[Federal Register Volume 78, Number 113 (Wednesday, June 12, 2013)]
[Rules and Regulations]
[Pages 35430-35506]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-13173]



[[Page 35429]]

Vol. 78

Wednesday,

No. 113

June 12, 2013

Part III





 Bureau of Consumer Financial Protection





-----------------------------------------------------------------------





12 CFR Part 1026





 Ability-to-Repay and Qualified Mortgage Standards Under the Truth in 
Lending Act (Regulation Z); Final Rule

  Federal Register / Vol. 78, No. 113 / Wednesday, June 12, 2013 / 
Rules and Regulations  

[[Page 35430]]


-----------------------------------------------------------------------

BUREAU OF CONSUMER FINANCIAL PROTECTION

12 CFR Part 1026

[Docket No. CFPB-2013-0002]
RIN 3170-AA34


Ability-to-Repay and Qualified Mortgage Standards Under the Truth 
in Lending Act (Regulation Z)

AGENCY: Bureau of Consumer Financial Protection.

ACTION: Final rule; official interpretations.

-----------------------------------------------------------------------

SUMMARY: The Bureau of Consumer Financial Protection (Bureau) is 
amending Regulation Z, which implements the Truth in Lending Act 
(TILA). Regulation Z generally prohibits a creditor from making a 
mortgage loan unless the creditor determines that the consumer will 
have the ability to repay the loan. The final rule provides an 
exemption to these requirements for creditors with certain 
designations, loans pursuant to certain programs, certain nonprofit 
creditors, and mortgage loans made in connection with certain Federal 
emergency economic stabilization programs. The final rule also provides 
an additional definition of a qualified mortgage for certain loans made 
and held in portfolio by small creditors and a temporary definition of 
a qualified mortgage for balloon loans. Finally, the final rule 
modifies the requirements regarding the inclusion of loan originator 
compensation in the points and fees calculation.

DATES: This rule is effective January 10, 2014.

FOR FURTHER INFORMATION CONTACT: Jennifer B. Kozma or Eamonn K. Moran, 
Counsels; Thomas J. Kearney or Mark Morelli, Senior Counsels; or 
Stephen Shin, Managing Counsel, Office of Regulations, at (202) 435-
7700.

SUPPLEMENTARY INFORMATION:

I. Summary of the Final Rule

    The Bureau is issuing this final rule to adopt certain exemptions, 
modifications, and clarifications to TILA's ability-to-repay 
requirements. TILA section 129C, as added by sections 1411, 1412, and 
1414 of the Dodd-Frank Wall Street Reform and Consumer Protection Act 
(Dodd-Frank Act), generally requires creditors to make a reasonable, 
good faith determination of a consumer's ability to repay a mortgage 
loan and creates a presumption of compliance with these ability-to-
repay requirements for certain loans designated as ``qualified 
mortgages.'' On January 10, 2013, the Bureau issued a final rule (the 
2013 ATR Final Rule) to implement these ability-to-repay requirements 
and qualified mortgage provisions. See 78 FR 6407 (Jan. 30, 2013). At 
the same time, the Bureau issued a proposed rule (the 2013 ATR Proposed 
Rule or Bureau's proposal) related to certain proposed exemptions, 
modifications, and clarifications to the ability-to-repay requirements. 
See 78 FR 6621 (Jan. 30, 2013). This final rule addresses the issues 
put forth for public comment in the 2013 ATR Proposed Rule. See part 
II.B below and part II.B-F of the 2013 ATR Final Rule for a complete 
discussion of the statutory and regulatory background to the ability-
to-repay requirements.

Loan Originator Compensation and the Points and Fees Calculation

    The Dodd-Frank Act generally provides that points and fees on a 
qualified mortgage may not exceed 3 percent of the loan balance and 
that points and fees in excess of 5 percent will trigger the 
protections for high-cost mortgages under the Home Ownership and Equity 
Protection Act (HOEPA).\1\ The Dodd-Frank Act also included a provision 
requiring that loan originator compensation be counted toward these 
thresholds, even if it is not paid up-front by the consumer directly to 
the loan originator.
---------------------------------------------------------------------------

    \1\ See title I subtitle B of the Riegle Community Development 
and Regulatory Improvement Act of 1994, Public Law 103-325, 108 
Stat. 2160 (Jan. 25, 1994).
---------------------------------------------------------------------------

    The Bureau had solicited comment on how to apply the statutory 
requirements in situations in which payments pass from one party to 
another over the course of a mortgage transaction. The Bureau was 
particularly concerned about situations in which the creditor pays 
compensation to a mortgage broker or its own loan originator employees 
because there is no simple way to determine whether the compensation is 
paid from money the creditor collected from up-front charges to the 
consumer (which would already be counted against the points and fees 
thresholds) or from the interest rate on the loan (which would not be 
counted toward the thresholds).
    The final rule excludes from points and fees loan originator 
compensation paid by a consumer to a mortgage broker when that payment 
has already been counted toward the points and fees thresholds as part 
of the finance charge under Sec.  1026.32(b)(1)(i). The final rule also 
excludes from points and fees compensation paid by a mortgage broker to 
an employee of the mortgage broker because that compensation is already 
included in points and fees as loan originator compensation paid by the 
consumer or the creditor to the mortgage broker.
    The final rule excludes from points and fees compensation paid by a 
creditor to its loan officers. The Bureau concluded that there were 
significant operational challenges to calculating individual employee 
compensation accurately early in the loan origination process, and that 
those challenges would lead to anomalous results for consumers. In 
addition, the Bureau concluded that structural differences between the 
retail and wholesale channels lessened risks to consumers. The Bureau 
will continue to monitor the market to determine if additional 
protections are necessary and evaluate whether there are different 
approaches for calculating retail loan officer compensation consistent 
with the purposes of the statute.
    The final rule retains an ``additive'' approach for calculating 
loan originator compensation paid by a creditor to a loan originator 
other than an employee of creditor. Under the additive approach, Sec.  
1026.32(b)(1)(ii) requires that a creditor include in points and fees 
compensation paid by the creditor to a mortgage broker, in addition to 
up-front charges paid by the consumer to the creditor that are included 
in points and fees under Sec.  1026.32(b)(1)(i).

Exemptions for Certain Creditors and Lending Programs

    Certain creditors and nonprofits. The final rule provides an 
exemption from the ability-to-repay requirements for extensions of 
credit made by certain types of creditors. Creditors designated by the 
U.S. Department of the Treasury as Community Development Financial 
Institutions and creditors designated by the U.S. Department of Housing 
and Urban Development as either a Community Housing Development 
Organization or a Downpayment Assistance Provider of Secondary 
Financing are exempt from the ability-to-repay requirements, under 
certain conditions. The final rule also generally exempts creditors 
designated as nonprofit organizations under section 501(c)(3) of the 
Internal Revenue Code of 1986 (26 U.S.C. 501(c)(3)) that extend credit 
no more than 200 times annually, provide credit only to low-to-moderate 
income consumers, and follow their own written procedures to determine 
that consumers have a reasonable ability to repay their loans.
    Credit extended pursuant to certain lending programs. The final 
rule provides an exemption from the ability-to-repay requirements for 
extensions of

[[Page 35431]]

credit made pursuant to programs administered by a housing finance 
agency and for an extension of credit made pursuant to an Emergency 
Economic Stabilization Act program, such as extensions of credit made 
pursuant to a State Hardest Hit Fund program.

Small Creditor Portfolio and Balloon-Payment Qualified Mortgages

    The final rule contains several provisions that are designed to 
facilitate compliance and preserve access to credit from small 
creditors, which are defined as creditors with no more than $2 billion 
in assets that (along with affiliates) originate no more than 500 
first-lien mortgages covered under the ability-to-repay rules per year. 
The Bureau had previously exercised authority under the Dodd-Frank Act 
to allow certain balloon-payment mortgages to be designated as 
qualified mortgages if they were originated and held in portfolio by 
small creditors operating predominantly in rural or underserved areas. 
In this final rule, the Bureau is:
     Adopting a new, fourth category of qualified mortgages for 
certain loans originated and held in portfolio for at least three years 
(subject to certain limited exceptions) by small creditors, even if 
they do not operate predominantly in rural or underserved areas. The 
loans must meet the general restrictions on qualified mortgages with 
regard to loan features and points and fees, and creditors must 
evaluate consumers' debt-to-income ratio or residual income. However, 
the loans are not subject to a specific debt-to-income ratio as they 
would be under the general qualified mortgage definition.
     Raising the threshold defining which qualified mortgages 
receive a safe harbor under the ability-to-repay rules for loans that 
are made by small creditors under the balloon-loan or small creditor 
portfolio categories of qualified mortgages. Because small creditors 
often have higher cost of funds, the final rule shifts the threshold 
separating qualified mortgages that receive a safe harbor from those 
that receive a rebuttable presumption of compliance with the ability-
to-repay rules from 1.5 percentage points above the average prime offer 
rate (APOR) on first-lien loans to 3.5 percentage points above APOR.
     Providing a two-year transition period during which small 
creditors that do not operate predominantly in rural or underserved 
areas can offer balloon-payment qualified mortgages if they hold the 
loans in portfolio. During the two-period transition period, the Bureau 
intends to study whether the definitions of ``rural'' or 
``underserved'' should be adjusted and to work with small creditors to 
transition to other types of products, such as adjustable-rate 
mortgages, that satisfy other qualified mortgage definitions.
    The ability-to-repay rules as revised by this final rule will take 
effect on January 10, 2014, along with various other rules implementing 
new mortgage protections under the Dodd-Frank Act.

II. Background

A. Mortgage Market Background
    The mortgage market is the single largest market for consumer 
financial products and services in the United States. In 2007 and 2008 
this market collapsed, greatly diminishing the wealth of millions of 
American consumers and sending the economy into a severe recession. A 
primary cause of the collapse was the steady deterioration of credit 
standards in mortgage lending. Evidence demonstrates that many mortgage 
loans were made solely against collateral and without consideration of 
ability to repay, particularly in the markets for ``subprime'' and 
``Alt-A'' products, which more than doubled from $400 billion in 
originations in 2003 to $830 billion in originations in 2006.\2\ 
Subprime products were sold primarily to consumers with poor or no 
credit history, while Alt-A loans were sold primarily to consumers who 
provided little or no documentation of income or other evidence of 
repayment ability.\3\
---------------------------------------------------------------------------

    \2\ Inside Mortg. Fin., The 2011 Mortgage Market Statistical 
Annual (2011).
    \3\ There is evidence that some consumers who would have 
qualified for ``prime'' loans were steered into subprime loans as 
well. The Federal Reserve Board on July 18, 2011 issued a consent 
cease and desist order and assessed an $85 million civil money 
penalty against Wells Fargo & Company of San Francisco, a registered 
bank holding company, and Wells Fargo Financial, Inc., of Des 
Moines. The order addresses allegations that Wells Fargo Financial 
employees steered potential prime-eligible consumers into more 
costly subprime loans and separately falsified income information in 
mortgage applications. In addition to the civil money penalty, the 
order requires that Wells Fargo compensate affected consumers. See 
Press Release, Federal Reserve Board (July 20, 2011), available at: 
http://www.federalreserve.gov/newsevents/press/enforcement/20110720a.htm.
---------------------------------------------------------------------------

    Because subprime and Alt-A loans involved additional risk, they 
were typically more expensive to consumers than ``prime'' mortgage 
loans, although many of them had very low introductory interest rates. 
While housing prices continued to increase, it was relatively easy for 
consumers to refinance their existing loans into more affordable 
products to avoid interest rate resets and other adjustments. When 
housing prices began to decline in 2005, however, refinancing became 
more difficult and delinquency rates on subprime and Alt-A products 
increased dramatically.\4\ By the summer of 2006, 1.5 percent of loans 
less than a year old were in default, and this figure peaked at 2.5 
percent in late 2007.\5\ As the economy worsened, the rates of serious 
delinquency (90 or more days past due or in foreclosure) for the 
subprime and Alt-A products began a steep increase from approximately 
10 percent in 2006, to 20 percent in 2007, to over 40 percent in 
2010.\6\ Although the mortgage market is recovering, consumers today 
continue to feel the effects of the financial crisis.
---------------------------------------------------------------------------

    \4\ U.S. Fin. Crisis Inquiry Comm'n, The Financial Crisis 
Inquiry Report: Final Report of the National Commission on the 
Causes of the Financial and Economic Crisis in the United States at 
215-217 (Official Gov't ed. 2011) (FCIC Report), available at: 
http://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf.
    \5\ FCIC Report at 215. CoreLogic Chief Economist Mark Fleming 
told the FCIC that the early payment default rate ``certainly 
correlates with the increase in the Alt-A and subprime shares and 
the turn of the housing market and the sensitivity of those loan 
products.'' Id.
    \6\ FCIC Report at 217.
---------------------------------------------------------------------------

Community-Focused Lending Programs

    While governmental and nonprofit programs have always been an 
important source of assistance for low- to moderate-income (LMI) 
consumers, these programs have taken on even greater significance in 
light of current tight mortgage credit standards and Federal 
initiatives to stabilize the housing market. There are a variety of 
programs designed to assist LMI consumers with access to homeownership. 
These programs are generally offered through a nonprofit entity, local 
government, or a housing finance agency (HFA). These programs play an 
important role in the housing sector of the economy.
    Types of financial assistance available. Community-focused lending 
programs typically provide LMI consumers with assistance ranging from 
housing counseling services to full mortgage loan financing. Some 
programs offer financial assistance through land trust programs, in 
which the consumer leases the real property and takes ownership of only 
the improvements. Many organizations provide ``downpayment assistance'' 
in connection with mortgage loan financing. This can be a gift, grant, 
or loan to the consumer to assist with the consumer's down payment, or 
to pay for some of the closing costs. These programs often rely on 
subsidies from Federal government funds, local government funds, 
foundations, or

[[Page 35432]]

employer funding.\7\ For example, many of these programs rely on funds 
provided through the HUD Home Investment Partnerships Program (HOME 
Program).\8\
---------------------------------------------------------------------------

    \7\ Abigail Pound, Challenges and Changes in Community-Based 
Lending for Homeownership, NeighborWorks America, Joint Center for 
Housing Studies of Harvard University (Feb. 2011), available at: 
http://www.jchs.harvard.edu/sites/jchs.harvard.edu/files/w11-2_pound.pdf.
    \8\ The HOME Investment Partnerships Program is authorized under 
title II of the Cranston-Gonzalez National Affordable Housing Act of 
1990, Public Law 101-625, 104 Stat. 4079 (1990). See 24 CFR 92.1 
through 92.618.
---------------------------------------------------------------------------

    Some programs offer first-lien mortgage loans designed to meet the 
needs of LMI consumers. These first-lien mortgage loans may have a 
discounted interest rate or limited origination fees or may permit high 
loan-to-value ratios. Many programs offer subordinate financing. 
Subordinate-financing options may be simple, such as a relatively 
inexpensive subordinate-lien loan to pay for closing costs. Other 
methods of subordinate financing may be complex. For example, one HFA 
program offers a 30-year, fixed-rate, subordinate-lien mortgage loan 
through partner creditors, with interest-only payments for the first 11 
years of the loan's term, and with an interest subsidy for the LMI 
consumer, resulting in a graduated monthly payment between the fifth 
and eleventh year of the loan; an additional 30-year deferred, 0 
percent subordinate-lien mortgage loan is extended by the HFA equal to 
the amount of the subsidy.\9\ Some of the loans offered by these 
programs, whether first-lien or subordinate-financing, are structured 
as hybrid grant products that are commonly forgiven.
---------------------------------------------------------------------------

    \9\ See http://www.mhp.net/homeownership/homebuyer/soft_second_works.php, describing the SoftSecond program offered by the 
Massachusetts Housing Partnership.
---------------------------------------------------------------------------

    Housing finance agencies. For over 50 years, HFAs have provided LMI 
consumers with opportunities for affordable homeownership.\10\ HFAs are 
governmental entities, chartered by either a State or a municipality, 
that engage in diverse housing financing activities for the promotion 
of affordable housing. Some HFAs are chartered to promote affordable 
housing goals across an entire State, while others' jurisdiction 
extends to only particular cities or counties.\11\ Many of the State 
and Federal programs HFAs administer do not provide administrative 
funds; others provide limited administrative funds. Most HFAs operate 
independently and do not receive State operating funds. These agencies 
are generally funded through tax-exempt bonds but may receive funding 
from Federal, State, or other sources.\12\ HFAs issue these tax-exempt 
bonds, also known as mortgage revenue bonds, and use the proceeds of 
the bond sale to finance affordable mortgage loans to LMI consumers. As 
of June 2012, the 51 State HFAs (including the District of Columbia) 
had $107 billion in outstanding tax-free municipal debt available. 
These mortgage revenue bonds funded approximately 100,000 first-time 
homeowners per year. HFAs may also receive funding through Federal 
programs, such as the HOME Program, which is the largest Federal block 
grant for affordable housing.\13\
---------------------------------------------------------------------------

    \10\ The first State housing finance agency was established in 
New York in 1960. See New York State Housing Finance Agency Act, 
1960 Laws of New York, 183rd Session, Chap. 671.
    \11\ For example, the Louisiana Housing Corporation administers 
affordable housing programs across all of Louisiana, while The 
Finance Authority of New Orleans administers programs only in 
Orleans Parish. See www.lhfa.state.la.us and 
www.financeauthority.org.
    \12\ Bonds issued by HFAs are tax-exempt if the proceeds are 
used to provide assistance to first-time or LMI-homebuyers. See 26 
U.S.C. 143.
    \13\ See www.hud.gov/homeprogram.
---------------------------------------------------------------------------

    HFAs employ several methods of promoting affordable homeownership. 
These agencies may partner with local governments to develop and 
implement long-term community-development strategies. For example, HFAs 
may provide tax credits to companies that build or rehabilitate 
affordable housing.\14\ These agencies may also administer affordable 
housing trust funds or other State programs to facilitate the 
affordable housing development.\15\ Many HFAs also provide education, 
counseling, or training courses to first-time or LMI consumers.
---------------------------------------------------------------------------

    \14\ The Tax Reform Act of 1986, Public Law 99-514, 100 Stat. 
2085 (1986), included the Low-Income Housing Tax Credit Program. 
Under this program, the IRS provides tax credits to HFAs. HFAs may 
transfer these tax credits to developers of affordable housing. 
Developers then sell these credits to fund the development program. 
See http://portal.hud.gov/hudportal/HUD?src=/program_offices/comm_planning/affordablehousing/training/web/lihtc/basics.
    \15\ The Massachusetts Affordable Housing Trust Fund provides 
funds to governmental subdivisions, nonprofit organizations, and 
other entities seeking to provide for the development of affordable 
housing. See www.masshousing.com. New York State's Mitchell-Lama 
program provides subsidies such as property tax exemptions to 
affordable housing developers. See http://www.nyshcr.org/Programs/mitchell-lama/.
---------------------------------------------------------------------------

    HFAs also provide financial assistance directly to consumers. 
Typically, HFAs offer the first-lien mortgage loan, subordinate 
financing, and downpayment assistance programs described above. HFAs 
may also establish pooled loss reserves to self-insure mortgage loans 
originated pursuant to the program, thereby permitting LMI consumers to 
avoid private mortgage insurance. HFAs may also provide other 
assistance to LMI consumers, such as mortgage loan payment subsidies or 
assistance with the up-front costs of a mortgage loan. In 2010, HFAs 
provided about $10 billion in affordable financing.\16\ In 2010, 89 
percent of HFAs provided down payment assistance loan or grant 
assistance and 57 percent of HFAs provided assistance in conjunction 
with programs offered by the Federal Housing Administration (FHA) or 
the U.S. Department of Agriculture (USDA).\17\ However, HFAs generally 
do not provide direct financing to LMI consumers. Many HFAs are 
prohibited by law from directly extending credit in an effort by State 
governments to avoid competing with the private sector. HFAs generally 
partner with creditors, such as local banks, that extend credit 
pursuant to the HFA's program guidelines. Most HFA programs are 
``mortgage purchase'' programs in which the HFA establishes program 
requirements (e.g., income limits, purchase price limits, interest 
rates, points and term limits, underwriting standards, etc.), and 
agrees to purchase loans made by private creditors that meet these 
requirements.
---------------------------------------------------------------------------

    \16\ National Council of State Housing Agencies, State HFA 
Factbook (2010), p. 33.
    \17\ Id. at 21-22, 35-36.
---------------------------------------------------------------------------

    Many HFAs expand on the underwriting standards of GSEs or Federal 
government agencies by applying even stricter underwriting standards 
than these guidelines or the ability-to-repay requirements, such as 
requiring mandatory counseling for all first-time homebuyers and strong 
loan servicing. For example, the State of New York Mortgage Agency 
(SONYMA)'s underwriting requirements generally include a two-year, 
stable history of earned income, a monthly payment-to-income ratio not 
to exceed 40 percent, a monthly debt-to-income ratio not to exceed 45 
percent, and review of the consumer's entire credit profile to 
determine acceptable credit.\18\
---------------------------------------------------------------------------

    \18\ See State of New York Mortgage Agency (SONYMA) Credit and 
Property Underwriting Notes, available at: http://www.nyshcr.org/assets/documents/1006.pdf.
---------------------------------------------------------------------------

    HFAs extend credit only after conducting a lengthy and thorough 
analysis of a consumer's ability to repay. HFAs generally employ 
underwriting requirements that are uniquely tailored to meet the needs 
of LMI consumers, and which often account for nontraditional 
underwriting criteria, extenuating circumstances, and other elements 
that are indicative of

[[Page 35433]]

creditworthiness, ability to repay, and responsible homeownership. In 
certain circumstances, some HFAs require the consideration of 
compensating factors and other elements that are different from the 
factors required to be considered and verified under the ability-to-
repay requirements. For example, the Connecticut Housing Finance Agency 
(CHFA)'s underwriting requirements require the consideration of certain 
compensating factors (e.g., ability to make a large down payment, 
demonstrated ability to accumulate savings, substantial documented cash 
reserves, etc.) for consumers with debt ratios that exceed the maximum 
CHFA monthly payment-to-income and debt-to-income ratio limits.\19\ In 
addition, to be eligible for Virginia Housing Development Authority 
(VHDA) conventional financing, a consumer must demonstrate the 
willingness and ability to repay the mortgage debt and creditors must 
consider: Employment and income; credit history; sufficient funds to 
close; monthly housing expenses; and monthly payment-to-income and 
debt-to-income ratios.\20\ VHDA underwriting guidelines allow delegated 
underwriters to approve exceptions to the above debt-to-income ratios, 
provided that the ratios do not exceed 2 percent above the guidelines. 
The exceptions must be justified with strong compensating factors, 
which must indicate that the consumer can afford the repayment of the 
increased debt.\21\ Through careful and regular oversight, however, 
HFAs help ensure that their lenders follow the HFAs' strict 
underwriting standards.
---------------------------------------------------------------------------

    \19\ See Connecticut Housing Finance Agency Operating Manual, 
Section 5--Underwriting, available at: http://www.chfa.org/content/CHFA%20Documents/Operating%20Manual%20-%20Section%2005%20Underwriting.pdf.
    \20\ See Virginia Housing Development Authority Origination 
Guide, Section 2.3 Underwriting Requirements (Aug. 2011), available 
at: http://www.vhda.com/BusinessPartners/Lenders/LoanInfoGuides/Loan%20Information%20and%20Guidelines/OriginationGuide.pdf.
    \21\ See id.
---------------------------------------------------------------------------

    Private organizations. While entities such as HFAs develop and 
finance affordable housing programs, these mortgage loans are generally 
extended by private organizations. These organizations often are 
structured as nonprofit 501(c)(3) organizations. Under Internal Revenue 
Code section 501(c)(3), the designation is for nonprofit, tax-exempt, 
charitable organizations not operated for the benefit of private 
interests.\22\ Under Federal tax law, 501(c)(3) organizations are 
restricted from lobbying activities, while 501(c)(4) organizations, 
which must exist to promote social welfare, may engage in political 
campaigning and lobbying.\23\ Most organizations that provide support 
to LMI consumers are structured as 501(c)(3) organizations. However, 
some organizations are structured as nonprofit 501(c)(4) organizations.
---------------------------------------------------------------------------

    \22\ See http://www.irs.gov/Charities-&-Non-Profits/Charitable-Organizations/Exemption-Requirements-Section-501(c)(3)-
Organizations.
    \23\ See http://www.irs.gov/Charities-&-Non-Profits/Other-Non-Profits/Social-Welfare-Organizations.
---------------------------------------------------------------------------

    Various Federal programs establish eligibility requirements and 
provide ongoing monitoring of specific types of creditors that receive 
Federal grants and other support. For example, Community Development 
Financial Institutions (CDFIs) are approved by the U.S. Department of 
the Treasury (Treasury Department) to receive monetary awards from the 
Treasury Department's CDFI Fund, which was established to promote 
capital development and growth in underserved communities. Promoting 
homeownership and providing safe lending alternatives are among the 
Fund's main goals. The Treasury Department created the CDFI designation 
to identify and support small-scale creditors that are committed to 
community-focused lending but have difficulty raising the capital 
needed to provide affordable housing services.\24\ CDFIs may operate on 
a for-profit or nonprofit basis, provided the CDFI has a primary 
mission of promoting community development.\25\ These programs are also 
subject to other eligibility requirements.\26\ As of July 2012, there 
were 999 such organizations in the U.S., 62 percent of which were 
classified as Community Development (CD) Loan Funds and 22 percent as 
CD Credit Unions, while the rest were CD Banks, Thrifts, or CD Venture 
Capital Funds.\27\
---------------------------------------------------------------------------

    \24\ See 68 FR 5704 (Feb. 4, 2003).
    \25\ See 12 CFR 1805.201(b).
    \26\ Id. Treasury Department eligibility requirements for CDFIs 
stipulate that an approved organization must: Be a legal entity at 
the time of certification application; have a primary mission of 
promoting community development; be a financing entity; primarily 
serve one or more target markets; provide development services in 
conjunction with its financing activities; maintain accountability 
to its defined target market; and be a non-government entity and not 
be under control of any government entity (Tribal governments 
excluded).
    \27\ See http://www.cdfifund.gov/docs/certification/cdfi/CDFI 
List-07-31-12.xls.
---------------------------------------------------------------------------

    The U.S. Department of Housing and Urban Development (HUD) may 
designate nonprofits engaging in affordable housing activities as 
Downpayment Assistance through Secondary Financing Providers 
(DAPs).\28\ HUD established this designation as part of an effort to 
promote nonprofit involvement in affordable housing programs.\29\ HUD-
approved nonprofits may participate in FHA single-family programs that 
allow them to purchase homes at a discount, finance FHA-insured 
mortgages with the same terms and conditions as owner-occupants, or be 
able to finance secondary loans for consumers obtaining FHA-insured 
mortgages.\30\ A DAP must be approved by HUD if it is a nonprofit or 
nonprofit instrumentality of government that provides downpayment 
assistance as a lien in conjunction with an FHA first mortgage; 
government entity DAPs and gift programs do not require approval.\31\ 
As of May 2013 HUD listed 228 nonprofit agencies and nonprofit 
instrumentalities of government in the U.S. that are authorized to 
provide secondary financing.\32\ HUD performs field reviews and 
requires annual reports of participating nonprofit agencies. 
Additionally, HUD's quality control plan requires periodic review for 
deficient policies and procedures and corrective actions. These 
approval and subsequent review procedures are intended to ensure that 
DAPs operate in compliance with HUD requirements and remain financially 
viable.\33\ However, HUD recognizes that these nonprofits have limited 
resources and gives consideration to DAP viability when crafting 
regulations.\34\
---------------------------------------------------------------------------

    \28\ See 24 CFR 200.194.
    \29\ ``Nonprofit organizations are important participants in 
HUD's efforts to further affordable housing opportunities for low- 
and moderate-income persons through the FHA single family programs. 
FHA's single family regulations recognize a special role for 
nonprofit organizations in conjunction with the . . . provision of 
secondary financing.'' See 67 FR 39238 (June 6, 2002).
    \30\ DAPs generally rely on FHA program guidelines for 
underwriting purposes, but have additional requirements for 
determining eligibility for assistance. For example, the Hawaii 
Homeownership Center is a HUD-approved DAP with separate eligibility 
criteria, available at: http://www.hihomeownership.org/pdf/DPAL5_FAQ_JAN2013.pdf.
    \31\ See http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/np/sfhdap01.
    \32\ See https://entp.hud.gov/idapp/html/f17npdata.cfm.
    \33\ ``It is vital that the Department periodically and 
uniformly assess the management and financial ability of 
participating nonprofit agencies to ensure they are not 
overextending their capabilities and increasing HUD's risk of loss 
as a mortgage insurance provider.'' 65 FR 9285, 9286 (Feb. 24, 
2000).
    \34\ ``HUD continues to strongly encourage the participation of 
nonprofit organizations, including community and faith-based 
organizations, in its programs. This proposed rule is not designed 
to place particular burdens on participation by nonprofit 
organizations. Rather, the proposed rule is designed to ensure that 
nonprofit organizations have the capacity, experience, and interest 
to participate in HUD's housing programs.'' 69 FR 7324, 7325 (Feb. 
13, 2004).
---------------------------------------------------------------------------

    Creditors may also be certified by HUD as Community Housing

[[Page 35434]]

Development Organizations (CHDOs) in connection with HUD's HOME 
Program, which provides grants to fund a wide range of activities that 
promote affordable homeownership.\35\ HUD Participating Jurisdictions 
confer CHDO certification only on community-focused nonprofits that are 
both dedicated to furthering a community's affordable housing goals and 
capable of complying with the requirements of the HOME Program.\36\ 
Creditors designated as CHDOs are eligible to receive special CHDO set-
aside funds from the HOME Program to fund local homebuyer assistance 
programs.\37\ Applicants seeking CHDO status must meet rigorous 
requirements. For example, a CHDO must be designated as a nonprofit 
under section 501(c)(3) or (c)(4) of the Internal Revenue Code, adhere 
to strict standards of financial accountability, have among its 
purposes the provision of decent and affordable housing for LMI 
consumers, maintain accountability to the community, and have a proven 
record of capably and effectively serving low-income communities.\38\ 
After the CHDO designation is obtained, CHDO creditors must operate 
under the supervision of a Participating Jurisdiction and in accordance 
with the requirements of the HOME Program.\39\ HUD conducts annual 
performance reviews to determine whether funds have been used in 
accordance with program requirements.\40\ While HUD continues to 
support affordable housing programs involving CHDOs, current market 
conditions have affected CHDO viability.\41\
---------------------------------------------------------------------------

    \35\ See http://portal.hud.gov/hudportal/HUD?src=/program_offices/comm_planning/affordablehousing/programs/home.
    \36\ ``The Department believes that there was specific statutory 
intent to create an entitlement for community-based nonprofit 
organizations that would own, sponsor or develop HOME assisted 
housing. While partnerships with State and local government are 
critical to the development of affordable housing, these 
organizations are viewed as private, independent organizations 
separate and apart from State or local governments. One of the major 
objectives of the Department's technical assistance program is to 
increase the number of capable, successful CHDOs able and willing to 
use the CHDO set-aside [fund].'' 61 FR 48736, 48737 (Sept. 16, 
1996).
    \37\ See 24 CFR 92.300 through 92.303.
    \38\ See 24 CFR 92.2.
    \39\ For example, no more than 5 percent of a Participating 
Jurisdiction's fiscal year HOME allocation may be used for CHDO 
operating expenses. 24 CFR 92.208(a).
    \40\ See 24 CFR 92.550 through 92.552.
    \41\ ``[Participating jurisdictions] have encountered new 
challenges in administering their programs and in managing their 
growing portfolios of older HOME projects. These challenges include 
reduced availability of states or local funding sources, reduced 
private lending, changes in housing property standards, and energy 
codes and reductions in states and local government workforces 
throughout the Nation. These challenges have been magnified by 
current housing and credit market conditions.'' 76 FR 78343, 78345 
(Dec. 16, 2011).
---------------------------------------------------------------------------

    CDFIs and CHDOs that provide mortgage loans generally employ 
underwriting guidelines tailored to the needs of LMI consumers. Unlike 
creditors that rely on industry-wide underwriting guidelines, which 
generally do not account for the unique credit characteristics of LMI 
consumers, CDFI and CHDO underwriting requirements include a variety of 
compensating factors. For example, these creditors often consider 
personal narratives explaining prior financial difficulties, such as 
gaps in employment or negative credit history.\42\ Others consider the 
amount of time a consumer spends working on the construction or 
rehabilitation of affordable homes.\43\ Some creditors also consider a 
consumer's general reputation, relying on references from a landlord or 
persons with whom the consumer does business.\44\ In these 
transactions, a CDFI or CHDO may determine that the strength of these 
compensating characteristics outweigh weaknesses in other underwriting 
factors, such as negative credit history or irregular income. Including 
these compensating factors in the underwriting process enables CDFIs 
and CHDOs to more appropriately underwrite LMI consumers.
---------------------------------------------------------------------------

    \42\ Neighborworks Anchorage, which is designated as both a CDFI 
and CHDO, requires letters of explanation regarding gaps in 
employment or derogatory credit history. See http://www.nwanchorage.org/home-ownership/buying-home/getting-loan-affordable-loans-lending-programs.
    \43\ The Community Development Corporation of Brownsville, which 
is designated as a CHDO, requires consumers to contribute 11 months 
of labor, or ``sweat equity,'' as part of the approval process. See 
http://www.cdcb.org/h-h-programs.html#programs2. St. Lucie Habitat 
for Humanity, which is designated as a CHDO, requires 300 hours of 
labor as part of the approval process. See http://stluciehabitat.org/#.
    \44\ Habitat for Humanity affiliates, many of which are 
designated as a CHDO or CDFI, consider references from current and 
former landlords, creditors, and others. See Habitat for Humanity 
Affiliate Operations Manual, available at: http://www.medinahabitat.org/files/AffilOpFamilySelect.pdf.
---------------------------------------------------------------------------

    Nonprofit creditors may engage in community-focused lending without 
obtaining one of the designations described above. Such nonprofits 
often rely on HFA or Federal programs for funding, lending guidelines, 
and other support. However, some nonprofits offer credit to LMI 
consumers independent of these State or Federal programs. For example, 
nonprofits may make mortgage loans in connection with a GSE affordable 
housing program. The Federal Home Loan Bank (FHLB) System, Federal 
National Mortgage Association (Fannie Mae), and Federal Home Loan 
Mortgage Corporation (Freddie Mac) offer several programs to support 
affordable housing by facilitating mortgage financing for LMI 
consumers. For example, the FHLB Affordable Housing Program provides 
grants to member banks to fund programs that assist with closing costs 
or down payments, buy down principal amounts or interest rates, 
refinance an existing loan, or assist with rehabilitation or 
construction costs.\45\ Fannie Mae and Freddie Mac also offer two 
programs focused on community-focused lending.\46\
---------------------------------------------------------------------------

    \45\ The Federal Home Loan Bank of Des Moines provides funds for 
member bank programs related to rural homeownership, urban first-
time homebuyers, and Native American homeownership. See http://www.fhlbdm.com/community-investment/down-payment-assistance-programs/. The Federal Home Loan Bank of Chicago provides funds for 
member bank programs related to down payment and closing cost 
assistance or eligible rehabilitation costs for the purchase of a 
home. See http://ci.fhlbc.com/Grant_Pgms/DPP.shtml.
    \46\ Fannie Mae offers first-lien mortgage loans through the My 
Community Mortgage program and subordinate-lien loans through the 
Community Seconds program. Freddie Mac offers both first- and 
subordinate-lien mortgage loans through the Home Possible program.
---------------------------------------------------------------------------

    Other options exist for nonprofits seeking to develop and fund 
community-focused lending programs. For example, a nonprofit may 
originate mortgage loans to LMI consumers and subsequently sell the 
loans to a bank, credit union, or other investor as part of a Community 
Reinvestment Act partnership program.\47\ Other nonprofits may operate 
a limited affordable housing assistance fund, funded entirely by 
private donations, under which LMI consumers may obtain subordinate 
financing. Nonprofits such as these often rely on the underwriting 
performed by the creditor for the first-lien mortgage loan, which is 
often a bank or credit union, to process, underwrite, and approve the 
LMI consumer's application. In addition, some nonprofits are self-
supporting and offer full financing to LMI consumers. These nonprofits 
often establish lending programs with unique guidelines, such as 
requirements that LMI consumers devote a minimum number of hours 
towards the construction of affordable housing.
---------------------------------------------------------------------------

    \47\ Under the Community Reinvestment Act (12 U.S.C. 2901), 
depository institutions may meet community reinvestment goals by 
directly originating or purchasing mortgage loans provided to LMI 
consumers. See 12 CFR 228.22.
---------------------------------------------------------------------------

Homeownership Stabilization and Foreclosure Prevention Programs

    During the early stages of the financial crisis the mortgage market 
significantly

[[Page 35435]]

tightened mortgage loan underwriting requirements in response to 
uncertainty over the magnitude of potential losses due to 
delinquencies, defaults, and foreclosures.\48\ This restriction in 
credit availability coincided with increasing unemployment, falling 
home values, and the onset of subprime ARM resets. As a result, many 
subprime ARM consumers could not afford their mortgage payments and 
were not able to obtain refinancings. This led to increases in 
delinquencies and foreclosures, which prompted further tightening of 
underwriting standards. Other subprime ARM consumers were able to 
remain current, but were not able to refinance because of a decrease in 
their loan-to-value ratio or an increase in their debt-to-income 
ratio.\49\ However, these consumers devoted most of their disposable 
income to mortgage payments, thereby lowering overall consumer demand 
and further weakening the national economy.\50\
---------------------------------------------------------------------------

    \48\ A 2011 OCC survey shows that 56 percent of supervised banks 
participating in the survey tightened residential real estate 
underwriting requirements between 2007 and 2008, and 73 percent 
tightened underwriting requirements between 2008 and 2009. See 
Office of the Comptroller of the Currency, Survey of Credit 
Underwriting Practices 2011, p. 11.
    \49\ ``[W]ith house prices becoming flat or declining in many 
parts of the country during 2007, it has become increasingly 
difficult for many subprime ARM borrowers to refinance. While many 
such borrowers remain current on their loans or are still able to 
refinance at market rates or into FHA products, an increasing number 
have either fallen behind on their existing payments or face the 
prospect of falling behind when rates reset and they are unable to 
refinance.'' Accelerating Loan Modifications, Improving Foreclosure 
Prevention and Enhancing Enforcement, 110th Cong. (Dec. 6, 2007) 
(testimony of John C. Dugan, Comptroller, Office of the Comptroller 
of the Currency).
    \50\ By the third quarter of 2007, the ratio of mortgage-related 
financial obligations (which is comprised of mortgage debt, 
homeowners' insurance, and property tax) to disposable personal 
income reached an all-time high of 11.3 percent. See http://www.federalreserve.gov/releases/housedebt/.
---------------------------------------------------------------------------

    Policymakers became concerned that the losses incurred from 
foreclosures on subprime mortgage loans would destabilize the entire 
mortgage market.\51\ There was a particular concern that the 
uncertainty surrounding exposure to these losses would lead to a fear-
induced downward economic spiral.\52\ As the crisis worsened, industry 
stakeholders attempted to stop this self-reinforcing cycle through a 
series of measures intended to stabilize homeownership and prevent 
foreclosure. Beginning in late 2008, the Federal government, Federal 
agencies, and GSEs implemented programs designed to facilitate 
refinancings and loan modifications.
---------------------------------------------------------------------------

    \51\ ``[A]nalysts are concerned that mortgage foreclosures will 
climb significantly higher and, along with falling housing prices, 
overwhelm the ability of mortgage markets to restructure or 
refinance loans for creditworthy borrowers.'' Congressional Budget 
Office, Options for Responding to Short-Term Economic Weakness, p. 
21 (Jan. 2008).
    \52\ ``[A] breakdown of mortgage markets could put the economy 
on a self-reinforcing downward spiral of less lending, weaker 
economic activity, lower house prices, more foreclosures, even less 
lending, and so on, either causing or significantly worsening a 
recession.'' Id. pp. 21-22.
---------------------------------------------------------------------------

    The Troubled Asset Relief Program. The U.S. government enacted and 
implemented several programs intended to promote economic recovery by 
stabilizing homeownership and preventing foreclosure. The Emergency 
Economic Stabilization Act of 2008,\53\ as amended by the American 
Recovery and Reinvestment Act of 2009,\54\ authorizes the Treasury 
Department to ``use loan guarantees and credit enhancements to 
facilitate loan modifications to prevent avoidable foreclosures.'' \55\ 
Pursuant to this authority, the Treasury Department established the 
Troubled Asset Relief Program (TARP), under which two programs were 
created to provide financial assistance directly to homeowners in 
danger of losing their homes: the Making Home Affordable (MHA) program 
and the Hardest Hit Fund (HHF) program. The MHA program is operated by 
the Treasury Department and seeks to provide Federally-directed 
assistance to consumers who are at risk of default, foreclosure, or 
were otherwise harmed by the financial crisis.\56\ The HHF program 
provides funds to certain HFAs in States where the Treasury Department 
has determined that locally-directed stabilization programs are 
required.\57\
---------------------------------------------------------------------------

    \53\ 12 U.S.C. 5201 et. seq.; Public Law 110-343 (Oct. 3, 2008).
    \54\ See Sec. 7002 of Public Law 111-5 (Jan. 6, 2009).
    \55\ 12 U.S.C. 5219(a)(1).
    \56\ See www.makinghomeaffordable.gov.
    \57\ See http://www.treasury.gov/initiatives/financial-stability/TARP-Programs/housing/hhf/Pages/default.aspx.
---------------------------------------------------------------------------

    MHA began with the introduction of the Home Affordable Modification 
Program (HAMP) in March 2009.\58\ HAMP is intended to assist employed 
homeowners by replacing the consumer's current mortgage loan with a 
more affordable mortgage loan.\59\ HAMP produced nearly 500,000 trial 
modifications during the first six months of the program.\60\ MHA 
offerings expanded with the creation of the Second Lien Modification 
Program in August 2009 and the Home Affordable Foreclosure Alternatives 
Program in November 2009.\61\ The Treasury Department subsequently 
modified these programs several times in response to the changing needs 
of distressed consumers and the mortgage market.\62\
---------------------------------------------------------------------------

    \58\ See Press Release, Treasury Department, Relief for 
Responsible Homeowners (Mar. 4, 2009), available at: http://www.treasury.gov/press-center/press-releases/Pages/200934145912322.aspx.
    \59\ Generally speaking, a loan can be modified under HAMP only 
if it yields a positive net present value using series of tests 
involving ``waterfalls.'' Under the waterfall method, servicers must 
repeatedly project amortizations based on sequential decreases in 
the interest rate and, if necessary, principal forgiveness, until 
arriving at a potential loan modification with a target front-end 
DTI ratio of 31 percent. See United States Department of the 
Treasury, ``Home Affordable Modification Program, Base Net Present 
Value (NPV) Model v5.02, Model Documentation'' (April 1, 2012), 
available at: https://www.hmpadmin.com/portal/programs/docs/hamp_servicer/npvmodeldocumentationv502.pdf. See also Consumer Compliance 
Outlook, Federal Reserve Bank of Philadelphia (Third Quarter 2009), 
available at: http://www.philadelphiafed.org/bank-resources/publications/consumer-compliance-outlook/2009/third-quarter/q3_02.cfm.
    \60\ See Troubled Asset Relief Program (TARP) Monthly Report to 
Congress--September 2009.
    \61\ See United States Department of the Treasury Office of 
Financial Stability, ``Troubled Asset Relief Program: Two Year 
Retrospective'' (Oct. 2010).
    \62\ See e.g., Supplemental Directive 10-02 (Mar. 24, 2010), 
modifying HAMP, Supplemental Directive 11-07 (July 25, 2011), 
expanding eligibility for the Home Affordable Unemployment Program, 
and Supplemental Directive 12-02 (Mar. 9, 2012), expanding HAMP 
eligibility.
---------------------------------------------------------------------------

    MHA programs are currently scheduled to expire on December 31, 
2013, although there is continuing debate about whether to extend 
them.\63\ As of December 2012, ten programs have been established under 
MHA. The Treasury Department operates five MHA programs.\64\ The 
remaining five MHA programs are operated in conjunction with U.S. 
Department of Veterans Affairs (VA), FHA, or USDA programs.\65\ Many 
consumers facing default or foreclosure have received assistance under 
these programs. For example, from the beginning of the HAMP program to 
March 2013, over 1.1 million permanent HAMP modifications have been 
completed, saving distressed consumers an estimated $19.1 billion.\66\
---------------------------------------------------------------------------

    \63\ Press Release, Treasury Department, Expanding our Efforts 
to Help More Homeowners and Strengthen Hard-hit Communities (Jan. 
27, 2012), available at: http://www.treasury.gov/connect/blog/Pages/Expanding-our-efforts-to-help-more-homeowners-and-strengthen-hard-hit-communities.aspx.
    \64\ In addition to HAMP, the Second Lien Modification Program, 
and the Home Affordable Foreclosure Alternatives Program, the 
Treasury Department also operates the Principal Reduction 
Alternative Program and the Home Affordable Unemployment Program.
    \65\ These programs are the FHA Home Affordable Modification 
Program, USDA Special Loan Servicing, Veterans Affairs Home 
Affordable Modification, FHA Second Lien Modification Program, and 
the FHA Short Refinance Program.
    \66\ See March 2013 Making Home Affordable Program Performance 
Report.

---------------------------------------------------------------------------

[[Page 35436]]

    In March 2010 the Treasury Department established the HHF program 
to enable the States most affected by the financial crisis to develop 
innovative assistance programs.\67\ Nineteen programs have been 
established under the HHF fund, which is currently scheduled to expire 
on December 31, 2017. These programs provide assistance to homeowners 
in the District of Columbia and the 18 States most affected by the 
economic crisis.\68\ The HHF provides funds directly to HFAs in these 
States, which are used to create foreclosure-avoidance programs. As of 
April 2013, approximately $2.2 billion has been allocated to support 
the 63 programs established to assist distressed consumers in these 
localities.\69\ In California alone, nearly 17,000 consumers have 
received over $166 million in assistance since the beginning of the 
program.\70\
---------------------------------------------------------------------------

    \67\ See Hardest Hit Fund Program Guidelines Round 1, available 
at: http://www.treasury.gov/initiatives/financial-stability/TARP-
Programs/housing/Documents/HFA_Proposal_Guidelines__-1st_
Rd.pdf.
    \68\ The HHF provides funds to HFAs located in Alabama, Arizona, 
California, Florida, Georgia, Illinois, Indiana, Kentucky, Michigan, 
Mississippi, Nevada, New Jersey, North Carolina, Ohio, Oregon, Rhode 
Island, South Carolina, Tennessee, and Washington, DC
    \69\ See Troubled Asset Relief Program (TARP) Monthly Report to 
Congress--April 2013.
    \70\ See Keep Your Home California 2012 Fourth Quarterly Report.
---------------------------------------------------------------------------

    As with the MHA programs discussed above, these HHF programs have 
evolved over time. The Treasury Department originally encouraged HFAs 
to establish programs for mortgage modifications, principal 
forbearance, short sales, principal reduction for consumers with high 
loan-to-value ratios, unemployment assistance, and second-lien mortgage 
loan reduction or modification.\71\ No HFAs were able to establish all 
of these programs in the early stages of the HHF. However, through 2011 
and 2012 State HHF programs were significantly modified and 
expanded.\72\ The 19 HFAs continue to modify these programs to develop 
more effective and efficient methods of providing assistance to at-risk 
consumers. For example, in September 2012 the Nevada HHF program was 
amended for the tenth time.\73\
---------------------------------------------------------------------------

    \71\ See Hardest Hit Fund Program Guidelines Round 1, available 
at: http://www.treasury.gov/initiatives/financial-stability/TARP-
Programs/housing/Documents/HFA_Proposal_Guidelines__-1st_
Rd.pdf.
    \72\ From 2011-2012, the program agreements between the 19 HFAs 
and the Treasury Department were modified 55 times. See http://www.treasury.gov/initiatives/financial-stability/TARP-Programs/housing/hhf/Pages/Archival-information.aspx.
    \73\ See Tenth Amendment to Commitment to Purchase Financial 
Instrument and HFA Participation Agreement, available at: http://www.treasury.gov/initiatives/financial-stability/TARP-Programs/housing/Pages/Program-Documents.aspx.
---------------------------------------------------------------------------

    Federal agency programs. In response to the financial crisis, the 
FHA, the VA, and the USDA expanded existing programs and implemented 
new programs intended to facilitate refinancings for consumers at risk 
of delinquency or default. Some of these programs operate in 
conjunction with the Treasury Department's MHA program, while others 
are run solely by the particular Federal agency. In 2008 Congress 
expanded access to refinancings under the VA's Interest Rate Reduction 
Refinancing Loan program by raising the maximum loan-to-value ratio to 
100 percent and increasing the maximum loan amount of loans eligible to 
be guaranteed under the program.\74\ In February 2009 HUD increased the 
maximum loan amount for FHA-insured mortgages.\75\ This change expanded 
access to refinancings available under the FHA's Streamline Refinance 
Program.\76\ Several months later, the FHA created the Short Refinance 
Option program to assist consumers with non-FHA mortgage loans.\77\ 
This program, which operates in conjunction with TARP, permits 
underwater consumers to refinance if the current creditor agrees to 
write down 10 percent of the outstanding principal balance. Similarly, 
in August 2010 the Rural Housing Service of the USDA (RHS) adopted 
rules intended to facilitate loan modifications for consumers 
struggling to make payments on USDA Guaranteed Loans.\78\ The USDA 
subsequently created the Single Family Housing Guaranteed Rural 
Refinance Pilot Program, which was intended to refinance USDA borrowers 
into more stable and affordable mortgage loans.\79\
---------------------------------------------------------------------------

    \74\ See Sec. 504 of the Veterans' Benefits Improvement Act of 
2008, Public Law 110-389 (Oct. 10, 2008).
    \75\ See HUD Mortgagee Letter 2009-07. Section 1202(b) of the 
American Recovery and Reinvestment Act of 2009, Public Law 111-5 
(Jan. 6, 2009), authorized the Secretary of Housing and Urban 
Development to increase the loan limit.
    \76\ The FHA Streamline Refinance Program contains reduced 
underwriting requirements for consumers with FHA mortgage loans 
seeking to refinance into a new FHA mortgage loan with a reduced 
interest rate. The FHA has offered streamline refinances for over 
thirty years. See HUD Mortgagee Letter 1982-23.
    \77\ See HUD Mortgagee Letter 2010-23.
    \78\ See 75 FR 52429 (Aug. 26, 2010).
    \79\ See Rural Dev. Admin. Notice No. 4615 (1980-D) (Feb. 1, 
2012).
---------------------------------------------------------------------------

    These efforts have enabled many consumers to receive refinancings 
under these programs. In 2011, the FHA accounted for 5.6 percent of the 
mortgage refinance market, with originations totaling $59 billion.\80\ 
However, the number of consumers receiving assistance under these 
programs varies. For example, between April 2009 and December 2011, the 
FHA started 5.6 million mortgage loan modifications.\81\ During a 
similar time period, nearly 997,000 FHA Streamline Refinances were 
consummated.\82\ In contrast, between February 2010 and September 2012, 
only 1,772 mortgage loans were refinanced under the Short Refinance 
Option program.\83\ Efforts continue to develop and enhance these 
programs to assist distressed homeowners while improving the 
performance of existing mortgage loans owned, insured, or guaranteed by 
these agencies.
---------------------------------------------------------------------------

    \80\ This number represents FHA's market share by dollar volume. 
By number of originations, the FHA controlled 6.5 percent of the 
refinance market, with 312,385 refinances originated. See FHA-
Insured Single-Family Mortgage Originations and Market Share Report 
2012--Q2, available at: http://portal.hud.gov/hudportal/documents/huddoc?id=fhamktq2_2012.pdf.
    \81\ See Hearing on FY13 Federal Housing Administration's Budget 
Request, 112th Cong. (Mar. 8, 2012) (testimony of Carol Galante, 
Acting Assistant Secretary for Housing/Federal Housing 
Administration Commissioner for the U.S. Department of Housing and 
Urban Development).
    \82\ A total of 996,871 mortgage loans were endorsed under the 
FHA Streamline Refinance program from Fiscal Year 2009 through 2012. 
See FHA Outlook Reports for Fiscal Years 2009, 2010, 2011, and 2012, 
available at: http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/rmra/oe/rpts/ooe/olmenu.
    \83\ See Office of the Special Inspector General for the 
Troubled Asset Relief Program, Quarterly Report to Congress, p. 64 
(Oct. 25, 2012).
---------------------------------------------------------------------------

    HARP and other GSE refinancing programs. After the GSEs were placed 
into conservatorship in late 2008, the Federal Housing Finance Agency 
(FHFA) took immediate steps to reduce GSE losses by mitigating 
foreclosures.\84\ In November 2008 FHFA and the GSEs, in coordination 
with the Treasury Department and other stakeholders, announced the 
Streamlined Modification Program, which was intended to help delinquent 
consumers avoid foreclosure by affordably restructuring mortgage 
payments.\85\ This program was the precursor to the Home Affordable 
Refinance Program (HARP)

[[Page 35437]]

that was announced in March 2009.\86\ The HARP program was originally 
set to expire in June 2010 and limited to consumers with a loan-to-
value ratio that did not exceed 105 percent. However, HARP was modified 
over time to account for the deteriorating mortgage market. In July 
2010 the maximum loan-to-value ratio was increased from 105 percent to 
125 percent.\87\ Nine months later FHFA extended the HARP expiration 
date by one year, to June 30, 2011.\88\
---------------------------------------------------------------------------

    \84\ See Press Release, FHFA, Statement of FHFA Director James 
B. Lockhart (Sept. 7, 2008), available at: http://www.fhfa.gov/webfiles/23/FHFAStatement9708final.pdf.
    \85\ See Press Release, FHFA, FHFA Announces Implementation 
Plans for Streamlined Loan Modification Program, (Dec. 18, 2008), 
available at: http://www.fhfa.gov/webfiles/267/SMPimplementation121808.pdf.
    \86\ See Press Release, Treasury Department, Relief for 
Responsible Homeowners (Mar. 4, 2009), available at: http://www.treasury.gov/press-center/press-releases/Pages/200934145912322.aspx.
    \87\ See Press Release, FHFA, FHFA Authorized Fannie Mae and 
Freddie Mac to Expand Home Affordable Refinance Program to 125 
Percent Loan-to-Value (July 1, 2009), available at: http://www.fhfa.gov/webfiles/13495/125_LTV_release_and_fact_sheet_7_01_09%5B1%5D.pdf.
    \88\ See Press Release, FHFA, FHFA Extends Refinance Program By 
One Year (Mar. 1, 2010), available at: http://www.fhfa.gov/webfiles/15466/HARPEXTENDED3110%5B1%5D.pdf.
---------------------------------------------------------------------------

    Many of the nearly five million eligible consumers were expected to 
receive refinancings under HARP.\89\ However, by mid-2011 fewer than 
one million consumers had received HARP refinances. Fannie Mae, Freddie 
Mac, and FHFA responded by significantly altering the HARP program.\90\ 
Perhaps most significantly, the maximum loan-to-value ratio was 
removed, facilitating refinances for all underwater consumers who 
otherwise fit HARP's criteria. More HARP refinances were completed 
during the first six months of 2012 than in all of 2011.\91\ These 
changes were especially effective in assisting consumers with high 
loan-to-value ratios. In September 2012, consumers with loan-to-value 
ratios in excess of 125 percent received 26 percent of all HARP 
refinances.\92\
---------------------------------------------------------------------------

    \89\ See Treasury Department Press Release supra note 94.
    \90\ See Press Release, FHFA, FHFA, Fannie Mae and Freddie Mac 
Announce HARP Changes to Reach More Borrowers (Oct. 24, 2011), 
available at: http://www.fhfa.gov/webfiles/22721/HARP_release_102411_Final.pdf.
    \91\ See Federal Housing Finance Agency Refinance Report (June 
2012).
    \92\ See Federal Housing Finance Agency Refinance Report (Sept. 
2012).
---------------------------------------------------------------------------

    The GSEs have implemented other streamline refinance programs 
intended to facilitate the refinancing of existing GSE consumers into 
more affordable mortgage loans. These programs are available for 
consumers who are not eligible for a refinancing under HARP. For 
example, a consumer with a loan-to-value ratio of less than 80 percent 
is eligible for a streamline refinancing through Fannie Mae's Refi Plus 
program or Freddie Mac's Relief Refinance program. These programs 
comprise a significant share of GSE refinancing activity. From January 
through September 2012, 45 percent of GSE streamline refinances were 
non-HARP refinances.\93\ FHFA and the GSEs remain committed to continue 
modifying these programs to enhance access to refinancing credit for 
distressed consumers.\94\ In April 2013, FHFA extended the HARP 
expiration date to December 31, 2015.\95\
---------------------------------------------------------------------------

    \93\ Id.
    \94\ ``Today, we continue to meet with lenders to ensure HARP is 
helping underwater borrowers refinance at today's historical low 
interest rates. As we continue to gain insight from the program we 
will make additional operational adjustments as needed to enhance 
access to this program.'' Edward J. DeMarco, Acting Director Federal 
Housing Finance Agency, Remarks at the American Mortgage Conference 
(Sept. 10, 2012), available at: http://www.fhfa.gov/webfiles/24365/2012DeMarcoNCSpeechFinal.pdf.
    \95\ See Press Release, FHFA, FHFA Extends HARP to 2015 (Apr. 
11, 2013), available at: http://www.fhfa.gov/webfiles/22721/HARP_release_102411_Final.pdf.
---------------------------------------------------------------------------

The Mortgage Loan Market for Small Portfolio Creditors

    Traditionally, underwriting standards were determined at the branch 
or local bank level. These practices heavily emphasized the 
relationship between the bank and the consumer.\96\ Starting in the 
mid-1990s, much of the mortgage market began to move toward 
standardized underwriting practices based on quantifiable and 
verifiable data points, such as a consumer's credit score.\97\ The 
shift toward standardized, electronic underwriting lowered costs for 
creditors and consumers, thereby increasing access to mortgage credit. 
Standardized loan-level data made it easier to analyze individual loans 
for compliance with underwriting requirements, which facilitated the 
expansion of private mortgage securitizations. This shift from 
portfolio-focused to securitization-focused mortgage lending also 
altered the traditional risk calculations undertaken by creditors, as 
creditors no longer retained the risks associated with poorly 
underwritten loans.\98\ Additionally, in another departure from the 
traditional mortgage lending model, these creditors increasingly relied 
on the fees earned by originating and selling mortgage loans, as 
opposed to the interest revenue derived from the loan itself.
---------------------------------------------------------------------------

    \96\ ``[C]ommunity banks tend to base credit decisions on local 
knowledge and nonstandard data obtained through long-term 
relationships and are less likely to rely on the models-based 
underwriting used by larger banks.'' Federal Deposit Insurance 
Corporation, FDIC Community Banking Study, p. 1-1 (Dec. 2012) (FDIC 
Community Banking Study).
    \97\ See FCIC Report at 72.
    \98\ See FCIC Report at 89.
---------------------------------------------------------------------------

    Small community creditor access to the secondary mortgage market 
was limited. Many small creditors originated ``non-conforming'' loans 
which could not be purchased by the GSEs. Also, many community 
creditors chose to retain the relationship model of underwriting, 
rather than fully adopting standardized data models popular with larger 
banks. Retaining these traditional business methods had important 
consequences during the subprime crisis. While large lending 
institutions generally depended on the secondary market for funding, 
small community banks and credit unions generally remained reliant on 
deposits to fund mortgage loans held in portfolio. As a result, 
community creditors were less affected by the contraction in the 
secondary mortgage market during the financial crisis.\99\ For example, 
the percentage of mortgage-backed securities in relation to the total 
assets of credit unions actually declined by more than 1.5 percent as 
subprime lending expanded.\100\
---------------------------------------------------------------------------

    \99\ Between 2005 and 2008, while loan originations at banks 
with assets in excess of $10 billion fell by 51 percent, loan 
originations at banks with assets between $1 and $10 billion 
declined by 31 percent, and loan originations at banks with less 
than $1 billion in assets declined by only 10 percent. See Federal 
Reserve Bank of Kansas City, Financial Industry Perspectives (Dec. 
2009).
    \100\ In December 2003, the ratio of mortgage-backed securities 
to total assets at credit unions was 4.67 percent. By December 2006, 
this ratio had decreased to 3.21 percent. See Accelerating Loan 
Modifications, Improving Foreclosure Prevention and Enhancing 
Enforcement, 110th Cong. (Dec. 6, 2007) (testimony of Gigi Hyland, 
Board Member of the National Credit Union Administration).
---------------------------------------------------------------------------

    Furthermore, by retaining mortgage loans in portfolio community 
creditors also retain the risk of delinquency or default on those 
loans. The presence of portfolio lending within this market remains an 
important influence on the underwriting practices of community banks 
and credit unions. These institutions generally rely on long-term 
relationships with a small group of consumers. Therefore, the 
reputation of these community banks and credit unions is largely 
dependent on serving their community in ways that cause no harm. Thus, 
community creditors have an added incentive to engage in thorough 
underwriting to protect their balance sheet as well as their 
reputation. To minimize portfolio performance risk, small community 
creditors have developed underwriting standards that are different than 
those employed by larger institutions. Small creditors generally engage 
in ``relationship banking,'' in which underwriting decisions rely on 
qualitative

[[Page 35438]]

information gained from personal relationships between creditors and 
consumers.\101\ This qualitative information, often referred to as 
``soft'' information, focuses on subjective factors such as consumer 
character and reliability, which ``may be difficult to quantify, 
verify, and communicate through the normal transmission channels of a 
banking organisation.'' \102\ Evidence suggests that underwriting based 
on such ``soft'' information yields loan portfolios that perform better 
than those underwritten according to ``hard'' information, such as 
credit score and consumer income levels.\103\ For example, one recent 
study found that delinquency and default rates were significantly lower 
for consumers receiving mortgage loans from institutions relying on 
soft information for underwriting decisions.\104\ This is consistent 
with market-wide data demonstrating that mortgage loan delinquency and 
charge-off rates are significantly lower at smaller banks than larger 
ones.\105\ Current data also suggests that that these relationship-
based lending practices lead to more accurate underwriting decisions 
during cycles of both lending expansion and contraction.\106\
---------------------------------------------------------------------------

    \101\ ``Many customers . . . value the intimate knowledge their 
banker has of their business and/or total relationship and prefer 
dealing consistently with the same individuals whom they do not have 
to frequently reeducate about their own unique financial and 
business situations. Such customers are consequently willing to pay 
relatively more for such service. Relationship lending thus provides 
a niche for community institutions that many large banks find less 
attractive or are less capable of providing.'' See Federal Reserve 
Bank of Atlanta, On the Uniqueness of Community Banks (Oct. 2005).
    \102\ See Allen N. Berger and Gregory F. Udell, Small Business 
Credit Availability and Relationship Lending: The Importance of Bank 
Organisational Structure, Economic Journal (2002).
    \103\ ``Moreover, a comparison of loss rates on individual loan 
categories suggests that community banks may also do a better job of 
underwriting loans than noncommunity institutions (see Table 4.4).'' 
FDIC Community Banking Study, p. 4-6. See also Sumit Agarwal, Brent 
W. Ambrose, Souphala Chomsisengphet, and Chunlin Liu, The Role of 
Soft Information in a Dynamic Contract Setting: Evidence from the 
Home Equity Market, 43 Journal of Money, Credit and Banking 633, 649 
(Oct. 2011) (analyzing home equity lending, the authors ``find that 
the lender's use of soft information can successfully reduce the 
risks associated with ex post credit losses.'').
    \104\ ``In particular, we find evidence that selection and soft 
information prior to purchase are significantly associated with 
reduced delinquency and default. And, in line with relationship 
lending, we find that this effect is most pronounced for borrowers 
with compromised credit (credit scores below 660), who likely 
benefit the most from soft information in the lending relationship. 
This suggests that for higher risk borrowers, relationship with a 
bank may be about more than the mortgage transaction.'' O. Emre 
Ergungor and Stephanie Moulton, Beyond the Transaction: Depository 
Institutions and Reduced Mortgage Default for Low-Income Homebuyers, 
Federal Reserve Bank of Cleveland Working Paper 11-15 (Aug. 2011).
    \105\ Federal Reserve Board, Charge-Off and Delinquency Rates on 
Loans and Leases at Commercial Banks (Nov. 2012), available at: 
http://www.federalreserve.gov/releases/chargeoff/default.htm. These 
data show that residential real estate charge-offs were higher at 
large banks than small ones for 12 of the previous 87 quarters, 
dating to the start of the small bank survey in 1991. For example, 
in the fourth quarter of 2009 large banks had a 3.16 percent charge-
off rate, while the rate at small banks was 1.2 percent. Delinquency 
rates demonstrate a similar effect.
    \106\ ``In two retail loan categories--residential real estate 
loans and loans to individuals--community banks consistently 
reported lower average loss rates from 1991 through 2011, the period 
for which these data are available.'' FDIC Community Banking Study, 
p. 4-6.
---------------------------------------------------------------------------

    Although the number of community banks has declined in recent 
years, these institutions remain an important source of nonconforming 
credit and of mortgage credit generally in areas commonly considered 
``rural'' or ``underserved.'' The Bureau's estimates based on Home 
Mortgage Disclosure Act (HMDA) and the Consolidated Report of Condition 
and Income (Call Report) data suggest that approximately one half of 
all nonconforming loans are originated by creditors with assets less 
than $2 billion and approximately one quarter are originated by 
creditors with total assets less than $2 billion that originate fewer 
than 500 first-lien mortgages annually. In 2011, community banks held 
over 50 percent of all deposits in micropolitan areas and over 70 
percent of all deposits held in rural areas.\107\ Similarly, in 2011, 
there were more than 600 counties where community banks operated 
offices but where no noncommunity bank offices were present, and more 
than 600 additional counties where community banks operated offices but 
where fewer than three noncommunity bank offices were present.\108\ 
These counties have a combined population of more than 16 million 
people and include both rural and metropolitan areas.\109\ It is 
important to note that the cost of credit offered by these community 
institutions is generally higher than the cost of similar products 
offered by larger institutions. One reason for this increased expense 
stems from the nature of relationship-based underwriting decisions. 
Such qualitative evaluations of creditworthiness tend to take more 
time, and therefore are more expensive, than underwriting decisions 
based on standardized points of data.\110\ Also, the cost of funds for 
community banks tends to be higher than the cost for larger 
institutions.\111\
---------------------------------------------------------------------------

    \107\ FDIC Community Banking Study, p. 3-6.
    \108\ FDIC Community Banking Study, p. 3-5.
    \109\ Id.
    \110\ FCIC Report at 72.
    \111\ FDIC Community Banking Study, p. 4-5; Government 
Accountability Office, Community Banks and Credit Unions: Impact of 
the Dodd-Frank Act Depends Largely on Future Rulemakings, p. 10 
(Sept. 2012) (GAO Community Banks and Credit Unions Report).
---------------------------------------------------------------------------

B. Statutory and Regulatory Background
    For over 20 years, consumer advocates, legislators, and regulators 
have raised concerns about creditors originating mortgage loans without 
regard to the consumer's ability to repay the loan. Beginning in about 
2006, these concerns were heightened as mortgage delinquencies and 
foreclosure rates increased dramatically, caused in part by the gradual 
deterioration in underwriting standards. See 73 FR 44524 (Jul. 30, 
2008). For detailed background information, including a summary of the 
legislative and regulatory responses to this issue, which culminated in 
the enactment of the Dodd-Frank Act on July 21, 2010, the Board of 
Governors of the Federal Reserve System's (the Board) issuance of a 
proposed rule on May 11, 2011 to implement certain amendments to TILA 
made by the Dodd-Frank Act, and the Bureau's issuance of the 2013 ATR 
Final Rule, see the discussion in the 2013 ATR Final Rule. See 78 FR 
6410-6420 (Jan. 30, 2013).

