[Federal Register Volume 78, Number 127 (Tuesday, July 2, 2013)]
[Proposed Rules]
[Pages 39902-39945]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-15466]



[[Page 39901]]

Vol. 78

Tuesday,

No. 127

July 2, 2013

Part IV





Bureau of Consumer Financial Protection





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12 CFR Parts 1002, 1024, and 1026





Amendments to the 2013 Mortgage Rules Under the Equal Credit 
Opportunity Act (Regulation B), Real Estate Settlement Procedures Act 
(Regulation X), and the Truth in Lending Act (Regulation Z); Proposed 
Rule

  Federal Register / Vol. 78 , No. 127 / Tuesday, July 2, 2013 / 
Proposed Rules  

[[Page 39902]]


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BUREAU OF CONSUMER FINANCIAL PROTECTION

12 CFR Parts 1002, 1024, and 1026

[Docket No. CFPB-2013-0018]
RIN 3170-AA37


Amendments to the 2013 Mortgage Rules Under the Equal Credit 
Opportunity Act (Regulation B), Real Estate Settlement Procedures Act 
(Regulation X), and the Truth in Lending Act (Regulation Z)

AGENCY: Bureau of Consumer Financial Protection.

ACTION: Proposed rule with request for public comment.

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SUMMARY: This rule proposes amendments to certain mortgage rules issued 
by the Bureau of Consumer Financial Protection (Bureau) in January 
2013. These proposed amendments focus primarily on clarifying, 
revising, or amending provisions on loss mitigation procedures under 
Regulation X's servicing provisions, amounts counted as loan originator 
compensation to retailers of manufactured homes and their employees for 
purposes of applying points and fees thresholds under the Home 
Ownership and Equity Protection Act and the qualified mortgage rules in 
Regulation Z, exemptions available to creditors that operate 
predominantly in ``rural or underserved'' areas for various purposes 
under the mortgage regulations, application of the loan originator 
compensation rules to bank tellers and similar staff, and the 
prohibition on creditor-financed credit insurance. The Bureau also is 
proposing to adjust the effective dates for certain provisions of the 
loan originator compensation rules. In addition, the Bureau is 
proposing technical and wording changes for clarification purposes to 
Regulations B, X, and Z.

DATES: Comments must be received on or before July 22, 2013.

ADDRESSES: You may submit comments, identified by Docket No. CFPB-2013-
0018 or RIN 3170-AA37, by any of the following methods:
     Electronic: http://www.regulations.gov. Follow the 
instructions for submitting comments.
     Mail/Hand Delivery/Courier: Monica Jackson, Office of the 
Executive Secretary, Consumer Financial Protection Bureau, 1700 G 
Street NW., Washington, DC 20552.
    Instructions: All submissions should include the agency name and 
docket number or Regulatory Information Number (RIN) for this 
rulemaking. Because paper mail in the Washington, DC area and at the 
Bureau is subject to delay, commenters are encouraged to submit 
comments electronically. In general, all comments received will be 
posted without change to http://www.regulations.gov. In addition, 
comments will be available for public inspection and copying at 1700 G 
Street NW., Washington, DC 20552, on official business days between the 
hours of 10 a.m. and 5 p.m. Eastern Time. You can make an appointment 
to inspect the documents by telephoning (202) 435-7275.
    All comments, including attachments and other supporting materials, 
will become part of the public record and subject to public disclosure. 
Sensitive personal information, such as account numbers or social 
security numbers, should not be included. Comments generally will not 
be edited to remove any identifying or contact information.

FOR FURTHER INFORMATION CONTACT: Whitney Patross, Attorney; Richard 
Arculin, Michael Silver, and Daniel Brown, Counsels; Marta Tanenhaus, 
Mark Morelli, Senior Counsels and Paul Ceja, Senior Counsel and Special 
Advisor, Office of Regulations, at (202) 435-7700.

SUPPLEMENTARY INFORMATION: 

I. Summary of Proposed Rule

    In January 2013, the Bureau issued several final rules concerning 
mortgage markets in the United States (2013 Title XIV Final Rules), 
pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection 
Act (Dodd-Frank Act), Public Law 111-203, 124 Stat. 1376 (2010).\1\
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    \1\ Specifically, on January 10, 2013, the Bureau issued Escrow 
Requirements Under the Truth in Lending Act (Regulation Z), 78 FR 
4726 (Jan. 30, 2013) (2013 Escrows Final Rule), High-Cost Mortgage 
and Homeownership Counseling Amendments to the Truth in Lending Act 
(Regulation Z) and Homeownership Counseling Amendments to the Real 
Estate Settlement Procedures Act (Regulation X), 78 FR 6856 (Jan. 
31, 2013) (2013 HOEPA Final Rule), and Ability to Repay and 
Qualified Mortgage Standards Under the Truth in Lending Act 
(Regulation Z), 78 FR 6407 (Jan. 30, 2013) (2013 ATR Final Rule). 
The Bureau concurrently issued a proposal to amend the 2013 ATR 
Final Rule, which was finalized on May 29, 2013. See 78 FR 6621 
(Jan. 10, 2013) and 78 FR 35430 (June 12, 2013). On January 17, 
2013, the Bureau issued the Real Estate Settlement Procedures Act 
(Regulation X) and Truth in Lending Act (Regulation Z) Mortgage 
Servicing Final Rules, 78 FR 10901 (Regulation Z) (Feb. 14, 2013) 
and 78 FR 10695 (Regulation X) (Feb. 14, 2013) (2013 Mortgage 
Servicing Final Rules). On January 18, 2013, the Bureau issued the 
Disclosure and Delivery Requirements for Copies of Appraisals and 
Other Written Valuations Under the Equal Credit Opportunity Act 
(Regulation B), 78 FR 7215 (Jan. 31, 2013) (2013 ECOA Final Rule) 
and, jointly with other agencies, issued Appraisals for Higher-
Priced Mortgage Loans (Regulation Z), 78 FR 10367 (Feb. 13, 2013). 
On January 20, 2013, the Bureau issued the Loan Originator 
Compensation Requirements under the Truth in Lending Act (Regulation 
Z), 78 FR 11279 (Feb. 15, 2013) (2013 Loan Originator Compensation 
Final Rule).
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    This document proposes several amendments to the provisions adopted 
by the 2013 Title XIV Final Rules to clarify or revise regulatory 
provisions and official interpretations primarily relating to the 2013 
Mortgage Servicing Final Rules and the 2013 Loan Originator 
Compensation Final Rule, as described further below. This document also 
proposes modifications to the effective dates for provisions adopted by 
the 2013 Loan Originator Compensation Final Rule, and certain technical 
corrections and minor refinements to Regulations B, X, and Z.
    Specifically, the Bureau is proposing several modifications to the 
Regulation X loss mitigation provisions adopted by the 2013 Mortgage 
Servicing Final Rules, in Sec.  1024.41. Two of the revisions concern 
the requirement in Sec.  1024.41(b)(2)(i) that servicers review a 
borrower's loss mitigation application within five days and provide a 
notice to the borrower acknowledging receipt and informing the borrower 
whether the application is complete or incomplete. If the servicer does 
not deem the application complete, the servicer's notice must also list 
the missing items and direct the borrower to provide the information by 
the earliest remaining date of four possible timeframes. The proposed 
changes would provide servicers more flexibility with regard to setting 
and describing the date by which borrowers should supply missing 
information and would set forth requirements and procedures for a 
servicer to follow in the event that an application is later found by 
the servicer to be missing information or documentation necessary to 
the evaluation process. Another proposed modification would provide 
servicers more flexibility in providing short-term payment forbearance 
plans based on an evaluation of an incomplete loss mitigation 
application. Other clarifications and revisions would address the 
content of notices required under Sec.  1024.41(c)(1)(ii) and (d), 
which inform borrowers of the outcomes of their evaluation for loss 
mitigation and any appeal filed by the borrower. In addition, the 
proposed amendments would address the appropriate timelines to apply 
where a foreclosure sale has not been scheduled at the time the 
borrower submits a loss mitigation application or when a foreclosure 
sale is rescheduled, what actions are permitted while the general ban 
on proceeding to foreclosure before a borrower is 120

[[Page 39903]]

days delinquent is in effect, and the application of the 120-day 
prohibition to foreclosures for certain reasons other than nonpayment.
    Second, the Bureau is proposing clarifications and revisions to the 
definition of points and fees for purposes of the qualified mortgage 
points and fees cap and the high-cost mortgage points and fees 
threshold, as adopted in the 2013 ATR Final Rule and the 2013 HOEPA 
Final Rule, respectively. In particular, the Bureau is proposing to add 
commentary to Sec.  1026.32(b)(1)(ii) to clarify for retailers of 
manufactured homes and their employees what compensation must be 
counted as loan originator compensation and thus included in the points 
and fees thresholds.
    Third, the Bureau is proposing to revise two exceptions available 
under the 2013 Title XIV Final Rules to small creditors operating in 
predominantly ``rural'' or ``underserved'' areas while the Bureau re-
examines the underlying definitions of ``rural'' or ``underserved'' 
over the next two years, as it recently announced it would do in 
Ability-to-Repay and Qualified Mortgage Standards Under the Truth in 
Lending Act (Regulation Z) (May 2013 ATR Final Rule).\2\ First, the 
Bureau is proposing to extend an exception to the general prohibition 
on balloon features for high-cost mortgages under Sec.  
1026.32(d)(1)(ii)(C) to allow all small creditors, regardless of 
whether they operate predominantly in ``rural'' or ``underserved'' 
areas, to continue originating balloon high-cost mortgages if the loans 
meet the requirements for qualified mortgages under Sec. Sec.  
1026.43(e)(6) or 1026.43(f). In addition, the Bureau is proposing to 
amend an exemption from the requirement to establish escrow accounts 
for higher-priced mortgage loans under the Sec.  1026.35(b)(2)(iii)(A) 
for small creditors that extend more than 50 percent of their total 
covered transactions secured by a first lien in ``rural'' or 
``underserved'' counties during the preceding calendar year. To prevent 
creditors that qualified for the exemption in 2013 from losing 
eligibility in 2014 or 2015 because of changes in which counties are 
considered rural while the Bureau is re-evaluating the underlying 
definition of ``rural,'' the Bureau is proposing to amend this 
provision to allow creditors to qualify for the exemption if they 
extended more than 50 percent of their total covered transactions in 
rural or underserved counties in any of the previous three calendar 
years (assuming the other criteria for eligibility are also met).
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    \2\ 78 FR 35430 (May 29, 2013)
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    Fourth, the Bureau is proposing revisions, as well as general 
technical and wording changes to various provisions of the 2013 Loan 
Originator Compensation Final Rule in Sec.  1026.36. These include 
revising the definition of ``loan originator'' in the regulatory text 
and commentary, such as provisions addressing when employees (or 
contractors or agents) of a creditor or loan originator in certain 
administrative or clerical roles (e.g., tellers or greeters) may become 
``loan originators'' and thus subject to the rule, upon providing 
contact information or credit applications for loan originators or 
creditors to consumers. It also proposes a number of clarifications to 
the commentary on prohibited payments to loan originators.
    Fifth, the Bureau is proposing to clarify and revise two aspects of 
the rules implementing the Dodd-Frank Act prohibition on creditors 
financing credit insurance premiums in connection with certain consumer 
credit transactions secured by a dwelling. The Bureau is proposing to 
add new Sec.  1026.36(i)(2)(ii) to clarify what constitutes financing 
of such premiums by a creditor. The Bureau also is proposing to add new 
Sec.  1026.36(i)(2)(iii) to clarify when credit insurance premiums are 
considered to be calculated and paid on a monthly basis, for purposes 
of the statutory exclusion from the prohibition for certain credit 
insurance premium calculation and payment arrangements.
    Sixth, the Bureau is proposing to make certain provisions under the 
2013 Loan Originator Compensation Final Rule take effect on January 1, 
2014, rather than January 10, 2014, as originally provided. The 
affected provisions would be the amendments to or additions of (as 
applicable) Sec.  1026.25(c)(2) (record retention), Sec.  1026.36(a) 
(definitions), Sec.  1026.36(b) (scope), Sec.  1026.36(d) 
(compensation), Sec.  1026.36(e) (anti-steering), Sec.  1026.36(f) 
(qualifications), and Sec.  1026.36(j) (compliance policies and 
procedures for depository institutions). The Bureau believes that this 
change would facilitate compliance because these provisions largely 
focus on compensation plan structures, registration and licensing, and 
hiring and training requirements that are often structured on an annual 
basis and typically do not vary from transaction to transaction. The 
Bureau is also seeking comment on whether to adjust the date for 
implementation of the ban on financing credit insurance under Sec.  
1026.36(i), which the Bureau temporarily delayed and extended to 
January 10, 2014, to provide additional guidance on the issues 
discussed above. See Loan Originator Compensation Requirements under 
the Truth in Lending Act (Regulation Z); Prohibition on Financing 
Credit Insurance Premiums; Delay of Effective Date (2013 Effective Date 
Final Rule).\3\
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    \3\ 78 FR 32547 (May 31, 2013).
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    In addition to the proposed clarifications and amendments to 
Regulations X and Z discussed above, the Bureau is proposing technical 
corrections and minor clarifications to wording throughout Regulations 
B, X, and Z that are generally not substantive in nature.

II. Background

A. Title XIV Rulemakings Under the Dodd-Frank Act

    In response to an unprecedented cycle of expansion and contraction 
in the mortgage market that sparked the most severe U.S. recession 
since the Great Depression, Congress passed the Dodd-Frank Act, which 
was signed into law on July 21, 2010. Pub. L. 111-203, 124 Stat. 1376 
(2010). In the Dodd-Frank Act, Congress established the Bureau and, 
under sections 1061 and 1100A, generally consolidated the rulemaking 
authority for Federal consumer financial laws, including the Equal 
Credit Opportunity Act (ECOA), Truth in Lending Act (TILA), and Real 
Estate Settlement Procedures Act (RESPA), in the Bureau.\4\ At the same 
time, Congress significantly amended the statutory requirements 
governing mortgage practices with the intent to restrict the practices 
that contributed to and exacerbated the crisis. Under the statute, most 
of these new requirements would have taken effect automatically on 
January 21, 2013, if the Bureau had not issued implementing regulations 
by that date.\5\ To avoid uncertainty and potential disruption in the 
national mortgage market at a time of economic vulnerability, the 
Bureau issued several final rules in a span of less than two weeks in 
January 2013 to implement these new statutory provisions and provide 
for an orderly transition.
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    \4\ Sections 1011 and 1021 of the Dodd-Frank Act, in title X, 
the ``Consumer Financial Protection Act,'' Public Law 111-203, 
sections 1001-1100H, codified at 12 U.S.C. 5491, 5511. The Consumer 
Financial Protection Act is substantially codified at 12 U.S.C. 
5481-5603. Section 1029 of the Dodd-Frank Act excludes from this 
transfer of authority, subject to certain exceptions, any rulemaking 
authority over a motor vehicle dealer that is predominantly engaged 
in the sale and servicing of motor vehicles, the leasing and 
servicing of motor vehicles, or both. 12 U.S.C. 5519.
    \5\ Dodd-Frank Act section 1400(c), 15 U.S.C. 1601 note.

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[[Page 39904]]

    On January 10, 2013, the Bureau issued the 2013 ATR Final Rule, the 
2013 Escrows Final Rule, and the 2013 HOEPA Final Rule. On January 17, 
2013, the Bureau issued the 2013 Mortgage Servicing Final Rules. On 
January 18, 2013, the Bureau issued Appraisals for Higher-Priced 
Mortgage Loans (Regulation Z) \6\ (issued jointly with other agencies) 
and the 2013 ECOA Final Rule. On January 20, 2013, the Bureau issued 
the 2013 Loan Originator Compensation Final Rule. Most of these rules 
will become effective on January 10, 2014.
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    \6\ 78 FR 10367.
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    Concurrent with the 2013 ATR Final Rule, on January 10, 2013, the 
Bureau issued Proposed Amendments to the Ability to Repay Standards 
Under the Truth in Lending Act (Regulation Z) (2013 ATR Concurrent 
Proposal), which the Bureau finalized on May 29, 2013 (May 2013 ATR 
Final Rule).\7\
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    \7\ 78 FR 6622; 78 FR 35430.
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B. Implementation Initiative for New Mortgage Rules

    On February 13, 2013, the Bureau announced an initiative to support 
implementation of its new mortgage rules (Implementation Plan),\8\ 
under which the Bureau would work with the mortgage industry and other 
stakeholders to ensure that the new rules can be implemented accurately 
and expeditiously. The Implementation Plan includes: (1) Coordination 
with other agencies, including to develop consistent, updated 
examination procedures; (2) publication of plain-language guides to the 
new rules; (3) publication of additional corrections and clarifications 
of the new rules, as needed; (4) publication of readiness guides for 
the new rules; and (5) education of consumers on the new rules.
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    \8\ Consumer Financial Protection Bureau Lays Out Implementation 
Plan for New Mortgage Rules. Press Release. Feb. 13, 2013.
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    This proposal concerns additional clarifications and revisions to 
the new rules. The purpose of these updates is to address important 
questions raised by industry, consumer groups, or other agencies. 
Priority for this set of updates has been given to issues that are 
important to a large number of stakeholders and critically affect loan 
originators' and mortgage servicers' implementation decisions. 
Additional updates will be issued as appropriate.

III. Legal Authority

    The Bureau is issuing this proposed rule pursuant to its authority 
under ECOA, TILA, RESPA, and the Dodd-Frank Act. Section 1061 of the 
Dodd-Frank Act transferred to the Bureau the ``consumer financial 
protection functions'' previously vested in certain other Federal 
agencies, including the Federal Reserve Board and the Department of 
Housing and Urban Development. The term ``consumer financial protection 
function'' is defined to include ``all authority to prescribe rules or 
issue orders or guidelines pursuant to any Federal consumer financial 
law, including performing appropriate functions to promulgate and 
review such rules, orders, and guidelines.'' \9\ Section 1061 of the 
Dodd-Frank Act also transferred to the Bureau all of HUD's consumer 
protections functions relating to RESPA.\10\ Title X of the Dodd-Frank 
Act, including section 1061 of the Dodd-Frank Act, along with ECOA, 
TILA, RESPA, and certain subtitles and provisions of title XIV of the 
Dodd-Frank Act, are Federal consumer financial laws.\11\
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    \9\ 12 U.S.C. 5581(a)(1).
    \10\ Public Law 111-203, 124 Stat. 1376, section 1061(b)(7); 12 
U.S.C. 5581(b)(7).
    \11\ Dodd-Frank Act section 1002(14), 12 U.S.C. 5481(14) 
(defining ``Federal consumer financial law'' to include the 
``enumerated consumer laws'' and the provisions of title X of the 
Dodd-Frank Act); Dodd-Frank Act section 1002(12), 12 U.S.C. 5481(12) 
(defining ``enumerated consumer laws'' to include TILA), Dodd-Frank 
section 1400(b), 15 U.S.C. 1601 note (defining ``enumerated consumer 
laws'' to include certain subtitles and provisions of Title XIV).
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A. ECOA

    Section 703(a) of ECOA authorizes the Bureau to prescribe 
regulations to carry out the purposes of ECOA. Section 703(a) further 
states that such regulations may contain--but are not limited to--such 
classifications, differentiation, or other provision, and may provide 
for such adjustments and exceptions for any class of transactions as, 
in the judgment of the Bureau, are necessary or proper to effectuate 
the purposes of ECOA, to prevent circumvention or evasion thereof, or 
to facilitate or substantiate compliance. 15 U.S.C. 1691b(a).

B. RESPA

    Section 19(a) of RESPA, 12 U.S.C. 2617(a), authorizes the Bureau to 
prescribe such rules and regulations, to make such interpretations, and 
to grant such reasonable exemptions for classes of transactions, as may 
be necessary to achieve the purposes of RESPA, which includes its 
consumer protection purposes. In addition, section 6(j)(3) of RESPA, 12 
U.S.C. 2605(j)(3), authorizes the Bureau to establish any requirements 
necessary to carry out section 6 of RESPA, and section 6(k)(1)(E) of 
RESPA, 12 U.S.C. 2605(k)(1)(E), authorizes the Bureau to prescribe 
regulations that are appropriate to carry out RESPA's consumer 
protection purposes. As identified in the 2013 RESPA Servicing Final 
Rule, the consumer protection purposes of RESPA include responding to 
borrower requests and complaints in a timely manner, maintaining and 
providing accurate information, helping borrowers avoid unwarranted or 
unnecessary costs and fees, and facilitating review for foreclosure 
avoidance options.

C. TILA

    Section 105(a) of TILA, 15 U.S.C. 1604(a), authorizes the Bureau to 
prescribe regulations to carry out the purposes of TILA. Under section 
105(a), such regulations may contain such additional requirements, 
classifications, differentiations, or other provisions, and may provide 
for such adjustments and exceptions for all or any class of 
transactions, as in the judgment of the Bureau are necessary or proper 
to effectuate the purposes of TILA, to prevent circumvention or evasion 
thereof, or to facilitate compliance therewith. A purpose of TILA is 
``to assure a meaningful disclosure of credit terms so that the 
consumer will be able to compare more readily the various credit terms 
available to him and avoid the uninformed use of credit.'' TILA section 
102(a), 15 U.S.C. 1601(a). In particular, it is a purpose of TILA 
section 129C, as amended by the Dodd-Frank Act, to assure that 
consumers are offered and receive residential mortgage loans on terms 
that reasonably reflect their ability to repay the loans and that are 
understandable and not unfair, deceptive, and abusive. Section 105(f) 
of TILA, 15 U.S.C. 1604(f), authorizes the Bureau to exempt from all or 
part of TILA any class of transactions if the Bureau determines that 
TILA coverage does not provide a meaningful benefit to consumers in the 
form of useful information or protection. Under TILA section 
103(bb)(4), the Bureau may adjust the definition of points and fees for 
purposes of that threshold to include such charges that the Bureau 
determines to be appropriate.
    TILA section 129C(b)(3)(B)(i) 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

[[Page 39905]]

the ability-to-repay requirements, to prevent circumvention or evasion 
thereof, or to facilitate compliance with TILA sections 129B and 129C. 
15 U.S.C. 1639c(b)(3)(B)(i). In addition, TILA section 129C(b)(3)(A) 
requires the Bureau to prescribe regulations to carry out the purposes 
of the qualified mortgage provisions, such as to ensure that 
responsible and affordable mortgage credit remains available to 
consumers in a manner consistent with the purposes of TILA section 
129C. 15 U.S.C. 1639c(b)(3)(A).

D. The Dodd-Frank Act

    Section 1022(b)(1) of the Dodd-Frank Act authorizes the Bureau to 
prescribe rules ``as may be necessary or appropriate to enable the 
Bureau to administer and carry out the purposes and objectives of the 
Federal consumer financial laws, and to prevent evasions thereof.'' 12 
U.S.C. 5512(b)(1). Title X of the Dodd-Frank Act is a Federal consumer 
financial law. Accordingly, the Bureau is exercising its authority 
under the Dodd-Frank Act section 1022(b) to prescribe rules that carry 
out the purposes and objectives of ECOA, RESPA, TILA, title X, and the 
enumerated subtitles and provisions of title XIV of the Dodd-Frank Act, 
and prevent evasion of those laws.
    Section 1032(a) of the Dodd-Frank Act provides that the Bureau 
``may prescribe rules to ensure that the features of any consumer 
financial product or service, both initially and over the term of the 
product or service, are fully, accurately, and effectively disclosed to 
consumers in a manner that permits consumers to understand the costs, 
benefits, and risks associated with the product or service, in light of 
the facts and circumstances.'' 12 U.S.C. 5532(a). The authority granted 
to the Bureau in Dodd-Frank Act section 1032(a) is broad, and empowers 
the Bureau to prescribe rules regarding the disclosure of the 
``features'' of consumer financial products and services generally. 
Accordingly, the Bureau may prescribe rules containing disclosure 
requirements even if other Federal consumer financial laws do not 
specifically require disclosure of such features.
    Dodd-Frank Act section 1032(c) provides that, in prescribing rules 
pursuant to Dodd-Frank Act section 1032, the Bureau ``shall consider 
available evidence about consumer awareness, understanding of, and 
responses to disclosures or communications about the risks, costs, and 
benefits of consumer financial products or services.'' 12 U.S.C. 
5532(c). Accordingly, in proposing provisions authorized under Dodd-
Frank Act section 1032(a), the Bureau has considered available studies, 
reports, and other evidence about consumer awareness, understanding of, 
and responses to disclosures or communications about the risks, costs, 
and benefits of consumer financial products or services.
    The Bureau is proposing to amend rules finalized in January 2013 
that implement certain Dodd-Frank Act provisions. In particular, the 
Bureau is proposing to amend regulatory provisions adopted by the 2013 
ECOA Final Rule, the 2013 Mortgage Servicing Final Rules, the 2013 
HOEPA Final Rule, the 2013 Escrows Final Rule, the 2013 Loan Originator 
Compensation Final Rule, and the 2013 ATR Final Rule.

IV. Proposed Effective Dates

A. For Provisions Other Than Those Related to the 2013 Loan Originator 
Compensation Final Rule or the 2013 Escrows Final Rule

    In enacting the Dodd-Frank Act, Congress significantly amended the 
statutory requirements governing a number of mortgage practices. Under 
the Dodd-Frank Act, most of these new requirements would have taken 
effect automatically on January 21, 2013, if the Bureau had not issued 
implementing regulations by that date.\12\ Where the Bureau was 
required to prescribe implementing regulations, the Dodd-Frank Act 
further provided that those regulations must take effect not later than 
12 months after the date of the regulations' issuance in final 
form.\13\ The Bureau issued the 2013 Title XIV Final Rules in January 
2013 to implement these new statutory provisions and provide for an 
orderly transition. To allow the mortgage industry sufficient time to 
comply with the new rules, the Bureau established January 10, 2014--one 
year after issuance of the earliest of the 2013 Title XIV Final Rules--
as the baseline effective date for nearly all of the new requirements. 
In the preamble to certain of the various 2013 Title XIV Final Rules, 
the Bureau further specified that the new regulations would apply to 
transactions for which applications were received on or after January 
10, 2014.
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    \12\ Dodd-Frank Act section 1400(c)(3), 15 U.S.C. 1601 note.
    \13\ Dodd-Frank Act section 1400(c)(1)(B), 15 U.S.C. 1601 note.
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    Except for the amendments regarding the 2013 Loan Originator 
Compensation Final Rule and the 2013 Escrows Final Rule discussed 
below, the Bureau proposes an effective date of January 10, 2014 for 
the proposals in this document. The Bureau believes that having a 
consistent effective date across most of the 2013 Title XIV Final Rules 
will facilitate compliance. The Bureau requests public comment on this 
proposed effective date, including on any suggested alternatives.

B. For Provisions Related to the 2013 Escrows Final Rule

    While the Bureau established January 10, 2014 as the baseline 
effective date for most of the 2013 Title XIV Final Rules, the Bureau 
identified certain provisions that it believed did not present 
significant implementation burdens for industry, including amendments 
to Sec.  1026.35 adopted by the 2013 Escrows Final Rule. For these 
provisions, the Bureau set an earlier effective date of June 1, 2013.
    As discussed in the section-by-section analysis below, the Bureau 
is now proposing to amend one such provision, Sec.  
1026.35(b)(2)(iii)(A), which provides an exemption from the higher-
priced mortgage loan escrow requirement to creditors that extend more 
than 50 percent of their total covered transactions secured by a first 
lien in ``rural'' or ``underserved'' counties during the preceding 
calendar year and also meet other small creditor criteria, and do not 
otherwise escrow loans serviced by themselves or an affiliate. In light 
of recent changes to which counties meet the definition of ``rural,'' 
the Bureau is proposing to amend this provision to prevent creditors 
that qualified for the exemption in 2013 from losing eligibility in 
2014 or 2015 because of these changes. The Bureau is proposing to amend 
this provision to allow creditors to qualify for the exemption if they 
qualified in any of the previous three calendar years (assuming the 
other criteria for eligibility are also met). In addition, the Bureau 
is proposing to amend Sec.  1026.35(b)(2)(iii)(D)(1) to prevent 
creditors that were previously ineligible for the exemption, but may 
now qualify in light of the proposed changes, from losing eligibility 
because they had established escrow accounts for first-lien higher-
priced mortgage loans (for which applications were received after June 
1, 2013), as required when the final rule took effect and prior to the 
proposed amendments taking effect.
    Because the Sec.  1026.35(b)(2)(iii) exemption applies based on a 
calendar year, the Bureau believes it is appropriate to set a January 
1, 2014 effective date for these provisions. The Bureau notes that a 
January 1, 2014 effective date is more beneficial to industry, because 
the amendment

[[Page 39906]]

would only expand eligibility for the exemption--thus an effective date 
of January 1, 2014, as opposed to January 10, 2014, would mean that 
creditors are able to take advantage of this expanded exemption 
earlier. The Bureau thus proposes that the amendments to Sec.  
1026.35(b)(2)(iii) and its commentary take effect for applications 
received on or after January 1, 2014. The Bureau invites comment on 
this approach, and specifically whether an effective date for 
transactions where applications were received on or after January 1, 
2014 is appropriate, in light of the proposed changes to the calendar 
year exemption under Sec.  1026.35(b)(2)(iii).

C. For Provisions Related to the 2013 Loan Originator Compensation 
Final Rule

    The proposed effective date for certain provisions in this proposal 
related to the 2013 Loan Originator Compensation Final Rule is January 
1, 2014 for the reasons discussed below.

V. Proposal To Change the Effective Date of the 2013 Loan Originator 
Compensation Rule

    As described above, the Bureau established January 10, 2014 as the 
baseline effective date for nearly all of the provisions in the 2013 
Title XIV Final Rules, including most provisions of the 2013 Loan 
Originator Compensation Final Rule. The Bureau believed that having a 
consistent effective date across nearly all of the 2013 Title XIV Final 
Rules would facilitate compliance. However, the Bureau identified a few 
provisions that it believed did not present significant implementation 
burdens for industry, including Sec.  1026.36(h) on mandatory 
arbitration clauses and waivers of certain consumer rights and Sec.  
1026.36(i) on financing credit insurance, as adopted by the 2013 Loan 
Originator Compensation Final Rule. For these provisions, the Bureau 
set an earlier effective date of June 1, 2013.\14\
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    \14\ After interpretive issues were raised concerning the credit 
insurance provision as discussed further below, the Bureau 
temporarily delayed and extended the effective date for Sec.  
1026.36(i) in the 2013 Effective Date Final Rule until January 10, 
2014. 78 FR 32547 (May 31, 2013).
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    Since issuing the 2013 Loan Originator Compensation Final Rule in 
January, the Bureau has received a number of questions about transition 
issues, particularly with regard to application of provisions under 
Sec.  1026.36(d) that generally prohibit basing loan originator 
compensation on transaction terms but permit creditors to award non-
deferred profits-based compensation determined with reference to 
profits from mortgage-related business so long as the compensation does 
not exceed 10 percent of the loan originators' total compensation or 
the loan originator does not engage in more than a specified number of 
transactions within a 12-month period. For instance, the Bureau has 
received inquiries about when the 2013 Loan Originator Compensation 
Final Rule permits creditors and loan originator organizations to begin 
taking into account transactions for purposes of paying compensation 
under a non-deferred profits-based compensation plan pursuant to Sec.  
1026.36(d)(1)(iv)(B)(1) (i.e., the 10-percent total compensation limit, 
or the 10-percent limit). The Bureau also believes that, given the 
current effective date, some creditors and loan originator 
organizations intending to pay compensation under a non-deferred 
profits-based compensation plan pursuant to Sec.  
1026.36(d)(1)(iv)(B)(1) might believe that they must undertake a 
separate accounting for the period from January 1 through January 9, 
2014, given that the effective date is January 10, 2014, and is tied to 
when applications are received.
    While the profits-based compensation provisions present relatively 
complicated transition issues, the Bureau is also conscious of the fact 
that most other provisions in the 2013 Loan Originator Compensation 
Final Rule are simpler to implement because they largely recodify and 
clarify existing requirements that were previously adopted by the 
Federal Reserve Board in 2010 with regard to loan originator 
compensation, and by various agencies under the Secure and Fair 
Enforcement for Mortgage Licensing Act of 2008, 12 U.S.C. 5106-5116 
(SAFE Act), with regard to loan originator qualification requirements. 
The provisions are also focused on compensation plan structures, 
registration and licensing, and hiring and training requirements that 
are often structured on an annual basis and typically do not vary from 
transaction to transaction.
    For all of these reasons, the Bureau proposes moving the general 
effective date for most provisions adopted by the 2013 Loan Originator 
Compensation Final Rule to January 1, 2014. Although that would shorten 
the implementation period by nine days, the Bureau believes that the 
change would actually facilitate compliance and reduce implementation 
burden by providing a cleaner transition period that more closely 
aligns with changes to employers' annual compensation structures and 
registration, licensing, and training requirements. In addition, 
because elements of the 2013 Loan Originator Compensation Final Rule 
concerning retention of records, definitions, scope, and implementing 
procedures affect multiple provisions, the Bureau is proposing to make 
the change with regard to the bulk of the 2013 Loan Originator 
Compensation Final Rule as described further below, rather than 
attempting to treat individual provisions in isolation. Finally, the 
Bureau is also proposing changes, discussed below, to the effective 
date for provisions on financing of credit insurance under Sec.  
1026.36(i), in connection with proposing further clarifications and 
guidance on the Dodd-Frank Act requirements related to that provision.
    These proposed clarifications and amendments to the effective date 
require only minimal revisions to the rule text and commentary. They 
primarily would be reflected in the Dates caption and discussion of 
effective dates in the Supplementary Information of a rule finalizing 
this proposal. 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. Further, 
under Dodd-Frank Act section 1022(b)(1), 15 U.S.C. 5512(b)(1), the 
Bureau has general authority 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. The Bureau is proposing to change the 
effective date of the 2013 Loan Originator Compensation Final Rule with 
respect to those provisions described above pursuant to its TILA 
section 105(a) and Dodd-Frank Act section 1022(b)(1) authority.
    The Bureau believes these changes would facilitate compliance and 
help ensure that the 2013 Loan Originator Compensation Final Rule does 
not have adverse unintended consequences. The Bureau requests public 
comment on these proposed effective dates, including on any suggested 
alternatives.

