[Federal Register Volume 78, Number 190 (Tuesday, October 1, 2013)]
[Rules and Regulations]
[Pages 60382-60451]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-22752]
[[Page 60381]]
Vol. 78
Tuesday,
No. 190
October 1, 2013
Part II
Bureau of Consumer Financial Protection
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12 CFR Parts 1002, 1024, and 1026
Amendments to the 2013 Mortgage Rules Under the Equal Credit
Opportunity Act (Regulation B), Real Estate Settlement Procedures Act
(Regulation X), and the Truth in Lending Act (Regulation Z); Final Rule
Federal Register / Vol. 78, No. 190 / Tuesday, October 1, 2013 /
Rules and Regulations
[[Page 60382]]
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BUREAU OF CONSUMER FINANCIAL PROTECTION
12 CFR Parts 1002, 1024, and 1026
[Docket No. CFPB-2013-0018]
RIN 3170-AA37
Amendments to the 2013 Mortgage Rules Under the Equal Credit
Opportunity Act (Regulation B), Real Estate Settlement Procedures Act
(Regulation X), and the Truth in Lending Act (Regulation Z)
AGENCY: Bureau of Consumer Financial Protection.
ACTION: Final rule.
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SUMMARY: This final rule amends some of the final mortgage rules issued
by the Bureau of Consumer Financial Protection (Bureau) in January
2013. These amendments focus primarily on loss mitigation procedures
under Regulation X's servicing provisions, amounts counted as loan
originator compensation to retailers of manufactured homes and their
employees for purposes of applying points and fees thresholds under the
Home Ownership and Equity Protection Act and the Ability-to-Repay rules
in Regulation Z, exemptions available to creditors that operate
predominantly in ``rural or underserved'' areas for various purposes
under the mortgage regulations, application of the loan originator
compensation rules to bank tellers and similar staff, and the
prohibition on creditor-financed credit insurance. The Bureau also is
adjusting the effective dates for certain provisions of the loan
originator compensation rules. In addition, the Bureau is adopting
technical and wording changes for clarification purposes to Regulations
B, X, and Z.
DATES: This final rule is effective January 10, 2014, except for the
amendments to Sec. Sec. 1026.35(b)(2)(iii), 1026.36(a), (b), and (j),
and commentary to Sec. Sec. 1026.25(c)(2), 1026.35, and 1026.36(a),
(b), (d), and (f) in Supp. I to part 1026, which are effective January
1, 2014, and the amendments to commentary to Sec. 1002.14(b)(3) in
Supplement I to part 1002, which are effective January 18, 2014.
In addition this rule changes the effective date from January 10,
2014, to January 1, 2014, for the amendments to Sec. Sec.
1026.25(c)(2), 1026.36(a), (b), (d), (e), (f), and (j) and commentary
to Sec. Sec. 1026.25(c)(2) and 1026.36(a), (b), (d), (e), (f), and (j)
in Supp. I to part 1026, published February 15, 2013, at 78 FR 11280.
FOR FURTHER INFORMATION CONTACT: Whitney Patross, Attorney; Richard
Arculin, William Corbett, Michael Silver, and Daniel Brown, Counsels;
Mark Morelli and Nicholas Hluchyj, Senior Counsels, and Paul Ceja,
Senior Counsel and Special Advisor, 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).\1\ In
June 2013, the Bureau proposed several amendments to those final rules
(``June 2013 Proposal'').\2\ This final rule adopts with some revisions
and additional clarifications the June 2013 Proposal. It makes several
amendments to the provisions adopted by the 2013 Title XIV Final Rules
to clarify or revise regulatory provisions and official interpretations
primarily relating to the 2013 Mortgage Servicing Final Rules and the
2013 Loan Originator Compensation Final Rule, as described further
below. This final rule also makes modifications to the effective dates
for provisions adopted by the 2013 Loan Originator Compensation Final
Rule, and certain technical corrections and minor refinements to
Regulations B, X, and Z. The specifics of these amendments and
modifications are discussed in the following paragraphs.
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\1\ Specifically, on January 10, 2013, the Bureau issued Escrow
Requirements Under the Truth in Lending Act (Regulation Z), 78 FR
4726 (Jan. 22, 2013) (2013 Escrows Final Rule), High-Cost Mortgage
and Homeownership Counseling Amendments to the Truth in Lending Act
(Regulation Z) and Homeownership Counseling Amendments to the Real
Estate Settlement Procedures Act (Regulation X), 78 FR 6856 (Jan.
31, 2013) (2013 HOEPA Final Rule), and Ability-to-Repay and
Qualified Mortgage Standards Under the Truth in Lending Act
(Regulation Z), 78 FR 6407 (Jan. 30, 2013) (2013 ATR Final Rule).
The Bureau concurrently issued a proposal to amend the 2013 ATR
Final Rule, which was finalized on May 29, 2013. See 78 FR 6621
(Jan. 30, 2013) and 78 FR 35430 (June 12, 2013). On January 17,
2013, the Bureau issued the Real Estate Settlement Procedures Act
(Regulation X) and Truth in Lending Act (Regulation Z) Mortgage
Servicing Final Rules, 78 FR 10901 (Regulation Z) (Feb. 14, 2013)
and 78 FR 10695 (Regulation X) (Feb. 14, 2013) (2013 Mortgage
Servicing Final Rules). On January 18, 2013, the Bureau issued the
Disclosure and Delivery Requirements for Copies of Appraisals and
Other Written Valuations Under the Equal Credit Opportunity Act
(Regulation B), 78 FR 7215 (Jan. 31, 2013) (2013 ECOA Final Rule)
and, jointly with other agencies, issued Appraisals for Higher-
Priced Mortgage Loans, 78 FR 10367 (Feb. 13, 2013). On January 20,
2013, the Bureau issued the Loan Originator Compensation
Requirements under the Truth in Lending Act (Regulation Z), 78 FR
11280 (Feb. 15, 2013) (2013 Loan Originator Compensation Final
Rule).
\2\ Amendments to the 2013 Mortgage Rules Under the Equal Credit
Opportunity Act (Regulation B), Real Estate Settlement Procedures
Act (Regulation X), and the Truth in Lending Act (Regulation Z), 78
FR 39902 (July 2, 2013).
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First, the Bureau is adopting several modifications to provisions
of Regulation X adopted by the 2013 Mortgage Servicing Final Rules,
including those related to error resolution procedures and information
requests (Sec. Sec. 1024.35 and 1024.36), and loss mitigation (Sec.
1024.41). With respect to loss mitigation, two of the revisions concern
the requirement in Sec. 1024.41(b)(2)(i) that a servicer review a
borrower's loss mitigation application within five days and provide a
notice to the borrower acknowledging receipt and informing the borrower
whether the application is complete or incomplete. If the servicer does
not deem the application complete, the servicer's notice must also list
the missing items and suggest the borrower provide the information by
the earliest remaining of four dates specified in the regulation. The
changes replace the four specified dates with a requirement that a
servicer give a borrower a reasonable date by which the borrower should
in which to provide the missing information. New commentary explains
the four dates previously specified in the regulation are now treated
as milestones that the servicer should consider in selecting a
reasonable date, however the final rule allows servicers more
flexibility than the existing rule. The changes also set forth
requirements and procedures for a servicer to follow in the event that
a facially complete application is later found by the servicer to
require additional information or corrections to a previously submitted
document in order to be evaluated for loss mitigation options available
to the borrower. Another modification provides servicers more
flexibility in providing short-term payment forbearance plans based on
an evaluation of an incomplete loss mitigation application. Other
clarifications and revisions address the content of notices required
under Sec. 1024.41(c)(1)(ii) and (h)(4), which inform borrowers of the
outcomes of their evaluation for loss mitigation and any appeals filed
by the borrowers. In addition, the amendments address how protections
are determined to apply where a foreclosure sale has not been scheduled
at the time the borrower submits a loss mitigation application or when
a foreclosure sale is rescheduled. Finally, the amendments explain what
actions constitute the ``first notice or filing'' for purposes of the
general ban on proceeding to foreclosure before a
[[Page 60383]]
borrower is 120 days delinquent, and provide exemptions from the 120-
day prohibition for foreclosures for certain reasons other than
nonpayment.
Second, the Bureau is clarifying and revising the definition of
points and fees for purposes of the qualified mortgage points and fees
cap and the high-cost mortgage points and fees threshold, as adopted in
the 2013 ATR Final Rule and the 2013 HOEPA Final Rule, respectively. In
particular, the Bureau is adding commentary to Sec. 1026.32(b)(1)(ii)
to clarify for retailers of manufactured homes and their employees what
compensation must be counted as loan originator compensation and thus
included in the points and fees thresholds. The Bureau also is adding
commentary to clarify the treatment of charges paid by parties other
than the consumer, including third parties, for purposes of the points
and fees thresholds.
Third, the Bureau is revising two exceptions available under the
2013 Title XIV Final Rules to small creditors operating predominantly
in ``rural'' or ``underserved'' areas pending the Bureau's re-
examination of the underlying definitions of ``rural'' or
``underserved'' over the next two years, as it recently announced it
would do in Ability-to-Repay and Qualified Mortgage Standards Under the
Truth in Lending Act (Regulation Z) (May 2013 ATR Final Rule).\3\ The
Bureau is extending an exception to the general prohibition on balloon
features for high-cost mortgages under Sec. 1026.32(d)(1)(ii)(C) to
allow all small creditors, regardless of whether they operate
predominantly in ``rural'' or ``underserved'' areas, to continue
originating balloon high-cost mortgages if the loans meet the
requirements for qualified mortgages under Sec. Sec. 1026.43(e)(6) or
1026.43(f). In addition, the Bureau is amending an exemption from the
requirement to establish escrow accounts for higher-priced mortgage
loans under Sec. 1026.35(b)(2)(iii)(A) for small creditors that extend
more than 50 percent of their total covered transactions secured by a
first lien in ``rural'' or ``underserved'' counties during the
preceding calendar year. To prevent creditors that qualified for the
exemption in 2013 from losing eligibility in 2014 or 2015 because of
changes in which counties are considered rural while the Bureau is re-
evaluating the underlying definition of ``rural,'' the Bureau is
amending this provision to allow creditors to qualify for the exemption
if they extended more than 50 percent of their total covered
transactions in rural or underserved counties in any of the previous
three calendar years (assuming the other criteria for eligibility are
also met).
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\3\ 78 FR 35430 (June 12, 2013).
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Fourth, the Bureau is adopting revisions, as well as general
technical and wording changes, to various provisions of the 2013 Loan
Originator Compensation Final Rule in Sec. 1026.36. These include
revising the definition of ``loan originator'' in the regulatory text
and commentary, such as provisions addressing when employees of a
creditor or loan originator in certain administrative or clerical roles
(e.g., tellers or greeters) may become ``loan originators'' and thus
subject to the rule, upon providing contact information or credit
applications for loan originators or creditors to consumers; further
clarification on the meaning of ``credit terms,'' which is used
throughout Sec. 1026.36(a); and additional clarifications regarding
when employees of manufactured housing retailers may be classified as
loan originators. The Bureau also is adopting a number of
clarifications to the commentary on prohibited payments to loan
originators.
Fifth, the Bureau is clarifying and revising three aspects of the
rules implementing the Dodd-Frank Act prohibition on creditors
financing credit insurance premiums in connection with certain consumer
credit transactions secured by a dwelling. The Bureau is adding new
Sec. 1026.36(i)(2)(ii) to clarify what constitutes financing of such
premiums by a creditor. The Bureau also is adding new Sec.
1026.36(i)(2)(iii) to clarify when credit insurance premiums are
considered to be calculated and paid on a monthly basis, for purposes
of the statutory exclusion from the prohibition for certain credit
insurance premium calculation and payment arrangements. And, finally,
the Bureau is adding new comment 36(i)-1 to clarify when including the
credit insurance premium or fee in the amount owed violates the rule.
Sixth, the Bureau is changing the effective date for certain
provisions under the 2013 Loan Originator Compensation Final Rule, so
they take effect on January 1, 2014, rather than January 10, 2014, as
originally provided. The affected provisions are the amendments to or
additions of (as applicable) Sec. 1026.25(c)(2) (record retention),
Sec. 1026.36(a) (definitions), Sec. 1026.36(b) (scope), Sec.
1026.36(d) (compensation), Sec. 1026.36(e) (anti-steering), Sec.
1026.36(f) (qualifications), and Sec. 1026.36(j) (compliance policies
and procedures for depository institutions) and the associated
commentary. The Bureau believes that this change will facilitate
compliance because these provisions largely focus on compensation plan
structures, registration and licensing, and hiring and training
requirements that are often structured on an annual basis and typically
do not vary from transaction to transaction. After reviewing comments,
the Bureau has decided to keep the date for implementation of the ban
on financing credit insurance under Sec. 1026.36(i) as January 10,
2014, consistent with the date previously adopted in the Loan
Originator Compensation Requirements under the Truth in Lending Act
(Regulation Z); Prohibition on Financing Credit Insurance Premiums;
Delay of Effective Date (2013 Effective Date Final Rule).\4\
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\4\ 78 FR 32547 (May 31, 2013).
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In addition to the clarifications and amendments to Regulations X
and Z discussed above, the Bureau is adopting technical corrections and
minor clarifications to wording throughout Regulations B, X, and Z that
are generally not substantive in nature.
II. Background
A. Title XIV Rules 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. Public Law 111-203, 124 Stat.
1376 (2010). In the Dodd-Frank Act, Congress established the Bureau
and, under sections 1061 and 1100A, generally consolidated the
rulemaking authority for Federal consumer financial laws, including the
Equal Credit Opportunity Act (ECOA), Truth in Lending Act (TILA), and
Real Estate Settlement Procedures Act (RESPA), in the Bureau.\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
[[Page 60384]]
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, the
2013 Escrows Final Rule, and the 2013 HOEPA Final Rule. On January 17,
2013, the Bureau issued the 2013 Mortgage Servicing Final Rules. On
January 18, 2013, the Bureau issued Appraisals for Higher-Priced
Mortgage Loans \7\ (issued jointly with other agencies) and the 2013
ECOA Final Rule. On January 20, 2013, the Bureau issued the 2013 Loan
Originator Compensation Final Rule. Most of these rules will become
effective on January 10, 2014.
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\7\ 78 FR 10367 (Feb. 13, 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), which the Bureau finalized on May 29, 2013 (May 2013 ATR
Final Rule).\8\
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\8\ 78 FR 6622 (Jan. 30, 2013); 78 FR 35430 (June 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),\9\
under which the Bureau would work with the mortgage industry and other
stakeholders to ensure that the new rules can be implemented accurately
and expeditiously. The Implementation Plan includes: (1) Coordination
with other agencies, including to develop consistent, updated
examination procedures; (2) publication of plain-language guides to the
new rules; (3) publication of additional corrections and clarifications
of the new rules, as needed; (4) publication of readiness guides for
the new rules; and (5) education of consumers on the new rules.
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\9\ Consumer Financial Protection Bureau Lays Out Implementation
Plan for New Mortgage Rules. Press Release. Feb. 13, 2013.
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In the June 2013 proposal, the Bureau proposed amendments to its
new mortgage rules. This final rule adopts those proposed amendments
with some additional clarifications and revisions. The purpose of these
updates is to address important questions raised by industry, consumer
groups, or other agencies.
C. Comments on the Proposed Rule
The Bureau received 280 comments on the proposed rule on which the
final rule is based. Many of these comments discussed issues on which
the proposed rule did not seek comment or address. A number of comments
addressed, for example, the small servicer exemption, the general
effective dates for the 2013 Title XIV Rules finalized in January 2013,
whether the Bureau should reconsider replacing the Sec. 1026.36(a)
definition of ``loan originator'' with the definition provided under
the SAFE Act, or whether the Bureau should amend the provision of the
mortgage servicing rules that deals with second or successive loss
mitigation applications. This final rule does not make any changes
outside the scope of the proposal. As proposed, it focuses on specific,
narrow implementation and interpretive issues, rather than broader
policy changes.
The Bureau has examined all comments submitted and discusses 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 ECOA, TILA, RESPA, and the Dodd-Frank Act. Section 1061 of the
Dodd-Frank Act transferred to the Bureau the ``consumer financial
protection functions'' previously vested in certain other Federal
agencies, including the Board of Governors of the Federal Reserve
System (Federal Reserve 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.'' \10\
Section 1061 of the Dodd-Frank Act also transferred to the Bureau all
of the Department of Housing and Urban Development's (HUD) consumer
protection functions relating to RESPA.\11\ Title X of the Dodd-Frank
Act, including section 1061 of the Dodd-Frank Act, along with ECOA,
TILA, RESPA, and certain subtitles and provisions of title XIV of the
Dodd-Frank Act, are Federal consumer financial laws.\12\
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\10\ 12 U.S.C. 5581(a)(1).
\11\ Public Law 111-203, 124 Stat. 1376, section 1061(b)(7); 12
U.S.C. 5581(b)(7).
\12\ Dodd-Frank Act section 1002(14), 12 U.S.C. 5481(14)
(defining ``Federal consumer financial law'' to include the
``enumerated consumer laws'' and the provisions of title X of the
Dodd-Frank Act); Dodd-Frank Act section 1002(12), 12 U.S.C. 5481(12)
(defining ``enumerated consumer laws'' to include TILA), Dodd-Frank
section 1400(b), 15 U.S.C. 1601 note (defining ``enumerated consumer
laws'' to include certain subtitles and provisions of Title XIV).
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A. ECOA
Section 703(a) of ECOA authorizes the Bureau to prescribe
regulations to carry out the purposes of ECOA. Section 703(a) further
states that such regulations may contain--but are not limited to--such
classifications, differentiation, or other provision, and may provide
for such adjustments and exceptions for any class of transactions as,
in the judgment of the Bureau, are necessary or proper to effectuate
the purposes of ECOA, to prevent circumvention or evasion thereof, or
to facilitate or substantiate compliance. 15 U.S.C. 1691b(a).
B. RESPA
Section 19(a) of RESPA, 12 U.S.C. 2617(a), authorizes the Bureau to
prescribe such rules and regulations, to make such interpretations, and
to grant such reasonable exemptions for classes of transactions, as may
be necessary to achieve the purposes of RESPA, which 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 ensuring that
servicers respond to borrower requests and complaints in a timely
manner and maintain and provide accurate information, helping borrowers
avoid unwarranted or unnecessary costs and fees, and facilitating
review for foreclosure avoidance options.
C. TILA
Section 105(a) of TILA, 15 U.S.C. 1604(a), authorizes the Bureau to
prescribe regulations to carry out the purposes of TILA. Under section
105(a), such regulations may contain such additional requirements,
classifications, differentiations, or other provisions, and may provide
for such adjustments and exceptions for all or any class of
transactions, as in the judgment of the Bureau are necessary or proper
to effectuate the purposes of TILA, to prevent circumvention or evasion
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thereof, or to facilitate compliance therewith. A purpose of TILA is
``to assure a meaningful disclosure of credit terms so that the
consumer will be able to compare more readily the various credit terms
available to him and avoid the uninformed use of credit.'' TILA section
102(a), 15 U.S.C. 1601(a). In particular, it is a purpose of TILA
section 129C, as amended by the Dodd-Frank Act, to assure that
consumers are offered and receive residential mortgage loans on terms
that reasonably reflect their ability to repay the loans and that are
understandable and not unfair, deceptive, and abusive. Section 105(f)
of TILA, 15 U.S.C. 1604(f), authorizes the Bureau to exempt from all or
part of TILA any class of transactions if the Bureau determines that
TILA coverage does not provide a meaningful benefit to consumers in the
form of useful information or protection. Under TILA section
103(bb)(4), the Bureau may adjust the definition of points and fees for
purposes of that threshold to include such charges that the Bureau
determines to be appropriate.
TILA section 129C(b)(3)(B)(i) provides the Bureau with authority to
prescribe regulations that revise, add to, or subtract from the
criteria that define a qualified mortgage upon a finding that such
regulations are necessary or proper to ensure that responsible,
affordable mortgage credit remains available to consumers in a manner
consistent with the purposes of the ability-to-repay requirements; or
are necessary and appropriate to effectuate the purposes of the
ability-to-repay requirements, to prevent circumvention or evasion
thereof, or to facilitate compliance with TILA sections 129B and 129C.
15 U.S.C. 1639c(b)(3)(B)(i). In addition, TILA section 129C(b)(3)(A)
requires the Bureau to prescribe regulations to carry out the purposes
of the qualified mortgage provisions, such as to ensure that
responsible and affordable mortgage credit remains available to
consumers in a manner consistent with the purposes of TILA section
129C. 15 U.S.C. 1639c(b)(3)(A).
D. The Dodd-Frank Act
Section 1022(b)(1) of the Dodd-Frank Act authorizes the Bureau to
prescribe rules ``as may be necessary or appropriate to enable the
Bureau to administer and carry out the purposes and objectives of the
Federal consumer financial laws, and to prevent evasions thereof.'' 12
U.S.C. 5512(b)(1). Title X of the Dodd-Frank Act is a Federal consumer
financial law. Accordingly, the Bureau is exercising its authority
under the Dodd-Frank Act section 1022(b) to prescribe rules that carry
out the purposes and objectives of ECOA, RESPA, TILA, title X, and the
enumerated subtitles and provisions of title XIV of the Dodd-Frank Act,
and prevent evasion of those laws.
Section 1032(a) of the Dodd-Frank Act provides that the Bureau
``may prescribe rules to ensure that the features of any consumer
financial product or service, both initially and over the term of the
product or service, are fully, accurately, and effectively disclosed to
consumers in a manner that permits consumers to understand the costs,
benefits, and risks associated with the product or service, in light of
the facts and circumstances.'' 12 U.S.C. 5532(a). The authority granted
to the Bureau in Dodd-Frank Act section 1032(a) is broad, and empowers
the Bureau to prescribe rules regarding the disclosure of the
``features'' of consumer financial products and services generally.
Accordingly, the Bureau may prescribe rules containing disclosure
requirements even if other Federal consumer financial laws do not
specifically require disclosure of such features.
Dodd-Frank Act section 1032(c) provides that, in prescribing rules
pursuant to Dodd-Frank Act section 1032, the Bureau ``shall consider
available evidence about consumer awareness, understanding of, and
responses to disclosures or communications about the risks, costs, and
benefits of consumer financial products or services.'' 12 U.S.C.
5532(c). Accordingly, in amending provisions authorized under Dodd-
Frank Act section 1032(a), the Bureau has considered available studies,
reports, and other evidence about consumer awareness, understanding of,
and responses to disclosures or communications about the risks, costs,
and benefits of consumer financial products or services.
The Bureau is amending rules finalized in January 2013 that
implement certain Dodd-Frank Act provisions. In particular, the Bureau
is amending regulatory provisions adopted by the 2013 ECOA Final Rule,
the 2013 Mortgage Servicing Final Rules, the 2013 HOEPA Final Rule, the
2013 Escrows Final Rule, the 2013 Loan Originator Compensation Final
Rule, and the 2013 ATR Final Rule.
IV. Effective Dates
A. Provisions Other Than Those Related to the 2013 Loan Originator
Compensation Final Rule or the 2013 Escrows Final Rule
In enacting the Dodd-Frank Act, Congress significantly amended the
statutory requirements governing a number of mortgage practices. Under
the Dodd-Frank Act, most of these new requirements would have taken
effect automatically on January 21, 2013, if the Bureau had not issued
implementing regulations by that date.\13\ Where the Bureau was
required to prescribe implementing regulations, the Dodd-Frank Act
further provided that those regulations must take effect not later than
12 months after the date of the regulations' issuance in final
form.\14\ The Bureau issued the 2013 Title XIV Final Rules in January
2013 to implement these new statutory provisions and provide for an
orderly transition. To allow the mortgage industry sufficient time to
comply with the new rules, the Bureau established January 10, 2014--one
year after issuance of the earliest of the 2013 Title XIV Final Rules--
as the baseline effective date for nearly all of the new requirements.
In the preamble to certain of the various 2013 Title XIV Final Rules,
the Bureau further specified that the new regulations would apply to
transactions for which applications were received on or after January
10, 2014.
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\13\ Dodd-Frank Act section 1400(c)(3), 15 U.S.C. 1601 note.
\14\ Dodd-Frank Act section 1400(c)(1)(B), 15 U.S.C. 1601 note.
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Except for the amendments regarding the 2013 Loan Originator
Compensation Final Rule and the 2013 Escrows Final Rule discussed
below, the Bureau proposed an effective date of January 10, 2014. The
Bureau proposed this effective date because it is consistent with the
effective dates for the 2013 Title XIV Final Rules, which this final
rule clarifies, revises, or amends. Most of the proposed amendments
were intended to clarify application of certain aspects of these rules
in advance of the January 10, 2014 effective date, or amend them in
manners that facilitate compliance. As discussed in the various 2013
Title XIV Final Rules, the Bureau believes that having a consistent
effective date across most of the 2013 Title XIV Final Rules will
facilitate compliance. This includes any clarifications, revisions, or
other amendments made during the implementation period--particularly
those amendments designed to facilitate compliance with the overarching
2013 Title XIV Final Rules. Thus, because the clarifications,
revisions, and amendments to the 2013 Title XIV Final Rules adopted in
this final rule interrelate with or depend on other aspects of the
underlying 2013 Title XIV Final Rules and are intended largely to
facilitate compliance with those rules,
[[Page 60386]]
the Bureau does not believe that the amendments adopted by this final
rule should become effective on a different date than the underlying
regulations. The Bureau thus proposed an effective date of January 10,
2014 for any amendments adopted by this final rule.
The Bureau received some comments from industry and trade
associations that addressed the effective dates, but most of these
comments generally requested a delayed effective date across all the
rules, which the Bureau did not propose. The Bureau received a handful
of comments that asked for staggered effective dates for the amended
rules, but none of these comments provided a reasonable means of
implementing the proposed amendments at a date later than the
underlying regulations the proposal would have amended. Despite these
comments, the Bureau remains persuaded that it would be impracticable
for these amendments to take effect later than the underlying
regulations they amend. Moreover, the Bureau believes that these
amendments should help industry participants comply with the other
components of the 2013 Title XIV Final Rules, which in most cases also
will take effect January 10, 2014. The Bureau thus is adopting the
effective date of January 10, 2014, for the amendments in this document
other than as discussed in parts IV.B and IV.C below.
B. For Provisions Related to the 2013 Escrows Final Rule
The Bureau proposed an effective date of January 1, 2014 for the
amendments to the new provisions in Sec. 1026.35 that govern higher-
priced mortgage loan escrow requirements, which took effect on June 1,
2013. While the Bureau established January 10, 2014 as the baseline
effective date for most of the 2013 Title XIV Final Rules, it
identified certain provisions that it believed did not present
significant implementation burdens for industry, including amendments
to Sec. 1026.35 adopted by the 2013 Escrows Final Rule. For these
provisions, the Bureau set an earlier effective date of June 1, 2013.
The proposal would have amended one such provision, Sec.
1026.35(b)(2)(iii)(A), which provides an exemption from the higher-
priced mortgage loan escrow requirement to creditors that extend more
than 50 percent of their total covered transactions secured by a first
lien in ``rural'' or ``underserved'' counties during the preceding
calendar year and also meet other small creditor criteria, and do not
otherwise maintain escrow accounts for loans serviced by themselves or
an affiliate. In light of recent changes to which counties meet the
definition of ``rural,'' the Bureau proposed to amend this provision to
prevent creditors that qualified for the exemption in 2013 from losing
eligibility in 2014 or 2015 because of these changes. The proposal
would have allowed creditors to qualify for the exemption if they
qualified in any of the previous three calendar years (assuming the
other criteria for eligibility are also met). In addition, the proposal
would have amended Sec. 1026.35(b)(2)(iii)(D)(1) to prevent creditors
that were previously ineligible for the exemption, but may now qualify
in light of the proposed changes, from losing eligibility because they
had established escrow accounts for first-lien higher-priced mortgage
loans (for which applications were received after June 1, 2013), as
required when the final rule took effect and prior to the proposed
amendments taking effect. The Bureau proposed to make this amendment
effective for applications received on or after January 1, 2014,
because the Sec. 1026.35(b)(2)(iii) exemption applies based on a
calendar year and relates to a regulation that is already in effect.
The Bureau received no comments addressing the proposed effective date
of this provision, other than comments that generally supported the
proposal.
As discussed in the section-by-section analysis below, the Bureau
is adopting amendments to Sec. 1026.35(b)(2)(iii) as proposed. In
addition, the Bureau is adopting amendments to the commentary to this
section substantially as proposed with one additional clarification.
The Bureau believes it is appropriate to set a January 1, 2014
effective date for these provisions. The Bureau notes that a January 1,
2014 effective date is more beneficial to industry, because the
amendment would only expand eligibility for the exemption--thus an
effective date of January 1, 2014, as opposed to January 10, 2014,
would mean that creditors are able to take advantage of this expanded
exemption earlier. Accordingly, the amendments to Sec.
1026.35(b)(2)(iii) and its commentary will apply to applications
received on or after January 1, 2014.
C. Provisions Related to the 2013 Loan Originator Compensation Final
Rule
The effective date for certain provisions in this final rule
related to the 2013 Loan Originator Compensation Final Rule, along with
the related provisions of the 2013 Loan Originator Compensation Final
Rule, is January 1, 2014, for the reasons discussed below.
V. Effective Date of the 2013 Loan Originator Compensation Rule
A. General
The Proposal
As described in the proposal, the Bureau established January 10,
2014, as the baseline effective date for nearly all of the provisions
in the 2013 Title XIV Final Rules, including most provisions of the
2013 Loan Originator Compensation Final Rule. In the proposal, the
Bureau stated that it believed that having a consistent effective date
across nearly all of the 2013 Title XIV Final Rules would facilitate
compliance. However, as explained in the proposal, the Bureau
identified a few provisions that it believed did not present
significant implementation burdens for industry, including Sec.
1026.36(h) on mandatory arbitration clauses and waivers of certain
consumer rights and Sec. 1026.36(i) on financing credit insurance, as
adopted by the 2013 Loan Originator Compensation Final Rule. As
explained in the proposal, for these provisions (and associated
commentary), the Bureau set an earlier effective date of June 1,
2013.\15\
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\15\ After interpretive issues were raised concerning the credit
insurance provision as discussed in the 2013 Loan Originator
Compensation Final Rule, the Bureau temporarily delayed and extended
the effective date for Sec. 1026.36(i) in the 2013 Effective Date
Final Rule until January 10, 2014. 78 FR 32547 (May 31, 2013). In
the proposal, the Bureau requested comment on whether the effective
date for Sec. 1026.36(i) may be set earlier than January 10, 2014.
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As described in the proposal, since issuing the 2013 Loan
Originator Compensation Final Rule in January 2013, the Bureau has
received a number of questions about transition issues, particularly
with regard to application of provisions under Sec. 1026.36(d) that
generally prohibit basing loan originator compensation on transaction
terms but permit creditors to award non-deferred profits-based
compensation subject to certain limits. For instance, as discussed in
the proposal, the Bureau has received inquiries about when creditors
and loan originator organizations may begin taking into account
transactions for purposes of paying compensation under a non-deferred
profits-based compensation plan pursuant to Sec.
1026.36(d)(1)(iv)(B)(1) (i.e., the 10-percent total compensation limit,
or the 10-percent limit). As the Bureau stated in the proposal, while
the profits-based compensation provisions present relatively
complicated transition issues, the Bureau is also conscious of the fact
that most other provisions in the 2013 Loan Originator Compensation
Final
[[Page 60387]]
Rule are simpler to implement because they largely recodify and clarify
existing requirements that were previously adopted by the Federal
Reserve Board in 2010 with regard to loan originator compensation, and
by various agencies under the Secure and Fair Enforcement for Mortgage
Licensing Act of 2008, 12 U.S.C. 5106-5116 (SAFE Act), with regard to
loan originator qualification requirements. The Bureau also stated in
the proposal that these provisions are focused on compensation plan
structures, registration and licensing, and hiring and training
requirements that are often structured on an annual basis and typically
do not vary from transaction to transaction.
For all of these reasons, the Bureau proposed moving the general
effective date for most provisions adopted by the 2013 Loan Originator
Compensation Final Rule to January 1, 2014. The Bureau stated in the
proposal that, although this change would shorten the implementation
period by nine days, the Bureau believes that the change would actually
facilitate compliance and reduce implementation burden by providing a
cleaner transition period that more closely aligns with changes to
employers' annual compensation structures and registration, licensing,
and training requirements. In addition, the Bureau also stated that,
because elements of the 2013 Loan Originator Compensation Final Rule
concerning retention of records, definitions, scope, and implementing
procedures affect multiple provisions, the Bureau was proposing to make
the change with regard to the bulk of the 2013 Loan Originator
Compensation Final Rule as described further below, rather than
attempting to treat individual provisions in isolation. Finally, the
Bureau also proposed changes to the effective date for provisions on
financing of credit insurance under Sec. 1026.36(i), in connection
with proposing further clarifications and guidance on the Dodd-Frank
Act requirements related to that provision.
The Bureau stated in the proposal that it believed these changes
would facilitate compliance and help ensure that the 2013 Loan
Originator Compensation Final Rule does not have adverse unintended
consequences. The Bureau requested public comment on these proposed
effective dates, including on any suggested alternatives.
Comments
The Bureau received approximately 30 comments addressing the
proposed changes to the effective date for the 2013 Loan Originator
Compensation Final Rule other than Sec. 1026.36(i).\16\ The comments
generally were supportive of these proposed changes. A national
association of credit unions and several state credit union
associations supported moving up the effective date from January 10,
2014, to January 1, 2014, stating that a January 1 date would result in
a cleaner transition period that more closely aligns with changes to
employers' annual compensation structures and registration, licensing,
and training requirements. A national trade association of banking
institutions stated its appreciation for the Bureau's efforts to
facilitate compliance and establish effective dates that are better
aligned with banker systems. This association wrote that it did not
believe a January 1 effective date would constitute a major burden. The
association urged the Bureau, however, to enact effective dates that
apply to transactions that are either consummated on or after January
1, 2014 or for which the creditor paid compensation on or after that
date. According to the association, allowing for an alternative option
would best accommodate the various payment systems and methods that
exist across various institutions and would not, in its opinion, give
rise to significant difficulties in terms of examinations.\17\
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\16\ The comments regarding the effective date for Sec.
1026.36(i) are discussed separately below.
\17\ The association stated further that, under this approach,
an institution would have to abide by whatever effective date
methodology it selects.
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One community bank commented that it would pose unnecessary and
wasteful burdens on financial institutions of all sizes to necessitate
a separate accounting and reporting for a nine-day period, because
accounting periods for compensation generally commence annually each
January 1st. A large mortgage company stated that it supported the
change because moving the effective date to January 1, 2014, would help
lenders update their systems on a consistent basis and avoid any
potential lapses in accounting or confusion that could emerge between
January 1 and January 10. One community bank stated that it is
``operationally efficient'' to apply rule changes at the beginning of a
month and that there would be no real difference in compliance burden
because ``most lenders would naturally'' comply as of the earlier date
anyway. A state association representing banking institutions wrote
that moving up the effective date by nine days aligns more closely with
payroll records and tax reporting and may actually be easier to
implement from an operational basis than a January 10 effective date.
This association did report that its members have indicated that they
will not be able to meet either a January 1 or a January 10, 2014,
effective date due to the 2013 Loan Originator Compensation Final
Rule's complexity and pending amendments.
Final Rule
As discussed in more detail below, the Bureau is finalizing the
effective dates for Sec. 1026.36 (and interrelated provisions in Sec.
1026.25(c)(2)) adopted by the 2013 Loan Originator Compensation Final
Rule (and associated commentary), and the amendments to and additions
to those sections contained in today's final rule, as proposed. The
Bureau discusses in turn below the effective dates for different
provisions of Sec. 1026.36 (and interrelated provisions in Sec.
1026.25(c)(2)). These clarifications and amendments to the effective
date require only minimal revisions to the rule text and commentary and
primarily are reflected in the Dates caption and discussion of
effective dates in this Supplementary Information. As amended by the
Dodd-Frank Act, TILA section 105(a), 15 U.S.C. 1604(a), directs the
Bureau to prescribe regulations to carry out the purposes of TILA, and
provides that such regulations may contain additional requirements,
classifications, differentiations, or other provisions, and may provide
for such adjustments and exceptions for all or any class of
transactions, that the Bureau judges are necessary or proper to
effectuate the purposes of TILA, to prevent circumvention or evasion
thereof, or to facilitate compliance. Under Dodd-Frank Act section
1022(b)(1), 15 U.S.C. 5512(b)(1), the Bureau has general authority to
prescribe rules as may be necessary or appropriate to enable the Bureau
to administer and carry out the purposes and objectives of the Federal
consumer financial laws, and to prevent evasions thereof. The Bureau is
changing the effective date of the 2013 Loan Originator Compensation
Final Rule with respect to those provisions described above pursuant to
its TILA section 105(a) and Dodd-Frank Act section 1022(b)(1)
authority.
B. Effective Date for Amendments to Sec. 1026.36(d)
The Proposal
The Bureau proposed three specific changes to the effective date
for the amendments to Sec. 1026.36(d) (and associated commentary)
contained in
[[Page 60388]]
the 2013 Loan Originator Compensation Final Rule. First, the Bureau
proposed that the provisions of the 2013 Loan Originator Compensation
Final Rule revising Sec. 1026.36(d) would be effective January 1,
2014, not January 10, 2014. The Bureau discussed its concern that an
effective date of January 10, 2014, for the revisions to Sec.