The Bureau's ATR Final Rule

    The Bureau's 2013 ATR Final Rule implemented the ability-to-repay 
requirements under TILA section 129C. Consistent with the statute, the 
Bureau's 2013 ATR Final Rule adopted Sec.  1026.43(a), which applies 
the ability-to-repay requirements to any consumer credit transaction 
secured by a dwelling, except an open-end credit plan, timeshare plan, 
reverse mortgage, or temporary loan.
    As adopted, Sec.  1026.43(c) provides that a creditor is prohibited 
from making a covered mortgage loan unless the creditor makes a 
reasonable and good faith determination, based on verified and 
documented information, that the consumer will have a reasonable 
ability to repay the loan, including any mortgage-related obligations 
(such as property taxes and mortgage insurance). Section 1026.43(c) 
describes certain requirements for making ability-to-repay 
determinations, but does not provide comprehensive underwriting 
standards to which creditors must adhere. At a minimum, however, the 
creditor must consider and verify eight underwriting factors: (1) 
Current or reasonably expected income or assets; (2) current employment 
status; (3) the monthly

[[Page 35439]]

payment on the covered transaction; (4) the monthly payment on any 
simultaneous loan; (5) the monthly payment for mortgage-related 
obligations; (6) current debt obligations; (7) the monthly debt-to-
income ratio or residual income; and (8) credit history.
    Section 1026.43(c)(3) generally requires the creditor to verify the 
information relied on in determining a consumer's repayment ability 
using reasonably reliable third-party records, with special rules for 
verifying a consumer's income or assets. Section 1026.43(c)(5)(i) 
requires the creditor to calculate the monthly mortgage payment based 
on the greater of the fully indexed rate or any introductory rate, 
assuming monthly, fully amortizing payments that are substantially 
equal. Section 1026.43(c)(5)(ii) provides special payment calculation 
rules for loans with balloon payments, interest-only loans, and 
negative amortization loans.
    Section 1026.43(d) provides special rules for complying with the 
ability-to-repay requirements for a creditor refinancing a ``non-
standard mortgage'' into a ``standard mortgage.'' This provision is 
based on TILA section 129C(a)(6)(E), which contains special rules for 
the refinancing of a ``hybrid loan'' into a ``standard loan.'' The 
purpose of this provision is to provide flexibility for creditors to 
refinance a consumer out of a risky mortgage into a more stable one 
without undertaking a full underwriting process. Under Sec.  
1026.43(d), a non-standard mortgage is defined as an adjustable-rate 
mortgage with an introductory fixed interest rate for a period of one 
year or longer, an interest-only loan, or a negative amortization loan. 
Under this option, a creditor refinancing a non-standard mortgage into 
a standard mortgage does not have to consider the eight specific 
underwriting criteria listed under Sec.  1026.43(c), if certain 
conditions are met.
    Section 1026.43(e) specifies requirements for originating 
``qualified mortgages,'' as well as standards for when the presumption 
of compliance with ability-to-repay requirements can be rebutted. 
Section 1026.43(e)(1)(i) provides a safe harbor under the ability-to-
repay requirements for loans that satisfy the definition of a qualified 
mortgage and are not higher-priced covered transactions (i.e., the APR 
does not exceed APOR \112\ plus 1.5 percentage points for first-lien 
loans or 3.5 percentage points for subordinate-lien loans). Section 
1026.43(e)(1)(ii) provides a rebuttable presumption for qualified 
mortgage loans that are higher-priced covered transactions (i.e., the 
APR exceeds APOR plus 1.5 percent for first lien or 3.5 percent for 
subordinate lien). Under the 2013 ATR Final Rule, Sec.  1026.43 also 
provides three options for creditors to originate a qualified mortgage:
---------------------------------------------------------------------------

    \112\ TILA section 129C(b)(2)(B) defines the average prime offer 
rate as ``the average prime offer rate for a comparable transaction 
as of the date on which the interest rate for the transaction is 
set, as published by the Bureau.'' 15 U.S.C. 1639c(b)(2)B).
---------------------------------------------------------------------------

    Qualified mortgage--general. Under the general definition for 
qualified mortgages in Sec.  1026.43(e)(2), a creditor must satisfy the 
statutory criteria restricting certain product features and points and 
fees on the loan, consider and verify certain underwriting requirements 
that are part of the general ability-to-repay standard, and confirm 
that the consumer has a total (or ``back-end'') debt-to-income ratio 
that is less than or equal to 43 percent. To determine whether the 
consumer meets the specific debt-to-income ratio requirement, the 
creditor must calculate the consumer's monthly debt-to-income ratio in 
accordance with appendix Q. A loan that satisfies these criteria and is 
not a higher-priced covered transaction receives a legal safe harbor 
from the ability-to-repay requirements. A loan that satisfies these 
criteria and is a higher-priced covered transaction receives a 
rebuttable presumption of compliance with the ability-to-repay 
requirements.
    Qualified mortgage--special rules. The second option for 
originating a qualified mortgage provides a temporary alternative to 
the general definition in Sec.  1026.43(e)(2). This option is intended 
to avoid unnecessarily disrupting the mortgage market at a time when it 
is especially fragile, as a result of the recent mortgage crisis. 
Section 1026.43(e)(4) provides that a loan is a qualified mortgage if 
it meets the statutory limitations on product features and points and 
fees, satisfies certain other requirements, and is eligible for 
purchase, guarantee, or insurance by one of the following entities:
     Fannie Mae or Freddie Mac, while operating under the 
conservatorship or receivership of the Federal Housing Finance Agency 
pursuant to section 1367 of the Federal Housing Enterprises Financial 
Safety and Soundness Act of 1992;
     Any limited-life regulatory entity succeeding the charter 
of either Fannie Mae or Freddie Mac pursuant to section 1367(i) of the 
Federal Housing Enterprises Financial Safety and Soundness Act of 1992;
     The U.S. Department of Housing and Urban Development under 
the National Housing Act (FHA);
     The U.S. Department of Veterans Affairs (VA);
     The U.S. Department of Agriculture (USDA); or
     The U.S. Department of Agriculture Rural Housing Service 
(RHS).
    With respect to GSE-eligible loans, this temporary provision 
expires when conservatorship of the GSEs ends. With respect to each 
other category of loan, this provision expires on the effective date of 
a rule issued by each respective Federal agency pursuant to its 
authority under TILA section 129C(b)(3)(ii) to define a qualified 
mortgage. In any event, this temporary provision expires no later than 
January 10, 2021.
    Qualified mortgage--balloon-payment loans by certain creditors. The 
third option for originating qualified mortgages is included under 
Sec.  1026.43(f), which provides that a small creditor operating 
predominantly in rural or underserved areas can originate a balloon-
payment qualified mortgage. The Dodd-Frank Act generally prohibits 
balloon-payment mortgages from being qualified mortgages. However, the 
statute creates a limited exception, with special underwriting rules, 
for loans made by a creditor that: (1) Operates predominantly in rural 
or underserved areas; (2) together with affiliates, has total annual 
residential mortgage loan originations that do not exceed a limit set 
by the Bureau; and (3) retains the balloon loans in portfolio. The 
purpose of this definition is to preserve credit availability in rural 
or underserved areas by assuring that small creditors offering loans 
that cannot be sold on the secondary market, and therefore must be 
placed on the creditor's balance sheet, are able to use a balloon-
payment structure as a means of controlling interest rate risk.
    Section 1026.43(f)(1)(vi) limits eligibility to creditors that 
originated 500 or fewer covered transactions secured by a first-lien in 
the preceding calendar year and that have assets of no more than $2 
billion (to be adjusted annually). In addition, to originate a balloon-
payment qualified mortgage more than 50 percent of a creditor's total 
first-lien covered transactions must have been secured by properties in 
counties that are ``rural'' or ``underserved,'' as designated by the 
Bureau. A county is ``rural'' if, during a calendar year, it is located 
in neither a metropolitan statistical area nor a micropolitan 
statistical area adjacent to a metropolitan statistical area, as those 
terms are defined by the U.S. Office of Management and Budget. A county 
is ``underserved'' if no more than two creditors extend covered 
transactions five or more times in that county during

[[Page 35440]]

a calendar year. Also, except as provided, the balloon-payment 
qualified mortgage must generally be held in portfolio for at least 
three years. Balloon loans by such creditors are eligible for qualified 
mortgage status if they meet the statutory limitations on product 
features and points and fees, and if the creditor follows certain other 
requirements that are part of the general ability-to-repay standard.
    The Bureau's 2013 ATR Final Rule added two additional requirements 
to Sec.  1026.43. Section 1026.43(g) implements the Dodd-Frank Act 
limits on prepayment penalties. Section 1026.43(h) prohibits a creditor 
from structuring a closed-end extension of credit as an open-end plan 
to evade the ability-to-repay requirements.

III. Summary of the Rulemaking Process

A. The Bureau's Proposal
    As discussed above, TILA section 129C, as added by sections 1411, 
1412, and 1414 of the Dodd-Frank Act, generally requires creditors to 
make a reasonable, good faith determination of a consumer's ability to 
repay the loan. On January 10, 2013, the Bureau issued the 2013 ATR 
Final Rule to implement these ability-to-repay requirements. See 78 FR 
6407 (Jan. 30, 2013). At the same time, the Bureau issued the 2013 ATR 
Proposed Rule related to certain proposed exemptions, modifications, 
and clarifications to the ability-to-repay requirements and qualified 
mortgage provisions. See 78 FR 6621 (Jan. 30, 2013). The 2013 ATR 
Proposed Rule contained three major elements.
    First, the Bureau proposed certain exemptions from the ability-to-
repay requirements for housing finance agencies, certain nonprofit 
creditors, certain homeownership stabilization and foreclosure 
prevention programs, and certain Federal agency and GSE refinancing 
programs. The Bureau was concerned that the ability-to-repay 
requirements were substantially different from the underwriting 
requirements employed by these creditors or required under these 
programs, which would discourage participation in and frustrate the 
purposes of these programs and significantly impair access to 
responsible, affordable credit for certain consumers.
    Second, the Bureau proposed modifications related to certain small 
creditors. Specifically, the Bureau proposed an additional definition 
of a qualified mortgage for certain loans made and held in portfolio by 
small creditors. The proposed new category would include certain loans 
originated by small creditors \113\ that: (1) Have total assets of $2 
billion or less at the end of the previous calendar year; and (2) 
together with all affiliates, originated 500 or fewer first-lien 
covered transactions during the previous calendar year. The proposed 
new category would include only loans held in portfolio by these 
creditors. The loans also would have to conform to all of the 
requirements under the general definition of a qualified mortgage 
except the 43 percent limit on monthly debt-to-income ratio. The Bureau 
also proposed to allow small creditors and small creditors operating 
predominantly in rural and underserved areas to charge a higher annual 
percentage rate for first-lien qualified mortgages in the proposed new 
category and still benefit from a conclusive presumption of compliance 
or ``safe harbor.'' A qualified mortgage in the proposed new category 
would be conclusively presumed to comply if the annual percentage rate 
is equal to or less than APOR plus 3.5 percentage points for both 
first-lien and subordinate-lien loans. The Bureau also posed and 
solicited comment on a specific question regarding whether there is a 
need for transition mechanisms for existing balloon loans that may end 
soon after the new rule takes effect.
---------------------------------------------------------------------------

    \113\ The $2 billion threshold reflects the purposes of the 
proposed category and the structure of the mortgage lending 
industry. The Bureau's choice of $2 billion in assets as a threshold 
for purposes of TILA section 129C does not imply that a threshold of 
that type or of that magnitude would be an appropriate way to 
distinguish small firms for other purposes or in other industries.
---------------------------------------------------------------------------

    Finally, the Bureau proposed several additional interpretive 
comments concerning the inclusion of loan originator compensation in 
the points and fees calculation under the qualified mortgage provisions 
and the high-cost mortgage provisions under HOEPA. The proposed 
comments addressed situations in which payments flow from one party to 
another over the course of a mortgage transaction and whether to count 
compensation separately where it may already have been counted toward 
points and fees under another element of the regulatory definition. In 
addition, the Bureau sought feedback on whether additional 
clarification was warranted in light of the Bureau's separate 
rulemaking to implement provisions of the Dodd-Frank Act restricting 
certain loan originator compensation practices.
B. Comments and Post-Proposal Outreach
    In response to the proposed rule, the Bureau received approximately 
1,150 letters from commenters, including members of Congress, 
creditors, consumer groups, trade associations, mortgage and real 
estate market participants, and individual consumers. The comments 
focused on all aspects of the proposal, including:
     the calculation of loan originator compensation for 
inclusion in points and fees for the qualified mortgage and high-cost 
mortgage points and fees limits;
     the proposed exemptions from the ability-to-repay 
requirements for housing finance agencies, certain nonprofit creditors, 
certain homeownership stabilization and foreclosure prevention 
programs, and certain Federal agency and GSE refinancing programs;
     the proposed definition of a fourth category of qualified 
mortgages including loans originated and held in portfolio by certain 
small creditors; and
     the proposed amendments to the definition of higher-priced 
covered transaction with respect to qualified mortgages that are 
originated and held in portfolio by small creditors and with respect to 
balloon-payment qualified mortgages originated and held in portfolio by 
small creditors operating predominantly in rural or underserved areas.
    Materials submitted were filed in the record and are publicly 
available at http://www.regulations.gov. The Bureau also elected to 
consider the comments received after the expiration of the comment 
period. As discussed in more detail below, the Bureau has considered 
these comments in adopting this final rule.

IV. Legal Authority

    The Bureau is issuing this final rule pursuant to its authority 
under TILA and the Dodd-Frank Act. See 15 U.S.C. 1604(a), 12 U.S.C. 
5512(b)(1).
A. TILA Ability-to-Repay and Qualified Mortgage Provisions
    As discussed above, the Dodd-Frank Act amended TILA to provide 
that, in accordance with regulations prescribed by the Bureau, no 
creditor may make a residential mortgage loan unless the creditor makes 
a reasonable and good faith determination based on verified and 
documented information that, at the time the loan is consummated, the 
consumer has a reasonable ability to repay the loan, according to its 
terms, and all applicable taxes, insurance (including mortgage 
guarantee insurance), and assessments. TILA section 129C(a)(1); 15 
U.S.C. 1639c(a)(1). As described below in part IV.B, the Bureau has 
authority to prescribe regulations to carry out the

[[Page 35441]]

purposes of TILA pursuant to TILA section 105(a). 15 U.S.C. 1604(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, or abusive. TILA section 129B(a)(2); 15 U.S.C. 1639b(a)(2).
    TILA, as amended by the Dodd-Frank Act, also provides creditors 
originating ``qualified mortgages'' special protection from liability 
under the ability-to-repay requirements. TILA section 129C(b), 15 
U.S.C. 1639c(b). TILA generally defines a ``qualified mortgage'' as a 
residential mortgage loan for which: the loan does not contain negative 
amortization, interest-only payments, or balloon payments; the term 
does not exceed 30 years; the points and fees generally do not exceed 3 
percent of the loan amount; the income or assets are considered and 
verified; and the underwriting is based on the maximum rate during the 
first five years, uses a payment schedule that fully amortizes the loan 
over the loan term, and takes into account all mortgage-related 
obligations. TILA section 129C(b)(2), 15 U.S.C. 1639c(b)(2). 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)].''
    TILA, as amended by 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 with 
authority to prescribe regulations to carry out the purposes of the 
qualified mortgage provisions--to ensure that responsible, affordable 
mortgage credit remains available to consumers in a manner consistent 
with the purposes of TILA section 129C. TILA section 129C(b)(3)(A), 15 
U.S.C. 1939c(b)(3)(A). As discussed in the section-by-section analysis 
below, the Bureau is issuing certain provisions of this rule pursuant 
to its authority under TILA section 129C(b)(3)(B)(i).
    In addition, for purposes of defining ``qualified mortgage,'' TILA 
section 129C(b)(2)(A)(vi) provides the Bureau with authority to 
establish guidelines or regulations relating to monthly debt-to-income 
ratios or alternative measures of ability to repay. As discussed in the 
section-by-section analysis below, the Bureau is issuing certain 
provisions of this rule pursuant to its authority under TILA sections 
129C(b)(2)(A)(vi).
B. Other Rulemaking and Exception Authorities
    This final rule also relies on the rulemaking and exception 
authorities specifically granted to the Bureau by TILA and the Dodd-
Frank Act, including the authorities discussed below.

TILA

    TILA section 105(a). As amended by the Dodd-Frank Act, TILA section 
105(a), 15 U.S.C. 1604(a), directs the Bureau to prescribe regulations 
to carry out the purposes of TILA, and provides that such regulations 
may contain additional requirements, classifications, differentiations, 
or other provisions, and may provide for such adjustments and 
exceptions for all or any class of transactions, that the Bureau judges 
are necessary or proper to effectuate the purposes of TILA, to prevent 
circumvention or evasion thereof, or to facilitate compliance 
therewith. A purpose of TILA is ``to assure a meaningful disclosure of 
credit terms so that the consumer will be able to compare more readily 
the various credit terms available to him and avoid the uninformed use 
of credit.'' TILA section 102(a), 15 U.S.C. 1601(a). This stated 
purpose is informed by Congress's finding that ``economic stabilization 
would be enhanced and the competition among the various financial 
institutions and other firms engaged in the extension of consumer 
credit would be strengthened by the informed use of credit[.]'' TILA 
section 102(a). Thus, strengthened competition among financial 
institutions is a goal of TILA, achieved through the effectuation of 
TILA's purposes.
    As amended by section 1402 of the Dodd-Frank Act, section 
129B(a)(2) of TILA provides that a purpose of section 129C of TILA is 
``to assure that consumers are offered and receive residential mortgage 
loans on terms that reasonably reflect their ability to repay the 
loans.'' This stated purpose is informed by Congress's finding that 
``economic stabilization would be enhanced by the protection, 
limitation, and regulation of the terms of residential mortgage credit 
and the practices related to such credit, while ensuring that 
responsible, affordable mortgage credit remains available to 
consumers.'' Thus, ensuring that responsible, affordable mortgage 
credit remains available to consumers is a goal of TILA, achieved 
through the effectuation of TILA's purposes.
    Historically, TILA section 105(a) has served as a broad source of 
authority for rules that promote the informed use of credit through 
required disclosures and substantive regulation of certain practices. 
However, Dodd-Frank Act section 1100A clarified the Bureau's section 
105(a) authority by amending that section to provide express authority 
to prescribe regulations that contain ``additional requirements'' that 
the Bureau finds are necessary or proper to effectuate the purposes of 
TILA, to prevent circumvention or evasion thereof, or to facilitate 
compliance. This amendment clarified the authority to exercise TILA 
section 105(a) to prescribe requirements beyond those specifically 
listed in the statute that meet the standards outlined in section 
105(a). The Dodd-Frank Act also clarified the Bureau's rulemaking 
authority over certain high-cost mortgages pursuant to section 105(a). 
As amended by the Dodd-Frank Act, TILA section 105(a) authority to make 
adjustments and exceptions to the requirements of TILA applies to all 
transactions subject to TILA, except with respect to the provisions of 
TILA section 129, 15 U.S.C. 1639, that apply to the high-cost mortgages 
defined in TILA section 103(bb), 15 U.S.C. 1602(bb).
    As discussed in the section-by-section analysis below, the Bureau 
is issuing regulations to carry out TILA's purposes, including such 
additional requirements, adjustments, and exceptions as, in the 
Bureau's judgment, are necessary and proper to carry out the purposes 
of TILA, prevent circumvention or evasion thereof, or to facilitate 
compliance. In developing these aspects of the final rule pursuant to 
its authority under TILA section 105(a), the Bureau has considered the 
purposes of TILA, including ensuring that consumers are offered and 
receive residential mortgage loans on terms that reasonably reflect 
their ability to repay the loans, ensuring meaningful

[[Page 35442]]

disclosures, facilitating consumers' ability to compare credit terms, 
and helping consumers avoid the uninformed use of credit, and the 
findings of TILA, including regulating the terms of residential 
mortgage credit and the practices related to such credit to ensure that 
responsible, affordable mortgage credit remains available to consumers, 
strengthening competition among financial institutions, and promoting 
economic stabilization.
    TILA section 105(f). Section 105(f) of TILA, 15 U.S.C. 1604(f), 
authorizes the Bureau to exempt from all or part of TILA all or any 
class of transactions (other than transactions involving any mortgage 
described in TILA section 103(aa), which are high-cost mortgages) if 
the Bureau determines that TILA coverage does not provide a meaningful 
benefit to consumers in the form of useful information or protection. 
In exercising this authority, the Bureau must consider the factors 
identified in section 105(f) of TILA and publish its rationale at the 
time it proposes an exemption for public comment. Specifically, the 
Bureau must consider:
    (a) The amount of the loan and whether the disclosures, right of 
rescission, and other provisions provide a benefit to the consumers who 
are parties to such transactions, as determined by the Bureau;
    (b) The extent to which the requirements of TILA complicate, 
hinder, or make more expensive the credit process for the class of 
transactions;
    (c) The status of the borrower, including--
    (1) Any related financial arrangements of the borrower, as 
determined by the Bureau;
    (2) The financial sophistication of the borrower relative to the 
type of transaction; and
    (3) The importance to the borrower of the credit, related 
supporting property, and coverage under TILA, as determined by the 
Bureau;
    (d) Whether the loan is secured by the principal residence of the 
consumer; and
    (e) Whether the goal of consumer protection would be undermined by 
such an exemption.
    As discussed in the section-by-section analysis below, the Bureau 
is adopting exemptions for certain classes of transactions from the 
requirements of TILA pursuant to its authority under TILA section 
105(f). In determining which classes of transactions to exempt under 
TILA section 105(f), the Bureau has considered the relevant factors and 
determined that the exemptions are appropriate.

The Dodd-Frank Act

    Dodd-Frank Act section 1022(b). Section 1022(b)(1) of the Dodd-
Frank Act authorizes the Bureau to prescribe rules ``as may be 
necessary or appropriate to enable the Bureau to administer and carry 
out the purposes and objectives of the Federal consumer financial laws, 
and to prevent evasions thereof.'' 12 U.S.C. 5512(b)(1). TILA and title 
X of the Dodd-Frank Act are Federal consumer financial laws. 
Accordingly, the Bureau is exercising its authority under Dodd-Frank 
Act section 1022(b) to prescribe rules that carry out the purposes and 
objectives of TILA and title X and prevent evasion of those laws.

V. Section-by-Section Analysis

Section 1026.32 Requirements for High-Cost Mortgages

32(b) Definitions
32(b)(1)
32(b)(1)(ii)
Background
    TILA section 129C(b)(2)(A)(vii), as added by section 1412 of the 
Dodd-Frank Act, defines a ``qualified mortgage'' as a loan for which, 
among other things, the total ``points and fees'' payable in connection 
with the transaction generally do not exceed 3 percent of the total 
loan amount. Section 1431(a) of the Dodd-Frank Act amended HOEPA's 
points and fees coverage test to provide in TILA section 
103(bb)(1)(A)(ii) that a mortgage is a high-cost mortgage if the total 
points and fees payable in connection with the transaction exceed 5 
percent of the total transaction amount (for transactions of $20,000 or 
more), or the lesser of 8 percent of the total transaction amount or 
$1,000 (for transactions of less than $20,000) or other prescribed 
amount. The Bureau finalized the Dodd-Frank Act's amendments to TILA 
concerning the points and fees limit for qualified mortgages and the 
points and fees coverage threshold for high-cost mortgages in the 2013 
ATR Final Rule and in the final rule implementing the Dodd-Frank Act's 
amendments to HOEPA,\114\ respectively.
---------------------------------------------------------------------------

    \114\ 78 FR 6856 (Jan. 31, 2013) (2013 HOEPA Final Rule).
---------------------------------------------------------------------------

    Those rulemakings also adopted the Dodd-Frank Act's amendments to 
TILA concerning the exclusion of certain bona fide third-party charges 
and up to two bona fide discount points from the points and fees 
calculation for both qualified mortgages and high-cost mortgages. With 
respect to bona fide discount points in particular, TILA sections 
129C(b)(2)(C)(ii)(I) and 103(dd)(1) provide for the exclusion of up to 
and including two bona fide discount points from points and fees for 
qualified mortgages and high-cost mortgages, respectively, but only if 
the interest rate for the transaction before the discount does not 
exceed by more than one percentage point the average prime offer rate, 
as defined in Sec.  1026.35(a)(2). Similarly, TILA sections 
129C(b)(2)(C)(ii)(II) and 103(dd)(2) provide for the exclusion of up to 
and including one bona fide discount point from points and fees, but 
only if the interest rate for the transaction before the discount does 
not exceed the average prime offer rate by more than two percentage 
points.\115\ The Bureau's 2013 ATR and HOEPA Final Rules implemented 
the bona fide discount point exclusions from points and fees in Sec.  
1026.32(b)(1)(i)(E) and (F) (closed-end credit) and (b)(2)(i)(E) and 
(F) (open-end credit), respectively.
---------------------------------------------------------------------------

    \115\ The 2013 ATR and HOEPA Final Rules also adopted the 
special calculation, prescribed under TILA for high-cost mortgages, 
for completing the bona fide discount point calculation for loans 
secured by personal property.
---------------------------------------------------------------------------

    TILA section 129C(b)(2)(C) defines ``points and fees'' for 
qualified mortgages and high-cost mortgages to have the same meaning as 
set forth in TILA section 103(aa)(4) (renumbered as section 
103(bb)(4)).\116\ Points and fees for the high-cost mortgage threshold 
are defined in Sec.  1026.32(b)(1) (closed-end credit) and (2) (open-
end credit), and Sec.  1026.43(b)(9) provides that, for a qualified 
mortgage, ``points and fees'' has the same meaning as in Sec.  
1026.32(b)(1).
---------------------------------------------------------------------------

    \116\ The Dodd-Frank Act renumbered existing TILA section 
103(aa), which contains the definition of ``points and fees,'' for 
the high-cost mortgage points and fees threshold, as section 
103(bb). See section 1100A(1)(A) of the Dodd-Frank Act. However, in 
defining points and fees for the qualified mortgage points and fees 
limits, TILA section 129C(b)(2)(C) refers to TILA section 103(aa)(4) 
rather than TILA section 103(bb)(4). To give meaning to this 
provision, the Bureau concluded that the reference to TILA section 
103(aa)(4) in TILA section 129C(b)(2)(C) is mistaken and therefore 
interpreted TILA section 129C(b)(2)(C) as referring to the points 
and fees definition in renumbered TILA section 103(bb)(4).
---------------------------------------------------------------------------

    Section 1431 of the Dodd-Frank Act amended TILA to require that 
``all compensation paid directly or indirectly by a consumer or 
creditor to a mortgage originator from any source, including a mortgage 
originator that is also the creditor in a table-funded transaction,'' 
be included in points and fees. TILA section 103(bb)(4)(B) (emphases 
added). Prior to the amendment, TILA had provided that only 
compensation paid by a consumer to a mortgage broker at

[[Page 35443]]

or before closing should count toward the points and fees threshold for 
high-cost mortgages. Under amended TILA section 103(bb)(4)(B), however, 
compensation paid to anyone that qualifies as a ``mortgage originator'' 
is to be included in points and fees for the points and fees thresholds 
for both qualified mortgages and high-cost mortgages.\117\ Thus, in 
addition to mortgage brokerage firms, other mortgage originators, 
including employees of a creditor (i.e., loan officers) or of a 
brokerage firm (i.e., individual brokers) are included in ``mortgage 
originator.'' In addition, the Dodd-Frank Act removed the phrase 
``payable at or before closing'' from the high-cost mortgage points and 
fees test and did not apply the ``payable at or before closing'' 
limitation to the points and fees cap for qualified mortgages. See TILA 
sections 103(bb)(1)(A)(ii) and 129C(b)(2)(A)(vii) and (C).
---------------------------------------------------------------------------

    \117\ ``Mortgage originator'' is generally defined to include 
``any person who, for direct or indirect compensation or gain, or in 
the expectation of direct or indirect compensation or gain--(i) 
takes a residential mortgage loan application; (ii) assists a 
consumer in obtaining or applying to obtain a residential mortgage 
loan; or (iii) offers or negotiates terms of a residential mortgage 
loan.'' TILA section 103(cc)(2)(A). The statute excludes certain 
persons from the definition, including a person who performs purely 
administrative or clerical tasks; an employee of a retailer of 
manufactured homes who does not take a residential mortgage 
application or offer or negotiate terms of a residential mortgage 
loan; and, subject to certain conditions, real estate brokers, 
sellers who finance three or fewer properties in a 12-month period, 
and servicers. TILA section 103(cc)(2)(C) through (F).
---------------------------------------------------------------------------

    The 2013 ATR Final Rule. The Bureau's 2013 ATR Final Rule amended 
Sec.  1026.32(b)(1) to implement revisions to the definition of 
``points and fees'' under section 1431 of the Dodd-Frank Act, for the 
purposes of both HOEPA and qualified mortgages. Among other things, the 
Dodd-Frank Act added loan originator compensation to the definition of 
``points and fees'' that had previously applied to high-cost mortgages 
under HOEPA. Section 1431 of the Dodd-Frank Act also amended TILA to 
provide that open-end credit plans (i.e., home equity lines of credit 
or HELOCs) are covered by HOEPA. The Bureau's 2013 HOEPA Final Rule 
thus separately amended Sec.  1026.32(b)(2) to provide for the 
inclusion of loan originator compensation in points and fees for 
HELOCs, to the same extent as such compensation is required to be 
counted for closed-end credit transactions. Under Sec.  
1026.32(b)(1)(ii) (for closed-end credit) and Sec.  1026.32(b)(2)(ii) 
(for open-end credit), all compensation paid directly or indirectly by 
a consumer or creditor to a loan originator, as defined in Sec.  
1026.36(a)(1), that can be attributed to that transaction at the time 
the interest rate is set, is required to be included in points and 
fees. The commentary to Sec.  1026.32(b)(1)(ii) as adopted in the 2013 
ATR Final Rule provides details for applying this requirement for 
closed-end credit transactions (e.g., by clarifying when compensation 
must be known to be counted). The commentary to Sec.  1026.32(b)(2)(ii) 
as adopted in the 2013 HOEPA Final Rule cross-references the commentary 
adopted in Sec.  1026.32(b)(1)(ii) for interpretive guidance.
    In the 2013 ATR Final Rule, the Bureau noted that, in response to 
the Board's 2011 proposal (Board's 2011 ATR Proposal or Board's 
proposal) \118\ and the Bureau's 2012 proposal to implement the Dodd-
Frank Act's amendments to HOEPA,\119\ the Bureau received extensive 
feedback regarding the inclusion of loan originator compensation in the 
qualified mortgage and high-cost mortgage points and fees calculation. 
In the context of both rulemakings, several industry commenters argued 
that including loan originator compensation in points and fees would 
result in ``double-counting'' because creditors often compensate loan 
originators with funds collected from consumers at consummation. The 
commenters argued that money collected in up-front charges to consumers 
should not be counted a second time toward the points and fees 
thresholds if it is passed on to a loan originator. Consumer advocates 
urged the Bureau not to assume that loan originator compensation is 
funded through up-front consumer payments to creditors rather than 
through the interest rate. They noted that, in the wholesale channel, 
if the parties to a transaction would like to fund loan originator 
compensation through up-front payments, a consumer can pay the mortgage 
broker directly instead of paying origination charges to the creditor 
and having the creditor pass through payments to the mortgage broker.
---------------------------------------------------------------------------

    \118\ 76 FR 27390 (May 11, 2011).
    \119\ 77 FR 49090 (Aug. 15, 2012) (2012 HOEPA Proposal).
---------------------------------------------------------------------------

    The literal language of TILA section 103(bb)(4) as amended by the 
Dodd-Frank Act defines points and fees to include all items included in 
the finance charge (except interest or the time-price differential), 
all compensation paid directly or indirectly by a consumer or creditor 
to a loan originator, ``and'' various other enumerated items. The 2013 
ATR Final Rule noted that both the use of ``and'' and the reference to 
``all'' compensation paid ``directly or indirectly'' and ``from any 
source'' supports counting compensation as it flows downstream from one 
party to another so that it is counted each time that it reaches a loan 
originator, whatever the previous source.
    The Bureau stated that it believes the statute would be read to 
require that loan originator compensation be treated as additive to the 
other elements of points and fees and should be counted as it flows 
downstream from one party to another so that it is included in points 
and fees each time it reaches a loan originator, whatever the previous 
source. The Bureau indicated that it did not believe that an automatic 
literal reading of the statute in all cases would be in the best 
interest of either consumers or industry, but it did not believe that 
it yet had sufficient information with which to choose definitively 
between the additive approach provided for in the statutory language 
and other potential methods of accounting for payments in all 
circumstances, given the multiple practical and complex policy 
considerations involved. Accordingly, the Bureau finalized the rule 
without a qualifying interpretation on this issue and included in the 
2013 ATR Proposed Rule several comments to explain how to calculate 
loan originator compensation in connection with particular payment 
streams between particular parties. However, the 2013 ATR Final Rule 
itself implemented the additive approach of the statute.
    The 2013 Loan Originator Final Rule. Earlier this year, the Bureau 
issued a final rule to implement various provisions of the Dodd-Frank 
Act that addressed compensation paid to loan originators. 78 FR 11280 
(Feb. 15, 2013) (2013 Loan Originator Final Rule). As the Bureau noted, 
the Board had proposed rules in 2009, that, among other things, would 
have prohibited payments to a loan originator based on the 
transaction's terms or conditions; prohibited a loan originator from 
receiving dual compensation (i.e., compensation from both a consumer 
and another person in the same transaction); and prohibited a loan 
originator from steering consumers to transactions not in their 
interest to increase the loan originator's compensation. In section 
1403 of the Dodd-Frank Act, Congress amended TILA section 129B to 
codify significant elements of the Board's 2009 proposal. In a final 
rule issued in 2010, the Board finalized its proposed rules, while 
acknowledging that further rulemaking would be required to address 
certain

[[Page 35444]]

issues and adjustments made by the Dodd-Frank Act. 75 FR 58509 (Sept. 
24, 2010) (2010 Loan Originator Final Rule). As discussed below, the 
Bureau's 2013 Loan Originator Final Rule implemented certain provisions 
of TILA section 129B, including rules expanding and clarifying some of 
the prohibitions adopted by the Board in the 2010 Loan Originator Final 
Rule.
    The Bureau's 2013 Loan Originator Final Rule clarified the scope of 
Sec.  1026.36(d)(1), which prohibits basing a loan originator's 
compensation on any of the transaction's terms. This provision was 
intended to eliminate incentives for the loan originator to, for 
example, persuade the consumer to accept a higher interest rate or a 
prepayment penalty, in exchange for the loan originator receiving 
higher compensation. The Bureau retained the core prohibition in Sec.  
1026.36(d)(1), but it clarified the meaning of a ``term'' of the 
transaction and clarified the standard for determining when 
compensation is impermissibly based on a proxy for a term of the 
transaction. It also permitted certain bonuses and retirement profit-
sharing plans to be based on the terms of multiple loan originators' 
transactions and permitted a loan originator to participate in a 
defined benefit plan without restrictions on whether the benefits may 
be based on the terms of a loan originator's transactions. See Sec.  
1026.36(d)(1)(iii) and (iv). Consistent with the statute, the Bureau 
also revised Sec.  1026.36(d)(1) so that it also applies in 
transactions in which the consumer pays a mortgage broker directly.
    The 2013 Loan Originator Final Rule also clarified the scope of 
Sec.  1026.36(d)(2), which prohibits a loan originator from receiving 
compensation from both the consumer and other persons in the same 
transaction. This provision was designed to address consumer confusion 
over mortgage broker loyalties when brokers received payments both from 
the consumer and the creditor. The 2013 Loan Originator Final Rule 
retained this prohibition but provided an exception to permit mortgage 
brokers to pay their employees or contractors commissions (although the 
commissions cannot be based on the terms of the loans they originate).
    In addition, the Bureau used its exception authority to adopt a 
complete exemption to the statutory ban on up-front fees set forth in 
TILA section 129B(c)(2)(B)(ii). See Sec.  1026.36(d)(2)(ii). That 
statutory ban would have permitted a loan originator to receive an 
origination fee or charge from someone other than the consumer only if: 
(1) The loan originator did not receive any compensation directly from 
the consumer; and (2) the consumer did not make an up-front payment of 
discount points, origination points, or fees (other than bona fide 
third-party charges not retained by the loan originator, creditor, or 
an affiliate of either). Thus, the Bureau's exemption permits the 
consumer to pay origination charges or fees to the creditor in 
transactions in which the creditor is paying compensation to the 
mortgage broker.
    The Bureau also clarified the safe harbor for loan originators to 
comply with existing Sec.  1026.36(e)(1), which prohibits a loan 
originator from steering a consumer to consummate a particular 
transaction so that the loan originator will receive greater 
compensation. The Bureau clarified how to determine which loans a 
creditor must offer to consumers to take advantage of the safe harbor. 
See Sec.  1026.36(e)(3)(i)(C) and comment 36(e)(3)-3. The Bureau did 
not, however, implement the portion of section 1403 of the Dodd-Frank 
Act that requires the Bureau to prescribe additional regulations to 
prohibit certain types of steering, abusive or unfair lending 
practices, mischaracterization of credit histories or appraisals, and 
discouraging consumers from shopping with other mortgage originators. 
The Bureau noted that it intends to prescribe those regulations in a 
future rulemaking. See 78 FR 11292 n.55.
The 2013 ATR Proposed Rule
    In the 2013 ATR Proposed Rule, the Bureau proposed commentary to 
address situations in which loan originator compensation passes from 
one party to another. The Bureau indicated that it believed that 
Congress included loan originator compensation in points and fees 
because of concern that loans with high loan originator compensation 
may be more costly and riskier to consumers. Despite the statutory 
language, the Bureau questioned whether it would serve the statutory 
purpose to apply a strict additive rule that would automatically 
require that loan originator compensation be counted against the points 
and fees thresholds even if it has already been included in points and 
fees. The Bureau indicated that it did not believe that it is necessary 
or appropriate to count the same payment between a consumer and a 
mortgage broker firm twice, simply because it is both part of the 
finance charge and loan originator compensation. Similarly, the Bureau 
indicated that, where a payment from either a consumer or a creditor to 
a mortgage broker is counted toward points and fees, it would not be 
necessary or appropriate to count separately funds that the broker then 
passes on to its individual employees. In each case, any costs and 
risks to the consumer from high loan originator compensation are 
adequately captured by counting the funds a single time against the 
points and fees cap; thus, the Bureau stated that it did not believe 
the purposes of the statute would be served by counting some or all of 
the funds a second time, and was concerned that doing so could have 
negative impacts on the price and availability of credit.
    Proposed comment 32(b)(1)(ii)-5.i thus would have provided that a 
payment from a consumer to a mortgage broker need not be counted toward 
points and fees twice because it is both part of the finance charge 
under Sec.  1026.32(b)(1)(i) and loan originator compensation under 
Sec.  1026.32(b)(1)(ii). Similarly, proposed comment 32(b)(1)(ii)-5.ii 
would have clarified that Sec.  1026.32(b)(1)(ii) does not require a 
creditor to include payments by a mortgage broker to its individual 
loan originator employee in the calculation of points and fees. For 
example, assume a consumer pays a $3,000 fee to a mortgage broker, and 
the mortgage broker pays a $1,500 commission to its individual loan 
originator employee for that transaction. The $3,000 mortgage broker 
fee is included in points and fees, but the $1,500 commission is not 
included in points and fees because it has already been included in 
points and fees as part of the $3,000 mortgage broker fee. The Bureau 
stated that it believed that any costs to the consumer from loan 
originator compensation are adequately captured by counting the funds a 
single time against the points and fees cap. The Bureau sought comment 
regarding these proposed comments.
    The Bureau noted that determining the appropriate accounting method 
is significantly more complicated when a consumer pays some up-front 
charges to the creditor and the creditor pays loan originator 
compensation to either its own employee or to a mortgage broker firm. 
As described in the 2013 ATR Final Rule, a creditor can fund 
compensation to its own loan officer or to a mortgage broker in two 
different ways. First, the payment could be funded by origination 
charges paid by the consumer to the creditor. Second, the payment could 
be funded through the interest rate, in which case the creditor 
forwards funds to the loan originator at consummation which the 
creditor recovers through profit realized on the subsequent sale of the 
mortgage or, for portfolio loans, through payments by the consumer over 
time. Because

[[Page 35445]]

money is fungible, tracking how a creditor spends money it collects in 
up-front charges versus amounts collected through the rate to cover 
both loan originator compensation and its other overhead expenses would 
be extraordinarily complex and cumbersome. The Bureau stated that, to 
facilitate compliance, it believed it would be appropriate and 
necessary to adopt generalized rules regarding the accounting of 
various payments, but did not have sufficient information to make those 
choices in the 2013 ATR Final Rule. However, the 2013 ATR Final Rule 
itself implemented the additive approach of the statute.
    The Bureau noted in the 2013 ATR Proposed Rule that the potential 
downstream effects of different accounting methods may be significant. 
Under the ``additive'' approach where no netting of up-front consumer 
payments against creditor-paid loan originator compensation is allowed, 
some loans might be precluded from being qualified mortgages or may 
exceed the high-cost mortgage threshold because of the combination of 
loan originator compensation with other charges that are included in 
points and fees, such as fees paid to affiliates for settlement 
services. In other cases, creditors whose combined loan originator 
compensation and up-front charges would otherwise exceed the points and 
fees limits would have strong incentives to cap their up-front charges 
for other overhead expenses under the threshold and instead recover 
those expenses by increasing interest rates to generate higher gains on 
sale. This would adversely affect consumers who prefer to pay a lower 
interest rate over time in return for higher up-front costs and, at the 
margins, could result in some consumers being unable to qualify for 
credit. Additionally, to the extent creditors responded to an 
``additive'' rule by increasing interest rates, this could increase the 
number of qualified mortgages that receive a rebuttable presumption of 
compliance, rather than a safe harbor from liability, under the 
ability-to-repay provisions adopted by the 2013 ATR Final Rule.
    The Bureau noted that one alternative would be to allow all 
consumer payments of up-front points and fees to be netted against 
creditor-paid loan originator compensation. However, this ``netting'' 
approach would allow creditors to offset much higher levels of up-front 
points and fees against expenses paid through rate before the 
heightened consumer protections required by the Dodd-Frank Act would 
apply. For example, a consumer could pay three percentage points in 
origination charges and be charged an interest rate sufficient to 
generate a 3 percent loan originator commission, and the loan could 
still fall within the 3 percent cap for qualified mortgages. The 
consumer could be charged five percentage points in origination charges 
and an interest rate sufficient to generate a 5 percent loan originator 
commission and still stay under the HOEPA points and fees trigger, 
thereby denying consumers the special protections afforded to loans 
with high up-front costs. In markets that are less competitive, this 
would create an opportunity for creditors or brokerage firms to take 
advantage of their market power to harm consumers.
    The Bureau sought comment on two alternative versions of proposed 
comment 32(b)(1)(ii)-5.iii. The first--the additive approach--would 
have explicitly precluded netting, consistent with the literal language 
of the statute, by specifying that Sec.  1026.32(b)(1)(ii) requires a 
creditor to include compensation paid by a consumer or creditor to a 
loan originator in the calculation of points and fees in addition to 
any fees or charges paid by the consumer to the creditor. This proposed 
comment contained an example to illustrate this principle: Assume that 
a consumer pays to the creditor a $3,000 origination fee and that the 
creditor pays to its loan officer employee $1,500 in compensation 
attributed to the transaction. Assume further that the consumer pays no 
other charges to the creditor that are included in points and fees 
under Sec.  1026.32(b)(1)(i) and the loan officer receives no other 
compensation that is included in points and fees under Sec.  
1026.32(b)(1)(ii). For purposes of calculating points and fees, the 
$3,000 origination fee would be included in points and fees under Sec.  
1026.32(b)(1)(i) and the $1,500 in loan officer compensation would be 
included in points and fees under Sec.  1026.32(b)(1)(ii), equaling 
$4,500 in total points and fees, provided that no other points and fees 
are paid or compensation received.
    The second alternative--the netting approach--would have provided 
that, in calculating the amount of loan originator compensation to 
include in points and fees, creditors would be permitted to net 
consumer payments of up-front fees and points against creditor payments 
to the loan originator. Specifically, it would have provided that Sec.  
1026.32(b)(1)(ii) permits a creditor to reduce the amount of loan 
originator compensation included in the points and fees calculation 
under Sec.  1026.32(b)(1)(ii) by any amount paid by the consumer to the 
creditor and included in the points and fees calculation under Sec.  
1026.32(b)(1)(i). This proposed comment contained an example to 
illustrate this principle: Assume that a consumer pays to the creditor 
a $3,000 origination fee and that the creditor pays to the loan 
originator $1,500 in compensation attributed to the transaction. Assume 
further that the consumer pays no other charges to the creditor that 
are included in points and fees under Sec.  1026.32(b)(1)(i) and the 
loan originator receives no other compensation that is included in 
points and fees under Sec.  1026.32(b)(1)(ii). For purposes of 
calculating points and fees, the $3,000 origination fee would be 
included in points and fees under Sec.  1026.32(b)(1)(i), but the 
$1,500 in loan originator compensation need not be included in points 
and fees. If, however, the consumer pays to the creditor a $1,000 
origination fee and the creditor pays to the loan originator $1,500 in 
compensation, then the $1,000 origination fee would be included in 
points and fees under Sec.  1026.32(b)(1)(i), and $500 of the loan 
originator compensation would be included in points and fees under 
Sec.  1026.32(b)(1)(ii), equaling $1,500 in total points and fees, 
provided that no other points and fees are paid or compensation 
received.
    The Bureau solicited feedback regarding all aspects of both 
alternatives. In addition, the Bureau specifically requested feedback 
regarding whether there are differences in various types of loans, 
consumers, loan origination channels, or market segments which would 
justify applying different netting or additive rules to such 
categories. The Bureau also sought feedback as to whether, if netting 
were permitted, the creditor should be allowed to reduce the loan 
originator compensation by the full amount of points and fees included 
in the finance charge or whether the reduction should be limited to 
that portion of points and fees denominated as general origination 
charges.
    The Bureau also sought comment on the implications of each 
alternative on protecting consumers pursuant to the ability-to-repay 
requirements, qualified mortgage provisions, and the high-cost mortgage 
provisions of HOEPA. The Bureau also sought comment on the likely 
market reactions and impacts on the pricing of and access to credit of 
each alternative, particularly as to how such reactions might affect 
interest rate levels, the safe harbor and rebuttable presumption 
afforded to particular qualified mortgages, and application of the 
separate rate threshold for high-cost mortgages under HOEPA and whether

[[Page 35446]]

adjustment to the final rule would be appropriate. The Bureau further 
sought comment on the implications of both of the above proposed 
alternatives in light of the fact that both the qualified mortgage and 
HOEPA provisions allow certain bona fide discount points and bona fide 
third party charges to be excluded from the calculation of points and 
fees, but do not do so for affiliate charges.
    The Bureau adopted in the 2013 HOEPA Final Rule a requirement that 
creditors include compensation paid to originators of open-end credit 
plans in points and fees, to the same extent that such compensation is 
required to be included for closed-end credit transactions. The Bureau 
did not receive comments in response to the 2012 HOEPA Proposal 
indicating that additional or different guidance would be needed to 
calculate loan originator compensation in the open-end credit context. 
The Bureau noted in the 2013 ATR Proposed Rule that it would be useful 
to provide the public with an additional opportunity to comment. Thus, 
the Bureau solicited input on what guidance, if any, beyond that 
provided for closed-end credit transactions, would be helpful for 
creditors in calculating loan originator compensation in the open-end 
credit context.
    Finally, the Bureau sought comment generally on whether additional 
guidance or regulatory approaches regarding the inclusion of loan 
originator compensation in points and fees would be useful to protect 
consumers and facilitate compliance. In particular, the Bureau sought 
comment on whether it would be helpful to provide for additional 
adjustment of the rules or additional commentary to clarify any 
overlaps in definitions between the points and fees provisions in the 
ability-to-repay and HOEPA rulemakings and the provisions that the 
Bureau was separately finalizing in connection with the Bureau's 2012 
Loan Originator Proposal (since adopted in the 2013 Loan Originator 
Final Rule). For example, the Bureau sought comment on whether 
additional guidance would be useful with regard to treatment of 
compensation by persons who are ``loan originators'' but are not 
employed by a creditor or mortgage broker, given that the 2013 Loan 
Originator Final Rule implemented provisions of the Dodd-Frank Act that 
specify when employees of retailers of manufactured homes, servicers, 
and other parties are loan originators for Dodd-Frank Act purposes.
Comments Received
    The Bureau received numerous comments regarding the calculation of 
loan originator compensation for inclusion in points and fees for the 
qualified mortgage and high-cost mortgage points and fees limits. Many 
of the comments were substantially similar letters submitted by 
mortgage brokers. Many of the comments responded to the Bureau's 
proposed commentary regarding potential double counting of loan 
originator compensation. As described below, however, some comments 
also raised other issues regarding loan originator compensation.
    Few commenters addressed the Bureau's proposed comments 
32(b)(1)(ii)-5.i and 32(b)(1)(ii)-5.ii, which would have provided that 
payments by consumers to mortgage brokers (where those payments already 
have been included in points and fees under Sec.  1026.32(b)(1)(i)) and 
payments by mortgage brokers to their individual loan originator 
employees need not be counted as loan originator compensation and 
included in points and fees. Nearly all commenters that addressed these 
proposed comments supported them. One industry commenter, however, 
argued that the Bureau should not adopt the proposed comments unless 
the Bureau also excludes from points and fees compensation paid by 
creditors to their own loan officers. That commenter claimed that it 
would be inequitable to exclude from points and fees compensation paid 
to individual loan originators employed by a mortgage broker firm but 
not to exclude compensation paid to individual loan originators 
employed by the creditor.
    Many more commenters addressed the Bureau's two alternatives for 
proposed comment 32(b)(1)(ii)-5.iii. Consumer advocates urged the 
Bureau to adopt an additive approach for transactions in the wholesale 
channel, i.e., transactions originated through a mortgage broker. They 
argued that the statutory provision was intended to limit the total up-
front charges and loan originator compensation in loans designated as 
qualified mortgages (and to ensure that loans with charges and 
compensation above the threshold are subject to the special protection 
as high-cost mortgages). They maintained that a netting rule would in 
essence double the points and fees thresholds for qualified mortgages 
and high-cost mortgages. As a result, loans of $100,000 or more could 
have up-front charges of 3 percent of the total loan amount and loan 
originator compensation paid by the creditor equal to another 3 
percent, yet the loan could still be a qualified mortgage.\120\ 
Similarly, loans of $20,000 or more could have up-front charges of 5 
percent of the total loan amount and creditor-paid compensation equal 
to another 5 percent, yet the loan would still not qualify as a high-
cost mortgage.\121\
---------------------------------------------------------------------------

    \120\ For loans less than $100,000, the qualified mortgage 
points and fees limits are more than 3 percent of the total loan 
amount. See Sec.  1026.43(e)(3).
    \121\ For loans less than $20,000, the points and fees 
thresholds for high-cost mortgages are more than 5 percent of the 
loan amount. See Sec.  1026.32(a)(1)(ii).
---------------------------------------------------------------------------

    Some consumer advocates also argued that consumers have difficulty 
understanding and evaluating the cost of creditor-paid compensation to 
mortgage brokers. They contend that, as a result, creditor-paid 
compensation historically has resulted in more costly loans for 
consumers, with a higher risk of default, particularly when consumers 
also have made up-front payments. They argued that an additive rule 
provides important protection because the Bureau elected in the 2013 
Loan Originator Final Rule to permit creditors to continue charging up-
front fees to consumers when creditors compensate loan originators. 
They maintained that a netting rule would encourage creditors and 
mortgage brokers to combine creditor-paid compensation with up-front 
charges paid by consumers to creditors because such compensation then 
would not be included in points and fees. They argued that this 
combination is less transparent and more confusing to consumers than a 
model in which the consumer pays a mortgage broker directly or pays all 
charges through the rate.
    Some consumer advocates also argued that the additive approach was 
necessary to complement the protections contained in Sec.  1026.36(d) 
and (e) prohibiting or restricting certain loan originator compensation 
practices. They contended that mortgage brokers could develop 
problematic business models that would not violate the prohibition in 
Sec.  1026.36(d)(1) against basing compensation on loan terms and the 
prohibition in Sec.  1026.36(e) against steering consumers to 
consummate particular transactions to maximize loan originator 
compensation. For example, some consumer advocates noted that, without 
violating these prohibitions, mortgage brokers could specialize in 
subprime transactions with high up-front charges and high interest 
rates and could induce creditors to compete for such transactions and 
offer high loan originator compensation, so long as the compensation 
did not vary with the

[[Page 35447]]

terms of individual loans. Alternatively, they suggested that mortgage 
brokers could do business with a mix of high-cost creditors that pay 
high compensation and creditors offering more competitive loans that 
pay lower compensation to brokers. For consumers that mortgage brokers 
believe would be more likely to agree to more costly loans, mortgage 
brokers could take advantage of the safe harbor in the anti-steering 
rules by providing three quotes from high-cost creditors but could 
continue providing other customers with more competitive loans through 
other creditors. Consumer advocates argued that an additive approach 
would deter such practices because creditors charging high up-front 
fees and paying high compensation to mortgage brokers would find it 
more difficult to remain below the qualified mortgage points and fees 
limits and the high-cost mortgage points and fees threshold.
    Some consumer advocates also argued that the Bureau lacks the 
authority to adopt a netting approach for high-cost mortgages under 
HOEPA. They claimed that the Bureau would need to use its exception 
authority to adopt the netting approach and that TILA section 105(a) 
does not permit the Bureau to use its exception authority to modify the 
items included in points and fees for high-cost mortgages. Thus, they 
argued that the Bureau can adopt a netting approach only for 
calculating loan originator compensation for the qualified mortgage 
points and fees limits. They maintained that creating different 
measures for loan originator compensation for qualified mortgages and 
high-cost mortgages would be confusing and create compliance 
difficulties.
    Some consumer advocates also argued that double-counting concerns 
could be addressed simply by having the consumer pay the mortgage 
broker directly. They noted that this approach to structuring mortgage 
pricing would permit a consumer to pay up-front charges to reduce the 
amount of the interest rate. The consumer payment to the broker would 
be counted in points and fees only one time. Some consumer advocates 
maintained that there is little justification for combining creditor-
paid compensation to mortgage brokers with up-front charges paid by 
consumers. They claimed that, historically, the rationale for creditor-
paid compensation for mortgage brokers was that it provided an option 
for consumers that did not have sufficient funds or did not want to pay 
a mortgage broker directly and instead preferred to pay such 
compensation through a higher interest rate. They noted that such a 
rationale does not make sense in a transaction in which creditor-paid 
compensation is combined with up-front charges paid by the consumer. 
Some consumer advocates also suggested that double-counting concerns 
could be addressed by permitting creditors to net origination payments 
from consumers against loan originator compensation, so long as the 
creditors provided more detailed disclosures to consumers when such 
payments would be passed through as compensation to loan originators.
    Some consumer advocates argued that the Bureau should treat all 
loan originators the same and should therefore also adopt an additive 
rule for transactions in the retail channel. They maintained that, 
while problematic loan originator compensation practices historically 
may have been more prevalent in the wholesale channel, there were also 
similar problems in the retail channel. They also argued that, despite 
the prohibitions on steering and term-based compensation, creditors 
will find ways to encourage retail loan officers to steer consumers to 
higher-cost loans. For example, they suggested that creditors may use 
deferred compensation plans to provide some incentives for retail loan 
officers to steer consumers toward higher cost loans. They therefore 
argued that the same protections provided by an additive approach are 
necessary in the retail channel.
    Some consumer advocates, however, argued that the Bureau should 
adopt a different rule for transactions in the retail channel. They 
argued that Congress was particularly concerned with transactions with 
creditor-paid compensation to mortgage brokers and that such 
transactions historically tended to be more costly and to have higher 
rates of default. They claimed that the risks of consumer injury from 
loan originator compensation practices are significantly lower in the 
retail channel. They contended that, in the retail channel, creditors 
and their loan officers would have far greater difficulties in 
structuring their businesses to evade the prohibitions against steering 
and term-based compensation in Sec.  1026.36(d)(1) and Sec.  
1026.36(e). They noted that retail loan officers cannot pick and choose 
different loans from different creditors offering different levels of 
loan originator compensation. They also argued that mortgage brokers 
may be more successful in convincing consumers to accept more costly 
loans because consumers perceive that their mortgage broker is a 
trusted advisor and mistakenly believe that the broker is obligated to 
provide them with the lowest cost loan.
    Some consumer advocates also argued that the double-counting 
concerns are more pronounced in the retail channel because consumers do 
not have the option to pay retail loan officers directly. Under an 
additive approach, any loan originator compensation paid by the 
creditor to its loan officers would be included in points and fees in 
addition to any up-front charges paid by the consumer to the creditor. 
Because the consumer cannot pay up-front charges directly to the retail 
loan officer, the consumer would have less flexibility to pay up-front 
charges to receive a lower interest rate and still remain under the 
points and fees limits.
    In developing the final rule, the Bureau consulted with several 
Federal agencies, as required by section 1022(b)(2)(B) of the Dodd-
Frank Act. Three agencies, the Federal Deposit Insurance Corporation 
(FDIC), HUD, and the Office of the Comptroller of the Currency (OCC) 
submitted formal comment letters. The FDIC and HUD submitted a joint 
comment stating their view that compensation paid to mortgage brokers 
should be included in points and fees whether the consumer pays such 
compensation directly through up-front charges or indirectly through 
the creditor and funded through the interest rate. The FDIC and HUD 
stated that yield spread premiums (YSPs), i.e., compensation paid by a 
creditor and funded out of the interest rate, have been offered as a 
payment option for consumers that prefer lower up-front costs and a 
higher interest rate but that a consumer's choice to use a YSP to 
compensate a broker should not affect the calculation of loan 
originator compensation for points and fees. The FDIC and HUD 
maintained that the netting approach would undercount points and fees. 
They also stated that a netting approach would create incentives for 
transactions to include both up-front origination charges and YSPs 
because the up-front charges could be netted against the YSPs to reduce 
or eliminate the loan originator compensation that would be included in 
points and fees. The FDIC and HUD argued that evidence shows that 
transactions with both up-front charges and ``back-end'' payments tend 
to be the most costly for consumers and are the most difficult for them 
to evaluate when shopping for a mortgage.
    The FDIC and HUD supported the proposal to exclude compensation 
paid by a mortgage broker to its employees but argued that the Bureau 
should also exclude compensation paid by a creditor to its employees. 
The FDIC and