1. Effective Date for Amendments to Sec.  1026.36(d)

    The Bureau is proposing three specific changes to the effective 
date for

[[Page 39907]]

the amendments to Sec.  1026.36(d). First, the Bureau is proposing that 
the provisions of the 2013 Loan Originator Compensation Final Rule 
revising Sec.  1026.36(d) would be effective January 1, 2014, not 
January 10, 2014. The Bureau is concerned that an effective date of 
January 10, 2014, for the revisions to Sec.  1026.36(d) may result in 
creditors and loan originator organizations believing that they have to 
account separately for the period from January 1 through January 9, 
2014, when applying the new compensation restrictions under Sec.  
1026.36(d) (for example, if a creditor wishes to pay individual loan 
originators through non-deferred profits-based compensation plans 
pursuant to Sec.  1026.36(d)(1)(iv), or if a loan originator 
organization wishes to pay to an individual loan originator 
compensation pursuant to Sec.  1026.36(d)(2)(i)(C)). The Bureau 
recognizes that this proposal would make certain aspects of the 2013 
Loan Originator Compensation Final Rule effective nine days earlier 
than originally stated, meaning that creditors and loan originator 
organizations would have a slightly shorter implementation period. On 
balance, however, the Bureau believes this proposed change will ease 
compliance burdens for creditors and loan originator organizations by 
eliminating any concern about a need for separate accountings as 
described above. As noted above, the Bureau is also proposing to change 
the effective date for the addition of Sec.  1026.25(c)(2) (records 
retention) from January 10, 2014, to January 1, 2014. This proposed 
change dovetails with the proposal to change the effective date of 
Sec.  1026.36(d) to January 1, 2014, to ensure that records on 
compensation paid between January 1 and January 10, 2014, are properly 
maintained.
    Second, the Bureau is proposing that the revisions to Sec.  
1026.36(d) (other than the addition of Sec.  1026.36(d)(1)(iii), as 
discussed below) would apply to transactions that are consummated and 
for which the creditor or loan originator organization paid 
compensation on or after January 1, 2014. The Bureau believes applying 
the effective date for the revisions to Sec.  1026.36(d) based on 
application receipt, rather than based on transaction consummation and 
compensation payment, could present compliance challenges. This 
proposed change would permit transactions to be taken into account for 
purposes of compensating individual loan originators under the 
exceptions set forth in Sec.  1026.36(d)(1)(iv) if the transactions 
were consummated and compensation was paid to the individual loan 
originator on or after January 1, 2014, even if the applications for 
those transactions were received prior to January 1, 2014. The Bureau 
believes this clarification, in conjunction with the proposed change to 
the effective date for the revisions to Sec.  1026.36(d) described 
above, will reduce compliance burdens on creditors and loan originator 
organizations by allowing them to take into account all transactions 
consummated in 2014 (and for which compensation is paid to individual 
loan originators in 2014) for purposes of paying compensation under 
Sec.  1026.36(d)(1)(iv) that is earned in 2014. This proposed revision 
will also allow the consumer-paid compensation restrictions and 
exceptions thereto in the revisions to Sec.  1026.36(d)(2) to be 
effective upon the consummation of any transaction where such 
compensation is paid in 2014 even if the application for that 
transaction was received in 2013. Making this proposed clarification 
would eliminate the concern that creditors and loan originator 
organizations would potentially have to undertake separate accountings 
depending on when the applications for the transactions were 
received.\15\
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    \15\ The Bureau recognizes that, under this proposed revision, 
creditors and loan originator organizations would still have to 
account separately for compensation under a non-deferred profits-
based compensation plan that is paid in 2014 but is earned in 2013 
(e.g., a year-end bonus paid in January 2014 based on profits of a 
creditor's mortgage-related business during calendar year 2013). 
This approach is consistent with how compensation under a non-
deferred profits-based compensation plan is treated generally for 
purposes of the 10-percent limit calculation under Sec.  
1026.36(d)(1)(iv)(B)(1) (i.e., non-deferred profits-based 
compensation that is earned during one time period but is actually 
paid during a second time period is excluded from the total 
compensation amount for the second time period, and may be included 
in total compensation for the first time period). See comment 
36(d)(1)-3.v.C, as proposed to be revised.
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    For example, assume a creditor utilizes a calendar-year accounting 
method and wishes, pursuant to the exception for non-deferred profits-
based compensation in Sec.  1026.36(d)(1)(iv)(B)(1), to pay a bonus to 
an individual loan originator with reference to the profits of the 
creditor's mortgage-related business during the first quarter of 
calendar year 2014. In applying the 10-percent limit under Sec.  
1026.36(d)(1)(iv)(B)(1) to determine the maximum permissible amount of 
the quarterly bonus, a creditor could have interpreted the 2013 Loan 
Originator Compensation Final Rule's effective date provision to mean 
that it would have to account separately for transactions that were 
consummated in 2014 but where the applications were received in 2013 
(i.e., by not counting them in the calculation of the 10-percent limit 
for the first quarter of 2014). The Bureau's proposal would alleviate 
this concern by allowing the creditor to calculate the bonus with 
reference to the creditor's mortgage-related business profits during 
the first quarter of 2014 without having to inquire into the particular 
details about the transactions on whose terms the compensation was 
based, such as when the applications for those transactions were 
received.
    Third, the Bureau is proposing that the provisions of Sec.  
1026.36(d)(1)(iii), which pertain to contributions to or benefits under 
designated tax-advantaged plans for individual loan originators, would 
apply to transactions for which the creditor or loan originator 
organization paid compensation on or after January 1, 2014, regardless 
of when the transactions were consummated or their applications were 
received. These changes regarding the effective date for the revisions 
to Sec.  1026.36(d)(1)(iii) more clearly reflect the Bureau's intent to 
permit payment of compensation related to designated tax-advantaged 
plans during both 2013 (as explained in CFPB Bulletin 2012-2 clarifying 
current Sec.  1026.36(d)(1)) \16\ and thereafter (under the 2013 Loan 
Originator Compensation Final Rule). Without this proposed change, the 
Bureau believes there could be uncertainty about whether the 
clarification in the Bulletin, new Sec.  1026.36(d)(1)(iii), or neither 
would apply if a creditor or loan originator organization wished to pay 
compensation in 2014 in the form of contributions to or benefits under 
designated tax-advantaged plans where the compensation was determined 
based on the terms of transactions consummated during 2013.
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    \16\ The Bureau explained in the Supplementary Information to 
the 2013 Loan Originator Compensation Final Rule that it issued CFPB 
Bulletin 2012-2 (the Bulletin) to address questions regarding the 
application of Sec.  1026.36(d)(1) to ``Qualified Plans'' (as 
defined in the Bulletin). The Bureau noted in that Supplementary 
Information that until the final rule takes effect, the 
clarifications in CFPB Bulletin 2012-2 remain in effect and that the 
Bureau interprets ``Qualified Plan'' as used in the Bulletin to 
include the designated tax-advantaged plans described in the final 
rule.
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    In addition to the three specific changes to the effective date 
described above, the Bureau solicits comment generally on whether the 
proposed changes to the effective date for the amendments to Sec.  
1026.36(d) are appropriate or whether other approaches should be 
considered. In particular, the Bureau solicits comment on whether the 
amendments to

[[Page 39908]]

Sec.  1026.36(d) should take effect on January 1, 2014, and apply to 
all payments of compensation made on or after that date, regardless of 
the date of consummation of the transactions on whose terms the 
compensation was based. The Bureau believes such an approach would 
create a bright line that the payment of compensation on or after 
January 1, 2014, would be subject to the new rule. However, this 
approach could raise complexity about how the new rule would apply to 
payments under non-deferred profits-based compensation plans pursuant 
to Sec.  1026.36(d)(1)(iv)(B)(1) made on or after January 1, 2014, 
where the compensation payments are based on the terms of transactions 
consummated in 2013, prior to the effect of the new rule.\17\ This 
approach also could incentivize creditors and loan originator 
organizations to structure their compensation programs for 2013 to pay 
non-deferred profits-based compensation earned during 2013 in early 
2014, rather than in 2013 when the current rule would remain in effect 
(although the Bureau also notes that the 10-percent limit would set an 
upper limit on such behavior).
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    \17\ For example, the 2013 Loan Originator Compensation Final 
Rule revised Sec.  1026.36(d)(1)(i) and comment 36(d)(1)-2 to 
clarify how to determine whether a factor is a proxy for a term of a 
transaction, and Sec.  1026.36(d)(1)(ii) now contains a definition 
of ``term of a transaction.'' Thus, there is a question as to 
whether, with respect to payments under a non-deferred profits-based 
compensation plan pursuant to Sec.  1026.36(d)(1)(iv)(B)(1), a 
creditor or loan originator organization would have to apply the new 
proxy provisions and definition of a term of a transaction 
retroactively in assessing whether compensation based on 
transactions consummated in 2013 can be paid in 2014.
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2. Effective Dates for Amendments to or Additions of Sec.  1026.36(a), 
(b), (e), (f), (g), and (j)

    Rather than implementing the proposed change in effective dates for 
Sec.  1026.36(d) in isolation, the Bureau is also proposing to make the 
amendments to or additions of (as applicable) Sec.  1026.36(a) 
(definitions), Sec.  1026.36(b) (scope), Sec.  1026.36(e) (anti-
steering provisions), Sec.  1026.36(f) (loan originator qualification 
requirements) and Sec.  1026.36(j) (compliance policies and procedures 
for depository institutions) take effect on January 1, 2014. The Bureau 
is proposing not to tie the effective date to the receipt of a 
particular loan application, but rather to a date certain. Because 
these provisions rely on a common set of definitions and in some cases 
cross reference each other,\18\ the Bureau is proposing to make them 
effective on January 1, 2014, and without reference to receipt of 
applications to avoid a potential incongruity among the effective dates 
of those substantive provisions and the effective dates of the 
regulatory definitions and scope provisions supporting those 
substantive provisions. Thus, the Bureau believes this proposed 
revision would facilitate compliance.
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    \18\ For example, Sec.  1026.36(j) requires that depository 
institutions establish written policies and procedures reasonably 
designed to ensure and monitor compliance with Sec.  1026.36(d), 
(e), (f), and (g).
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    The Bureau is not, however, proposing to adjust the effective date 
for Sec.  1026.36(g), which requires that loan originators' names and 
identifier numbers be provided on certain loan documentation, except to 
clarify and confirm that the provision takes effect with regard to any 
application received on or after January 10, 2014, by a creditor or a 
loan originator organization. Because this provision requires 
modifications to documentation for individual loans and the systems 
that generate such documentation, the Bureau believes it is appropriate 
to have it take effect with the other 2013 Title XIV Final Rules that 
affect individual loan processing.

3. Effective Date for Sec.  1026.36(i)

    As discussed in the 2013 Effective Date Final Rule and below, the 
Bureau initially adopted a June 1, 2013 effective date for Sec.  
1026.36(i), but later delayed the provision's effective date to January 
10, 2014, while the Bureau considered addressing interpretive questions 
concerning the provision's applicability to transactions other than 
those in which a lump-sum premium is added to the loan amount at 
consummation. As discussed in the section-by-section analysis below, 
the Bureau is now proposing amendments to Sec.  1026.36(i), which will 
not be finalized until the Bureau has appropriately considered public 
comments and issued a final rule. The Bureau believes that creditors 
will need time to adjust certain credit insurance premium billing 
practices once the clarifications are finalized. However, the Bureau 
believes that the January 10, 2014 effective date adopted in the 2013 
Effective Date Final Rule will allow sufficient time for compliance. 
This is consistent with the generally applicable effective date for the 
2013 Title XIV Final Rules, including for several provisions the Bureau 
is proposing to amend through this notice. The Bureau requests comment 
on whether the effective date for Sec.  1026.36(i) may be set earlier 
than January 10, 2014, upon finalization of any clarifications and 
amendments, and still permit sufficient time for creditors to adjust 
credit insurance premium practices as necessary.

VI. Section-by-Section Analysis

A. Regulation B

Section 1002.14 Rules on Providing Appraisals and Other Valuations
14(b) Definitions
14(b)(3) Valuation
    The Bureau is proposing to amend commentary to Sec.  1002.14 to 
clarify the definition of ``valuation'' as adopted by the 2013 ECOA 
Final Rule. Dodd-Frank Act section 1744 amended ECOA by, among other 
things, defining ``valuation'' to include any estimate of the value of 
the dwelling developed in connection with a creditor's decisions to 
provide credit. See ECOA section 701(e)(6). Similarly, the 2013 ECOA 
Final Rule adopted Sec.  1002.14(b)(3), which defines ``valuation'' as 
any estimate of the value of a dwelling developed in connection with an 
application for credit. Consistent with these provisions, the Bureau 
intended the term ``valuation'' to refer only to an estimate for 
purposes of the 2013 ECOA Final Rule's newly adopted provisions. 
However, the 2013 ECOA Final Rule added two comments that refer to a 
valuation as an appraiser's estimate or opinion of the value of the 
property: Comment 14(b)(3)-1.i, which gives examples of ``valuations,'' 
as defined by Sec.  1002.14(b)(3); and comment 14(b)(3)-3.v, which 
provides examples of documents that discuss or restate a valuation of 
an applicant's property but nevertheless do not constitute 
``valuations'' under Sec.  1002.14(b)(3).
    The Bureau did not intend by these two comments to alter the 
meaning of ``valuation'' to become inconsistent with ECOA section 
701(e)(6) and Sec.  1002.14(b)(3). Accordingly, the Bureau proposes to 
clarify comments 14(b)(3)-1.i and 14(b)(3)-3.v by removing the words 
``or opinion'' from their texts.

B. Regulation X

General--Technical Corrections
    In addition to the proposed clarifications and amendments to 
Regulation X discussed below, the Bureau is proposing technical 
corrections and minor wording adjustments for the purpose of clarity 
throughout Regulation X that are not substantive in nature. The Bureau 
is proposing such technical and wording clarifications to regulatory 
text in Sec. Sec.  1024.30, 1024.39, and 1024.41; and to commentary to 
Sec. Sec.  1024.17, 1024.33 and 1024.41.

[[Page 39909]]

Sections 1024.35 and .36, Error Resolution Procedures and Requests for 
Information
    The Bureau is proposing minor amendments to the error resolution 
and request for information provisions of Regulation X, adopted by the 
2013 Mortgage Servicing Final Rules. The error resolution procedures 
largely parallel the information request procedures (particularly in 
the areas in which amendments are proposed); thus the two sections are 
discussed together below. Section 1024.35 implements section 6(k)(1)(C) 
of RESPA, and Sec.  1024.36 implements section 6(k)(1)(D) of RESPA. To 
the extent the requirements under Sec. Sec.  1024.35 and 1024.36 are 
applicable to qualified written requests, these provisions also 
implement sections 6(e) and 6(k)(1)(B) of RESPA. As discussed in part V 
(Legal Authority), the Bureau proposes these amendments pursuant to its 
authority under RESPA sections 6(j), 6(k)(1)(E) and 19(a). As explained 
in more detail below, these amendments are necessary and appropriate to 
achieve the consumer protection purposes of RESPA, including ensuring 
responsiveness to consumer requests and complaints and the provision 
and maintenance of accurate and relevant information.
35(c) and 36(b), Contact Information for Borrowers To Assert Errors and 
Information Requests
    The Bureau is proposing to amend the commentary to Sec.  1024.35(c) 
and Sec.  1024.36(b) with respect to disclosure of the exclusive 
address (if a servicer chooses to establish one) when a servicer 
discloses contact information to the borrower for the purpose of 
assistance from the servicer. Section 1024.35(c) states that a servicer 
may, by written notice provided to a borrower, establish an address 
that a borrower must use to submit a notice of error to a servicer in 
accordance with the procedures set forth in Sec.  1024.35. Comment 
35(c)-2 clarifies that, if a servicer establishes any such exclusive 
address, the servicer must provide that address to the borrower in any 
communication in which the servicer provides the borrower with contact 
information for assistance from the servicer. Similarly, Sec.  
1024.36(b) states that a servicer may, by written notice provided to a 
borrower, establish an address that a borrower must use to submit 
information requests to a servicer in accordance with the procedures 
set forth in Sec.  1024.36. Comment 36(b)-2 clarifies that, if a 
servicer establishes any such exclusive address, a servicer must 
provide that address to the borrower in any communication in which the 
servicer provides the borrower with contact information for assistance 
from the servicer.
    The Bureau is concerned that comments 35(c)-2 and 36(b)-2 could be 
interpreted more broadly than the Bureau had intended. Section 
1024.35(c) and comment 35(c)-2, as well as Sec.  1024.36(b) and comment 
36(b)-2, are intended to inform borrowers of the correct address for 
the borrower to use for purposes of submitting notices of error or 
information requests, so that borrowers do not inadvertently send these 
communications to other non-designated servicer addresses (which would 
not provide the protections afforded by Sec. Sec.  1024.35 and 1024.36, 
respectively). If interpreted literally, the existing comments would 
require the servicer to include the designated address for notices of 
error and requests for information when any contact information for the 
servicer is given to the borrower. However, if the servicer is merely 
including a phone number or web address (without a mailing address), 
there is no risk of the borrower mailing a notice of error or 
information request to a wrong address. Thus it would be unnecessary to 
mandate that the servicer provide the designated address every time a 
phone number or web address is given. The Bureau does not intend that 
the servicer be required to inform the borrower of the designated 
address in all communications with borrowers where any contact 
information whatsoever for assistance from the servicer is provided.
    Accordingly, the Bureau is proposing to amend comment 35(c)-2 to 
provide that, if a servicer establishes a designated error resolution 
address, the servicer must provide that address to a borrower in any 
communication in which the servicer provides the borrower with an 
address for assistance from the servicer. Similarly, the Bureau is 
proposing to amend comment 36(b)-2 to provide that if a servicer 
establishes a designated information request address, the servicer must 
provide that address to a borrower in any communication in which the 
servicer provides the borrower with an address for assistance from the 
servicer. The Bureau requests comment regarding this proposed revision 
to comments 35(c)-2 and 36(b)-2, and in particular about whether these 
updated comments appropriately clarify when the address must be 
disclosed.
35(g) and 36(f) Requirements Not Applicable
35(g)(1)(iii)(B) and 36(f)(1)(v)(B)
    The Bureau is proposing amendments to Sec.  1024.35(g)(1)(iii)(B) 
(untimely notices of error) and Sec.  1024.36(f)(1)(v)(B) (untimely 
requests for information). Section 1024.35(g)(1)(iii)(B) provides that 
a notice of error is untimely if it is delivered to the servicer more 
than one year after a mortgage loan balance was paid in full. 
Similarly, Sec.  1024.36(f)(1)(v)(B) provides that an information 
request is untimely if it is delivered to the servicer more than one 
year after a mortgage loan balance was paid in full.
    The Bureau is proposing to replace the references to the date a 
mortgage loan balance is paid in full to the date the mortgage loan is 
discharged. This change would specifically address circumstances in 
which a loan is terminated without being paid in full, for example, 
because it was discharged through foreclosure or deed in lieu of 
foreclosure. This change would also align more closely with the Sec.  
1024.38(c)(1) record retention requirements, which require a servicer 
to retain records that document actions taken with respect to a 
borrower's mortgage loan account only until one year after the date a 
mortgage loan is discharged. The Bureau requests comment regarding 
these proposed changes.
Section 1024.41 Loss Mitigation Procedures
    As discussed in part V (Legal Authority), the Bureau proposes 
amendments to Sec.  1024.41 pursuant to its authority under sections 
6(j)(3), 6(k)(1)(E), and 19(a) of RESPA. The Bureau believes that these 
proposed amendments are necessary to achieve the consumer protection 
purposes of RESPA, including to facilitate the evaluation of borrowers 
for foreclosure avoidance options. Further, the proposed amendments 
implement, in part, a servicer's obligation to take timely action to 
correct errors relating to avoiding foreclosure under section 
6(k)(1)(C) of RESPA by establishing servicer duties and procedures that 
must be followed where appropriate to avoid errors with respect to 
foreclosure. In addition, the Bureau relies on its authority pursuant 
to section 1022(b) of the Dodd-Frank Act to prescribe regulations 
necessary or appropriate to carry out the purposes and objectives of 
Federal consumer financial law, including the purpose and objectives 
under sections 1021(a) and (b) of the Dodd-Frank Act. The Bureau

[[Page 39910]]

additionally relies on its authority under section 1032(a) of the Dodd-
Frank Act, which authorizes the Bureau to prescribe rules to ensure 
that the features of any consumer financial product or service both 
initially and over the terms of the product or service, are fully, 
accurately, and effectively disclosed to consumers in a manner that 
permits consumers to understand the costs, benefits, and risks 
associated with the product or service, in light of the facts and 
circumstances.
41(b) Receipt of a Loss Mitigation Application
41(b)(2) Review of Loss Mitigation Application Submission
41(b)(2)(i) Requirements
    The Bureau is proposing to amend the commentary to Sec.  
1024.41(b)(2)(i) to clarify servicers' obligations with respect to 
providing notices to borrowers regarding the review of loss mitigation 
applications. Section 1024.41(b)(2)(i) requires a servicer that 
receives a loss mitigation application 45 days or more before a 
foreclosure sale to review and evaluate the application promptly and 
determine, based on that review, whether the application is complete or 
incomplete.\19\ If the application is incomplete, the servicer must 
also determine what additional documentation and information are 
required to make it complete. The servicer then must notify the 
borrower within five days (excluding legal public holidays, Saturdays 
and Sundays) that the servicer acknowledges receipt of the application, 
and that the servicer has determined that the loss mitigation 
application is either complete or incomplete. If an application is 
incomplete, the notice must state the additional documents and 
information that the borrower must submit to make the loss mitigation 
application complete. In addition, servicers are obligated under Sec.  
1024.41(b)(1) to exercise reasonable diligence in obtaining documents 
and information necessary to complete an incomplete application, which 
may require, when appropriate, the servicer to contact the borrower and 
request such information as illustrated in comment 41(b)(1)-4.i.
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    \19\ A ``complete loss mitigation application'' is defined in 
Sec.  1024.41(b)(1) as ``an application in connection with which a 
servicer has received all the information the servicer requires from 
a borrower in evaluating applications for the loss mitigation 
options available to the borrower.''
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    The Bureau believes that additional commentary is warranted to 
address situations in which a servicer determines additional 
information from the borrower is needed to complete an evaluation of a 
loss mitigation application after either (1) the servicer has provided 
notice to the borrower informing the borrower that the loss mitigation 
application is complete, or (2) the servicer has provided notice to the 
borrower identifying specific information or documentation necessary to 
complete the application and the borrower has furnished that 
documentation or information. The notice required by Sec.  
1024.41(b)(2)(i)(B) is intended to provide the borrower with timely 
notification that a loss mitigation application was received and either 
is considered complete by the servicer or is considered incomplete and 
that the borrower is required to take further action for the servicer 
to evaluate the loss mitigation application. The Bureau has received 
repeated questions concerning circumstances in which a borrower submits 
information that appears facially complete based on an initial review 
by the servicer, but the servicer, upon further evaluation, determines 
that it does not in fact have enough information to evaluate the 
borrower for a loss mitigation option pursuant to requirements imposed 
by an investor or guarantor of a mortgage loan. The Bureau is very 
conscious of concerns that servicers have prolonged loss mitigation 
processes by incomplete and inadequate document reviews that lead to 
repeated requests for supplemental information, and designed the rule 
to ensure an adequate up-front review. At the same time, the Bureau 
does not believe it is in the best interest of borrowers or servicers 
to create a system that leads to borrower applications being denied 
solely because they contain inadequate information and the servicer 
believes it may not request the additional information needed.
    The Bureau is therefore proposing three provisions to address these 
concerns. First, the Bureau is proposing new comment 41(b)(2)(i)(B)-1 
to clarify that, notwithstanding that a servicer has informed a 
borrower that an application is complete (or notified the borrower of 
specific information necessary to complete an incomplete application), 
a servicer must request additional information from a borrower if the 
servicer determines, in the course of evaluating the loss mitigation 
application submitted by the borrower, that additional information is 
required.
    Second, the Bureau is proposing new comment 41(b)(2)(i)(B)-2, to 
clarify that except as provided in Sec.  1024.41(c)(2)(iv), the 
provisions and timelines triggered by a complete loss mitigation 
application in Sec.  1024.41 are not triggered by an incomplete 
application. An application is considered complete only when a servicer 
has received all the information the servicer requires from a borrower 
in evaluating applications for the loss mitigation options available to 
the borrower, regardless of whether the servicer has sent a Sec.  
1024.41(b)(2)(i)(B) notification incorrectly informing the borrower 
that the loss mitigation application is complete or incorrectly 
informed the borrower of the information necessary to complete such 
application. The Bureau notes that the proposed clarifications do not 
allow servicers to inform borrowers that facially incomplete 
applications are complete or to incorrectly describe the information 
necessary to complete an application. Servicers are required under 
Sec.  1024.41(b)(2)(i)(A) to review a loss mitigation application to 
determine whether it is complete or incomplete. In addition, servicers 
are subject to the Sec.  1024.38(b)(2)(iv) requirement to have policies 
and procedures reasonably designed to achieve the objectives of 
identifying documents and information that a borrower is required to 
submit to complete an otherwise incomplete loss mitigation application, 
and servicers are obligated under Sec.  1024.41(b)(1) to exercise 
reasonable diligence in obtaining documents and information necessary 
to complete an incomplete application.
    Third, as described more fully below, the Bureau is proposing new 
Sec.  1024.41(c)(2)(iv) to require that, if a servicer creates a 
reasonable expectation that a loss mitigation application is complete 
but later discovers information is missing, the servicer must treat the 
application as complete for certain purposes until the borrower has 
been given a reasonable opportunity to complete the loss mitigation 
application. The Bureau believes the proposed rule would mitigate 
potential risks to consumers that could arise through a loss mitigation 
process prolonged by incomplete and inadequate document reviews and 
repeated requests for supplemental information. The Bureau believes 
these new provisions will provide flexibility to servicers who make 
good faith mistakes in conducting up-front reviews of loss mitigation 
applications for completeness, while ensuring that borrowers do not 
lose the protections under the rule due to such mistakes and that 
servicers have incentives to conduct rigorous up-front review of loss 
mitigation applications. However, the Bureau requests comment regarding 
whether proposed comments 41(b)(2)(i)(B)-1 and -2, in connection

[[Page 39911]]

with proposed Sec.  1024.41(c)(2)(iv), adequately balance the consumer 
interests in receipt of accurate notices. The Bureau also seeks comment 
regarding whether further provisions would be warranted to protect 
borrowers' interests in reducing dual tracking and prolonged loss 
mitigation processing, and avoiding application denials for lack of 
adequate information, while also providing servicers strong incentives 
to conduct rigorous up-front reviews and appropriate flexibility in the 
event of good-faith and clerical mistakes in conducting such reviews.
41(b)(2)(ii) Time Period Disclosure
    The Bureau is proposing to amend the Sec.  1024.41(b)(2)(ii) time 
period disclosure requirement, which requires a servicer to provide a 
date by which a borrower should submit any missing documents and 
information necessary to make a loss mitigation application complete. 
Section 1024.41(b)(2)(ii) requires a servicer to provide in the notice 
required pursuant to Sec.  1024.41(b)(2)(i)(B) the earliest remaining 
of four specific dates set forth in Sec.  1024.41(b)(2)(ii). The four 
dates set forth in Sec.  1024.41(b)(2)(ii) are: (1) The date by which 
any document or information submitted by a borrower will be considered 
stale or invalid pursuant to any requirements applicable to any loss 
mitigation option available to the borrower; (2) the date that is the 
120th day of the borrower's delinquency; (3) the date that is 90 days 
before a foreclosure sale; and (4) the date that is 38 days before a 
foreclosure sale.
    In general, many of the protections afforded to a borrower by Sec.  
1024.41 are dependent on a borrower submitting a complete loss 
mitigation application a certain amount of time before a foreclosure 
sale, and such protections decrease as a foreclosure sale approaches. 
It is therefore in the interest of borrowers to complete loss 
mitigation applications as early in the delinquency and foreclosure 
process as possible. However, even if a borrower does not complete a 
loss mitigation application sufficiently early in the process to secure 
all the protections available under Sec.  1024.41, that borrower may 
still benefit from some of the protections afforded. Borrowers should 
not be discouraged from completing loss mitigation applications merely 
because they cannot complete a loss mitigation application by the date 
that would be most advantageous in terms of securing the protections 
available under Sec.  1024.41. Accordingly, the goal of Sec.  
1024.41(b)(2)(ii) is to inform borrowers of the time by which they 
should complete their loss mitigation applications to receive the 
greatest set of protections available, without discouraging later 
efforts if any such timeline is not met. The Bureau notes Sec.  
1024.41(b)(2)(ii) requires servicers to inform borrowers of the date by 
which the borrower should make the loss mitigation application 
complete, as opposed to the date by which the borrower must make the 
loss mitigation application complete.
    The Bureau believes based on communications with consumer 
advocates, servicers, and trade associations that the requirement in 
Sec.  1024.41(b)(2)(ii) may be over-prescriptive and may prevent a 
servicer from having the flexibility to suggest an appropriate date by 
which a borrower should complete a loss mitigation application. For 
example, if a borrower submits a loss mitigation application on the 
114th day of delinquency, the servicer would have to inform him or her 
by the 119th day that the borrower should complete the loss mitigation 
application by the 120th day under the current provision. A borrower is 
unlikely to be able to assemble the missing information within one day, 
and would be better served by being advised to complete the loss 
mitigation application by a reasonable later date that would afford the 
borrower the benefits of the rule as well as enough time to gather the 
information.
    In response to these concerns, and in accordance with the goals of 
the provision, the Bureau is proposing to amend the requirement in 
Sec.  1024.41(b)(2)(ii). Specifically, the Bureau proposes to replace 
the requirement that a servicer disclose the earliest remaining date of 
the four specific dates set forth in Sec.  1024.41(b)(2)(ii) with a 
more flexible requirement that a servicer determine and disclose a 
reasonable date by which the borrower should submit the documents and 
information necessary to make the loss mitigation application complete. 
The Bureau proposes to clarify this amendment in proposed comment 
41(b)(2)(ii)-1, which would clarify that, in determining a reasonable 
date, a servicer should select the deadline that preserves the maximum 
borrower rights under Sec.  1024.41, except when doing so would be 
impracticable. Proposed comment 41(b)(2)(ii)-1 would further clarify 
that a servicer should consider the four deadlines previously set forth 
in Sec.  1024.41(b)(2)(ii) as factors in selecting a reasonable date. 
Proposed comment 41(b)(2)(ii)-1 also would clarify that if a 
foreclosure sale is not scheduled, for the purposes of determining a 
reasonable date, a servicer may make a reasonable estimate of when a 
foreclosure sale may be scheduled. This proposal is intended to provide 
appropriate flexibility while also requiring that servicers consider 
the impact of the various timing requirements set forth in Sec.  
1024.41. The Bureau requests comment regarding the proposed revision to 
Sec.  1024.41(b)(2)(ii).
41(b)(3) Timelines
    The Bureau is proposing to add a new provision in Sec.  
1024.41(b)(3) addressing the timelines when no foreclosure sale is 
scheduled as of the date a complete loss mitigation application is 
received or a foreclosure sale is rescheduled after receipt of a 
complete application. As discussed above, Sec.  1024.41 is structured 
to provide different procedural rights to borrowers and impose 
different requirements on servicers depending on the number of days 
remaining until a foreclosure sale is scheduled to occur, as of the 
time that a complete loss mitigation application is received. In 
particular, Sec.  1024.41(e)(1) requires that, if a complete loss 
mitigation application is received 90 days or more before a foreclosure 
sale, a servicer may require that a borrower accept or reject an offer 
of a loss mitigation option no earlier than 14 days after the servicer 
provides the offer. Similarly, Sec.  1024.41(h) provides borrowers with 
a right to appeal a denial of a loan modification option when a 
complete loss mitigation application is received 90 days or more in 
advance of a foreclosure sale. Alternatively, Sec.  1024.41(e)(1) 
provides that if a complete loss mitigation application is received 
less than 90 but more than 37 days before a foreclosure sale, a 
servicer may require that a borrower accept or reject an offer of a 
loss mitigation option no earlier than seven days after the servicer 
provides such offer, and under Sec.  1024.41(h), the borrower does not 
have a right to appeal denial of a loan modification option in this 
circumstance. Likewise, the prohibition on foreclosure sales in Sec.  
1024.41(g) sets limitations on a servicer's ability to move for 
judgment or order of sale or to conduct a foreclosure sale when a 
complete application is received more than 37 days before a foreclosure 
sale.
    However, the provisions of Sec.  1024.41 do not expressly address 
situations in which a foreclosure sale is rescheduled, or has not yet 
been scheduled at the time a complete loss mitigation application is 
received. Since issuance of the final rule, the Bureau has received 
questions about the applicability of the timing provisions in such 
scenarios. Specifically, industry stakeholders have asked whether it is 
appropriate to use

[[Page 39912]]

estimated dates of foreclosure where a foreclosure sale has not been 
scheduled at the time a complete loss mitigation application is 
received, and have requested guidance on how to apply the timelines if 
no foreclosure is scheduled as of the date a complete loss mitigation 
application is received, but a foreclosure sale is subsequently 
scheduled less than 90 days after receipt of such application, or if a 
foreclosure sale has been scheduled for less than 90 days after a 
complete application is received, but is then postponed to a date that 
is 90 days or more after the receipt date.
    The Bureau believes guidance in such situations is appropriate, and 
is proposing in Sec.  1024.41(b)(3) to provide that, for purposes of 
Sec.  1024.41, timelines based on the proximity of a foreclosure sale 
to the receipt of a complete loss mitigation application will be 
determined as of the date a complete loss mitigation application is 
received. Proposed comment 41(b)(3)-1 would clarify that if a 
foreclosure sale has not yet been scheduled as of the date that a 
complete loss mitigation application is received, the application shall 
be treated as if it were received at least 90 days before a foreclosure 
sale. Proposed comment 41(b)(3)-2 would clarify that such timelines 
would remain in effect even if at a later date, a foreclosure sale was 
rescheduled.
    The Bureau believes this approach would provide certainty to both 
servicers and borrowers as well as ensure that borrowers receive the 
broadest protections available under the rule in situations in which a 
foreclosure sale has not been scheduled at the time a borrower submits 
a complete loss mitigation application. The Bureau considered proposing 
a rule that would vary the applicable timelines depending on the number 
of days remaining until foreclosure sale at the time that a foreclosure 
sale is in fact scheduled even when the scheduling (or rescheduling) 
occurs after a complete loss mitigation application is received. Such 
an approach would have some advantages to both servicers (in reducing 
the risk of foreclosure sale delays compared to categorically applying 
the procedures applicable to applications received at least 90 days 
before a scheduled foreclosure sale when no foreclosure sale has yet 
been scheduled when a complete loss mitigation application is received) 
and to consumers (in providing appeal rights if a sale is initially 
scheduled to occur less than 90 days after receipt of a completed 
application but is later delayed). However, the Bureau was concerned 
that such a rule would have a number of disadvantages. First, it would 
add significant complexity and uncertainty to the existing timelines 
under the regulation. Second, it could create incentives for servicers 
to draw out their evaluation processes in the hope that a foreclosure 
sale would be scheduled in the intervening period, and disincentives 
for servicers to push off a previously scheduled foreclosure sale. 
Third, it could potentially create borrower confusion if changes to the 
timelines were permitted to occur after the servicer has provided the 
borrower with the notice required under Sec.  1024.41(c)(1)(ii) 
explaining whether the loss mitigation application has been approved 
and laying out applicable timelines for follow-up. Similarly, the 
Bureau was concerned that allowing servicers to estimate foreclosure 
dates where a complete loss mitigation application is received before a 
foreclosure sale is scheduled would be imprecise--the Bureau believes 
it is necessary to clearly define what rights a borrower is entitled to 
and does not believe it is appropriate for a borrower's rights to turn 
on an estimated date.
    Thus, on balance, the Bureau believes that a straightforward rule 
under which deadlines are calculated as of the date of receipt of a 
complete loss mitigation application, and a complete loss mitigation 
application is treated as having been received 90 days or more before a 
foreclosure sale if no sale is scheduled as of the date the application 
is received, may be preferable because it would provide industry and 
borrowers with clarity regarding its application, without the 
unnecessary complexity that may arise from an approach where the 
timelines would vary based on the number of days remaining before a 
later-scheduled foreclosure sale and whether a notice has already been 
provided to the borrower. The Bureau recognizes that the proposed rule 
might in some cases require a servicer to delay a foreclosure sale to 
adhere to the specified time for the borrower to respond to a loss 
mitigation offer and to appeal the servicer's denial of a loan 
modification option, where applicable. However, the Bureau believes 
that, in most circumstances, a foreclosure sale that is not scheduled 
at the time a complete application is received is unlikely to be 
subsequently scheduled to occur less than 90 days after the receipt 
date. The Bureau requests comment and supporting data regarding 
circumstances in which this may occur. Additionally, the Bureau 
believes borrowers should not lose certain protections of the rule 
because a servicer quickly schedules a foreclosure sale, particularly 
when a borrower has been informed by either the Sec.  1024.41(c)(1)(ii) 
notice or the Sec.  1024.41(h)(4) notice that he or she has such 
rights. The Bureau seeks comment on this provision addressing the 
calculation of timelines as of the date a complete loss mitigation 
application is received, or a scheduled foreclosure sale is 
subsequently rescheduled after receipt of a complete loss mitigation 
application. In particular the Bureau seeks comment as to whether the 
alternative approach that would vary the applicable timelines depending 
on the number of days remaining until foreclosure sale at the time that 
a foreclosure sale is in fact scheduled or subsequently rescheduled 
would be preferable and whether there are additional situations in 
which application of the timelines should be clarified or modified.
41(c) Evaluation of Loss Mitigation Applications
41(c)(1) Complete Loss Mitigation Application
41(c)(1)(ii)
    The Bureau is proposing to amend Sec.  1024.41(c)(1)(ii) to state 
explicitly that the notice required by Sec.  1024.41(c)(1)(ii) must 
state the deadline for accepting or rejecting a servicer's offer of a 
loss mitigation option, in addition to the requirements currently in 
Sec.  1024.41(d)(2) to specify, where applicable, that the borrower may 
appeal the servicer's denial of a loan modification option, the 
deadline for doing so, and any requirements for making an appeal. The 
Bureau intended that the Sec.  1024.41(c)(1)(ii) notice would specify 
the time and procedures for the borrower to accept or to reject the 
servicer's offer, in accordance with the timing requirements specified 
in Sec.  1024.41(e). Indeed, Sec.  1024.41(e)(2) provides both that the 
servicer may deem the borrower to have rejected the offer if the 
borrower does not respond within the timelines specified under Sec.  
1024.41(e)(1) and that the servicer must give the borrower a reasonable 
opportunity to complete documentation necessary to accept the offer if 
the borrower does not follow the specified procedures but begins making 
payments in accordance with the offer by the deadline specified in 
Sec.  1024.41(e)(1). The Bureau is therefore proposing to amend Sec.  
1024.41(c)(1)(ii) to state explicitly that the notice provided to the 
borrower under the provision must state the date and procedures by 
which the borrower is required to respond to an offer of a loss 
mitigation option, in addition to the information regarding appeals 
currently required to be