1026.36(d) may result in creditors and loan originator organizations
believing that they have to account separately for the period from
January 1 through January 9, 2014, when applying the new compensation
restrictions under Sec. 1026.36(d). While recognizing that this
proposal would mean that creditors and loan originator organizations
would have a slightly shorter implementation period, the Bureau stated
that on balance it believed the proposed change would have eased
compliance burdens for creditors and loan originator organizations by
eliminating any concern about a need for separate accountings as
described above. As noted above, the Bureau also proposed to change the
effective date for the addition of Sec. 1026.25(c)(2) (records
retention) (and associated commentary) from January 10, 2014, to
January 1, 2014, to dovetail with the proposal to change the effective
date of Sec. 1026.36(d) to January 1, 2014, to ensure that records on
compensation paid between January 1 and January 10, 2014, are properly
maintained.
Second, the Bureau proposed that the revisions to Sec. 1026.36(d)
(other than the addition of Sec. 1026.36(d)(1)(iii), as discussed
below) would have applied to transactions that are consummated and for
which the creditor or loan originator organization paid compensation on
or after January 1, 2014. The Bureau stated its belief that applying
the effective date for the revisions to Sec. 1026.36(d) based on
application receipt, rather than based on transaction consummation and
compensation payment, could present compliance challenges. This
proposed change, as the Bureau discussed in the proposal, would have
permitted transactions to be taken into account for purposes of
compensating individual loan originators under the exceptions set forth
in Sec. 1026.36(d)(1)(iv) if the transactions were consummated and
compensation was paid to the individual loan originator on or after
January 1, 2014, even if the applications for those transactions were
received prior to January 1, 2014. The Bureau stated that it believes
this clarification, in conjunction with the proposed change to the
effective date for the revisions to Sec. 1026.36(d) described above,
would have reduced compliance burdens on creditors and loan originator
organizations by allowing them to take into account all transactions
consummated in 2014 (and for which compensation is paid to individual
loan originators in 2014) for purposes of paying compensation under
Sec. 1026.36(d)(1)(iv) that is earned in 2014. This proposed revision
also would have allowed the consumer-paid compensation restrictions and
exceptions thereto in the revisions to Sec. 1026.36(d)(2) to be
effective upon the consummation of any transaction where such
compensation is paid in 2014 even if the application for that
transaction was received in 2013.
Third, the Bureau proposed that the provisions of Sec.
1026.36(d)(1)(iii), which pertain to contributions to or benefits under
designated tax-advantaged plans for individual loan originators, would
apply to transactions for which the creditor or loan originator
organization paid compensation on or after January 1, 2014, regardless
of when the transactions were consummated or the applications were
received. The Bureau explained in the proposal that these changes
regarding the effective date for the revisions to Sec.
1026.36(d)(1)(iii) would have more clearly reflected the Bureau's
intent to permit payment of compensation related to designated tax-
advantaged plans during both 2013 (as explained in CFPB Bulletin 2012-2
clarifying current Sec. 1026.36(d)(1)) \18\ and thereafter (under the
2013 Loan Originator Compensation Final Rule).
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\18\ The Bureau explained in the Supplementary Information to
the 2013 Loan Originator Compensation Final Rule that it issued CFPB
Bulletin 2012-2 (the Bulletin) to address questions regarding the
application of Sec. 1026.36(d)(1) to ``Qualified Plans'' (as
defined in the Bulletin). The Bureau noted in that Supplementary
Information that until the final rule takes effect, the
clarifications in CFPB Bulletin 2012-2 remain in effect. Moreover,
as the Bureau stated in the proposal, the Bureau interprets
``Qualified Plan'' as used in the Bulletin to include the designated
tax-advantaged plans described in the final rule.
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In addition to the three specific changes to the effective date
described above, the Bureau solicited comment generally on whether the
proposed changes to the effective date for the amendments to Sec.
1026.36(d) are appropriate or whether other approaches should be
considered. In particular, the Bureau solicited comment on whether the
amendments to Sec. 1026.36(d) should take effect on January 1, 2014,
and apply to all payments of compensation made on or after that date,
regardless of the date of consummation of the transactions on whose
terms the compensation was based.
Comments
Industry commenters generally supported the proposed changes to the
effective date for the amendments to Sec. 1026.36(d) that were added
by the 2013 Loan Originator Compensation Final Rule. There were no
objections to the Bureau's proposal to delete application receipt as
the triggering event for the effective date provisions of Sec. 1026.36
(other than for Sec. 1026.36(g)). One state trade association of
banking institutions wrote that applying the effective date for
revisions to Sec. 1026.36(d) based on receipt of applications would
create ``serious compliance and recordkeeping challenges.'' Moreover,
industry commenters generally supported the shift of the effective date
for the amendments of Sec. 1026.36(d) from January 10 to January 1,
2014 (see discussion above with regard to the general comments the
Bureau received on the changes to the effective dates for the 2013 Loan
Originator Compensation Final Rule). Industry commenters also did not
raise any objections to the proposed revisions to the effective date
for Sec. 1026.36(d)(1)(iii), which would have applied to transactions
for which compensation is paid on or after January 1, 2014, without
regard to when the transactions were consummated. Nor did industry
commenters specifically object to the proposal to change the effective
date for the addition of Sec. 1026.25(c)(2) (records retention) from
January 10, 2014, to January 1, 2014.
Several commenters expressly supported the Bureau's proposal to
apply the effective date for the amendments to Sec. 1026.36(d) (other
than the addition of Sec. 1026.36(d)(1)(iii)) to transactions
consummated on or after January 1, 2014, and where compensation was
paid on or after January 1, 2014. A large depository institution wrote
that this approach to the effective date would be a ``welcome
clarification.'' One industry commenter that specializes in the
financing of manufactured housing, in expressing support for proposed
changes to the effective date, objected to the alternative on which the
Bureau solicited comment (i.e., that the effective date would apply to
compensation paid on or after January 1, 2014, regardless of the date
of consummation of the transaction).\19\
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\19\ This commenter noted its agreement with the Bureau's
statement in the proposal that such an approach could raise
complexity about how the new rule would apply to payments under non-
deferred profits-based compensation plans made on or after January
1, 2014, where the compensation payments were based on the terms of
transactions consummated in 2013. This commenter wrote that such an
approach would adversely affect, without fair warning, those
creditors and their employees for whom 2013 compensation plans were
made in mid-2012.
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[[Page 60389]]
A small number of industry commenters asked that the Bureau provide
more flexibility as to the effective date for the amendments to Sec.
1026.36(d). As noted above, one national trade association asked that
the effective dates for the various provisions of the 2013 Loan
Originator Compensation Final Rule be triggered either by the
consummation of transactions on or after January 1, 2014, or by the
payment of compensation on or after January 1, 2014, with the complying
parties having the option of selecting the applicable triggering event.
A state association representing banking institutions similarly asked
for an ``either/or'' approach with regard to the proposed trigger for
the effective date. A state association representing banking
institutions stated that the proposed formula for the effective date
(i.e., considering both the consummation date and the payment date) was
unnecessarily complex, and instead recommended that the effective date
be tied solely to the payment date. A national trade association of
mortgage banking institutions and a mortgage company recommended that
the Bureau adopt January 1, 2014, as an optional effective date, with
mandatory implementation as of January 10, 2014. The association
reasoned that while the earlier effective date may benefit many
lenders, there may be some lenders that have already arranged
compliance for the later date and would be forced to incur additional
expense if compliance were required earlier. The mortgage company
stated this change might assist in a small way in regards to payroll
systems.
Final Rule
The Bureau is finalizing the effective date and applicability for
the amendments to Sec. Sec. 1026.36(d) and 1026.25(c)(2) (and
associated commentary) adopted by the 2013 Loan Originator Compensation
Final Rule and the proposed amendments and additions thereto in the
June 2013 proposal, as proposed. That is: (1) The amendments to Sec.
1026.36(d) (other than the addition of Sec. 1026.36(d)(1)(iii)) and
the provisions of Sec. 1026.25(c)(2) will apply to transactions that
are consummated and for which the creditor or loan originator
organization paid compensation on or after January 1, 2014; and (2) the
provisions of Sec. 1026.36(d)(1)(iii) will apply to transactions for
which the creditor or loan originator organization paid compensation on
or after January 1, 2014, regardless of when the transactions were
consummated or their applications were received. For the reasons stated
in the proposal and supported by many of the commenters, the Bureau
believes that a January 1, 2014, effective date will ease compliance
burden by aligning the effective date for the amendments to Sec.
1026.36(d) with the date on which annual changes to compensation
policies are implemented. Moreover, the Bureau believes that tying the
application of the effective date for the amendments to Sec.
1026.36(d) (other than the addition of Sec. Sec. 1026.36(d)(1)(iii)
and 1026.25(c)(2)) to conjunctive triggering events on or after January
1, 2014 (i.e., the consummation of transactions and the payment of
compensation based on the terms of those transactions) best facilitates
a smooth transition from one set of compensation rules to another. The
Bureau thus disagrees with the commenters that asked for an ``either/
or'' approach (i.e., tied to either the consummation date or the
payment date) or for the effective date to be tied only to payment of
compensation. A rule where the complying party has the option of
choosing among two possible triggering events potentially would create
confusion for complying parties and examiners about whether
compensation earned in 2013 but paid in 2014 is subject to the current
compensation rules under Sec. 1026.36(d) or the amendments to Sec.
1026.36(d) added by the 2013 Loan Originator Compensation Final Rule,
and as to whether the amended recordkeeping requirements in Sec.
1026.25(c)(2) would apply. Moreover, as one commenter suggested,
permitting creditors and loan originator organizations to pay, in 2014,
compensation earned in 2013--at which time the current compensation
rules were still in effect--might disadvantage creditors or loan
originator organizations that relied on the current rules in setting up
their 2013 compensation programs in 2012.
The Bureau also believes that providing for an optional compliance
date of January 1, 2014--as suggested by a small number of industry
commenters--would add complexity which would likely outweigh the
benefits of the flexibility that some complying parties might gain from
this approach. The Bureau is concerned that this approach to the
effective date would lead to unnecessary dispersion of compliance dates
over a ten-day period in early 2014, which in turn would be difficult
to track by examiners and enforcing parties, and potentially raise
other legal and operational questions. It could potentially lead to
gaps in recordkeeping as well. Even further confusion could result due
to the continued effect of the current compensation rules for an
additional nine-day period. The Bureau also notes that the weight of
comments it received on the proposed effective date changes supported a
mandatory compliance date of January 1, 2014.
C. Effective Dates for Amendments to or Additions of Sec. 1026.36(a),
(b), (e), (f), (g), and (j)
The Proposal
Rather than implementing the proposed change in effective dates for
Sec. 1026.36(d) in isolation, the Bureau also proposed to make the
amendments to or additions of (as applicable) Sec. 1026.36(a)
(definitions), Sec. 1026.36(b) (scope), Sec. 1026.36(e) (anti-
steering), Sec. 1026.36(f) (qualifications) and Sec. 1026.36(j)
(compliance policies and procedures for depository institutions) (and
associated commentary) contained in the 2013 Loan Originator
Compensation Final Rule take effect on January 1, 2014. The Bureau
proposed not to tie the effective date to the receipt of a particular
loan application, but rather to a date certain. Because these
provisions rely on a common set of definitions and in some cases cross-
reference each other,\20\ the Bureau proposed to make them effective on
January 1, 2014, and without reference to receipt of applications to
avoid a potential incongruity among the effective dates of the
substantive provisions and the effective dates of the regulatory
definitions and scope provisions supporting those substantive
provisions. In the proposal, the Bureau stated that it believes this
proposed approach would facilitate compliance.
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\20\ For example, Sec. 1026.36(j) requires that depository
institutions establish written policies and procedures reasonably
designed to ensure and monitor compliance with Sec. 1026.36(d),
(e), (f), and (g).
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The Bureau did not, however, propose to adjust the effective date
for Sec. 1026.36(g) (and associated commentary), which requires that
loan originators' names and identifier numbers be provided on certain
loan documentation, except to clarify and confirm that the provision
takes effect with regard to any application received on or after
January 10, 2014, by a creditor or a loan originator organization.
Because this provision requires modifications to documentation for
individual loans and the systems that generate such documentation, the
Bureau stated in the
[[Page 60390]]
proposal that it believes it is appropriate to have this provision take
effect with the other 2013 Title XIV Final Rules that affect individual
loan processing.
Comments
As noted above, the commenters that addressed the proposed changes
to the effective dates for the provisions of the 2013 Loan Originator
Compensation Final Rule generally expressed support for the proposed
changes. In nearly all cases, these comments did not discuss the
application of the effective date to specific provisions within Sec.
1026.36, other than the amendments to Sec. 1026.36(d). One national
trade association that requested an optional compliance date of January
1, 2014, for the amendments to Sec. 1026.36(d) noted that, if the
Bureau were to adopt a mandatory compliance date of January 1, 2014, it
nonetheless agreed with the proposal to keep the effective date for the
provisions of Sec. 1026.36(g) as January 10, 2014. The association
stated that systems changes to revise loan documents scheduled to take
effect on January 10 should not be made costlier or less convenient as
a result of the Bureau's changes to the effective date provisions.
Final Rule
The Bureau is finalizing the effective date for the amendments to
or additions of Sec. 1026.36(a), (b), (e), (f), (g), and (j) (and
associated commentary) contained in the 2013 Loan Originator
Compensation Final Rule and the proposed amendments and additions
thereto in the June 2013 proposal, as proposed. Therefore: (1) The
effective date for the amendments to or additions of Sec. 1026.36(a),
(b), (e), (f), and (j) as finalized in this rule will be January 1,
2014 (i.e., a date certain that is not tied to a triggering event, such
as receipt of an application on or after that date); and (2) the
effective date for the addition of Sec. 1026.36(g) will be January 10,
2014, and that section therefore will apply to all transactions for
which the creditor or loan originator organization received an
application on or after that date.\21\
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\21\ While a depository institution must have its policies and
procedures under Sec. 1026.36(j) in place by January 1, 2014,
including policies and procedures covering Sec. 1026.36(g), the
depository institution is, of course, not required to ensure and
monitor compliance with Sec. 1026.36(g) until January 10, 2014, the
effective date of Sec. 1026.36(g).
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While the Bureau is not changing the effective date for Sec.
1026.36(g), it has become aware that some uncertainty exists with
respect to the application of this provision where more than one loan
originator organization is involved in originating the same transaction
(e.g., a mortgage broker and a creditor performing origination services
with respect to the same transaction). The Bureau understands that some
loan originator organizations are planning to comply by including the
name and Nationwide Mortgage Licensing System and Registry (NMLSR) ID
(where the NMLSR has provided one) for multiple loan originator
organizations involved in originating the transaction on the loan
documents, while others are planning to comply by including the name
and NMLSR ID (where the NMLSR has provided one) for just one of the
loan originator organizations involved in originating the transaction
on the loan documents. The Bureau believes that either approach
complies with the rule in its current form. However, the Bureau is
considering proposing to clarify at some point in the future that the
name and NMLSR ID (where the NMLSR has provided one) for multiple loan
originator organizations involved in originating the transaction must
be included on the loan documents. If the Bureau ultimately adopts such
a clarification, it will provide adequate time for compliance.
D. Effective Date for Sec. 1026.36(i)
As discussed in the 2013 Effective Date Final Rule and below, the
Bureau initially adopted a June 1, 2013 effective date for Sec.
1026.36(i), but later delayed the provision's effective date to January
10, 2014, while the Bureau considered addressing interpretive questions
concerning the provision's applicability to transactions other than
those in which a lump-sum premium is added to the loan amount at
consummation. The Bureau sought comment on whether the January 10, 2014
effective date would be appropriate in light of the proposed changes,
or whether an earlier effective date could be set that permits
sufficient time for creditors to adjust their insurance premium
practices as necessary. The Bureau received comments from trade
associations, the credit insurance industry, credit unions and other
financial institutions, as well as consumer groups, which addressed the
proposed effective date. Industry commenters and trade associations
strongly preferred the January 10th date to an earlier date, and stated
that system adjustments will be required to implement the final rule.
However, these commenters generally supported the January 10, 2014
effective date as reasonable, so long as the final rule does not
materially differ from the proposal. Consumer groups suggested that the
Bureau set the effective date at January 1, 2014, noting that the
consumer benefit derived from the provision has already been delayed
from its original effective date of June 1, 2013.
As discussed in the section-by-section analysis below, the Bureau
is adopting amendments to Sec. 1026.36(i) substantially as proposed,
with some additional clarifications. The Bureau believes that creditors
will need time to adjust certain credit insurance premium billing
practices to account for the final rule, but believes that the January
10, 2014 effective date adopted in the 2013 Effective Date Final Rule
will allow sufficient time for compliance. This approach is consistent
with comments from industry and trade associations, as well as the
generally applicable effective date for the 2013 Title XIV Final Rules,
including for several provisions the Bureau is amending through this
notice.
VI. Section-by-Section Analysis
A. Regulation B
Section 1002.14 Rules on Providing Appraisals and Other Valuations
14(b) Definitions
14(b)(3) Valuation
The Proposal
The Bureau proposed to amend commentary to Sec. 1002.14 to clarify
the definition of ``valuation'' as adopted by the 2013 ECOA Final Rule.
As the Bureau stated in the proposal, the Dodd-Frank Act section 1474
amended ECOA by, among other things, defining ``valuation'' to include
any estimate of the value of the dwelling developed in connection with
a creditor's decisions to provide credit. See ECOA section 701(e)(6).
Similarly, the 2013 ECOA Final Rule adopted Sec. 1002.14(b)(3), which
defines ``valuation'' as any estimate of the value of a dwelling
developed in connection with an application for credit. Consistent with
these provisions, the Bureau intended the term ``valuation'' to refer
only to an estimate for purposes of the 2013 ECOA Final Rule's newly
adopted provisions. However, the 2013 ECOA Final Rule added two
comments that refer to a valuation as an appraiser's estimate or
opinion of the value of the property: comment 14(b)(3)-1.i, which gives
examples of ``valuations,'' as defined by Sec. 1002.14(b)(3); and
comment 14(b)(3)-3.v, which provides examples of documents that discuss
or restate a valuation of an applicant's property but nevertheless do
not constitute ``valuations'' under Sec. 1002.14(b)(3).
Because the Bureau did not intend by these two comments to alter
the meaning of ``valuation'' to become inconsistent with ECOA section
701(e)(6) and Sec. 1002.14(b)(3), the Bureau
[[Page 60391]]
proposed to clarify comments 14(b)(3)-1.i and 14(b)(3)-3.v by removing
the words ``or opinion'' from their texts, and sought comment on the
clarification.
Comments
The Bureau received a few comments from trade associations and
credit unions that generally supported the clarification. The Bureau
also received one comment from a trade association that suggested the
proposed change could cause additional confusion, because the term
``opinion of value'' is commonly used to describe appraisals. This
commenter also pointed out that appraisals are generally not considered
to be ``estimates,'' and thus the application of the rule to appraisals
could be confusing in light of the proposed change. The commenter
suggested that, rather than deleting the word ``opinion'' altogether,
the Bureau instead clarify that a valuation includes any ``estimate or
opinion of value.''
Final Rule
The Bureau is adopting comment 14(b)(3)-1.i as proposed with some
additional modifications, and also is adding new comment 14(b)(3)-3.vi
based on the trade association comment. In proposing these amendments,
the Bureau intended to clarify that the comments referred to appraisals
or other valuation models by removing the word ``opinion,'' which could
be read broadly to include even speculative opinions not based on an
appraisal or other valuation model. However, in light of the trade
association's comments the Bureau believes that simply deleting the
word ``opinion'' could also cause confusion regarding whether and how
the rule applies to appraisals that are commonly described as
``opinions of value.'' Thus, the Bureau is substituting ``opinion of
value'' for ``opinion'' rather than deleting the word entirely. The
Bureau is adopting revised comment 14(b)(3)-1.i with this change. The
Bureau is adopting comment 14(b)(3)-3.v as proposed, and does not
believe any additional revisions are necessary in light of this
clarification, because the comment deals exclusively with reports
reflecting property inspections and not appraisals. However, the Bureau
is adding new comment 14(b)(3)-3.vi to clarify that appraisal reviews
that do not provide an estimate of value or ``opinion of value'' are
included in the list of examples of items that are not considered
``valuations'' for purposes of Sec. 1002.14(b)(3).
B. Regulation X
General--Technical Corrections
In addition to the clarifications and amendments to Regulation X
discussed below, the Bureau proposed technical corrections and minor
wording adjustments for the purpose of clarity throughout Regulation X
that were not substantive in nature. No comments were received on these
changes, and the Bureau is finalizing such technical and wording
clarifications to regulatory text in Sec. Sec. 1024.30, 1024.39, and
1024.41; and to commentary to Sec. Sec. 1024.17, 1024.33 and 1024.41.
Sections 1024.35 and .36 Error Resolution Procedures and Requests for
Information
The Bureau proposed minor amendments to the error resolution and
request for information provisions of Regulation X, adopted by the 2013
Mortgage Servicing Final Rules. In the areas in which amendments were
proposed, the error resolution procedures largely parallel the
information request procedures; thus the two sections are discussed
together below. Section 1024.35 implements section 6(k)(1)(C) of RESPA,
as amended by the Dodd-Frank Act, and Sec. 1024.36 implements section
6(k)(1)(D) of RESPA, as amended by the Dodd-Frank Act. To the extent
the requirements under Sec. Sec. 1024.35 and 1024.36 are applicable to
qualified written requests, these provisions also implement sections
6(e) and 6(k)(1)(B) of RESPA. As discussed in part III (Legal
Authority), the Bureau is finalizing these amendments pursuant to its
authority under RESPA sections 6(j), 6(k)(1)(E) and 19(a). As explained
in more detail below, the Bureau believes these provisions are
necessary and appropriate to achieve the consumer protection purposes
of RESPA, including ensuring responsiveness to consumer requests and
complaints and the provision and maintenance of accurate and relevant
information.
35(c) and 36(b) Contact Information for Borrowers To Assert Errors and
Information Requests
The Proposal
The Bureau proposed to amend the commentary to Sec. 1024.35(c) and
Sec. 1024.36(b) with respect to disclosure of the exclusive address (a
servicer may designate an exclusive address for the receipt of
notifications of errors and requests for information) when a servicer
discloses contact information to the borrower for the purpose of
assistance from the servicer. Section 1024.35(c), as adopted by the
2013 Mortgage Servicing Final Rules, state that a servicer may, by
written notice provided to a borrower, establish an address that a
borrower must use to submit a notice of error to a servicer in
accordance with the procedures set forth in Sec. 1024.35. Comment
35(c)-2 clarifies that, if a servicer establishes any such exclusive
address, the servicer must provide that address to the borrower in any
communication in which the servicer provides the borrower with contact
information for assistance from the servicer. Similarly, Sec.
1024.36(b) states that a servicer may, by written notice provided to a
borrower, establish an address that a borrower must use to submit
information requests to a servicer in accordance with the procedures
set forth in Sec. 1024.36. Comment 36(b)-2 clarifies that, if a
servicer establishes any such exclusive address, the servicer must
provide that address to the borrower in any communication in which the
servicer provides the borrower with contact information for assistance
from the servicer.
In the proposal, the Bureau expressed concern that comments 35(c)-2
and 36(b)-2 could be interpreted more broadly than the Bureau had
intended. Section 1024.35(c) and comment 35(c)-2, as well as Sec.
1024.36(b) and comment 36(b)-2, are intended to ensure that servicers
inform borrowers of the correct address for the borrower to use for
purposes of submitting notices of error or information requests, so
that borrowers do not inadvertently send these communications to other
non-designated servicer addresses (which would not provide the
protections afforded by Sec. Sec. 1024.35 and 1024.36, respectively).
If interpreted literally, the existing comments would require the
servicer to include the designated address for notices of error and
requests for information when any contact information, even just a
phone number or web address, for the servicer is given to the borrower.
The Bureau did not intend that the servicer be required to inform the
borrower of the designated address in all communications with borrowers
where any contact information whatsoever for the servicer is provided.
Accordingly, the Bureau proposed to amend comment 35(c)-2 to
provide that, if a servicer establishes a designated error resolution
address, the servicer must provide that address to a borrower in any
communication in which the servicer provides the borrower with an
address for assistance from the servicer. Similarly, the Bureau
proposed to amend comment 36(b)-2 to provide that, if a servicer
establishes a
[[Page 60392]]
designated information request address, the servicer must provide that
address to a borrower in any communication in which the servicer
provides the borrower with an address for assistance from the servicer.
Comments
The Bureau received comments from industry as well as consumer
groups addressing these proposed clarifications. Industry commenters
supported limiting the locations where the designated address is
required, but asserted that the requirement was still overbroad and
unclear as to when the designated address must be provided. These
commenters expressed concern that they would have to provide the
designated address on every letter that included a return address or an
address in the letterhead. The commenters also stated this would be
unduly burdensome as it would require significant programming costs.
Commenters further stated this would create problems for borrowers by
causing cluttered, confusing documents leading borrowers to incorrectly
send other things to the designated address (e.g., a borrower may send
a payment to the designated address, leading to a delay in payment
processing). Finally, commenters stated the proposed clarification
could create conflicts with other regulations, such as the force-placed
insurance letters, which include an address but do not allow additional
information to be included. Industry commenters generally suggested the
designated address be required only in a specific subset of contexts:
the initial designation letter, the periodic statements and coupon
book, the servicer's Web site, and loss mitigation documents.
Consumer group commenters expressed concern that borrowers will not
be informed of their rights. Such commenters objected to a decision the
Bureau made, in the 2013 Mortgage Servicing Final Rules, to eliminate
the requirement that a servicer receiving a transferred loan include
information on the error resolution procedures in its notice to the
borrower about the transfer. Such commenters suggested that information
on the error resolution and information request rights should be
included on each periodic statement.
Final Rule
The Bureau is adopting revised versions of proposed comments 35(c)-
2 and 36(b)-2. The Bureau notes that the proposal only addressed when
the designated address must be provided, and that comments about
providing borrowers information about the general procedures to submit
error notifications or information requests are beyond the scope of the
proposed changes to the rule.
The Bureau is persuaded that the proposed language of ``an address
for assistance'' might not have fully addressed the concerns of the
provision being overbroad, as the proposed language could have been
interpreted to require the designated address on every document from
the servicer that contains a return address. The Bureau is further
persuaded by the concern that borrowers could have been confused and
incorrectly sent items that did not concern error resolution to the
designated address. To require the designated address on every piece of
written communication that includes a return address would be unduly
burdensome and not in the best interests of the borrower. Thus, under
the final rule, the designated address need be included in only a
specific subset of contexts, specifically (1) the written notice,
required by Sec. 1024.35(c) and Sec. 1024.36(b) if a servicer
designates an exclusive address; (2) any periodic statement or coupon
book required pursuant to 12 CFR 1026.41; (3) any Web site maintained
by the servicer in connection with the servicing of the loan; and (4)
any notice required pursuant to Sec. Sec. 1024.39 or 1026.41 that
includes contact information for assistance.
While servicers will not specifically be required to provide the
designated address in contexts other than those described in the
amended comments, the Bureau notes that a servicer remains subject to
the requirement in Sec. 1026.38(b)(5) to have policies and procedures
reasonably designed to ensure that the servicer informs the borrower of
the procedures for submitting written notices of error and information
requests. Further, as discussed below in the section-by-section
analysis of section 38(b)(5), the Bureau is adopting new comment
38(b)(5)-3 clarifying a servicer's obligation to ensure borrowers are
informed of the designated address. The Bureau believes this the final
rule will best balance practical considerations with the need to notify
borrowers of the designated address.
35(g) and 36(f) Requirements Not Applicable
35(g)(1)(iii)(B) and 36(f)(1)(v)(B)
The Proposal
The Bureau proposed amendments to Sec. 1024.35(g)(1)(iii)(B)
(untimely notices of error) and Sec. 1024.36(f)(1)(v)(B) (untimely
requests for information). Section 1024.35(g)(1)(iii)(B) provides that
a notice of error is untimely if it is delivered to the servicer more
than one year after a mortgage loan balance was paid in full.
Similarly, current Sec. 1024.36(f)(1)(v)(B) provides that an
information request is untimely if it is delivered to the servicer more
than one year after a mortgage loan balance was paid in full.
The Bureau proposed to replace the references to ``the date a
mortgage loan balance is paid in full'' with ``the date the mortgage
loan is discharged.'' The proposal noted that this change would address
circumstances in which a loan is terminated without being paid in full,
such as a loan that was discharged through foreclosure or deed in lieu
of foreclosure without full satisfaction of the underlying contractual
obligation. Further, the proposal stated that this change also would
align more closely with Sec. 1024.38(c)(1), which requires a servicer
to retain records that document actions taken with respect to a
borrower's mortgage loan account only until one year after the date a
mortgage loan is ``discharged.''
Comments
The Bureau received comments from industry as well as consumer
groups addressing the proposed modifications. Commenters were generally
supportive of changing the rule to address situations when the loan is
not paid in full, but expressed concerns about the use of the word
``discharged,'' stating that this word has a specific meaning in
bankruptcy and that there may be some ambiguity as to when a loan is
discharged in certain situations. In particular, commenters discussed
the foreclosure process, as well as situations in which there is a
deficiency balance after a foreclosure sale, and situations in which
bankruptcy proceedings may eliminate the debt but leave a lien on the
property.
Final Rule
The Bureau is adopting Sec. 1024.35(g)(1)(iii)(B) and Sec.
1024.36(f)(1)(v)(B) as proposed. The Bureau believes the requirement to
resolve errors and respond to information requests should last over the
same timeframe as the obligation to retain records. The Bureau believes
it would be impractical to require a servicer to resolve errors and
provide information at a time when Regulation X no longer requires the
servicer to retain the relevant records. Conversely, the Bureau
believes the servicer should be responsible to correct those records
during the period when Regulation X does require a servicer to retain
records,
[[Page 60393]]
if necessary, and provide borrowers information from the records.
Further, the Bureau believes the use of the term ``discharged'' is
appropriate, especially given that the term is already used in the
timing of the record-retention requirement. For purposes of the
Bureau's mortgage servicing rules, as opposed to bankruptcy purposes, a
mortgage loan is discharged when both the debt and all corresponding
liens have been extinguished or released, as applicable. The Bureau
believes a borrower should have the benefit of the error resolution,
information request, and record retention provisions so long as a debt
or lien remains because only after both have been eliminated will there
be no further possibility of a borrower needing to seek servicing
information or to assert a servicing error. Thus, the Bureau is
finalizing this provision as proposed.
Section 1024.38 General Servicing Policies, Procedures and Requirements
38(b) Objectives
38(b)(5) Informing Borrowers of the Written Error Resolution and
Information Request
Procedures
As discussed above in the section-by-section discussion of
Sec. Sec. 1024.35(c) and 1024.36(b), the Bureau is amending comments
35(c)-2 and 36(b)-2 to clarify in what contexts the designated address
for notices of error or requests for information must be provided. The
finalized comments clarify that, if a servicer designates such an
address, that address must be provided in any notice required pursuant
to Sec. Sec. 1024.39 or 1024.41 that includes contact information for
assistance. The Bureau notes that servicers may provide borrowers in
delinquency with different addresses for different purposes. For
example, a servicer may provide a borrower with the designated address
for asserting errors, and a separate address for submission of loss
mitigation applications. To mitigate the risk of a borrower sending a
notification of error to the wrong address (and thus not triggering the
associated protections), the Bureau is adopting new comment 38(b)(5)-3.
Section 1024.35 sets out certain procedures a servicer must follow
when a borrower submits a written notice of error. These procedures
provide important protections to borrowers who in are in delinquency
(as well as at other times). Specifically, the procedures in Sec.
1024.35(e)(3)(i)(B) require a servicer to take certain actions before a
scheduled foreclosure sale if a borrower asserts certain errors.\22\
These protections are only triggered if a borrower submits a written
notice of error to the designated address (assuming the servicer has
designated such an address). Thus, the Bureau believes it is important
that borrowers asserting errors send the notice of error to the proper
address.
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\22\ Section 1024.35(e)(3)(i)(B) requires that, if a borrower
asserts an error related to a servicer making the first notice or
filing required by applicable law for any judicial or non-judicial
foreclosure process in violation of Sec. 1024.41(f) or (j), or
related to a servicer moving for foreclosure judgment or order of
sale or conducting a foreclosure sale in violation of Sec.
1024.41(g) or (j), the servicer must comply with the requirements of
the error resolution procedures prior to the date of a foreclosure
sale, or within 30 days (excluding legal public holidays, Saturdays,
and Sundays) after the servicer receives the notice of error,
whichever is earlier.
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The Bureau notes that existing provisions do address ensuring the
borrower is aware of the procedures required to trigger the error
resolution protections. Section 1024.38(b)(5) requires a servicer to
have policies and procedures reasonably designed to achieve the
objective of informing borrowers of the written error resolution and
information request procedures. The Bureau acknowledges that a borrower
in delinquency who is working with a continuity of contact
representative and submitting documents related to loss mitigation may
be confused about where to submit notices asserting errors. If such a
borrower were to orally report the assertion of the error to the
continuity of contact representative, comment 38(b)(5)-2 explains that
Sec. 1024.38(b)(s) would require servicers to have policies and
procedures reasonably designed to notify a borrower who is not
satisfied with the resolution of the complaint of the procedures for
submitting a written notice of error. However, the Bureau is concerned
that, if borrowers were to submit written assertions of an error to the
addresses where they were submitting loss mitigation documents, such
borrowers may believe they have properly followed the procedures, but
in fact would not have triggered the protections under Sec. 1024.35.
To address this concern, in connection with the clarification above
on the contexts in which the designated address must be provided, the
Bureau is adopting new comment 38(b)(5)-3. The new comment clarifies a
servicer's obligation pursuant to Sec. 1024.38(b)(5) by stating that a
servicer's policies and procedures must be reasonably designed to
ensure that if a borrower submits a notice of error to an incorrect
address that was given to the borrower in connection with submission of
a loss mitigation application or the continuity of contact pursuant to
Sec. 1024.40, the servicer will ensure the borrower is informed of the
procedures for submitting written notices of error set forth in Sec.
1024.35, including the correct address. Alternatively, the servicer
could redirect notices of error that were sent to an incorrect address
to the designated address established pursuant to Sec. 1024.35(c).
Section 1024.41 Loss Mitigation Procedures
As discussed above in part III (Legal Authority), the Bureau is
finalizing amendments to Sec. 1024.41 pursuant to its authority under
sections 6(j)(3), 6(k)(1)(E), and 19(a) of RESPA. The Bureau believes
that these amendments are necessary and appropriate to achieve the
consumer protection purposes of RESPA and in particular of section 6 of
RESPA, including to facilitate the evaluation of borrowers for
foreclosure avoidance options. Further, the amendments implement, in
part, section 6(k)(1)(C) of RESPA, which obligates a servicer to take
timely action to correct errors relating to avoiding foreclosure, by
establishing servicer duties and procedures that must be followed where
appropriate to avoid such errors. In addition, the Bureau relies on its
authority pursuant to section 1022(b) of the Dodd-Frank Act to
prescribe regulations necessary or appropriate to carry out the
purposes and objectives of Federal consumer financial law, including
the purpose and objectives under sections 1021(a) and (b) of the Dodd-
Frank Act. The Bureau additionally relies on its authority under
section 1032(a) of the Dodd-Frank Act, which authorizes the Bureau to
prescribe rules to ensure that the features of any consumer financial
product or service, both initially and over the terms of the product or
service, are fully, accurately, and effectively disclosed to consumers
in a manner that permits consumers to understand the costs, benefits,
and risks associated with the product or service, in light of the facts
and circumstances.
41(b) Receipt of a Loss Mitigation Application
41(b)(1) Complete Loss Mitigation Application
In connection with the provisions addressing payment forbearance
discussed below in the section-by-section analysis of
1024.41(c)(2)(iii), the Bureau is amending comment 41(b)(1)-4 to
clarify the obligation of a servicer to use reasonable diligence to
[[Page 60394]]
complete a loss mitigation application. See the discussion below.
41(b)(2) Review of Loss Mitigation Application Submission
41(b)(2)(i) Requirements
The Proposal
The Bureau proposed to amend the commentary to Sec.
1024.41(b)(2)(i) to clarify servicers' obligations with respect to
providing notices to borrowers regarding the review of loss mitigation
applications. Section 1024.41(b)(2)(i) requires a servicer that
receives a loss mitigation application 45 days or more before a
foreclosure sale to review and evaluate the application promptly and
determine, based on that review, whether the application is complete or
incomplete.\23\ The servicer then must notify the borrower within five
days (excluding legal public holidays, Saturdays and Sundays) that the
servicer acknowledges receipt of the application, and that the servicer
has determined that the loss mitigation application is either complete
or incomplete. If an application is incomplete, the notice must state
the additional documents and information that the borrower must submit
to make the loss mitigation application complete. In addition,
servicers are obligated under Sec. 1024.41(b)(1) to exercise
reasonable diligence in obtaining documents and information necessary
to complete an incomplete application, which may require, when
appropriate, the servicer to contact the borrower and request such
information as illustrated in comment 41(b)(1)-4.i.
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\23\ A ``complete loss mitigation application'' is defined in
Sec. 1024.41(b)(1) as ``an application in connection with which a
servicer has received all the information the servicer requires from
a borrower in evaluating applications for the loss mitigation
options available to the borrower.''
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Following publication of the 2013 Mortgage Servicing Final Rules,
the Bureau received numerous inquiries from industry stakeholders
requesting guidance or clarification regarding how this provision may
apply in instances where a servicer determines that additional
information from the borrower is needed to complete an evaluation of a
loss mitigation application after either (1) the servicer has provided
notice to the borrower informing the borrower that the loss mitigation
application is complete, or (2) the servicer has provided notice to the
borrower identifying other specific information or documentation
necessary to complete the application and the borrower has furnished
that documentation or information. As these stakeholders noted,
servicers sometimes must collect additional information from borrowers,
the need for which may not have been apparent at the point of initial
application, in order to process the application and satisfy the
applicable investor requirements. In these situations, a borrower may
have submitted the documents and information identified in the initial
notice, resulting in an application that is facially complete based on
the servicer's initial review, but the servicer, upon further
evaluation, determines that additional information is required to
evaluate the borrower for a loss mitigation option pursuant to
requirements imposed by an investor or guarantor of a mortgage.
