining debts and income for purposes of 
the 2013 ATR Final Rule. The Bureau also believes that the broad nature 
of these provisions could increase the risk of litigation to creditors 
attempting to take advantage of the qualified mortgage presumption of 
compliance. For these reasons, the Bureau is proposing amendments to 
section I.B.1 of appendix Q to explain and clarify the criteria for 
calculating a consumer's employment income and to determine whether a 
consumer's income is continuing for the purposes of the DTI 
calculation. The Bureau also is proposing to amend section I.B.1.a to 
require creditors to evaluate only whether a consumer's income level 
would not be reasonably expected to continue based on the documentation 
provided, with no three-year requirement. The Bureau believes that 
creditors should be required to analyze recent and current employment, 
along with any evidence in the applicant's

[[Page 25650]]

documentation indicating whether employment is likely to continue. The 
Bureau is proposing to add a note would make clear that creditors 
should not assume that a consumer's wage or salary income can be 
reasonably expected to continue if the verification of current 
employment includes an affirmative statement that the employment is 
likely to cease, such as a statement that indicates the employee has 
given (or been given) notice of employment suspension or termination. 
However, if the consumer's application and the employment confirmation 
indicate that the consumer is currently employed and provide no such 
indication that employment will cease, the Bureau believes the creditor 
should be able to use that consumer's income without an obligation to 
predict whether or not that consumer will be employed on some future 
date.
    For similar reasons, the Bureau also is proposing changes to 
sections 1.B.2 and 1.B.3, regarding bonus and overtime income. The 
Bureau is proposing to eliminate the requirement in section I.B.2.a 
that creditors determine whether such income ``will continue.'' 
Instead, creditors must focus on evaluating the consumer's documented 
bonus and overtime income history for the past two years and any 
submitted documentation indicating whether the income likely will 
cease. The Bureau recognizes that bonus and overtime income may vary 
from year to year and generally may be less reliable than salary. 
However, in certain occupations, overtime and bonus income may be an 
integral and reliable component of the consumer's income. The Bureau 
believes that creditors must confirm that bonus and overtime income is 
not anomalous. Even so, the Bureau believes the requirement to analyze 
the consumer's two-year overtime bonus and overtime history and to 
verify that the submitted documentation does not indicate bonus or 
overtime income will cease adequately addresses this concern while 
satisfying the purposes of the qualified mortgage provision.
    The Bureau further is proposing clarifications to the provisions in 
section I.B.11 of appendix Q as adopted explaining how to account for 
Social Security income. Section I.B.11 as adopted requires that Social 
Security income either be verified by the Social Security 
Administration or through Federal tax returns. While the provision as 
adopted references Federal tax returns, the Bureau believes that a 
Social Security benefit verification letter may more easily provide 
proof of the receipt of Social Security benefits and their continuance. 
Thus, the Bureau is proposing to amend section I.B.11 to remove the 
option of using Federal tax returns and instead require creditors to 
obtain a benefit verification letter issued by the Social Security 
Administration. The Bureau also proposes to clarify in section I.B.11 
that a creditor shall assume a benefit is ongoing and will not expire 
within three years absent evidence of expiration. The Bureau believes 
this would provide a more workable and accurate standard for 
verification of Social Security income.
C. Section I.D. General Information on Self-Employed Consumers and 
Income Analysis
    As adopted, section I.D of appendix Q permits income from self-
employed consumers to be considered income for the purposes of the DTI 
calculation if certain criteria are met, including various 
documentation requirements and analysis of the financial strength of 
the consumer's business. Among the documentation requirements in 
section I.D.4 is the requirement to provide a ``business credit report 
for corporations and `S' corporations.'' The analysis of the financial 
strength of the business in section I.D.6 requires that the creditor 
carefully analyze the ``source of the business's income'' and the 
``general economic outlook of similar businesses in the area.'' Like 
other provisions of appendix Q discussed above, the Bureau has received 
inquiries from stakeholders concerning these requirements and also 
noted compliance difficulties and increased risk of litigation that may 
arise from them. Specifically, industry has raised concerns that 
business credit reports can be expensive and difficult to obtain, and a 
requirement to assess economic conditions for geographic areas both 
costly and difficult, as well as imprecise--which is contrary to the 
purpose of appendix Q to provide reliable and uniform standards for 
assessing income. Furthermore, the broad and fact-specific nature of 
this requirement could also increase litigation risk by undermining the 
qualified mortgage presumption of compliance.
    The Bureau proposes to make several amendments to these income 
stability requirements for self-employed consumers. The first amendment 
eliminates the requirement in current section I.D.4 that self-employed 
consumers provide a business credit report for corporations and ``S'' 
corporations. The Bureau recognizes that business credit reports for 
many smaller businesses can be difficult or very expensive to obtain. 
The Bureau believes that these reports may provide some valuable 
information for the purposes of an underwriting analysis, but are less 
suited to function as a requirement to determining income for self-
employed consumers.
    The second proposed amendment eliminates two requirements under the 
requirement to analyze a business's financial strength in section 
I.D.6. Current section I.D.6 requires creditors (i) to evaluate the 
sources of the business's income and (ii) to evaluate the general 
economic outlook for similar businesses in the area. The Bureau 
believes that both of these requirements demand that the creditor 
engage in complex analysis without providing clarity concerning what 
types of evaluations are satisfactory for the purpose of complying with 
the rule. As discussed above, such a provision is better-suited to 
function as part of an underwriting analysis subject to waiver, 
variance, and guidance rather than a regulatory rule--and as adopted 
could increase the risk of litigation risk to creditors. Accordingly, 
the proposal would eliminate these requirements.
    The Bureau's proposal also makes technical revisions to section 
I.D. to accommodate removal of these requirements.
II. NON-EMPLOYMENT RELATED CONSUMER INCOME
A. Section II.B. Investment and Trust Income
    Section II.B.2 of appendix Q as adopted permits trust income to be 
considered income for the purposes of the DTI calculation ``if 
guaranteed, constant payments will continue for at least the first 
three years of the mortgage term.'' Current appendix Q then provides a 
list of required documentation consumers must provide but does not 
otherwise specify the universe creditors must review to make and 
support the three-year determination.
    For clarification purposes, the Bureau proposes to delineate more 
clearly the breadth of the analysis for trust income by specifying that 
the analysis is limited to the documents appendix Q requires. 
Specifically, the proposal revises ``if guaranteed, constant payments 
will continue for at least the first three years of the mortgage term'' 
by adding ``as evidenced by trust income documentation.'' Under the 
current requirements in section II.B.2, there is no specific cut-off 
for the amount of diligence required or information that must be 
collected to satisfy the requirement. The Bureau believes that the 
amendment will facilitate compliance and help ensure access to

[[Page 25651]]

credit by making the standard clear and easy to apply.
    For notes receivable income to be considered income, section 
II.B.3.a of appendix Q as adopted requires that the consumer provide a 
copy of the note and documentary evidence that payments have been 
consistently made over the prior 12 months. If the consumer is not the 
original payee on the note, however, section II.B.3.b requires the 
creditor to establish that the consumer is ``now a holder in due 
course, and able to enforce the note.'' The Bureau proposes to 
eliminate the requirement that the consumer be a holder in due course, 
which may require further investigation than is necessary to establish 
that the income is effective for the purposes of the rule. The proposal 
would amend appendix Q to require only that the consumer is able to 
enforce the note.
B. Section II.D. Rental Income
    As adopted, appendix Q allows creditors to consider certain rental 
income payable to the consumer taking out the loan for the purposes of 
the DTI calculation in section II.D. Section II.D.3.a states that it is 
not acceptable to consider income from roommates in a single-family 
property occupied as the consumer's primary residence as ``income'' for 
the purposes of determining the consumer's DTI, but that it is 
acceptable to consider rental income payable to the consumer from 
boarders related by blood, marriage, or law. The Bureau adopted this 
provision of appendix Q for consistency with existing FHA standards 
used by industry.
    Since publication of the Final Rule, the Bureau has become aware of 
concerns that may arise from requirements that boarders be related to 
the homeowner in order for rental income payable to the consumer to be 
considered ``income'' for DTI purposes. The Bureau does not believe 
that the relation requirement is useful in determining whether or not 
the rental income should be used in determining DTI. The Bureau 
accordingly proposes to eliminate the requirement that boarders be 
related by blood, marriage, or law from section II.D.3.a.
    The Bureau adopted Appendix Q under its TILA section 105(a) and its 
authority under TILA section 129C(b)(2)(vi) to establish guidelines or 
regulations relating to ratios of total monthly debt to monthly income 
for the purposes of defining qualified mortgages and, more broadly, its 
authority under 129C(b)(3) to prescribe rules to implement the 
qualified mortgage and revise, add to or subtract form the qualified 
mortgage criteria. The Bureau invites comment on these proposed changes 
to appendix Q. The Bureau also seeks comment on other potential 
amendments that may better facilitate compliance while furthering the 
purposes of the qualified mortgage provision and the 2013 ATR Final 
Rule.

