[Federal Register Volume 78, Number 142 (Wednesday, July 24, 2013)]
[Rules and Regulations]
[Pages 44686-44728]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-16962]



[[Page 44685]]

Vol. 78

Wednesday,

No. 142

July 24, 2013

Part III





Bureau of Consumer Financial Protection





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12 CFR Parts 1024 and 1026





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

  Federal Register / Vol. 78 , No. 142 / Wednesday, July 24, 2013 / 
Rules and Regulations  

[[Page 44686]]


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BUREAU OF CONSUMER FINANCIAL PROTECTION

12 CFR Parts 1024 and 1026

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


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

AGENCY: Bureau of Consumer Financial Protection.

ACTION: Final rule; official interpretations.

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

DATES: This rule is effective January 10, 2014, except for the 
amendment to Sec.  1026.35(e), which is effective July 24, 2013. See 
part V, Effective Date, in SUPPLEMENTARY INFORMATION.

FOR FURTHER INFORMATION CONTACT: Marta Tanenhaus, Senior Counsel, Paul 
Ceja, Senior Counsel and Special Advisor; Joseph Devlin, Counsel; 
Office of Regulations, at (202) 435-7700.

SUPPLEMENTARY INFORMATION: 

I. Summary of Final 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). On 
January 10, 2013, the Bureau issued the 2013 ATR Final Rule; \1\ on 
January 17, 2013, the Bureau issued the 2013 Mortgage Servicing Final 
Rules; \2\ and on May 16, 2013, the Bureau issued Amendments to the 
2013 Escrows Final Rule.\3\ This final rule makes several amendments to 
those rules. These amendments clarify, correct, or amend provisions on 
(1) the relation to State law of Regulation X's servicing provisions; 
(2) implementation dates for adjustable-rate mortgage disclosures; (3) 
exclusions from the repayment ability and prepayment penalty 
requirements for higher-priced mortgage loans (HPMLs); (4) the small 
servicer exemption from certain of the new servicing rules; (5) the use 
of government-sponsored enterprise (GSE) and Federal agency purchase, 
guarantee or insurance eligibility for determining qualified mortgage 
(QM) status; and (6) the determination of debt and income for purposes 
of originating QMs. In addition to these six revisions and 
clarifications, which are discussed more fully below, the Bureau is 
making certain technical corrections to the regulations with no 
substantive change intended.
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    \1\ Ability-to-Repay and Qualified Mortgage Standards Under the 
Truth in Lending Act (Regulation Z) (2013 ATR Final Rule), 78 FR 
6407 (Jan. 30, 2013).
    \2\ Mortgage Servicing Rules Under the Real Estate Settlement 
Procedures Act (Regulation X) (2013 RESPA Servicing Final Rule) and 
Mortgage Servicing Rules Under the Truth in Lending Act (Regulation 
Z) (2013 TILA Servicing Final Rule) (together, 2013 Mortgage 
Servicing Final Rules), 78 FR 10695 (Feb. 14, 2013) (Regulation X), 
78 FR 10901 (Feb. 14, 2013) (Regulation Z).
    \3\ Amendments to the 2013 Escrows Final Rule under the Truth in 
Lending Act (Regulation Z), 78 FR 30739 (May 23, 2013). Those 
amendments revised 78 FR 4726 (Jan. 22, 2013) (2013 Escrows Final 
Rule).
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    First, the Bureau is amending the commentary to the preemption 
provision of Regulation X to clarify that the regulation does not 
occupy the field of regulation of the practices covered by the Real 
Estate Settlement Procedures Act (RESPA) or Regulation X, including 
with respect to mortgage servicers or mortgage servicing. The rule also 
redesignates the Regulation X preemption provision, Sec.  1024.13, as 
Sec.  1024.5(c).
    Second, in response to industry requests, the Bureau is providing 
clarification of the implementation dates for adjustable-rate mortgage 
provisions Sec.  1026.20(c) and (d) of the 2013 TILA Servicing Final 
Rule. This clarification is provided in the section-by-section analysis 
and does not revise the 2013 TILA Servicing Final Rule or its official 
commentary.
    Third, the Bureau is revising Sec.  1026.35(e) of Regulation Z, as 
amended by the Amendments to the 2013 Escrows Final Rule,\4\ to clarify 
that construction and bridge loans and reverse mortgages are not 
subject to its requirements regarding repayment abilities and 
prepayment penalties for HPMLs.
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    \4\ 78 FR 30739 (May 23, 2013).
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    Fourth, the Bureau is clarifying the scope and application of the 
exemption for small servicers that is set forth in Regulation Z's 
periodic statement provision, Sec.  1026.41, and incorporated by cross-
reference in certain provisions of Regulation X. The rule clarifies 
which mortgage loans to consider in determining small servicer status 
and the application of the small servicer exemption with regard to 
servicer/affiliate and master servicer/subservicer relationships. 
Further, the rule provides that three types of mortgage loans will not 
be considered in determining small servicer status: mortgage loans 
voluntarily serviced for an unaffiliated entity without remuneration, 
reverse mortgages, and mortgage loans secured by a consumer's interest 
in timeshare plans.
    Fifth, the Bureau is revising regulatory text and an official 
interpretation adopted in the 2013 ATR Final Rule and adding a new 
official interpretation to describe qualified mortgages that are 
entitled to a presumption of compliance with the ability-to-repay 
requirements under the Dodd-Frank Act. Specifically, the Bureau is 
providing clarifications with regard to Sec.  1026.43(e)(4), which 
allows qualified mortgage status to certain loans that are eligible for 
purchase, guarantee, or insurance by the GSEs or federal agencies. 
Section 1026.43(e)(4)(ii)(A)-(E) is amended to make clear that matters 
wholly unrelated to ability to repay will not be relevant to 
determination of QM status under this provision. Comment 43(e)(4)-4 
explains that matters wholly unrelated to ability to repay are those 
matters that are wholly unrelated to credit risk or the underwriting of 
the loan. Comment 43(e)(4)-4 also clarifies the standards a creditor 
must meet when relying on a written guide or an automated underwriting 
system to determine qualified mortgage status under Sec.  
1026.43(e)(4). In addition, the revised comment specifies that a 
creditor relying on approval through an automated underwriting system 
to establish qualified mortgage status must also meet the conditions on 
approval that are generated by that same system.
    The Bureau is also revising comment 43(e)(4)-4 to clarify that a 
loan meeting eligibility requirements provided in a written agreement 
with one of the GSEs, HUD, VA, USDA, or RHS is also eligible for 
purchase or guarantee by the GSEs or insured or guaranteed by the 
agencies for the purposes of Sec.  1026.43(e)(4). In addition, the 
comment has been clarified to provide that loans receiving individual 
waivers from GSEs or agencies will be considered eligible as

[[Page 44687]]

well. Thus, such loans could be qualified mortgages.
    The Bureau is also issuing new comment 43(e)(4)-5, which provides 
that a repurchase or indemnification demand by the GSEs, HUD, VA, USDA, 
or RHS is not dispositive for ascertaining qualified mortgage status. 
The comment provides two examples to illustrate the application of this 
guidance.
    Sixth, the Bureau is amending appendix Q of Regulation Z to 
facilitate compliance and ensure access to credit by assisting 
creditors in determining a consumer's debt-to-income ratio (DTI) for 
the purposes of Sec.  1026.43(e)(2), the primary qualified mortgage 
provision. The Bureau is making changes to address compliance 
challenges raised by stakeholders, as well as technical and wording 
changes for clarification purposes. The Bureau's revisions include 
clarifications to appendix Q on: (1) Stability of income, and the 
creditor requirement to evaluate the probability of the consumer's 
continued employment; (2) with regard to salary, wage, and other forms 
of consumer income, the creditor requirement to determine whether the 
consumer's income level can reasonably be expected to continue; (3) 
creditor analysis of consumer overtime and bonus income; (4) creditor 
analysis of consumer Social Security income; (5) requirements related 
to the analysis of self-employed consumer income; (6) requirements 
related to non-employment related consumer income, including creditor 
analysis of consumer trust income; and (7) creditor analysis of rental 
income. The Bureau is also revising the introduction to appendix Q to 
make clear that creditors may refer to other federal agency and GSE 
guidance that is in accordance with appendix Q as a resource, and to 
provide default rules and an optional safe harbor when appendix Q's 
standards do not otherwise resolve how to treat a particular type of 
debt or income.

II. Background

A. Title XIV Rulemakings Under the Dodd-Frank Act

    In response to an unprecedented cycle of expansion and contraction 
in the mortgage market that sparked the most severe U.S. recession 
since the Great Depression, Congress passed the Dodd-Frank Act, which 
was signed into law on July 21, 2010. In the Dodd-Frank Act, Congress 
established the Bureau and, under sections 1061 and 1100A, generally 
consolidated the rulemaking authority for Federal consumer financial 
laws, including the Truth in Lending Act (TILA) and RESPA, in the 
Bureau.\5\ 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.\6\ 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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    \5\ 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.
    \6\ Dodd-Frank Act section 1400(c), 15 U.S.C. 1601 note.
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    On January 10, 2013, the Bureau issued the 2013 ATR Final Rule, 
Escrow Requirements Under the Truth in Lending Act (Regulation Z) (2013 
Escrows Final Rule),\7\ and High-Cost Mortgages and Homeownership 
Counseling Amendments to the Truth in Lending Act (Regulation Z) and 
Homeownership Counseling Amendments to the Real Estate Settlement 
Procedures Act (Regulation X) (2013 HOEPA Final Rule).\8\ 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) \9\ (issued jointly with other agencies) 
and Disclosure and Delivery Requirements for Copies of Appraisals and 
Other Written Valuations Under the Equal Credit Opportunity Act 
(Regulation B) (2013 Appraisals Final Rule).\10\ On January 20, 2013, 
the Bureau issued Loan Originator Compensation Requirements Under the 
Truth in Lending Act (Regulation Z) (2013 Loan Originator Final 
Rule).\11\ Most of these rules will become effective on January 10, 
2014.
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    \7\ 78 FR 4726 (Jan. 22, 2013).
    \8\ 78 FR 6855 (Jan. 31, 2013).
    \9\ 78 FR 10367 (Feb. 13, 2013).
    \10\ 78 FR 7215 (Jan. 31, 2013).
    \11\ 78 FR 11279 (Feb. 15, 2013).
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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).\12\ This proposal has now been made final (May 2013 ATR 
Final Rule).\13\ The May 2013 ATR Final Rule provides exemptions for 
creditors with certain designations, loans pursuant to certain 
programs, certain nonprofit creditors, and mortgage loans made in 
connection with certain Federal emergency economic stabilization 
programs. The final rule also provides an additional definition of a 
qualified mortgage for certain loans made and held in portfolio by 
small creditors and a temporary definition of a qualified mortgage for 
balloon loans. Finally, the May 2013 ATR Final Rule modifies the 
requirements regarding the inclusion of loan originator compensation in 
the points and fees calculation.
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    \12\ 78 FR 6622 (Jan. 30, 2013).
    \13\ 78 FR 35429 (Jun. 12, 2013).
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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),\14\ 
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 included (1) coordination 
with other agencies; (2) publication of plain-language guides to the 
new rules; (3) publication of additional corrections and clarifications 
of the new rules, as needed; (4) publication of readiness guides for 
the new rules; and (5) education of consumers on the new rules.
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    \14\ Consumer Financial Protection Bureau Lays Out 
Implementation Plan for New Mortgage Rules. Press Release. Feb. 13, 
2013.
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    This final rule is the third final rule providing additional 
revisions and clarifications of and amendments to the 2013 Title XIV 
Final Rules. In addition, the Bureau issued a proposed rule with 
further revisions and clarifications of and amendments to several of 
the 2013 Title XIV Final Rules on June 24, 2013. The purpose of these 
updates is to address important questions raised by industry, consumer 
groups, or other agencies. Priority for these updates is given to 
issues that are important to a large number of stakeholders and that 
critically affect mortgage companies' implementation decisions. 
Previously, the Bureau issued a final rule \15\ providing corrections 
and clarifications of its 2013 Escrows Final Rule, and a final rule 
delaying the effective date for a provision related to credit insurance

[[Page 44688]]

financing in the 2013 Loan Originator Final Rule. On June 24, 2013, the 
Bureau issued additional proposed clarifications \16\ to several of the 
new mortgage rules, including the servicing rules touched on here and 
the 2013 Loan Originator Final Rule. The Bureau expects to review the 
comments received and finalize that proposal later this summer. Going 
forward, the Bureau will continue to assess whether additional 
clarifications or revisions are warranted.
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    \15\ 78 FR 30739 (May 23, 2013).
    \16\ 78 FR 39902 (July 2, 2013).
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Comments on the Proposed Rule
    The Bureau received 73 comments on the proposed rule \17\ on which 
this final rule is based. Many of these comments discussed issues that 
the proposed rule did not touch upon such as disparate impact in regard 
to fair lending enforcement, calculation methods for residual income, 
and whether or not the special QM provision at Sec.  1026.43(e)(4) 
should be eliminated before the rule goes into effect. The Bureau notes 
that it would be inconsistent with the Administrative Procedure Act 
(APA) to make changes outside the scope of the proposal because the 
other commenters and the public would not have notice and opportunity 
to comment. In addition, these regulatory updates are intended to focus 
on specific narrow implementation issues, and broader policy changes 
would not be appropriate as part of this process.
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    \17\ 78 FR 25638 (May 2, 2013).
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    The Bureau has examined all comments submitted and will discuss 
those that were responsive to the proposal in the section-by-section 
analysis below.

III. Legal Authority

    The Bureau is issuing this final rule pursuant to its authority 
under RESPA, TILA, and the Dodd-Frank Act. Section 1061 of the Dodd-
Frank Act transferred to the Bureau the ``consumer financial protection 
functions'' previously vested in certain other Federal agencies, 
including the Federal Reserve Board (Board). The term ``consumer 
financial protection function'' is defined to include ``all authority 
to prescribe rules or issue orders or guidelines pursuant to any 
Federal consumer financial law, including performing appropriate 
functions to promulgate and review such rules, orders, and 
guidelines.'' \18\ Section 1061 of the Dodd-Frank Act also transferred 
to the Bureau all of HUD's consumer protection functions relating to 
RESPA.\19\ Title X of the Dodd-Frank Act, including section 1061, along 
with RESPA, TILA, and certain subtitles and provisions of title XIV of 
the Dodd-Frank Act are Federal consumer financial laws.\20\
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    \18\ 12 U.S.C. 5581(a)(1).
    \19\ Public Law 111-203, 124 Stat. 1376, section 1061(b)(7); 12 
U.S.C. 5581(b)(7).
    \20\ 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. 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 include 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.

B. 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 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, or 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. Accordingly, the Bureau has 
authority to issue regulations pursuant to title X as well as RESPA and 
TILA, as amended by title XIV.
    In addition, to constitute a qualified mortgage a loan must meet 
``any guidelines or regulations established by the Bureau relating to 
ratios of total monthly debt to monthly income or alternative measures 
of ability to pay regular expenses after payment of total monthly debt, 
taking into account the income levels of the borrower and such other 
factors as the Bureau may determine are relevant and consistent with 
the purposes described in [TILA section 129C(b)(3)(B)(i)].'' The Dodd 
Frank Act also provides the Bureau with authority to prescribe 
regulations that revise, add to, or subtract from the criteria that 
define a qualified mortgage upon a finding that such regulations are 
necessary or proper to ensure that responsible, affordable mortgage 
credit remains available to consumers in a manner consistent with the 
purposes of the ability-to-repay requirements; or are necessary and 
appropriate to effectuate the purposes of the ability-to-repay 
requirements, to prevent circumvention or evasion thereof, or to 
facilitate compliance with TILA sections 129B and 129C. TILA section 
129C(b)(3)(B)(i), 15 U.S.C. 1639c(b)(3)(B)(i). In addition, TILA 
section 129C(b)(3)(A) provides the Bureau with authority 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. TILA section 129C(b)(3)(A), 15 U.S.C. 
1639c(b)(3)(A).

C. 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

[[Page 44689]]

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 title X, as well as 
of RESPA, TILA, and the enumerated subtitles and provisions of title 
XIV of the Dodd-Frank Act, and to prevent evasion of those laws.
    The Bureau is amending certain rules finalized in January, 2013, 
that implement a number of Dodd-Frank Act provisions. In particular, 
the Bureau is clarifying or amending regulatory provisions and 
associated commentary adopted by the 2013 ATR Final Rule,\21\ the 2013 
TILA Servicing Final Rule,\22\ the 2013 RESPA Servicing Final Rule,\23\ 
and the 2013 Escrows Final Rule \24\ as amended by the 2013 Amendments 
to the 2013 Escrows Final Rule.\25\
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    \21\ 78 FR 6408 (Jan. 30, 2013).
    \22\ 78 FR 10902 (Feb. 14, 2013).
    \23\ 78 FR 10696 (Feb. 14, 2013).
    \24\ 78 FR 4726 (Jan. 22, 2013).
    \25\ 78 FR 30739 (May 23, 2013).
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IV. Section-by-Section Analysis

A. Regulation X

Subpart A--General Provisions
    The Bureau proposed a technical amendment to the heading for 
Subpart A of Regulation X from ``Subpart A--General'' to ``Subpart A--
General Provisions'' to conform the heading in the text of the 
regulation to the heading set forth in the corresponding commentary. No 
comments were received on this change, and it is adopted as proposed.
Section 1024.5 Coverage of RESPA
The Proposal
    The Bureau proposed to redesignate Sec.  1024.13 as Sec.  
1024.5(c). Section 1024.13, ``Relation to State laws,'' sets forth 
rules regarding the relationship of the requirements in RESPA and 
Regulation X to requirements established pursuant to State law. In the 
2013 RESPA Servicing Final Rule, the Bureau divided Regulation X into 
subparts and Sec.  1024.13 was located in new ``Subpart B--Mortgage 
Settlement and Escrow Accounts.'' However, the provisions of Sec.  
1024.13(a) are intended to apply with respect to all of Regulation X. 
Because Sec.  1024.13 applies for all sections of Regulation X, the 
Bureau proposed to redesignate Sec.  1024.13 as Sec.  1024.5(c), 
located within ``Subpart A--General Provisions.'' Further, the Bureau 
proposed to remove and reserve Sec.  1024.13.
    The Bureau further proposed to add commentary for proposed Sec.  
1024.5(c) to make clear that Regulation X does not create field 
preemption. Since issuing the 2013 RESPA Servicing Final Rule, the 
Bureau had received inquiries as to whether Regulation X's mortgage 
servicing rules result in preemption of the field of mortgage servicing 
regulation. The Bureau had addressed this question in the preamble to 
the final rule, stating that ``the Final Servicing Rules generally do 
not have the effect of prohibiting State law from affording borrowers 
broader consumer protection relating to mortgage servicing than those 
conferred under the Final Servicing Rules.'' \26\ The preamble further 
stated that, although ``in certain circumstances, the effect of 
specific requirements of the Final Servicing Rules is to preempt 
certain limited aspects of state law'' in general, ``the Bureau 
explicitly took into account existing standards (both State and 
Federal) and either built in flexibility or designed its rules to 
coexist with those standards.'' \27\
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    \26\ 78 FR 10706 (Feb. 14, 2013).
    \27\ Id. (specifically identifying the National Mortgage 
Settlement and the California Homeowner Bill of Rights).
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    Because the Bureau continued to receive questions on this issue, 
the Bureau believed it was appropriate to propose commentary to clarify 
the scope of proposed Sec.  1024.5(c) and expressly address concerns 
about field preemption. Consistent with the preamble to the 2013 RESPA 
Servicing Final Rule, proposed comment 5(c)(1)-1 stated that State laws 
that are in conflict with the requirements of RESPA or Regulation X may 
be preempted by RESPA and Regulation X. Proposed comment 5(c)(1)-1 
stated further that nothing in RESPA or Regulation X, including the 
provisions in subpart C with respect to mortgage servicers or mortgage 
servicing, should be construed to preempt the entire field of 
regulation of the covered practices. This proposed addition to the 
commentary was meant to clarify that RESPA and Regulation X do not 
effectuate field preemption of States' regulation of mortgage servicers 
or mortgage servicing. The comment also made clear that RESPA and 
Regulation X do not preempt State laws that give greater protection to 
consumers than do these federal laws.
    The Bureau requested comment regarding the addition of the proposed 
commentary, including whether further clarification regarding the 
preemption effects of RESPA and Regulation X was necessary or 
appropriate.
Comments
    Numerous consumer and community groups provided similar comments 
supporting the proposed changes to the Regulation X preemption 
provision. These commenters supported the relocation of the preemption 
provision to Sec.  1024.5(c) in the General Provisions subpart and the 
addition of comment 5(c)(1)-1. Many of these consumer and community 
groups further suggested that the regulatory text itself be changed to 
replace the phrase ``settlement practices'' with language more clearly 
inclusive of servicing activities. Several also requested that an 
example be included with comment 5(c)(1)-1 showing that a state law 
more protective of consumers will not be preempted by Regulation X.
    Two industry commenters supported the proposed changes to the 
Regulation X preemption provision. One trade association suggested that 
the Bureau should promote uniform servicing standards to help create 
certainty in the market. Another industry commenter stated that the 
current regulation covered the situation sufficiently and the proposed 
guidance was unnecessary.
    Two trade associations stated that the Bureau was narrowing the 
existing preemption provision to reduce the likelihood of preemption. 
One opposed the idea that state laws more protective of consumers are 
not preempted, and so opposed the inclusion of the comment. The other 
stated that the preemption provision for mortgage servicing transfers 
functions statutorily as a general preemption of mortgage servicing.
    Several industry commenters pointed out that the statute and 
regulation use the word ``inconsistent'' when explaining which state 
laws may be preempted, while the proposed comment uses the more common 
term ``conflict'' to describe the situation. They suggested that the 
comment also use the term ``inconsistent'' to avoid confusion.
Final Rule
    The relocation of the preemption provision and the guidance in 
proposed comment 5(c)(1)-1 were not intended to change the current 
preemption regime under Regulation X and the Bureau does not believe 
that they do so. The sentence in the regulation that consumer and 
community groups urged the Bureau to change simply replicates text in 
RESPA section 18. Therefore the Bureau does not believe that a change 
to that sentence would be appropriate. Comment 5(c)(1)-1 provides the

[[Page 44690]]

Bureau's official interpretation of that regulatory language. As stated 
in the proposal, the Bureau believes that the relocation of the 
preemption provision and the addition of the comment are necessary and 
appropriate to eliminate any confusion as to how the preemption 
provision operates. In addition, the Bureau believes that the comment 
is sufficiently clear and does not consider an example to be necessary.
    The final rule adopts the amendments as proposed, but changes the 
word ``conflict'' in the comment to ``inconsistent'' to avoid 
confusion.

B. Regulation Z

Section 1026.20 Disclosure Requirements Regarding Post-Consummation 
Events
20(c) Rate Adjustments With a Corresponding Change in Payment
20(d) Initial Rate Adjustment
    Implementation Date. In its proposal, the Bureau did not seek to 
revise or clarify Sec.  1026.20(c) and (d), the adjustable-rate 
mortgage (ARM) servicing regulations issued by the Bureau in the 2013 
TILA Servicing Final Rule. Nevertheless, the Bureau received 
unsolicited queries regarding the implementation dates for these rules. 
Despite the unsolicited nature of these comments, the Bureau believes 
it would be helpful to clarify the ARM implementation dates.
    ARM regulations Sec.  1026.20(c) and (d) generally apply to ARMs 
originated both prior to and after the January 10, 2014, effective 
date. However, no servicer is required to comply with the rule until 
the effective date.
    Implementation Date for Sec.  1026.20(d). Because the notice 
required by Sec.  1026.20(d) must be provided to the consumer between 
210 and 240 days before the first payment is due after the initial 
interest rate adjustment, servicers will not be required to provide the 
Sec.  1026.20(d) notice when such payment is due 209 or fewer days from 
the effective date. However, payments due 210 or more days from the 
effective date are subject to the rule.
    Implementation Date for Sec.  1026.20(c). Because the notice 
required by Sec.  1026.20(c) must be provided to the consumer between 
60 and 120 days before the first payment is due after an interest rate 
adjustment causing a corresponding change in payment, servicers will 
not be required to provide the Sec.  1026.20(c) notice when such 
payment is due 25 to 59 days from the effective date. Note that, under 
the time frame of current Sec.  1026.20(c), notices are required 25 to 
120 days before the first payment is due after the interest rate 
adjustment. Thus, servicers already will have provided the Sec.  
1026.20(c) notices required by the current rule when such payment is 
due 24 or fewer days from the January 10, 2014, effective date.
Section 1026.35 Requirements for Higher-Priced Mortgage Loans
35(e) Repayment Ability, Prepayment Penalties
    The Bureau is concerned that its recently published Amendments to 
the 2013 Escrows Final Rule \28\ requiring industry to comply with 
certain provisions regarding repayment ability and prepayment penalties 
for HPMLs could be interpreted as requiring that certain transactions 
excluded from such requirements are now subject to those requirements. 
The Bureau believes that the amendments, properly understood, continue 
the exclusion for such transactions from the requirements. To provide 
certainty, the Bureau is revising Sec.  1026.35(e) \29\ to explicitly 
exclude from coverage construction and bridge loans and reverse 
mortgages--loans that were previously explicitly excluded from such 
requirements, as discussed below.
---------------------------------------------------------------------------

    \28\ 78 FR 30739 (May 23, 2013).
    \29\ Id.
---------------------------------------------------------------------------

    In January 2013, the Bureau issued the 2013 Escrows Final Rule,\30\ 
which implements certain provisions of the Dodd-Frank Act relating to 
escrow accounts. That final rule revised the definition of ``higher-
priced mortgage loan'' in 12 CFR 1026.35(a) by removing certain 
exclusions from the scope of consumer credit transactions that may be 
HPMLs. The loans no longer excluded from the definition of HPML are: 
Transactions to finance the initial construction of a dwelling 
(construction loans); temporary or ``bridge loans'' with a terms of 
twelve months or less, such as a loan to purchase a new dwelling where 
the consumer plans to sell a current dwelling within twelve months 
(bridge loans); and reverse mortgages subject to Sec.  1026.33 (reverse 
mortgages). The Bureau removed these exclusions from the general 
definition of HPML and located them directly into the individual 
provisions regarding appraisal, escrow, ability to repay, and 
prepayment penalty requirements for HPMLs.\31\
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    \30\ 78 FR 4726 (Jan. 22, 2013).
    \31\ See Sec.  1026.35(c)(2) of the 2013 TILA Appraisals Rule, 
78 FR 10368 (Feb. 13, 2013) (which was adopted by the Bureau, 
together with several other Federal agencies, as an inter-agency 
rulemaking); Sec.  1026.35(b)(2) of the 2013 Escrows Final Rule, 78 
FR 4727 (Jan. 22, 2013); Sec.  1026.43(a) of the 2013 ATR Final 
Rule, 78 FR 6408 (Jan. 30, 2013); and Sec.  1026.32(a) of the 2013 
HOEPA Final Rule, 78 FR 6856 (Jan. 31, 2013).
---------------------------------------------------------------------------