[[Page 35448]]

HUD argued that including in points and fees compensation paid by a 
creditor to its employee would increase compliance costs and make it 
difficult for them to create compliant systems by the January 2014 
effective date. They also stated that including such compensation in 
points and fees could result in variations in points and fees for loans 
with identical costs to the consumer, merely because, for example, one 
transaction involved a high-performing loan officer. They argued that 
excluding from points and fees compensation paid by a creditor to its 
employees would not compromise the consumer protection goals of the 
points and fees provision because of the loan originator compensation 
restrictions in Sec.  1026.36(d). They noted that employees of 
creditors have no ability to choose among creditors, further reducing 
the risk that consumers would be steered toward more costly loans.
    The OCC also submitted a comment stating its support for excluding 
from points and fees loan originator compensation paid by a consumer to 
a mortgage broker when that payment already is included in points and 
fees as part of the finance charge; excluding from points and fees 
compensation paid by a mortgage broker to its employees; excluding from 
points and fees compensation paid by a creditor to its employees; and 
using an additive approach to include in points and fees both 
origination charges paid by a consumer to a creditor and loan 
originator compensation paid by a creditor to a mortgage broker. The 
OCC stated that a netting approach would permit YSPs and origination 
fees to be charged in the same transaction without including both in 
points and fees and argued that this would not serve the interest of 
consumers or of a transparent, competitive mortgage market. The OCC 
noted that a netting approach would permit a qualified mortgage to have 
up-front charges equal to 3 percent of the loan amount and an interest 
rate sufficient to generate a 3 percent loan origination commission; 
similarly, a netting approach would permit a mortgage loan to have up-
front charges equal to 5 percent of the loan amount and an interest 
rate sufficient to generate a 5 percent loan origination commission. 
The OCC also maintained that including both origination charges and 
YSPs increases the complexity of mortgage transactions and confuses 
consumers, particularly those who are most vulnerable and have the 
fewest credit choices.
    As noted above, the OCC supported excluding from points and fees 
compensation paid by a creditor to its loan officers. The OCC noted 
that the banking industry expressed concerns about the operational 
burden of attempting to track compensation and about the potential 
uncertainty of whether, because of changes in loan originator 
compensation, a transaction would be a qualified mortgage. The OCC 
argued that excluding from points and fees compensation paid by a 
creditor to its loan officers would not adversely affect consumer 
protection. The OCC noted that individual employees in both the retail 
and wholesale channels are prohibited from steering a consumer to a 
more costly loan to increase their compensation but that there is an 
added layer of protection because a creditor's loan officers generally 
do not have the ability to select from different creditors when 
presenting loan options to consumers.
    Repeating arguments they made in response to the Board's 2011 ATR 
Proposal, many industry commenters, including creditors and their 
representatives and mortgage brokers and their representatives, again 
urged the Bureau to exclude loan originator compensation from points 
and fees altogether. They argued that loan originator compensation has 
little or no bearing on a consumer's ability to repay a mortgage and 
that it therefore is unnecessary to include such compensation in points 
and fees. They also maintained that other regulatory protections, 
including the prohibition in Sec.  1026.36(d)(1) on compensating loan 
originators based on the terms of the transaction and the prohibition 
in Sec.  1026.36(e) on steering consumers to consummate particular 
transactions to increase loan originator compensation, are sufficient 
to protect consumers against problematic loan originator compensation 
practices. They claimed that including loan originator compensation in 
points and fees would impose a significant compliance burden and make 
it far more difficult to offer qualified mortgages, leading to higher 
costs for credit and reduced access to credit.
    A trade group representing mortgage brokers and many individual 
mortgage brokers submitted substantially similar comments recommending 
that the Bureau exclude all compensation paid by creditors to loan 
originators. They argued that the Board's 2010 Loan Originator Final 
Rule already restricted loan originator compensation to prevent 
steering of consumers to more costly mortgages.
    One industry commenter recommended that, if the Bureau declines to 
exclude all loan originator compensation from points and fees, the 
Bureau should consider whether compensation paid by a creditor to a 
mortgage broker should be included in points and fees only for higher-
priced mortgage loans because competition may not be as robust for such 
loans. The commenter suggested that the Bureau consider excluding such 
compensation entirely from points and fees for mortgage loans in the 
prime market and excluding only a certain amount for higher-priced 
mortgage loans.
    Many industry commenters advocated that, if the Bureau declines to 
exclude loan originator compensation altogether, the Bureau should 
exclude from points and fees any compensation paid to loan originator 
employees. Many creditors and their representatives argued that 
compensation paid to loan originators employed by creditors, as well as 
loan originators employed by mortgage brokers, should be excluded from 
points and fees. They raised a number of different arguments to support 
excluding compensation paid to individual loan originators, including 
retail loan officers.
    First, they asserted that calculating loan originator compensation 
for individual loan originators would impose a substantial burden, 
particularly for employees of creditors. They noted that retail loan 
officers often receive a substantial part of their compensation after a 
mortgage loan is consummated, making it difficult to track and 
attribute compensation to a transaction before that transaction is 
consummated. They argued that, for retail loan officers, it would 
create significant compliance burdens to track compensation paid to 
each loan officer and attribute that compensation to each transaction. 
They noted that their existing systems are unable to track and 
attribute compensation for each loan officer for each transaction, and 
stated that they would have to develop new systems that could track 
compensation in real time and communicate with loan origination systems 
to calculate points and fees. They also asserted that it would impose 
substantial compliance risk because of the difficulty in accurately 
calculating such compensation.
    Second, they argued that calculating loan originator compensation 
at the time the interest rate is set would result in an inaccurate 
measure of compensation and would result in significant anomalies. They 
noted that various types of compensation, including salary and bonuses 
based on factors such as loan quality and customer satisfaction, would 
not be included in loan originator compensation because they cannot be 
attributed to a particular

[[Page 35449]]

transaction. However, they asserted that the amount of compensation 
that is included in points and fees may have little bearing on how much 
the consumer actually pays for a given transaction. For example, they 
noted that two transactions with identical interest rates and up-front 
charges may nevertheless have different loan originator compensation 
merely because one transaction involved an experienced, more highly 
compensated loan officer or because the interest rate in a transaction 
was set at the end of the month when a loan officer had qualified for a 
higher commission.
    Finally, they argued that employee compensation is merely another 
overhead cost that already is captured in the interest rate or in 
origination charges and has little, if any, bearing on a consumer's 
ability to repay a mortgage. They argued that compensation typically is 
already captured in points and fees as origination charges and that 
including employee loan originator compensation would constitute double 
counting.
    One industry commenter recommended that, if the Bureau declines to 
exclude compensation paid to individual loan originators from points 
and fees, the Bureau should consider other methods to simplify the 
calculation of loan originator compensation. That commenter suggested 
that the Bureau permit a creditor to include as loan originator 
compensation a fixed amount based on average costs for loan originator 
compensation over a prior period of time. The commenter noted that such 
an approach would ease the burden and complexity of tracking 
compensation for each loan.
    A trade group representing mortgage brokers and many individual 
mortgage brokers submitted substantially similar comments urging the 
Bureau to include in points and fees only compensation received by the 
originating entity for loan origination activities. They argued that 
fees associated with creditors or wholesale lenders should not be 
included in points and fees. They also maintained that originators 
should be permitted to charge various percentages for their loan 
origination activities, provided they do not exceed the qualified 
mortgage 3 percent cap and that non-bank originators should be 
permitted to receive compensation from the consumer, creditor, or a 
combination of both, as long as total compensation does not exceed 3 
percent of the loan amount.
    Many industry commenters argued that, if the Bureau elects not to 
exclude loan originator compensation from points and fees altogether, 
or to exclude compensation paid to loan originator employees, the 
Bureau should adopt the netting rule in proposed alternative 2 of 
comment 32(b)(1)(ii)-5.iii. They argued that the additive rule in 
proposed alternative 1 of comment 32(b)(1)(ii)-5.iii would result in 
significant double counting and could cause many loans to exceed the 
qualified mortgage points and fees limits and could cause some loans to 
exceed the high-cost mortgage threshold.
    One commenter asserted that the inclusion of loan originator 
compensation in points and fees, along with limitations on the number 
of discount points that may be excluded from points and fees, would 
limit the ability of nonprofit organizations to assist consumers in 
obtaining affordable mortgages. The commenter argued that the Bureau 
should adopt a rule permitting creditors to exclude payments to loan 
originators if the costs of such payments are absorbed by creditors and 
not passed along to consumers. As an alternative, the commenter 
supported comments 32(b)(1)(ii)-5.i and 32(b)(1)(ii)-5.ii, and the 
second alternative of comment 32(b)(1)(ii)-5.iii, arguing that these 
comments minimize double-counting. The commenter also urged the Bureau 
to permit consumers to exclude from points and fees more than two bona 
fide discount points, recommending that the Bureau exclude from points 
and fees any amounts used to buy down an interest rate that starts at 
or below the average 30-year fixed prime offer rate.
    Commenters also raised other issues related to loan originator 
compensation. Several industry and nonprofit commenters requested 
additional guidance regarding the calculation of loan originator 
compensation for transactions involving manufactured homes. They noted 
that, under Sec.  1026.36(a), as amended by the Bureau's 2013 Loan 
Originator Final Rule, manufactured home retailers and their employees 
could qualify as loan originators. Industry commenters requested 
additional guidance on what activities would cause a manufactured home 
retailer and its employees to qualify as loan originators. They stated 
that it remains unclear what activities a retailer and its employees 
could engage in without qualifying as loan originators and causing 
their compensation to be included in points and fees. Industry 
commenters also noted that, because the creditor had limited knowledge 
of and control over the activities of the retailer's employees, it 
would be difficult for the creditor to know whether the retailer and 
its employees had engaged in activities that would require their 
compensation to be included in points and fees. They therefore urged 
the Bureau to adopt a bright-line rule under which compensation would 
be included in points and fees only if paid to an employee of a 
creditor or a mortgage broker.
    Industry commenters also requested that the Bureau clarify what 
compensation must be included in points and fees when a manufactured 
home retailer and its employees qualify as loan originators. They 
argued that it is not clear whether the sales price or the sales 
commission in a transaction should be considered, at least in part, 
loan originator compensation. They urged the Bureau to clarify that 
compensation paid to a retailer and its employees in connection with 
the sale of a manufactured home should not be counted as loan 
originator compensation.
    Finally, a number of industry commenters again advocated excluding 
certain other items from points and fees. In particular, several 
industry commenters urged the Bureau to exclude from points and fees 
real-estate related charges paid to affiliates of the creditor and up-
front charges to recover the costs of loan-level price adjustments 
(LLPAs) imposed by the GSEs.
The Final Rule
    The Bureau addresses below various issues regarding the inclusion 
of loan originator compensation in points and fees. Specifically, the 
final rule provides that payments by consumers to mortgage brokers need 
not be counted as loan originator compensation where such payments 
already have been included in points and fees as part of the finance 
charge. In addition, compensation paid by a mortgage broker to its 
employees need not be included in points and fees. The Bureau also 
concludes that compensation paid by a creditor to its own loan officers 
need not be included in points and fees. The Bureau determines, 
however, that it should not use its exception authority to alter the 
requirement that compensation paid by a creditor to a mortgage broker 
is included in points and fees in addition to any origination charges 
paid by a consumer to the creditor. Finally, the Bureau provides 
further guidance on how to calculate the amount of loan originator 
compensation for transactions involving manufactured homes.
    Compensation paid by consumers to mortgage brokers. In the 2013 ATR 
Proposed Rule, the Bureau stated that the broad statutory language 
requiring inclusion of ``all'' compensation paid

[[Page 35450]]

``directly or indirectly'' and ``from any source'' supports counting 
compensation in points and fees each time it is paid to a loan 
originator. Thus, the Bureau reads the express language of the statute 
as providing for the inclusion of loan originator compensation in 
points and fees, even if some or all of that compensation may already 
have been included in points and fees under other elements of the 
definition, and the 2013 ATR Final Rule adopted this statutory 
approach.
    However, as noted in the 2013 ATR Proposed Rule, the Bureau does 
not believe it would be in the interest of consumers or industry to 
adhere to this ``additive'' approach when it is clear that the 
compensation already has been captured in points and fees. Thus, as 
explained below, the Bureau is using its adjustment and exception 
authority and its authority to revise the criteria that define a 
qualified mortgage to eliminate double counting in such situations.
    As noted above, the Bureau proposed in the 2013 ATR Proposed Rule 
three different examples (one of which had two alternatives) for 
calculating loan originator compensation when such compensation may 
already have been included in points and fees. The first example, 
proposed comment 32(b)(1)(ii)-5.i, would have provided that a consumer 
payment to a mortgage broker that is included in points and fees under 
Sec.  1026.32(b)(1)(i) (because it is included in the finance charge) 
does not have to be counted in points and fees again under Sec.  
1026.32(b)(1)(ii) (as loan originator compensation). The Bureau noted 
in the 2013 ATR Proposed Rule that it did not believe that counting a 
single payment to a mortgage broker twice would advance the purpose of 
the points and fees limits. Few comments addressed this proposed 
example, and, with one exception, which is discussed below in 
connection with proposed comment 32(b)(1)(ii)-5.ii, those comments 
supported the Bureau's proposal that such payments should not be 
included in points and fees under Sec.  1026.32(b)(1)(ii) if they 
already are included in points and fees under Sec.  1026.32(b)(1)(i).
    The Bureau is therefore adopting comment 32(b)(1)(ii)-5.i as 
proposed and renumbered as 32(b)(1)(ii)-4.i. The Bureau also is 
adopting new Sec.  1026.32(b)(1)(ii)(A) to provide that loan originator 
compensation paid by a consumer to a mortgage broker, as defined in 
Sec.  1026.36(a)(2), is not included in points and fees if it already 
has been included in points and fees because it is included in the 
finance charge under Sec.  1026.32(b)(1)(i). The term ``mortgage 
broker'' is defined in Sec.  1026.36(a)(2) to mean any loan originator 
other than an employee of a creditor. Under this definition, persons 
whose primary business is not originating mortgage loans may 
nevertheless be mortgage brokers if they qualify as a ``loan 
originator'' under Sec.  1026.36(a)(1) and are not employees of a 
creditor. The use of the term ``mortgage broker'' in Sec.  
1026.32(b)(1)(ii)(A) is appropriate because compensation is excluded 
from points and fees under Sec.  1026.32(b)(1)(ii)(A) only if such 
compensation already has been included in points and fees under Sec.  
1026.32(b)(1)(i).
    The Bureau is adopting new Sec.  1026.32(b)(1)(ii)(A) pursuant to 
its authority under TILA section 105(a) to make such adjustments and 
exceptions for any class of transactions as the Bureau finds necessary 
or proper to facilitate compliance with TILA and to effectuate the 
purposes of TILA, including the purposes of TILA section 129C of 
ensuring that consumers are offered and receive residential mortgage 
loans that reasonably reflect their ability to repay the loans. The 
Bureau's understanding of this purpose is informed by the findings 
related to the purposes of section 129C of ensuring that responsible, 
affordable mortgage credit remains available to consumers. The Bureau 
believes that using its exception authorities to ensure that a single 
payment to a mortgage broker will not be counted twice in points and 
fees will facilitate compliance with the points and fees regulatory 
regime by allowing creditors to count the payment to a broker once 
without requiring further investigation into the mortgage broker's 
employee compensation practices, and by making sure that all creditors 
apply the provision consistently. It will also effectuate the purposes 
of TILA by preventing the points and fees calculation from being 
artificially inflated, thereby helping to keep mortgage loans available 
and affordable by ensuring that they are subject to the appropriate 
regulatory framework with respect to qualified mortgages and the high-
cost mortgage threshold. The Bureau is also invoking its authority 
under TILA section 129C(b)(3)(B) to revise, add to, or subtract from 
the criteria that define a qualified mortgage consistent with 
applicable standards. For the reasons explained above, the Bureau has 
determined that it is necessary and proper to ensure that responsible, 
affordable mortgage credit remains available to consumers in a manner 
consistent with the purposes of TILA section 129C and necessary and 
appropriate to effectuate the purposes of this section and to 
facilitate compliance with section 129C. With respect to its use of 
TILA section 129C(b)(3)(B) here and elsewhere in this section, the 
Bureau believes this authority includes adjustments and exceptions to 
the definitions of the criteria for qualified mortgages and that it is 
consistent with the purpose of facilitating compliance to extend use of 
this authority to the points and fees definitions for high-cost 
mortgage in order to preserve the consistency of the qualified mortgage 
and high-cost mortgage definitions. As noted above, by helping to 
ensure that the points and fees calculation is not artificially 
inflated by counting a single payment to a mortgage broker twice, the 
Bureau is helping to ensure that responsible, affordable mortgage 
credit remains available to consumers.
    Some consumer advocates argued that the Bureau lacks exception 
authority to exclude loan originator compensation from the points and 
fees calculation for the high-cost mortgage threshold under HOEPA.\122\ 
However, while the Bureau's authority under TILA section 105(a) does 
not extend to the substantive protections for high-cost mortgages in 
TILA section 129, the provision that defines high-cost mortgages, 
including the points and fees definitions, is part of TILA section 103. 
Thus, although the Bureau cannot use its authority under TILA section 
105(a) to alter the substantive protections accorded to high-cost 
mortgages under TILA section 129, it can use that authority to adjust 
the criteria used to define a high-cost mortgage, including the method 
for calculating points and fees, as specified elsewhere in TILA.
---------------------------------------------------------------------------

    \122\ The consumer advocate commenters made this argument to 
oppose the Bureau's using exception authority to exclude from points 
and fees (or use a netting approach for) compensation paid by 
creditors to loan originators. However, because this argument would 
also apply to the Bureau's use of exception authority to exclude 
from points and fees compensation paid by a consumer to a mortgage 
broker or by a mortgage broker to its employees, the Bureau 
addresses this argument here with respect to this and other uses of 
its exception authority in this rulemaking to exclude certain loan 
originator compensation from points and fees.
---------------------------------------------------------------------------

    Compensation paid by mortgage brokers to their loan originator 
employees. The second example, proposed comment 32(b)(1)(ii)-5.ii, 
would have provided that compensation paid by a mortgage broker to its 
individual loan originator employees is not included in points and fees 
under Sec.  1026.32(b)(1)(ii). The Bureau stated in the 2013 ATR 
Proposed Rule that the exclusion from points and fees was warranted 
because a payment from

[[Page 35451]]

either a consumer or creditor to a mortgage broker firm already is 
counted in points and fees, and that it would not be necessary or 
appropriate to also include in points and fees any funds that the 
mortgage broker firm passes on to its individual loan originator 
employees. Again, few commenters addressed this example, and, with one 
exception, they supported the Bureau's proposed comment.
    As noted above, one creditor argued that it would be unfair to 
adopt proposed comments 32(b)(1)(ii)-5.i and 32(b)(1)(ii)-5.ii without 
adopting a similar exclusion for compensation paid by a creditor to its 
employee loan originators (i.e., its own loan officers). For the 
reasons set forth below, the Bureau is using its exception authority to 
permit creditors to exclude from points and fees compensation paid to 
their own loan officers.
    Accordingly, the Bureau is adopting comment 32(b)(1)(ii)-5.ii 
substantially as proposed and renumbered as 32(b)(1)(ii)-4.ii, and is 
adopting new Sec.  1026.32(b)(1)(ii)(B) to provide that a payment from 
a mortgage broker, as defined in Sec.  1026.36(a)(2), to a loan 
originator who is an employee of the mortgage broker is not included in 
points and fees. As noted above, the term ``mortgage broker'' is 
defined in Sec.  1026.36(a)(2) to mean any loan originator other than 
an employee of a creditor. Under this definition, persons whose primary 
business is not originating mortgage loans may nevertheless be mortgage 
brokers if they qualify as a ``loan originator'' under Sec.  
1026.36(a)(1) and are not employees of a creditor. To qualify as a loan 
originator under Sec.  1026.36(a)(1), a person must engage in loan 
origination activities in expectation of compensation. The use of the 
term ``mortgage broker'' in Sec.  1026.32(b)(1)(ii)(B) is appropriate 
because, as discussed above, compensation that a mortgage broker 
receives from a consumer or creditor is included in points and fees, 
and this compensation provides the funds for any compensation that is 
paid by the mortgage broker to its employee.
    TILA section 103(bb)(4)(B) provides that compensation paid by a 
``consumer or creditor'' to a loan originator is included in points and 
fees. The Bureau notes that a mortgage broker firm is neither a 
consumer nor a creditor, so the statute could plausibly be read so that 
points and fees would not include payments from a mortgage broker firm 
to loan originators who work for the firm. However, TILA section 
103(bb)(4)(B) provides that compensation must be included in points and 
fees if it is paid ``directly or indirectly'' by a consumer or creditor 
``from any source.'' Because compensation by a mortgage broker firm to 
its employees is funded from consumer or creditor payments, such 
compensation could be interpreted as being paid indirectly by a 
consumer or creditor.
    Given the ambiguity, the Bureau is also invoking its authority 
under TILA section 105(a) to make such adjustments and exceptions for a 
class of transactions as the Bureau finds necessary or proper to 
facilitate compliance with TILA and to effectuate the purposes of TILA, 
including the purposes of TILA section 129C of ensuring that consumers 
are offered and receive residential mortgage loans that reasonably 
reflect their ability to repay the loans. The Bureau's understanding of 
this purpose is informed by the findings related to the purposes of 
section 129C of ensuring that responsible, affordable mortgage credit 
remains available to consumers. Because payments by mortgage brokers to 
their employees already have been captured in the points and fees 
calculation, excluding such payments will facilitate compliance with 
the points and fees regulatory regime by eliminating the need for 
further investigation into the mortgage brokers' employee compensation 
practices, and by making sure that all creditors apply the provision 
consistently. It will also effectuate the purposes of TILA by 
preventing the points and fees calculation from being artificially 
inflated, thereby helping to keep mortgage loans available and 
affordable by ensuring that they are subject to the appropriate 
regulatory framework with respect to qualified mortgages and the high-
cost mortgage threshold. The Bureau is also invoking its authority 
under TILA section 129C(b)(3)(B) to revise, add to, or subtract from 
the criteria that define a qualified mortgage consistent with 
applicable standards. For the reasons explained above, the Bureau has 
determined that it is necessary and proper to ensure that responsible, 
affordable mortgage credit remains available to consumers in a manner 
consistent with the purposes of TILA section 129C and necessary and 
appropriate to effectuate the purposes of this section and to 
facilitate compliance with section 129C.
    Compensation paid by creditors. As noted in the 2013 ATR Proposed 
Rule, it is significantly more complicated to devise a rule for 
calculating loan originator compensation when the consumer pays some 
up-front charges to the creditor and the creditor pays loan originator 
compensation to either its own loan officer or to a mortgage broker. 
That is because the creditor can fund the compensation in two different 
ways: either through origination charges paid by the consumer (which 
would be included in points and fees) or through the interest rate 
(which would not be included in points and fees). There is no 
practicable method for the Bureau to determine by rule the extent to 
which compensation paid by the creditor was funded through origination 
charges and, thereby, already captured in the points and fees 
calculation. The Bureau therefore indicated that it believed that 
bright-line rules would be necessary to facilitate compliance.
    As discussed below, the Bureau concludes that it is appropriate to 
apply different requirements to loan originator compensation paid by 
the creditor to its own loan officers and to compensation paid by the 
creditor to other loan originators. Specifically, the Bureau is using 
its exception authority to exclude from points and fees compensation 
paid by the creditor to its own loan officers. Compensation paid by the 
creditor to other loan originators is included in points and fees, and 
such compensation must be counted in addition to any up-front charges 
that are included in points and fees.
    Compensation paid by creditors to their own loan officers. In 
response to the Board's 2011 ATR Proposal, many creditors and 
organizations representing creditors urged the Bureau to exclude all 
compensation paid to individual loan originators. Among other things, 
these commenters had argued that compensation paid to loan originators 
already is included in the cost of loan, either in the interest rate or 
in origination charges; that having to track individual loan 
originators' compensation and attribute it to specific transactions 
would impose a significant compliance burden; and that including 
compensation paid to individual loan originators would cause anomalous 
results, with otherwise identical loans having different amounts of 
loan originator compensation included in points and fees because of the 
timing of the loan or the identity of the loan originator. See 78 FR 
6433-34 (Jan. 30, 2013).
    In the 2013 ATR Final Rule, the Bureau acknowledged the concerns 
about including in points and fees compensation paid to individual loan 
originators. Nevertheless, the Bureau declined to exclude such 
compensation, noting that the statutory language provided that points 
and fees include compensation paid to ``mortgage originators,'' which 
is defined to

[[Page 35452]]

include individual loan officers. Id. at 6436. The Bureau also noted 
that excluding from points and fees compensation paid by creditors to 
their loan officers would exacerbate the differential treatment between 
the retail and wholesale channels, as creditors in retail transactions 
would not be required to include any loan originator compensation in 
points and fees, while creditors in wholesale transactions would be 
required to include in points and fees compensation paid by either 
consumers or creditors to mortgage brokers. Id.
    The Bureau notes that, in responding to the Board's 2011 ATR 
Proposal, commenters did not have the benefit of considering how 
including loan originator compensation in points and fees would 
interact with the rules regarding loan originator compensation that 
were proposed by the Bureau in the 2012 Loan Originator Proposal and 
finalized in the 2013 Loan Originator Final Rule. In response to the 
2013 ATR Proposed Rule, the Bureau received detailed comments analyzing 
whether, in light of the protections in the 2013 Loan Originator Final 
Rule, it would be appropriate to include various types of loan 
originator compensation in points and fees. The Bureau also received 
more extensive explanations from creditors and organizations 
representing creditors about the difficulties of calculating 
compensation paid by creditors to their own loan officers.
    After carefully considering the comments received in response to 
the 2013 ATR Proposed Rule, the Bureau believes it is appropriate to 
reconsider whether compensation paid to individual loan originators 
should be excluded from points and fees. As noted above, the Bureau 
already has determined that compensation paid by a mortgage broker to 
its loan originator employees need not be included in points and fees. 
The Bureau concludes that it should use its exception authority to 
exclude the compensation that creditors pay to their loan officers from 
points and fees as well. As discussed in more detail below, the Bureau 
determines that including compensation paid by creditors to their loan 
officers in points and fees at this time not only would impose a severe 
compliance burden on the industry, but also would lead to distortions 
in the market for mortgage loans and produce anomalous results for 
consumers. The Bureau also believes that there are structural and 
operational reasons why not including in points and fees compensation 
paid to retail loan officers poses a limited risk of harm to consumers. 
As a result, the Bureau believes that including such compensation in 
points and fees would not effectuate the purposes of the statute and in 
fact would frustrate efforts to implement and comply with the points 
and fees limits and with the broader statutory and regulatory regime 
for qualified mortgages and high-cost mortgages that must be 
implemented by January 2014. The Bureau has decided at this time to 
exclude compensation paid by creditors to their own loan officers. The 
Bureau will continue to gather data to determine the need for and the 
best method for counting compensation paid by creditors to their loan 
officers consistent with the purpose of the statute. The Bureau will 
closely monitor the market as it considers this issue to determine if 
further action is warranted.
    As indicated above, several factors support this conclusion.\123\ 
Attributing overall individual loan officer compensation to specific 
transactions is an extraordinarily difficult task. The Bureau 
considered these difficulties in the 2013 ATR Final Rule, when it 
revised Sec.  1026.32(b)(1)(ii) to provide that creditors must include 
in points and fees loan originator compensation that can be attributed 
to that transaction at the time the interest rate is set. The 
requirement that the compensation is included only if it can be 
attributed to the transaction at the time the interest rate is set was 
intended to permit creditors to calculate compensation sufficiently 
early in the process so that they could know well before consummation 
whether a loan would be a qualified mortgage or a high-cost mortgage. 
See 78 FR 6437 (Jan. 30, 2013). This calculation is straightforward for 
compensation paid by creditors to mortgage brokers: For each 
transaction, creditors typically pay a commission to mortgage brokers 
pursuant to a pre-existing contract between the creditor and the 
broker, and that commission is known at the time the interest rate is 
set. Furthermore, because the commission structure is known in advance 
it can be built into the price of the loan, either through up-front 
charges or through the interest rate.
---------------------------------------------------------------------------

    \123\ Some creditors and organizations representing creditors 
had argued that it would be appropriate to exclude from points and 
fees compensation paid by creditors to their loan officers because 
compensation paid to loan originator employees of a mortgage 
brokerage firm would also be excluded. As noted above, compensation 
paid to employees of mortgage brokerage firms is excluded from 
points and fees because such compensation already is captured in 
points and fees in the payments by consumers or creditors to the 
mortgage brokerage firms. By contrast, as noted above, compensation 
paid to a retail loan officer may be funded either through 
origination charges or through the interest rate, so there is no 
guarantee that such compensation already has been included in points 
and fees. As discussed below, however, the Bureau concludes that 
additional factors justify excluding from points and fees 
compensation paid by creditors to their own loan officers.
---------------------------------------------------------------------------

    The calculation of loan originator compensation is significantly 
more complicated for retail loan officers.\124\ As noted by industry 
commenters, compensation for retail loan officers often is not 
determined until after the end of the month or some other, longer time 
period (such as a quarter) and in many cases is based upon the number 
or dollar volume of the transactions that have been consummated during 
the preceding month or other time period. However, for purposes of 
determining whether a particular transaction is a qualified mortgage 
(or a high-cost mortgage), the calculation of points and fees (and thus 
loan originator compensation) must be performed prior to consummation. 
Thus, to calculate loan originator compensation for retail loan 
officers for purposes of applying the qualified mortgage and high-cost 
mortgage thresholds, creditors would have to determine, at the time the 
interest rate is set, what compensation a retail loan officer would be 
entitled to receive if a particular transaction were consummated. As 
noted above, this calculation often would be based on the number or 
dollar amount of transactions already consummated during the time 
period in which compensation is set (e.g., the month or quarter or 
other time period). This calculation may produce an artificial measure 
of compensation because, for the transaction for which compensation is 
being calculated, the date the interest rate is set may fall in a 
different time period than the date the transaction is consummated and 
actual compensation is set.\125\ If the interest rate were to be reset 
(if, for example, a rate lock expires or underwriting identifies risk 
factors which leads to an increase in the interest rate), the 
compensation would have to be recalculated.
---------------------------------------------------------------------------

    \124\ The calculation of compensation paid by mortgage brokerage 
firms to their individual loan originator employees could be 
similarly complicated. However, as discussed above, the Bureau is 
excluding such compensation from points and fees because such 
compensation already has been captured in the points and fees 
calculation.
    \125\ The Bureau recognizes that a more accurate measure of 
compensation could be calculated at the time of consummation. 
However, as noted in the 2013 ATR Final Rule, creditors need to know 
in advance of consummation whether a transaction will be a qualified 
mortgage or a high-cost mortgage and therefore need to be able to 
calculate loan originator compensation, and points and fees 
generally, prior to consummation. Thus, the Bureau does not believe 
that is appropriate to require that loan originator compensation be 
calculated at consummation.

---------------------------------------------------------------------------

[[Page 35453]]

    The Bureau understands from industry comments that creditors' 
existing systems generally do not track compensation for each loan 
officer for each specific transaction. Thus, creditors would have to 
develop new systems or reprogram existing systems to track and 
attribute compensation for each transaction. Depending on the 
compensation structure, these systems would have to be dynamic so that 
they could track at the time the interest rate is set what compensation 
a loan officer would be entitled to receive if a given transaction were 
consummated.\126\ Further, the systems would have to feed into the 
creditors' origination systems so that the points-and-fee calculation 
could be made. The Bureau is also concerned that creditors may have 
difficulty in implementing these systems by January 2014, when the ATR 
Final Rule becomes effective.
---------------------------------------------------------------------------

    \126\ Moreover, the Bureau understands that some consumers 
prefer to float the interest rate and other consumers lock their 
interest rate but have the right to relock one time at a lower rate. 
Thus, in these circumstances, creditors would have to calculate (or 
recalculate) loan originator compensation later in the process.
---------------------------------------------------------------------------

    In addition, the Bureau is concerned that requiring creditors to 
calculate loan originator compensation for their loan officers may 
create uncertainty about the points and fees calculations and thus 
about whether loans satisfy the standards for qualified mortgages and 
remain below the threshold for high-cost mortgages. As noted above, if 
compensation paid to creditors' loan officers were included in points 
and fees, creditors would have to calculate at the time the interest 
rate is set what compensation a loan officer would be entitled to 
receive in the future. This compensation often would depend on the 
timing of other loans (i.e., how many loans have been consummated or 
the dollar value of loans consummated by the loan officer at the time 
the interest rate is set), introducing complexity and potential for 
errors into the calculation. Moreover, counting retail compensation in 
points and fees would introduce significant uncertainty into 
transactions in which the interest rate is not locked well in advance 
of consummation. For instance, if the consumer elected at the time of 
application to allow the interest rate to float, the interest rate may 
not be set until several days before consummation. In such cases, the 
creditor might be uncertain as to whether the transaction was a 
qualified mortgage or a high-cost mortgage until that time. Similarly, 
even if the interest rate is locked in early in the process, it may 
subsequently be re-set, either because the rate lock expires or because 
the terms of the transaction are renegotiated after underwriting. In 
those cases, a transaction that was expected to be a qualified mortgage 
may lose that status because the loan originator compensation is 
recalculated at the time the interest rate is finally set. The 
uncertainty of calculating compensation highlights the difficulty 
creditors would face in complying with a rule that includes 
compensation to the creditors' employees in points and fees, and the 
Bureau is concerned that this uncertainty could be disruptive to the 
market.
    The burden and uncertainty of requiring creditors to calculate loan 
originator compensation for their loan officers with respect to each 
individual transaction as of the time the interest rate is set are of 
particular concern because it does not appear that this calculation 
would further the purposes of the statute. The Bureau believes that 
Congress expanded the scope of loan originator compensation to be 
included in points and fees because of concerns that a loan with high 
loan originator compensation is likely to be more costly and may pose 
greater risk for consumers. However, for the reasons discussed below, 
the Bureau does not believe that calculating at the time the interest 
rate is set the compensation to be paid by creditors to their own loan 
officers is likely to be an accurate measure of the actual compensation 
the loan officer will receive if the loan is consummated or of the 
costs passed along to consumers.
    First, the compensation as calculated may be inaccurate and 
incomplete. As noted above, compensation would be calculated at the 
time the interest rate is set, so the actual compensation that a loan 
officer would receive may be different from the amount that would be 
included in points and fees. Moreover, various types of compensation, 
such as salary and bonuses for factors such as loan performance and 
customer satisfaction, cannot be attributed to specific transactions 
and therefore would not be included in loan originator compensation for 
calculating points and fees. As a result, the calculation would produce 
an incomplete measure of compensation, and creditors would have 
substantial flexibility to restructure their compensation systems to 
reduce the amount of loan originator compensation that they would have 
to include in points and fees. To the extent that increasing numbers of 
creditors were to restructure compensation to avoid the impact of the 
rules, the inclusion of loan originator compensation in points and fees 
would become even less meaningful or consistent over time.
    Second, because of the limitations on calculating compensation, 
counting retail loan originator compensation in points and fees would 
produce arbitrary outcomes because the amount of compensation that 
would be attributed to a particular transaction often will be unrelated 
to the costs or risks borne by the consumer. For example, two retail 
transactions with identical interest rates and up-front charges could 
have different loan originator compensation, and therefore different 
points and fees, simply because a senior, more highly compensated loan 
officer was involved in one of the transactions. Similarly, two 
transactions involving the same loan officer could have different loan 
originator compensation amounts depending on whether the interest rates 
are set at the end of the month, when the loan officer might qualify 
for a higher commission for meeting a monthly quota for loans closed, 
rather than at the beginning of the month, when such a quota is 
unlikely to have been met.\127\ By contrast, the costs to the consumer, 
as reflected in origination charges and the interest rate, are not 
likely to vary based on the seniority of the loan originator handling 
the transaction or the loan officer's satisfaction of the creditor's 
monthly quota for obtaining a higher commission.
---------------------------------------------------------------------------

    \127\ Another arbitrary result could occur when a consumer 
relocks at a lower interest rate. At the time of the initial rate 
set, the creditor could calculate loan originator compensation and 
determine that points and fees do not exceed the qualified mortgage 
points and fees limit or the high-cost mortgage threshold. However, 
after the rate is reset, the creditor would have to recalculate loan 
originator compensation, and, if the loan originator has satisfied a 
creditor's monthly quota for obtaining a higher commission, it is 
possible that the higher loan originator compensation could cause 
the points and fees to exceed the qualified mortgage limits (or the 
high-cost mortgage threshold).
---------------------------------------------------------------------------

    The Bureau is also concerned that including in points and fees 
compensation paid by a creditor to its own loan officer would place 
additional limits on consumers' ability to structure their preferred 
combination of up-front charges and interest rate. The points and fees 
limits themselves restrict consumers' ability to pay up-front charges 
and still obtain a qualified mortgage (or avoid a high-cost mortgage). 
However, these limits would permit even less flexibility in the retail 
channel because consumers cannot pay retail loan officers directly. For 
example, assume a consumer is seeking a $100,000 loan and wants to pay 
$2,500 in up-front charges at closing rather than paying those costs 
through a higher

[[Page 35454]]

interest rate. Assume that the up-front charges would all be included 
in points and fees and that the transaction is being originated through 
a creditor's loan officer, whose compensation is $1,500. Under an 
additive approach, if the consumer pays $2,500 in origination charges 
to the creditor and the creditor pays $1,500 to its loan officer, the 
points and fees would be $4,000 and the loan could not be a qualified 
mortgage. In contrast with a transaction originated through a mortgage 
broker, the consumer would not have the option of paying $1,500 
directly to the loan officer. The $1,500 in loan originator 
compensation would count toward the points and fees limits, so the 
consumer therefore would not be able to pay all of the $2,500 up-front 
without exceeding the points and fees limit for a qualified 
mortgage.\128\ The consumer would have to pay other costs through a 
higher interest rate and the resulting higher monthly payments. Thus, 
under an additive rule, consumers in the retail channel would have less 
flexibility to pay up-front charges to achieve a lower interest rate 
and have the transaction remain below the points and fees limits for 
qualified mortgages and below the threshold for high-cost mortgages. 
For certain consumers, such as those who do not qualify for a higher 
interest rate, the impact could affect their access to credit. 
Excluding from points and fees loan originator compensation paid by a 
creditor to its loan officers would address this concern.
---------------------------------------------------------------------------

    \128\ If the consumer's payments satisfy the standards of Sec.  
1026.32(b)(1)(i)(E) or (F), the up-front fees could be excluded from 
points and fees as bona fide discount points.
---------------------------------------------------------------------------

    The Bureau recognizes that creditors may earn greater profits when 
consumers receive more costly loans and that, in the absence of 
regulatory protections, creditors could adopt compensation arrangements 
that create incentives for their loan officers to originate loans that 
are more costly for consumers. Including loan officer compensation in 
points and fees would have imposed some limits on the ability of 
creditors to offer higher compensation to its loan officers. The Bureau 
believes, however, that the prohibition on terms-based compensation in 
Sec.  1026.36(d)(1) will provide substantial protection against 
problematic loan originator compensation practices in the retail 
channel. The Bureau concludes that these protections will significantly 
diminish the risk of consumer injury from excluding from points and 
fees compensation paid by creditors to their retail loan officers. The 
prohibition in Sec.  1026.36(d)(1) prevents a creditor from paying 
higher compensation to its loan officer for a transaction that, for 
example, has a higher interest rate or higher up-front charges. 
Moreover, the Bureau agrees with consumer advocate commenters and 
comments by the FDIC and HUD and by the OCC that argue that retail loan 
officers would have greater difficulty than mortgage brokers in trying 
to maneuver around the margins of Sec.  1026.36(d)(1). Unlike a 
mortgage broker, a retail loan officer works with only one creditor and 
therefore cannot choose among different creditors paying different 
compensation in deciding which loans to offer a consumer.
    As noted above, some consumer advocates argued that creditors would 
still be able to structure loan originator compensation to create 
incentives for their loan officers to direct consumers toward higher-
cost loans. For example, they noted that the 2013 Loan Originator Final 
Rule adopted Sec.  1026.36(d)(1)(iii) and (iv), which permit creditors 
to offer, under certain conditions, deferred compensation plans and 
non-deferred profits-based compensation to their loan officers that 
otherwise would violate the prohibition on term-based compensation. 
They suggested that such arrangements could be structured to encourage 
loan officers to induce consumers to accept more costly loans. The 
Bureau is sensitive to the risk that unscrupulous creditors may look 
for gaps and loopholes in regulations; however, the Bureau notes that 
the referenced provisions of Sec.  1026.36(d)(1) were carefully crafted 
to attenuate any incentives for directing consumers to higher-cost 
loans to increase compensation. The Bureau recognizes that creditors 
have significant incentives to work around the margins of the rules 
and, as noted above, is committed to monitoring compensation practices 
closely for problematic developments that may require further action.
    In light of these concerns about the significant compliance burden 
and the questionable accuracy of the calculation for retail loan 
officer compensation, the Bureau believes it is appropriate at this 
time to exclude such compensation from points and fees. The Bureau will 
continue to monitor and gather information about loan originator 
compensation practices to determine if there are methods that are 
practicable and consistent with the purposes of the statute for 
including in points and fees loan originator compensation paid by 
creditors to their loan officers. As part of the Bureau's ongoing 
monitoring of the mortgage market and for the purposes of the Dodd-
Frank Act section 1022(d) five-year review, the Bureau will assess how 
the exclusion from points and fees of compensation paid by creditors to 
their loan officers is affecting consumers. If the Bureau were to find 
that the exclusion for retail loan officer compensation was harming 
consumers, the Bureau could issue a new proposal to narrow or eliminate 
the exclusion. The Bureau is aware that problematic loan originator 
compensation practices occurred in the past in the retail channel and 
that questionable practices may occur again. The Bureau will carefully 
monitor the marketplace to respond to any such abusive practices, 
including through the use of its supervisory and enforcement authority.
    The Bureau stated in the 2013 ATR Final Rule that it was reluctant 
to exclude from points and fees compensation paid to individual loan 
originators because it would treat the retail and wholesale channels 
differently. As discussed above, however, after considering the 
information received in response to the 2013 ATR Proposed Rule, the 
Bureau believes there are significant difficulties in calculating loan 
originator compensation in the retail channel. By contrast, in 
transactions involving mortgage brokers, there is little compliance 
burden in calculating loan originator compensation, and compensation 
typically can be calculated with relative ease and accuracy. Moreover, 
the Bureau believes that there is less risk of consumer injury from 
excluding loan originator compensation from points and fees in the 
retail channel. The Bureau is concerned that that mortgage brokers may 
have the flexibility to structure their business model to evade the 
prohibitions of Sec.  1026.36(d)(1) and Sec.  1026.36(e) and that the 
risk of consumer injury from problematic loan originator compensation 
practices is therefore higher in the wholesale channel than in the 
retail channel. The Bureau is also concerned that unscrupulous 
creditors seeking to originate more costly loans could use the 
wholesale channel to expand their operations more rapidly and with 
limited investment. Historical evidence also suggests that the risks of 
consumer injury may be greater in the wholesale channel. As noted 
above, some consumer advocates cited evidence that, particularly in the 
subprime market, loans originated with mortgage brokers were on average 
more expensive and more likely to default than loans

[[Page 35455]]

originated in the retail channel.\129\ Thus, for the reasons discussed 
above, the Bureau believes that it is necessary and proper to use its 
exception authority to exclude from points and fees compensation paid 
by creditors to their loan officers.
---------------------------------------------------------------------------

    \129\ See, e.g., Keith Ernst, Debbie Bocian, Wei Li, Ctr. for 
Responsible Lending, Steered Wrong: Brokers, Borrowers, and Subprime 
Loans (2008); Antje Berndt, Burton Hollifield, and Patrik Sandas, 
What Broker Charges Reveal About Mortgage Credit Risk, (2012); Susan 
E. Woodward, A Study of Closing Costs for FHA Mortgages available at 
http://www.huduser.org/Publications/pdf/FHA_closing_cost.pdf. The 
Bureau's review of studies generally supports this view, though the 
evidence is not unequivocal. Wei Jiang, Ashlyn Aiko Nelson, and 
Edward Vytacil, Liar's Loan? Effects of Origination Channel and 
Information Falsification on Mortgage Delinquency, SSRN working 
paper 142162 (2009) use a dataset from one bank with approximately 
700,000 loans originated between 2004 and 2008. They report that 
``the Broker subsamples have delinquency probabilities that are 10-
14 percentage points (or more than 50%) higher than the Bank 
subsamples, a manifestation of the misalignment of incentives for 
brokers who issue loans on the bank's behalf for commissions but do 
not bear the long-term consequences of low-quality loans.'' They 
also show that loan pricing does not compensate for the loan 
performance differences. Michael LaCour-Little, The Pricing of 
Mortgages by Brokers: An Agency Problem?, J. of Real Estate 
Research, 31(2), 235-263 (2009) showcases the agency problems in the 
brokerage channel, and provides a deep literature review. This 
paper's results ``suggest loans originated by brokers cost borrowers 
about 20 basis points more, on average, than retail loans and that 
this premium is higher for lower-income and lower credit score 
borrowers.'' In contrast, Amany El-Anshany, Gregory Elliehausen, and 
Yoshiaki Shimazaki, Mortgage Brokers and the Subprime Mortgage 
Market, Proceedings, Federal Reserve Bank of Chicago (2005), find 
that consumers buying through brokers paid less for their loans, by 
a similar magnitude as in the LaCour-Little paper.
---------------------------------------------------------------------------

    The Bureau considered options other than excluding from points and 
fees compensation paid by a creditor to its loan officers. The Bureau 
considered adopting a netting rule for compensation paid by a creditor 
to its loan officers. This approach would have addressed the concern 
that an additive methodology would unduly restrict a consumers' ability 
to structure their preferred combination of up-front charges and 
interest rate. However, a netting rule would not alleviate the 
compliance burden or address the other implementation concerns 
associated with including in points and fees compensation paid by 
creditors to their loan officers. One industry commenter recommended 
that, if the Bureau declines to exclude compensation paid to retail 
loan officers from points and fees, it should consider permitting 
creditors to include in points and fees an average measure of loan 
originator compensation over a prior period of time as an alternative 
to calculating compensation on a transaction-by-transaction basis. The 
Bureau considered such an approach as an alternative for alleviating 
the compliance burden and eliminating some of the anomalies between 
transactions. However, the Bureau has concerns about whether this 
approach is consistent with the statutory purpose of identifying 
transactions that, because of high up-front charges and high loan 
originator compensation, should not be eligible for the presumption of 
compliance of a qualified mortgage or that should receive the 
protections for high-cost mortgages. Moreover, permitting creditors to 
employ an average measure of loan originator compensation would raise 
significant issues. For example, the Bureau would have to determine 
what compensation would be included in the measure of average 
compensation, the period for which the average would be calculated, and 
whether the average would be for an entire firm, for a business unit, 
for a limited geographic area, or even for individual loan originators. 
In light of the limited time remaining before the effective date of the 
rules, the Bureau does not believe it would be practicable to attempt 
to implement this alternative.
    To implement the exclusion from points and fees of compensation 
paid by a creditor to its loan officers, the Bureau is adding new Sec.  
1026.32(b)(1)(ii)(C), which excludes compensation paid by a creditor to 
a loan originator that is an employee of the creditor. The Bureau also 
is adding language to comment 32(b)(1)(ii)-1 to clarify that 
compensation paid by a creditor to a loan originator that is an 
employee of the creditor is not included in points and fees.
    As the Bureau noted in the 2013 ATR Final Rule, the Dodd-Frank Act 
provides that points and fees include all compensation paid by a 
consumer or creditor to a ``mortgage originator.'' In addition, as 
noted above, the Bureau reads the statutory language as requiring that 
loan originator compensation be included in points and fees in addition 
to any other items that are included in points and fees, even if the 
loan originator compensation may have been funded through charges that 
already are included in points and fees. Moreover the Bureau reads the 
statutory provision on compensation as meaning that compensation is 
added as it flows downstream from one party to another so that it is 
counted each time that it reached a loan originator, whatever its 
previous source. Given this statutory language, the Bureau believes 
that, to exclude from points and fees compensation paid by a creditor 
to its loan officers, the Bureau must use its exception authority. As 
provided in new Sec.  1026.32(b)(1)(ii)(C), the Bureau is excluding 
compensation paid by creditors to their loan officers pursuant to its 
authority under TILA section 105(a) to make such adjustments and 
exceptions for a class of transactions as the Bureau finds necessary or 
proper to facilitate compliance with TILA and its purposes and to 
effectuate the purposes of TILA, including the purposes of TILA section 
129C of ensuring that consumers are offered and receive residential 
mortgage loans that reasonably reflect their ability to repay the 
loans. The Bureau's understanding of this purpose is informed by the 
findings related to the purposes of section 129C of ensuring that 
responsible, affordable mortgage credit remains available to consumers. 
The Bureau has determined that excluding compensation paid to retail 
loan officers will facilitate compliance with TILA and these purposes 
by helping to reduce the burden and uncertainty of calculating points 
and fees in the retail context and by helping to assure that, as of the 
effective date of the rule, creditors will have systems in place that 
are capable of making this calculation. At the same time, the Bureau 
has determined that excluding compensation paid to retail loan officers 
will effectuate the purposes of TILA by helping to ensure that loans 
are not arbitrarily precluded from satisfying the criteria for a 
qualified mortgage or arbitrarily designated as high-cost mortgages 
because of potential anomalies in how loan originator compensation 
would be calculated for the points and fees limits. Thus, the exclusion 
will help ensure the availability of reasonably repayable credit, given 
that the points and fees threshold will continue to provide limits, 
apart from compensation not included in finance charge, on costs 
related to loans.
    The Bureau is also relying upon its authority under TILA section 
129C(b)(3)(B) to revise, add to, or subtract from the criteria that 
define a qualified mortgage consistent with applicable standards. For 
the reasons explained above, the Bureau has determined that it is 
necessary and proper to ensure that responsible, affordable mortgage 
credit remains available to consumers in a manner consistent with the 
purposes of TILA section 129C and necessary and appropriate to 
effectuate the purposes of this section and to facilitate compliance 
with section 129C.
    Certain commentary adopted in the 2013 ATR Final Rule is no longer 
necessary in light of the Bureau's decisions discussed above. Comment 
32(b)(1)(ii)-2 describes certain types of

[[Page 35456]]

compensation that would and would not be included in points and fees 
for individual loan originators. Portions of comment 32(b)(1)(ii)-3 
discuss how the timing affects what compensation paid to individual 
loan originators must be included in points and fees. Comment 
32(b)(1)(ii)-4 provides examples for calculating compensation for 
individual loan originators. Because compensation paid by mortgage 
brokers to their individual loan originator employees and compensation 
paid by creditors to their loan officers is no longer included in 
points and fees, the guidance for calculating compensation for 
individual loan originators is no longer necessary. Accordingly, the 
Bureau is deleting portions of comments 32(b)(1)(ii)-2.ii and -3, and, 
the entirety of comment 32(b)(1)(ii)-4.
    Compensation paid by creditors to mortgage brokers. In response to 
the Board's 2011 ATR Proposal, many industry commenters urged the 
Bureau to exclude loan originator compensation from points and fees 
altogether. See 78 FR 6433 (Jan. 30, 2013). Among other things, 
industry commenters had argued that compensation paid to loan 
originators already is included in the cost of the loan and has little, 
if any bearing on a consumer's ability to repay a mortgage loan. They 
also argued that other statutory provisions and rules already provide 
adequate protection from abusive loan originator compensation practices 
and that it therefore is unnecessary to include loan originator 
compensation in points and fees. Finally, they argued that including 
loan originator compensation in points and fees would cause many loans 
to exceed the qualified mortgage points and fees limits, which would 
result in an increase in the cost of credit and diminished access to 
credit.
    In the 2013 ATR Final Rule, the Bureau acknowledged the concerns 
about including loan originator compensation in points and fees. 
However, the Bureau noted that, in light of the express statutory 
language and Congress's evident concern with increasing consumer 
protections in connection with loan originator compensation practices, 
the Bureau did not believe it appropriate to use its exception 
authority to exclude loan originator compensation entirely from points 
and fees. In response to the 2013 ATR Proposed Rule, many industry 
commenters, including mortgage brokers and their representatives and 
some creditors and their representatives, again urged the Bureau to 
exclude loan originator compensation from points and fees altogether 
(or to at least exclude from points and fees all compensation paid by 
creditors to loan originators). Repeating many of the same arguments 
made in response to the Board's 2011 ATR Proposal, these commenters 
argued that loan originator compensation already is included in the 
cost of the loan and has little or no effect on consumers' ability to 
repay the loan. They claimed that other protections adopted by the 
Bureau and the Board adequately protect consumers against harmful loan 
originator compensation practices and that it therefore is unnecessary 
to include loan originator compensation in points and fees. Finally, 
they argued that including loan originator compensation in points and 
fees would cause many loans to exceed the qualified mortgage points and 
fees cap or the high-cost mortgage threshold and that, as a result, 
many loans would not be made, including in particular smaller loans.
    The Bureau does not believe that it is consistent with the 
standards for its use of exception and adjustment authority to exclude 
from points and fees compensation paid by creditors to loan originators 
that are not employees of creditors. As noted above, in excluding from 
points and fees compensation paid by creditors to their loan originator 
employees, the Bureau invoked its exception and adjustment authority to 
facilitate compliance and, generally speaking, to meet purposes of 
ensuring that credit is available to consumers on reasonably repayable 
terms. These factors do not support excluding compensation paid by 
creditors to loan originators not employed by creditors. The compliance 
burden of calculating compensation paid by creditors to loan 
originators other than their own employees is minimal and does not 
provide a basis for exclusion based on a rationale related to 
facilitating compliance. As noted above, this calculation is 
straightforward for compensation paid by creditors to mortgage brokers: 
For each transaction, creditors typically pay a commission to mortgage 
brokers pursuant to a pre-existing contract between the creditor and 
the broker, and that commission is known at the time the interest rate 
is set.\130\ Moreover, as discussed below, the Bureau believes that 
there remain some risks of consumer injury from business models in 
which mortgage brokers attempt to steer consumers to more costly 
transactions. Including in points and fees compensation paid by 
creditors to mortgage brokers should help reduce those risks. 
Accordingly, the Bureau declines to use its exception authority to 
exclude such compensation from points and fees.
---------------------------------------------------------------------------

    \130\ As discussed above, the compliance burden of calculating 
compensation paid by creditors to their own loan officers is 
substantial and offsets the limited potential consumer protection 
benefits of including such compensation in points and fees.
---------------------------------------------------------------------------

    The Bureau also does not believe it is appropriate to use its 
exception authority to exclude loan originator compensation payments 
from creditors to mortgage brokers in certain types of transactions. As 
noted above, one industry commenter urged the Bureau to consider 
whether compensation paid by creditors to mortgage brokers should be 
included in points and fees only in subprime transactions. The 
commenter did not provide data or other evidence to support this 
approach. In addition, subprime transactions already have less 
flexibility than prime transactions under the points and fees limits 
because bona fide discount points may not excluded from points and fees 
for transactions with interest rates greater than 2 percentage points 
above APOR, see Sec.  1026.32(b)(1)(i)(E) and (F), and the Bureau is 
concerned about widening the disparity in treatment under the points 
and fees limits. Accordingly, the Bureau does not believe it is 
appropriate to use its exception authority to create different 
requirements for loan originator compensation in the prime and subprime 
markets. Another commenter requested that, to avoid impairing 
affordable lending programs offered by nonprofit organizations, the 
Bureau exclude such payments when the creditor absorbs the costs of the 
payments and does not pass along the costs to consumers.\131\ The 
Bureau believes it would be difficult, if not impossible, to determine 
when a creditor was in fact not passing along loan origination costs to 
consumers and that any exemption, even if well-intentioned, could be 
susceptible to abuse.
---------------------------------------------------------------------------

    \131\ As discussed below, the Bureau is adopting Sec.  
1026.43(a)(3)(v), which exempts certain creditors, including certain 
nonprofit creditors, from the ability-to-repay requirements.
---------------------------------------------------------------------------

    In the 2013 ATR Proposed Rule, the Bureau proposed two 
alternatives--an ``additive'' approach and a ``netting'' approach-- for 
calculating compensation. As discussed above, proposed alternative 1 of 
comment 32(b)(1)(ii)-5.iii would have adopted an additive approach in 
which loan originator compensation would have been included in points 
and fees in addition to any charges paid by the consumer to the 
creditor. Proposed alternative 2 of comment 32(b)(1)(ii)-5.iii would 
have permitted creditors to net origination charges against loan 
originator compensation to calculate the

[[Page 35457]]

amount of loan originator compensation that is included in points and 
fees. As discussed above, a creditor's payments to a loan originator 
may be funded by up-front charges to the consumer, through the interest 
rate, or through some combination. The up-front charges to the consumer 
would be captured in points and fees, but compensation funded through 
the interest rate would not be captured. Thus, when a consumer pays up-
front charges, it is not clear whether a creditor's payments to a loan 
originator are captured in such points and fees.\132\
---------------------------------------------------------------------------

    \132\ It is doubtful that Congress contemplated this issue 
because, as noted above, absent the Bureau's use of exception 
authority, TILA section 129B(c)(2)(B)(ii) would have prohibited a 
creditor from imposing origination fees or charges if the creditor 
were compensating a loan originator.
---------------------------------------------------------------------------

    As noted above, the Bureau reads the statutory language as 
requiring that loan originator compensation be included in points and 
fees in addition to any other items that are included in points and 
fees, even if the loan originator compensation may have been funded 
through charges that already are included in points and fees. Moreover 
the Bureau reads the statutory provision on compensation as meaning 
that compensation is added as it flows downstream from one party to 
another so that it is counted each time that it reached a loan 
originator, whatever its previous source. After carefully considering 
the comments, the Bureau has determined that, for calculating 
compensation paid by creditors to mortgage brokers, it is not necessary 
or proper to revise the additive approach prescribed by the statute and 
adopted in the 2013 ATR Final Rule.
    For creditor payments to loan originators not employed by 
creditors, calculating loan originator compensation under an additive 
approach does not impose a significant compliance burden. As noted 
above, this calculation is straightforward for compensation paid by 
creditors to mortgage brokers: For each transaction, creditors 
typically pay a commission to mortgage brokers pursuant to a pre-
existing contract between the creditor and the broker, and that 
commission is known at the time the interest rate is set.
    For transactions in the wholesale channel, brokers and creditors 
can obviate double counting concerns by having consumers pay brokers 
directly.\133\ Under new comment 32(b)(1)(ii)-5.i, the consumer's 
payment to the mortgage broker would be included in points and fees 
only one time. For example, assume a consumer is seeking a $100,000 
loan and wants to pay $2,500 in up-front charges at closing rather than 
paying those costs through a higher interest rate. The transaction is 
being originated through a mortgage broker firm, which charges $1,500. 
Under an additive approach, if the consumer pays $2,500 in origination 
charges to the creditor and the creditor pays $1,500 to the mortgage 
broker firm, the points and fees would be $4,000 and the loan could not 
be a qualified mortgage. However, if the consumer pays $1,500 directly 
to the mortgage broker firm and then pays $1,000 in origination charges 
to the creditor, then the points and fees would be $2,500 and would not 
prevent the loan from being a qualified mortgage. Moreover, if the 
consumer pays the mortgage broker directly, then the creditor would no 
longer be responsible for the cost of compensating the mortgage broker; 
as a result, the interest rate should be the same whether the consumer 
pays $1,500 to the mortgage broker and $1,000 to the creditor or the 
consumer pays $2,500 to the creditor and the creditor pays $1,500 to 
the mortgage broker. In light of the options that direct consumer 
payments provide in the wholesale channel, the Bureau believes that 
affordable credit will continue to be available in connection with 
wholesale loans and that use of adjustment authorities to achieve 
statutory purposes is not necessary.
---------------------------------------------------------------------------

    \133\ The Bureau does not believe that the potential double 
counting of loan originator compensation and origination charges 
could be adequately addressed by permitting a netting approach in 
combination with more detailed disclosures to consumers. The Bureau 
notes that, because money is fungible, creditors could adjust their 
accounting so that they could disclose that they are recovering loan 
originator compensation through up-front charges and other 
origination costs through the interest rate. Thus, this disclosure-
based approach would permit creditors to reduce the amount of loan 
originator compensation they include in points and fees without 
changing the amount of up-front fees or the interest rate they 
charge. Moreover, given the complex interaction between loan 
originator compensation, up-front charges, and the interest rate, 
the Bureau has concerns that consumers would not understand the 
disclosures.
---------------------------------------------------------------------------

    The Bureau is concerned that, as noted by the FDIC and HUD, by the 
OCC, and by some consumer advocate commenters, a netting rule in the 
wholesale channel could create incentives for mortgage brokers and 
creditors to structure transactions so that loan originator 
compensation is paid by the creditor to the mortgage broker, rather 
than by the consumer to the mortgage broker. Under a netting rule, 
creditors could impose origination charges on the consumer and net 
those charges against the compensation the creditor pays the mortgage 
broker when calculating points and fees. By contrast, in a transaction 
in which the consumer pays the mortgage broker directly, the consumer's 
payment to the mortgage broker would be included in points and fees in 
addition to any origination charges imposed by the creditor. Thus, a 
netting rule likely would provide creditors with a greater ability to 
charge up-front fees and still remain under the points and fees 
limits.\134\ The Bureau believes it would be anomalous to treat 
wholesale transactions differently for purposes of the qualified 
mortgage and high-cost mortgage points and fees limits simply because 
in one transaction the consumer paid compensation directly to the 
mortgage broker and in another transaction the consumer paid the 
compensation indirectly. Such an anomaly would actually disserve the 
broad purposes of TILA to inform consumers because in the transaction 
that would be favored (i.e., the transaction in which the broker's 
commission is bundled in the fees paid to the creditor or in the 
interest rate) the costs would be less transparent than in the 
disfavored transaction (i.e., the transaction in which the consumer 
paid the compensation directly to the broker).
---------------------------------------------------------------------------