V. Section 1022(b)(2) of the Dodd-Frank Act

A. Overview

    The Bureau is considering the potential benefits, costs, and 
impacts of the proposed rule.\35\ The Bureau requests comment on the 
preliminary analysis presented below as well as submissions of 
additional data that could inform the Bureau's analysis of the 
benefits, costs, and impacts of the proposed rule. The Bureau has 
consulted, or offered to consult with, the prudential regulators, SEC, 
HUD, VA, USDA, FHFA, the Federal Trade Commission, and the Department 
of the Treasury, including regarding consistency with any prudential, 
market, or systemic objectives administered by such agencies.
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    \35\ Section 1022(b)(2)(A) of the Dodd-Frank Act, 12 U.S.C. 
5521(b)(2), directs the Bureau, when prescribing a rule under the 
Federal consumer financial laws, to consider the potential benefits 
and costs of regulation to consumers and covered persons, including 
the potential reduction of access by consumers to consumer financial 
products or services; the impact on insured depository institutions 
and credit unions with $10 billion or less in total assets as 
described in section 1026 of the Dodd-Frank Act; and the impact on 
consumers in rural areas. Section 1022(b)(2)(B) of the Dodd-Frank 
Act directs the Bureau to consult with appropriate prudential 
regulators or other Federal agencies regarding consistency with 
prudential, market, or systemic objectives that those agencies 
administer.
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    As noted above, this rule proposes amendments to some of the final 
mortgage rules issued by the Bureau in January of 2013. These 
amendments clarify or correct provisions on (1) The small servicer 
exemption from the new servicing rules; (2) the use of GSE and federal 
agency purchase, guarantee, or insurance eligibility for determining 
qualified mortgage status; (3) the determination of debt and income for 
purposes of originating qualified mortgages; and (4) the relation to 
State law of Regulation X's servicing provisions.

B. Potential Benefits and Costs to Consumers and Covered Persons

    The Bureau believes that, compared to the baseline established by 
the final rules issued in January 2013,\36\ the primary benefit of most 
of the provisions of the proposed rule to both consumers and covered 
persons is an increase in clarity and precision of the regulations and 
an accompanying reduction in compliance costs. More specifically, the 
provisions that would clarify: (1) The definition of qualified mortgage 
under the test that they be eligible for purchase or guarantee by the 
GSEs or insured or guaranteed by the agencies for the purposes of the 
provisions adopted by the 2013 ATR Final Rule; (2) the proposed new 
comment which provides that a repurchase or indemnification demand by 
the GSEs, FHA, VA, USDA, or RHS is not determinative of qualified 
mortgage status; (3) the proposed changes to appendix Q of Regulation Z 
assisting creditors in determining a consumer's debt-to-income ratio 
(DTI); and, (4) the proposed amendment to Regulation X to clarify that 
the preemption provisions in Regulation X do not preempt the field of 
regulation of the practices covered by RESPA and Regulation X all 
should add clarity to the rule and thus lower costs of compliance. The 
Bureau believes that each of these changes simply conform the rules to 
the policies intended by the final rules issued in January. 
Accordingly, the discussion of benefits, costs, or impacts discussed in 
part VII of each of the January rules considered each of the proposed 
provisions.
---------------------------------------------------------------------------

    \36\ The Bureau has discretion in any rulemaking to choose an 
appropriate scope of analysis with respect to potential benefits and 
costs and an appropriate baseline.
---------------------------------------------------------------------------

    One of the proposed changes may slightly alter whether particular 
persons are covered by a relevant exemption. Specifically, the proposal 
would modify the text of the Regulation Z servicing rule to clarify 
scope and application of the small servicer exemption, to clarify the 
application of the small servicer exemption with regard to servicer/
affiliate and master servicer/subservicer relationships, and to exclude 
mortgage loans voluntarily serviced for an unaffiliated entity without 
remuneration, reverse mortgage transactions, and mortgage loans secured 
by consumers' interest in timeshare plans from being considered when 
determining whether a servicer qualifies as a small servicer. In total, 
these changes are expected to grant the small servicer exemption to a 
larger number of firms: These entities should benefit from lower costs 
while their customers may lose some of the protections embedded in the 
relevant rules. The nature and magnitude of these protections and their 
potential costs are described in part VII of both of the 2013 Mortgage 
Servicing Final Rules.
    The proposed rule is not expected to have a differential impact on 
depository

[[Page 25652]]

institutions and credit unions with $10 billion or less in total assets 
as described in section 1026 or on consumers in rural areas. Given the 
small changes for the proposed rule, the Bureau does not believe that 
the proposed rule would meaningfully reduce consumers' access to 
consumer products and services.

VI. Regulatory Flexibility Act Analysis

    The Regulatory Flexibility Act (RFA) generally requires an agency 
to conduct an initial regulatory flexibility analysis (IRFA) and a 
final regulatory flexibility analysis (FRFA) of any rule subject to 
notice-and-comment rulemaking requirements.\37\ These analyses must 
``describe the impact of the proposed rule on small entities.'' \38\ An 
IRFA or FRFA is not required if the agency certifies that the rule will 
not have a significant economic impact on a substantial number of small 
entities,\39\ or if the agency considers a series of closely related 
rules as one rule for purposes of complying with the IRFA or FRFA 
requirements.\40\ 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.\41\
---------------------------------------------------------------------------

    \37\ 5 U.S.C. 601 et seq.
    \38\ 5 U.S.C. 603(a). For purposes of assessing the impacts of 
the proposed rule on small entities, ``small entities'' is defined 
in the RFA to include small businesses, small 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).
    \39\ 5 U.S.C. 605(b).
    \40\ 5 U.S.C. 605(c).
    \41\ 5 U.S.C. 609.
---------------------------------------------------------------------------

    This rulemaking is part of a series of rules that have revised and 
expanded the regulatory requirements for entities that originate or 
service mortgage loans. In January 2013, the Bureau adopted the 2013 
ATR Final Rule and the 2013 Mortgage Servicing Final Rules, along with 
other related rules mentioned above. Part VIII of the supplementary 
information to each of these rules set forth the Bureau's analyses and 
determinations under the RFA with respect to those rules. See 78 FR 
10861 (Regulation X), 78 FR 10994 (Regulation Z--servicing), 78 FR 6575 
(Regulation Z--ATR). The Bureau also notes that any lack of clarity, 
along with the resulting potential confusion or compliance burden, was 
inadvertent; as such, its Regulatory Flexibility analyses considered 
the impact of the provisions at issue in this rule as if no such lack 
of clarity existed. Because these rules qualify as ``a series of 
closely related rules,'' for purposes of the RFA, the Bureau relies on 
those analyses and determines that it has met or exceeded the IRFA 
requirement.
    In the alternative, the Bureau also concludes that the proposed 
rule would not have a significant impact on a substantial number of 
small entities. As noted, the proposal generally clarifies the existing 
rule. These changes would not have a material impact on small entities. 
In the instance of the small servicer exemption, the rule likely 
reduces burden for the affected firms. Therefore, the Bureau affirms 
that the proposal would not have a significant impact on a substantial 
number of small entities.

VII. Paperwork Reduction Act

    This proposed rule would amend 12 CFR part 1026 (Regulation Z), 
which implements the Truth in Lending Act (TILA), and 12 CFR part 1024 
(Regulation X), which implements the Real Estate Settlement Procedures 
Act (RESPA). Regulations Z and X currently contain collections of 
information approved by OMB. The Bureau's OMB control number for 
Regulation Z is 3170-0015 and for Regulation X is 3170-0016. However, 
the Bureau has determined that this proposed rule would not materially 
alter these collections of information or impose any new recordkeeping, 
reporting, or disclosure requirements on the public that would 
constitute collections of information requiring approval under the 
Paperwork Reduction Act, 44 U.S.C. 3501 et seq. Comments on this 
determination may be submitted to the Bureau as instructed in the 
ADDRESSES section of this notice and to the attention of the Paperwork 
Reduction Act Officer.