    Since adopting the above-referenced rules, the Bureau adopted 
Amendments to the 2013 Escrows Final Rule \32\ to prevent the 
inadvertent and temporary elimination of certain consumer protections 
for HPMLs concerning ability to repay and prepayment penalties that 
were codified in 12 CFR 1026.35(b) prior to June 1, 2013. The 2013 
Escrows Final Rule took effect June 1, 2013, while the 2013 ATR and 
HOEPA Final Rules \33\ do not take effect until January 10, 2014. 
Consequently, the existing ability-to-repay and prepayment penalty 
protections for HPMLs would have been removed, pursuant to the 2013 
Escrows Final Rule, over seven months before parallel provisions would 
take effect. The Amendments to the 2013 Escrows Final Rule restored 
those protections temporarily in, and re-codified them as part of, 
newly created 12 CFR 1026.35(e), which took effect June 1, 2013, and 
will be effective through January 9, 2014.
---------------------------------------------------------------------------

    \32\ 78 FR 30739 (May 23, 2013).
    \33\ 78 FR 6408 (Jan. 30, 2013); 78 FR 6856 (Jan. 31, 2013), 
respectively.
---------------------------------------------------------------------------

    The Bureau's renumbering of the ability-to-repay and prepayment 
penalty provisions in Sec.  1026.35(e) of Regulation Z, without 
excluding reverse mortgages and construction and bridge loans from 
coverage under that section, could be seen as removing these exclusions 
from the requirements of that temporary provision. To clarify that the 
Amendments to the 2013 Escrows Final Rule did not have that effect, the 
Bureau is revising temporary Sec.  1026.35(e) to explicitly exclude 
construction loans, bridge loans, and reverse mortgages from its 
requirements. The Bureau is replacing current Sec.  1026.35(e)(3) with 
new Sec.  1026.35(e)(3), which states that the requirements of Sec.  
1026.35(e) do not apply to construction loans, bridge loans, and 
reverse mortgages. The Bureau is renumbering current Sec.  
1026.35(e)(3), ``Sunset of requirements on repayment ability and 
prepayment penalties,'' as new Sec.  1026.35(e)(4). The general 
language in Sec.  1026.35(e) is also revised to reflect the addition of 
these exclusions. As noted below, the amendment to Sec.  1026.35(e) 
will apply to any transaction consummated on or after June 1, 2013, for 
which the creditor receives an application on or before January 9, 
2014. Then, at the time Sec.  1026.35(e) expires, the exclusions for 
construction loans, bridge loans, and reverse mortgages in the 2013 ATR 
and HOEPA Final Rules will take effect. Thus, the revision of Sec.  
1026.35(e) in this

[[Page 44691]]

final rule will make clear that construction loans, bridge loans, and 
reverse mortgages have continued and will continue to be excluded from 
certain HPML requirements regarding prepayment penalties and a 
consumer's ability to repay the loan.
    Legal authority. Construction loans, bridge loans, and reverse 
mortgages have always been excluded from the requirements of Regulation 
Z regarding repayment ability and prepayment penalties. The mortgage 
rules referenced above that implement the Dodd-Frank Act continue to 
exclude such loans from their requirements, including those governing 
repayment ability and prepayment penalties. Thus, the revisions to 
Sec.  1026.35(e) in this final rule are merely technical changes to 
clarify the temporary provision's consistency with the historical and 
current treatment of such loans under Regulation Z.
    For these reasons, the Bureau is revising temporary amendment Sec.  
1026.35(e) to explicitly exclude construction loans, bridge loans, and 
reverse mortgages from its requirements regarding ability to repay and 
prepayment penalties for HPMLs, pursuant to its authority to provide 
for adjustments and exceptions under TILA section 105(a) and (f), and 
with reliance on the authority used by the Board in amending Regulation 
Z to include these requirements,\34\ including TILA section 129(p). As 
the Board concluded before it, the Bureau does not believe subjecting 
these loans to the repayment ability and prepayment penalty 
requirements would effectuate the purposes of, or facilitate compliance 
with TILA and Regulation Z. Many of the characteristics of these loans 
make it inappropriate or unnecessary to apply the repayment ability and 
prepayment penalty requirements of Sec.  1026.35(e). For example, 
because the structure of reverse mortgages does not provide for 
repayment, the requirements related to repayment are not appropriate 
for such loans. The Bureau also notes that it anticipates undertaking a 
rulemaking to address how the Dodd-Frank Act title XIV requirements 
apply to reverse mortgages, and consumer protection issues in the 
reverse mortgage market may be addressed through such a rulemaking. 
Thus, the Bureau both interprets Sec.  1026.35(e) not to subject the 
affected loans to its requirements and also, pursuant to 105(a) and 
105(f) of TILA, continues to exclude those loans from the requirements 
of Sec.  1026.35(e).
---------------------------------------------------------------------------

    \34\ 73 FR 44522 (July 30, 2008).
---------------------------------------------------------------------------

    Notice and comment are not necessary for this revision of Sec.  
1026.35(e), which merely makes explicit in the regulation the Bureau's 
continuing interpretation that certain loans have been excluded from 
certain legal requirements throughout the renumbering process. 
Moreover, the Bureau finds good cause to proceed without notice and 
comment. 5 U.S.C. 553(b)(B). This revision merely clarifies the 
operation of the rule that should already have been apparent to many 
market participants. Notice and comment are therefore unnecessary. In 
addition, the length of the notice and comment period make it 
impracticable to correct erroneous interpretations of a rule that is 
already in effect and that expires within months. For these reasons and 
under the authority cited above, the Bureau is expressly excluding 
construction and bridge loans and reverse mortgages from the ability-
to-repay and prepayment penalty requirements for HPMLs under interim 
Sec.  1026.35(e).
Section 1026.41 Periodic Statements for Residential Mortgage Loans
41(a) In General
41(a)(1) Scope
    Section 1026.41(a)(1) of the 2013 TILA Servicing Final Rule 
addresses the scope of the mortgage loans subject to the periodic 
statement requirements, stating that the rule applies to closed-end 
consumer credit transactions secured by a dwelling, subject to certain 
exemptions set forth in Sec.  1026.41(e). It goes on to say that, for 
purposes of Sec.  1026.41, ``such transactions are referred to as 
mortgage loans.''
    To eliminate any confusion as to which loans ``such transactions'' 
refers, and thus to which loans the periodic statement rule applies, 
the Bureau proposed to clarify Sec.  1026.41(a)(1). The proposed 
revision would have replaced the indefinite reference ``such 
transactions'' in Sec.  1026.41(a)(1) with a reiteration of the loans 
to which the rule applies, that is, closed-end consumer credit 
transactions secured by a dwelling. This revision would have clarified 
which transactions are considered ``mortgage loans'' for purposes of 
Sec.  1026.41.
    The proposal stated that the Bureau believed this change also would 
reduce uncertainty about which loans to consider in determining a 
servicer's eligibility for one of the exemptions under Sec.  
1026.41(e), the small servicer exemption. Section 1026.41(e)(4)(ii) 
defines a small servicer as a servicer that services 5,000 or fewer 
mortgage loans, for all of which the servicer (or an affiliate) is the 
creditor or assignee.\35\ The Bureau reasoned that the proposed text 
would have clarified that, in general, a servicer determines whether it 
is a small servicer by considering the closed-end consumer credit 
transactions secured by a dwelling that it services--including coupon 
book loans, which are exempt from some of the requirements of the 
periodic statement rule. The proposal noted that, pursuant to proposed 
Sec.  1026.41(e)(4)(iii), reverse mortgages and transactions secured by 
consumers' interests in timeshares, which are exempt from all of the 
requirements of Sec.  1026.41, would be excluded from consideration for 
purposes of determining small servicer status.
---------------------------------------------------------------------------

    \35\ The proposal stated that Housing Finance Agencies are 
deemed small servicers under Sec.  1026.41(e)(4)(ii)(B) regardless 
of loan count and loan ownership status.
---------------------------------------------------------------------------

    The Bureau received no comments on its proposed change to the 
regulatory text of Sec.  1026.41(a)(1) and therefore is adopting it as 
proposed. The Bureau did, however, receive comments regarding the 
mortgage loans covered by the small servicer exemption, and those 
comments are discussed below in the sections specifically addressing 
the small servicer exemption.
41(e) Exemptions
41(e)(4) Small Servicers
41(e)(4)(ii) Small Servicer Defined
The Proposal
    The proposed rule explained that, for the reasons set forth in the 
2013 Servicing Final Rules,\36\ the Bureau determined that it was 
appropriate to exempt small servicers from certain mortgage servicing 
requirements. The proposal set forth the rules from which small 
servicers, as defined by Sec.  1026.41(e)(4), are exempt: the 
Regulation Z requirement to provide periodic statements for residential 
mortgage loans \37\ and, in Regulation X, (1) certain requirements 
relating to obtaining force-placed insurance,\38\ (2) the general 
servicing policies, procedures, and requirements,\39\ and (3) certain 
requirements and restrictions relating to communicating with borrowers 
about, and evaluation of applications for, loss mitigation options.\40\
---------------------------------------------------------------------------

    \36\ See, e.g., 78 FR 10718-10720 (Feb. 14, 2013).
    \37\ 12 CFR 1026.41(e).
    \38\ 12 CFR 1024.17(k)(5).
    \39\ 12 CFR 1024.30(b)(1).
    \40\ Id.
---------------------------------------------------------------------------

    Scope and application of the small servicer exemption. The Bureau's 
proposal would have clarified the scope and application of the small 
servicer

[[Page 44692]]

exemption. The proposal stated that determination of a servicer's 
status as a small servicer, and thus its eligibility for the small 
servicer exemption, is set forth in Sec.  1026.41(e)(4) and that, as 
set forth above, this standard is applicable by cross-reference to 
certain provisions of Regulation X. The proposal pointed out that 
Regulation X applies to ``federally related mortgage loans,'' which 
excludes certain loans that are ``mortgage loans'' as defined by 
Regulation Z Sec.  1026.41(a)(1). The proposed revision would have 
clarified that, to qualify for the small servicer exemption applicable 
to either rule, the servicer must qualify as a small servicer under 
Sec.  1026.41(a)(1)--a determination based on closed-end consumer 
credit transactions secured by a dwelling. The proposal would have 
clarified that this Regulation Z standard applies regardless of whether 
or not the loans considered are subject to the requirements of 
Regulation X. The Bureau noted in the proposal that, although some 
mortgage loans not subject to coverage under Regulation X are 
considered for purposes of determining eligibility as a small servicer, 
servicing such loans under Regulation X rules would not be required. 
Thus, the Bureau posited, a servicer that services 5,000 federally 
related mortgage loans, as defined by Regulation X, may service more 
than 5,000 mortgage loans, as defined by Regulation Z Sec.  
1026.41(a)(1). The Bureau went on to explain that, in such a case, 
because the servicer's loans exceed the 5,000 mortgage loan limit, the 
servicer is not a small servicer and, thus, would not qualify for the 
small servicer exemption with regard to Regulation Z and Regulation X. 
The proposal reiterated that the servicer would not have to comply with 
Regulation X requirements for those mortgage loans counted for purposes 
of determining small servicer eligibility but which are not federally 
related mortgage loans. The proposal stated that by clarifying how a 
servicer determines whether it qualifies as a small servicer with 
regard to Regulation Z, the proposal also would have clarified how a 
servicer determines whether it qualifies for the small servicer 
exemptions from the applicable mortgage servicing requirements in 
Regulation X.
    To ensure understanding of the small servicer exemption, the Bureau 
proposed to amend the commentary to Sec.  1026.41(e)(4)(ii) to 
specifically identify which mortgage loans are considered for purposes 
of determining eligibility for the small servicer exemption. To this 
end, the Bureau proposed to add comment 41(e)(4)(ii)-1, which would 
have clarified that, in general and pursuant to Sec.  1026.41(a)(1), 
the mortgage loans considered in determining qualification for the 
small servicer exemption are closed-end consumer credit transactions 
secured by a dwelling. Proposed comment 41(e)(4)(ii)-1 also would have 
highlighted that, pursuant to Sec.  1026.41(e)(4)(iii), certain closed-
end consumer credit transactions secured by a dwelling are not 
considered in determining status as a small servicer, as discussed 
further below in connection with proposed Sec.  1026.41(e)(4)(iii).
    The Bureau requested comments and data regarding whether proposed 
comment 41(e)(4)(ii)-1 would appropriately clarify the scope of 
mortgage loans that must be considered for determining if a servicer 
qualifies as a small servicer. The Bureau specifically requested 
comment and data regarding whether any servicers service a significant 
number of closed-end consumer credit transactions secured by a 
dwelling, which are subject to Regulation Z, but service significantly 
fewer ``federally related mortgage loans,'' which are subject to 
Regulation X. By way of example, the Bureau requested comment and data 
regarding whether any servicers would not be considered a small 
servicer if the small servicer exemption were based on whether a 
servicer services 5,000 or fewer closed end consumer credit 
transactions secured by a dwelling, but would be a small servicer if 
the small servicer exemption were based on whether a servicer services 
5,000 or fewer ``federally related mortgage loan[s],'' as that term is 
defined in 12 CFR 1024.2. The proposal provided a specific example in a 
footnote of a servicer that services 10,000 construction loans, which 
are not considered ``federally related mortgage loans'' pursuant to 12 
CFR 1024.2, and 100 mortgage loans that are considered ``federally 
related mortgage loans'' pursuant to 12 CFR 1024.2.\41\ Such a 
servicer, the Bureau stated, would be considered to service 10,100 
closed-end consumer credit transactions secured by a dwelling and would 
not qualify for the small servicer exemption. The proposal, however, 
underscored the fact that, in any case, only the 100 federally related 
mortgage loans serviced by the servicer would be subject to the 
mortgage servicing requirements set forth in Regulation X pursuant to 
12 CFR 1024.31.
---------------------------------------------------------------------------

    \41\ 78 FR 25638, 25642 n.27 (May 2, 2013).
---------------------------------------------------------------------------

Comments
    In response to its request for comment, the Bureau received several 
comments expressing general support for its proposed clarification of 
the scope of loans to consider in determining whether a servicer is a 
small servicer, and received no comments opposing the proposed 
clarification. Nor did the Bureau receive any data or comment with 
regard to servicers servicing a disproportionate number of federally 
related mortgage loans, as defined by Regulation X, compared to the 
number of ``mortgage loans'' they service, as defined by Regulation Z.
    The Bureau also received a number of comments that were beyond the 
scope of the proposal. Three national trade associations urged the 
Bureau to revise the rule itself so that more servicers could qualify 
for the small servicer exemption, but provided no data or reasoning in 
support of this position. Similarly, a credit union trade association 
recommended that the Bureau revise the rule to consider only 
``federally related mortgage loans'' instead of the more inclusive 
``mortgage loans,'' as defined by the rule, but likewise provided no 
supporting data or reasoning. A trade association representing 
community banks generally urged the Bureau to reduce the loan pool used 
to determine small servicer status by limiting it to ``federally 
related mortgage loans'' and, in the alternative, specifically 
recommended carving out construction loans--one of the categories of 
loans not included in the definition of ``federally related mortgage 
loans''--from the category of ``mortgage loans.'' The trade association 
set forth reasons why construction loans require less oversight than 
other mortgage loans. Finally, a trade association representing home 
builders voiced concern that the proposal's reference to construction 
loans in the footnote example might cause ``confusion'' which could 
result in community banks reducing their construction loan portfolio to 
preserve their small servicer status. To avoid this possibility, the 
trade association recommended excluding construction loans from the 
loans considered in determining small servicer status.
Final Rule
    As stated above in section I, this final rule generally does not 
address comments not directly related to the clarifications and 
revisions proposed by the rule. Absent opposition or responsive 
comments and in view of the support the Bureau received for its

[[Page 44693]]

proposed clarification that the scope of loans considered in 
determining small servicer status are mortgage loans, as defined by 
Sec.  1026.41, the Bureau is adopting comment 41(e)(4)(ii)-1 as 
proposed and declines to revise Sec.  1026.41 with regard to the scope 
of loans considered in determining small servicer status.
The Proposal
    Affiliate and master/subservicer relationships. The Bureau also 
proposed to amend Sec.  1026.41(e)(4)(ii)(A), which states that a small 
servicer is a servicer that ``services 5,000 or fewer mortgage loans, 
for all of which the servicer (or an affiliate) is the creditor or 
assignee.'' Proposed Sec.  1026.41(e)(4)(ii)(A) would have provided 
clarification that, for purposes of determining small servicer status, 
a servicer considers the mortgage loans it services together with any 
mortgage loans serviced by any affiliates. This change, the Bureau 
explained, would conform that section with Sec.  1026.41(e)(4)(iii), 
which states that small servicer status is determined by counting ``the 
number of mortgage loans serviced by the servicer and any affiliates as 
of January 1 for the remainder of the calendar year.'' To avoid any 
risk of inconsistency, the Bureau believed it would have been 
appropriate to amend Sec.  1026.41(e)(4)(ii)(A) to conform the language 
to Sec.  1026.41(e)(4)(iii) by adding the clause ``together with any 
affiliates'' such that a small servicer is a servicer that ``services, 
together with any affiliates, 5,000 or fewer mortgage loans, for all of 
which the servicer (or an affiliate) is the creditor or assignee.'' As 
stated in the proposal, this change would more fully conform the 
language of Sec.  1026.41(e)(4)(ii)(A) with the language of Sec.  
1026.41(e)(4)(iii) but would not change the meaning of the small 
servicer exemption.
    The Bureau also proposed to amend the comments to Sec.  
1026.41(e)(4)(ii)(A). Specifically, comment 41(e)(4)(ii)-1 would have 
been redesignated as comment 41(e)(4)(ii)-2 and would have been amended 
to clarify several elements set forth in the 2013 TILA Servicing Final 
Rule. First, it would have clarified that there are two concurrent 
requirements for determining whether a servicer is a small servicer, as 
discussed further below. Second, it would have explained that the 
mortgage loans considered in making this determination are those 
serviced by the servicer as well as by its affiliates. Finally, it 
would have clarified that the second requirement of the small servicer 
test, that a servicer must be either the ``creditor or assignee'' of 
the mortgage loans it services, means that the servicer must either 
currently own or have originated all of the mortgage loans it services. 
The comment also would have provided examples to illustrate these 
points.
    Proposed comment 41(e)(4)(ii)-2 would have set forth the two 
requirements for determining if a servicer is a small servicer and 
would have clarified that both requirements apply to the mortgage loans 
serviced by the servicer as well as by its affiliates. The comment 
would have set forth both requirements: (1) A servicer, together with 
its affiliates, must service 5,000 or fewer mortgage loans, and (2) the 
servicer must only service mortgage loans for which the servicer (or an 
affiliate) is the creditor or assignee. Proposed comment 41(e)(4)(ii)-2 
further would have clarified that to be the ``creditor or assignee'' of 
a mortgage loan, the servicer (or an affiliate) must either currently 
own the mortgage loan or must have been the entity to which the 
mortgage loan was initially payable. It also would have clarified that 
a servicer that only services such mortgage loans may qualify as a 
small servicer so long as the servicer also only services 5,000 or 
fewer mortgage loans. The Bureau stated that it believed that this 
clarification would provide a helpful alternative way of expressing the 
requirement stated in the rule that the servicer or affiliate must also 
be the creditor or assignee of a mortgage loan.
    Proposed comment 41(e)(4)(ii)-2 also would have provided examples 
of specific circumstances demonstrating these requirements. The first 
example would have illustrated the effect affiliation has on the loan 
count requirement of the small servicer test. Proposed comment 
41(e)(4)(ii)-2.i stated that if a servicer services 3,000 mortgage 
loans, but is affiliated (as defined at Sec.  1026.32(b)(2)) \42\ with 
another servicer that services 4,000 other mortgage loans, both 
servicers are considered to service 7,000 mortgage loans and neither 
servicer is considered a small servicer. The second example would have 
illustrated the ownership requirement of the small servicer test. 
Proposed comment 41(e)(4)(ii)-2.ii stated that if a servicer services 
3,100 mortgage loans, including 100 mortgage loans it neither owns nor 
originated but for which it owns the mortgage servicing rights, the 
servicer is not a small servicer. The proposal explained that this is 
because the servicer services some mortgage loans for which the 
servicer (or an affiliate) is not the creditor or assignee, 
notwithstanding that the total number of mortgage loans serviced is 
fewer than 5,000.
---------------------------------------------------------------------------

    \42\ The definition of ``affiliate'' for purposes of subpart E 
of Regulation Z, which includes Sec.  1026.41, is set forth in Sec.  
1026.32(b)(2) and applies to all of subpart E, including the small 
servicer exemption. Affiliate, as defined in Sec.  1026.32(b)(2), 
``means any company that controls, is controlled by, or is under 
common control with another company, as set forth in the Bank 
Holding Company Act of 1956 (12 U.S.C 1841 et seq.).''
---------------------------------------------------------------------------

    Finally, the Bureau proposed to redesignate comment 41(e)(4)(ii)-2 
as 41(e)(4)(ii)-3 and to revise the comment so that it would provide 
further clarification regarding the application of the small servicer 
exemption in certain master servicer/subservicer relationships. Under 
the 2013 TILA Servicing Final Rule, the Bureau explained, comment 
41(e)(4)(ii)-2 references Regulation X, 12 CFR 1024.31, for the 
definitions of ``master servicer'' and ``subservicer'' that apply to 
the rule. It also provided an example demonstrating that even though a 
master servicer meets the definition of a small servicer, a subservicer 
retained by that master servicer that does not meet the definition does 
not qualify for the small servicer exemption.
    Proposed comment 41(e)(4)(ii)-3 would have clarified that a small 
servicer does not lose its small servicer status because it retains a 
subservicer, as that term is defined in 12 CFR 1024.31, to service any 
of its mortgage loans. The comment also would have clarified that, for 
a subservicer, as that term is defined in 12 CFR 1024.31, to gain the 
benefit of the small servicer exemption, both the master servicer and 
the subservicer must be small servicers. The comment also would have 
pointed out that, generally, a subservicer will not qualify as a small 
servicer because it does not own or did not originate the mortgage 
loans it subservices. However, the comment went on to state, a 
subservicer would qualify as a small servicer if it is an affiliate of 
a master servicer that qualifies as a small servicer.
    Proposed comment 41(e)(4)(ii)-3 also would have removed the example 
in 2013 TILA Servicing Rule comment 41(e)(4)(ii)-2 described above in 
favor of three other examples that would have demonstrated the 
implication of a master servicer/subservicer relationship for purposes 
of qualifying for the small servicer exemption. In the first proposed 
example, a credit union services 4,000 mortgage loans--all of which it 
originated or owns. The credit union retains a credit union service 
organization to subservice 1,000 of the mortgage loans and the credit 
union services the remaining 3,000 mortgage loans itself. The credit 
union has no affiliation relationship with the credit union service 
organization. The credit

[[Page 44694]]

union is a small servicer and, thus, the small servicer exemption 
applies to the 3,000 mortgage loans the credit union services itself. 
The credit union service organization is not a small servicer because 
it services mortgage loans it does not own or did not originate. 
Accordingly, the credit union service organization does not gain the 
benefit of the small servicer exemption and, thus, must comply with any 
applicable mortgage servicing requirements for the 1,000 mortgage loans 
it subservices.
    Proposed comment 41(e)(4)(ii)-3.ii would have posited the example 
of a bank holding company that, through a lender subsidiary, owns or 
originated 4,000 mortgage loans. In the example, all mortgage servicing 
rights for the 4,000 mortgage loans are owned by a wholly owned master 
servicer subsidiary. Servicing for the 4,000 mortgage loans is 
conducted by a wholly owned subservicer subsidiary. The bank holding 
company controls all of these subsidiaries and, thus, they are 
affiliates of the bank holding company pursuant Sec.  1026.32(b)(2). 
Because the master servicer and subservicer service 5,000 or fewer 
mortgage loans and because the mortgage loans are owned or originated 
by an affiliate of each, the master servicer and the subservicer are 
each considered a small servicer and qualify for the small servicer 
exemption for all 4,000 mortgage loans.
    Proposed comment 41(e)(4)(ii)-3.iii would have posited the example 
of a nonbank servicer that services 4,000 mortgage loans, all of which 
it originated or owns. The servicer retains a ``component servicer'' to 
assist it with servicing functions. The component servicer is not 
engaged in ``servicing'' as defined in 12 CFR 1024.2; that is, the 
component servicer does not receive any scheduled periodic payments 
from a borrower pursuant to the terms of any mortgage loan, including 
amounts for escrow accounts, and does not make the payments to the 
owner of the loan or other third parties of principal and interest and 
such other payments with respect to the amounts received from the 
borrower as may be required pursuant to the terms of the mortgage 
servicing loan documents or servicing contract. In this proposed 
example, the component servicer is not a subservicer pursuant to 12 CFR 
1024.31 because it is not engaged in servicing, as that term is defined 
in 12 CFR 1024.2. The nonbank servicer is a small servicer and the 
small servicer exemption applies to all 4,000 mortgage loans it 
services.
Comments
    Many commenters expressed their appreciation for the Bureau's 
clarification of the affiliate and master/subservicer relationships. 
Among them, a trade association representing the banking industry noted 
that the proposed clarification of the affiliate relationship was 
consistent with the regulation as issued by the Bureau. Several 
commenters submitted comments outside the scope of this rulemaking 
recommending that the Bureau reconsider altogether the inclusion of 
affiliate loans in determining eligibility for the small servicer 
exemption. A trade association representing credit union service 
organizations (CUSOs), a national and state trade association 
representing credit unions, and two individual credit unions raised 
concerns that the affiliate relationships some CUSOs have with one or 
more credit unions would prevent those CUSOs (and their credit union 
affiliates) from qualifying for the small servicer exemption. (The 
proposed example clarifying the master/subservicer relationship 
included a CUSO that was not an affiliate.) These commenters 
recommended that the Bureau either revise the rule to remove affiliates 
and their mortgage loans from consideration in determining small 
servicer status or that the Bureau provide clarification regarding how 
to take into account the loans of CUSO affiliates that are not wholly-
owned by credit unions or of CUSOs with multiple owners. Two of the 
commenters explained that many credit unions have an affiliate 
relationship with a CUSO to facilitate mortgage lending and borrowing. 
The trade associations noted the many cases of multiple credit unions 
affiliating with a single CUSO in order to achieve economies of scale 
and to maintain competitiveness in the marketplace. They indicated that 
these arrangements are particularly important for small credit unions 
with limited capacity. The trade association representing CUSOs voiced 
concern that the affiliate requirement in Sec.  1026.41 could have a 
chilling effect on the mortgage CUSO industry by encouraging credit 
unions to divest their interests in CUSOs to maintain their small 
servicer exemption or by discouraging credit unions that qualify as 
small servicers from investing in an affiliate relationship with a 
CUSO.
Final Rule
    In view of the comments supporting the proposed clarification of 
affiliate and master/subservicer relationships with regard to small 
servicer qualification and in the absence of responsive comments to the 
contrary, the Bureau is adopting the clarifications as proposed. With 
respect to the comments outside the scope of this rulemaking 
recommending that the Bureau exclude the mortgage loans of affiliates 
from consideration in determining small servicer status, the Bureau 
declines to revise the rule. In addition to the fact that reopening 
consideration of a major policy decision would require notice and 
comment relatively late in the implementation process, the Bureau 
continues to believe that the reasons underlying the rule as set forth 
in the 2013 Servicing Final Rules are persuasive on the merits.
    For clarification with regard to CUSOs and their relationships with 
one or more credit unions, the Bureau directs both the CUSOs and the 
credit unions to the Bank Holding Company Act of 1956 (12 U.S.C. 1841 
et seq.) to determine whether their particular business relationships 
constitute affiliate relationships.\43\ For further clarification, the 
Bureau notes that, pursuant to the affiliate requirement in Sec.  
1026.41, in any affiliate relationship with a CUSO, the total number of 
the mortgage loans of the affiliated entities must be considered in 
determining small servicer status. For example, for a credit union and 
its CUSO affiliate, the total number of mortgage loans serviced by both 
entities must be considered to determine the small servicer status for 
both the credit union and the CUSO.\44\ The same is true for credit 
unions that are deemed affiliates under the Bank Holding Company Act of 
1956.
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    \43\ Pursuant to Sec.  1026.32(b)(2), Sec.  1026.41 is subject 
to the definition of ``affiliate'' as set forth in the Bank Holding 
Company Act of 1956 (the Act). See proposed comment 41(e)(4)(ii)-
3.ii. Under the Act, ``affiliate'' is defined as any company that 
controls, is controlled by, or is under common control with another 
company. The percentage of control is a determining factor in 
whether an affiliate relationship exists. The Bureau notes that, 
absent other determining factors, if a credit union's percentage of 
control over a CUSO falls below the statutory minimum, there would 
be no affiliate relationship.
    \44\ For the small servicer status of a credit union/master 
servicer and the small servicer status of its unaffiliated CUSO/
subservicer, see proposed comment 41(e)(4)(ii)-3.i, which the Bureau 
is adopting as proposed in this final rule.
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41(e)(4)(iii) Small Servicer Determination
    Section 1026.41(e)(4)(iii) of the 2013 TILA Servicing Final Rule 
sets forth certain criteria regarding how to determine if a servicer 
qualifies as a small servicer. In addition, that section explains that 
small servicer determination is based on the number of mortgage loans 
serviced by the servicer and any affiliates as of January 1 for the 
remainder of the calendar year. It also specifies that a servicer that 
``crosses the threshold,'' and thus loses its small