[[Page 39913]]

included in such notices under Sec.  1024.41(d)(2).
41(c)(2) Incomplete Loss Mitigation Application Evaluation
41(c)(2)(iii) Payment Forbearance
    The Bureau is proposing to modify the requirement in Sec.  
1024.41(c)(2) to allow servicers to offer certain short-term 
forbearances to borrowers, notwithstanding the prohibition on servicers 
offering a loss mitigation option to a borrower based on the review of 
an incomplete loss mitigation application. The Bureau had intentionally 
drafted Sec.  1024.41 with broad definitions of ``loss mitigation 
option'' and ``loss mitigation application,'' to provide a streamlined 
process in which a borrower will be evaluated for all available loss 
mitigation options at the same time, rather than having to apply 
multiple times to be evaluated for different options one at a time. 
Since publication of the final rule, however, both industry and 
consumer advocates have raised questions and concerns about how the 
rule applies in situations in which a borrower merely needs and 
requests short-term forbearance. For instance, a number of servicers 
have inquired about whether the rule would prevent them from granting a 
borrower's request for waiver of late fees or other short-term relief 
after a natural disaster until the borrower submits all information 
necessary for evaluation of the borrower for long-term loss mitigation 
options. Additionally, both consumer advocates and servicers have 
raised concerns about whether a borrower's request for short-term 
relief would later preclude a borrower from invoking the protections 
afforded by the rule if the borrower encounters a significant change in 
circumstances that warrants long-term loss mitigation alternatives.
    The Bureau is very conscious of the difficulties involved in 
distinguishing short-term forbearance programs from other types of loss 
mitigation and of the fact that some servicers have significantly 
exacerbated borrowers' financial difficulties in the past by using 
short-term forbearance programs inappropriately instead of reviewing 
the borrowers for long-term options. Nevertheless, the Bureau believes 
that it may be possible to revise the rule to facilitate appropriate 
use of short-term payment forbearance programs without creating undue 
risk for borrowers who need to be evaluated for a full range of loss 
mitigation alternatives.
    At the outset, the Bureau notes that it does not construe the 
existing rule to require that servicers obtain a complete loss 
mitigation application prior to exercising their discretion to waive 
late fees. Additionally the Bureau notes that a servicer may offer any 
borrower any loss mitigation option if the borrower has not submitted a 
loss mitigation application or if the option is not based on an 
evaluation of information submitted by the borrower in connection with 
a loss mitigation application, as clarified in existing comment 
41(c)(2)(i)-1.
    With regard to short-term forbearance programs that involve more 
than simply waiving late fees, such as where a servicer allows a 
borrower to forgo making two payments and then to catch up by spreading 
the cost over the next year, the Bureau believes that the issues raised 
by various stakeholders can most appropriately be addressed by 
providing more flexibility to servicers to provide such relief 
notwithstanding that a borrower has submitted an incomplete loss 
mitigation application. Thus, the Bureau is not proposing to change the 
current definition of loss mitigation option, which includes all 
forbearance programs, but rather to relax the prohibition in Sec.  
1024.41(c)(2)(i) against evading the requirement to evaluate a 
borrower's complete loss mitigation application for all loss mitigation 
options available to the borrower by offering a loss mitigation option 
based upon an evaluation of an incomplete loss mitigation application. 
Specifically, the Bureau is proposing to add Sec.  1024.41(c)(2)(iii) 
to provide that a servicer may offer a short-term payment forbearance 
program to a borrower based upon an evaluation of an incomplete loss 
mitigation application.
    The proposed exemption in Sec.  1024.41(c)(2)(iii) would apply only 
to short-term payment forbearance programs. Proposed comment 
41(c)(2)(iii)-1 states that a payment forbearance program is a loss 
mitigation option for which a servicer allows a borrower to forgo 
making certain payments for a period of time. Payment forbearance 
programs are usually offered when a borrower is having a short-term 
difficulty brought on, for example, a natural disaster. In such cases, 
the servicer offers a short-term payment forbearance arrangement to 
assist the borrower in managing the hardship. The Bureau believes it is 
appropriate for servicers to have the flexibility to offer short-term 
payment forbearance programs prior to receiving a complete loss 
mitigation application for all available loss mitigation options.
    Proposed comment 41(c)(2)(iii)-1 also would explain how to 
determine whether a particular payment forbearance program is ``short-
term.'' Specifically, it would provide that short-term programs allow 
the forbearance of payments due over periods of up to two months. Thus, 
if a borrower is allowed to forgo making payments due in January and 
February, but must make the monthly obligation due in March, such a 
program would be considered a two-month program. The proposed comment 
clarifies this would be considered a two-month payment forbearance, 
regardless of the amount of time the servicer provides the borrower to 
make up the forborne payments, and provides examples illustrating this 
principle. Different payment forbearance programs may have the borrower 
make up the payments at the end of the forbearance period, spread over 
a certain period of time (for example, over the next 12 payments) or 
may make the forgone payments due when the loan matures. The Bureau 
believes these all would be considered two-month payment forbearance 
programs despite the different repayment time periods because, under 
all of these scenarios, the borrower would resume making regular 
payments in March.
    The Bureau notes that, under the proposed approach, servicers that 
receive a request for a short-term payment forbearance and grant such 
requests would remain subject to the requirements triggered by the 
receipt of a loss mitigation application in Sec.  1024.41. Thus, as 
explained in proposed comment 41(c)(2)(iii)-2, if a servicer offers a 
payment forbearance program based on an incomplete loss mitigation 
application, the servicer is still required to review the application 
for completeness, to send the Sec.  1024.41(b)(2)(i)(B) notice to 
inform the borrower whether the application is complete or incomplete, 
and if incomplete what documents or additional information are 
required, and to use due diligence to complete the loss mitigation 
application. If a borrower submits a complete application, the servicer 
must evaluate it for all available loss mitigation options. The Bureau 
believes that maintaining these requirements is important to ensure 
that borrowers are not inappropriately diverted into short-term 
forbearance programs without access to the full protections of the 
regulation. At the same time, if a borrower in fact does not want an 
evaluation for long-term options, the borrower will simply fail to 
provide the additional information necessary to submit a complete 
application and the servicer will therefore not be required to conduct 
a full assessment for all options.

[[Page 39914]]

    To ensure that a borrower who is receiving an offer of short-term 
payment forbearance program understands the options available, proposed 
Sec.  1024.41(c)(2)(iii) would require a servicer offering a short-term 
payment forbearance program to a borrower based on an incomplete loss 
mitigation application to include in the Sec.  1024.41(b)(2)(i)(B) 
notice additional information, specifically that: (1) The servicer has 
received an incomplete loss mitigation application and on the basis of 
that application the servicer is offering a short-term payment 
forbearance program; (2) absent further action by the borrower, the 
servicer will not be reviewing the incomplete application for other 
loss mitigation options; and (3) if the borrower would like to be 
considered for other loss mitigation options, he or she must submit the 
missing documents and information required to complete the loss 
mitigation application. The Bureau believes that providing this more 
specific information, coupled with the proposed amendments under Sec.  
1024.41(c)(2)(iii), is critical to ensure that the rule provides both 
flexibility to servicers and borrowers to avoid unwarranted delays and 
paperwork where short-term forbearance is appropriate and a safeguard 
against the misuse of short-term forbearance to avoid addressing long-
term problems. For example, suppose a borrower submits information in 
connection with a request for a payment forbearance program, but such 
information is not a complete loss mitigation application as defined in 
Sec.  1024.41(b)(1). Under proposed Sec.  1024.41(c)(2)(iii), the 
servicer would be able to offer the borrower a payment forbearance 
program. However, the servicer would have to send the notice required 
by Sec.  1024.41(b)(2)(i)(B) notifying the borrower that his or her 
loss mitigation application is incomplete and stating the additional 
documents and information the borrower must submit to make the loss 
mitigation application complete. The borrower then would have the 
information needed to complete the loss mitigation application if he or 
she would like a full review for all loss mitigation options. However, 
if the borrower feels the payment forbearance program is sufficient, he 
or she would be able to decline to complete the loss mitigation 
application and the full Sec.  1024.41 procedures would not be 
triggered.
    Finally, the Bureau proposes comment 41(c)(2)(iii)-3 clarifying 
servicers' obligations on receipt of a complete loss mitigation 
application. The proposed comment states that, notwithstanding that a 
servicer offers a borrower a payment forbearance program after an 
evaluation of an incomplete loss mitigation application, a servicer 
must still comply with all requirements in Sec.  1024.41 on receipt of 
a borrowers submission of a complete loss mitigation application. This 
comment is intended to clarify that, even though payment forbearance 
may be offered as short-term assistance to a borrower, a borrower is 
still entitled to submit a complete loss mitigation application and 
receive an evaluation of such application for all available loss 
mitigation options. Although payment forbearance may assist a borrower 
with a short-term hardship, a borrower should not be precluded from 
demonstrating a long-term inability to afford a mortgage, and being 
considered for long-term solutions, such as a loan modification, when 
that may be appropriate.
    Accordingly, the Bureau proposes to amend the loss mitigation 
provisions in Sec.  1024.41 by adding new Sec.  1024.41(c)(2)(iii) and 
new comments 41(c)(2)(iii)-1, -2, and -3. The Bureau requests comment 
regarding all aspects of these proposed provisions, and in particular 
on whether the proposed amendments appropriately address concerns 
regarding servicers' ability to work with borrowers by offering payment 
forbearance programs as appropriate, pending receipt and evaluation of 
complete loss mitigation applications. Additionally, the Bureau 
requests comment as to whether short-term forbearance programs are 
appropriately defined and whether it might be appropriate to develop 
tailored definitions to address specific situations such as programs 
offered to victims of natural disasters or unemployment. Further, the 
Bureau seeks comment as to whether it would be helpful to require that 
additional language be added to the Sec.  1024.41(b)(2)(i)(B) notice 
when a servicer is offering a short-term payment forbearance program 
based on an incomplete loss mitigation application to encourage a 
borrower to assess realistically whether he or she is encountering 
short-term or long-term problems and to complete a loss mitigation 
application as appropriate. Finally, the Bureau seeks comment on 
whether additional safeguards would be appropriate or necessary to 
provide flexibility for appropriate use of short-term forbearance 
programs without creating loopholes for abuse or disincentives to long-
term loss mitigation activities.
41(c)(2)(iv) Servicer Creates Reasonable Expectation That a Loss 
Mitigation Application Is Complete
    As discussed above, the Bureau is proposing new Sec.  
1024.41(c)(2)(iv) which states that if a servicer creates a reasonable 
expectation that a loss mitigation application is complete but later 
discovers that the application is incomplete, the servicer shall treat 
the application as complete as of the date the borrower had reason to 
believe the application was complete for purposes of applying 
paragraphs (f)(2) and (g) until the borrower has been given a 
reasonable opportunity to complete the loss mitigation application. 
This provision is designed to work in connection with proposed new 
comments 41(b)(2)(i)-1 and -2 as discussed above to address scenarios 
when a servicer determines that an application the servicer determined 
to be complete or to be missing particular information in fact is 
lacking additional information needed for evaluation.
    The Bureau has received questions about the impact of an error in 
the notice required by Sec.  1024.41(b)(2)(i)(B), particularly in light 
of the short time period the servicer has to review the information 
submitted by the borrower. As discussed above the Bureau recognizes 
that, in certain circumstances, a borrower may submit information that 
appears facially complete, or that appears to be missing only specific 
information, but that a servicer, upon further evaluation, may 
determine that additional information is needed in order for the 
servicer to evaluate the borrower for all available loss mitigation 
options. The proposed commentary to Sec.  1024.41(b)(2)(i) is intended 
to clarify that servicers are required to obtain the missing 
information in such situations. Proposed Sec.  1024.41(c)(2)(iv) is 
intended to protect borrowers while a servicer requests the missing 
information.
    Proposed comment 41(c)(2)(iv)-1 would clarify that a servicer 
creates a reasonable expectation that a loss mitigation application is 
complete when the servicer notifies the borrower in the Sec.  
1024.41(b)(2)(i)(B) notice that the application is complete or when the 
servicer notifies the borrower in the Sec.  1024.41(b)(2)(i)(B) notice 
that certain items are missing and the borrower provides all the 
missing documents and information. The Bureau believes that a borrower 
would have a reasonable expectation that his or her loss mitigation 
application was complete in either of these situations.
    Where a servicer creates a reasonable expectation that a loss 
mitigation

[[Page 39915]]

application is complete but later discovers that the application is 
incomplete, proposed Sec.  1024.41(c)(2)(iv) would provide that the 
servicer shall treat the application as complete for certain purposes 
until the borrower has been given a reasonable opportunity to supply 
the missing information necessary to complete the loss mitigation 
application. Specifically, under this provision, the servicer would 
need to treat the application as complete for purposes of the 
foreclosure referral ban in Sec.  1024.41(f)(2) and the foreclosure 
sale limitations in Sec.  1024.41(g). Proposed Sec.  1024.41(c)(2)(iv) 
would ensure that servicers that make good faith mistakes in making 
initial determinations of completeness need not be considered in 
violation of the rule, and that borrowers do not lose protections under 
the rule due to such mistake. The Bureau believes that, once a borrower 
is given reason to believe he or she has the benefit of certain 
protections (which are triggered by submission of a complete loss 
mitigation application), if the servicer discovers that an application 
is incomplete, the borrower should have a reasonable opportunity to 
complete the application before losing the benefit of such protections.
    Proposed comment 41(c)(2)(iv)-2 gives guidance on what would be a 
reasonable opportunity for the borrower to complete a loss mitigation 
application. The comment states that a reasonable opportunity requires 
that the borrower be notified of what information is missing and be 
given sufficient time to gather the information and submit it to the 
servicer. The amount of time that is sufficient for this purpose will 
depend on the facts and circumstances.
    The Bureau believes proposed Sec.  1024.41(c)(2)(iv) would provide 
incentives to servicers to conduct rigorous up-front reviews, while 
providing servicers the ability to correct a good-faith mistake or 
clerical error. Further, servicers seeking relief under the provision 
need only give borrowers a reasonable opportunity to provide the 
missing information, thus allowing a servicer to continue the 
foreclosure process if a borrower does not provide such information. 
The Bureau seeks comment on all aspects of this proposed provision. In 
particular, the Bureau seeks comment as to if the additional 
information is supplied by the borrower, should the application be 
considered complete as of the date the borrower was given a reasonable 
belief it was complete, or as of the date it was actually completed. 
Additionally the Bureau seeks comment as to if other measures would be 
necessary or useful to clarify servicer obligations and risks regarding 
the Sec.  1024.41(b)(2)(i)(B) notice.
Section 1024.41(d) Denial of Loan Modification Options
    As discussed above, the Bureau is proposing to move the substance 
of Sec.  1024.41(d)(2) to Sec.  1024.41(c)(1)(ii). Therefore, the 
Bureau is proposing to re-codify Sec.  1024.41(d)(1) as Sec.  
1024.41(d) and to re-designate the corresponding commentary 
accordingly.
    The Bureau is also proposing to clarify the requirement in Sec.  
1024.41(d)(1), re-codified as Sec.  1024.41(d), that a servicer must 
disclose the reasons for the denial of any trial or permanent loan 
modification option available to the borrower. The Bureau believes it 
is appropriate to clarify that the requirement to disclose the reasons 
for denial focuses on only those determinations actually made by the 
servicer and does not require a servicer to continue evaluating 
additional factors after a decision has been established. Thus, when a 
servicer's automated system uses a program that considers a borrower 
for a loan modification by proceeding through a series of questions and 
ends the process if the consumer is denied, the servicer need not 
modify the system to continue evaluating the borrower under additional 
criteria. For example, suppose a borrower must meet qualifications A, 
B, and C to receive a loan modification, but the borrower does not meet 
any of these qualifications. A servicer's system may start by asking if 
the borrower meets qualification A, and on the failure of that 
qualification end the analysis for that specific loan modification 
option. If a servicer were required to disclose all potential reasons 
why the borrower may have been denied for that loan modification option 
(i.e., A, B, and C), it would need to consider a lengthy series of 
hypothetical scenarios: For example, if the borrower had met 
qualification A, would the borrower also have met qualification B? The 
Bureau did not intend such a requirement, which it believes would be 
potentially burdensome.
    The Bureau instead intended to require only the disclosure of the 
actual reason or reasons on which the borrower was evaluated and 
denied. Accordingly, the Bureau is proposing to amend Sec.  1024.41(d) 
to require that a denial notice provided by the servicer must state the 
``specific reason or reasons'' for the denial and also, where 
applicable, disclose that the borrower was not evaluated based on other 
criteria. The Bureau believes that this additional information will 
help borrowers understand the status of their application and the fact 
that they were not fully evaluated under all factors (where 
applicable). The Bureau is also proposing new comment 41(d)-4 stating 
that, if a servicer's system reaches the first issue that causes a 
denial but does not evaluate borrowers for additional factors, a 
servicer need only provide the reason or reasons actually considered. 
Amended Sec.  1024.41(d) would also require that the notice must state 
the servicer did not evaluate the borrower on other criteria. The 
notice is not required to list such criteria. Thus, a servicer would 
not be required to consider hypothetical situations to compile a 
complete list of potential reasons for denial of the loan modification 
option, but a borrower would not be given the false impression that the 
denial reason stated is the only grounds on which he or she might have 
been denied. The Bureau believes this proposed amendment appropriately 
balances potential concerns about compliance challenges with concerns 
about informing borrowers about the status of their applications and 
about information that is relevant to potential appeals. The Bureau 
seeks comment on this proposed amendment to the denial notification 
requirement.
41(f) Prohibition on Foreclosure Referral
    The Bureau is proposing new comment 41(f)-1 to clarify what 
servicer actions are prohibited during the pre-foreclosure review 
period. Section 1024.41(f) prohibits a servicer from making the first 
notice or filing required by applicable law for any judicial or non-
judicial foreclosure process unless a borrower's mortgage loan is more 
than 120 days delinquent; a servicer is also prohibited from making 
such a notice or filing while a borrower's complete loss mitigation 
application is being evaluated. The Bureau has received numerous 
questions about what is prohibited. Specifically, the Bureau has been 
asked if the first notice or filing includes the breach letters 
required by Fannie Mae (typically required at 60 days delinquency). 
Additionally, the Bureau has been asked if the phrase ``first notice or 
filing'' has the same interpretation as the Federal Housing 
Administration (FHA) uses to define the ``first public action,'' which 
marks the initiation of the foreclosure process (which includes filing 
a complaint or petition, recording a notice of default or publication 
of a notice of sale, but not merely posting a notice on the property). 
In light of the requests for clarification of what is allowed under

[[Page 39916]]

this provision, the Bureau believes additional guidance is appropriate.
    The Bureau notes that the foreclosure process is a matter of State 
law, and is addressed differently in each State. Thus, the first notice 
or filing required by applicable law will be determined based on State 
law. In general, once a loan is delinquent, a servicer continues 
collection activity and will begin early intervention outreach. The 
Bureau believes that servicers frequently use demand or breach letters 
to notify borrowers of their delinquency at this stage. It is at this 
point that the Fannie Mae breach letter would typically be sent. At 
some point, many servicers will internally refer the loan to a 
foreclosure department or will send the loan to a foreclosure attorney. 
The formal foreclosure process will begin, generally, with a notice of 
default mailed to the borrower in a non-judicial State or with the 
onset of a legal action in a judicial State. It is at this point that 
the ``first public action,'' as FHA defines it, would typically occur.
    The Bureau designed the pre-foreclosure review period to mitigate 
the harms of dual tracking, by giving borrowers the opportunity to 
submit a complete loss mitigation application and have it considered 
without the pressure imposed by an active foreclosure process. Once a 
formal foreclosure process has begun, there is both more potential 
confusion on the part of borrowers due to dual tracking between 
foreclosure procedures and loss mitigation applications, and there is 
more pressure on the servicer to comply with State requirements and 
owner/investor requirements and expectations to complete the 
foreclosure process in a timely fashion. The Bureau is concerned that 
defining ``first notice or filing'' to match the terms used by the FHA 
and Fannie Mae for purposes of managing their foreclosure processes 
would be inconsistent with the intent behind the pre-foreclosure review 
period under 1024.41(f). In particular, the Bureau is concerned that 
the FHA ``first public action'' requirement could occur significantly 
later in the foreclosure process than the Bureau had intended under the 
``first notice or filing'' standard because the term ``first public 
action,'' as defined by FHA, does not encompass notices to the 
borrower. The Bureau believes that interpreting the term ``first notice 
or filing'' consistent with the term ``first public action'' would 
allow activity the rule intended to delay until after the pre-
foreclosure review period.
    The Bureau notes that the rule does not prohibit servicers from 
engaging in collection activity or communication with the borrower; in 
fact, other provisions of the rules affirmatively require that periodic 
statements with delinquency information be sent and that the servicer 
must engage in early intervention activities. The Bureau believes it 
would be appropriate for a servicer to send a breach letter at day 60, 
if the letter were sent for the general purpose of notifying the 
borrower of his or her delinquency and encouraging discussions about 
potential cures and loss mitigation options. However, to the extent 
that the servicer is sending a breach letter at day 60 with the purpose 
of serving as the formal notification of default to begin foreclosure 
proceedings in a non-judicial State, that is the type of activity that 
the rule was intended to delay until after the pre-foreclosure review 
period. The Bureau is therefore proposing a new comment to clarify what 
is prohibited under Sec.  1024.41(f). Proposed comment 41(f)-1 would 
state that whether a document is considered the first notice or filing 
is determined according to applicable State law. A document that would 
be used as evidence of compliance with foreclosure practices required 
pursuant to State law is considered the first notice or filing, and a 
servicer thus is prohibited from filing such a document during the pre-
foreclosure review period. Documents that would not be used in this 
fashion are not considered the first notice or filing. Thus, a servicer 
is not prohibited from attempting to collect the debt, sending periodic 
statements, sending breach letters or any other activity during the 
pre-foreclosure review period, so long as such documents would not be 
used as evidence of complying with requirements applicable pursuant to 
State law in connection with a foreclosure process, and are not banned 
by other applicable law (e.g., the Fair Debt Collection Practices Act 
or bankruptcy law). Instead, the Bureau expects that, when a State 
requires the first step to begin the formal foreclosure process is that 
a notice of default must be mailed to the borrower, such a notice would 
be sent after the expiration of the pre-foreclosure review period 
because earlier notices could not be used for such purposes consistent 
with the regulation.
    Thus, under proposed comment 41(f)-1, to comply with the 
requirements of Sec.  1024.41(f), any document that would be used as 
evidence of compliance with a State law requirement to initiate the 
foreclosure process by providing the borrower with a notice of default 
must be provided after the pre-foreclosure review period required by 
Sec.  1024.41(f). If a State law process mandates a notice to a 
borrower of the availability of mediation and such notice is a 
necessary prerequisite under State law to commence the foreclosure 
process, that notice is included in the definition of first notice or 
filing for the purposes of Sec.  1024.41.
    The Bureau acknowledges that the provisions of Sec.  1024.41 extend 
the timeline of a foreclosure by an additional 120 days. While the 
proposed clarifications may highlight that existing state procedures in 
connection with the Bureau's rule may create delays in the foreclosure 
process that are longer than 120 days, the Bureau notes this is not a 
new delay imposed by the proposed clarifications. The Bureau seeks to 
establish a rule that balances protecting consumers and encouraging 
communication between borrowers and servicers. The proposed rule would 
protect consumers by giving effect to the provisions in Sec.  1024.41 
intended to ensure a borrower is given sufficient time to submit a 
complete loss mitigation application and a servicer has time to work 
with the borrower without the pressure of a foreclosure practice. The 
rule would encourage communication by allowing the servicer to engage 
in any activity not being used as a prerequisite to State foreclosure 
practices. Further, the Bureau seeks to establish a workable rule that 
will clearly define what is and is not allowed, a goal that is 
complicated in light of both the varying foreclosure laws of different 
states, and the fact that a notice to the borrower may be sent for 
multiple reasons. The Bureau believes the proposed clarifications best 
balance these goals, but seeks comment on this topic.
41(f)(1) Pre-Foreclosure Review Period
    The Bureau is proposing to amend the prohibition on referral to 
foreclosure until after the 120th day of delinquency by limiting the 
foreclosure ban in two scenarios: when the foreclosure is based on a 
borrower's violation of a due-on-sale clause, and when the servicer is 
joining the foreclosure action of a subordinate lienholder. Section 
1024.41(f)(1) requires a 120-day pre-foreclosure review period; A 
servicer may not make the first notice or filing required by applicable 
law for any judicial or non-judicial foreclosure process unless a 
borrower's mortgage loan obligation is more than 120 days delinquent. 
This review period is intended to ensure a borrower's loss mitigation 
application may be submitted and reviewed without the pressure of an 
active foreclosure process and to mitigate some of the consumer harms 
associated with dual tracking. However,

[[Page 39917]]

the Bureau notes that there may be some circumstances where a servicer 
forecloses for reasons that do not involve a borrower's delinquency. In 
such scenarios, the Bureau acknowledges the protections for delinquent 
borrowers may not be appropriate or necessary. For example, if a 
borrower were current on his or her loan but transferred the property 
to another party (in breach of the loan contract), the rationale for 
the pre-foreclosure review of loss mitigation applications would not be 
applicable. Similarly, if a borrower were current on his or her first 
lien but was delinquent on a second lien mortgage, and the servicer for 
the second lien began a foreclosure action, it would be appropriate for 
the servicer of the first lien to join the foreclosure action, 
regardless of the fact that the borrower is current on the first lien 
mortgage.
    The Bureau believes it may be appropriate to include an exemption 
to the 120-day pre-foreclosure review period in certain scenarios and 
is proposing to amend Sec.  1024.41(f)(1) to include exclusions to the 
120-day foreclosure ban when the foreclosure is based on a borrower's 
violation of a due-on-sale clause or when the servicer is joining the 
foreclosure action of a subordinate lienholder. The Bureau seeks 
comment on the proposed changes. Additionally, the Bureau seeks comment 
on whether other scenarios would appropriately be exempted from the 
120-day foreclosure ban and on whether the exemption is appropriate in 
situations in which a borrower has submitted a complete loss mitigation 
application
41(h) Appeal Process
41(h)(4) Appeal Determination
    The Bureau is proposing to amend Sec.  1024.41(h)(4) to provide 
expressly that the notice informing a borrower of the determination of 
his or her appeal must also state the amount of time the borrower has 
to accept or reject an offer of a loss mitigation option after the 
notice is provided to the borrower. For the reasons discussed in the 
section-by-section analysis of Sec.  1024.41(c)(1)(ii), which would 
require the Sec.  1024.41(b)(2)(i)(B) notice to include how long the 
borrower has to accept or reject an offer of a loss mitigation option, 
the Bureau believes it is important that borrowers be informed of their 
rights. The Bureau believes that a borrower who is offered a loss 
mitigation option should be informed of how long he or she has to 
accept that option regardless of whether the option is being offered in 
response to an initial evaluation of a loss mitigation application or 
after the conclusion of an appeal. The Bureau seeks comment on this 
amendment.
41(j) Prohibition on Foreclosure Referral
    As discussed above, the Bureau is proposing to amend the 
prohibition on referral to foreclosure until after the 120th day of 
delinquency by limiting the foreclosure ban in two situations: when the 
foreclosure is based on a borrower's violation of a due-on-sale clause 
and when the servicer is joining the foreclosure action of a 
subordinate lienholder. For the same reasons, the Bureau believes it 
would be appropriate to make corresponding amendments to the provision 
in Sec.  1024.41(j) prohibiting a small servicer from making the first 
notice or filing required by applicable law for any judicial or non-
judicial foreclosure process unless a borrower's mortgage loan 
obligation is more than 120 days delinquent. Thus, the Bureau is 
proposing to amend Sec.  1024.41(j) to allow foreclosure before the 
120th day of delinquency when the foreclosure is based on a borrower's 
violation of a due-on-sale clause and when the servicer is joining the 
foreclosure action of a subordinate lienholder, by incorporating a 
cross-reference to Sec.  10124.41(f)(1). The Bureau seeks comment on 
this amendment.