List of Subjects

12 CFR Part 1024

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

12 CFR Part 1026

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

Authority and Issuance

    For the reasons set forth in the preamble, the Bureau proposes to 
further amend Regulation X, 12 CFR part 1024, as amended by the final 
rule published on February 14, 2013, 78 FR 10695, and further amend 
Regulation Z, 12 CFR part 1026, as amended by the final rules published 
on January 30, 2013, 78 FR 6407, and February 14, 2013, 78 FR 10901, as 
set forth below:

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

0
1. The authority citation for part 1024 continues to read as follows:

    Authority: 12 U.S.C. 2603-2605, 2607, 2609, 2617, 5512, 5532, 
5581.

0
2. In subpart A, the heading is revised to read as follows:

Subpart A--General Provisions

0
3. Section 1024.5 is amended by adding paragraph (c) to read as 
follows:


Sec.  1024.5  Coverage of RESPA.

* * * * *
    (c) Relation to State laws. (1) State laws that are inconsistent 
with RESPA or this part are preempted to the extent of the 
inconsistency. However, RESPA and these regulations do not annul, 
alter, affect, or exempt any person subject to their provisions from 
complying with the laws of any State with respect to settlement 
practices, except to the extent of the inconsistency.
    (2) Upon request by any person, the Bureau is authorized to 
determine if inconsistencies with State law exist; in doing so, the 
Bureau shall consult with appropriate Federal agencies.
    (i) The Bureau may not determine that a State law or regulation is 
inconsistent with any provision of RESPA or this part, if the Bureau 
determines that such law or regulation gives greater protection to the 
consumer.
    (ii) In determining whether provisions of State law or regulations 
concerning affiliated business arrangements are inconsistent with RESPA 
or this part, the Bureau may not construe those provisions that impose 
more stringent limitations on affiliated business arrangements as 
inconsistent with RESPA so long as they give more protection to 
consumers and/or competition.
    (3) Any person may request the Bureau to determine whether an 
inconsistency exists by submitting to the address established by the 
Bureau to request an official interpretation, a copy of the State law 
in question, any other

[[Page 25653]]

law or judicial or administrative opinion that implements, interprets 
or applies the relevant provision, and an explanation of the possible 
inconsistency. A determination by the Bureau that an inconsistency with 
State law exists will be made by publication of a notice in the Federal 
Register. ``Law'' as used in this section includes regulations and any 
enactment which has the force and effect of law and is issued by a 
State or any political subdivision of a State.
    (4) A specific preemption of conflicting State laws regarding 
notices and disclosures of mortgage servicing transfers is set forth in 
Sec.  1024.33(d).

Subpart B--Mortgage Settlement and Escrow Accounts

0
4. Section 1024.13 is removed and reserved.
0
5. In Supplement I to Part 1024, Subpart A is added to read as follows:

Supplement I to Part 1024--Official Bureau Interpretations

* * * * *

Subpart A--General Provisions

Section 1024.5 Coverage of RESPA

    5(c) Relation to State laws.
    Paragraph 5(c)(1).
    1. State laws that are in conflict with the requirements of RESPA 
or Regulation X may be preempted by RESPA or Regulation X. State laws 
that give greater protection to consumers do not conflict with and are 
not preempted by RESPA or Regulation X. In addition, nothing in RESPA 
or Regulation X should be construed to preempt the entire field of 
regulation of the practices covered by RESPA or Regulation X, including 
the regulations in Subpart C with respect to mortgage servicers or 
mortgage servicing.
* * * * *

PART 1026--TRUTH IN LENDING (REGULATION Z)

0
6. The authority citation for part 1026 is revised to read as follows:

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

Subpart E--Special Rules for Certain Home Mortgage Transactions

0
7. Section 1026.41 is amended by revising paragraphs (a)(1), 
(e)(4)(ii), and (e)(4)(iii) to read as follows:


Sec.  1026.41  Periodic statements for residential mortgage loans.

    (a) In general. (1) Scope. This section applies to a closed-end 
consumer credit transaction secured by a dwelling, unless an exemption 
in paragraph (e) of this section applies. A closed-end consumer credit 
transaction secured by a dwelling is referred to as a mortgage loan for 
purposes of this section.
* * * * *
    (e) * * *
    (4) * * *
    (ii) Small servicer defined. A small servicer is a servicer that 
either:
    (A) Services, together with any affiliates, 5,000 or fewer mortgage 
loans, for all of which the servicer (or an affiliate) is the creditor 
or assignee; or
    (B) Is a Housing Finance Agency, as defined in 24 CFR 266.5.
    (iii) Small servicer determination. In determining whether a 
servicer is a small servicer, the servicer is evaluated based on the 
mortgage loans serviced by the servicer and any affiliates as of 
January 1 for the remainder of the calendar year. A servicer that 
ceases to qualify as a small servicer will have six months from the 
time it ceases to qualify or until the next January 1, whichever is 
later, to comply with any requirements from which the servicer is no 
longer exempt as a small servicer. The following mortgage loans are not 
considered in determining whether a servicer qualifies as a small 
servicer:
    (A) Mortgage loans voluntarily serviced by the servicer for a 
creditor or assignee that is not an affiliate of the servicer and for 
which the servicer does not receive any compensation or fees.
    (B) Reverse mortgage transactions.
    (C) Mortgage loans secured by consumers' interests in timeshare 
plans.
* * * * *
0
8. Appendix Q to Part 1026-Standards for Determining Monthly Debt and 
Income is revised to read as follows:

Appendix Q to Part 1026--Standards for Determining Monthly Debt and 
Income

    Section 1026.43(e)(2)(vi) provides that, to satisfy the 
requirements for a qualified mortgage under Sec.  1026.43(e)(2), the 
ratio of the consumer's total monthly debt payments to total monthly 
income at the time of consummation cannot exceed 43 percent. Section 
1026.43(e)(2)(vi)(A) requires the creditor to calculate the ratio of 
the consumer's total monthly debt payments to total monthly income 
using the following standards, with additional requirements for 
calculating debt and income appearing in Sec.  1026.43(e)(2)(vi)(B).

I. Consumer Employment Related Income

    A. Stability of Income.
    1. Effective Income. Income may not be used in calculating the 
consumer's debt-to-income ratio if it comes from any source that 
cannot be verified, is not stable, or will not continue.
    2. Verifying Employment History.
    a. The creditor must verify the consumer's employment for the 
most recent two full years, and the creditor must require the 
consumer to:
    i. Explain any gaps in employment that span one or more months, 
and
    ii. Indicate if he/she was in school or the military for the 
recent two full years, providing evidence supporting this claim, 
such as college transcripts, or discharge papers.
    b. Allowances can be made for seasonal employment, typical for 
the building trades and agriculture, if documented by the creditor.

    Note: A consumer with a 25 percent or greater ownership interest 
in a business is considered self-employed and will be evaluated as a 
self-employed consumer.

    3. Analyzing a Consumer's Employment Record.
    a. When analyzing a consumer's employment, creditors must 
examine:
    i. The consumer's past employment record; and
    ii. The employer's confirmation of current, ongoing employment 
status.

    Note: Creditors may assume that employment is ongoing if a 
consumer's employer verifies current employment and does not 
indicate that employment has been, or is set to be terminated. 
Creditors should not rely upon a verification of current employment 
that includes an affirmative statement that the employment is likely 
to cease, such as a statement that indicates the employee has given 
(or been given) notice of employment suspension or termination.

    b. Creditors may favorably consider the stability of a 
consumer's income if he/she changes jobs frequently within the same 
line of work, but continues to advance in income or benefits. In 
this analysis, income stability takes precedence over job stability.
    4. Consumers Returning to Work After an Extended Absence. A 
consumer's income may be considered effective and stable when 
recently returning to work after an extended absence if he/she:
    a. Is employed in the current job for six months or longer; and
    b. Can document a two year work history prior to an absence from 
employment using:
    i. Traditional employment verifications; and/or
    ii. Copies of IRS Form W-2s or pay stubs.

    Note: An acceptable employment situation includes individuals 
who took several years off from employment to raise children, then 
returned to the workforce.

    c. Important: Situations not meeting the criteria listed above 
may not be used in qualifying. Extended absence is defined as six 
months.
    B. Salary, Wage and Other Forms of Income.
    1. General Policy on Consumer Income Analysis.
    a. The income of each consumer who will be obligated for the 
mortgage debt and whose income is being relied upon in determining 
ability to repay must be analyzed to determine whether his/her 
income level can be reasonably expected to continue.

[[Page 25654]]

    b. In most cases, a consumer's income is limited to salaries or 
wages. Income from other sources can be considered as effective, 
when properly verified and documented by the creditor.