[[Page 44695]]

servicer status and its small servicer exemption, has six months after 
crossing the threshold or until the next January 1, whichever is later, 
to comply with any requirements from which the servicer is no longer 
exempt.
The Proposal
    To provide clarification regarding the date for determining small 
service status and when a servicer that loses small servicer status 
must begin to comply with regulations from which it had been exempt, 
and that those dates apply to both elements of the small servicer 
exemption (loan count and ownership status), proposed Sec.  
1026.41(e)(4)(iii) included a number of revisions to the 2013 TILA 
Servicing Final Rule Sec.  1026.41(e)(4)(iii). First, proposed Sec.  
1026.41(e)(4)(iii) would have replaced the reference to a servicer that 
``crosses the threshold'' for determining if the servicer qualifies as 
a small servicer with broader language indicating that a servicer that 
``ceases to qualify'' as a small servicer will have six months or until 
the next January 1, whichever is later, to comply with any requirements 
for which a servicer is no longer exempt as a small servicer. The 
Bureau stated it believed that the broader phrase ``ceases to qualify'' 
would more accurately reflect the fact that there are two elements to 
determining if a servicer qualifies as a small servicer and pointed to 
the discussion above to underscore that either one of these elements 
could cause a servicer to lose exempt status.
    Proposed Sec.  1026.41(e)(4)(iii) therefore would have applied the 
transition period set out in the rule to situations in which a servicer 
no longer meets the loan count requirement as well as to situations in 
which the servicer no longer meets the requirement that the servicer is 
the creditor or assignee of all mortgage loans it services. Thus, the 
proposal stated, if a servicer exceeds the 5,000 mortgage loan limit or 
begins to service mortgage loans it does not own or did not originate, 
it must comply with any requirements from which it is no longer exempt 
by either the following January 1 or six months after the change in 
operations that disqualifies it as a small servicer, whichever is 
later. The proposal would have provided the example that, if on 
September 1 a servicer that previously qualified as a small servicer 
begins to service a mortgage loan that it does not own and did not 
originate, the servicer has until March 1 of the following year to 
comply with the requirements from which it was previously exempt as a 
small servicer.
Comments and Final Rule
    The Bureau did not receive any responsive comments regarding the 
proposed clarifications discussed above, outside of general support for 
providing clarification regarding this issue. In order to clarify the 
timing provision, the Bureau is adopting the changes as proposed.
    In this final rule, the Bureau also is revising a comment to Sec.  
1026.41(e)(4)(iii) that provides three examples of the timing for when 
a small servicer is no longer considered a small servicer and when that 
former small servicer must start complying with any requirements from 
which it previously was exempt as a small servicer. The Bureau is 
revising comment 41(e)(4)(iii)-2 to maintain consistency with and 
further clarify the changes to the regulatory text the Bureau is 
adopting in Sec.  1026.41(e)(4)(iii), as discussed above.
    To this end, the Bureau is revising the heading of comment 
41(e)(4)(iii)-2. The Bureau is removing the reference to ``threshold'' 
and is amending the heading to read: ``Timing for small servicer 
exemption'' for the same reasons discussed above and to maintain 
consistency with the adopted regulatory changes to Sec.  
1026.41(e)(4)(iii). In addition, the Bureau is amending the examples in 
the comment to conform to and further clarify the changes the Bureau is 
adopting in the regulatory text. The first of the current examples 
states that a servicer that begins servicing more than 5,000 loans on 
October 1 and is servicing more than 5,000 loans as of January 1 of the 
following year would no longer be considered a small servicer on April 
1 of that following year. The second current example states that a 
servicer that begins servicing more than 5,000 mortgage loans on 
February 1, and services more than 5,000 loans as of January 1 of the 
following year, would no longer be considered a small servicer on 
January 1 of that following year. The third example states that a 
servicer that begins servicing more than 5,000 mortgage loans on 
February 1, but services less than 5,000 loans as of January 1 of the 
following year, is considered a small servicer for that following year.
    The revised examples clarify two points. The first point is that 
the application of the calendar dates apply to both elements of the 
small servicer test, i.e., exceeding the allowable maximum number of 
loans serviced and servicing mortgage loans a servicer either does not 
own or did not originate. The second point of clarification is that 
January 1 is the date used to determine whether or not a servicer is 
considered a small servicer and the other dates (the latter of six 
months from the time the servicer ceases to be a small servicer or 
until the next January 1) are used to determine when a small servicer 
that has lost its small servicer status must begin complying with the 
regulations for which it had been exempt.
    The first revised example explains that a small servicer that 
begins servicing more than 5,000 mortgage loans (or begins servicing 
one or more mortgage loans it does not own or did not originate) on 
October 1 and is servicing 5,000 mortgage loans (or services one or 
more mortgage loans it does not own or did not originate) as of January 
1 of the following year, would no longer be considered a small servicer 
on January 1 of that following year and would have to comply with any 
requirements from which it is no longer exempt as a small servicer on 
April 1 of that following year. The second revised example states that 
a small servicer that begins servicing more than 5,000 mortgage loans 
(or begins servicing one or more mortgage loans it does not own or did 
not originate) on February 1, and services more than 5,000 mortgage 
loans (or begins servicing one or more mortgage loans it does not own 
or did not originate) as of January 1 of the following year, would no 
longer be considered a small servicer on January 1 of that following 
year and would have to comply with any requirements from which it is no 
longer exempt as a small servicer on that same January 1. The third 
revised example states that a servicer that begins servicing more than 
5,000 mortgage loans (or begins servicing one or more mortgage loans it 
does not own or did not originate) on February 1, but services less 
than 5,000 mortgage loans (or no longer services mortgage loans it does 
not own or did not originate) as of January 1 of the following year, is 
considered a small servicer for that following year. In sum, the 
amended heading and examples conform to and provide further 
clarification of the proposed changes to the regulatory text discussed 
above that the Bureau is adopting in this final rule.
The Proposal
    Consideration of loans serviced. The proposed rule also would have 
added language to Sec.  1026.41(e)(4)(iii) to specify which mortgage 
loans should not be considered in determining small servicer status. 
Proposed Sec.  1026.41(e)(4)(iii) would have clarified that certain 
closed-end consumer credit transactions secured by a dwelling would not 
be considered for purposes of

[[Page 44696]]

determining whether a servicer qualifies as a small servicer. 
Specifically, the proposal went on to explain, because reverse mortgage 
transactions and mortgage loans secured by a consumer's interest in 
timeshare plans are exempt from Sec.  1026.41, such loans are not 
considered when determining if a servicer is a small servicer. The 
proposed rule also would have clarified that, because coupon book loans 
are exempt only from some requirements of Sec.  1026.41, such loans 
must be considered in determining whether a servicer is a small 
servicer.
    The proposal also would have excluded from consideration in 
connection with the small servicer exemption, any mortgage loan 
voluntarily serviced by a servicer for a creditor or assignee that is 
not an affiliate of the servicer and for which the servicer does not 
receive any compensation or fees (``charitably serviced'' mortgage 
loans). The Bureau explained that it had received feedback that certain 
servicers that otherwise would be considered small servicers 
voluntarily service mortgage loans for unaffiliated nonprofit entities 
for charitable purposes and do not receive compensation or fees from 
engaging in that servicing. The Bureau further explained that, if such 
charitably serviced mortgage loans were considered in connection with 
determining whether a servicer qualifies as a small servicer, a 
servicer engaging in this practice would not qualify for the small 
servicer exemption because the servicer would be servicing a mortgage 
loan it does not own or did not originate, notwithstanding that such 
servicer undertook to service those mortgage loans for charitable 
purposes.
    The Bureau expressed concern that including charitably serviced 
mortgage loans in determining small servicer status would cause 
servicers to refrain from charitable servicing rather than lose the 
benefits of a small servicer exemption. The Bureau stated its belief 
that such a result would not further the goal of consumer protection 
for the affected consumers and might instead negatively affect the 
availability and costs of credit for consumers whose mortgage loans 
would otherwise be serviced pursuant to such charitable arrangements. 
Further, the Bureau believed that consumers would be more likely to 
receive superior service from an entity in the business of servicing 
that is willing to donate its services than they would if nonprofit 
entities that are not experienced in the business of servicing were 
forced to take on those duties themselves. Finally, the Bureau stated 
that it believed that the benefits of excluding charitably serviced 
mortgage loans from small servicer determination would outweigh the 
potential risks to consumers that exclusion may pose.
    The Bureau proposed that, for the reasons set forth above and 
pursuant to the Bureau's exemption authority and authority to provide 
for adjustments and exceptions for any class of transactions as may be 
necessary or proper to effectuate the purposes of TILA, under TILA 
sections 105(a) and (f), mortgage loans voluntarily serviced by a 
servicer for a creditor or assignee that is not an affiliate of the 
servicer and for which the servicer does not receive any compensation 
or fees would not be considered in determining a servicer's 
qualification as a small servicer. The Bureau stated that it believed 
that considering such loans in determining if a servicer is a small 
servicer would defeat the purposes of TILA by penalizing charitable 
servicers, thereby dissuading them from engaging in charitable 
servicing to the detriment of the consumers that otherwise would 
benefit from this activity. The Bureau requested comment regarding 
whether it would be appropriate not to consider such mortgage loans 
when determining if a servicer qualifies for the small servicer 
exemption. The Bureau further requested comment on whether other 
mortgage loans serviced through similar limited arrangements should not 
be considered in determining whether a servicer is a small servicer. 
The Bureau emphasized in its proposed rule that it was neither 
reexamining nor seeking comment on the issue of exempting nonprofit 
entities engaged in mortgage servicing from the requirements of the 
periodic statement or any other mortgage servicing rule.
    Finally, the Bureau proposed to add comment 41(e)(4)(iii)-3. 
Proposed comment 41(e)(4)(iii)-3 would have clarified that mortgage 
loans that are not considered for purposes of determining small 
servicer qualification pursuant to Sec.  1026.41(e)(4)(iii), are not 
considered for determining either whether a servicer services, together 
with any affiliates, 5,000 or fewer mortgage loans or whether a 
servicer is servicing mortgage loans that it does not own or did not 
originate. Proposed comment 41(e)(4)(iii)-3 further would have posited 
the example of a servicer that services a total of 5,400 mortgage 
loans, of which the servicer owns or originated 4,800 mortgage loans, 
services 300 reverse mortgage transactions that it does not own or did 
not originate, and voluntarily services 300 mortgage loans that it does 
not own or did not originate for an unaffiliated nonprofit organization 
for which the servicer does not receive any compensation or fees. The 
example stated that neither the reverse mortgage transactions nor the 
mortgage loans voluntarily serviced by the servicer are considered for 
purposes of determining if the servicer is a small servicer. The 
example concluded that, because the only mortgage loans considered are 
the 4,800 other mortgage loans serviced by the servicer, and the 
servicer owns or originated each of those mortgage loans, the servicer 
is considered a small servicer and qualifies for the small servicer 
exemption with regard to all 5,400 mortgage loans it services. The 
comment also would have noted that reverse mortgages and transactions 
secured by a consumer's interest in timeshare plans, in addition to not 
being considered in determining small servicer qualification, also are 
exempt from the requirements of Sec.  1026.41. In contrast, the 
proposed comment noted, although charitably serviced mortgage loans, as 
defined by Sec.  1026.41(e)(4)(iii), are likewise not considered in 
determining small servicer qualification, they are not exempt from the 
requirements of Sec.  1026.41. The comment thus would have clarified 
that a servicer that does not qualify as a small servicer would not be 
required to provide periodic statements for reverse mortgages and 
timeshare plans because they are exempt from the rule, but would be 
required to provide periodic statements for the mortgage loans it 
charitably services.
    Legal authority. The Bureau proposed to exclude charitably serviced 
mortgage loans and reverse mortgage transactions from consideration in 
determining a servicer's status as a small servicer for purposes of the 
small servicer exemption in Sec.  1024.41(e)(4) pursuant to its 
authority to provide for adjustments and exceptions under TILA section 
105(a) and (f).\45\ The proposal went on to say that, with respect to 
charitably serviced mortgage loans, the Bureau believed, for the 
reasons described above, that declining to consider such mortgage loans 
for purposes of determining eligibility as a small servicer would 
effectuate the purposes of, and would facilitate compliance with TILA 
and Regulation Z. The proposal further stated that, consistent with 
TILA

[[Page 44697]]

section 105(f) and in light of the factors in that provision, the 
Bureau believed that requiring servicers to consider mortgage loans 
they charitably service for purposes of determining eligibility as a 
small servicer would cause mortgage servicers to withdraw from such 
charitable relationships and not provide a meaningful benefit to 
consumers in the form of useful information or protection. In addition, 
the Bureau expressed its concern regarding the extent to which any 
requirement to consider such loans would complicate, hinder, or make 
more expensive the credit process for such mortgage loan transactions, 
especially considering the status of the borrowers that typically 
secure mortgage loans that are charitably serviced. The Bureau said 
that ultimately it believed the goal of consumer protection would be 
undermined if it were to consider, for purposes of small servicer 
qualification, mortgage loans voluntarily serviced by a servicer for a 
creditor or assignee that is not an affiliate of the servicer and for 
which the servicer does not receive any compensation or fees.
---------------------------------------------------------------------------

    \45\ The proposal stated that TILA section 128(f) requires 
periodic statements for ``residential mortgage loans,'' which, 
pursuant to TILA section 103(cc)(5), excludes transactions secured 
by consumers' interests in timeshare plans. For this reason, the 
proposed rule said, exception authority is not required to exclude 
such loans from consideration in determining if a servicer is a 
small servicer.
---------------------------------------------------------------------------

    In the proposed rule, the Bureau said it similarly believed that 
not considering reverse mortgages in determining whether a servicer is 
a small servicer would effectuate the purposes of, and would facilitate 
compliance with, TILA and Regulation Z. The Bureau said it believed 
this for the same reasons set forth in the 2013 TILA Servicing Final 
Rule \46\ exempting reverse mortgages from the requirements of Sec.  
1026.41. The Bureau pointed to the discussion in that final rule that 
the periodic statement requirements were designed for a traditional 
mortgage product and that information relevant and useful for consumers 
with reverse mortgages differs substantially from the information 
required on the periodic statement and, thus, would not provide a 
meaningful benefit to consumers of reverse mortgages. Finally, the 
proposal put forth the Bureau's belief that not considering reverse 
mortgages in determining whether a servicer is a small servicer is 
proper irrespective of the amount of the loan, the status of the 
consumer (including related financial arrangements, financial 
sophistication, and the importance to the consumer of the loan), or 
whether the loan is secured by the principal residence of the consumer.
---------------------------------------------------------------------------

    \46\ See 78 FR 10901, 10973 (Feb. 14, 2013).
---------------------------------------------------------------------------

Comments and Final Rule
    The Bureau received only positive comments regarding its proposed 
clarification that reverse mortgage transactions and mortgage loans 
secured by a consumer's interest in timeshare plans, which are exempt 
from all provisions of Sec.  1026.41, are excluded from the loan pool 
used to determine eligibility for the small servicer exemption. 
However, one national trade association representing credit unions 
contested the Bureau's clarification that fixed-rate loans with coupon 
books must be considered for purposes of determining eligibility for 
the small servicer exemption. The commenter said that including fixed-
rate loans with coupon books in the loan pool used to determine small 
servicer status but excluding them from the requirement to provide 
periodic statements would create confusion without providing adequate 
benefits. The Bureau disagrees and notes, as discussed above, that 
fixed-rate loans with coupon books are exempt only from some of the 
requirements of Sec.  1026.41--as opposed to reverse mortgage 
transactions and mortgage loans secured by a consumer's interest in 
timeshare plans which are not subject to any of the requirements of 
Sec.  1026.41. Servicers servicing fixed-rate loans with coupon books 
are exempt from the requirement to provide periodic statements for 
these loans under Sec.  1026.41, but servicers nevertheless have to 
provide to consumers with such loans the information contained in the 
periodic statement, either in the coupon book or in some other form. 
Because servicers servicing fixed-rate loans with coupon books must 
comply with the requirements of Sec.  1026.41 regarding those mortgage 
loans, it is appropriate that such loans would be considered in 
determining whether such servicers are small servicers and therefore 
exempt from complying with the requirements of Sec.  1026.41 with 
regard to those loans. Conversely, it is appropriate to exclude reverse 
mortgage transactions and mortgage loans secured by a consumer's 
interest in timeshare plans from the loan pool used to determine small 
servicer status because, regardless of that servicer's small servicer 
status, there is no requirement for the servicer to comply with any of 
the requirements of Sec.  1026.41 with regard to those loans.
    The Bureau received strong support for its proposed revision of 
Sec.  1026.41 to exclude charitably serviced loans from consideration 
in determining whether a servicer qualifies as a small servicer, that 
is, mortgage loans voluntarily serviced for a non-affiliate creditor or 
assignee and for which the servicer does not receive any compensation 
or fees. Commenters agreed that, absent the Bureau's proposal, small 
servicers likely would relinquish their volunteer efforts in order to 
preserve their small servicer status. In response to one commenter's 
request for clarification, the Bureau notes that its proposed revision 
of the rule with regard to volunteer servicing is not limited to the 
servicing of mortgage loans owned or originated by nonprofit 
organizations, although the Bureau suspects that most charitable 
servicing is done on behalf of such organizations. Due to the support 
received by the Bureau for its proposed revision of Sec.  
1026.41(e)(4)(iii)(A) excluding charitably serviced mortgage loans from 
the loan pool used to determine small servicer eligibility, and for the 
reasons stated above, the Bureau is adopting the revision as proposed.
    In addition to requesting comment regarding the appropriateness of 
excluding charitably serviced mortgage loans when determining small 
servicer status, the proposal solicited comment on whether other 
mortgage loans serviced through similar limited arrangements should not 
be considered in determining whether a servicer is a small servicer. 
The Bureau did not receive comments recommending that any other 
servicing arrangements be excluded from consideration for purposes of 
determining small servicer status. The Bureau did receive a comment 
outside of the scope of the proposal from a national trade association 
requesting guidance regarding the trade association's conclusion that 
certain depository services some of its members provide for depositors 
who self-finance the sale of residential real estate do not qualify as 
``servicing,'' as defined in 12 CFR 1024.2(b). The trade association 
explained that, for a minimal fee, some banks--usually small banks--
receive mortgage payments from a borrower and deposit the funds into 
that customer's account. According to the trade association, the 
agreement between the bank and the depositor/creditor typically 
excludes any other services, such as providing servicing in the case of 
delinquency. The trade association expressed concern that small 
institutions will discontinue this service for their depository 
customers who owner-finance the sale of real property for fear of 
losing their small servicer status if the depository service could be 
construed as servicing mortgage loans that the bank does not own or did 
not originate.
    Because the comment was outside the scope of the proposal, the 
Bureau declines to provide the requested guidance. Moreover, even if 
the comment were within the scope of the proposal, the Bureau is not 
able to

[[Page 44698]]

provide guidance at this juncture because the trade association did not 
provide sufficient information about the banking service described.
Section 1026.43 Minimum Standards for Transactions Secured by a 
Dwelling
43(e) Qualified Mortgages
43(e)(4) Qualified Mortgage Defined--Special Rules
    The 2013 ATR Final Rule generally requires creditors to make a 
reasonable, good faith determination of a consumer's ability to repay 
any consumer credit transaction secured by a dwelling (excluding an 
open-end credit plan, timeshare plan, reverse mortgage, or temporary 
loan) and establishes certain protections from liability under this 
requirement for ``qualified mortgages.'' These provisions, in Sec.  
1026.43(c), (e)(2), (e)(4), (e)(5), (e)(6) \47\ and (f), implement the 
requirements of TILA section 129C(a)(1) and the qualified mortgage 
provisions of TILA section 129C(b).
---------------------------------------------------------------------------

    \47\ The May 2013 ATR Final Rule amended the 2013 ATR Final Rule 
in part by adding two new types of qualified mortgages, at Sec.  
1026.43(e)(5) and (6). See 78 FR 35430 (June 12, 2013).
---------------------------------------------------------------------------

    To determine the qualified mortgage status of a loan, creditors 
must analyze whether the loan meets one of the definitions of 
``qualified mortgage'' in Sec.  1026.43(e)(2), (e)(4), (e)(5), (e)(6) 
or (f). Section 1026.43(e)(4) provides a definition of qualified 
mortgage for loans that (1) meet the prohibitions on certain risky loan 
features (e.g., negative amortization and interest only features); (2) 
do not exceed certain limitations on points and fees under Sec.  
1026.43(e)(2); and (3) either are eligible for purchase or guarantee by 
one of the GSEs, while under the conservatorship of the Federal Housing 
Finance Agency, or are eligible to be insured or guaranteed by HUD 
under the National Housing Act (12 U.S.C. 1707 et seq.), the VA, the 
USDA, or RHS.\48\ HUD, VA, USDA, and RHS have authority under the Dodd-
Frank Act to define qualified mortgage standards for the types of loans 
they insure, guarantee, or administer. See TILA section 
129C(b)(3)(B)(ii). Coverage under Sec.  1026.43(e)(4) for such loans 
will sunset once each agency promulgates its own qualified mortgage 
standards and such rules take effect. Coverage of GSE-eligible loans 
will sunset when conservatorship ends.
---------------------------------------------------------------------------

    \48\ Eligibility standards for the GSEs and Federal agencies are 
available at: Fannie Mae, Single Family Selling Guide, https://www.fanniemae.com/content/guide/sel111312.pdf; Freddie Mac, Single-
Family Seller/Servicer Guide, http://www.freddiemac.com/sell/guide/; 
HUD Handbook 4155.1, http://www.hud.gov/offices/adm/hudclips/handbooks/hsgh/4155.1/41551HSGH.pdf; Lenders Handbook--VA Pamphlet 
26-7, Web Automated Reference Material System (WARMS), http://www.benefits.va.gov/warms/pam26_7.asp; Underwriting Guidelines: 
USDA Rural Development Guaranteed Rural Housing Loan Program, http://www.rurdev.usda.gov/SupportDocuments/CA-SFH-GRHUnderwritingGuide.pdf.
---------------------------------------------------------------------------

    Even if the Federal agencies do not issue additional rules or 
conservatorship does not end, the temporary qualified mortgage 
definition in Sec.  1026.43(e)(4) will expire seven years after the 
effective date of the rule.\49\ Covered transactions that satisfy the 
requirements of Sec.  1026.43(e)(4) that are consummated before the 
sunset of Sec.  1026.43(e)(4) will retain their qualified mortgage 
status after the temporary definition expires. However, a loan 
consummated after the sunset of Sec.  1026.43(e)(4) may be a qualified 
mortgage only if it satisfies the requirements of another qualified 
mortgage provision in effect at that time.
---------------------------------------------------------------------------

    \49\ The rule's effective date is January 10, 2014, thus the 
Sec.  1026.43(e)(4) qualified mortgage definition expires at the 
latest after January 10, 2021.
---------------------------------------------------------------------------

Eligibility Under GSE/Agency Guides and Automated Underwriting Systems
The Proposal
    As adopted by the 2013 ATR Final Rule, comment 43(e)(4)-4 clarifies 
that, to satisfy Sec.  1026.43(e)(4)(ii), a loan need not be actually 
purchased or guaranteed by a GSE or insured or guaranteed by HUD, VA, 
USDA, or RHS. Rather, Sec.  1026.43(e)(4)(ii) requires only that the 
loan be eligible for such purchase, guarantee, or insurance. For 
example, the comment provides that, for purposes of Sec.  
1026.43(e)(4), a creditor is not required to sell a loan to a GSE for 
that loan to be a qualified mortgage. Rather, the loan must be eligible 
for purchase or guarantee by a GSE. The Commentary clarifies that, with 
respect to GSEs, to determine eligibility, a creditor may rely on an 
underwriting recommendation provided by one of the GSEs' automated 
underwriting systems (AUSs) or their written guides. Accordingly, with 
regard to the GSEs, the comment states that a covered transaction is 
eligible for purchase or guarantee by Fannie Mae or Freddie Mac (and 
therefore a qualified mortgage under Sec.  1026.43(e)(4)) if: (i) the 
loan conforms to the standards set forth in the Fannie Mae Single-
Family Selling Guide or the Freddie Mac Single-Family Seller/Servicer 
Guide; or (ii) the loan receives an ``Approve/Eligible'' recommendation 
from Desktop Underwriter (DU); or an ``Accept and Eligible to 
Purchase'' recommendation from Loan Prospector (LP).
    The Bureau proposed to revise comment 43(e)(4)-4 in a number of 
ways. First, the proposal would have clarified that a creditor is not 
required to comply with all GSE or agency requirements to show 
qualified mortgage status. Specifically, the proposed revision made 
clear that the creditor need not comply with certain requirements that 
are wholly unrelated to a consumer's ability to repay, including 
activities related to selling, securitizing, or delivering consummated 
loans and any requirement the creditor is required to perform after the 
consummated loan is sold, guaranteed, or endorsed for insurance (in the 
case of agency loans) such as document custody, quality control, and 
servicing. These requirements are spelled out in the most depth in the 
GSE and agency written guides, but may also be referenced in automated 
underwriting system conditions and in written agreements with 
individual creditors, as discussed further below.
    The Bureau believed that the proposed comment would clarify the 
intended scope of the temporary category of qualified mortgage created 
in Sec.  1026.43(e)(4) and facilitate compliance with the provisions of 
Regulation Z adopted in the 2013 ATR Final Rule. As explained in the 
preamble to the final rule, the Bureau established Sec.  1026.43(e)(4) 
as a temporary transition measure designed to ensure access to 
responsible, affordable credit for consumers with debt-to-income ratios 
that exceed the 43 percent threshold that the Bureau adopted as a 
bright-line standard in the permanent general definition of qualified 
mortgage under Sec.  1026.43(e)(2) while creditors adapted to the new 
ATR rules and other changes in economic and regulatory conditions. The 
Bureau believed that using widely recognized underwriting standards of 
Federal agencies and entities under Federal conservatorship to define 
qualified mortgages during this interim period would both facilitate 
compliance and ensure responsible lending practices. The temporary 
provision therefore bases qualified mortgage status on eligibility for 
purchase, insurance, or guarantee, which requires use of the federally 
related underwriting standards, but does not require actual sale, 
guarantee, or insurance endorsement. Furthermore, the temporary 
provision requires that a qualified mortgage must be eligible at 
consummation.
    However, the Bureau recognized in the proposed rule that the GSEs 
and agencies impose a wide variety of requirements relating not only to 
underwriting of potentially eligible loans, but also to the mechanics 
of sale, guarantee, or insurance and post-consummation activities. 
Because