    \134\ As consumer advocates noted in their comments, mortgage 
brokers historically have defended arrangements in which creditors 
pay compensation to mortgage brokers by arguing that this approach 
permits consumers to obtain mortgage loans when they do not have 
sufficient funds to compensate mortgage brokers directly. See Nat'l 
Assoc. of Mortgage Brokers v. Fed. Reserve Bd., 773 F.Supp. 2d 151, 
158 (D.D.C 2011). This rationale for creditors' paying compensation 
to mortgage brokers has little if any force if the consumer is 
paying up-front charges to the creditor.
---------------------------------------------------------------------------

    Finally, an additive approach would place some additional limits on 
the ability of mortgage brokers to obtain high compensation for loans 
that are more costly to consumers. As noted above, consumer advocates 
have identified two ways in which mortgage brokers potentially could 
extract high compensation for delivering loans that are more costly to 
consumers (and possibly more profitable for creditors) would not appear 
to violate the prohibitions on steering and compensating loan 
originators based on loan terms. First, mortgage brokers could 
specialize in providing creditors with loans that are more costly to 
consumers in exchange for high compensation, so long as that 
compensation does not vary based on the terms of individual loans.
    Second, mortgage brokers could do business with a mix of creditors, 
some offering more costly loans (and paying high compensation to 
mortgage brokers) and some offering loans with more favorable terms 
(and paying lower compensation to brokers). Mortgage

[[Page 35458]]

brokers could attempt to steer borrowers that are less sophisticated 
and less likely to shop for better terms to the creditors with more 
costly loans, and they potentially could evade the anti-steering 
prohibition by offering quotes from at least three such creditors.\135\ 
An additive approach likely would reduce the potential consumer injury 
by limiting the ability of creditors to impose high up-front charges 
and pay high loan originator compensation, unless creditors are willing 
to exceed the qualified mortgage points and fees limits and, 
potentially, to bear the burden of originating high-cost mortgages 
under HOEPA.\136\
---------------------------------------------------------------------------

    \135\ Competitive market pressures and the difficulties of 
specializing in (or at least identifying and steering) vulnerable 
consumers may constrain mortgage brokers' ability to exploit gaps in 
the regulatory structure. Nevertheless, the Bureau is concerned 
about the potential for consumer injury, particularly for consumers 
who are less sophisticated or less likely to shop for competitive 
terms.
    \136\ The Bureau recognizes that an additive approach would not 
preclude creditors from paying mortgage brokers above-market 
compensation (up to the points and fees limits) and recovering the 
costs of compensating the mortgage brokers and other costs through 
an above-market interest rate. However, as consumer advocates noted 
in their comments, consumers may shop more effectively when 
comparing a single variable, such as the interest rate.
---------------------------------------------------------------------------

    The Bureau recognizes that an additive approach makes it more 
difficult for creditors to impose up-front charges and still remain 
under the qualified mortgage points and fees limits and the high-cost 
mortgage threshold. Commenters provided limited data regarding the 
magnitude of the effects of an additive approach. Nevertheless, even in 
transactions in which a mortgage broker's compensation is two 
percentage points of the loan amount--which the Bureau understands to 
be at the high end of mortgage broker commissions--the creditor would 
still be able to charge up to one point in up-front charges that would 
count toward the qualified mortgage points and fees limits. As noted 
above, the creditor may reduce the costs it needs to recover from 
origination charges or through the interest rate by having the consumer 
pay the mortgage broker directly. In addition, creditors in the 
wholesale channel that prefer to originate only qualified mortgages in 
many cases will have the flexibility to recover more of their 
origination costs through the interest rate to ensure that their 
transactions remain below the points and fees limits.\137\
---------------------------------------------------------------------------

    \137\ Moreover, to the extent that consumers prefer to pay up-
front charges to reduce the interest rate, creditors may be able to 
exclude as many as two bona fide discount points under Sec.  
1026.32(b)(1)(i)(E) or (F).
---------------------------------------------------------------------------

    For the reasons discussed above, the Bureau believes that it is 
neither necessary nor appropriate to deviate from the additive approach 
prescribed by the statute and adopted in the 2013 ATR Final Rule to 
calculate compensation paid by creditors to mortgage brokers. The 
Bureau believes that affordable credit will continue to be available in 
connection with loans in the wholesale channel and that use of 
adjustment authorities to achieve statutory purposes is not necessary 
and proper. As noted above, the Bureau believes that, to the extent 
that the additive approach limits the ability of mortgage brokers to 
steer consumers toward more costly loans, the additive approach is 
consistent with the statutory purposes. Accordingly, the Bureau 
concludes that it should not exercise its exception authority to alter 
the additive approach prescribed by the statute. Accordingly, as 
adopted by this final rule, comment 32(b)(1)(ii)-4.iii clarifies that, 
for loan originators that are not employees of the creditor, (i.e., 
mortgage brokers, as defined in Sec.  1026.36(a)(2)) loan originator 
compensation is included in points and fees in addition to any 
origination charges that are paid by the consumer to the creditor.
    As noted above, the term ``mortgage broker'' is defined in Sec.  
1026.36(a)(2) to mean any loan originator other than an employee of a 
creditor. The Bureau believes that the additive approach is appropriate 
for all mortgage brokers, including persons whose primary business is 
not originating mortgage loans but who nevertheless qualify as a 
``mortgage broker'' under Sec.  1026.36(a)(2). In general, calculating 
compensation paid by a consumer or creditor to such persons for loan 
origination activities should be straightforward and would impose 
little compliance burden. However, as discussed below, the Bureau 
intends to provide additional guidance for calculating loan originator 
compensation for manufactured home transactions.
    Loan originator compensation for open-end credit plans. For the 
high-cost mortgage points and fees threshold, the 2013 HOEPA Final Rule 
applied the same requirements for including loan originator 
compensation in points and fees in open-end credit plans as for closed-
end credit transactions. In the 2013 ATR Proposed Rule, the Bureau 
solicited comment about whether different or additional guidance is 
appropriate for calculating loan originator compensation for open-end 
credit plans. The Bureau received few comments that addressed open-end 
credit plans, and they did not advocate for different or additional 
guidance. Accordingly, the Bureau believes that it is appropriate to 
continue to apply the same requirements for calculating loan originator 
compensation for points and fees in closed-end credit transactions and 
open-end credit plans. The Bureau is therefore revising Sec.  
1026.32(b)(2)(ii), which addresses loan originator compensation for 
open-end credit plans, to incorporate the same exclusions from points 
and fees as those discussed above for closed-end credit transactions in 
Sec.  1026.32(b)(1)(ii). The Bureau is not adopting additional guidance 
for open-end credit plans.
    Calculation of loan originator compensation for manufactured home 
transactions. As noted above, several industry and nonprofit commenters 
requested clarification of what compensation must be included in points 
and fees in connection with transactions involving manufactured homes. 
They requested additional guidance on what activities would cause a 
manufactured home retailer and its employees to qualify as loan 
originators. The 2013 Loan Originator Final Rule had provided 
additional guidance on what activities would cause such a retailer and 
its employees to qualify as loan originators in light of language in 
the Dodd-Frank Act creating an exception from the definition of loan 
originator for employees of manufactured home retailers performing 
certain limited activities. See Sec.  1026.36(a)(1)(i)(B) and comments 
36(a)-1.i.A and 36(a)-4. The commenters nevertheless argued that it 
remains unclear what activities a retailer and its employees could 
engage in without qualifying as loan originators and causing their 
compensation to be included in points and fees. Industry commenters 
also noted that, because a creditor has limited knowledge of and 
control over the activities of a retailer and its employees, it would 
be difficult for a creditor to know whether a retailer and its 
employees had engaged in activities that would require their 
compensation to be included in points and fees. Industry commenters 
therefore urged the Bureau to adopt a bright-line rule that would 
exclude from points and fees compensation paid to manufactured home 
retailers and their employees. They also requested that the Bureau 
clarify that, in any event, compensation received by the manufactured 
home retailer or its employee for the sale of the home should not be 
counted as loan

[[Page 35459]]

originator compensation and included in points and fees.
    The Bureau does not believe it is appropriate to exclude 
compensation that is paid to a manufactured home retailer for loan 
origination activities. In such circumstances, the retailer is 
functioning as a mortgage broker and compensation for the retailer's 
loan origination activities should be captured in points and fees. The 
Bureau recognizes, however, that it may be difficult for a creditor to 
ascertain whether a retailer engages in loan origination activities 
and, if so, what compensation that retailer receives for those 
activities, at least when such compensation was not paid directly by 
the creditor itself. Accordingly, the Bureau intends to propose 
additional guidance on these issues prior to the effective date of the 
2013 ATR Final Rule to facilitate compliance.
    With respect to employees of manufactured home retailers, the 
Bureau believes that, in most circumstances, new Sec.  
1026.32(b)(1)(ii)(B) will make it unnecessary for creditors to 
determine whether employees of retailers have engaged in loan 
origination activities that would cause them to qualify as loan 
originators. As discussed above, Sec.  1026.32(b)(1)(ii)(B) excludes 
compensation paid by mortgage brokers to their loan originator 
employees. In the usual case, when an employee of a retailer would 
qualify as a loan originator, the retailer would qualify as a mortgage 
broker. If the retailer is a mortgage broker, any compensation paid by 
the retailer to the employee would be excluded from points and fees 
under Sec.  1026.32(b)(1)(ii)(B). Nevertheless, as part of its proposal 
to provide additional guidance as noted above, the Bureau intends to 
request comment on whether additional guidance is necessary for 
calculating loan originator compensation for employees of manufactured 
home retailers.
    Other issues related to points and fees. As noted above, many 
commenters requested that the Bureau reconsider whether certain items 
should be included in points and fees. In particular, many commenters 
urged that real-estate related charges paid to affiliates and up-front 
charges imposed by creditors on consumers to recover the costs of LLPAs 
should not be included in points and fees. Commenters also asked the 
Bureau to permit the creditor to exclude more than two bona fide 
discount points from points and fees. The Bureau is not reconsidering 
its decision that, as provided in the statute, real-estate related 
charges paid to affiliates of the creditor are included in points and 
fees. The Bureau also declines to reconsider its decision that, where a 
creditor recovers the costs of LLPAs through up-front charges to the 
consumer, those charges are included in points and fees. Finally, the 
Bureau is not reconsidering its decision that, as provided in the 
statute, creditors may exclude no more than two bona fide discount 
points from points and fees.
    Many individual mortgage brokers and a trade group representing 
mortgage brokers urged the Bureau to reconsider certain restrictions on 
loan originator compensation in Sec.  1026.36(d)(1) and (2), arguing 
that these restrictions are unnecessary because the points and fees 
limits for qualified mortgages effectively cap loan origination 
compensation at 3 percent of the loan amount.\138\ The 2013 Loan 
Originator Final Rule clarified and expanded Sec.  1026.36(d)(1) and 
(2), and the Bureau declines to revisit those provisions in this 
rulemaking.
---------------------------------------------------------------------------

    \138\ The Bureau notes that the general 3 percent points and 
fees limit applies only to qualified mortgages and would not 
restrict the loan originator compensation paid to mortgage brokers 
in mortgage transactions that are not qualified mortgages.
---------------------------------------------------------------------------

Section 1026.35 Prohibited Acts or Practices in Connection With Higher-
Priced Mortgage Loans

35(b) Escrow Accounts
35(b)(2) Exemptions
35(b)(2)(iii)
    As discussed further below, the Bureau proposed Sec.  1026.43(e)(5) 
to create a new type of qualified mortgage for certain portfolio loans 
originated and held by small creditors. The Bureau proposed to adopt 
the same parameters defining small creditor for purposes of the new 
category of qualified mortgage as it had used in implementing 
provisions of the Dodd-Frank Act that allow certain balloon loans to 
receive qualified mortgage status and an exemption from the requirement 
to maintain an escrow accounts for certain higher priced mortgage loans 
where such loans are made by small creditors operating predominantly in 
rural or underserved areas. The size thresholds for purposes of the 
rural balloon and escrow provisions are set forth in Sec.  
1026.35(b)(2)(iii), as adopted by the 2013 Escrows Final Rule, which 
provides that an escrow account need not be established in connection 
with a mortgage if the creditor, within applicable time periods, 
annually extends more than 50 percent of its covered first-lien 
transactions on properties that are located in rural or underserved 
counties, originates (with its affiliates) 500 or fewer first-lien 
covered transactions per year, and has total assets of less than $2 
billion (adjusted annually for inflation), in addition to other escrow 
account limitations.
    The Bureau did not propose to make any specific amendments to the 
escrows provision in Sec.  1026.35(b)(2), but indicated that if the 
provisions creating a new type of small creditor portfolio qualified 
mortgage in proposed Sec.  1026.43(e)(5) were adopted with changes 
inconsistent with Sec.  1026.35(b)(2), the Bureau would consider and 
might adopt parallel amendments to Sec.  1026.35(b)(2) to keep these 
sections of the regulation consistent.
    The Bureau solicited comment on the advantages and disadvantages of 
maintaining consistency between Sec.  1026.35(b)(2) and Sec.  
1026.43(e)(5). Commenters did not specifically address the importance 
of consistency. However, several small creditors and a small creditor 
trade group raised concerns regarding the cost and burden associated 
with the escrow requirements and urged the Bureau to expand or adopt 
exceptions to those requirements. For example, commenters suggested 
broadening the Sec.  1026.35(b)(2)(iii) exemption and exempting home 
improvement loans and loans secured by mobile homes.
    As discussed below in the section-by-section analysis of Sec.  
1026.43(e)(5), the Bureau is adopting Sec.  1026.43(e)(5) consistent 
with existing Sec.  1026.35(b)(2) with regard to the asset size and 
annual loan origination thresholds defining a small creditor. The 
Bureau did not propose and did not solicit comment regarding other 
amendments to the escrow provisions in Sec.  1026.35(b)(2). The Bureau 
therefore is not reconsidering the issues raised by commenters at this 
time and is not adopting any changes to Sec.  1026.35(b)(2) in this 
rulemaking.

Section 1026.43 Minimum Standards for Transactions Secured by a 
Dwelling

43(a) Scope
43(a)(3)
Background
    Section 129C(a)(1) of TILA, as added by section 1411 of the Dodd-
Frank Act, states that, in accordance with regulations prescribed by 
the Bureau, no creditor may make a residential mortgage loan unless the 
creditor makes a reasonable and good faith determination based on 
verified and documented information that, at the time the loan is 
consummated, the consumer has a reasonable ability to

[[Page 35460]]

repay the loan, according to its terms, and all applicable taxes, 
insurance (including mortgage guarantee insurance), and assessments. 
Section 1401 of the Dodd-Frank Act adds new TILA section 103(cc)(5), 
which defines ``residential mortgage loan'' to mean, with some 
exceptions, any consumer credit transaction secured by a mortgage, deed 
of trust, or other equivalent consensual security interest on ``a 
dwelling or on residential real property that includes a dwelling.'' 
TILA section 103(v) defines ``dwelling'' to mean a residential 
structure or mobile home which contains one- to four-family housing 
units, or individual units of condominiums or cooperatives. Thus, a 
``residential mortgage loan'' generally includes all mortgage loans, 
except mortgage loans secured by a structure with more than four 
residential units. However, TILA section 103(cc)(5) specifically 
excludes from the term ``residential mortgage loan'' an open-end credit 
plan and an extension of credit secured by an interest in a timeshare 
plan, for purposes of the ability-to-repay requirements under TILA 
section 129C as well as provisions concerning prepayment penalties and 
other restrictions. In addition, TILA section 129C(a)(8) exempts 
reverse mortgages and temporary or ``bridge'' loans with a term of 12 
months or less from the ability-to-repay requirements. Thus, taken 
together, the ability-to-repay requirements of TILA section 129C(a) 
apply to all closed-end mortgage loans secured by a one- to four-unit 
dwelling, except loans secured by a consumer's interest in a timeshare 
plan, reverse mortgages, or temporary or ``bridge'' loans with a term 
of 12 months or less.
    The Bureau's 2013 ATR Final Rule adopted provisions on scope that 
are substantially similar to the statute, which included modifications 
to conform to the terminology of Regulation Z. However, feedback 
provided to the Bureau suggested that the ability-to-repay requirements 
would impose an unsustainable burden on certain creditors, such as 
housing finance agencies (HFAs) and certain nonprofit organizations, 
offering mortgage loan programs for low- to moderate-income (LMI) 
consumers. The Bureau was concerned that the ability-to-repay 
requirements adopted in the 2013 ATR Final Rule would undermine or 
frustrate application of the uniquely tailored underwriting 
requirements employed by these creditors and programs, and would 
require a significant diversion of resources to compliance, thereby 
significantly reducing access to credit. The Bureau was also concerned 
that some of these creditors would not have the resources to implement 
and comply with the ability-to-repay requirements, and may have ceased 
or severely limited extending credit to low- to moderate-income 
consumers, which would result in the denial of responsible, affordable 
mortgage credit. In addition, the Bureau was concerned that the 
ability-to-repay requirements may have frustrated the purposes of 
certain homeownership stabilization and foreclosure prevention 
programs, such as Hardest-Hit-Fund (HHF) programs and the Home 
Affordable Refinance Program (HARP). Accordingly, the Bureau proposed 
several exemptions intended to ensure that responsible, affordable 
mortgage credit remained available for LMI and financially distressed 
consumers.
43(a)(3)(iv)
The Bureau's Proposal
    As discussed above, neither TILA nor Regulation Z provide an 
exemption to the ability-to-repay requirements for extensions of credit 
made pursuant to a program administered by a Housing Finance Agency 
(HFA), as defined under 24 CFR 266.5. However, the Bureau was concerned 
that the ability-to-repay requirements may unnecessarily impose 
additional requirements onto the underwriting requirements of HFA 
programs and impede access to credit available under these programs. 
The Bureau was especially concerned that the costs of implementing and 
complying with the requirements of Sec.  1026.43(c) through (f) would 
endanger the viability and effectiveness of these programs. The Bureau 
was concerned that the burden could prompt some HFAs to severely 
curtail their programs and some private creditors that partner with 
HFAs to cease participation in such programs, both of which could 
reduce mortgage credit available to LMI consumers. The Bureau was also 
concerned that the ability-to-repay requirements may affect the ability 
of HFAs to apply customized underwriting criteria or offer customized 
credit products that are designed to meet the needs of LMI consumers 
while promoting long-term housing stability.
    Based on these concerns and to obtain additional information 
regarding these potential effects, the Bureau proposed an exemption and 
solicited feedback on several issues. Proposed Sec.  1026.43(a)(3)(iv) 
would have provided an exemption to the ability-to-repay requirements 
for credit extended pursuant to a program administered by an HFA. The 
Bureau solicited comment on every aspect of this approach. In 
particular, the Bureau sought comment on the premise that the ability-
to-repay requirements could impose significant implementation and 
compliance burdens on HFA programs even if credit extended under the 
HFA programs were granted a presumption of compliance as qualified 
mortgages. The Bureau also sought comment on whether HFAs have 
sufficiently rigorous underwriting standards and monitoring processes 
to protect the interests of consumers in the absence of TILA's ability-
to-repay requirements. The Bureau also requested data related to the 
delinquency, default, and foreclosure rates of consumers participating 
in these programs. In addition, the Bureau solicited feedback regarding 
whether such an exemption could harm consumers, such as by denying 
consumers the ability to pursue claims arising under violations of 
Sec.  1026.43(c) through (f) against creditors extending credit in 
connection with these programs. Finally, the Bureau also requested 
feedback on any alternative approaches that would preserve the 
availability of credit under HFA programs while ensuring that consumers 
receive mortgage loans that reasonably reflect consumers' ability to 
repay.
Comments Received
    In response to the proposed rule, some commenters completely 
opposed the proposed exemption from the ability-to-repay requirements 
for extensions of credit made pursuant to programs administered by 
HFAs. These commenters generally argued that the rules should apply 
equally to all creditors. These commenters contended that granting 
exemptions to certain creditors would create market distortions and 
steer consumers towards certain creditors, thereby reducing consumer 
choice and ability to shop. Other commenters suggested alternative 
modifications to address HFA programs. One industry commenter favored 
creating special ability-to-repay requirements tailored to the unique 
underwriting characteristics of LMI consumers. Another industry 
commenter supported some type of exemption from the ability-to-repay 
requirements but advocated for conditions or the provision of authority 
to HFAs to impose their own ability-to-repay standards, as various 
Federal agencies (the Department of Housing and Urban Development, the 
Department of Veterans Affairs, and the Department of Agriculture), are 
authorized to do. The majority of

[[Page 35461]]

industry and consumer group commenters, however, asserted that the 
proposed exemption to the ability-to-repay requirements for credit 
extended pursuant to a program administered by an HFA is necessary 
because these programs meet the customized needs of LMI consumers who 
are creditworthy but may not otherwise qualify for mortgage credit 
under the Bureau's ability-to-repay requirements.
    The latter group of commenters generally supported the Bureau's 
goal of preserving access to affordable credit for LMI consumers and 
favored the Bureau's proposal to exempt community-focused lending 
programs from the ATR requirements altogether. These commenters 
contended that HFA loan products balance access to residential mortgage 
credit for LMI consumers with a focus on the consumer's ability to 
repay. Consumer group commenters argued that HFA lending programs 
typically offer low-cost mortgage products, require full documentation 
of income and demonstrated ability to repay, and often include 
extensive financial counseling with the consumer. Commenters argued 
that HFA homeowner assistance programs are tailored to the credit 
characteristics of LMI consumers that HFAs serve and noted that these 
organizations only extend credit after conducting their own lengthy and 
thorough analysis of an applicant's ability to repay, which often 
account for nontraditional underwriting criteria, income sources that 
do not fall within typical mortgage underwriting criteria, extenuating 
circumstances, and other subjective factors that are indicative of 
responsible homeownership and ability to repay. An industry commenter 
noted that, for first-time homebuyer lending, HFAs use a combination of 
low-cost financing and traditional fixed-rate, long-term products; 
flexible, but prudent, underwriting with careful credit evaluation; 
diligent loan documentation and income verification; down payment and 
closing cost assistance; homeownership counseling; and proactive 
counseling and servicing. This commenter stated that many HFAs 
elaborate beyond the underwriting standards of Federal government 
agencies, such as FHA, USDA, or RHS loans, and that HFAs also oversee 
creditors involved in these programs carefully by ensuring the HFA's 
strict underwriting standards and lending requirements are followed. 
Comments provided to the Bureau state that a New York State HFA 
considers the consumer's entire credit history rather than consider 
only a consumer's credit score, which allows it to help those consumers 
who may have a lower credit score due to a prior financial hardship. 
Whereas creditors do not need to engage in separate verification where 
a consumer's application lists a debt that is not apparent from the 
consumer's credit report pursuant to Sec.  1026.43(c), comments 
provided to the Bureau also state that the Pennsylvania Housing Finance 
Agency's underwriting standards require that the creditor provide a 
separate verification of that obligation, indicating the current 
balance, the monthly payment, and the payment history of the account.
    Commenters also provided data related to the relative performance 
of HFA loans as further justification to support the proposed exemption 
from the ability-to-repay requirements for extensions of credit made 
pursuant to a program administered by a HFA. Although comprehensive 
data for HFA loan performance are not available, commenters reported 
that the delinquency, default, and foreclosure statistics for consumers 
who receive mortgage loans from HFA programs are generally lower than 
for those of the general populace, which demonstrates that HFA programs 
ensure that consumers are extended credit on reasonably repayable 
terms.\139\ Commenters reported that a limited review of HFA loan data 
conducted by Fannie Mae in 2011 found that HFA-financed loans performed 
significantly better than other Fannie Mae affordable housing loans. 
Also, comments cited a 2011 National Council of State Housing Agencies 
(NCSHA) study of HFA-financed and non-HFA-financed loans insured by FHA 
that found that, in a large majority of States, HFA-financed loans had 
lower long-term delinquency and foreclosure rates than non-HFA loans.
---------------------------------------------------------------------------

    \139\ For example, as of September 30, 2012, just 3.7 percent of 
SONYMA's single-family borrowers were 60 or more days delinquent, 
compared with 10.9 percent of all borrowers. Data from the 
Pennsylvania Housing Finance Agency show that for the third quarter 
of 2012, its conventional loans had 90-plus day delinquency and 
foreclosure rates of 2.98 percent and .99 percent, respectively, 
which are well below the equivalent rates for all conventional loans 
in the State of Pennsylvania. Data from the Massachusetts Housing 
Partnership's SoftSecond Program show that the foreclosure rate for 
program loans is substantially lower than the rate for prime loans 
in the State of Massachusetts (0.87 percent for SoftSecond loans as 
compared to 1.72 percent for prime loans). FHA-insured loans 
purchased by the Connecticut Housing Finance Agency have lower 
foreclosure rates than comparable FHA loans in the northeast, and 
loans financed by the Delaware State Housing Authority and serviced 
by U.S. Bank have a 60 days or more delinquency rate of just over 2 
percent, compared with a national 60 days or more rate of 8.3 
percent. Finally, Virginia Housing Development Authority loan 
foreclosure rates on FHA and conventional loans both fall under 1 
percent. This is 3.2 percentage points under the national FHA 
foreclosure rate and 2.5 percentage points lower than the national 
foreclosure rate for conventional loans in New York State, according 
to the Mortgage Bankers Association. Prior to the recent mortgage 
crisis, SONYMA's 60-plus day default rate had never exceeded 2 
percent.
---------------------------------------------------------------------------

    A number of commenters argued that, in the absence of an exemption, 
HFA homeowner assistance programs would not be able to continue to meet 
the needs of LMI consumers or distressed borrowers as intended. 
Commenters generally stated that requiring HFAs to comply with the 
ability-to-repay requirements would be unduly burdensome and would have 
a negative impact on their ability to offer consumers loan products 
that fit their unique needs, thereby endangering the viability and 
effectiveness of these programs. Commenters also argued that HFAs, 
which are governmental entities chartered by either a State or a 
municipality and are taxpayer-supported, may not have sufficient 
resources to implement and comply with the ability-to-repay 
requirements. According to commenters, some HFAs may respond to the 
burden by severely curtailing the credit offered under these programs 
and others may divert resources from lending to compliance, which may 
also reduce access to credit for LMI consumers.
    Commenters noted that, because most HFAs operate in partnership 
with private creditors who participate voluntarily in HFA programs, the 
Bureau's proposed HFA exemption would help encourage eligible creditors 
to continue making loans that might not otherwise be originated due to 
constraints under, or concerns about, the Bureau's ability-to-repay 
requirements. Commenters argued that the ability-to-repay requirements 
would impose significant implementation and compliance burdens on 
participating private creditors, and this would likely discourage 
creditors from participating in HFA programs and would result in the 
denial of mortgage credit to LMI consumers.
    A number of industry commenters argued that the proposed exemption 
from the ability-to-repay requirements is in the best interests of 
consumers and the nation as a whole, as the exemption will allow 
homeowners to remain in their homes and help stabilize communities that 
were harmed by the mortgage crisis and limit the degree to which future 
LMI consumers have difficulty obtaining access to credit. Creditors 
also generally supported clarifying that the exemption applies 
regardless of whether the credit is extended directly by an HFA to the

[[Page 35462]]

consumer or through an intermediary that is operating pursuant to a 
program administered by an HFA, and to include all HFA programs 
regardless of structure (e.g., mortgage revenue bonds or mortgage 
credit certificates).
The Final Rule
    Based on these comments and considerations, the Bureau believes 
that it is appropriate to exempt credit extended pursuant to an HFA 
program from the ability-to-repay requirements. The comments received 
confirm that HFA programs generally employ underwriting requirements 
that are uniquely tailored to meet the needs of LMI consumers, such 
that applying the more generalized statutory ability-to-repay 
requirements would provide little or no net benefit to consumers and 
instead could be unnecessarily burdensome by diverting the focus of 
HFAs and their private creditor partners from mission activities to 
managing compliance and legal risk from two overlapping sets of 
underwriting requirements. The Bureau is concerned that absent an 
exemption, this diversion of resources would significantly reduce 
access to responsible mortgage credit for many LMI borrowers.
    As discussed above in part II.A, many HFAs expand on the 
underwriting standards of GSEs or Federal government agencies by 
applying even stricter underwriting standards than these guidelines, 
such as requiring mandatory counseling for all first-time homebuyers 
and strong loan servicing. As HFAs extend credit to promote long-term 
housing stability, rather than for profit, HFAs generally extend credit 
after performing a complex and lengthy analysis of a consumer's ability 
to repay. As also discussed above in part II.A, the Bureau finds that, 
as compared to traditional underwriting criteria, under which LMI 
borrowers may be less likely to qualify for credit, the underwriting 
standards of some HFAs allow greater weight for (and sometimes require) 
the consideration of nontraditional underwriting elements, extenuating 
circumstances, and other subjective compensating factors that are 
indicative of responsible homeownership. The Bureau notes, however, 
that HFAs do conduct regular and careful oversight of their lenders, 
helping ensure that they follow the HFAs' strict underwriting 
standards.
    The Bureau is concerned that HFAs, which are governmental entities 
and taxpayer-supported, may not have sufficient resources to implement 
and comply with the ability-to-repay requirements, or that the 
additional compliance burdens would at least significantly reduce the 
resources available to HFAs for the purpose of providing homeowner 
assistance. As discussed above in part II.A, many of the State and 
Federal programs that HFAs administer do not provide administrative 
funds; others provide limited administrative funds. Most HFAs operate 
independently and do not receive State operating funds. Consequently, 
HFAs may not have enough resources to increase compliance efforts 
without negatively impacting their missions. In the absence of an 
exemption from the ability-to-repay requirements, HFAs would have to 
dedicate substantially more time and resources to ensure their programs 
and lending partners are in compliance.
    Moreover, because many HFAs must conduct their programs through 
partnerships with private creditors, the Bureau is concerned that 
absent an exemption private creditor volunteers would determine that 
complying with both the ability-to-repay requirements and the 
specialized HFA program requirements is too burdensome or the liability 
risks too great. For example, needing to comply with both the HFA 
underwriting requirements that often account for (and sometimes require 
the consideration of) nontraditional underwriting criteria, extenuating 
circumstances, and compensating factors, as discussed above in part 
II.A, and the ability-to-repay requirements may cause some private 
creditors to cease participation in such programs. This too would 
reduce access to mortgage credit to LMI consumers.
    With respect to the comment suggesting that a better approach would 
be to allow HFAs to establish their own ability-to-repay and qualified 
mortgage guidelines, the Bureau notes that Congress has the authority 
to determine which agencies and programs have the authority under TILA 
to prescribe rules related to the ability-to-repay requirements or the 
definition of qualified mortgage. The Bureau is mindful that Congress 
has not authorized HFAs to prescribe rules related to the ability-to-
repay requirements or the definition of qualified mortgage.
    Regarding the comment favoring the creation of special ability-to-
repay requirements tailored to the unique underwriting characteristics 
of LMI consumers, the Bureau does not believe it is appropriate to 
establish alternative conditions. HFA programs have strong but flexible 
ability-to-repay requirements tailored to the unique needs and credit 
characteristics of the LMI consumers they serve. The Bureau is 
concerned that imposing uniform alternative requirements by regulation 
would curtail this flexibility and ultimately reduce access to 
responsible and affordable credit for this population.
    No commenters addressed whether credit extended pursuant to a 
program administered by an HFA should be granted a presumption of 
compliance as qualified mortgages, and, if so, under what conditions. 
However, the Bureau does not believe that extending qualified mortgage 
status to these loans would be as effective in addressing the concerns 
raised above as an exemption. Even if credit extended under the HFA 
programs were granted a presumption of compliance as qualified 
mortgages, HFA programs could be impacted by significant implementation 
and compliance burdens. Furthermore, as discussed above, many loans 
extended under these programs would not appear to satisfy the qualified 
mortgage standards under Sec.  1026.43(e)(2). Thus, a creditor 
extending such a mortgage loan would still be required to comply with 
the ability-to-repay requirements of Sec.  1026.43(c) and the potential 
liability of noncompliance would cease or severely curtail mortgage 
lending.
    The Bureau received a number of comments completely opposed to the 
proposed exemptions from the ability-to-repay requirements on the 
grounds that the rules should apply equally to all creditors. However, 
pursuant to section 105(a) of TILA, the Bureau generally may prescribe 
regulations that provide for such adjustments and exceptions for all or 
any class of transactions that the Bureau judges are necessary or 
proper to effectuate the purposes of TILA, among other things. In 
addition, pursuant to TILA section 105(f) the Bureau may exempt by 
regulation from all or part of this title all or any class of 
transactions for which in the determination of the Bureau coverage does 
not provide a meaningful benefit to consumers in the form of useful 
information or protection, if certain conditions specified in that 
section are met. For the reasons discussed in each relevant section, 
the Bureau believes that the exemptions adopted in this final rule are 
necessary and proper to effectuate the purposes of TILA, which include 
purposes of section 129C, by ensuring that consumers are offered and 
receive residential mortgage loans on terms that reasonably reflect 
their ability to repay. Furthermore, without the exemptions the Bureau 
believes that consumers in these demographics are at risk of being 
denied access to the responsible, affordable credit offered under these 
programs, which is contrary to the purposes of TILA.

[[Page 35463]]

    Accordingly, the Bureau believes that the proposed exemption for 
credit made pursuant to programs administered by an HFA is appropriate 
under the circumstances. The Bureau believes that consumers who receive 
extensions of credit made pursuant to a program administered by an HFA 
do so after a determination of ability to repay using specially 
tailored criteria. The exemption adopted by the Bureau is limited to 
creditors or transactions with certain characteristics and 
qualifications that ensure consumers are offered responsible, 
affordable credit on reasonably repayable terms. The Bureau thus finds 
that coverage under the ability-to-repay requirements provides little 
if any meaningful benefit to consumers in the form of useful 
protection, given the nature of the credit extended through HFAs. At 
the same time, the Bureau is concerned that the narrow class of 
creditors subject to the exemption may either cease or severely curtail 
mortgage lending if the ability-to-repay requirements are applied to 
their transactions, resulting in a denial of access to credit. 
Accordingly, the Bureau is adopting Sec.  1026.43(a)(3)(iv) as 
proposed, which provides that an extension of credit made pursuant to a 
program administered by an HFA, as defined under 24 CFR 266.5, is 
exempt from Sec.  1026.43(c) through (f).
    The Bureau is adopting new comment 43(a)(3)(iv)-1 to provide 
additional clarification which will facilitate compliance. As discussed 
above, the Bureau understands that most HFA programs are ``mortgage 
purchase'' programs in which the HFA establishes program requirements 
(e.g., income limits, purchase price limits, interest rates, points and 
term limits, underwriting standards, etc.), and agrees to purchase 
loans made by private creditors that meet these requirements. As a 
result, the success of these programs in large part depends upon the 
participation of private creditors. The Bureau intended the exemption 
to apply to both extensions of credit by HFAs and extensions of credit 
by private creditors under a mortgage purchase or similar HFA program. 
The comment clarifies that both extensions of credit made by HFAs 
directly to consumers as well as extensions of credit made by other 
creditors pursuant to a program administered by an HFA are exempt from 
the requirements of Sec.  1026.43(c) through (f). In addition, as 
discussed above in part II.A, the Bureau understands that HFAs are 
generally funded through tax-exempt bonds (also known as mortgage 
revenue bonds), but may receive other types of funding, including 
funding through Federal programs such as the HOME Program, which is the 
largest Federal block grant for affordable housing. The Bureau intended 
the exemption to apply to extensions of credit made pursuant to a 
program administered by an HFA, regardless of the funding source. The 
comment clarifies that the creditor is exempt from the requirements of 
Sec.  1026.43(c) through (f) regardless of whether the program 
administered by an HFA receives funding from Federal, State, or other 
sources.
    Section 1026.43(a)(3)(iv) is adopted pursuant to the Bureau's 
authority under section 105(a) and (f) of TILA. Pursuant to section 
105(a) of TILA, the Bureau generally may prescribe regulations that 
provide for such adjustments and exceptions for all or any class of 
transactions that the Bureau judges are necessary or proper to 
effectuate the purposes of TILA, among other things. For the reasons 
discussed in more detail above, the Bureau believes that this exemption 
is necessary and proper to effectuate the purposes of TILA, which 
include purposes of section 129C, by ensuring that consumers are 
offered and receive residential mortgage loans on terms that reasonably 
reflect their ability to repay. The Bureau believes that mortgage loans 
originated pursuant to programs administered by HFAs sufficiently 
account for a consumer's ability to repay, and the exemption ensures 
that consumers are able to receive assistance under these programs. 
Furthermore, without the exemption the Bureau believes that consumers 
in this demographic are at risk of being denied access to the 
responsible, affordable credit offered under these programs, which is 
contrary to the purposes of TILA. This exemption is consistent with the 
findings of TILA section 129C by ensuring that consumers are able to 
obtain responsible, affordable credit from the creditors discussed 
above.
    The Bureau has considered the factors in TILA section 105(f) and 
believes that, for the reasons discussed above, an exemption is 
appropriate under that provision. Pursuant to TILA section 105(f) the 
Bureau may exempt by regulation from all or part of this title all or 
any class of transactions for which in the determination of the Bureau 
coverage does not provide a meaningful benefit to consumers in the form 
of useful information or protection. In determining which classes of 
transactions to exempt the Bureau must consider certain statutory 
factors. For the reasons discussed above, the Bureau exempts an 
extension of credit made pursuant to a program administered by an HFA 
because coverage under the ability-to-repay regulations does not 
provide a meaningful benefit to consumers in the form of useful 
protection in light of the nature of the credit extended through HFAs. 
Consistent with its rationale in the proposed rule, the Bureau believes 
that the exemption is appropriate for all affected consumers to which 
the exemption would apply, regardless of their other financial 
arrangements, financial sophistication, or the importance of the loan 
to them. Similarly, the Bureau believes that the exemption is 
appropriate for all affected loans covered under the exemption, 
regardless of the amount of the loan and whether the loan is secured by 
the principal residence of the consumer. Furthermore, the Bureau 
believes that, on balance, the exemption will simplify the credit 
process without undermining the goal of consumer protection, denying 
important benefits to consumers, or increasing the expense of the 
credit process. Based on these considerations and the analysis 
discussed elsewhere in this final rule, the Bureau believes that the 
exemptions are appropriate. Therefore all credit extended through the 
Housing Finance Agencies is subject to the exemption.
43(a)(3)(v)
Background
    As discussed above, neither TILA nor Regulation Z provides an 
exemption to the ability-to-repay requirements for creditors, such as 
nonprofits, that primarily engage in community development lending. 
However, feedback provided to the Bureau suggested that the ability-to-
repay requirements might impose an unsustainable burden on certain 
creditors offering mortgage loan programs for LMI consumers. The Bureau 
was concerned that these creditors would not have the resources to 
implement and comply with the ability-to-repay requirements, and would 
have ceased or severely limited extending credit to LMI consumers, 
which would result in the unavailability of responsible, affordable 
mortgage credit. Accordingly, the Bureau proposed several exemptions 
intended to ensure that responsible, affordable mortgage credit 
remained available for LMI consumers.
Credit Extended by CDFIs, CHDOs, and DAPs
    The Bureau's proposal. The Bureau proposed to exempt from the 
ability-to-repay requirements several types of creditors that focus on 
extending credit

[[Page 35464]]

to LMI consumers. Proposed Sec.  1026.43(a)(3)(v)(A) would have 
exempted an extension of credit made by a creditor designated as a 
Community Development Financial Institution (CDFI), as defined under 12 
CFR 1805.104(h). Proposed Sec.  1026.43(a)(3)(v)(B) would have exempted 
an extension of credit made by a creditor designated as a Downpayment 
Assistance Provider of Secondary Financing (DAP) operating in 
accordance with regulations prescribed by the U.S. Department of 
Housing and Urban Development applicable to such persons. Proposed 
Sec.  1026.43(a)(3)(v)(C) would have exempted an extension of credit 
made by a creditor designated as a Community Housing Development 
Organization (CHDO), as defined under 24 CFR 92.2, operating in 
accordance with regulations prescribed by the U.S. Department of 
Housing and Urban Development applicable to such persons. The Bureau 
requested feedback regarding whether the requirements imposed in 
connection with obtaining and maintaining these designations were 
sufficient to ensure that such creditors provide consumers with 
responsible and affordable credit, and regarding whether unscrupulous 
or irresponsible creditors would be able to use these designations to 
evade the requirements of TILA, extend credit without regard to the 
consumer's ability to repay, or otherwise harm consumers.
    Comments received. The Bureau received many comments addressing the 
proposed exemptions for creditors designated as a CDFI, CHDO, or DAP. A 
large number of industry commenters completely opposed the proposed 
exemptions. These commenters generally argued that the rules should 
apply equally to all creditors. However, many industry and consumer 
advocate commenters supported the proposed exemptions. Twenty-five 
commenters supported the proposed exemption for creditors designated as 
CDFIs. Also, in response to the Bureau's request for feedback, several 
commenters provided data related to CDFI underwriting requirements and 
loan performance. Some commenters specifically discussed and supported 
the proposed exemption for CHDOs. While several commenters supported 
the proposed exemption for DAPs, the Bureau received no specific 
feedback related to these creditors. A few commenters asked the Bureau 
to consider exemptions for other types of designations or lending 
programs. For example, a few commenters requested that the Bureau 
provide a similar exemption for creditors that are chartered members of 
the NeighborWorks Network, while other commenters requested an 
exemption for creditors approved as Counseling Intermediaries by HUD.
    The Bureau received feedback from several industry commenters 
requesting that the Bureau provide an exemption for credit unions 
designated as low-income credit unions (LICUs) by the National Credit 
Union Administration (NCUA). These commenters explained that the NCUA's 
LICU designation is similar to the Treasury Department's CDFI 
designation. However, these commenters stated that most credit unions 
choose to obtain the LICU designation instead of the CDFI designation. 
Some commenters suggested that many credit unions are not eligible for 
CDFI status.
    The final rule. The Bureau is adopting the exemptions in a form 
that is substantially similar to the version proposed. For the reasons 
discussed below, the Bureau has concluded that a creditor designated as 
a CDFI or DAP should be exempt from the ability-to-repay requirements, 
provided these creditors meet certain other applicable requirements. As 
comments confirmed, creditors seeking these designations must undergo a 
screening process related to the ability of applicants to provide 
affordable, responsible credit to obtain the designation and must 
operate in accordance with the requirements of these programs, 
including periodic recertification.\140\ Comments provided to the 
Bureau also confirmed that the ability-to-repay requirements generally 
differ from the unique underwriting criteria which are related to the 
characteristics of the consumers served by these creditors. The 
ability-to-repay requirements primarily consist of quantitative 
underwriting considerations, such as an analysis of the consumer's 
debt-to-income ratio. In contrast, as discussed in part II.A above, the 
Bureau understands that creditors with these designations typically 
engage in a lengthy underwriting process that is specifically tailored 
to the needs of these consumers by incorporating a variety of 
compensating factors. Also, although market-wide data is not available 
for the delinquency rates of credit extended by CHDOs, comments 
provided to the Bureau related to CDFI loan performance reflect the low 
default levels associated with these creditors' programs, which 
strongly suggest that consumers are extended credit on reasonably 
repayable terms. Finally, commenters confirmed that these creditors 
serve consumers that have difficulty obtaining responsible and 
affordable credit, and that the burdens imposed by the ability-to-repay 
requirements would significantly impair the ability of these creditors 
to continue serving this market. Taken together, this feedback 
demonstrates that creditors with these designations provide residential 
mortgage loans on reasonably repayable terms, that these exemptions are 
necessary and proper to ensure that responsible, affordable mortgage 
credit remains available to consumers served by these creditors, and 
that the government approval and oversight associated with these 
designations ensures that there is little risk that consumers would be 
subject to abusive lending practices. Thus, the Bureau has determined 
that it is appropriate to adopt Sec.  1026.43(a)(3)(v)(A) and (B) as 
proposed.
---------------------------------------------------------------------------

    \140\ 24 CFR 200.194(d) provides that HUD certification as an 
approved nonprofit expires after two years, and nonprofits must 
reapply for approval prior to the expiration of the two year period. 
Also, on February 4, 2013 the CDFI Fund required recertification of 
most CDFIs. See http://www.cdfifund.gov/news_events/CDFI-2013-06-CDFI_Fund_Releases_Mandatory_Recertification_Guidelines_for_CDFIs.asp.
---------------------------------------------------------------------------

    The Bureau has also concluded that a creditor designated as a CHDO 
should be exempt from the ability-to-repay requirements. Comments 
illustrated that, like CDFIs and DAPs, CHDOs generally extend credit on 
reasonably repayable terms and ensure that LMI consumers have access to 
responsible, affordable mortgage credit. However, HUD provided comments 
to the Bureau suggesting that the exemption be narrowed. A person may 
obtain a CHDO designation for reasons unrelated to residential mortgage 
lending, such as to acquire tax credits to assist in the development of 
affordable rental properties. The Bureau believes that it is 
appropriate to narrow the exemption to only those persons that obtain 
the CHDO designation for purposes of residential mortgage lending. A 
person seeking CHDO status to engage in residential mortgage lending 
must enter into a commitment with the participating jurisdiction 
developing the project under the HOME Program. The Bureau also believes 
that providing specific citations to the relevant regulations 
prescribed by HUD would facilitate compliance. Thus, the Bureau is 
adopting Sec.  1026.43(a)(3)(v)(C) with language similar to that 
proposed, but with the additional condition that the creditor 
designated as a CHDO has entered into a commitment with a participating 
jurisdiction and is undertaking a project under the HOME Program, 
pursuant to the provisions of

[[Page 35465]]

24 CFR 92.300(a), and as the terms community housing development 
organization, commitment, participating jurisdiction, and project are 
defined under 24 CFR 92.2.
    The Bureau acknowledges that creditors with other types of 
designations also provide valuable homeownership assistance to certain 
types of consumers or communities. However, the Bureau does not believe 
that it would be appropriate to provide exemptions for the designations 
suggested by commenters. For example, while Counseling Intermediaries 
must be approved by HUD, this approval is not related to the ability of 
an applicant to provide consumers with responsible and affordable 
mortgage credit. Furthermore, the Bureau is unaware of evidence 
suggesting that approval as a Counseling Intermediary is sufficient to 
ensure that consumers are offered and receive residential mortgage 
loans on reasonably repayable terms. With respect to the feedback 
suggesting that the Bureau consider providing an exemption for 
creditors that are chartered members of the NeighborWorks Network, the 
Bureau acknowledges that these creditors are also subject to government 
oversight and seem to provide responsible and affordable mortgage 
credit. However, the Bureau does not believe that providing an 
exemption to these creditors would be necessary to ensure access to 
responsible and affordable credit, as many of these creditors would 
qualify for one of the exemptions adopted in Sec.  1026.43(a)(3)(v)(A) 
through (D). Therefore, the Bureau declines to adopt exemptions for the 
other designations or lending programs suggested by commenters.
    In response to feedback provided regarding creditors designated as 
low-income credit unions, the Bureau conducted additional research and 
analysis to determine whether an exemption for these creditors would be 
appropriate. LICUs, like CDFIs, provide credit to low-income consumers. 
However, NCUA regulations require LICUs to serve only ``predominantly'' 
low-income consumers, thereby permitting LICUs to extend credit to many 
consumers with higher incomes.\141\ Thus, such an exemption would be 
too broad and would affect consumers for whom access to credit is not a 
concern. In addition, the Bureau believes that the small creditor 
portfolio qualified mortgage loan provisions adopted in Sec.  
1026.43(e)(5) will address the concerns raised by commenters and 
accommodate the needs of small creditors, such as LICUs, while 
providing consumers with valuable protections. Therefore, the Bureau 
does not believe that it would be appropriate to provide an exemption 
for creditors with an LICU designation.
---------------------------------------------------------------------------

    \141\ ``The term predominantly is defined as a simple 
majority.'' 12 CFR 701.34(a)(3).
---------------------------------------------------------------------------

Credit Extended by Certain Nonprofits

    The Bureau's proposal. Proposed Sec.  1026.43(a)(3)(v)(D) would 
have exempted an extension of credit made by a creditor with a tax 
exemption ruling or determination letter from the Internal Revenue 
Service under section 501(c)(3) of the Internal Revenue Code of 1986 
(26 CFR 1.501(c)(3)-1), provided that certain other conditions were 
satisfied. Under proposed Sec.  1026.43(a)(3)(iv)(D)(1), the exemption 
would have been available only if the creditor extended credit secured 
by a dwelling no more than 100 times in the calendar year preceding 
receipt of the consumer's application. Proposed Sec.  
1026.43(a)(3)(v)(D)(2) would have further conditioned the exemption on 
the creditor, in the calendar year preceding receipt of the consumer's 
application, extending credit secured by a dwelling only to consumers 
with income that did not exceed the qualifying limit for moderate-
income families, as established pursuant to section 8 of the United 
States Housing Act of 1937 and amended from time to time by the U.S. 
Department of Housing and Urban Development. Proposed Sec.  
1026.43(a)(3)(v)(D)(3) would have made the proposed exemption available 
only if the extension of credit was to a consumer with income that did 
not exceed this qualifying limit. Finally, proposed Sec.  
1026.43(a)(3)(v)(D)(4) would have made the proposed exemption 
contingent upon the creditor determining, in accordance with written 
procedures, that the consumer had a reasonable ability to repay the 
extension of credit.
    Proposed comment 43(a)(3)(v)(D)-1 would have clarified that an 
extension of credit is exempt from the requirements of Sec.  1026.43(c) 
through (f) if the credit is extended by a creditor described in Sec.  
1026.43(a)(3)(v)(D), provided the conditions specified in that section 
are satisfied. The conditions specified in Sec.  1026.43(a)(3)(v)(D)(1) 
and (2) are determined according to activity that occurred in the 
calendar year preceding the calendar year in which the consumer's 
application was received. Section 1026.43(a)(3)(v)(D)(2) provides that, 
during the preceding calendar year, the creditor must have extended 
credit only to consumers with income that did not exceed the qualifying 
limit then in effect for moderate-income families, as specified in 
regulations prescribed by HUD pursuant to section 8 of the United 
States Housing Act of 1937. For example, a creditor has satisfied the 
requirements of Sec.  1026.43(a)(3)(v)(D)(2) if the creditor 
demonstrates that the creditor extended credit only to consumers with 
income that did not exceed the qualifying limit in effect on the dates 
the creditor received each consumer's individual application. The 
condition specified in Sec.  1026.43(a)(3)(v)(D)(3), which relates to 
the current extension of credit, provides that the extension of credit 
must be to a consumer with income that does not exceed the qualifying 
limit specified in Sec.  1026.43(a)(3)(v)(D)(2) in effect on the date 
the creditor received the consumer's application. For example, assume 
that a creditor with a tax exemption ruling under section 501(c)(3) of 
the Internal Revenue Code of 1986 has satisfied the conditions 
identified in Sec.  1026.43(a)(3)(v)(D)(1) and (2). If, on May 21, 
2014, the creditor in this example extends credit secured by a dwelling 
to a consumer whose application reflected income in excess of the 
qualifying limit identified in Sec.  1026.43(a)(3)(v)(D)(2), the 
creditor has not satisfied the condition in Sec.  
1026.43(a)(3)(v)(D)(3) and this extension of credit is not exempt from 
the requirements of Sec.  1026.43(c) through (f).
    The Bureau solicited comment regarding whether the proposed 
exemption was appropriate. The Bureau also specifically requested 
feedback on whether the proposed 100 transaction limitation was 
appropriate, on the costs of implementing and complying with the 
ability-to-repay requirements that would be incurred by creditors that 
extend credit secured by a dwelling more than 100 times a year, the 
extent to which this proposed condition would affect access to 
responsible, affordable credit, and whether the limit of 100 
transactions per year should be increased or decreased. The Bureau also 
requested comment regarding the costs that nonprofit creditors would 
incur in connection with the ability-to-repay requirements, the extent 
to which these additional costs would affect the ability of nonprofit 
creditors to extend credit to LMI consumers, and whether consumers 
could be harmed by the proposed exemption. The Bureau solicited comment 
regarding whether the proposed exemption should be extended to 
creditors designated as nonprofits under section 501(c)(4) of the 
Internal Revenue Code of 1986. The Bureau also requested financial 
reports

[[Page 35466]]

and mortgage lending activity data supporting the argument that the 
marginal cost of implementing and complying with the ability-to-repay 
requirements would cause 501(c)(4) nonprofit creditors to cease, or 
severely limit, extending credit to LMI consumers.
    Comments received. The Bureau received many comments addressing 
this proposed exemption. Many commenters completely opposed the 
proposed exemption for community-focused creditors. These commenters 
generally argued that the rules should apply equally to all creditors. 
One industry commenter argued that a better approach would be to create 
special ability-to-repay requirements tailored to the unique 
underwriting characteristics of LMI consumers. Many other commenters 
approved of the proposed exemption, including the Bureau's proposed 
conditions. Several commenters stated that an exemption for certain 
nonprofits was necessary, but requested various modifications. Most of 
the commenters that approved of the proposed exemption were concerned 
that the exemption could be used as a loophole to harm consumers and 
agreed that conditions were needed to address this potential risk.
    Many commenters, including industry, consumer advocate, and 
nonprofit commenters, explicitly supported the proposed limitation of 
100 extensions of credit. These commenters generally explained that the 
100-extension limitation was an appropriate limit that would make it 
difficult for sham nonprofit creditors to harm consumers. However, 
several commenters asked the Bureau to raise the transaction 
limitation. The commenters were primarily concerned that the limitation 
would force nonprofits to limit certain types lending. For example, a 
few commenters stated that nonprofits that offer both home-purchase 
mortgage loans and small-dollar mortgage loans, such as for home energy 
improvement, would limit small-dollar lending to remain under the 100-
extension limitation. One nonprofit commenter argued that, for 
creditors that provide first- and subordinate-lien financing to LMI 
consumers on the same transaction, the 100-extension limit is 
effectively a 50-transaction limit. Another nonprofit commenter 
suggested that the Bureau either apply the 100-extension limit to 
first-lien mortgage loans, or raise the limit to 500 for total 
transactions. One consumer advocate commenter suggested raising the 
limit to 250 transactions per calendar year to address these concerns. 
A few commenters asked that the Bureau remove the limitation 
completely. For example, one commenter argued that the Bureau's 
proposed limit of 100 extensions of credit would harm LMI consumers by 
raising the cost of credit obtained from larger-scale nonprofit 
organizations.
    One commenter argued that the proposed exemption was too narrow and 
urged the Bureau to expand the exemption in several ways. First, this 
commenter argued that the exemption should not be limited to extensions 
of credit by creditors, but rather should be extended to all 
transactions in which a nonprofit organization dedicated to providing 
opportunities for affordable, long-term homeownership is involved, but 
is not the creditor. This commenter also asked the Bureau to provide 
no-action letters that would provide a safe harbor for certain mortgage 
lending programs. In addition, this commenter argued that the proposed 
references to the low- to moderate-income threshold under section 8 of 
the National Housing Act was inappropriate because use of the threshold 
would result in the denial of credit to consumers with income slightly 
above the threshold. Furthermore, this commenter asserted that it would 
be arbitrary and unjustified for the Bureau to extend an exemption to 
State HFAs but not provide an exemption to organizations that rely on 
underwriting criteria similar to those used by State HFAs, such as the 
consideration of a consumer's life circumstances. Finally, this 
commenter disputed the Bureau's justification for the proposed 
exemptions--that access to credit for LMI consumers would be impaired 
if certain creditors did not have the resources to implement and comply 
with the ability-to-repay requirements and ceased or severely limited 
extending credit--by arguing that LMI consumers are harmed when any 
creditor, regardless of size, spends money on regulatory compliance 
that would otherwise have been lent to LMI consumers.
    One consumer advocate group opposed providing an exemption for 
nonprofit creditors and instead suggested several modifications to the 
ability-to-repay requirements intended to address the Bureau's concerns 
regarding nonprofits. This commenter argued that, rather than providing 
an exemption for the proposed categories of nonprofit creditor, the 
Bureau should provide a rebuttable presumption of compliance for these 
nonprofit creditors, without requiring the nonprofits to satisfy the 
requirements of Sec.  1026.43(c) through (f). Also, this commenter 
argued, these provisions should apply to only bona fide nonprofits, so 
that consumers would be provided legal recourse against unscrupulous 
creditors operating sham nonprofits. Further, this commenter suggested 
that the Bureau should expand the anti-evasion provisions of Sec.  
1026.43(h) to include the adoption of nonprofit status for purposes of 
avoiding the ability-to-repay requirements. This commenter argued that 
such modifications would provide genuine nonprofits with relief from 
the regulatory and compliance burdens associated with the ability-to-
repay requirements, while enabling consumers to seek recourse against 
abusive, sham nonprofits.
    The Bureau did not receive feedback regarding whether the proposed 
exemption should be extended to creditors designated as nonprofits 
under section 501(c)(4) of the Internal Revenue Code of 1986. However, 
several credit unions and State credit union associations requested 
that the Bureau expand the nonprofit exemption to all credit unions, as 
credit unions are designated as nonprofits under sections 501(c)(1) and 
501(c)(14) of the Internal Revenue Code of 1986. These commenters 
generally explained that credit unions, like the nonprofit creditors 
addressed in the Bureau's proposal, are often small businesses that 
have difficulty complying with regulatory burdens. Industry commenters 
also requested an exemption for certain creditors that extend credit to 
LMI consumers, or for certain programs intended to facilitate access to 
credit for LMI consumers. For example, some commenters argued that the 
Bureau should provide an exemption for credit unions operating in 
certain areas, such as areas defined as ``underserved'' under the 
Federal Credit Union Act, while others argued that the Bureau should 
provide an exemption for loans that meet the regulatory requirements of 
the Community Reinvestment Act or similar programs. These commenters 
generally argued that such an exemption would facilitate access to 
credit for LMI consumers by minimizing the regulatory burdens imposed 
by the ability-to-repay requirements.
    A few industry and consumer advocate commenters asked the Bureau to 
establish a publicly accessible database of all nonprofits that 
qualified for the exemption. These commenters argued that such a 
database would facilitate compliance and allow consumers to determine 
if nonprofit creditors were actually exempt from the requirements. A 
State attorney general expressed concern about potential abuse and 
asked the Bureau to consider

[[Page 35467]]

vigorous oversight of nonprofits eligible for the exemption.
    The final rule. The Bureau is adopting Sec.  1026.43(a)(3)(v)(D) in 
a form that is substantially similar to the version proposed, except 
that the Bureau is increasing the annual originations limit from 100 to 
200 extensions of credit. For the reasons discussed below, the Bureau 
has concluded that the exemption should apply provided that, in 
additional to the annual originations limit: (1) The creditor is 
designated as a nonprofit organization under section 501(c)(3) of the 
Internal Revenue Code; (2) the extension of credit is to a consumer 
with income that does not exceed the limit for low- and moderate-income 
households as established pursuant regulations prescribed by the U.S. 
Department of Housing and Urban Development; (3) during the calendar 
year preceding receipt of the consumer's application the creditor 
extended credit only to consumers with income that did not exceed the 
above limit; and (4) the creditor determines, in accordance with 
written procedures, that the consumer has a reasonable ability to repay 
the extension of credit. Comments provided to the Bureau generally 
confirmed that these conditions were reasonable and appropriate 
measures to ensure that the exemption would not be used as a loophole 
to avoid the ability-to-repay requirements. Thus, the Bureau has 
determined that it is appropriate to adopt Sec.  
1026.43(a)(3)(v)(D)(2), (3), and (4) generally as proposed, but with 
technical modifications to paragraphs (a)(3)(v)(D)(2) and (3), as 
discussed below.
    However, upon further consideration of the comments received, the 
Bureau has determined that it is appropriate to raise the threshold in 
proposed Sec.  1026.43(a)(3)(v)(D)(1) from 100 to 200 extensions of 
credit. Most commenters agreed with the rationale advanced in the 2013 
ATR Proposed Rule that a limitation is necessary to prevent the 
exemption from being exploited by unscrupulous creditors seeking to 
harm consumers. The Bureau strongly believes that this risk outweighs 
the costs that a limitation may impose on some nonprofit creditors. 
While many commenters approved of the proposed 100-extension 
limitation, the Bureau is concerned that this limitation could lead to 
unintended consequences. The Bureau is particularly concerned that 
nonprofit creditors providing primary and subordinate financing on the 
same transaction effectively would be limited to 50 transactions per 
year. The Bureau did not intend to propose such a strict limitation. 
The Bureau has concluded that a 200-extension limitation, doubling the 
100-extension limit to capture creditors making first- and subordinate-
lien loans on the same transaction, would address the concerns raised 
by commenters while achieving the original intent of the proposed 
condition. The Bureau does not agree with the suggestions proposed by 
some commenters that separate limits for first- and subordinate-lien 
loans should be implemented. The Bureau believes that such a 
restriction would be needlessly restrictive, and it would be more 
efficient to allow nonprofit creditors to determine the most efficient 
allocation of funds between primary and subordinate financing. 
Furthermore, the Bureau does not agree with the arguments raised by 
commenters that the threshold should be raised above 200, such as to 
500 transactions. As explained in the 2013 ATR Proposed Rule, the 
Bureau intended to narrowly tailor the exemption to small nonprofits 
that did not have the resources to bear the burdens associated with the 
ability-to-repay requirements, and solicited feedback regarding whether 
a 100 extension of credit limit was indicative of such a resource 
limitation.\142\ While feedback indicated that a 200-extension 
limitation would more appropriately address the Bureau's intentions, 
the Bureau received no feedback indicating that nonprofit creditors 
making more than 200 extensions of credit lacked the resources to 
implement and comply with the ability-to-repay requirements. The Bureau 
believes that creditors originating such a number of mortgage loans 
likely have the resources to bear the implementation and compliance 
burden associated with the ability-to-repay requirements, unlike 
smaller nonprofit creditors that make fewer loans. Therefore, as 
adopted, Sec.  1026.43(a)(3)(v)(D)(1) conditions the exemption from the 
ability-to-repay requirements on the creditor extending credit secured 
by a dwelling no more than 200 times during the calendar year preceding 
receipt of the consumer's application.
---------------------------------------------------------------------------

    \142\ See 78 FR 6644 (Jan. 30, 2013).
---------------------------------------------------------------------------