    Notes: 
    i. Effective income for consumers planning to retire during the 
first three-year period must include the amount of:
    a. Documented retirement benefits;
    b. Social Security payments; or
    c. Other payments expected to be received in retirement.
    ii. Creditors must not ask the consumer about possible, future 
maternity leave.
    iii. Creditors may assume that salary or wage income from 
employment verified in accordance with section I.A.3 above can be 
reasonably expected to continue if a consumer's employer verifies 
current employment and income and does not indicate that employment 
has been, or is set to be terminated. Creditors should not assume 
that income can be reasonably expected to continue if a verification 
of current employment that includes an affirmative statement that 
the employment is likely to cease, such as a statement that 
indicates the employee has given (or been given) notice of 
employment suspension or termination.

    2. Overtime and Bonus Income.
    a. Overtime and bonus income can be used to qualify the consumer 
if he/she has received this income for the past two years, and 
documentation submitted for the loan does not indicate this income 
will likely cease. If, for example, the employment verification 
states that the overtime and bonus income is unlikely to continue, 
it may not be used in qualifying.
    b. The creditor must develop an average of bonus or overtime 
income for the past two years. Periods of overtime and bonus income 
less than two years may be acceptable, provided the creditor can 
justify and document in writing the reason for using the income for 
qualifying purposes.
    3. Establishing an Overtime and Bonus Income Earning Trend.
    a. The creditor must establish and document an earnings trend 
for overtime and bonus income. If either type of income shows a 
continual decline, the creditor must document in writing a sound 
rationalization for including the income when qualifying the 
consumer.
    b. A period of more than two years must be used in calculating 
the average overtime and bonus income if the income varies 
significantly from year to year.
    4. Qualifying Part-Time Income.
    a. Part-time and seasonal income can be used to qualify the 
consumer if the creditor documents that the consumer has worked the 
part-time job uninterrupted for the past two years, and plans to 
continue. Many low and moderate income families rely on part-time 
and seasonal income for day to day needs, and creditors should not 
restrict consideration of such income when qualifying the income of 
these consumers.
    b. Part-time income received for less than two years may be 
included as effective income, provided that the creditor justifies 
and documents that the income is likely to continue.
    c. Part-time income not meeting the qualifying requirements may 
not be used in qualifying.

    Note: For qualifying purposes, ``part-time'' income refers to 
employment taken to supplement the consumer's income from regular 
employment; part-time employment is not a primary job and it is 
worked less than 40 hours.

    5. Income from Seasonal Employment.
    a. Seasonal income is considered uninterrupted, and may be used 
to qualify the consumer, if the creditor documents that the 
consumer:
    i. Has worked the same job for the past two years, and
    ii. Expects to be rehired the next season.
    b. Seasonal employment includes, but is not limited to:
    i. Umpiring baseball games in the summer; or
    ii. Working at a department store during the holiday shopping 
season.
    6. Primary Employment Less Than 40 Hour Work Week.
    a. When a consumer's primary employment is less than a typical 
40-hour work week, the creditor should evaluate the stability of 
that income as regular, on-going primary employment.
    b. Example: A registered nurse may have worked 24 hours per week 
for the last year. Although this job is less than the 40-hour work 
week, it is the consumer's primary employment, and should be 
considered effective income.
    7. Commission Income.
    a. Commission income must be averaged over the previous two 
years. To qualify commission income, the consumer must provide:
    i. Copies of signed tax returns for the last two years; and
    ii. The most recent pay stub.
    b. Consumers whose commission income was received for more than 
one year, but less than two years may be considered favorably if the 
underwriter can:
    i. Document the likelihood that the income will continue, and
    ii. Soundly rationalize accepting the commission income.

    Notes: 
    i. Unreimbursed business expenses must be subtracted from gross 
income.
    ii. A commissioned consumer is one who receives more than 25 
percent of his/her annual income from commissions.
    iii. A tax transcript obtained directly from the IRS may be used 
in lieu of signed tax returns.

    8. Qualifying Commission Income Earned for Less Than One Year.
    a. Commission income earned for less than one year is not 
considered effective income. Exceptions may be made for situations 
in which the consumer's compensation was changed from salary to 
commission within a similar position with the same employer.
    b. A consumer's income may also qualify when the portion of 
earnings not attributed to commissions would be sufficient to 
qualify the consumer for the mortgage.
    9. Employer Differential Payments. If the employer subsidizes a 
consumer's mortgage payment through direct payments, the amount of 
the payments:
    a. Is considered gross income, and
    b. Cannot be used to offset the mortgage payment directly, even 
if the employer pays the servicing creditor directly.
    10. Retirement Income. Retirement income must be verified from 
the former employer, or from Federal tax returns. If any retirement 
income, such as employer pensions or 401(k)'s, will cease within the 
first full three years of the mortgage loan, such income may not be 
used in qualifying.
    11. Social Security Income. Social Security income must be 
verified by a Social Security Administration benefit verification 
letter (sometimes called a ``proof of income letter,'' ``budget 
letter,'' ``benefits letter,'' or ``proof of award letter''). If any 
benefits expire within the first full three years of the loan, the 
income source may not be used in qualifying.

    Notes: 
    i. If the Social Security Administration benefit verification 
letter does not indicate a defined expiration date within three 
years of loan origination, the creditor shall consider the income 
effective and likely to continue. Pending or current re-evaluation 
of medical eligibility for benefit payments is not considered an 
indication that the benefit payments are not likely to continue.
    ii. Some portion of Social Security income may be ``grossed up'' 
if deemed nontaxable by the IRS.

    12. Automobile Allowances and Expense Account Payments.
    a. Only the amount by which the consumer's automobile allowance 
or expense account payments exceed actual expenditures may be 
considered income.
    b. To establish the amount to add to gross income, the consumer 
must provide the following:
    i. IRS Form 2106, Employee Business Expenses, for the previous 
two years; and
    ii. Employer verification that the payments will continue.
    c. If the consumer uses the standard per-mile rate in 
calculating automobile expenses, as opposed to the actual cost 
method, the portion that the IRS considers depreciation may be added 
back to income.
    d. Expenses that must be treated as recurring debt include:
    i. The consumer's monthly car payment; and
    ii. Any loss resulting from the calculation of the difference 
between the actual expenditures and the expense account allowance.
    C. Consumers Employed by a Family Owned Business.
    1. Income Documentation Requirement.
    In addition to normal employment verification, a consumer 
employed by a family owned business is required to provide evidence 
that he/she is not an owner of the business, which may include:
    a. Copies of signed personal tax returns, or
    b. A signed copy of the corporate tax return showing ownership 
percentage.

    Note: A tax transcript obtained directly from the IRS may be 
used in lieu of signed tax returns.

    D. General Information on Self-Employed Consumers and Income 
Analysis.

[[Page 25655]]

    1. Definition: Self-Employed Consumer. A consumer with a 25 
percent or greater ownership interest in a business is considered 
self-employed.
    2. Types of Business Structures. There are four basic types of 
business structures. They include:
    a. Sole proprietorships;
    b. Corporations;
    c. Limited liability or ``S'' corporations; and
    d. Partnerships.
    3. Minimum Length of Self Employment.
    a. Income from self-employment is considered stable, and 
effective, if the consumer has been self-employed for two or more 
years.
    b. Due to the high probability of failure during the first few 
years of a business, the requirements described in the table below 
are necessary for consumers who have been self-employed for less 
than two years.
[GRAPHIC] [TIFF OMITTED] TP02MY13.003

    4. General Documentation Requirements for Self-Employed 
Consumers. Self-employed consumers must provide the following 
documentation:
    a. Signed, dated individual tax returns, with all applicable tax 
schedules for the most recent two years;
    b. For a corporation, ``S'' corporation, or partnership, signed 
copies of Federal business income tax returns for the last two 
years, with all applicable tax schedules; and
    c. Year to date profit and loss (P&L) statement and balance 
sheet.
    5. Establishing a Self-Employed Consumer's Earnings Trend.
    a. When qualifying income, the creditor must establish the 
consumer's earnings trend from the previous two years using the 
consumer's tax returns.
    b. If a consumer:
    i. Provides quarterly tax returns, the income analysis may 
include income through the period covered by the tax filings, or
    ii. Is not subject to quarterly tax returns, or does not file 
them, then the income shown on the P&L statement may be included in 
the analysis, provided the income stream based on the P&L is 
consistent with the previous years' earnings.
    c. If the P&L statements submitted for the current year show an 
income stream considerably greater than what is supported by the 
previous year's tax returns, the creditor must base the income 
analysis solely on the income verified through the tax returns.
    d. If the consumer's earnings trend for the previous two years 
is downward and the most recent tax return or P&L is less than the 
prior year's tax return, the consumer's most recent year's tax 
return or P&L must be used to calculate his/her income.
    6. Analyzing the Business's Financial Strength.
    The creditor must consider the business's financial strength by 
examining annual earnings. Annual earnings that are stable or 
increasing are acceptable, while businesses that show a significant 
decline in income over the analysis period are not acceptable.
    E. Income Analysis: Individual Tax Returns (IRS Form 1040).
    1. General Policy on Adjusting Income Based on a Review of IRS 
Form 1040. The amount shown on a consumer's IRS Form 1040 as 
adjusted gross income must either be increased or decreased based on 
the creditor's analysis of the individual tax return and any related 
tax schedules.
    2. Guidelines for Analyzing IRS Form 1040. The table below 
contains guidelines for analyzing IRS Form 1040:
BILLING CODE 4810-AM-P