The Bureau proposed additional commentary to address these
concerns. As the Bureau explained in the June 2013 Proposal, the notice
required by Sec. 1024.41(b)(2)(i)(B) is intended to provide the
borrower with timely notification that a loss mitigation application
was received and either is considered complete by the servicer or is
considered incomplete and that the borrower is required to take further
action for the servicer to evaluate the loss mitigation application.
The Bureau was conscious of concerns that servicers have unnecessarily
prolonged loss mitigation processes by incomplete and inadequate
document reviews that lead to repeated requests for supplemental
information that reasonably could have been requested initially, and so
the Bureau designed the rule to ensure an adequate up-front review. At
the same time, the Bureau did not believe it would be in the best
interest of borrowers or servicers to create a system that leads to
borrower applications being denied solely because they contain
inadequate information and the servicer believes it may not request the
additional information needed.
The Bureau therefore proposed three provisions to address these
concerns. First, the Bureau proposed new comment 41(b)(2)(i)(B)-1,
which would have clarified that, notwithstanding that a servicer has
informed a borrower that an application is complete (or notified the
borrower of specific information necessary to complete an incomplete
application), a servicer must request additional information from a
borrower if the servicer determines, in the course of evaluating the
loss mitigation application submitted by the borrower, that additional
information is required.
Second, the Bureau proposed new comment 41(b)(2)(i)(B)-2, which
would have clarified that, except as provided in Sec.
1024.41(c)(2)(iv) (the Bureau's third proposed new provision, discussed
below), the protections triggered by a complete loss mitigation
application in Sec. 1024.41 would not be triggered by an incomplete
application. An application would have been considered complete only
when a servicer has received all the information the servicer requires
from a borrower in evaluating applications for the loss mitigation
options available to the borrower, even if an inaccurate Sec.
1024.41(b)(2)(i)(B) notice had been sent to the borrower. The Bureau
noted that the proposed clarifications would not have allowed servicers
deliberately to inform borrowers that incomplete applications are
complete or to describe the information necessary to complete an
application as something less than all of the necessary information.
Servicers are required under Sec. 1024.41(b)(2)(i)(A) to review a loss
mitigation application to determine whether it is complete or
incomplete. In addition, servicers are subject to the Sec.
1024.38(b)(2)(iv) requirement to have policies and procedures
reasonably designed to achieve the objectives of identifying documents
and information that a borrower is required to submit to complete an
otherwise incomplete loss mitigation application, and servicers are
obligated under Sec. 1024.41(b)(1) to exercise reasonable diligence in
obtaining documents and information necessary to complete an incomplete
application. Thus, the proposed clarifications were intended to address
situations where servicers make bona fide mistakes in initially
evaluating loss mitigation applications.
Third, as described more fully below, the Bureau proposed new Sec.
1024.41(c)(2)(iv) to require that, if a servicer creates a reasonable
expectation that a loss mitigation application is complete, but later
discovers information is missing, the servicer must treat the
application as complete for certain purposes until the borrower has
been given a reasonable opportunity to complete the loss mitigation
application. The Bureau believed the proposed rule would mitigate
potential risks to consumers that could arise through a loss mitigation
process prolonged by incomplete and inadequate document reviews and
repeated requests for supplemental information. The Bureau believed
these new provisions would provide a mechanism for servicers to correct
bona fide mistakes in conducting up-front reviews of loss mitigation
applications for completeness, while ensuring that borrowers do not
lose the protections under the rule due to such mistakes and that
servicers have incentives to
[[Page 60395]]
conduct rigorous up-front review of loss mitigation applications.
Comments
The Bureau received comments from industry as well as consumer
groups addressing the proposed provisions addressing a facially
complete application. Commenters were generally supportive of the
Bureau addressing situations where a servicer later discovers
additional information is required to evaluate an application that is
complete according to the terms of the notice the servicer sent the
borrower. Commenters generally agreed that a strict rule that prevents
servicers from seeking additional information when needed would result
in unnecessary denials of loss mitigation to the borrower and that
encouraging communication from the servicer to the borrower will
improve loss mitigation procedures for the borrower. However, some
commenters expressed the view that the 2013 Mortgage Servicing Final
Rules were sufficient in this regard and that revisions at a date so
close to implementation are counterproductive to institutions trying to
implement the rule.
Final Rule
As discussed further below in connection with Sec.
1024.41(c)(2)(iv), the Bureau is adopting amendments that achieve
largely the same effect as the proposal in addressing situations where
a servicer requires additional information to review a facially
complete loss mitigation application. The Bureau believes, as it
suggested in the proposal, that there is little value in requiring a
servicer to evaluate a loss mitigation application when the servicer
has determined certain items of information are missing. The Bureau is
therefore adopting comment 41(b)(2)(i)(B)-1, which clarifies that if, a
servicer determines, in the course of evaluating the loss mitigation
application submitted by the borrower, that additional information is
required, the servicer must promptly request the additional information
from the borrower. The comment also references Sec. 1024.41(c)(2)(iv),
a new provision that sets forth requirements and procedures for a
servicer to follow in the event that a facially complete application is
later found by the servicer to require additional information or
documentation to be evaluated. See the discussion of Sec.
1024.41(c)(2)(iv) in the section-by-section analysis below.
The Bureau is not adopting proposed comment 41(b)(2)(i)(B)-2, which
would have provided that protections triggered by a ``complete'' loss
mitigation application would not be triggered by a facially complete
application--i.e., where the servicer informs the borrower that the
application is complete, or the borrower provides all the documents and
information specified by the servicer in the Sec. 1024.41(b)(2)(i)(B)
notice as needed to render the application complete. The Bureau
continues to believe that certain protections must be provided to
borrowers who have submitted all the missing documents and information
requested in the 1026.41(b)(2)(i)(B) notice, even if a servicer later
determines additional information is necessary. However, the Bureau has
been persuaded by commenters that argued a borrower who submits all the
documents requested in the Sec. 1024.41(b)(2)(i)(B) notice (if any)
should receive the protection the rule affords to borrowers at the time
the borrower submits those documents. In accordance with this approach,
proposed comment 41(b)(2)(i)(B)-2 has not been finalized.
41(b)(2)(ii) Time Period Disclosure
The Proposal
The Bureau proposed to amend the Sec. 1024.41(b)(2)(ii) time
period disclosure requirement, which requires a servicer to provide a
date by which a borrower should submit any missing documents and
information necessary to make a loss mitigation application complete.
Section 1024.41(b)(2)(ii) requires a servicer to provide in the notice
required pursuant to Sec. 1024.41(b)(2)(i)(B) the earliest remaining
of four specific dates set forth in Sec. 1024.41(b)(2)(ii). The four
dates set forth in Sec. 1024.41(b)(2)(ii) are: (1) The date by which
any document or information submitted by a borrower will be considered
stale or invalid pursuant to any requirements applicable to any loss
mitigation option available to the borrower; (2) the date that is the
120th day of the borrower's delinquency; (3) the date that is 90 days
before a foreclosure sale; and (4) the date that is 38 days before a
foreclosure sale.
In general, many of the protections afforded to a borrower by Sec.
1024.41 are dependent on a borrower submitting a complete loss
mitigation application a certain amount of time before a foreclosure
sale. The later a borrower submits a complete application, and the
closer in time to a foreclosure sale, the fewer protections the
borrower receives under Sec. 1024.41. It is therefore in the interest
of borrowers to complete loss mitigation applications as early in the
delinquency and foreclosure process as possible. However, even if a
borrower does not complete a loss mitigation application sufficiently
early in the process to secure all the protections possibly available
under Sec. 1024.41, that borrower may still benefit from some of the
protections afforded. Borrowers should not be discouraged from
completing loss mitigation applications merely because they cannot
complete a loss mitigation application by the date that would be most
advantageous in terms of securing the protections available under Sec.
1024.41. Accordingly, the goal of Sec. 1024.41(b)(2)(ii) is to inform
borrowers of the time by which they should complete their loss
mitigation applications to receive the greatest set of protections
available, without discouraging later efforts if the borrower does not
complete the loss mitigation application by the suggested date. The
Bureau notes Sec. 1024.41(b)(2)(ii) requires servicers to inform
borrowers of the date by which the borrower should make the loss
mitigation application complete, as opposed to the date by which the
borrower must make the loss mitigation application complete.
The Bureau believed, based on communications with consumer
advocates, servicers, and trade associations, that the requirement in
Sec. 1024.41(b)(2)(ii) may be overly prescriptive and may prevent a
servicer from having the flexibility to suggest an appropriate date by
which a borrower should complete a loss mitigation application. For
example, if a borrower submits a loss mitigation application on the
114th day of delinquency, the servicer would have to inform him or her
by the 119th day that the borrower should complete the loss mitigation
application by the 120th day under the current provision. A borrower is
unlikely to be able to assemble the missing information within one day,
and would be better served by being advised to complete the loss
mitigation application by a reasonable later date that would afford the
borrower most of the benefits of the rule as well as enough time to
gather the information.
In response to these concerns, and in accordance with the goals of
the provision, the Bureau proposed to amend the requirement in Sec.
1024.41(b)(2)(ii). Specifically, the Bureau proposed to replace the
requirement that a servicer disclose the earliest remaining date of the
four specific dates set forth in Sec. 1024.41(b)(2)(ii) with a more
flexible requirement that a servicer determine and disclose a
reasonable date by which the borrower should submit the documents and
information necessary to
[[Page 60396]]
make the loss mitigation application complete. The Bureau proposed to
clarify this amendment in proposed comment 41(b)(2)(ii)-1, which would
have explained that, in determining a reasonable date, a servicer
should select the deadline that preserves the maximum borrower rights
under Sec. 1024.41, except when doing so would be impracticable.
Proposed comment 41(b)(2)(ii)-1 would have clarified further that a
servicer should consider the four deadlines previously set forth in
Sec. 1024.41(b)(2)(ii) as factors in selecting a reasonable date.
Proposed comment 41(b)(2)(ii)-1 also would have clarified that if a
foreclosure sale is not scheduled, for the purposes of determining a
reasonable date, a servicer may make a reasonable estimate of when a
foreclosure sale may be scheduled. This proposal was intended to
provide appropriate flexibility while also requiring that servicers
consider the impact of the various times, and the associated
protections, set forth in Sec. 1024.41.
Comments
The Bureau received comments from industry as well as consumer
groups addressing these proposed provisions. Industry commenters
appreciated the extra flexibility offered by the proposal, but
expressed concern about the complexity of selecting a date. Such
commenters noted that different servicers might have different
estimates of what should be a reasonable time for otherwise similarly
situated borrowers, and differences in state law might also cause two
apparently similar borrowers to receive different notices.
Additionally, these commenters expressed concern that ambiguity in what
is ``practical'' increases the risk of litigation. These commenters
suggested either a simpler rule, under which the application should be
complete by the earlier of 30 days after the borrower submitted the
incomplete application or the 38th day before a scheduled foreclosure
sale (an approach taken by HAMP), or that the Bureau provide additional
guidance for determining what is impractical. Finally, commenters
expressed concern about borrower confusion, stating that borrowers will
not understand the significance of the various dates.
Consumer groups expressed concern that if servicers have discretion
about how to inform borrowers when they should complete their
applications, servicers will misguide borrowers and cause them to
complete applications too late to receive all the protections that
could have been available under the rule. Additionally, some consumer
groups expressed the view that this whole issue would be avoided if the
loss mitigation protections were triggered by an initial application
package, defined as a specific subset of documents required for loss
mitigation, rather than a complete loss mitigation application.
Final Rule
The Bureau is amending the text of Sec. 1024.41(b)(2)(ii) to
require that the related notice must include a reasonable date by which
the borrower should submit the missing information. Additionally, the
Bureau is adopting an revised version of proposed comment 41(b)(2)(ii)-
1 to clarify what is a reasonable date to include in a notice sent
pursuant to Sec. 1024.41(b)(2)(i)(B). Similar to the proposal, final
comment 41(b)(2)(ii)-1 states that, in determining a reasonable date, a
servicer should select the date that preserves the maximum borrower
rights possible under Sec. 1024.41 (and provides the four milestones
originally in the regulation text), except when doing so would be
impracticable to permit the borrower sufficient time to obtain and
submit the type of documentation needed. The final comment has been
amended to state further that, generally, it would be impracticable for
a borrower to obtain and submit documents in less than seven days.
As discussed in the proposed rule, the Bureau has structured this
provision so that borrowers receive information that encourages them to
submit a complete application in time to receive the most protections
possible under the rule, while not discouraging borrowers who miss this
time from later submitting an application to receive a subset of the
protections. Because some of the protections are triggered by the
submission of a complete loss mitigation application when a certain
amount of time remains before a scheduled foreclosure sale, the
protections decrease the later a borrower submits an application. Thus,
the Bureau declines to adopt a rule that simply suggests the borrower
complete the application within 30 days because such a rule will not
meet the intended purposes of the provision.
The Bureau also understands that a borrower may not understand the
significance of certain milestones, and may be confused if presented by
a list of different dates. This is the very reason the rule requires
the servicer to provide a single date by which the borrower should
complete the application--it removes the burden from the borrower of
calculating the different timelines and attempting to determine by when
they should complete their application.
The Bureau does appreciate the challenges of determining what would
be impracticable, thus the Bureau has added language to the commentary
explaining that generally it would be impracticable for a borrower to
obtain and submit documents in less than seven days. The Bureau notes
this is a minimum number of days, and that a servicer may extend this
timeline if it believes the borrower would need more time to gather the
information. The Bureau believes this approach gives servicers guidance
as to what is impracticable, while allowing some flexibility for
servicers to address situations where additional time would be required
for the borrower to submit particular types of missing information.
Finally, while the final rule does not permit servicers to estimate
foreclosure sale dates in other contexts, such as for purposes of
determining whether a borrower will be granted an appeal right when no
foreclosure sale has actually been scheduled, the Bureau believes it
appropriate to allow servicers to estimate a foreclosure sale date for
the narrow purpose of this provision. The Bureau notes that servicers
may have information about when a foreclosure sale is likely to be
scheduled and that allowing a servicer to use this information in
determining the time by which a borrower should complete the
application would provide the most useful date for borrowers. Thus, the
Bureau includes this provision in the comment adopted by this final
rule.
The Bureau notes that some consumer groups suggested loss
mitigation protections should be triggered by an initial application
package, defined as a specific subset of documents required for loss
mitigation, rather than a complete loss mitigation application. The
Bureau notes that while such an approach has been used in other loss
mitigation programs, such a modification to the loss mitigation
provisions of Sec. 1024.41 is beyond the scope of the proposed changes
to the rule.
41(b)(3) Determining Protections
The Proposal
The Bureau proposed to add new Sec. 1024.41(b)(3) addressing the
borrowers' rights in situations in which no foreclosure sale has been
scheduled as of the date a complete loss mitigation application is
received, or a previously scheduled foreclosure sale is rescheduled
after receipt of a complete application. As discussed in the proposal,
Sec. 1024.41 is structured to
[[Page 60397]]
provide different procedural rights to borrowers and impose different
requirements on servicers depending on the number of days remaining
until a foreclosure sale is scheduled to occur, as of the time that a
complete loss mitigation application is received. However, the
provisions of Sec. 1024.41 do not expressly address situations in
which a foreclosure sale has not yet been scheduled at the time a
complete loss mitigation application is received, or is rescheduled
after the application is received. Since issuance of the final rule,
the Bureau has received questions about the applicability of the timing
provisions in such situations. Specifically, industry stakeholders have
asked whether it is appropriate to use estimated dates of foreclosure
where a foreclosure sale has not been scheduled at the time a complete
loss mitigation application is received. Further, industry stakeholders
have requested guidance on how to apply the timelines if no foreclosure
is scheduled as of the date a complete loss mitigation application is
received, but a foreclosure sale is subsequently scheduled less than 90
days after receipt of such application, or if a foreclosure sale has
been scheduled for less than 90 days after a complete application is
received, but is then postponed to a date that is 90 days or more after
the receipt date.
The Bureau proposed new Sec. 1024.41(b)(3), which stated that, for
purposes of Sec. 1024.41, timelines based on the proximity of a
foreclosure sale to the receipt of a complete loss mitigation
application will be determined as of the date a complete loss
mitigation application is received. Proposed comment 41(b)(3)-1 would
have clarified that if a foreclosure sale has not yet been scheduled as
of the date that a complete loss mitigation application is received,
the application shall be treated as if it were received at least 90
days before a foreclosure sale. Proposed comment 41(b)(3)-2 would have
clarified that such timelines would remain in effect even if at a later
date a foreclosure sale was rescheduled.
The Bureau believed this approach would provide certainty to both
servicers and borrowers as well as ensure that borrowers receive the
broadest protections available under the rule in situations in which a
foreclosure sale has not been scheduled at the time a borrower submits
a complete loss mitigation application. In the proposal, the Bureau
also discussed alternative modifications to the rule, which the Bureau
declined to propose, including having the applicable timelines vary
depending on the newly scheduled (or re-scheduled) sale date, or
allowing servicers to estimate when a foreclosure sale might be
scheduled. On balance, the Bureau believed that a straightforward rule
under which the protections that attach are determined as of the date
of receipt of a complete loss mitigation application, and a complete
loss mitigation application is treated as having been received 90 days
or more before a foreclosure sale if no sale is scheduled as of the
date the application is received, is preferable because it would
provide industry and borrowers with clarity regarding its application,
without the unnecessary complexity that other approaches might produce.
The Bureau recognized that the proposed rule might in some cases
require a servicer to delay a foreclosure sale to allow the specified
time for the borrower to respond to a loss mitigation offer and to
appeal the servicer's denial of a loan modification option, where
applicable, and sought comment and supporting data regarding
circumstances in which this may occur.
Comments
The Bureau received comments from industry as well as consumer
groups addressing these proposed provisions. Overall, commenters
appreciated the clarity and simplicity of the proposed rule. They
supported the idea that borrower protection should be clear and
certain. One consumer advocate expressed concern that the rule limits,
but does not eliminate, dual tracking. This commenter was concerned
that a sale may be scheduled with less than 37 days' notice. Another
consumer advocate suggested the rule should always adopt the most
consumer-friendly timeline. That is, if a sale is postponed, a borrower
should receive the benefit of any extra protections that might arise
given a longer time between the sale and the submission of a complete
application; but if a sale is scheduled to occur on a short timeline,
the borrower should not lose the original protections that had attached
on the basis of the longer timeline.
Industry commenters expressed concern about the feasibility of the
proposed rule. Such commenters were concerned this may inappropriately
extend the timeline of a foreclosure sale. These commenters urged the
Bureau to limit the appeal right to when a complete application is
submitted within 30 days of the first notice or filing required for a
foreclosure sale. Alternatively, some commenters urged the Bureau to
allow servicers to estimate when a foreclosure sale may occur. For
example, one commenter suggested such estimates could be based on
estimates provided by nationally recognized sources. Finally, industry
commenters expressed concern the proposed provision may not be feasible
because a servicer may be unable to move a scheduled foreclosure sale.
One commenter recommended the Bureau offer an exemption from liability
when an investor or court requires a servicer to continue with a
foreclosure sale in violation of the applicable timelines.
Final Rule
The Bureau is finalizing Sec. 1024.41(b)(3) and its related
commentary substantially as proposed, but with minor wording changes.
For the reasons discussed in the proposal, the Bureau believes the
final rule appropriately balances consumer protection and servicer
needs. This approach provides certainty to both servicers and
borrowers, as well as ensures that borrowers receive the broadest
protections available under the rule in situations where a foreclosure
sale has not been scheduled at the time a complete loss mitigation
application is received.
The Bureau declines to adopt other approaches suggested in
comments. The Bureau notes that structuring the rule such that a
borrower's rights may be added or removed because a foreclosure sale
was moved or rescheduled would not provide the certainty or simplicity
created by the proposed rule. Further, the Bureau is concerned that if
moving a foreclosure sale to a later date could trigger new
protections, such a policy may provide a disincentive for a servicer to
reschedule a foreclosure sale for a later date. Finally, the Bureau
does not believe it is appropriate to limit the appeal rights to when a
complete application is submitted within 30 days of the first notice or
filing, because, regardless of when a first notice or filing is made, a
servicer should be able to provide a borrower an appeal when there is
sufficient time before the scheduled foreclosure sale.
The Bureau does not believe that the rule being finalized, which
grants the borrower certain rights if a borrower submits a complete
loss mitigation application before a sale has been scheduled, will
cause inappropriate delays in the foreclosure process. First, while
some States may schedule foreclosure sales to occur in less than 90
days of the scheduling of the sale, completing the process of reviewing
a loss mitigation application may not necessitate a delay in the
scheduled sale. For example, if the scheduling of a sale occurs 30 days
after a complete loss mitigation application is submitted, and the sale
is scheduled for 60 days after the scheduling occurs, the servicer
[[Page 60398]]
will have sufficient time to follow the complete loss mitigation
procedures without having to move the foreclosure sale. Second,
servicers control many of the timelines in the process, including the
30-day evaluation window, and the time to process an appeal. If a
foreclosure sale is rescheduled to occur in less than 90 days after a
borrower submitted a complete application, a servicer does have the
option to review the application quickly and, in doing so, the servicer
may avoid the need to postpone the foreclosure sale.
In situations where there is a conflict (a later scheduled
foreclosure sale that does not allow a servicer or borrower sufficient
time to complete the procedures required by the loss mitigation rules),
the Bureau expects a servicer to take the necessary steps to avoid
having the foreclosure sale occur before the loss mitigation review
procedures run their course, including asking a court to move a
scheduled foreclosure sale, if necessary. An important objective of the
2013 Mortgage Servicing Final Rules is to ensure that loss mitigation
applications receive careful review, so that a servicer does not
foreclose on a borrower who would have qualified for a loss mitigation
option and who timely submitted a complete application for loss
mitigation. Consistent with that objective, once a borrower has
submitted an application, a servicer should carry out the procedures
prescribed by the rule in light of the timing and content of the
application. To permit a later scheduled (or rescheduled) foreclosure
sale to cut short those procedures would be inconsistent with the
objective just described. For these reasons, the Bureau finalizes the
rule substantially as proposed, with minor wording changes.
41(c) Evaluation of Loss Mitigation Applications
41(c)(1) Complete Loss Mitigation Application
41(c)(1)(ii)
The Bureau proposed to amend Sec. 1024.41(c)(1)(ii) to state
explicitly that the notice this provision requires must state the
deadline for accepting or rejecting a servicer's offer of a loss
mitigation option, in addition to the requirements currently in Sec.
1024.41(d)(2) to specify, where applicable, that the borrower may
appeal the servicer's denial of a loan modification option, the
deadline for doing so, and any requirements for making an appeal. As
described in the proposal, the Bureau intended that the Sec.
1024.41(c)(1)(ii) notice would specify the time and procedures for the
borrower to accept or to reject the servicer's offer, in accordance
with requirements specified in Sec. 1024.41(e). Indeed, Sec.
1024.41(e)(2)(i) provides that the servicer may deem the borrower to
have rejected the offer if the borrower does not respond within the
timelines specified under Sec. 1024.41(e)(1). Further, under Sec.
1024.41(e)(2)(ii) and that the servicer must give the borrower a
reasonable opportunity to complete documentation necessary to accept an
offer of a trial loan modification plan if the borrower does not follow
the specified procedures but begins making payments in accordance with
the offer by the deadline specified in Sec. 1024.41(e)(1). Commenters
did not have any objections to the proposed provision, and the Bureau
is adopting this provision as proposed.
41(c)(2) Incomplete Loss Mitigation Application Evaluation
41(c)(2)(iii) Payment Forbearance
The Proposal
The Bureau proposed to modify Sec. 1024.41(c)(2) to allow
servicers to offer short-term forbearance to borrowers based on a
review of an incomplete loss mitigation application, notwithstanding
that provision's restriction on servicers offering a loss mitigation
option to a borrower based on the review of an incomplete loss
mitigation application. In adopting the 2013 Mortgage Servicing Final
Rules, the Bureau crafted broad definitions of ``loss mitigation
option'' and ``loss mitigation application'' for purposes of Sec.
1024.41, to provide a streamlined process in which a borrower will be
evaluated for all available loss mitigation options at the same time,
rather than having to apply multiple times to be evaluated for
different options one at a time. Since publication of the final rule,
however, both industry and consumer advocates have raised questions and
concerns about how the rule applies in situations in which a borrower
needs and requests only short-term forbearance. For instance, a number
of servicers have inquired about whether the rule would prevent them
from granting a borrower's request for waiver of late fees or other
short-term relief after a natural disaster until the borrower submits
all information necessary for evaluation of the borrower for long-term
loss mitigation options. Additionally, both consumer advocates and
servicers have raised questions about whether a borrower's request for
short-term relief would later preclude a borrower from invoking the
protections afforded by the rule if the borrower encounters a
significant change in circumstances that warrants long-term loss
mitigation alternatives.
The Bureau was conscious of the difficulties involved in
distinguishing short-term forbearance programs from other types of loss
mitigation and of the concern that some servicers may have
significantly exacerbated borrowers' financial difficulties by using
short-term forbearance programs inappropriately instead of reviewing
the borrowers for long-term options. Nevertheless, the Bureau believed
that it was possible to revise the rule to facilitate appropriate use
of short-term payment forbearance programs without creating undue risk
for borrowers who need to be evaluated for a full range of loss
mitigation alternatives.
At the outset, the Bureau noted that it does not construe the
existing rule to require that servicers obtain a complete loss
mitigation application prior to exercising their discretion to waive
late fees. Additionally the Bureau noted that, under the rule as
adopted, a servicer may offer any borrower any loss mitigation option
if the borrower has not submitted a loss mitigation application or if
the offer is not based on an evaluation of an incomplete loss
mitigation application, as clarified in existing comment 41(c)(2)(i)-1.
With regard to short-term forbearance programs that involve more
than simply waiving late fees, such as where a servicer allows a
borrower to forgo making a certain number of payments and then to catch
up by spreading the unpaid amounts over some subsequent period of time,
the Bureau believed that the issues raised by various stakeholders
could most appropriately be addressed by providing more flexibility to
servicers to provide such relief even if it is based on review of an
incomplete loss mitigation application. Thus, the Bureau did not
propose to change the current definition of loss mitigation option,
which includes all forbearance programs. Rather, the Bureau proposed to
relax the anti-evasion restriction in Sec. 1024.41(c)(2)(i), which
prohibits a servicer from offering a loss mitigation option based upon
an evaluation of an incomplete loss mitigation application.
The Bureau thus proposed Sec. 1024.41(c)(2)(iii), which would have
allowed short-term payment forbearance programs to be offered based on
a review of an incomplete loss mitigation application. The proposed
exemption would have applied only to short-term payment forbearance
programs. Proposed comment 41(c)(2)(iii)-1 stated that a payment
forbearance program is a loss mitigation option for which a servicer
allows a borrower to forgo
[[Page 60399]]
making certain payments for a period of time. Short-term payment
forbearance programs may be offered when a borrower is having a short-
term difficulty brought on, for example, by a natural disaster. In such
cases, the servicer offers a short-term payment forbearance arrangement
to assist the borrower in managing the hardship. The Bureau explained
that, in its view, it is appropriate for servicers to have the
flexibility to offer short-term payment forbearance programs prior to
receiving a complete loss mitigation application for all available loss
mitigation options. Proposed comment 41(c)(2)(iii)-1 also would have
explained that a short-term program is one that allows the forbearance
of payments due over periods of up to two months.
The Bureau noted that, under the proposed approach, servicers that
receive a request for short-term payment forbearance and grant such
requests would remain subject to the requirements triggered by the
receipt of a loss mitigation application in Sec. 1024.41. Thus, as
explained in proposed comment 41(c)(2)(iii)-2, if a servicer offers a
payment forbearance program based on an incomplete loss mitigation
application, the servicer still would be required to review the
application for completeness, to send the Sec. 1024.41(b)(2)(i)(B)
notice to inform the borrower whether the application is complete or
incomplete, and if incomplete what documents or additional information
are required, and to use reasonable diligence to complete the loss
mitigation application. If a borrower in this situation submits a
complete application, the servicer must evaluate it for all available
loss mitigation options. The Bureau believed that maintaining these
requirements is important to ensure that borrowers are not
inappropriately diverted into short-term forbearance programs without
access to the full protections of the regulation. At the same time, if
a borrower in fact does not want an evaluation for long-term options,
the borrower may simply refrain from providing the additional
information necessary to submit a complete application and the servicer
will therefore not be required to conduct a full assessment for all
options.
To ensure that a borrower who is receiving an offer of short-term
payment forbearance understands the options available, proposed Sec.
1024.41(c)(2)(iii) would have required a servicer offering a short-term
payment forbearance program to a borrower based on an incomplete loss
mitigation application to include in the Sec. 1024.41(b)(2)(i)(B)
notice additional information, specifically that: (1) The servicer has
received an incomplete loss mitigation application and on the basis of
that application the servicer is offering a short-term payment
forbearance program; (2) absent further action by the borrower, the
servicer will not be reviewing the incomplete application for other
loss mitigation options; and (3) if the borrower would like to be
considered for other loss mitigation options, he or she must submit the
missing documents and information required to complete the loss
mitigation application. The Bureau believed that providing borrowers
this more specific information is important to ensure that borrowers do
not face unwarranted delays and paperwork and that servicers do not
misuse short-term forbearance to avoid addressing long-term problems.
Finally, the Bureau proposed comment 41(c)(2)(iii)-3 to clarify
servicers' obligations on receipt of a complete loss mitigation
application. The proposed comment would have stated that,
notwithstanding that a servicer may have offered a borrower a payment
forbearance program after an evaluation of an incomplete loss
mitigation application, and even if the borrower accepted the payment
forbearance offer, a servicer must still comply with all requirements
in Sec. 1024.41 on receipt of a borrower's submission of a complete
loss mitigation application. This proposed comment was intended to
clarify that, even though payment forbearance may be offered as short-
term assistance to a borrower, a borrower is still entitled to submit a
complete loss mitigation application and receive an evaluation of such
application for all available loss mitigation options. Although payment
forbearance may assist a borrower with a short-term hardship, a
borrower should not be precluded from demonstrating a long-term
inability to afford the original mortgage, and being considered for
long-term solutions, such as a loan modification, when that may be
appropriate.
Comments
The Bureau received comments from both industry and consumer group
commenters on this provision. Commenters were generally very supportive
of allowing an exclusion from the full loss mitigation procedures for
short-term problems, that is, problems that can be quickly resolved
(e.g., a borrower needed new tires for his or her car and thus falls a
month behind on mortgage payments). They asserted that short-term
problems are better resolved quickly and that the full loss mitigation
procedures should apply only to consumers with long-term problems. One
industry commenter stated that the paperwork of the full procedures
would be seen as burdensome when a borrower had a short-term problem,
and this would be perceived as poor customer service. Additionally,
commenters pointed out that, under Sec. 1024.41(i), a borrower is
entitled to the full procedures for only a single complete loss
mitigation application, and it would not be in the borrower's best
interest to ``waste'' that single evaluation under the full procedures
on a simple, short-term problem. Consumer advocate commenters suggested
that borrowers should be warned before they use their single
evaluation.
Both consumer advocate and industry commenters expressed concern
that the two-month forbearance contemplated by the proposed rule was
too brief. Such commenters urged the Bureau to permit payment
forbearances of as long as six months or a year, to allow borrowers the
opportunity to resolve their problems (for example, attempting to find
a new job) before using up their opportunities to be evaluated for
long-term options, such as a loan modification. Further, commenters
expressed that the industry standard for payment forbearance programs
was longer than two months--often six months or even a year. Finally,
commenters expressed that short-term forbearances were particularly
important for addressing two situations, unemployment and natural
disasters.
Final Rule
The Bureau is adopting Sec. 1024.41(c)(2)(iii) generally as
proposed. However, in light of comments received, the Bureau has made
some adjustments to the proposed provisions. As discussed below, the
Bureau is clarifying the servicer's reasonable diligence obligation
when a borrower has been offered a payment forbearance based on
evaluation of an incomplete loss mitigation application, and the Bureau
has adjusted the limit on the length of payment forbearances that would
be allowed under this provision.
Payment forbearance based on an incomplete application. The Bureau
is adopting, with some adjustments, the general exclusion for short-
term forbearance from the prohibition on offering loss mitigation based
on an incomplete application. The Bureau continues to believe this
exclusion is appropriate, because it should provide servicers greater
flexibility to address short-term problems quickly and efficiently.
Further, because the exclusion applies to decisions based on review of
incomplete loss mitigation
[[Page 60400]]
applications, it will allow the borrower's short-term problems to be
addressed while preserving a borrower's single use of the full Sec.
1024.41 loss mitigation procedures.
The Bureau declines to exclude payment forbearance from the
definition of loss mitigation. The final rule provides the same
benefits in flexibility that would be achieved by revising the
definition of loss mitigation while preserving important consumer
protections. If a borrower requests payment forbearance, he or she
should be regarded as having requested loss mitigation under the terms
of Sec. 1024.41, and the procedures generally required by the rule
should take place. Further, the Bureau notes that a borrower always has
the option of completing his or her loss mitigation application and
receiving a full evaluation for all options. This is reflected in
comment 41(c)(2)(iii)-3, which states that even if a servicer offers a
borrower a payment forbearance program after an evaluation of an
incomplete loss mitigation application, the servicer must still comply
with all other requirements in Sec. 1024.41 if the borrower completes
his or her loss mitigation application.
The Bureau notes that the new provision addresses only payment
forbearance that is offered based on an evaluation of an incomplete
application. The Bureau is aware, as some commenters noted, that
situations may arise where a borrower completes a loss mitigation
application and goes through a full loss mitigation evaluation, and the
end result is the borrower being offered a payment forbearance--which
would exhaust his or her single use of the Sec. 1024.41 loss
mitigation procedures. The Bureau notes that some consumer advocates
asked the Bureau to exempt any such loss mitigation evaluation from the
successive request provision in Sec. 1024.41(i), or require that such
borrowers be warned so they know not to complete their application if
they are seeking only payment forbearance.
While the Bureau acknowledges these concerns, the Bureau notes that
the proposal was limited to discussing payment forbearance based on
incomplete applications, and comments addressing payment forbearance
based on complete applications are beyond the scope of the proposed
rule. Further, the Bureau notes that the loss mitigation rules are
intended to address only procedures, and leave the substantive
decisions on different loss mitigation programs to the discretion of
the owner or assignee. Finally, the Bureau notes that any issues
related to the second or successive request provision in Sec.
1024.41(i) would more appropriately be addressed in a rulemaking
focusing on that provision.
Payment forbearance and reasonable diligence. The proposed
provision on payment forbearance included a modification to the Sec.
1024.41(b)(2)(i)(B) notice, which would have required the notice to
include additional information when a servicer was offering a borrower
payment forbearance based on an incomplete application. While the
Bureau believes it is important for borrowers to be informed that they
are being offered payment forbearance based on an incomplete loss
mitigation application and they may receive a full review for all other
options by completing their applications, the Bureau believes that
servicers should have flexibility to provide this message at the
appropriate time. A servicer may, in some circumstances, need to
communicate additional information regarding payment forbearance. For
example, a servicer may require additional information--short of a
complete loss mitigation application--to offer a borrower a payment
forbearance program. Further, the Bureau acknowledges that a servicer
may decide to offer a borrower payment forbearance at various stages of
the loss mitigation process, and the message should be provided at the
appropriate time. For example, if a servicer needs additional
information before offering payment forbearance, the servicer might not
decide to offer a borrower payment forbearance until after the Sec.
1024.41(b)(2)(i)(B) notice has been sent out. In light of these
considerations, the Bureau declines to finalize the provision regarding
modification of the Sec. 1024.41(b)(2)(i)(B) notice in the context of
payment forbearance. Instead, the Bureau has amended comment 41(b)(1)-
4, added paragraph 4.iii, which addresses a servicer's reasonable
diligence obligations. The comment explains that, when a servicer
offers a borrower payment forbearance based on an incomplete
application, the servicer should notify the borrower that the borrower
may complete the application to receive a full evaluation of all loss
mitigation options available to the borrower.
The Bureau believes a servicer's diligence obligations may vary
depending on the facts and circumstances. In some instances, it may be
appropriate for servicers to include this additional information in the
Sec. 1024.41(b)(2)(i)(B) notice. For example, if a servicer decides to
offer a borrower payment forbearance based on the initial submission
that establishes the loss mitigation application (e.g., the borrower
calls the servicer and, on the basis of that call, the servicer decides
to offer the borrower payment forbearance), the servicer might include
the message (that the borrower is being offered payment forbearance but
may complete the application to receive a full evaluation) in the Sec.
1024.41(b)(2)(i)(B) notice, along with the full list of information and
documents necessary to complete the loss mitigation application.
Alternatively, if the servicer wanted to offer the borrower a payment
forbearance program, but needed a few additional documents to do so,
the servicer might send a Sec. 1024.41(b)(2)(i)(B) notice explaining
that the borrower has the option of submitting a few items and
receiving payment forbearance, or submitting all the missing
information and receiving a full evaluation. If the borrower submitted
only the items for the payment forbearance and the servicer offered the
borrower a payment forbearance program, at that time the servicer could
to notify the borrower that he or she has the option of completing the
application.
Conversely, if the servicer does not decide to offer a payment
forbearance program based on an evaluation of an incomplete loss
mitigation application until after the Sec. 1024.41(b)(2)(i)(B) notice
has been sent, the servicer would still have the option of offering the
borrower payment forbearance at that later time. The servicer would
notify the borrower that he or she has the option of completing the
application at the time the servicer offered the payment forbearance
program.