[[Page 44699]]

underwriting is a complex process that involves assessment of the 
consumer's ability to repay the loan as well as other credit risk 
factors, the Bureau believed that it was appropriate to base qualified 
mortgage status under Sec.  1026.43(e)(4) on the GSEs' and agencies' 
general standards concerning borrower, product, and mortgage 
eligibility and underwriting. While some of these underwriting 
requirements may be more closely or directly related to assessing a 
consumer's ability to repay than others, the Bureau believed that 
attempting to disaggregate them would be an extraordinarily complex 
task that would defeat the purposes of the temporary definition in 
adopting widely recognized standards to facilitate compliance and 
access to responsible credit. Where groups of requirements are wholly 
unrelated to underwriting (i.e., wholly unrelated to assessing ability 
to repay and other risk-related factors), however, the Bureau believed 
that it was appropriate to specify that such requirements do not affect 
qualified mortgage status.
    The Bureau believed that the items described in the comment would 
meet this test and provide greater clarity to the temporary definition 
of qualified mortgage. Because TILA requires assessment of a consumer's 
ability to repay a loan as of the time of consummation, the Bureau 
believed that GSE and agency requirements relating to post-consummation 
activity should not be relevant to qualified mortgage status. And 
because the temporary definition does not require actual purchase, 
guarantee, or insurance, the Bureau believed that it would not be 
appropriate to base qualified mortgage status on elements of the guides 
relating to the mechanics of actual delivery, purchase, guarantee, and 
endorsement. The Bureau recognized that most requirements wholly 
unrelated to underwriting involve post-consummation activity; however, 
pre-consummation GSE and agency requirements could also be wholly 
unrelated to underwriting. For example, the status of a creditor's 
approval or eligibility to do business with a GSE is not relevant for 
ascertaining qualified mortgage status using an AUS. The Bureau invited 
comment on this proposed clarification generally and on whether other 
GSE or agency requirements should be excluded.
Comments
    Only one consumer group commented on the Bureau's inclusion of 
guidance stating that issues wholly unrelated to ability to repay would 
not affect a loan's QM status. This consumer group is also a nonprofit 
lender. Its comment suggested that the Bureau should state clearly 
those issues that are ``related'' to ability to repay, such as income 
or obligations that materially impact ability to repay, and violations 
of specific QM product restrictions, and rule out such things as credit 
score and appraisal requirements. This commenter also stated that 
failure to make this guidance clearer could reduce credit availability.
    Industry commenters overwhelmingly supported the interpretation 
that issues wholly unrelated to ability to repay should not be 
considered in assessing the QM status of a loan under Sec.  
1026.43(e)(4). Most, however, also suggested that the guidance on what 
would be considered wholly unrelated to ability to repay should be 
clarified and the excluded items or categories expanded. Commenters 
agreed that failure to comply with post-consummation requirements 
should be excluded. As did the consumer group in the comment referenced 
above, some industry commenters requested that the Bureau make clear 
that items deemed related to ability to repay be limited to narrow 
issues of a borrower's ability to make the loan's payments, and that 
other risk-related factors be excluded. Specifically, commenters asked 
that factors related to willingness to repay (as opposed to ability to 
repay) and issues involving the attributes or defects of the collateral 
be excluded. Some commenters raised the issue of excluding jumbo 
loans.\50\ Two commenters requested that a time limit be imposed so 
that repurchase or indemnification claims on seasoned loans would be 
disregarded. One commenter stated that income determinations are 
variable and subjective, so errors made in good faith should not 
invalidate QM status. Another commenter asked for guidance on some of 
the issues above, rather than specifically requesting exclusion.
---------------------------------------------------------------------------

    \50\ Although one commenter asked that jumbo size, which renders 
a loan too large to be eligible for GSE purchase or guarantee, be 
deemed wholly unrelated to ability to repay, another commenter 
merely asked for guidance on whether or not jumbos would be 
excluded. The Bureau stated in the January 2013 final rule that the 
temporary qualified mortgage definition does not include ``jumbo'' 
loans in 1026.43(e)(4), given, in part, that the Bureau views the 
jumbo market as already robust and stable. Excluding jumbo loan size 
eligibility conditions for GSEs would effectively reverse the 
Bureau's conclusion on this matter. The Bureau continues to believe 
that the jumbo loan market does not need the benefit of temporary 
qualified mortgage definition and notes that jumbo loans can be 
qualified mortgages to the extent that they meet the other qualified 
mortgage definitions.
---------------------------------------------------------------------------

    In addition, commenters generally suggested that various other 
topics should be specifically listed as wholly unrelated to ability to 
repay, including: (1) Failure to comply with laws and regulations, 
including consumer protection laws and regulations; (2) purchase of a 
state-issued title guarantee for loans held in portfolio; (3) delayed 
note certification; (4) Ginnie Mae modification; (5) early buy-out 
programs; (6) non-material technical defects triggering repurchase or 
indemnification; and (7) ``additional repurchase requirements.''
    The two GSEs both commented on the proposed rule, and both 
discussed the ``wholly unrelated to ability to repay'' guidance. One 
specifically stated support for the guidance, and both urged the Bureau 
to state that collateral-related issues were wholly unrelated to 
ability to repay.
Final Rule
    The Bureau adopts the guidance on issues of what is wholly 
unrelated to ability to repay substantially as proposed, but has 
adopted the standard in the regulatory text to harmonize the 
eligibility requirements that must be met for the temporary qualified 
mortgage definition under the rule with those permitted under the 
Commentary. In addition, comment 43(e)(4)-4 has been revised to state 
that matters wholly unrelated to ability to repay are those matters 
that are wholly unrelated to credit risk or the underwriting of the 
loan, and to provide more detailed guidance on applying the standard.
    As stated in the proposed rule, underwriting is a complex process 
that involves assessment of the consumer's ability to repay the loan as 
well as a variety of other credit risk factors. The Bureau made a 
deliberate decision in the 2013 ATR Final Rule to base qualified 
mortgage status under Sec.  1026.43(e)(4) on the GSEs' and agencies' 
general underwriting and credit risk analysis standards. While some of 
these factors may be more closely and directly focused on consumers' 
ability to repay than others, the Bureau continues to believe that 
attempting to disaggregate GSE and agency underwriting requirements 
based on degree of relationship to ability to repay would be an 
extraordinarily complex task that would defeat the purposes of the 
temporary definition in adopting widely recognized standards to 
facilitate compliance and access to responsible credit. Indeed, the 
statute itself requires consideration of a borrower's credit history, 
which could relate to willingness as well as ability to repay. 
Exclusion of requirements regarding collateral and other risk-related 
factors

[[Page 44700]]

would require line-drawing exercises that could potentially interfere 
with the regulatory purpose. Moreover, allowing disaggregation would 
not be consistent with the use of AUS determinations to demonstrate 
compliance, as they involve interdependent risk factors and do not 
focus solely on a borrower's capacity to make payments.
    The Bureau has revised the final comment to add an express general 
statement that matters wholly unrelated to ability to repay are those 
matters wholly unrelated to credit risk or the underwriting of the 
loan. The Bureau believes that this language, in conjunction with the 
reference to specific sets of requirements that are wholly unrelated to 
assessing ability to repay at the time of consummation (such as those 
related to selling, securitizing, or delivering consummated loans), 
provides useful guidance to stakeholders.
    As stated in the proposed rule, and consistent with the final rule, 
QM status depends on eligibility for sale, insurance, or guarantee at 
consummation, not on an actual executed sale, insuring, or guarantee of 
the individual loan. Accordingly, the Bureau considers events occurring 
after consummation and GSE and agency requirements concerning execution 
of an actual sale, insuring, or guarantee of the loan to be wholly 
unrelated to ability to repay.\51\ In addition, the Bureau believes 
that in regard to very limited matters, such as the status of a 
creditor's approval or eligibility to do business with a GSE, 
additional pre-consummation occurrences may also be wholly unrelated to 
ability to repay. Accordingly, the Bureau has revised the language in 
the final comment to identify specifically that these sets of 
requirements are considered wholly unrelated to ability to repay for 
purposes of the rule.
---------------------------------------------------------------------------

    \51\ Because the determination is based on the situation at 
consummation, the later repayment history or ``seasoning'' of the 
loan would not be an appropriate metric for this standard.
---------------------------------------------------------------------------

    Although the Bureau has reviewed many of the requests for 
determinations as to particular requirements in the comments received, 
the Bureau notes that with respect to certain of these inquiries, there 
was not sufficient detail or background information to discern the 
precise nature of the request or question. For instance, commenters' 
bare suggestion that ``additional purchase requirements'' be deemed 
wholly unrelated to ability to repay was simply too vague to analyze, 
and would require further specification in order to apply the standard.
Use of Automated Underwriting Systems
The Proposal
    The Bureau also proposed to revise comment 43(e)(4)-4 to clarify 
eligibility as determined by an automated underwriting system of a GSE 
or one of the agencies. As explained in comment 43(e)(4)-4 as adopted 
in the 2013 ATR Final Rule, the AUSs and the written guides of the GSEs 
as well as the agencies can be used for eligibility purposes under 
Sec.  1026.43(e)(4). The proposed revision of the comment explained 
that to rely upon an AUS recommendation to demonstrate qualified 
mortgage status a creditor must have (1) accurately inputted the loan 
information into the automated system, and (2) satisfied any 
accompanying requirements or conditions to the AUS approval that would 
otherwise invalidate the recommendation, unless, as discussed above, 
the conditions are wholly unrelated to the consumer's ability to repay. 
The comment as adopted in the 2013 ATR Final Rule assumed that any 
recommendation used for compliance would be valid, and these 
clarifications merely listed two criteria that should be monitored to 
ensure that validity. In particular, because the AUSs generate a list 
of conditions that must be met in support of the approval designation, 
the Bureau believed that those conditions must be satisfied to show 
eligibility for purchase, guarantee, or insurance. The Bureau sought 
comment on these revisions as well and also proposed technical edits to 
comment 43(e)(4)-4 for clarity and accuracy.
Comments
    The consumer and community group commenters did not discuss the 
guidance in comment 43(e)(4)-4 requiring that an AUS determination be 
based on accurate inputs, and that the creditor comply with any 
requirements and conditions specified by the AUS. About half of the 
industry commenters that specifically discussed this guidance supported 
its inclusion. Industry commenters asked that the Bureau make clear 
that QM status will not be invalidated by minor inaccuracies and by 
inaccuracies that would not change the outcome of the AUS 
determination. One commenter stated that it will not be possible to 
determine whether or not a loan would have been approved with accurate 
inputs.
Final Rule
    The Bureau adopts the comment as proposed, with minor edits for 
clarity. As stated in the regulation, a loan is a QM if it is eligible 
for purchase, insurance or guarantee by a GSE or agency other than with 
regard to issues wholly unrelated to ability to repay, and meets the 
other relevant requirements. For this reason, minor inaccuracies in 
input data that do not affect eligibility will not affect QM status. 
The Bureau believes the convenience and ease of compliance made 
possible by this provision are more important than avoiding those few 
situations in which it is difficult to determine which inaccuracies 
will affect the AUS outcome.
    Although the reference to issues wholly unrelated to ability to 
repay in the main paragraph of the proposed comment applied to the 
requirements and conditions accompanying an AUS determination, and 
unquestionably do now that the standard is in the regulatory language, 
the Bureau believes that repeating such language in paragraph ii will 
enhance the clarity of the comment, and is doing so.
Effect of Written Contract Variances
The Proposal
    The Bureau also proposed to revise comment 43(e)(4)-4 in a third 
way to clarify further that a loan meeting eligibility requirements 
provided in a written agreement between the creditor and a GSE or 
agency that permits variation from the standards of the written guides 
and/or AUSs in effect at the time of consummation is also eligible for 
purchase or guarantee by the GSEs or insurance or guarantee by the 
agencies for the purposes of Sec.  1026.43(e)(4). Thus, such loans 
would be qualified mortgages. The Bureau recognized that these 
agreements between creditors and the GSEs or agencies effectively 
constitute modification of, or substitutes for, the general manuals or 
AUSs with regard to these creditors. In many cases, the agreements 
allow the creditors to use other automated underwriting systems rather 
than the GSE or agency systems, subject to certain conditions or 
limitations on which loans the GSE or agency will accept as eligible 
for purchase, guarantee, or insurance. The Bureau believed that it was 
therefore appropriate for the purposes of Sec.  1026.43(e)(4) to 
consider the agreements to be equivalent to the standard written guides 
for purposes of the specific creditor to which the agreement applies. 
Many of these agreements are necessary to accommodate local and 
regional market variations and other considerations that do not 
substantially relate to ATR-related underwriting criteria and

[[Page 44701]]

therefore are generally consistent with the consumer protection and 
other purposes of the rule. However, the Bureau did not believe that it 
would be appropriate to allow one creditor to rely on the terms 
specified in another creditor's written agreement with a GSE or agency 
to establish qualified mortgage status, as the written agreements are 
individually negotiated and monitored. The Bureau sought comment on 
this proposed clarification generally and on whether other variations 
on standard guides and eligibility criteria should be considered.
Comments
    Two consumer and community group commenters discussed the use of 
variances with Sec.  1026.43(e)(4). One comment, from a group of 
organizations, stated that allowing use of variances was a mistake 
because the agreements are private and this would make them very 
difficult for consumers to enforce when they are violated. This comment 
also suggested that if the variance provision is adopted the Bureau 
should make clear that a borrower would have access to such variance 
agreements by sending a qualified written request under RESPA. The 
other consumer group commenter, which operates a nonprofit lender, 
supported the use of variances as provided in the comment.
    Industry commenters were very supportive of allowing the use of 
variances. However, one association representing credit unions opposed 
allowing the use of variances, stating that it would disadvantage 
smaller market participants. A real estate association commented that 
variances should be allowed but should be required to be made public so 
that any creditor could request use of their terms. Other industry 
commenters requested that the Bureau make clear that later assignees 
could rely on the QM status of loans originated pursuant to a variance. 
Another commenter asked that the Bureau specify that, in order to be 
relied on, a variance must be in effect at the time of consummation of 
the loan.
    Several industry commenters pointed out that these variances are 
often used with correspondent lenders, and the creditor who has 
negotiated the variance agreement acts as an aggregator or sponsor, 
pooling loans originated by others. They stated that the comment as 
proposed would present a problem because it states that the variance 
can only be used by a creditor who is a party to the agreement with the 
GSE. They further stated that this problem could interfere with the 
origination of a large number of loans that meet the GSEs' standards, 
and argued that correspondent lenders should be allowed to rely on the 
variances of their sponsors or aggregators. One large bank, however, 
opposed the idea of allowing one creditor to rely on another's 
variance, stating that this might allow loans to become QMs after 
consummation.
    One of the GSEs provided comment on the variance provision, 
strongly supporting it, and pointing out in addition that both GSEs 
sometimes grant individual loan waivers of their standards. The GSE 
stated that these waivers do not proceed from an increase in its 
appetite for risk, and are only granted ``on an exceptional basis,'' 
and that they should be treated the same as the negotiated variances. 
One industry association also asked that such individual waivers be 
treated this way.
Final Rule
    The language regarding variances is adopted substantially as 
proposed, with two important changes. The Bureau agrees that 
disallowing correspondent use of variances would interfere unduly with 
the market, and is adding language to clarify use in such circumstances 
without allowing wholly unrelated entities to rely on some other 
creditor's agreement. Also, the Bureau believes that individual waivers 
granted by the GSEs should benefit from the same treatment as creditor-
specific variances negotiated with the GSEs.
    As with all the QM provisions, the status of a loan is determined 
at the time of consummation. The variance applied to a transaction must 
be in effect at the time a loan is consummated, and the loan must meet 
all relevant requirements at that time. For this reason, a loan cannot 
be retroactively made into a QM by a creditor or assignee. In addition, 
because the status is determined at consummation, later assignees can 
rely on that status if it is valid. Allowing correspondents to rely on 
the variances of their sponsors or aggregators in effect at the time of 
consummation will not change this situation, and it will help to 
alleviate concerns that only larger market participants may take 
advantage of negotiated variances. The language of comment 43(e)(4)-4 
has been crafted to ensure that the correspondent is involved in a 
direct relationship with the variance holder and originating the QM 
pursuant to that relationship.
    In addition, the Bureau does not believe that allowing use of 
variances will disadvantage smaller market participants, since it is 
intended only to maintain the current market situation. Although 
variances are private agreements, with the potential for attendant 
disadvantages described by commenters above such as difficulty of 
enforcement, the Bureau does not believe it is appropriate to regulate 
transparency for these agreements through this narrowly focused 
amendatory rulemaking, without further review. As always, the Bureau 
will monitor the effects of its rules on the marketplace going forward.
    The Bureau has decided to allow loans benefitting from individual 
waivers granted by the GSEs to be treated the same as loans originated 
following negotiated variances. The Bureau has no reason to believe 
that these loans present undue risk to consumers, and notes that the 
GSEs are under government conservatorship.
    The provision regarding variances is adopted as proposed, with the 
two changes discussed above.
Repurchase and Indemnification Demands
The Proposal
    The Bureau also proposed new comment 43(e)(4)-5 to provide 
additional clarification on how repurchase and indemnification demands 
by the GSEs and agencies may affect the qualified mortgage status of a 
loan. The proposed comment did not amend the meaning of the current 
rule but clarified how a determination of the qualified mortgage status 
of a loan should be understood in relation to claims that the loan was 
not eligible for purchase, insurance, or guarantee and therefore not a 
qualified mortgage. In making the proposal, the Bureau understood that 
facts upon which eligibility status was determined at or before 
consummation could later be found to be incorrect. Often, a repurchase 
or indemnification demand by a GSE or an agency involves such issues. 
However, the mere occurrence of a GSE or agency demand that a creditor 
repurchase a loan or indemnify the agency for an insurance claim does 
not necessarily mean that the loan is not a qualified mortgage.
    Proposed comment 43(e)(4)-5 would have provided that a repurchase 
or indemnification demand by the GSEs, HUD, VA, USDA, or RHS is not 
dispositive in ascertaining qualified mortgage status. Much as 
qualified mortgage status under the general definition in Sec.  
1026.43(e)(2) may typically turn on whether the consumer's debt-to-
income ratio at the time of consummation was equal to or less than 43 
percent, qualified mortgage status under Sec.  1026.43(e)(4) may 
typically turn on whether the loan was eligible for purchase, 
guarantee, or

[[Page 44702]]

insurance at the time of consummation. Thus, for example, a demand for 
repurchase or indemnification based on post-consummation GSE or agency 
requirements would therefore not be relevant to qualified mortgage 
status. As indicated above, such factors meet the wholly unrelated to 
ability to repay standard that the Bureau is finalizing in Sec.  
1026.43(e)(4). Only reasons for a repurchase or indemnification demand 
that specifically apply to the qualified mortgage status of the loan 
under Sec.  1026.43(e)(4) would be relevant, as discussed above in 
connection with comment 43(e)(4)-4. Moreover, the mere fact that a 
demand has been made, or even resolved, between a creditor and GSE or 
agency is not dispositive with regard to eligibility for purposes of 
Sec.  1026.43(e)(4), as those parties are involved in an ongoing 
business relationship rather than an adjudicatory process. However, 
evidence of whether a particular loan satisfied the Sec.  1026.43(e)(4) 
eligibility criteria at consummation may be brought to light in the 
course of dealings over a particular demand, depending on the facts and 
circumstances. Such evidence--like any evidence discovered after 
consummation that relates to the facts as of the time of consummation--
may be relevant in assessing whether a particular loan is a qualified 
mortgage.
    To clarify this point further, proposed comment 43(e)(4)-5 included 
two examples of relevant evidence discovered after consummation. In the 
first example, one would assume that a loan's eligibility for purchase 
was based in part on the consumer's employment income of $50,000 per 
year. The creditor uses the income figure in obtaining an approve/
eligible recommendation from DU. A quality control review, however, 
later determines that the documentation provided and verified by the 
creditor to comply with Fannie Mae requirements did not support the 
reported income of $50,000 per year. As a result, Fannie Mae demands 
that the creditor repurchase the loan. Assume that the quality control 
review is accurate, and that DU would not have issued an approve/
eligible recommendation if it had been provided the accurate income 
figure. The Bureau believed that, given the facts and circumstances of 
this example, the DU determination at the time of consummation was 
invalid because it was based on inaccurate information provided by the 
creditor; therefore, the loan was never a qualified mortgage.
    For the second example, one would assume that a creditor delivered 
a loan, which the creditor determined was a qualified mortgage at the 
time of consummation, to Fannie Mae for inclusion in a particular To-
Be-Announced Mortgage Backed Security (MBS) pool of loans. The data 
submitted by the creditor at the time of loan delivery indicated that 
the various loan terms met the product type, weighted-average coupon, 
weighted-average maturity, and other MBS pooling criteria, and MBS 
issuance disclosures to investors reflected this loan data. However, 
after delivery and MBS issuance, a quality control review determines 
that the loan violates the pooling criteria. The loan still meets 
eligibility requirements for other Fannie Mae products and loan terms. 
Fannie Mae, however, requires the creditor to repurchase the loan due 
to the violation of MBS pooling requirements. Assume that the quality 
control review determination is accurate. The reason the creditor 
repurchases this loan would not be relevant to the loan's qualified 
mortgage status. The loan still meets other Fannie Mae eligibility 
requirements and therefore remains a qualified mortgage based on these 
facts and circumstances.
    The Bureau invited comment on proposed comment 43(e)(4)-5 in 
general. The Bureau also solicited comment on whether additional 
examples or other particular situations should be provided or whether 
alternatives for eligibility other than relationship to ability-to-
repay standards should be adopted that would determine the qualified 
mortgage status of a loan.
Comments
    One consumer group and nonprofit lender commented on the 
explanation of how repurchase and indemnification demands should be 
understood in relation to QM status, stating support for the Bureau's 
rule but requesting more fully developed guidance on the issue.
    Industry commenters overwhelmingly supported the addition of 
comment 43(e)(4)-5, but also had various suggestions for changes. One 
industry commenter, along with one of the GSEs, stated that the first 
example given, in which an accurate determination that the creditor-
reported income did not support QM status meant that QM status was 
invalid, appeared to suggest that the repurchase demand was indeed 
dispositive. A trade association asked that the Bureau not include as 
``loans for which repurchase or indemnification demand has been made'' 
those loans that are not eventually repurchased or indemnified.
    Both GSEs commented on this guidance, and both supported the 
addition of comment 43(e)(4)-5. One GSE also suggested that the Bureau 
should delete the examples given because they would cause confusion. 
One also requested that the Bureau make clear that even if QM status 
under Sec.  1026.43(e)(4) is invalidated, the loan may still have 
qualified for QM status under another provision.
Final Rule
    Comment 43(e)(4)-5 is adopted as proposed, with two small edits to 
make clear that only QM status under Sec.  1026.43(e)(4) is being 
discussed in the examples and that in the second example the critical 
fact is that the loan still meets Fannie Mae's eligibility 
requirements.
    Regarding the first example in the comment, it is not the 
repurchase demand nor the quality control review that is dispositive as 
to QM status, but the fact that the finding that the income figure is 
unsupported by the documentation is stated to be ``accurate.'' The 
example is a hypothetical, and assuming the accuracy of an issue that 
would normally have to be established through an investigation of the 
facts and circumstances of the transaction allows for better 
explanation of how the rule works. As for the issue of what should be 
considered a repurchase or indemnification demand, the question is 
irrelevant to QM status. Repurchase or indemnification demands are 
potentially relevant to QM status only because they may indicate or 
lead to evidence that a loan did not qualify as a QM at the time of 
consummation. In addition, the Bureau believes that the examples will 
increase clarity for stakeholders, and not cause confusion. 
Accordingly, the Bureau considers the two examples presented as 
providing clear and appropriate guidance on the issue, with the edits 
mentioned above.
Appendix Q to Part 1026--Standards for Determining Monthly Debt and 
Income
Overview
    Under the general definition for qualified mortgages in Sec.  
1026.43(e)(2), a creditor must satisfy the statutory criteria 
restricting certain product features and points and fees on the loan, 
consider and verify certain underwriting requirements that are part of 
the general ability-to-repay standard, and confirm that the consumer 
has a total (or ``back-end'') debt-to-income ratio (DTI) that is less 
than or equal to 43 percent. To determine whether the consumer meets 
the specific DTI requirement, the creditor must calculate the 
consumer's monthly DTI in accordance with appendix Q. The Bureau 
adopted the 43

[[Page 44703]]

percent DTI requirement and other modifications to the statutory 
criteria pursuant to its authorities under TILA section 129C and 
105(a).\52\
---------------------------------------------------------------------------

    \52\ The Bureau notes that the specific 43 percent debt-to-
income requirement applies only to qualified mortgages under Sec.  
1026.43(e)(2). The specific DTI requirement does not apply to loans 
that meet the qualified mortgage definitions in Sec.  1026.43(e)(4), 
(5), (6), or (f), or that are not qualified mortgages and instead 
comply with the general ability-to-repay standard.
---------------------------------------------------------------------------

    Appendix Q, as adopted, contains detailed requirements for 
determining ``debt'' and ``income'' for the purposes of the DTI 
calculation based on the definitions of those terms set forth in HUD 
Handbook 4155.1, Mortgage Credit Analysis for Mortgage Insurance on 
One-to-Four-Unit Mortgage Loans. The standards in the Handbook are used 
by creditors originating residential mortgages insured by the Federal 
Housing Administration (FHA) to determine and verify a consumer's total 
monthly debt and monthly income. For the purposes of appendix Q, the 
Bureau largely codified the Handbook, but modified various portions of 
it to remove standards and references unique to the FHA underwriting 
process.
    In adopting appendix Q in the 2013 ATR Final Rule, the Bureau 
believed that using, to the extent possible, existing HUD/FHA 
underwriting guidelines as the foundation for determining ``debt'' and 
``income'' for DTI purposes would provide creditors with well-
established standards for determining whether a loan is a qualified 
mortgage under Sec.  1026.43(e)(2).
    Following publication of the 2013 ATR Final Rule, the Bureau 
received a number of inquiries from industry stakeholders regarding 
provisions codified in the appendix that they believed had been 
intended to function as flexible standards used by the FHA for 
insurance underwriting purposes, rather than codified as bright-line 
requirements for determining debt and income. Concerns were raised that 
these provisions may be properly suited for the purposes of a holistic 
and qualitative underwriting analysis but are not well-suited to 
function as regulatory requirements that are not subject to 
discretionary variance or waiver on an individual basis. Stakeholders 
also expressed concern that many of these provisions provided little 
clarity or guidance for creditors for compliance purposes. Similarly, 
stakeholders expressed concerns that the broad nature of these 
provisions could undermine the presumption of compliance available to 
creditors who make qualified mortgages and expose them to significant 
litigation risk.
    In response to these concerns, the Bureau included certain proposed 
revisions to appendix Q in its proposed rule to facilitate compliance 
when determining DTI and to further the purposes of the ATR Final Rule. 
The Bureau agreed that certain provisions of appendix Q as adopted were 
not properly suited to function as regulations. The Bureau intended 
appendix Q to serve as a reliable mechanism for creditors to evaluate 
income and debts for the purpose of determining DTI and not as a 
general and flexible underwriting policy for assessing risk (as it is 
used by FHA in the context of insurance). The Bureau also recognized 
that it would not have the same level of discretion regarding the 
application of appendix Q.\53\
---------------------------------------------------------------------------