[[Page 25656]]

[GRAPHIC] [TIFF OMITTED] TP02MY13.004

BILLING CODE 4810-AM-C
    F. Income Analysis: Corporate Tax Returns (IRS Form 1120).
    1. Description: Corporation. A corporation is a State-chartered 
business owned by its stockholders.
    2. Need To Obtain Consumer Percentage of Ownership Information.
    a. Corporate compensation to the officers, generally in 
proportion to the percentage of ownership, is shown on the:
    i. Corporate tax return IRS Form 1120; and
    ii. Individual tax returns.

[[Page 25657]]

    b. When a consumer's percentage of ownership does not appear on 
the tax returns, the creditor must obtain the information from the 
corporation's accountant, along with evidence that the consumer has 
the right to any compensation.
    3. Analyzing Corporate Tax Returns.
    a. In order to determine a consumer's self-employed income from 
a corporation the adjusted business income must:
    i. Be determined; and
    ii. Multiplied by the consumer's percentage of ownership in the 
business.
    b. The table below describes the items found on IRS Form 1120 
for which an adjustment must be made in order to determine adjusted 
business income.
[GRAPHIC] [TIFF OMITTED] TP02MY13.005

    G. Income Analysis: ``S'' Corporation Tax Returns (IRS Form 
1120S).
    1. Description: ``S'' Corporation.
    a. An ``S'' corporation is generally a small, start-up business, 
with gains and losses passed to stockholders in proportion to each 
stockholder's percentage of business ownership.
    b. Income for owners of ``S'' corporations comes from IRS Form 
W-2 wages, and is taxed at the individual rate. The IRS Form 1120S, 
Compensation of Officers line item is transferred to the consumer's 
individual IRS Form 1040.
    2. Analyzing ``S'' Corporation Tax Returns.
    a. ``S'' corporation depreciation and depletion may be added 
back to income in proportion to the consumer's share of the 
corporation's income.
    b. In addition, the income must also be reduced proportionately 
by the total obligations payable by the corporation in less than one 
year.
    c. Important: The consumer's withdrawal of cash from the 
corporation may have a severe negative impact on the corporation's 
ability to continue operating, and must be considered in the income 
analysis.
    H. Income Analysis: Partnership Tax Returns (IRS Form 1065).
    1. Description: Partnership.
    a. A partnership is formed when two or more individuals form a 
business, and share in profits, losses, and responsibility for 
running the company.
    b. Each partner pays taxes on his/her proportionate share of the 
partnership's net income.
    2. Analyzing Partnership Tax Returns.
    a. Both general and limited partnerships report income on IRS 
Form 1065, and the partners' share of income is carried over to 
Schedule E of IRS Form 1040.
    b. The creditor must review IRS Form 1065 to assess the 
viability of the business. Both depreciation and depletion may be 
added back to the income in proportion to the consumer's share of 
income.
    c. Income must also be reduced proportionately by the total 
obligations payable by the partnership in less than one year.
    d. Important: Cash withdrawals from the partnership may have a 
severe negative impact on the partnership's ability to continue 
operating, and must be considered in the income analysis.

II. Non-Employment Related Consumer Income

    A. Alimony, Child Support, and Maintenance Income Criteria. 
Alimony, child support, or maintenance income may be considered 
effective, if:
    1. Payments are likely to be received consistently for the first 
three years of the mortgage;
    2. The consumer provides the required documentation, which 
includes a copy of the:
    i. Final divorce decree;
    ii. Legal separation agreement;
    iii. Court order; or
    iv. Voluntary payment agreement; and
    3. The consumer can provide acceptable evidence that payments 
have been received during the last 12 months, such as:
    i. Cancelled checks;
    ii. Deposit slips;
    iii. Tax returns; or
    iv. Court records.

    Notes: 
    i. Periods less than 12 months may be acceptable, provided the 
creditor can adequately document the payer's ability and willingness 
to make timely payments.
    ii. Child support may be ``grossed up'' under the same 
provisions as non-taxable income sources.

    B. Investment and Trust Income.
    1. Analyzing Interest and Dividends.
    a. Interest and dividend income may be used as long as tax 
returns or account statements support a two-year receipt history. 
This income must be averaged over the two years.
    b. Subtract any funds that are derived from these sources, and 
are required for the cash investment, before calculating the 
projected interest or dividend income.
    2. Trust Income.
    a. Income from trusts may be used if guaranteed, constant 
payments will continue for at least the first three years of the 
mortgage term as evidenced by trust income documentation.
    b. Required trust income documentation includes a copy of the 
Trust Agreement or other trustee statement, confirming the:
    i. Amount of the trust;
    ii. Frequency of distribution; and
    iii. Duration of payments.
    c. Trust account funds may be used for the required cash 
investment if the consumer provides adequate documentation that the 
withdrawal of funds will not negatively affect income. The consumer 
may use funds from the trust account for the required cash 
investment, but the trust income used to determine repayment ability 
cannot be affected negatively by its use.
    3. Notes Receivable Income.
    a. In order to include notes receivable income, the consumer 
must provide:
    i. A copy of the note to establish the amount and length of 
payment, and
    ii. Evidence that these payments have been consistently received 
for the last 12 months through deposit slips, cancelled checks, or 
tax returns.
    b. If the consumer is not the original payee on the note, the 
creditor must establish that the consumer is able to enforce the 
note.
    4. Eligible Investment Properties.
    Follow the steps in the table below to calculate an investment 
property's income or loss if the property to be subject to a 
mortgage is an eligible investment property.

[[Page 25658]]

[GRAPHIC] [TIFF OMITTED] TP02MY13.006

    C. Military, Government Agency, and Assistance Program Income.
    1. Military Income.
    a. Military personnel not only receive base pay, but often times 
are entitled to additional forms of pay, such as:
    i. Income from variable housing allowances;
    ii. Clothing allowances;
    iii. Flight or hazard pay;
    iv. Rations; and
    v. Proficiency pay.
    b. These types of additional pay are acceptable when analyzing a 
consumer's income as long as the probability of such pay to continue 
is verified in writing.

    Note: The tax-exempt nature of some of the above payments should 
also be considered.

    2. VA Benefits.
    a. Direct compensation for service-related disabilities from the 
Department of Veterans Affairs (VA) is acceptable, provided the 
creditor receives documentation from the VA.
    b. Education benefits used to offset education expenses are not 
acceptable.
    3. Government Assistance Programs.
    a. Income received from government assistance programs is 
acceptable as long as the paying agency provides documentation 
indicating that the income is expected to continue for at least 
three years.
    b. If the income from government assistance programs will not be 
received for at least three years, it may not be used in qualifying.
    c. Unemployment income must be documented for two years, and 
there must be reasonable assurance that this income will continue. 
This requirement may apply to seasonal employment.

    Note: Social Security income is acceptable as provided in 
section I.B.11.

    4. Mortgage Credit Certificates.
    a. If a government entity subsidizes the mortgage payments 
either through direct payments or tax rebates, these payments may be 
considered as acceptable income.
    b. Either type of subsidy may be added to gross income, or used 
directly to offset the mortgage payment, before calculating the 
qualifying ratios.
    5. Homeownership Subsidies.
    a. A monthly subsidy may be treated as income, if a consumer is 
receiving subsidies under the housing choice voucher home ownership 
option from a public housing agency (PHA). Although continuation of 
the homeownership voucher subsidy beyond the first year is subject 
to Congressional appropriation, for the purposes of underwriting, 
the subsidy will be assumed to continue for at least three years.
    b. If the consumer is receiving the subsidy directly, the amount 
received is treated as income. The amount received may also be 
treated as nontaxable income and be ``grossed up'' by 25 percent, 
which means that the amount of the subsidy, plus 25 percent of that 
subsidy may be added to the consumer's income from employment and/or 
other sources.
    c. Creditors may treat this subsidy as an ``offset'' to the 
monthly mortgage payment (that is, reduce the monthly mortgage 
payment by the amount of the home ownership assistance payment 
before dividing by the monthly income to determine the payment-to-
income and debt-to-income ratios). The subsidy payment must not pass 
through the consumer's hands.
    d. The assistance payment must be:
    i. Paid directly to the servicing creditor; or
    ii. Placed in an account that only the servicing creditor may 
access.