In addition, the Bureau is adding a new subpart to comment
41(b)(1)-4 to further elaborate on the servicer's reasonable diligence
obligation when a borrower is considered for short-term forbearance
under this provision. Once a borrower has begun a payment forbearance
program, the Bureau believes the servicer need not continue to request
missing items from the borrower during the course of the payment
forbearance program, unless the borrower fails to comply with the
payment forbearance program or the borrower indicates he or she would
like to continue completing the application. Thus, comment 41(b)(1)-
4.iii states that, once a servicer provides this notification, the
servicer could suspend reasonable diligence efforts until near the end
of the payment forbearance program, so long as the borrower remains in
compliance with the payment forbearance program and does not request
any further assistance.
Finally, the Bureau believes that, unless the borrower has brought
his or
[[Page 60401]]
her loan current, it may be necessary for the servicer to contact the
borrower prior to the end of the forbearance period to determine if the
borrower wishes to complete the application and proceed with a full
loss mitigation evaluation. Thus, comment 41(b)(1)-4.iii states that
near the end of the program, and prior to the end of the forbearance
period, it may be necessary for the servicer to contact the borrower to
determine if the borrower wishes to complete the application and
proceed with a full loss mitigation evaluation.
Length of payment forbearance. The Bureau is amending the proposed
interpretation of ``short-term'' forbearance, in light of public
comments that supported the general exception, but suggested that an
exception permitting only two-month forbearances would be of limited
benefit to borrowers and servicers. The Bureau is persuaded that a two-
month payment forbearance window may not allow the borrower sufficient
time to remedy even some short-term problems. As adopted, comment
41(b)(2)(iii)-1 explains that ``short-term'' forbearance means a
program that allows the forbearance of payments due over periods of no
more than six months, as opposed to two months. The Bureau notes that
this six-month period may cover time both before and after the payment
forbearance was granted (for example, if a borrower is one month
delinquent when a servicer offers a payment forbearance program, the
program may only extend 5 months into the future). The Bureau believes
the extended timeline allows the servicer sufficient flexibility to
address most short-term situations.
As discussed in the proposal, the Bureau was concerned that, if a
servicer offered a borrower a payment forbearance of more than two
months, the borrower may lose the benefit of the 120-day foreclosure
referral prohibition in Sec. 1024.41(f)(1), because the 120 days may
run out during the course of the forbearance plan. The Bureau believes
that, as part of a payment forbearance program as contemplated by this
rule, a servicer should not foreclose on a borrower who is complying
with the payment forbearance program. To make explicit that this
restriction is an aspect of the payment forbearance programs
permissible under the new provision, the Bureau has added a foreclosure
protection clause to the payment forbearance provision in Sec.
1024.41(c)(2)(iii).
The Bureau received comments requesting longer payment forbearance
programs and noting that existing programs that may be offered through
HUD or HAMP, or by the Federal National Mortgage Association and
Federal Home Loan Mortgage Corporation (collectively ``GSEs''), may
offer payment forbearance for periods extending beyond six months to a
year, particularly in situations such as natural disaster or
unemployment. The Bureau remains convinced that, if a borrower has a
long-term problem, such a borrower should, if the borrower chooses,
receive a full evaluation for all loss mitigation options. Because
forbearance programs under Sec. 1024.41(c)(2)(iii) should only be used
for temporary problems, the Bureau believes it is important to reassess
a borrower's situation after no more than six months.
However, the new rule does not preclude a servicer from offering
multiple successive short-term payment forbearance programs. As
discussed below in the Section 1022(b)(2) of the Dodd-Frank Act
analysis, the Bureau has sought to ensure that borrowers would receive
significant benefits from the additional option without losing
protections provided by Sec. 1024.41. Commenters strongly felt that a
short forbearance period would not provide much additional benefit to
borrowers, and further explained that a payment forbearance of less
than a year may interfere with existing programs under HUD, HAMP, and
the GSEs. The Bureau acknowledges that a borrower will generate a
significant unpaid debt over the course of a long forbearance period.
However, the Bureau notes that a borrower who believes the
circumstances warrant cutting a long forbearance short can receive a
full review for all loss available mitigation options by submitting a
complete loss mitigation application. In addition, the Bureau believes
that the risk servicers would attempt to evade the full loss mitigation
procedures by offering sequential six-month forbearances to delinquent
borrowers is low. Thus, the Bureau believes that borrowers benefit more
from renewable forbearance agreements than they would benefit from any
limit the Bureau might impose at this time on the maximum number of
forbearances. The Bureau notes, however, that while the final rule does
not prohibit a servicer from offering multiple short-term forbearances
under this provision, the Bureau intends to monitor how temporary
forbearances are used after this final rule becomes effective and, if
it determines servicers are inappropriately offering sequential payment
forbearances, may address the issue in a later rulemaking or by other
means at a later date.
41(c)(2)(iv) Facially Complete Application
The Proposal
As discussed above, the Bureau proposed new Sec.
1024.41(c)(2)(iv), which stated that if a servicer creates a reasonable
expectation that a loss mitigation application is complete but later
discovers additional documents or information is needed to evaluate the
application, the servicer shall treat the application as complete as of
the date the borrower had reason to believe the application was
complete, for purposes of applying Sec. 1024.41(f)(2) and (g), until
the borrower has been given a reasonable opportunity to complete the
loss mitigation application. This provision was designed to work
together with proposed new comments 41(b)(2)(i)-1 and -2, as discussed
above, to address situations when a servicer determines that an
application the servicer previously determined to be complete (or to be
missing particular information) is in fact is lacking additional
information needed for evaluation.
The Bureau has received questions about the impact of an error in
the notice required by Sec. 1024.41(b)(2)(i)(B), particularly in light
of the short time the servicer has to review the information submitted
by the borrower. As discussed above, the Bureau recognizes that, in
certain circumstances, an application may appear to be complete (or to
be missing only specific information), but the servicer, upon further
evaluation, may determine that additional information is needed before
the servicer can evaluate the borrower for all available loss
mitigation options. The proposed commentary to Sec. 1024.41(b)(2)(i)
was intended to clarify that servicers are required to obtain the
missing information in such situations. Proposed Sec.
1024.41(c)(2)(iv) was intended to protect borrowers while a servicer
requests the missing information.
Proposed comment 41(c)(2)(iv)-1 would have clarified that a
reasonable expectation is created when the borrower submits all the
missing items (if any) identified in the Sec. 1024.41(b)(2)(i)(B)
notice. When a reasonable expectation that a loss mitigation
application is complete is created but the servicer later discovers
that the application is incomplete, proposed Sec. 1024.41(c)(2)(iv)
would have provided that the servicer shall treat the application as
complete for certain purposes until the borrower has been given a
reasonable opportunity to supply the missing information necessary to
complete the loss
[[Page 60402]]
mitigation application. Specifically, under this provision, the
servicer would need to treat the application as complete for purposes
of the foreclosure referral prohibition in Sec. 1024.41(f)(2) and the
foreclosure sale limitations in Sec. 1024.41(g). Proposed Sec.
1024.41(c)(2)(iv) would have ensured that servicers that made bona fide
mistakes in making initial determinations of completeness need not be
considered in violation of the rule, and that borrowers do not lose
protections under the rule due to such mistakes. The Bureau believed
that, once a borrower is given reason to believe he or she has the
benefit of certain protections (which are triggered by submission of a
complete loss mitigation application), if the servicer discovers that
an application is incomplete, the borrower should have a reasonable
opportunity to complete the application before losing the benefit of
such protections.
Proposed comment 41(c)(2)(iv)-2 would have provided guidance on
what would be a reasonable opportunity for the borrower to complete a
loss mitigation application. The comment states that a reasonable
opportunity requires that the borrower be notified of what information
is missing and be given sufficient time to gather the information and
submit it to the servicer. The amount of time that is sufficient for
this purpose would depend on the facts and circumstances.
The Bureau believed that proposed Sec. 1024.41(c)(2)(iv) would
preserve servicers' obligation to conduct rigorous up-front reviews,
while providing servicers the ability to correct a good-faith mistake
or clerical error. Further, servicers seeking relief under the
provision need only give borrowers a reasonable opportunity to provide
the missing information, thus allowing a servicer to continue the
foreclosure process if a borrower does not provide such information.
Comments
As discussed above in the section-by-section analysis of Sec.
1024.41(b)(2)(i), the Bureau received comments from industry as well a
consumer groups addressing these proposed provisions. Commenters were
generally supportive of the Bureau addressing situations where a
servicer later discovers additional documents or information are
required to complete a loss mitigation application. However, commenters
sought additional clarification on several aspects of the proposed
amendment. First, commenters sought clarification on when a borrower's
rights or protections are triggered. Commenters also expressed concern
that it was unclear when a reasonable expectation had been created. For
example, one commenter stated that a servicer may argue a homeowner had
no reasonable expectation even if a complete application was submitted.
Second, commenters sought clarification as to what would be considered
a reasonable amount of time for a borrower to complete an application.
Commenters suggested a set number of days should be given. Finally,
commenters asked what happens after the missing information is provided
or a reasonable time passes and the borrower fails to provide the
information. Some commenters stated that the application should be
considered complete only as of the date the missing information was
provided and the application was actually completed. Other commenters
stated the application should be treated as if it were complete when
the reasonable expectation was created. One commenter pointed out that
the expectation should be created based on the borrower's action
(submitting the items requested in the Sec. 1024.41(b)(2)(i)(B)
notice), rather than on an action (or inaction) of the servicer. As
this commenter noted, if a borrower initially submits a complete
application, the related protections of the rule should be triggered
when the borrower submits the application, not when the servicer sends
the Sec. 1024.41(b)(2)(i)(B) notice. Therefore, this commenter
asserted, if a borrower is asked to provide certain items, the
protections should be triggered when those items are provided, not when
the servicer deems the application to be complete. Finally, some
commenters suggested the proposed revisions should go further and
require a confirmation notice, as well as provide additional guidance
on the timing and content of that notice. For example, one commenter
suggested that servicers should be required to explain the reason a
particular document does not meet underwriting guidelines, rather than
simply requesting the document again.
Final Rule
The Bureau is adopting a final version of Sec. 1024.41(c)(2)(iv)
that is similar to the proposed version, but with some modifications.
First, the Bureau is not including the ``reasonable expectation''
standard set forth in the proposal. Instead, the provision as adopted
states that, if a borrower submits all the missing information listed
in the notice required pursuant to Sec. 1026.41(b)(2)(i)(B), or if no
additional information is requested in such notice, the application
shall be considered ``facially complete'' and will trigger certain
borrower protections. Upon further consideration, the Bureau believes
the subjective nature of the term ``reasonable expectation'' could have
resulted in unnecessary compliance challenges and confusion as to when
a reasonable expectation had been established. The Bureau believes the
concept of facial completeness, on the other hand, provides greater
clarity to servicers and borrowers.
Second, the Bureau is modifying proposed Sec. 1024.41(c)(2)(iv) to
enhance borrower protections by providing that servicers are required
to treat a ``facially complete'' application as complete for purposes
of the Sec. 1026.41(h) appeal right and the borrower response
timelines in Sec. 1024.41(e). As discussed above, proposed Sec.
1026.41(c)(2)(iv) would have required servicers to treat the
application as complete for purposes of the foreclosure referral ban in
Sec. 1024.41(f)(2) and the foreclosure sale limitations in Sec.
1024.41(g) until the borrower had been given a reasonable opportunity
to supply the missing information necessary to complete the loss
mitigation application. However, for purposes of the appeal right under
Sec. 1024.41(h) and the borrower response timelines under Sec.
1024.41(e), the proposal would have treated the application as complete
only once the borrower submitted the additional information or
documents needed to evaluate the application. Thus, under the proposal,
if a servicer gave a borrower a reasonable expectation that he or she
had submitted a complete application more than 90 days before a
scheduled foreclosure sale but later requested more information
pursuant to new Sec. 1024.41(c)(2)(iv), the borrower might not have
received the right to an appeal or to a 14-day response time depending
on the timing of the supplemental information request and the
borrower's response. The Bureau has been persuaded that such a borrower
should enjoy the benefit of the appeal right and the 14-day response
timeline. Furthermore, the Bureau is persuaded by the comment that
suggested that the protections of Sec. 1024.41 should be triggered
based on the date when a borrower submits all the documents and
information as stated in the Sec. 1024.41(b)(2)(i)(B) notice, rather
than when the servicer deems the application to be complete.
Thus, under Sec. 1026.41(c)(2)(iv) as adopted by the final rule,
if a borrower submits a facially complete application that is later
found by the servicer to require additional information or corrected
documents to be evaluated,
[[Page 60403]]
and the borrower subsequently provides the corrected documents or
information necessary to complete the application, the application is
treated as complete, for the purposes of Sec. 1024.41(d), (e), (f)(2),
(g), and (h), as of the date it was facially complete. However, the 30-
day window during which the servicer must evaluate the borrower for all
available loss mitigation options (as required pursuant to Sec.
1026.41(c)) will begin only when the servicer receives the missing
information. The Bureau continues to believe there is little value in
requiring a servicer to evaluate a loss mitigation application when a
servicer has determined certain items of information are missing.
Finally, Bureau has adopted new comment 41(c)(2)(iv)-2 to address
situations in which a borrower fails to provide the missing information
within a reasonable timeframe as prescribed by the servicer. This
comment states that, if the borrower fails to complete the application
within the reasonable timeframe, the servicer may treat the application
as incomplete.
The Bureau is not addressing in this final rule comments that
suggested further protections for borrowers are needed, including
additional notice requirements. The Bureau believes these concerns are
adequately addressed. Several protections already established by the
rule, including the requirement to have polices and procedures
reasonable designed to achieve the objective of facilitating compliance
with the requirement to send an accurate Sec. 1024.41(b)(2)(i)(B)
notice (in Sec. 1024.38(b)(2)(iv); the continuity of contact
requirements in Sec. 1024.40, and the obligation on the servicer to
use reasonable diligence in completing an application already require
that servicers work with borrowers to complete a loss mitigation
application. For example, the reasonable diligence obligation requires
servicers to promptly seek documents or information necessary to
complete a loss mitigation application, which the Bureau believes
includes an obligation to work proactively with borrowers when they
discover any additional documents or information are needed to complete
the application, as well as notify a borrower when a submitted document
is insufficient to complete an application--for example, because a
signature is missing. Servicers cannot be dilatory in seeking such
materials or corrected documents. Given these and other protections and
obligations, the Bureau believes borrowers will be adequately
protected, because the rules should ensure they receive the benefits of
foreclosure protections at the time their applications are facially
complete, and will continue to receive those protections once they have
submitted the additional materials. The Bureau notes that a servicer
that complies with Sec. 1024.41(c)(2)(iv) will be deemed to have
satisfied the requirement to provide an accurate Sec.
1024.41(b)(2)(i)(B) notice. The Bureau believes this approach
appropriately balances the servicer's need to collect additional pieces
of information while still providing protection for the borrower.
41(d) Denial of Loan Modification Options
The Proposal
The Bureau proposed to move the substance of Sec. 1024.41(d)(2), a
provision addressing disclosure of information on the borrower's right
to appeal, to Sec. 1024.41(c)(1)(ii). As a conforming amendment, the
Bureau proposed to re-codify Sec. 1024.41(d)(1) as Sec. 1024.41(d)
and to re-designate the corresponding commentary accordingly. The
Bureau is finalizing these provisions as proposed.
The Bureau also proposed to clarify the requirement in Sec.
1024.41(d)(1), re-codified as Sec. 1024.41(d), that a servicer must
disclose the reasons for the denial of any trial or permanent loan
modification option available to the borrower. The Bureau believed it
was appropriate to clarify that the requirement to disclose the reasons
for denial focuses on only those determinations actually made by the
servicer and does not require a servicer to continue evaluating
additional factors after the servicer has already decided to deny a
borrower for a particular loss mitigation option. Thus, when a
servicer's automated system uses a program that considers a borrower
for a loan modification by proceeding through a series of questions and
ends the process if the consumer is denied, the servicer need not
modify the system to continue evaluating the borrower under additional
criteria. For example, suppose a borrower must meet qualifications A,
B, and C to receive a loan modification, but the borrower does not meet
any of these qualifications. A servicer's system may start by asking if
the borrower meets qualification A, and on the failure of that
qualification end the analysis for that specific loan modification
option. If a servicer were required to disclose all potential reasons
why the borrower may have been denied for that loan modification option
(i.e., A, B, and C), it would need to consider a lengthy series of
hypothetical scenarios: for example, if the borrower had met
qualification A, would the borrower also have met qualification B? The
Bureau did not intend such a requirement, which it believes would be
unnecessarily burdensome.
The Bureau instead intended to require only the disclosure of the
actual reason or reasons on which the borrower was evaluated and
denied. Accordingly, the Bureau proposed to amend Sec. 1024.41(d) to
require that a denial notice provided by the servicer must state the
``specific reason or reasons'' for the denial and also, where
applicable, disclose that the borrower was not evaluated based on other
criteria. The notice would not be required to list such criteria. The
Bureau believed that this additional information will help borrowers
understand the status of their application and the fact that they were
not fully evaluated under all factors (where applicable). The Bureau
also proposed new comment 41(d)-4 stating that, if a servicer's system
reaches the first issue that causes a denial but does not evaluate
borrowers for additional factors, a servicer need only provide the
reason or reasons actually considered. The Bureau believed this
proposed amendment would appropriately balance potential concerns about
compliance challenges with concerns about informing borrowers about the
status of their applications and about information that is relevant to
potential appeals.
Comments
The Bureau received comments from both industry and consumer groups
addressing the proposed modifications. Commenters were generally in
favor of this revision to the rule, and agreed it would be unduly
burdensome for servicers to construct systems to consider hypothetical
scenarios solely for the purpose of compiling a complete list of all
potential denial reasons. One industry commenter suggested that the
denial reasons disclosed be limited to ``primary'' or ``initial''
reasons. One consumer group expressed concern that the proposed
revision would allow servicers to avoid disclosing the factors used in
the net present value analysis.
Final Rule
For the reasons discussed in the proposal, the Bureau is finalizing
the rule as proposed. The Bureau declines to modify the rule to require
only the ``initial'' or ``primary'' reasons as suggested by some
commenters because the Bureau believes these terms are unclear. The
Bureau also disagrees with commenters that suggested that the
modification to the rule allows a servicer to evade disclosure of a
factor used in an NPV analysis. The rule
[[Page 60404]]
requires servicers to disclose the basis for the denial, so if a
servicer denies a borrower for a loan modification option based on an
NPV analysis, that servicer must disclose the factors used in the
analysis. However, if a servicer denies a borrower a loan modification
option on other grounds, it would be unduly burdensome for the servicer
to disclose factors that would have been used, had the servicer done a
NPV analysis.
41(f) Prohibition on Foreclosure Referral
First Notice or Filing
The Proposal
Section 1024.41(f) prohibits a servicer from making the first
notice or filing required by applicable law for any judicial or non-
judicial foreclosure process unless a borrower's mortgage loan is more
than 120 days delinquent. A servicer also is prohibited from making
such a notice or filing while a borrower's complete loss mitigation
application is being evaluated. In response to numerous questions
received by the Bureau about the meaning of the phrase ``first notice
or filing,'' the Bureau proposed to redesignate comment 41(f)(1)-1 as
comment 41(f)-1, and then revise it to clarify what actions Sec.
1024.41(f) would prohibit.
Specifically, the proposed comment would have stated that whether a
document is considered the first notice or filing is determined under
applicable State law. Under the proposal, a document that would be used
as evidence of compliance with foreclosure practices required pursuant
to State law would have been considered the first notice or filing.
Thus, a servicer would have been prohibited from sending such a notice
or filing such a document during the pre-foreclosure review period or
during the review period for a complete loss mitigation application.
Documents that would not be used in this fashion would not have been
considered the first notice or filing. The proposed comment would have
stated expressly that this prohibition does not extend to activity such
as attempting to collect the debt, sending periodic statements, sending
breach letters, or any other activity during the pre-foreclosure review
period, so long as such documents would not be used as evidence of
complying with requirements applicable pursuant to State law in
connection with a foreclosure process.
The Bureau acknowledged that, under the proposed interpretation, if
a State law mandates a notice to a borrower of the availability of
mediation as a prerequisite to commence foreclosure, such notices would
be considered the ``first notice or filing'' for purposes of Sec.
1024.41. The Bureau also recognized that existing State foreclosure
processes often can be lengthy. The proposed comment sought to balance
protecting consumers and encouraging communication between borrowers
and servicers by providing borrowers sufficient time to submit a
complete loss mitigation application without the stress and costs of
foreclosure, but also permitting servicers to communicate with
borrowers to respond promptly to requests. However, recognizing
potential practical difficulties for servicers as well as borrower
protection concerns that could arise from chilling early communications
provided for borrowers under State law, the Bureau sought comment on
the best way to establish a workable rule that clearly identifies what
is prohibited, while balancing these goals.
Comments
The Bureau received substantial comments from trade associations,
individual servicers including credit unions, the GSEs, some State
governments, and two consumer advocacy groups, which generally
disagreed with the proposed ``evidence of compliance with State law''
standard and asked the Bureau to reconsider the scope of the
prohibition. Numerous commenters, including trade organizations, the
GSEs, individual servicers and credit unions, asserted that the
proposed comment would cause significant delays in the foreclosure
process, especially where the first notice or filing would be followed
by lengthy periods mandated by State law before actual initiation of
court proceedings or establishing a foreclosure sale date. These
commenters asserted that the proposal would have prohibited often
lengthy processes from starting until after 120 days of delinquency
have passed. For example, commenters noted that Massachusetts requires
its own notice and opportunity to cure process that may take up to 150
additional days before foreclosure is filed. Thus, if the notice
beginning that cure process is deemed the ``first notice'' for purposes
of the prohibition on foreclosure referral (as it would have been under
the proposal), foreclosure proceedings may be delayed until the 270th
day of delinquency. One industry commenter raised concerns that such
delays would impact compliance with regulatory capital requirements.
Industry commenters expressed substantial concerns with the
proposal's use of the phrase ``evidence of compliance with State law.''
These commenters asserted that the phrase is vague, and that State law
may often require proof of compliance with the mortgage contract's
terms, which may include the sending of general default notices not
expressly required by statute. The commenters indicated servicers would
have difficulty understanding what documents were prohibited and likely
would be discouraged from sending any early communications to borrowers
if they later must use such document to show compliance with applicable
State law.
Industry commenters, State governments, and some consumer advocates
indicated that the proposal likely would delay notices required under
State-mandated pre-foreclosure programs. As these commenters noted,
under the proposal such notices likely would constitute ``evidence of
compliance with State law'' and thus would be prohibited until after
the 120th day of delinquency. These commenters also asserted that such
programs complement the Bureau's early intervention rule and that there
is substantial benefit to borrowers in receiving these notices early in
their delinquencies. For example, many statutory notices require that
counseling, legal aid, or other resources be identified to borrowers,
and consumer groups agreed that borrowers are more likely to respond
and seek loss mitigation when they receive notices clearly informing
them that foreclosure is imminent if they do not act. Several
commenters pointed to data or experience that indicated many borrowers
do not reach out to servicers for loss mitigation assistance until
foreclosure notices or notices of default are sent. These commenters
believed that borrowers would receive little benefit if these notices
were delayed until after the 120th day of delinquency because the
likelihood of a successful resolution would be reduced. On the whole,
these commenters indicated that delaying State-mandated notices
relating to loss mitigation programs or statutory rights to cure
delinquencies would frustrate State efforts at avoiding foreclosure by
making resolutions more difficult or cure more costly to consumers.
As an alternative to the proposed interpretation of ``first notice
or filing,'' many industry commenters recommended that the Bureau adopt
an interpretation based on the Federal Housing Administration's (FHA)
definition of ``first legal,'' citing familiarity with this concept. In
the alternative, some industry commenters suggested a more uniform and
objective definition or a State-by-State
[[Page 60405]]
determination. These commenters generally stated that a prohibition
that extends to documents defined in a manner that closely tracks
``first legal'' would better facilitate compliance for industry, while
at the same time would permit and encourage the early notices to
borrowers, including those that provide counseling, legal aid, or other
resources. A number of commenters suggested that specific notices be
expressly permitted, including State-mandated outreach to delinquent
borrowers and breach letters required by the GSEs.
Final Rule
The Bureau is adopting a revised version of proposed comment 41(f)-
1 that states a document is considered the ``first notice or filing''
on the basis of foreclosure procedure under applicable State law, but
adjusts the Bureau's interpretation of what constitutes a ``first
notice or filing.'' Rather than relying on the general notion that any
evidence of compliance with State foreclosure law constitutes a first
notice or filing, the Bureau is revising comment 41(f)-1 and adopting
four new subparts that are more specifically addressed to different
types of foreclosure procedures. New comment 41(f)-1.i explains that,
when the foreclosure procedure under applicable State law requires
commencement of a court action or proceeding, a document is considered
the first notice or filing if it is the earliest document required to
be filed with a court or other judicial body to commence the action or
proceeding (e.g., a complaint, petition, order to docket, notice of
hearing). The Bureau also is adopting new comment 41(f)-1.ii, which
explains that, when the foreclosure procedure under applicable State
law does not require a court action or proceeding, a document is
considered the first notice or filing if it is the earliest document
required to be recorded or published to initiate the foreclosure
process. To address situations not already covered by comments (i) and
(ii), new comment 41(f)-1.iii provides that, where a foreclosure
procedure does not require initiating a court action or proceeding or
recording or publishing of any document, a document is considered a
``first notice or filing'' if it is the first document which
establishes, sets or schedules the foreclosure sale date.
As noted above, the proposal sought to balance protecting consumers
and encouraging communication between servicers and borrowers. The
Bureau believed that, under the proposed interpretation of ``first
notice or filing,'' borrowers would be ensured sufficient time to
submit a complete loss mitigation application, but servicers would
still be able to send many of the typical early-default communications,
so long as they were not being used as evidence of compliance with
State law. The Bureau requested comment on whether the proposal
established a workable rule that was clear, in light of varied
foreclosure procedures in different states, and the multiple purposes
for notices. As noted above, many commenters, including consumer
advocate groups and State governments, indicated concerns with the
proposed interpretation's impact on communication and its impact on
State-mandated loss mitigation programs. Many commenters asserted that
the proposal would result in either less or ineffective early default
communication and lessen the likelihood that borrowers would
successfully access loss mitigation resolutions or otherwise avoid
foreclosure.
The Bureau is persuaded by these comments that revising the
interpretation is necessary to provide greater clarity and also provide
for more effective pre-foreclosure outreach. As commenters noted, the
proposed interpretation would have prohibited the use of many State-
mandated notices that do not initiate foreclosure proceedings and are
intended to provide borrowers with information about counseling and
other loss mitigation resources as a means of avoiding foreclosure. In
addition, the Bureau is persuaded by comments that the proposed
interpretation would have chilled other servicer communications, such
as cure notices or breach letters, based on confusion over whether such
communications were ``evidence of compliance'' and thus prohibited by
Sec. 1024.41.
The Bureau believes the interpretation of first notice or filing
adopted by this final rule provides an objective basis for determining
compliance with the prohibition on foreclosure referral. In addition,
it addresses the concerns raised in comments that the proposal would
restrict communications informing borrowers of assistance and statutory
rights to cure. The Bureau agrees with commenters that permitting
communication about cure rights or pre-foreclosure loss mitigation
assistance or procedures available under State law, even within the
first 120 days of a borrower's delinquency, furthers the objective of
Sec. 1024.41's loss mitigation procedures. The Bureau believes early
communication to borrowers about resources such as housing counseling,
emergency loan programs, and pre-foreclosure mediation will increase
the likelihood that borrowers will submit complete applications in time
to benefit from the full loss mitigation procedures under Sec.
1024.41. The Bureau appreciates that, under this modified
interpretation, some borrowers who have not yet submitted loss
mitigation applications may face shorter foreclosure timeframes after
the 120th day of delinquency than under the proposed interpretation.
However, the Bureau believes the adopted interpretation provides
sufficient opportunity for borrowers to seek loss mitigation assistance
without the pressure of pending litigation or foreclosure proceedings.
The Bureau also believes a borrower's ability to exercise a statutory
or contractual right to cure a default likely will be greater where
notice of the cure rights is provided before several months of
arrearages have accumulated. While the proposed interpretation was not
intended to prohibit sending any such notice, only one that would be
used as evidence of compliance with applicable law, the modified
interpretation provides greater clarity.
The Bureau acknowledges that its interpretation of ``first notice
or filing'' may prohibit, during the 120-day period, initiation of
State-mandated loss mitigation efforts or opportunities to cure in
those jurisdictions where the applicable foreclosure procedure requires
such information to appear first in a court filing, or a document that
is recorded or published. However, were the Bureau to adopt an
interpretation that excluded such notices from the definition of first
filing, based on their inclusion of information related to cure rights
or loss mitigation assistance, this likely would create significant
confusion and frustrate the purposes of the rule, by permitting certain
foreclosure actions within the 120-day period.
Finally, the Bureau is adding new comment 41(f)-1.iv to clarify
that a document provided to a borrower that initially is not required
to be filed, recorded or published is not considered the first notice
or filing solely on the basis that the foreclosure procedure requires a
copy of the document to be included as an attachment to a subsequent
document required to be filed or recorded to carry out the foreclosure
process. The Bureau is aware through comments that, in many states,
letters or notices (including breach letters, notices of rights to
cure) that are required to be sent to the borrower, but do not initiate
formal foreclosure proceedings, nonetheless are required to be included
in later filings, i.e., as part of a complaint or subsequent
[[Page 60406]]
pleading. Such letters or notices may be sent during the pre-
foreclosure review period without violating the foreclosure referral
ban.
The interpretation of ``first notice or filing'' adopted by this
final rule closely tracks, but may not be identical in all
jurisdictions, to the FHA's ``first legal action necessary to initiate
foreclosure'' or ``first legal'' or ``first public'' action, as some
commenters requested.\24\ However, the Bureau believes to the extent
there are jurisdictions where ``first notice or filing'' of Sec.
1024.41(f) is inconsistent with the FHA standard, it will not hinder
servicers' compliance with obligations under the FHA or investor
requirements based upon the FHA's standard. The Bureau notes that the
``first legal'' standard primarily serves to inform mortgagees of their
contractual obligations as servicers of FHA-insured mortgages. In light
of the fact that Sec. 1024.41(f) is enforceable by private right of
action, the Bureau is adopting this interpretation of ``first notice or
filing'' in order to provide sufficient clarity to borrowers,
servicers, and courts. The Bureau also believes this interpretation
provides States with clarity of the application of Sec. 1024.41(f),
not just as to present State foreclosure procedure but with respect to
future modifications of State law.
---------------------------------------------------------------------------
\24\ See Department of Housing and Urban Development, Mortgagee
Letter 2005-30, July 12, 2005.
---------------------------------------------------------------------------
Exceptions to the Prohibition of Early Foreclosure Referrals
The Proposal
The Bureau also proposed to amend Sec. 1024.41(f)(1) so that the
prohibition on referral to foreclosure until after the 120th day of
delinquency would not apply in two situations: (1) When the foreclosure
is based on a borrower's violation of a due-on-sale clause, and (2)
when the servicer is joining the foreclosure action of a subordinate
lienholder. As discussed in the proposal, the Bureau is aware that
there may be some circumstances when a foreclosure is not based upon a
borrower's delinquency, and thus protections designed to provide
delinquent borrowers time to bring their mortgages current or apply for
loss mitigation (such as the 120-day ban on foreclosure referral) may
not be appropriate or necessary. The Bureau proposed amending Sec.
1024.41(f)(1) to provide the two exemptions for foreclosures based upon
due-on-sale clauses and for joining a subordinate lienholder's
foreclosure, but also recognized that other situations may exist that
also warrant exclusion. Thus, in addition to the two situations
described above, the Bureau sought comment on what other situations may
be appropriate to exempt, or whether the proposed exemptions were
appropriate in situations in which a borrower has submitted a complete
loss mitigation application.
Comments
The Bureau received substantial comments from trade associations,
individual servicers including credit unions, and the GSEs, which
generally supported the added exemptions to Sec. 1024.41(f)(1).
Industry commenters generally supported the proposed exemptions, citing
a need to provide relief from the foreclosure referral ban where
default is based upon a non-monetary provision of a mortgage. With
respect to the Bureau's request for comment on other situations that
may warrant exclusion, numerous commenters suggested the Bureau provide
guidance or add exemptions for foreclosure based upon a determination
that the property was abandoned or vacant. Some commenters advocated an
exemption for abandoned properties and suggested the Bureau provide a
list of factors to be considered in determining whether the property
was abandoned. Consumer groups, however, expressed concerns that,
because abandonment or vacancy status is necessarily a fact-specific
determination, an exemption may facilitate evasion.
In addition, some commenters suggested the Bureau exempt situations
where the borrower is deceased without heirs or in other cases. Some
industry commenters requested that the rule permit foreclosure within
the 120-day period where borrowers have failed to maintain insurance or
property tax payments or where the borrower had failed to pay late
fees. Finally, some commenters requested an exemption for other
situations including where borrowers commit waste, are non-responsive
to the servicer's attempts to maintain live contact, or state a desire
to surrender the property.
Consumer groups acknowledged that situations may exist that warrant
exclusion from the 120-day prohibition, such as the proposed
exemptions, but raised concerns about their breadth. Specifically,
these commenters expressed concerns that an exemption for all
foreclosures based on violation of a due-on-sale clause may be overly
broad, and could be construed to allow foreclosure where the transfer
is to a deceased borrowers' family member or where a transfer occurs as
a result of State divorce decree or probate order, or other transfer to
a borrower's family member. Many of these commenters suggested that the
exemption expressly exclude such transfers to the extent they were
protected under the Garn-St. Germain Act.\25\ Consumer advocate
commenters also suggested that the exemption for joining a foreclosure
action of a subordinate lienholder should be limited to situations
where all of the servicers and lienholders with respect to the property
are separate entities.
---------------------------------------------------------------------------
\25\ Garn-St. Germain Depository Institutions Act, Public Law
97-320 (1982) (codified in various sections). The Act generally
prohibits the exercise of due-on-sale clauses with respect to
certain protected transfers. See 12 U.S.C. 1701j-3.
---------------------------------------------------------------------------
Final Rule
The Bureau is adopting the amendments to Sec. 1024.41(f)(1) as
proposed, without adopting additional exemptions. The Bureau
appreciates comments that suggested the 120-day prohibition was
designed to protect delinquent borrowers, but should not extend to non-
monetary defaults or breaches of the underlying mortgage agreement.
However, the Bureau remains mindful of consumer protection concerns
that could arise from a broader set of exemptions. For example,
industry commenters suggested that foreclosure based on a borrower's
failure to maintain insurance or pay property taxes should be excluded,
but, as some of these commenters acknowledged, those and other examples
provided are likely to coincide with borrower delinquency. The Bureau
does not believe that servicers should be allowed to sidestep the
borrower protections set forth in Sec. 1024.41 for delinquent
borrowers simply because borrowers may have breached other components
of the underlying mortgage, such as requirements to pay property taxes,
maintain insurance, or pay late fees. The Bureau believes that
additional exemptions would create uncertainty and could potentially be
construed in a manner that permits evasion of the requirements of Sec.
1024.41(f). Moreover, the Bureau does not believe exemption from the
pre-foreclosure review period is appropriate merely because foreclosure
is based upon an obligation other than the borrower's monthly payment.
In many instances, these borrowers are likely experiencing financial
distress and thus may benefit from time to seek loss mitigation.
For similar reasons, the Bureau does not believe it is appropriate
to adopt an exemption from the 120-day prohibition for situations where
a borrower may be deemed to commit ``waste'' in violation of an
underlying mortgage agreement.
[[Page 60407]]
As noted above, the Bureau is concerned that such an exemption could be
used to circumvent the 120-day prohibition for borrowers who are also
delinquent. However, the Bureau also notes that what constitutes waste
is very fact-specific and the few commenters who suggested an exemption
provided no precise definition of the term. Furthermore, while
mortgages typically permit foreclosure in the event of waste, they also
frequently provide other non-foreclosure remedies. In light of the
absence of evidence suggesting waste that would necessitate rapid
foreclosure is a significant problem, the Bureau is convinced that no
such exemption is necessary.
In addition, the Bureau does not believe any further narrowing or
clarifying revisions to the due-on-sale clause exemption in Sec.
1024.41(f)(1)(i), to protect transfers to family members or transfers
ordered by divorce decree or probate proceedings, are necessary. The
Bureau notes that, to the extent the Garn-St. Germain Act prohibits the
exercise of due-on-sale clauses, the exemption from the 120-day period
would not apply. The exemption does not alter limitations or
obligations imposed on a servicer by another Federal or State law with
respect to whether a due-on-sale clause validly may be exercised.
Rather it merely provides an exception to the 120-day pre-foreclosure
review period where the basis for foreclosure is a due-on-sale clause.
The Bureau notes that servicers may not avail themselves of the due-on-
sale clause exemption and make the first notice or filing before the
120th day of delinquency unless such a clause is validly enforceable.
The Bureau is also not adopting any limitation on the exemption for
joining a foreclosure initiated by a subordinate lienholder. The Bureau
does not believe it is appropriate to limit the exemption application
to only those situations where the senior and junior liens are held or
serviced by separate entities, as was requested. In the case where an
entity services both a first and a second lien, the servicer will be
required to complete the pre-foreclosure review for the second lien,
and will be required to respond to a borrower's loss mitigation
application with respect to the first mortgage as well. Furthermore,
the comments did not provide an adequate explanation to persuade the
Bureau that servicers are more likely to pursue foreclosure in a manner
that evades the 120-day pre-foreclosure review period when the senior
and junior lien are held and serviced by the same entity.