    \53\ 78 FR 25648.
---------------------------------------------------------------------------

    The Bureau therefore proposed revisions to appendix Q on: (1) 
Stability of income, and the creditor requirement to evaluate the 
probability of the consumer's continued employment; (2) with regard to 
salary, wage, and other forms of consumer income, the creditor 
requirement to determine whether the consumer's income level can 
reasonably be expected to continue; (3) creditor analysis of consumer 
overtime and bonus income; (4) creditor analysis of consumer Social 
Security income; (5) requirements related to the analysis of self-
employed consumer income; (6) requirements related to non-employment 
related consumer income, including creditor analysis of consumer trust 
income; and (7) creditor analysis of rental income.
    The Bureau also proposed other revisions to clarify the application 
of appendix Q, as well as general technical and wording changes 
throughout appendix Q for consistency and clarification, including 
technical changes to conform to the specific purpose that appendix Q 
serves in the 2013 ATR Final Rule, as opposed to the function that the 
HUD Handbook serves for FHA underwriting.
Overview of Comments on Bureau's Appendix Q Proposals
    Commenters, including both industry and consumer commenters, 
generally supported the Bureau's proposed changes to appendix Q. A bank 
for example stated that it appreciated the Bureau's efforts to 
establish clear and reliable standards within appendix Q, and that it 
generally believed the proposed amendments would allow creditors to 
underwrite loans with improved confidence that appendix Q standards 
have been met. A bank trade association stated that it appreciated the 
Bureau's efforts to clarify the ability-to-repay regulations and stated 
that it believed the Bureau's proposals would go a long way in 
improving the final rules. A state credit union association stated that 
it strongly supported the Bureau's proposed changes to appendix Q as 
certain provisions adopted in appendix Q are not suitable to function 
as regulations. A consumer organization stated its support for the 
Bureau's clarifications of appendix Q but also suggested the need for 
further clarifications. Most commenters suggested additional 
clarifications to appendix Q, some specific to the Bureau's proposals, 
and some beyond the Bureau's specific proposals--including general 
revisions.
Response to General Comments on Appendix Q
    The Bureau appreciates the comments received on its appendix Q 
proposals. The Bureau believes that the proposals as adopted in this 
final rule will further the purpose and intent of appendix Q by 
establishing clearer requirements for assessing the debt and income of 
consumers, while at the same time facilitating creditor compliance and 
access to credit for consumers. The comments received generally support 
the Bureau's view.
I. CONSUMER ELIGIBILITY
A. Section I.A. Stability of Income
The Proposal
    The Bureau proposed revising the criteria in appendix Q for 
determining whether a consumer's income is ``stable'' for the purposes 
of DTI.
    Appendix Q as adopted required in section I.A.3.a that creditors 
evaluate the ``probability of continued employment'' by analyzing, 
among other things, (1) the consumer's past employment record; (2) the 
consumer's qualification for the position; (3) the consumer's previous 
training and education; and (4) the employer's confirmation of 
continued employment. Stakeholders had raised concerns that, beyond 
analysis of a consumer's past employment record and current employment 
status, each of these requirements was incompatible with appendix Q's 
purpose of providing clear rules for determining debt and income, and 
was likely to result in compliance difficulty and significant exposure 
to litigation risk for creditors attempting to avoid such risk by 
originating qualified mortgages and thereby taking advantage of the 
presumption of compliance. Stakeholders, for example, indicated

[[Page 44704]]

that many employers were likely to be unwilling for various reasons 
(including but not limited to economic uncertainty) to confirm that a 
consumer's employment will continue into the future, and similarly 
creditors may be unqualified to evaluate a consumer's education, 
training, and job qualifications.
    In response to these concerns, the Bureau proposed to amend 
appendix Q in section I.A.3.a to eliminate the requirements that 
creditors determine the ``probability of continued employment'' by 
considering a consumer's ``qualifications for the position'' and 
``previous training and education.'' The Bureau proposed instead to 
amend the section to require creditors to examine a consumer's past and 
current employment. The Bureau also proposed to remove the requirement 
that creditors obtain the ``employer's confirmation of continued 
employment'' and instead require only that the creditor examine the 
``employer's confirmation of current, ongoing employment status.'' The 
Bureau believed that requirements for a creditor to evaluate a 
consumer's training, education, and qualifications for his or her 
position are not well-suited to function as regulations designed to 
enable creditors to determine debts and income and in turn calculate 
DTI, and may increase exposure to litigation risk. Specifically, the 
Bureau indicated that it was not entirely clear what creditors would 
need to do in order to comply with these requirements, or how those 
determinations would affect a consumer's income for the purpose of 
calculating DTI.
    The Bureau also stated its belief that requiring creditors to 
obtain an employer's confirmation of the consumer's continued 
employment would not function properly as a regulatory requirement 
because employers likely would be unwilling to provide any confirmation 
of employment continuing beyond current, ongoing employment. The Bureau 
pointed out that without the benefit of waiver or variance, such a 
requirement could serve to disqualify any such consumer's employment 
income from being included in the DTI calculation--which would 
frustrate access to credit.
    The Bureau stated further that a confirmation of current, ongoing 
employment status is adequate to verify employment for purposes of 
determining income. To that end, the Bureau also proposed for 
clarification purposes a proposed note to section I.A.3 that states 
creditors may assume that employment is ongoing if a consumer's 
employer verifies current employment and does not indicate that 
employment has been, or is set to be terminated. The proposed note made 
clear, however, that creditors should not rely upon a verification of 
current employment that includes an affirmative statement that the 
employment is likely to cease, such as a statement that indicates the 
employee has given (or been given) notice of employment suspension or 
termination.
    Finally, the Bureau also proposed several other technical, non-
substantive changes to section I.A for clarification purposes.
Comments
    Commenters, primarily from industry, who submitted comments 
concerning the Bureau's proposed changes to section I.A.3 were 
generally supportive of those changes although some clarification or 
additional guidance was suggested by several.
    Several bank trade associations and a bank, in expressing support 
for the changes, noted that: (1) While it is reasonable to require an 
examination of current employment, provisions which require a creditor 
to speculate or predict future employment are problematic; (2) 
creditors should not be asked to second guess employer hiring decisions 
or be expert in establishing qualifications for positions; (3) the 
eliminated criteria could have a negative impact on consumers with ``on 
the job'' education; and (4) employers will not discuss certainty of 
continued employment for fear that it could create a new employment 
contract for at-will employees. These commenters also suggested that 
the Bureau provide guidance that verbal confirmation would satisfy the 
requirement that the creditor examine the employer's confirmation of 
the consumer's ``current, ongoing employment status'' as provided in 
I.A.3.a as proposed by the Bureau.
    A state banking association commenter, in expressing support for 
the Bureau's proposal to replace the section I.A.3.a requirement that 
the creditor obtain an employer's ``confirmation of continued 
employment'' for an applicant with a requirement to ``confirm current, 
ongoing employment,'' requested that the Bureau provide additional 
clarification for instances in which employment is inherently dependent 
on contingencies outside the employee's or employer's control--such as 
applicants whose salaries are funded through ongoing grants, agency 
funded positions at a nonprofit organization or federal work programs, 
or applicants who are political appointees. A national banking 
association commenter requested similar clarification noting that 
flexibility is required to ensure that all populations are adequately 
served.
    One commenter, a manufactured housing lender, with regard to the 
Bureau's proposed note amending section I.A.3.a, stated that the Bureau 
should make clear that the creditor has no obligation to inquire--
either in writing or verbally--as to the employee's job performance 
and/or whether any suspension or termination is imminent.
    A credit union commenter that indicated that it serves the 
education community stated, in referring to the Bureau's proposed note 
amending I.A.3.a, that the employment of many of its members who are 
teachers, professors and other educators is established by year-to-year 
contracts that generally include a termination date. The commenter 
noted that these contracts are generally renewable and negotiated 
through the teacher's association or other union representation. The 
commenter stated that the Bureau's proposed note would likely preclude 
it from relying upon a copy of a member's contract as evidence of 
stability of income since if the contract included a termination date 
the commenter would be unable to assume that the member's employment is 
``ongoing.'' The commenter suggested the proposed note be expanded to 
consider fields of employment that may be viewed as ``seasonal'' or 
industries where employment is established by contract, such as the 
education community, so that a creditor could also examine past and 
current employment as part of its analysis of the stability of income.
    The manufactured housing lender commenter also suggested that if 
the Bureau adopted its proposal to amend section I.A.3.a to eliminate 
the obligation of creditors to predict a consumer's likelihood of 
continued employment, that it remove existing section I.A.3.b. Section 
I.A.3.b provides that ``creditors may favorably consider the stability 
of a consumer's income if he/she changes jobs frequently within the 
same line of work, but continues to advance in income or benefits. In 
this analysis, income stability takes precedence over job stability.'' 
The commenter stated that this section existed as a caveat to the 
obligation of creditors to predict a consumer's future employment or 
advancement, and with the elimination of that requirement it is no 
longer necessary.

[[Page 44705]]

Final Rule
    The Bureau is adopting the revisions to section I.A.3 as proposed. 
The Bureau agrees with commenters that elimination of the requirements 
that the creditor: (1) examine the consumer's qualifications for the 
position, previous training and education; and (2) examine the 
employer's confirmation of the consumer's continued employment--will 
provide clearer and more appropriate standards for creditors under 
appendix Q, and facilitate compliance with the Bureau's ATR Final Rule.
    With regard to the comment suggesting that the Bureau amend its 
proposed note in section I.A.3.a to expand it to consider industries 
where employment is established by contract, including the education 
community, the Bureau appreciates the comment and recognizes the 
special circumstances confronted by contract employees. The Bureau 
believes, however, that additional revisions to section I.A.3.a are not 
necessary given the existing provisions of appendix Q with regard to 
the treatment of seasonal employment and income. That language, at 
sections I.A.2.b and I.B.5, provides the means for creditor assessment 
of the employment and stability of income of contract employees for 
purposes of appendix Q.\54\
---------------------------------------------------------------------------

    \54\ The Bureau notes that Section II.E.4, Projected Income for 
New Job, provides the means for creditor assessment of projected 
income where such income does not already satisfy the requirements 
of Section I.
---------------------------------------------------------------------------

    With regard to the comment requesting that the Bureau clarify that 
the creditor has no obligation to inquire about a consumer's job 
performance and/or whether any suspension or termination is imminent, 
the Bureau's revisions to I.A.3.a do not require creditors to 
affirmatively make such inquiries. That section, as revised, only 
provides that a creditor cannot rely on a verification of current 
employment if it includes an affirmative statement that employment is 
likely to cease.
    Concerning the comment requesting that the Bureau provide guidance 
to explicitly allow verbal confirmation by employers of the consumer's 
current, ongoing employment status, the Bureau would like to review 
this request further to ensure that such guidance would be consistent 
with the purposes of appendix Q and the ATR Final Rule. Similarly, with 
regard to the comment requesting clarification that a creditor's 
obligation to only consider a consumer's past and current and ongoing 
(and not continual) employment as proposed by the Bureau includes 
employment in contingent situations outside of the employee's or 
employer's control, the Bureau plans to review this issue further to 
determine whether such clarification to the existing appendix Q 
requirements is necessary, and how any such clarification would be 
framed. As discussed above, the Bureau believes appendix Q provides 
creditors with the ability to assess the employment and stability of 
income of employees generally and contract employees in particular.
    Finally, with regard to the comment recommending the deletion of 
section I.A.3.b as unnecessary with the adoption of the Bureau's 
proposed revisions to section I.A.3.a, the Bureau disagrees, as it 
believes that section I.A.3.b, as amended by the Bureau's proposed 
revisions, has continuing relevance in the determination of the 
stability of the consumer's income. As revised, section I.A.3.a 
requires an examination of the consumer's past employment record and a 
verification of current, ongoing employment status as a method of 
assessing stability of income. Section I.A.3.b provides creditors with 
an additional method of assessing stability of income, and of meeting 
the ability to repay and qualified mortgage requirements, in the 
situation where a consumer changes jobs frequently.
B. Section I.B. Salary, Wage and Other Forms of Income
    Section I.B.1.a of appendix Q, the ``General Policy on Consumer 
Income Analysis,'' as adopted in the ATR Final Rule stated that 
creditors must analyze the income for each consumer who will be 
obligated for the mortgage debt to determine whether his/her income 
level can be reasonably expected to continue ``through at least the 
first three years of the mortgage loan.'' Sections I.B.2 and I.B.3 of 
appendix Q as adopted similarly required that creditors determine 
whether overtime and bonus income ``will likely continue'' and that 
they ``establish and document an earnings trend for overtime and bonus 
income.'' The Bureau received inquiries from industry stakeholders on 
these sections of Appendix Q similar to those received regarding 
section I.A.1, noting, among other things, (1) that these provisions 
codify general, forward-looking standards that are better suited for 
the purposes of a holistic and qualitative underwriting analysis (such 
as the FHA guidelines for determining insurance eligibility) and may 
not function properly as regulations; and (2) because the Bureau may 
not have the flexibility to waive or grant variances on an individual 
basis regarding the application of appendix Q, these provisions will 
undermine the purpose of appendix Q to serve as a reliable mechanism 
for evaluating income and debts for the purpose of determining the 
qualified mortgage status of a loan, and also increase the risk of 
litigation.
    In response to these issues raised by stakeholders, the Bureau 
proposed several amendments to section I.B of appendix Q to explain and 
clarify the criteria for calculating a consumer's employment income and 
to determine whether a consumer's income is continuing for the purposes 
of the DTI calculation.
I.B.1. General Policy on Consumer Income Analysis
The Proposal
    The Bureau proposed to amend section I.B.1.a to require creditors 
to evaluate only whether a consumer's income level would not be 
reasonably expected to continue based on the documentation provided, 
with no three-year requirement. In support of this proposal, the Bureau 
stated its belief that the intended purpose of appendix Q would not be 
served by requiring creditors to predict a consumer's employment status 
up to three years after application. The Bureau stated further that 
creditors should be required to analyze recent and current employment, 
along with any evidence in the applicant's documentation indicating 
whether employment is likely to continue. The Bureau therefore, 
proposed to add a note to section 1.B.1.a to make clear that creditors 
should not assume that a consumer's wage or salary income can be 
reasonably expected to continue if the verification of current 
employment includes an affirmative statement that the employment is 
likely to cease, such as a statement that indicates the employee has 
given (or been given) notice of employment suspension or termination. 
The Bureau stated however, that if the consumer's application and the 
employment confirmation indicate that the consumer is currently 
employed and provide no such indication that employment will cease, the 
Bureau believed, as reflected in the proposed note, that the creditor 
should be able to use that consumer's income without an obligation to 
predict whether or not that consumer will be employed on some future 
date.
Comments
    Various industry participants commented on the Bureau's proposed 
amendments to section 1.B.1.a of appendix Q, and the elimination of the 
3-year requirement. These commenters

[[Page 44706]]

suggested additional clarifications to this section.
    A joint bank trade association and a bank recommended revising 
section 1.B.1.a to require each consumer to disclose to the lender 
whether the consumer has reason to believe that their income level will 
not continue through the first three years of the mortgage. These 
commenters noted that consumers are in the best position to know 
whether they expect to retire, take a leave of absence or otherwise not 
have their income continue for the first three years of the mortgage 
loan, and that lenders have no way to reliably determine this. They 
stated further that questioning consumers about retirement or time off 
to raise children raises potential fair lending issues. They also 
requested guidance on the treatment of statements from consumers such 
as, ``I might retire.''
    Another bank trade association, in commenting on the Bureau's 
proposed elimination of the requirement to analyze whether the 
consumer's income level can reasonably be expected to continue through 
the first three years of the mortgage loan, requested clarification of 
how far into the future creditors must reasonably expect income to 
continue.
    One bank commenter in stating its support for the Bureau's proposed 
changes in sections I.B.1, 2 and 3, stated that it agreed with the 
Bureau that creditors cannot be reasonably expected to evaluate and 
document whether a consumer's income level can be expected to continue 
for a three-year period.
    Various other commenters suggested several other changes to section 
I.B. For example, similar to the joint bank trade association comment 
on I.B.1.a discussed above, several commenters raised possible fair 
lending issues with regard to the section I.B.1 notes, specifically, 
section i, which states that effective income for consumers planning to 
retire during the first three-year period must include documented 
retirement benefits, Social Security payments, and other payments 
expected to be received in retirement. One bank, for example, stated 
that while it supported the existing section i it recommended that, to 
mitigate potential fair lending risks based on age, the Bureau add a 
clarification that creditors should not ask consumers about future 
retirement plans, but should consider documented retirement benefits 
and payments if a consumer disclosed a plan to retire during the first 
three-year period. Another bank commenter similarly requested that the 
Bureau explicitly state, for fair lending reasons, that creditors are 
not expected to ask consumers if they plan to retire. This commenter 
also noted that it would be impracticable if not impossible to get 
documented benefits and payments if the consumer has yet to actually 
receive any retirement income and may not activate the source for up to 
a period of three years. The joint bank trade association commenter 
referred to above suggested adding language to section i of the notes 
indicating that effective income requirements for consumers planning to 
retire only applies to those who disclose such plans. A bank commenter, 
citing existing section ii of the notes, which prohibits creditors from 
asking consumers about possible future maternity leave, suggested, for 
fair lending reasons, that the Bureau add a clarification that 
creditors should not ask consumers about future medical leaves, and a 
joint bank trade association commenter suggested changing the term 
``maternity'' leave to ``medical'' leave in section ii of the notes.
Final Rule
    The Bureau is adopting the revisions to section I.B.1 as proposed. 
The Bureau continues to believe that the requirement in section I.B.1.a 
eliminated by the Bureau's proposal, i.e., that the consumer's income 
must be analyzed to determine whether the consumer's income level can 
be reasonably expected to continue ``through the first three years of 
the mortgage loan,'' does not serve the intended purposes of appendix 
Q. Instead, as proposed, the Bureau revises section I.B.1.a to require 
only that the creditor determine whether a consumer's income level 
``can be reasonably expected to continue.'' New section iii of the 
notes to section I.B.1, adopted by this final rule, provides that 
creditors can assume that the consumer's salary or wage income can be 
reasonably expected to continue if the consumer's employer verifies 
current employment and income and does not indicate that employment has 
been or is set to be terminated. That section states further, however, 
that this assumption cannot be made by the creditor if a verification 
of current employment includes an affirmative statement that the 
consumer's employment is likely to cease--such as a statement that the 
consumer has given or been given notice of employment suspension or 
termination. The Bureau believes that, as revised by this final rule, 
section I.B.1 effectively sets out the analysis required of the 
creditor for assessing the continuance of consumer salary and wage 
income, and is consistent with the purposes of appendix Q.
    With regard to the commenter that requested clarification to 
appendix Q on how far into the future creditors must reasonably expect 
a consumer's income to continue, the Bureau believes that section 
I.B.1.a, as revised by the Bureau, effectively sets out the standard 
needed to be followed by creditors. As stated in new section iii of the 
notes, creditors can ``assume that salary or wage income . . . can be 
reasonably expected to continue if the consumer's employer verifies 
current employment and income and does not indicate that employment has 
been or is set to be terminated.'' That section, as revised by the 
Bureau, does not require creditors to make a determination that the 
consumer's income will continue through the first three years of the 
mortgage loan, or any other specified period.
    The Bureau appreciates the recommendations from some commenters 
that section I.B.1 be amended to require consumers to disclose whether 
they have reason to believe their income level will not continue as the 
consumer is in the best position to know their future employment and 
income status. However, section I.B.1 already provides that creditors 
may assume that the consumer's salary or wage income can be reasonably 
expected to continue if the consumer's employer verifies current 
employment and income and does not indicate that employment has been, 
or is set to be terminated. Where no such appropriate verification is 
provided, the creditor must analyze the consumer's income and determine 
whether the consumer's income level can be reasonably expected to 
continue. In such cases, the Bureau believes that further analysis 
should be required of creditors, and that, as revised, section I.B 
provides creditors with an effective regulatory framework for carrying 
out that analysis.
    With regard to the fair lending concerns raised by some commenters 
regarding questions presented to consumers relating to future 
retirement plans, the Bureau agrees that the final rule and appendix Q 
do not obligate creditors to ask consumers when they expect to retire. 
If, however, a consumer discloses a plan to retire during the first 
three-year period by making an affirmative statement of such plans, 
creditors should consider documented retirement benefits, Social 
Security payments, and other payments expected to be received in 
retirement. The Bureau similarly believes that the ATR Final Rule and 
appendix Q do not require

[[Page 44707]]

creditors to ask whether a consumer may, in the future, take medical 
leave. The Bureau does not believe it is necessary, however, to amend 
appendix Q with specific statements in that regard. In all cases, the 
Bureau expects creditors to fully comply with all applicable fair 
lending laws.
I.B.2. Overtime and Bonus Income.
The Proposal
    The Bureau also proposed changes to section 1.B.2 regarding 
overtime and bonus income.\55\ Specifically, the Bureau proposed to 
eliminate the requirement in section I.B.2.a that creditors determine 
whether such income ``will continue.'' Instead, the proposal would have 
amended section I.B.2.a. to provide that creditors must focus on 
evaluating the consumer's documented overtime and bonus income history 
for the past two years and any submitted documentation indicating 
whether the income likely will cease. In proposing this change the 
Bureau stated that it recognized that overtime and bonus income may 
vary from year to year and generally may be less reliable than salary 
but noted that, in certain occupations, overtime and bonus income may 
be an integral and reliable component of the consumer's income. The 
Bureau stated further that while it believed that creditors must 
confirm that overtime and bonus income is not anomalous, the 
requirement to analyze the consumer's two-year overtime and bonus 
income history, and to verify that the submitted documentation does not 
indicate overtime or bonus income will cease, would adequately address 
this concern while satisfying the purposes of the qualified mortgage 
provision.
---------------------------------------------------------------------------

    \55\ The Bureau's proposed rule preamble at 78 FR 25650 also 
briefly referred to Bureau changes to section I.B.3. However, this 
was a typographical error and no Bureau changes were proposed to 
section I.B.3.
---------------------------------------------------------------------------

Comments
    Several industry commenters, including several banks, a joint trade 
association, several state bank associations, and a state credit union 
association provided comments specific to the Bureau's proposed change 
to section I.B.2.a. These commenters generally supported the Bureau's 
proposed changes. Some of these commenters suggested additional changes 
to sections I.B.2 and I.B.3.
    A bank commenter, in stating support for the Bureau's proposed 
change eliminating language requiring creditors to determine whether 
overtime and bonus income will continue, and substituting language 
focusing on a two-year income history, commented that the change would 
facilitate better access to credit for consumers who rely on overtime 
and bonus income. Two state bank associations similarly expressed 
support for the Bureau's proposed change, with one stating that while 
most employers are not willing to indicate bonus income is likely to 
continue, they are willing to affirm such bonus payments were paid and 
if they have ceased to exist. This second bank association commenter 
stated further that in the absence of confirmation from the employer 
that a bonus program or overtime is no longer available to an employee, 
past history is an excellent predictive tool. Another bank commenter, 
in stating that the Bureau's analysis supporting its proposed change to 
I.B.2.a on overtime and bonus income was sound, recommended that the 
formulation for assessing overtime and bonus income in that section be 
applied to other parts of appendix Q, on different types of income.
    A state credit union association commenter stated that while the 
Bureau's proposed change to section I.B.2.a is adequate to satisfy the 
qualified mortgage provision, there are still concerns from credit 
unions that warrant further guidance. Specifically, this commenter 
requested that the Bureau provide examples of documentation and/or 
further clarification to assist in determining whether bonus and 
overtime income is anomalous.
    A joint trade association commenter suggested revisions to section 
I.B.2.a to provide that overtime and bonus income can be used if the 
consumer has received the income for the past two years and there is no 
evidence in the loan file that it will not continue. In support of this 
revision, the commenter stated that the lender should not be in a 
position to determine that the income will or will not continue. The 
commenter further stated that the two-year history should satisfy this 
element on its own absent evidence to the contrary.
    A credit union commenter stated that in some lines of work such as 
nursing, overtime is a standard component of the overall compensation 
plan. It stated further that the requirement in section I.B.2.a, as 
revised by the Bureau's proposal, to document and evaluate at least two 
years of overtime income, could adversely impact certain consumers who 
are new to their field or recently hired and do not yet have two years 
of overtime history. The commenter urged the Bureau to reconsider the 
impact on nurses, firefighters and law enforcement personnel who are 
just beginning their careers, and to make appropriate adjustments to 
the proposed revision.
    A mortgage lender specializing in the financing of manufactured 
housing commented on section I.B.2.b, which, in addition to requiring 
creditors to develop an average of bonus and overtime income for the 
past two years, states that ``periods of overtime and bonus income less 
than two years may be acceptable provided the creditor can justify and 
document in writing the reason for using the income for qualifying 
purposes'' (emphasis added). This commenter stated that without clear 
direction and guidance from the Bureau as to what justification and 
documentation would suffice in these instances, lenders will instead 
choose to exclude this income rather than face regulatory scrutiny and 
a potential lawsuit for choosing to include the income. A joint trade 
association commenter suggested several technical edits to I.B.2.b.
    Several industry commenters provided comments on section I.B.3. 
Section I.B.3.a requires a creditor to establish and document an 
earnings trend for overtime and bonus income and, if either type of 
income shows a continual decline, to document in writing a sound 
rationalization for including the income when qualifying the consumer. 
Section I.B.3.b provides that a period of more than two years must be 
used in calculating the average overtime and bonus income if the income 
varies significantly from year to year.
    With regard to section I.B.3, a joint trade association commenter 
suggested removing and reformatting this section as part of a new 
I.B.2.c and I.B.2.d to provide that eligible bonus or overtime income 
be calculated as the lesser of the current year or the average of the 
previous two years, as long as there is no evidence in the loan file 
that the income will not continue, and the creditor documents in 
writing a sound rationalization for including the income. This 
commenter noted that income from bonuses and overtime, commissions and 
self-employment can be variable and susceptible to significant declines 
from circumstances within and outside of the control of the consumer. 
The commenter stated that the revisions it was proposing to this 
section and others in appendix Q would provide a new and simple 
qualitative test for determining the amount of income to include in the 
DTI analysis. The commenter stated that the test would require lenders 
to use the lesser amount of the average of two