    As discussed above, one commenter argued that the Bureau should 
limit the exemption to bona fide nonprofit creditors. Adding a bona 
fide nonprofit condition would provide another avenue for consumers to 
seek redress against harmful lending practices, which may deter persons 
from using the exemption as a loophole. However, the Bureau believes 
that the requirements of Sec.  1026.43(a)(3)(v)(D) are narrowly 
tailored to protect consumers and limit the risk that an unscrupulous 
creditor could create a nonprofit for the purpose of extending credit 
in a harmful, reckless, or abusive manner. Therefore, the Bureau 
declines to adopt an additional bona fide nonprofit requirement at this 
time. As with the other exemptions to the ability-to-repay 
requirements, the Bureau will monitor the mortgage market and may 
reevaluate this issue if circumstances warrant reconsideration.
    As discussed above, one commenter suggested that the Bureau adopt a 
qualified mortgage definition with a rebuttable presumption of 
compliance instead of an exemption to the ability-to-repay 
requirements. The Bureau does not believe it is necessary to adopt a 
qualified mortgage definition for nonprofit creditors meeting the 
conditions of Sec.  1026.43(a)(3)(v)(D). The Bureau believes that an 
exemption is a more effective method of addressing the concerns 
discussed above. The Bureau believes that a rebuttable presumption 
would re-introduce the compliance burdens on certain nonprofits that 
the Bureau seeks to alleviate. Furthermore, the line between a safe 
harbor and a rebuttable presumption was determined based on pricing 
thresholds and providing a rebuttable presumption based on other 
criteria is inconsistent with the approach taken in the 2013 ATR Final 
Rule. Nor does the Bureau believe that modifying the anti-evasion 
provisions of Sec.  1026.43(h) is necessary. Either approach would 
increase regulatory complexity for these creditors, and may frustrate 
the goals the Bureau seeks to achieve in accommodating nonprofit 
creditors. The Bureau also has decided that it is inappropriate to 
provide no-action letters for certain creditors, as suggested by one 
commenter. For the reasons discussed in this section, the Bureau 
believes that the exemptions adopted in this final rule are the optimal 
approach for providing access to responsible, affordable credit while 
ensuring that consumers are offered and receive mortgage credit on 
reasonably repayable terms.
    The Bureau has also determined that it is appropriate to limit the 
exemption to creditors designated as nonprofits under section 
501(c)(3), but not 501(c)(4), of the Internal Revenue Code of 1986. The 
Bureau recognizes that these creditors also may be affected by the 
ability-to-repay requirements. However, the Bureau believes that this 
distinction is appropriate. As discussed in the 2013 ATR Proposed Rule, 
this exemption is premised on the belief that the additional costs 
imposed by the ability-to-repay requirements will force certain 
nonprofit creditors to cease extending credit, or substantially limit

[[Page 35468]]

credit activities, thereby harming low- to moderate-income 
consumers.\143\ The Bureau solicited comment regarding whether the 
exemption should be extended to creditors designated as nonprofits 
under section 501(c)(4) of the Internal Revenue Code of 1986. The 
Bureau also requested financial reports and mortgage lending activity 
data supporting the argument that the marginal cost of implementing and 
complying with the ability-to-repay requirements would cause 501(c)(4) 
nonprofit creditors to cease, or severely limit, extending credit to 
low- to moderate-income consumers. The Bureau received no comment in 
response to this request. Thus, the Bureau concludes that it is 
appropriate to limit the exemption to creditors designated as 
nonprofits under section 501(c)(3) of the Internal Revenue Code of 
1986, and adopts Sec.  1026.43(a)(3)(v)(D) as proposed.
---------------------------------------------------------------------------

    \143\ See 78 FR 6645 (Jan. 30, 2013).
---------------------------------------------------------------------------

    As noted above, the Bureau received a comment suggesting that the 
exemption should not be limited to extensions of credit by a creditor 
but, rather, should be extended to other transactions in which a 
nonprofit organization that is dedicated to providing opportunities for 
affordable, long-term homeownership is involved, but is not the 
creditor. While the Bureau believes that such organizations provide 
valuable assistance to LMI consumers, the Bureau has determined that it 
would be inappropriate to extend the exemption in this manner. The 
exemptions adopted by the Bureau are limited to creditors or 
transactions where the Bureau believes that consumers are offered and 
receive residential mortgage loans on reasonably repayable terms. The 
proposed exemption involves creditors with certain characteristics that 
ensure consumers are offered responsible, affordable credit on 
reasonably repayable terms. In these narrow circumstances the Bureau 
has determined that there is little risk of harm to consumers. However, 
adopting the approach suggested in this comment effectively would 
expand the exemption to all creditors, as any creditor could involve 
such a nonprofit organization in some capacity during the origination 
process. Such a broad expansion would not be necessary or proper to 
effectuate the purposes of TILA; to the contrary, it would instead 
exempt a potentially large number of creditors from the ability-to-
repay requirements. The Bureau would not be able to determine if each 
potential creditor extended credit only on reasonably repayable terms 
and does not believe it would be appropriate to assume that any 
involvement by a nonprofit organization is sufficient to ensure that 
consumers were not harmed by the exemption. Therefore, the Bureau 
declines to extend the exemption to transactions involving nonprofit 
organizations that are dedicated to providing opportunities for 
affordable homeownership.
    With respect to the comment disputing the Bureau's justification 
for the proposed exemptions, the Bureau believes that this criticism 
results from a misunderstanding of the Bureau's rationale for the 
proposed exemptions. As explained in the 2013 ATR Proposed Rule, the 
Bureau may provide an exemption to the ability-to-repay requirements if 
the statutory conditions for the use of such an exemption are met.\144\ 
Providing an exemption for a particular class of creditors requires a 
careful balancing of considerations, including the nature of credit 
extended, safeguards or other factors that may protect consumers from 
harm, and the extent to which application of the regulatory 
requirements would affect access to responsible, affordable credit. As 
discussed in the Bureau's proposal, the Bureau was concerned about 
creditors that would be forced to cease or severely limit lending to 
LMI consumers.\145\ Based on feedback provided in response to this 
question, the Bureau has adopted an exemption narrowly tailored to the 
situations where an exemption is necessary and proper.
---------------------------------------------------------------------------

    \144\ See 78 FR 6635-36 (Jan. 30, 2013).
    \145\ Id. at 6643.
---------------------------------------------------------------------------

    The Bureau also disagrees with the arguments advanced that limiting 
the exemption to creditors extending credit to consumers with income 
below the qualifying limit for moderate income families as established 
pursuant to section 8 of the United States Housing Act of 1937 is 
arbitrary. The Bureau acknowledges that there may be cases where a 
consumer with income slightly above the LMI threshold is unable to 
secure credit. However, most commenters agreed that these conditions 
helped ensure that the proposed exemption would not become a regulatory 
loophole by which consumers could be harmed. Thus, the Bureau believes 
that it is necessary to draw a line, and the section 8 income 
limitations are clear and well-known. Such an approach will facilitate 
compliance while ensuring that the exemption is narrowly tailored to 
address the consumers for whom access to credit is a concern. 
Therefore, the Bureau has concluded that it is appropriate to refer to 
these qualifying income limits. Furthermore, the Bureau intends to 
monitor these qualifying income limits in the future to ensure that the 
exemption remains narrowly tailored. The Bureau has determined that it 
is necessary to make a technical change to the proposed language. 
Although HUD's qualifying income limits are colloquially referred to as 
``section 8 limits,'' the thresholds were established by section 102 of 
the Housing and Community Development Act of 1974, which amended the 
National Housing Act of 1937. The Bureau believes that it is 
appropriate to identify the thresholds by the exact statutory and 
regulatory reference. Accordingly, the Bureau is adopting Sec.  
1026.43(a)(3)(v)(D)(2) and (3) generally as proposed, but with a 
technical modification that refers to the low- and moderate-income 
household limit as established pursuant to section 102 of the Housing 
and Community Development Act of 1974.
    As discussed above, several commenters asked the Bureau to remain 
engaged with the nonprofit community to ensure that the exemption is 
not used as a loophole to harm consumers. For example, some commenters 
asked the Bureau to establish a database of creditors that qualify for 
the Sec.  1026.43(a)(3)(v)(D) exemption. The Bureau intends to keep 
abreast of developments in the mortgage market, including lending 
programs offered by nonprofit creditors pursuant to this exemption. 
However, the Bureau does not believe that it is necessary to develop a 
formal oversight mechanism, such as a database of creditors eligible 
for this exemption, at this time. Instead, the Bureau will continue to 
collect information related to the effectiveness of the ability-to-
repay requirements, including the Sec.  1026.43(a)(3)(v)(D) exemption, 
and will pursue additional rulemakings or data collections if the 
Bureau determines in the future that such action is necessary.
    The Bureau has also carefully considered the comments requesting a 
full or limited exemption from the ability-to-repay requirements for 
certain creditors or for certain programs intended to facilitate access 
to credit for LMI consumers. For example, as discussed above, several 
industry commenters argued that the Bureau should provide an exemption 
for all credit unions, which are designated as nonprofit organizations 
under sections 501(c)(1) and 501(c)(14) of the Internal Revenue Code of 
1986. Other industry commenters argued that the Bureau should provide 
an exemption for credit unions operating in certain areas, such

[[Page 35469]]

as areas defined as ``underserved'' under the Federal Credit Union Act. 
The Bureau agrees with the arguments advanced by commenters that credit 
unions were not the source of the financial crisis, have historically 
employed responsible underwriting requirements, and are often an 
important source of credit for LMI consumers. However, the Bureau does 
not believe that any of the requested exemptions for credit unions are 
necessary. The Bureau understands that many credit unions will qualify 
for the additional qualified mortgage definitions discussed below in 
the section-by-section analyses of Sec.  1026.43(e)(5) and (e)(6). 
Also, given the thoroughness of the traditional underwriting methods 
employed by credit unions, the Bureau does not believe that larger 
credit unions will have difficulty complying with the general ability-
to-repay requirements or qualified mortgage provisions. Further, absent 
evidence suggesting that the ability-to-repay requirements would force 
these credit unions to cease or severely curtail extending credit to 
LMI consumers, the Bureau does not believe that an exemption would be 
appropriate. For similar reasons, the Bureau declines to expand the 
exemption to loans that meet the regulatory requirements of the 
Community Reinvestment Act or similar programs. The Bureau is not 
persuaded that such an expansive exemption is necessary to ensure that 
LMI consumers have access to responsible, affordable credit.
    To summarize, the Bureau has determined that an exemption to the 
ability-to-repay requirements is appropriate for certain nonprofit 
creditors. The Bureau has modified the proposed exemption in a manner 
that addressed the concerns raised by various commenters. As adopted, 
Sec.  1026.43(a)(3)(v)(D) exempts an extension of credit made by a 
creditor with a tax exemption ruling or determination letter from the 
Internal Revenue Service under section 501(c)(3) of the Internal 
Revenue Code of 1986 (26 U.S.C. 501(c)(3); 26 CFR 1.501(c)(3)-1), 
provided that all of the conditions in Sec.  1026.43(a)(3)(v)(D)(1) 
through (4) are satisfied. Section 1026.43(a)(3)(v)(D)(1) conditions 
the exemption on the requirement that, during the calendar year 
preceding receipt of the consumer's application, the creditor extended 
credit secured by a dwelling no more than 200 times. Section 
1026.43(a)(3)(v)(D)(2) conditions the exemption on the requirement 
that, during the calendar year preceding receipt of the consumer's 
application, the creditor extended credit secured by a dwelling only to 
consumers with income that did not exceed the low- and moderate-income 
household limit as established pursuant to section 102 of the Housing 
and Community Development Act of 1974 (42 U.S.C. 5302(a)(20)) and 
amended from time to time by the U.S. Department of Housing and Urban 
Development, pursuant to 24 CFR 570.3. Section 1026.43(a)(3)(v)(D)(3) 
conditions the exemption on the requirement that the extension of 
credit is to a consumer with income that does not exceed the above 
limit. Section 1026.43(a)(3)(v)(D)(4) conditions the exemption on the 
requirement that the creditor determines, in accordance with written 
procedures, that the consumer has a reasonable ability to repay the 
extension of credit. The Bureau is also adopting comment 
43(a)(3)(v)(D)-1 generally as proposed, but with technical 
modifications that reflect the appropriate references to HUD's low- and 
moderate-income household limit, as described above.
Legal Authority
    Section 1026.43(a)(3)(v) is adopted pursuant to the Bureau's 
authority under section 105(a) and (f) of TILA. Pursuant to section 
105(a) of TILA, the Bureau generally may prescribe regulations that 
provide for such adjustments and exceptions for all or any class of 
transactions that the Bureau judges are necessary and proper to 
effectuate the purposes of TILA, among other things. For the reasons 
discussed in more detail above, the Bureau has concluded that this 
exemption is necessary and proper to effectuate the purposes of TILA, 
which include the purposes of TILA section 129C. By ensuring the 
viability of the low- to moderate-income mortgage market, this 
exemption would ensure that consumers are offered and receive 
residential mortgage loans on terms that reasonably reflect their 
ability to repay. The Bureau also believes that mortgage loans 
originated by these creditors generally account for a consumer's 
ability to repay. Without the exemption the Bureau believes that low- 
to moderate-income consumers are at risk of being denied access to the 
responsible and affordable credit offered by these creditors, which is 
contrary to the purposes of TILA. This exemption is consistent with the 
finding of TILA section 129C by ensuring that consumers are able to 
obtain responsible, affordable credit from the nonprofit creditors 
discussed above which inform the Bureau's understanding of its 
purposes.
    The Bureau has considered the factors in TILA section 105(f) and 
has concluded that, for the reasons discussed above, an exemption is 
appropriate under that provision. Pursuant to TILA section 105(f) the 
Bureau may exempt by regulation from all or part of this title all or 
any class of transactions for which in the determination of the Bureau 
coverage does not provide a meaningful benefit to consumers in the form 
of useful information or protection. In determining which classes of 
transactions to exempt, the Bureau must consider certain statutory 
factors. For the reasons discussed above, the Bureau exempts an 
extension of credit made by the creditors and under conditions provided 
in Sec.  1026.43(a)(3)(v) because coverage under the ability-to-repay 
requirements does not provide a meaningful benefit to consumers in the 
form of useful protection in light of the protection the Bureau 
believes that the credit extended by these creditors already provides 
to consumers. Consistent with its rationale in the 2013 ATR Proposed 
Rule, the Bureau believes that the exemptions are appropriate for all 
affected consumers to which the exemption applies, regardless of their 
other financial arrangements and financial sophistication and the 
importance of the loan to them. Similarly, the Bureau believes that the 
exemptions are appropriate for all affected loans covered under the 
exemption, regardless of the amount of the loan and whether the loan is 
secured by the principal residence of the consumer. Furthermore, the 
Bureau believes that, on balance, the exemptions will simplify the 
credit process without undermining the goal of consumer protection, 
denying important benefits to consumers, or increasing the expense of 
the credit process. The Bureau recognizes that its exemption and 
exception authorities apply to a class of transactions, and has decided 
to apply these authorities to the loans covered under the final rule of 
the entities subject to the adopted exemptions.
43(a)(3)(vi)
The Bureau's Proposal
    As discussed above, neither TILA nor Regulation Z provides an 
exemption to the ability-to-repay requirements for Federal programs 
designed to stabilize homeownership or mitigate the risks of 
foreclosure. However, the Bureau was concerned that the ability-to-
repay requirements would inhibit the effectiveness of these Federal 
programs. As a result, the Bureau proposed

[[Page 35470]]

Sec.  1026.43(a)(3)(vi), which would have provided that an extension of 
credit made pursuant to a program authorized by sections 101 and 109 of 
the Emergency Economic Stabilization Act of 2008 (12 U.S.C. 5211; 5219) 
(EESA) is exempt from Sec.  1026.43(c) through (f).
    Proposed comment 43(a)(3)(vi)-1 would have explained that the 
requirements of Sec.  1026.43(c) through (f) did not apply to a 
mortgage loan modification made in connection with a program authorized 
by sections 101 and 109 of EESA. If a creditor is underwriting an 
extension of credit that is a refinancing, as defined by Sec.  
1026.20(a), that will be made pursuant to a program authorized by 
sections 101 and 109 of the Emergency Economic Stabilization Act of 
2008, the creditor also need not comply with Sec.  1026.43(c) through 
(f). Thus, a creditor need not determine whether the mortgage loan 
modification is considered a refinancing under Sec.  1026.20(a) for 
purposes of determining applicability of Sec.  1026.43; if the 
transaction is made in connection with these programs, the requirements 
of Sec.  1026.43(c) through (f) do not apply.
    The Bureau solicited general feedback regarding whether this 
proposed exemption was appropriate. In particular, the Bureau sought 
comment regarding whether applicability of the ability-to-repay 
requirements would constrict the availability of credit offered under 
these programs and whether consumers have suffered financial loss or 
other harm by creditors participating in these programs. The Bureau 
also requested information on the extent to which the requirements of 
these Federal programs account for a consumer's ability to repay. The 
Bureau also sought comment regarding whether, if the Bureau determined 
that a full exemption is not warranted, what modifications to the 
general ability-to-repay standards would be warranted and whether 
qualified mortgage status should be granted instead, and, if so, under 
what conditions.
Comments Received
    The Bureau received several comments addressing this proposed 
exemption. One consumer advocate commenter opposed the exemption and 
stated that these programs lack meaningful underwriting guidance. Many 
industry and consumer advocate commenters supported the exemption. 
These commenters generally argued that the ability-to-repay 
requirements would make these programs unworkable, which would 
frustrate the public policy purposes of EESA and harm consumers in need 
of assistance. A few industry commenters requested that the Bureau 
provide an exemption for homeownership stabilization and foreclosure 
prevention programs, other than those authorized by sections 101 and 
109 of EESA, such as a creditor's proprietary program intended to 
provide assistance to consumers who have experienced a loss of 
employment or other financial difficulty.
The Final Rule
    The Bureau is adopting Sec.  1026.43(a)(3)(vi) and comment 
43(a)(3)(vi)-1 as proposed. For the reasons discussed below, the Bureau 
has determined that an exemption from the ability-to-repay requirements 
is necessary and appropriate for extensions of credit made pursuant to 
a program authorized by sections 101 and 109 of EESA. Commenters agreed 
with the Bureau that the ability-to-repay requirements would interfere 
with, or are inapplicable to, these programs, which are intended to 
address the unique underwriting requirements of certain consumers at 
risk of default or foreclosure. By significantly impairing the 
effectiveness of these programs, the Bureau believes that there is a 
considerable risk that the ability-to-repay requirements would actually 
prevent at-risk consumers from receiving mortgage credit provided in an 
affordable and responsible manner.
    With respect to the feedback provided opposing this exemption, the 
Bureau believes that, based on the existence of Federal oversight and 
the EESA requirements, the risk of consumer harm is low. Additionally, 
as discussed in part II.A above, the Bureau understands that these EESA 
programs have highly detailed requirements, created and maintained by 
the Treasury Department, to determine whether EESA assistance will 
benefit distressed consumers.\146\ In addition to satisfying these 
Treasury Department requirements, consumers receiving assistance under 
an EESA program must meet EESA eligibility requirements and creditor 
program requirements.\147\ Thus, the Bureau believes that credit 
available under these programs is extended on reasonably repayable 
terms and conditions.
---------------------------------------------------------------------------

    \146\ See United States Department of the Treasury, ``Home 
Affordable Modification Program, Base Net Present Value (NPV) Model 
v5.02, Model Documentation'' (April 1, 2012).
    \147\ See http://www.makinghomeaffordable.gov/programs/Pages/default.aspx. For example, the EESA PRA program contains several 
eligibility requirements in addition to program requirements. See 
http://www.makinghomeaffordable.gov/programs/lower-payments/Pages/pra.aspx.
---------------------------------------------------------------------------

    Several industry commenters asked the Bureau to consider an 
exemption for proprietary foreclosure mitigation and homeownership 
stabilization programs. While the Bureau believes that these programs 
likely benefit many consumers, the Bureau has determined that an 
exemption from the ability-to-repay requirements is inappropriate. 
Proprietary programs are not under the jurisdiction of the U.S. 
Department of the Treasury, as EESA programs are. This lack of 
accountability increases the risk that an unscrupulous creditor could 
harm consumers. Furthermore, EESA programs will expire by 2017 and are 
intended to provide assistance to a narrow set of distressed consumers. 
In contrast, the exemption suggested by commenters is potentially 
indefinite and indeterminate. Also, the Bureau believes that creditors 
seeking to provide assistance to consumers in distress without 
incurring the obligations associated with the ability-to-repay 
requirements may do so by providing a consumer with a workout or 
similar modification that does not constitute a refinancing under Sec.  
1026.20(a). Thus, the Bureau declines to provide an exemption for these 
proprietary programs.
    No commenters addressed whether credit extended pursuant to an EESA 
program should be granted a presumption of compliance as qualified 
mortgages, and, if so, under what conditions. However, the Bureau does 
not believe that extending qualified mortgage status to these loans 
would be as effective in addressing the concerns raised above as an 
exemption. Even if credit extended under EESA programs were granted a 
presumption of compliance as qualified mortgages, creditors extending 
credit pursuant to these programs could be impacted by significant 
implementation and compliance burdens. Furthermore, as discussed above, 
many loans extended under these programs would not appear to satisfy 
the qualified mortgage standards under Sec.  1026.43(e)(2). For 
example, consumers receiving assistance under EESA programs may have 
DTI ratios in excess of the Sec.  1026.43(e)(2)(vi) threshold.\148\ 
Thus, a creditor extending such a mortgage loan--assuming the loan does 
not qualify for another qualified mortgage definitions--would be 
required to comply with the ability-to-repay requirements of Sec.  
1026.43(c) and, in response to the potential liability for

[[Page 35471]]

noncompliance, would cease or severely curtail lending under the 
voluntary EESA programs.
---------------------------------------------------------------------------

    \148\ Consumers receiving assistance under EESA programs may 
have back-end DTI ratios in excess of 50 percent. See United States 
Department of the Treasury, Making Home Affordable Program 
Performance Report (March 2013), page 9, available at: http://www.treasury.gov/initiatives/financial-stability/reports/Documents/March%202013%20MHA%20Report%20Final.pdf.
---------------------------------------------------------------------------

    Accordingly, the Bureau believes that the proposed exemption for 
credit made pursuant to an EESA program is appropriate under the 
circumstances. The Bureau believes that consumers who receive 
extensions of credit made pursuant to an EESA program do so after a 
determination of ability to repay using criteria unique to the 
distressed consumers seeking assistance under the program. The 
exemption adopted by the Bureau is limited to creditors or transactions 
with certain characteristics and qualifications that ensure consumers 
are offered responsible, affordable credit on reasonably repayable 
terms. The Bureau thus finds that coverage under the ability-to-repay 
requirements provides little if any meaningful benefit to consumers in 
the form of useful protection, given the nature of the credit offered 
under EESA programs. At the same time, the Bureau is concerned that the 
narrow class of creditors subject to the exemption may either cease or 
severely curtail mortgage lending if the ability-to-repay requirements 
are applied to their transactions, resulting in a denial of access to 
credit. Accordingly, the Bureau is adopting Sec.  1026.43(a)(3)(vi) as 
proposed.
    Section 1026.43(a)(3)(vi) is adopted pursuant to the Bureau's 
authority under section 105(a) and (f) of TILA. Pursuant to section 
105(a) of TILA, the Bureau generally may prescribe regulations that 
provide for such adjustments and exceptions for all or any class of 
transactions that the Bureau judges are necessary and proper to 
effectuate the purposes of TILA, among other things. As discussed in 
more detail above, the Bureau has concluded that this exemption is 
necessary and proper to effectuate the purposes of TILA, which include 
the purposes of TILA section 129C. This exemption would ensure that 
consumers are offered and receive residential mortgage loans on terms 
that reasonably reflect their ability to repay. In the Bureau's 
judgment extensions of credit made pursuant to a program authorized by 
sections 101 and 109 of the Emergency Economic Stabilization Act of 
2008 sufficiently account for a consumer's ability to repay, and the 
exemption ensures that consumers are able to receive assistance under 
these programs. Furthermore, without the exemption the Bureau believes 
that consumers at risk of default or foreclosure would be denied access 
to the responsible, affordable credit offered under these programs, 
which is contrary to the purposes of TILA. This exemption is consistent 
with the finding of TILA section 129C by ensuring that consumers are 
able to obtain responsible, affordable credit from the nonprofit 
creditors discussed above which inform the Bureau's understanding of 
its purposes.
    The Bureau has considered the factors in TILA section 105(f) and 
has concluded that, for the reasons discussed above, an exemption is 
appropriate under that provision. Pursuant to TILA section 105(f) the 
Bureau may exempt by regulation from all or part of this title all or 
any class of transactions for which in the determination of the Bureau 
coverage does not provide a meaningful benefit to consumers in the form 
of useful information or protection. In determining which classes of 
transactions to exempt, the Bureau must consider certain statutory 
factors. The Bureau exempts an extension of credit pursuant to a 
program authorized by sections 101 and 109 of the Emergency Economic 
Stabilization Act of 2008 because coverage under the ability-to-repay 
requirements does not provide a meaningful benefit to consumers in the 
form of useful protection in light of the protection the Bureau 
believes that the credit extended through these programs already 
provides to consumers. Consistent with its rationale in the 2013 ATR 
Proposed Rule, the Bureau believes that the exemptions are appropriate 
for all affected consumers to which the exemption applies, regardless 
of their other financial arrangements and financial sophistication and 
the importance of the loan to them. Similarly, the Bureau believes that 
the exemptions are appropriate for all affected loans covered under the 
exemption, regardless of the amount of the loan and whether the loan is 
secured by the principal residence of the consumer. Furthermore, the 
Bureau believes that, on balance, the exemptions will simplify the 
credit process without undermining the goal of consumer protection, 
denying important benefits to consumers, or increasing the expense of 
the credit process. The Bureau recognizes that its exemption and 
exception authorities apply to a class of transactions, and has decided 
to apply these authorities to the loans covered under the final rule of 
the entities subject to the adopted exemptions.
43(a)(3)(vii)
The Bureau's Proposal
    As discussed above, neither TILA nor Regulation Z provide an 
exemption to the ability-to-repay requirements for refinancing programs 
offered by the Department of Housing and Urban Development (HUD), the 
Department of Veterans Affairs (VA), or the U.S. Department of 
Agriculture (USDA). However, comments provided to the Bureau during the 
development of the 2013 ATR Final Rule suggested that the ability-to-
repay requirements would restrict access to credit for consumers 
seeking to obtain a refinancing under certain Federal agency 
refinancing programs, that the ability-to-repay requirements adopted by 
the Bureau should account for the requirements of Federal agency 
refinancing programs, and that Federal agency refinancing programs 
should be exempt from several of the ability-to-repay requirements. 
TILA section 129C(b)(3)(B)(ii), as amended by section 1411 of the Dodd-
Frank Act, requires these Federal agencies to prescribe rules related 
to the definition of qualified mortgage. These Federal agencies have 
not yet prescribed rules related to the definition of qualified 
mortgage. Section 1411 of the Dodd-Frank Act addresses refinancing of 
existing mortgage loans under the ability-to-repay requirements. As 
amended by the Dodd-Frank Act, TILA section 129C(a)(5) provides that 
Federal agencies may create an exemption from the income and 
verification requirements for certain streamlined refinancings of loans 
made, guaranteed, or insured by various Federal agencies. 15 U.S.C. 
1639(a)(5). These Federal agencies also have not yet prescribed rules 
related to the ability-to-repay requirements for refinancing programs. 
Section 1026.43(e)(4), as adopted in the 2013 ATR Final Rule, provides 
temporary qualified mortgage status for mortgage loans eligible to be 
insured, guaranteed, or made pursuant to a program administered by one 
of these Federal agencies, until the effective date of the agencies' 
qualified mortgage rules prescribed pursuant to TILA section 
129C(b)(3)(B)(ii). However, the Bureau was concerned that the ability-
to-repay requirements would impede access to credit available under 
these programs. Based on these concerns and to gather more information 
about the potential effect of the ability-to-repay requirements on 
Federal agency refinancing programs, the Bureau proposed an exemption 
for certain refinancings under specified Federal programs and solicited 
feedback on several issues.
    Specifically, proposed Sec.  1026.43(a)(3)(vii) would have provided 
that an extension of credit that is a refinancing, as defined under

[[Page 35472]]

Sec.  1026.20(a) but without regard for whether the creditor is the 
creditor, holder, or servicer of the original obligation, that is 
eligible to be insured, guaranteed, or made pursuant to a program 
administered by the FHA, VA, or USDA, is exempt from Sec.  1026.43(c) 
through (f), provided that the agency administering the program under 
which the extension of credit is eligible to be insured, guaranteed, or 
made has not prescribed rules pursuant to section 129C(a)(5) or 
129C(b)(3)(B)(ii) of TILA. The Bureau solicited comment regarding 
whether this exemption is appropriate, whether there are any additional 
conditions that should be required, whether the ability-to-repay 
requirements would negatively affect the availability of credit offered 
under Federal agency programs, and whether consumers could be harmed by 
exempting these extensions of credit from the ability-to-repay 
requirements.
Comments Received
    In response to the proposed rule, most commenters supported the 
proposed exemption. Industry commenters stated that the Federal agency 
refinancing programs have successfully provided significant benefits to 
many individual consumers and have helped stabilize the housing and 
real estate markets. Industry commenters and an association of State 
bankers noted that Federal agency refinancing programs are subject to 
comprehensive requirements and limitations that account for a 
consumer's ability to repay (e.g., demonstrated payment history), and 
participating creditors must document and certify program compliance. 
These commenters also noted that these refinancing programs are in the 
interest of consumers because they specifically require a demonstrated 
consumer benefit such as a lower interest rate, lower payment amount, 
shorter loan term, or more stable mortgage product. Industry commenters 
and an association of State bankers argued that subjecting these 
Federal agency refinancing programs to the ability-to-repay 
requirements would conflict with the objectives of the programs, limit 
participation and access to these programs, and raise the cost for 
consumers. Without an exemption from the ability-to-repay requirements, 
they feared that most Federal agency refinancing programs would not be 
used, causing communities and homeowners to suffer. Industry commenters 
noted that the exemption from the ability-to-repay requirements for 
Federal agency refinancing programs would encourage broad participation 
in such programs, which are a critical component of the housing market 
recovery, and in light of the improving, but continued fragile state, 
of the housing market and broader economy, help support market 
stability. Industry commenters argued that the exemption would provide 
more certainty for creditors, which would lead to more of these types 
of loans being originated.
    Several commenters asked the Bureau to clarify which Federal agency 
refinancing programs would qualify, as programs change, may be 
replaced, and new programs may develop in the future. In addition, an 
industry commenter suggested clarifying that events occurring after 
closing of a loan would not remove the exemption from the ability-to-
repay requirements, in order to provide greater certainty for 
creditors. An industry trade group commenter also argued that the 
Bureau should exempt not only loans that are eligible for a Federal 
agency refinancing program, but also loans that are or would be 
accepted into such program except for a good faith mistake, because 
otherwise creditors will underwrite to the ability-to-repay 
requirements in all cases and the benefits of exemption will be 
severely diminished, if not lost completely.
    No commenters addressed whether Federal agency refinancings should 
or should not be exempt from the ability-to-repay requirements given 
that FHA, VA, and USDA loans, including refinances, are afforded 
qualified mortgage status under the Bureau's 2013 ATR Final Rule. 
Specifically, no commenters addressed the premise that the ability-to-
repay requirements could impose significant implementation and 
compliance burdens on the designated creditors and programs even if 
credit extended by the designated creditors or under the designated 
programs were granted a presumption of compliance as qualified 
mortgages.
    Some consumer advocate commenters were strongly opposed to the 
exemption, asserting that assessment of a consumer's ability to repay 
is of paramount importance under the statutory scheme. These commenters 
contended that consumers could be harmed by exempting these extensions 
of credit from the ability-to-repay requirements. The primary arguments 
were that serial refinancings (and the resulting equity-stripping) were 
a root cause of the financial crisis, and that the proposed exemption 
would leave consumers with no recourse. These commenters argued that 
such serial refinancings were often not voluntarily chosen by the 
consumer, but, instead, were temporary measures that delayed 
foreclosure or were driven by a loan originator seeking more business. 
Consumer group commenters argued that Federal agency refinance 
guidelines do not contain adequate assurances of ability to repay, and 
asserted that FHA streamlined refinances are available with no 
requirement to underwrite for affordability and VA streamlined 
refinances are also available without any proof of income or appraisal. 
One consumer group commenter stressed that the ability-to-repay 
requirements were intended to protect consumers from equity-stripping 
or other forms of predatory refinancing practices that harmed so many 
consumers, and that refinancing an unaffordable loan with other loans 
that are not responsible or affordable does not help consumers. This 
commenter argued that consumers do not benefit when they receive loans 
they cannot afford, nor do they benefit when a refinance that costs 
money and strips the consumer of equity simply delays the inevitable 
reality that the consumer cannot afford his or her home. This commenter 
also stated that the proposed exemption would immunize creditors from 
TILA liability with respect to refinancings offered to some of the most 
vulnerable consumers, enabling unscrupulous creditors to engage in 
serial refinancings that harm consumers. This commenter also disputed 
the contention raised by others that the ability-to-repay requirements 
are costly and burdensome by asserting that the Bureau's provisions 
comprise basic underwriting requirements that all creditors should 
consider before extending refinancing credit. This commenter argued 
that it is not difficult to determine a consumer's ability to repay a 
loan, and that the Bureau's ability-to-repay requirements are 
straightforward, streamlined, and should become the industry standard 
for all loans, whether purchase money or refinancings. A State attorney 
general also argued that the proposed exemption would affect a large 
segment of the mortgage market, thereby potentially placing a large 
number of consumers at risk while undermining the Bureau's goal of 
providing uniform standards for the entire mortgage loan industry.
    Consumer group commenters and a State attorney general also 
observed that these Federal agencies have not yet prescribed rules 
related to the ability-to-repay requirements for refinances, pursuant 
to TILA section 129C(a)(5), or the definition of qualified mortgage, 
pursuant to TILA section 129C(b)(3)(B)(ii), but that they have nearly a 
year before the 2013 Final Rule goes into effect, which is ample time 
for

[[Page 35473]]

them to issue their own rules under the Dodd-Frank Act. Accordingly, 
the State attorney general argued that consumers' access to credit will 
not be seriously prejudiced by a temporary application of the ability-
to-repay requirements because these Federal agency rules are likely 
forthcoming. Consumer group commenters and the State attorney general 
argued that Federal agencies should be bound by the ability-to-repay 
requirements between now and the time they issue their own new rules. 
These commenters argued that exempting Federal agency refinancing 
programs from the ability-to-repay requirements before they have 
promulgated their own rules removes an incentive for the agencies to 
promulgate their own rules in a timely manner while opening up the 
possibility that creditors acting pursuant to Federal agency 
refinancing programs could originate loans that are not responsible or 
affordable in the interim, thereby endangering the most vulnerable 
consumers who receive these loans.
The Final Rule
    The Bureau is withdrawing the proposed exemption for the reasons 
below. Upon further review and consideration of the comments received, 
the Bureau has determined that the proposed exemption would be 
inappropriate. As discussed in the Bureau's proposal, the Bureau was 
concerned that the ability-to-repay requirements and qualified mortgage 
provisions would restrict access to credit for certain consumers 
seeking to obtain a refinancing. After performing additional analysis 
prompted by the comments received, the Bureau believes that the 
qualified mortgage provision under Sec.  1026.43(e)(4), which generally 
provides qualified mortgage status to loans that are eligible for 
purchase, insurance, or guarantee by the specified Federal agencies, 
including refinancings, strikes the appropriate balance between 
preserving consumers' rights to seek redress for violations of TILA and 
ensuring access to responsible, affordable credit during the current 
transition period.
    The Bureau agrees with the arguments raised by commenters that 
Federal agency refinancing programs have helped stabilize the housing 
and real estate markets. The Bureau also acknowledges that these 
programs are subject to comprehensive underwriting requirements that 
account for a consumer's ability to repay, which helps ensure that 
consumers receive access to credit. Although many commenters approved 
of the proposed exemption for the above reasons, these commenters did 
not address the costs and benefits of the proposed exemption in light 
of the qualified mortgage status granted to loans that are eligible for 
purchase, insurance, or guarantee by the specified Federal agencies 
under the Bureau's 2013 ATR Final Rule. Specifically, even absent an 
exemption from the ability-to-repay requirements, FHA, VA, and USDA 
loans, including refinancings, are given qualified mortgage status 
under the Bureau's 2013 ATR Final Rule, which provides for a temporary 
category of qualified mortgages for loans that satisfy the underwriting 
requirements of, and are therefore eligible to be purchased, 
guaranteed, or insured by HUD, VA, USDA, or RHS. This temporary 
provision will expire when qualified mortgage regulations issued by the 
various Federal agencies become effective, and in any event after seven 
years.
    Section 1026.43(e)(4) addresses any inconsistencies that may occur 
between the general ability-to-repay and qualified mortgage provisions 
of the 2013 ATR Final Rule and Federal agency requirements, which 
should maintain the status quo in the Federal agency refinancing market 
and ensure that consumers are able to obtain responsible, affordable 
refinancing credit under these programs. Under the temporary qualified 
mortgage provisions in Sec.  1026.43(e)(4), for instance, creditors 
need only comply with the documentation and underwriting requirements 
established by the respective Federal agencies, and need not apply the 
43 percent debt-to-income ratio or follow the documentation and 
underwriting procedures applicable to the general category of qualified 
mortgages under Sec.  1026.43(e)(3) and appendix Q. Since the Federal 
agency eligibility generally satisfies the requirements of Sec.  
1026.43(e)(4), the Bureau does not believe that the qualified mortgage 
provisions are inconsistent with the requirements of Federal agency 
refinancing programs.
    Under the qualified mortgage provision in Sec.  1026.43(e)(4), a 
loan that is eligible to be purchased, guaranteed, or insured by the 
specified Federal agencies would still need to meet certain minimum 
requirements imposed by the Dodd-Frank Act. To receive qualified 
mortgage status, in addition to Federal agency-eligibility, Sec.  
1026.43(e)(4)(i)(A) provides that a mortgage loan may not include the 
higher-risk loan terms identified in Sec.  1026.43(e)(2)(i) (e.g., 
negative amortization and interest-only payments), may not have a loan 
term that exceeds 30 years, and may not impose points and fees in 
excess of the thresholds in Sec.  1026.43(e)(3). However, while some 
Federal agency refinancings may not be eligible for qualified mortgage 
status, the Bureau does not believe that many Federal agency 
refinancings would fail to meet these minimum requirements. Although 
some Federal agency refinancings may contain the risky features 
identified in Sec.  1026.43(e)(2)(i) and provide for loan terms in 
excess of 30 years, the Bureau does not believe that many consumers 
receive such loans. Further, while market-wide data regarding points 
and fees on Federal agency refinancings is not available, the Bureau 
does not believe that many Federal agency refinancings would provide 
for points and fees in excess of the Sec.  1026.43(e)(3) thresholds. 
Refinancings are usually less complicated than purchase transactions. 
Therefore, refinancings generally require fewer costs, which makes it 
unlikely that a Federal agency refinancing would exceed the points and 
fees thresholds and loans under these programs. In addition, the Bureau 
did not receive comment suggesting that points and fees on Federal 
agency refinancings exceed the Sec.  1026.43(e)(3) thresholds. In any 
event, to the extent that eligibility for qualified mortgage status 
based upon these minimum requirements becomes an issue, the Bureau 
notes that the various Federal agencies can address any eligibility 
concerns when they prescribe their own detailed regulations concerning 
qualified mortgages and refinancings. Importantly, as discussed in the 
2013 ATR Final Rule, the Bureau believes that Congress intended for 
loans with these risky features, long loan terms, or high points and 
fees to be excluded from the scope of the qualified mortgage 
definition. As the Bureau believes that few Federal agency refinancings 
would fail to meet these minimum statutory requirements, the Bureau 
does not believe that a modification is necessary to ensure access to 
responsible, affordable credit.
    The Bureau believes that the temporary qualified mortgage 
provisions will help ensure that Federal agency refinancing programs 
will continue to be used and provide more certainty for creditors, 
which will lead to more of these types of loans being originated, and 
encourage broad participation in such programs, which will help support 
market stability. Thus, the Bureau disagrees with the concerns raised 
by some commenters that the withdrawal of the exemption would conflict 
with the objectives of the programs, limit participation and access to 
these programs, impair the effectiveness of

[[Page 35474]]

such programs, or raise the cost for consumers. The Bureau believes 
that it has provided a sufficient transition mechanism until the 
various Federal agencies can prescribe their own regulations concerning 
qualified mortgages and refinancings.
    In addition, the Bureau believes that the temporary qualified 
mortgage definition more appropriately balances risks to consumers than 
a full exemption until such time as the Federal agencies can address 
the concerns raised by commenters in their own detailed rulemakings. 
The Bureau agrees that the ability-to-repay requirements were intended, 
in part, to prevent harmful practices such as equity stripping and 
other forms of predatory refinancings. The Bureau's temporary qualified 
mortgage provision provides additional protection to consumers and 
preserves potential claims in the event of abuse. For higher-priced 
qualified mortgages, consumers will still have the ability to assert a 
claim under TILA section 130(a) and (k) and prove that, despite the 
presumption of compliance attached to the qualified mortgage, the 
creditor nonetheless failed to comply with the ability-to-repay 
requirements. A consumer who prevails on such a claim may be able to 
recover special statutory damages equal to the sum of all finance 
charges and fees paid within the first three years after consummation, 
among other damages and costs, and may be able to assert the creditor's 
failure to comply to obtain recoupment or setoff in a foreclosure 
action even after the statute of limitations for affirmative claims has 
passed. The Bureau received no persuasive evidence that the qualified 
mortgage provisions of Sec.  1026.43(e)(4) fail to strike the 
appropriate balance between consumer protection and the needs of the 
mortgage lending market during the current transition period.
    Based on these considerations, the Bureau has determined that the 
withdrawal of this proposed exemption would ensure that consumers are 
offered and receive residential mortgage loans on terms that reasonably 
reflect their ability to repay. Based on the qualified mortgage status, 
the Bureau does not believe that the ability-to-repay requirements 
would significantly interfere with requirements of these Federal agency 
refinancing programs, make it more difficult for many consumers to 
qualify for these programs, or increase the cost of credit for those 
who do. The Bureau believes that the temporary qualified mortgage 
definition for loans that are eligible for purchase, insurance, or 
guarantee by the specified Federal agencies adequately addresses 
concerns about overlapping underwriting requirements while also 
preserving consumers' rights to seek redress if an abuse occurs. 
Accordingly, the Bureau concludes that this temporary exemption is not 
necessary to preserve access to affordable and responsible credit, and, 
therefore, is withdrawing the proposed exemption.
    As discussed above, several industry commenters requested various 
modifications to the proposed language. For example, some commenters 
asked the Bureau to clarify which Federal agency refinancing programs 
would qualify for the exemption from the ability-to-repay requirements, 
as programs change, may be replaced, and new programs may develop in 
the future. An industry commenter suggested clarifying that events 
occurring after closing of a loan would not remove the exemption from 
the ability-to-repay requirements, in order to provide greater 
certainty for creditors. In addition, an industry trade group commenter 
argued that the Bureau should exempt not only loans that are eligible 
for a Federal agency refinance program, but also loans that are or 
would be accepted into such program except for a good faith mistake. As 
the Bureau has decided to withdraw proposed Sec.  1026.43(a)(3)(vii), 
the issues addressed in these and similar comments are moot. As 
discussed above, mortgage loans that are eligible for purchase, 
insurance, or guarantee by the specified Federal agencies receive the 
temporary qualified mortgage status under Sec.  1026.43(e)(4), provided 
the requirements of that paragraph are met.
43(a)(3)(viii)
The Bureau's Proposal
    As discussed above, neither TILA nor Regulation Z provides an 
exemption to the ability-to-repay requirements for particular lending 
programs. However, comments provided to the Bureau during the 
development of the 2013 ATR Final Rule suggested that the ability-to-
repay requirements would restrict access to credit for consumers 
seeking to obtain a refinancing under certain GSE programs for mortgage 
loans with high loan-to-value ratios or for consumers harmed by the 
financial crisis. These programs include HARP, which was defined as an 
``eligible targeted refinancing program'' in regulations promulgated by 
FHFA, to replace high loan-to-value mortgage loans with affordable 
refinancings.\149\ To gather more information about the potential 
effect of the ability-to-repay requirements on programs such as HARP 
and explore a potential exemption, the Bureau proposed Sec.  
1026.43(a)(3)(viii), which would have provided that an extension of 
credit that is a refinancing, as defined under Sec.  1026.20(a) but 
without regard for whether the creditor is the creditor, holder, or 
servicer of the original obligation, that is eligible for purchase or 
guarantee by Fannie Mae or Freddie Mac is exempt from Sec.  1026.43(c) 
through (f). This proposed exemption would have applied provided that: 
(1) The refinancing is made pursuant to an eligible targeted 
refinancing program, as defined under 12 CFR 1291.1; (2) such entities 
are operating under the conservatorship or receivership of the FHFA 
pursuant to section 1367 of the Federal Housing Enterprises Financial 
Safety and Soundness Act of 1992 (12 U.S.C. 4617(i)) on the date the 
refinancing is consummated; (3) the existing obligation satisfied and 
replaced by the refinancing is owned by Fannie Mae or Freddie Mac; (4) 
the existing obligation satisfied and replaced by the refinancing was 
not consummated on or after January 10, 2014; and (5) the refinancing 
was not consummated on or after January 10, 2021.
---------------------------------------------------------------------------

    \149\ See, e.g., 12 CFR 1291.1; 74 FR 38514, 38516 (Aug. 4, 
2009).
---------------------------------------------------------------------------

    Proposed comment 43(a)(3)(viii)-1 would have explained that Sec.  
1026.43(a)(3)(viii) provides an exemption from the requirements of 
Sec.  1026.43(c) through (f) for certain extensions of credit that are 
considered refinancings, as defined in Sec.  1026.20(a) but without 
regard for whether the creditor is the creditor, holder, or servicer of 
the original obligation, that are eligible for purchase or guarantee by 
Fannie Mae or Freddie Mac. The comment would also have explained that 
the exemption provided by Sec.  1026.43(a)(3)(viii) would be available 
only while these entities remain in conservatorship. The proposed 
comment also contained illustrative examples of this provision.
    The Bureau expressed concern that unscrupulous creditors would be 
able to use the exemption to engage in loan-flipping or other harmful 
practices. Thus, the Bureau requested feedback on whether this 
exemption was generally appropriate. In particular, the Bureau 
requested feedback regarding whether consumers could be harmed by the 
proposed exemption and whether this exemption would ensure access to 
responsible and affordable refinancing credit. The Bureau also 
requested feedback regarding the reference to eligible targeted 
refinancing programs under proposed Sec.  1026.43(a)(3)(viii)(A). 
Specifically, the Bureau requested

[[Page 35475]]

comment regarding whether it would be more appropriate to refer to 
another public method of identifying refinancing programs similar to 
HARP, and, if so, what method of public identification would be 
appropriate. The Bureau also solicited feedback regarding whether 
reference to a notice published by FHFA pursuant to 12 CFR 1253.3 or 
1253.4 would facilitate compliance more effectively than the proposed 
reference in Sec.  1026.43(a)(3)(viii)(A).
Comments Received
    Many commenters supported the proposed exemption. Several industry 
commenters argued that the exemption was necessary to prevent the 
imposition of unnecessary costs on consumers. These commenters 
generally believed that the ability-to-repay requirements were too 
burdensome and that creditors would be forced to raise costs to comply 
with the regulations. One government-sponsored enterprise commenter 
argued that the exemption was necessary to preserve access to credit 
for consumers eligible for a refinancing under HARP. This commenter 
argued that many HARP loans would be subject to the rebuttable 
presumption of compliance, and that industry would refuse to make any 
loans that fell outside of the safe harbor for qualified mortgages. 
Several industry commenters and a Federal agency commenter argued that 
the Bureau's proposed reference to FHFA regulations was unnecessary. 
These commenters asserted that FHFA oversight was sufficient to ensure 
that consumers would not be harmed by creditors offering mortgage loans 
eligible for purchase or guarantee by the GSEs. For similar reasons, 
these commenters argued that the Bureau's proposed date on which the 
exemption would expire was unnecessary, as consumers would always 
benefit from a GSE-eligible refinancing, regardless of when the 
consumer's original loan was consummated or when the consumer obtained 
the refinancing. Finally, several industry commenters and a Federal 
agency commenter argued that limiting the refinancing exemption to 
HARP-eligible consumers was unnecessary, as all consumers could benefit 
from a GSE refinancing program and limiting the exemption to HARP-
eligible consumers would impose needless costs on all other consumers. 
Some of these commenters also asked the Bureau to define eligible 
refinancings by reference to the Fannie Mae or Freddie Mac selling or 
servicing guides, and some asked the Bureau to expand the exemption to 
include refinancings eligible for non-GSE streamlined refinancing 
programs.
    One consumer advocate commenter strongly opposed the proposed 
exemption. This commenter stressed that predatory refinancings were one 
of the primary causes of the financial crisis and that the ability-to-
repay requirements were intended to protect consumers from the abusive 
equity-stripping practices that harmed so many consumers. This 
commenter stated that the proposed exemption would immunize creditors 
from TILA liability with respect to refinancings offered to some of the 
most vulnerable consumers, enabling unscrupulous creditors to engage in 
serial refinancings that harm consumers. This commenter also disputed 
the contention raised by others that the ability-to-repay requirements 
are costly and burdensome by asserting that the Bureau's provisions 
comprise basic underwriting requirements that all creditors should 
consider before extending refinancing credit. A State attorney general 
also opposed the proposed exemption for similar reasons. This commenter 
also argued that the proposed exemption would affect a large segment of 
the mortgage market, thereby potentially placing a large number of 
consumers at risk while undermining the Bureau's goal of providing 
uniform standards for the entire mortgage loan industry.
The Final Rule
    The Bureau is withdrawing the proposed exemption for the reasons 
discussed below. Upon further review and consideration of the comments 
received, the Bureau has determined that the proposed exemption would 
be inappropriate. As discussed in the Bureau's proposal, the Bureau was 
concerned that the ability-to-repay requirements and qualified mortgage 
provisions would restrict access to credit for certain consumers 
seeking to obtain a refinancing. After performing additional analysis 
prompted by the comments received, the Bureau believes that the special 
qualified mortgage provision under Sec.  1026.43(e)(4), which generally 
provides qualified mortgage status to GSE-eligible mortgage loans, 
including refinancings, strikes the appropriate balance between 
preserving consumers' rights to seek redress for violations of TILA and 
ensuring access to responsible, affordable credit during the current 
transition period.
    The Bureau acknowledges that, under the qualified mortgage 
provision in Sec.  1026.43(e)(4), a HARP loan would still need to meet 
certain minimum requirements imposed by the Dodd-Frank Act. To receive 
qualified mortgage status, in addition to GSE-eligibility, Sec.  
1026.43(e)(4)(i)(A) provides that a mortgage loan may not include the 
higher-risk loan terms identified in Sec.  1026.43(e)(2)(i) (e.g., 
negative amortization and interest-only payments), may not have a loan 
term that exceeds 30 years, and may not impose points and fees in 
excess of the thresholds in Sec.  1026.43(e)(3). However, while some 
HARP refinancings may not be eligible for this qualified mortgage 
status, the Bureau does not believe that many HARP loans would fail to 
meet these minimum requirements. Currently, HARP refinancings generally 
may not contain the risky features identified in Sec.  
1026.43(e)(2)(i).\150\ While, HARP programs permit refinancings that 
provide for loan terms in excess of 30 years, the Bureau does not 
believe that many consumers receive such loans.\151\ Furthermore, while 
market-wide data regarding points and fees on HARP loans is not 
available, the Bureau does not believe that many HARP loans would 
provide for points and fees in excess of the Sec.  1026.43(e)(3) 
thresholds. Refinancings are usually less complicated than purchase 
transactions. Therefore, refinancings generally require fewer costs, 
which makes it unlikely that a HARP loan would exceed the points and 
fees thresholds, and loans under this program would not likely be 
subject to some types of pricing abuses related to refinancings 
generally. In addition, the Bureau did not receive comment suggesting 
that points and fees on HARP loans exceed the Sec.  1026.43(e)(3) 
thresholds. Importantly, as discussed in the 2013 ATR Final Rule, the 
Bureau believes that Congress intended for loans with these risky 
features, long loan terms, or high points and fees to be excluded from 
the scope of the qualified mortgage definition.\152\ As the Bureau 
believes that few HARP loans would fail to meet these minimum statutory 
requirements, the Bureau does not believe that a

[[Page 35476]]

modification is necessary to ensure access to responsible, affordable 
credit.
---------------------------------------------------------------------------

    \150\ As of April, 2013, HARP refinancings offered by Fannie Mae 
may not include negative amortization or interest-only features. See 
Fannie Mae, Single-Family Selling Guide, Chapter 5 (April 9, 2013), 
available at https://www.fanniemae.com/content/guide/sel040913.pdf. 
Freddie Mac does not offer mortgage loans with interest-only 
features and prohibits negative amortization on refinancings made 
under its HARP program. See Freddie Mac, Single-Family Seller/
Servicer Guide, Vol. I, Chapters 22.4 and A24.3, available at: 
http://www.freddiemac.com/sell/guide/.
    \151\ Data on HARP loans with 40-year loan terms is not publicly 
available. See Federal Housing Finance Agency Refinance Report (June 
2012), available at: http://www.fhfa.gov/webfiles/25164/Feb13RefiReportFinal.pdf.
    \152\ See 78 FR 6516-20 (Jan. 30, 2013).
---------------------------------------------------------------------------

    Although many commenters approved of the proposed exemption, these 
commenters generally did not address the costs and benefits of the 
proposed exemption in light of the special qualified mortgage status 
granted to GSE-eligible loans under the Bureau's January 2013 ATR Final 
Rule. For example, several commenters asserted that the ability-to-
repay requirements were incompatible with HARP program requirements. 
However, given that GSE eligibility generally satisfies the 
requirements of Sec.  1026.43(e)(4), the Bureau does not believe that 
the special qualified mortgage provisions are inconsistent with the 
requirements of HARP or similar programs. For the same reasons, the 
Bureau does not agree with the arguments advanced by several commenters 
that the ability-to-repay requirements would add costs that would make 
these programs unsustainable. These comments did not explain what 
additional costs would be imposed by the regulation beyond the costs 
creditors would incur in determining GSE eligibility, which would be 
required even in the absence of the Bureau's requirements. Based on the 
comments provided, the Bureau does not believe that the requirements of 
Sec.  1026.43(e)(4) impose any additional meaningful costs on 
creditors. Thus, it does not appear that the ability-to-repay 
requirements would impair the effectiveness of programs such as HARP.
    While one GSE commenter addressed the potential difference between 
the proposed exemption and the qualified mortgage provisions, the 
Bureau is not persuaded by the arguments that creditors would rather 
cease extending credit than make a qualified mortgage loan subject to 
the rebuttable presumption. As discussed above, as GSE eligibility 
generally satisfies the requirements of Sec.  1026.43(e)(4), the Bureau 
does not believe that creditors making qualified mortgages would incur 
any meaningful additional risk by making mortgage loans pursuant to the 
eligibility requirements prescribed by GSEs. The Bureau believes that 
the ability-to-repay requirements and qualified mortgage provisions 
reflect standard industry underwriting practices, and that creditors 
that make a reasonable effort to determine a consumer's ability to 
repay would not be concerned with potential litigation risk that may 
result from the rebuttable presumption. Thus, based on the feedback 
provided, the Bureau does not believe that a creditor would incur much, 
if any, additional cost by extending refinancing credit under the 
qualified mortgage provisions of Sec.  1026.43(e)(4) as opposed to the 
exemption under proposed Sec.  1026.43(a)(3)(viii). Absent evidence 
that the special qualified mortgage provisions for GSE-eligible loans 
impose significant costs on creditors, the Bureau does not believe that 
consumers are at risk of being denied responsible, affordable mortgage 
credit.
    On the other hand, there is a risk that consumers could be harmed 
by the proposed exemption. The Bureau is persuaded by the arguments 
that the proposed exemption could potentially enable unscrupulous 
creditors to harm consumers. The Bureau agrees that the ability-to-
repay requirements were intended, in part, to prevent harmful practices 
such as equity-stripping. While the abuses of the past are seemingly 
absent from today's mortgage market, the Bureau does not believe it 
would be appropriate to deny consumers the means to seek redress for 
TILA violations. As discussed above, the Sec.  1026.43(e)(4) qualified 
mortgage provision provides additional protection to consumers and 
preserves potential claims in the event of abuse. For higher-priced 
qualified mortgages, consumers will still have the ability to assert a 
claim under TILA section 130(a) and (k) and prove that, despite the 
presumption of compliance attached to the qualified mortgage, the 
creditor nonetheless failed to comply with the ability-to-repay 
requirements. Thus the cost to consumers of an exemption could be 
significant, as opposed to the relatively insignificant costs 
associated with complying with the special qualified mortgage 
provisions. Furthermore, given the detailed GSE eligibility 
requirements, the Bureau does not believe it is likely that a creditor 
operating a legitimate mortgage lending operation would face meaningful 
litigation risk by originating qualified mortgages, even those subject 
to the rebuttable presumption. The Bureau received no persuasive 
comments contradicting the Bureau's belief that the special qualified 
mortgage provisions of Sec.  1026.43(e)(4) strikes the appropriate 
balance between consumer protection and the needs of the mortgage 
lending market during the current transition period. Absent persuasive 
evidence that the qualified mortgage provisions would endanger access 
to credit for the consumers addressed by the proposal, the Bureau does 
not believe that permitting this risk of consumer abuse is appropriate. 
Thus, the Bureau concludes that the proposed exemption is neither 
necessary nor proper, and proposed Sec.  1026.43(a)(3)(viii) is 
withdrawn.
    As discussed above, several industry commenters and a Federal 
agency commenter requested various modifications to the proposed 
language. For example, some commenters argued that the exemption should 
refer to the Fannie Mae or Freddie Mac selling guide, some commenters 
requested that the Bureau provide an exemption for all streamlined 
refinancing programs, and some commenters asked the Bureau to adopt the 
proposed exemption without the time limitations in proposed Sec.  
1026.43(a)(3)(viii)(D) and (E). As the Bureau has decided to withdraw 
proposed Sec.  1026.43(a)(3)(viii), the issues addressed in these and 
similar comments are moot. As discussed above, mortgage loans made 
under a streamlined refinancing program are eligible for the temporary 
qualified mortgage status under Sec.  1026.43(e)(4), provided the 
requirements of that paragraph are met.
43(b) Definitions
43(b)(4)
Background
    TILA section 129C(a)(1) through (4) and the Bureau's rules 
thereunder, Sec.  1026.43(c), prohibit a creditor from making a 
residential mortgage loan unless the creditor makes a reasonable, good 
faith determination, based on verified and documented information, that 
the consumer has a reasonable ability to repay the loan. TILA section 
129C(b) provides a presumption of compliance with regard to these 
ability-to-repay requirements if a loan is a qualified mortgage. 
Creditors may view qualified mortgage status as important at least in 
part because TILA section 130(a) and (k) provide that, if a creditor 
fails to comply with the ability-to repay requirements, a consumer may 
be able to recover special statutory damages equal to the sum of all 
finance charges and fees paid within the first three years after 
consummation, among other damages and costs, and may be able to assert 
the creditor's failure to comply to obtain recoupment or setoff in a 
foreclosure action even after the statute of limitations for 
affirmative claims has passed. TILA section 129C(b)(3)(B)(i) authorizes 
the Bureau to prescribe regulations that revise, add to, or subtract 
from the criteria that define a qualified mortgage upon a finding that 
such regulations are, among other things, necessary or proper to ensure 
that responsible, affordable credit remains available to consumers in a 
manner consistent with the purposes of TILA section 129C.

[[Page 35477]]

    Section 1026.43(e)(1) specifies the strength of presumption of 
compliance regardless of which regulatory definition of qualified 
mortgage applies. Under Sec.  1026.43(e)(1)(i), a qualified mortgage 
that is not a higher-priced covered transaction as defined in Sec.  
1026.43(b)(4) is subject to a conclusive presumption of compliance, or 
safe harbor. In contrast, under Sec.  1026.43(e)(1)(ii) a qualified 
mortgage that is a higher-priced covered transaction is subject to a 
rebuttable presumption of compliance.
    Section 1026.43(b)(4) defines a higher-priced covered transaction 
to mean a transaction within the scope of Sec.  1026.43 with an annual 
percentage rate that exceeds the average prime offer rate for a 
comparable transaction as of the date the interest rate is set by 1.5 
or more percentage points for a first-lien covered transaction or by 
3.5 or more percentage points for a subordinate-lien covered 
transaction. The average prime offer rates are published weekly by the 
Federal Financial Institutions Examination Council based on a national 
survey of creditors, the Freddie Mac Primary Mortgage Market 
Survey[supreg]. The average prime offer rates estimate the national 
average APR for first-lien mortgages offered to consumers with good 
credit histories and low-risk transaction features (e.g., loan-to-value 
ratios of 80 percent or less). The higher-priced covered transaction 
thresholds generally conform to the thresholds for ``higher-priced 
mortgage loans'' under Sec.  1026.35, which contains escrow 
requirements and other special protections adopted after the financial 
crisis for loans that have traditionally been considered subprime.
    Section 1026.43(e) and (f) defines three categories of qualified 
mortgages. First, Sec.  1026.43(e)(2) provides a general definition of 
a qualified mortgage. Second, Sec.  1026.43(e)(4) provides that loans 
that are eligible to be purchased, guaranteed, or insured by certain 
government agencies or Fannie Mae or Freddie Mac are qualified 
mortgages, subject to certain restrictions including restrictions on 
product features and points and fees. Section 1026.43(e)(4) expires 
after seven years and may expire sooner with respect to some loans if 
other government agencies exercise their rulemaking authority under 
TILA section 129C or if Fannie Mae or Freddie Mac exit conservatorship.
    Third, Sec.  1026.43(f) provides that certain balloon-payment loans 
are qualified mortgages if they are made by a small creditor that:
     Had total assets less than $2 billion (adjusted annually 
for inflation) as of the end of the preceding calendar year;
     Together with all affiliates, extended 500 or fewer first-
lien mortgages during the preceding calendar year; and
     Extended more than 50 percent of its total mortgages 
secured by properties that are in rural or underserved areas during the 
preceding calendar year.