C. Regulation Z

General--Technical Corrections
    In addition to the proposed clarifications and amendments to 
Regulation Z discussed below, the Bureau is also proposing technical 
corrections and minor clarifications to wording throughout Regulation Z 
that are not substantive in nature. The Bureau is proposing such 
technical and wording clarifications to regulatory text in Sec. Sec.  
1026.23, 1026.31, 1026.32, 1026.35, and 1026.36 and to commentary to 
Sec. Sec.  1026.25, 1026.32, 1026.34, 1026.36, and 1026.41.
Section 1026.23 Right of Rescission
23(a) Consumer's Right To Rescind
23(a)(3)(ii)
    The Bureau is proposing to amend Sec.  1026.23(a)(3)(ii) to update 
a cross-reference within that section from Sec.  1026.35(e)(2), as 
adopted by the Bureau's Amendments to the 2013 Escrows Final Rule under 
the Truth in Lending Act (Regulation Z) (May 2013 Escrows Final 
Rule),\20\ to Sec.  1026.43(g). The cross-reference in the Amendments 
to the 2013 Escrows Final Rule under the Truth in Lending Act 
(Regulation Z) is the correct cross-reference during the time period 
that rule will be in effect for transactions where applications are 
received on or after June 1, 2013, but prior to January 10, 2014. For 
transactions where applications are received on or after January 10, 
2014, the correct cross-reference will be to Sec.  1026.43(g). For this 
reason, the Bureau is proposing to remove the cross-reference to Sec.  
1026.35(e)(2) and replace it with a cross-reference to Sec.  
1026.43(g).
---------------------------------------------------------------------------

    \20\ 78 FR 30739 (May 23, 2013).
---------------------------------------------------------------------------

Section 1026.32 Requirements for High-Cost Mortgages
32(b) Definitions
    Two of the Bureau's 2013 Title XIV Final Rules--the 2013 ATR Final 
Rule and the 2013 HOEPA Final Rule--contain provisions that relate to a 
transaction's ``points and fees.'' \21\ Specifically, Sec.  
1026.43(e)(2)(iii), as adopted by the 2013 ATR Final Rule, sets forth a 
cap on points and fees for a closed-end credit transaction to acquire 
qualified mortgage status. In addition, Sec.  1026.32(a)(1)(ii), as 
adopted by the 2013 HOEPA Final Rule, sets forth a points and fees 
coverage threshold for both closed- and open-end credit 
transactions.\22\ These two final rules also adopted definitions of 
points and fees for closed- and open-end credit transactions.
---------------------------------------------------------------------------

    \21\ See 78 FR 6407; 78 FR 6856. The Bureau also addressed 
points and fees in the May 2013 ATR Final Rule. See 78 FR 35430.
    \22\ Section 1026.43(b)(9) provides that, for the qualified 
mortgage points and fees cap, ``points and fees'' has the same 
meaning as in Sec.  1026.32(b)(1).
---------------------------------------------------------------------------

    Section 1026.32(b)(1) defines ``points and fees'' for closed-end 
credit transactions, for purposes of both the qualified mortgage points 
and fees cap and the high-cost mortgage coverage threshold. Section 
1026.32(b)(1)(i) defines points and fees for closed-end credit 
transactions to include all items included in the finance charge as 
specified under Sec.  1026.4(a) and (b), with the exception of certain 
items specifically excluded under Sec.  1026.32(b)(1)(i)(A) through 
(F). These excluded items include interest or time-price differential; 
certain types and amounts of mortgage insurance premiums; certain bona 
fide third-party charges not retained by the creditor, loan originator 
or an affiliate of either; and certain bona fide discount points paid 
by the consumer. Section 1026.32(b)(1)(ii) through (vi) lists certain 
other items that are specifically included in points and fees, 
including compensation paid directly or indirectly by a consumer or 
creditor to a loan originator; certain real-estate related items listed 
in Sec.  1026.4(c)(7); premiums

[[Page 39918]]

for various forms of credit insurance, including credit life, credit 
disability, credit unemployment and credit property insurance; the 
maximum prepayment penalty, as defined in Sec.  1026.32(b)(6)(i), that 
may be charged or collected under the terms of the mortgage loan; and 
the total prepayment penalty as defined in Sec.  1026.32(b)(6)(i) 
incurred by the consumer if the consumer refinances an existing 
mortgage loan with the current holder of the existing loan (or a 
servicer acting on behalf of the current holder, or an affiliate of 
either).
    Section 1026.32(b)(2), which defines points and fees for open-end 
credit plans for purposes of the high-cost mortgage thresholds, 
essentially follows the inclusions and exclusions set out in Sec.  
1026.32(b)(1) for closed-end transactions, with several modifications 
and additional inclusions related to fees charged for open-end credit 
plans.
32(b)(1)
    The Bureau is proposing to add new commentary to Sec.  
1026.32(b)(1) to clarify when charges paid by parties other than the 
consumer, including third parties, are included in points and fees. 
Prior to the Dodd-Frank Act, TILA section 103(aa)(1)(B) provided that a 
mortgage is subject to the restrictions and requirements of HOEPA if 
the total points and fees ``payable by the consumer at or before 
closing'' (emphasis added) exceed the threshold amount. However, 
section 1431(a) of the Dodd-Frank Act amended the 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'' (emphasis added) exceed newly 
established thresholds. Similarly, TILA section 129C(b)(2)(A)(vii) 
provides that points and fees ``payable in connection with the loan'' 
(emphasis added) are included in the points and fees calculation for 
qualified mortgages.
    The Bureau believes that additional clarification concerning the 
treatment of charges paid by parties other than the consumer, including 
third parties, for purposes of inclusion in or exclusion from points 
and fees would be beneficial to consumers and creditors and facilitate 
compliance with the rule. Specifically, the Bureau is proposing to add 
new comment 32(b)(1)-2 to clarify the treatment of charges imposed in 
connection with a closed-end credit transaction that are paid by a 
party to the transaction other than the consumer, for purposes of 
determining whether that charge is included in points and fees as 
defined in Sec.  1026.32(b)(1). The proposed comment states that 
charges paid by third parties that fall within the definition of points 
and fees set forth in Sec.  1026.32(b)(1)(i) through (vi) are included 
in points and fees, and provides examples of third-party payments that 
are included and excluded. In discussing included charges, the proposed 
comment notes that a third-party payment of an item excluded from the 
finance charge under a provision of Sec.  1026.4, while not included in 
points and fees under Sec.  1026.32(b)(1)(i), may be included under 
Sec.  1026.32(b)(1)(ii) through (vi). In discussing excluded charges, 
the proposed comment states that a charge paid by a third party is not 
included in points and fees under Sec.  1026.32(b)(1)(i) as a component 
of the finance charge if any of the exclusions from points and fees in 
Sec.  1026.32(b)(1)(i)(A) through (F) applies.
    The proposed comment also discusses the treatment of ``seller's 
points,'' as described in Sec.  1026.4(c)(5) and commentary. The 
proposed comment states that seller's points are excluded from the 
finance charge and thus are not included in points and fees under Sec.  
1026.32(b)(1)(i), but also notes that charges paid by the seller may be 
included in points and fees if the charges are for items in Sec.  
1026.32(b)(1)(ii) through (vi). Finally the proposed comment restates 
for clarification purposes that, pursuant to Sec.  1026.32(b)(1)(i)(A) 
and (ii), charges that are paid by the creditor, other than loan 
originator compensation paid by the creditor that is required to be 
included in points and fees under Sec.  1026.32(b)(1)(ii), are excluded 
from points and fees. To the extent that the creditor recovers the cost 
of such charges from the consumer, the cost is recovered through the 
interest rate, which is excluded from points and fees under Sec.  
1026.32(b)(1)(i)(A). Section 1026.32(b)(1)(i) and (A) implements 
section 103(bb)(4)(A) of TILA to include in points and fees ``[a]ll 
items included in the finance charge under 1026.4(a) and (b)'' but 
specifically excludes ``interest and time-price differential.'' Under 
Sec.  1026.32(b)(1)(ii), however, compensation paid by the creditor to 
loan originators, other than employees of the creditor, is included in 
points and fees.
    The Bureau believes this clarification of the treatment of charges 
paid by parties other than the consumer for points and fees purposes is 
consistent with the amendment to TILA made by section 1431(a) of the 
Dodd-Frank Act, discussed above.
32(b)(1)(ii) and 32(b)(2)(ii)
    Section 1431(c)(1)(B) of the Dodd-Frank Act requires that points 
and fees include ``all compensation paid directly or indirectly by a 
consumer or creditor to a mortgage originator from any source . . . . 
'' TILA section 103(bb)(4). The 2013 ATR Final Rule implemented this 
statutory provision in amended Sec.  1026.32(b)(1)(ii), which provides 
that, for both the qualified mortgage points and fees limits and the 
high-cost mortgage points and fees threshold, points and fees include 
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 the transaction at the time the interest rate is set. The 
2013 HOEPA Final Rule implemented Sec.  1026.32(b)(2)(ii), which 
provides the same standard for including loan originator compensation 
in points and fees for open-end credit plans (i.e., a home equity line 
of credit, or HELOC). Concurrent with the 2013 ATR Final Rule, the 
Bureau also issued the 2013 ATR Concurrent Proposal, which, among other 
things, proposed certain clarifications for calculating loan originator 
compensation for points and fees. The Bureau finalized the 2013 ATR 
Concurrent Proposal in the May 2013 ATR Final Rule, which further 
amended Sec.  1026.32(b)(1)(ii) to exclude certain types of loan 
originator compensation from points and fees. In particular, the May 
2013 ATR 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). See Sec.  
1026.32(b)(1)(ii)(A). It 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. See Sec.  1026.32(b)(1)(ii)(B). In addition, the 
May 2013 ATR Final Rule excludes from points and fees compensation paid 
by a creditor to its loan officers. See Sec.  1026.32(b)(1)(ii)(C).
    The 2013 ATR Concurrent Proposal had requested comment on whether 
additional adjustment of the rules or additional commentary is 
necessary to clarify any overlapping definitions between the points and 
fees provisions in the 2013 ATR Final Rule and the 2013 HOEPA Final 
Rule and the provisions adopted by the 2013 Loan Originator 
Compensation Final Rule. In particular, the Bureau sought comment

[[Page 39919]]

on whether additional guidance would be useful regarding persons who 
are ``loan originators'' under Sec.  1026.36(a)(1) but are not employed 
by a creditor or mortgage broker, such as employees of a retailer of 
manufactured homes.
    In response to the 2013 ATR Concurrent Proposal, several industry 
and nonprofit commenters requested clarification of what compensation 
must be included in points and fees in connection with transactions 
involving manufactured homes. First, they requested additional guidance 
on what activities would cause a manufactured home retailer and its 
employees to qualify as loan originators. Second, they requested 
additional guidance on what compensation paid to manufactured home 
retailers and their employees would be counted as loan originator 
compensation and included in points and fees. The Bureau believes it is 
appropriate to provide additional opportunity for public comment on 
these issues. Accordingly, rather than provide additional guidance in 
the May 2013 ATR Final Rule, the Bureau noted that it would propose and 
seek comment on additional guidance.
    The 2013 Loan Originator Compensation 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 from 
the Dodd-Frank Act creating an exception from the definition of loan 
originator for employees of manufactured home retailers that engage in 
certain limited activities. See Sec.  1026.36(a)(1)(i)(B) and comments 
36(a)-1.i.A and 36(a)-4. Commenters responding to the 2013 ATR 
Concurrent Proposal 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 manufactured home retailer and its 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. Industry commenters 
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.
    As noted in the May 2013 ATR Final Rule, the Bureau does not 
believe it is appropriate to use its exception authority to exclude 
from points and fees all compensation that may be paid to a 
manufactured home retailer. As a general matter, to the extent that the 
consumer or creditor is paying the retailer for loan origination 
activities, the retailer is functioning as a mortgage broker and 
compensation for the retailer's loan origination activities should be 
captured in points and fees. As discussed below, the Bureau is 
proposing to clarify what compensation must be included in points and 
fees. As discussed in the Supplementary Information describing proposed 
revisions and clarifications to the rule text and commentary defining 
``loan originator,'' the Bureau is also proposing to clarify the 
circumstances in which employees of manufactured home retailers are 
loan originators, including a revision to Sec.  1026.36(a)(i)(B). In 
addition, the Bureau is continuing to conduct outreach with the 
manufactured home industry and other interested parties to address 
concerns about what activities are permissible for a retailer and its 
employees without causing them to qualify as loan originators.
    Industry commenters responding to the 2013 ATR Concurrent Proposal 
also requested that the Bureau clarify what compensation must be 
included in points and fees when a retailer and its employees qualify 
as loan originators. They argued that it is not clear whether the sales 
price received by the retailer or the sales commission received by the 
retailer's employee 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.
    Under Sec.  1026.32(b)(1)(ii), loan originator compensation is 
included in points and fees only if it can be attributed to a 
transaction at the time the interest rate is set. The Bureau believes 
that the sales price would not include compensation that is paid for 
loan origination activities and that can be attributed to a specific 
transaction. The sales price of a manufactured home allows manufactured 
home retailers to recover their costs (including the costs of 
compensating salespersons and other employees) and earn a profit. The 
Bureau does not believe that manufactured home retailers charge a 
different sales price depending on whether or not the retailer engages 
in loan origination activities for that particular transaction. If the 
retailer does not increase the price to obtain compensation for loan 
origination activities, then it does not appear that the sales price 
would include loan originator compensation that could be attributed to 
that particular transaction.
    The Bureau acknowledges that it is theoretically possible that the 
sales price could include loan originator compensation that could be 
attributed to a particular transaction at the time the interest rate is 
set and that therefore should be included in points and fees. One 
approach for calculating loan originator compensation for manufactured 
home transactions would be to compare the sales price in a transaction 
in which the retailer engaged in loan origination activities and the 
sales prices in transactions in which the retailer did not do so (such 
as in cash transactions or in transactions in which the consumer 
arranged credit through another party). To the extent that there is a 
higher sales price in the transaction in which the retailer engaged in 
loan origination activities, then the difference in sales prices could 
be counted as loan originator compensation that can be attributed to 
that transaction and that therefore should be included in points and 
fees.
    However, the Bureau does not believe that it is workable for the 
creditor to use this comparative sales price approach to determine 
whether the sales price includes loan originator compensation that must 
be included in points and fees. The creditor is responsible for 
calculating loan originator compensation to be included in points and 
fees for the qualified mortgage and high-cost mortgage points and fees 
thresholds. Accordingly, under the comparative sales price approach, 
the creditor would have to analyze a manufactured home retailer's 
prices to determine if there were differences in the prices that would 
have to be included in points and fees as loan originator compensation. 
This would appear to be an extremely difficult analysis for the 
creditor to perform. Not only would the creditor have to compare the 
sales prices from numerous transactions, it would have to determine 
whether any differences between the sales prices can be attributed to 
the loan origination activities of the retailer and not to other 
factors.
    As noted above, the Bureau does not believe that the sales price of 
a manufactured home includes loan originator compensation that can be 
attributed to a particular transaction. Moreover, the Bureau does not 
believe it is practicable for the creditor to attempt to analyze the 
sales price to determine if it does in fact include loan originator 
compensation that can be attributed to a particular transaction and

[[Page 39920]]

therefore must be included in points and fees. Accordingly, the Bureau 
is proposing guidance providing that the sales price of a manufactured 
home does not include loan originator compensation that can be 
attributed to the transaction at the time the interest rate is set and 
that the sales price therefore does not include loan originator 
compensation that must be included in points and fees under Sec.  
1026.32(b)(1)(ii). The Bureau requests comment on this proposed 
guidance. In addition, the Bureau requests comment on whether the sales 
price of a manufactured home does include loan originator compensation 
that can be attributed to the transaction at the time the interest rate 
is set, and, if so, whether there are practicable ways for a creditor 
to measure that compensation so that it could be included in points and 
fees.
    With respect to employees of manufactured home retailers, the 
Bureau notes that the May 2013 ATR Final Rule added Sec.  
1026.32(b)(1)(ii)(B), which excludes from points and fees compensation 
paid by mortgage brokers to their loan originator employees. It appears 
to the Bureau that when an employee of a retailer would qualify as a 
loan originator, the retailer also would qualify as a loan originator 
and therefore would qualify as a mortgage broker. If the retailer 
qualifies as 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).
    The Bureau notes, however, that if there were instances in which an 
employee of a manufactured home retailer would qualify as a loan 
originator but the retailer would not, the exclusion from points and 
fees in Sec.  1026.32(b)(1)(ii)(B) for compensation paid to an employee 
of a mortgage broker would not apply because the retailer would not be 
a mortgage broker. Nevertheless, the Bureau believes it may still be 
appropriate to exclude such compensation paid to an employee of a 
manufactured home retailer. As noted by some commenters responding to 
the 2013 ATR Concurrent Proposal, it may be difficult for creditors to 
determine whether employees of a manufactured home retailer have 
engaged in loan origination activities and, if so, what compensation 
they received for doing so. The Bureau understands that a retailer 
typically pays a sales commission to its employees, so it may be 
difficult for a creditor to know whether a retailer has paid any 
compensation to its employees for loan origination activities, as 
distinct from compensation for sales activities.\23\ Accordingly, to 
prevent any such uncertainty, the Bureau is proposing new Sec.  
1026.32(b)(1)(ii)(D), which excludes from points and fees all 
compensation paid by manufactured home retailers to their employees. 
The Bureau requests comment on this proposed exclusion. The Bureau also 
requests comment on whether there are instances in which an employee of 
a manufactured home retailer would qualify as a loan originator but the 
retailer would not qualify as a loan originator.
---------------------------------------------------------------------------

    \23\ Commenters asserted that creditors may presume that the 
sales commissions should be treated as loan originator compensation 
and include such payments in points and fees. They maintain that 
doing so would prevent most loans from staying under the qualified 
mortgage points and fees limits and would cause many loans to exceed 
the high-cost mortgage points and fees thresholds.
---------------------------------------------------------------------------

    The Bureau notes that it is proposing to exclude from points and 
fees only compensation that is paid by a manufactured home retailer to 
its employees. To the extent that an employee of a manufactured home 
retailer receives from another source (such as the creditor) loan 
originator compensation that can be attributed to the transaction at 
the time the interest rate is set, then that compensation must be 
included in points and fees.
    As noted above, the Bureau is proposing new Sec.  
1026.32(b)(1)(ii)(D), which excludes from points and fees all 
compensation paid by manufactured home retailers to their employees. 
The Bureau is also proposing new Sec.  1026.32(b)(2)(ii)(D), which 
provides that, for open-end credit plans, compensation paid by 
manufactured home retailers to their employees is excluded from points 
and fees for purposes of the high-cost mortgage points and fees 
threshold.
    The Bureau is also proposing new comment 32(b)(1)(ii)-5, which 
explains what compensation is included in loan originator compensation 
that must be included in points and fees for manufactured home 
transactions. Proposed comment 32(b)(1)(ii)-5.i states that, if a 
manufactured home retailer receives compensation for loan origination 
activities and such compensation can be attributed to the transaction 
at the time the interest rate is set, then such compensation is loan 
originator compensation that is included in points and fees. Proposed 
comment 32(b)(1)(ii)-5.ii specifies that the sales price of the 
manufactured home does not include loan originator compensation that 
can be attributed to the transaction at the time the interest rate is 
set and therefore is not included in points and fees. Proposed comment 
32(b)(1)(ii)-5.iii specifies that, consistent with new Sec.  
1026.32(b)(1)(ii)(D), compensation paid by a manufactured home retailer 
to its employees is not included in points and fees.
    The Bureau is proposing new Sec.  1026.32(b)(1)(ii)(D) and 
(b)(2)(ii)(D) 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 TILA exception 
authorities will facilitate compliance with the points and fees 
regulatory regime by not requiring creditors to investigate the 
manufactured housing retailer's employee compensation practices, and by 
making sure that all creditors apply the provision consistently. It 
will also effectuate the purposes of TILA by 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), 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

[[Page 39921]]

noted above, by helping to ensure that the points and fees calculation 
is not artificially inflated, the Bureau is helping to ensure that 
responsible, affordable mortgage credit remains available to consumers.
    The Bureau also has considered the factors in TILA section 105(f) 
and has concluded that, for the reasons discussed above, the proposed 
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 is proposing to exclude from points and fees compensation 
paid by a retailer of manufactured homes to its employees because 
including such compensation in points and fees does not provide a 
meaningful benefit to consumers. The Bureau believes that the proposed 
exemption is appropriate for all affected consumers to which the 
proposed 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 proposed 
exemption is appropriate for all affected loans covered under the 
proposed 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 proposed 
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.
    The Bureau also concludes that, to the extent that it determines 
that it would be appropriate to adopt a regulatory provision that 
excludes from points and fees any loan originator compensation in the 
sales price of a manufactured home, such an exclusion also would be 
appropriate under TILA section 105(f). The Bureau believes that 
including such compensation in points and fees does not provide a 
meaningful benefit to consumers. The Bureau believes that such an 
exemption would be appropriate for all affected consumers to which the 
exemption would apply, regardless of their other financial arrangements 
and financial sophistication and the importance of the loan to them. 
Similarly, the Bureau believes that the exemption would be appropriate 
for all affected loans, 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 would 
simplify the credit process without undermining the goal of consumer 
protection, denying important benefits to consumers, or increasing the 
expense of the credit process.
32(b)(1)(vi) and 32(b)(2)(vi)
    The Bureau is proposing changes to Sec.  1026.32(b)(1)(vi) and 
(2)(vi) to harmonize more fully the definitions of ``total prepayment 
penalty'' adopted in these two sections with the statutory requirement 
implemented by them. Section 1026.32(b)(1)(vi) and (2)(vi) implements 
section 1431(c) of the Dodd-Frank Act, which added new TILA section 
103(bb)(4)(F). That provision requires that points and fees include 
``all prepayment fees or penalties that are incurred by the consumer if 
the loan refinances a previous loan made or currently held by the same 
creditor or an affiliate of the creditor.'' As adopted by the 2013 ATR 
Final Rule, Sec.  1026.32(b)(1)(vi) implements this provision as it 
relates to closed-end credit transactions, and provides that points and 
fees must include ``[t]he total prepayment penalty, as defined in 
paragraph (b)(6)(i) of this section, incurred by the consumer if the 
consumer refinances the existing mortgage loan with the current holder 
of the existing loan, a servicer acting on behalf of the current 
holder, or an affiliate of either.'' As adopted by the 2013 HOEPA Final 
Rule, Sec.  1026.32(b)(2)(vi) implements this provision as it relates 
to open-end credit plans (i.e., a home equity line of credit, or 
HELOC), and provides that points and fees must include ``[t]he total 
prepayment penalty, as defined in paragraph (b)(6)(ii) of this section, 
incurred by the consumer if the consumer refinances an existing closed-
end credit transaction with an open-end credit plan, or terminates an 
existing open-end credit plan in connection with obtaining a new 
closed- or open-end credit transaction, with the current holder of the 
existing plan, a servicer acting on behalf of the current holder, or an 
affiliate of either.''
    The Bureau intended these provisions to work in the same manner for 
closed-end and open-end credit transactions: To include in points and 
fees any prepayment charges triggered by the refinancing of an existing 
loan or termination of a HELOC by obtaining a new credit transaction 
with the current holder of the existing closed-end mortgage loan or 
open-end credit plan. The Bureau believes that additional clarification 
as to when prepayment penalties are included in points and fees in 
connection with the refinancing of a closed-end mortgage loan or the 
termination and replacement of a HELOC with the holder of the existing 
loan or HELOC would be beneficial.
    The Bureau is proposing changes to Sec.  1026.32(b)(1)(vi) and 
(2)(vi) to clarify both provisions' application. Specifically, the 
Bureau is proposing to state expressly that Sec.  1026.32(b)(1)(vi) 
applies to instances where the consumer takes out a closed-end mortgage 
loan to pay off and terminate an existing open-end credit plan held by 
the same creditor and the plan imposes a prepayment penalty (as defined 
in Sec.  1026.32(b)(6)(ii)) on the consumer. The Bureau also is 
proposing to strike from Sec.  1026.32(b)(2)(vi) the reference to 
obtaining a new closed-end credit transaction because Sec.  
1026.32(b)(2)(vi) relates to points and fees only for open-end credit 
plans and Sec.  1026.32(b)(1)(vi) would apply instead. The Bureau is 
also proposing to insert in Sec.  1026.32(b)(2)(vi) a reference to 
Sec.  1026.32(b)(6)(i), the definition of prepayment penalties for 
closed-end credit transactions, to clarify that this definition applies 
in calculating the prepayment penalties included where a consumer 
refinances a closed-end mortgage loan with a HELOC with the creditor 
holding the closed-end mortgage loan (i.e., the closed-end mortgage 
loan's prepayment penalties are included in calculating points and fees 
for the HELOC). The Bureau believes that these changes are consistent 
with the statutory provision implemented by this section and clarify 
the Bureau's intended application of Sec.  1026.32(b)(1)(vi) and 
(2)(vi).
32(b)(2)
    The Bureau is proposing the addition of a new comment 32(b)(2)-1 
that directs readers for further guidance on the inclusion of charges 
paid by parties other than the consumer in points and fees for open-end 
credit plans to proposed comment 32(b)(1)-2 on closed-end credit 
transactions.
32(d) Limitations
32(d)(1)
32(d)(1)(ii) Exceptions
32(d)(1)(ii)(C)
    The Bureau is proposing to revise the exception to the prohibition 
on balloon payments for high-cost mortgages in Sec.  
1026.32(d)(1)(ii)(c) for transactions that satisfy the criteria set 
forth in Sec.  1026.43(f), which implements a Dodd-

[[Page 39922]]

Frank Act provision that allows certain balloon-payment mortgages made 
by small creditors operating predominantly in ``rural or underserved 
areas'' to be accorded status as qualified mortgages under the 2013 ATR 
Final Rule. The Bureau has received extensive comment on the 
definitions of ``rural'' and ``underserved'' that it adopted for 
purposes of Sec.  1026.43(f) and certain other purposes in the 2013 
Title XIV Final Rules, and recently announced that it would reexamine 
those definitions over the next two years to determine whether further 
adjustments are appropriate particularly in light of access to credit 
concerns.\24\ The Bureau also amended the 2013 ATR Final Rule to add 
Sec.  1026.43(e)(6) to allow small creditors during the period from 
January 10, 2014, to January 10, 2016, to make balloon-payment 
qualified mortgages even if they do not operate predominantly in rural 
or underserved areas.\25\ In light of those actions, the Bureau is 
proposing to revise Sec.  1026.32(d)(1)(ii)(c) to expand the exception 
to the prohibition on balloon payments for high-cost mortgages for 
transactions that satisfy the criteria in either Sec.  1026.43(f) or 
(e)(6).
---------------------------------------------------------------------------

    \24\ See e.g., U.S. Consumer Fin Prot. Bureau, Clarification of 
the 2013 Escrows Final Rule (May 16, 2013), available at http://www.consumerfinance.gov/blog/clarification-of-the-2013-escrows-final-rule/.
    \25\ Specifically, in the May 2013 ATR Final Rule, the Bureau 
adopted Sec.  1026.43(e)(6), which provided for a temporary balloon-
payment qualified mortgage that requires all of the same criteria be 
satisfied as the balloon-payment qualified mortgage definition in 
Sec.  1026.43(f) except the requirement that the creditor extend 
more than 50 percent of its total first-lien covered transactions in 
counties that are ``rural'' or ``underserved.'' This temporary 
balloon-payment qualified mortgage would sunset, however, after 
January 10, 2016. As discussed in the section-by-section analysis of 
Sec.  1026.43(e)(6) in the May 2013 ATR Final Rule, the Bureau 
adopted this two-year transition period for small creditors to roll 
over existing balloon-payment loans as qualified mortgages, even if 
they do not operate predominantly in rural or underserved areas, 
because the Bureau believes it is necessary to preserve access to 
responsible, affordable mortgage credit for some consumers. The 
Bureau also noted that, during the two-year period for which Sec.  
1026.43(e)(6) is in place, the Bureau intends to review whether the 
definitions of ``rural'' and ``underserved'' should be adjusted 
further and to explore how it can best facilitate the transition of 
small creditors that do not operate predominantly in rural or 
underserved areas from balloon-payment loans to adjustable-rate 
mortgages. 78 FR 35430.
---------------------------------------------------------------------------

    The balloon qualified mortgage provision in Sec.  1026.43(f) 
implements a Dodd-Frank Act provision that appears to have been 
designed to promote access to credit. The Dodd-Frank Act generally 
prohibits balloon-payment loans from being accorded qualified mortgage 
status, but Congress appears to have been concerned that small 
creditors in rural areas might have sufficient difficulty converting 
from balloon-payment loans to adjustable rate mortgages that they would 
curtail mortgage lending if they could not obtain qualified mortgage 
status for their balloon-payment loans. As adopted in the 2013 ATR 
Final Rule, the exemption is available to creditors that extended more 
than 50 percent of their total covered transactions secured by a first 
lien in ``rural'' or ``underserved'' counties during the preceding 
calendar year.
    Because commenters raised similar concerns about the prohibition in 
HOEPA on high-cost mortgages having balloon-payment features, the 
Bureau decided in the 2013 HOEPA Final Rule to adopt Sec.  
1026.32(d)(1)(ii)(C) to allow balloon-payment features on loans that 
met the qualified mortgage requirements. The Bureau stated that, in its 
view, (1) allowing creditors in certain rural or underserved areas to 
extend high-cost mortgages with balloon payments will benefit consumers 
by expanding access to credit in these areas, and also will facilitate 
compliance for creditors who make these loans; and (2) allowing 
creditors that make high-cost mortgages in rural or underserved areas 
to originate loans with balloon payments if they satisfy the same 
criteria promotes consistency between the 2013 HOEPA Final Rule and the 
2013 ATR Final Rule, and thereby facilitates compliance for creditors 
that operate in these areas.
    Because the Bureau has now decided to allow small creditors an 
additional two years to transition from balloon-payment loans to other 
products while it reevaluates the definitions of ``rural'' and 
``underserved,'' the Bureau believes it is appropriate to carry over 
the flexibility provided by the revised May 2013 ATR Final Rule into 
the HOEPA balloon loan provisions. Accordingly, the Bureau is proposing 
to amend Sec.  1026.32(d)(1)(ii)(C) to include the Sec.  1026.43(e)(6) 
exception. The Bureau is proposing to expand this exception pursuant to 
its authority under TILA section 129(p)(1), which grants it authority 
to exempt specific mortgage products or categories from any or all of 
the prohibitions specified in TILA section 129(c) through (i) if the 
Bureau finds that the exemption is in the interest of the borrowing 
public and will apply only to products that maintain and strengthen 
homeownership and equity protections.
    The Bureau believes expanding the balloon-payment exception for 
high-cost mortgages to allow certain small creditors operating in areas 
that do not qualify as ``rural'' or ``underserved'' to continue to 
originate high-cost mortgages with balloon payments is in the interest 
of the borrowing public and will strengthen homeownership and equity 
protection. The Bureau believes allowing greater access to credit in 
remote areas that nevertheless may not meet the definitions of 
``rural'' or ``underserved'' while creditors transition to adjustable 
rate mortgages (or the Bureau reconsiders those definitions) will help 
those consumers who otherwise may be able to obtain credit only from a 
limited number of creditors. Further, it will do so in a manner that 
balances consumer protections with access to credit. In the Bureau's 
view, concerns about potentially abusive practices that may accompany 
balloon payments will be curtailed by the additional requirements set 
forth in Sec.  1026.43(e)(6) and (f). Creditors that make these high-
cost mortgages will be required to verify that the loans also satisfy 
the additional criteria discussed above, including some specific 
criteria required for qualified mortgages. Further, creditors that make 
balloon-payment high-cost mortgages under this exception will be 
required to hold the high-cost mortgages in portfolio for a specified 
time, which the Bureau believes also decreases the risk of abusive 
lending practices. Accordingly, for these reasons and for the purpose 
of consistency between the two rulemakings, the Bureau is proposing to 
amend the 2013 HOEPA Final Rule to include an exception to the Sec.  
1026.32(d)(1) balloon-payment restriction for high-cost mortgages where 
the creditor satisfies the conditions set forth in Sec. Sec.  
1026.43(f)(1)(i) through (vi) and 1026.43(f)(2) or the conditions set 
forth in Sec.  1026.43(e)(6).
Section 1026.35 Requirements for Higher-Priced Mortgage Loans
35(b) Escrow Accounts
35(b)(2) Exemptions
35(b)(2)(iii)
35(b)(2)(iii)(A)
    The Bureau is proposing to revise the exemption provided by Sec.  
1026.35(b)(2)(iii) to the general requirement that creditors establish 
an escrow account for first lien higher-priced mortgage loans where a 
small creditor operates predominantly in rural or underserved areas and 
meets various other criteria. The Bureau has received extensive comment 
on the definitions of ``rural'' and ``underserved'' that it adopted for 
purposes of Sec.  1026.35(b)(2) and certain other purposes in the 2013 
Title XIV Final Rules and recently announced that it would re-examine 
those definitions over the next two years

[[Page 39923]]

to determine whether further adjustments are appropriate particularly 
in light of access to credit concerns. In light of that coming re-
examination, the Bureau is proposing to revise Sec.  1026.35(b) and its 
commentary to minimize volatility in the definitions while they are 
being re-evaluated.
    The exemption in Sec.  1026.35(b)(2)(iii) implements a Dodd-Frank 
Act provision that appears to have been designed to promote access to 
credit by exempting small creditors in rural areas that might have 
sufficient difficulty maintaining escrow accounts that they would 
curtail making higher-priced mortgage loans rather than trigger the 
escrow account requirement. As adopted in the 2013 Escrows Final Rule, 
and as amended by the Amendments to the 2013 Escrows Final Rule,\26\ 
the exemption is available to creditors that extended more than 50 
percent of their total covered transactions secured by a first lien on 
properties that are located in ``rural'' or ``underserved'' counties 
during the preceding calendar year. In general, a county's status as 
``rural'' is defined in relation to Urban Influence Codes (UICs) 
established by the United States Department of Agriculture's Economic 
Research Service. Due to updated information from the 2010 Census, 
however, the list of ``rural'' counties will change between 2013 and 
2014, with a small number of new counties meeting the definition of 
rural and approximately 82 counties no longer meeting that definition. 
The Bureau estimates that approximately 200-300 otherwise eligible 
creditors during 2013 could lose their eligibility for 2014 solely 
because of changes in the status of the counties in which they operate 
(assuming the geographical distribution of their mortgage originations 
does not change significantly over the relevant period).\27\ In light 
of the Bureau's intent to review whether the definitions of ``rural'' 
and ``underserved'' should be adjusted further during the two-year 
transition period for balloon-payment mortgages discussed above, the 
Bureau also believes that subjecting small creditors that make higher-
priced mortgage loans to such volatility in their eligibility for the 
exemption from the escrows requirement in the meanwhile could create 
significant burden for such creditors with little meaningful benefit to 
consumers in return.
---------------------------------------------------------------------------

    \26\ 78 FR 30739 (May 23, 2013).
    \27\ The extent of such volatility in the transition from 2012 
rural/non-rural status (for purposes of eligibility for the 
exemption during 2013) to 2013 rural/non-rural status (for purposes 
of eligibility for the exemption during 2014) is likely far greater 
than during other year-to-year transitions. This is due to the fact 
that this first year-to-year transition under the Bureau's ``rural'' 
definition happens to coincide with the redesignation by the USDA's 
Economic Research Service of U.S. counties' urban influence codes, 
on which the ``rural'' definition is generally based. This 
redesignation occurs only decennially, based on the most recent 
census data. Nevertheless, for purposes of eligibility for the 
exemption during 2013 and 2014, the volatility is significant--just 
as creditors are first attempting to apply the exemption's criteria.
---------------------------------------------------------------------------

    Accordingly, the Bureau is proposing to revise Sec.  
1026.35(b)(2)(iii)(A) to provide that, to qualify for the exemption, a 
creditor must have extended more than 50 percent of its total covered 
transactions secured by a first lien on properties located in ``rural'' 
or ``underserved'' counties during any of the preceding three calendar 
years. As proposed, the provision thus would prevent a creditor from 
losing eligibility for the exemption under the ``rural or underserved'' 
element of the test unless it has failed to exceed the 50-percent 
threshold three years in a row.
    As discussed above in the section-by-section analysis of Sec.  
1026.32(d)(1)(ii)(C), the Bureau also is proposing to modify the 
exception from the prohibition on balloon payments for high-cost 
mortgages in that section. Section 1026.32(d)(1)(ii)(C) provides an 
exception to the general prohibition on balloon payments for high-cost 
mortgages for balloon-payment qualified mortgages made by certain 
creditors operating predominantly in ``rural'' or ``underserved'' 
areas. Believing that the same rationale for allowing balloon-payment 
qualified mortgages made by creditors in rural or underserved areas 
applies to high-cost mortgages, the Bureau adopted the Sec.  
1026.32(d)(1)(ii)(C) exception in the 2013 HOEPA Final Rule. As 
explained above, the Bureau believes the same underlying rationale for 
the two-year transition period for balloon-payment qualified mortgages 
described above applies equally to the Sec.  1026.32(d)(1)(ii)(C) 
exception from the high-cost mortgage balloon prohibition. Accordingly, 
the Bureau believes it is appropriate to extend this temporary 
framework to Sec.  1026.32(d)(1)(ii)(C) and therefore is proposing to 
amend Sec.  1026.32(d)(1)(ii)(C) to include loans meeting the criteria 
under Sec.  1026.43(e)(6). Thus, for both balloon-payment qualified 
mortgages and for the high-cost mortgage balloon prohibition, the 
Bureau has adopted or is now proposing to adopt a two-year transition 
period during which the special treatment of balloon-payment loans does 
not depend on the creditor operating predominantly in rural or 
underserved areas.
    The Bureau considered taking the same approach with regard to the 
escrow requirement but concluded ultimately that a smaller adjustment 
was appropriate. Because higher-priced mortgage loans are already 
subject to an escrow requirement, all creditors are currently required 
to maintain escrow accounts for such loans. Implementation of the Dodd-
Frank Act exemption will thus reduce burden for some creditors, but 
does not impose different requirements than the status quo except as to 
the length of time that an escrow account must be maintained. This is 
fundamentally different than the ability-to-repay and high-cost 
mortgage requirements, which would prohibit new balloon-payment loans 
from being accorded qualified mortgage status or from being made going 
forward absent implementation of the special exemptions. In addition, 
the Bureau may change the definition of rural or underserved areas as 
the result of its re-examination process, but does not anticipate 
lifting the requirement that creditors operate predominantly in rural 
or underserved areas to qualify for the exemption because Congress 
specifically contemplated that limitation on the escrows exemption. 
Accordingly, the Bureau believes it is appropriate to leave the 
definition in place, but to prevent volatility in the definition from 
negatively impacting creditors who have fallen within the existing 
definition while the Bureau re-evaluates the underlying definitions. 
The Bureau believes that, as with the other two balloon-payment 
provisions for which the Bureau believes two-year transition periods 
are appropriate, this amendment will benefit consumers by expanding 
access to credit in certain areas that met the definitions of ``rural'' 
or ``underserved'' at some time in the preceding three calendar years 
and also will facilitate compliance for creditors that make these 
loans. The Bureau also believes that the proposed amendment will 
promote additional consistency between the 2013 HOEPA Final Rule, the 
2013 ATR Final Rule, and the 2013 Escrows Final Rule, thereby 
facilitating compliance for affected creditors.
    The Bureau notes that the mechanics of proposed Sec.  
1026.35(b)(2)(iii)(A) differ slightly from the express transition 
period ending on January 10, 2016, under Sec.  1026.43(e)(6). Thus, 
this proposed amendment would not parallel the same transition period 
precisely, as does proposed Sec.  1026.32(d)(1)(ii)(C), which simply 
would incorporate Sec.  1026.43(e)(6)'s conditions by cross-reference. 
Instead, proposed Sec.  1026.35(b)(2)(iii)(A) would approximate a two-
year transition period by extending from one to three