[[Page 44708]]

year's past income or the most recent year's earnings.
    With specific regard to section I.B.3.b, which states that `a 
period of more than two years must be used in calculating the average 
overtime and bonus income if the income varies significantly from year 
to year,'' this joint trade association commenter stated that the word 
``significantly'' in that section is too vague for a legal standard and 
will invite litigation. It stated further that lenders should only use 
the most recent income, not the average, for declining income and 
provide a rationale for the inclusion of the income. A bank similarly 
commented on section I.B.3.b, that as the term ``varies significantly'' 
in that section is not defined that the requirement in that section 
that a period of more than two years must be used in calculating the 
average overtime and bonus income either be eliminated or clarified.
Final Rule
    The Bureau is adopting the revisions to section I.B.2 regarding 
overtime and bonus income as proposed. The Bureau believes that the 
revisions proposed to section I.B.2.a, eliminating language requiring 
creditors to determine whether overtime and bonus income will continue, 
and substituting language that states that such income can be used if 
the consumer has received it for the past two years and documentation 
submitted for the loan does not indicate this income will likely cease, 
will facilitate creditor compliance and, as stated by a commenter, 
better access to credit for consumers who are dependent upon overtime 
and bonus income. At the same time the Bureau believes that the changes 
to this section otherwise further the purpose and intent of appendix Q 
and the qualified mortgage provision through clear requirements for a 
creditor assessment of the consumer's receipt of the overtime or bonus 
income for the previous two years, and a review of the loan 
documentation for indications that the income will likely cease. As 
some commenters noted, employers may not be willing to indicate if 
bonus income, for example, is likely to continue, and in the absence of 
employer confirmation, past history can be used as a predictive tool.
    With regard to other proposed changes to section I.B.2.a raised by 
commenters, such as a suggestion to substitute language that there is 
no evidence in the loan file that the overtime or bonus income will not 
continue, or possible changes to address the potential impact of the 
two-year requirement on new employees who depend on overtime or bonus 
income, the Bureau believes that the Bureau's revisions strike the 
right balance between facilitating compliance and ensuring an adequate 
assessment of consumer income for purposes of the DTI and the ATR 
requirements. For example, as revised by this final rule, section 
I.B.2.a provides that bonus or overtime income may be used if the 
documentation in the loan file does not indicate that the consumer's 
overtime or bonus income ``will likely cease,'' which is very similar 
to the language suggested by the commenter. To the extent that the 
commenter's proposed language would have a different effect, the Bureau 
believes that the final rule's approach provides clear, objective 
guidance to creditors that is consistent with the analysis required by 
the rest of appendix Q. As for the potential impact of the two-year 
requirement on new employees, the Bureau believes that current section 
I.B.2.b, as discussed further below, provides creditors with the 
ability to assess the overtime and bonus income of new employees.
    As for comments on sections beyond the Bureau's specific proposed 
changes to section I.B.2.a, for example with regard to sections I.B.2.b 
and I.B.3, the Bureau does not believe any changes to those sections 
are warranted at this time. With regard to section I.B.2.b for example, 
the Bureau believes that section provides flexibility for creditors to 
justify and properly document the use of a period of overtime and bonus 
income of less than two years. The other requirements of section 
I.B.2.a (that documentation submitted for the loan does not indicate 
the overtime or bonus income will likely cease) and section I.B.3.a 
will continue to apply to the income analysis of the consumer. With 
regard to the comments on section I.B.3, suggesting a removal of that 
section and a reformatting into a new test in section I.B.2.c. for 
determining the amount of income to include in the DTI analysis, the 
Bureau appreciates the comment but believes that sections I.B.2, as 
amended by this final rule, and I.B.3, provide for a required income 
analysis consistent with the purposes and intent of appendix Q. 
Regarding the comments on section I.B.3.b, the Bureau will continue to 
review this section to determine if further clarification is needed 
with regard to a creditor determination of whether overtime or bonus 
income ``varies significantly,'' but is not making any changes at this 
time. The Bureau needs additional information in order to fully assess 
whether this standard requires additional clarification for creditors 
in making the necessary appendix Q determinations, and whether possible 
alternative standards would be adequate.
I.B.11. Social Security Income
The Proposal
    The Bureau proposed several clarifications to the provisions in 
section I.B.11 of appendix Q as adopted, explaining how to account for 
Social Security income.
    Section I.B.11 as adopted by the ATR Final Rule required that (1) 
Social Security income either be verified by the Social Security 
Administration (SSA) or through Federal tax returns; (2) the creditor 
obtain a complete copy of the current awards letter; and (3) the 
creditor obtain proof of continuation of payments, given that not all 
Social Security income is for retirement-aged recipients. The Bureau 
proposed to amend section I.B.11 to remove the mention of Federal tax 
returns and instead require only that creditors obtain a benefit 
verification letter issued by the SSA. In support of this change the 
Bureau stated its belief that a Social Security benefit verification 
letter would provide easily accessible proof of the receipt of Social 
Security benefits and their continuance.
    The Bureau also proposed to clarify in section I.B.11 that a 
creditor shall assume a benefit is ongoing and will not expire within 
three years absent evidence of expiration. The Bureau stated, in 
support of this change, its belief that this would provide a more 
workable and accurate standard for verification of Social Security 
income.
Comments
    Several banks, national and state banking trade associations, a 
state credit union, and a consumer group submitted comments on the 
Bureau's proposal to amend section I.B.11 to remove the reference to 
Federal tax returns and to require creditors to obtain a benefit 
verification letter. Most industry commenters saw the change as 
reducing compliance flexibility, and the consumer group requested 
further changes to protect against falsification of income.
    With regard to the industry commenters, a bank trade association 
stated that it could find no justification for what it saw as 
eliminating the flexibility of allowing the use of Federal tax returns 
in the current rule. It stated that while it agreed with the Bureau's 
explanation for the change, i.e., that a Social Security benefit 
verification letter would more easily provide proof of the receipt of 
Social Security benefits and their continuance, the explanation did

[[Page 44709]]

not provide a reason to eliminate the Federal tax return option. A bank 
commenter requested that I.B.11 be revised to permit Federal tax 
returns or other alternative documentation that verifies receipt of 
Social Security Income. A state banking association commented that in 
many cases applicants have lost or misplaced their award letters but 
that they can easily document and verify Social Security income through 
Federal tax returns and/or monthly bank statements. Another state 
banking association stated that the Federal tax return option would 
facilitate compliance. A state credit union commented that it was 
concerned that limiting verification to a benefit verification letter 
could facilitate discrimination. Another state credit union trade 
association, in stating its concern about the supposed elimination of 
the Federal tax return option, stated that it could delay the lending 
process as a result of consumers who cannot locate their Social 
Security benefit verification letter and who therefore need to request 
a copy from the SSA, resulting in a potential increased workload for 
the SSA. A credit union commenter, in recommending the Federal tax 
return option, stated that sole reliance on the Social Security benefit 
verification letter could pose a potential risk of fraud through a 
modification of the letter by the recipient before it is received by 
the lending institution.
    One bank commenter stated that it supported the Bureau's proposal 
to require creditors to obtain a Social Security benefit verification 
letter to verify Social Security income, but recommended the adoption 
of language acknowledging that creditors may obtain federal tax returns 
in addition to verification letters. This commenter noted that tax 
returns may be useful to creditors to determine an applicable tax rate 
used to gross up non-taxable Social Security income, and that they may 
be needed to verify income received other than from Social Security. 
This commenter also stated its support for the Bureau's proposed 
clarification providing that Social Security income shall be assumed 
not to expire within three years, absent evidence of expiration, 
stating that it would reduce potential barriers to accessing credit for 
Social Security income recipients, while providing creditors clear 
guidance to mitigate fair lending risk.
    A consumer group commenter stated that so long as the documentation 
requirements for Social Security income require that the Social 
Security benefit verification letter come directly from the SSA, this 
documentation is sufficient. It noted, however, that if the 
verification letter is delivered to the lender through a broker or 
originator working for the lender, this is not sufficient documentation 
as it may become a vehicle for falsification of income. The commenter 
therefore recommended that section I.B.11 be revised to require 
creditors to use either tax returns or bank statements showing the 
deposit of benefits into the bank account, in addition to requiring a 
verification letter--where the verification letter cannot be obtained 
directly from the government payor. The commenter noted that the 
additional information will provide more substantial verification in a 
form that is still readily available to applicants. It concluded on 
this point that this approach will ensure that homeowners have easy 
access to needed income documentation without providing a means for 
public benefit documentation to be used to inflate income on a loan. 
This commenter also suggested, referring to section ii of the notes to 
section I.B.11 (which allows some portion of Social Security income to 
be ``grossed up'' if deemed non-taxable by the IRS), that the Bureau 
should specify that grossing up of Social Security benefits should be 
done based on a tax bracket that is appropriate for the income 
received. It stated further on this point that the language currently 
in I.B.11 will lead to and support the existing practice of grossing up 
that allows, rather than prevents, many unaffordable loans, as many 
homeowners who receive Social Security benefits have their income 
grossed up to the top tax bracket.
Final Rule
    The Bureau is adopting the revisions to section I.B.11 as proposed. 
The Bureau believes that the Social Security benefit verification 
letter provides the best method of verifying receipt of Social Security 
income by the consumer and its continuance. The Bureau understands the 
concerns expressed by various industry commenters regarding the 
potential limitation on compliance flexibility resulting from the 
removal of the supposed option to verify Social Security income through 
Federal tax returns. The Bureau notes, however, that section I.B.11 as 
adopted in the 2013 ATR Final Rule required, in addition to income 
verification by the SSA or Federal tax returns, a complete copy of the 
current awards letter, and documented continuation of payments. The 
proposed revisions to section I.B.11 simplify these requirements by 
providing that one document--the Social Security benefit verification 
letter--satisfies all needs for documentation. A Federal tax return is 
of less value in demonstrating a consumer's continued receipt of Social 
Security income and would not be available for consumers who only 
recently began to receive Social Security benefits. Section I.B.11 as 
revised by the final rule specifically provides that if the Social 
Security benefit verification letter does not indicate a defined 
expiration date within three years of loan origination, the creditor 
must consider the income effective and likely to continue. The 
consumer's bank statements, suggested by some commenters as an 
alternative means to verify income, also are of less value in 
demonstrating continuance of receipt. The Bureau notes moreover that 
continuing to require the Social Security benefits letter to verify 
that such benefits are not likely to cease parallels the general 
requirement of employer verification of current, ongoing employment.
    As far as the concern expressed by a commenter that the Social 
Security benefit verification letter could become a vehicle for 
falsification of income if not required to be received directly from 
the government payor--and in which case it was suggested that tax 
returns or bank statements be required as additional verification--the 
Bureau believes that effective due diligence by creditors will limit 
such a possibility. The Bureau expects that creditors will exercise the 
same due diligence against fraud with regard to their review of Social 
Security benefit verification letters that they apply in their review 
of any mortgage loan related documents submitted to them. With regard 
to the comments received expressing concern about consumers who are 
unable to locate their Social Security Benefit verification letters, it 
is the Bureau's understanding that benefit verification letters may be 
requested on-line or over the phone toll-free from the SSA or from a 
local SSA office.
    Finally, with regard to the comment requesting that the Bureau put 
limitations on the grossing up of Social Security benefits (as 
permitted under section I.B.11 in some instances), the Bureau is not 
addressing that issue at this time, as this requires further review and 
consideration. Other commenters made suggestions for changes with 
regard to section II.E, Non-Taxable and Projected Income, and the 
gross-up rate allowed for non-taxable income generally (discussed later 
in this preamble) which, in addition to Social Security income, 
includes Federal government employee retirement income, State 
government retirement income, military allowances, as well as

[[Page 44710]]

other types of income. The Bureau needs additional time to fully 
consider and evaluate the implications of these comments, including 
those specifically related to Social Security income, to ensure 
consistency with and furtherance of the purposes of appendix Q.
C. Section I.D. General Information on Self-Employed Consumers and 
Income Analysis
The Proposal
    Section I.D of appendix Q, as adopted, permitted income from self-
employed consumers to be considered income for the purposes of the DTI 
calculation if certain criteria were met, including various 
documentation requirements and analysis of the financial strength of 
the consumer's business. The documentation requirements in section 
I.D.4 included the requirement to provide a ``business credit report 
for corporations and `S' corporations.'' The analysis of the financial 
strength of the business in section I.D.6 required that the creditor 
carefully analyze the ``source of the business's income'' and the 
``general economic outlook of similar businesses in the area.'' 
Following the publication of appendix Q the Bureau received inquiries 
from stakeholders concerning these requirements and also noted 
compliance difficulties and increased risk of litigation that could 
arise from them. Industry raised specific concerns that business credit 
reports can be expensive and difficult to obtain, and that a 
requirement to assess economic conditions for geographic areas can be 
both costly and difficult, as well as imprecise.
    The Bureau proposed to make several amendments to these income 
stability requirements for self-employed consumers. The Bureau's first 
proposed amendment eliminated the requirement in current section I.D.4 
that self-employed consumers provide a business credit report for 
corporations and ``S'' corporations. In proposing this amendment the 
Bureau stated that it recognized that business credit reports for many 
smaller businesses can be difficult or very expensive to obtain. The 
Bureau also stated its belief that while these reports may provide some 
valuable information for the purposes of an underwriting analysis, they 
are less suited to function as a requirement to determine income for 
self-employed consumers.
    The Bureau's second proposed amendment eliminated two requirements 
under the requirement to analyze a business's financial strength in 
section I.D.6. Section I.D.6, as adopted, required creditors (1) to 
evaluate the sources of the business's income and (2) to evaluate the 
general economic outlook for similar businesses in the area. In 
proposing this amendment the Bureau stated its belief that both of 
these requirements demand that the creditor engage in complex analysis 
without providing clarity concerning what types of evaluations are 
satisfactory for the purpose of complying with the rule. The Bureau 
also stated that such a provision is better suited to function as part 
of an underwriting analysis subject to waiver, variance, and guidance 
rather than a regulatory rule.
    The Bureau's proposal also made technical revisions to section I.D 
to accommodate removal of these requirements.
Comments
    Industry commenters--several banks and national and state trade 
associations--submitted comments on the Bureau's proposed changes to 
sections I.D.4 and I.D.6. The commenters generally supported the 
Bureau's proposals.
    A bank stated that it agreed with the Bureau's proposals to 
eliminate the requirement for business credit reports, citing the 
potential difficulty and expense associated with obtaining such 
reports. The bank stated that requiring a business credit report could 
increase the cost of credit or restrict access to credit for self-
employed consumers. The bank also noted that appendix Q requires 
creditors to obtain year-to-date profit and loss statements and balance 
sheets from self-employed consumers, and suggested, in the alternative, 
that creditors be permitted to accept quarterly tax filings if the 
consumers most recent tax return is greater than four months old. This 
commenter also stated its agreement with the Bureau's proposal to 
eliminate creditor requirements to evaluate both the sources of 
consumer's business income and the general economic outlook for similar 
businesses in the area stating that it agreed with the Bureau's 
conclusion that such requirements are ill-suited to a regulatory rule 
designed for consumer transactions. The commenter added further that 
such requirements are too subjective for purposes of establishing 
documentation standards for income.
    Another bank commenter expressed support for the Bureau's proposed 
elimination of the business credit report requirement in section I.D.4, 
and with regard to the Bureau's proposed elimination of the creditor 
requirements in section I.D.6 stated that it agreed that requiring 
creditors to analyze a business's financial strength is beyond the 
scope of the DTI standard. This commenter suggested the removal of 
section I.D.6 entirely from appendix Q, stating that the type of 
determination required by this section is highly subjective and that 
such subjectivity greatly undermines the certainty presumed to be tied 
to a safe harbor test. This commenter also suggested a change to 
section I.D.4.c to make clear that profit and loss statements will only 
be required if quarterly tax returns are not available.
    A joint trade association commenter also suggested the entire 
deletion of section I.D.6, stating that subjective criteria should be 
removed in favor of documented income. This commenter also supported 
the elimination of the business credit report requirement in section 
I.D.4.d. It also suggested changes to section I.D.4.c, stating that 
profit and loss statements and balance sheets should only be required 
if they are needed because quarterly taxes are not available.
    Two state banking association commenters also supported the 
Bureau's proposal to eliminate the requirements in section I.D.4.d, and 
I.D.6. One association, with regard to section I.D.4.d, noted that 
credit reports for small businesses can be difficult to obtain and 
quite expensive. The other association stated, with regard to I.D.6, 
that the creditor requirements proposed to be eliminated by the Bureau 
in that section would be inherently difficult for creditors to make and 
would carry no indication of accuracy. A state credit union association 
also expressed support for the Bureau's changes in these sections.
    A national trade association that represents real estate agents 
commented that it supported the Bureau's proposals eliminating the 
requirements relating to self-employed consumers in I.D.4.d and I.D.6, 
stating that it agreed with the Bureau's assessment that these 
requirements are too expensive and complex, and without clarity. This 
commenter also suggested additional clarifications beyond the Bureau's 
proposals, to section I.D and section I.B.7, as those sections relate 
to many of its members who work as self-employed contractors working in 
association with real estate brokers, not as employees. In particular 
this commenter requested additional clarity on how creditors should 
consider real estate commission income.
Final Rule
    The Bureau is adopting its revisions to section I.D.4 and I.D.6 as 
proposed.

[[Page 44711]]

With regard to the revisions to section I.D.4, and the elimination from 
the documentation requirements for self-employed consumers business 
credit reports for corporations and ``S'' corporations, the Bureau 
recognizes the concerns expressed by commenters regarding the expense 
associated with obtaining such reports, and agrees with commenters that 
this additional expense could increase the cost of credit or restrict 
access to credit for self-employed consumers.
    With regard to the Bureau's revisions to section I.D.6 and the 
elimination of the requirements that creditors evaluate sources of the 
consumer's business income, and the general economic outlook for 
similar businesses in the area, the Bureau agrees with commenters who 
noted the subjective nature of these requirements, and recognizes the 
difficulty for creditors in making these assessments. The Bureau 
believes that these requirements are better suited to a flexible 
underwriting analysis than a regulatory rule. With regard to those 
commenters who recommended the elimination of section I.D.6 in its 
entirety, the Bureau believes that the revisions to that section 
adopted by the Bureau significantly improve this requirement as an 
assessment of the business's financial strength, and make this an 
effective and useful measure for purposes of the DTI analysis. 
Furthermore, the standard as revised is straightforward for creditors, 
i.e., annual earnings that are stable or increasing are acceptable, 
while income from businesses that show a significant decline in income 
over the analysis period is not acceptable.
    The Bureau notes the other changes to these sections beyond the 
Bureau's specific proposals recommended by some commenters, including, 
for example, that creditors be permitted to accept quarterly tax 
filings as an alternative to profit and loss statements and balance 
sheets under section I.D.4.c, and additional clarification on self-
employed contractors, and real estate commission income, under I.D. and 
I.B.7. The Bureau appreciates those recommendations, but will need to 
fully evaluate them for purposes of consistency with and furtherance of 
the purposes of appendix Q, and the implications for all stakeholders.
II. NON-EMPLOYMENT RELATED CONSUMER INCOME
A. Section II.B. Investment and Trust Income
The Proposal
    Section II.B.2 of appendix Q as adopted permitted trust income to 
be considered income for the purposes of the DTI calculation ``if 
guaranteed, constant payments will continue for at least the first 
three years of the mortgage term.'' Appendix Q then provided a list of 
required documentation consumers must provide but did not otherwise 
specify the universe creditors must review to make and support the 
three-year determination.
    The Bureau proposed an amendment to this section to delineate more 
clearly the breadth of the analysis for trust income by specifying that 
the analysis is limited to the documents appendix Q requires. 
Specifically, the proposal revised ``if guaranteed, constant payments 
will continue for at least the first three years of the mortgage term'' 
by adding ``as evidenced by trust income documentation.'' Under the 
requirements in section II.B.2 as adopted, there was no specific cut-
off for the amount of diligence required or information that must be 
collected to satisfy the requirement. The Bureau stated its belief in 
proposing the amendment that it would facilitate compliance and help 
ensure access to credit by making the standard clear and easy to apply.
    Section II.B.3.a of appendix Q as adopted required, for notes 
receivable income to be considered income, that the consumer provide a 
copy of the note and documentary evidence that payments have been 
consistently made over the prior 12 months. If the consumer is not the 
original payee on the note, however, section II.B.3.b required the 
creditor to establish that the consumer is ``now a holder in due 
course, and able to enforce the note.'' The Bureau proposed an 
amendment to eliminate the requirement that the consumer be a holder in 
due course, which requirement the Bureau believed may require further 
investigation than is necessary to establish that the income is 
effective for the purposes of the rule. The proposal would have amended 
appendix Q to require only that the consumer is able to enforce the 
note.
Comments
    Industry commenters who submitted comments on the Bureau's proposal 
to revise section II.B.2 of appendix Q either supported the changes or 
requested additional clarification on existing language in the section.
    A bank commenter, for example, stated that the change to section 
II.B.2.a concerning trust income provided clearer guidance with respect 
to the required documentation, and would help facilitate continued 
access to credit for recipients of such income. This commenter 
expressed concerns, however, with the requirement that trust income be 
``guaranteed'' and recommended its elimination. This commenter stated 
that while trust income documentation may provide insight into periods 
of likely income continuance, it is unclear as to whether such 
documentation would provide evidence of an absolute guarantee of 
payment. Other commenters similarly objected to the word 
``guaranteed.'' Another bank commenter stated that while it agreed with 
the Bureau's proposed changes to limit the analysis for trust income 
only to trust documentation, it encouraged the Bureau to remove 
``guaranteed'' as it seems to imply that documentation will be 
available in the form of a guarantee or that an individual can be 
requested to provide such a guarantee. This commenter stated that the 
creditor should be expected to review the trust documentation to ensure 
the income is not clearly scheduled to end in the first three years of 
the mortgage. A joint trade association commenter also suggested the 
deletion of the word ``guaranteed'' in this section, stating that it is 
unclear who would provide the guarantee, and that this is not in 
keeping with current practice. A state banking association stated that 
it supported the Bureau's proposed addition of the phrase ``as 
evidenced by the trust income documentation'' to section II.B.2.a so 
long as the provision regarding required trust income documentation 
allows for the consumer to provide a trustee's statement confirming the 
amount of the trust, frequency of distribution and duration of 
payments. This state banking association commenter stated that reliance 
on a trustee's statement would allow its state's banks to take 
advantage of the protection afforded by state law (rather than having 
to collect a complete copy of the trust agreement).
    With regard to the Bureau's proposed changes to section II.B.3, a 
bank commenter agreed with the Bureau's proposal to eliminate the 
requirement for creditors to establish that consumers are holders in 
due course if the consumer is not the original payee on the note. This 
commenter noted that creditors will be required to obtain a copy of the 
note, which should generally be sufficient to establish enforceability. 
This commenter also recommended shortening the documentation period to 
evidence consistency of payment receipts in section II.B.3.b from 12 
months to six months. Finally, this commenter stated that the list of 
acceptable documentation in section II.B.3.b to establish that evidence 
of receipt of

[[Page 44712]]

notes receivable (i.e., deposit slips, cancelled checks or tax returns) 
is too restrictive, and does not take into account other common 
electronic payment methods. The commenter recommended modifying the 
list of acceptable documentation types to include, but not be limited 
to, deposit slips or receipts, cancelled checks, bank statements or tax 
returns. A joint trade association and a bank also recommended 
expansion of the list of acceptable documentation in section II.B.3.b 
to include bank statements and other deposit accounts, as electronic 
payments are an increasingly common way to transfer money regularly 
between consumers.
Final Rule
    The Bureau is adopting the revisions to sections II.B.2 and II.B.3 
as proposed with two modifications. The changes proposed by the Bureau 
to both sections were generally accepted by commenters. However, with 
regard to section II.B.2 the Bureau agrees with commenters that the use 
of the word ``guarantee'' in that section, i.e., that income from the 
trust may be used if ``guaranteed'' constant payments will continue, is 
unclear and should be eliminated. The Bureau believes that the 
requirement for creditor evaluation of the trust documentation, with 
proper due diligence by the creditor in the review of such 
documentation, is sufficient to meet the requirement in section II.B.2 
with regard to the continuance of the trust income. With regard to the 
state banking association commenter recommending that required trust 
documentation include a trustee's statement, the Bureau notes that 
section II.B.2 specifically provides that ``required trust 
documentation'' includes a trustee statement confirming the amount of 
the trust, the frequency of the distribution, and the duration of 
payments.
    With regard to section II.B.3, the Bureau agrees with the 
commenters that suggested a modification of the list of acceptable 
documentation in section II.B.3.ii to take into account common 
electronic payment methods. The Bureau is therefore modifying this list 
to include, in addition to deposit slips, cancelled checks and tax 
returns, also deposit receipts and bank or other account statements. 
Finally, with regard to the comment recommending shortening the 
documentation period in section II.B.3.b from 12 months to six months, 
the Bureau appreciates the comment but believes this requires further 
evaluation to ensure consistency with the purposes of appendix Q and 
the ATR Final Rule.
B. Section II.D. Rental Income
The Proposal
    Appendix Q, as adopted, allowed creditors to consider certain 
rental income payable to the consumer taking out the loan for the 
purposes of the DTI calculation in section II.D. Section II.D.3.a 
stated that it is not acceptable to consider income from roommates in a 
single-family property occupied as the consumer's primary residence as 
``income'' for the purposes of determining the consumer's DTI, but that 
it is acceptable to consider rental income payable to the consumer from 
boarders related by blood, marriage, or law. The Bureau originally 
adopted this provision of appendix Q for consistency with existing FHA 
standards used by industry.
    Following publication of the 2013 ATR Final Rule, the Bureau became 
aware of concerns regarding requirements that boarders be related to 
the homeowner in order for rental income payable to the consumer to be 
considered ``income'' for DTI purposes. The Bureau did not believe that 
the relation requirement was useful in determining whether or not the 
rental income should be used in determining DTI. The Bureau therefore 
proposed to eliminate the requirement that boarders be related by 
blood, marriage, or law from section II.D.3.a.
Comments
    Commenters generally supported the Bureau's proposed change to 
section II.D.3.a, eliminating the prohibition on considering rental 
income payable to a consumer from boarders in a single-family property 
who are not related by blood, marriage or by law. Various commenters 
recommended further clarifications to this section.
    A joint trade association commenter in recommending the same change 
to section II.D.3.a. as proposed by the Bureau, stated that rental 
income evidenced on tax returns should be given equal treatment 
regardless of the relationship status of renters. Another national 
trade association commenter stated that it generally agreed with the 
Bureau's proposed changes to this section, but that it believed that 
the guidelines need to be further modified to be workable. Specifically 
this commenter stated that the requirements as currently written will 
be difficult to administer because they depend on distinctions and 
varying definitions of the terms ``roommate'' and ``boarder.'' The 
commenter noted that these terms are not defined in the regulation, and 
they have no set meaning in law or custom. The commenter stated that it 
did not believe that these regulations should impose or dictate the 
types of habitation agreements that people choose to enter. A state 
bank association commenter noted that the Bureau's proposal retains the 
prohibition on using rental income paid by roommates, and that neither 
the rule nor appendix Q provides a definition of roommate or boarder. 
Stating that the provision to limit rental income to boarders is 
unnecessarily restrictive, the commenter requested that creditors be 
permitted to consider rental income received from roommates or 
boarders, provided such income is shown on the applicant's tax return. 
A similar comment from another state bank association stated that if 
the distinction between rental income received from roommates and 
boarders is retained it requested that the Bureau define within the 
regulation the terms ``roommate'' and ``boarder.''
Final Rule
    The Bureau agrees with those commenters on the Bureau's proposed 
revisions to section II.D.3 that the requirements as proposed would be 
difficult to administer and comply with as they depend on distinctions 
between ``roommate'' and ``boarder'' which are undefined terms in that 
section, and in appendix Q generally. The Bureau believes that rental 
income established through tax returns is the relevant factor for 
purposes of a DTI analysis, and that the distinction between the terms 
roommate and boarder is not relevant to that determination. Therefore 
the Bureau is modifying section II.D.3.a to eliminate the prohibition 
on the acceptability of income from roommates in a single family 
property occupied as the consumer's primary residence, and to provide 
that income from either roommates or boarders is acceptable. The Bureau 
retains the section II.D.3.b requirement that rental income may be 
considered effective if shown on the consumer's tax return, and states 
further that, if not on the tax return, rental income paid by the 
roommate or boarder may not be used in qualifying.
Clarifications and other Technical Changes
    As noted above, the Bureau proposed various other technical and 
wording changes in appendix Q, for consistency and clarification. The 
Bureau is adopting those revisions as proposed.
Comments on Aspects of Appendix Q beyond Bureau's Specific Proposals
    As noted previously, various commenters submitted comments on 
aspects of appendix Q that were not the subject of the Bureau's 
specific