Finally, the Bureau notes that several commenters requested that
the Bureau exempt vacant or abandoned properties from the 120-day
prohibition. However, while many commenters asserted that there is a
limited benefit to prohibiting foreclosure referral where a property is
``vacant'' or ``abandoned'', they also generally agreed that such a
determination depends on the individual facts and circumstances, and
may vary according applicable State law. While some commenters
suggested the Bureau adopt a multiple-factor test to determine whether
a property was ``abandoned,'' the Bureau believes any such test would
inherently rely on a holistic determination based on individual facts
and circumstances, and would not provide the clear guideline that the
Bureau believes is appropriate with respect to the prohibition on
foreclosure referral. Moreover, as noted by consumer groups, a number
of borrower protection concerns could arise from affording servicers
too much discretion in determining whether a property is abandoned or
vacant. In addition, some industry commenters conceded that it would be
rare for a property to be determined abandoned or vacant earlier than
the 120th day of delinquency.
For these reasons, the Bureau is not adopting an exclusion from the
120-day prohibition for vacant or abandoned properties. However, the
Bureau notes that the provisions of Sec. Sec. 1024.39 through 1024.41
apply only to a mortgage loan secured by property that is a borrower's
principal residence. See 12 CFR 1024.30(c)(2). Thus, depending on the
facts and circumstances, it is possible that some foreclosures against
vacant or abandoned properties will not be subject to Sec. 1024.41(f).
41(h) Appeal Process
41(h)(4) Appeal Determination
The Bureau proposed to amend Sec. 1024.41(h)(4) to provide
expressly that the notice informing a borrower of the determination of
his or her appeal must also state the amount of time the borrower has
to accept or reject an offer of a loss mitigation option after the
notice is provided to the borrower. The Bureau did not receive any
comments on this provision and is finalizing it as proposed.
41(j) Prohibition on Foreclosure Referral
As discussed above, the Bureau is adopting, as proposed, amendments
to Sec. 1024.41(f)(1) that exempt two situations from the prohibition
on referral to foreclosure until after the 120th day of delinquency:
When the foreclosure is based on a borrower's violation of a due-on-
sale clause and when the servicer is joining the foreclosure action of
a subordinate lienholder. The Bureau also proposed corresponding
amendments to the provision in Sec. 1024.41(j), which provides the
same prohibition with respect to small servicers. While the Bureau
received a number of comments regarding the proposed amendments to
Sec. 1024.41(f)(1) as discussed above, the Bureau received no comments
addressing the corresponding amendments to Sec. 1024.41(j).
Accordingly, the Bureau is adopting, as proposed, the amendments to
Sec. 1024.41(j) to allow foreclosure before the 120th day of
delinquency when the foreclosure is based on a borrower's violation of
a due-on-sale clause and when the servicer is joining the foreclosure
action of a subordinate lienholder, by incorporating a cross-reference
to Sec. 10124.41(f)(1).
C. Regulation Z
General--Technical Corrections
In addition to the clarifications and amendments to Regulation Z
discussed below, the Bureau proposed technical corrections and minor
clarifications to wording throughout Regulation Z that are not
substantive in nature. The Bureau is adopting such technical and
wording clarifications as proposed to regulatory text in Sec. Sec.
1026.23, 1026.31, 1026.32, 1026.35, and 1026.36 and to commentary to
Sec. Sec. 1026.25, 1026.32, 1026.34, 1026.36, and 1026.41. In
addition, the Bureau is adding additional technical corrections to
regulation text in Sec. 1026.43 and commentary to Sec. Sec. 1026.25,
1026.32, and 1026.43. The Bureau also is making one correction to an
amendatory instruction that relates to FR Doc. 2013-16962, published on
Wednesday July 24, 2013.
Section 1026.23 Right of Rescission
23(a) Consumer's Right To Rescind
23(a)(3)(ii)
The Bureau proposed to amend Sec. 1026.23(a)(3)(ii) to update a
cross-reference within that section from Sec. 1026.35(e)(2), as
adopted by the Bureau's Amendments to the 2013 Escrows Final Rule under
the Truth in Lending Act (Regulation Z) (May 2013 Escrows Final
Rule),\26\ to Sec. 1026.43(g). The cross-reference in the May 2013
Escrows Final Rule is the correct cross-reference during the time
period that rule will be in effect for transactions where applications
are received on or after June 1, 2013, but prior to January
[[Page 60408]]
10, 2014. For transactions where applications are received on or after
January 10, 2014, the correct cross-reference will be to Sec.
1026.43(g). For this reason, the Bureau proposed to remove the cross-
reference to Sec. 1026.35(e)(2) and replace it with a cross-reference
to Sec. 1026.43(g). The Bureau received no comments addressing this
change and is finalizing this amendment as proposed.
---------------------------------------------------------------------------
\26\ 78 FR 30739 (May 23, 2013).
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Section 1026.32 Requirements for High-Cost Mortgages
32(b) Definitions
The Bureau's 2013 ATR Final Rule and 2013 HOEPA Final Rule contain
provisions that relate to a transaction's ``points and fees.'' \27\ As
adopted by the 2013 ATR Final Rule, Sec. 1026.43(e)(2)(iii) sets forth
a cap on points and fees for a closed-end credit transaction to acquire
qualified mortgage status. As adopted by the 2013 HOEPA Final Rule,
Sec. 1026.32(a)(1)(ii), sets forth a points and fees coverage
threshold for both closed- and open-end credit transactions.
Definitions of points and fees for closed- and open-end credit
transactions were also provided by these two final rules.
---------------------------------------------------------------------------
\27\ See 78 FR 6407 (Jan. 30, 2013); 78 FR 6856 (Jan. 31, 2013).
The Bureau also addressed points and fees in the May 2013 ATR Final
Rule. See 78 FR 35430 (June 12, 2013).
---------------------------------------------------------------------------
For purposes of both the qualified mortgage points and fees cap and
the high-cost mortgage coverage threshold, Sec. 1026.32(b)(1) defines
``points and fees'' for closed-end credit transactions.\28\ Section
1026.32(b)(1)(i) defines points and fees for closed-end credit
transactions to include all items included in the finance charge as
specified under Sec. 1026.4(a) and (b), with the exception of certain
items specifically excluded under Sec. 1026.32(b)(1)(i)(A) through
(F). These excluded items include interest or time-price differential;
certain types and amounts of mortgage insurance premiums; certain bona
fide third-party charges not retained by the creditor, loan originator,
or an affiliate of either; and certain bona fide discount points paid
by the consumer. Section 1026.32(b)(1)(ii) through (vi) lists (as
clarified by this final rule) certain other items that are specifically
included in points and fees, including compensation paid directly or
indirectly by a consumer or creditor to a loan originator; certain
real-estate related items listed in Sec. 1026.4(c)(7) unless certain
conditions are met; premiums for various forms of credit insurance,
including credit life, credit disability, credit unemployment and
credit property insurance; the maximum prepayment penalty, as defined
in Sec. 1026.32(b)(6)(i), that may be charged or collected under the
terms of the mortgage loan; and the total prepayment penalty as defined
in Sec. 1026.32(b)(6)(i) or (ii) incurred by the consumer if the
consumer refinances an existing mortgage loan or terminates an existing
open-end credit plan in connection with obtaining a new mortgage loan
with the current holder of the existing loan or plan (or a servicer
acting on behalf of the current holder, or an affiliate of either).
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\28\ Section 1026.43(b)(9) provides that, for the qualified
mortgage points and fees cap, ``points and fees'' has the same
meaning as in Sec. 1026.32(b)(1).
---------------------------------------------------------------------------
Points and fees for open-end credit plans for purposes of the high-
cost mortgage thresholds is defined in section 1026.32(b)(2), which
essentially follows the inclusions and exclusions set out in Sec.
1026.32(b)(1) for closed-end transactions, with several modifications
and additional inclusions related to fees charged for open-end credit
plans.
32(b)(1)
The Proposal
Prior to the Dodd-Frank Act, TILA section 103(aa)(1)(B) provided
that a mortgage is subject to the restrictions and requirements of
HOEPA if the total points and fees ``payable by the consumer at or
before closing'' (emphasis added) exceed the threshold amount. However,
section 1431(a) of the Dodd-Frank Act amended the points and fees
coverage test to provide in TILA section 103(bb)(1)(A)(ii) that a
mortgage is a high-cost mortgage if the total points and fees ``payable
in connection with the transaction'' (emphasis added) exceed newly
established thresholds. Similarly, TILA section 129C(b)(2)(A)(vii)
provides that points and fees ``payable in connection with the loan''
(emphasis added) are included in the points and fees calculation for
qualified mortgages. As adopted by the 2013 ATR and HOEPA Final Rules,
which implemented these changes, the definition of points and fees
includes certain charges not paid by the consumer.
Following publication of the Bureau's ATR and HOEPA Final Rules,
the Bureau received numerous questions from industry seeking guidance
regarding the treatment of third party-paid charges and creditor-paid
charges for purposes of the points and fees calculation. Based on these
questions, the Bureau determined that additional clarification
concerning the treatment of charges paid by parties other than the
consumer, including third parties, for purposes of inclusion in or
exclusion from points and fees would be beneficial to consumers and
creditors and facilitate compliance with the final rules. The Bureau
therefore proposed to add new commentary to Sec. 1026.32(b)(1) to
clarify when charges paid by parties other than the consumer, including
third parties, are included in points and fees. Specifically, the
Bureau proposed to add new comment 32(b)(1)-2 to clarify the treatment
of charges imposed in connection with a closed-end credit transaction
that are paid by a party to the transaction other than the consumer,
for purposes of determining whether that charge is included in points
and fees as defined in Sec. 1026.32(b)(1). The proposed comment would
have stated that charges paid by third parties that fall within the
definition of points and fees set forth in Sec. 1026.32(b)(1)(i)
through (vi) are included in points and fees, and would have provided
examples of third-party payments that are included and excluded. In
discussing included charges, the proposed comment noted that a third-
party payment of an item excluded from the finance charge under a
provision of Sec. 1026.4, while not included in points and fees under
Sec. 1026.32(b)(1)(i), may be included under Sec. 1026.32(b)(1)(ii)
through (vi). In discussing excluded charges, the proposed comment
stated that a charge paid by a third party is not included in points
and fees under Sec. 1026.32(b)(1)(i) as a component of the finance
charge if any of the exclusions from points and fees in Sec.
1026.32(b)(1)(i)(A) through (F) applies.
The proposed comment also discussed the treatment of ``seller's
points,'' as described in Sec. 1026.4(c)(5) and commentary. The
proposed comment would have stated that seller's points are excluded
from the finance charge and thus are not included in points and fees
under Sec. 1026.32(b)(1)(i), but also would have noted that charges
paid by the seller may be included in points and fees if the charges
are for items in Sec. 1026.32(b)(1)(ii) through (vi).
Finally the proposed comment would have restated for clarification
purposes that, pursuant to Sec. 1026.32(b)(1)(i)(A) and (ii), charges
that are paid by the creditor, other than loan originator compensation
paid by the creditor that is required to be included in points and fees
under Sec. 1026.32(b)(1)(ii), are excluded from points and fees. In
proposing this clarification, the Bureau noted that, to the extent that
the creditor recovers the cost of such charges from the consumer, the
cost is recovered through the interest rate, which is excluded from
points and fees under Sec. 1026.32(b)(1)(i)(A). Specifically, the
Bureau noted, Sec. 1026.32(b)(1)(i) and
[[Page 60409]]
(b)(1)(i)(A) implements section 103(bb)(4)(A) of TILA to include in
points and fees ``[a]ll items included in the finance charge under
Sec. 1026.4(a) and (b)'' but specifically excludes ``interest and
time-price differential.'' However, the Bureau noted further, under
Sec. 1026.32(b)(1)(ii) compensation paid by the creditor to loan
originators, other than employees of the creditor, is included in
points and fees.
In proposing this comment, the Bureau stated its belief that the
proposed comment's clarification of the treatment of charges paid by
parties other than the consumer for points and fees purposes was
consistent with the amendment to TILA made by section 1431(a) of the
Dodd-Frank Act, discussed above.
Comments
The Bureau received comments on this aspect of the proposal from
industry trade associations, banks, mortgage companies, and a
manufactured housing lender. Many of these comments expressed general
concerns or disagreements with the points and fees thresholds or other
aspects of points and fees that were not at issue in the proposal, or
expressed general support or disagreement with the treatment of charges
paid by parties other than the consumer for purposes of the points and
fees determination, particularly with respect to charges paid to
creditor affiliates. The Bureau notes that it proposed commentary
clarifying only the application of Sec. 1026.32(b)(1) and (2) to
charges paid by parties other than the consumer, and does not consider
these comments responsive to the proposal.
Other commenters suggested further revisions to the Bureau's
comment with regard to its discussion of third-party-paid charges, and
seller's points. Some industry commenters expressed particular concern
about the impact of the proposed comment on certain employer payments
of employee relocation expenses, for example employer payment of
discount points on behalf of their employees to encourage them to
relocate. These commenters generally raised concerns that inclusion in
points and fees could discourage relocation incentives, and requested
that the Bureau exclude employer-paid charges from points and fees.
Most industry commenters expressed support for the clarifications
that seller's points are generally excluded from points and fees (as
they are not included as a finance charge under Sec. 1026.4(c)(5)),
but some commenters expressed concern about the possible inclusion of
some seller-paid charges in points and fees. For example, some industry
commenters also expressed concern that the possible inclusion of some
seller-paid charges would create difficulties for creditors in
determining which seller payments are included in points and fees and
which are not. Specifically, some commenters noted that creditors may
have difficulty in determining how seller assistance is allocated in
the transaction, because a seller-paid amount is often provided as a
flat dollar amount or a percentage of the purchase price that allows
the borrower to determine how it should be applied, or the allocation
changes at the closing table. As a proposed solution, one financial
institution recommended that the Bureau's final comment allow creditors
to rely on any written statement provided by the borrower, third party,
or seller regarding the purpose of the payment.
Industry commenters were generally supportive of the Bureau's
proposed comment with regard to creditor-paid charges. Commenters
generally stated that the Bureau's proposed comment provided helpful
language that clarified that creditor-paid amounts are excluded from
points and fees (other than loan originator compensation). Some
suggested, however, that it would be additionally helpful if further
comments were added to state explicitly that such charges are excluded
from the finance charge, and that it is not material to this
calculation that a creditor either absorbs the charges or provides a
credit to pay them in return for a higher rate.
Final Rule
The Bureau is adopting comment 32(b)(1)-2 as proposed, with several
modifications. The Bureau believes that the comment as proposed, with
several modifications, provides needed clarification to creditors to
assist them in determining what is included in points and fees. The
comment specifically describes when third-party-paid charges, including
seller's points, are to be included in points and fees and when they
are to be excluded, and provides examples. In addition, the comment
treats third-party-paid charges consistently with the treatment of
consumer-paid charges under Sec. 1026.32(b)(1) and current commentary
(i.e., comment 32(b)(1)(i)-1)). Specifically, it provides that a third-
party payment of a charge is included in points and fees if it falls
within the definition of points and fees set forth in Sec.
1026.32(b)(1)(i) through (vi)--which includes items included in the
finance charge under Sec. 1026.4(a) and (b). It also provides that,
while a third-party paid charge may be excluded from the finance charge
under Sec. 1026.4, it may be included in the points and fees
calculation under Sec. 1026.32(b)(1)(ii) through (vi) such as, for
example, if the third-party payment is for items such as compensation
to a loan originator, certain real estate related items listed in Sec.
1026.4(c)(7), premiums for certain credit insurance, and a prepayment
penalty incurred by the consumer in some circumstances. The comment
also specifically describes the treatment of seller's points, which,
like other items excluded from the finance charge, are not included in
points and fees under Sec. 1026.32(b)(1)(i) but nevertheless may be
included in points and fees if listed in Sec. 1026.32(b)(1)(ii)
through (vi). In addition, the comment specifically addresses the
treatment of creditor-paid charges and excludes them from points and
fees with the exception of a payment for loan originator compensation.
The Bureau further notes that the comment treats seller's points
consistently with the definition of points and fees in Regulation Z by
excluding them from the points and fees calculation (as they are
excluded from the finance charge), except in certain instances
specified in Regulation Z. Section 1026.32(b)(1) defines points and
fees to include all items included in the finance charge under Sec.
1026.4(a) and (b), except for certain specified exclusions. This
includes the Sec. 1026.4(c)(5) exclusion of seller's points from the
finance charge.
The Bureau notes that some commenters expressed concern about the
ability of creditors to determine what third-party paid charges,
including seller's payments, should be included in points and fees--
specifically that creditors may be aware that a lump-sum amount was
advanced by the seller, but not aware of the breakdown of what exactly
was paid for by the advance. The Bureau appreciates this concern and
does believe creditors could be confronted with situations where they
are unsure how they should account for the seller or third-party amount
in points and fees, particularly as relates to the specific fee
breakdown. For example, the Bureau agrees that, if a seller paid $1000
in excluded seller's points, $500 in fees that would be included in
points and fees, and another $500 in fees that would be excluded, all
the creditor may be aware of is that $2,000 was advanced. Absent
additional information, the creditor may have difficulty in determining
what, if any, portion of the seller-paid amount needs to be included in
points and fees (in the example above, $500). To facilitate compliance,
the Bureau is modifying the final comment to clarify that creditors
[[Page 60410]]
may rely on written statements from the borrower or third party,
including the seller, as to the source of the funds and the purpose of
the payment in calculating the points and fees involving third-party
payments.
As discussed, some commenters expressed concern that the Bureau's
treatment of third-party paid charges as provided in its proposed
comment would adversely affect employer relocation assistance
arrangements for employees that include assistance to the employee in
financing the purchase of a home. The Bureau does not believe that the
issues raised by these commenters provide sufficient justification to
warrant the exercise of the Bureau's exception authority under TILA
section 105(a) to provide a blanket exclusion of such payments from the
calculation of points and fees. In addition, employers continue to have
flexibility with regard to such arrangements. For example, commenters
who raised this issue focused, in particular, on the impact of the
Bureau's proposed comment on arrangements where the employer pays an
employee's discount points in a transaction. However Sec.
1026.32(b)(1)(i)(E) provides for an exclusion from points and fees of
certain bona fide discount points, which would extend to any such
discount points paid by a third-party employer.
With regard to creditor-paid charges, the Bureau is finalizing
comment 32(b)(1)-2, which makes clear that ``[c]harges that are paid by
the creditor, other than loan originator compensation paid by the
creditor that is required to be included in points and fees under Sec.
1026.32(b)(1)(ii), are excluded from points and fees.'' This exclusion
of creditor-paid charges therefore covers charges under Sec.
1026.32(b)(1)(iii)-(vi). The Bureau also believes that existing Sec.
1026.4 and supporting commentary already address the treatment of
creditor-paid charges for purposes of the finance charge under Sec.
1026.32(b)(1)(i). For example, comment 4(a)-2 states that ``[c]harges
absorbed by the creditor as a cost of doing business are not finance
charges, even though the creditor may take such costs into
consideration in determining the interest rate to be charged.'' The
Bureau disagrees with commenters that suggested additional guidance is
needed regarding creditor-paid charges beyond what already exists in
Regulation Z and new comment 32(b)(1)-2, but for convenience is adding
an express reference to comment 4(a)-2 to the Bureau's final 32(b)(1)-2
comment.
32(b)(1)(ii) and 32(b)(2)(ii)
A. Background
Section 1431(c)(1)(A) of the Dodd-Frank Act requires that points
and fees include ``all compensation paid directly or indirectly by a
consumer or creditor to a mortgage originator from any source . . .''
TILA section 103(bb)(4). The 2013 ATR Final Rule implemented this
statutory provision in amended Sec. 1026.32(b)(1)(ii), which provides
that, for both the qualified mortgage points and fees limits and the
high-cost mortgage points and fees threshold, points and fees include
all compensation paid directly or indirectly by a consumer or creditor
to a loan originator, as defined in Sec. 1026.36(a)(1), that can be
attributed to the transaction at the time the interest rate is set. The
2013 HOEPA Final Rule implemented Sec. 1026.32(b)(2)(ii), which
provides the same standard for including loan originator compensation
in points and fees for open-end credit plans (i.e., a home equity line
of credit, or HELOC). Concurrent with the 2013 ATR Final Rule, the
Bureau also issued the 2013 ATR Concurrent Proposal, which, among other
things, proposed certain clarifications for calculating loan originator
compensation for points and fees. The Bureau finalized the 2013 ATR
Concurrent Proposal in the May 2013 ATR Final Rule, which further
amended Sec. 1026.32(b)(1)(ii) to exclude certain types of loan
originator compensation from points and fees. In particular, the May
2013 ATR Final Rule excludes from points and fees loan originator
compensation paid by a consumer to a mortgage broker when that payment
has already been counted toward the points and fees thresholds as part
of the finance charge under Sec. 1026.32(b)(1)(i). See Sec.
1026.32(b)(1)(ii)(A). It also excludes from points and fees
compensation paid by a mortgage broker to an employee of the mortgage
broker because that compensation is already included in points and fees
as loan originator compensation paid by the consumer or the creditor to
the mortgage broker. See Sec. 1026.32(b)(1)(ii)(B). In addition, the
May 2013 ATR Final Rule excludes from points and fees compensation paid
by a creditor to its loan officers. See Sec. 1026.32(b)(1)(ii)(C).
The 2013 ATR Concurrent Proposal had requested comment on whether
additional adjustment of the rules or additional commentary is
necessary to clarify any overlapping definitions between the points and
fees provisions in the 2013 ATR Final Rule and the 2013 HOEPA Final
Rule and the provisions adopted by the 2013 Loan Originator
Compensation Final Rule. In particular, the Bureau sought comment on
whether additional guidance would be useful regarding persons who are
``loan originators'' under Sec. 1026.36(a)(1) but are not employed by
a creditor or mortgage broker, such as employees of a retailer of
manufactured homes.
In response to the 2013 ATR Concurrent Proposal, several industry
and nonprofit commenters requested clarification of what compensation
must be included in points and fees in connection with transactions
involving manufactured homes. First, they requested additional guidance
on what activities would cause a manufactured home retailer and its
employees to qualify as loan originators. This issue is addressed below
in the section-by-section analysis of Sec. 1026.36(a)(1).\29\ Second,
they requested additional guidance on what compensation paid to
manufactured home retailers and their employees would be counted as
loan originator compensation and included in points and fees. Industry
commenters responding to the 2013 ATR Concurrent Proposal argued that
it is not clear whether the sales price received by the retailer or the
sales commission received by the retailer's employee should be
considered, at least in part, loan originator compensation. They urged
the Bureau to clarify that compensation paid to a retailer and its
employees in connection with the sale of a manufactured home should not
be counted as loan originator compensation. Rather than provide
additional guidance in the May 2013 ATR Final Rule, the Bureau instead
decided to propose and seek comment on additional guidance.
---------------------------------------------------------------------------
\29\ As discussed below, the Bureau is clarifying what
compensation must be included in points and fees. As discussed in
the Supplementary Information describing revisions and
clarifications to the rule text and commentary defining ``loan
originator,'' the Bureau is also clarifying the circumstances in
which employees of manufactured home retailers are loan originators.
In addition, the Bureau will continue to conduct outreach with the
manufactured home industry and other interested parties to address
concerns about what activities are permissible for a retailer and
its employees without causing them to qualify as loan originators.
---------------------------------------------------------------------------
B. Sections 32(b)(1)(ii)(D) and 32(b)(2)(ii)(D)
The Proposal
The Bureau proposed new Sec. 1026.32(b)(1)(ii)(D), which would
have excluded from points and fees all compensation paid by
manufactured home retailers to their employees. The Bureau also
proposed new Sec. 1026.32(b)(2)(ii)(D), which would have provided
that, for open-end credit plans, compensation paid by manufactured home
retailers to their employees is
[[Page 60411]]
excluded from points and fees for purposes of the high-cost mortgage
points and fees threshold.
The Bureau noted that the May 2013 ATR Final Rule added Sec.
1026.32(b)(1)(ii)(B), which excludes from points and fees compensation
paid by mortgage brokers to their loan originator employees. The Bureau
noted that it appeared that when an employee of a retailer would
qualify as a loan originator, the retailer also would qualify as a loan
originator and therefore would qualify as a mortgage broker. If the
retailer qualifies as a mortgage broker, any compensation paid by the
retailer to the employee would be excluded from points and fees under
Sec. 1026.32(b)(1)(ii)(B). The Bureau noted, however, that if there
were instances in which an employee of a manufactured home retailer
would qualify as a loan originator but the retailer would not, the
exclusion from points and fees in Sec. 1026.32(b)(1)(ii)(B) for
compensation paid to an employee of a mortgage broker would not apply
because the retailer would not be a mortgage broker. The Bureau
suggested that it may still be appropriate to exclude such compensation
paid to an employee of a manufactured home retailer because it may be
difficult for creditors to determine whether employees of a
manufactured home retailer have engaged in loan origination activities
and, if so, what compensation they received for doing so. The Bureau
noted that a retailer typically pays a sales commission to its
employees, so it may be difficult for a creditor to know whether a
retailer has paid any compensation to its employees for loan
origination activities, as distinct from compensation for sales
activities. To prevent any such uncertainty, the Bureau proposed new
Sec. 1026.32(b)(1)(ii)(D), to exclude from points and fees all
compensation paid by manufactured home retailers to their employees.
The Bureau requested comment on this proposed exclusion and on whether
there are instances in which an employee of a manufactured home
retailer would qualify as a loan originator but the retailer would not
qualify as a loan originator.
In addition, to provide additional guidance on what compensation
would be included in loan originator compensation that must be counted
in points and fees for manufactured home transactions, the Bureau also
proposed new comment 32(b)(1)(ii)-5. Proposed comment 32(b)(1)(ii)-5.i
would have provided that, if a manufactured home retailer receives
compensation for loan origination activities and such compensation can
be attributed to the transaction at the time the interest rate is set,
then such compensation is loan originator compensation that is included
in points and fees. As noted in the May 2013 ATR Final Rule, the Bureau
does not believe it is appropriate to use its exception authority to
exclude from points and fees all compensation that may be paid to a
manufactured home retailer. As a general matter, to the extent that the
consumer or creditor is paying the retailer for loan origination
activities, the retailer is functioning as a mortgage broker and
compensation for the retailer's loan origination activities should be
captured in points and fees. Commenters did not address this proposed
guidance, and the Bureau is therefore adopting it as proposed.\30\
---------------------------------------------------------------------------
\30\ As addressed below in the discussion of Sec. 1026.36(a),
several industry commenters argued that the Bureau should clarify
and narrow the scope of activities that would cause a manufactured
home retailer and its employees to qualify as loan originators.
---------------------------------------------------------------------------
Proposed comment 32(b)(1)(ii)-5.ii would have specified that the
sales price of a manufactured home does not include loan originator
compensation that can be attributed to the transaction at the time the
interest rate is set and therefore is not included in points and
fees.\31\
---------------------------------------------------------------------------
\31\ As noted above, the Bureau is adopting as proposed comment
32(b)(1)(ii)-5.iii, which specifies that, consistent with new Sec.
1026.32(b)(1)(ii)(D), compensation paid by a manufactured home
retailer to its employees is not included in points and fees.
---------------------------------------------------------------------------
In proposing in comment 32(b)(1)(ii)-5.ii that the sales price of a
manufactured home would not include compensation that must be included
in points and fees, the Bureau indicated that it did not believe that
the sales price would include compensation that is paid for loan
origination activities and that can be attributed to a specific
transaction. The Bureau noted that if a retailer does not increase the
price to obtain compensation for loan origination activities, then it
does not appear that the sales price would include loan originator
compensation that could be attributed to that particular transaction.
The Bureau acknowledged that it is possible that the sales price
could include loan originator compensation that could be attributed to
a particular transaction at the time the interest rate is set and that
therefore should be included in points and fees. The Bureau noted that
one approach for calculating loan originator compensation for
manufactured home transactions would be to compare the sales price in a
transaction in which the retailer engaged in loan origination
activities and the sales prices in transactions in which the retailer
did not do so (such as in cash transactions or in transactions in which
the consumer arranged credit through another party). To the extent that
there is a higher sales price in the transaction in which the retailer
engaged in loan origination activities, then the difference in sales
prices could be counted as loan originator compensation that can be
attributed to that transaction and that therefore should be included in
points and fees.
However, the Bureau stated that it did not believe that it would be
workable to use this comparative sales price approach to determine
whether the sales price includes loan originator compensation that must
be included in points and fees. The creditor is responsible for
calculating loan originator compensation to be included in points and
fees for the qualified mortgage and high-cost mortgage points and fees
thresholds. The Bureau noted that, under the comparative sales price
approach, the creditor would have to analyze a manufactured home
retailer's prices to determine if there were differences in the prices
that would have to be included in points and fees as loan originator
compensation. This would appear to be an extremely difficult analysis
for the creditor to perform. Not only would the creditor have to
compare the sales prices from numerous transactions, it would have to
determine whether any differences between the sales prices could be
attributed to the loan origination activities of the retailer and not
to other factors.
The Bureau requested comment on the proposed guidance specifying
that the sales price does not include loan originator compensation that
can be attributed to the transaction at the time the interest rate is
set. In addition, the Bureau requested comment on whether the sales
price of a manufactured home does in fact include loan originator
compensation that can be attributed to the transaction at the time the
interest rate is set, and, if so, whether there are practicable ways
for a creditor to measure that compensation so that it could be
included in points and fees.
Comments
The Bureau received few comments that addressed proposed Sec.
1026.32(b)(1)(ii)(D). Two industry commenters generally supported the
proposal. Consumer advocates did not comment on this issue.
With respect to new comment 32(b)(1)(ii)-5, industry commenters
supported the Bureau's proposed guidance. They maintained that the
sales price of a manufactured home does
[[Page 60412]]
not include loan originator compensation and that, in any event, it
would not be possible for the creditor to determine if the sales price
did include any such compensation.
Consumer advocates, however, opposed the proposed comment. They
argued that retailers could easily conceal loan originator compensation
in the sales price by inflating the price above what a cash customer
would pay. They contended that it is difficult to determine the
equivalent cash price for manufactured homes because most sales are on
credit and, because of the variety of options, there are not standard
cash prices for particular models. They stated that the Manufacturer's
Suggested Retail Price (MSRP) is not a reliable measure because it
often does not include many options that are included with the sale and
because the close relationships between many lenders, dealers, and
manufacturers create an incentive to inflate MSRPs. They recommended
that the commentary should instead provide that any originator
compensation concealed in the sales price should be included in points
and fees.
Final Rule
For the reasons noted above, the Bureau is adopting new Sec.
1026.32(b)(1)(ii)(D) and (b)(2)(ii)(D) as proposed. As discussed below,
the Bureau is also adopting, with revisions, comment 32(b)(1)(ii)-5,
which, among other things, explains in comment 32(b)(1)(ii)-5.iii, that
consistent with Sec. 1026.32(b)(1)(ii)(D), compensation paid by a
manufactured home retailer to its employees is not included in points
and fees. The Bureau notes, however, that it does not acknowledge that
situations exist where a manufactured housing retailer's employee is
considered a loan originator, but the retailer itself is not.
As discussed in the proposal, the Bureau is using its exception
authority to adopt new Sec. 1026.32(b)(1)(ii)(D) and (b)(2)(ii)(D)
pursuant to its authority under TILA section 105(a) to make such
adjustments and exceptions for any class of transactions as the Bureau
finds necessary or proper to facilitate compliance with TILA and to
effectuate the purposes of TILA, including the purposes of TILA section
129C of ensuring that consumers are offered and receive residential
mortgage loans that reasonably reflect their ability to repay the
loans. The Bureau's understanding of this purpose is informed by the
findings related to the purposes of section 129C of ensuring that
responsible, affordable mortgage credit remains available to consumers.
The Bureau believes that using its TILA exception authorities will
facilitate compliance with the points and fees regulatory regime by not
requiring creditors to investigate the manufactured housing retailer's
employee compensation practices, and by making sure that all creditors
apply the provision consistently. It will also effectuate the purposes
of TILA by helping to keep mortgage loans available and affordable by
ensuring that they are subject to the appropriate regulatory framework
with respect to qualified mortgages and the high-cost mortgage
threshold. The Bureau is also invoking its authority under TILA section
129C(b)(3)(B) to revise, add to, or subtract from the criteria that
define a qualified mortgage consistent with applicable standards. For
the reasons explained above, the Bureau has determined that it is
necessary and proper to ensure that responsible, affordable mortgage
credit remains available to consumers in a manner consistent with the
purposes of TILA section 129C and necessary and appropriate to
effectuate the purposes of this section and to facilitate compliance
with section 129C. With respect to its use of TILA section
129C(b)(3)(B), the Bureau believes this authority includes adjustments
and exceptions to the definitions of the criteria for qualified
mortgages and that it is consistent with the purpose of facilitating
compliance to extend use of this authority to the points and fees
definitions for high-cost mortgage in order to preserve the consistency
of the qualified mortgage and high-cost mortgage definitions. As noted
above, by helping to ensure that the points and fees calculation is not
artificially inflated, the Bureau is helping to ensure that
responsible, affordable mortgage credit remains available to consumers.
The Bureau also has considered the factors in TILA section 105(f)
and has concluded that, for the reasons discussed above, the exemption
is appropriate under that provision. Pursuant to TILA section 105(f),
the Bureau may exempt by regulation from all or part of this title all
or any class of transactions for which in the determination of the
Bureau coverage does not provide a meaningful benefit to consumers in
the form of useful information or protection. In determining which
classes of transactions to exempt, the Bureau must consider certain
statutory factors. For the reasons discussed above, the Bureau is
excluding from points and fees compensation paid by a retailer of
manufactured homes to its employees because including such compensation
in points and fees does not provide a meaningful benefit to consumers.
The Bureau believes that the exemption is appropriate for all affected
consumers to which the exemption applies, regardless of their other
financial arrangements and financial sophistication and the importance
of the loan to them. Similarly, the Bureau believes that the exemption
is appropriate for all affected loans covered under the exemption,
regardless of the amount of the loan and whether the loan is secured by
the principal residence of the consumer. Furthermore, the Bureau
believes that, on balance, the exemption will simplify the credit
process without undermining the goal of consumer protection, denying
important benefits to consumers, or increasing the expense of the
credit process.
The Bureau notes that it is permitting creditors to exclude from
points and fees compensation paid to a manufactured home retailer's
employees only where that compensation is paid by the retailer. To the
extent that an employee of a manufactured home retailer receives from
another source (such as the creditor) loan originator compensation that
can be attributed to the transaction at the time the interest rate is
set, then that compensation must be included in points and fees.
The Bureau is adopting a modified version of comment 32(b)(1)(ii)-5
in light of comments from consumer groups. The Bureau is concerned
that, as noted by consumer advocates, it is possible that the sales
price of a manufactured home could include loan originator
compensation. In particular, the Bureau is concerned that creditors and
manufactured home retailers could work together to conceal loan
originator compensation in the sales price. As a result, the Bureau
does not believe that it can determine by rule that the sales price of
a manufactured home does not include loan originator compensation that
must be included in points and fees.
However, no commenters proposed a practicable method for creditors
to determine whether the sales price of a manufactured home does in
fact include loan originator compensation that can be attributed to the
transaction at the time the interest rate is set. As the Bureau noted
in the proposal, the Bureau does not believe that it is workable for
the creditor to attempt to compare sales prices in different
transactions to try to determine if the sales price includes loan
originator compensation that must be included in points and fees.
Because the Bureau's primary concern is that creditors and
manufactured home
[[Page 60413]]
retailers could work together to conceal loan originator compensation
in the sales price, the Bureau is adopting new guidance that focuses on
the knowledge of the creditor. Specifically, the Bureau is revising
proposed comment 32(b)(1)(ii)-5.ii to provide that, if the creditor has
knowledge that the sales price of a manufactured home includes loan
originator compensation, then that compensation must be included in
points and fees. The creditor does not, however, have an obligation to
investigate the retailer's sales prices to determine if the sales price
includes such compensation.
This approach is consistent with the current rules for calculating
points and fees and the amount of loan originator compensation that
must be included in points and fees. Under Sec. 1026.32(b)(1), amounts
must be included in points and fees only if they are ``known at or
before consummation.'' Under Sec. 1026.32(b)(1)(ii), loan originator
compensation is included in points and fees only if it can be
attributed to the transaction at the time the interest rate is set. In
general, the Bureau does not believe that many creditors will know
whether the sales price of a manufactured home includes loan originator
compensation, and therefore would not be able to attribute any such
compensation to the transaction at the time the interest rate is set.
However, to the extent that, for example, a creditor and a retailer
establish an arrangement in which the sales price of a manufactured
home includes loan originator compensation, then the creditor would
have knowledge that the sales price includes loan originator
compensation and would have to include such compensation in points and
fees. The Bureau believes that this approach will balance the goals of
ensuring that creditors and retailers not evade the points and fees
limits by working together to conceal loan originator compensation in
the sales price and of avoiding a standard that would impose an
unreasonable burden on creditors to investigate the pricing of
manufactured home retailers.