[[Page 39924]]

years the time for which a creditor, once eligible for the exemption, 
cannot lose that eligibility because of changes in the rural (or 
underserved) status of the counties in which the creditor operates. 
Because the 2013 Escrows Final Rule took effect on June 1, 2013, the 
escrows provisions already have begun operating over seven months 
earlier than the provisions adopted by the 2013 HOEPA and ATR Final 
Rules (which take effect on January 10, 2014). Thus, whereas the two 
balloon-payment provisions specifically last through January 10, 2016, 
the escrows-requirement exemption would guarantee eligibility (for a 
creditor that is eligible during 2013) through 2015. Thus, the proposed 
Sec.  1026.35(b)(2)(iii) exemption would approximately, though not 
exactly, track the extension of the balloon exemption for qualified 
mortgages under Sec.  1026.43(e)(6), and the proposed extension of the 
HOEPA balloon exemption under proposed Sec.  1026.32(d)(1)(ii)(C).
    In addition to the proposed changes discussed above, the Bureau 
also is proposing to amend Sec.  1026.35(b)(2)(iii)(D)(1) and its 
commentary to conform to the proposed expansion of the exemption to 
creditors that may meet the section 35(b)(2)(iii)(A) criteria for 
calendar year 2014 based on loans made in ``rural'' or ``underserved'' 
counties in calendar year 2011, but not 2012 or 2013. Section Sec.  
1026.35(b)(2)(iii)(D)(1) currently prohibits any creditor from availing 
itself of the exemption if it maintains escrow accounts for any 
extensions of consumer credit secured by real property or a dwelling 
that it or its affiliate currently service, unless the escrow accounts 
were established for first-lien higher-priced mortgage loans on or 
after April 1, 2010, and before June 1, 2013, or were established after 
consummation as an accommodation for distressed consumers. With respect 
to loans where escrows were established on or after April 1, 2010, and 
before June 1, 2013, the Supplementary Information to the 2013 Escrows 
Final Rule explained that the Bureau believes creditors should not be 
penalized for compliance with the then current regulation, which would 
have required any such loans to be escrowed after April 1, 2010, and 
prior to June 1, 2013--the date the exemption took effect.
    The Bureau understands that creditors who did not make more than 50 
percent of their first-lien higher-priced mortgage loans in ``rural'' 
or ``underserved'' counties in calendar year 2012 would have been 
ineligible for the exemption for calendar year 2013, and thus would 
have been required under Sec.  1026.35(a) to escrow any higher-priced 
mortgage loans those creditors made after June 1, 2013. However, it is 
possible in light of the proposed amendments that some of these same 
creditors may have met this criteria during calendar year 2011--and 
thus, should the Bureau finalize the proposal and allow creditors to 
qualify for the exemption (assuming they satisfy the other conditions 
set forth in Sec.  1026.35(b)(2)(iii)(B), (C), and (D))--such creditors 
may qualify for the exemption in 2014. However, there would be one 
barrier: For applications received on or after June 1, 2013, but before 
the date the proposed amendment takes effect (as proposed, January 1, 
2014), such a creditor who made a first-lien higher-priced mortgage 
loan would have been required to escrow that loan, and thus would be 
deemed ineligible under Sec.  1026.35(b)(2)(iii)(D).
    The Bureau does not believe that such creditors should lose the 
exemption because they were ineligible prior to the proposed amendment 
taking effect and thus made loans with escrows from June 1, 2013, 
through December 31, 2013. As the Bureau discussed in the Supplementary 
Information to the final rule, the Bureau believes creditors should not 
be penalized for compliance with the current regulation. The Bureau 
thus believes it is appropriate to amend Sec.  1026.35(b)(2)(iii)(D)(1) 
and comment 35(b)(2)(iii)-1.iv to exclude escrow accounts established 
after April 1, 2010 and before January 1, 2014. The Bureau invites 
comment on this approach, and specifically whether an effective date 
for transactions where applications were received on or after January 
1, 2014 is appropriate, in light of the proposed change to the calendar 
year exemption under Sec.  1026.35(b)(2)(iii).
Section 1026.36 Loan Originator Compensation
36(a) Definitions
    The Bureau is proposing several clarifications, revisions, and 
amendments to Sec.  1026.36(a) and associated commentary to resolve 
inconsistencies in wording, to conform the comments to the intended 
operation of the regulation text, and to address issues raised during 
the regulatory implementation process. The Bureau proposes these 
changes pursuant to its TILA section 105(a) and Dodd-Frank Act section 
1022(b)(1) authority.
References to Credit Terms
    The Bureau is proposing to amend Sec.  1026.36(a) and its 
commentary to clarify the meaning of ``credit terms'' in those 
provisions. For example, Sec.  1026.36(a)(1)(i)(A) excludes from the 
definition of ``loan originator'' persons--i.e., a loan originator's or 
creditor's employees (or agents or contractors thereof) engaged in 
certain administrative and clerical tasks that are not considered to be 
loan originator activity under the rules. To be eligible for the 
exclusion, the person must not, among other things, offer or negotiate 
``credit terms available from a creditor.'' Likewise, comment 36(a)-
4.i. provides that the definition of loan originator does not include 
persons who, among other things, do not discuss ``specific credit terms 
or products available from a creditor with the consumer.'' Similarly, 
comment 36(a)-4.ii.B provides that the definition of loan originator 
does not include an employee of a creditor or loan originator who 
provides loan originator or creditor contact information to a consumer, 
provided the employee does not, among other things, ``discuss 
particular credit terms available from a creditor.'' See also Sec.  
1026.36(a)(1)(i)(B) and comments 36(a)-1.i.A.2 through -1.i.A.4 (other 
similar references to credit terms). As discussed below, the Bureau is 
proposing to revise comment 36(a)-4.ii.B to clarify that it applies to 
loan originator or creditor agents and contractors as well as 
employees.
    The Bureau intended the references to ``credit terms'' in these 
provisions to refer to particular credit terms that are or may be made 
available to the consumer in light of the consumer's financial 
characteristics. The Bureau believes that, when a loan originator's or 
creditor's employee (or agent or contractor thereof) is offering or 
discussing particular credit terms selected based on his or her 
assessment of the consumer's financial characteristics, the person is 
acting in the role of a loan originator. However, this does not extend 
to a person's discussion of general credit terms that a creditor makes 
available and advertises to the public at large, such as where such 
person merely states: ``We offer rates as low as 3% to qualified 
consumers.''
    In light of inquiries from loan originators and creditors, the 
Bureau is concerned that the term ``credit terms'' could be construed 
too broadly and thus render any person that provides such general 
information a loan originator. This was not the Bureau's intent. 
Accordingly, the Bureau is proposing to revise Sec.  
1026.36(a)(1)(i)(A) and (B), and comments 36(a)-1 and -4 to address 
several inconsistencies regarding the meaning of ``credit terms'' to 
clarify that any such activity must relate to

[[Page 39925]]

``particular credit terms that are or may be available from a creditor 
to that consumer selected based on the consumer's financial 
characteristics,'' not credit terms generally. Thus, a person who 
discusses with a consumer that, based on the consumer's financial 
characteristics, a creditor should be able to offer the consumer an 
interest rate of 3%, would be considered a loan originator. However, a 
person who merely states general information such as ``we offer rates 
as low as 3% to qualified consumers'' would not be considered a loan 
originator under the proposed rule because the person is not offering 
particular credit terms that are or may be available to that consumer 
selected based on the consumer's financial characteristics. In 
addition, for clarification purposes the Bureau is proposing to move a 
parenthetical that explains ``credit terms'' includes rates, fees, and 
other costs to new Sec.  1026.36(a)(1)(i)(6).
    The Bureau believes these changes better align the scope of the 
loan originator definition with the intended scope of the 2013 Loan 
Originator Compensation Final Rule. The Bureau solicits comment on 
whether additional guidance concerning the meaning of particular credit 
terms that are or may be made available to the consumer in light of the 
consumer's financial characteristics is necessary, and if so, what 
clarifications would be helpful.
Application-Related Administrative and Clerical Tasks
    Comment 36(a)-4.i provides that the definition of loan originator 
does not include persons who (1) At the request of the consumer, 
provide an application form to the consumer; (2) accept a completed 
application form from the consumer; or (3) without assisting the 
consumer in completing the application, processing or analyzing the 
information, or discussing specific credit terms or products available 
from a creditor with the consumer, deliver the application to a loan 
originator or creditor.
    The Bureau is proposing to revise comment 36(a)-4.i to provide that 
the definition of loan originator does not include a person who, acting 
in his or her capacity as an employee (or agent or contractor), 
provides a credit application form from the entity for whom the person 
works to the consumer for the consumer to complete. In such a case, 
provided that the person does not assist the consumer in completing the 
application or otherwise influence his or her decision, the Bureau 
believes the person is performing an administrative task, not acting as 
a loan originator by engaging in a referral to a particular creditor or 
loan originator or assisting a consumer in obtaining or applying to 
obtain credit. As also discussed below with respect to persons who 
provide creditor or loan originator contact information, the Bureau 
believes ambiguity regarding the meaning of ``in response to a 
consumer's request'' could cause unnecessary compliance challenges. 
Moreover, the Bureau notes that classifying such individuals as loan 
originators would subject them to the requirements applicable to loan 
originators with, in the Bureau's view, little appreciable benefit for 
consumers in situations where the person is providing a credit 
application from the entity for whom the person works. The Bureau 
proposes to revise comment 36(a)-4.i accordingly, including removing 
the condition that the provision of the application must be ``at the 
request of the consumer.''
    As a result of these proposed revisions, employees (or agents or 
contractors) of manufactured home retailers who provide a credit 
application form from one particular creditor or loan originator 
organization that is not the entity for which they work would not 
qualify for the exclusion in Sec.  1026.36(a)(1)(i)(B), but those who 
simply provide a credit application form from the entity for which they 
work would potentially be eligible for the exclusion if other 
conditions are met. An employee of a manufactured home retailer who 
simply provides a credit application form from one particular creditor 
or loan originator organization that is its employer would potentially 
be eligible for the exclusion in Sec.  1026.36(a)(1)(i)(B). An agent or 
contractor of a manufactured home retailer who simply provides a credit 
application form from one particular creditor or loan originator 
organization it works for as agent or contractor would potentially be 
eligible for the exclusion discussed in comment 36(a)-4.i. The 
revisions would also clarify that someone who merely delivers a 
completed credit application form from the consumer to a creditor or 
loan originator would potentially be eligible for the exclusion if 
other conditions are met but would remove language that could have been 
misinterpreted to suggest that someone who accepts an application in 
the sense of taking or helping the consumer complete an application 
could be eligible for the exclusion.
Responding to Consumer Inquiries and Providing General Information
    Employees (or agents or contractors) of a creditor or loan 
originator who provide loan originator or creditor contact information. 
Comment 36(a)-4.ii.B provides that the definition of loan originator 
does not include persons who, acting as employees of a creditor or loan 
originator, provide loan originator or creditor contact information to 
a consumer in response to the consumer's request, provided that the 
employee does not discuss particular credit terms available from a 
creditor and does not direct the consumer, based on the employee's 
assessment of the consumer's financial characteristics, to a particular 
loan originator or creditor seeking to originate particular credit 
transactions to consumers with those financial characteristics. Similar 
to the clarifications regarding credit terms discussed above, the 
Bureau also is proposing to clarify that comment 36(a)-4.ii.B applies 
to loan originator or creditor agents and contractors as well as 
employees. The Bureau notes this is consistent with comments 36(a)-
1.i.B and 36(a)-4.
    In addition to making conforming technical revisions, the Bureau is 
proposing to remove the requirement that creditor or loan originator 
contact information must be provided ``in response to the consumer's 
request'' for the exclusion to apply. The Bureau has received many 
inquiries on this topic from stakeholders expressing concern that, 
absent a clarifying amendment, the rule could be interpreted to require 
tellers, greeters, or other such employees (or contractors or agents) 
to be classified as loan originators for merely providing contact 
information to a consumer who did not clearly or explicitly ask for it. 
Stakeholders have further asserted that such persons should not be 
considered loan originators when their conduct is limited to following 
a script prompting them to ask whether the consumer is interested in a 
mortgage loan and the tellers are not able to engage in any independent 
assessment of the consumer. Moreover, stakeholders have asserted it 
would be very costly to implement the training and certification 
requirements under Regulation Z as amended by the 2013 Loan Originator 
Compensation Final Rule for employers with large numbers of 
administrative staff who interact with consumers on a day-to-day basis 
in the manner described.
    In light of these concerns, the Bureau is proposing a limited 
expansion of the existing exclusion that does not require the consumer 
to initiate a request for loan originator or creditor contact 
information as a prerequisite to its availability. The Bureau 
understands that basing the exclusion on the

[[Page 39926]]

consumer requesting contact information could cause those who work for 
creditor or loan originator organizations in administrative or clerical 
roles (e.g., tellers) to be treated as loan originators when simply 
attempting to explain generally what financing products the entity for 
which the person works offers. The Bureau also believes ambiguity 
regarding the meaning of ``in response to a consumer's request'' could 
cause unnecessary compliance challenges. In such instances, the Bureau 
does not believe tellers or other such staff should be considered loan 
originators for merely providing loan originator or creditor contact 
information to the consumer, provided that the person does not discuss 
particular credit terms available from a creditor to the consumer and 
does not direct the consumer, based on his or her assessment of the 
consumer's financial characteristics, to a particular loan originator 
or creditor seeking to originate credit transactions to consumers with 
those financial characteristics. The Bureau also notes that classifying 
such individuals as loan originators would subject them to the 
requirements applicable to loan originators with, in the Bureau's view, 
little appreciable benefit for consumers.
    Accordingly, the Bureau is proposing to remove the qualifying 
phrase ``in response to the consumer's request'' from comment 36(a)-
4.ii.B. However, the Bureau is not proposing to exclude from the 
definition of ``loan originator'' employees (or agents or contractors) 
of creditors and loan originator organizations who, in the course of 
providing loan originator or creditor contact information to the 
consumer, direct that consumer to a particular loan originator or 
particular creditor based on his or her assessment of the consumer's 
financial characteristics or discuss particular credit terms available 
from a creditor to the consumer. These actions can influence the credit 
terms that the consumer ultimately obtains, and the Bureau continues to 
believe these actions should result in application of the requirements 
imposed by the rule on loan originators. The Bureau believes this 
proposed amendment should enable creditors and loan originators to 
implement the rule with respect to persons acting under the controlled 
circumstances specified by the comment while still mitigating harmful 
steering outcomes the Bureau intended for the rule to address.
    Describing other product-related services. Comment 36(a)-4.ii.C 
provides that the definition of loan originator does not include 
persons who describe other product-related services. The Bureau is 
proposing to amend this comment to provide examples of persons who 
describe other product-related services. The proposed new examples 
include persons who describe optional monthly payment methods via 
telephone or via automatic account withdrawals, the availability and 
features of online account access, the availability of 24-hour customer 
support, or free mobile applications to access account information. In 
addition, the proposed amendment to comment 36(a)-4.iii.C would clarify 
that persons who perform the administrative task of coordinating the 
closing process are excluded, whereas persons who arrange credit 
transactions are not excluded.
    Amounts for Charges for Services That Are Not Loan Origination 
Activities. Comment 36(a)-5.iv.B provides that compensation includes 
any salaries, commissions, and any financial or similar incentive, 
regardless of whether it is labeled as payment for services that are 
not loan origination activities. The Bureau is proposing to revise this 
comment to provide that compensation includes any salaries, 
commissions, and any financial or similar incentive ``to an individual 
loan originator,'' regardless of whether it is labeled as payment for 
services that are not loan origination activities. The proposed wording 
change conforms this provision to the other provisions in comment 
36(a)-5.iv that permit compensation paid to a loan originator 
organization under certain circumstances for services it performs that 
are not loan originator activities. The Bureau requests comment on 
these proposed clarifications generally and on whether other 
clarifications to comments 36(a)-4 and 36(a)-5 should be considered.
36(b) Scope
    The Bureau is proposing to revise the scope of provisions in Sec.  
1026.36(b) to reflect the applicability of the servicing provisions in 
Sec.  1026.36(c) regarding payment processing, pyramiding late fees, 
and payoff statements as modified by the 2013 TILA Servicing Final 
Rule.\28\ Current Sec.  1026.36(b) and comment 36(b)-1 (relocated from 
Sec.  1026.36(f) and comment 36-1, respectively, by the 2013 Loan 
Originator Compensation Final Rule) provide that Sec.  1026.36(c) 
applies to closed-end consumer credit transactions secured by a 
consumer's principal dwelling. The new payment processing provisions in 
Sec.  1026.36(c)(1) and the restrictions on pyramiding late fees in 
Sec.  1026.36(c)(2) both apply to consumer credit transactions secured 
by a consumer's principal dwelling. The new payoff statement provisions 
in Sec.  1026.36(c)(3), however, apply more broadly to consumer credit 
transactions secured by a dwelling.
---------------------------------------------------------------------------

    \28\ Among other things, the 2013 TILA Servicing Final Rule 
implemented TILA sections 129F and 129G added by section 1464 of the 
Dodd-Frank Act. The requirements in TILA section 129F concerning 
prompt crediting of payments apply to consumer credit transactions 
secured by a consumer's principal dwelling. The requirements in TILA 
section 129G concerning payoff statements apply to creditors or 
servicers of a home loan. The 2013 TILA Servicing Final Rule, 
however, did not substantively revise the existing late fee 
pyramiding requirement in Sec.  1026.36(c) but instead redesignated 
the requirement as new paragraph 36(c)(2) to accommodate the 
regulatory provisions implementing TILA sections 129F and 129G.
---------------------------------------------------------------------------

    The proposal would revise Sec.  1026.36(b) and comment 36(b)-1 to 
state that Sec.  1026.36(c)(1) and (c)(2) apply to consumer credit 
transactions secured by a consumer's principal dwelling. The proposed 
revisions also would provide that Sec.  1026.36(c)(3) applies to a 
consumer credit transaction secured by a dwelling (even if it is not 
the consumer's principal dwelling).
    The Bureau is proposing these revisions to Sec.  1026.36(b) and 
comment 36(b)-1 to conform them to modifications made to Sec.  
1026.36(c) by the 2013 Servicing Final Rules that changed the 
applicability of certain provisions in Sec.  1026.36(c). The Bureau 
believes the proposed revisions are necessary to reflect the 
applicability of the provisions in Sec.  1026.36(c) as modified by the 
2013 Servicing Final Rules.
    The Bureau seeks comment on these proposed revisions generally. The 
Bureau also invites comment on whether additional revisions to Sec.  
1026.36(b) and comment 36(b)-1 should be considered to clarify further 
the applicability of the provisions in Sec.  1026.36(c) as modified by 
the 2013 Servicing Final Rules.
36(d) Prohibited Payments to Loan Originators
36(d)(1) Payments Based on a Term of the Transaction
36(d)(1)(i)
    The Bureau is proposing to revise comments 36(d)(1)-1.ii and 
36(d)(1)-1.iii.D, which interpret Sec.  1026.36(d)(1)(i)-(ii), to 
improve the consistency of the wording across the regulatory text and 
commentary, and provide further interpretation of the intended meaning 
of the regulatory text.
36(d)(1)(iii)
    The Bureau is proposing to revise the portions of comment 36(d)(1)-
3 that interpret Sec.  1026.36(d)(1)(iii) to improve the consistency of 
the wording across

[[Page 39927]]

the regulatory text and commentary, and provide further interpretation 
of the intended meaning of the regulatory text.
36(d)(1)(iv)
    The Bureau is proposing revisions to the portions of comment 
36(d)(1)-3 that interpret Sec.  1026.36(d)(1)(iv). Section 
1026.36(d)(1)(iv) permits, under certain circumstances, the payment of 
compensation under a non-deferred profits-based compensation plan to an 
individual loan originator even if the compensation is directly or 
indirectly based on the terms of multiple transactions by multiple 
individual loan originators. Section 1026.36(d)(1)(iv)(B)(1) permits 
this compensation if it does not exceed 10 percent of the individual 
loan originator's total compensation corresponding to the time period 
for which the compensation under a non-deferred profits-based 
compensation plan is paid. Comments 36(d)(1)-3.ii through -3.v further 
interpret Sec.  1026.36(d)(1)(iv)(B)(1). Section 
1026.36(d)(1)(iv)(B)(2) permits this type of compensation if the 
individual loan originator is a loan originator for ten or fewer 
consummated transactions during the 12-month period preceding the 
compensation determination. Comment 36(d)(1)-3.vi further interprets 
Sec.  1026.36(d)(1)(iv)(B)(2).
    The Bureau is proposing to amend comment 36(d)(1)-3 to improve the 
consistency of the wording across the regulatory text and commentary, 
provide further interpretation as to the intended meaning of the 
regulatory text in Sec.  1026.36(d)(1)(iv), and ensure that the 
examples included in the commentary accurately reflect the 
interpretations of the regulatory text contained elsewhere in the 
commentary. These proposed amendments include clarifying in comment 
36(d)(1)-3.vi that, for purposes of determining whether an individual 
loan originator was the loan originator for ten or fewer transactions, 
only consummated transactions are counted, consistent with Sec.  
1026.36(d)(1)(iv)(B)(2). Nearly all of the proposed revisions address 
the commentary sections that interpret the meaning of Sec.  
1026.36(d)(1)(iv)(B)(1) (i.e., setting forth the 10-percent total 
compensation limit) and not Sec.  1026.36(d)(1)(iv)(B)(2).
    The Bureau is proposing more extensive clarifications to two 
comments interpreting Sec.  1026.36(d)(1). First, the Bureau proposes 
to revise comment 36(d)(1)-3.v.A, which clarifies the meaning of 
``total compensation'' as used in Sec.  1026.36(d)(1)(iv)(B)(1). The 
proposed revisions clarify that the first component of total 
compensation--all wages and tips reportable for Medicare tax purposes 
in box 5 on IRS form W-2 (or IRS form 1099-MISC, as applicable)--
includes all such wages and tips that are actually paid during the 
relevant time period regardless of when they are earned, except for any 
compensation under a non-deferred profits-based compensation plan that 
is earned during a different time period. The Bureau is proposing these 
changes to comment 36(d)(1)-3.v.A in conjunction with proposed 
revisions, described below, to comment 36(d)(1)-3.v.C. The proposed 
revisions to the two comments cumulatively are intended to provide a 
more precise interpretation of the following language in Sec.  
1026.36(d)(1)(iv)(B)(1): ``total compensation corresponding to the time 
period for which the compensation under the non-deferred profits-based 
compensation plan is paid.'' In particular, the Bureau believes that it 
is important to state more expressly in the commentary that 
compensation under a non-deferred profits-based compensation plan that 
is paid during a particular time period but is earned during a 
different time period (e.g., a bonus made with reference to mortgage-
related business profits for a calendar year that is paid in January of 
the following calendar year) is excluded from the total compensation 
amount for the particular time period in which the payment is made. 
This concept is discussed in an example in comment 36(d)(1)-3.v.C, but 
the Bureau is concerned that failing to highlight the concept more 
generally could lead to the language being misinterpreted to apply only 
to the facts in the example.
    The Bureau is also proposing additional language in comment 
36(d)(1)-3.v.A to make clearer that compensation under the non-deferred 
profits-based compensation plan that is earned during a particular time 
period can be included in the total compensation amount for that time 
period at the election of the party paying the compensation. This 
interpretation of the meaning of ``total compensation'' was implied in 
several examples in the commentary to Sec.  1026.36(d)(1)(iv)(B)(1) 
(e.g., comment 36(d)(1)-3.v.F.1); in this proposal, it is made more 
explicit.\29\ The Bureau also is proposing to clarify that, if the 
person elects to include in total compensation the amount of any 
creditor or loan originator organization contributions to accounts of 
individual loan originators in designated tax-advantaged plans that are 
defined contribution plans, the contributions must be actually made 
during the relevant time period (rather than earned during that time 
period but made during a different time period). The Bureau believes 
that these changes would facilitate compliance.
---------------------------------------------------------------------------

    \29\ The Bureau included these commentary provisions in the 2013 
Loan Originator Compensation Final Rule based on its belief that 
creditors and loan originator organizations paying non-deferred 
profits-based compensation under Sec.  1026.36(d)(1)(iv)(B)(1) would 
potentially benefit from having the discretion to include the non-
deferred profits-based compensation in the total compensation 
amount, which, if done, would increase the amount of non-deferred 
profits-based compensation that can be paid under the 10-percent 
limit (although this would make the calculation of total 
compensation somewhat more complex). The Bureau similarly provided 
discretion to creditors and loan originator organizations to include 
in total compensation the amount of any contributions by the 
creditor or loan originator organization to the individual loan 
originator's accounts in designated tax-advantaged plans that are 
defined contribution plans. The Bureau believes the potential 
marginal increase in the non-deferred profits-based compensation 
that can be paid under Sec.  1026.36(d)(1)(iv)(B)(1) as a result of 
including these components of compensation in the total compensation 
amount does not raise a significant risk of steering incentives. See 
comment 36(d)(1)-3.v.F, as proposed to be revised, for an example of 
where including non-deferred profits-based compensation in total 
compensation affects the amount of non-deferred profits-based 
compensation that can be paid.
---------------------------------------------------------------------------

    Furthermore, the Bureau is proposing to revise comment 36(d)(1)-
3.v.C to clarify the meaning of ``time period'' in Sec.  
1026.36(d)(1)(iv)(B)(1). The Bureau is concerned that comment 36(d)(1)-
3.v.C inadvertently conflates the two relevant time periods to be used 
for the 10-percent limit calculation: The time period for compensation 
under the non-deferred profits-based compensation plan, and the time 
period for the total compensation. The proposed revisions would clarify 
that: (1) The relevant time period for compensation paid under the non-
deferred profits-based compensation plan is the time period for which a 
person makes reference to profits in determining the compensation 
(i.e., when the compensation was earned); and (2) the relevant time 
period for the total compensation is the same time period, but only 
certain types of compensation may be included in the total compensation 
amount for that time period, as explained in comment 36(d)(1)-3.v.A.
    Collectively, the proposed revisions to comments 36(d)(1)-3.v.A and 
-3.v.C are intended to clarify that, while the time period used to 
determine both elements of the 10-percent limit ratio is the same: (1) 
The non-deferred profits-based compensation for the time period is 
whatever such compensation was earned during that time period, 
regardless of when it was actually paid; and (2) compensation that is 
actually paid during the time period, regardless of when it was earned, 
generally will be

[[Page 39928]]

included in the amount of total compensation for that time period, but 
whether the compensation is included ultimately depends on the type of 
compensation. The proposal also revises the examples in comment 
36(d)(1)-3.v.C to reflect the proposed changes to comment 36(d)(1)-
3.v.A and, to allay potential confusion about when the provisions take 
effect, remove reference to calendar year 2013. See part IV of this 
Supplementary Information for discussion more generally of the Bureau's 
proposed changes to the effective date for the provisions of Sec.  
1026.36(d)(1). The Bureau believes these changes would facilitate 
compliance.
36(f) Loan Originator Qualification Requirements
36(f)(3)
    The Bureau is proposing to change the dates referenced in Sec.  
1026.36(f)(3)(i) and (f)(3)(ii) and its associated commentary from 
January 10, 2014, to January 1, 2014. These proposed changes coincide 
with the proposed revision of the effective date for Sec.  1026.36(f). 
See part IV of the Supplementary Information for a discussion of the 
effective date for Sec.  1026.36(f).
36(i) Prohibition on Financing Credit Insurance
    The Bureau is proposing to amend Sec.  1026.36(i) to clarify the 
scope of the prohibition on a creditor financing, directly or 
indirectly, any premiums for credit insurance in connection with a 
consumer credit transaction secured by a dwelling. Dodd-Frank Act 
section 1414 added TILA section 129C(d), which generally prohibits a 
creditor from financing premiums or fees for credit insurance in 
connection with a closed-end consumer credit transaction secured by a 
dwelling, or an extension of open-end consumer credit secured by the 
consumer's principal dwelling. The prohibition applies to credit life, 
credit disability, credit unemployment, credit property insurance, and 
other similar products, including debt cancellation and debt suspension 
contracts (defined collectively as ``credit insurance'' for purposes of 
this discussion). The same provision, however, excludes from the 
prohibition credit insurance premiums or fees that are ``calculated and 
paid in full on a monthly basis.''
Section 1026.36(i) as Adopted in the 2013 Loan Originator Compensation 
Final Rule
    In the 2013 Loan Originator Compensation Final Rule, the Bureau 
implemented this prohibition by adopting the statutory provision 
without substantive change, in Sec.  1026.36(i). The final rule 
provided an effective date of June 1, 2013 for Sec.  1026.36(i), and 
clarified that the provision applies to transactions for which a 
creditor received an application on or after that date.\30\
---------------------------------------------------------------------------

    \30\ 78 FR at 11390.
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    In the preamble to the final rule, the Bureau responded to public 
comments on the regulatory text that the Bureau had included in its 
proposal. The public comments included requests from consumer groups 
for clarification on the applicability of the regulatory prohibition to 
certain factual scenarios where credit insurance premiums are charged 
periodically, rather than as a lump-sum that is added to the loan 
amount at consummation. In particular, they requested clarification on 
the meaning of the exclusion from the prohibition for credit insurance 
premiums or fees that are ``calculated and paid in full on a monthly 
basis.'' The Bureau did not receive any public comments from the credit 
insurance industry. The Bureau received a limited number of comments 
from creditors concerning the general prohibition, but these comments 
did not address specifically the applicability of the exclusion from 
the prohibition for premiums that are calculated and paid in full on a 
monthly basis.
    In their comments, the consumer groups described two practices that 
they believed should be prohibited by the regulatory provision. First, 
they described a practice in which some creditors charge credit 
insurance premiums on a monthly basis but add those premiums to the 
consumer's outstanding principal. They stated that this practice does 
not meet the requirement that, to be excluded from the prohibition, 
premiums must be ``paid in full on a monthly basis.'' They also stated 
that this practice constitutes ``financing'' of credit insurance 
premiums, which is prohibited by the provision. Second, the consumer 
groups described a practice in which credit insurance premiums are 
charged to the consumer on a ``levelized'' basis, meaning that the 
premiums remain the same each month, even as the consumer pays down the 
outstanding balance of the loan. They stated that this practice does 
not meet the condition of the exclusion that premiums must be 
``calculated . . . on a monthly basis,'' and therefore violates the 
statutory prohibition. In the preamble of the final rule, the Bureau 
stated that it agreed that these practices do not meet the condition of 
the exclusion and violate the prohibition on creditors financing credit 
insurance premiums.
    Outreach during implementation period following publication of the 
final rule. After publication of the final rule, representatives of 
credit unions and credit insurers expressed concern to the Bureau about 
these statements in the preamble of the final rule. Credit union 
representatives questioned whether adding monthly premiums to a 
consumer's loan balance should necessarily be considered prohibited 
``financing'' of the credit insurance premiums and indicated that, if 
it is considered financing, they would not be able to adjust their data 
processing systems before the June 1, 2013 effective date.
    Credit insurance company representatives stated that level and 
levelized credit insurance premiums are in fact ``calculated . . . on a 
monthly basis.'' (They use the term ``levelized'' premiums to refer to 
a flat monthly payment that is derived from a decreasing monthly 
premium payment arrangement and use the term ``level'' premium to refer 
to premiums for which there is no decreasing monthly premium payment 
arrangement available, such as for level mortgage life insurance.) The 
companies asserted that levelized premiums are, in fact, ``calculated . 
. . on a monthly basis,'' because an actuarially derived rate is 
multiplied by a fixed monthly principal and interest payment to derive 
the monthly insurance premium. They also asserted that level premiums 
are ``calculated . . . on a monthly basis'' because an actuarially 
derived rate is multiplied by the consumer's original loan amount to 
derive the monthly insurance premium. Accordingly, they urged that 
level and levelized credit insurance premiums should be excluded from 
the prohibition on creditors financing credit insurance premiums so 
long as they are also paid in full on a monthly basis. Industry 
representatives have further stated that even if the Bureau concludes 
that level or levelized credit insurance premiums are not 
``calculated'' on a monthly basis within the meaning of the exclusion 
from the prohibition, they are not ``financed'' by a creditor and thus 
are not prohibited by the statutory provision.
Delay of Sec.  1026.36(i) Effective Date
    In light of these concerns, and the Bureau's belief that, if the 
effective date were not delayed, creditors could face uncertainty about 
whether and under what circumstances credit insurance premiums may be 
charged periodically in connection with covered consumer credit 
transactions secured by a

[[Page 39929]]

dwelling, the Bureau issued the 2013 Effective Date Final Rule delaying 
the June 1, 2013 effective date of Sec.  1026.36(i) to January 10, 
2014.\31\ In that final rule, the Bureau stated its belief that this 
uncertainty could result in a substantial compliance burden to 
industry. However, the Bureau also stated that it would revisit the 
effective date of the provision in this proposal.
---------------------------------------------------------------------------

    \31\ 78 FR 32547 (May 31, 2013).
---------------------------------------------------------------------------