[[Page 44713]]

proposals, including suggestions for significant revisions to appendix 
Q. Those comments are summarized and addressed below.
Adopt or Allow Use of GSE Guidelines
    Several banks and a joint trade association commenter recommended 
that the Bureau either allow creditors to use GSE guidelines in certain 
instances not addressed by appendix Q, or to look to and adopt certain 
existing GSE guideline language. Specifically, one bank commenter urged 
the Bureau to expressly allow creditors to use GSE guidelines for any 
matter not addressed by appendix Q, as GSE guidance is widely used by 
industry and is consistent with prudent underwriting. This commenter 
stated, for example, that appendix Q does not specify how to annuitize 
assets, but that GSE guidance spells out how to annuitize a consumer's 
assets in qualifying a borrower. It also stated that, as a general 
matter, appendix Q should be revised to allow creditors to ``add back'' 
amounts deducted from a borrower's income, consistent with a Fannie Mae 
worksheet. This commenter also noted several other specific areas where 
adoption of GSE guidance on add-backs was requested, for example, 
certain add-backs permitted by the GSEs with regard to section I.E. 
Income Analysis: Individual Tax Returns (IRS Form 1040); and with 
regard to section II.D.5. Rental Income, Analyzing IRS Form 1040 
Schedule E. In addition this commenter recommended with regard to 
section II.E.4. Projected Income for a New Job, adoption of the GSEs' 
approach in assessing the projected income of certain teachers. A joint 
trade association commenter similarly recommended replacing, for 
reasons of clarity, appendix Q language in section I.B.12. Automobile 
Allowances and Expense Account Payments, with GSE guidance, and 
replacing language in sections I.E, F, G and H with a requirement to 
follow GSE guidelines for self-employed cash flow analysis, including 
the use of several GSE forms, and the adoption of GSE requirements in 
section II.E.2. Adding Non-Taxable Income to a Consumer's Gross Income. 
This commenter also recommended that appendix Q follow current GSE 
guidelines for an identified list of areas where it stated appendix Q 
is silent and where it was seeking additional clarity.
    Another bank commenter stated that there are instances in which the 
Appendix Q guidelines fail to reflect the level of detail needed to 
underwrite in the current mortgage market, and noted that the GSEs have 
adopted guidelines which provide greater detail and in some instances 
would be clearer and better suited to setting a regulatory requirement. 
This commenter encouraged the Bureau to review certain specifically 
identified sections of the GSE guidelines which it stated might provide 
more clarity than the present appendix Q rules. This commenter stated, 
however, that it was not recommending that the Bureau defer to the GSE 
guidelines which are subject to change without opportunity for notice 
and comment. It requested the Bureau review, for example, GSE 
guidelines with regard to ``income from other sources'' in section 
I.B.1.b, giving as an example GSE guidelines on documenting of tips and 
foreign income. Like the previously discussed commenters, it also 
suggested review of sections I.E, F, G and H.
Generally Revise Appendix Q to Eliminate Subjective Determinations
    Several commenters suggested major revisions to appendix Q to 
address what the commenters viewed as standards that require creditors 
to make subjective determinations on a consumer's debt and income. For 
example, a joint trade association commenter stated that it was 
concerned that appendix Q mandates a calculation of DTI that will 
require lenders to establish essentially a manual underwriting process 
due to the numerous subjective determinations prescribed by the rule. 
It stated further that if qualified mortgages will comprise a 
significant fraction of mortgage originations, the proper calculation 
of DTI under appendix Q must be able to be incorporated into an 
automated underwriting system. The commenter therefore urged the Bureau 
to revise appendix Q to minimize the requirements for subjective 
determinations by lenders and to provide sufficient certainty to allow 
its integration into automated underwriting systems. It stated further 
that, for appendix Q to be an effective bright-line rule, the 
application of appendix Q should ideally deliver the same result 
regardless of the lender implementing it. However, the commenter noted, 
to do that would mean requirements for quantitative inputs, with 
supporting documentation, that eliminate any need for subjective 
determinations. This commenter concluded that appendix Q will be relied 
upon to verify the sufficiency of the lender's determination whether a 
loan is a qualified mortgage and should be able to be conclusively 
proven by written evidence, such as a loan file, in a court of law. 
This commenter supplemented its comment with a detailed chart with 
suggested revisions and comments on the Bureau's proposals, and on a 
number of other appendix Q provisions beyond the Bureau's specific 
proposals.
    A bank commenter echoed the comments of the joint trade association 
commenter that appendix Q needs to be revised to remove requirements 
for subjective determinations. This commenter stated, however, that it 
believes the structure and form of appendix Q can be retained while 
making tailored changes to its provisions as necessary to allow it to 
serve the intended purposes of appendix Q and the ATR Final Rule. A 
lender specializing in manufactured housing financing requested that 
the Bureau examine all of appendix Q with the goal of providing clarity 
and reducing litigation, and commented further that in order to 
incentivize lenders to gravitate towards qualified mortgages, the 
guidelines for making a qualified mortgage must be as objective as 
possible. To that end this commenter stated that should the Bureau 
ultimately decide not to remove the DTI requirements and appendix Q, it 
should amend certain sections of appendix Q that the commenter believes 
may not function properly as regulations.
    A GSE commenter recommended that the Bureau treat appendix Q as 
guidance rather than regulation that is subject to notice and comment 
rulemaking as it is the commenter's opinion that there are provisions 
of appendix Q that are not properly suited to be regulations. This 
commenter stated that such guidance could be revised as needed, and in 
relatively short order, in response to changing market conditions and 
industry practices, and that, in contrast, if appendix Q remains as a 
regulation subject to notice and comment it loses such flexibility. 
Another GSE commenter also recommended that the Bureau issue appendix Q 
in the form of a handbook or other written guidance, akin to the manner 
in which FHA provides underwriting standards to lenders, citing the 
Bureau's loss of flexibility and ability to respond promptly, if 
appendix Q remains a regulation subject to notice and comment 
rulemaking.
    A consumer group commenter stated that while it supported the 
Bureau's proposed clarifications to appendix Q it recommended that the 
Bureau go further to clarify it in a way that is consistent with 
automated underwriting. This commenter stated further that while manual 
underwriting is used by some lenders, lenders should not be required to 
underwrite in this manner simply to comply with the definitions of debt 
and income included in appendix Q.

[[Page 44714]]

Other Comments on Aspects of Appendix Q beyond the Bureau's Proposals
    In addition to the comments discussed above, various commenters had 
comments on certain specific sections in appendix Q, relating to 
matters not included in the Bureau's proposals. As noted, a joint trade 
association commenter supplemented its comment letter with a detailed 
chart of suggested changes to a variety of appendix Q sections both 
with regard to sections which were included in the Bureau's specific 
proposals, and sections that were not included. Various bank commenters 
stated that they endorsed the comments made by this commenter. Included 
in the joint trade association commenter's suggested changes of 
sections outside of the Bureau's proposals, for example, were changes 
to sections II.A. Alimony, Child Support, and Maintenance Income 
Criteria; II.C. Military Government Agency and Assistance and Program 
Income; and III.2. Debt to Income Ratio Computation for Recurring 
Obligations. As discussed above, this commenter also identified a list 
of areas where it stated appendix Q is silent and where it was seeking 
additional guidance. In its comment letter, this commenter also 
suggested a new quantitative test for determining the amount of 
consumer income to include in the DTI analysis, which it suggested not 
only be applied to overtime and bonus income, but other income analysis 
in appendix Q as well. Another Bank association commenter identified 
various areas with regard to sources of income that it stated appendix 
Q did not address, or did not adequately address, and for which it was 
seeking additional clarification, including, for example, asset 
amortization, stock options, capital gain income, foreign income, 
relocation earnings, and contractor and other irregular income 
situations. This commenter also requested additional guidance on 
section I.C. Consumers Employed by a Family Owned Business, and 
suggested changes with regard to section II.E. Non-Taxable and 
Projected Income to allow creditors to use a 25 percent ``gross-up'' 
rate for all non-taxable income. Other commenters that raised issues on 
sections outside of those sections that were the subject of the 
Bureau's specific proposals included a consumer commenter that 
recommended that the 12-month maximum for defining projected 
obligations (in section V.1) should be extended for loans with 
predictable repayment requirements and inflexible repayment terms, such 
as private student loans and student loan repayment programs.
Response to Comments on Aspects of Appendix Q beyond Bureau's Specific 
Proposals
    The Bureau appreciates the comments received on other aspects of 
appendix Q that were not the subject of the Bureau's specific 
proposals. These comments will assist the Bureau in its efforts to 
ensure the continuing effectiveness and utility of appendix Q as a part 
of the DTI analysis.
    The Bureau notes that a substantial number of industry commenters 
cited particular areas of appendix Q that they asserted either provided 
no guidance, or insufficient guidance, to enable creditors to make the 
required income and debt determinations. As described above, many of 
these commenters suggested that the Bureau adopt, allow creditors to 
use, or look to GSE guidelines with regard to certain types of income 
and/or debt not specifically addressed by appendix Q in order to, in 
effect, provide a means for filling this gap. The Bureau believes in 
general that the long history and experience of other federal agencies 
as well as the GSEs in matters addressed by appendix Q can be helpful 
in this context and acknowledges that requirements established by the 
other federal agencies and the GSEs already play a significant role in 
the mortgage market.
    Indeed, the Bureau notes that the temporary qualified mortgage 
status established by the ATR Final Rule provides creditors with the 
option to issue qualified mortgages without relying on the standards 
set forth in Appendix Q. Under Section 1026.43(e)(4), creditors who 
prefer federal agency or GSE underwriting rules can use those rules to 
obtain qualified mortgage status by ensuring that, among other things, 
their loans either are eligible for purchase or guarantee by the GSEs 
or to be insured or guaranteed by the agencies.
    The Bureau notes further, however, that while appendix Q does not 
specifically refer to every possible type of debt or income, it does 
set forth basic guidelines for the treatment of debt and income. 
Section I of appendix Q addresses consumer employment related income, 
and section I.B.1 sets out standards for analysis of salary, wage, and 
other consumer employment related income. Section I.B.1.b provides that 
income from sources other than salaries or wages ``can be considered as 
effective'' when it is ``properly verified and documented by the 
creditor.'' This provision sets the rule for the treatment of types of 
income whose treatment is not otherwise more specifically addressed by 
appendix Q. Likewise, section III.2.a provides as a general rule that 
recurring charges extending ten months or more for specified recurring 
obligations and ``other continuing obligations'' must be treated as 
debt.
    In light of these circumstances, the Bureau has revised the 
introduction to appendix Q to make two points. First, where guidance 
issued by federal agencies including the U.S. Department of Housing and 
Urban Development, the U.S. Department of Veterans Affairs, the U.S. 
Department of Agriculture, or the Rural Housing Service, or issued by 
the GSEs, Fannie Mae and Freddie Mac, while operating under the 
conservatorship or receivership of the Federal Housing Finance Agency, 
or issued by a limited-life regulatory entity succeeding the charter of 
either Fannie Mae or Freddie Mac (collectively, Agency or GSE guidance) 
is in accordance with appendix Q, creditors may look to that guidance 
as a helpful resource in applying appendix Q. Thus, where only the 
broad principle contained in section I.B.1.b applies to a particular 
type of income, a creditor may look to Agency or GSE guidance that is 
in accordance with appendix Q's standards in determining whether that 
income has been properly documented and verified. For example, appendix 
Q does not specifically address additional steps a creditor might take 
to document and verify wage or salary income when it is earned from 
foreign sources and paid in foreign currency. Agency or GSE guidance 
may therefore be used to provide more specific standards with regard to 
verification or calculation of such income, as long as the guidance 
used is not inconsistent with the requirements of appendix Q. 
Similarly, where the treatment of a particular recurring obligation is 
not specifically addressed in appendix Q, the creditor may look to 
Agency or GSE guidance for purposes of determining how to assess that 
obligation, as long as that guidance is in accordance with the 
requirements of section III of appendix Q.
    Second, in the event that there may be consumer situations that 
present questions that appendix Q simply does not presently address at 
all, the Bureau is adding language to the introduction providing that 
when the standards contained in appendix Q do not resolve the treatment 
of a specific kind of debt or income, the creditor may either (1) 
exclude the income or include the debt, or (2) treat the income or debt 
in accordance with guidance issued by the federal agencies or GSEs. The 
introduction makes clear, however, that the Bureau expects that the 
above-

[[Page 44715]]

described default rule on excluding income and including debts and the 
optional safe harbor reliance on GSE or Agency guidance will be used 
sparingly. The introduction emphasizes that the creditor may not rely 
on Agency or GSE guidance to reach a resolution contrary to that 
provided by appendix Q's standards, even if the Agency or GSE guidance 
specifically addresses the particular type of debt or income but the 
appendix Q standards are more generalized. For clarity, the 
introduction provides a definition for when appendix Q's standards 
resolve the appropriate treatment of a specific kind of income or debt: 
where the appendix Q standards provide a discernible answer to the 
question of how to treat the debt or income. Under this definition, the 
Bureau believes that the use of the default rule or the optional safe 
harbor should only rarely be necessary. Thus, while the Bureau's 
revisions to appendix Q reflect commenters' concerns about the 
possibility of gaps in appendix Q, the Bureau emphasizes that as 
revised by this final rule, the introduction to appendix Q only allows 
creditors to use Agency or GSE guidance whenever appendix Q does not 
resolve how to treat a particular type of debt or income (or where such 
guidance is used in applying appendix Q consistent with its standards, 
as discussed above). Add-backs to income permitted by Agency or GSE 
guidance, for example, are not permitted by appendix Q except in 
accordance with its standards.
    With regard to the request by some commenters for a major revision 
to appendix Q, including, for example, the removal of all requirements 
for subjective determinations, the Bureau believes that the revisions 
made by today's final rule, including the default rule and the optional 
safe harbor just described, will provide creditors with the means 
necessary to effectively carry out the analysis required by appendix Q. 
The Bureau will continue to review the implementation of appendix Q to 
ensure that creditors can readily comply with its requirements, but the 
Bureau believes that, with today's final rule, appendix Q currently 
meets that standard.
    As discussed, some commenters suggested that the appendix Q 
requirements be revised to allow its integration into automated 
underwriting systems. After the Bureau's rules go into effect in 
January 2014, the Bureau, in reviewing the implementation of those 
rules, including the ATR Final Rule, will give additional consideration 
to the suggestions raised by these commenters. In the meantime, the 
Bureau believes that the temporary qualified mortgage provisions 
established by the ATR Final Rule should provide the needed flexibility 
for creditors. Regarding the comments suggesting that the Bureau treat 
appendix Q as guidance rather than as a regulation subject to notice 
and comment in order to respond to changing market conditions and 
industry practices, as previously stated, the Bureau ``did not intend 
for appendix Q to function as a general flexible underwriting policy 
for assessing risk (as it is used by FHA in the context of insurance), 
and recognizes that the Bureau will not have the same level of 
discretion regarding the application of appendix Q.'' \56\ Indeed, the 
Bureau believes that appendix Q could not fully serve its intended 
purpose of providing clarity and certainty as to the DTI determination 
were it treated as guidance. Moreover, the Bureau believes that 
appendix Q, particularly as clarified and revised by today's final 
rule, provides creditors with sufficient and appropriate standards for 
assessing the income and debt of consumers.
---------------------------------------------------------------------------

    \56\ 78 FR 25648.
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V. Effective Date

    The amendments in this rule are effective January 10, 2014, except 
for the change to Sec.  1026.35(e). The amendment to Sec.  1026.35(e) 
is effective immediately on publication of this rule in the Federal 
Register. As explained above, this amendment clarifies the Bureau's 
interpretation of Sec.  1026.35(e); it is therefore an interpretive 
rule, for which an immediate effective date is appropriate. In 
addition, the Bureau concludes that good cause exists to make the 
amendment effective immediately. The clarification will provide 
certainty to the industry and imposes no obligations with which 
mortgage lenders must comply.
    Applicability date. The amendment to Sec.  1026.35(e) applies to 
any transaction consummated on or after June 1, 2013, and for which the 
creditor receives an application on or before January 9, 2014.

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

A. Overview

    In developing the final rule, the Bureau has considered potential 
benefits, costs, and impacts.\57\ In addition, the Bureau has 
consulted, or offered to consult with, the prudential regulators, SEC, 
HUD, VA, USDA, FHFA, the Federal Trade Commission, and the Department 
of the Treasury, including regarding consistency with any prudential, 
market, or systemic objectives administered by such agencies.
---------------------------------------------------------------------------

    \57\ 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.
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    As noted above, this rule makes amendments to some of the final 
mortgage rules issued by the Bureau in January of 2013.\58\ These 
amendments clarify, correct, or amend provisions on (1) the relation to 
State law of Regulation X's servicing provisions; (2) implementation 
transition requirements for adjustable-rate mortgage disclosures; (3) 
the small servicer exemption from certain of the new servicing rules; 
(4) exclusions from the repayment ability and prepayment penalty 
requirements for higher-priced mortgage loans (HPMLs); (5) the use of 
government-sponsored enterprise (GSE) and Federal agency purchase, 
guarantee or insurance eligibility for determining qualified mortgage 
(QM) status; and (6) the determination of debt and income for purposes 
of originating QMs. In addition to these revisions, which are discussed 
more fully below, the Bureau is also making certain technical 
corrections to the regulations with no substantive change intended.
---------------------------------------------------------------------------

    \58\ For convenience, the reference to these January 2013 rules 
is also meant to encompass the rules issued in May 2013 that amended 
the January rules, including the final rule amending the 2013 
Escrows Final Rule, issued on May 16, 2013.
---------------------------------------------------------------------------

    The analysis in this section relies on data that the Bureau has 
obtained and the record established by the Board and Bureau during the 
development of the 2013 Title XIV Final Rules. However, the Bureau 
notes that for some analyses, there are limited data available with 
which to quantify the potential costs, benefits, and impacts of this 
final rule. In particular, the Bureau did not receive comments 
specifically addressing the Section 1022 analysis in the proposed rule. 
Still, general economic principles together with the limited data that 
are available provide insight into the benefits, costs, and impacts and 
where relevant, the analysis provides a qualitative discussion of the 
benefits, costs, and impacts of the final rule.

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,\59\ the

[[Page 44716]]

primary benefit of most of the provisions of the final rule to both 
consumers and covered persons is an increase in clarity and precision 
of the regulations and an accompanying reduction in compliance costs.
---------------------------------------------------------------------------

    \59\ 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.
---------------------------------------------------------------------------

    More specifically, the provisions that clarify: (1) That the 
preemption provisions in Regulation X do not preempt the field of 
regulation of the practices covered by RESPA and Regulation X; (2) the 
timing of required disclosures for adjustable-rate mortgages; and, (3) 
the exclusion of construction loans, bridge loans, and reverse 
mortgages from the requirements of the ability-to-repay and prepayment 
penalty provisions in Sec.  1026.35(e) generally conform the rules to 
the policies articulated by the final rules already issued. The 
discussion of benefits, costs, or impacts discussed in part VII of each 
of the January rules included consideration of each of these 
provisions.
    The final rule also modifies the text of the Regulation Z servicing 
rule to clarify the scope and application of the small servicer 
exemption. Specifically, it clarifies the application of the small 
servicer exemption with regard to servicer/affiliate and master 
servicer/subservicer relationships and excludes mortgage loans 
voluntarily serviced for an unaffiliated entity without remuneration, 
reverse mortgage transactions, mortgage loans secured by consumers' 
interest in timeshare plans, from being considered when determining 
whether a servicer qualifies as a small servicer. In total, these 
changes are expected to grant the small servicer exemption to a larger 
number of firms. These entities should benefit from lower costs while 
their customers may lose some of the protections embedded in the 
relevant rules. The nature and magnitude of these protections and their 
potential costs are described in part VII of both of the 2013 Mortgage 
Servicing Final Rules.
    The provisions that clarify and amend the definition of qualified 
mortgage should also add clarity to the rules and thus lower costs of 
compliance. These include the clarification of the test that they be 
eligible for purchase or guarantee by the GSEs or insured or guaranteed 
by the agencies, the clarification that a repurchase or indemnification 
demand by the GSEs, FHA, VA, USDA, or RHS is not determinative of 
qualified mortgage status, and the revisions clarifying that a loan 
meeting eligibility requirements provided in a written agreement with 
one of the GSEs, HUD, VA, USDA, or RHS is also eligible as are loans 
receiving individual waivers from GSEs or agencies.
    These provisions make explicit that matters wholly unrelated to 
ability to repay will not be relevant to determination of QM status and 
that a creditor is not required to satisfy certain mandates concerning 
loan delivery and other requirements that are wholly unrelated to 
assessing a consumer's ability to repay the loan. They also clarify 
that loans meeting GSE or agency eligibility requirements set forth in 
an applicable written contract variance or individual waiver at the 
time of consummation are eligible for GSE or agency purchase, 
guarantee, or insurance under Sec.  1026.43(e)(4). As such, these 
provisions should lower the burden for these loans to be qualified 
mortgages. The Bureau believes that these changes provide useful 
guidance to industry and generally conform the rules to the policies 
intended by the final rules issued in January. Accordingly, the 
discussion of benefits, costs, or impacts discussed in part VII of each 
of the January rules included consideration of the effects of each of 
these provisions.
    The amendments to appendix Q in this final rule reduce the 
creditor's requirements to obtain affirmative confirmation that several 
types of income will continue in the future. Under these amendments, 
creditors may assume in the absence of contrary evidence, that certain 
past, current, and/or ongoing conditions can be reasonably expected to 
continue. Other provisions clarify the types of evidence that creditors 
may rely on to verify income, while another expands the types of rental 
income that may be used in the DTI calculation. The Bureau is also 
revising the introduction to appendix Q to clarify that creditors may 
look to guidance from certain federal agencies and the GSEs in applying 
appendix Q so long as that guidance is in accordance with the standards 
in appendix Q and to provide a default rule of excluding income and 
including debts and an optional safe harbor for reliance on GSE or 
Agency guidance when appendix Q's standards do not otherwise resolve 
how to treat a particular type of debt or income. As noted earlier, the 
Bureau believes that these provisions will establish clearer 
requirements for assessing the debt and income of consumers while at 
the same time facilitating creditor compliance. More specifically, 
these provisions should increase the probability that certain loans are 
originated as qualified mortgages and receive a presumption of 
compliance with the ability-to-repay standards. 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. 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.
    The final 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 or on consumers in 
rural areas. The main exception is for those depository institutions 
and credit unions, which by virtue of their size, are more likely to 
qualify for the small servicer exemption and to benefit from the 
reduction in compliance burden.
    Given the nature of the changes made by the final rule, the Bureau 
does not believe that the final rule will materially reduce consumers' 
access to consumer products and services. Rather, the reduced burden in 
many of the changes in this rule should generally help to improve 
access to credit.

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.\60\ These analyses must 
``describe the impact of the proposed rule on small entities.'' \61\ 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,\62\ or if the agency considers a series of closely related 
rules as one rule for

[[Page 44717]]

purposes of complying with the IRFA or FRFA requirements.\63\ 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.\64\
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    \60\ 5 U.S.C. 601 et seq.
    \61\ 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 nonprofit 
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).
    \62\ 5 U.S.C. 605(b).
    \63\ 5 U.S.C. 605(c).
    \64\ 5 U.S.C. 609.
---------------------------------------------------------------------------

    This rulemaking is part of a series of rules that have revised and 
expanded the regulatory requirements for entities that originate or 
service mortgage loans. In January 2013, the Bureau adopted the 2013 
ATR Final Rule and the 2013 Mortgage Servicing Final Rules, along with 
other related rules mentioned above. Part VIII of the supplementary 
information to each of these rules set forth the Bureau's analyses and 
determinations under the RFA with respect to those rules. See 78 FR 
10861 (Regulation X), 78 FR 10994 (Regulation Z--servicing), 78 FR 6575 
(Regulation Z--ATR). Because this final rule generally makes clarifying 
changes to conform the January rules to their intended purposes, the 
RFA analyses associated with those rules generally take into account 
the impact of the changes made by this final rule.
    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 and FRFA 
requirements.
    In the alternative, the Bureau also concludes that the final rule 
will not have a significant impact on a substantial number of small 
entities. As noted, this final rule generally clarifies the existing 
rules. These changes will not have a material impact on small entities. 
In the instance of the small servicer exemption, the rule likely 
reduces burden for the affected firms. In addition, the changes to 
appendix Q will likely reduce compliance costs by increasing clarity 
and providing more objective standards for evaluating certain kinds of 
income. The changes to appendix Q should also increase the probability 
that certain loans are originated as qualified mortgages and receive a 
presumption of compliance with the ability-to-repay standards. 
Therefore, the undersigned certifies that the rule will not have a 
significant impact on a substantial number of small entities.

VIII. Paperwork Reduction Act

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

List of Subjects

12 CFR Part 1024

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

12 CFR Part 1026

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

Authority and Issuance

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

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

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

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

Subpart A--General Provisions

0
2. The subpart A heading is revised to read as set forth above.


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


Sec.  1024.5  Coverage of RESPA.

* * * * *
    (c) Relation to State laws. (1) State laws that are inconsistent 
with RESPA or this part are preempted to the extent of the 
inconsistency. However, RESPA and these regulations do not annul, 
alter, affect, or exempt any person subject to their provisions from 
complying with the laws of any State with respect to settlement 
practices, except to the extent of the inconsistency.
    (2) Upon request by any person, the Bureau is authorized to 
determine if inconsistencies with State law exist; in doing so, the 
Bureau shall consult with appropriate Federal agencies.
    (i) The Bureau may not determine that a State law or regulation is 
inconsistent with any provision of RESPA or this part, if the Bureau 
determines that such law or regulation gives greater protection to the 
consumer.
    (ii) In determining whether provisions of State law or regulations 
concerning affiliated business arrangements are inconsistent with RESPA 
or this part, the Bureau may not construe those provisions that impose 
more stringent limitations on affiliated business arrangements as 
inconsistent with RESPA so long as they give more protection to 
consumers and/or competition.
    (3) Any person may request the Bureau to determine whether an 
inconsistency exists by submitting to the address established by the 
Bureau to request an official interpretation, a copy of the State law 
in question, any other law or judicial or administrative opinion that 
implements, interprets or applies the relevant provision, and an 
explanation of the possible inconsistency. A determination by the 
Bureau that an inconsistency with State law exists will be made by 
publication of a notice in the Federal Register. ``Law'' as used in 
this section includes regulations and any enactment which has the force 
and effect of law and is issued by a State or any political subdivision 
of a State.
    (4) A specific preemption of conflicting State laws regarding 
notices and disclosures of mortgage servicing transfers is set forth in 
Sec.  1024.33(d).