    Note: Assistance payments made directly to the consumer must be 
treated as income.

    D. Rental Income.
    1. Analyzing the Stability of Rental Income.
    a. Rent received for properties owned by the consumer is 
acceptable as long as the creditor can document the stability of the 
rental income through:
    i. A current lease;
    ii. An agreement to lease; or
    iii. A rental history over the previous 24 months that is free 
of unexplained gaps greater than three months (such gaps could be 
explained by student, seasonal, or military renters, or property 
rehabilitation).
    b. A separate schedule of real estate is not required for rental 
properties as long as all properties are documented on the Uniform 
Residential Loan Application.

    Note: The underwriting analysis may not consider rental income 
from any property being vacated by the consumer, except under the 
circumstances described below.

    2. Rental Income From Consumer Occupied Property.
    a. The rent for multiple unit property where the consumer 
resides in one or more units and charges rent to tenants of other 
units may be used for qualifying purposes.
    b. Projected rent for the tenant-occupied units only may:
    i. Be considered gross income, only after deducting vacancy and 
maintenance factors, and
    ii. Not be used as a direct offset to the mortgage payment.
    3. Income from Roommates in a Single Family Property.
    a. Income from roommates in a single family property occupied as 
the consumer's primary residence is not acceptable. Rental income 
from boarders however, is acceptable.
    b. The rental income may be considered effective, if shown on 
the consumer's tax return. If not on the tax return, rental income 
paid by the boarder may not be used in qualifying.
    4. Documentation Required To Verify Rental Income. Analysis of 
the following required documentation is necessary to verify all 
consumer rental income:
    a. IRS Form 1040 Schedule E; and
    b. Current leases/rental agreements.
    5. Analyzing IRS Form 1040 Schedule E.
    a. The IRS Form 1040 Schedule E is required to verify all rental 
income. Depreciation shown on Schedule E may be added back to the 
net income or loss.
    b. Positive rental income is considered gross income for 
qualifying purposes, while negative income must be treated as a 
recurring liability.
    c. The creditor must confirm that the consumer still owns each 
property listed, by comparing Schedule E with the real estate owned 
section of the Uniform Residential Loan Application (URLA).
    6. Using Current Leases To Analyze Rental Income.
    a. The consumer can provide a current signed lease or other 
rental agreement for a property that was acquired since the last 
income tax filing, and is not shown on Schedule E.
    b. In order to calculate the rental income:
    i. Reduce the gross rental amount by 25 percent for vacancies 
and maintenance;
    ii. Subtract PITI and any homeowners association dues; and
    iii. Apply the resulting amount to income, if positive, or 
recurring debts, if negative.
    7. Exclusion of Rental Income From Property Being Vacated by the 
Consumer. Underwriters may not consider any rental income from a 
consumer's principal residence that is being vacated in favor of 
another principal residence, except under the conditions described 
below:

    Notes: 

[[Page 25659]]

    i. This policy assures that a consumer either has sufficient 
income to make both mortgage payments without any rental income, or 
has an equity position not likely to result in defaulting on the 
mortgage on the property being vacated.
    ii. This applies solely to a principal residence being vacated 
in favor of another principal residence. It does not apply to 
existing rental properties disclosed on the loan application and 
confirmed by tax returns (Schedule E of form IRS 1040).

    8. Policy Exceptions Regarding the Exclusion of Rental Income 
From a Principal Residence Being Vacated by a Consumer.
    When a consumer vacates a principal residence in favor of 
another principal residence, the rental income, reduced by the 
appropriate vacancy factor, may be considered in the underwriting 
analysis under the circumstances listed in the table below.
[GRAPHIC] [TIFF OMITTED] TP02MY13.007

    E. Non-Taxable and Projected Income.
    1. Types of Non-Taxable Income.
    Certain types of regular income may not be subject to Federal 
tax. Such types of non-taxable income include:
    a. Some portion of Social Security, some Federal government 
employee retirement income, Railroad Retirement Benefits, and some 
State government retirement income;
    b. Certain types of disability and public assistance payments;
    c. Child support;
    d. Military allowances; and
    e. Other income that is documented as being exempt from Federal 
income taxes.
    2. Adding Non-Taxable Income to a Consumer's Gross Income.
    a. The amount of continuing tax savings attributed to regular 
income not subject to Federal taxes may be added to the consumer's 
gross income.
    b. The percentage of non-taxable income that may be added cannot 
exceed the appropriate tax rate for the income amount. Additional 
allowances for dependents are not acceptable.
    c. The creditor:
    i. Must document and support the amount of income grossed up for 
any non-taxable income source, and
    ii. Should use the tax rate used to calculate the consumer's 
last year's income tax.

    Note: If the consumer is not required to file a Federal tax 
return, the tax rate to use is 25 percent.

    3. Analyzing Projected Income.
    a. Projected or hypothetical income is not acceptable for 
qualifying purposes. However, exceptions are permitted for income 
from the following sources:
    i. Cost-of-living adjustments;
    ii. Performance raises; and
    iii. Bonuses.
    b. For the above exceptions to apply, the income must be:
    i. Verified in writing by the employer; and
    ii. Scheduled to begin within 60 days of loan closing.
    4. Projected Income for New Job.
    a. Projected income is acceptable for qualifying purposes for a 
consumer scheduled to start a new job within 60 days of loan closing 
if there is a guaranteed, non-revocable contract for employment.
    b. The creditor must verify that the consumer will have 
sufficient income or cash reserves to support the mortgage payment 
and any other obligations between loan closing and the start of 
employment. Examples of this type of scenario are teachers whose 
contracts begin with the new school year, or physicians beginning a 
residency after the loan closes.
    c. The income does not qualify if the loan closes more than 60 
days before the consumer starts the new job.

III. Consumer Liabilities: Recurring Obligations

    1. Types of Recurring Obligation. Recurring obligations include:
    a. All installment loans;
    b. Revolving charge accounts;
    c. Real estate loans;
    d. Alimony;
    e. Child support; and
    f. Other continuing obligations.
    2. Debt to Income Ratio Computation for Recurring Obligations.
    a. The creditor must include the following when computing the 
debt to income ratios for recurring obligations:
    i. Monthly housing expense; and
    ii. Additional recurring charges extending ten months or more, 
such as
    a. Payments on installment accounts;
    b. Child support or separate maintenance payments;
    c. Revolving accounts; and
    d. Alimony.
    b. Debts lasting less than ten months must be included if the 
amount of the debt affects the consumer's ability to pay the 
mortgage during the months immediately after loan closing, 
especially if the consumer will have limited or no cash assets after 
loan closing.


[[Page 25660]]


    Note: Monthly payments on revolving or open-ended accounts, 
regardless of the balance, are counted as a liability for qualifying 
purposes even if the account appears likely to be paid off within 10 
months or less.

    3. Revolving Account Monthly Payment Calculation. If the credit 
report shows any revolving accounts with an outstanding balance but 
no specific minimum monthly payment, the payment must be calculated 
as the greater of:
    a. 5 percent of the balance; or
    b. $10.

    Note: If the actual monthly payment is documented from the 
creditor or the creditor obtains a copy of the current statement 
reflecting the monthly payment, that amount may be used for 
qualifying purposes.

    4. Reduction of Alimony Payment for Qualifying Ratio 
Calculation. Since there are tax consequences of alimony payments, 
the creditor may choose to treat the monthly alimony obligation as a 
reduction from the consumer's gross income when calculating the 
ratio, rather than treating it as a monthly obligation.