Proposed Amendments to Sec.  1026.36(i)
    The Bureau is now, as contemplated in the 2013 Effective Date Final 
Rule, proposing amendments to Sec.  1026.36(i) to clarify the scope of 
the prohibition on a creditor financing, directly or indirectly, any 
premiums for credit insurance in connection with a consumer credit 
transaction secured by a dwelling. The Bureau believes from 
communications with consumer advocates, creditors, and trade 
associations that its statement in the final rule in response to 
consumer group public comments may have been overbroad and left 
ambiguity about when a creditor violates the prohibition on financing 
credit insurance premiums.
    As an initial, interpretive matter, the Bureau believes it is 
important to highlight the structure of Sec.  1026.36(i). First, 
although the heading of the statutory prohibition emphasizes the 
prohibition on financing ``single-premium'' credit insurance, which 
historically has been accomplished by adding a lump-sum premium to the 
consumer's loan balance at consummation, the provision more broadly 
prohibits a creditor from ``financing'' credit insurance premiums 
``directly or indirectly'' in connection with a covered consumer credit 
transaction secured by a dwelling. That is, it generally prohibits a 
creditor from financing credit insurance premiums at any time, not just 
at consummation. The Bureau is proposing to clarify the scope of the 
prohibition by striking the term ``single-premium'' from the Sec.  
1026.36(i) heading, and by adding redesignated Sec.  1026.36(i)(2)(ii), 
as discussed below. Second, ``credit insurance for which premiums or 
fees are calculated and paid in full on a monthly basis'' is excluded 
from the general prohibition. However, the mere fact that, under a 
particular premium calculation and payment arrangement, credit 
insurance premiums do not meet the conditions of the exclusion that 
they be ``calculated and paid in full on a monthly basis'' does not 
mean that a creditor is necessarily financing them in violation of the 
prohibition. For example, it is possible that credit insurance premiums 
could be calculated and paid in full by a consumer directly to a credit 
insurer on a quarterly basis with no indicia that the creditor is 
financing the premiums. The Bureau is proposing to clarify the scope of 
this exclusion by adding Sec.  1026.36(i)(2)(iii), as discussed below.
    ``Financing'' credit insurance. The Bureau believes that practices 
that constitute ``financing'' of credit insurance premiums or fees by a 
creditor are generally equivalent to an extension of credit to a 
consumer with respect to payment of the credit insurance premiums or 
fees. Under Sec.  1026.2(a)(14), credit means ``the right to defer 
payment of debt or to incur debt and defer its payment.'' Accordingly, 
as discussed above, financing of credit insurance premiums is not 
limited to addition of a single, lump-sum premium to the loan amount by 
the creditor at consummation. The Bureau believes that a creditor also 
finances credit insurance premiums within the meaning of the 
prohibition when it provides a consumer the right to defer payment of 
premiums or fees at other times, including when it adds a monthly 
credit insurance premium to the consumer's principal balance.
    Accordingly, the Bureau proposes to add redesignated Sec.  
1026.36(i)(2)(ii), which clarifies that a creditor finances credit 
insurance premiums or fees when it provides a consumer the right to 
defer payment of a credit insurance premium or fee owed by the 
consumer. However, the Bureau invites public comment on whether this 
clarification is appropriate. For example, the Bureau does not believe 
that a brief delay in receipt of the consumer's premium or fee, such as 
might happen preceding a death or period of employment that the credit 
insurance is intended to cover, should cause immediate cancellation of 
the credit insurance. The Bureau also does not believe that refraining 
from cancelling or causing cancellation of credit insurance in such 
circumstances means that a creditor has provided the consumer a right 
to defer payment of the premium or fee, but the Bureau invites public 
comment on consequences of defining the term ``finances'' as proposed. 
In addition, some creditors have suggested that they may, as a purely 
mechanical matter, add a monthly credit insurance premium to the 
principal balance shown on a monthly statement but then subtract the 
premium from the principal balance immediately or as soon as the 
premium or fee is paid. Furthermore, under a provision of Regulation X 
(12 CFR 1024.17(f)(4), a creditor servicing a loan and escrowing credit 
insurance premiums may permit a consumer to make additional monthly 
deposits over one or more months to eliminate an escrow deficiency, and 
if the deficiency is greater than or equal to one month's escrow 
payment, cannot require elimination of the deficiency faster than 
through two or more equal monthly payments. Accordingly, the Bureau 
solicits comment on whether a creditor should instead be considered to 
have financed credit insurance premiums or fees only if it charges a 
``finance charge,'' as defined in Sec.  1026.4(a), on or in connection 
with the credit insurance premium or fee.
    Calculated and paid in full on a monthly basis. The Bureau proposes 
to clarify in Sec.  1026.36(i)(2)(iii) that credit insurance premiums 
or fees are calculated on a monthly basis if they are determined 
mathematically by multiplying a rate by the monthly outstanding balance 
(e.g., the loan balance following the consumer's most recent monthly 
payment). As discussed above, Sec.  1026.36(i) excludes from the 
prohibition on a creditor financing credit insurance premiums or fees 
any ``credit insurance for which premiums or fees are calculated and 
paid in full on a monthly basis.'' Although it has considered the 
concerns raised by industry following the issuance of the final rule, 
the Bureau continues to believe that the more straightforward 
interpretation of the statutory language regarding a premium or fee 
that is ``calculated . . . on a monthly basis'' is a premium or fee 
that declines as the consumer pays down the outstanding principal 
balance. Credit insurance with this feature is often referred to as a 
``monthly outstanding balance,'' or M.O.B. credit insurance product. 
Level or levelized premiums or fees that are calculated by multiplying 
a rate by the initial loan amount or by a fixed monthly principal and 
interest payment are not calculated ``on a monthly basis'' in any 
meaningful way because the factors in the calculation do not change 
monthly (in contrast to the M.O.B. credit insurance product). 
Accordingly, under the proposed clarification, credit insurance cannot 
be categorically excluded from the scope of the prohibition on the 
ground that it is ``calculated and fully paid on a monthly basis'' if 
its premium or fee does not decline as the consumer pays down the 
outstanding principal balance. The Bureau notes that even if a 
particular premium calculation and payment arrangement provides for 
credit insurance premiums to be calculated on a monthly basis within 
the meaning of the proposed clarification, it must also

[[Page 39930]]

provide for the premiums to be paid in full on a monthly basis (rather 
than added to principal, for example) to be categorically excluded from 
Sec.  1026.36(i).
    Financed by the creditor. The Bureau notes that the scope of the 
prohibition only extends to credit insurance premiums financed by the 
creditor. Thus, while a monthly credit insurance premium or fee that 
does not decline as the consumer pays down the outstanding principal 
balance may not be categorically excluded from the prohibition's scope 
as ``calculated and fully paid on a monthly basis,'' a creditor only 
violates the prohibition if the creditor finances the credit insurance 
premium or fee.
    Accordingly, the Bureau's statement implying in the final rule that 
levelized credit insurance premiums amount to a violation of the 
prohibition appears to have been overbroad. For example, credit 
insurance companies have described creditors as acting as passive 
conduits collecting and transmitting monthly premiums from the consumer 
to a credit insurer, rather than advancing funds to an insurer and 
collecting them subsequently from the consumer. Under such a scenario, 
the Bureau believes that a creditor would not likely be providing a 
consumer the right to defer payment of a credit insurance premium or 
fee owed by the consumer within the meaning of the proposal, as 
discussed above. Similarly, under an alternative interpretation that a 
creditor ``finances'' credit insurance only if it charges a ``finance 
charge'' on or in connection with the credit insurance premium or fee, 
as discussed above, a creditor that acts merely as a passive conduit 
for the payment of credit insurance premiums and fees to a credit 
insurer would not likely be charging such a finance charge. On the 
other hand, a creditor that does not act merely as a passive conduit, 
but instead achieves a levelized premium by deferring payments, or 
portions of payments, due to a credit insurer for a monthly outstanding 
balance credit insurance product (or by imposing a finance charge 
incident to such deferment, under the alternative interpretation 
discussed above) would likely be considered to be financing the credit 
insurance premiums or fees.
    The Bureau invites public comment on the extent to which creditors 
act other than as passive conduits in a manner that would constitute 
financing of credit insurance premiums or fees. The Bureau specifically 
invites public comment on what actions by a creditor should or should 
not be considered financing of debt cancellation or suspension contract 
fees, when the creditor is a party to the debt cancellation or 
suspension contract and payments for principal, interest, and the debt 
cancellation or suspension contract are retained by the creditor.

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

A. Overview

    In developing the proposed rule, the Bureau has considered the 
potential benefits, costs, and impacts.\32\ The Bureau requests comment 
on the preliminary analysis presented below as well as submissions of 
additional data that could inform the Bureau's analysis of the 
benefits, costs, and impacts. 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.
---------------------------------------------------------------------------

    \32\ 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.
---------------------------------------------------------------------------

    As noted above, the proposed amendments focus primarily on 
clarifying or revising provisions on (1) Loss mitigation procedures 
under Regulation X's servicing provisions; (2) amounts counted as loan 
originator compensation to retailers of manufactured homes and their 
employees for purposes of applying points and fees thresholds under 
HOEPA and the qualified mortgage rules in Regulation Z; (3) 
determination of which creditors operate predominantly in ``rural'' or 
``underserved'' areas for various purposes under the mortgage 
regulations; (4) application of the loan originator compensation rules 
to bank tellers and similar staff; and (5) the prohibition on creditor-
financed credit insurance. The Bureau also is proposing to adjust the 
effective dates for certain provisions adopted by the 2013 Loan 
Originator Compensation Final Rule and proposing technical and wording 
changes for clarification purposes to Regulations B, X, and Z.

B. Potential Benefits and Costs to Consumers and Covered Persons

    The Bureau believes that, compared to the baseline established by 
the final rules issued in January 2013,\33\ the primary benefit of most 
of the provisions of the proposed rule to both consumers and covered 
persons is an increase in clarity and precision of the regulations and 
an accompanying reduction in compliance costs.
---------------------------------------------------------------------------

    \33\ The Bureau has discretion in any rulemaking to choose an 
appropriate scope of analysis with respect to potential benefits and 
costs and an appropriate baseline.
---------------------------------------------------------------------------

    As described above, the proposed modifications to the Regulation X 
loss mitigation provisions would help servicers by providing clarity as 
to what is required by certain provisions of the rule, including a 
servicer's responsibility when it determines that a loss mitigation 
application that appeared facially complete in fact is lacking 
information necessary to complete review, how timelines are calculated 
when a foreclosure sale has not been scheduled or is rescheduled, and 
the actions prohibited during the pre-foreclosure review period.
    In addition, the Bureau proposed modifications to the Regulation X 
loss mitigation provisions, which include allowing servicers more 
flexibility regarding the disclosure of a date by which a borrower 
should complete an incomplete loss mitigation application; allowing 
servicers to accommodate borrowers in need of immediate, short-term 
relief by offering short-term payment forbearance based on the 
evaluation of an incomplete loss mitigation application; the disclosure 
of certain information in the notices informing borrowers of the 
decisions of the evaluation of a loss mitigation application; and 
allowing servicers to foreclose before the 120th day of delinquency 
when the foreclosure is based on a borrower's violation of a due-on-
sale clause or a subordinate lien is foreclosing.
    The Bureau believes that servicers and consumers will benefit from 
these amendments because they will provide increased clarity, in part 
through reduced implementation costs. Further, the Bureau believes the 
proposed modifications to the loss mitigation rules would only 
minimally increase costs to servicers, and in many instances would 
reduce servicer burden. These modifications would improve the loss 
mitigation process for servicers by allowing them to provide more 
practical deadlines for borrowers to complete loss mitigation 
applications, and by allowing servicers to offer a short-term payment 
forbearance program based on an incomplete application. Further, the 
proposal would provide servicers a reasonable mechanism to seek 
additional information in situations in which a facially complete loss 
mitigation application is later

[[Page 39931]]

determined to lack information that is critical to completion of the 
servicer's review, while providing appropriate protections for 
consumers to minimize dual tracking and provide strong incentives for 
servicers to conduct rigorous up-front reviews.
    The Bureau believes the proposed modifications to the servicing 
final rule should generally benefit borrowers by encouraging servicers 
to disclose to borrowers more useful information regarding the deadline 
to submit loss mitigation applications and to offer short-term 
forbearance without requiring borrowers to submit complete loss 
mitigation applications. The Bureau believes that such modifications 
could result in some cost to consumers if a servicer's mistake in the 
Sec.  1024.41(b)(1)(i)(B) notice were to prolong or delay the loss 
mitigation process. However, the Bureau has sought to minimize this 
potential cost by providing incentives for servicers to conduct 
rigorous upfront review and preserving certain of the protections under 
the rule for borrowers in the event of servicer mistakes. The proposed 
amendments would impose some costs on consumers by making it easier for 
servicers to foreclose during the first 120 days of delinquency for 
certain reasons other than nonpayment of a debt.
    The Bureau does not currently have data regarding the incidence of 
the situations specifically covered by these provisions, e.g. how often 
servicers make mistakes regarding whether an application is complete or 
the information necessary to complete an incomplete application, and 
therefore cannot quantify these benefits. However, the nature of the 
benefits and costs of specific timelines, procedures and disclosures 
was considered in detail in the discussion of benefits, costs, and 
impacts in part VII of the 2013 Mortgage Servicing Final Rules.
    Two of the proposed sets of modifications to the Regulation Z 
provisions involve loan originator compensation. The Bureau is 
proposing to clarify for retailers of manufactured homes and their 
employees what compensation can be attributed to a transaction at the 
time the interest rate is set and must be included in the points and 
fees thresholds for qualified mortgages and high-cost mortgages under 
HOEPA. As discussed above, the proposal would exclude from points and 
fees of loan originator compensation paid by a retailer of manufactured 
homes to its employees and would clarify that the sales price of a 
manufactured home does not include loan originator compensation that 
must be included in points and fees. Both of these proposed changes 
would reduce the burden for creditors in manufactured home transactions 
by eliminating the need for them to attempt to determine what, if any, 
retailer employee compensation and what, if any, part of the sales 
price would count as loan originator compensation that must be included 
in points and fees. As a result, this amendment is likely to lower 
slightly the amount of money counted toward the points and fees 
thresholds on the covered loans. As a result, keeping all other 
provisions of a given loan fixed, this will result in a greater number 
of loans to be eligible to be qualified mortgages. For such loans, the 
costs of origination may be slightly lower as a result of the slightly 
decreased liability for the lender and any assignees and for possibly 
decreased compliance costs. Consumers may benefit from slightly 
increased access to credit and lower costs on the affected loans, 
however these consumers will also not have the added consumer 
protections that accompany loans made under the general ability-to-
repay provisions. The lower amount of points and fees may also lead 
fewer loans to be above the points and fees triggers for high-cost 
mortgages under HOEPA: This should make these loans both more available 
and offered at a lower cost to consumers, though consumers will not 
have the added consumer protections that apply to high-cost mortgages. 
A more detailed discussion of these effects is contained in the 
discussion of benefits, costs, and impacts in part VII of the 2013 ATR 
Final Rule and the 2013 HOEPA Final Rule.
    The Bureau also is proposing to revise when employees (or agents or 
contractors) of a creditor or loan originator in certain administrative 
or clerical roles (e.g., tellers or greeters) may become ``loan 
originators'' under the 2013 Loan Originator Compensation Rule, and 
therefore subject to that Rule's requirements applicable to loan 
originators, such as qualification requirements and restrictions on 
certain compensation practices. As noted above, classifying such 
individuals as loan originators would subject them to the requirements 
applicable to loan originators with, in the Bureau's view, little 
appreciable benefit for consumers. Removing them from this 
classification should lower compliance costs including those related to 
SAFE Act training, certification requirements, and compensation 
restrictions.
    The proposed provisions regarding credit insurance would clarify 
what constitutes financing of such premiums by a creditor, and is 
therefore generally prohibited under the Dodd-Frank Act. The proposal 
would also clarify when credit insurance premiums are considered to be 
calculated and paid on a monthly basis for purposes of a statutory 
exclusion from the prohibition for certain credit insurance premium 
calculation and payment arrangements.
    As noted earlier, the Bureau believes that language in the preamble 
to the 2013 Loan Originator Compensation Final Rule led to some 
confusion among creditors and credit insurance providers regarding 
whether credit insurance products were prohibited under the rule based 
on how their premiums are calculated. The Bureau is now proposing to 
clarify that the prohibition only extends to creditors financing credit 
insurance premiums, and providing additional guidance on what 
constitutes creditor financing and what is excluded from the 
prohibition. The Bureau believes that increased clarity regarding the 
application of the rule to certain products--particularly to insurance 
with ``level'' or ``levelized'' premiums--should benefit both creditors 
and providers of credit insurance products.
    The proposal would also make two adjustments to provisions that 
provide certain exceptions for creditors operating predominantly in 
``rural'' or ``underserved'' areas during the next two years, while the 
Bureau reexamines the definition of ``rural'' or ``underserved'' as it 
recently announced in the May 2013 ATR Final Rule. Specifically, the 
proposal would extend an exception to the general prohibition on 
balloon features for high-cost mortgages under the 2013 HOEPA Final 
Rule that is available to certain loans made by small creditors who 
operate predominantly in rural or underserved areas temporarily to all 
small creditors, regardless of their geographic operations. The 
proposal would also amend an exemption from the requirement to maintain 
escrows for higher-priced mortgage loans under the 2013 Escrow Final 
Rule that is available to small creditors that extended more than 50 
percent of their total covered transactions secured by a first lien in 
``rural'' or ``underserved'' counties during the preceding calendar 
year to allow small creditors to qualify for the exemption if they made 
more than 50 percent of their covered transactions in ``rural'' or 
``underserved'' counties during any of the previous three calendar 
years.
    As noted above, the Bureau believes expanding the balloon-payment 
exception for high-cost mortgages to allow certain small creditors 
operating

[[Page 39932]]

in areas that do not qualify as ``rural'' or ``underserved'' to 
continue to originate certain high-cost mortgages with balloon payments 
during the next two years will benefit creditors who might be unable to 
convert to offering adjustable rate mortgages by the time the final 
rules take effect in January 2014. The proposal would also promote 
consistency between HOEPA requirements and the May 2013 ATR Final Rule, 
thereby facilitating compliance for creditors. The Bureau believes that 
the proposal would also benefit consumers by increasing access to 
credit relative to the 2013 HOEPA Final Rule. Although balloon loans 
can in some cases increase risks for consumers, the Bureau believes 
that those risks are appropriately mitigated in these circumstances 
because the balloon loans must meet the requirements for qualified 
mortgages in order to qualify for the exception. This includes certain 
restrictions on the amount of up-front points and fees and various loan 
features, as well as a requirement that the loans be held on portfolio 
by the small creditor. These requirements reduce the risk of 
potentially abusive lending practices and provide strong incentives for 
the creditor to underwrite the loan appropriately.
    The amendment to the qualifications for the exemption from the 
escrow requirements should minimize the disruptions from any changes in 
the categorization of certain counties while the Bureau is reevaluating 
the underlying definitions. This in turn should lower compliance costs 
for certain creditors during the interim period. Consumers may benefit 
from greater access to credit and lower costs, but in return would not 
receive the benefits of an escrow account. A more detailed discussion 
of these effects is contained in the discussion of benefits, costs, and 
impacts in part VII of the 2013 Escrows Final Rule.

C. Impact on Depository Institutions and Credit Unions With $10 Billion 
or Less in Total Assets, As Described in Section 1026; the Impact of 
the Provisions on Consumers in Rural Areas; Impact on Access to 
Consumer Financial Products and Services

    The proposed rule is generally not expected to have a differential 
impact on depository institutions and credit unions with $10 billion or 
less in total assets as described in section 1026. The exceptions are 
those provisions related to the definition of rural and underserved 
which directly impact entities with under $2 billion in total assets. 
The proposed rule may have some differential impacts on consumers in 
rural areas. To the extent that manufactured housing loans, higher-
priced mortgage loans, high-cost loans or balloon loans are more 
prevalent in these areas, the relevant provisions may have slightly 
greater impacts. As discussed above, costs for creditors in these areas 
should be reduced; consumers should benefit from increased access to 
credit and lower costs, though they will not have access to the 
heightened protections afforded by various provisions. Given the nature 
and limited scope of the changes in the proposed rule, the Bureau does 
not believe that the proposed rule would reduce consumers' access to 
consumer products and services.

VII. Regulatory Flexibility Act Analysis

    The Regulatory Flexibility Act (RFA) generally requires an agency 
to conduct an initial regulatory flexibility analysis (IRFA) and a 
final regulatory flexibility analysis (FRFA) of any rule subject to 
notice-and-comment rulemaking requirements.\34\ These analyses must 
``describe the impact of the proposed rule on small entities.'' \35\ 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,\36\ or if the agency considers a series of closely related 
rules as one rule for purposes of complying with the IRFA or FRFA 
requirements.\37\ 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.\38\
---------------------------------------------------------------------------

    \34\ 5 U.S.C. 601 et. seq.
    \35\ 5 U.S.C. 603(a). For purposes of assessing the impacts of 
the proposed rule on small entities, ``small entities'' is defined 
in the RFA to include small businesses, small not-for-profit 
organizations, and small government jurisdictions. 5 U.S.C. 601(6). 
A ``small business'' is determined by application of Small Business 
Administration regulations and reference to the North American 
Industry Classification System (NAICS) classifications and size 
standards. 5 U.S.C. 601(3). A ``small organization'' is any ``not-
for-profit enterprise which is independently owned and operated and 
is not dominant in its field.'' 5 U.S.C. 601(4). A ``small 
governmental jurisdiction'' is the government of a city, county, 
town, township, village, school district, or special district with a 
population of less than 50,000. 5 U.S.C. 601(5).
    \36\ 5 U.S.C. 605(b).
    \37\ 5 U.S.C. 605(c).
    \38\ 5 U.S.C. 609.
---------------------------------------------------------------------------

    This rulemaking is part of a series of rules that have revised and 
expanded the regulatory requirements for entities that originate or 
service mortgage loans. As noted above, in January, 2013, the Bureau 
issued the 2013 ATR Final Rule, 2013 Escrows Final Rule, 2013 HOEPA 
Final Rule, 2013 Mortgage Servicing Final Rules, and the 2013 Loan 
Originator Compensation Final Rule. Since January 2013, the Bureau also 
has issued the May 2013 ATR Final Rule, Amendments to the 2013 Escrows 
Final Rule, and the 2013 Effective Date Final Rule, along with Proposed 
Amendments to the 2013 Mortgage Rules under the Real Estate Settlement 
Procedures Act (Regulation X) and Truth in Lending Act (Regulation 
Z).\39\ The Supplementary Information to each of these rules set forth 
the Bureau's analyses and determinations under the RFA with respect to 
those rules. Because these rules qualify as ``a series of closely 
related rules,'' for purposes of the RFA, the Bureau relies on those 
analyses and determines that it has met or exceeded the IRFA 
requirement.
---------------------------------------------------------------------------

    \39\ 78 FR 25638 (May 2, 2013).
---------------------------------------------------------------------------

    In the alternative, the Bureau also concludes that the proposed 
rule, if adopted, would not have a significant impact on a substantial 
number of small entities. As noted, the proposal generally clarifies 
the existing rule and to the extent any changes are substantive, these 
changes would not have a material impact on small entities. The 
provisions related to servicing do not apply to many small entities 
under the small servicer exemption (and to the extent that they do, 
small entities will benefit from the same increased flexibility under 
the proposed provisions as other servicers), while the provisions 
related to loan officer compensation and the ``rural'' and 
``underserved'' definitions lower the regulatory burden and possible 
compliance costs for affected entities. Therefore, the undersigned 
certifies that the proposed rule, if adopted, would not have a 
significant impact on a substantial number of small entities.

VIII. Paperwork Reduction Act

    This proposed rule would amend 12 CFR Part 1002 (Regulation B) 
which implements the Equal Credit Opportunity Act, 12 CFR Part 1026 
(Regulation Z), which implements the Truth in Lending Act (TILA), and 
12 CFR Part 1024 (Regulation X), which implements the Real Estate 
Settlement Procedures Act (RESPA). Regulations B, Z and X currently 
contain collections of information approved by OMB. The Bureau's OMB 
control number for Regulation B is 3170-0013, for Regulation Z is 3170-
0015 and for Regulation X is 3170-0016. However, the Bureau has 
determined that this proposed rule would not materially alter these 
collections of information or

[[Page 39933]]

impose any new recordkeeping, reporting, or disclosure requirements on 
the public that would constitute collections of information requiring 
approval under the Paperwork Reduction Act, 44 U.S.C. 3501 et seq. 
Comments on this determination may be submitted to the Bureau as 
instructed in the ADDRESSES section of this notice and to the attention 
of the Paperwork Reduction Act Officer.

List of Subjects

12 CFR Part 1002

    Aged, Banks, Banking, Civil rights, Consumer protection, Credit, 
Credit unions, Discrimination, Fair lending, Marital status 
discrimination, National banks, National origin discrimination, 
Penalties, Race discrimination, Religious discrimination, Reporting and 
recordkeeping requirements, Savings associations, Sex discrimination.

12 CFR Part 1024

    Condominiums, Consumer protection, Housing, Mortgage servicing, 
Mortgages, Reporting and recordkeeping.

12 CFR Part 1026

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

Authority and Issuance

    For the reasons set forth in the preamble, the Bureau proposes to 
amend 12 CFR parts 1002, 1024, and 1026 as set forth below:

PART 1002--EQUAL CREDIT OPPORTUNITY ACT (REGULATION B)

0
1. The authority citation for part 1002 continues to read as follows:

    Authority:  12 U.S.C. 5512, 5581; 15 U.S.C. 1691b.

0
2. Appendix A to Part 1002 is amended by revising paragraph 2.d to read 
as follows:

Appendix A to Part 1002--Federal Agencies To Be Listed in Adverse 
Action Notices

* * * * *
    2. * * *
    d. Federal Credit Unions: National Credit Union Administration, 
Office of Consumer Protection, 1775 Duke Street, Alexandria, VA 
22314.
* * * * *
0
3. In Supplement I to Part 1002, under Section 1002.14, under Paragraph 
14(b)(3) Valuation, as amended January 31, 2013, at 78 FR 6407, 
effective January 18, 2014, paragraphs 1.i and 3.v are revised to read 
as follows:

Supplement I to Part 1002--Official Interpretations

* * * * *

Section 1002.14 Rules on Providing Appraisals and Valuations

* * * * *
    14(b)(3) Valuation.
    1. * * *
    i. A report prepared by an appraiser (whether or not licensed or 
certified) including the appraiser's estimate of the property's 
value.
* * * * *
    3. * * *
    v. Reports reflecting property inspections that do not provide 
an estimate of the value of the property and are not used to develop 
an estimate of the value of the property.
* * * * *

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

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

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

Subpart A--General

0
5. Section 1024.30, as amended February 14, 2013, at 78 FR 10695, 
effective January 10, 2014, is amended by revising paragraph (a) to 
read as follows:


Sec.  1024.30  Scope.

    (a) In general. Except as provided in paragraphs (b) and (c) of 
this section, this subpart applies to any mortgage loan, as that term 
is defined in Sec.  1024.31.
* * * * *
0
6. Section 1024.35, as amended February 14, 2013, at 78 FR 10695, 
effective January 10, 2014, is amended by revising paragraph 
(g)(1)(iii)(B) to read as follows:


Sec.  1024.35  Error resolution procedures.

* * * * *
    (g) * * *
    (1) * * *
    (iii) * * *
    (B) The mortgage loan is discharged.
* * * * *
0
7. Section 1024.36, as amended February 14, 2013, at 78 FR 10695, 
effective January 10, 2014, is amended by revising paragraph 
(f)(1)(v)(B) to read as follows:


Sec.  1024.36  Requests for information.

* * * * *
    (f) * * *
    (1) * * *
    (v) * * *
    (B) The mortgage loan is discharged.
* * * * *
0
8. Section 1024.39, as amended February 14, 2013, at 78 FR 10695, 
effective January 10, 2014, is amended by revising paragraphs (b)(1) 
and (3) to read as follows:


Sec.  1024.39  Early intervention requirements for certain borrowers.

* * * * *
    (b) Written notice. (1) Notice required. Except as otherwise 
provided in this section, a servicer shall provide to a delinquent 
borrower a written notice with the information set forth in paragraph 
(b)(2) of this section not later than the 45th day of the borrower's 
delinquency. A servicer is not required to provide the written notice 
more than once during any 180-day period.
* * * * *
    (3) Model clauses. Model clauses MS-4(A), MS-4(B), and MS-4(C), in 
appendix MS-4 to this part may be used to comply with the requirements 
of this paragraph (b).
* * * * *
0
9. Section 1024.41, as amended February 14, 2013, at 78 FR 10695, 
effective January 10, 2014, is amended by revising paragraphs 
(b)(2)(ii), (c)(1)(ii), (c)(2)(i), (d), (f)(1), (h)(4), (j) and adding 
paragraphs (b)(3), (c)(2)(iii), and (c)(2)(iv) to read as follows:


Sec.  1024.41  Loss mitigation procedures.

* * * * *
    (b) * * *
    (2) * * *
    (ii) Time period disclosure. The notice required pursuant to 
paragraph (b)(2)(i)(B) of this section must include a reasonable date 
by which the borrower should submit the documents and information 
necessary to make the loss mitigation application complete.
    (3) Timelines. For purposes of this section, timelines based on the 
proximity of a foreclosure sale to the receipt of a complete loss 
mitigation application will be determined as of the date a complete 
loss mitigation application is received.
    (c) * * *
    (1) * * *
    (ii) Provide the borrower with a notice in writing stating the 
servicer's determination of which loss mitigation options, if any, it 
will offer to the borrower on behalf of the owner or assignee of the 
mortgage. The servicer shall include in this notice the amount of time 
the borrower has to accept or reject an offer of a loss mitigation 
program as provided for in paragraph (e) of this section, if 
applicable, and a notification, if applicable, that the borrower has 
the right to appeal the denial of any loan modification option as well 
as the amount of time the

[[Page 39934]]

borrower has to file such an appeal and any requirements for making an 
appeal as provided for in paragraph (h) of this section.
    (2) * * *
    (i) In general. Except as set forth in paragraphs (c)(2)(ii) and 
(iii) of this section, a servicer shall not evade the requirement to 
evaluate a complete loss mitigation application for all loss mitigation 
options available to the borrower by offering a loss mitigation option 
based upon an evaluation of any information provided by a borrower in 
connection with an incomplete loss mitigation application.
* * * * *
    (iii) Payment forbearance. Notwithstanding paragraph (c)(2)(i) of 
this section, a servicer may offer a short-term payment forbearance 
program to a borrower based upon an evaluation of an incomplete loss 
mitigation application. A servicer offering such a program to a 
borrower who has submitted an incomplete loss mitigation application 
must include in the notice of incomplete application required pursuant 
to paragraph (b)(2)(i)(B) of this section a statement that:
    (A) The servicer has received an incomplete loss mitigation 
application, and on the basis of that application the servicer is 
offering a payment forbearance program;
    (B) Absent further action by the borrower, the servicer will not 
review the incomplete application for other loss mitigation options; 
and
    (C) If the borrower would like to be considered for other loss 
mitigation options, the borrower must notify the servicer and submit 
the missing documents and information required to complete the loss 
mitigation application.
    (iv) Servicer creates reasonable expectation that a loss mitigation 
application is complete. If a servicer creates a reasonable expectation 
that a loss mitigation application is complete but the servicer later 
discovers that the application is incomplete, the servicer shall treat 
the application as complete as of the date the borrower had reason to 
believe the application was complete for purposes of paragraphs (f)(2) 
and (g) of this section until the borrower has been given a reasonable 
opportunity to complete the loss mitigation application.
    (d) Denial of loan modification options. If a borrower's complete 
loss mitigation application is denied for any trial or permanent loan 
modification option available to the borrower pursuant to paragraph (c) 
of this section, a servicer shall state in the notice sent to the 
borrower pursuant to paragraph (c)(1)(ii) of this section the specific 
reason or reasons for the servicer's determination for each such trial 
or permanent loan modification option, and a notification that the 
borrower was not evaluated on other criteria (if applicable).
* * * * *
    (f) * * *
    (1) Pre-foreclosure review period. A servicer shall not make the 
first notice or filing required by applicable law for any judicial or 
non-judicial foreclosure process unless:
    (i) A borrower's mortgage loan obligation is more than 120 days 
delinquent;
    (ii) The foreclosure is based on a borrower's violation of a due-
on-sale clause; or
    (iii) The servicer is joining the foreclosure action of a 
subordinate lienholder.
* * * * *
    (h) * * *
    (4) Appeal determination. Within 30 days of a borrower making an 
appeal, the servicer shall provide a notice to the borrower stating the 
servicer's determination of whether the servicer will offer the 
borrower a loss mitigation option based upon the appeal, and, if 
applicable, how long the borrower has to accept or reject such an offer 
or a prior offer of a loss mitigation option, as provided for in this 
paragraph. A servicer may require that a borrower accept or reject an 
offer of a loss mitigation option after an appeal no earlier than 14 
days after the servicer provides the notice to a borrower. A servicer's 
determination under this paragraph is not subject to any further 
appeal.
* * * * *
    (j) Small servicer requirements. A small servicer shall be subject 
to the prohibition on foreclosure referral in paragraph (f)(1) of this 
section. A small servicer shall not make the first notice or filing 
required by applicable law for any judicial or non-judicial foreclosure 
process and shall not move for foreclosure judgment or order of sale, 
or conduct a foreclosure sale, if a borrower is performing pursuant to 
the terms of an agreement on a loss mitigation option.
0
10. Appendix MS-3 to Part 1024, as amended February 14, 2013, at 78 FR 
10695, effective January 10, 2014, is amended by:
0
a. Revising the entry for MS-3(D) in the table of contents at the 
beginning of the appendix, and
0
b. Revising the heading of MS-3(D).
    The amendments read as follows:

Appendix MS-3 to Part 1024

* * * * *

MS-3(D)--Model Form for Renewal or Replacement of Force-Placed 
Insurance Notice Containing Information Required By Sec.  
1024.37(e)(2)

* * * * *
0
11. In Supplement I to Part 1024, as amended February 14, 2013, at 78 
FR 10695, effective January 10, 2014,:
0
a. Under Section 1024.17 the heading for 17(k)(5)(ii) is revised.
0
b. Under Section 1024.33--Mortgage Servicing Transfers:
0
i. Under Paragraph 33(a) Servicing Disclosure Statement, paragraph 1 is 
revised.
0
ii. Under Paragraph 33(c)(1) Payments not considered late, paragraph 2 
is revised.
0
c. Under Section 1024.35--Error Resolution Procedures, Paragraph 35(c), 
paragraph 2 is revised.
0
d. Under Section 1024.36--Request for Information, Paragraph 36(b), 
paragraph 2 is revised.
0
e. The heading for Section 1024.41 is revised.
0
f. Under Section 1024.41, Loss Mitigation Procedures;
0
i. Paragraphs 41(b)(2), 41(b)(3), 41(c)(2)(iii), and 41(c)(2)(iv) are 
added.
0
ii. The heading for paragraphs 41(c) is revised.
0
iii. Under newly designated 41(c), paragraph (c)(2)(iii) is added.
0
iv. The heading Paragraph 41(d)(1) is removed.
0
v. Under paragraph 41(d), paragraph 3 is redesignated as 
Paragraph(c)(1), paragraph 4, and paragraph 4 is redesignated as 
paragraph 3.
0
vii. Under paragraph 41(d), paragraph 4 is added.
0
viii. Under paragraph 41(f), new paragraph 1 is added.

Supplement I to Part 1024--Official Bureau Interpretations

* * * * *

Subpart B--Mortgage Settlement and Escrow Accounts

* * * * *

Section 1024.17--Escrow Accounts

    17(k)(5)(ii) Inability to disburse funds.
* * * * *

Subpart C--Mortgage Servicing

* * * * *

Section 1024.33--Mortgage Servicing Transfers

* * * * *
    33(a) Servicing disclosure statement.
    1. Terminology. Although the servicing disclosure statement must 
be clear and conspicuous pursuant to Sec.  1024.32(a), Sec.  
1024.33(a) does not set forth any specific

[[Page 39935]]

rules for the format of the statement, and the specific language of 
the servicing disclosure statement in appendix MS-1 is not required 
to be used. The model format may be supplemented with additional 
information that clarifies or enhances the model language.
* * * * *
    33(c) Borrower payments during transfer of servicing.
    33(c)(1) Payments not considered late.
    1. * * *
    2. Compliance with Sec.  1024.39. A transferee servicer's 
compliance with Sec.  1024.39 during the 60-day period beginning on 
the effective date of a servicing transfer does not constitute 
treating a payment as late for purposes of Sec.  1024.33(c)(1).

Section 1024.35 Error Resolution Procedures

* * * * *
    35(c) Contact information for borrowers to assert errors
* * * * *
    2. Notice of an exclusive address. A notice establishing an 
address that a borrower must use to assert an error may be included 
with a different disclosure, such as on a notice of transfer, 
periodic statement, or coupon book. The notice is subject to the 
clear and conspicuous requirement in Sec.  1024.32(a)(1). If a 
servicer establishes an address that a borrower must use to assert 
an error, a servicer must provide that address to the borrower in 
any communication in which the servicer provides the borrower with 
an address for assistance from the servicer.
* * * * *

Section 1024.36 Requests for Information

* * * * *
    36(b) Contact information for borrowers to request information
    1. * * *
    2. Notice of an exclusive address. A notice establishing an 
address that a borrower must use to request information may be 
included with a different disclosure, such as on a notice of 
transfer, periodic statement, or coupon book. The notice is subject 
to the clear and conspicuous requirement in Sec.  1024.32(a)(1). If 
a servicer establishes an address that a borrower must use to 
request information, a servicer must provide that address to the 
borrower in any communication in which the servicer provides the 
borrower with an address for assistance from the servicer.
* * * * *

Section 1024.41--Loss Mitigation Procedures.