Section 1026.43(f) includes only balloon-payment loans held in 
portfolio for at least three years by these small creditors, subject to 
certain exceptions. Further, it includes only loans that were not 
subject, at consummation, to a commitment to be acquired by any person 
other than another qualified small creditor.
    As discussed in the section-by-section analysis of Sec.  
1026.43(e)(5) below, the Bureau proposed and is adopting an additional 
fourth category of qualified mortgages that includes certain loans 
originated and held in portfolio by small creditors. Like Sec.  
1026.43(f), Sec.  1026.43(e)(5) includes loans originated and held in 
portfolio by creditors that had total assets less than $2 billion 
(adjusted annually for inflation) as of the end of the preceding 
calendar year and, together with all affiliates, extended 500 or fewer 
first-lien mortgages during the preceding calendar year. Unlike Sec.  
1026.43(f), new Sec.  1026.43(e)(5) is not limited to creditors that 
operate predominantly in rural or underserved areas and does not 
include loans with a balloon payment.
Proposal Regarding Higher-Priced Covered Transactions
    The Bureau proposed to amend the definition of higher-priced 
covered transaction in Sec.  1026.43(b)(4) with respect to qualified 
mortgages that are originated and held in portfolio by small creditors 
as described in Sec.  1026.43(e)(5) and with respect to balloon-payment 
qualified mortgages originated and held in portfolio by small creditors 
operating predominantly in rural or underserved areas as described in 
Sec.  1026.43(f). The Bureau proposed to amend Sec.  1026.43(b)(4) to 
provide that a first-lien loan that is a qualified mortgage under Sec.  
1026.43(e)(5) or (f) is a higher-priced covered transaction if the 
annual percentage rate exceeds APOR for a comparable transaction by 3.5 
or more percentage points. This would have the effect of extending the 
qualified mortgage safe harbor described in Sec.  1026.43(e)(1)(i) to 
first-lien loans that are qualified mortgages under Sec.  1026.43(e)(5) 
or (f) that have an annual percentage rate between 1.5 and 3.5 
percentage points above APOR. As discussed in more detail below, the 
Bureau understands that small creditors often charge higher rates and 
fees than larger creditors for reasons including their higher cost of 
funds. The Bureau proposed this amendment to Sec.  1026.43(b)(4) 
because it believes that many loans made by small creditors will exceed 
the existing qualified mortgage safe harbor threshold. Without the 
proposed amendment to Sec.  1026.43(b)(4), these loans would be 
considered higher-priced covered transactions and would fall under the 
rebuttable presumption of compliance described in Sec.  
1026.43(e)(1)(ii). The Bureau was concerned that small creditors would 
be less likely to make such loans due to concerns about liability risk, 
thereby reducing access to responsible credit.
Comments Received
    The Bureau solicited comment on several issues related to the 
proposed amendments to Sec.  1026.43(b)(4). First, the Bureau solicited 
comment regarding whether the proposed amendments to Sec.  
1026.43(b)(4) are necessary to preserve access to responsible, 
affordable mortgage credit and regarding any adverse effects the 
proposed amendments would have on consumers. Most commenters agreed 
that small creditors may charge more than larger creditors for 
legitimate business reasons; that amending the definition of higher-
priced covered transaction for these types of qualified mortgages is 
necessary to preserve access to responsible, affordable mortgage 
credit; and that the rule would provide appropriate protection for 
consumers even with a higher interest rate threshold. Commenters 
expressing this view included some consumer advocacy organizations, 
coalitions of State regulators, national and State trade groups 
representing creditors, national and State mortgage bankers 
associations, a national association representing home builders, one 
very large creditor, and many small creditors.
    A much smaller number of commenters opposed the proposed 
amendments. These included other consumer advocacy organizations, a 
trade group representing very large creditors, a national organization 
representing mortgage brokers, a letter submitted in substantially 
similar form by several individual mortgage brokers, and one very large 
creditor. These commenters generally argued that a consumer's ability 
to repay does not depend on the creditor's size and that the same 
standards therefore should apply to all creditors. One of these 
commenters argued that small creditors do not need to charge higher 
rates and fees because their higher costs are offset by lower default 
rates.

[[Page 35478]]

    The Bureau also solicited comment on the proposed 3.5 percentage 
point threshold and whether another threshold would be more 
appropriate. While many commenters supported the proposed 3.5 
percentage point threshold, several commenters argued that the proposed 
3.5 percentage point threshold was not sufficient and should be raised. 
Commenters expressing this view included a national trade group 
representing creditors, State bankers associations, and several small 
creditors. These commenters generally suggested thresholds between 4.0 
and 5.5 percentage points above APOR. Several of these commenters, 
including the national trade group, cited the traditional principle 
that small creditors generally must charge consumers 4.0 percentage 
points above the creditor's cost of funds in order to operate safely 
and soundly.
    Finally, the Bureau solicited comment on whether, to preserve 
access to mortgage credit, the Bureau also should raise the threshold 
for subordinate-lien covered transactions that are qualified mortgages 
under Sec.  1026.43(e)(5) and (f), and, if so, what threshold would be 
appropriate for those loans. A small number of commenters, including a 
State bankers association and several small creditors, urged the Bureau 
to adopt a higher threshold for subordinate-lien covered transactions. 
These commenters generally argued that subordinate-lien loans entail 
inherently greater credit risk and that a higher threshold was needed 
to account for this additional risk. Most commenters did not address 
the threshold for subordinate-lien loans.
The Final Rule
    The amendments to Sec.  1026.43(b)(4) are adopted as proposed. The 
Bureau believes the amendments are warranted to preserve access to 
responsible, affordable mortgage credit for some consumers, including 
consumers who do not qualify for conforming mortgage credit and 
consumers in rural and underserved areas, as described below.
    As discussed above in part II.A, the Bureau understands that small 
creditors are a significant source of loans that do not conform to the 
requirements for government guarantee and insurance programs or 
purchase by entities such as Fannie Mae and Freddie Mac. The Bureau 
also understands that larger creditors may be unwilling to make at 
least some of these loans because the consumers or properties involved 
cannot be accurately assessed using the standardized underwriting 
criteria employed by larger creditors or are illiquid because they are 
non-conforming and therefore entail greater risk. For similar reasons, 
the Bureau understands that larger creditors may be unwilling to 
purchase such loans. Small creditors often are willing to evaluate the 
merits of unique consumers and properties using flexible underwriting 
criteria and make highly individualized underwriting decisions. Small 
creditors often hold these loans on their balance sheets, retaining the 
associated credit, liquidity, and other risks.
    The Bureau also understands that small creditors are a significant 
source of credit in rural and underserved areas. As discussed above in 
part II.A, small creditors are significantly more likely than larger 
creditors to operate offices in rural areas, and there are hundreds of 
counties nationwide where the only creditors are small creditors and 
hundreds more where larger creditors have only a limited presence.
    The Bureau also understands that small creditors, including those 
operating in rural and underserved areas, may charge consumers higher 
interest rates and fees than larger creditors for several legitimate 
business reasons. As discussed above in part II.A, small creditors may 
pay more for funds than larger creditors. Small creditors generally 
rely heavily on deposits to fund lending activities and therefore pay 
more in expenses per dollar of revenue as interest rates fall and the 
spread between loan yields and deposit costs narrows. Small creditors 
also may rely more on interest income than larger creditors, as larger 
creditors obtain higher percentages of their income from noninterest 
sources such as trading, investment banking, and fiduciary services.
    In addition, small creditors may find it more difficult to limit 
their exposure to interest rate risk than larger creditors and 
therefore may charge higher rates to compensate for that exposure. 
Similarly, any individual loan poses a proportionally more significant 
credit risk to a smaller creditor than to a larger creditor, and small 
creditors may charge higher rates or fees to compensate for that risk. 
Consumers obtaining loans that cannot readily be sold into the 
securitization markets also may pay higher interest rates and fees to 
compensate for the risk associated with the illiquidity of such loans.
    Small creditors, including those operating in rural and underserved 
areas, have repeatedly asserted to the Bureau and to other regulators 
that they are unable or unwilling to assume the risk of litigation 
associated with lending outside the qualified mortgage safe harbor. The 
Bureau does not believe that the regulatory requirement to make a 
reasonable and good faith determination based on verified and 
documented evidence that a consumer has a reasonable ability to repay 
would entail significant litigation risk for small creditors, 
especially where their loan meets a qualified mortgage definition and 
qualifies for a rebuttable presumption of compliance. As discussed in 
part II.A above, small creditors as a group have consistently 
experienced lower credit losses for residential mortgage loans than 
larger creditors. The Bureau believes this is strong evidence that 
small creditors have historically engaged in responsible mortgage 
underwriting that includes considered determinations of consumers' 
ability to repay, at least in part because they bear the risk of 
default associated with loans held in their portfolios. The Bureau also 
believes that because many small creditors use a lending model based on 
maintaining ongoing relationships with their customers and have 
specialized knowledge of the community in which they operate, they 
therefore may have a more comprehensive understanding of their 
customers' financial circumstances and may be better able to assess 
ability to repay than larger creditors. In addition, the Bureau 
believes that small creditors operating in limited geographical areas 
may face significant risk of harm to their reputation within their 
community if they make loans that consumers cannot repay. At the same 
time, because of the relationship small creditors have with their 
customers, the Bureau believes that the likelihood of litigation 
between a customer and his or her community bank or credit union is 
low.
    However, the Bureau acknowledges that due to their size small 
creditors may find even a remote prospect of litigation risk to be so 
daunting that they may change their business models to avoid it. The 
Bureau also believes that the exit of small creditors from the 
residential mortgage market could create substantial short-term access 
to credit issues.
    The Bureau continues to believe that raising the interest rate 
threshold as proposed is necessary and appropriate to preserve access 
to responsible, affordable credit for consumers that are unable to 
obtain loans from other creditors because they do not qualify for 
conforming loans or because they live in rural or underserved areas. 
The existing qualified mortgage safe harbor applies to first-lien loans 
only if the annual percentage rate is less than 1.5 percentage points 
above APOR for comparable transactions. The Bureau believes that many 
loans made by small

[[Page 35479]]

creditors, including those operating in rural and underserved areas, 
will exceed that threshold but will not pose risks to consumers. These 
small creditors have repeatedly asserted to the Bureau and other 
regulators that they will not continue to extend mortgage credit unless 
they can make loans that are covered by the qualified mortgage safe 
harbor. The Bureau therefore believes that, unless Sec.  1026.43(b)(4) 
is amended as proposed, small creditors operating in rural and 
underserved areas may reduce the number of mortgage loans they make or 
stop making mortgage loans altogether, limiting the availability of 
nonconforming mortgage credit and of mortgage credit in rural and 
underserved areas.
    The Bureau is sensitive to concerns about the consistency of 
protections for all consumers and about maintaining a level playing 
field for market participants, but believes that a differentiated 
approach is justified here. The commenters who suggested that 
consumers' interests are best served by subjecting all creditors to the 
same standards provided nothing substantive that refutes the points 
raised in the Bureau's proposal regarding the lending track records and 
business models of small creditors, their concerns about litigation 
risk and compliance burden, and the potential access to credit problems 
the Bureau believes will arise if Sec.  1026.43(b)(4) is not amended. 
For example, these commenters have not indicated that large creditors 
would be able and willing to fulfill the role currently played by small 
creditors in providing access to responsible, affordable nonconforming 
credit or credit in rural and underserved areas, nor have they provided 
evidence that the Bureau's concerns about limitations on access to 
credit if the interest rate threshold is not raised are unfounded. One 
commenter asserted that small creditors' lower credit losses are 
sufficient to offset their higher costs, making it unnecessary to raise 
the interest rate threshold. While the Bureau understands that small 
creditors have historically had lower credit losses, this commenter 
provided no evidence that these lower losses are sufficient to offset 
small creditors' higher cost of funds and greater reliance on interest 
income and the greater risks associated with holding loans in a 
comparatively small portfolio, and the Bureau is not aware of any such 
evidence.\153\ In addition, these commenters have provided no evidence 
to challenge the Bureau's view, as described in the proposal, above, 
and in the section-by-section analysis of Sec.  1026.43(e)(5) below, 
that the combination of the small creditors' relationship lending 
model, local knowledge, and other characteristics and the inherent 
incentives of portfolio lending are sufficient to protect consumers.
---------------------------------------------------------------------------

    \153\ The FDIC Community Banking Study, to which the Bureau has 
referred as authority for the point that small creditors have 
historically incurred lower credit losses than larger creditors, 
indicates that despite their lower credit losses and lower non-
interest expenses, community banks on average have lower (worse) 
pre-tax return on assets and a higher and increasing (worse and 
deteriorating) ratio of noninterest expense to net operating revenue 
than noncommunity banks. The study attributes these in large part to 
community banks' reliance on interest income and the narrowing of 
the spread between asset yields and funding costs due to a prolonged 
period of historically low interest rates. FDIC Community Banking 
Study, p. IV-V, 4-1-4-11. See also GAO Community Banks and Credit 
Unions Report, p. 10-11.
---------------------------------------------------------------------------

    The Bureau does not believe, however, that it is necessary to raise 
the threshold for first-lien covered transactions above APOR plus 3.5 
percentage points for either first-lien or subordinate-lien loans as 
suggested by some commenters. The Bureau estimated the average cost of 
funds for small creditors from publicly available call reports filed by 
small creditors between 2000 and 2012. These estimates suggest that the 
majority of first-lien mortgage loans priced by a small creditor at the 
creditor's cost of funds plus 4.0 percentage points, the traditional 
principle of small creditor safe and sound lending noted by several 
commenters, would fall below even the original threshold of APOR plus 
1.5 percentage points. However, the Bureau acknowledges that its 
estimates are averages that do not reflect individual or regional 
differences in cost of funds and do not reflect the additional credit 
risk associated with subordinate-lien loans. The Bureau believes that 
the additional 2.0 percentage points afforded by the APOR plus 3.5 
percentage point standard are sufficient to address these differences. 
The Bureau therefore believes that amending Sec.  1026.43(b)(4) as 
proposed will allow small creditors to lend at a sustainable rate and 
still fall within the qualified mortgage safe harbor, thereby 
preserving access to affordable, responsible credit.
    As discussed below in the section-by-section analysis of Sec.  
1026.43(e)(6), the Bureau is providing a two-year transition period 
during which small creditors may make balloon-payment qualified 
mortgages regardless of whether they operate predominantly in rural or 
underserved areas. The Bureau therefore is amending Sec.  1026.43(b)(4) 
to include references to Sec.  1026.43(e)(6) and to provide that a 
first-lien loan that is a qualified mortgage under Sec.  1026.43(e)(6) 
is a higher priced covered transaction if the annual percentage rate 
exceeds APOR for a comparable transaction by 3.5 or more percentage 
points. This provision would apply to the same creditors and loans as 
Sec.  1026.43(e)(5) and (f). The Bureau therefore believes that the 
rationales regarding raising the interest rate threshold for qualified 
mortgages under Sec.  1026.43(e)(5) and (f) described above apply with 
equal force to qualified mortgages under this new provision.
    Accordingly, the Bureau is exercising its authority under TILA 
sections 105(a) to amend Sec.  1026.43(b)(4) substantially as proposed, 
with conforming amendments as described above. Pursuant to TILA section 
105(a) the Bureau generally may prescribe regulations that provide for 
such adjustments and exceptions for all or any class of transactions 
that the Bureau judges are necessary or proper to effectuate the 
purposes of TILA, among other things. In the 2013 ATR Final Rule the 
Bureau stated that it interpreted TILA section 129C(b)(1) to create a 
rebuttable presumption for qualified mortgages generally and exercised 
its adjustment authority under TILA 105(a) with respect to prime loans 
(loans with an APR that do not exceed APOR by 1.5 percentage points for 
first liens and 3.5 percentage points for second liens), to provide a 
conclusive presumption (e.g., safe harbor).\154\ In this final rule the 
Bureau uses its TILA section 105(a) adjustment authority to further 
expand the safe harbor to include certain covered transactions (those 
subject to the qualified mortgage definition under paragraph (e)(5), 
(e)(6) or (f)) that have an APR that exceeds the prime offer rate for a 
comparable transaction as of the date the interest rate is set by 3.5 
percentage points for a first-lien covered transaction.
---------------------------------------------------------------------------

    \154\ See 78 FR 6514.
---------------------------------------------------------------------------

    The Bureau believes that this adjustment to also provide a safe 
harbor for these loans is necessary and proper to facilitate compliance 
with and to effectuate the purposes of TILA, including to assure that 
consumers are offered and receive residential mortgage loans on terms 
that reasonably reflect their ability to repay the loans.\155\ As

[[Page 35480]]

described above, the Bureau believes that, unless Sec.  1026.43(b)(4) 
is amended, small creditors will be less likely to make residential 
mortgage loans. Because small creditors are a significant source of 
nonconforming mortgage credit and mortgage credit generally in rural or 
underserved areas, this would significantly limit access to mortgage 
credit for some consumers. The Bureau also believes that the 
relationship lending model, qualitative local knowledge, and size of 
small creditors, combined with the intrinsic incentives of portfolio 
lending, provide strong assurances that these creditors will make 
reasonable and good faith determinations of consumers' ability to 
repay. Providing a safe harbor for these loans facilitates compliance 
with the ability-to-repay standards in a manner consistent with the 
purposes of TILA.
---------------------------------------------------------------------------

    \155\ These adjustments are also consistent with the Bureau's 
authority under TILA section 129C(b)(3)(B)(i) 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 this section, necessary and appropriate to 
effectuate the purposes of TILA section 129B and section 129C, to 
prevent circumvention or evasion thereof, or to facilitate 
compliance with such section.
---------------------------------------------------------------------------

43(e) Qualified Mortgages
43(e)(1) Safe Harbor and Presumption of Compliance
    The Bureau is adopting two additional provisions regarding 
qualified mortgages, as discussed in the section-by-section analyses of 
Sec.  1026.43(e)(5) and (6) below. The Bureau therefore is adopting 
conforming changes to Sec.  1026.43(e)(1) to include references to 
these new provisions. Like other qualified mortgages, qualified 
mortgages under Sec.  1026.43(e)(5) and (6) are covered by the safe 
harbor described in Sec.  1026.43(e)(1)(i) if they are not higher-
priced covered transactions and are subject to the rebuttable 
presumption of compliance described in Sec.  1026.43(e)(1)(ii) if they 
are higher-priced covered transactions. However, the Bureau is adopting 
a different definition of higher-priced covered transaction to first-
lien qualified mortgages under Sec.  1026.43(e)(5) and (6). The 
section-by-section analysis of Sec.  1026.43(b)(4), above, describes 
the alternate definition of higher-priced covered transactions.
43(e)(2) Qualified Mortgage Defined--General
    The Bureau is adopting conforming amendments to Sec.  1026.43(e)(2) 
to include references to Sec.  1026.43(e)(5) and (6), as described in 
the section-by-section analyses of those sections, below.
43(e)(5) Qualified Mortgage Defined--Small Creditor Portfolio Loans
Background
    TILA section 129C(a)(1) through (4) and the Bureau's rules 
thereunder, Sec.  1026.43(c), prohibit a creditor from making a 
residential mortgage loan unless the creditor makes a reasonable, good 
faith determination, based on verified and documented information, that 
the consumer has a reasonable ability to repay the loan. TILA section 
129C(b) provides that a creditor or assignee may presume that a loan 
has met the ability-to-repay requirements if a loan is a qualified 
mortgage. Creditors may view qualified mortgage status as important at 
least in part because TILA section 130 provides that, if a creditor 
fails to comply with the ability-to-repay requirements, a consumer may 
be able to recover special statutory damages equal to the sum of all 
finance charges and fees paid within the first three years after 
consummation, among other damages and costs, and may be able to assert 
the creditor's failure to comply to obtain recoupment or setoff in a 
foreclosure action even after the statute of limitations on affirmative 
claims has expired. TILA section 129C(b)(2)(A)(vi) authorizes, but does 
not require, the Bureau to establish limits on debt-to-income ratio or 
other measures of a consumer's ability to pay regular expenses after 
making payments on mortgage and other debts. TILA section 
129C(b)(3)(B)(i) authorizes the Bureau to revise, add to, or subtract 
from the criteria that define a qualified mortgage upon a finding that 
such regulations are, among other things, necessary or proper to ensure 
that responsible, affordable credit remains available to consumers in a 
manner consistent with the purposes of TILA section 129C or necessary 
and appropriate to effectuate the purposes of TILA sections 129B and 
129C.
    Section 1026.43(e) and (f) defines three categories of qualified 
mortgages. First, Sec.  1026.43(e)(2) prescribes the general definition 
of a qualified mortgage. Second, Sec.  1026.43(e)(4) provides that 
certain loans that are eligible to be purchased, guaranteed, or insured 
by certain Federal government agencies or Fannie Mae or Freddie Mac 
while operating under conservatorship are qualified mortgages. Section 
1026.43(e)(4) expires seven years after its effective date and may 
expire earlier with respect to certain loans if other Federal 
government agencies exercise their rulemaking authority under TILA 
section 129C or if the GSEs exit conservatorship. Third, Sec.  
1026.43(f) provides that certain loans with a balloon payment made by 
small creditors operating predominantly in rural or underserved areas 
are qualified mortgages.
The Bureau's Proposal
    The Bureau proposed to define a fourth category of qualified 
mortgages including loans originated and held in portfolio by certain 
small creditors in new Sec.  1026.43(e)(5). This additional category of 
qualified mortgages would have been similar in several respects to 
Sec.  1026.43(f), which provides that certain balloon loans made by 
small creditors operating predominantly in rural or underserved areas 
are qualified mortgages. As under Sec.  1026.43(f), the additional 
category would have included loans originated by small creditors, as 
defined by asset-size and transaction thresholds, and held in portfolio 
by those creditors for at least three years, subject to certain 
exceptions. However, proposed Sec.  1026.43(e)(5) would have included 
small creditors that do not operate predominantly in rural or 
underserved areas and would not have included loans with a balloon 
payment.
    Specifically, the new category would have included certain loans 
originated by creditors that:
     Have total assets that do not exceed $2 billion as of the 
end of the preceding calendar year (adjusted annually for inflation); 
and
     Together with all affiliates, extended 500 or fewer first-
lien mortgages during the preceding calendar year.
    The proposed additional category would have included only loans 
held in portfolio by these creditors. Specifically, proposed Sec.  
1026.43(e)(5) would have provided that a loan would lose its qualified 
mortgage status under Sec.  1026.43(e)(5) if it is sold, assigned, or 
otherwise transferred, subject to exceptions for transfers that are 
made three or more years after consummation, to another qualifying 
institution, as required by a supervisory action, or pursuant to a 
merger or acquisition. In addition, proposed Sec.  1026.43(e)(5) would 
have provided that a loan must not be subject at consummation to a 
commitment to be acquired by any person other than a person that also 
meets the above asset and origination criteria.
    The loan also would have had to conform to all of the requirements 
under the Sec.  1026.43(e)(2) general definition of a qualified 
mortgage except with regard to debt-to-income ratio. In other words, 
the loan could not have:
     Negative-amortization, interest-only, or balloon-payment 
features;
     A term longer than 30 years; or

[[Page 35481]]

     Points and fees greater than 3 percent of the total loan 
amount (or, for smaller loans, a specified amount).
    When underwriting the loan the creditor would have been required to 
take into account the monthly payment for any mortgage-related 
obligations, and:
     Use the maximum interest rate that may apply during the 
first five years and periodic payments of principal and interest that 
will repay the full principal;
     Consider and verify the consumer's current and reasonably 
expected income or assets other than the value of the property securing 
the loan; and
     Consider and verify the consumer's current debt 
obligations, alimony, and child support.
    The creditor also would have been required to consider the 
consumer's debt-to-income ratio or residual income and to verify the 
underlying information generally in accordance with Sec.  
1026.43(c)(7). Section 1026.43(c)(7) describes how creditors must 
calculate a consumers' debt-to-income ratio or residual income for 
purposes of complying with the ability-to-repay rules set forth in 
Sec.  1026.43(c). Section 1026.43(c)(7) specifies that a creditor must 
consider the ratio of or difference between a consumer's total monthly 
debt obligations and total monthly income. Section 1026.43(c)(7)(i)(A) 
specifies that a consumer's total monthly debt obligations includes the 
payment on the covered transaction as calculated according to Sec.  
1026.43(c)(5). However, for purposes of Sec.  1026.43(e)(5), the 
calculation of the payment on the covered transaction must be 
determined in accordance with Sec.  1026.43(e)(2)(iv) instead of Sec.  
1026.43(c)(5).
    In contrast, the general definition of a qualified mortgage in 
Sec.  1026.43(e)(2) requires a creditor to calculate the consumer's 
debt-to-income ratio according to instructions in appendix Q \156\ and 
specifies that the consumer's debt-to-income ratio must be 43 percent 
or less.
---------------------------------------------------------------------------

    \156\ The Bureau has proposed certain revisions to Appendix Q. 
See 78 FR 25638-25662 (May 2, 2013). Comments on this proposal must 
be received on or before June 3, 2013.
---------------------------------------------------------------------------

    As with all qualified mortgages, a qualified mortgage under Sec.  
1026.43(e)(5) would have received either a rebuttable presumption of 
compliance with, or a safe harbor from liability for violating, the 
ability-to-repay requirements in Sec.  1026.43(c), depending on the 
annual percentage rate. However, as described above in the section-by-
section analysis of Sec.  1026.43(b)(4), the Bureau also proposed and 
is adopting an alternate definition of higher-priced covered 
transaction for first-lien covered transactions that are qualified 
mortgages under proposed Sec.  1026.43(e)(5). Amended as proposed, 
Sec.  1026.43(b)(4) provides that a first-lien covered transaction that 
is a qualified mortgage under proposed Sec.  1026.43(e)(5) is a higher-
priced covered transaction if the annual percentage rate exceeds APOR 
for a comparable transaction by 3.5 or more percentage points. This 
extends the qualified mortgage safe harbor described in Sec.  
1026.43(e)(1)(i) to first-lien qualified mortgages defined under 
proposed Sec.  1026.43(e)(5) even if those loans have annual percentage 
rates between 1.5 and 3.5 percentage points higher than APOR. Without 
the amendment to Sec.  1026.43(b)(4), such loans would have been 
covered by the rebuttable presumption of compliance described in Sec.  
1026.43(e)(1)(ii).
    The Bureau proposed ten comments to clarify the requirements 
described in proposed Sec.  1026.43(e)(5). Proposed comment 43(e)(5)-1 
would have provided additional guidance regarding the requirement to 
comply with the general definition of a qualified mortgage under Sec.  
1026.43(e)(2). The proposed comment would have restated the regulatory 
requirement that a covered transaction must satisfy the requirements of 
the Sec.  1026.43(e)(2) general definition of qualified mortgage, 
except with regard to debt-to-income ratio, to be a qualified mortgage 
under Sec.  1026.43(e)(5). As an example, the proposed comment would 
have explained that a qualified mortgage under Sec.  1026.43(e)(5) may 
not have a loan term in excess of 30 years because longer terms are 
prohibited for qualified mortgages under Sec.  1026.43(e)(2)(ii). As 
another example, the proposed comment would have explained that a 
qualified mortgage under Sec.  1026.43(e)(5) may not result in a 
balloon payment because Sec.  1026.43(e)(2)(i)(C) provides that 
qualified mortgages may not have balloon payments except as provided 
under Sec.  1026.43(f). Finally, the proposed comment would have 
clarified that a covered transaction may be a qualified mortgage under 
Sec.  1026.43(e)(5) even though the consumer's monthly debt-to-income 
ratio exceeds 43 percent, Sec.  1026.43(e)(2)(vi) notwithstanding.
    Proposed comment 43(e)(5)-2 would have clarified that Sec.  
1026.43(e)(5) does not prescribe a specific monthly debt-to-income 
ratio with which creditors must comply. Instead, creditors must 
consider a consumer's debt-to-income ratio or residual income 
calculated generally in accordance with Sec.  1026.43(c)(7) and verify 
the information used to calculate the debt-to-income ratio or residual 
income in accordance with Sec.  1026.43(c)(3) and (4). The proposed 
comment would have explained that Sec.  1026.43(c)(7) refers creditors 
to Sec.  1026.43(c)(5) for instructions on calculating the payment on 
the covered transaction and that Sec.  1026.43(c)(5) requires creditors 
to calculate the payment differently than Sec.  1026.43(e)(2)(iv). The 
proposed comment would have clarified that, for purposes of the 
qualified mortgage definition in Sec.  1026.43(e)(5), creditors must 
base their calculation of the consumer's debt-to-income ratio or 
residual income on the payment on the covered transaction calculated 
according to Sec.  1026.43(e)(2)(iv) instead of according to Sec.  
1026.43(c)(5). Finally, the proposed comment would have clarified that 
creditors are not required to calculate the consumer's monthly debt-to-
income ratio in accordance with appendix Q as is required under the 
general definition of qualified mortgages by Sec.  1026.43(e)(2)(vi).
    Proposed comment 43(e)(5)-3 would have noted that the term 
``forward commitment'' is sometimes used to describe a situation where 
a creditor originates a mortgage loan that will be transferred or sold 
to a purchaser pursuant to an agreement that has been entered into at 
or before the time the transaction is consummated. The proposed comment 
would have clarified that a mortgage that will be acquired by a 
purchaser pursuant to a forward commitment does not satisfy the 
requirements of Sec.  1026.43(e)(5), whether the forward commitment 
provides for the purchase and sale of the specific transaction or for 
the purchase and sale of transactions with certain prescribed criteria 
that the transaction meets. However, the proposed comment also would 
have clarified that a forward commitment to another person that also 
meets the requirements of Sec.  1026.43(e)(5)(i)(D) is permitted. The 
proposed comment would have given the following example: Assume a 
creditor that is eligible to make qualified mortgages under Sec.  
1026.43(e)(5) makes a mortgage. If that mortgage meets the purchase 
criteria of an investor with which the creditor has an agreement to 
sell such loans after consummation, then the loan does not meet the 
definition of a qualified mortgage under Sec.  1026.43(e)(5). However, 
if the investor meets the requirements of Sec.  1026.43(e)(5)(i)(D), 
the mortgage will be a qualified mortgage if all other applicable 
criteria also are satisfied.
    Proposed comment 43(e)(5)-4 would have reiterated that, to be 
eligible to make qualified mortgages under

[[Page 35482]]

Sec.  1026.43(e)(5), a creditor must satisfy the requirements of Sec.  
1026.35(b)(2)(iii)(B) and (C). For ease of reference, the comment would 
have stated that Sec.  1026.35(b)(2)(iii)(B) requires that, during the 
preceding calendar year, the creditor and its affiliates together 
originated 500 or fewer first-lien covered transactions and that Sec.  
1026.35(b)(2)(iii)(C) requires that, as of the end of the preceding 
calendar year, the creditor had total assets of less than $2 billion, 
adjusted annually for inflation.
    Proposed comment 43(e)(5)-5 would have clarified that creditors 
generally must hold a loan in portfolio to maintain the transaction's 
status as a qualified mortgage under Sec.  1026.43(e)(5), subject to 
four exceptions. The proposed comment would have clarified that, unless 
one of these exceptions applies, a loan is no longer a qualified 
mortgage under Sec.  1026.43(e)(5) once legal title to the debt 
obligation is sold, assigned, or otherwise transferred to another 
person. Accordingly, unless one of the exceptions applies, the 
transferee could not benefit from the presumption of compliance for 
qualified mortgages under Sec.  1026.43(e)(1) unless the loan also met 
the requirements of another qualified mortgage definition. Proposed 
comment 43(e)(5)-6 would have clarified that Sec.  1026.43(e)(5)(ii) 
applies not only to an initial sale, assignment, or other transfer by 
the originating creditor but to subsequent sales, assignments, and 
other transfers as well. The proposed comment would have given the 
following example: Assume Creditor A originates a qualified mortgage 
under Sec.  1026.43(e)(5). Six months after consummation, Creditor A 
sells the qualified mortgage to Creditor B pursuant to Sec.  
1026.43(e)(5)(ii)(B) and the loan retains its qualified mortgage status 
because Creditor B complies with the limits on asset size and number of 
transactions. If Creditor B sells the qualified mortgage, it will lose 
its qualified mortgage status under Sec.  1026.43(e)(5) unless the sale 
qualifies for one of the Sec.  1026.43(e)(5)(ii) exceptions for sales 
three or more years after consummation, to another qualifying 
institution, as required by supervisory action, or pursuant to a merger 
or acquisition.
    Proposed comment 43(e)(5)-7 would have clarified that, under Sec.  
1026.43(e)(5)(ii)(A), if a qualified mortgage under Sec.  1026.43(e)(5) 
is sold, assigned, or otherwise transferred three years or more after 
consummation, the loan retains its status as a qualified mortgage under 
Sec.  1026.43(e)(5) following the transfer. The proposed comment would 
have clarified that this is true even if the transferee is not itself 
eligible to originate qualified mortgages under Sec.  1026.43(e)(5). 
The proposed comment would have clarified that, once three or more 
years after consummation have passed, the qualified mortgage will 
continue to be a qualified mortgage throughout its life, and a 
transferee, and any subsequent transferees, may invoke the presumption 
of compliance for qualified mortgages under Sec.  1026.43(e)(1).
    Proposed comment 43(e)(5)-8 would have clarified that, under Sec.  
1026.43(e)(5)(ii)(B), a qualified mortgage under Sec.  1026.43(e)(5) 
may be sold, assigned, or otherwise transferred at any time to another 
creditor that meets the requirements of Sec.  1026.43(e)(5)(v). The 
proposed comment would have noted that section Sec.  1026.43(e)(5)(v) 
requires that a creditor, together with all affiliates during the 
preceding calendar year, originated 500 or fewer first-lien covered 
transactions and had total assets less than $2 billion (adjusted 
annually for inflation) at the end of the preceding calendar year. The 
proposed comment would have clarified that a qualified mortgage under 
Sec.  1026.43(e)(5) that is transferred to a creditor that meets these 
criteria would retain its qualified mortgage status even if it is 
transferred less than three years after consummation.
    Proposed comment 43(e)(5)-9 would have clarified that Sec.  
1026.43(e)(5)(ii)(C) facilitates sales that are deemed necessary by 
supervisory agencies to revive troubled creditors and resolve failed 
creditors. The proposed comment would have noted that this section 
provides that a qualified mortgage under Sec.  1026.43(e)(5) retains 
its qualified mortgage status if it is sold, assigned, or otherwise 
transferred to: another person pursuant to a capital restoration plan 
or other action under 12 U.S.C. 1831o; the actions or instructions of 
any person acting as conservator, receiver or bankruptcy trustee; an 
order of a State or Federal government agency with jurisdiction to 
examine the creditor pursuant to State or Federal law; or an agreement 
between the creditor and such an agency. The proposed comment would 
have clarified that a qualified mortgage under Sec.  1026.43(e)(5) that 
is sold, assigned, or otherwise transferred under these circumstances 
retains its qualified mortgage status regardless of how long after 
consummation it is sold and regardless of the size or other 
characteristics of the transferee. The proposed comment also would have 
clarified that Sec.  1026.43(e)(5)(ii)(C) does not apply to transfers 
done to comply with a generally applicable regulation with future 
effect designed to implement, interpret, or prescribe law or policy in 
the absence of a specific order by or a specific agreement with a 
government agency described in Sec.  1026.43(e)(5)(ii)(C) mandating the 
sale of one or more qualified mortgages under Sec.  1026.43(e)(5) held 
by the creditor, or one of the other circumstances listed in Sec.  
1026.43(e)(5)(ii)(C). As an example, the proposed comment would have 
explained that a qualified mortgage under Sec.  1026.43(e)(5) that is 
sold pursuant to a capital restoration plan under 12 U.S.C. 1831o would 
retain its status as a qualified mortgage following the sale. However, 
if the creditor simply chose to sell the same qualified mortgage as one 
way to comply with general regulatory capital requirements in the 
absence of supervisory action or agreement, the mortgage would lose its 
status as a qualified mortgage following the sale unless it qualifies 
under another definition of qualified mortgage.
    Proposed comment 43(e)(5)-10 would have clarified that a qualified 
mortgage under Sec.  1026.43(e)(5) retains its qualified mortgage 
status if a creditor merges with or is acquired by another person 
regardless of whether the creditor or its successor is eligible to 
originate new qualified mortgages under Sec.  1026.43(e)(5) after the 
merger or acquisition. However, the proposed comment also would have 
clarified that the creditor or its successor can originate new 
qualified mortgages under Sec.  1026.43(e)(5) after the merger or 
acquisition only if the creditor or its successor complies with all of 
the requirements of Sec.  1026.43(e)(5) at that time. The proposed 
comment would have provided the following example: Assume a creditor 
that originates 250 covered transactions each year and originates 
qualified mortgages under Sec.  1026.43(e)(5) is acquired by a larger 
creditor that originates 10,000 covered transactions each year. 
Following the acquisition, the small creditor would no longer be able 
to originate Sec.  1026.43(e)(5) qualified mortgages because, together 
with its affiliates, it would originate more than 500 covered 
transactions each year. However, the Sec.  1026.43(e)(5) qualified 
mortgages originated by the small creditor before the acquisition would 
retain their qualified mortgage status.
Comments Received
    A large number and broad range of commenters expressed support for 
proposed Sec.  1026.43(e)(5). These commenters included national, 
State, and regional trade groups representing

[[Page 35483]]

banks and credit unions, more than 90 small and mid-size creditors from 
more than two dozen States, one very large creditor, coalitions of 
State regulators, consumer advocacy organizations, a national trade 
group representing mortgage bankers, national trade groups representing 
homebuilders and real estate agents, a tribally designated housing 
entity, and representatives of the manufactured housing industry. These 
commenters generally agreed with the points made by the Bureau in its 
proposal.
    A much smaller number of commenters objected to proposed Sec.  
1026.43(e)(5). These creditors included a consumer advocacy 
organization, a national trade group representing very large creditors, 
one very large creditor, a national trade group representing mortgage 
brokers, and several individual mortgage brokers. These commenters 
generally argued that the Bureau should not adopt special rules for 
small creditors because a consumer's ability to repay does not depend 
on the size of the creditor. These commenters also raised other 
arguments, such as that proposed Sec.  1026.43(e)(5) would encourage 
regulatory arbitrage and charter shopping by creditors or that the 
Bureau's proposal to provide an additional qualified mortgage 
definition is evidence that the ability-to-repay and qualified mortgage 
provisions of the Dodd-Frank Act are fundamentally flawed and should be 
abandoned in favor of further study.
    The Bureau solicited comments on a number of specific issues 
related to proposed Sec.  1026.43(e)(5). First, the Bureau solicited 
comment on whether non-conforming mortgage credit is likely to be 
unavailable if the rule is not amended and whether amending the rule as 
proposed would ensure that such credit is made available in a 
responsible, affordable way. Commenters supporting proposed Sec.  
1026.43(e)(5) generally agreed with the Bureau's assessment that, 
without amendment, the ability-to-repay and qualified mortgage rules 
would significantly limit access to nonconforming credit and access to 
credit in rural and underserved areas. Many individual small creditors 
asserted that they would limit the number of residential mortgage loans 
they made or cease mortgage lending altogether if the rule was not 
amended and that this would severely limit access to credit in their 
communities. National and State trade groups representing creditors 
expressed similar views on behalf of their members. These commenters 
generally agreed that small creditors are uniquely able and have strong 
incentives to make accurate determinations of ability to repay, that 
the incentives to make these determinations accurately and 
conservatively are particularly strong with respect to portfolio loans, 
and that the combination of these factors would provide ample 
protection for consumers. Commenters opposing proposed Sec.  
1026.43(e)(5) did not refute the points raised by the Bureau in the 
proposal. These commenters did not offer evidence or substantive 
arguments that access to credit would be preserved without the proposed 
amendments, did not suggest meaningful alternative ways of preserving 
access to credit, and did not offer substantive arguments or evidence 
that credit made available pursuant to proposed Sec.  1026.43(e)(5) 
likely would be irresponsible or unaffordable. One commenter argued 
that proposed Sec.  1026.43(e)(5) would not preserve access to credit 
because it would not provide significant regulatory relief to small 
creditors and because it was limited to a small number of loans per 
small creditor and therefore would not benefit consumers.
    Second, the Bureau solicited comment on the following issues 
relating to the criteria describing small creditors: Whether the Bureau 
should adopt criteria consistent with those used in Sec.  1026.35(b) 
and in the Sec.  1026.43(f) definition of qualified mortgages which 
applies to certain balloon loans made by small creditors operating 
predominantly in rural or underserved areas; whether the proposed $2 
billion asset limit is appropriate and whether the limit should be 
higher or lower; and whether to include a limitation on the number of 
first-lien covered transactions extended by the creditor and its 
affiliates and, if so, whether the proposed 500-transaction limit is 
appropriate.
    Most commenters urged the Bureau to expand the scope of proposed 
Sec.  1026.43(e)(5) by adjusting the asset or originations limits or 
both.\157\ Many commenters, including national and State trade groups 
representing banks and credit unions and many individual small 
creditors, asserted that 500 annual first-lien originations is more 
typical of a creditor with assets of $500 million than a creditor with 
assets of $2 billion. These commenters argued that the 500 annual 
first-lien originations limit is significantly more restrictive than 
the $2 billion asset limit and should therefore either be raised or be 
eliminated. Commenters suggested alternate limits such as 1,000 
portfolio loans or between 2,000 and 5,000 total first-lien 
originations. Some commenters, including trade groups representing 
creditors and individual small and mid-size creditors, urged the Bureau 
to raise the $2 billion asset limit to $5 billion or $10 billion. These 
commenters argued that this change is necessary to facilitate access to 
nonconforming credit and access to credit in areas that are served only 
by mid-sized banks with assets greater than $2 billion.
---------------------------------------------------------------------------

    \157\ Several commenters, including representatives of creditors 
that finance manufactured housing and two creditors that provide 
low-documentation mortgage loans predominantly to Asian immigrants 
in California, argued that the Bureau should adopt additional 
qualified mortgage definitions that would include their mortgage 
loan products. The Bureau did not propose and did not solicit 
comment regarding such additional qualified mortgage definitions and 
is not adopting such definitions at this time.
---------------------------------------------------------------------------

    Third, the Bureau solicited comment regarding the requirement that 
loans be held in portfolio generally, including whether the proposed 
exemptions were appropriate and whether other criteria, guidance, or 
exemptions should be included regarding the requirement to hold loans 
in portfolio, either in lieu of or in addition to those included in the 
proposal. Commenters generally did not object to the requirement that 
loans be held in portfolio as described in proposed Sec.  1026.43(e)(5) 
and the accompanying comments. In addition, many commenters agreed with 
the Bureau that the requirement that loans be held in portfolio 
provides important protections for consumers because it aligns 
consumers' and creditors' interests regarding ability to repay. One 
commenter, a consumer advocacy organization, argued against the 
proposed provision allowing loans to be transferred less than three 
years after origination because of a creditor's bankruptcy or failure. 
This commenter argued that bankruptcy or failure may be indicative of 
poor underwriting leading to high default rates and that consumers 
therefore should retain the right to make claims against the creditor 
in bankruptcy, conservatorship, or receivership.
    Fourth, the Bureau solicited comment on the loan feature and 
underwriting requirements with which qualified mortgages under proposed 
Sec.  1026.43(e)(5) would have to comply. The Bureau solicited comment 
on whether qualified mortgages under proposed Sec.  1026.43(e)(5) 
should be exempt from additional provisions of Sec.  1026.43(e)(2) or 
should be subject to any other loan feature or underwriting 
requirements, either in lieu of or in addition to those proposed. In 
particular, the Bureau solicited comment on whether these qualified 
mortgages should be exempt from the requirement to consider debt-to-
income

[[Page 35484]]

ratio calculated according to appendix Q and the prohibition on debt-
to-income ratios in excess of 43 percent and whether other requirements 
related to debt-to-income ratio or residual income should be provided, 
either in lieu of or in addition to those proposed. Most commenters 
supported relaxing underwriting restrictions on portfolio loans made by 
small creditors generally and exempting these loans from both the 
requirement to consider debt-to-income ratio calculated according to 
appendix Q and the prohibition on debt-to-income ratios in excess of 43 
percent specifically.\158\ These commenters, including consumer 
advocacy organizations, national and State trade groups representing 
banks and credit unions, and many small creditors, agreed that small 
creditors are particularly able to make accurate determinations of 
ability to repay without a specific numeric limit and that the 
requirement to calculate debt-to-income ratio according to appendix Q 
would present a significant burden to many small creditors with little 
or no corresponding benefit to consumers. In addition, many small 
creditors and national and State trade groups representing creditors 
argued that all small creditors should be eligible to make balloon-
payment qualified mortgages if the loan is held in portfolio.
---------------------------------------------------------------------------

    \158\ One commenter, a consumer advocacy organization, urged the 
Bureau to adopt a lower debt-to-income ratio limit, such as 41 
percent, for low-income borrowers for all qualified mortgages. In 
contrast, other commenters urged the Bureau to raise or eliminate 
the debt-to-income ratio limit for all qualified mortgages secured 
by property in Puerto Rico and Hawaii. These commenters argued that 
the 43 percent debt-to-income ratio limit would limit access to 
mortgage credit in Puerto Rico and Hawaii because debt-to-income 
ratios in these areas often are more than 43 percent. The Bureau did 
not propose and did not solicit comment regarding changes to the 
debt-to-income ratio limit for other categories of qualified 
mortgages and is not reconsidering this issue at this time.
---------------------------------------------------------------------------

    Fifth, and last, the Bureau solicited comment on the following 
issue. Section 1026.43(e)(5) could provide different legal status to 
loans with identical terms based solely on the creditor's size and 
intention to hold the loan in portfolio. The Bureau stated its belief 
that the size of and relationship lending model employed by small 
creditors provide significant assurances that the mortgage credit they 
extend will be responsible and affordable. However, to the extent that 
consumers may have a choice of creditors, some of whom are not small, 
it was not clear that consumers shopping for mortgage loans would be 
aware that their choice of creditor could significantly affect their 
legal rights. The Bureau solicited comment on the extent and 
significance of this risk generally. Specifically, the Bureau solicited 
comment on whether consumers who obtain small creditor portfolio loans 
likely could have obtained credit from other sources and on the extent 
to which a consumer who obtains a portfolio loan from a small creditor 
would be disadvantaged by the inability to make an affirmative claim of 
noncompliance with the ability-to-repay rules or to assert 
noncompliance in a foreclosure action.
    Most commenters, including national and State trade groups 
representing banks and credit unions, as well as many individual small 
creditors, stated that small creditors make portfolio loans almost 
exclusively to consumers who do not qualify for secondary market 
financing for reasons unrelated to ability to repay, including: 
comparable sales that are not sufficiently similar, too distant, or too 
old; irregular zoning, lack of zoning, or problems with land records; 
condominiums that do not comply with secondary market owner-occupancy 
requirements; loan-to-value ratio; self-employed and seasonally-
employed consumers who cannot prove continuance to the satisfaction of 
the secondary market; consumers with a new job; and small dollar loans 
that fall below secondary market thresholds. These commenters noted 
that these issues may be particularly problematic in rural areas but 
that they are common in suburban and urban areas as well. These 
commenters stated that consumers who qualify for secondary market 
financing generally obtain secondary market loans that are not held in 
portfolio and would be unaffected by proposed Sec.  1026.43(e)(5).
    Two commenters, a national trade group representing very large 
creditors and a very large creditor, argued that consumers would be 
disadvantaged by proposed Sec.  1026.43(e)(5) because the rule would 
apply even in geographic areas where there are other creditors and 
because consumers comparing loans from different creditors would have 
to compare different legal rights that are difficult to value.
The Final Rule
    Section 1026.43(e)(5) and the related comments are adopted as 
proposed. For the reasons stated below, the Bureau believes that Sec.  
1026.43(e)(5) is necessary and appropriate to preserve access to 
responsible, affordable credit for some consumers, including consumers 
who do not qualify for conforming mortgage credit.
    Access to affordable, responsible credit. The Bureau continues to 
believe that Sec.  1026.43(e)(5) is necessary to preserve access to 
credit for some consumers, including consumers who do not qualify for 
conforming mortgage credit, and will ensure that this credit is 
provided in a responsible, affordable way.
    As discussed above in part II.A and in the section-by-section 
analysis of Sec.  1026.43(b)(4), the Bureau understands that small 
creditors are a significant source of nonconforming mortgage credit. 
The Bureau believes that many of these loans would not be made by 
larger creditors because the consumers or properties involved are not 
accurately assessed by the standardized underwriting criteria used by 
larger creditors or because larger creditors are unwilling to make 
loans that cannot be sold to the securitization markets. The Bureau 
therefore believes that access to mortgage credit for some consumers 
would be restricted if small creditors stopped making nonconforming 
loans or significantly reduced the number of nonconforming loans they 
make.
    Such an impact could be particularly significant in rural areas, 
where small creditors are a significant source of credit. As discussed 
above in part II.A, small creditors are significantly more likely than 
larger creditors to operate offices in rural areas, and there are 
hundreds of counties nationwide where the only creditors are small 
creditors and hundreds more where larger creditors have only a limited 
presence.
    The Bureau also continues to believe that small creditors are 
particularly well suited to originate responsible, affordable mortgage 
credit. As discussed above in part II.A, the small creditors often are 
better able to assess ability to repay because they are more likely to 
base underwriting decisions on local knowledge and qualitative data and 
less likely to rely on standardized underwriting criteria. Because many 
small creditors use a lending model based on maintaining ongoing 
relationships with their customers, they often have a more 
comprehensive understanding of their customer's financial 
circumstances. Small creditors' lending activities often are limited to 
a single community, allowing the creditor to have an in-depth 
understanding of the economic and other circumstances of that 
community. In addition, because small creditors often consider a 
smaller volume of applications for mortgage credit, small creditors may 
be more willing and able to consider the unique facts and circumstances 
attendant to each consumer and property, and senior personnel are more 
likely to be able to bring their judgment to bear regarding individual 
underwriting decisions.

[[Page 35485]]

    Small creditors also have particularly strong incentives to make 
careful assessments of a consumer's ability to repay because small 
creditors bear the risk of default associated with loans held in 
portfolio and because each loan represents a proportionally greater 
risk to a small creditor than to a larger one. In addition, small 
creditors operating in limited geographical areas may face significant 
risk of harm to their reputations within their communities if they make 
loans that consumers cannot repay.
    As many commenters reiterated, small creditors have repeatedly 
asserted that they will not lend outside the qualified mortgage safe 
harbor. The Bureau does not believe that small creditors face 
significant litigation risk from the ability-to-repay requirements. For 
the reasons stated above, the Bureau believes that small creditors as a 
group generally are better positioned to assess ability to repay than 
larger creditors, have particularly strong incentives to accurately 
assess ability to repay independent of the threat of ability-to-repay 
litigation, and historically have been very successful at accurately 
assessing ability to repay, as demonstrated by their comparatively low 
credit losses. In addition, the Bureau believes that because many small 
creditors use a lending model based on maintaining ongoing 
relationships with their customers, those customers may be more likely 
to pursue alternatives to litigation in the event that difficulties 
with a loan arise. The Bureau therefore believes that it is unlikely 
that small creditors will face significant liability for claims of 
noncompliance filed by their customers or will be significantly 
disadvantaged by recoupment and setoff claims in foreclosure actions.
    However, the Bureau acknowledges that due to their size small 
creditors may find even a remote prospect of litigation risk to be so 
daunting that they may change their business models to avoid it. The 
Bureau also believes that the exit of small creditors from the 
residential mortgage market could create substantial short-term access 
to credit issues.
    The Bureau therefore believes that, absent an amendment to the 
ability-to-repay and qualified mortgage rules, many small creditors 
will reduce or cease their mortgage lending activities, which would 
cause many consumers to face constraints on their access to credit that 
are entirely unrelated to their ability to repay. The Bureau believes 
that Sec.  1026.43(e)(5) will preserve consumers' access to credit and, 
because of the characteristics of small creditors and portfolio lending 
described above, the credit provided generally will be responsible and 
affordable.
    The Bureau is sensitive to concerns about the consistency of 
protections for all consumers and about maintaining a level playing 
field for market participants, but nevertheless believes that a 
differentiated approach is justified here. The commenters that 
suggested that consumers' interests are best served by subjecting all 
creditors to the same standards provided nothing that refutes the 
points raised in the Bureau's proposal regarding the low credit losses 
and unique business models of small creditors, their concerns about 
litigation risk and compliance burden, and the potential access to 
credit problems the Bureau believes will arise if the rule is not 
amended. The Bureau also disagrees that Sec.  1026.43(e)(5) would not 
benefit consumers because it is limited to a small number of loans per 
creditor. Because there are thousands of small creditors as defined by 
Sec.  1026.43(e)(5) in the United States, the Bureau believes that 
Sec.  1026.43(e)(5) is likely to preserve access to affordable, 
responsible mortgage credit for hundreds of thousands of consumers 
annually.
    Asset and originations limits. Section 1026.43(e)(5) includes 
portfolio loans made by creditors that have assets of $2 billion or 
less (adjusted annually for inflation) and, together with all 
affiliates, originate 500 or fewer first-lien mortgages each year. The 
Bureau proposed these thresholds to maintain consistency with the Sec.  
1026.43(f) qualified mortgage definition, which includes certain 
balloon loans made and held in portfolio by small creditors operating 
predominantly in rural or underserved areas, and with thresholds used 
in Sec.  1026.35 as adopted by the Bureau's 2013 Escrows Final Rule. In 
the proposal, the Bureau emphasized the importance of maintaining 
consistent criteria, particularly between Sec.  1026.43(e)(5) and (f), 
to avoid creating undesirable regulatory incentives (such as an 
incentive to make balloon loans where a creditor has the capability of 
making other mortgages that better protect consumers' interests) and to 
minimize compliance burdens by minimizing the number of metrics 
creditors must track to determine their eligibility for various 
regulatory provisions. The Bureau continues to believe that it is 
important to maintain consistency between these provisions.
    Many commenters urged the Bureau to raise the limit above 500 
first-lien originations for Sec.  1026.43(e)(5), for instance by 
changing the types of loans counted or the numeric threshold. A 
national trade group representing small creditors and several other 
commenters argued that the originations limit in Sec.  1026.43(e)(5) 
should be based on portfolio loans originated annually rather than all 
first-lien originations. These commenters argued that including loans 
sold to the secondary market in the origination threshold was not 
appropriate because the purpose of Sec.  1026.43(e)(5) is to encourage 
portfolio lending and thereby preserve consumers' access to 
nonconforming credit.
    On its face, the rationale advanced by these commenters argues 
against any limitation on the number of portfolio loans, as any limit 
would discourage portfolio lending in excess of that limit and all 
portfolio loans appear to carry with them a greater inherent incentive 
to exercise care in determining ability to repay than loans sold to the 
secondary market. However, one of the lessons learned in the recent 
financial crisis is that in the heat of a housing bubble, even 
portfolio lending standards can become too lax and standards that 
ensure responsible, affordable lending may be threatened.
    Thus, the Bureau did not propose to provide qualified mortgage 
treatment to all portfolio loans, but rather only to portfolio loans 
made by small creditors on the theory that both the characteristics of 
the creditor--its small size, community-based focus, and commitment to 
relationship lending--and the inherent incentives associated with 
portfolio lending together would justify extending qualified mortgage 
status to a loan that would not meet the ordinary qualified mortgage 
criteria. Given this rationale, the Bureau does not believe it is 
appropriate to adopt an originations limit under which a creditor would 
be treated as a small, relationship-based creditor no matter how many 
loans it is selling to the secondary market.
    Using publicly available HMDA data and call report data, the Bureau 
estimated the impact of adopting a limit based on portfolio loan 
originations instead of total first-lien originations. This change 
would add nearly one thousand creditors to the scope of Sec.  
1026.43(e)(5). These creditors appear to hold a significantly smaller 
percentage of the loans they originate in portfolio than creditors that 
would fall within Sec.  1026.43(e)(5) as proposed, raising questions 
about the extent to which these creditors can be considered 
relationship lenders. This reinforces the point that the relationship 
lending model underlying the Bureau's rationale for Sec.  1026.43(e)(5) 
cannot be defined by reference only to a subset of a creditor's

[[Page 35486]]

originations, but rather based on the nature of its overall operations. 
The Bureau therefore continues to believe that an originations limit 
based on total first-lien originations is the most appropriate way to 
ensure that the new category of qualified mortgages is appropriately 
cabined.
    In addition, many commenters recommended increasing the 
originations limit from 500 first-lien mortgages to between 2,000 and 
5,000. The principal rationale offered by these commenters is that 
banks with assets over $500 million often originate more than 500 
first-lien mortgages per year and that the limitation on originations 
is not consistent with (i.e., is significantly more restrictive than) 
the $2 billion asset limit.
    The Bureau intended and believes that both elements of the 
threshold play independent and important roles. The Bureau believes 
that an originations limit is the most accurate means of limiting Sec.  
1026.43(e)(5) to the class of small creditors the business model of 
which the Bureau believes will best assure that the qualified mortgage 
definition facilitates access only to responsible, affordable credit. 
However, the Bureau believes that an asset limit is nonetheless 
important to preclude a very large creditor with relatively modest 
mortgage operations from taking advantage of a provision designed for 
much smaller creditors with much different characteristics and 
incentives. Due to general scale, such a creditor would not have the 
same type of community focus and reputational and balance-sheet 
incentives to assess ability to repay with sufficient care as smaller, 
community-based creditors, and is generally better able from a systems 
perspective to handle compliance functions.
    Based on estimates from publicly available HMDA and call report 
data, the Bureau understands that, under the proposed criteria, the 
likelihood of falling within the scope of Sec.  1026.43(e)(5) decreases 
as a creditor's size increases. The proposed limits include 
approximately 95 percent of creditors with less than $500 million in 
assets, approximately 74 percent of creditors with assets between $500 
million and $1 billion, and approximately 50 percent of creditors with 
assets between $1 billion and $2 billion. These percentages are 
entirely consistent with the Bureau's rationale for Sec.  
1026.43(e)(5), as described above. As the size of an institution 
increases, it is to be expected that the scale of its lending business 
will increase as well. As the scale of a creditor's lending business 
increases, the likelihood that the institution is engaged in 
relationship-based lending and employing qualitative or local knowledge 
in its underwriting decreases. The Bureau therefore continues to 
believe that the proposed limit of 500 total first-lien originations is 
consistent with the rationale underlying Sec.  1026.43(e)(5) and 
appropriate to ensure that consumers have access only to responsible, 
affordable mortgage credit.
    Finally, some commenters argued that the Bureau should increase the 
asset limit from $2 billion to $5 billion or $10 billion. The Bureau 
does not believe this change is necessary to preserve access to credit. 
The traditional definition of a community bank has long been regarded 
as an institution with less than $1 billion in assets.\159\ The 
Bureau's estimates show that Sec.  1026.43(e)(5) as proposed includes 
over 90 percent of institutions with assets less than $1 billion. In 
its recent Community Bank Study, the FDIC employed a more complex 
definition that excluded a small number of institutions with assets 
under $1 billion based primarily on the nature of their assets and 
added a modest number of banks with assets greater than $1 billion 
based on a multi-factor test including criteria such as the geographic 
scope of the institution's operations and focus on core banking 
activities.\160\ The Bureau has concluded that the FDIC's definition is 
too complex for regulatory purposes and no commenters advocated that 
the Bureau adopt it. However, the Bureau notes that the larger banks 
added by the FDIC's more nuanced definition of community bank had 
average assets of $1.9 billion.
---------------------------------------------------------------------------

    \159\ See, e.g., FDIC Community Banking Study, p. 1-1.
    \160\ FDIC Community Banking Study, p. 1-1--1-5.
---------------------------------------------------------------------------

    In addition, the Bureau notes that a creditor with assets between 
$1 billion and $2 billion has, on average, 16 branches, 252 employees, 
and operations in 5 counties. In contrast, a creditor with between $2 
billion and $10 billion in assets has, on average, 34 branches, 532 
employees, and operations in 12 counties. As the staff and geographic 
scope of an institution increases, it becomes less and less likely that 
a creditor will engage in relationship lending or use qualitative or 
local knowledge in its underwriting. In addition, as an institution 
adds staff and branches, it is more likely from a systems perspective 
to handle compliance functions. The Bureau therefore believes that the 
proposed $2 billion asset limit is consistent with the rationale 
underlying Sec.  1026.43(e)(5) and appropriate to ensure that consumers 
have access only to affordable, responsible credit.
    Portfolio requirements. The Bureau continues to believe that the 
discipline imposed when small creditors make loans that they will hold 
in their portfolio is important to protect consumers' interests and to 
prevent evasion. The Bureau proposed that qualified mortgages under 
Sec.  1026.43(e)(5) must be held in portfolio for three years to retain 
their status as qualified mortgages, thus matching the statute of 
limitations for affirmative claims for violations of the ability-to-
repay rules. If a small creditor holds a qualified mortgage in 
portfolio for three years, it retains all of the litigation risk for 
potential violations of the ability-to-repay rules except in the event 
of a subsequent foreclosure.
    The Bureau is extending qualified mortgage status only to portfolio 
loans made by small creditors, rather than all portfolio loans, 
because, as discussed above, the Bureau believes that small creditors 
are a unique and important source of non-conforming mortgage credit and 
mortgage credit in rural areas for which there is no readily available 
replacement, that small creditors are likely to be particularly 
burdened by the litigation risk associated with the ability-to-repay 
requirements and are particularly likely to reduce or cease mortgage 
lending if subjected to these rules without accommodation, and that 
small creditors have both strong incentives and particular ability to 
make these loans in a way that ensures that consumers are able to repay 
that may not be present for larger creditors.
    As the Bureau acknowledged in the proposal, limitations on the 
ability of a creditor to sell loans in its portfolio may limit the 
creditor's ability to manage its regulatory capital levels by adjusting 
the value of its assets, may affect the creditor's ability to manage 
interest rate risk by preventing sales of seasoned loans, and may 
present other safety and soundness concerns. The Bureau has consulted 
with prudential regulators on these issues and continues to believe the 
proposed exceptions address these concerns without sacrificing the 
consumer protection provided by the portfolio requirement.
    One commenter, a consumer advocacy organization, argued that the 
Bureau should not adopt the proposed exception that would allow a 
qualified mortgage under Sec.  1026.43(e)(5) to retain its qualified 
mortgage status if it is transferred less than three years after 
origination because of a bank failure. The commenter argued that the 
need for supervisory action strongly suggests that