IV. Consumer Liabilities: Contingent Liability

    1. Definition: Contingent Liability. A contingent liability 
exists when an individual is held responsible for payment of a debt 
if another party, jointly or severally obligated, defaults on the 
payment.
    2. Application of Contingent Liability Policies. The contingent 
liability policies described in this topic apply unless the consumer 
can provide conclusive evidence from the debt holder that there is 
no possibility that the debt holder will pursue debt collection 
against him/her should the other party default.
    3. Contingent Liability on Mortgage Assumptions. Contingent 
liability must be considered when the consumer remains obligated on 
an outstanding FHA-insured, VA-guaranteed, or conventional mortgage 
secured by property that:
    a. Has been sold or traded within the last 12 months without a 
release of liability, or
    b. Is to be sold on assumption without a release of liability 
being obtained.
    4. Exemption From Contingent Liability Policy on Mortgage 
Assumptions. When a mortgage is assumed, contingent liabilities need 
not be considered if the:
    a. Originating creditor of the mortgage being underwritten 
obtains, from the servicer of the assumed loan, a payment history 
showing that the mortgage has been current during the previous 12 
months, or
    b. Value of the property, as established by an appraisal or the 
sales price on the HUD-1 Settlement Statement from the sale of the 
property, results in a loan-to-value (LTV) ratio of 75 percent or 
less.
    5. Contingent Liability on Cosigned Obligations.
    a. Contingent liability applies, and the debt must be included 
in the underwriting analysis, if an individual applying for a 
mortgage is a cosigner/co-obligor on:
    i. A car loan;
    ii. A student loan;
    iii. A mortgage; or
    iv. Any other obligation.
    b. If the creditor obtains documented proof that the primary 
obligor has been making regular payments during the previous 12 
months, and does not have a history of delinquent payments on the 
loan during that time, the payment does not have to be included in 
the consumer's monthly obligations.

V. Consumer Liabilities: Projected Obligations and Obligations Not 
Considered Debt

    1. Projected Obligations.
    a. Debt payments, such as a student loan or balloon-payment note 
scheduled to begin or come due within 12 months of the mortgage loan 
closing, must be included by the creditor as anticipated monthly 
obligations during the underwriting analysis.
    b. Debt payments do not have to be classified as projected 
obligations if the consumer provides written evidence that the debt 
will be deferred to a period outside the 12-month timeframe.
    c. Balloon-payment notes that come due within one year of loan 
closing must be considered in the underwriting analysis.
    2. Obligations Not Considered Debt. Obligations not considered 
debt, and therefore not subtracted from gross income, include:
    a. Federal, State, and local taxes;
    b. Federal Insurance Contributions Act (FICA) or other 
retirement contributions, such as 401(k) accounts (including 
repayment of debt secured by these funds):
    c. Commuting costs;
    d. Union dues;
    e. Open accounts with zero balances;
    f. Automatic deductions to savings accounts;
    g. Child care; and
    h. Voluntary deductions.
0
9. In Supplement I to Part 1026--Official Interpretations:
    A. Under Section 1026.41--Periodic Statements for Residential 
Mortgage Loans:
    i. Under 41(e)(4) Small servicers:
    a. Under 41(e)(4)(ii) Small servicer defined, paragraphs 1 and 2 
are revised and paragraph 3 is added.
    b. Under Paragraph 41(e)(4)(iii) Small servicer determination, 
paragraph 3 is added.
    B. Under Section 1026.43--Minimum Standards for Transactions 
Secured by a Dwelling:
    i. Under 43(e)(4) Qualified mortgage defined-special rules, 
paragraph 4 is revised and paragraph 5 is added.
    The revisions and additions read as follows:

Supplement I to Part 1026--Official Interpretations

* * * * *

Subpart E--Special Rules for Certain Home Mortgage Transactions

* * * * *

Section 1026.41--Periodic Statements for Residential Mortgage Loans

* * * * *
    41(e)(4)(ii) Small servicer defined.
    1. Mortgage loans considered. Pursuant to Sec.  1026.41(a)(1), 
the mortgage loans considered in determining status as small 
servicer are closed-end consumer credit transactions secured by a 
dwelling, subject to the exclusions in Sec.  1026.41(e)(4)(iii).
    2. Requirements to be a small servicer. Pursuant to Sec.  
1026.41(e)(4)(ii)(A), to qualify as a small servicer, a servicer 
must service, together with any affiliates, 5,000 or fewer mortgage 
loans, for all of which the servicer (or an affiliate) is the 
creditor or assignee. There are two elements to this requirement. 
First, a servicer, together with any affiliates, must service 5,000 
or fewer mortgage loans. Second, a servicer must service only 
mortgage loans for which the servicer (or an affiliate) is the 
creditor or assignee. To be the creditor or assignee of a mortgage 
loan, the servicer (or an affiliate) must either currently own the 
mortgage loan or must have been the entity to which the mortgage 
loan obligation was initially payable (that is, the originator of 
the mortgage loan). A servicer is not a small servicer if it 
services any mortgage loans for which the servicer or an affiliate 
is not the creditor or assignee (that is, for which the servicer or 
an affiliate is not the owner or was not the originator). The 
following two examples demonstrate circumstances in which a servicer 
would not qualify as a small servicer because it did not meet both 
requirements for determining a servicer's status as a small 
servicer:
    i. A servicer services 3,000 mortgage loans, all of which it or 
an affiliate owns or originated. An affiliate of the servicer 
services 4,000 other mortgage loans, all of which it or an affiliate 
owns or originated. Because the number of mortgage loans serviced by 
a servicer is determined by counting the mortgage loans serviced by 
a servicer together with any affiliates, both of these servicers are 
considered to be servicing 7,000 mortgage loans and neither servicer 
is a small servicer.
    ii. A servicer services 3,100 mortgage loans--3,000 mortgage 
loans it owns or originated and 100 mortgage loans it neither owns 
nor originated, but for which it owns the mortgage servicing rights. 
The servicer is not a small servicer because it services mortgage 
loans for which the servicer (or an affiliate) is not the creditor 
or assignee, notwithstanding that the servicer services fewer than 
5,000 mortgage loans.
    3. Master servicing and subservicing. A servicer that qualifies 
as a small servicer does not lose its small servicer status if it 
retains a subservicer, as that term is defined in 12 CFR 1024.31, to 
service any of its mortgage loans. A subservicer can gain the 
benefit of the small servicer exemption only if (1) the master 
servicer, as that term is defined in 12 CFR 1024.31, is a small 
servicer and (2) the subservicer is a small servicer. A subservicer 
generally will not qualify as a small servicer because it does not 
own or did not originate the mortgage loans it subservices--unless 
it is an affiliate of a master servicer that qualifies as a small 
servicer. The following

[[Page 25661]]

examples demonstrate the application of the small servicer exemption 
for different forms of servicing relationships:
    i. A credit union services 4,000 mortgage loans, all of which it 
originated or owns. The credit union retains a credit union service 
organization, that is not an affiliate, to subservice 1,000 of the 
mortgage loans. The credit union is a small servicer and, thus, can 
gain the benefit of the small servicer exemption for the 3,000 
mortgage loans the credit union services itself. The credit union 
service organization is not a small servicer because it services 
mortgage loans it does not own or did not originate. Accordingly, 
the credit union service organization does not gain the benefit of 
the small servicer exemption and, thus, must comply with any 
applicable mortgage servicing requirements for the 1,000 mortgage 
loans it subservices.
    ii. A bank holding company, through a lender subsidiary, owns or 
originated 4,000 mortgage loans. All mortgage servicing rights for 
the 4,000 mortgage loans are owned by a wholly owned master servicer 
subsidiary. Servicing for the 4,000 mortgage loans is conducted by a 
wholly owned subservicer subsidiary. The bank holding company 
controls all of these subsidiaries and, thus, they are affiliates of 
the bank holding company pursuant 12 CFR 1026.32(b)(2). Because the 
master servicer and subservicer service 5,000 or fewer mortgage 
loans, and because all the mortgage loans are owned or originated by 
an affiliate, the master servicer and the subservicer both qualify 
for the small servicer exemption for all 4,000 mortgage loans.
    iii. A nonbank servicer services 4,000 mortgage loans, all of 
which it originated or owns. The servicer retains a ``component 
servicer'' to assist it with servicing functions. The component 
servicer is not engaged in ``servicing'' as defined in 12 CFR 
1024.2; that is, the component servicer does not receive any 
scheduled periodic payments from a borrower pursuant to the terms of 
any mortgage loan, including amounts for escrow accounts, and does 
not make the payments to the owner of the loan or other third 
parties of principal and interest and such other payments with 
respect to the amounts received from the borrower as may be required 
pursuant to the terms of the mortgage servicing loan documents or 
servicing contract. The component servicer is not a subservicer 
pursuant to 12 CFR 1024.31 because it is not engaged in servicing, 
as that term is defined in 12 CFR 1024.2. The nonbank servicer is a 
small servicer and, thus, can gain the benefit of the small servicer 
exemption with regard to all 4,000 mortgage loans it services.
    41(e)(4)(iii) Small servicer determination.
* * * * *
    3. Mortgage loans not considered in determining whether a 
servicer is a small servicer. Mortgage loans that are not considered 
for purposes of determining whether a servicer is a small servicer 
pursuant to Sec.  1026.41(e)(4)(iii), are not considered either for 
determining whether a servicer, together with any affiliates, 
services 5,000 or fewer mortgage loans or whether a servicer is 
servicing only mortgage loans that it owns or originated. For 
example, assume a servicer services 5,400 mortgage loans. Of these 
mortgage loans, the servicer owns or originated 4,800 mortgage 
loans, services 300 reverse mortgage transactions that it does not 
own or did not originate, and voluntarily services 300 mortgage 
loans that it does not own or did not originate for an unaffiliated 
non-profit organization for which the servicer does not receive any 
compensation or fees. Neither the reverse mortgage transactions nor 
the mortgage loans voluntarily serviced by the servicer are 
considered in determining whether a servicer is a small servicer. 
Thus, because the only mortgage loans considered are the 4,800 other 
mortgage loans serviced by the servicer, and the servicer owns or 
originated each of those mortgage loans, the servicer is considered 
a small servicer and qualifies for the small servicer exemption with 
regard to all 5,400 mortgage loans it services. Note that reverse 
mortgages and mortgage loans secured by consumers' interests in 
timeshare plans, in addition to not being considered in determining 
small servicer qualification, also are exempt from the requirements 
of the Sec.  1026.41. In contrast, although charitably serviced 
mortgage loans, as defined by Sec.  1026.41(e)(4)(iii), are likewise 
not considered in determining small servicer qualification, they are 
not exempt from the requirements of Sec.  1026.41. Thus, a servicer 
that does not qualify as a small servicer would not have to provide 
periodic statements for reverse mortgages and timeshare plans 
because they are exempt from the rule, but would have to provide 
periodic statements for mortgage loans it charitably services.
* * * * *