    41(b) Receipt of loss mitigation application
* * * * *
    41(b)(2) Review of loss mitigation application submission
    41(b)(2)(i) Requirements
    Paragraph 41 (b)(2)(i)(B)
    1. Notification of complete application. Even if a servicer has 
informed a borrower that an application is complete (or notified the 
borrower of specific information necessary to complete an incomplete 
application), if the servicer determines, in the course of 
evaluating the loss mitigation application submitted by the 
borrower, that additional information is required, the servicer must 
request the additional information from a borrower pursuant to the 
Sec.  1024.41(b)(1) obligation to exercise reasonable diligence in 
obtaining such documents and information.
    2. Effect on timelines. Except as provided in Sec.  
1024.41(c)(2)(iv), the provisions and timelines triggered by a 
complete loss mitigation application in Sec.  1024.41 will not be 
triggered by an incomplete application, regardless of whether a 
servicer has sent a Sec.  1024.41(b)(2)(i)(B) notification 
incorrectly informing the borrower that the loss mitigation 
application is complete or otherwise given the borrower reason to 
believe the application is complete.
    41(b)(2)(ii) Time period disclosure
    1. Reasonable date factors. Section 1024.41(b)(2)(ii) requires 
that a notice informing a borrower that a loss mitigation 
application is incomplete must include a reasonable date by which 
the borrower should submit the documents and information necessary 
to make the loss mitigation application complete. In determining a 
reasonable date, a servicer should select the deadline that 
preserves the maximum borrower rights under Sec.  1024.41, except 
when doing so would be impracticable. Thus, in setting a date, the 
factors listed below should be considered (if the date of a 
foreclosure sale is not known, a servicer may use a reasonable 
estimate of when a foreclosure sale may be scheduled):
    i. The date by which any document or information submitted by a 
borrower will be considered stale or invalid pursuant to any 
requirements applicable to any loss mitigation option available to 
the borrower;
    ii. The date that is the 120th day of the borrower's 
delinquency;
    iii. The date that is 90 days before a foreclosure sale;
    iv. The date that is 38 days before a foreclosure sale.
    41(b)(3) Timelines
    1. Foreclosure sale not scheduled. If no foreclosure sale has 
been scheduled as of the date that a complete loss mitigation 
application is received, the application shall be treated as if it 
were received at least 90 days before a scheduled foreclosure sale.
    2. Foreclosure sale re-scheduled. These timelines established as 
of the receipt of a complete loss mitigation application shall 
remain in effect, even if a foreclosure sale is later re-scheduled 
to occur earlier or later.
    41(c) Evaluation of loss mitigation applications
* * * * *
    41(c)(2) Incomplete loss mitigation application evaluation
    41(c)(2)(iii) Payment forbearance
    1. Short-term payment forbearance program. The exemption in 
Sec.  1024.41(c)(2)(iii) applies to a short-term payment forbearance 
program. A payment forbearance program is a loss mitigation option 
for which a servicer allows a borrower to forgo making certain 
payments or portions of payments for a period of time. A short-term 
payment forbearance program allows the forbearance of payments due 
over periods of no more than two months. Such a program would be 
short-term regardless of the amount of time a servicer allows the 
borrower to make up the missing payments. The examples below 
illustrate how the length of a payment forbearance program is 
calculated for purposes of Sec.  1024.41(c)(2)(iii).
    i. A servicer allows a borrower to forgo payment for January, 
February and March, and the borrower must make these payments in 
addition to the April payment at the time the April payment is due. 
This is a three-month forbearance program and thus would not be 
considered short-term.
    ii. A servicer allows a borrower to forgo payment for January 
and February, and the borrower must make the January and February 
payments in addition to the March payment, at the time the March 
payment is due. This is a two-month forbearance program, and thus 
would be considered short-term.
    iii. A servicer allows a borrower to forgo payment for January 
and February. These payments are spread over the next six months, 
and the borrower will make larger payments for March through August. 
This is a two-month forbearance program, and thus would be 
considered short-term.
    iv. A servicer allows a borrower to forgo payment for January 
and February. These payments are added to the last monthly payment 
at the end of the loan obligation. This is a two-month forbearance 
program, and thus would be considered short-term.
    2. Payment forbearance and incomplete applications. Section 
1024.41(c)(2)(iii) allows a servicer to offer a borrower a short-
term payment forbearance program based on an evaluation of an 
incomplete loss mitigation application. Such an incomplete loss 
mitigation application is still subject to the other obligations in 
Sec.  1024.41, including the obligation in Sec.  1024.41(b)(2) to 
review the application to determine if it is complete, the 
obligation in Sec.  1024.41(b)(1) to exercise reasonable diligence 
in obtaining documents and information to complete a loss mitigation 
application, and the obligation to provide the borrower with the 
Sec.  1024.41(b)(2)(ii) notice that the servicer acknowledges the 
receipt of the application and has determined the application is 
incomplete (and any other information required to be in such a 
notice).
    3. Payment forbearance and complete applications. Even if a 
servicer offers a borrower a payment forbearance program after an 
evaluation of an incomplete loss mitigation application, the 
servicer must still comply with all other requirements in Sec.  
1024.41 on receipt of a borrower's submission of a complete loss 
mitigation application.
    41(c)(2)(iv) Servicer creates reasonable expectation that a loss 
mitigation application is complete.
    1. Reasonable expectation. A servicer creates a reasonable 
expectation that a loss mitigation application is complete when:
    i. The servicer notifies the borrower in the Sec.  
1024.41(b)(2)(i)(B) notice that the servicer has determined the 
application is complete. The borrower would have a reasonable 
expectation upon receipt of the notice that the application was 
complete as of the date the application was submitted.
    ii. The servicer notifies the borrower in the Sec.  
1024.41(b)(2)(i)(B) notice that the servicer

[[Page 39936]]

has determined the application is incomplete and identifies 
information and documentation necessary to complete the application, 
and the borrower provides all the documents and information that 
were listed as missing in that notice within a reasonable time. The 
borrower would have a reasonable expectation that the application 
was complete as of the date the borrower submitted all the documents 
and information that were listed as missing.
    2. Reasonable opportunity. Section 1024.41(c)(2)(iv) requires a 
servicer to treat as complete an application that the servicer has 
created a reasonable expectation is complete until a borrower has 
been given a reasonable opportunity to complete the loss mitigation 
application. A reasonable opportunity requires the servicer to 
notify the borrower of what information and documentation is 
missing, and afford the borrower sufficient time to gather the 
information and/or documentation necessary to complete the 
application and submit it to the servicer. The amount of time that 
is sufficient for this purpose will depend on the facts and 
circumstances.
    41(d) Denial of loan modification options
* * * * *
    4. Reasons listed. A servicer is required to disclose the actual 
reason or reasons for the denial. If a servicer's systems establish 
a hierarchy of eligibility criteria and reach the first criterion 
that causes a denial but do not evaluate the borrower based on 
additional criteria, a servicer complies with the rule by providing 
only the reason or reasons with respect to which the borrower was 
actually evaluated as well as notification that the borrower was not 
evaluated on other criteria. A servicer is not required to determine 
or disclose whether a borrower would have been denied on the basis 
of additional criteria if such criteria were not actually 
considered.
    41(f) Prohibition on foreclosure referral
    1. Prohibited activities. Section 1024.41(f) prohibits a 
servicer from making the first notice or filing required by 
applicable law for any judicial or non-judicial foreclosure process 
under certain circumstances. Whether a document is considered the 
first notice or filing is determined under applicable State law. 
Specifically, a document is considered the first notice or filing if 
it would be used by the servicer as evidence of compliance with 
foreclosure practices required pursuant to State law, but is not 
considered the first notice or filing if it is used solely for other 
purposes. Thus, a servicer is not prohibited from attempting to 
collect payments, sending periodic statements, sending breach 
letters, or engaging in any other activity during the pre-
foreclosure review period, so long as such documents or activity 
would not be used as evidence of complying with requirements 
applicable pursuant to State law in connection with a foreclosure 
process, and are not banned by other applicable law (e.g., the Fair 
Debt Collection Practices Act or bankruptcy law).
* * * * *

PART 1026--TRUTH IN LENDING (REGULATION Z)

0
12. 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 C--Closed-End Credit

0
13. Section 1026.23 is amended by revising paragraph (a)(3)(ii) to read 
as follows:


Sec.  1026.23  Right of rescission.

    (a) * * *
    (3) * * *
    (ii) For purposes of this paragraph (a)(3), the term ``material 
disclosures'' means the required disclosures of the annual percentage 
rate, the finance charge, the amount financed, the total of payments, 
the payment schedule, and the disclosures and limitations referred to 
in Sec. Sec.  1026.32(c) and (d) and 1026.43(g).
* * * * *

Subpart E--Special Rules for Certain Home Mortgage Transactions

0
14. Section 1026.31, as amended January 31, 2013, at 78 FR 6856, 
effective January 10, 2014, is amended by revising paragraphs 
(h)(1)(iii)(A) and (h)(2)(iii)(A) to read as follows:


Sec.  1026.31  General rules.

* * * * *
    (h) * * *
    (1) * * *
    (iii) * * *
    (A) Make the loan or credit plan satisfy the requirements of 15 
U.S.C. 1631-1651; or
* * * * *
    (2) * * *
    (iii) * * *
    (A) Make the loan or credit plan satisfy the requirements of 15 
U.S.C. 1631-1651; or
* * * * *
0
15. Section 1026.32 is amended by:
0
a. Revising paragraph (a)(2)(iii), as amended January 31, 2013, at 78 
FR 6856, effective January 10, 2014;
0
b. Revising paragraph (b)(1)(ii), as amended June 2, 2013, at 78 FR 
35430, effective January 10, 2014;
0
c. Revising paragraph (b)(1)(vi), as amended January 30, 2013, at 78 FR 
6408, effective January 10, 2014;
0
d. Revising paragraph (b)(2)(ii), as amended June 12, 2013, at 78 FR 
35430, effective January 10, 2014; and
0
e. Revising paragraphs (b)(2)(vi), (b)(6)(ii), and (d)(1)(ii)(C), as 
amended January 31, 2013, at 78 FR 6856, effective January 10, 2014.
    The revisions read as follows:


Sec.  1026.32  Requirements for high-cost mortgages.

    (a) * * *
    (2) * * *
    (iii) A transaction originated by a Housing Finance Agency, where 
the Housing Finance Agency is the creditor for the transaction; or
    (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;
    (C) That compensation is paid by a creditor to a loan originator 
that is an employee of the creditor; or
    (D) That compensation is paid by a retailer of manufactured homes 
to its employee.
* * * * *
    (vi) The total prepayment penalty, as defined in paragraph 
(b)(6)(i) or (ii) of this section, as applicable, incurred by the 
consumer if the consumer refinances the existing mortgage loan, or 
terminates an existing open-end credit plan in connection with 
obtaining a new mortgage loan, with the current holder of the existing 
loan or plan, a servicer acting on behalf of the current holder, or an 
affiliate of either.
* * * * *
    (b) * * *
    (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;
    (C) That compensation is paid by a creditor to a loan originator 
that is an employee of the creditor; or

[[Page 39937]]

    (D) That compensation is paid by a retailer of manufactured homes 
to its employee.
* * * * *
    (vi) The total prepayment penalty, as defined in paragraph 
(b)(6)(i) or (ii) of this section, as applicable, incurred by the 
consumer if the consumer refinances an existing closed-end credit 
transaction with an open-end credit plan, or terminates an existing 
open-end credit plan in connection with obtaining a new open-end credit 
plan, with the current holder of the existing transaction or plan, a 
servicer acting on behalf of the current holder, or an affiliate of 
either;
* * * * *
    (6) * * *
    (ii) Open-end credit. For an open-end credit plan, prepayment 
penalty means a charge imposed by the creditor if the consumer 
terminates the open-end credit plan prior to the end of its term, other 
than a waived, bona fide third-party charge that the creditor imposes 
if the consumer terminates the open-end credit plan sooner than 36 
months after account opening.
* * * * *
    (d) Limitations. A high-cost mortgage shall not include the 
following terms:
    (1) * * *
    (ii) * * *
    (C) A loan that meets the criteria set forth in Sec. Sec.  
1026.43(f)(1)(i) through (vi) and 1026.43(f)(2), or the conditions set 
forth in Sec.  1026.43(e)(6).
* * * * *
0
16. Section 1026.35 is amended by revising paragraphs (b)(2)(i)(D), 
(b)(2)(iii)(A), and (b)(2)(iii)(D)(1) to read as follows:


Sec.  1026.35  Requirements for higher-priced mortgage loans.

* * * * *
    (b) * * *
    (2) * * *
    (i) * * *
    (D) A reverse mortgage transaction subject to Sec.  1026.33.
* * * * *
    (iii) * * *
    (A) During any of the three preceding calendar years, the creditor 
extended more than 50 percent of its total covered transactions, as 
defined by Sec.  1026.43(b)(1), secured by a first lien, on properties 
that are located in counties that are either ``rural'' or 
``underserved,'' as set forth in paragraph (b)(2)(iv) of this section;
* * * * *
    (D) * * *
    (1) Escrow accounts established for first-lien higher-priced 
mortgage loans on or after April 1, 2010, and before January 1, 2014; 
or
* * * * *
0
17. Section 1026.36, as amended February 15, 2013, at 78 FR 11280, 
effective January 10, 2014, is amended by revising paragraphs 
(a)(1)(i)(A) and (B), adding paragraph (a)(6), and revising paragraphs 
(b), (f)(3)(i) introductory text, (f)(3)(ii), (i), and (j)(2) to read 
as follows:


Sec.  1026.36  Prohibited acts or practices and certain requirements 
for credit secured by a dwelling.

    (a) * * *
    (1) * * *
    (i) * * *
    (A) A person who does not take a consumer credit application or 
offer or negotiate credit terms available from a creditor to that 
consumer selected based on the consumer's financial characteristics, 
but who performs purely administrative or clerical tasks on behalf of a 
person who does engage in such activities.
    (B) An employee of a manufactured home retailer who does not take a 
consumer credit application, offer or negotiate credit terms available 
from a creditor to that consumer selected based on the consumer's 
financial characteristics, or advise a consumer on particular credit 
terms available from a creditor to that consumer selected based on the 
consumer's financial characteristics.
* * * * *
    (6) Credit terms. For purposes of this section, the term ``credit 
terms'' includes rates, fees, and other costs.
* * * * *
    (b) Scope. Paragraphs (c)(1) and (2) of this section apply to 
closed-end consumer credit transactions secured by a consumer's 
principal dwelling. Paragraph (c)(3) of this section applies to a 
consumer credit transaction secured by a dwelling. Paragraphs (d) 
through (i) of this section apply to closed-end consumer credit 
transactions secured by a dwelling. This section does not apply to a 
home equity line of credit subject to Sec.  1026.40, except that 
paragraphs (h) and (i) of this section apply to such credit when 
secured by the consumer's principal dwelling and paragraph (c)(3) 
applies to such credit when secured by a dwelling. Paragraphs (d) 
through (i) of this section do not apply to a loan that is secured by a 
consumer's interest in a timeshare plan described in 11 U.S.C. 
101(53D).
* * * * *
    (f) * * *
    (3) * * *
    (i) Obtain for any individual whom the loan originator organization 
hired on or after January 1, 2014 (or whom the loan originator 
organization hired before this date but for whom there were no 
applicable statutory or regulatory background standards in effect at 
the time of hire or before January 1, 2014, used to screen the 
individual) and for any individual regardless of when hired who, based 
on reliable information known to the loan originator organization, 
likely does not meet the standards under Sec.  1026.36(f)(3)(ii), 
before the individual acts as a loan originator in a consumer credit 
transaction secured by a dwelling:
* * * * *
    (ii) Determine on the basis of the information obtained pursuant to 
paragraph (f)(3)(i) of this section and any other information 
reasonably available to the loan originator organization, for any 
individual whom the loan originator organization hired on or after 
January 1, 2014 (or whom the loan originator organization hired before 
this date but for whom there were no applicable statutory or regulatory 
background standards in effect at the time of hire or before January 1, 
2014, used to screen the individual) and for any individual regardless 
of when hired who, based on reliable information known to the loan 
originator organization, likely does not meet the standards under this 
paragraph (f)(3)(ii), before the individual acts as a loan originator 
in a consumer credit transaction secured by a dwelling, that the 
individual loan originator:
* * * * *
    (i) Prohibition on financing credit insurance. (1) A creditor may 
not finance, directly or indirectly, any premiums or fees for credit 
insurance in connection with a consumer credit transaction secured by a 
dwelling (including a home equity line of credit secured by the 
consumer's principal dwelling). This prohibition does not apply to 
credit insurance for which premiums or fees are calculated and paid in 
full on a monthly basis.
    (2) For purposes of this paragraph (i):
    (i) ``Credit insurance'':
    (A) Means credit life, credit disability, credit unemployment, or 
credit property insurance, or any other accident, loss-of income, life, 
or health insurance, or any payments directly or indirectly for any 
debt cancellation or suspension agreement or contract, but
    (B) Excludes credit unemployment insurance for which the 
unemployment insurance premiums are reasonable, the creditor receives 
no direct or indirect compensation in connection with the unemployment 
insurance premiums, and the unemployment insurance

[[Page 39938]]

premiums are paid pursuant to a separate insurance contract and are not 
paid to an affiliate of the creditor;
    (ii) A creditor finances premiums or fees for credit insurance if 
it provides a consumer the right to defer payment of a credit insurance 
premium or fee owed by the consumer; and
    (iii) Credit insurance premiums or fees are calculated on a monthly 
basis if they are determined mathematically by multiplying a rate by 
the actual monthly outstanding balance.
* * * * *
    (j) * * *
    (2) For purposes of this paragraph (j), ``depository institution'' 
has the meaning in section 1503(3) of the SAFE Act, 12 U.S.C. 5102(3). 
For purposes of this paragraph (j), ``subsidiary'' has the meaning in 
section 3 of the Federal Deposit Insurance Act, 12 U.S.C. 1813.
* * * * *
0
18. Appendix H to Part 1026, as amended February 14, 2013, at 78 FR 
10901, effective January 10, 2014, is amended by:
0
a. Revising the entry for H-30(C) in the table of contents at the 
beginning of the appendix, and
0
b. Revising the heading of H-30(C).
    The revision reads as follows:

Appendix H to Part 1026--Closed-End Model Forms and Clauses

* * * * *
    H-30(C) Sample Form of Periodic Statement for a Payment-Option 
Loan
* * * * *
0
19. In Supplement I to Part 1026:
0
a. Under Section 1026.25--Record Retention, under Paragraph 25(c)(2) 
Records related to requirements for loan originator compensation, as 
amended February 15, 2013, at 78 FR 11280, effective January 10, 2014, 
paragraph 1 is revised.
0
b. Under Section 1026.32 Requirements for High Cost Mortgages:
0
i. Under Paragraph 32(b)(1), as amended January 30, 2013, at 78 FR 
6408, effective January 10, 2014, paragraph 2 is added.
0
ii. Under Paragraph 32(b)(1)(ii), as amended June 12, 2013, at 78 FR 
35430, effective January 10, 2014, paragraph 5 is added.
0
iii. Paragraph 32(b)(2), as amended January 30, 2013, at 78 FR 6408, 
effective January 10, 2014, and paragraph 1 are added.
0
iv. Under Paragraph 32(b)(2)(i), as amended January 30, 2013, at 78 FR 
6408, effective January 10, 2014, paragraph 1 is revised.
0
v. Under Paragraph 32(b)(2)(i)(D), as amended January 30, 2013, at 78 
FR 6408, effective January 10, 2014, paragraph 1 is revised.
0
vi. Under Paragraph 32(d)(8)(ii), as amended January 30, 2013, at 78 FR 
6408, effective January 10, 2014, paragraph 1 is revised.
0
c. Under Section 1026.34--Prohibited Acts or Practices in Connection 
with High--Cost Mortgages, under Paragraph 34(a)(5)(v), as amended 
January 30, 2013, at 78 FR 6408, effective January 10, 2014, paragraph 
1 is revised.
0
d. Under Section 1026.35--Requirements for Higher-Priced Mortgage Loans
0
i. Under Paragraph 35(b)(2)(iii), paragraph 1 is revised.
0
ii. Under Paragraph 35(b)(2)(iii)(D(1), paragraph 1 is revised.
0
e. Under Section 1026.36--Prohibited Acts or Practices in Connection 
With Credit Secured by a Dwelling
0
i. Under Paragraph 36(a), as amended February 14, 2013, at 78 FR 11280, 
effective January 10, 2014, paragraphs 1, 4, and 5 are revised.
0
ii. Under Paragraph 36(b), as amended February 14, 2013, at 78 FR 
11280, effective January 10, 2014, paragraph 1 is revised.
0
iii. Under Paragraph 36(d)(1), as amended February 14, 2013, at 78 FR 
11280, effective January 10, 2014, paragraphs 1, 3, and 6 are revised.
0
iv. Under Paragraph 36(f)(3)(i), as amended February 14, 2013, at 78 FR 
11280, effective January 10, 2014, paragraphs 1 and 2 are revised.
0
v. Under Paragraph 36(f)(3)(ii), as amended February 14, 2013, at 78 FR 
11280, effective January 10, 2014, paragraphs 1and 2 are revised.
0
f. Under Section 1026.41--Periodic Statements for Residential Mortgage 
Loans
0
i. Under Paragraph 41(b), as amended February 14, 2013, at 78 FR 10901, 
effective January 10, 2014, paragraph 1 is revised.
0
ii. Under Paragraph 41(d), as amended February 14, 2013, at 78 FR 
10901, effective January 10, 2014, paragraph 3 is revised.
0
iii. Under Paragraph 41(d)(4), as amended February 14, 2013, at 78 FR 
10901, effective January 10, 2014, paragraph 1 is revised.
0
iv. Under Paragraph 41(e)(3), as amended February 14, 2013, at 78 FR 
10901, effective January 10, 2014, paragraph 1 is revised.
0
v. Under Paragraph 41(e)(4)(iii), as amended February 14, 2013, at 78 
FR 10901, effective January 10, 2014, paragraph 1 is revised.
    The revisions read as follows:

Supplement I to Part 1026--Official Interpretations

* * * * *

Subpart D--Miscellaneous

Section 1026.25 Record Retention

* * * * *
    25(c) Records related to certain requirements for mortgage 
loans.
    25(c)(2) Records related to requirements for loan originator 
compensation.
    1. * * *
    i. Records sufficient to evidence payment and receipt of 
compensation. Records are sufficient to evidence payment and receipt 
of compensation if they demonstrate the following facts: The nature 
and amount of the compensation; that the compensation was paid, and 
by whom; that the compensation was received, and by whom; and when 
the payment and receipt of compensation occurred. The compensation 
agreements themselves are to be retained in all circumstances 
consistent with Sec.  1026.25(c)(2)(i). The additional records that 
are sufficient necessarily will vary on a case-by-case basis 
depending on the facts and circumstances, particularly with regard 
to the nature of the compensation. For example, if the compensation 
is in the form of a salary, records to be retained might include 
copies of required filings under the Internal Revenue Code that 
demonstrate the amount of the salary. If the compensation is in the 
form of a contribution to or a benefit under a designated tax-
advantaged plan, records to be maintained might include copies of 
required filings under the Internal Revenue Code or other applicable 
Federal law relating to the plan, copies of the plan and amendments 
thereto in which individual loan originators participate and the 
names of any loan originators covered by the plan, or determination 
letters from the Internal Revenue Service regarding the plan. If the 
compensation is in the nature of a commission or bonus, records to 
be retained might include a settlement agent ``flow of funds'' 
worksheet or other written record or a creditor closing instructions 
letter directing disbursement of fees at consummation. Where a loan 
originator is a mortgage broker, a disclosure of compensation or 
broker agreement required by applicable State law that recites the 
broker's total compensation for a transaction is a record of the 
amount actually paid to the loan originator in connection with the 
transaction, unless actual compensation deviates from the amount in 
the disclosure or agreement. Where compensation has been decreased 
to defray the cost, in whole or part, of an unforeseen increase in 
an actual settlement cost over an estimated settlement cost 
disclosed to the consumer pursuant to section 5(c) of RESPA (or 
omitted from that disclosure), records to be maintained are those 
documenting the decrease in compensation and reasons for it.
    ii. Compensation agreement. For purposes of Sec.  1026.25(c)(2), 
a compensation agreement includes any agreement, whether oral, 
written, or based on a course of conduct that establishes a 
compensation arrangement between the parties (e.g., a brokerage 
agreement between a creditor and a mortgage broker or provisions of 
employment contracts between a creditor and an individual loan 
originator employee addressing payment of

[[Page 39939]]

compensation). Where a compensation agreement is oral or based on a 
course of conduct and cannot itself be maintained, the records to be 
maintained are those, if any, evidencing the existence or terms of 
the oral or course of conduct compensation agreement. Creditors and 
loan originators are free to specify what transactions are governed 
by a particular compensation agreement as they see fit. For example, 
they may provide, by the terms of the agreement, that the agreement 
governs compensation payable on transactions consummated on or after 
some future effective date (in which case, a prior agreement governs 
transactions consummated in the meantime). For purposes of applying 
the record retention requirement to transaction-specific 
commissions, the relevant compensation agreement for a given 
transaction is the agreement pursuant to which compensation for that 
transaction is determined.
* * * * *

Subpart E--Special Rules for Certain Home Mortgage Transactions

* * * * *

Section 1026.32 Requirements for High-Cost Mortgages

* * * * *
    32(b) Definitions.
* * * * *
    Paragraph 32(b)(1)
* * * * *
    2. Charges paid by parties other than the consumer. Under Sec.  
1026.32(b)(1), points and fees may include charges paid by third 
parties in addition to charges paid by the consumer. Specifically, 
charges paid by third parties that fall within the definition of 
points and fees set forth in Sec.  1026.32(b)(1)(i) through (vi) are 
included in points and fees.
    i. Examples--included in points and fees. A creditor's 
origination charge paid by a consumer's employer on the consumer's 
behalf that is included in the finance charge as defined in Sec.  
1026.4(a) or (b), must be included in points and fees under Sec.  
1026.32(b)(1)(i), unless other exclusions under Sec.  1026.4 or 
Sec.  1026.32(b)(1)(i)(A) through (F) apply. In addition, consistent 
with comment 32(b)(1)(i)-1, a third-party payment of an item 
excluded from the finance charge under a provision of Sec.  1026.4, 
while not included in the total points and fees under Sec.  
1026.32(b)(1)(i), may be included under Sec.  1026.32(b)(1)(ii) 
through (vi). For example, a payment by a third party of a creditor-
imposed fee for an appraisal performed by an employee of the 
creditor is included in points and fees under Sec.  
1026.32(b)(1)(iii). See comment 32(b)(1)(i).
    ii. Examples--not included in points and fees. A charge paid by 
a third party is not included in points and fees under Sec.  
1026.32(b)(1)(i) if the exclusions to points and fees in Sec.  
1026.32(b)(1)(i)(A) through (F) apply. For example, certain bona 
fide third-party charges not retained by the creditor, loan 
originator, or an affiliate of either are excluded from points and 
fees under Sec.  1026.32(b)(1)(i)(D), regardless of whether those 
charges are paid by a third party or the consumer.
    iii. Seller's points. Seller's points, as described in Sec.  
1026.4(c)(5) and commentary, are excluded from the finance charge 
and thus are not included in points and fees under Sec.  
1026.32(b)(1)(i). However, charges paid by the seller for items 
listed in Sec.  1026.32(b)(1)(ii) through (vi) are included in 
points and fees.
    iv. Creditor-paid charges. Charges that are paid by the 
creditor, other than loan originator compensation paid by the 
creditor that is required to be included in points and fees under 
Sec.  1026.32(b)(1)(ii), are excluded from points and fees. See 
Sec.  1026.32(b)(1)(i)(A).
* * * * *
    Paragraph 32(b)(1)(ii)
* * * * *
    5. Loan originator compensation--calculating loan originator 
compensation in manufactured home transactions. i. If a manufactured 
home retailer qualifies as a loan originator under Sec.  
1026.36(a)(1), then compensation that is paid by a consumer or 
creditor to the retailer for loan origination activities and that 
can be attributed to the transaction at the time the interest rate 
is set must be included in points and fees. For example, assume a 
manufactured home retailer takes a residential mortgage loan 
application and is entitled to receive at consummation a $1,000 
commission from the creditor for taking the mortgage loan 
application. The $1,000 commission is loan originator compensation 
that must be included in points and fees.
    ii. The sales price of the manufactured home does not include 
loan originator compensation that can be attributed to the 
transaction at the time the interest rate is set and therefore is 
not included in points and fees under Sec.  1026.32(b)(1)(ii).
    iii. As provided in Sec.  1026.32(b)(1)(ii)(D), compensation 
paid by a manufactured home retailer to its employees is not 
included in points and fees under Sec.  1026.32(b)(1)(ii).
* * * * *
    Paragraph 32(b)(2)
    1. See comment 32(b)(1)-2 for guidance concerning the inclusion 
in points and fees of charges paid by parties other than the 
consumer.
* * * * *
    Paragraph 32(b)(2)(i).
    1. Finance charge. The points and fees calculation under Sec.  
1026.32(b)(2) generally does not include items that are included in 
the finance charge but that are not known until after account 
opening, such as minimum monthly finance charges or charges based on 
account activity or inactivity. Transaction fees also generally are 
not included in the points and fees calculation, except as provided 
in Sec.  1026.32(b)(2)(vi). See comments 32(b)(1)-1 and 32(b)(1)(i)-
1 for additional guidance concerning the calculation of points and 
fees.
* * * * *
    Paragraph 32(b)(2)(i)(D)
    1. For purposes of Sec.  1026.32(b)(2)(i)(D), the term loan 
originator means a loan originator as that term is defined in Sec.  
1026.36(a)(1), without regard to Sec.  1026.36(a)(2). See comments 
32(b)(1)(i)(D)-1 through -4 for further guidance concerning the 
exclusion of bona fide third-party charges from points and fees.
* * * * *
    Paragraph 32(d)(8)(ii).
    1. Failure to meet repayment terms. A creditor may terminate a 
loan or open-end credit agreement and accelerate the balance when 
the consumer fails to meet the repayment terms resulting in a 
default in payment under the agreement; a creditor may do so, 
however, only if the consumer actually fails to make payments 
resulting in a default in the agreement. For example, a creditor may 
not terminate and accelerate if the consumer, in error, sends a 
payment to the wrong location, such as a branch rather than the main 
office of the creditor. If a consumer files for or is placed in 
bankruptcy, the creditor may terminate and accelerate under Sec.  
1026.32(d)(8)(ii) if the consumer fails to meet the repayment terms 
resulting in a default of the agreement. Section 1026.32(d)(8)(ii) 
does not override any State or other law that requires a creditor to 
notify a consumer of a right to cure, or otherwise places a duty on 
the creditor before it can terminate a
* * * * *

Section 1026.34 Prohibited Acts or Practices in Connection With 
High-Cost Mortgages

* * * * *
    34(a)(5) Pre-Loan Counseling
* * * * *
    Paragraph 34(a)(5)(v) Counseling fees.
    1. Financing. Section 1026.34(a)(5)(v) does not prohibit a 
creditor from financing the counseling fee as part of the 
transaction for a high-cost mortgage, if the fee is a bona fide 
third-party charge as provided by Sec.  1026.32(b)(1)(i)(D) and 
(b)(2)(i)(D).
* * * * *

Section 1026.35 Requirements for Higher-Priced Mortgage Loans

* * * * *
    35(b) Escrow accounts.
* * * * *
    35(b)(2) Exemptions.
* * * * *
    Paragraph 35(b)(2)(iii)
    1. Requirements for exemption. Under Sec.  1026.35(b)(2)(iii), 
except as provided in Sec.  1026.35(b)(2)(v), a creditor need not 
establish an escrow account for taxes and insurance for a higher-
priced mortgage loan, provided the following four conditions are 
satisfied when the higher-priced mortgage loan is consummated:
    i. During any of the three preceding calendar years, more than 
50 percent of the creditor's total first-lien covered transactions, 
as defined in Sec.  1026.43(b)(1), are secured by properties located 
in counties that are either ``rural'' or ``underserved,'' as set 
forth in Sec.  1026.35(b)(2)(iv). Pursuant to that section, a 
creditor may rely as a safe harbor on a list of counties published 
by the Bureau to determine whether counties in the United States are 
rural or underserved for a particular calendar year. Thus, for 
example, if a creditor originated 90 covered transactions, as 
defined by Sec.  1026.43(b)(1),

[[Page 39940]]

secured by a first lien, during 2011, 2012, or 2013, the creditor 
meets this condition for an exemption in 2014 if at least 46 of 
those transactions in one of those three calendar years are secured 
by first liens on properties that are located in such counties.
* * * * *
    Paragraph 35(b)(2)(iii)(D)(1)
    1. Exception for certain accounts. Escrow accounts established 
for first-lien higher-priced mortgage loans on or after April 1, 
2010, and before January 1, 2014, are not counted for purposes of 
Sec.  1026.35(b)(2)(iii)(D). On and after January 1, 2014, 
creditors, together with their affiliates, that establish new escrow 
accounts, other than those described in Sec.  
1026.35(b)(2)(iii)(D)(2), do not qualify for the exemption provided 
under Sec.  1026.35(b)(2)(iii). Creditors, together with their 
affiliates, that continue to maintain escrow accounts established 
between April 1, 2010, and January 1, 2014, still qualify for the 
exemption provided under Sec.  1026.35(b)(2)(iii) so long as they do 
not establish new escrow accounts for transactions consummated on or 
after January 1, 2014, other than those described in Sec.  
1026.35(b)(2)(iii)(D)(2), and they otherwise qualify under Sec.  
1026.35(b)(2)(iii).
* * * * *