32(b)(1)(vi) and 32(b)(2)(vi)
The Proposal
The Bureau proposed clarifying changes to Sec. 1026.32(b)(1)(vi)
and (b)(2)(vi) to better harmonize the definitions of ``total
prepayment penalty'' adopted in these two sections more fully with the
statutory requirement implemented by them. Sections 1026.32(b)(1)(vi)
and (2)(vi) implement TILA section 103(bb)(4)(F), as added by section
1431(c) of the Dodd-Frank Act. That provision requires that points and
fees include ``all prepayment fees or penalties that are incurred by
the consumer if the loan refinances a previous loan made or currently
held by the same creditor or an affiliate of the creditor.'' Section
1026.32(b)(1)(vi), as adopted by the 2013 ATR Final Rule, implemented
this provision as it related to closed-end credit transactions, and
provided that points and fees must include ``[t]he total prepayment
penalty, as defined in paragraph (b)(6)(i) of this section, incurred by
the consumer if the consumer refinances the existing mortgage loan with
the current holder of the existing loan, a servicer acting on behalf of
the current holder, or an affiliate of either.'' Section
1026.32(b)(2)(vi), as adopted by the 2013 HOEPA Final Rule, implemented
this provision as it related to open-end credit plans (i.e., a home
equity line of credit, or HELOC), and provided that points and fees
must include ``[t]he total prepayment penalty, as defined in paragraph
(b)(6)(ii) of this section, incurred by the consumer if the consumer
refinances an existing closed-end credit transaction with an open-end
credit plan, or terminates an existing open-end credit plan in
connection with obtaining a new closed- or open-end credit transaction,
with the current holder of the existing plan, a servicer acting on
behalf of the current holder, or an affiliate of either.''
The Bureau proposed changes to Sec. 1026.32(b)(1)(vi) and (2)(vi)
to clarify both provisions' application. In doing so the Bureau stated
that it intended these provisions to work in the same manner for
closed-end and open-end credit transactions--i.e., to include in points
and fees any prepayment charges triggered by the refinancing of an
existing loan or termination of a HELOC by obtaining a new credit
transaction with the current holder of the existing closed-end mortgage
loan or open-end credit plan. The Bureau, therefore, proposed to state
expressly that Sec. 1026.32(b)(1)(vi) applies to instances where the
consumer takes out a closed-end mortgage loan to pay off and terminate
an existing open-end credit plan held by the same creditor and the plan
imposes a prepayment penalty (as defined in Sec. 1026.32(b)(6)(ii)) on
the consumer. The Bureau also proposed to strike from the existing
Sec. 1026.32(b)(2)(vi) the reference to obtaining a new closed-end
credit transaction because Sec. 1026.32(b)(2)(vi) relates to points
and fees only for open-end credit plans and Sec. 1026.32(b)(1)(vi)
would apply instead. The Bureau also proposed to insert in Sec.
1026.32(b)(2)(vi) a reference to Sec. 1026.32(b)(6)(i), the definition
of prepayment penalties for closed-end credit transactions, to clarify
that the Sec. 1026.32(b)(6)(i) definition applies in calculating the
prepayment penalties included where a consumer refinances a closed-end
mortgage loan with a HELOC with the creditor holding the closed-end
mortgage loan (i.e., the closed-end mortgage loan's prepayment
penalties are included in calculating points and fees for the HELOC).
Comments
The Bureau did not receive comments specific to these proposed
changes.
Final Rule
The Bureau is adopting the changes to Sec. 1026.32(b)(1)(vi) and
(2)(vi) as proposed. The Bureau believes that these changes are
consistent with the statutory provision implemented by this section and
provide needed clarification to the Bureau's intended application of
Sec. 1026.32(b)(1)(vi) and (2)(vi). In addition, the Bureau also is
adopting as proposed comment 32(b)(2)-1, which directs readers for
further guidance on the inclusion of charges paid by parties other than
the consumer in points and fees for open-end credit plans to proposed
comment 32(b)(1)-2 on closed-end credit transactions.
32(d) Limitations
32(d)(1)
32(d)(1)(ii) Exceptions
32(d)(1)(ii)(C)
The Proposal
The Bureau proposed to revise the exception to the prohibition on
balloon payments for high-cost mortgages in Sec. 1026.32(d)(1)(ii)(c)
for transactions that satisfy the criteria set forth in Sec.
1026.43(f), which implements TILA section 129C(b)(2)(E) as added by the
Dodd-Frank Act provision, allows certain balloon-payment mortgages made
by small creditors operating predominantly in ``rural or underserved
areas'' to be accorded status as qualified mortgages under Sec.
1026.43(f). The HOEPA balloon exception is based on the same statutory
provision, which appears to have been designed to promote access to
credit. TILA section 129C as added by the Dodd-Frank Act generally
prohibits balloon-payment loans from being accorded qualified mortgage
status, but Congress appears to have been concerned that small
creditors in rural areas might have sufficient difficulty converting
from balloon-payment loans to adjustable rate mortgages that they would
curtail mortgage lending if they could not
[[Page 60414]]
obtain qualified mortgage status for their balloon-payment loans. As
adopted in Sec. 1026.43(f) by the 2013 ATR Final Rule, the exemption
is available to creditors that extended more than 50 percent of their
total covered transactions secured by a first lien in ``rural'' or
``underserved'' counties during the preceding calendar year, as those
terms are defined in Sec. 1026.35(b)(2)(iv)(A) and (B), respectively.
Because commenters raised similar concerns about the prohibition in
HOEPA on high-cost mortgages having balloon-payment features, the
Bureau decided in the 2013 HOEPA Final Rule to adopt Sec.
1026.32(d)(1)(ii)(C) to allow balloon-payment features on loans that
met the qualified mortgage requirements. The Bureau stated that, in its
view, (1) allowing creditors in certain rural or underserved areas to
extend high-cost mortgages with balloon payments will benefit consumers
by expanding access to credit in these areas, and also will facilitate
compliance for creditors who make these loans; and (2) allowing
creditors that make high-cost mortgages in rural or underserved areas
to originate loans with balloon payments if they satisfy the same
criteria promotes consistency between the 2013 HOEPA Final Rule and the
2013 ATR Final Rule, and thereby facilitates compliance for creditors
that operate in these areas.
Since publication of the 2013 HOEPA Final Rule and the 2013 ATR
Final Rule, the Bureau received extensive comment on the definitions of
``rural'' and ``underserved'' that it adopted for purposes of Sec.
1026.43(f) and certain other purposes in the 2013 Title XIV Final
Rules, including Sec. 1026.32(d)(1)(ii)(C). In light of these
comments, the Bureau added Sec. 1026.43(e)(6) to allow small creditors
during the period from January 10, 2014, to January 10, 2016, to make
balloon-payment qualified mortgages even if they do not operate
predominantly in rural or underserved areas.\32\ In addition, the
Bureau announced that it would reexamine those definitions over the
next two years to determine whether further adjustments are appropriate
particularly in light of access to credit concerns.\33\
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\32\ Specifically, in the May 2013 ATR Final Rule, the Bureau
adopted Sec. 1026.43(e)(6), which provided for a temporary balloon-
payment qualified mortgage that requires all of the same criteria be
satisfied as the balloon-payment qualified mortgage definition in
Sec. 1026.43(f) except the requirement that the creditor extend
more than 50 percent of its total first-lien covered transactions in
counties that are ``rural'' or ``underserved.'' This temporary
balloon-payment qualified mortgage would sunset, however, after
January 10, 2016. As discussed in the section-by-section analysis of
Sec. 1026.43(e)(6) in the May 2013 ATR Final Rule, the Bureau
adopted this two-year transition period for small creditors to roll
over existing balloon-payment loans as qualified mortgages, even if
they do not operate predominantly in rural or underserved areas,
because the Bureau believes it is necessary to preserve access to
responsible, affordable mortgage credit for some consumers. The
Bureau also noted that, during the two-year period for which Sec.
1026.43(e)(6) is in place, the Bureau intends to review whether the
definitions of ``rural'' and ``underserved'' should be adjusted
further and to explore how it can best facilitate the transition of
small creditors that do not operate predominantly in rural or
underserved areas from balloon-payment loans to adjustable-rate
mortgages. 78 FR 35430 (June 12, 2013).
\33\ See, e.g., U.S Consumer Fin Prot. Bureau, Clarification of
the 2013 Escrows Final Rule (May 16, 2013), available at http://www.consumerfinance.gov/blog/clarification-of-the-2013-escrows-final-rule/.
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In light of the Bureau's decision to allow small creditors an
additional two years to transition from balloon-payment loans to other
products while it reevaluates the definitions of ``rural'' and
``underserved,'' the Bureau also proposed revisions to Sec.
1026.32(d)(1)(ii)(c) to also allow small creditors to carry over the
flexibility provided by the revised May 2013 ATR Final Rule into the
HOEPA balloon loan provisions. The proposal would have revised Sec.
1026.32(d)(1)(ii)(C) to expand the exception to the prohibition on
balloon payments for high-cost mortgages for transactions that satisfy
the criteria in either Sec. 1026.43(f) or Sec. 1026.43(e)(6). The
Bureau sought comment on this aspect of the proposal.
Comments
The Bureau received substantial comments from trade associations,
credit unions, and other industry advocates supporting the proposed
amendments. Specifically, many of these commenters commended the Bureau
for facilitating compliance with the balloon payment restrictions
adopted by the 2013 HOEPA Final Rule, especially with respect to small
creditors whose communities technically fail to meet the Bureau's
definition of ``rural'' because they lie within the boundaries of
micropolitan statistical areas. These commenters noted that the ability
to originate mortgages with balloons is important to small creditors,
who often have unique product pricing risks and also commonly do not
have adequate staff or training to produce the additional disclosures
required by adjustable-rate mortgages. The Bureau received one comment
from a housing counseling organization that disagreed with the proposed
expansion of the exemption, but the commenter raised no specific issues
with the proposal. Rather the commenter disagreed in general with the
original exception adopted by the 2013 HOEPA Final Rule on the premise
that it believes balloon high-cost mortgages should never be permitted
under any circumstances.
Final Rule
The Bureau is adopting revised Sec. 1026.32(d)(1)(ii)(c) as
proposed. The Bureau is expanding this exception pursuant to its
authority under TILA section 129(p)(1), which grants it authority to
exempt specific mortgage products or categories from any or all of the
prohibitions specified in TILA section 129(c) through (i) if the Bureau
finds that the exemption is in the interest of the borrowing public and
will apply only to products that maintain and strengthen homeownership
and equity protections.
The Bureau believes expanding the balloon-payment exception for
high-cost mortgages to allow certain small creditors operating in areas
that do not qualify as ``rural'' or ``underserved'' to continue to
originate high-cost mortgages with balloon payments is in the interest
of the borrowing public and will strengthen homeownership and equity
protection. The Bureau believes allowing greater access to credit in
remote areas that nevertheless may not meet the definitions of
``rural'' or ``underserved'' while creditors transition to adjustable-
rate mortgages (or the Bureau reconsiders those definitions) will help
those consumers who otherwise may be able to obtain credit only from a
limited number of creditors. Further, it will do so in a manner that
balances consumer protections with access to credit. In the Bureau's
view, concerns about potentially abusive practices that may accompany
balloon payments will be curtailed by the additional requirements set
forth in Sec. 1026.43(e)(6) and (f). Creditors that make these high-
cost mortgages will be required to verify that the loans also satisfy
the additional criteria discussed above, including some specific
criteria required for qualified mortgages. Further, creditors that make
balloon-payment high-cost mortgages under this exception will be
required to hold the high-cost mortgages in portfolio for a specified
time, which the Bureau believes also decreases the risk of abusive
lending practices. Accordingly, for these reasons and for the purpose
of consistency between the two rules, the Bureau is adopting an
exception to the Sec. 1026.32(d)(1) balloon-payment restriction for
high-cost mortgages where the creditor satisfies the conditions set
forth in Sec. Sec. 1026.43(f) or the conditions set forth in Sec.
1026.43(e)(6).
[[Page 60415]]
Section 1026.35 Requirements for Higher-Priced Mortgage Loans
35(b) Escrow Accounts
35(b)(2) Exemptions
35(b)(2)(iii)
35(b)(2)(iii)(A)
The Proposal
In addition to the HOEPA and ATR balloon provisions discussed
above, the definitions of ``rural'' and ``underserved'' also relate to
the Sec. 1026.35(b)(2)(iii) exemption from the requirement that
creditors establish escrow accounts for certain higher-priced mortgage
loans available to small creditors that operate predominantly in
``rural'' or ``underserved'' areas. The exemption in Sec.
1026.35(b)(2)(iii) was designed to promote access to credit by
exempting small creditors in rural or underserved areas that might have
sufficient difficulty maintaining escrow accounts that they would
curtail making higher-priced mortgage loans rather than trigger the
escrow account requirement. As adopted in the 2013 Escrows Final Rule,
and as amended by the May 2013 Escrows Final Rule,\34\ the exemption is
available to creditors that extended more than 50 percent of their
total covered transactions secured by a first lien on properties that
are located in ``rural'' or ``underserved'' counties during the
preceding calendar year. In general, a county's status as ``rural'' is
defined in relation to Urban Influence Codes (UICs) established by the
United States Department of Agriculture's Economic Research Service.
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\34\ 78 FR 30739 (May 23, 2013).
---------------------------------------------------------------------------
Because of updated information from the 2010 Census, however,
numerous counties' status under the Bureau's definition will change
between 2013 and 2014, with a small number of new counties meeting the
definition of ``rural'' and approximately 82 counties no longer meeting
that definition. The Bureau estimates that approximately 200-300
otherwise eligible creditors during 2013 could lose their eligibility
for 2014 solely because of changes in the status of the counties in
which they operate (assuming the geographical distribution of their
mortgage originations does not change significantly over the relevant
period).\35\
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\35\ The extent of such volatility in the transition from 2012
rural/non-rural status (for purposes of eligibility for the
exemption during 2013) to 2013 rural/non-rural status (for purposes
of eligibility for the exemption during 2014) is likely far greater
than during other year-to-year transitions. This is due to the fact
that this first year-to-year transition under the Bureau's ``rural''
definition happens to coincide with the redesignation by the USDA's
Economic Research Service of U.S. counties' urban influence codes,
on which the ``rural'' definition is generally based. This
redesignation occurs only decennially, based on the most recent
census data. Nevertheless, for purposes of eligibility for the
exemption during 2013 and 2014, the volatility is significant--just
as creditors are first attempting to apply the exemption's criteria.
---------------------------------------------------------------------------
In light of the Bureau's intent to review whether the definitions
of ``rural'' and ``underserved'' should be adjusted further during the
two-year transition period for balloon-payment mortgages discussed
above, the Bureau proposed to revise the exemption provided by Sec.
1026.35(b)(2)(iii) to the general requirement that creditors establish
an escrow account for first lien higher-priced mortgage loans where a
small creditor operates predominantly in rural or underserved areas and
meets various other criteria. The proposal would have revised Sec.
1026.35(b) and its commentary to minimize volatility in the definitions
while they are being re-evaluated. The proposal also would have amended
Sec. 1026.35(b)(2)(iii)(D)(1) and its commentary to conform to the
expansion of the exemption to creditors that may meet the Sec.
1026.35(b)(2)(iii)(A) criteria for calendar year 2014 based on loans
made in ``rural'' or ``underserved'' counties in calendar year 2011,
but not 2012 or 2013.
The Bureau sought comment on these proposed amendments and also
proposed an effective date for the amendments that would apply to
transactions where applications were received on or after January 1,
2014, in light of the proposed change to the calendar year exemption
under Sec. 1026.35(b)(2)(iii).
Comments
The Bureau received substantial comments from trade associations,
credit unions, and other industry advocates supporting the proposed
amendments. Many of the comments relating to the amendments to Sec.
1026.32(d)(1)(ii)(A) discussed above also discussed the amendments to
Sec. 1026.35(b)(2)(iii) and offered similar or identical comments
commending the Bureau for facilitating compliance with the requirements
adopted by the 2013 Escrow Final Rule, particularly in light of changes
to ``rural'' status for certain counties based on the last available
Census data that would have caused certain creditors to lose
eligibility for the exemption. The same housing counseling organization
that disagreed with the balloon exception adopted by the 2013 HOEPA
Final Rule also disagreed with the original exemption from the escrows
requirement and thus also the proposed expansion. As before, this
commenter did not raise any specific issues related to the proposal,
but rather stated that all higher-priced mortgage loans should be
escrowed, without exception. As discussed in part V above, while nearly
all comments supported the proposal in general, no comments expressly
addressed the January 1, 2014 effective date.
Final Rule
The Bureau is adopting revised Sec. 1026.35(b)(2)(iii)(A) as
proposed. The amended provision provides that, to qualify for the
exemption, a creditor must have extended more than 50 percent of its
total covered transactions secured by a first lien on properties
located in ``rural'' or ``underserved'' counties during any of the
preceding three calendar years. The provision thus prevents a creditor
from losing eligibility for the exemption under the ``rural or
underserved'' element of the test unless it has failed to exceed the
50-percent threshold three years in a row.
As discussed above in the section-by-section analysis of Sec.
1026.32(d)(1)(ii)(C), the Bureau also is modifying the exception from
the prohibition on balloon payments for high-cost mortgages in that
section. Section 1026.32(d)(1)(ii)(C) provides an exception to the
general prohibition on balloon payments for high-cost mortgages for
balloon-payment qualified mortgages made by certain creditors operating
predominantly in ``rural'' or ``underserved'' areas. Believing that the
same rationale for allowing balloon-payment qualified mortgages made by
creditors in rural or underserved areas applies to high-cost mortgages,
the Bureau adopted the Sec. 1026.32(d)(1)(ii)(C) exception in the 2013
HOEPA Final Rule. As explained above, the Bureau believes the same
underlying rationale for the two-year transition period for balloon-
payment qualified mortgages described above applies equally to the
Sec. 1026.32(d)(1)(ii)(C) exception from the high-cost mortgage
balloon prohibition. Accordingly, the Bureau believes it is appropriate
to extend this temporary framework to Sec. 1026.32(d)(1)(ii)(C) and
therefore is amending Sec. 1026.32(d)(1)(ii)(C) to include loans
meeting the criteria under Sec. 1026.43(e)(6). Thus, for both balloon-
payment qualified mortgages and for the high-cost mortgage balloon
prohibition, the Bureau has adopted a two-year transition period during
which the special treatment of balloon-payment loans does not depend on
the creditor operating predominantly in rural or underserved areas.
The Bureau considered taking the same approach with regard to the
[[Page 60416]]
escrow requirement but concluded ultimately that a smaller adjustment
was appropriate. Because higher-priced mortgage loans are already
subject to an escrow requirement, all creditors are currently required
to maintain escrow accounts for such loans. Implementation of the
amendments to the exemption will thus reduce burden for some creditors,
but does not impose different requirements than the status quo except
as to the length of time that an escrow account must be maintained.
This is fundamentally different than the ability-to-repay and high-cost
mortgage requirements, which would prohibit new balloon-payment loans
from being accorded qualified mortgage status or from being made going
forward absent implementation of the special exemptions. In addition,
the Bureau may change the definitions of rural or underserved areas as
the result of its re-examination process but does not anticipate
lifting the requirement that creditors operate predominantly in rural
or underserved areas to qualify for the exemption because Congress
specifically contemplated that limitation on the escrows exemption.
Accordingly, the Bureau believes it is appropriate to leave the
definition in place, but to prevent volatility in the definition from
negatively affecting creditors while the Bureau re-evaluates the
underlying definitions. The Bureau believes that, as with the two
balloon-payment provisions for which the Bureau believes two-year
transition periods are appropriate, this amendment will benefit
consumers by expanding access to credit in certain areas that met the
definitions of ``rural'' or ``underserved'' at some time in the
preceding three calendar years and also will facilitate compliance for
creditors that make these loans. The Bureau also believes that the
amendment will promote additional consistency between the regulatory
provisions adopted by the 2013 HOEPA Final Rule, the 2013 ATR Final
Rule, and the 2013 Escrows Final Rule, thereby facilitating compliance
for affected creditors.
The Bureau notes that the mechanics of Sec. 1026.35(b)(2)(iii)(A)
differ slightly from the express transition period ending on January
10, 2016, under Sec. 1026.43(e)(6). Thus, this amendment does not
parallel the same transition period precisely, as does revised Sec.
1026.32(d)(1)(ii)(C), which simply incorporates Sec. 1026.43(e)(6)'s
conditions by cross-reference. Instead, revised Sec.
1026.35(b)(2)(iii)(A) approximates a two-year transition period by
extending from one to three years the time for which a creditor, once
eligible for the exemption, cannot lose that eligibility because of
changes in the rural (or underserved) status of the counties in which
the creditor operates. Because the 2013 Escrows Final Rule took effect
on June 1, 2013, the escrows provisions already have begun operating
over seven months earlier than the provisions adopted by the 2013 HOEPA
and ATR Final Rules (which take effect on January 10, 2014). Thus,
whereas the two balloon-payment provisions specifically last through
January 10, 2016, the escrows-requirement exemption will guarantee
eligibility (for a creditor that is eligible during 2013 with respect
to operating predominantly in rural or underserved areas, and meets the
other applicable criteria) through 2015. Thus, the revised Sec.
1026.35(b)(2)(iii) exemption will approximately, though not exactly,
track the extension of the balloon exemption for qualified mortgages
under Sec. 1026.43(e)(6), and the extension of the HOEPA balloon
exemption under revised Sec. 1026.32(d)(1)(ii)(C).
In addition to the changes discussed above, the Bureau also is
amending Sec. 1026.35(b)(2)(iii)(D)(1) and its commentary to conform
to the expansion of the exemption to creditors that may meet the
section 35(b)(2)(iii)(A) criteria for calendar year 2014 based on loans
made in ``rural'' or ``underserved'' counties in calendar year 2011,
but not 2012 or 2013. Section Sec. 1026.35(b)(2)(iii)(D)(1) currently
prohibits any creditor from availing itself of the exemption if it
maintains escrow accounts for any extensions of consumer credit secured
by real property or a dwelling that it or its affiliate currently
service, unless the escrow accounts were established for first-lien
higher-priced mortgage loans on or after April 1, 2010, and before June
1, 2013, or were established after consummation as an accommodation for
distressed consumers. With respect to loans where escrows were
established on or after April 1, 2010, and before June 1, 2013, the
Supplementary Information to the 2013 Escrows Final Rule explained that
the Bureau believes creditors should not be penalized for compliance
with the then current regulation, which would have required any such
loans to be escrowed after April 1, 2010, and prior to June 1, 2013--
the date the exemption took effect. The Bureau understands that
creditors that did not make more than 50 percent of their first-lien
higher-priced mortgage loans in ``rural'' or ``underserved'' counties
in calendar year 2012 would have been ineligible for the exemption for
calendar year 2013, and thus would have been required under Sec.
1026.35(a) to establish escrow accounts for any higher-priced mortgage
loans those creditors made after June 1, 2013. However, it is possible
in light of the amendments the Bureau is adopting that some of these
same creditors may have met this criteria during calendar year 2011--
and thus, because the Bureau is finalizing the proposal and allowing
creditors to qualify for the exemption (assuming they satisfy the other
conditions set forth in Sec. 1026.35(b)(2)(iii)(B), (C), and (D))--
such creditors will qualify for the exemption in 2014. However, absent
additional clarification, there would be one barrier: For applications
received on or after June 1, 2013, but before the date the proposed
amendment takes effect (as proposed, January 1, 2014), such a creditor
that made a first-lien higher-priced mortgage loan would have been
required to escrow for that loan, and thus would be deemed ineligible
under Sec. 1026.35(b)(2)(iii)(D). The Bureau does not believe that
such creditors should lose the exemption because they were ineligible
prior to the proposed amendment taking effect and thus made loans with
escrows from June 1, 2013, through December 31, 2013. As the Bureau
discussed in the Supplementary Information to the 2013 Escrows Final
Rule, the Bureau believes creditors should not be penalized for
compliance with the current regulation. The Bureau thus believes it is
appropriate to amend Sec. 1026.35(b)(2)(iii)(D)(1) and comment
35(b)(2)(iii)(D)(1)-1.iv to exclude escrow accounts established after
April 1, 2010 and before January 1, 2014.
In addition, the Bureau is revising comment 35(b)(2)(iii)(D)(1)-
1.iv to clarify that the date ranges provided in Sec.
1026.35(b)(2)(iii)(D)(1) apply to transactions for which creditors
received applications on or after April 1, 2010, and before January 1,
2014. As discussed above, the Bureau believes such creditors should
still qualify for the exemption provided under Sec. 1026.35(b)(2)(iii)
so long as they do not establish new escrow accounts for transactions
for which they received applications on or after January 1, 2014, other
than those described in Sec. 1026.35(b)(2)(iii)(D)(2), and they
otherwise qualify under Sec. 1026.35(b)(2)(iii). The Bureau believes
this clarification reflects both the manner in which the 2013 Escrows
Rule originally applied to transactions and the applicability of this
final rule.
[[Page 60417]]
Section 1026.36 Loan Originator Compensation
36(a) Definitions
Section 1026.36(a) defines the term ``loan originator'' for
purposes of Sec. 1026.36 as a person \36\ who, for or in expectation
of direct or indirect compensation or other monetary gain, engages in a
defined set of activities or services (unless otherwise excluded).
Section 1026.36(a) describes these activities broadly to include any
such person who ``takes an application, offers, arranges, assists a
consumer in obtaining or applying to obtain, negotiates, or otherwise
obtains or makes an extension of consumer credit for another person; or
through advertising or other means of communication represents to the
public that such person can or will perform any of these activities.''
Commentary to Sec. 1026.36(a) further describes and provides
illustrations of these activities, including how the practice of
``referring'' consumers to creditors or loan originators, may affect
one's status under the section.
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\36\ ``Person'' is defined in Sec. 1026.2(a)(22) to mean, ``a
natural person or an organization, including a corporation,
partnership, proprietorship, association, cooperative, estate,
trust, or government unit.''
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Following publication of the 2013 Loan Originator Compensation
Final Rule, the Bureau received numerous inquiries from industry
regarding the activities that, if done for compensation or gain, would
cause a person to be classified as a ``loan originator'' under Sec.
1026.36. As discussed below, many of these inquiries sought
clarification regarding specific terms used throughout the section,
such as ``credit terms,'' or guidance on how the provision may apply to
certain loan originator or creditor employees, agents or contractors
such as tellers and greeters, as well as other interpretive questions.
In response, the Bureau proposed several amendments to Sec. 1026.36(a)
and associated commentary adopted by the 2013 Loan Originator
Compensation Final Rule to resolve inconsistencies in wording, to
conform the comments to the intended operation of the regulation text,
and to address issues raised during the regulatory implementation
process. The Bureau proposed these changes pursuant to its TILA section
105(a) and Dodd-Frank Act section 1022(b)(1) authority. As discussed
below, the Bureau is adopting most of these amendments as proposed with
some revisions and additional clarifying amendments.
The Bureau also proposed to revise comments 36(a)-4.i and 36(a)-
4.ii.B to clarify those provisions' application to loan originator or
creditor agents and contractors as well as employees. The Bureau is not
adopting this aspect of the proposal. As discussed below, comments
36(a)-4.i and 36(a)-4.ii.B illustrate two situations where an employee
of a creditor or loan originator is conducting ``in house'' activity
for his or her employer that is not considered to be ``referring'': (1)
Handing applications from the employer to a consumer; and (2) providing
loan originator or creditor contact information for the loan originator
or creditor entity for which the person works, or a person that works
for the same entity. The Bureau proposed to clarify that comments
36(a)-4.i and 36(a)-4.ii.B may be available to certain persons who work
for creditors or loan originators, but may not technically be
``employed'' by the loan originator or creditor organization--i.e.,
contract employees, temporary employees, interns, or other persons who
may be working on a voluntary basis or being paid by another entity.
However, upon further consideration, the Bureau believes the terms
``agent'' and ``contractor'' could be interpreted more broadly than the
Bureau intended to include independent contractors or agents used by
loan originators or creditors to refer customers to that loan
originator or creditor. The Bureau did not intend these provisions to
be applied this broadly, and also is concerned that such a reading
could be inconsistent with other applicable laws, such as RESPA's
prohibition on referral fees for federally related mortgages.
Accordingly, the Bureau is limiting the scope of this comment to
employees of loan originators or creditors.
The Bureau notes, however, that this does not mean these provisions
may never be available to certain persons who may possibly be
considered agents or contractors, such as temps or contract employees.
While these provisions are limited to employees of creditors or loan
originators, Sec. 1026.2(b)(3) states that any terms not defined by
Regulation Z is given the meanings given to them by State law or
contract. The Bureau believes the term ``employee''--which is not
defined under Regulation Z--is commonly defined under State law as well
as employment contracts, and may extend to such persons in appropriate
circumstances.
A. References to Credit Terms
The Proposal
The Bureau proposed to amend Sec. 1026.36(a) and its commentary to
clarify the meaning of ``credit terms,'' which is used in defining some
of the exclusions to the general definition of ``loan originator,''
thereby further delineating the general definition. For example, as
adopted by the 2013 Loan Originator Compensation Final Rule, Sec.
1026.36(a)(1)(i)(A) allows persons who act as assistants to loan
originators to perform clerical or administrative tasks on a loan
originator's behalf without becoming loan originators themselves. To be
eligible for the exclusion, however, the person must not, among other
things, offer or negotiate ``credit terms available from a creditor.''
Similarly, comment 36(a)-4.i. explains when providing a consumer
with a credit application, an activity that would otherwise be a
referral, does not cause a person to be classified as a loan
originator. This comment provides an exception to certain persons who,
among other things, do not discuss ``specific credit terms or products
available from a creditor with the consumer.''
In addition, comment 36(a)-4.ii.B explains when a loan originator's
or creditor's employee, such as a teller or greeter, may engage in
providing loan originator contact information to consumers, an activity
that would otherwise be a referral, without being classified as a loan
originator. This comment provides that the definition of loan
originator does not include a creditor's or loan originator's employee
who provides loan originator or creditor contact information to a
consumer, provided the employee does not, among other things, ``discuss
particular credit terms available from a creditor.'' See also Sec.
1026.36(a)(1)(i)(B) and comments 36(a)-1.i.A.2 through-1.i.A.4 (other
similar references to credit terms). This exclusion also assists in
defining persons who are loan originators in the sense that it implies
persons who do discuss specific or particular credit terms, as this
activity is further clarified in this rule, would be included in the
definition.
Following publication of the 2013 Loan Originator Compensation
Final Rule, the Bureau received numerous inquiries from loan
originators and creditors seeking guidance on the meaning of ``credit
terms'' in these various contexts. In light of these inquiries, the
Bureau was concerned that the term ``credit terms'' could have been
construed too broadly and in a manner that could render any person that
provides such general information a loan originator, which was not the
Bureau's intent. Rather, the Bureau generally intended the references
to ``credit terms'' throughout Sec. 1026.36(a) to refer to particular
credit terms that
[[Page 60418]]
are or may be made available to the consumer selected based on the
consumer's financial characteristics. Distinct from such particular
credit terms are general credit terms that a loan originator or
creditor makes available and advertises to the public at large, such as
where such person merely states: ``We offer rates as low as 3% to
qualified consumers.''
To address these questions, the Bureau proposed to clarify usage of
the term ``credit terms'' throughout the section in several ways.
First, the Bureau noted that the definition of ``credit terms,'' which
explains the term includes rate, fees, and other costs, had been
provided only by a parenthetical clause in Sec. 1026.36(a)(1)(i)(B) (a
single exclusion that relates to retailers of manufactured homes)
rather than in a separate, definitional provision. Thus, the definition
appears to be limited to that single provision, even though the term is
used in multiple places throughout Sec. 1026.36(a). For clarification
purposes, the Bureau proposed to move this definition from Sec.
1026.36(a)(1)(i)(B), to new Sec. 1026.36(a)(6), which explicitly makes
the definition applicable to the entire section. The Bureau solicited
comment on whether additional guidance concerning the meaning of
particular credit terms that are or may be made available to the
consumer in light of the consumer's financial characteristics is
necessary, and if so, what clarifications would be helpful.
Second, the Bureau proposed to revise Sec. 1026.36(a)(1)(i)(A) and
(B), and comments 36(a)-1 and -4 to address inconsistencies regarding
the meaning of ``credit terms,'' and to clarify that an activity
involving credit terms for purposes of determining when a person is a
loan originator must relate to ``particular credit terms that are or
may be available from a creditor to that consumer selected based on the
consumer's financial characteristics,'' not credit terms generally. The
proposal would have clarified that a person who discusses with a
consumer that, based on the consumer's financial characteristics, a
creditor should be able to offer the consumer an interest rate of 3%,
would be considered a loan originator. However, a person who merely
states general information such as ``we offer rates as low as 3% to
qualified consumers'' would not have been considered a loan originator
because the person is not offering particular credit terms that are or
may be available to that consumer selected based on the consumer's
financial characteristics.
Comments
The Bureau received comments from trade associations, industry, and
consumer groups that addressed this clarification. Most commenters
generally supported the proposed clarification that ``credit terms''
refers to ``credit terms that are or may be made available from a
creditor to that consumer selected based on the consumer's financial
characteristics,'' as well as the proposed explanation that ``credit
terms'' includes rates, fees, and other costs. Some commenters
requested additional clarification regarding the meaning and
application of ``the consumer's financial characteristics.'' A few
industry commenters suggested that ``financial characteristics'' be
limited to traditional factors that influence a credit decision, such
as income and credit score. These commenters also asked the Bureau to
clarify that an assessment of a consumer's financial characteristics
does not include a person simply having general knowledge of the
consumer's account or finances, but requires an actual assessment of
the consumer's financial characteristics that form the basis for
selection of credit terms. Consumer groups generally supported the
clarification, but suggested that an assessment of a consumer's
financial characteristics should include steering based on other
factors such as race, ethnicity, or zip code.
Final Rule
The Bureau is adopting the clarifications to references to ``credit
terms'' in Sec. 1026.36(a)(1)(i)(A) and comments 36(a)-1 and -4 as
proposed, and new Sec. 1026.36(a)(6) (which states the definition of
``credit terms'' for purposes of the section) as proposed with an
additional clarification. In response to public comments requesting
additional clarification, the Bureau is modifying proposed Sec.
1026.36(a)(6) to clarify that credit terms are selected based on a
consumer's financial characteristics when those terms are selected
based on factors that may influence a credit decision, such as the
consumer's debts, income, assets, or credit history. The Bureau intends
this language to capture situations where credit terms are offered or
discussed as available or potentially available to a consumer based on
that consumer's ability to obtain such credit. This would include
examining the consumer's credit history (which could include a credit
score), income, debts, or assets and then selecting credit terms that
are either available or potentially available to the consumer based on
those factors. The Bureau does not intend this language to cover
situations where, for example, an employee of a loan originator or
creditor may be aware of a consumer's assets, income, or other factors
but does not select credit terms based on those factors.
The Bureau is not providing additional commentary to address
potential referral concerns based on race, gender, ethnicity, or other
non-financial factors. The Bureau intends this provision only to
provide clarification on when a person may be considered a ``loan
originator'' by discussing credit terms--i.e., when the terms have been
selected based on the consumer's financial characteristics. To the
extent that inappropriate non-financial characteristics such as race,
gender, or ethnicity may factor into the selection of credit terms, the
Bureau believes such situations would be addressed by other applicable
laws such as ECOA and the Fair Housing Act. In any event, the Bureau
did not intend this clarification to define the appropriate means of
evaluating consumers for credit; rather it only intended to clarify
when a person may be considered a loan originator by virtue of
discussing credit terms with a consumer. The Bureau believes these
changes better align the scope of the loan originator definition with
the intended scope of Sec. 1026.36.
Finally, as explained below in the section that discusses
applicability of Sec. 1026.36(a)(1) to employees of manufactured home
retailers, the Bureau is not adopting the proposed clarification to
Sec. 1026.36(a)(1)(i)(B) except for removing the parenthetical
reference defining credit terms.
B. Application-Related Administrative and Clerical Tasks
The Proposal
Comment 36(a)-4 and its subparts explain certain activities that,
for purposes of Sec. 1026.36(a), do not constitute ``referring'' as
defined in comment 36(a)-1, when done (in the absence of other loan
originator activities defined in Sec. 1026.36(a)(1)) by certain
managers, administrative or clerical staff, or similar employees of a
loan originator or creditor. One such comment, 36(a)-4.i, provides
guidance regarding when such persons engage in application-related
administrative and clerical tasks. Specifically, this comment provides
that persons do not act as loan originators when they (1) at the
request of the consumer, provide an application form to the consumer;
(2) accept a completed application form from the consumer; or (3)
without assisting the consumer in completing
[[Page 60419]]
the application, processing or analyzing the information, or discussing
specific credit terms or products available from a creditor with the
consumer, deliver the application to a loan originator or creditor.
After publication of the final rule, the Bureau received inquiries
regarding the scope of this comment, specifically if the Bureau
intended this comment to allow such persons only to provide
applications from the entity for which they work to consumers without
that constituting a ``referral,'' or if the exception is broader and
would allow any such person to influence consumers' decisions and refer
them to a particular creditor or set of creditors without being
considered loan originators. The Bureau proposed revisions to comment
36(a)-4.i to clarify when providing a consumer with a credit
application amounts to acting as a loan originator, as opposed to
falling under the exclusion provided in comment 36(a)-4.i for
application-related administrative and clerical tasks. Specifically,
the Bureau proposed to revise this comment to clarify that the
exclusion only extends to a loan originator or creditor employee (or
agent or contractor) that provides a credit application form from the
entity for which the person works to the consumer for the consumer to
complete.
Comments
The Bureau received a number of comments from industry and trade
associations that supported these clarifications. Most of these
comments did not identify any additional need for clarification or
suggestions. The Bureau also received a few comments from the
manufactured housing industry, which are addressed separately in the
discussion of Sec. 1026.36(a)(1)(i)(B) below.
Final Rule
For the reasons discussed above, the Bureau is adopting comment
36(a)-4.i mostly as proposed, with some conforming changes for purposes
of consistency with comment 36(a)-4.ii.B. While generally any person,
including a loan originator employee would be acting as a loan
originator for purposes of Sec. 1026.36(a)(1) if he or she refers
consumers to a particular creditor by providing an application from
that creditor, the Bureau does not believe that a loan originator or
creditor employee should be considered a loan originator for simply
providing an application from the loan originator or creditor entity
for which he or she works. The Bureau believes that, in such a case,
provided that the person does not assist the consumer in completing the
application or otherwise influence his or her decision, the person is
performing an administrative task on behalf of the entity for which he
or she works. Thus, in the Bureau's view, there would be little
appreciable benefit for consumers for the rule to regard such persons
as loan originators.