[[Page 35487]]

loans should not be entitled to the presumption of compliance 
associated with qualified mortgage status. The commenter further 
asserted that agencies charged with resolving failed creditors have 
sufficient authority to protect transferees from consumers' claims. The 
Bureau understands that creditors fail for many different reasons, many 
of which are entirely unrelated to underwriting practices for 
residential mortgage loans. The Bureau also continues to believe that 
this exception is necessary to ensure that resolutions are not impeded. 
The Bureau therefore declines to adopt the commenter's suggestion.
    Underwriting requirements and debt-to-income ratio. Qualified 
mortgages under Sec.  1026.43(e)(5) differ from qualified mortgages 
under the Sec.  1026.43(e)(2) general definition in two key respects. 
First, as discussed above in the section-by-section analysis of Sec.  
1026.43(b)(4), qualified mortgages under Sec.  1026.43(e)(5) are 
subject to a higher annual percentage rate threshold for the qualified 
mortgage safe harbor. Second, creditors are required to consider the 
consumer's debt-to-income ratio or residual income and to verify the 
underlying information generally in accordance with Sec.  1026.43(c), 
but are not required to calculate the consumer's debt-to-income ratio 
according to appendix Q and there is no numeric limit on the consumers' 
debt-to-income ratio.
    The Bureau continues to believe that consideration of debt-to-
income ratio or residual income is fundamental to any determination of 
ability to repay. A consumer is able to repay a loan if he or she has 
sufficient funds to pay his or her other obligations and expenses and 
still make the payments required by the terms of the loan. 
Arithmetically comparing the funds to which a consumer has recourse 
with the amount of those funds the consumer has already committed to 
spend or is committing to spend in the future is necessary to determine 
whether sufficient funds exist.
    However, for the same reasons that the Bureau declined to impose a 
specific 43-percent threshold for balloon-payment qualified mortgages 
under the balloon loan provision in Sec.  1026.43(f), the Bureau does 
not believe it is necessary to impose a specific debt-to-income ratio 
or residual income threshold for this category of qualified mortgages. 
As discussed above, the Bureau believes that small creditors often are 
particularly able to make highly individualized determinations of 
ability to repay that take into consideration the unique 
characteristics and financial circumstances of a particular consumer. 
While the Bureau believes that many creditors can make mortgage loans 
with consumer debt-to-income ratios above 43 percent that consumers are 
able to repay, the Bureau also believes that portfolio loans made by 
small creditors are particularly likely to be made responsibly and to 
be affordable for the consumer even if such loans exceed the 43-percent 
threshold. The Bureau therefore believes that it is appropriate to 
presume compliance even above the 43-percent threshold for small 
creditors who meet the criteria set forth in Sec.  1026.43(e)(5). The 
Bureau believes that the discipline imposed when small creditors make 
loans that they will hold in their portfolio is sufficient to protect 
consumers' interests in this regard. Because the Bureau is not adopting 
a specific limit on consumers' debt-to-income ratio, the Bureau does 
not believe it is necessary to require creditors to calculate debt-to-
income ratio in accordance with a particular standard such as that set 
forth in appendix Q.
    The Bureau does not believe it is appropriate to permit all small 
creditors to make balloon-payment qualified mortgages under Sec.  
1026.43(e)(5) as suggested by some commenters. The Bureau believes that 
Congress clearly indicated in the Dodd-Frank Act that only small 
creditors operating predominantly in rural or underserved areas should 
be eligible to originate balloon-payment qualified mortgages. However, 
as discussed below in the section-by-section analyses of Sec.  
1026.43(e)(6) and (f), the Bureau is providing a two-year transition 
period during which all small creditors may originate balloon-payment 
qualified mortgages. This transition period will allow the Bureau to 
study the existing definitions of rural and underserved to determine 
whether they adequately preserve consumers' access to responsible, 
affordable mortgage credit and will facilitate creditors' transition to 
alternatives to balloon-payment mortgages, such as adjustable-rate 
mortgages.
    Valuation of legal rights by consumers. Finally, the Bureau is 
convinced that small creditor portfolio loans covered by Sec.  
1026.43(e)(5) are unlikely to be provided to consumers who qualify for 
secondary market financing or who can otherwise obtain mortgage credit. 
The Bureau therefore concludes that the risk that comparison shopping 
consumers will be unable to assess the value of the right to sue in the 
event of default or foreclosure is unlikely to be significant in 
practice. Also, as discussed above, the Bureau believes that small 
creditors' historically low credit losses demonstrate that the size and 
other characteristics of and relationship lending model employed by 
small creditors provide significant assurances that the mortgage credit 
they extend will be responsible and affordable. Because consumers are 
unlikely to receive loans from small creditors that result in default 
or foreclosure, it appears unlikely that consumers will be 
significantly disadvantaged by the inability to make an affirmative 
claim of noncompliance with the ability-to-repay rules or to assert 
noncompliance in a foreclosure action. The Bureau therefore believes 
that this issue is not sufficient to outweigh the significant benefit 
of Sec.  1026.43(e)(5) in preserving access to credit.
    Legal authority. Accordingly, the Bureau is exercising its 
authority under TILA sections 105(a), 129C(b)(2)(vi), and 
129C(b)(3)(B)(i) to adopt Sec.  1026.43(e)(5) as proposed for the 
reasons summarized below and discussed in more detail above. Under TILA 
section 105(a) the Bureau generally may prescribe regulations that 
provide for such adjustments and exceptions for all or any class of 
transactions that the Bureau judges are necessary and proper to 
effectuate the purposes of TILA, which include the purposes of TILA 
129C, and facilitate compliance with these purposes, among other 
things. The Bureau believes that these amendments are necessary and 
proper to ensure that consumers are offered and receive residential 
mortgage loans on terms that reasonably reflect their ability to repay 
the loans. This provision is consistent with the findings of TILA 
section 129C by ensuring that consumers are able to obtain responsible 
affordable credit, which informs the Bureau's understanding of its 
purposes.
    Furthermore, the Bureau revises the qualified mortgage criteria in 
the statute to adopt this new definition by finding that this provision 
is necessary and proper to ensure that responsible, affordable mortgage 
credit remains available to consumers in a manner consistent with the 
purposes of TILA section 129C, necessary and appropriate to effectuate 
the purposes of TILA section 129C and to facilitate compliance with 
TILA section129C. As described above, the Bureau believes that, unless 
Sec.  1026.43(e)(5) is adopted, small creditors will be less likely to 
make residential mortgage loans. Because small creditors are a 
significant source of nonconforming mortgage credit nationally and 
mortgage credit generally in rural or underserved areas, this would 
significantly limit access to

[[Page 35488]]

mortgage credit for some consumers. The Bureau also believes that the 
relationship lending model, qualitative local knowledge, and size of 
small creditors, combined with the intrinsic incentives of portfolio 
lending, provide strong assurances that these creditors typically will 
make reasonable and good faith determinations of consumers' ability to 
repay when originating loans pursuant to Sec.  1026.43(e)(5). This 
provision is also necessary and proper to facilitate compliance with 
the purposes of TILA by easing the ability of small creditors to make 
qualified mortgages. The Bureau also believes that the provisions of 
Sec.  1026.43(e)(5) relating to debt-to-income ratio or residual income 
are authorized by TILA section 129C(b)(2)(vi), which authorizes, but 
does not require, the Bureau to adopt guidelines or regulations 
relating to debt-to-income ratio or alternative measures of ability to 
pay regular expenses after payment of total monthly debt.
43(e)(6) Qualified Mortgage Defined--Temporary Balloon-Payment 
Qualified Mortgage Rules Background
    As discussed above, TILA section 129C(b) and the Bureau's rules 
thereunder, Sec.  1026.43(e), provide that a creditor or assignee may 
presume that a loan has met the ability-to-repay requirements described 
in TILA section 129C(a)(1) through (4) and the Bureau's rules 
thereunder, Sec.  1026.43(c), if a loan is a qualified mortgage. TILA 
section 129C(b)(2)(A)(ii) provides that qualified mortgages generally 
cannot include a balloon payment. Accordingly, Sec.  1026.43(e)(2) of 
the Bureau's rules provides a general qualified mortgage definition 
that excludes loans with a balloon payment. In addition, Sec.  
1026.43(e)(4) provides a temporary qualified mortgage definition that 
also excludes balloon-payment loans.
    However, TILA section 129C(b)(2)(E) permits the Bureau to provide 
by regulation an alternate qualified mortgage definition that includes 
certain balloon payment mortgages originated and held in portfolio by 
small creditors operating predominantly in rural or underserved areas. 
The Bureau exercised this authority in adopting Sec.  1026.43(f). 
Section 1026.43(f) allows creditors with less than $2 billion in assets 
that originate, together with all affiliates, fewer than 500 first-lien 
mortgages annually to originate balloon-payment qualified mortgages if 
the creditor operates predominantly in rural or underserved areas and 
if certain other requirements are met. The Bureau adopted definitions 
of rural and underserved in Sec.  1026.35(b)(2)(iv).
    As discussed above in the section-by-section analysis of Sec.  
1026.43(e)(5), the Bureau proposed and is adopting a fourth category of 
qualified mortgage which includes loans originated and held in 
portfolio by small creditors that meet the same asset and originations 
criteria regardless of whether they operate predominantly in rural and 
underserved areas. Qualified mortgages in this category are subject to 
different, more relaxed requirements regarding debt-to-income ratio and 
are covered by the regulatory safe harbor at a higher annual percentage 
rate than other qualified mortgages. However, because TILA section 
129C(b)(2)(A)(ii) specifies that qualified mortgages generally may not 
have a balloon payment, Sec.  1026.43(e)(5) does not include mortgages 
with a balloon payment.
The Bureau's Proposal and Comments Received
    Prohibition on balloon payments generally. As discussed above, in 
proposing the new category of qualified mortgage for certain small 
creditor portfolio loans under Sec.  1026.43(e)(5), the Bureau 
solicited comment regarding the loan feature and underwriting 
requirements with which qualified mortgages under proposed Sec.  
1026.43(e)(5) would have to comply. Specifically, the Bureau solicited 
comment on whether qualified mortgages under proposed Sec.  
1026.43(e)(5) should be exempt from provisions of Sec.  1026.43(e)(2) 
in addition to those related to debt-to-income ratio or should be 
subject to any other loan feature or underwriting requirements, either 
in lieu of or in addition to those proposed.
    A large number of commenters, including national and State trade 
groups representing creditors and many individual small creditors, 
argued that Sec.  1026.43(e)(5) would not have the intended effect of 
preserving access to nonconforming mortgage credit and mortgage credit 
in rural areas unless Sec.  1026.43(e)(5) permitted small creditors to 
make balloon-payment mortgages within the qualified mortgage safe 
harbor regardless of whether they operate predominantly in rural or 
underserved areas.
    These commenters argued that small creditors rely on balloon-
payment provisions to manage interest rate risk for the overwhelming 
majority of their residential mortgage portfolio loans. One national 
trade group representing small creditors estimated that 75 percent of 
all residential mortgages in small creditors' portfolios have a 
balloon-payment feature. Many small creditors who reported information 
regarding their own portfolios reported that between 90 and 100 percent 
of their portfolio mortgage loans include a balloon-payment feature.
    These commenters also stated that small creditors that rely on 
balloon-payment features generally do not have the capability at this 
time to originate and service adjustable-rate mortgages, also known as 
ARMs. Adjustable-rate mortgages would serve as an alternate way to 
manage interest rate risk and are permissible under Sec.  1026.43(e)(5) 
as proposed and finalized. However, commenters expressed concerns that 
adjustable-rate mortgages are more difficult for small creditors to 
originate and service because of the systems and disclosures required.
    Finally, these commenters reiterated that small creditors generally 
will be unwilling or unable to lend outside the qualified mortgage safe 
harbor because of the associated litigation risk. As such, argued these 
commenters, the prohibition on balloon-payments under Sec.  
1026.43(e)(5) would cause a significant reduction in consumers' access 
to nonconforming credit.
    These commenters also asserted that small creditors have been 
originating balloon-payment loans for many years without significant 
harm to consumers and that balloon-payment loans made by small 
creditors generally have very low default rates that are a fraction of 
average default rates for mortgage loans generally. These commenters 
added that portfolio mortgage loans are a significant portion of assets 
and a significant revenue stream for most small creditors. Therefore, 
the commenters argued, the inability to make balloon-payment loans 
within the qualified mortgage safe harbor will cause serious financial 
harm to many small creditors, further reducing consumers' access to 
nonconforming and other mortgage credit.
    Rollover balloons. The Bureau also solicited comment regarding 
consumers with balloon-payment loans originated before the January 10, 
2014, effective date of the 2013 ATR Final Rule for which the balloon 
payment will become due after the effective date. The Bureau noted that 
small creditors that use balloon-payment loans to manage interest rate 
risk generally refinance the remaining principal when the balloon 
payment becomes due. In other words, the small creditors who follow 
this practice generally use the balloon payment feature as an 
opportunity to adjust the loan's interest rate, not because they expect 
the consumer will repay the loan in full before the balloon payment 
becomes due.

[[Page 35489]]

    In the proposal, the Bureau stated its belief that the balloon-
payment qualified mortgage provision in Sec.  1026.43(f) and the small 
creditor portfolio exemption in proposed Sec.  1026.43(e)(5) would be 
adequate to facilitate refinancing of balloon-payment loans for which 
the balloon-payment becomes due after January 10, 2014. However, the 
Bureau solicited feedback regarding whether these provisions were 
adequate for this purpose or whether creditors would need additional 
time beyond the January 10, 2014, effective date or would require any 
additional accommodations, modifications, or exemptions.
    Several commenters, including small creditors and creditor trade 
groups, specifically acknowledged the difficulties presented by 
balloon-payment loans originated before the effective date. These 
commenters stated the balloon-payment mortgages offered by small 
creditors generally have payments (other than the balloon) that 
amortize the loan over 30 years. These commenters stated that consumers 
most often take these loans not because they expect to repay the loan 
before the balloon payment becomes due but based on creditors' 
assurances that they will be able to refinance the loan, albeit at a 
different rate. In other words, these commenters confirmed that small 
creditors use balloons in a way that is functionally similar to a long-
term adjustable-rate mortgage. These commenters asserted that small 
creditors generally are committed to refinancing these loans for their 
customers. They stated, however, that they will be unable or unwilling 
to do so after the effective date unless changes are made to permit 
them to originate new balloon-payment loans within the qualified 
mortgage safe harbor.
    These commenters stated that, if the small creditors who originated 
these loans are unable or unwilling to refinance them, consumers will 
be forced to seek refinancing elsewhere. According to these commenters, 
consumers with balloon-payment loans from small creditors generally do 
not qualify for secondary market financing, and many of these consumers 
therefore will have difficulty finding other refinancing or 
restructuring options. The commenters asserted that in extreme 
circumstances some consumers who are unable to refinance or make the 
balloon payment might face foreclosure if they were unable to secure 
refinancing.
    Commenters who raised this issue generally argued that the Bureau 
should exempt loans that refinance a balloon-payment loan originated 
before the effective date from the ability-to-repay and qualified 
mortgage rules or significantly broaden the ability of creditors to 
make balloon loans within the qualified mortgage safe harbor such that 
a greater portion of these refinancing loans would be covered.
The Final Rule
    The Bureau is adopting new Sec.  1026.43(e)(6), which provides a 
two-year transition period during which small creditors as defined by 
Sec.  1026.43(e)(5) can originate balloon-payment qualified mortgages 
even if they do not operate predominantly in rural or underserved 
areas. The Bureau is adopting new Sec.  1026.43(e)(6) because it 
believes that doing so is necessary to preserve access to responsible, 
affordable mortgage credit for some consumers. As discussed further 
below and in connection with Sec.  1026.43(f), during the two-year 
period in which Sec.  1026.43(e)(6) is in place, the Bureau intends to 
review whether the definitions of ``rural'' or ``underserved'' should 
be further adjusted for purposes of the qualified mortgage rule and to 
explore how it can best facilitate the transition of small creditors' 
who do not operate predominantly in rural or underserved areas from 
balloon-payment loans to adjustable-rate mortgages as Congress intended 
under the Dodd-Frank Act. At the end of the period, however, the Bureau 
expects that the statutory framework will take full effect such that 
balloon-payment loans are treated as qualified mortgages only where 
originated by small creditors operating predominantly in rural or 
underserved areas under Sec.  1026.43(f).
    New Sec.  1026.43(e)(6) defines an additional category of qualified 
mortgages that, like Sec.  1026.43(e)(5), includes loans originated and 
held in portfolio by creditors that:
     Have total assets that do not exceed $2 billion as of the 
end of the preceding calendar year (adjusted annually for inflation); 
and
     Together with all affiliates, extended 500 or fewer first-
lien covered transactions during the preceding calendar year.
    New Sec.  1026.43(e)(6) is not limited to small creditors operating 
predominantly in rural or underserved areas. However, the new provision 
incorporates by reference all other requirements under the Sec.  
1026.43(f) balloon-payment qualified mortgage definition. The loan 
therefore cannot have:
     Payments that result in an increase of the principal 
balance;
     A term longer than 30 years; and
     Points and fees greater than 3 percent of the total loan 
amount (or, for smaller loans, a specified amount).
    The creditor must consider and verify the consumer's current or 
reasonably expected income or assets (other than the dwelling and 
attached real property that secure the loan) and the consumer's current 
debt obligations, alimony, and child support. The creditor also must 
consider the consumer's monthly debt-to-income ratio or residual 
income. As with Sec.  1026.43(e)(5) and (f), there is no numeric limit 
on a consumer's debt-to-income ratio and creditors are not required to 
calculate debt-to-income ratio according to appendix Q. In addition, 
the loan must provide for scheduled payments that are substantially 
equal and calculated using an amortization period that does not exceed 
30 years, an interest rate that does not increase over the term of the 
loan, and a term of 5 years or longer.
    A loan must not be subject at consummation to a commitment to be 
acquired by any person other than a person that also meets the above 
asset-size and number of transactions criteria. A loan loses its 
qualified mortgage status under Sec.  1026.43(e)(6) if it is sold, 
assigned, or otherwise transferred, subject to exceptions for transfers 
that are made three or more years after consummation, to another 
qualifying institution, as required by a supervisory action, or 
pursuant to a merger or acquisition.
    As with all qualified mortgages, a qualified mortgage under Sec.  
1026.43(e)(6) receives either a rebuttable or conclusive presumption of 
compliance with the ability-to repay requirements in Sec.  1026.43(c), 
depending on the annual percentage rate. However, as described above in 
the section-by-section analysis of Sec.  1026.43(b)(4), the Bureau is 
adopting an alternate definition of higher-priced covered transaction 
for first-lien covered transactions that are qualified mortgages under 
Sec.  1026.43(e)(5) and (f). As also is discussed above in the section-
by-section analysis of Sec.  1026.43(b)(4), this alternate definition 
applies to qualified mortgages under Sec.  1026.43(e)(6) as well. As 
such, Sec.  1026.43(b)(4) provides that a first-lien covered 
transaction that is a qualified mortgage under proposed Sec.  
1026.43(e)(6) is a higher-priced covered transaction if the annual 
percentage rate exceeds APOR for a comparable transaction by 3.5 or 
more percentage points. This extends the qualified mortgage safe harbor 
described in Sec.  1026.43(e)(1)(i) to first-lien qualified mortgages 
defined under proposed Sec.  1026.43(e)(6) even if those loans have 
annual percentage rates

[[Page 35490]]

between 1.5 and 3.5 percentage points higher than APOR. Such loans 
otherwise would be covered by the rebuttable presumption of compliance 
described in Sec.  1026.43(e)(1)(ii).
    As discussed below, Sec.  1026.43(e)(6) is intended to provide a 
temporary transition period during which small creditors that do not 
operate predominantly in rural and underserved areas can originate 
balloon-payment qualified mortgages. Section 1026.43(e)(6) therefore 
applies only to loans consummated on or before January 10, 2016, two 
years after the effective date of the 2013 ATR Final Rule. Qualified 
mortgages originated under Sec.  1026.43(e)(6) on or before January 10, 
2016, will retain their qualified mortgage status after January 10, 
2016, as long as all other requirements, such as the requirement to 
retain the loan in portfolio subject to certain exceptions, are met.
    The Bureau believes Sec.  1026.43(e)(6) appropriately balances 
consumer protection and access to credit issues. As discussed above in 
the section-by-section analyses of Sec.  1026.43(b)(4) and (e)(5), the 
Bureau believes that small creditors are an important source of 
mortgage credit, including nonconforming mortgage credit, and that 
there would be a significant reduction in consumers' access to credit 
if small creditors were to substantially reduce the number of 
residential mortgage loans they make or cease mortgage lending 
altogether. The Bureau also understands that small creditors generally 
do not originate long-term fixed-rate portfolio loans because of the 
associated interest rate risk, that many small creditors do not offer 
ARMs because they do not have the compliance and other systems in place 
to originate and service them, and that many small creditors have 
expressed reluctance to offer balloon-payment mortgages outside the 
qualified mortgage safe harbor because of the associated litigation 
risk. The Bureau also understands that some consumers may find it more 
inconvenient, more costly, or more difficult to refinance their 
existing balloon-payment loans if small creditors are unable or 
unwilling to refinance these loans because these consumers would have 
to seek financing from other creditors. The Bureau also is sensitive to 
concerns that some consumers may be unable to find alternative 
financing and therefore could face foreclosure.
    Commenters' preferred solution is for the Bureau to significantly 
and permanently broaden the ability of all small creditors to make 
balloon-payment mortgages that are either exempt from the ability-to-
repay rules or within the qualified mortgage safe harbor. As discussed 
further below with regard to Sec.  1026.43(f), the Bureau believes it 
is appropriate to use the two-year transition period to consider 
whether it can develop more accurate or precise definitions of rural 
and underserved. However, the Bureau believes that Congress made a 
deliberate policy choice in the Dodd-Frank Act not to extend qualified 
mortgage status to balloon-payment products outside of such areas. The 
Bureau believes that with appropriate transition time, and perhaps 
implementation support, small creditors can develop adjustable-rate 
mortgage products that will enable them to manage interest rate risk in 
a manner that poses less risk for consumers. Accordingly, the Bureau 
also will focus during the two-year transition period on facilitating 
small creditors' conversion to adjustable-rate mortgage products.
    The Bureau understands that adjustable-rate mortgages offered today 
by many creditors would fall within that qualified mortgage safe harbor 
and incorporate interest rate adjustment features similar to those of 
the balloon-payment mortgages used by many small creditors. For 
example, the interest rate of a 5/5 ARM adjusts five years after 
consummation and every five years thereafter for the duration of the 
loan term, paralleling the interest rate adjustment terms of an 
amortizing 5-year balloon-payment mortgage that is expected to be 
refinanced until it is paid off. The Bureau also understands that there 
are differences between adjustable-rate and balloon-payment mortgages 
that may be significant for some creditors. Interest rate adjustments 
for adjustable-rate mortgages are tied to changes in an index rate, and 
commonly used index rates (e.g., the London Interbank Offered Rate or 
``LIBOR'') may not track small creditors' cost of funds. Interest rates 
for adjustable-rate mortgages generally are capped at a certain amount 
above the initial rate, and this cap makes managing interest rate risk 
more complex. In addition, creditors that do not currently originate 
ARMs are likely to incur costs for developing the capability to do so 
(such as by purchasing additional modules for existing lending 
platforms), and there are additional expenses associated with servicing 
adjustable-rate mortgages, as consumers must be notified before each 
interest rate adjustment and servicing systems must be equipped to 
adjust the interest rate and payment amount.
    However, adjustable-rate mortgages also pose significantly less 
risk to consumers. The Bureau believes that balloon-payment mortgages 
are particularly risky for consumers because the consumer must rely on 
the creditors' nonbinding assurances that the loan will be refinanced 
before the balloon payment becomes due. Even a creditor with the best 
of intentions may find itself unable to refinance a loan when a balloon 
payment becomes due. Changes in the consumer's credit profile may 
affect the creditor's willingness to refinance or the price of the 
loan, and consumers may be unable to anticipate the new rate that will 
be offered and suddenly find that they are unable to afford it. 
Consumers with balloon-payment mortgages therefore face the periodic 
possibility of losing their property even if they perform their 
obligations under the terms of the loan. Adjustable-rate mortgages 
present less risk to consumers because they do not require refinancing 
and because interest rate adjustments are calibrated over the life of 
the loan and therefore are more predictable.
    Publicly available data from reports filed with the National Credit 
Union Administration indicate that around 20 percent of small credit 
unions, including some with assets below $150 million, originate 
adjustable-rate mortgages and only 18 percent of small credit unions 
originate balloon-payment mortgages but not adjustable-rate mortgages. 
This suggests that small creditors can manage interest rate risk, lend 
safely and soundly, and afford the expense and compliance burden 
associated with originating adjustable-rate mortgages.
    The Bureau believes that Congress made a clear policy choice in the 
Dodd-Frank Act that small creditors not operating predominantly in 
rural or underserved areas must ultimately conduct their residential 
mortgage business using adjustable-rate mortgages or other alternatives 
to balloon-payment mortgages. However, as discussed below in the 
section-by-section analysis of Sec.  1026.43(f), the Bureau believes 
that further study of the existing definitions of rural and underserved 
is warranted. In addition, the Bureau acknowledges that many small 
creditors are not equipped to offer alternatives to balloon-payment 
mortgages today and are unlikely to be so equipped by the January 10, 
2014, effective date. If small creditors are unable or unwilling to 
originate new loans as of that date, the Bureau believes there will be 
deleterious effects on access to nonconforming credit and possible harm 
to consumers with balloon-payment mortgages originated before the 
effective date that expect to refinance their loans with the same 
creditor when the balloon payment becomes due.

[[Page 35491]]

    The Bureau therefore believes that, in order to preserve access to 
affordable, responsible credit, it is necessary and appropriate to 
provide small creditors, as defined in Sec.  1026.43(e)(5), with a two-
year transition period after the effective date during which they can 
continue to originate balloon loans. The Bureau believes that this two-
year period will enable the Bureau to re-examine the definitions of 
rural or underserved to determine, among other things, whether these 
definitions accurately identify communities in which there are 
limitations on access to credit and whether it is possible to develop 
definitions that are more accurate or more precise. The Bureau may 
consider proposing changes to the definitions of rural or underserved 
based on the results of its inquiry. The two-year transition period 
also will facilitate small creditors' conversion to adjustable-rate 
mortgage products or other alternatives to balloon-payment loans.
    Accordingly, the Bureau is exercising its authority under TILA 
sections 105(a), 129C(b)(2)(vi), and 129C(b)(3)(B)(i) to adopt Sec.  
1026.43(e)(6) for the reasons summarized below and discussed in more 
detail above. Under TILA section 105(a) the Bureau generally may 
prescribe regulations that provide for such adjustments and exceptions 
for all or any class of transactions that the Bureau judges are 
necessary and proper to effectuate the purposes of TILA, which include 
the purposes of TILA 129C, and facilitate compliance with these 
purposes, among other things. The Bureau believes that these amendments 
are necessary and proper to ensure that consumers are offered and 
receive residential mortgage loans on terms that reasonably reflect 
their ability to repay the loans. This provision is consistent with the 
findings of TILA section 129C by ensuring that consumers are able to 
obtain responsible affordable credit, which informs the Bureau's 
understanding of its purposes.
    Furthermore, the Bureau revises the qualified mortgage criteria in 
the statute to adopt this new definition by finding that this provision 
is necessary and proper to ensure that responsible, affordable mortgage 
credit remains available to consumers in a manner consistent with the 
purposes of TILA section 129C, necessary and appropriate to effectuate 
the purposes of TILA section 129C and to facilitate compliance with 
TILA section129C. As described above, the Bureau believes that, unless 
Sec.  1026.43(e)(6) is adopted, small creditors will be less likely to 
make residential mortgage loans. Because small creditors are a 
significant source of nonconforming mortgage credit nationally and 
mortgage credit generally in rural or underserved areas, this would 
significantly limit access to mortgage credit for some consumers. The 
Bureau also believes that the relationship lending model, qualitative 
local knowledge, and size of small creditors, combined with the 
intrinsic incentives of portfolio lending, provide strong assurances 
that these creditors typically will make reasonable and good faith 
determinations of consumers' ability to repay when originating loans 
pursuant to Sec.  1026.43(e)(6). This provision is also necessary and 
proper to facilitate compliance with the purposes of TILA by easing the 
ability of small creditors to make qualified mortgages. The Bureau also 
believes that the provisions of Sec.  1026.43(e)(6) relating to debt-
to-income ratio or residual income are authorized by TILA section 
129C(b)(2)(vi), which authorizes, but does not require, the Bureau to 
adopt guidelines or regulations relating to debt-to-income ratio or 
alternative measures of ability to pay regular expenses after payment 
of total monthly debt.
43(f) Balloon-Payment Qualified Mortgages Made by Certain Creditors
    Section 1026.43(f) provides that certain balloon loans made and 
held in portfolio by certain small creditors operating predominantly in 
rural or underserved areas are qualified mortgages. The Bureau did not 
propose specific amendments to Sec.  1026.43(f), but explained that if 
proposed Sec.  1026.43(e)(5) were adopted with changes inconsistent 
with Sec.  1026.43(f), the Bureau would consider and might adopt 
parallel amendments to Sec.  1026.43(f) in order to keep these sections 
of the regulation consistent.
    The Bureau solicited comment on the advantages and disadvantages of 
maintaining consistency between Sec.  1026.43(e)(5) and (f). Commenters 
generally did not specifically discuss the importance of consistency, 
although most commenters advocating for changes to Sec.  1026.43(e)(5) 
stated that conforming changes should be made to Sec.  1026.43(f) as 
well. However, many commenters raised concerns regarding the scope of 
the Bureau's definitions of rural and underserved under Sec.  
1026.43(f). Commenters including national and State trade groups 
representing creditors and dozens of small creditors argued that the 
Bureau's definitions of rural and underserved are too restrictive and 
do not adequately preserve consumers' access to credit. Commenters were 
particularly critical of the Bureau's definition of ``rural,'' which 
they asserted excluded many communities that are considered rural under 
other legal or regulatory definitions or that are commonly viewed as 
rural because of their small, isolated, agricultural or undeveloped 
characteristics. Some of these commenters proposed that the Bureau 
adopt alternate definitions of ``rural,'' such as those used by the 
U.S. Department of Agriculture's Rural Housing Loan Program or the Farm 
Credit System. Others suggested that all creditors or all small 
creditors should be eligible to make balloon-payment qualified 
mortgages if the loan is held in portfolio, or that a balloon-payment 
mortgage should be considered a qualified mortgage if the consumer and 
property have certain characteristics that suggest the loan would not 
be eligible for sale to the secondary market.
    Other commenters raised concerns about the requirement that 
balloon-payment qualified mortgages have a loan term of five years or 
longer. These commenters asserted that many small creditors currently 
originate balloon-payment loans with shorter terms and would be unable 
to manage interest rate risk using balloon-payment loans with a five-
year term.
    One commenter, a consumer advocacy organization, argued that all 
qualified mortgages should be long-term, fixed-rate loans and that the 
Sec.  1026.43(f) definition of balloon-payment qualified mortgages 
should be abandoned.
    As discussed above in the section by section analysis of Sec.  
1026.43(e)(5), Sec.  1026.43(e)(5) as adopted is consistent with 
existing Sec.  1026.43(f). The Bureau did not propose and did not 
solicit comment regarding amendments Sec.  1026.43(f) except with 
respect to preserving consistency with Sec.  1026.43(e)(5), and the 
Bureau is not reconsidering the definitions of rural and underserved 
and the Sec.  1026.43(f) restrictions on the terms of balloon-payment 
qualified mortgages at this time. The Bureau is therefore not adopting 
any changes to Sec.  1026.43(f) in this rulemaking.
    However, the Bureau is sensitive to concerns expressed by 
commenters that the existing definitions of rural and underserved may 
not include some communities in which there are limitations on access 
to credit related to the community's rural character or the small 
number of creditors operating in the community. For example, the Bureau 
is aware that there are drawbacks to a county-based system for defining 
``rural'' and ``undeserved,'' such as in western States where counties 
may cover extremely large

[[Page 35492]]

areas. As discussed above in the section-by-section analysis of Sec.  
1026.43(e)(6), the Bureau is providing a two-year transition period 
during which small creditors can originate balloon payment qualified 
mortgages even if they do not operate predominantly in rural or 
underserved areas. In addition to providing time for small creditors to 
further develop their capacity to offer adjustable-rate mortgages, the 
Bureau expects to re-examine the definitions of rural or underserved 
during this time to determine, among other things, whether these 
definitions accurately identify communities in which there are 
limitations on access to credit and whether it is possible to develop 
definitions that are more accurate or more precise. The Bureau may 
consider proposing changes to the definitions of rural or underserved 
based on the results of its inquiry.
43(g) Prepayment Penalties
    The Bureau is adopting conforming amendments to Sec.  1026.43(g) to 
include references to Sec.  1026.43(e)(5) and (6), as described in the 
section-by-section analyses of those sections, above.

VI. Effective Date

    This final rule is effective on January 10, 2014. The rule applies 
to transactions for which the creditor received an application on or 
after that date. The Bureau received several comments requesting 
various delays in the effective date. For example, one commenter asked 
the Bureau to delay the effective date for all of Sec.  1026.43 by six 
months to provide sufficient time to implement the processes, 
procedures, and systems changes needed to comply with the ability-to-
repay requirements. The Bureau has considered these comments, but 
declines to delay the effective date. The Bureau acknowledges the 
challenges identified by commenters, but believes that an effective 
date of January 10, 2014 provides sufficient time to implement the 
required changes. Also, as discussed in the 2013 ATR Final Rule, the 
Bureau believes that this effective date will ensure that consumers 
receive the protections in these rules as soon as reasonably 
practicable, taking into account the timeframes established in section 
1400(c) of the Dodd-Frank Act, the overlapping provisions of the other 
title XIV final rules, the Bureau's efforts at facilitating regulatory 
implementation, and the need to afford creditors, other affected 
entities, and other industry participants sufficient time to implement 
the more complex or resource-intensive new requirements.\161\
---------------------------------------------------------------------------

    \161\ See 78 FR 6555 (Jan. 30, 2013).
---------------------------------------------------------------------------

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

    In developing the final rule, the Bureau has considered potential 
benefits, costs, and impacts.\162\ In addition, the Bureau has 
consulted, or offered to consult with, the prudential regulators, SEC, 
HUD, 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. The Bureau also 
held discussions with or solicited feedback from the United States 
Department of Agriculture, Rural Housing Service, the Federal Housing 
Administration, and the Department of Veterans Affairs regarding the 
potential impacts of the final rule on those entities' loan programs.
---------------------------------------------------------------------------

    \162\ Specifically, section 1022(b)(2)(A) of the Dodd-Frank Act 
calls for the Bureau to consider the potential benefits and costs of 
a regulation to consumers and covered persons, including the 
potential reduction of access by consumers to consumer financial 
products or services; the impact on depository institutions and 
credit unions with $10 billion or less in total assets as described 
in section 1026 of the Dodd-Frank Act; and the impact on consumers 
in rural areas.
---------------------------------------------------------------------------

    The Bureau is issuing this final rule to adopt certain exemptions, 
modifications, and clarifications to TILA's ability-to-repay rule. On 
January 10, 2013, the Bureau issued the 2013 ATR Final Rule to 
implement the ability-to-repay requirements of the Dodd-Frank Act that 
generally require a creditor to make a reasonable, good faith 
determination of a consumer's ability to repay a mortgage loan and 
other statutory provisions. See 78 FR 6407 (Jan. 30, 2013). At the same 
time, the Bureau issued the 2013 ATR Proposed Rule related to certain 
proposed exemptions, modifications, and clarifications to the ability-
to-repay rule. See 78 FR 6621 (Jan. 30, 2013).
    The final rule provides exceptions to the 2013 ATR Final Rule, 
which implements the statute's inclusion of loan originator 
compensation in points and fees. Specifically, in the final rule, 
payments by consumers to mortgage brokers need not be counted as loan 
originator compensation where such payments already have been included 
in points and fees as part of the finance charge. In addition, 
compensation paid by a mortgage broker to its employee loan originator 
need not be included in points and fees, nor does compensation paid by 
a creditor to its own loan originator employees. However, consistent 
with the statute and 2013 ATR Final Rule, compensation paid by a 
creditor to a mortgage broker continues to be included in points and 
fees in addition to any origination charges paid by a consumer to the 
creditor.
    The final rule also provides certain exemptions from the ATR 
requirements. These include exemptions for extensions of credit made by 
certain types of creditors, in accordance with applicable conditions, 
including creditors designated by the U.S. Department of the Treasury 
as Community Development Financial Institutions; creditors designated 
by the U.S. Department of Housing and Urban Development as either a 
Community Housing Development Organization or a Downpayment Assistance 
Provider of Secondary Financing; and certain creditors designated as 
nonprofit organizations under section 501(c)(3) of the Internal Revenue 
Code. The final rule also exempts from the ability-to-repay 
requirements extensions of credit made pursuant to a program 
administered by a housing finance agency (HFA) and extensions of credit 
made pursuant to an Emergency Economic Stabilization Act program.
    The final rule creates two new definitions for loans that can be 
qualified mortgages. The final rule creates a new category of qualified 
mortgages that includes, among other conditions, certain loans 
originated and held on portfolio by creditors that have total assets of 
less than $2 billion at the end of the previous calendar year and, 
together with all affiliates, originated 500 or fewer first-lien 
covered mortgages during the previous calendar year. In addition, the 
final rule creates a two-year transition period during which balloon 
loans originated and held on portfolio by small creditors (as defined 
above) who do not operate predominantly in rural or underserved areas 
can be qualified mortgages under defined conditions. Such loans would 
not be eligible for qualified mortgage status under section 1026.43(f) 
because under the statute, that provision is limited to creditors that 
operate predominantly in rural or underserved areas. The final rule 
also allows small creditors to charge a higher annual percentage rate 
of 3.5 percentage points above the Average Prime Offer Rate for first-
lien qualified mortgages, and still benefit from a conclusive 
presumption of compliance (or safe harbor). This higher threshold 
applies to the new small creditor portfolio qualified mortgages just 
described, to first-lien balloon-payment qualified mortgages originated 
by small creditors operating

[[Page 35493]]

predominantly in rural or underserved areas and, to balloon mortgages 
originated by other small creditors during the two-year transition 
period.
    This analysis generally examines the benefits, costs, and impacts 
of the final rule against the baseline of the January 2013 ATR 
Rule.\163\ For the analyses considered here, the Bureau believes that 
the baseline of the 2013 ATR Final Rule is the most appropriate and 
informative. Because the final rule includes amendments and 
clarifications to the January 2013 ATR Rule, a comparison to the 
January baseline focuses precisely on the impacts of such provisions. 
The analyses in this section rely on data that the Bureau have 
obtained, the record including comments received in the proposed rule, 
and the record established by the Board and Bureau during the 
development of the 2013 ATR Final Rule. However, the Bureau notes that 
for some analyses, there are limited data available with which to 
quantify the potential costs, benefits, and impacts of the proposal. 
Still, general economic principles together with the limited data that 
are available provide insight into the benefits, costs, and impacts and 
in these cases, the analysis provides a qualitative discussion of the 
benefits, costs, and impacts of the final rule.
---------------------------------------------------------------------------

    \163\ The Bureau has discretion in future rulemakings to choose 
the relevant provisions to discuss and to choose the most 
appropriate baseline for that particular rulemaking.
---------------------------------------------------------------------------

    Commenters on the proposed rule did not submit comments 
specifically addressing the analyses under Section 1022 contained in 
the Supplemental Information accompanying the proposal. However, 
several did address the overall benefits, costs and impacts of the 
proposal.\164\ The comments are discussed throughout the section-by-
section analyses above.
---------------------------------------------------------------------------

    \164\ In conducting the interagency consultation process under 
section 1022(b)(2)(B), the Bureau received communications for the 
public record regarding the proposed rule. The FDIC, HUD, and OCC 
wrote the Bureau regarding the proposed provisions on loan 
originator compensation and FHFA and HUD wrote the Bureau regarding 
the proposed exemptions from the ability-to-repay requirements. 
These comments are discussed in more detail in the section-by-
section analyses above.
---------------------------------------------------------------------------

A. Potential Benefits and Costs to Consumers and Covered Persons

1. Points and Fees Calculation
    In the final rule, payments by consumers to mortgage brokers need 
not be counted as loan originator compensation where such payments 
already have been included in points and fees as part of the finance 
charge. In addition, compensation paid by a mortgage broker to its 
employee loan originator need not be included in points and fees, nor 
does compensation paid by a creditor to its own loan originator 
employees. However, compensation paid by a creditor to a mortgage 
broker is included in points and fees in addition to any origination 
charges paid by a consumer to the creditor.
    As noted above, the Bureau believes that the most appropriate 
baseline against which to consider these changes is the 2013 ATR Final 
Rule. Consistent with the literal language of the statute, the 2013 ATR 
Final Rule provided that loan originator compensation be treated as 
additive to other elements of points and fees and that compensation is 
added as it flows downstream to the loan originator. As discussed in 
the section-by-section analyses above, the Bureau is now invoking its 
exception and revision authorities to alter the statutory additive 
approach to exclude certain compensation.
    At a general level, the exclusion (inclusion) of additional sources 
of compensation in the points and fees calculation decreases 
(increases) the total amount of points and fees. As explained in the 
2013 ATR Final Rule, keeping all other provisions of a given loan 
fixed, calculations that exclude additional amounts of compensation 
will result in a greater number of loans being eligible as qualified 
mortgages. Conversely, calculations that include additional amounts of 
compensation are less likely to achieve qualified mortgage status. For 
loans that are not eligible to be qualified mortgages, the costs of 
origination may be slightly higher as a result of the slightly 
increased liability for the lender and any assignees and of possibly 
increased compliance costs related to the origination and documentation 
of the loan. If these costs are passed along, consumers' costs for 
these loans may also increase. However, these consumers will also have 
the added consumer protections that accompany loans made under the 
general ability-to-repay provisions. In some instances, such up-front 
points and fees could be folded into the interest rate in order to 
maintain loans' status as qualified mortgages, which in turn could move 
loans out of the safe harbor and into the rebuttable presumption. The 
2013 ATR Final Rule discussed the impacts of the ability-to-repay/
qualified mortgage regime on consumers in depth including the nature of 
the liability regime. To the extent that the impact of various 
provisions of this rule on consumers is essentially to expand or 
contract coverage of the ability-to-repay/qualified mortgage regime, 
the general discussion of the impacts from the January 2013 rule is 
informative for each of the various provisions.
    The exclusion (inclusion) of additional loan originator 
compensation amounts in points and fees may similarly lead fewer (more) 
loans to exceed the points and fees triggers and rate triggers for 
high-cost mortgages under HOEPA. Based on the history of high-cost 
mortgage loans, the Bureau believes that loans exceeding the high-cost 
thresholds are less likely to be offered unless they can be 
restructured with lower up front points and fees. Consumers who are 
offered and accept loans above the high-cost mortgage threshold will 
have the added consumer protections that accompany high-cost mortgage 
loans; other consumers may still able to take out their loan by paying 
a higher interest rate and less up-front.\165\ The January 2013 HOEPA 
rule discussed the impacts of the high-cost mortgage regime on 
consumers in depth including the nature of the liability regime. To the 
extent that the impact of various provisions of this rule on consumers 
is essentially to expand or contract coverage of the high cost mortgage 
regime, the general discussion of the impacts from the January 2013 
HOEPA rule is informative for each of the various provisions.
---------------------------------------------------------------------------

    \165\ The ability to cover up-front costs in the interest rate 
depends on the characteristics of the borrower and the loan. The 
interest rate threshold for high-cost mortgages under HOEPA could 
also potentially limit this option.
---------------------------------------------------------------------------

    Measured against the 2013 ATR Final Rule baseline, the final rule 
excludes certain compensation from the points and fees calculation in 
both the wholesale and retail channels. In the wholesale channel, two 
types of compensation are excluded: Payments by consumers to mortgage 
brokers where such payments are already included in points and fees as 
part of the finance charge and compensation paid by a mortgage broker 
to its employee loan originator. In the retail channel, compensation 
paid by a creditor to its own loan originator employees is also 
excluded. Because of these exclusions, more loans will satisfy the 
points and fees threshold for qualified mortgages and fewer loans will 
exceed the points and fees threshold for high-cost mortgages. As 
described above, for covered persons, the costs of supplying such loans 
should be slightly reduced; consumers with such loans should therefore 
benefit from greater access to credit and lower costs, but would have a 
more restricted ability to challenge violations of the ability-to-repay 
rules and would not benefit from

[[Page 35494]]

the protections afforded to high-cost mortgages.
    The magnitude of both of these effects--changes in the status of 
loans as qualified mortgages or high cost mortgages and the extent to 
which lenders may adjust pricing and compensation practices in response 
to such provisions--will determine the costs, benefits, and impacts on 
covered persons and consumers. As noted earlier, comprehensive and 
representative data that include points and fees as well as loan 
originator compensation is not readily available. The Bureau did 
receive some data, however, in response to its requests included in the 
proposed rule. In a communication that has been made part of the 
record, one industry trade group submitted data to the Bureau that 
contained loan-level information for three anonymous retail lenders. 
These data included information on points and fees and estimates of 
loan originator compensation. Based on the limited data in this 
submission, excluding compensation paid by retail lenders to their loan 
officers has a minor impact on the number of loans below the qualified 
mortgage points and fees or high-cost mortgage thresholds.\166\ The 
Bureau is not able to determine precisely how representative these data 
are of the overall retail mortgage market, however. The Bureau 
therefore did not rely on these data, although the overall patterns in 
these data and the general magnitudes of any effects align with the 
Bureau's general understanding of the level of loan originator 
compensation and the level of up-front charges in the market. This 
general understanding informs the Bureau's analysis and leads the 
Bureau to believe that the economic impact of these outcomes should be 
small. On the whole, the final rule will slightly reduce costs related 
to supplying these loans as well as compliance costs for covered 
persons as compared to the 2013 ATR Final Rule. The Bureau believes 
that consumers will benefit from slightly increased access to credit 
and lower costs on the affected loans, but in return will not receive 
the protections afforded to loans originated under the general ability-
to-repay standards or to high-cost mortgages.
---------------------------------------------------------------------------

    \166\ The precise magnitudes of the effects depend critically on 
whether third-party charges are provided by an affiliate of the loan 
originator. Assuming that affiliates are not involved in the 
transaction, the rule has almost no effect, with fewer than 0.5% of 
loans in this sample dropping below the relevant thresholds. Under 
the assumption that affiliates provided all settlement services, 
roughly 6% of loans that would exceed the limits are projected to no 
longer do so once loan originator compensation is excluded. However, 
this figure is very likely an overestimate: Even for those creditors 
that use affiliates, it is rare that all settlement charges would be 
provided by affiliated third parties.
---------------------------------------------------------------------------

    This provision of the rule may also alter the competitive dynamics 
between the wholesale channel and the retail channel. As noted above, 
the Bureau recognizes that an additive approach makes it more difficult 
for creditors to impose up-front charges and still remain under the 
qualified mortgage points and fees limits and the high-cost mortgage 
threshold. For certain loans originated through the brokerage channel, 
the inclusion of compensation paid by the creditor to the brokerage 
firm in the points and fees calculation may have the effect of denying 
the loan qualified mortgage status while a loan ostensibly similar in 
terms of interest rate and up-front charges but that has no broker 
commission because it is offered through the retail channel might be a 
qualified mortgage. However, for loans in the brokerage channel, this 
impact could be mitigated by having the consumer pay the broker 
directly, by shifting other origination charges into the rate, and/or 
by shifting from a settlement services provider affiliated with the 
creditor to a non-affiliated provider.
    The major alternative that the Bureau considered to address the 
competitive impact of the final rule was including in points and fees 
compensation from creditors to their loan originator employees in 
retail transactions (either under an additive or netting approach). 
This alternative, however, also could have altered the nature of 
competition between retail and the wholesale channels. On the one hand, 
if this alternative had been implemented, fewer loans made through the 
retail channel would have fallen within the regulatory points and fees 
thresholds.\167\ On the other hand, the compliance burden on creditors 
originating retail transactions would have been significant, which 
could have given the wholesale channel a competitive advantage over the 
retail channel due to the cost of complying with this alternative. As 
noted above, the Bureau's general understanding of the market suggests 
that this alternative would not materially change which loans are 
qualified mortgages in the retail channel. However, the Bureau received 
numerous industry comments asserting that counting loan officer 
compensation in retail transactions would impose a significant burden 
on the retail channel.\168\ Each creditor originating loans through the 
retail channel would have to devise internal policies and systems 
regarding which components of loan officers' compensation (and that of 
any other employees occasionally performing some of the loan officers' 
functions) to include under the rule and a method of tracking such 
compensation in real time for the purpose of determining whether a 
particular loan is eligible for the qualified mortgage status or is a 
high-cost mortgage. The Bureau believes that the labor and investments 
to develop such systems would be substantial. As described above, the 
Bureau was also concerned that this alternative would have provided 
little benefit to consumers, in part due to the anomalies in counting 
individual loan originator compensation that is specific to the retail 
transaction as of the time that the interest rate is set.
---------------------------------------------------------------------------

    \167\ The extent that payments from creditors to brokerage firms 
must cover overhead, which is not included in payments from creditor 
to their own employees, limits the degree to which this alternative 
could achieve a fully equal impact.
    \168\ The wholesale channel does not experience nearly the same 
burden due to this rule. Both the creditor to broker and the 
consumer to creditor fees are already routinely calculated by the 
industry.
---------------------------------------------------------------------------

    The other major alternative discussed in the proposed rule would 
have permitted creditors to net origination charges against loan 
originator compensation paid to brokers (and creditors' own loan 
originator employees) to calculate the amount of loan originator 
compensation that is included in points and fees. As noted, under such 
an approach (as compared to the final rule), fewer loans originated 
through the wholesale channel would exceed the qualified mortgage and 
high-cost points and fees thresholds. In the wholesale context, 
comprehensive data that includes points and fees as well as loan 
originator compensation is also not readily available. However, as 
discussed above, the Bureau was concerned that such an approach would 
reduce the benefits to consumers of the qualified mortgage status and 
high-cost mortgage protections by allowing higher combined loan 
originator compensation and up-front points and fees. Particularly in 
markets that are not fully competitive or in transactions involving 
less sophisticated consumers or consumers who are less likely to shop 
for competitive pricing, the Bureau was concerned that the netting 
approach would provide greater flexibility to structure loan originator 
compensation to provide incentives for mortgage brokers to deliver more 
costly loans. In addition, the Bureau was concerned that such an 
approach would have created strong incentives for creditors and 
mortgage brokers to structure loan originator compensation to be paid

[[Page 35495]]

through the creditor to take advantage of the netting approach, which 
is not available where the consumer pays the mortgage broker directly.
    Other combinations of the additive approach, the netting approach, 
and the approach of excluding all compensation in either channel are 
also possible; the impacts are derived as combinations of the ones 
discussed here.
2. Exemptions From Ability-to-Repay Requirements
    As described in the Section 1022 Analysis of the 2013 ATR Final 
Rule, there are a number of situations where creditors may engage in 
lending with too little regard for the consumer's ability to repay. The 
2013 Final ATR Rule is designed to minimize such activity by ensuring 
proper documentation and verification related to extensions of credit 
and by requiring consideration of a number of factors including the 
consumer's debt-to-income ratio and credit history. Creditors who fail 
to follow any of these requirements, or who extend credit without a 
``reasonable and good faith determination'' of the consumer's ability 
to repay, are subject to liability.\169\ However, as described above, 
the Bureau was concerned that the ability-to-repay requirements adopted 
in the 2013 ATR Final Rule would undermine or frustrate application of 
the uniquely tailored underwriting requirements employed by certain 
creditors and programs, and would require a significant diversion of 
resources to compliance, thereby significantly reducing access to 
credit. The Bureau was also concerned that some of these creditors 
would not have the resources to implement and comply with the ability-
to-repay requirements, and may have ceased or severely limited 
extending credit to low- to moderate-income consumers, which would 
result in the denial of responsible, affordable mortgage credit. The 
exemptions from the ability-to-repay requirements are designed to 
eliminate these requirements and thereby to limit creditors' costs and 
protect credit availability in carefully defined circumstances, namely 
loans or loan programs that serve certain consumers or communities and 
that typically assess repayment ability in ways that do not necessarily 
comport with the requirements of the Act and the 2013 ATR Final Rule.
---------------------------------------------------------------------------

    \169\ The liability regime extends beyond creditors. As amended 
by section 1413 of the Dodd-Frank Act, TILA provides that when a 
creditor, an assignee, other holder or their agent initiates a 
foreclosure action, a consumer may assert a violation of TILA 
section 129C(a) ``as a matter of defense by recoupment or setoff.'' 
TILA section 130(k). There is no time limit on the use of this 
defense and the amount of recoupment or setoff is limited, with 
respect to the special statutory damages, to no more than three 
years of finance charges and fees. The impacts of the liability 
regime applicable to covered mortgages are discussed in more detail 
in the 1022 analysis for the 2013 ATR Final Rule.
---------------------------------------------------------------------------

    As described earlier, mortgage lending by community-focused 
creditors, programs operated by housing finance agencies, nonprofit 
organizations, and housing stabilization programs, varies widely in the 
form of financing, the products offered, and the precise nature of 
underwriting. In particular, the Bureau understands that many of these 
creditors do not use documentation and verification procedures closely 
aligned with the requirements of the 2013 ATR Final Rule or consider 
all of the underwriting factors specified in the rule. The benefits of 
the final rule derive from eliminating the costs of imposing these 
requirements on these particular extensions of credits and assuring 
that credit remains available through these programs without regard to 
the rule's underwriting factors. Access to credit is a specific concern 
for the populations generally served by these lenders and programs.
    As explained in the 2013 ATR Final Rule, in general, consumers and 
others could be harmed by this action as it removes particular consumer 
protections and could allow some deleterious lending to occur. However, 
in all of the cases discussed above, the Bureau believes that the 
community-focused mission of the creditor organizations and/or programs 
through which credit is extended, the close interaction between 
creditors and consumers in these instances, and other safeguards 
(including government monitoring of certain categories and the 
origination thresholds for the general nonprofit category) should 
mitigate any potential harms to consumers and costs from the rule.
    Data regarding the exact scope of lending through these channels 
are limited, as are data regarding the performance of these loans. 
There are 51 HFAs and approximately 1,000 CDFIs, 62 percent of which 
are classified as Community Development (CD) Loan Funds, 22 percent as 
CD Credit Unions, while the rest are CD Banks, Thrifts, or CD Venture 
Capital Funds.\170\ There are 233 501(c)(3) nonprofit agencies and 
nonprofit instrumentalities of government in the U.S. that are 
authorized to provide secondary financing,\171\ 267 creditors certified 
by HUD as Community Housing Development Organizations (CHDOs) in 
connection with HUD's HOME Investment Partnership Program,\172\ and 231 
organizations certified as Downpayment Assistance through Secondary 
Financing Providers.\173\ The Bureau is not aware and commenters did 
not provide a comprehensive list of these institutions. However, the 
Bureau believes that there may be substantial overlap among these 
institutions. A large number of creditors participate in the housing 
stabilization programs covered by the final rule.
---------------------------------------------------------------------------

    \170\ See U.S. Dep't of the Treas., Community Development 
Financial Institutions Fund, http://www.cdfifund.gov/docs/certification/cdfi/CDFI List -07-31-12.xls.
    \171\ See U.S. Dep't of Hous. and Urban Development: Nonprofits, 
https://entp.hud.gov/idapp/html/f17npdata.cfm.
    \172\ Includes 2011 data for institutions with CHDO reservations 
and CHDO loans without a rental tenure type. See U.S. Dep't of Hous. 
and Urban Development: HOME Participating Jurisdiction's Open 
Activities Reports, http://www.hud.gov/offices/cpd/affordablehousing/reports/open/.
    \173\ Includes data for institutions shown to offer secondary 
financing. See U.S. Dep't of Hous. and Urban Development: 
Nonprofits, https://entp.hud.gov/idapp/html/f17npdata.cfm.
---------------------------------------------------------------------------

    Data regarding the number or volume of loans made by housing 
finance agencies and community-focused lending programs is limited. 
There is some data suggesting that HFA bonds funded approximately 
67,000 loans in 2010 with a value of just over $8 billion.\174\ Data 
regarding CDFIs indicate that these institutions funded just under $4 
billion in loans; however, data on the type of housing supported is 
unavailable.\175\ Lending at CHDOs totaled $64 million in 2011 with 
just under 500 loans.\176\
---------------------------------------------------------------------------

    \174\ See National Council of State Housing Agencies, State HFA 
Factbook (2010), http://www.ncsha.org/story/ncsha-releases-comprehensive-survey-hfa-program-activity.
    \175\ See U.S. Dep't of the Treas., Community Development 
Financial Institutions Fund: Awardees/Allocatees, http://www.cdfifund.gov/awardees/db/basicSearchResults.asp.
    \176\ See U.S. Dep't of Hous. and Urban Development: HOME 
Participating Jurisdiction's Open Activities Reports, http://www.hud.gov/offices/cpd/affordablehousing/reports/open.
---------------------------------------------------------------------------

    The Bureau had proposed an exemption to the ability-to-repay 
requirements for refinancing programs offered by the Department of 
Housing and Urban Development (HUD), the Department of Veterans Affairs 
(VA), or the U.S. Department of Agriculture (USDA). Similarly, the 
Bureau had proposed an exemption to the ability-to-repay requirements 
for certain GSE refinancing programs. However, as noted above, the 
Bureau has concluded after further deliberation that the proposed 
exemptions from the ability-to-repay requirements are unnecessary 
because, even absent an exemption from the ability-to-repay 
requirements, FHA,

[[Page 35496]]

VA, and USDA loans, including refinancings, as well as GSE 
refinancings, are given qualified mortgage status under the Bureau's 
2013 ATR Final Rule. Under the temporary category of qualified 
mortgages in Sec.  1026.43(e)(4), the final rule already incorporates 
the refinancing programs' specific underwriting criteria and affords 
these loans a presumption (in some cases, conclusive) of compliance 
with the ability-to-repay requirements, so long as they meet certain 
product feature requirements and limitations on points and fees. The 
small difference between the proposed exemption and the 2013 ATR Final 
Rule temporary category for QMs involves loan features (e.g., negative 
amortization and interest only features) and the cap on points and fees 
under Sec.  1026.43(e)(2). Under the 2013 ATR Final Rule, loans with 
those features or above the points and fees threshold (that otherwise 
meet the conditions of the QM definition) cannot be originated as 
qualified mortgages and therefore must meet the ability-to-repay 
requirements, while under the proposed exemption they would have been 
exempted from those requirements as well. The Bureau believes that very 
few refinancings would be excluded on these grounds and therefore that 
these restrictions should not impose any additional meaningful costs on 
creditors or impede consumers' access to responsible, affordable 
mortgage credit.
    Qualified mortgage refinancings that trigger the threshold for 
higher-priced mortgage loans are also another small area of difference: 
under the 2013 ATR Final Rule, these loans have a rebuttable 
presumption of compliance with the ability-to-repay requirements while 
under the exemption there would have been no such requirements. As 
described, costs for covered persons offering these loans could be 
slightly higher. However, as discussed above, in light of the history 
of refinancings, the Bureau believes that it is a meaningful benefit to 
consumers to preserve their ability to seek redress in the event of 
abuse.
3. Extension of Qualified Mortgage Status
    The benefits to covered persons from extending qualified mortgage 
status to certain loans made by smaller creditors and held on portfolio 
also derive from maintaining access to credit and limiting potential 
increases in the costs of these loans. By granting creditors that 
qualify under the new qualified mortgage definition a conclusive or 
rebuttable presumption of compliance with the ability-to-repay 
provisions, the final rule limits the legal liability of these 
creditors and most expected litigation costs. The final rule may also 
provide greater flexibility with regard to certain documentation, 
verification, and underwriting practices in certain circumstances.\177\ 
These cost reductions in turn could enhance the willingness of such 
creditors to make these loans or reduce the amount the creditors would 
otherwise charge for these loans.\178\ Consumers, too, will benefit to 
the extent that the expanded qualified mortgage status makes creditors 
more willing to continue extending such credit and to do so at a lower 
price than they might charge for non-qualified mortgages under the new 
regulations. In return, however, consumers will have narrower grounds 
on which to challenge any violations of the ability-to-repay rules as 
discussed in more detail in the Section 1022 analysis of the 2013 Final 
ATR Rule.
---------------------------------------------------------------------------

    \177\ For example, the final rule requires that small creditors 
assess either the debt-to-income ratio or the residual income of the 
borrower, but does not require that the consumer's DTI not exceed 43 
percent as determined pursuant to appendix Q nor that the loan be 
eligible for purchase, guarantee, or insurance by the GSEs or by 
specified federal agencies.
    \178\ To the extent that the cost advantage is material, this 
provision could give some smaller institutions a slight advantage 
over lenders not eligible to make qualified mortgages using this 
definition.
---------------------------------------------------------------------------

    Given the lower default and delinquency rates at these smaller 
community-focused institutions, the avoided costs related to liability 
and litigation are likely small. However, the lower default and 
delinquency rates at these institutions, the relationship lending that 
they engage in, and restrictions on reselling the loans on the 
secondary market for at least three years, together also suggest that 
the risk of consumer harm (and therefore the costs of this provisions) 
are also very small.\179\ While the mathematical impacts of litigation 
costs/risks may be limited, the Bureau believes that the broader 
impacts on access to credit could be significant particularly in 
individual communities.
---------------------------------------------------------------------------

    \179\ The possibility that small creditors qualifying for this 
exemption can make certain mortgages as qualified mortgages, while 
their larger competitors can only make these loans subject to the 
ability-to-repay provisions, may allow them to offer these loans at 
lower rates. However, as discussed in the 2013 ATR Final Rule, any 
effects on pricing are likely to be small.
---------------------------------------------------------------------------

    Based on data from 2011, roughly 9,200 institutions with 
approximately 450,000 loans on portfolio are likely to be affected by 
the extension of qualified mortgages for certain small creditors.\180\ 
Based on the Bureau's estimates, on average, 16.7 percent of portfolio 
loans at these institutions are estimated to have a DTI ratio above 43 
percent. For the subset of these loans that also do not contain any of 
the prohibited features for the general definition for qualified 
mortgages (assuming other conditions are met), the final rule grants 
the creditor a conclusive or rebuttable presumption of compliance with 
the ability-to-repay requirements. The Bureau is unable to estimate the 
percentage of these loans that would not qualify for the temporary 
expansion of the qualified mortgage definition in the final rule under 
Sec.  1026.43(e)(4). Similarly, the Bureau is unable to estimate the 
number of balloon mortgages originated by lenders not operating in 
rural areas that are eligible for qualified mortgage status under the 
final rule's temporary provision.
---------------------------------------------------------------------------

    \180\ The estimates in this analysis are based upon data and 
statistical analyses performed by the Bureau. To estimate counts and 
properties of mortgages for entities that do not report under HMDA, 
the Bureau has matched HMDA data to Call Report data and MCR data 
and has statistically projected estimated loan counts for those 
depository institutions that do not report these data either under 
HMDA or on the NCUA call report. The Bureau has projected 
originations of higher-priced mortgage loans for depositories that 
do not report HMDA in a similar fashion. These projections use 
Poisson regressions that estimate loan volumes as a function of an 
institution's total assets, employment, mortgage holdings, and 
geographic presence. Neither HMDA nor the Call Report data have loan 
level estimates of the DTI. To estimate these figures, the Bureau 
has matched the HMDA data to data on the HLP dataset provided by the 
FHFA. This allows estimation of coefficients in a probit model to 
predict DTI using loan amount, income, and other variables. This 
model is then used to estimate DTI for loans in HMDA.
---------------------------------------------------------------------------

    Similar tradeoffs are involved in the increase in the qualified 
mortgage threshold from 1.5 percentage points above the average prime 
offer rate (APOR) to 3.5 percentage points above APOR for first lien 
mortgages originated and held by small creditors and for the qualified 
balloon mortgages originated and held by small creditors predominantly 
operating in rural or underserved areas. For loans in this APR range, 
whether they meet the definition of qualified mortgage under the 2013 
Final ATR Rule or under the new definitions provided in this final 
rule, the presumption of compliance with the ability-to-repay 
requirements would be strengthened. The Bureau estimates that roughly 
8-10 percent of portfolio loans at these institutions are likely to be 
affected by this change. Strengthening the presumption of compliance 
for these loans will benefit consumers and/or covered persons to the 
extent doing so improves credit access or reduces costs. Strengthening 
the presumption will have a cost to consumers to the extent consumers 
who find themselves unable to afford their

[[Page 35497]]

mortgage, and would otherwise be able to make out a claim and recover 
their losses, would be unable to do so under the expanded safe harbor.