Section 1026.43--Minimum Standards for Transactions Secured by a 
Dwelling

* * * * *
    43(e)(4) Qualified mortgage defined--special rules.
* * * * *
    4. Eligible for purchase, guarantee, or insurance. To satisfy 
Sec.  1026.43(e)(4)(ii), a loan need not be actually purchased or 
guaranteed by Fannie Mae or Freddie Mac or insured or guaranteed by 
one of the Agencies (the U.S. Department of Housing and Urban 
Development (HUD), U.S. Department of Veterans Affairs (VA), U.S. 
Department of Agriculture (USDA), or Rural Housing Service (RHS)). 
Rather, Sec.  1026.43(e)(4)(ii) requires only that the creditor 
determine that the loan is eligible (i.e., meets the criteria) for 
such purchase, guarantee, or insurance at consummation. For example, 
for purposes of Sec.  1026.43(e)(4), a creditor is not required to 
sell a loan to Fannie Mae or Freddie Mac (or any limited-life 
regulatory entity succeeding the charter of either) for that loan to 
be a qualified mortgage; however, the loan must be eligible for 
purchase or guarantee by Fannie Mae or Freddie Mac (or any limited-
life regulatory entity succeeding the charter of either), including 
satisfying any requirements regarding consideration and verification 
of a consumer's income or assets, credit history, and debt-to-income 
ratio or residual income. To determine eligibility for purchase or 
guarantee, a creditor may rely on a valid underwriting 
recommendation provided by a GSE or Agency automated underwriting 
systems (AUS); compliance with the standards in the GSE or Agency 
written guide in effect at the time; or a written agreement between 
the creditor and a GSE or Agency that permits variation from the 
standards of the written guides and/or variation from the AUSs, in 
effect at the time. However, the creditor need not satisfy standards 
that are wholly unrelated to assessing a consumer's ability to repay 
that the creditor is required to perform such as requirements 
related to selling, securitizing, or delivering already consummated 
loans and any requirement that the creditor must perform after the 
consummated loan is sold, guaranteed, or endorsed for insurance such 
as document custody, quality control, or servicing. Accordingly, a 
covered transaction is eligible for purchase or guarantee by Fannie 
Mae or Freddie Mac, for example, if:
    i. The loan conforms to the relevant standards set forth in the 
Fannie Mae Single-Family Selling Guide or the Freddie Mac Single-
Family Seller/Servicer Guide in effect at the time, or to standards 
set forth in a written agreement between the creditor and Fannie Mae 
or Freddie Mac that permits variation from the standards of those 
guides; or
    ii. The creditor inputs information accurately into the Fannie 
Mae or Freddie Mac AUS or another AUS pursuant to a written 
agreement between the creditor and Fannie Mae or Freddie Mac that 
permits variation from the GSE AUS; the loan receives one of the 
recommendations specified below in paragraphs A or B from the 
corresponding GSE AUS or an equivalent recommendation pursuant to 
another AUS as authorized in the written agreement; and the creditor 
satisfies any requirements and conditions specified by the relevant 
AUS, the non-satisfaction of which would invalidate that 
recommendation:
    A. An ``Approve/Eligible'' recommendation from Desktop 
Underwriter (DU); or
    B. A risk class of ``Accept'' and purchase eligibility of 
``Freddie Mac Eligible'' from Loan Prospector (LP).
    5. Repurchase and indemnification demands. A repurchase or 
indemnification demand by Fannie Mae, Freddie Mac, HUD, VA, USDA, or 
RHS is not dispositive of qualified mortgage status. Qualified 
mortgage status under Sec.  1026.43(e)(4) depends on whether a loan 
is eligible to be purchased, guaranteed, or insured at the time of 
consummation, provided that other requirements under Sec.  
1026.43(e)(4) are satisfied. Some repurchase or indemnification 
demands are not related to eligibility criteria at consummation. See 
comment 43(e)(4)-4. Further, even where a repurchase or 
indemnification demand relates to whether the loan satisfied 
relevant eligibility requirements as of the time of consummation, 
the mere fact that a demand has been made, or even resolved, between 
a creditor and GSE or agency is not dispositive for purposes of 
Sec.  1026.43(e)(4). However, evidence of whether a particular loan 
satisfied the Sec.  1026.43(e)(4) eligibility criteria at 
consummation may be brought to light in the course of dealings over 
a particular demand, depending on the facts and

[[Page 25662]]

circumstances. Accordingly, each loan should be evaluated by the 
creditor based on the facts and circumstances relating to the 
eligibility of that loan at the time of consummation. For example:
    i. Assume eligibility to purchase a loan was based in part on 
the consumer's employment income of $50,000 per year. The creditor 
uses the income figure in obtaining an approve/eligible 
recommendation from DU. A quality control review, however, later 
determines that the documentation provided and verified by the 
creditor to comply with Fannie Mae requirements did not support the 
reported income of $50,000 per year. As a result, Fannie Mae demands 
that the creditor repurchase the loan. Assume that the quality 
control review is accurate, and that DU would not have issued an 
approve/eligible recommendation if it had been provided the accurate 
income figure. The DU determination at the time of consummation was 
invalid because it was based on inaccurate information provided by 
the creditor; therefore, the loan was never a qualified mortgage.
    ii. Assume that a creditor delivered a loan, which the creditor 
determined was a qualified mortgage at the time of consummation 
under Sec.  1026.43(e)(4), to Fannie Mae for inclusion in a 
particular To-Be-Announced Mortgage Backed Security (MBS) pool of 
loans. The data submitted by the creditor at the time of loan 
delivery indicated that the various loan terms met the product type, 
weighted-average coupon (WAC), weighted-average maturity (WAM), and 
other MBS pooling criteria, and MBS issuance disclosures to 
investors reflected this loan data. However, after delivery and MBS 
issuance, a quality control review determines that the loan violates 
the pooling criteria. The loan still meets eligibility requirements 
for Fannie Mae products and loan terms. Fannie Mae, however, 
requires the creditor to repurchase the loan due to the violation of 
MBS pooling requirements. Assume that the quality control review 
determination is accurate. The reason the creditor repurchases this 
loan is wholly unrelated to assessing a consumer's ability to repay 
under Sec.  1026.43(e)(4). The loan still meets Fannie Mae 
eligibility requirements and therefore remains a qualified mortgage 
based on these facts and circumstances.
* * * * *

    Dated: April 19, 2013.
Richard Cordray,
Director, Bureau of Consumer Financial Protection.
[FR Doc. 2013-09750 Filed 5-1-13; 8:45 am]
BILLING CODE 4810-AM-P