Also, as discussed below with respect to employees who provide
creditor or loan originator contact information under comment 36(a)-
4.ii.B, the Bureau believes ambiguity regarding the meaning of ``in
response to a consumer's request''--a factor included in both comments
36(a)-4.i and 36(a)-4.ii.B--could cause unnecessary compliance
challenges. Moreover, the Bureau notes that classifying such
individuals as loan originators for providing an application without
first waiting for an express request from the consumer would subject
them to the requirements applicable to loan originators. Again, in the
Bureau's view, there would be little appreciable benefit for consumers
for the rule to regard such persons as loan originators where the
person is simply providing a credit application from the entity for
whom the person works. Accordingly, the Bureau is adopting comment
36(a)-4.i as proposed, including removing the condition that the
provision of the application must be ``at the request of the consumer''
and making a conforming change to the comment to only apply to
employees of the loan originator or creditor, not all persons. However,
the Bureau is making some wording changes for purposes of consistency
with comment 36(a)-4.ii.B. The Bureau also is removing a reference to
``credit products'' which also is inconsistent with comment 36(a)-
4.ii.B. The Bureau believes in both instances the rule should consider
employees to be loan originators when such persons discuss credit terms
that are or may be made available by a creditor or loan originator to
that consumer selected based on the consumer's financial
characteristics, not when they simply discuss particular categories of
credit products generally, such as mortgages or home equity loans. Also
as discussed above, the Bureau is not adopting proposed language that
expressly would have extended this comment to agents or contractors of
loan originators or creditors.
C. Responding to Consumer Inquiries and Providing General Information
1. Employees of a Creditor or Loan Originator Who Provide Loan
Originator or Creditor Contact Information
The Proposal
Comment 36(a)-4.ii.B provides that the definition of loan
originator does not include persons who, as employees of a creditor or
loan originator, provide loan originator or creditor contact
information to a consumer in response to the consumer's request,
provided that the employee does not discuss particular credit terms
available from a creditor and does not direct the consumer, based on
the employee's assessment of the consumer's financial characteristics,
to a particular loan originator or creditor seeking to originate
particular credit transactions to consumers with those financial
characteristics. Prior to issuing the proposal, the Bureau received
many inquiries on this topic from stakeholders expressing concern that,
absent a clarifying amendment, the rule could be interpreted to require
tellers, greeters, or other such employees to be classified as loan
originators for merely providing contact information to a consumer who
did not clearly or explicitly ask for it. Stakeholders further asserted
that such persons should not be considered loan originators when their
conduct is limited to following a script prompting them to ask whether
the consumer is interested in a mortgage loan and the tellers are not
able to engage in any independent assessment of the consumer. Moreover,
stakeholders have asserted it would be very costly to implement the
training and certification requirements under Regulation Z as amended
by the 2013 Loan Originator Compensation Final Rule for employers with
large numbers of administrative staff who interact with consumers on a
day-to-day basis in the manner described.
The proposal would have addressed these concerns by removing the
requirement that creditor or loan originator contact information must
be provided ``in response to the consumer's request'' for the exclusion
to apply. In addition, and similar to the clarifications regarding
credit terms discussed above, the Bureau also proposed to clarify that
comment 36(a)-4.ii.B applies to loan originator or creditor agents and
contractors as well as employees.
Comments
The Bureau received substantial comments from trade associations
and
[[Page 60420]]
industry, including credit unions and other small creditors, supporting
the proposal. Consumer advocates also generally supported the proposal
and did not raise specific objections to the revised comment. As
discussed above, some consumer advocates and trade associations asked
for additional clarification on what constitutes an ``assessment of a
consumer's financial characteristics,'' but most comments did not make
specific suggestions other than to note that they support the proposal
and welcome the change. The Bureau also received a few comments from
the manufactured housing industry requesting additional clarification
regarding how the proposed comment would apply to retailers, who,
according to these commenters, may not be employees, agents, or
contractors of a loan originator or creditor. Specifically, these
commenters requested that the Bureau expressly include employees,
agents, or contractors of manufactured housing retailers as covered by
the provision, even if such person does not work for a loan originator
or creditor, but provides loan originator contact information to
consumers in the same manner described in the proposal.
Final Rule
The Bureau is adopting comment 36(a)-4.ii.B as proposed with two
modifications. First, as discussed above with respect to comment 36(a)-
4.i, the Bureau is not adopting proposed language that would have
extended the scope of the comment to agents or contractors of loan
originators or creditors. Second, the Bureau is clarifying that the
exclusion is only available to employees of a loan originator or
creditor that provide the contact information of the loan originator or
creditor entity for which he or she works, or of a person who works for
that same entity. As proposed, the Bureau is removing the qualifying
phrase ``in response to the consumer's request.'' The Bureau believes
ambiguity regarding the meaning of ``in response to a consumer's
request'' could have caused unnecessary compliance challenges. In such
instances, the Bureau does not believe tellers or other such staff
should be considered loan originators for merely providing loan
originator or creditor contact information to the consumer (which would
consist of such an employee directing a consumer to a loan originator
who works for the same entity, or a creditor that is the same entity,
as made explicit to conform the language in comments 4.i and 4.ii.B).
The Bureau also notes that classifying such individuals as loan
originators would subject them to the requirements applicable to loan
originators with, in the Bureau's view, little appreciable benefit for
consumers. However, the Bureau is retaining language, with some
conforming changes, that would cover within the definition of ``loan
originator'' any such employee of a creditor or loan originator
organization who, in the course of providing loan originator or
creditor contact information to the consumer, directs that consumer to
a particular loan originator or particular creditor based on his or her
assessment of the consumer's financial characteristics or discusses
particular credit terms that are or may be available from a creditor or
loan originator to the consumer selected based on consumer's financial
characteristics. The Bureau believes these actions can influence the
credit terms that the consumer ultimately obtains, and continues to
believe these actions should result in application of the requirements
imposed by the rule on loan originators. The Bureau believes this
amendment should enable creditors and loan originators to implement the
rule with respect to persons acting under the controlled circumstances
specified by the comment while maintaining stronger protections in
situations where significant steering could occur.
As noted above, the Bureau is making one adjustment to the comment
to clarify that the exclusion only is available to an employee of a
loan originator or creditor who provides the contact information of the
loan originator or creditor entity for which he or she works, or of a
person who works for that same entity. The Bureau recognizes that the
proposed amendments did not expressly limit the exclusion in this way.
However, the Bureau intended that the exclusion be subject to this
limitation and believes it was strongly implied, given that the
language of the exclusion begins with the qualification that the
definition of loan originator does not include persons who,'' as
employees of a creditor or loan originator,'' engage in certain
activities. The fact that the exclusion only applies to persons in
their capacity as employees of creditors or loan originators signals
that they are only providing loan originator or creditor contract
information for the entity for which they work. The Bureau did not
contemplate that such persons would provide contact information, as
employees of a creditor or loan originator, to loan originators or
creditors that were not their employers and no comments indicating a
different understanding of this provision were received. However, to
better clarify application of the provision, the Bureau is modifying
comment 36(a)-4.ii.B to state that the exclusion only extends to
employees providing the contact information of ``the entity for which
he or she works or of a person who works for that same entity.'' The
Bureau believes this will eliminate any ambiguity in the proposed
comment that may have led such employees to believe the exclusion would
extend to providing contact information for loan originators or
creditors outside the entity for which they work. Accordingly, the
Bureau is adopting this revised comment as proposed with this
modification.
Finally, as discussed in greater detail below in the section that
addresses employees of manufactured housing retailers, the Bureau also
received some comments that suggested manufactured housing retailer
employees should be exempt from the loan originator definition
altogether for ``referring,'' or otherwise should fall under this
particular exclusion, regardless of whether they are employees, agents,
or contractors of a loan originator or creditor. As discussed below in
the discussion of Sec. 1026.36(a)(1)(i)(B), the Bureau does not
believe that any additional amendments to this comment are necessary
that relate to manufactured housing retailer employees.
2. Describing Other Product-Related Service.
Comment 36(a)-4.ii.C provides that the definition of loan
originator does not include persons who describe other product-related
services. The Bureau proposed to amend this comment to provide examples
of persons who describe other product-related services. The proposed
new examples would have included persons who describe optional monthly
payment methods via telephone or via automatic account withdrawals, the
availability and features of online account access, the availability of
24-hour customer support, or free mobile applications to access account
information. In addition, the proposed amendment to comment 36(a)-
4.iii.C would have clarified that persons who perform the
administrative task of coordinating the closing process are excluded,
whereas persons who arrange credit transactions are not excluded. The
Bureau received comments that generally supported the proposed
clarifications, but did not receive comments specifically addressing
this clarification in isolation. Accordingly, the Bureau is adopting
[[Page 60421]]
revised comments 36(a)-4.ii.C and 36(a)-4.iii.C as proposed.
3. Amounts for Charges for Services That Are Not Loan Origination
Activities
Comment 36(a)-5.iv.B provides that compensation includes any
salaries, commissions, and any financial or similar incentive,
regardless of whether it is labeled as payment for services that are
not loan origination activities. The Bureau proposed to revise this
comment to provide that compensation includes any salaries,
commissions, and any financial or similar incentive ``to an individual
loan originator,'' regardless of whether it is labeled as payment for
services that are not loan origination activities. The proposed wording
change conforms this provision to the other provisions in comment
36(a)-5.iv that permit compensation paid to a loan originator
organization under certain circumstances for services it performs that
are not loan originator activities. The Bureau received comments that
generally supported the proposed clarifications, but did not receive
comments specifically addressing this clarification in isolation.
Accordingly, the Bureau is adopting revised comment 36(a)-5 as
proposed.
D. Clarification of Exclusion for Employees of Retailers of
Manufactured Homes
The Proposal
As discussed above, the Bureau proposed to revise both Sec. Sec.
1026.36(a)(1)(i)(A) and 1026.36(a)(1)(i)(B) to address several
inconsistencies regarding the meaning of ``credit terms'' and to
clarify that any such activity must relate to ``particular credit terms
that are or may be available from a creditor to that consumer selected
based on the consumer's financial characteristics,'' not credit terms
generally. The proposed rule preamble also provided examples of how the
proposed revisions to comment 36(a)-4.i would affect such employees of
manufactured home retailers. As a result of these proposed revisions,
employees (or agents or contractors) of manufactured home retailers who
provide a credit application form from one particular creditor or loan
originator organization that is not the entity for which they work
would not have qualified for the exclusions in Sec.
1026.36(a)(1)(i)(A) or Sec. 1026.36(a)(1)(i)(B) and comment 36(a)-4.i.
would not apply. In contrast, an employee of a manufactured home
retailer who simply provides a credit application form from one
particular creditor or loan originator organization that is his or her
employer potentially would have been eligible for the exclusions in
Sec. 1026.36(a)(1)(i)(A) and Sec. 1026.36(a)(1)(B) and comment 36(a)-
4.i potentially would have applied. An agent or contractor of a
manufactured home retailer who simply provides a credit application
form from one particular creditor or loan originator organization it
works for as agent or contractor potentially would have been eligible
for the exclusion in Sec. 1026.36(a)(1)(i)(A) and comment 36(a)-4.i.
potentially would have applied. The proposed revisions also would have
clarified that comment 36(a)-4.i. would apply to someone who merely
delivers a completed credit application form from the consumer to a
creditor or loan originator if other conditions are met, but would have
removed language that could have been misinterpreted to suggest that
comment 36(a)-4.i. would apply to someone who accepts an application in
the sense of taking or helping the consumer complete an application
could be eligible for the exclusion.
Comments
The Bureau received comments from the manufactured housing industry
that sought additional clarification on how the proposed amendments
would apply to employees of manufactured housing retailers.
Specifically, these comments relate to the illustrations of the
proposed amendments the Bureau provided in the preamble indicating that
comment 36(a)-4.i would only apply to manufactured housing retailer
employees who also are employees (or agents or contractors) of the
creditor or loan originator. Commenters expressed concern that
manufactured housing retailer employees are typically not employees,
agents, or contractors of a loan originator or creditor, and thus would
only be able to take advantage of this particular exclusion in the case
where the retailer itself provides financing or acts as the loan
originator. These commenters suggested that retailer employees should
be allowed to ``refer'' customers to particular loan originators or
creditors other than the retailer itself without being considered loan
originators, so long as the other conditions set forth in comment
36(a)-4.i are met. In addition, these commenters also suggested that
their employees should not be covered by the loan originator rules at
all to the extent that they do not receive compensation from any
creditor for such activity. No other commenters focused on application
of the rules to manufactured home retailer employees.
Final Rule
As discussed below, the Bureau is adopting several clarifying
amendments and additional commentary to address comments from the
manufactured housing industry that questioned the applicability to
manufactured home retailer employees of commentary that describes
``referral'' as loan originator activity and of various exclusions set
forth in Sec. 1026.36(a)(1)(i)(A), Sec. 1026.36(a)(1)(i)(B), and
discussed in comment 36(a)-4 and its subparts.
Background. As an initial interpretive matter, the Bureau believes
it is helpful to outline the statutory provision implemented by Sec.
1026.36(a)(1)(i)(B), and how it relates to other provisions implemented
by the 2013 Loan Originator Compensation Final Rule. TILA section
103(cc)(2)(A) provides a three-part test for determining if a person is
a loan originator, namely that, for or in expectation of direct or
indirect compensation or gain, a person (1) Takes a mortgage
application, (2) assists a consumer in obtaining or applying to obtain
a mortgage loan, or (3) offers or negotiates terms of a mortgage loan.
The language of TILA section 103(cc) that defines a ``mortgage
originator'' does not specifically include the term ``refer'' or its
variants. However, the Bureau has interpreted both ``assists a consumer
in obtaining or applying to obtain a residential mortgage loan'' under
section 103(cc)(2)(A)(ii) and ``offers'' under section
103(cc)(2)(A)(iii) to include a referral of a consumer to a loan
originator or creditor.\37\
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\37\ See 78 FR at 11300, including footnote 62 (Supplemental
Information to the 2013 Loan Originator Compensation Final Rule,
discussing ``offers'').
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This definition, which forms the basis for the definition of loan
originator adopted in Sec. 1026.36(a)(1)(i), applies generally to all
persons, unless one of a limited number of exclusions applies. One such
exclusion exists for manufactured home retailer employees in TILA
section 103(cc)(2)(C)(ii), and provides that the second part of the
three-part test described above--assisting a consumer in obtaining or
applying to obtain a mortgage loan--does not render a retailer employee
a loan originator provided the employee does not engage in either of
the other two steps (taking an application or offering or negotiating
terms) and also does not advise a consumer on loan terms (including
rates, fees, and other costs). Thus, a retailer employee who merely
assists without offering, negotiating, taking an application, or
advising, is not a loan originator (while one who offers or negotiates,
takes an
[[Page 60422]]
application, or advises on loan terms would be a loan originator).
This statutory provision was implemented by Sec.
1026.36(a)(1)(i)(B), which is based on, and largely tracks, the
statutory language. Consistent with this statutory structure, Sec.
1026.36(a)(1)(i)(B) provides an exclusion for ``An employee of a
manufactured home retailer who does not take a consumer credit
application, offer or negotiate credit terms available from a creditor,
or advise a consumer on credit terms (including rates, fees, and other
costs) available from a creditor.'' The effect of this exclusion is
that retailer employees are loan originators if they do anything in the
general, core definition in Sec. 1026.36(a)(1)(i) other than
``assist'' in a manner that doesn't constitute taking, advising,
offering or negotiating, or advising on credit terms. Because both
``assisting'' and ``offering'' include the activity of referring, a
retailer employee who makes a referral is ``offering'' and therefore is
a loan originator.\38\
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\38\ This aspect of the retailer employee exclusion was
implemented by Sec. 1026.36(a) as adopted by the 2013 Loan
Originator Compensation Final Rule, and explicitly addressed in the
preamble to that rule, where the Bureau responded to similar
comments from the manufactured housing industry. One of those
comments asserted that, under the proposed exclusion for employees
of a manufactured home retailer, employees could be compensated, in
effect, for referring a consumer to a creditor without becoming a
loan originator. The Bureau made clear that this was not a correct
reading of the exclusion, and explained its basis for disagreeing.
See 78 FR at 11305.
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The Bureau believes these provisions make clear how employees of
manufactured housing retailers fit within the Sec. 1026.36(a)(1)(i)
definition of loan originator, including with respect to referrals as
described in comment 36(a)-1.i.A.1. The Bureau also provided some
additional explanation in the Supplementary Information to the proposed
rule, which sought to clarify further the application of comment 36(a)-
4.i to such employees. However, the Bureau continues to receive
inquiries from industry, including comments received in connection with
the June 2013 Proposal, that indicate there is still substantial
confusion regarding the application of these provisions and comments to
employees of manufactured housing retailers. For this reason, the
Bureau is adopting additional commentary to provide further guidance
and codify explanations previously set forth in the Supplementary
Information to the 2013 Loan Originator Compensation Final Rule and the
June 2013 Proposal.
Proposed amendments to Sec. 1026.36(a)(1)(i)(B). The Bureau is not
adopting in this final rule proposed amendments to Sec.
1026.36(a)(1)(i)(B) other than moving the definition of ``credit
terms'' to Sec. 1026.36(a)(6). As discussed above related to ``credit
terms,'' the Bureau proposed to modify the reference to ``credit
terms'' in Sec. Sec. 1026.36(a)(1)(i)(A) and 1026.36(a)(1)(i)(B), as
well as comments 36(a)-4.i and 36(a)-4.ii.B, to be limited to ``credit
terms available from a creditor to that consumer selected based on the
consumer's financial characteristics.'' As discussed above, the Bureau
believes this limitation is appropriate in the context of Sec.
1026.36(a)(1)(i)(A) and comments 36(a)-4.i and 36(a)-4.ii.B. Each of
these provisions addresses situations where employees of a loan
originator or creditor may, absent exception, be considered loan
originators for conducting activity within the entities for which they
work. For example, Sec. 1026.36(a)(1)(i)(A) relates to persons who
perform purely administrative or clerical tasks on behalf of a person
who is classified as a loan originator or creditor, while comments
36(a)-4.i and 36(a)-4.ii.B relate to determining whether an employee of
a loan originator or creditor engages in ``referring'' by providing an
application from the entity for which such person works, or providing
loan originator or creditor contact information for a loan originator
or creditor that is or works for the same entity. Each of these
situations applies to persons who may be assisting loan originators
within the same entity or otherwise technically ``referring'' consumers
to loan originators or creditors that are or work for the same entity.
However, upon further consideration the Bureau believes the limitation
is not appropriate in the context of Sec. 1026.36(a)(1)(i)(B), which
states that a manufactured home retailer employee would not be
considered a loan originator if that person does not, among other
things, ``offer or negotiate credit terms'' or ``advise a consumer on
credit terms.'' The limitation is only intended to apply in the context
of an employee of a loan originator or creditor assisting a loan
originator or making a referral to the loan originator or creditor
entity for which such person works. To the extent a retailer of
manufactured housing is also a loan originator or creditor, the
exclusions under Sec. 1026.36(a)(1)(i)(A) and comments 36(a)-4.i and
36(a)-4.ii.B may be available for its employees. However, the
limitation has no applicability outside of the loan originator or
creditor employer/employee context and, accordingly, is not being
included as the Bureau proposed in Sec. 1026.36(a)(1)(i)(B), which
addresses a different employer/employee context.
Accordingly, the Bureau is not adopting this proposed change to
Sec. 1026.36(a)(1)(i)(B).
Referrals. The Bureau is amending comment 36(a)-1.i.A.1 to explain
further the underlying statutory and regulatory bases for including
``referrals'' as loan originator activity. As adopted by the 2013 Loan
Originator Compensation Final Rule, comment 36(a)-1.i.A.1 explains what
actions constitute '' referring'' for purposes of Sec.
1026.36(a)(1)(i), while comment 36(a)-4 and its subparts provide
guidance on certain activities that do not constitute referring. The
Bureau is amending this comment to explain that referring is an
activity included under each of the activities of offering, arranging,
or assisting a consumer in obtaining or applying to obtain an extension
of credit. Accordingly, the Bureau believes this amendment makes clear
that, while a referral may be considered ``assisting,'' it also falls
within other statutory and regulatory categories of loan originator
activity not excluded from the loan originator definition for
manufactured housing retailer employees. The Bureau believes the
discussion above and the conforming revision to comment 36(a)-1.i.A.1
better clarify what activities, when done by an employee of a retailer
of manufactured homes, will cause such an employee to be classified as
a loan originator for purposes of Sec. 1026.36. The Bureau further
notes this revision is consistent with the 2013 Loan Originator
Compensation Final Rule, which provides an extensive discussion of the
activities covered by TILA section 103(cc)(2)(A)(ii).\39\ As noted
above in this preamble, the retailer employee exclusion allows such an
employee to engage in ``assisting'' activities in a manner that doesn't
constitute taking, advising, offering or negotiating, or advising on
credit terms.
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\39\ See 78 FR at 11301 through 11303.
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New commentary. In addition, the Bureau is adding new commentary to
provide further guidance on what activities may be considered
``assisting,'' but not other loan originator activities such as
offering, arranging, or taking an application. In the Bureau's view,
these activities, when engaged in by employees of manufactured housing
retailers (in the absence of other activities), do not render such
employees loan originators for purposes of Sec. 1026.36. Accordingly,
to provide greater clarity concerning the retailer employee exclusion
consistent with these conclusions, a new comment
[[Page 60423]]
36(a)(1)(i)(B) is added by this final rule. The comment states that
engaging in certain listed activities, as described below, does not
make such an employee a loan originator.
The Bureau is adding new comment 36(a)(1)(i)(B)-1.i to explain that
a retailer employee may generally describe the credit application
process to a consumer and that this activity, standing alone, would not
cause the employee to be considered a loan originator.\40\ However, the
retailer employee would be considered a loan originator if he or she
advises on credit terms available from a creditor.
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\40\ See 78 FR at 11302.
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The Bureau is adding new comment 36(a)(1)(i)(B)-1.ii to explain
that a retailer employee may prepare residential mortgage loan packages
without being considered a loan originator.\41\ Thus, a retailer
employee may compile and process application materials and supporting
documentation and, further consistent with the Final Rule, provide
general application instruction to consumers so consumers can complete
an application, but without interacting or communicating with the
consumer regarding specific transaction terms.
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\41\ See TILA section 103(cc)(4) (definition of ``assists'').
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The Bureau notes that this comment is consistent with the
Supplementary Information to the 2013 Loan Originator Compensation
Final Rule, which states:
The Bureau agrees that persons generally engaged in loan
processing or who compile and process application materials and
supporting documentation and do not take an application, collect
information on behalf of the consumer, or communicate or interact
with consumers regarding specific transaction terms or products are
not loan originators (see the separate discussion above on taking an
application and collecting information on behalf of the
consumer).\42\
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\42\ 78 FR at 11303
In contrast, however, the Supplementary Information to the 2013
Loan Originator Compensation Final Rule also noted that ``filling out a
consumer's application, inputting the information into an online
application or other automated system, and taking information from the
consumer over the phone to complete the application should be
considered `tak[ing] an application' for the purposes of the rule.''
\43\ Because the retailer employee exclusion does not apply if the
employee engages in taking an application, filling out a consumer's
application, inputting the information into an online application or
other automated system, and taking information from the consumer over
the phone to complete the application would make the employee a loan
originator.
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\43\ 78 FR at 11299. See also comment 36(a)-1.i.A.3., 78 FR at
11415.
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The Bureau is adding new comment 36(a)(1)(i)(B)-1.iii to explain
that a retailer employee may collect information on behalf of the
consumer with regard to a residential mortgage loan.\44\ This activity
is not included in the activities covered by taking or offering or
assisting that would make a retailer employee a loan originator.
Comment 36(a)-1.i.3. and the Supplementary Information to the 2013 Loan
Originator Compensation Final Rule describe the activity of collecting
information on behalf of the consumer as including gathering
information or supporting documentation from third parties on behalf of
the consumer to provide to the consumer, for the consumer then to
provide in the application or for the consumer to submit to the loan
originator or creditor.\45\
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\44\ See TILA section 103(cc)(4) (definition of ``assists a
consumer in obtaining or applying to obtain a residential mortgage
loan'').
\45\ 78 FR at 11303, 11415.
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The Bureau is adding new comment 36(a)(1)(i)(B)-1.iv to explain
that a retailer employee may provide or make available general
information about creditors that may offer financing for manufactured
homes in the consumer's general area, when doing so does not otherwise
amount to ``referring'' as defined in comment 36(a)-1.i.A.1. Comment
36(a)-1.i.A.1 provides in part that referring ``includes any oral or
written action directed to a consumer that can affirmatively influence
the consumer to select a particular loan originator or creditor to
obtain an extension of credit when the consumer will pay for such
credit.'' Although this statement hardly covers the range of activities
that may constitute referring, it does provide a basis for addressing
the relatively unique circumstances of manufactured home retailer
employees, who are covered by a limited statutory exclusion from the
definition of loan originator.
The Bureau believes that most consumers purchasing a manufactured
home will need financing, and that a limited set of options may be
available. As public commenters have noted, only a small number of
creditors make loans secured by manufactured homes, and it is
beneficial to consumers for that information to be made available to
them by a retailer. To facilitate consumer access to credit in this
situation, new comment 36(a)(1)(i)(B)-.1.iv allows a retailer employee
to make general information about creditors or loan originators
available, which includes making available, in a neutral manner,
general brochures or information about the different creditors or loan
originators that may offer financing to a consumer, but does not
include recommending a particular creditor or loan originator or
otherwise influencing the consumer's decision. The Bureau believes this
comment falls within the purview of the quoted portion of comment
36(a)-1.i.A.1 above, taking into consideration the unique circumstances
and the limited statutory exclusion.
Finally, the Bureau notes that the comment extends to providing
general information about loan originators (i.e., mortgage brokers) as
well as creditors. Based on public comments, the Bureau believes that
under current market conditions only a small number of specialized
creditors currently operate in this market, and the Bureau is not aware
of any mortgage brokers or similar loan originators that currently
operate in this space. Nevertheless, the Bureau recognizes that
circumstances may change and brokers or other loan originators may
decide to offer loans secured by manufactured homes, and if that were
to occur the Bureau believes the same logic that applies to creditors
described above would apply with respect to these persons or
organizations. Accordingly, the comment includes loan originators as
well as creditors.
36(b) Scope
The Proposal
The Bureau proposed to revise the scope of provisions in Sec.
1026.36(b) to reflect the applicability of the servicing provisions in
Sec. 1026.36(c) regarding payment processing, pyramiding late fees,
and payoff statements as modified by the 2013 TILA Servicing Final
Rule.\46\ Current Sec. 1026.36(b) and comment 36(b)-1 (relocated from
Sec. 1026.36(f) and comment 36-1, respectively, by the 2013 Loan
Originator Compensation Final Rule)
[[Page 60424]]
provide that Sec. 1026.36(c) applies to closed-end consumer credit
transactions secured by a consumer's principal dwelling. The new
payment processing provisions in Sec. 1026.36(c)(1) and the
restrictions on pyramiding late fees in Sec. 1026.36(c)(2) both apply
to consumer credit transactions secured by a consumer's principal
dwelling. The new payoff statement provisions in Sec. 1026.36(c)(3),
however, apply more broadly to consumer credit transactions secured by
a dwelling.
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\46\ Among other things, the 2013 TILA Servicing Final Rule
implemented TILA sections 129F and 129G added by section 1464 of the
Dodd-Frank Act. The requirements in TILA section 129F concerning
prompt crediting of payments apply to consumer credit transactions
secured by a consumer's principal dwelling. The requirements in TILA
section 129G concerning payoff statements apply to creditors or
servicers of a home loan. The 2013 TILA Servicing Final Rule,
however, did not substantively revise the existing late fee
pyramiding requirement in Sec. 1026.36(c) but instead redesignated
the requirement as new paragraph 36(c)(2) to accommodate the
regulatory provisions implementing TILA sections 129F and 129G.
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The proposal would have revised Sec. 1026.36(b) and comment 36(b)-
1 to state that Sec. 1026.36(c)(1) and (c)(2) apply to consumer credit
transactions secured by a consumer's principal dwelling. The proposed
revisions also would have provided that Sec. 1026.36(c)(3) applies to
a consumer credit transaction secured by a dwelling (even if it is not
the consumer's principal dwelling). The Bureau sought comment on these
proposed revisions generally. The Bureau also invited comment on
whether additional revisions to Sec. 1026.36(b) and comment 36(b)-1
should be considered to clarify further the applicability of the
provisions in Sec. 1026.36(c) as modified by the 2013 Servicing Final
Rules.
Comments
The Bureau received one comment that generally supported this
clarification.
Final Rule
The Bureau is adopting these revisions to Sec. 1026.36(b) and
comment 36(b)-1 as proposed, to conform them to modifications made to
Sec. 1026.36(c) by the 2013 Servicing Final Rules that changed the
applicability of certain provisions in Sec. 1026.36(c). The Bureau
believes the revisions are necessary to reflect the applicability of
the provisions in Sec. 1026.36(c) as modified by the 2013 Servicing
Final Rules.
36(d) Prohibited Payments to Loan Originators
36(d)(1) Payments Based on a Term of the Transaction
36(d)(1)(i)
The Bureau proposed to revise comments 36(d)(1)-1.ii and 36(d)(1)-
1.iii.D, which interpret Sec. 1026.36(d)(1)(i)-(ii), to improve the
consistency of the wording across the regulatory text and commentary,
and provide further interpretation of the intended meaning of the
regulatory text. The Bureau did not receive any comments pertaining to
these particular proposed changes. As described below in the section-
by-section analysis for Sec. 1026.36(d)(1)(iv), the Bureau received a
small number of comments expressing general support for the proposed
clarifications to Sec. 1026.36(d) and its commentary. The Bureau is
finalizing the revisions to comments 36(d)(1)-1.ii and -1.iii.D as
proposed. As it stated in the proposal, the Bureau believes these
changes facilitate compliance.
36(d)(1)(iii)
The Bureau proposed to revise the portions of comment 36(d)(1)-3
that interpret Sec. 1026.36(d)(1)(iii) to improve the consistency of
the wording across the regulatory text and commentary, and provide
further interpretation of the intended meaning of the regulatory text.
The Bureau did not receive any comments pertaining to these particular
proposed changes. As described below in the section-by-section analysis
for Sec. 1026.36(d)(1)(iv), the Bureau received a small number of
comments expressing general support for the proposed clarifications to
Sec. 1026.36(d) and its commentary. The Bureau is finalizing the
revisions to the portions of comment 36(d)(1)-3 that interpret Sec.
1026.36(d)(1)(iii) as proposed. As it stated in the proposal, the
Bureau believes these changes facilitate compliance.
36(d)(1)(iv)
The Bureau proposed revisions to the portions of comment 36(d)(1)-3
that interpret Sec. 1026.36(d)(1)(iv). Section 1026.36(d)(1)(iv)
permits, under certain circumstances, the payment of compensation under
a non-deferred profits-based compensation plan to an individual loan
originator even if the compensation is directly or indirectly based on
the terms of multiple transactions by multiple individual loan
originators. Section 1026.36(d)(1)(iv)(B)(1) permits this compensation
if it does not exceed 10 percent of the individual loan originator's
total compensation corresponding to the time period for which the
compensation under a non-deferred profits-based compensation plan is
paid. Comments 36(d)(1)-3.ii through -3.v further interpret Sec.
1026.36(d)(1)(iv)(B)(1). Section 1026.36(d)(1)(iv)(B)(2) permits this
compensation if the individual loan originator is a loan originator for
ten or fewer consummated transactions during the 12-month period
preceding the compensation determination. Comment 36(d)(1)-3.vi further
interprets Sec. 1026.36(d)(1)(iv)(B)(2). The Bureau proposed to amend
comment 36(d)(1)-3 to improve the consistency of the wording across the
regulatory text and commentary, provide further interpretation as to
the intended meaning of the regulatory text in Sec. 1026.36(d)(1)(iv),
and ensure that the examples included in the commentary accurately
reflect the interpretations of the regulatory text contained elsewhere
in the commentary. As the Bureau explained in the proposal, nearly all
of the proposed revisions address the commentary sections that
interpret the meaning of Sec. 1026.36(d)(1)(iv)(B)(1) (i.e., setting
forth the 10-percent total compensation limit) and not Sec.
1026.36(d)(1)(iv)(B)(2). In the proposal, the Bureau explained that it
was proposing more extensive clarifications to two comments
interpreting Sec. 1026.36(d)(1), comment 36(d)(1)-3.v.A, which
clarifies the meaning of ``total compensation'' as used in Sec.
1026.36(d)(1)(iv)(B)(1), and comment 36(d)(1)-3.v.C, to clarify the
meaning of ``time period'' in Sec. 1026.36(d)(1)(iv)(B)(1). The Bureau
stated in the proposal that these proposed revisions were collectively
intended to clarify that, while the time period used to determine both
elements of the 10-percent limit ratio is the same: (1) the non-
deferred profits-based compensation for the time period is whatever
such compensation was earned during that time period, regardless of
when it was actually paid; and (2) compensation that is actually paid
during the time period, regardless of when it was earned, generally
will be included in the amount of total compensation for that time
period, but whether the compensation is included ultimately depends on
the type of compensation.
Of the institutions and individuals who submitted comments on the
proposed changes to the 2013 Loan Originator Compensation Final Rule,
very few specifically discussed the proposed clarifications and
amendments to Sec. 1026.36(d) and its commentary. One large depository
institution first highlighted some of the proposed changes to the Sec.
1026.36(d) commentary and then stated that it generally agreed with the
Bureau's proposed amendments and clarifications. Some consumer groups
expressed general disagreement with elements of Sec. 1026.36(d)
adopted by the 2013 Loan Originator Compensation Final Rule, which they
believe the proposed revisions would amplify, but did not address any
specific issues with the proposal itself.
The Bureau is finalizing the changes to Sec. 1026.36(d) and the
portions of comment 36(d)(1)-3 that interpret Sec. 1026.36(d)(1)(iv)
as proposed. As it stated in the proposal, the Bureau
[[Page 60425]]
believes these changes would facilitate compliance.
36(i) Prohibition on Financing Credit Insurance
The Bureau proposed to amend Sec. 1026.36(i) to clarify the scope
of the prohibition on a creditor financing, directly or indirectly, any
premiums for credit insurance in connection with a consumer credit
transaction secured by a dwelling. Dodd-Frank Act section 1414 added
TILA section 129C(d), which generally prohibits a creditor from
financing premiums or fees for credit insurance in connection with a
closed-end consumer credit transaction secured by a dwelling, or an
extension of open-end consumer credit secured by the consumer's
principal dwelling. The prohibition applies to credit life, credit
disability, credit unemployment, credit property insurance, and other
similar products, including debt cancellation and debt suspension
contracts (defined collectively as ``credit insurance'' for purposes of
this discussion). The same provision, however, excludes from the
prohibition credit insurance premiums or fees that are ``calculated and
paid in full on a monthly basis.'' As discussed below, the Bureau is
adopting amended Sec. 1026.36(i) as proposed with some modifications.
A. Background
1. Section 1026.36(i) as Adopted in the 2013 Loan Originator
Compensation Final Rule
In the 2013 Loan Originator Compensation Final Rule, the Bureau
implemented this prohibition by adopting the statutory provision
without substantive change, in Sec. 1026.36(i). The final rule
provided an effective date of June 1, 2013, for Sec. 1026.36(i) and
clarified that the provision applies to transactions for which a
creditor received an application on or after that date.\47\
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\47\ 78 FR at 11390.
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In the preamble to the final rule, the Bureau responded to public
comments on the regulatory text that the Bureau had included in its
proposal. The public comments included requests from consumer groups
for clarification on the applicability of the regulatory prohibition to
certain factual scenarios where credit insurance premiums are charged
periodically, rather than as a lump-sum that is added to the loan
amount at consummation. In particular, they requested clarification on
the meaning of the exclusion from the prohibition for credit insurance
premiums or fees that are ``calculated and paid in full on a monthly
basis.'' The Bureau did not receive any public comments from the credit
insurance industry. The Bureau received a limited number of comments
from creditors concerning the general prohibition, but these comments
did not address specifically the applicability of the exclusion from
the prohibition for premiums that are calculated and paid in full on a
monthly basis.
In their comments, the consumer groups described two practices that
they believed should be prohibited by the regulatory provision. First,
they described a practice in which some creditors charge credit
insurance premiums on a monthly basis but add those premiums to the
consumer's outstanding principal. They stated that this practice does
not meet the requirement that, to be excluded from the prohibition,
premiums must be ``paid in full on a monthly basis.'' They also stated
that this practice constitutes ``financing'' of credit insurance
premiums, which is prohibited by the provision. Second, the consumer
groups described a practice in which credit insurance premiums are
charged to the consumer on a ``levelized'' basis, meaning that the
premiums remain the same each month, even as the consumer pays down the
outstanding balance of the loan. They stated that this practice does
not meet the condition of the exclusion that premiums must be
``calculated . . . on a monthly basis,'' and therefore violates the
statutory prohibition. In the preamble of the final rule, the Bureau
stated that it agreed that these practices do not meet the condition of
the exclusion and violate the prohibition on creditors financing credit
insurance premiums.
2. Outreach During Implementation Period Following Publication of the
Final Rule
After publication of the final rule, representatives of credit
unions and credit insurers expressed concern to the Bureau about these
statements in the preamble of the final rule. Credit union
representatives questioned whether adding monthly premiums to a
consumer's loan balance should necessarily be considered prohibited
``financing'' of the credit insurance premiums and indicated that, if
it is considered financing and therefore is prohibited, they would not
be able to adjust their data processing systems to comply before the
June 1, 2013 effective date.