B. Potential Specific Impacts of the Final Rule

1. Potential Impact on Consumer Access to Consumer Financial Products 
or Services
    The Bureau does not anticipate that the final rule would reduce 
consumers' access to consumer financial products and services. Rather, 
as discussed above, the Bureau believes that the final rule would in 
fact enhance certain consumers' access to mortgage credit as compared 
to the 2013 ATR Final Rule. The Bureau believes that the exclusion of 
certain compensation from the calculation of points and fees allows 
more mortgages under the qualified mortgage and high-cost mortgage 
thresholds; the exemption from the ability-to-repay requirements should 
facilitate lending under various programs and by various creditors; 
and, the new and expanded qualified mortgage definitions should also 
expand responsible lending.
2. Depository Institutions and Credit Unions With $10 Billion or Less 
in Total Assets, as Described in Section 1026
    The Bureau believes the final rule will have differential impacts 
on some depository institutions and credit unions with $10 billion or 
less in total assets as described in Section 1026. The depository 
institutions and credit unions that are CDFIs, and are therefore 
covered under the exemption from the ability-to-repay requirements, and 
the institutions covered by new definition of qualified mortgages and 
the higher-rate threshold for small creditor portfolio loans are all in 
this group and are therefore uniquely impacted by the rule as discussed 
above.
3. Impact of the Provisions on Consumers in Rural Areas
    The final rule will have some differential impacts on consumers in 
rural areas. In these areas, a greater fraction of loans are made by 
smaller institutions and carried on portfolio and therefore the small 
creditor portfolio exemption would be likely to have greater impacts. 
The Bureau understands that mortgage loans in these areas and by these 
institutions are less standardized and often cannot be sold into the 
secondary market. These differences may result in slightly higher 
interest rates on average for loans to rural consumers and more higher 
priced mortgage loans. By making it easier for loans held in portfolio 
by certain institutions to receive qualified mortgage status and by 
raising the rebuttable presumption threshold for those loans, the final 
rule will likely have a greater relative effect on rural consumers than 
on their non-rural counterparts: more loans will meet the definitions 
for qualified mortgages and within that group, more loans will have the 
safe harbor presumption of compliance with the ability-to-repay 
requirements. To the extent that these changes expand access to credit, 
rural consumers will benefit. While the relationship model of lending 
prevalent in this area makes both delinquency and litigation less 
likely overall, these changes will also limit some of the protections 
for these consumers as well.\181\
---------------------------------------------------------------------------

    \181\ Relationship lending refers to underwriting decisions 
predicated on more tacit information and personal relationships, in 
particular, relative to more automated and formula-based forms of 
underwriting.
---------------------------------------------------------------------------

VIII. Regulatory Flexibility Act Analysis

A. Overview

    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.\182\ These analyses must 
``describe the impact of the proposed rule on small entities.'' \183\ 
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.\184\ 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.\185\
---------------------------------------------------------------------------

    \182\ 5 U.S.C. 601 et. seq.
    \183\ 5 U.S.C. 603(a); 5 U.S.C. 604(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).
    \184\ 5 U.S.C. 605(b).
    \185\ 5 U.S.C. 609.
---------------------------------------------------------------------------

    The final rule amends Regulation Z, which implements the Truth in 
Lending Act (TILA) and is related to a final rule published in the 
Federal Register in January 2013 (78 FR 6408) (2013 ATR Final Rule). 
That final rule implements certain amendments to TILA that were added 
by sections 1411, 1412, and 1414 of the Dodd-Frank Wall Street Reform 
and Consumer Protection Act (Dodd-Frank Act), which created new TILA 
section 129C. These changes were made in response to the recent 
foreclosure crisis to address certain lending practices (such as low- 
or no-documentation loans or underwriting mortgages without including 
any principal repayments in the underwriting determination) that led to 
consumers having mortgages they could not afford, thereby contributing 
to high default and foreclosure rates. Among other things, the Dodd-
Frank Act 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 provision for ``qualified 
mortgages.''
    As discussed above, the Bureau believes that the 2013 ATR Final 
Rule should be modified to address potential adverse consequences on 
certain narrowly-defined categories of lending programs. Specifically, 
the final rule adopts certain amendments to the 2013 ATR Final Rule 
implementing these requirements, including exemptions for certain 
nonprofit and community-focused lending creditors and certain 
homeownership stabilization and foreclosure prevention programs. The 
final rule also creates a new category of qualified mortgages, similar 
to the one for rural balloon-payment loans, for loans without balloon-
payment features that are originated and held on portfolio by small 
creditors. The new category will not be limited to creditors that 
operate predominantly in rural or underserved areas, but will use the 
same general size thresholds and other criteria as the rural or 
underserved balloon-payment rules. In light of the fact that small 
creditors often have higher costs of funds than larger creditors, the 
final rule also increases the threshold separating safe harbor and 
rebuttable presumption qualified mortgages for balloon-payment 
qualified mortgages, the new small portfolio qualified mortgages, and 
balloon-payment qualified mortgages originated under the new temporary 
two-year balloon mortgage provision. Finally, the final rule provides 
additional clarifications and exclusions regarding

[[Page 35498]]

the inclusion of loan originator compensation in the points and fees 
calculation for all categories of qualified mortgage.
    In the proposal, the Bureau certified that the rule would not have 
a significant economic impact on a substantial number of small entities 
and therefore did not prepare an IRFA. Approximately 100 commenters 
argued that the Bureau should conduct a SBREFA panel to learn more 
about how the rule will impact the thousands of small business entities 
that originate mortgage loans. These commenters noted that while the 
Bureau stated that an initial regulatory flexibility analysis (IRFA) 
was not necessary under the Regulatory Flexibility Act (RFA) because 
the proposal would not have a significant economic impact on a 
substantial number of small entities, the Bureau's own methodology 
showed that the rule would apply to 9,373 small entities out of 14,194 
total entities that originate mortgage loans. These commenters 
contended that the Bureau use its authority under the Dodd-Frank Act to 
delay the effective date of the 2013 ATR Final Rule and conduct further 
analysis of the mortgage loan origination market and how loan 
originators are currently assessing and determining consumers' ability 
to repay.\186\
---------------------------------------------------------------------------

    \186\ 78 FR 6663-6666.
---------------------------------------------------------------------------

    While the Bureau acknowledges that the exemption applies to many 
small entities, this does not imply that it has a significant impact on 
a substantial number of small entities. Further, the commenters 
provided little reasoning and no data to support the claim that the 
rule would have such an effect. The Bureau believes that the final rule 
will not have a significant impact on a substantial number of small 
entities and therefore neither a SBREFA panel nor a FRFA is required.
    The analysis below evaluates the potential economic impact of the 
final rule on small entities as defined by the RFA. The analysis 
generally examines the regulatory impact of the provisions of the final 
rule against the baseline of the 2013 ATR Final Rule published in 
January 2013, however some of the discussion includes consideration of 
alternative baselines. As a result of this analysis, the Bureau 
certifies that the final rule would not have a significant economic 
impact on a substantial number of small entities.

B. Number and Classes of Affected Entities

    The final rule will apply to all creditors that extend closed-end 
credit secured by a dwelling, including real property attached to a 
dwelling, subject to certain exemptions. All small entities that extend 
these loans are potentially subject to at least some aspects of the 
final rule. This rule may impact small businesses, small nonprofit 
organizations, and small government jurisdictions. A ``small business'' 
is determined by application of SBA regulations and reference to the 
North American Industry Classification System (NAICS) classifications 
and size standards.\187\ Under such standards, depository institutions 
with $175 million or less in assets are considered small; other 
financial businesses are considered small if such entities have average 
annual receipts (i.e., annual revenues) that do not exceed $7 million. 
Thus, commercial banks, savings institutions, and credit unions with 
$175 million or less in assets are small businesses, while other 
creditors extending credit secured by real property or a dwelling are 
small businesses if average annual receipts do not exceed $7 million.
---------------------------------------------------------------------------

    \187\ 5 U.S.C. 601(3). The current SBA size standards are 
located on the SBA's Web site at http://www.sba.gov/content/table-small-business-size-standards.
---------------------------------------------------------------------------

    The Bureau can identify through data under the Home Mortgage 
Disclosure Act, Reports of Condition and Income (Call Reports), and 
data from the National Mortgage Licensing System (NMLS) the approximate 
numbers of small depository institutions that will be subject to the 
final rule. Origination data is available for entities that report in 
HMDA, NMLS or the credit union call reports; for other entities, the 
Bureau has estimated their origination activities using statistical 
projection methods.
    The following table provides the Bureau's estimate of the number 
and types of entities to which the rule will apply:

----------------------------------------------------------------------------------------------------------------
                                                                                                        Small
                                                                                          Entities     entities
                                                                                            that         that
                    Category                      NAICS Code     Total        Small      originate    originate
                                                                entities     entities       any          any
                                                                                          mortgage     mortgage
                                                                                         loans \b\      loans
----------------------------------------------------------------------------------------------------------------
Commercial Banking.............................       522110        6,505        3,601    \a\ 6,307    \a\ 3,466
Savings Institutions...........................       522120          930          377      \a\ 922      \a\ 373
Credit Unions \c\..............................       522130        7,240        6,296    \a\ 4,178    \a\ 3,240
Real Estate Credit \d e\.......................       522292        2,787        2,294        2,787    \a\ 2,294
                                                ----------------------------------------------------------------
    Total......................................  ...........       17,462       12,568       14,194        9,373
----------------------------------------------------------------------------------------------------------------
Source: 2011 HMDA, Dec 31, 2011 Bank and Thrift Call Reports, Dec 31, 2011 NCUA Call Reports, Dec 31, 2011 NMLSR
  Mortgage Call Reports.
\a\ For HMDA reporters, loan counts from HMDA 2011. For institutions that are not HMDA reporters, loan counts
  projected based on Call Report data fields and counts for HMDA reporters.
\b\ Entities are characterized as originating loans if they make one or more loans.
\c\ Does not include cooperativas operating in Puerto Rico. The Bureau has limited data about these institutions
  or their mortgage activity.
\d\ NMLSR Mortgage Call Report (MCR) for 2011. All MCR reporters that originate at least one loan or that have
  positive loan amounts are considered to be engaged in real estate credit (instead of purely mortgage brokers).
  For institutions with missing revenue values, the probability that institution was a small entity is estimated
  based on the count and amount of originations and the count and amount of brokered loans.
\e\ Data do not distinguish nonprofit from for-profit organizations, but Real Estate Credit presumptively
  includes nonprofit organizations.

    It is difficult to determine the number of small nonprofits that 
would be subject to the regulation. Nonprofits do not generally file 
Call Reports or HMDA reports. As explained in part II above, as of 
November 2012 there are 233 nonprofit agencies and nonprofit 
instrumentalities of government in the U.S. that are authorized by HUD 
to provide secondary financing,\188\ 267 institutions designated as 
Community Housing Development Organizations that provided credit in 
2011, and 231 institutions designated as Downpayment Assistance through

[[Page 35499]]

Secondary Financing Providers. A comprehensive list of these 
institutions is not available; however the Bureau believes that there 
may be substantial overlap among these institutions and that most of 
these institutions would qualify as small entities.
---------------------------------------------------------------------------

    \188\ See U.S. Dep't of Hous. and Urban Development: Nonprofits, 
https://entp.hud.gov/idapp/html/f17npdata.cfm.
---------------------------------------------------------------------------

    Also, as of July 2012 there were 999 organizations designated by 
the Treasury Department as CDFIs, 356 of which are depository 
institutions or credit unions counted above. Among the remaining, some 
are nonprofits and most likely small.\189\
---------------------------------------------------------------------------

    \189\ See U.S. Dep't of the Treas., Community Development 
Financial Institutions Fund, http://www.cdfifund.gov/docs/certification/cdfi/CDFIList-07-31-12.xls.
---------------------------------------------------------------------------

C. Clarification Regarding Loan Originator Compensation in the Points 
and Fees Calculation

    As discussed in detail above, the Dodd-Frank Act requires creditors 
to include all compensation paid directly or indirectly by a consumer 
or creditor to a mortgage originator from any source, including a 
mortgage originator that is also the creditor in a table-funded 
transaction, in the calculation of points and fees. The statute does 
not express any limitation on this requirement, and thus, the Bureau 
adopted in the 2013 ATR Final Rule that loan originator compensation be 
treated as additive to up-front charges paid by the consumer and the 
other elements of points and fees and that compensation is added as it 
flows downstream to the loan originator.
    The final rule provides that payments by consumers to mortgage 
brokers need not be counted as loan originator compensation where such 
payments already have been included in points and fees as part of the 
finance charge. The final rule also provides that compensation paid by 
a mortgage broker to its employee loan originator need not be included 
in points and fees. In the final rule, compensation paid by a creditor 
to a mortgage broker is included in points and fees in addition to any 
origination charges paid by a consumer to the creditor. Compensation 
paid by a creditor to its own loan originator employees need not be 
included in points and fees.
    The statute requires loan originator compensation to be treated as 
additive to the other elements of points and fees and the 2013 ATR 
Final Rule adopted this approach. This places a burden on small 
creditors, since it makes it more likely that mortgage loans will not 
be eligible as qualified mortgages under the ability-to-repay rules or 
will be classified as high-cost mortgages for purposes of HOEPA. The 
Bureau's exercise of its exception and adjustment authority in the 
final rule, however, will reduce burden on small entities and 
facilitate compliance. Compared to the January 2013 baseline, where 
such compensation is included in the points and fees calculation, the 
final rule reduces burden on certain small entities: for retail 
originators, fewer loans will exceed the points and fees limits for 
qualified mortgages and high cost mortgages, and firms will face 
lowered compliance costs.\190\
---------------------------------------------------------------------------

    \190\ The Bureau notes that the ability-to-repay requirements as 
well as the rules applying to high-cost mortgages generally apply to 
creditors and not to other classes of small entities including 
mortgage brokers.
---------------------------------------------------------------------------

D. Exemptions from the Ability-to-Repay Requirements

    The provisions related to community-focused lending programs 
discussed above all provide exemptions from the ability-to-repay 
requirements. Measured against the baseline of the Bureau's 2013 ATR 
Final Rule, these provisions impose either no or insignificant 
additional burdens on small entities. More specifically, these 
provisions will reduce the burdens associated with implementation 
costs, additional underwriting costs, and compliance costs stemming 
from the ability-to-repay requirements.
    Section 1026.43(a)(3)(iv) provides that an extension of credit made 
pursuant to a program administered by a housing finance agency, as 
defined by 24 CFR 266.5, is exempt from the requirements of Sec.  
1026.43(c) through (f). For any housing finance agencies and their 
partner creditors that meet the definition of ``small entity,'' this 
provision will remove the burden of having to modify the underwriting 
practices associated with these programs to implement the ability-to-
repay requirements. This provision will also remove the burden to small 
entities of having to develop and maintain policies and procedures to 
monitor compliance with the ability-to-repay requirements.
    The final rule also exempts from the ability-to-repay requirements 
an extension of credit made by a creditor designated as a Community 
Development Financial Institution, a Downpayment Assistance through 
Secondary Financing Provider, or a Community Housing Development 
Organization (CHDO) if the CHDO meets certain additional criteria. This 
provision will remove the burden to small entities of having to 
implement the ability-to-repay requirements. This provision will also 
remove the burden to small entities of having to develop and maintain 
policies and procedures to monitor compliance with the ability-to-repay 
requirements. Regulatory burdens may be associated with obtaining and 
maintaining one of the designations required to qualify for the 
exemption. However, this decision is voluntary and the Bureau presumes 
that a small entity would not do so unless the burden reduction 
resulting from the exemption outweighed the additional burden imposed 
by obtaining and maintaining the designation. Thus, additional burdens 
would still be part of an overall burden reduction.
    The final rule also exempts from the ability-to-repay requirements 
extensions of credit made by a creditor with a tax exemption ruling or 
determination letter from the Internal Revenue Service under section 
501(c)(3) of the Internal Revenue Code of 1986 (26 U.S.C. 501(c)(3) 
provided that: during the calendar year preceding receipt of the 
consumer's application, the creditor extended credit secured by a 
dwelling no more than 200 times; during the calendar year preceding 
receipt of the consumer's application, the creditor extended credit 
secured by a dwelling only to consumers with income that did not exceed 
the low- and moderate-income household limits; the extension of credit 
is to a consumer with income that does not exceed the above limit; and, 
the creditor determines, in accordance with written procedures, that 
the consumer has a reasonable ability to repay the extension of credit.
    For eligible entities, this provision will remove the burden of 
complying with the ability-to-repay requirements. This provision will 
also remove the burden to small entities of having to develop and 
maintain policies and procedures to monitor compliance with the 
ability-to-repay requirements in the 2013 ATR Final Rule. While 
eligible nonprofit creditors will need to maintain documentation of 
their own procedures regarding the determination of a consumer's 
ability to repay, the Bureau believes that such small nonprofits 
already have written policies and procedures. In any case, the decision 
to use the exemption is voluntary and entities are expected to use it 
only if reduces overall burden. Regulatory burdens may be associated 
with obtaining and maintaining the 501(c)(3) designation required to 
qualify for the exemption. However, this decision is voluntary and the 
Bureau presumes that a small entity would not do so unless the burden 
reduction resulting from the exemption outweighed the additional burden 
imposed by obtaining and maintaining

[[Page 35500]]

the designation. Thus, additional burdens would still be part of an 
overall burden reduction.
    The final rule provides that an extension of credit made pursuant 
to a program authorized by sections 101 and 109 of the Emergency 
Economic Stabilization Act of 2008 is exempt from the ability-to-repay 
requirements. This provision will remove the burden to participating 
small entities of having to modify the underwriting practices 
associated with these programs to implement the ability-to-repay 
requirements. This provision will also remove the burden to small 
entities of having to develop and maintain policies and procedures to 
monitor compliance with these ability-to-repay requirements.

E. Portfolio Loans Made by Small Creditors and Balloon-Payment 
Qualified Mortgages

    As discussed above, the Bureau is finalizing certain amendments to 
the 2013 ATR Final Rule, including an additional definition of a 
qualified mortgage for certain loans made and held in portfolio by 
small creditors. The new category includes certain loans originated by 
small creditors that: (1) Have total assets less than $2 billion at the 
end of the previous calendar year; and (2) together with all 
affiliates, originated 500 or fewer covered transactions, secured by 
first-liens during the previous calendar year. The $2 billion asset 
threshold in the definition will be adjusted annually based on the 
year-to-year change in the average of the Consumer Price Index for 
Urban Wage Earners and Clerical Workers, not seasonally adjusted. These 
loans must generally conform to the requirements under the general 
definition of a qualified mortgage in Sec.  1026.43(e)(2), except that 
a loan with a consumer debt-to-income ratio higher than 43 percent 
could be a qualified mortgage if all other criteria are met. Small 
creditors are required to consider the consumer's debt-to-income ratio 
or residual income in underwriting the loans, but are not required to 
follow appendix Q or subject to any specific threshold.
    This provision would reduce burden on small creditors by removing 
the 43 percent debt-to-income limitation for qualified mortgages, as 
well as providing more flexibility in the assessment of debt-to-income 
ratios. At the small creditors identified, 16.7 percent of mortgage 
loans on portfolio are estimated to have a debt to income ratios above 
43 percent. For these loans, the final rule grants creditors a 
presumption of compliance with the ability-to-repay requirements; rough 
estimates indicate that three quarters of these loans will gain a 
conclusive presumption and the remaining loans will gain the rebuttable 
presumption. The final rule also temporarily allows small creditors 
that do not operate predominantly in rural or underserved areas to 
offer balloon-payment qualified mortgages, with the same presumptions 
of compliance, if they hold the loans in portfolio.
    The Bureau also is allowing small creditors to charge a higher 
annual percentage rate for first-lien qualified mortgages in the new 
category and still benefit from a conclusive presumption of compliance 
or ``safe harbor.'' In addition, the Bureau also is allowing small 
creditors operating predominantly in rural or underserved areas to 
offer first-lien balloon loans with a higher annual percentage rate and 
still benefit from a conclusive presumption of compliance with the 
ability-to-repay rules or ``safe harbor.'' The increase in the 
threshold from the average prime offer rate (APOR) plus 1.5 percentage 
points to APOR plus 3.5 percentage points will reduce burden for the 
loans at these institutions between these rates, as these loans will 
now qualify for a conclusive, rather than a rebuttable presumption.
    The regulatory requirement to make a reasonable and good faith 
determination based on verified and documented evidence that a consumer 
has a reasonable ability to repay may entail litigation risk for small 
creditors. It is difficult to estimate the reduction in potential 
future liability costs associated with the changes. However, the Bureau 
notes that lending practices at smaller institutions are often based on 
a more personal relationship based model and that historically, 
delinquency rates on mortgages at smaller institutions are lower than 
the average in the industry. The Bureau believes that small creditors 
have historically engaged in responsible mortgage underwriting that 
includes thorough and thoughtful determinations of consumers' ability 
to repay, at least in part because they bear the risk of default 
associated with loans held in their portfolios. The Bureau also 
believes that because small creditors' lending model is based on 
maintaining ongoing, mutually beneficial relationships with their 
customers, they therefore have a more comprehensive understanding of 
their customers' financial circumstances and are better able to assess 
ability to repay than larger creditors. As such, the expected 
litigation costs from the ability-to-repay provisions of the 2013 ATR 
Final Rule, and therefore the reduced burden from this final rule, 
should be small.
    The Bureau acknowledges the possibility that this final rule may 
increase small creditor burden to the extent that creditors need to 
maintain records relating to eligibility for the exemption, but the 
Bureau believes that these costs are negligible, as creditor asset size 
and origination activity are data that all depository institutions and 
credit unions are likely to maintain for routine business or 
supervisory purposes. Thus, the Bureau believes that the burden 
reduction stemming from a reduction in liability costs would outweigh 
any potential recordkeeping costs, resulting in overall burden 
reduction. Small entities for which such cost reductions are outweighed 
by additional record keeping costs may choose not to utilize the 
exemption.

F. Conclusion

    Each element of this final rule results in an economic burden 
reduction for these small entities. The exemptions for nonprofit 
creditors would lessen any economic impact resulting from the ability-
to-repay requirements. The exemptions for homeownership stabilization 
and foreclosure prevention programs would also soften any economic 
impact on small entities extending credit pursuant to those programs. 
The new categories of qualified mortgage would make it easier for small 
entities to originate qualified mortgages. The Bureau's clarifications 
ensuring consumer-paid compensation to brokers is counted only once and 
the exclusion of retail loan officer and broker employee compensation 
will reduce burden on small entities and make it more likely that 
mortgage loans will be eligible for a presumption of compliance as 
qualified mortgages under the ability-to-repay rules and not be 
classified as high-cost mortgages for purposes of HOEPA. While all of 
these provisions may entail some additional recordkeeping costs, the 
Bureau believes that these costs are minimal and outweighed by the cost 
reductions resulting from the final rule. Small entities for which such 
cost reductions are outweighed by additional record keeping costs may 
choose not to utilize the exemptions.
Certification
    Accordingly, the undersigned certifies that this proposal will not 
have a significant economic impact on a substantial number of small 
entities.

IX. Paperwork Reduction Act Analysis

    Certain provisions of this final rule contain ``collection of 
information''

[[Page 35501]]

requirements within the meaning of the Paperwork Reduction Act of 1995 
(44 U.S.C. 3501 et seq.) (Paperwork Reduction Act or PRA). On January 
30, 2013, the Bureau published notice of the proposed rule in the 
Federal Register (78 FR 6622). The Bureau received no PRA-related 
comments on the information collections in Sec.  1026.43(c).
    This final rule amends 12 CFR part 1026 (Regulation Z), which 
implements the Truth in Lending Act (TILA). Regulation Z currently 
contains collections of information approved by the Office of 
Management and Budget (OMB). The Bureau's OMB control number for 
Regulation Z is 3170-0015. The PRA (44 U.S.C. 3507(a), (a)(2) and 
(a)(3)) requires that a Federal agency may not conduct or sponsor a 
collection of information unless OMB approved the collection under the 
PRA and the OMB control number obtained is displayed. Further, 
notwithstanding any other provisions of law, no person is required to 
comply with, or is subject to any penalty for failure to comply with, a 
collection of information that does not display a currently valid OMB 
control number (44 U.S.C. 3512). The collection of information 
contained in this rule, and identified as such, has been submitted to 
OMB for review under section 3507(d) of the PRA.

A. Overview

    As described below, the final rule amends the collections of 
information currently in Regulation Z to implement amendments to TILA 
made by the Dodd-Frank Act. This final rule is related to the Ability-
to-Repay/Qualified Mortgage final rule (2013 ATR Final Rule) published 
in the Federal Register in January 2013 (78 FR 6408). The 2013 ATR 
Final Rule implements sections 1411, 1412, and 1414 of the Dodd-Frank 
Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), 
which creates new TILA section 129C. Among other things, the Dodd-Frank 
Act requires creditors to make a reasonable, good faith determination, 
based on verified and documented information, that the consumer will 
have a reasonable ability to repay any consumer credit transaction 
secured by a dwelling (excluding an open-end credit plan, timeshare 
plan, reverse mortgage, or temporary loan), including any mortgage-
related obligations (such as property taxes), and establishes certain 
protections from liability under this requirement for ``qualified 
mortgages.'' TILA section 129C(a); 15 U.S.C. 1639c(a). The stated 
purpose of the Dodd-Frank Act ability-to-repay requirement is 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 not understandable and not unfair, deceptive or abusive. TILA 
section 129B(a)(2); 15 U.S.C. 1639b(a)(2). Prior to the Dodd-Frank Act, 
existing Regulation Z provided ability-to-repay requirements for high-
cost and higher-priced mortgage loans. The Dodd-Frank Act expanded the 
scope of the ability-to-repay requirement to cover all residential 
mortgage loans with its scope.
    The 2013 ATR Final Rule establishes standards for complying with 
the ability-to-repay requirement, including defining ``qualified 
mortgage.'' In addition to the ability-to-repay and qualified mortgage 
provisions, the 2013 ATR Final Rule implements the Dodd-Frank Act 
limits on prepayment penalties and lengthens the time creditors must 
retain records that evidence compliance with the ability-to-repay and 
prepayment penalty provisions.
    This final rule adopts certain amendments to the 2013 ATR Final 
Rule implementing these ability-to-repay requirements, including 
exemptions for certain community-focused creditors, housing finance 
agencies, nonprofit organizations and housing stabilization programs; 
an additional definition of a qualified mortgage for certain loans made 
and held in portfolio by small creditors that have total assets less 
than $2 billion at the end of the previous calendar year and, together 
with all affiliates, originated 500 or fewer first-lien covered 
transactions during the previous calendar year. The final rule also 
temporarily allows small creditors that do not operate predominantly in 
rural or underserved areas to offer balloon-payment qualified mortgages 
if they hold the loans in portfolio. The Bureau also is allowing small 
creditors to charge a higher annual percentage rate for first-lien 
qualified mortgages in the new category and still benefit from a 
conclusive presumption of compliance or ``safe harbor,'' and to allow 
small creditors operating predominantly in rural or underserved areas 
to offer first-lien balloon loans with a higher annual percentage rate 
and still benefit from a conclusive presumption of compliance with the 
ability-to-repay rules or ``safe harbor.''
    The final rule also provides exceptions to the 2013 ATR Final Rule, 
which implements the statute's inclusion of loan originator 
compensation in points and fees. Specifically, in the final rule, 
payments by consumers to mortgage brokers need not be counted as loan 
originator compensation where such payments already have been included 
in points and fees as part of the finance charge. In addition, 
compensation paid by a mortgage broker to its employee loan originator 
need not be included in points and fees, nor does compensation paid by 
a creditor to its own loan originator employees. However, consistent 
with the statute and 2013 ATR Final Rule, compensation paid by a 
creditor to a mortgage broker continues to be included in points and 
fees in addition to any origination charges paid by a consumer to the 
creditor.
    The information collection in the final rule is required to provide 
benefits for consumers and would be mandatory. See 15 U.S.C. 1601 et 
seq.; 12 U.S.C. 2601 et seq. Because the Bureau does not collect any 
information under the final rule, no issue of confidentiality arises. 
The likely respondents would be depository institutions (i.e., 
commercial banks, savings institutions and credit unions) and non-
depository institutions (i.e., mortgage companies or other non-bank 
creditors) subject to Regulation Z.\191\
---------------------------------------------------------------------------

    \191\ For purposes of this PRA analysis, references to 
``creditors'' or ``lenders'' shall be deemed to refer collectively 
to commercial banks, savings institutions, credit unions, and 
mortgage companies (i.e., non-depository lenders), unless otherwise 
stated. Moreover, reference to ``respondents'' shall generally mean 
all categories of entities identified in the sentence to which this 
footnote is appended, except as otherwise stated or if the context 
indicates otherwise.
---------------------------------------------------------------------------

    Under the final rule, the Bureau generally accounts for the 
paperwork burden associated with Regulation Z for the following 
respondents pursuant to its administrative enforcement authority: 
insured depository institutions with more than $10 billion in total 
assets and their depository institution affiliates; privately insured 
credit unions; and certain nondepository creditors. The Bureau and the 
FTC generally both have enforcement authority over non-depository 
institutions for Regulation Z. Accordingly, the Bureau has allocated to 
itself half of the estimated burden to non-depository institutions. 
Other Federal agencies are responsible for estimating and reporting to 
OMB the total paperwork burden for the institutions for which they have 
administrative enforcement authority. They may, but are not required 
to, use the Bureau's burden estimation methodology.
    Using the Bureau's burden estimation methodology, there is no 
change to the total estimated burden under Regulation Z as a result of 
the final rule.

[[Page 35502]]

B. Information Collection Requirements

Ability-to-Repay Verification and Documentation Requirements
    As discussed above, the 2013 ATR Final Rule published in January 
2013 contains specific criteria that a creditor must consider in 
assessing a consumer's repayment ability while different verification 
requirements apply to qualified mortgages. As described in the relevant 
sections of the final rule, the Bureau does not believe that the 
verification and documentation requirements of the final rule result in 
additional ongoing costs for most covered persons. However, for some 
creditors, notably the community-focused lending programs, housing 
finance agencies, and not-for profit organizations exempted in the 
final rule, lending can vary widely, in the form of financing, the 
products offered and the precise nature of underwriting. These 
processes may not involve the more traditional products covered by the 
qualified mortgage definition nor do these creditors use documentation 
and verification procedures closely aligned with the requirements of 
the 2013 ATR Final Rule.
    For these creditors, the final rule should eliminate any costs from 
imposing these requirements on these particular extensions of credits. 
The Bureau estimates one-time and ongoing costs to respondents of 
complying with the final rule as follows.
    One-time costs. The Bureau estimates that covered persons will 
incur one-time costs associated with reviewing the relevant sections of 
the Federal Register and training relevant employees. In general, the 
Bureau estimates these costs to include, for each covered person, the 
costs for one attorney and one compliance officer to read and review 
the sections of the final rule that describe the verification and 
documentation requirements for loans, the exemptions from the ability-
to-repay requirements, and the costs for each loan officer or other 
loan originator to receive training concerning the requirements. 
However, the Bureau believes that respondents will review the relevant 
sections of this final rule along with the 2013 ATR Final Rule to best 
understand any new regulatory requirements and their coverage. As such, 
there is no additional one-time burden attributed to the final rule.
    Ongoing costs. The exemptions for the covered institutions should 
reduce any burden related to these provisions. However, in the 2013 ATR 
Final Rule, the Bureau did not attribute any paperwork burden to these 
provisions on the assumption that the verification and documentation 
requirements of the 2013 ATR Final Rule will not result in additional 
ongoing costs for most covered persons. As such, it would be 
inappropriate to credit any reduction in burden to the final rule.

C. Summary of Burden Hours

    As noted, the Bureau does not believe the final rule results in any 
changes in the burdens under Regulation Z associated with information 
collections for Bureau respondents under the PRA.

D. Comments

    The Consumer Financial Protection Bureau has a continuing interest 
in the public's opinions of our collections of information. At any 
time, comments regarding the burden estimate, or any other aspect of 
this collection of information, including suggestions for reducing the 
burden, may be sent to:
    The Consumer Financial Protection Bureau (Attention: PRA Office), 
1700 G Street NW., Washington, DC, 20552, or by the internet to [email protected].

List of Subjects in 12 CFR Part 1026

    Advertising, Consumer protection, Mortgages, Reporting and 
recordkeeping requirements, Truth in Lending.

Authority and Issuance

    For the reasons set forth in the preamble, the Bureau amends 
Regulation Z, 12 CFR part 1026, as amended by the final rules published 
on January 30, 2013 (78 FR 6408), and January 31, 2013 (78 FR 6962), as 
set forth below:

PART 1026--TRUTH IN LENDING (REGULATION Z)

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

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

Subpart E--Special Rules for Certain Home Mortgage Transactions

0
2. Section 1026.32 is amended by revising paragraphs (b)(1)(ii) and 
(b)(2)(ii) to read as follows:


Sec.  1026.32  Requirements for high-cost mortgages.

* * * * *
    (b) * * *
    (1) * * *
    (ii) All compensation paid directly or indirectly by a consumer or 
creditor to a loan originator, as defined in Sec.  1026.36(a)(1), that 
can be attributed to that transaction at the time the interest rate is 
set unless:
    (A) That compensation is paid by a consumer to a mortgage broker, 
as defined in Sec.  1026.36(a)(2), and already has been included in 
points and fees under paragraph (b)(1)(i) of this section;
    (B) That compensation is paid by a mortgage broker, as defined in 
Sec.  1026.36(a)(2), to a loan originator that is an employee of the 
mortgage broker; or
    (C) That compensation is paid by a creditor to a loan originator 
that is an employee of the creditor.
* * * * *
    (2) * * *
    (ii) All compensation paid directly or indirectly by a consumer or 
creditor to a loan originator, as defined in Sec.  1026.36(a)(1), that 
can be attributed to that transaction at the time the interest rate is 
set unless:
    (A) That compensation is paid by a consumer to a mortgage broker, 
as defined in Sec.  1026.36(a)(2), and already has been included in 
points and fees under paragraph (b)(2)(i) of this section;
    (B) That compensation is paid by a mortgage broker, as defined in 
Sec.  1026.36(a)(2), to a loan originator that is an employee of the 
mortgage broker; or
    (C) That compensation is paid by a creditor to a loan originator 
that is an employee of the creditor.
* * * * *

0
3. Section 1026.43 is amended by revising paragraphs (a)(3)(ii) and 
(iii), (b)(4), (e)(1), (e)(2), and (g)(1)(ii)(B), and adding new 
paragraphs (a)(3)(iv) through (vi), (e)(5) and (e)(6), to read as 
follows:


Sec.  1026.43  Minimum standards for transactions secured by a 
dwelling.

    (a) * * *
    (3) * * *
    (ii) A temporary or ``bridge'' loan with a term of 12 months or 
less, such as a loan to finance the purchase of a new dwelling where 
the consumer plans to sell a current dwelling within 12 months or a 
loan to finance the initial construction of a dwelling;
    (iii) A construction phase of 12 months or less of a construction-
to-permanent loan;
    (iv) An extension of credit made pursuant to a program administered 
by a Housing Finance Agency, as defined under 24 CFR 266.5;
    (v) An extension of credit made by:
    (A) A creditor designated as a Community Development Financial 
Institution, as defined under 12 CFR 1805.104(h);
    (B) A creditor designated as a Downpayment Assistance through 
Secondary Financing Provider, pursuant

[[Page 35503]]

to 24 CFR 200.194(a), operating in accordance with regulations 
prescribed by the U.S. Department of Housing and Urban Development 
applicable to such persons;
    (C) A creditor designated as a Community Housing Development 
Organization provided that the creditor has entered into a commitment 
with a participating jurisdiction and is undertaking a project under 
the HOME program, pursuant to the provisions of 24 CFR 92.300(a), and 
as the terms community housing development organization, commitment, 
participating jurisdiction, and project are defined under 24 CFR 92.2; 
or
    (D) A creditor with a tax exemption ruling or determination letter 
from the Internal Revenue Service under section 501(c)(3) of the 
Internal Revenue Code of 1986 (26 U.S.C. 501(c)(3); 26 CFR 1.501(c)(3)-
1), provided that:
    (1) During the calendar year preceding receipt of the consumer's 
application, the creditor extended credit secured by a dwelling no more 
than 200 times;
    (2) During the calendar year preceding receipt of the consumer's 
application, the creditor extended credit secured by a dwelling only to 
consumers with income that did not exceed the low- and moderate-income 
household limit as established pursuant to section 102 of the Housing 
and Community Development Act of 1974 (42 U.S.C. 5302(a)(20)) and 
amended from time to time by the U.S. Department of Housing and Urban 
Development, pursuant to 24 CFR 570.3;
    (3) The extension of credit is to a consumer with income that does 
not exceed the household limit specified in paragraph (a)(3)(v)(D)(2) 
of this section; and
    (4) The creditor determines, in accordance with written procedures, 
that the consumer has a reasonable ability to repay the extension of 
credit.
    (vi) An extension of credit made pursuant to a program authorized 
by sections 101 and 109 of the Emergency Economic Stabilization Act of 
2008 (12 U.S.C. 5211; 5219);
    (b) * * *
    (4) Higher-priced covered transaction means a covered transaction 
with an annual percentage rate that exceeds the average prime offer 
rate for a comparable transaction as of the date the interest rate is 
set by 1.5 or more percentage points for a first-lien covered 
transaction, other than a qualified mortgage under paragraph (e)(5), 
(e)(6), or (f) of this section; by 3.5 or more percentage points for a 
first-lien covered transaction that is a qualified mortgage under 
paragraph (e)(5), (e)(6), or (f) of this section; or by 3.5 or more 
percentage points for a subordinate-lien covered transaction.
* * * * *
    (e) Qualified mortgages. (1) Safe harbor and presumption of 
compliance. (i) Safe harbor for loans that are not higher-priced 
covered transactions. A creditor or assignee of a qualified mortgage, 
as defined in paragraphs (e)(2), (e)(4), (e)(5), (e)(6), or (f) of this 
section, that is not a higher-priced covered transaction, as defined in 
paragraph (b)(4) of this section, complies with the repayment ability 
requirements of paragraph (c) of this section.
    (ii) Presumption of compliance for higher-priced covered 
transactions. (A) A creditor or assignee of a qualified mortgage, as 
defined in paragraph (e)(2), (e)(4), (e)(5), (e)(6), or (f) of this 
section, that is a higher-priced covered transaction, as defined in 
paragraph (b)(4) of this section, is presumed to comply with the 
repayment ability requirements of paragraph (c) of this section.
    (B) To rebut the presumption of compliance described in paragraph 
(e)(1)(ii)(A) of this section, it must be proven that, despite meeting 
the prerequisites of paragraph (e)(2), (e)(4), (e)(5), (e)(6), or (f) 
of this section, the creditor did not make a reasonable and good faith 
determination of the consumer's repayment ability at the time of 
consummation, by showing that the consumer's income, debt obligations, 
alimony, child support, and the consumer's monthly payment (including 
mortgage-related obligations) on the covered transaction and on any 
simultaneous loans of which the creditor was aware at consummation 
would leave the consumer with insufficient residual income or assets 
other than the value of the dwelling (including any real property 
attached to the dwelling) that secures the loan with which to meet 
living expenses, including any recurring and material non-debt 
obligations of which the creditor was aware at the time of 
consummation.
    (2) Qualified mortgage defined--general. Except as provided in 
paragraph (e)(4), (e)(5), (e)(6), or (f) of this section, a qualified 
mortgage is a covered transaction:
* * * * *
    (5) Qualified mortgage defined--small creditor portfolio loans. (i) 
Notwithstanding paragraph (e)(2) of this section, a qualified mortgage 
is a covered transaction:
    (A) That satisfies the requirements of paragraph (e)(2) of this 
section other than the requirements of paragraph (e)(2)(vi) and without 
regard to the standards in appendix Q to this part;
    (B) For which the creditor considers at or before consummation the 
consumer's monthly debt-to-income ratio or residual income and verifies 
the debt obligations and income used to determine that ratio in 
accordance with paragraph (c)(7) of this section, except that the 
calculation of the payment on the covered transaction for purposes of 
determining the consumer's total monthly debt obligations in paragraph 
(c)(7)(i)(A) shall be determined in accordance with paragraph 
(e)(2)(iv) of this section instead of paragraph (c)(5) of this section;
    (C) That is not subject, at consummation, to a commitment to be 
acquired by another person, other than a person that satisfies the 
requirements of paragraph (e)(5)(i)(D) of this section; and
    (D) For which the creditor satisfies the requirements stated in 
Sec.  1026.35(b)(2)(iii)(B) and (C).
    (ii) A qualified mortgage extended pursuant to paragraph (e)(5)(i) 
of this section immediately loses its status as a qualified mortgage 
under paragraph (e)(5)(i) if legal title to the qualified mortgage is 
sold, assigned, or otherwise transferred to another person except when:
    (A) The qualified mortgage is sold, assigned, or otherwise 
transferred to another person three years or more after consummation of 
the qualified mortgage;
    (B) The qualified mortgage is sold, assigned, or otherwise 
transferred to a creditor that satisfies the requirements of paragraph 
(e)(5)(i)(D) of this section;
    (C) The qualified mortgage is sold, assigned, or otherwise 
transferred to another person pursuant to a capital restoration plan or 
other action under 12 U.S.C. 1831o, actions or instructions of any 
person acting as conservator, receiver, or bankruptcy trustee, an order 
of a State or Federal government agency with jurisdiction to examine 
the creditor pursuant to State or Federal law, or an agreement between 
the creditor and such an agency; or
    (D) The qualified mortgage is sold, assigned, or otherwise 
transferred pursuant to a merger of the creditor with another person or 
acquisition of the creditor by another person or of another person by 
the creditor.
    (6) Qualified mortgage defined--temporary balloon-payment qualified 
mortgage rules. (i) Notwithstanding paragraph (e)(2) of this section, a 
qualified mortgage is a covered transaction:
    (A) That satisfies the requirements of paragraph (f) of this 
section other than

[[Page 35504]]

the requirements of paragraph (f)(1)(vi); and
    (B) For which the creditor satisfies the requirements stated in 
Sec.  1026.35(b)(2)(iii)(B) and (C).
    (ii) The provisions of this paragraph (e)(6) apply only to covered 
transactions consummated on or before January 10, 2016.
* * * * *
    (g) * * *
    (1) * * *
    (ii) * * *
    (B) Is a qualified mortgage under paragraph (e)(2), (e)(4), (e)(5), 
(e)(6), or (f) of this section; and
* * * * *

0
4. In Supplement I to Part 1026--Official Interpretations:
0
A. Under Section 1026.32--Requirements for High-Cost Mortgages:
0
i. Under 32(b) Definitions:
0
a. Under Paragraph 32(b)(1)(ii), paragraphs 1, 2, 3, and 4 are revised.
0
B. Under Section 1026.43--Minimum Standards for Transactions Secured by 
a Dwelling:
0
i. Under 43(a) Scope:
0
a. Paragraph 43(a)(3)(iv) and paragraph 1 are added.
0
b. Paragraph 43(a)(3)(v)(D) and paragraph 1 are added.
0
c. Paragraph 43(a)(3)(vi) and paragraph 1 are added.
0
ii. Under 43(e) Qualified Mortgages:
0
a. Paragraph 43(e)(5) and paragraphs 1 through 10 are 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 1026.32--Requirements for High-Cost Mortgages

* * * * *
    32(b) Definitions.
* * * * *
    Paragraph 32(b)(1)(ii).
    1. Loan originator compensation--general. Compensation paid by a 
consumer or creditor to a loan originator, other than an employee of 
the creditor, is included in the calculation of points and fees for 
a transaction, provided that such compensation can be attributed to 
that particular transaction at the time the interest rate is set. 
Compensation paid to an employee of a creditor is not included in 
points and fees. Loan originator compensation includes amounts the 
loan originator retains and is not dependent on the label or name of 
any fee imposed in connection with the transaction.
    2. Loan originator compensation--attributable to a particular 
transaction. Loan originator compensation is compensation that is 
paid by a consumer or creditor to a loan originator that can be 
attributed to that particular transaction. The amount of 
compensation that can be attributed to a particular transaction is 
the dollar value of compensation that the loan originator will 
receive if the transaction is consummated. As explained in comment 
32(b)(1)(ii)-3, the amount of compensation that a loan originator 
will receive is calculated as of the date the interest rate is set 
and includes compensation that is paid before, at, or after 
consummation.
    3. Loan originator compensation--timing. Compensation paid to a 
loan originator that can be attributed to a transaction must be 
included in the points and fees calculation for that loan regardless 
of whether the compensation is paid before, at, or after 
consummation. The amount of loan originator compensation that can be 
attributed to a transaction is determined as of the date the 
interest rate is set. Thus, loan originator compensation for a 
transaction includes compensation that can be attributed to that 
transaction at the time the creditor sets the interest rate for the 
transaction, even if that compensation is not paid until after 
consummation.
    4. Loan originator compensation--calculating loan originator 
compensation in connection with other charges or payments included 
in the finance charge or made to loan originators. i. Consumer 
payments to mortgage brokers. As provided in Sec.  
1026.32(b)(1)(ii)(A), consumer payments to a mortgage broker already 
included in the points and fees calculation under Sec.  
1026.32(b)(1)(i) need not be counted again under Sec.  
1026.32(b)(1)(ii). For example, assume a consumer pays a mortgage 
broker a $3,000 fee for a transaction. The $3,000 mortgage broker 
fee is included in the finance charge under Sec.  1026.4(a)(3). 
Because the $3,000 mortgage broker fee is already included in points 
and fees under Sec.  1026.32(b)(1)(i), it is not counted again under 
Sec.  1026.32(b)(1)(ii).
    ii. Payments by a mortgage broker to its individual loan 
originator employee. As provided in Sec.  1026.32(b)(1)(ii)(B), 
compensation paid by a mortgage broker to its individual loan 
originator employee is not included in points and fees under Sec.  
1026.32(b)(1)(ii). For example, assume a consumer pays a $3,000 fee 
to a mortgage broker, and the mortgage broker pays a $1,500 
commission to its individual loan originator employee for that 
transaction. The $3,000 mortgage broker fee is included in points 
and fees, but the $1,500 commission is not included in points and 
fees because it has already been included in points and fees as part 
of the $3,000 mortgage broker fee.
    iii. Creditor's origination fees--loan originator not employed 
by creditor. Compensation paid by a consumer or creditor to a loan 
originator who is not employed by the creditor is included in the 
calculation of points and fees under Sec.  1026.32(b)(1)(ii). Such 
compensation is included in points and fees in addition to any 
origination fees or charges paid by the consumer to the creditor 
that are included in points and fees under Sec.  1026.32(b)(1)(i). 
For example, assume that a consumer pays to the creditor a $3,000 
origination fee and that the creditor pays a mortgage broker $1,500 
in compensation attributed to the transaction. Assume further that 
the consumer pays no other charges to the creditor that are included 
in points and fees under Sec.  1026.32(b)(1)(i) and that the 
mortgage broker receives no other compensation that is included in 
points and fees under Sec.  1026.32(b)(1)(ii). For purposes of 
calculating points and fees, the $3,000 origination fee is included 
in points and fees under Sec.  1026.32(b)(1)(i) and the $1,500 in 
loan originator compensation is included in points and fees under 
Sec.  1026.32(b)(1)(ii), equaling $4,500 in total points and fees, 
provided that no other points and fees are paid or compensation 
received.
* * * * *

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

    43(a) Scope.
* * * * *
    Paragraph 43(a)(3)(iv).
    1. General. The requirements of Sec.  1026.43(c) through (f) do 
not apply to an extension of credit made pursuant to a program 
administered by a Housing Finance Agency, as defined under 24 CFR 
266.5. Under the exemption, the requirements of Sec.  1026.43(c) 
through (f) do not apply to extensions of credit made by housing 
finance agencies and extensions of credit made by intermediaries 
(e.g., private creditors) pursuant to a program administered by a 
housing finance agency. For example, if a creditor is extending 
credit, including a subordinate-lien covered transaction, that will 
be made pursuant to a program administered by a housing finance 
agency, the creditor is exempt from the requirements of Sec.  
1026.43(c) through (f). Similarly, the creditor is exempt from the 
requirements of Sec.  1026.43(c) through (f) regardless of whether 
the program administered by a housing finance agency is funded by 
Federal, State, or other sources.
    Paragraph 43(a)(3)(v)(D).
    1. General. An extension of credit is exempt from the 
requirements of Sec.  1026.43(c) through (f) if the credit is 
extended by a creditor described in Sec.  1026.43(a)(3)(v)(D), 
provided the conditions specified in that section are satisfied. The 
conditions specified in Sec.  1026.43(a)(3)(v)(D)(1) and (2) are 
determined according to activity that occurred in the calendar year 
preceding the calendar year in which the consumer's application was 
received. Section 1026.43(a)(3)(v)(D)(2) provides that, during the 
preceding calendar year, the creditor must have extended credit only 
to consumers with income that did not exceed the limit then in 
effect for low- and moderate-income households, as specified in 
regulations prescribed by the U.S. Department of Housing and Urban 
Development pursuant to 24 CFR 570.3. For example, a creditor has 
satisfied the requirement in Sec.  1026.43(a)(3)(v)(D)(2) if the 
creditor extended credit only to consumers with incomes that did not 
exceed the limit in effect on the dates the creditor received each 
consumer's individual application. The condition specified in Sec.  
1026.43(a)(3)(v)(D)(3), which relates to the

[[Page 35505]]

current extension of credit, provides that the extension of credit 
must be to a consumer with income that does not exceed the limit 
specified in Sec.  1026.43(a)(3)(v)(D)(2) in effect on the date the 
creditor received the consumer's application. For example, assume 
that a creditor with a tax exemption ruling under section 501(c)(3) 
of the Internal Revenue Code of 1986 has satisfied the conditions 
identified in Sec.  1026.43(a)(3)(v)(D)(1) and (2). If, on May 21, 
2014, the creditor in this example extends credit secured by a 
dwelling to a consumer whose application reflected income in excess 
of the limit identified in Sec.  1026.43(a)(3)(v)(D)(2) in effect on 
the date the creditor received that consumer's application, the 
creditor has not satisfied the condition in Sec.  
1026.43(a)(3)(v)(D)(3) and this extension of credit is not exempt 
from the requirements of Sec.  1026.43(c) through (f).
    Paragraph 43(a)(3)(vi).
    1. General. The requirements of Sec.  1026.43(c) through (f) do 
not apply to a mortgage loan modification made in connection with a 
program authorized by sections 101 and 109 of the Emergency Economic 
Stabilization Act of 2008. If a creditor is underwriting an 
extension of credit that is a refinancing, as defined by Sec.  
1026.20(a), that will be made pursuant to a program authorized by 
sections 101 and 109 of the Emergency Economic Stabilization Act of 
2008, the creditor also need not comply with Sec.  1026.43(c) 
through (f). A creditor need not determine whether the mortgage loan 
modification is considered a refinancing under Sec.  1026.20(a) for 
purposes of determining applicability of Sec.  1026.43; if the 
transaction is made in connection with these programs, the 
requirements of Sec.  1026.43(c) through (f) do not apply. In 
addition, if a creditor underwrites a new extension of credit, such 
as a subordinate-lien mortgage loan, that will be made pursuant to a 
program authorized by sections 101 and 109 of the Emergency Economic 
Stabilization Act of 2008, the creditor need not comply with the 
requirements of Sec.  1026.43(c) through (f).
* * * * *
    43(e) Qualified mortgages.
* * * * *
    Paragraph 43(e)(5).
    1. Satisfaction of qualified mortgage requirements. For a 
covered transaction to be a qualified mortgage under Sec.  
1026.43(e)(5), the mortgage must satisfy the requirements for a 
qualified mortgage under Sec.  1026.43(e)(2), other than the 
requirements regarding debt-to-income ratio. For example, a 
qualified mortgage under Sec.  1026.43(e)(5) may not have a loan 
term in excess of 30 years because longer terms are prohibited for 
qualified mortgages under Sec.  1026.43(e)(2)(ii). Similarly, a 
qualified mortgage under Sec.  1026.43(e)(5) may not result in a 
balloon payment because Sec.  1026.43(e)(2)(i)(C) provides that 
qualified mortgages may not have balloon payments except as provided 
under Sec.  1026.43(f). However, a covered transaction need not 
comply with Sec.  1026.43(e)(2)(vi), which prohibits consumer 
monthly debt-to-income ratios in excess of 43 percent. A covered 
transaction therefore can be a qualified mortgage under Sec.  
1026.43(e)(5) even though the consumer's monthly debt-to-income 
ratio is greater than 43 percent.
    2. Debt-to-income ratio or residual income. Section 
1026.43(e)(5) does not prescribe a specific monthly debt-to-income 
ratio with which creditors must comply. Instead, creditors must 
consider a consumer's debt-to-income ratio or residual income 
calculated generally in accordance with Sec.  1026.43(c)(7) and 
verify the information used to calculate the debt-to-income ratio or 
residual income in accordance with Sec.  1026.43(c)(3) and (4). 
However, Sec.  1026.43(c)(7) refers creditors to Sec.  1026.43(c)(5) 
for instructions on calculating the payment on the covered 
transaction. Section 1026.43(c)(5) requires creditors to calculate 
the payment differently than Sec.  1026.43(e)(2)(iv). For purposes 
of the qualified mortgage definition in Sec.  1026.43(e)(5), 
creditors must base their calculation of the consumer's debt-to-
income ratio or residual income on the payment on the covered 
transaction calculated according to Sec.  1026.43(e)(2)(iv) instead 
of according to Sec.  1026.43(c)(5). Creditors are not required to 
calculate the consumer's monthly debt-to-income ratio in accordance 
with appendix Q to this part as is required under the general 
definition of qualified mortgages by Sec.  1026.43(e)(2)(vi).
    3. Forward commitments. A creditor may make a mortgage loan that 
will be transferred or sold to a purchaser pursuant to an agreement 
that has been entered into at or before the time the transaction is 
consummated. Such an agreement is sometimes known as a ``forward 
commitment.'' A mortgage that will be acquired by a purchaser 
pursuant to a forward commitment does not satisfy the requirements 
of Sec.  1026.43(e)(5), whether the forward commitment provides for 
the purchase and sale of the specific transaction or for the 
purchase and sale of transactions with certain prescribed criteria 
that the transaction meets. However, a forward commitment to another 
person that also meets the requirements of Sec.  1026.43(e)(5)(i)(D) 
is permitted. For example, assume a creditor that is eligible to 
make qualified mortgages under Sec.  1026.43(e)(5) makes a mortgage. 
If that mortgage meets the purchase criteria of an investor with 
which the creditor has an agreement to sell loans after 
consummation, then the loan does not meet the definition of a 
qualified mortgage under Sec.  1026.43(e)(5). However, if the 
investor meets the requirements of Sec.  1026.43(e)(5)(i)(D), the 
mortgage will be a qualified mortgage if all other applicable 
criteria also are satisfied.
    4. Creditor qualifications. To be eligible to make qualified 
mortgages under Sec.  1026.43(e)(5), a creditor must satisfy the 
requirements stated in Sec.  1026.35(b)(2)(iii)(B) and (C). Section 
1026.35(b)(2)(iii)(B) requires that, during the preceding calendar 
year, the creditor and its affiliates together originated 500 or 
fewer first-lien covered transactions. Section 1026.35(b)(2)(iii)(C) 
requires that, as of the end of the preceding calendar year, the 
creditor had total assets of less than $2 billion, adjusted annually 
by the Bureau for inflation.
    5. Requirement to hold in portfolio. Creditors generally must 
hold a loan in portfolio to maintain the transaction's status as a 
qualified mortgage under Sec.  1026.43(e)(5), subject to four 
exceptions. Unless one of these exceptions applies, a loan is no 
longer a qualified mortgage under Sec.  1026.43(e)(5) once legal 
title to the debt obligation is sold, assigned, or otherwise 
transferred to another person. Accordingly, unless one of the 
exceptions applies, the transferee could not benefit from the 
presumption of compliance for qualified mortgages under Sec.  
1026.43(e)(1) unless the loan also met the requirements of another 
qualified mortgage definition.
    6. Application to subsequent transferees. The exceptions 
contained in Sec.  1026.43(e)(5)(ii) apply not only to an initial 
sale, assignment, or other transfer by the originating creditor but 
to subsequent sales, assignments, and other transfers as well. For 
example, assume Creditor A originates a qualified mortgage under 
Sec.  1026.43(e)(5). Six months after consummation, Creditor A sells 
the qualified mortgage to Creditor B pursuant to Sec.  
1026.43(e)(5)(ii)(B) and the loan retains its qualified mortgage 
status because Creditor B complies with the limits on asset size and 
number of transactions. If Creditor B sells the qualified mortgage, 
it will lose its qualified mortgage status under Sec.  1026.43(e)(5) 
unless the sale qualifies for one of the Sec.  1026.43(e)(5)(ii) 
exceptions for sales three or more years after consummation, to 
another qualifying institution, as required by supervisory action, 
or pursuant to a merger or acquisition.
    7. Transfer three years after consummation. Under Sec.  
1026.43(e)(5)(ii)(A), if a qualified mortgage under Sec.  
1026.43(e)(5) is sold, assigned, or otherwise transferred three 
years or more after consummation, the loan retains its status as a 
qualified mortgage under Sec.  1026.43(e)(5) following the transfer. 
The transferee need not be eligible to originate qualified mortgages 
under Sec.  1026.43(e)(5). The loan will continue to be a qualified 
mortgage throughout its life, and the transferee, and any subsequent 
transferees, may invoke the presumption of compliance for qualified 
mortgages under Sec.  1026.43(e)(1).
    8. Transfer to another qualifying creditor. Under Sec.  
1026.43(e)(5)(ii)(B), a qualified mortgage under Sec.  1026.43(e)(5) 
may be sold, assigned, or otherwise transferred at any time to 
another creditor that meets the requirements of Sec.  
1026.43(e)(5)(v). That section requires that a creditor, during the 
preceding calendar year, together with all affiliates, 500 or fewer 
first-lien covered transactions and had total assets less than $2 
billion (as adjusted for inflation) at the end of the preceding 
calendar year. A qualified mortgage under Sec.  1026.43(e)(5) 
transferred to a creditor that meets these criteria would retain its 
qualified mortgage status even if it is transferred less than three 
years after consummation.
    9. Supervisory sales. Section 1026.43(e)(5)(ii)(C) facilitates 
sales that are deemed necessary by supervisory agencies to revive 
troubled creditors and resolve failed creditors. A qualified 
mortgage under Sec.  1026.43(e)(5) retains its qualified mortgage 
status if it is sold, assigned, or otherwise transferred to another 
person pursuant to: A capital restoration plan or other action under

[[Page 35506]]

12 U.S.C. 1831o; the actions or instructions of any person acting as 
conservator, receiver or bankruptcy trustee; an order of a State or 
Federal government agency with jurisdiction to examine the creditor 
pursuant to State or Federal law; or an agreement between the 
creditor and such an agency. A qualified mortgage under Sec.  
1026.43(e)(5) that is sold, assigned, or otherwise transferred under 
these circumstances retains its qualified mortgage status regardless 
of how long after consummation it is sold and regardless of the size 
or other characteristics of the transferee. Section 
1026.43(e)(5)(ii)(C) does not apply to transfers done to comply with 
a generally applicable regulation with future effect designed to 
implement, interpret, or prescribe law or policy in the absence of a 
specific order by or a specific agreement with a governmental agency 
described in Sec.  1026.43(e)(5)(ii)(C) directing the sale of one or 
more qualified mortgages under Sec.  1026.43(e)(5) held by the 
creditor or one of the other circumstances listed in Sec.  
1026.43(e)(5)(ii)(C). For example, a qualified mortgage under Sec.  
1026.43(e)(5) that is sold pursuant to a capital restoration plan 
under 12 U.S.C. 1831o would retain its status as a qualified 
mortgage following the sale. However, if the creditor simply chose 
to sell the same qualified mortgage as one way to comply with 
general regulatory capital requirements in the absence of 
supervisory action or agreement it would lose its status as a 
qualified mortgage following the sale unless it qualifies under 
another definition of qualified mortgage.
    10. Mergers and acquisitions. A qualified mortgage under Sec.  
1026.43(e)(5) retains its qualified mortgage status if a creditor 
merges with, is acquired by, or acquires another person regardless 
of whether the creditor or its successor is eligible to originate 
new qualified mortgages under Sec.  1026.43(e)(5) after the merger 
or acquisition. However, the creditor or its successor can originate 
new qualified mortgages under Sec.  1026.43(e)(5) only if it 
complies with all of the requirements of Sec.  1026.43(e)(5) after 
the merger or acquisition. For example, assume a creditor that 
originates 250 covered transactions each year and originates 
qualified mortgages under Sec.  1026.43(e)(5) is acquired by a 
larger creditor that originates 10,000 covered transactions each 
year. Following the acquisition, the small creditor would no longer 
be able to originate Sec.  1026.43(e)(5) qualified mortgages 
because, together with its affiliates, it would originate more than 
500 covered transactions each year. However, the Sec.  1026.43(e)(5) 
qualified mortgages originated by the small creditor before the 
acquisition would retain their qualified mortgage status.
* * * * *

    Dated: May 29, 2013.
Richard Cordray,
Director, Bureau of Consumer Financial Protection.
[FR Doc. 2013-13173 Filed 6-11-13; 8:45 am]
BILLING CODE 4810-AM-P