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

    36(a) Definitions.
    1. Meaning of loan originator. i. General. A. Section 1026.36(a) 
defines the set of activities or services any one of which, if done 
for or in the expectation of compensation or gain, makes the person 
doing such activities or performing such services a loan originator, 
unless otherwise excluded. The scope of activities covered by the 
term loan originator includes:
    1. Referring a consumer to any person who participates in the 
origination process as a loan originator. Referring includes any 
oral or written action directed to a consumer that can affirmatively 
influence the consumer to select a particular loan originator or 
creditor to obtain an extension of credit when the consumer will pay 
for such credit. See comment 36(a)-4 with respect to certain 
activities that do not constitute referring.
    2. Arranging a credit transaction, including initially 
contacting and orienting the consumer to a particular loan 
originator's or creditor's origination process or particular credit 
terms that are or may be available to that consumer selected based 
on the consumer's financial characteristics, assisting the consumer 
to apply for credit, taking an application, offering particular 
credit terms to the consumer selected based on the consumer's 
financial characteristics, negotiating credit terms, or otherwise 
obtaining or making an extension of credit.
    3. Assisting a consumer in obtaining or applying for consumer 
credit by advising on particular credit terms that are or may be 
available to that consumer based on the consumer's financial 
characteristics, filling out an application form, preparing 
application packages (such as a credit application or pre-approval 
application or supporting documentation), or collecting application 
and supporting information on behalf of the consumer to submit to a 
loan originator or creditor. A person who, acting on behalf of a 
loan originator or creditor, collects information or verifies 
information provided by the consumer, such as by asking the consumer 
for documentation to support the information the consumer provided 
or for the consumer's authorization to obtain supporting documents 
from third parties, is not collecting information on behalf of the 
consumer. See also comment 36(a)-4.i through iv with respect to 
application-related administrative and clerical tasks and comment 
36(a)-1.v with respect to third-party advisors.
    4. Presenting particular credit terms for the consumer's 
consideration that are selected based on the consumer's financial 
characteristics, or communicating with a consumer for the purpose of 
reaching a mutual understanding about prospective credit terms.
* * * * *
    4. * * *
    i. Application-related administrative and clerical tasks. The 
definition of loan originator does not include a loan originator's 
or creditor's employee (or agent or contractor) who provides a 
credit application form from the entity for which the person works 
to the consumer for the consumer to complete or, without assisting 
the consumer in completing the credit application, processing or 
analyzing the information, or discussing particular credit terms or 
particular credit products available from a creditor to that 
consumer selected based on the consumer's financial characteristics, 
deliver the credit application from a consumer to a loan originator 
or creditor. A person does not assist the consumer in completing the 
application if the person explains to the consumer filling out the 
application the contents of the application or where particular 
consumer information is to be provided, or generally describes the 
credit application process to a consumer without discussion of 
particular credit terms or particular products available from a 
creditor to that consumer selected based on the consumer's financial 
characteristics.
    ii. Responding to consumer inquiries and providing general 
information. The definition of loan originator does not include 
persons who:
    A. * * *
    B. As employees (or agents or contractors) of a creditor or loan 
originator, provide loan originator or creditor contact information 
to a consumer, provided that the person does not discuss particular 
credit terms that are or may be available from a creditor to that 
consumer selected based on the consumer's financial characteristics 
and does not direct the consumer, based on his or her assessment of 
the consumer's financial characteristics, to a particular loan 
originator or particular creditor seeking to originate credit 
transactions to consumers with those financial characteristics;
    C. Describe other product-related services (for example, persons 
who describe optional monthly payment methods via telephone or via 
automatic account withdrawals, the availability and features of 
online account access, the availability of 24-hour customer support, 
or free mobile applications to access account information); or
    D. * * *
    iii. Loan processing. The definition of loan originator does not 
include persons who, acting on behalf of a loan originator or a 
creditor:
    A. * * *
    B. * * *
    C. Coordinate consummation of the credit transaction or other 
aspects of the credit transaction process, including by 
communicating with a consumer about process deadlines and documents 
needed at consummation, provided that any communication that 
includes a discussion about credit terms available from a creditor 
to that consumer selected based on the consumer's financial 
characteristics only confirms credit terms already agreed to by the 
consumer;
    iv. Underwriting, credit approval, and credit pricing. The 
definition of loan originator does not include persons who:
    A. * * *
    B. Approve particular credit terms or set particular credit 
terms available from a creditor to that consumer selected based on 
the consumer's financial characteristics in offer or counter-offer 
situations, provided that only a loan originator communicates to or 
with the consumer regarding these credit terms, an offer, or 
provides or engages in negotiation, a counter-offer, or approval 
conditions; or
* * * * *
    5. Compensation.
* * * * *
    iv. Amounts for charges for services that are not loan 
origination activities. A. * * *
    B. Compensation includes any salaries, commissions, and any 
financial or similar incentive to an individual loan originator, 
regardless of whether it is labeled as payment for services that are 
not loan origination activities.
* * * * *
    36(b) Scope.
    1. Scope of coverage. Section 1026.36(c)(1) and (c)(2) applies 
to closed-end consumer credit transactions secured by a consumer's 
principal dwelling. Section 1026.36(c)(3) applies to a consumer 
credit transaction, including home equity lines of credit under 
Sec.  1026.40, secured by a consumer's dwelling. Paragraphs (h) and 
(i) of Sec.  1026.36 apply to home equity lines of credit under 
Sec.  1026.40 secured by a consumer's principal dwelling. Paragraphs 
(d), (e), (f), (g), (h), and (i) of Sec.  1026.36 apply to closed-
end consumer credit transactions secured by a dwelling. Closed-end 
consumer credit transactions include transactions secured by first 
or subordinate liens, and reverse mortgages that are not home equity 
lines of credit under Sec.  1026.40. See Sec.  1026.36(b) for 
additional restrictions on the scope of Sec.  1026.36, and 
Sec. Sec.  1026.1(c) and 1026.3(a) and corresponding commentary for 
further discussion of extensions of credit subject to Regulation Z.
* * * * *

[[Page 39941]]

    36(d) Prohibited payments to loan originators.
* * * * *
    36(d)(1) Payments based on a term of a transaction.
    1. * * *
    ii. Single or multiple transactions. The prohibition on payment 
and receipt of compensation under Sec.  1026.36(d)(1)(i) encompasses 
compensation that directly or indirectly is based on the terms of a 
single transaction of a single individual loan originator, the terms 
of multiple transactions by that single individual loan originator, 
or the terms of multiple transactions by multiple individual loan 
originators. Compensation to an individual loan originator that is 
based upon profits determined with reference to a mortgage-related 
business is considered compensation that is based on the terms of 
multiple transactions by multiple individual loan originators. For 
clarification about the exceptions permitting compensation based 
upon profits determined with reference to mortgage-related business 
pursuant to either a designated tax-advantaged plan or a non-
deferred profits-based compensation plan, see comment 36(d)(1)-3. 
For clarification about ``mortgage-related business,'' see comments 
36(d)(1)-3.v.B and -3.v.E.
    A. Assume that a creditor pays a bonus to an individual loan 
originator out of a bonus pool established with reference to the 
creditor's profits and the profits are determined with reference to 
the creditor's revenue from origination of closed-end consumer 
credit transactions secured by a dwelling. In such instance, the 
bonus is considered compensation that is based on the terms of 
multiple transactions by multiple individual loan originators. 
Therefore, the bonus is prohibited under Sec.  1026.36(d)(1)(i), 
unless it is otherwise permitted under Sec.  1026.36(d)(1)(iv).
    B. Assume that an individual loan originator's employment 
contract with a creditor guarantees a quarterly bonus in a specified 
amount conditioned upon the individual loan originator meeting 
certain performance benchmarks (e.g., volume of originations 
monthly). A bonus paid following the satisfaction of those 
contractual conditions is not directly or indirectly based on the 
terms of a transaction by an individual loan originator, the terms 
of multiple transactions by that individual loan originator, or the 
terms of multiple transactions by multiple individual loan 
originators under Sec.  1026.36(d)(1)(i) as clarified by this 
comment 36(d)(1)-1.ii, because the creditor is obligated to pay the 
bonus, in the specified amount, regardless of the terms of 
transactions of the individual loan originator or multiple 
individual loan originators and the effect of those terms of 
multiple transactions on the creditor's profits. Because this type 
of bonus is not directly or indirectly based on the terms of 
multiple transactions by multiple individual loan originators, as 
described in Sec.  1026.36(d)(1)(i) (as clarified by this comment 
36(d)(1)-1.ii), it is not subject to the 10-percent total 
compensation limit described in Sec.  1026.36(d)(1)(iv)(B)(1).
    iii. * * *
* * * * *
    D. The fees and charges described above in paragraphs B and C 
can only be a term of a transaction if the fees or charges are 
required to be disclosed in the Good Faith Estimate, the HUD-1, or 
the HUD-1A (and subsequently in any integrated disclosures 
promulgated by the Bureau under TILA section 105(b) (15 U.S.C. 
1604(b)) and RESPA section 4 (12 U.S.C. 2603) as amended by sections 
1098 and 1100A of the Dodd-Frank Act).
* * * * *
    3. Interpretation of Sec.  1026.36(d)(1)(iii) and (iv). Subject 
to certain restrictions, Sec.  1026.36(d)(1)(iii) and Sec.  
1026.36(d)(1)(iv) permit contributions to or benefits under 
designated tax-advantaged plans and compensation under a non-
deferred profits-based compensation plan even if the contributions, 
benefits, or compensation, respectively, are based on the terms of 
multiple transactions by multiple individual loan originators.
    i. Designated tax-advantaged plans. Section 1026.36(d)(1)(iii) 
permits an individual loan originator to receive, and a person to 
pay, compensation in the form of contributions to a defined 
contribution plan or benefits under a defined benefit plan provided 
the plan is a designated tax-advantaged plan (as defined in Sec.  
1026.36(d)(1)(iii)), even if contributions to or benefits under such 
plans are directly or indirectly based on the terms of multiple 
transactions by multiple individual loan originators. In the case of 
a designated tax-advantaged plan that is a defined contribution 
plan, Sec.  1026.36(d)(1)(iii) does not permit the contribution to 
be directly or indirectly based on the terms of that individual loan 
originator's transactions. A defined contribution plan has the 
meaning set forth in Internal Revenue Code section 414(i), 26 U.S.C. 
414(i). A defined benefit plan has the meaning set forth in Internal 
Revenue Code section 414(j), 26 U.S.C. 414(j).
    ii. Non-deferred profits-based compensation plans. As used in 
Sec.  1026.36(d)(1)(iv), a ``non-deferred profits-based compensation 
plan'' is any compensation arrangement where an individual loan 
originator may be paid variable, additional compensation based in 
whole or in part on the mortgage-related business profits of the 
person paying the compensation, any affiliate, or a business unit 
within the organizational structure of the person or the affiliate, 
as applicable (i.e., depending on the level within the person's or 
affiliate's organization at which the non-deferred profits-based 
compensation plan is established). A non-deferred profits-based 
compensation plan does not include a designated tax-advantaged plan 
or other forms of deferred compensation that are not designated tax-
advantaged plans, such as those created pursuant to Internal Revenue 
Code section 409A, 26 U.S.C. 409A. Thus, if contributions to or 
benefits under a designated tax-advantaged plan or compensation 
under another form of deferred compensation plan are determined with 
reference to the mortgage-related business profits of the person 
making the contribution, then the contribution, benefits, or other 
compensation, as applicable, are not permitted by Sec.  
1026.36(d)(1)(iv) (although, in the case of contributions to or 
benefits under a designated tax-advantaged plan, the benefits or 
contributions may be permitted by Sec.  1026.36(d)(1)(iii)). Under a 
non-deferred profits-based compensation plan, the individual loan 
originator may, for example, be paid directly in cash, stock, or 
other non-deferred compensation, and the compensation under the non-
deferred profits-based compensation plan may be determined by a 
fixed formula or may be at the discretion of the person (e.g., the 
person may elect not to pay compensation under a non-deferred 
profits-based compensation plan in a given year), provided the 
compensation is not directly or indirectly based on the terms of the 
individual loan originator's transactions. As used in Sec.  
1026.36(d)(1)(iv) and this commentary, non-deferred profits-based 
compensation plans include, without limitation, bonus pools, profits 
pools, bonus plans, and profit-sharing plans. Compensation under a 
non-deferred profits-based compensation plan could include, without 
limitation, annual or periodic bonuses, or awards of merchandise, 
services, trips, or similar prizes or incentives where the bonuses, 
contributions, or awards are determined with reference to the 
profitability of the person, business unit, or affiliate, as 
applicable. As used in Sec.  1026.36(d)(1)(iv) and this commentary, 
a business unit is a division, department, or segment within the 
overall organizational structure of the person or the person's 
affiliate that performs discrete business functions and that the 
person or the affiliate treats separately for accounting or other 
organizational purposes. For example, a creditor that pays its 
individual loan originators bonuses at the end of a calendar year 
based on the creditor's average net return on assets for the 
calendar year is operating a non-deferred profits-based compensation 
plan under Sec.  1026.36(d)(1)(iv). A bonus that is paid to an 
individual loan originator from a source other than a non-deferred 
profits-based compensation plan (or a deferred compensation plan 
where the bonus is determined with reference to mortgage-related 
business profits), such as a retention bonus budgeted for in advance 
or a performance bonus paid out of a bonus pool set aside at the 
beginning of the company's annual accounting period as part of the 
company's operating budget, does not violate the prohibition on 
payment of compensation based on the terms of multiple transactions 
by multiple individual loan originators under Sec.  
1026.36(d)(1)(i), as clarified by comment 36(d)(1)-1.ii; therefore, 
Sec.  1026.36(d)(1)(iv) does not apply to such bonuses.
    iii. Compensation that is not directly or indirectly based on 
the terms of multiple transactions by multiple individual loan 
originators. The compensation arrangements addressed in Sec.  
1026.36(d)(1)(iii) and (iv) are permitted even if they are directly 
or indirectly based on the terms of multiple transactions by 
multiple individual loan originators. See comment 36(d)(1)-1 for 
additional interpretation. If a loan originator organization's 
revenues are exclusively

[[Page 39942]]

derived from transactions subject to Sec.  1026.36(d) (whether paid 
by creditors, consumers, or both) and that loan originator 
organization pays its individual loan originators a bonus under a 
non-deferred profits-based compensation plan, the bonus is not 
directly or indirectly based on the terms of multiple transactions 
by multiple individual loan originators if Sec.  1026.36(d)(1)(i) is 
otherwise complied with.
    iv. Compensation based on terms of an individual loan 
originator's transactions. Under both Sec.  1026.36(d)(1)(iii), with 
regard to contributions made to a defined contribution plan that is 
a designated tax-advantaged plan, and Sec.  1026.36(d)(1)(iv)(A), 
with regard to compensation under a non-deferred profits-based 
compensation plan, the payment of compensation to an individual loan 
originator may not be directly or indirectly based on the terms of 
that individual loan originator's transaction or transactions. 
Consequently, for example, where an individual loan originator makes 
loans that vary in their interest rate spread, the compensation 
payment may not take into account the average interest rate spread 
on the individual loan originator's transactions during the relevant 
calendar year.
    v. Compensation under non-deferred profits-based compensation 
plans. Assuming that the conditions in Sec.  1026.36(d)(1)(iv)(A) 
are met, Sec.  1026.36(d)(1)(iv)(B)(1) permits certain compensation 
to an individual loan originator under a non-deferred profits-based 
compensation plan. Specifically, if the compensation is determined 
with reference to the profits of the person from mortgage-related 
business, compensation under a non-deferred profits-based 
compensation plan is permitted provided the compensation does not, 
in the aggregate, exceed more than 10 percent of the individual loan 
originator's total compensation corresponding to the time period for 
which compensation under the non-deferred profits-based compensation 
plan is paid. The compensation restrictions under Sec.  
1026.36(d)(1)(iv)(B)(1) are sometimes referred to in this commentary 
as the ``10-percent total compensation limit or the ``10-percent 
limit.''
    A. Total compensation. For purposes of Sec.  
1026.36(d)(1)(iv)(B)(1), the individual loan originator's total 
compensation consists of the sum total of: (1) All wages and tips 
reportable for Medicare tax purposes in box 5 on IRS form W-2 (or, 
if the individual loan originator is an independent contractor, 
reportable compensation on IRS form 1099-MISC) that are actually 
paid during the relevant time period (regardless of when the wages 
and tips are earned), except for any compensation under a non-
deferred profits-based compensation plan that is earned during a 
different time period (see comment 36(d)(1)-3.v.C); (2) at the 
election of the person paying the compensation, all contributions 
that are actually made during the relevant time period by the 
creditor or loan originator organization to the individual loan 
originator's accounts in designated tax-advantaged plans that are 
defined contribution plans (regardless of when the contributions are 
earned); and (3) at the election of the person paying the 
compensation, all compensation under a non-deferred profits-based 
compensation plan that is earned during the relevant time period, 
regardless of whether the compensation is actually paid during that 
time period (see comment 36(d)(1)-3.v.C). If an individual loan 
originator has some compensation that is reportable on the W-2 and 
some that is reportable on the 1099-MISC, the total compensation is 
the sum total of what is reportable on each of the two forms.
    B. Profits of the Person. Under Sec.  1026.36(d)(1)(iv), a plan 
is a non-deferred profits-based compensation plan if compensation is 
paid, based in whole or in part, on the profits of the person paying 
the compensation. As used in Sec.  1026.36(d)(1)(iv), ``profits of 
the person'' include, as applicable depending on where the non-
deferred profits-based compensation plan is set, the profits of the 
person, the business unit to which the individual loan originators 
are assigned for accounting or other organizational purposes, or any 
affiliate of the person. Profits from mortgage-related business are 
profits determined with reference to revenue generated from 
transactions subject to Sec.  1026.36(d). Pursuant to Sec.  
1026.36(b) and comment 36(b)-1, Sec.  1026.36(d) applies to closed-
end consumer credit transactions secured by dwellings. This revenue 
includes, without limitation, and as applicable based on the 
particular sources of revenue of the person, business unit, or 
affiliate, origination fees and interest associated with dwelling-
secured transactions for which individual loan originators working 
for the person were loan originators, income from servicing of such 
transactions, and proceeds of secondary market sales of such 
transactions. If the amount of the individual loan originator's 
compensation under non-deferred profits-based compensation plans 
paid for a time period does not, in the aggregate, exceed 10 percent 
of the individual loan originator's total compensation corresponding 
to the same time period, compensation under non-deferred profits-
based compensation plans may be paid under Sec.  
1026.36(d)(1)(iv)(B)(1) regardless of whether or not it was 
determined with reference to the profits of the person from 
mortgage-related business.
    C. Time period for which the compensation under the non-deferred 
profits-based compensation plan is paid and to which the total 
compensation corresponds. Under Sec.  1026.36(d)(1)(iv)(B)(1), 
determination of whether payment of compensation under a non-
deferred profits-based compensation plan complies with the 10-
percent limit requires a calculation of the ratio of the 
compensation under the non-deferred profits-based compensation plan 
(i.e., the compensation subject to the 10-percent limit) and the 
total compensation corresponding to the relevant time period. For 
compensation subject to the 10-percent limit, the relevant time 
period is the time period for which a person makes reference to 
profits in determining the compensation (i.e., when the compensation 
was earned). It does not matter whether the compensation is actually 
paid during that particular time period. For total compensation, the 
relevant time period is the same time period, but only certain types 
of compensation may be included in the total compensation amount for 
that time period (see comment 36(d)(1)-3.v.A). For example, assume 
that during calendar year 2014 a creditor pays an individual loan 
originator compensation in the following amounts: $80,000 in 
commissions based on the individual loan originator's performance 
and volume of loans generated during the calendar year; and $10,000 
in an employer contribution to a designated tax-advantaged defined 
contribution plan on behalf of the individual loan originator. The 
creditor desires to pay the individual loan originator a year-end 
bonus of $10,000 under a non-deferred profits-based compensation 
plan. The commissions are paid and employer contributions to the 
designated tax-advantaged defined contribution plan are made during 
calendar year 2014, but the year-end bonus will be paid in January 
2015. For purposes of the 10-percent total compensation limit, the 
year-end bonus is counted toward the 10-percent limit for calendar 
year 2014, even though it is not actually paid until 2015. 
Therefore, for calendar year 2014 the individual loan originator's 
compensation that is subject to the 10-percent limit would be 
$10,000 (i.e., the year-end bonus) and the total compensation would 
be $100,000 (i.e., the sum of the commissions, the designated tax-
advantaged plan contribution (assuming the creditor elects to 
include it in total compensation for calendar year 2014), and the 
bonus (assuming the creditor elects to include it in total 
compensation for calendar year 2014)); the bonus would be 
permissible under Sec.  1026.36(d)(1)(iv) because it does not exceed 
10 percent of total compensation. The determination of total 
compensation corresponding to 2014 also would not take into account 
any compensation subject to the 10-percent limit that is actually 
paid in 2014 but is earned during a different calendar year (e.g., 
an annual bonus determined with reference to mortgage-related 
business profits for calendar year 2013 that is paid in January 
2014). If the employer contribution to the designated tax-advantaged 
plan is earned in 2014 but actually made in 2015, however, it may 
not be included in total compensation for 2014. A company, business 
unit, or affiliate, as applicable, may pay compensation subject to 
the 10-percent limit during different time periods falling within 
its annual accounting period for keeping records and reporting 
income and expenses, which may be a calendar year or a fiscal year 
depending on the annual accounting period. In such instances, 
however, the 10-percent limit applies both as to each time period 
and cumulatively as to the annual accounting period. For example, 
assume that a creditor uses a calendar-year accounting period. If 
the creditor pays an individual loan originator a bonus at the end 
of each quarter under a non-deferred profits-based compensation 
plan, the payment of each quarterly bonus is subject to the 10-
percent limit measured with respect to each quarter. The creditor 
can also pay an annual bonus under the non-deferred profits-based 
compensation plan that does not exceed the difference of 10 percent 
of the individual loan originator's total compensation corresponding 
to the calendar year and the aggregate amount of the quarterly 
bonuses.

[[Page 39943]]

    D. Awards of merchandise, services, trips, or similar prizes or 
incentives. If any compensation paid to an individual loan 
originator under Sec.  1026.36(d)(1)(iv) consists of an award of 
merchandise, services, trips, or similar prize or incentive, the 
cash value of the award is factored into the calculation of the 10-
percent total compensation limit. For example, during a given 
calendar year, individual loan originator A and individual loan 
originator B are each employed by a creditor and paid $40,000 in 
salary, and $45,000 in commissions. The creditor also contributes 
$5,000 to a designated tax-advantaged defined contribution plan for 
each individual loan originator during that calendar year, which the 
creditor elects to include in the total compensation amount. Neither 
individual loan originator is paid any other form of compensation by 
the creditor. In December of the calendar year, the creditor rewards 
both individual loan originators for their performance during the 
calendar year out of a bonus pool established with reference to the 
profits of the mortgage origination business unit. Individual loan 
originator A is paid a $10,000 cash bonus, meaning that individual 
loan originator A's total compensation is $100,000 (assuming the 
creditor elects to include the bonus in the total compensation 
amount). Individual loan originator B is paid a $7,500 cash bonus 
and awarded a vacation package with a cash value of $3,000, meaning 
that individual loan originator B's total compensation is $100,500 
(assuming the creditor elects to include the reward in the total 
compensation amount). Under Sec.  1026.36(d)(1)(iv)(B)(1), 
individual loan originator A's $10,000 bonus is permissible because 
the bonus would not constitute more than 10 percent of the 
individual loan originator A's total compensation for the calendar 
year. The creditor may not pay individual loan originator B the 
$7,500 bonus and award the vacation package, however, because the 
total value of the bonus and the vacation package would be $10,500, 
which is greater than 10 percent (10.45 percent) of individual loan 
originator B's total compensation for the calendar year. One way to 
comply with Sec.  1026.36(d)(1)(iv)(B)(1) would be if the amount of 
the bonus were reduced to $7,000 or less or the vacation package 
were structured such that its cash value would be $2,500 or less.
    E. Compensation determined only with reference to non-mortgage-
related business profits. Compensation under a non-deferred profits-
based compensation plan is not subject to the 10-percent total 
compensation limit under Sec.  1026.36(d)(1)(iv)(B)(1) if the non-
deferred profits-based compensation plan is determined with 
reference only to profits from business other than mortgage-related 
business, as determined in accordance with reasonable accounting 
principles. Reasonable accounting principles reflect an accurate 
allocation of revenues, expenses, profits, and losses among the 
person, any affiliate of the person, and any business units within 
the person or affiliates, and are consistent with the accounting 
principles applied by the person, the affiliate, or the business 
unit with respect to, as applicable, its internal budgeting and 
auditing functions and external reporting requirements. Examples of 
external reporting and filing requirements that may be applicable to 
creditors and loan originator organizations are Federal income tax 
filings, Federal securities law filings, or quarterly reporting of 
income, expenses, loan origination activity, and other information 
required by government-sponsored enterprises. As used in Sec.  
1026.36(d)(1)(iv)(B)(1), profits means positive profits or losses 
avoided or mitigated.
    F. Additional examples. 1. Assume that, during a given calendar 
year, a loan originator organization pays an individual loan 
originator employee $40,000 in salary and $125,000 in commissions, 
and makes a contribution of $15,000 to the individual loan 
originator's 401(k) plan. At the end of the year, the loan 
originator organization wishes to pay the individual loan originator 
a bonus based on a formula involving a number of performance 
metrics, to be paid out of a profit pool established at the level of 
the company but that is determined in part with reference to the 
profits of the company's mortgage origination unit. Assume that the 
loan originator organization derives revenues from sources other 
than transactions covered by Sec.  1026.36(d). In this example, the 
performance bonus would be directly or indirectly based on the terms 
of multiple individual loan originators' transactions as described 
in Sec.  1026.36(d)(1)(i), because it is being determined with 
reference to profits from mortgage-related business. Assume, 
furthermore, that the loan originator organization elects to include 
the bonus in the total compensation amount for the calendar year. 
Thus, the bonus is permissible under Sec.  1026.36(d)(1)(iv)(B)(1) 
if it does not exceed 10 percent of the loan originator's total 
compensation, which in this example consists of the individual loan 
originator's salary, commissions, contribution to the 401(k) plan 
(if the loan originator organization elects to include the 
contribution in the total compensation amount), and the performance 
bonus. Therefore, if the loan originator organization elects to 
include the 401(k) contribution in total compensation for these 
purposes, the loan originator organization may pay the individual 
loan originator a performance bonus of up to $20,000 (i.e., 10 
percent of $200,000 in total compensation). If the loan originator 
organization does not include the 401(k) contribution in calculating 
total compensation, or the 401(k) contribution is actually made in 
January of the following calendar year (in which case it cannot be 
included in total compensation for the initial calendar year), the 
bonus may be up to $18,333.33. If the loan originator organization 
includes neither the 401(k) contribution nor the performance bonus 
in the total compensation amount, the bonus may not exceed $16,500.
    2. Assume that the compensation during a given calendar year of 
an individual loan originator employed by a creditor consists of 
only salary and commissions, and the individual loan originator does 
not participate in a designated tax-advantaged defined contribution 
plan. Assume further that the creditor uses a calendar-year 
accounting period. At the end of the calendar year, the creditor 
pays the individual loan originator two bonuses: A ``performance'' 
bonus based on the individual loan originator's aggregate loan 
volume for a calendar year that is paid out of a bonus pool 
determined with reference to the profitability of the mortgage 
origination business unit, and a year-end ``holiday'' bonus in the 
same amount to all company employees that is paid out of a company-
wide bonus pool. Because the performance bonus is paid out of a 
bonus pool that is determined with reference to the profitability of 
the mortgage origination business unit, it is compensation that is 
determined with reference to mortgage-related business profits, and 
the bonus is therefore subject to the 10-percent total compensation 
limit. If the company-wide bonus pool from which the ``holiday'' 
bonus is paid is derived in part from profits of the creditor's 
mortgage origination business unit, then the combination of the 
``holiday'' bonus and the performance bonus is subject to the 10-
percent total compensation limit. The ``holiday'' bonus is not 
subject to the 10-percent total compensation limit if the bonus pool 
is determined with reference only to the profits of business units 
other than the mortgage origination business unit, as determined in 
accordance with reasonable accounting principles. If the 
``performance'' bonus and the ``holiday'' bonus in the aggregate do 
not exceed 10 percent of the individual loan originator's total 
compensation, the bonuses may be paid under Sec.  
1026.36(d)(1)(iv)(B)(1) without the necessity of determining from 
which bonus pool they were paid or whether they were determined with 
reference to the profits of the creditor's mortgage origination 
business unit.
    G. Reasonable reliance by individual loan originator on 
accounting or statement by person paying compensation. An individual 
loan originator is deemed to comply with its obligations regarding 
receipt of compensation under Sec.  1026.36(d)(1)(iv)(B)(1) if the 
individual loan originator relies in good faith on an accounting or 
a statement provided by the person who determined the individual 
loan originator's compensation under a non-deferred profits-based 
compensation plan pursuant to Sec.  1026.36(d)(1)(iv)(B)(1) and 
where the statement or accounting is provided within a reasonable 
time period following the person's determination.
    vi. Individual loan originators who originate ten or fewer 
transactions. Assuming that the conditions in Sec.  
1026.36(d)(1)(iv)(A) are met, Sec.  1026.36(d)(1)(iv)(B)(2) permits 
compensation to an individual loan originator under a non-deferred 
profits-based compensation plan even if the payment or contribution 
is directly or indirectly based on the terms of multiple individual 
loan originators' transactions if the individual is a loan 
originator (as defined in Sec.  1026.36(a)(1)(i)) for ten or fewer 
consummated transactions during the 12-month period preceding the 
compensation determination. For example, assume a loan originator 
organization employs two individual loan originators who originate 
transactions subject to Sec.  1026.36 during a

[[Page 39944]]

given calendar year. Both employees are individual loan originators 
under Sec.  1026.36(a)(1)(ii), but only one of them (individual loan 
originator B) acts as a loan originator in the normal course of 
business, while the other (individual loan originator A) is called 
upon to do so only occasionally and regularly performs other duties 
(such as serving as a manager). In January of the following calendar 
year, the loan originator organization formally determines the 
financial performance of its mortgage business for the prior 
calendar year. Based on that determination, the loan originator 
organization on February 1 decides to pay a bonus to the individual 
loan originators out of a company bonus pool. Assume that, between 
February 1 of the prior calendar year and January 31 of the current 
calendar year, individual loan originator A was the loan originator 
for eight consummated transactions, and individual loan originator B 
was the loan originator for 15 consummated transactions. The loan 
originator organization may award the bonus to individual loan 
originator A under Sec.  1026.36(d)(1)(iv)(B)(2). The loan 
originator organization may not award the bonus to individual loan 
originator B relying on the exception under Sec.  
1026.36(d)(1)(iv)(B)(2) because it would not apply, although it 
could award a bonus pursuant to the 10-percent total compensation 
limit under Sec.  1026.36(d)(1)(iv)(B)(1) if the requirements of 
that provision are complied with.
* * * * *
    6. Periodic changes in loan originator compensation and terms of 
transactions. Section 1026.36 does not limit a creditor or other 
person from periodically revising the compensation it agrees to pay 
a loan originator. However, the revised compensation arrangement 
must not result in payments to the loan originator that are based on 
the terms of a credit transaction. A creditor or other person might 
periodically review factors such as loan performance, transaction 
volume, as well as current market conditions for originator 
compensation, and prospectively revise the compensation it agrees to 
pay to a loan originator. For example, assume that during the first 
six months of the year, a creditor pays $3,000 to a particular loan 
originator for each loan delivered, regardless of the terms of the 
transaction. After considering the volume of business produced by 
that originator, the creditor could decide that as of July 1, it 
will pay $3,250 for each loan delivered by that particular 
originator, regardless of the terms of the transaction. No violation 
occurs even if the loans made by the creditor after July 1 generally 
carry a higher interest rate than loans made before that date, to 
reflect the higher compensation.
* * * * *
    36(f) Loan originator qualification requirements.
* * * * *
    Paragraph 36(f)(3).
* * * * *
    Paragraph 36(f)(3)(i).
    1. Criminal and credit histories. Section 1026.36(f)(3)(i) 
requires the loan originator organization to obtain, for any of its 
individual loan originator employees who is not required to be 
licensed and is not licensed as a loan originator pursuant to the 
SAFE Act, a criminal background check, a credit report, and 
information related to any administrative, civil, or criminal 
determinations by any government jurisdiction. The requirement 
applies to individual loan originator employees who were hired on or 
after January 1, 2014 (or whom the loan originator organization 
hired before this date but for whom there were no applicable 
statutory or regulatory background standards in effect at the time 
of hire or before January 1, 2014, used to screen the individual). A 
credit report may be obtained directly from a consumer reporting 
agency or through a commercial service. A loan originator 
organization with access to the NMLSR can meet the requirement for 
the criminal background check by reviewing any criminal background 
check it receives upon compliance with the requirement in 12 CFR 
1007.103(d)(1) and can meet the requirement to obtain information 
related to any administrative, civil, or criminal determinations by 
any government jurisdiction by obtaining the information through the 
NMLSR. Loan originator organizations that do not have access to 
these items through the NMLSR may obtain them by other means. For 
example, a criminal background check may be obtained from a law 
enforcement agency or commercial service. Information on any past 
administrative, civil, or criminal findings (such as from 
disciplinary or enforcement actions) may be obtained from the 
individual loan originator.
    2. Retroactive obtaining of information not required. Section 
1026.36(f)(3)(i) does not require the loan originator organization 
to obtain the covered information for an individual whom the loan 
originator organization hired as a loan originator before January 1, 
2014, and screened under applicable statutory or regulatory 
background standards in effect at the time of hire. However, if the 
individual subsequently ceases to be employed as a loan originator 
by that loan originator organization, and later resumes employment 
as a loan originator by that loan originator organization (or any 
other loan originator organization), the loan originator 
organization is subject to the requirements of Sec.  
1026.36(f)(3)(i).
* * * * *
    Paragraph 36(f)(3)(ii).
    1. Scope of review. Section 1026.36(f)(3)(ii) requires the loan 
originator organization to review the information that it obtains 
under Sec.  1026.36(f)(3)(i) and other reasonably available 
information to determine whether the individual loan originator 
meets the standards in Sec.  1026.36(f)(3)(ii). Other reasonably 
available information includes any information the loan originator 
organization has obtained or would obtain as part of a reasonably 
prudent hiring process, including information obtained from 
application forms, candidate interviews, other reliable information 
and evidence provided by a candidate, and reference checks. The 
requirement applies to individual loan originator employees who were 
hired on or after January 1, 2014 (or whom the loan originator 
organization hired before this date but for whom there were no 
applicable statutory or regulatory background standards in effect at 
the time of hire or before January 1, 2014, used to screen the 
individual).
    2. Retroactive determinations not required. Section 
1026.36(f)(3)(ii) does not require the loan originator organization 
to review the covered information and make the required 
determinations for an individual whom the loan originator 
organization hired as a loan originator on or before January 1, 2014 
and screened under applicable statutory or regulatory background 
standards in effect at the time of hire. However, if the individual 
subsequently ceases to be employed as a loan originator by that loan 
originator organization, and later resumes employment as a loan 
originator by that loan originator organization (or any other loan 
originator organization), the loan originator organization employing 
the individual is subject to the requirements of Sec.  
1026.36(f)(3)(ii).
* * * * *

Section 1026.41--Periodic Statements for Residential Mortgage Loans

* * * * *
    41(b) Timing of the periodic statement.
    1. Reasonably prompt time. Section 1026.41(b) requires that the 
periodic statement be delivered or placed in the mail no later than 
a reasonably prompt time after the payment due date or the end of 
any courtesy period. Delivering, emailing or placing the periodic 
statement in the mail within four days of the close of the courtesy 
period of the previous billing cycle generally would be considered 
reasonably prompt.
* * * * *
    41(d) Content and layout of the periodic statement.
* * * * *
    3. Terminology. A servicer may use terminology other than that 
found on the sample periodic statements in appendix H-30, so long as 
the new terminology is commonly understood. For example, servicers 
may take into consideration regional differences in terminology and 
refer to the account for the collection of taxes and insurance, 
referred to in Sec.  1026.41(d) as the ``escrow account,'' as an 
``impound account.''
* * * * *
    41(d)(4) Transaction Activity.
    1. Meaning. Transaction activity includes any transaction that 
credits or debits the amount currently due. This is the same amount 
that is required to be disclosed under Sec.  1026.41(d)(1)(iii). 
Examples of such transactions include, without limitation:
* * * * *
    41(e)(3) Coupon book exemption.
    1. Fixed rate. For guidance on the meaning of ``fixed rate'' for 
purpose of Sec.  1026.41(e)(3), see Sec.  1026.18(s)(7)(iii) and its 
commentary.
* * * * *
    41(e)(4) Small servicers.
* * * * *
    41(e)(4)(iii) Small servicer determination.
    1. Loans obtained by merger or acquisition. Any mortgage loans 
obtained by a servicer or

[[Page 39945]]

an affiliate as part of a merger or acquisition, or as part of the 
acquisition of all of the assets or liabilities of a branch office 
of a creditor, should be considered mortgage loans for which the 
servicer or an affiliate is the creditor to which the mortgage loan 
is initially payable. A branch office means either an office of a 
depository institution that is approved as a branch by a Federal or 
State supervisory agency or an office of a for-profit mortgage 
lending institution (other than a depository institution) that takes 
applications from the public for mortgage loans.
* * * * *


    Dated: June 24, 2013.
Richard Cordray,
Director, Bureau of Consumer Financial Protection.
[FR Doc. 2013-15466 Filed 6-27-13; 4:15 pm]
BILLING CODE 4810-AM-P