Subpart B--Mortgage Settlement and Escrow Accounts


Sec.  1024.13  [Removed and Reserved]


0
4. Section 1024.13 is removed and reserved.


0
5. In Supplement I to Part 1024, Subpart A is added to read as follows:

Supplement I to Part 1024--Official Bureau Interpretations

* * * * *

Subpart A--General Provisions


Sec.  1024.5  Coverage of RESPA

5(c) Relation to State laws.
Paragraph 5(c)(1).
    1. State laws that are inconsistent with the requirements of RESPA 
or

[[Page 44718]]

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

PART 1026--TRUTH IN LENDING (REGULATION Z)

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

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

Subpart E--Special Rules for Certain Home Mortgage Transactions

0
7. Section 1026.35 is amended by revising paragraph (e) introductory 
text, redesignating paragraph (e)(3) as paragraph (e)(4), and adding 
new paragraph (e)(3) to read as follows:


Sec.  1026.35  Requirements for higher-priced mortgage loans.

* * * * *
    (e) Repayment ability, prepayment penalties. Except as provided in 
paragraph (e)(3) of this section, higher-priced mortgage loans are 
subject to the following restrictions:
* * * * *
    (3) Exclusions. This paragraph (e) does not apply to a transaction 
to finance the initial construction of a dwelling; a temporary or 
``bridge'' loan with a term of twelve months or less, such as a loan to 
purchase a new dwelling where the consumer plans to sell a current 
dwelling within twelve months; or a reverse mortgage transaction 
subject to Sec.  1026.33.
* * * * *


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


Sec.  1026.41  Periodic statements for residential mortgage loans.

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


0
9. Section 1026.43 is amended by revising paragraphs (e)(4)(ii)(A) 
introductory text through (E) to read as follows:


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

* * * * *
    (e) * * *
    (4) * * *
    (ii) * * *
    (A) A loan that is eligible, except with regard to matters wholly 
unrelated to ability to repay:
* * * * *
    (B) A loan that is eligible to be insured, except with regard to 
matters wholly unrelated to ability to repay, by the U.S. Department of 
Housing and Urban Development under the National Housing Act (12 U.S.C. 
1707 et seq.);
    (C) A loan that is eligible to be guaranteed, except with regard to 
matters wholly unrelated to ability to repay, by the U.S. Department of 
Veterans Affairs;
    (D) A loan that is eligible to be guaranteed, except with regard to 
matters wholly unrelated to ability to repay, by the U.S. Department of 
Agriculture pursuant to 42 U.S.C. 1472(h); or
    (E) A loan that is eligible to be insured, except with regard to 
matters wholly unrelated to ability to repay, by the Rural Housing 
Service.
* * * * *


0
10. Appendix Q to Part 1026 is revised to read as follows:

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

    Section 1026.43(e)(2)(vi) provides that, to satisfy the 
requirements for a qualified mortgage under Sec.  1026.43(e)(2), the 
ratio of the consumer's total monthly debt payments to total monthly 
income at the time of consummation cannot exceed 43 percent. Section 
1026.43(e)(2)(vi)(A) requires the creditor to calculate the ratio of 
the consumer's total monthly debt payments to total monthly income 
using the following standards, with additional requirements for 
calculating debt and income appearing in Sec.  1026.43(e)(2)(vi)(B). 
Where guidance issued by the U.S. Department of Housing and Urban 
Development, the U.S. Department of Veterans Affairs, the U.S. 
Department of Agriculture, or the Rural Housing Service, or issued 
by the Federal National Mortgage Association (Fannie Mae) or the 
Federal Home Loan Mortgage Corporation (Freddie Mac) while operating 
under the conservatorship or receivership of the Federal Housing 
Finance Agency, or issued by a limited-life regulatory entity 
succeeding the charter of either Fannie Mae or Freddie Mac 
(collectively, Agency or GSE guidance) is in accordance with 
appendix Q, creditors may look to that guidance as a helpful 
resource in applying appendix Q. Moreover, when the following 
standards do not resolve how a specific kind of debt or income 
should be treated, the creditor may either (1) exclude the income or 
include the debt, or (2) rely on Agency or GSE guidance to resolve 
the issue. The following standards resolve the appropriate treatment 
of a specific kind of debt or income where the standards provide a 
discernible answer to the question of how to treat the debt or 
income. However, a creditor may not rely on Agency or GSE guidance 
to reach a resolution contrary to that provided by the following 
standards, even if such Agency or GSE guidance specifically 
addresses the particular type of debt or income but the following 
standards provide more generalized guidance.

I. Consumer Employment Related Income

A. Stability of Income

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


[[Page 44719]]


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

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

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

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

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

    c. Important: Situations not meeting the criteria listed above 
may not be used in qualifying. Extended absence is defined as six 
months.

B. Salary, Wage and Other Forms of Income

    1. General Policy on Consumer Income Analysis.
    a. The income of each consumer who will be obligated for the 
mortgage debt and whose income is being relied upon in determining 
ability to repay must be analyzed to determine whether his/her 
income level can be reasonably expected to continue.
    b. In most cases, a consumer's income is limited to salaries or 
wages. Income from other sources can be considered as effective, 
when properly verified and documented by the creditor.

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

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

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

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

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

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

[[Page 44720]]

letter,'' or ``proof of award letter''). If any benefits expire 
within the first full three years of the loan, the income source may 
not be used in qualifying.

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

    12. Automobile Allowances and Expense Account Payments.
    a. Only the amount by which the consumer's automobile allowance 
or expense account payments exceed actual expenditures may be 
considered income.
    b. To establish the amount to add to gross income, the consumer 
must provide the following:
    i. IRS Form 2106, Employee Business Expenses, for the previous 
two years; and
    ii. Employer verification that the payments will continue.
    c. If the consumer uses the standard per-mile rate in 
calculating automobile expenses, as opposed to the actual cost 
method, the portion that the IRS considers depreciation may be added 
back to income.
    d. Expenses that must be treated as recurring debt include:
    i. The consumer's monthly car payment; and
    ii. Any loss resulting from the calculation of the difference 
between the actual expenditures and the expense account allowance.

C. Consumers Employed by a Family Owned Business.

    1. Income Documentation Requirement.
    In addition to normal employment verification, a consumer 
employed by a family owned business is required to provide evidence 
that he/she is not an owner of the business, which may include:
    a. Copies of signed personal tax returns, or
    b. A signed copy of the corporate tax return showing ownership 
percentage.

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

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

    1. Definition: Self-Employed Consumer.
    A consumer with a 25 percent or greater ownership interest in a 
business is considered self-employed.
    2. Types of Business Structures.
    There are four basic types of business structures. They include:
    a. Sole proprietorships;
    b. Corporations;
    c. Limited liability or ``S'' corporations; and
    d. Partnerships.
    3. Minimum Length of Self Employment.
    a. Income from self-employment is considered stable, and 
effective, if the consumer has been self-employed for two or more 
years.
    b. Due to the high probability of failure during the first few 
years of a business, the requirements described in the table below 
are necessary for consumers who have been self-employed for less 
than two years.
[GRAPHIC] [TIFF OMITTED] TR24JY13.000

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

E. Income Analysis: Individual Tax Returns (IRS Form 1040).

    1. General Policy on Adjusting Income Based on a Review of IRS 
Form 1040.
    The amount shown on a consumer's IRS Form 1040 as adjusted gross 
income must either be increased or decreased based on the creditor's 
analysis of the individual tax return and any related tax schedules.
    2. Guidelines for Analyzing IRS Form 1040.
    The table below contains guidelines for analyzing IRS Form 1040:
BILLING CODE 4810-AM-P

[[Page 44721]]

[GRAPHIC] [TIFF OMITTED] TR24JY13.001

F. Income Analysis: Corporate Tax Returns (IRS Form 1120).

    1. Description: Corporation.
    A corporation is a State-chartered business owned by its 
stockholders.
    2. Need To Obtain Consumer Percentage of Ownership Information.
    a. Corporate compensation to the officers, generally in 
proportion to the percentage of ownership, is shown on the:
    i. Corporate tax return IRS Form 1120; and
    ii. Individual tax returns.
    b. When a consumer's percentage of ownership does not appear on 
the tax returns, the creditor must obtain the

[[Page 44722]]

information from the corporation's accountant, along with evidence 
that the consumer has the right to any compensation.
    3. Analyzing Corporate Tax Returns.
    a. In order to determine a consumer's self-employed income from 
a corporation the adjusted business income must:
    i. Be determined; and
    ii. Multiplied by the consumer's percentage of ownership in the 
business.
    b. The table below describes the items found on IRS Form 1120 
for which an adjustment must be made in order to determine adjusted 
business income.
[GRAPHIC] [TIFF OMITTED] TR24JY13.002

G. Income Analysis: ``S'' Corporation Tax Returns (IRS Form 1120S).

    1. Description: ``S'' Corporation.
    a. An ``S'' corporation is generally a small, start-up business, 
with gains and losses passed to stockholders in proportion to each 
stockholder's percentage of business ownership.
    b. Income for owners of ``S'' corporations comes from IRS Form 
W-2 wages, and is taxed at the individual rate. The IRS Form 1120S, 
Compensation of Officers line item is transferred to the consumer's 
individual IRS Form 1040.
    2. Analyzing ``S'' Corporation Tax Returns.
    a. ``S'' corporation depreciation and depletion may be added 
back to income in proportion to the consumer's share of the 
corporation's income.
    b. In addition, the income must also be reduced proportionately 
by the total obligations payable by the corporation in less than one 
year.
    c. Important: The consumer's withdrawal of cash from the 
corporation may have a severe negative impact on the corporation's 
ability to continue operating, and must be considered in the income 
analysis.

H. Income Analysis: Partnership Tax Returns (IRS Form 1065).

    1. Description: Partnership.
    a. A partnership is formed when two or more individuals form a 
business, and share in profits, losses, and responsibility for 
running the company.
    b. Each partner pays taxes on his/her proportionate share of the 
partnership's net income.
    2. Analyzing Partnership Tax Returns.
    a. Both general and limited partnerships report income on IRS 
Form 1065, and the partners' share of income is carried over to 
Schedule E of IRS Form 1040.
    b. The creditor must review IRS Form 1065 to assess the 
viability of the business. Both depreciation and depletion may be 
added back to the income in proportion to the consumer's share of 
income.
    c. Income must also be reduced proportionately by the total 
obligations payable by the partnership in less than one year.
    d. Important: Cash withdrawals from the partnership may have a 
severe negative impact on the partnership's ability to continue 
operating, and must be considered in the income analysis.

II. Non-Employment Related Consumer Income

A. Alimony, Child Support, and Maintenance Income Criteria.

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

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

B. Investment and Trust Income.

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

[[Page 44723]]

[GRAPHIC] [TIFF OMITTED] TR24JY13.003

C. Military, Government Agency, and Assistance Program Income.

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

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

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

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

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

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

D. Rental Income.

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

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

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

[[Page 44724]]

another principal residence, except under the conditions described 
below:

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

    8. Policy Exceptions Regarding the Exclusion of Rental Income 
From a Principal Residence Being Vacated by a Consumer.
    When a consumer vacates a principal residence in favor of 
another principal residence, the rental income, reduced by the 
appropriate vacancy factor, may be considered in the underwriting 
analysis under the circumstances listed in the table below.
[GRAPHIC] [TIFF OMITTED] TR24JY13.004

E. Non-Taxable and Projected Income

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

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

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

III. Consumer Liabilities: Recurring Obligations

    1. Types of Recurring Obligation. Recurring obligations include:
    a. All installment loans;
    b. Revolving charge accounts;
    c. Real estate loans;
    d. Alimony;
    e. Child support; and
    f. Other continuing obligations.
    2. Debt to Income Ratio Computation for Recurring Obligations.
    a. The creditor must include the following when computing the 
debt to income ratios for recurring obligations:
    i. Monthly housing expense; and
    ii. Additional recurring charges extending ten months or more, 
such as
    a. Payments on installment accounts;
    b. Child support or separate maintenance payments;
    c. Revolving accounts; and
    d. Alimony.
    b. Debts lasting less than ten months must be included if the 
amount of the debt affects

[[Page 44725]]

the consumer's ability to pay the mortgage during the months 
immediately after loan closing, especially if the consumer will have 
limited or no cash assets after loan closing.

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

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

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

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

IV. Consumer Liabilities: Contingent Liability

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

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

1. Projected Obligations

    a. Debt payments, such as a student loan or balloon-payment note 
scheduled to begin or come due within 12 months of the mortgage loan 
closing, must be included by the creditor as anticipated monthly 
obligations during the underwriting analysis.
    b. Debt payments do not have to be classified as projected 
obligations if the consumer provides written evidence that the debt 
will be deferred to a period outside the 12-month timeframe.
    c. Balloon-payment notes that come due within one year of loan 
closing must be considered in the underwriting analysis.

2. Obligations Not Considered Debt

    Obligations not considered debt, and therefore not subtracted 
from gross income, include:
    a. Federal, State, and local taxes;
    b. Federal Insurance Contributions Act (FICA) or other 
retirement contributions, such as 401(k) accounts (including 
repayment of debt secured by these funds):
    c. Commuting costs;
    d. Union dues;
    e. Open accounts with zero balances;
    f. Automatic deductions to savings accounts;
    g. Child care; and
    h. Voluntary deductions.
    11. In Supplement I to Part 1026--Official Interpretations:
    A. Under Section 1026.41--Periodic Statements for Residential 
Mortgage Loans:
    i. Under 41(e)(4) Small servicers:
    a. Under 41(e)(4)(ii) Small servicer defined, paragraphs 1 and 2 
are revised and paragraph 3 is added.
    b. Under Paragraph 41(e)(4)(iii) Small servicer determination, 
paragraph 3 is added.
    B. Under Section 1026.43--Minimum Standards for Transactions 
Secured by a Dwelling:
    i. Under 43(e)(4) Qualified mortgage defined-special rules, 
paragraph 4 is revised and paragraph 5 is added.
    The revisions and additions read as follows:

Supplement I to Part 1026--Official Interpretations

* * * * *

Subpart E--Special Rules for Certain Home Mortgage Transactions

* * * * *


Sec.  1026.41  Periodic Statements for Residential Mortgage Loans

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

[[Page 44726]]

    3. Master servicing and subservicing. A servicer that qualifies as 
a small servicer does not lose its small servicer status if it retains 
a subservicer, as that term is defined in 12 CFR 1024.31, to service 
any of its mortgage loans. A subservicer can gain the benefit of the 
small servicer exemption only if (1) the master servicer, as that term 
is defined in 12 CFR 1024.31, is a small servicer and (2) the 
subservicer is a small servicer. A subservicer generally will not 
qualify as a small servicer because it does not own or did not 
originate the mortgage loans it subservices--unless it is an affiliate 
of a master servicer that qualifies as a small servicer. The following 
examples demonstrate the application of the small servicer exemption 
for different forms of servicing relationships:
    i. A credit union services 4,000 mortgage loans, all of which it 
originated or owns. The credit union retains a credit union service 
organization, that is not an affiliate, to subservice 1,000 of the 
mortgage loans. The credit union is a small servicer and, thus, can 
gain the benefit of the small servicer exemption for the 3,000 mortgage 
loans the credit union services itself. The credit union service 
organization is not a small servicer because it services mortgage loans 
it does not own or did not originate. Accordingly, the credit union 
service organization does not gain the benefit of the small servicer 
exemption and, thus, must comply with any applicable mortgage servicing 
requirements for the 1,000 mortgage loans it subservices.
    ii. A bank holding company, through a lender subsidiary, owns or 
originated 4,000 mortgage loans. All mortgage servicing rights for the 
4,000 mortgage loans are owned by a wholly owned master servicer 
subsidiary. Servicing for the 4,000 mortgage loans is conducted by a 
wholly owned subservicer subsidiary. The bank holding company controls 
all of these subsidiaries and, thus, they are affiliates of the bank 
holding company pursuant 12 CFR 1026.32(b)(2). Because the master 
servicer and subservicer service 5,000 or fewer mortgage loans, and 
because all the mortgage loans are owned or originated by an affiliate, 
the master servicer and the subservicer both qualify for the small 
servicer exemption for all 4,000 mortgage loans.
    iii. A nonbank servicer services 4,000 mortgage loans, all of which 
it originated or owns. The servicer retains a ``component servicer'' to 
assist it with servicing functions. The component servicer is not 
engaged in ``servicing'' as defined in 12 CFR 1024.2; that is, the 
component servicer does not receive any scheduled periodic payments 
from a borrower pursuant to the terms of any mortgage loan, including 
amounts for escrow accounts, and does not make the payments to the 
owner of the loan or other third parties of principal and interest and 
such other payments with respect to the amounts received from the 
borrower as may be required pursuant to the terms of the mortgage 
servicing loan documents or servicing contract. The component servicer 
is not a subservicer pursuant to 12 CFR 1024.31 because it is not 
engaged in servicing, as that term is defined in 12 CFR 1024.2. The 
nonbank servicer is a small servicer and, thus, can gain the benefit of 
the small servicer exemption with regard to all 4,000 mortgage loans it 
services.
    41(e)(4)(iii) Small servicer determination.
* * * * *
    2. Timing for small servicer exemption. The following examples 
demonstrate when a servicer either is considered or is no longer 
considered a small servicer:
    i. A servicer that begins servicing more than 5,000 mortgage loans 
(or begins servicing one or more mortgage loans it does not own or did 
not originate) on October 1, and services more than 5,000 mortgage 
loans (or services one or more mortgage loans it does not own or did 
not originate) as of January 1 of the following year, would no longer 
be considered a small servicer on January 1 of that following year and 
would have to comply with any requirements from which it is no longer 
exempt as a small servicer on April 1 of that following year.
    ii. A servicer that begins servicing more than 5,000 mortgage loans 
(or begins servicing one or more mortgage loans it does not own or did 
not originate) on February 1, and services more than 5,000 mortgage 
loans (or services one or more mortgage loans it does not own or did 
not originate) as of January 1 of the following year, would no longer 
be considered a small servicer on January 1 of that following year and 
would have to comply with any requirements from which it is no longer 
exempt as a small servicer on that same January 1.
    iii. A servicer that begins servicing more than 5,000 mortgage 
loans (or begins servicing one or more mortgage loans it does not own 
or did not originate) on February 1, but services less than 5,000 
mortgage loans (or no longer services mortgage loans it does not own or 
did not originate) as of January 1 of the following year, is considered 
a small servicer for that following year.
* * * * *
    3. Mortgage loans not considered in determining whether a servicer 
is a small servicer. Mortgage loans that are not considered for 
purposes of determining whether a servicer is a small servicer pursuant 
to Sec.  1026.41(e)(4)(iii) are not considered either for determining 
whether a servicer, together with any affiliates, services 5,000 or 
fewer mortgage loans or whether a servicer is servicing only mortgage 
loans that it owns or originated. For example, assume a servicer 
services 5,400 mortgage loans. Of these mortgage loans, the servicer 
owns or originated 4,800 mortgage loans, voluntarily services 300 
mortgage loans that it does not own or did not originate for an 
unaffiliated nonprofit organization for which the servicer does not 
receive any compensation or fees, and services 300 reverse mortgage 
transactions that it does not own and did not originate. Because the 
only mortgage loans considered are the 4,800 mortgage loans owned or 
originated by the servicer, the servicer is considered a small servicer 
and qualifies for the small servicer exemption with regard to all 5,400 
mortgage loans it services. Note that reverse mortgages and mortgage 
loans secured by consumers' interests in timeshare plans, in addition 
to not being considered in determining small servicer qualification, 
are also exempt from the requirements of Sec.  1026.41. In contrast, 
although charitably serviced mortgage loans, as defined by Sec.  
1026.41(e)(4)(iii), are likewise not considered in determining small 
servicer qualification, they are not exempt from the requirements of 
Sec.  1026.41. Thus, a servicer that does not qualify as a small 
servicer would not have to provide periodic statements for reverse 
mortgages and timeshare plans because they are exempt from the rule, 
but would have to provide periodic statements for mortgage loans it 
charitably services.
* * * * *


Sec.  1026.43  Minimum Standards for Transactions Secured by a Dwelling

* * * * *
    43(e)(4) Qualified mortgage defined--special rules.
* * * * *
    4. Eligible for purchase, guarantee, or insurance except with 
regard to matters wholly unrelated to ability to repay. To satisfy 
Sec.  1026.43(e)(4)(ii), a loan need not be actually purchased or 
guaranteed by Fannie Mae or Freddie Mac or insured or guaranteed by one 
of the

[[Page 44727]]

Agencies (the U.S. Department of Housing and Urban Development (HUD), 
U.S. Department of Veterans Affairs (VA), U.S. Department of 
Agriculture (USDA), or Rural Housing Service (RHS)). Rather, Sec.  
1026.43(e)(4)(ii) requires only that the creditor determine that the 
loan is eligible (i.e., meets the criteria) for such purchase, 
guarantee, or insurance at consummation. For example, for purposes of 
Sec.  1026.43(e)(4), a creditor is not required to sell a loan to 
Fannie Mae or Freddie Mac (or any limited-life regulatory entity 
succeeding the charter of either) for that loan to be a qualified 
mortgage; however, the loan must be eligible for purchase or guarantee 
by Fannie Mae or Freddie Mac (or any limited-life regulatory entity 
succeeding the charter of either), including satisfying any 
requirements regarding consideration and verification of a consumer's 
income or assets, credit history, debt-to-income ratio or residual 
income, and other credit risk factors, but not any requirements 
regarding matters wholly unrelated to ability to repay. To determine 
eligibility for purchase, guarantee or insurance, a creditor may rely 
on a valid underwriting recommendation provided by a GSE automated 
underwriting system (AUS) or an AUS that relies on an Agency 
underwriting tool; compliance with the standards in the GSE or Agency 
written guide in effect at the time; a written agreement between the 
creditor or a direct sponsor or aggregator of the creditor and a GSE or 
Agency that permits variation from the standards of the written guides 
and/or variation from the AUSs, in effect at the time of consummation; 
or an individual loan waiver granted by the GSE or Agency to the 
creditor. For creditors relying on the variances of a sponsor or 
aggregator, a loan that is transferred directly to or through the 
sponsor or aggregator at or after consummation complies with Sec.  
1026.43(e)(4). In using any of the four methods listed above, the 
creditor need not satisfy standards that are wholly unrelated to 
assessing a consumer's ability to repay that the creditor is required 
to perform. Matters wholly unrelated to ability to repay are those 
matters that are wholly unrelated to credit risk or the underwriting of 
the loan. Such matters include requirements related to the status of 
the creditor rather than the loan, requirements related to selling, 
securitizing, or delivering the loan, and any requirement that the 
creditor must perform after the consummated loan is sold, guaranteed, 
or endorsed for insurance such as document custody, quality control, or 
servicing.
    Accordingly, a covered transaction is eligible for purchase or 
guarantee by Fannie Mae or Freddie Mac, for example, if:
    i. The loan conforms to the relevant standards set forth in the 
Fannie Mae Single-Family Selling Guide or the Freddie Mac Single-Family 
Seller/Servicer Guide in effect at the time, or to standards set forth 
in a written agreement between the creditor or a sponsor or aggregator 
of the creditor and Fannie Mae or Freddie Mac in effect at that time 
that permits variation from the standards of those guides;
    ii. The loan has been granted an individual waiver by a GSE, which 
will allow purchase or guarantee in spite of variations from the 
applicable standards; or
    iii. The creditor inputs accurate information into the Fannie Mae 
or Freddie Mac AUS or another AUS pursuant to a written agreement 
between the creditor and Fannie Mae or Freddie Mac that permits 
variation from the GSE AUS; the loan receives one of the 
recommendations specified below in paragraphs A or B from the 
corresponding GSE AUS or an equivalent recommendation pursuant to 
another AUS as authorized in the written agreement; and the creditor 
satisfies any requirements and conditions specified by the relevant AUS 
that are not wholly unrelated to ability to repay, the non-satisfaction 
of which would invalidate that recommendation:
    A. An ``Approve/Eligible'' recommendation from Desktop Underwriter 
(DU); or
    B. A risk class of ``Accept'' and purchase eligibility of ``Freddie 
Mac Eligible'' from Loan Prospector (LP).
    5. Repurchase and indemnification demands. A repurchase or 
indemnification demand by Fannie Mae, Freddie Mac, HUD, VA, USDA, or 
RHS is not dispositive of qualified mortgage status. Qualified mortgage 
status under Sec.  1026.43(e)(4) depends on whether a loan is eligible 
to be purchased, guaranteed, or insured at the time of consummation, 
provided that other requirements under Sec.  1026.43(e)(4) are 
satisfied. Some repurchase or indemnification demands are not related 
to eligibility criteria at consummation. See comment 43(e)(4)-4. 
Further, even where a repurchase or indemnification demand relates to 
whether the loan satisfied relevant eligibility requirements as of the 
time of consummation, the mere fact that a demand has been made, or 
even resolved, between a creditor and GSE or agency is not dispositive 
for purposes of Sec.  1026.43(e)(4). However, evidence of whether a 
particular loan satisfied the Sec.  1026.43(e)(4) eligibility criteria 
at consummation may be brought to light in the course of dealing over a 
particular demand, depending on the facts and circumstances. 
Accordingly, each loan should be evaluated by the creditor based on the 
facts and circumstances relating to the eligibility of that loan at the 
time of consummation. For example:
    i. Assume eligibility to purchase a loan was based in part on the 
consumer's employment income of $50,000 per year. The creditor uses the 
income figure in obtaining an approve/eligible recommendation from DU. 
A quality control review, however, later determines that the 
documentation provided and verified by the creditor to comply with 
Fannie Mae requirements did not support the reported income of $50,000 
per year. As a result, Fannie Mae demands that the creditor repurchase 
the loan. Assume that the quality control review is accurate, and that 
DU would not have issued an approve/eligible recommendation if it had 
been provided the accurate income figure. The DU determination at the 
time of consummation was invalid because it was based on inaccurate 
information provided by the creditor; therefore, the loan was never a 
qualified mortgage under Sec.  1026.43(e)(4).
    ii. Assume that a creditor delivered a loan, which the creditor 
determined was a qualified mortgage at the time of consummation under 
Sec.  1026.43(e)(4), to Fannie Mae for inclusion in a particular To-Be-
Announced Mortgage Backed Security (MBS) pool of loans. The data 
submitted by the creditor at the time of loan delivery indicated that 
the various loan terms met the product type, weighted-average coupon, 
weighted-average maturity, and other MBS pooling criteria, and MBS 
issuance disclosures to investors reflected this loan data. However, 
after delivery and MBS issuance, a quality control review determines 
that the loan violates the pooling criteria.The loan still meets 
eligibility requirements for Fannie Mae products and loan terms. Fannie 
Mae, however, requires the creditor to repurchase the loan due to the 
violation of MBS pooling requirements. Assume that the quality control 
review determination is accurate. Because the loan still meets Fannie 
Mae's eligibility requirements, it remains a qualified mortgage based 
on these facts and circumstances.

[[Page 44728]]

* * * * *

    Dated: July 10, 2013.
Richard Cordray,
Director, Bureau of Consumer Financial Protection.
[FR Doc. 2013-16962 Filed 7-23-13; 8:45 am]
BILLING CODE 4810-AM-P