Credit insurance company representatives stated that level and
levelized credit insurance premiums are in fact ``calculated . . . on a
monthly basis.'' (These representatives explained that industry uses
the term ``levelized'' premiums to refer to a flat monthly payment that
is derived from a decreasing monthly premium payment arrangement and
use the term ``level'' premium to refer to premiums for which there is
no decreasing monthly premium payment arrangement available, such as
for level mortgage life insurance.) These representatives further
asserted that levelized premiums are, in fact, ``calculated . . . on a
monthly basis'' because an actuarially derived rate is multiplied by a
fixed monthly principal and interest payment to derive the monthly
insurance premium. They also asserted that level premiums are
``calculated . . . on a monthly basis'' because an actuarially derived
rate is multiplied by the consumer's original loan amount to derive the
monthly insurance premium. Accordingly, they urged that level and
levelized credit insurance premiums should be excluded from the
prohibition on creditors financing credit insurance premiums so long as
they are also paid in full on a monthly basis. Industry representatives
have further stated that, even if the Bureau concludes that level or
levelized credit insurance premiums are not ``calculated'' on a monthly
basis within the meaning of the exclusion from the prohibition, they
are not ``financed'' by a creditor and thus are not prohibited by the
statutory provision.
3. Delay of Sec. 1026.36(i) Effective Date
In light of these concerns, and the Bureau's belief that, if the
effective date were not delayed, creditors could face uncertainty about
whether and under what circumstances credit insurance premiums may be
charged periodically in connection with covered consumer credit
transactions secured by a dwelling, the Bureau issued the 2013
Effective Date Final Rule delaying the June 1, 2013 effective date of
Sec. 1026.36(i) to January 10, 2014.\48\ In that final rule, the
Bureau stated its belief that this uncertainty could result in a
substantial compliance burden to industry. However, the Bureau also
stated that it would revisit the effective date of the provision in
this proposal.
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\48\ 78 FR 32547 (May 31, 2013).
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B. Amendments to Sec. 1026.36(i)
The Bureau proposed, as contemplated in the 2013 Effective Date
Final Rule, amendments to Sec. 1026.36(i) to clarify the scope of the
prohibition on a creditor financing, directly or indirectly, any
premiums for credit insurance in connection with a
[[Page 60426]]
consumer credit transaction secured by a dwelling. The Bureau proposed
these amendments because it was persuaded, based on communications with
consumer advocates, creditors, and trade associations, that its
statement in the final rule in response to consumer group public
comments may have been overbroad concerning when a creditor violates
the prohibition on financing credit insurance premiums.
1. General Clarifications of Prohibition's Scope
The Proposal
The Bureau proposed two general clarifications to the scope of the
prohibition. First, the Bureau proposed to clarify that, although the
heading of the statutory prohibition emphasizes the prohibition on
financing ``single-premium'' credit insurance, which historically has
been accomplished by adding a lump-sum premium to the consumer's loan
balance at consummation, the provision more broadly prohibits a
creditor from ``financing'' credit insurance premiums ``directly or
indirectly'' in connection with a covered consumer credit transaction
secured by a dwelling. That is, it generally prohibits a creditor from
financing credit insurance premiums at any time. Accordingly, the
prohibited financing of credit insurance premiums is not limited to
addition of a single, lump-sum premium to the loan amount by the
creditor at consummation. The Bureau proposed to clarify the scope of
the prohibition by striking the term ``single-premium'' from the Sec.
1026.36(i) heading.
Second, the Bureau proposed to clarify the relationship between the
exclusion for ``credit insurance for which premiums or fees are
calculated and paid in full on a monthly basis'' and the general
prohibition. The Bureau emphasized in the proposal that the mere fact
that, under a particular premium calculation and payment arrangement,
credit insurance premiums do not meet the conditions of the exclusion
that they be ``calculated and paid in full on a monthly basis'' does
not mean that a creditor is necessarily financing them in violation of
the prohibition. For example, it is possible that credit insurance
premiums could be calculated and paid in full by a consumer directly to
a credit insurer on a quarterly basis with no indicia that the creditor
is financing the premiums. (The Bureau's proposal to clarify the scope
of the exclusion in situations in which the creditor is engaged in
financing of credit insurance premiums is discussed below.)
Comments
Several commenters, including credit unions, credit insurance
companies, and trade associations, expressed general appreciation and
support for the Bureau's willingness to provide further clarifications
regarding the prohibition. One credit insurance company asserted that
the statutory provision is clear and requires no clarification. A
number of credit insurance companies and trade associations supported
the Bureau's foundational clarification that credit insurance premiums
that do not meet the conditions of the exclusion that they be
``calculated and paid in full on a monthly basis'' do not necessarily
indicate that a creditor is financing them in violation of the
prohibition.
Several industry commenters, including credit unions and a credit
union trade association, objected to the proposed removal of the term
``single-premium'' from the heading of Sec. 1026.36(i), believing that
the proposed change would expand the applicability of the prohibition
to practices other than a creditor's addition of a single, lump-sum
premium to the loan amount at consummation. The commenters stated that
inclusion of the term ``single-premium'' in the heading of the
statutory provision indicated that Congress intended the prohibition to
apply only to that creditor practice.
Final Rule
The Bureau agrees that clarifications of the statutory and
regulatory provisions are important to ensure that consumers and
industry are able to determine which creditor practices regarding
credit insurance are prohibited. The Bureau disagrees with the
assertion that removal of the term ``single-premium'' from the heading
of Sec. 1026.36(i) affects the applicability of the regulatory
provision or expands it beyond that of the statutory provision. The
texts of both the statutory and regulatory provisions prohibit
creditors from financing credit insurance premiums generally, not just
those for single-premium credit insurance, in connection with certain
dwelling-secured loans. Although the heading of the statutory provision
emphasizes the applicability of the prohibition to financing of single-
premium credit insurance, a basic rule of statutory interpretation is
that the heading cannot narrow the plain meaning of the statutory
text.\49\
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\49\ Intel Corp. v. Advanced Micro Devices, Inc., 542 U.S. 241,
256 (2004).
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2. Definition of ``Financing'' for Purposes of Sec. 1026.36(i)
The Proposal
In the proposal, the Bureau explained its belief that practices
that constitute ``financing'' of credit insurance premiums or fees by a
creditor are generally equivalent to an extension of credit to a
consumer with respect to payment of the credit insurance premiums or
fees. While neither TILA nor the Dodd-Frank Act expressly defines the
term ``financing,'' section 103(f) of TILA provides that the term
``credit'' means ``the right granted by a creditor to a debtor to defer
payment of debt or to incur debt and defer its payment.'' \50\ Based on
this definition of ``credit,'' Sec. 1026.4(a) of Regulation Z defines
a ``finance charge'' to be a charge imposed by a creditor ``as an
incident to or condition of an extension of credit.'' Thus, the Bureau
believes the general understanding of the term ``financing'' under TILA
and Regulation Z to be analogous to an extension of credit--i.e., a
creditor's granting of a right to incur a debt and defer its payment.
The Bureau stated this belief in the proposal, noting that a creditor
finances credit insurance premiums within the meaning of the
prohibition when it provides a consumer the right to defer payment of
premiums or fees, including when it adds a lump-sum premium to the loan
balance at consummation, as well as when it adds a monthly credit
insurance premium to the consumer's principal balance.
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\50\ 15 U.S.C. 1602(f). Accord 12 CFR 1026.2(a)(14).
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Accordingly, the Bureau proposed to add redesignated Sec.
1026.36(i)(2)(ii), to clarify that a creditor finances credit insurance
premiums or fees when it provides a consumer the right to defer payment
of a credit insurance premium or fee owed by the consumer. However, the
Bureau invited public comment on whether this clarification is
appropriate. For example, the Bureau stated it did not believe that a
brief delay in receipt of the consumer's premium or fee, such as might
happen preceding a death or period of employment that the credit
insurance is intended to cover, should cause immediate cancellation of
the credit insurance. The Bureau also stated it did not believe that
refraining from cancelling or causing cancellation of credit insurance
in such circumstances means that a creditor has provided the consumer a
right to defer payment of the premium or fee, but the Bureau invited
public comment on consequences of defining the term ``finances'' as
proposed. In addition, the Bureau noted that some creditors have
suggested that
[[Page 60427]]
they may, as a purely mechanical matter, add a monthly credit insurance
premium to the principal balance shown on a monthly statement but then
subtract the premium from the principal balance immediately or as soon
as the premium or fee is paid. Accordingly, the Bureau solicited
comment on whether a creditor should instead be considered to have
financed credit insurance premiums or fees only if it charges a
``finance charge,'' as defined in Sec. 1026.4(a) (which implements
section 106 of TILA, 15 U.S.C. 1605), on or in connection with the
credit insurance premium or fee. The Bureau also requested comment on
other situations that may arise that could cause credit insurance
premiums to be considered ``financed'' under the proposal and may
warrant special treatment, such as deficiencies where credit insurance
premiums are escrowed.
Comments on the Proposed Clarification
The Bureau received substantial comment from the credit insurance
industry, trade associations, creditors, and consumer groups addressing
the proposed definition of financing as well as the alternative. The
Bureau received no comments identifying other situations such as
escrowed premiums that could cause credit insurance premiums to be
considered ``financed'' and may warrant special treatment. Most
industry commenters, including credit insurance companies, credit
unions, and their trade associations and attorneys, generally supported
the proposed clarification that a creditor finances credit insurance
premiums or fees when it provides a consumer the right to defer payment
of a credit insurance premium or fee owed by the consumer. They urged
the Bureau to clarify that the consumer does not ``owe'' the premium or
fee until the consumer has incurred a ``debt'' for it, within the
meaning of Sec. 1026.2(a)(14). They stated that the consumer should
not be considered to have incurred a debt for the credit insurance
premium or fee until the monthly period in which the premium is due
passes without the consumer having made the payment. Only then, these
commenters stated, might creditors advance funds on the consumer's
behalf and provide the consumer a right to defer its payment, such that
financing might occur. Accordingly, many of these commenters urged the
Bureau to clarify that a creditor finances a credit insurance premium
only if it provides a consumer the right to defer payment of the
premiums ``beyond the month in which they are due.'' These commenters
addressed a specific illustration provided by consumer groups in
connection with the 2013 Loan Originator Compensation Final Rule, which
adopted the provisions this proposal would have amended. In that
illustration, consumer groups described a creditor that appeared to be
adding the premium to principal on a monthly basis and then providing
the consumer the right to defer payment long beyond the month in which
it was due, or even indefinitely. Commenters agreed that such a
practice would be prohibited under the clarification they urged, though
they stated, variously, that they had never heard of a creditor
actually engaging in such a practice, or that such practices were very
rare. They also stated that the clarification they urged would show why
adding a lump-sum credit insurance premium to the loan balance at
consummation was prohibited. They stated that in such circumstances,
the premium is due at consummation, so there is no identifiable
``period'' in which the premium is due. One credit insurance company,
as well as attorneys for creditors and credit insurance companies,
stated that the credit insurance premium should be considered financed
by the creditor only if the consumer does not pay the premium when it
is due and the creditor incorporates it into the loan to create an
additional obligation. The company and attorneys stated that a creditor
should not be considered to have financed a past-due credit insurance
premium if it does not add the premium to the loan amount, but instead
it or the insurer provides a grace period, the insurer's obligation to
perform under the credit insurance contract is suspended, or the
contract is cancelled.
Some credit unions and credit insurance companies that urged the
Bureau to adopt the clarification discussed above suggested that it was
important, in part, to permit the continuation of some credit unions'
practice of ``posting'' the premium to the consumer's account, meaning
that it is added to principal before the credit insurance premium is
due, so it is reflected on the next periodic statement. Under the
practice, the creditor then credits the consumer's account (meaning it
is subtracted from principal) after the creditor receives the
consumer's payment. Comments suggested that, for at least some credit
unions and other small creditors, it is necessary to post the charge
prior to its due date so the consumer's next periodic statement
reflects the monthly charge. Some of these commenters stated that
additional interest accrues as a result of this addition until the
consumer's subsequent payment of credit insurance premium is credited
to the account. Other credit union commenters stated that when they add
the premium to principal before it is due, no additional interest
accrues as a result. One credit insurance company explained that this
credit union practice was necessary because credit unions' accounting
and data processing systems recognize only principal and interest
categories. The company stated that, as a result, there is no other way
for them to charge the premium without extensive and cost-prohibitive
changes in these systems. The company also stated that, for any
creditor making a closed-end, fixed-rate mortgage, the only way to
charge the consumer a monthly credit insurance premium that declines as
the mortgage balance declines and also to charge a total monthly
payment (i.e., a payment including premium, interest, and credit
insurance premium) that remains constant from month to month, is to add
the premium to principal. The same commenter stated that the act of
adding the premium to principal before it is due should not be
considered financing and that if the creditor adds the credit insurance
premium to principal before the premium is due, the creditor should be
considered to have financed the credit insurance premium only if the
consumer subsequently fails to pay the credit insurance premium by the
end of the month in which it is due. Another credit insurance company
urged the Bureau to clarify that a creditor's addition of the credit
insurance premium to the principal balance before it is due should not
be considered financing of the credit insurance premium even if the
consumer subsequently fails to make the payment when it is due,
provided that the creditor added it to principal in the same monthly
period in which the consumer was contractually obligated to pay the
credit insurance premium.
Credit insurance companies, a credit insurance trade group, and
several credit union commenters supported the proposed clarification of
what constitutes financing but urged the Bureau to clarify that a
creditor does not provide a consumer a right to defer payment of the
credit insurance premium merely because the consumer fails to pay the
premium when it is due, the creditor provides a forbearance, or the
creditor and consumer enter into a post-consummation work-out agreement
to defer or suspend mortgage payments. They stated that in such cases,
the creditor may provide the consumer a
[[Page 60428]]
contractual right to defer payment of the credit insurance premium but
typically does not ever add the deferred premium payment to the loan
balance.
Consumer groups opposed the Bureau's proposed clarification that a
creditor finances credit insurance premiums or fees when it provides a
consumer the right to defer payment of a credit insurance premium or
fee owed by the consumer. They reasoned that mere deferment of credit
insurance premium payments is beneficial consumers, but, in their view,
a creditor's act of charging consumers for the deferment is harmful to
consumers. They expressed concern that the proposed clarification based
on providing a consumer the right to defer payment of credit insurance
premiums could cause creditors to stop deferring a consumer's
obligation to pay credit insurance premiums without charge. They also
stated that the proposed clarification could be confusing because the
purpose of debt suspension contracts is to permit a consumer to skip a
monthly mortgage payment. They disagreed with the comment of a credit
insurance company that a creditor's addition of a credit insurance
premium to principal in the same month that the consumer is
contractually obligated to pay it should not be considered financing of
the premium, even if doing so results in increased interest charge to
the consumer and regardless of whether the consumer pays the credit
insurance premium when it is due. The consumer groups countered that,
if additional interest is charged as a result of the creditor's
addition of the credit insurance premium to principal, then the
creditor is clearly financing the credit insurance premium, regardless
of when the consumer is obligated to make the credit insurance premium
payment.
Comments on the Alternative Clarification
Several consumer groups, legal services organizations, and fair
housing organizations supported the alternative provision that would
have clarified what constitutes financing of credit insurance premiums
or fees, on which the Bureau invited public comment. The alternative
clarification would have provided that a creditor finances credit
insurance premiums only if it charges a finance charge on or in
connection with the credit insurance premium or fee. These commenters,
however, urged the Bureau to broaden the alternative proposal further,
to clarify that a creditor charges a finance charge in connection with
the premium and thus finances credit insurance premiums or fees if it
charges the consumer any dollar amount in a given month that exceeds a
rate filed with and not disapproved by the State insurance regulator.
A number of credit unions also supported the alternative
clarification. Generally, the credit unions that supported the
alternative approach were the same credit unions that reported using
the practice of adding credit insurance premiums to principal before
they are due but stated that, under their own practices, no additional
interest accrues as a result of the addition. These commenters stated
that their practice should not be considered to be financing credit
insurance premiums, but that a creditor that adds premiums to principal
and allows additional interest to accrue until the consumer's
subsequent payment is applied should be considered to be financing the
credit insurance premiums.
Most other credit insurance and credit union commenters opposed the
alternative proposal, for several reasons. Several credit insurance
companies, creditor trade associations, and a credit union opposed the
alternative proposal because the definition is vague. Specifically,
they noted that the definition of ``finance charge'' in Sec.
1026.2(a)(14) excludes credit insurance premiums and fees under certain
conditions, and argued that a definition of financing credit insurance
premiums and fees that depends on whether a finance charge is imposed
``on or in connection with'' credit insurance premiums or fees would
create confusion and lead to unintended consequences. For example, they
stated that a finance charge may arguably be paid ``in connection''
with a premium if additional interest accrues because payment of the
premium--even in full on a monthly basis--may result in slower
amortization of the loan than would occur if no premium were paid.
However, such interest does not indicate the premium or fee is being
advanced by the creditor to or on behalf of the consumer. They also
stated that any additional interest that is accrued as a result of the
creditor adding a monthly credit insurance premium to principal and the
passage of time until the consumer's subsequent payment is applied
should not be considered financing, because the addition to principal
for accounting and monthly statement purposes does not indicate that
the creditor is advancing any funds to or on behalf of the consumer.
One such credit union also emphasized that the additional interest that
accrues under its practices is very small, totaling on average 84 cents
per year. It stated that the substantial cost of having to change
accounting and data processing systems would be considerable, such that
credit unions might simply choose not to offer credit insurance
products to their customers.
In addition, these commenters stated that the alternative proposal
appears inconsistent with the statutory exclusion for credit insurance
premiums and fees that are calculated and ``paid in full on a monthly
basis,'' which would allow a finance charge in connection with a
premium to the extent monthly outstanding balance credit insurance
(where the premium satisfies the criteria for ``calculated'' on a
monthly basis) is paid in the same month the charge is posted.
Final Rule
Definition of financing. The Bureau is adopting in Sec.
1026.36(i)(2)(ii) the proposed definition of ``financing'' as proposed,
with one modification. Under final Sec. 1026.36(i)(2)(ii),
``financing'' occurs when a creditor treats a credit insurance premium
as an amount owed and provides a consumer the right to defer payment of
that obligation. The Bureau believes this clarification best conforms
the concept of ``financing'' in Sec. 1026.36(i) with Regulation Z's
concept of an extension of ``credit'' in Sec. 1026.2(a)(14), which is
defined as ``the right to defer payment of debt or to incur debt and
defer its payment'' (emphasis added). The Bureau also is adopting an
additional clarification that granting the consumer this right to defer
payment only constitutes financing if it provides the consumer the
right to defer payment of the premiums or fees ``beyond the period in
which they are due.''
The Bureau believes this additional clarification is appropriate in
light of public comments, and also is consistent with the exclusion for
credit insurance premiums that are calculated and paid in full on a
monthly basis. As some commenters suggested, if the total amount owed
by the consumer has not increased by the amount of the premium upon the
close of the monthly period (after accounting for principal payments),
then the creditor has not advanced funds or treated the premium as an
addition to the consumer's ``debt.'' Thus, consistent with Regulation
Z's general concept of ``credit'' in Sec. 1026.4(a)(14), the creditor
is not treating the premium or fee as a debt obligation owed by the
consumer and granting a right to defer payment of a debt, and is not
``financing'' the premium. This also is consistent with Sec.
1026.36(i)(2)(iii), which provides that any premium ``calculated'' on a
monthly basis would not be considered financed
[[Page 60429]]
if it were also paid in full on a monthly basis--i.e., that the premium
was not treated as a debt that the consumer was given a right to defer
payment of beyond the month in which it was due. Accordingly, a
creditor will not be considered to have financed a credit insurance
premium if, upon the close of the month, the consumer has failed to
make the premium or fee payment, but the creditor does not incorporate
that amount into the amount owed by the consumer. However, if the
creditor treats the premium as an addition to the consumer's debt, such
as by communicating to the consumer that the consumer must pay it to
satisfy the consumer's obligations under the loan or by charging
interest on the premium, the creditor will be considered to have
financed the premium in violation of the prohibition.
The Bureau recognizes that there are some specific situations where
it may be beneficial to consumers if creditors allow some period of
time after the end of the monthly period in which a premium was due to
decide if they would like to continue the insurance coverage. The
Bureau believes the important distinction regarding whether or not the
premium is considered to be financed hinges on whether the creditor
treats the premium as a debt obligation due and then defers a right
pay. But, as some commenters noted, as an alternative to the creditor
adding an unpaid premium to the loan balance to create additional debt,
a grace period could be provided during which the insurance remains in
force unless the consumer chooses not to pay the premium (in which case
the insurance contract is cancelled), the insurer's obligation to
perform under the credit insurance contract could be suspended in the
event of non-payment, or the insurance contract could be cancelled
automatically if the premium is not paid. In these cases, the creditor
may allow the consumer additional time to pay the premium and keep the
insurance in force, but does not advance the amount of money necessary
to meet the monthly credit insurance payment on the consumer's behalf
and then require that the consumer pay the creditor--i.e., the creditor
does not treat the premium as a debt and then provide the consumer a
right to defer payment of the premium or fee. The Bureau believes these
practices would, in most cases, not arise to the level of ``financing''
unless the creditor treats the premium as a debt and then allows
deferral of payment beyond the month in which it was due.
The Bureau believes similar logic would apply with respect to other
situations, such as consumers who are offered forbearance, modification
agreements, or are otherwise delinquent on their monthly payments. In
these cases, a creditor that effectively pays the monthly premium on
the consumer's behalf and then treats that amount as a debt owed to the
creditor beyond the month in which it is due would be financing the
premium for purposes of Sec. 1026.36(i). For example, assume that a
consumer has credit insurance and typically pays $50.00 per month for
that product. If the consumer is granted a six-month forbearance of
monthly payments by the creditor (and the credit insurance itself is
not used to cover monthly payments, but simply remains as a monthly
charge), the creditor ``finances'' for purposes of Sec. 1026.36(i) if
the creditor charges the consumer $50.00 each month without collecting
payment and ultimately adds $300.00 to the consumer's debt. Similarly,
if the same consumer were six months delinquent on his or her loan
(meaning no payments have been received), the creditor would not be
permitted to pay the credit insurance premiums on behalf of the
consumer and then treat $300.00 as an additional amount owed.
The Bureau appreciates the remaining concerns raised by consumer
groups, but disagrees with some of their analyses. Consumer groups
suggested providing that a creditor finances credit insurance premiums
or fees any time the amount charged to the consumer exceeds the premium
filed with and not disapproved by the State insurance regulator. It is
the Bureau's understanding that under some State insurance regulation
practices, not all types of credit insurance rates (such as those
determined by an actuarial method) must be filed with the regulator.
More importantly, even when applicable rates are filed with a State
insurance regulator, the fact that a consumer is being charged more
than the filed rate does not necessarily mean the creditor is financing
the premium, even if the creditor receives commissions from the credit
insurer. A difference between the filed rate and the amount charged to
the consumer could be the result of actions by the credit insurer,
rather than the creditor.
The Bureau also disagrees that significant confusion about debt
suspension products will be caused by the clarification that a creditor
finances premiums or fees for credit insurance if it provides a
consumer the right to defer payment of a credit insurance premium or
fee. Debt suspension contracts permit the consumer to defer payments of
principal and interest. The clarification the Bureau is adopting
addresses granting a consumer a right to defer payments of credit
insurance premiums and fees.
Application of the provision to single-premium credit insurance.
The Bureau is also adding comment 36(i)-1 to clarify how the
prohibition applies to single-premium and monthly-pay products. It
clarifies that in the case of single-premium credit insurance, a
creditor violates Sec. 1026.36(i) by adding the credit insurance
premium or fee to the amount owed by the consumer at closing. The
comment states further that, in the case of monthly-pay credit
insurance, a creditor violates Sec. 1026.36(i) if, upon the close of
the monthly period in which the premium or fee is due, the creditor
includes the premium or fee in the amount owed by the consumer--and
thus treats it not as a monthly charge that could be cancelled prior to
being due, but as a ``debt'' that is owed by the consumer to the
creditor, which the consumer then would have a right to pay at some
later date.
Interest charged when the borrower is not granted a right to defer
payment. The Bureau invited public comment on whether credit insurance
premiums should be considered financed by a creditor only if the
creditor imposes a finance charge on or in connection with the premium
or fee. In doing so, the Bureau assumed that in some cases creditors
were granting a consumer the right to defer payment and imposing a
finance charge for that right, but in other cases creditors were not
charging consumers for providing that right. The Bureau did not
anticipate that creditors were charging interest on the credit
insurance premium or fee even though no funds were being advanced on
the consumer's behalf at the time they began charging interest, under
the practice described by some commenters. However, the Bureau notes
that consumer groups and several industry commenters have stated that,
at least in some cases, creditors appear to be adding credit insurance
premiums to a consumer's principal balance before the premium is due
from the consumer--even though no funds are advanced on behalf of the
consumer at that time. Interest then accrues on the increased principal
until the consumer's subsequent payment is credited to the account.
Commenters have pointed out that this is typically a very small amount
of interest; one industry commenter noted that, on average, the amount
of interest accrued due to this practice is 87 cents per consumer.
In such cases, the Bureau believes that the accruing interest does
not indicate that the creditor has financed the
[[Page 60430]]
premium precisely because, as several such creditors insist, they do
not (and could not) advance any funds for the premium, and therefore
could not add to the consumer's debt, until after the consumer's
payment is actually due. Nevertheless (and even though the amount of
interest charged may be very little), the Bureau believes that interest
charged under such practices raises potential consumer protection
concerns and may not be appropriate--although the reason it may be
inappropriate is not because it indicates the creditor is financing the
premium. Rather, the potential concerns arise if the creditor is
charging the consumer additional interest on the premium even though
the creditor is not financing the premium.
The Bureau notes that the scope of the Sec. 1026.36(i) prohibition
is limited to a creditor's practice of financing of premiums--which
does not include treating the premium as an addition to the consumer's
principal and charging interest on the addition before the premium is
due.\51\ Indeed, even under the proposed alternative definition of
financing--which would have relied upon the creditor's imposing a
``finance charge'' in connection with the premium--this interest would
not have fallen under the exclusion. The interest at issue would fail
to meet the definition of a ``finance charge'' under Sec. 1026.4,
which is any charge imposed as an incident to or a condition of an
extension of ``credit.'' As discussed above, Sec. 1026.2(a)(14)
defines ``credit'' as ``the right to defer payment of a debt or to
incur debt and defer its payment''--and in the case of this particular
practice there is neither a debt nor a right to defer payment prior to
the point at which the charge is actually due. Thus, under either of
the proposed definitions of financing, this practice would not have
been subject to the prohibition.
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\51\ The same concerns do not seem to arise if a creditor adds
the premium to a line labeled ``principal'' on a monthly statement
due to accounting and data system limitations but does not otherwise
treat the premium as an addition to the consumer's debt and does not
charge interest on the addition.
---------------------------------------------------------------------------
However, the fact that imposing interest on a premium before it is
due does not constitute ``financing'' the premium does not mean that
such practices comply with other Federal or State requirements. The
Bureau intends to monitor this practice in the future and may address
this issue at another time, whether by rulemaking or other means.
However, based on public comments received, the Bureau believes that
credit unions and other small creditors should be able to mitigate any
risk that may arise from this practice by not collecting the interest
that accrues from the consumer. For example, some credit unions that
face these accounting and data processing system limitations appear to
add the premium to principal before the consumer's payment is due but
do so without additional interest being charged to the consumer. The
Bureau believes credit unions or other creditors facing such system
limitations may be able to credit any accrued interest back to the
consumer timely, thereby mitigating consumer protection concerns.
3. Calculated and Paid in Full on a Monthly Basis
The Proposal
The Bureau proposed to clarify in Sec. 1026.36(i)(2)(iii) that
credit insurance premiums or fees are calculated on a monthly basis if
they are determined mathematically by multiplying a rate by the monthly
outstanding balance (e.g., the loan balance following the consumer's
most recent monthly payment). As discussed above, Sec. 1026.36(i)
excludes from the prohibition on a creditor financing credit insurance
premiums or fees any ``credit insurance for which premiums or fees are
calculated and paid in full on a monthly basis.'' Although it had
considered the concerns raised by industry following the issuance of
the 2013 Loan Originator Compensation Final Rule, the Bureau stated
that it continued to believe that the more straightforward
interpretation of the statutory language regarding a premium or fee
that is ``calculated . . . on a monthly basis'' is a premium or fee
that declines as the consumer pays down the outstanding principal
balance. Credit insurance with this feature is often referred to as a
``monthly outstanding balance,'' or M.O.B. credit insurance product.
Level or levelized premiums or fees that are calculated by multiplying
a rate by the initial loan amount or by a fixed monthly principal and
interest payment are not calculated ``on a monthly basis'' in any
meaningful way because the factors in the calculation do not change
monthly (in contrast to the M.O.B. credit insurance product).
Accordingly, under the proposed clarification, credit insurance could
not have been categorically excluded from the scope of the prohibition
on the ground that it is ``calculated and fully paid on a monthly
basis'' if its premium or fee does not decline as the consumer pays
down the outstanding principal balance. The Bureau noted that even if a
particular premium calculation and payment arrangement provides for
credit insurance premiums to be calculated on a monthly basis within
the meaning of the proposed clarification, it must also provide for the
premiums to be paid in full on a monthly basis (rather than added to
principal, for example) to be categorically excluded from Sec.
1026.36(i).
Comments
Most of the comments discussed above addressed the statutory
exclusion as it relates to the definition of financing, but the Bureau
also received some comments specifically addressing the exclusion. One
credit insurance company, three state trade associations of credit
unions, one national trade association of credit unions, and several
consumer groups, legal services organizations, and fair housing
organizations supported the Bureau's proposal clarifying what credit
insurance premiums are calculated on a monthly basis. They agreed with
the Bureau's statement that the most straightforward interpretation of
a premium that is ``calculated . . . on a monthly basis'' is one that
is determined mathematically by multiplying a rate by the monthly
outstanding balance. Consumer groups urged the Bureau to clarify that
the exclusion should apply only to a rate filed with and not
disapproved by a State insurance regulator. A credit insurance company
commenter urged the Bureau to clarify that the premium or fee is ``paid
in full on a monthly basis'' if the consumer is contractually required
to pay it in the same month in which the creditor ``posts'' it to the
consumer's account, even if the consumer does not in fact pay a premium
by the end of the monthly period.
Other credit insurance companies, a credit insurance trade
association, several credit unions, and two state trade associations of
credit unions stated that the Bureau's clarification was too narrow.
They argued that any ``monthly pay'' credit insurance product should be
excluded from the prohibition, regardless of whether the premium
declines as the outstanding balance of the loan declines. They noted
that model state legislation includes similar phrasing and has not been
interpreted as being limited to products whose premiums decline as the
loan balance declines. They stated that there was no indication that
Congress intended a narrow meaning when it used similar language in the
statutory prohibition.
Finally, one creditor trade association believed that the Bureau's
proposal meant that levelized premiums
[[Page 60431]]
necessarily amount to prohibited creditor financing of credit insurance
and it opposed the Bureau's proposal on that basis. An actuarial firm
noted that level premiums are an important option in credit insurance
products and urged the Bureau not to ban them.
Final Rule
The Bureau is adopting the provision as proposed. The Bureau does
not believe that similarities between the statutory provision and
language in model state legislation cited by some commenters means that
Congress intended the phrase ``calculated . . . on a monthly basis'' to
include a premium that stays constant every month, rather than the more
straightforward meaning discussed above. The Bureau disagrees with the
commenter that urged the Bureau to deem a premium to have been ``paid
in full on a monthly basis'' by a consumer simply because it is
contractually required to be paid monthly. Instead, if the creditor
does not receive the consumer's payment, then the analysis under this
final rule's clarification on what constitutes a creditor's financing
of credit insurance premiums or fees, discussed above, applies.
Finally, the Bureau again emphasizes that a credit insurance product
with a level or levelized premium is not prohibited by this final rule.
For any credit insurance product that does not meet the conditions of
the exclusion, this final rule's clarification on what constitutes a
creditor's financing of credit insurance premiums or fees applies.
4. Description of Creditors as at Times Acting as ``Passive Conduits''
for Credit Insurance Premiums and Fees
The Proposal
The Bureau noted in the proposal that credit insurance companies,
in their communications with the Bureau subsequent to issuance of the
2013 Loan Originator Compensation Final Rule, described creditors as
acting as ``passive conduits'' collecting and transmitting monthly
premiums from the consumer to a credit insurer, rather than advancing
funds to an insurer and collecting them subsequently from the consumer.
Under such a scenario described by the credit insurance companies, the
Bureau stated its belief that a creditor would not likely be providing
a consumer the right to defer payment of a credit insurance premium or
fee owed by the consumer within the meaning of the proposal, as
discussed above. Similarly, the Bureau stated that, under the
alternative interpretation that a creditor ``finances'' credit
insurance only if it charges a ``finance charge'' on or in connection
with the credit insurance premium or fee, as discussed above, a
creditor that acts merely as a passive conduit for the payment of
credit insurance premiums and fees to a credit insurer would not likely
be charging such a finance charge. The Bureau stated that, on the other
hand, a creditor that does not act merely as a passive conduit, but
instead achieves a levelized premium by deferring payments, or portions
of payments, due to a credit insurer for a monthly outstanding balance
credit insurance product (or by imposing a finance charge incident to
such deferment, under the alternative interpretation discussed above)
would likely be considered to be financing the credit insurance
premiums or fees.
The Bureau invited public comment on the extent to which creditors
act other than as passive conduits in a manner that would constitute
financing of credit insurance premiums or fees. Relatedly, the Bureau
sought public comment on whether debt cancellation or suspension
contracts, which may be provided by the creditor itself or its
affiliate, and not a separate insurance company, may warrant different
or specialized treatment under the provision because a creditor would
not, by nature, act as a ``passive conduit'' to an insurance provider.
The Bureau specifically invited public comment on what actions by a
creditor should or should not be considered financing of debt
cancellation or suspension contract fees, when the creditor is a party
to the debt cancellation or suspension contract and payments for
principal, interest, and the debt cancellation or suspension contract
are retained by the creditor.
Comments
Several commenters objected to the Bureau's inclusion in preamble
of the credit insurance industry's description of creditors as
``passive conduits'' that merely transmit consumers' credit insurance
premiums on to credit insurance companies. Two credit insurance
companies conceded that they had described creditors in this way but
expressed concern that the Bureau's use of the term in the preamble
might be misinterpreted. They stated that the description was intended
to refer to one example of when a creditor was not financing credit
insurance premiums, but that it might be interpreted to mean that when
a creditor acts other than as a ``passive conduit'' for credit
insurance premiums, it is necessarily financing them. Further, they
stated that the Bureau's discussion in the preamble of an example of a
creditor acting other than as a passive conduit (i.e., when the
creditor achieves a levelized premium by deferring payments, or
portions of payments, due to a credit insurer) does not ever happen in
practice. In addition, industry commenters stated that debt
cancellation or suspension contracts should not be treated differently
under the prohibition, but instead are charged and collected
functionally in the same manner as traditional insurance products,
except that they generally are not regulated by state insurance
commissions or subject to rate-filing requirements.
Consumer groups asserted that creditors never act as passive
conduits because creditors receive substantial commissions from credit
insurance companies for the policies they sell and because the
creditors are the primary beneficiaries of the credit insurance.
Accordingly, they stated that, whenever a consumer is charged more in
total premiums for a levelized credit insurance product than it would
be charged for a monthly outstanding balance product with equivalent
coverage, the creditor should be deemed to have financed the credit
insurance premium, even if the insurer, rather than the creditor,
accomplished the ``levelizing'' of the premium.
Final Rule
With respect to the Bureau's discussion of creditors as ``passive
conduits'' of credit insurance premiums in the preamble of the proposed
rule, the Bureau did not propose to promulgate, and is not promulgating
in this final rule, a provision adopting that concept. Instead, as the
Bureau explained in the proposal, the description was offered by credit
insurance companies in their discussions with the Bureau, and the
Bureau referred to it in the proposal as a means to elicit public
comments and information on creditor practices that do not fit that
description, especially with respect to debt cancellation and debt
suspension products. The Bureau did not state a belief that creditors
do act as passive conduits, or that any action that does not fit that
description amounts to a violation of the provision. In addition, based
on public comments it received, the Bureau does not believe it is
necessary to adopt a provision that treats debt suspension or debt
cancellation fees differently from credit insurance products.
[[Page 60432]]
VII. Section 1022(b)(2) of the Dodd-Frank Act
A. Overview
In developing the final rule, the Bureau has considered the
potential benefits, costs, and impacts.\52\ In addition, the Bureau has
consulted, or offered to consult with, the prudential regulators, the
Securities and Exchange Commission, HUD, the Federal Housing Finance
Agency, the Federal Trade Commission, and the Department of the
Treasury, including regarding consistency with any prudential, market,
or systemic objectives administered by such agencies.
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\52\ 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.\53\ These
amendments focus primarily on clarifying or revising (1) Provisions of
Regulation X's related to information requests and error notices; (2)
loss mitigation procedures under Regulation X's servicing provisions;
(3) amounts counted as loan originator compensation to retailers of
manufactured homes and their employees for purposes of applying points
and fees thresholds under HOEPA and the qualified mortgage rules in
Regulation Z; (4) determination of which creditors operate
predominantly in ``rural'' or ``underserved'' areas for various
purposes under the mortgage regulations; (5) application of the loan
originator compensation rules to bank tellers and similar staff; and
(6) the prohibition on creditor-financed credit insurance. The Bureau
also is adjusting the effective dates for certain provisions adopted by
the 2013 Loan Originator Compensation Final Rule and making technical
and wording changes for clarification purposes to Regulations B, X, and
Z.
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\53\ 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 May 2013 Escrows Final Rule.
---------------------------------------------------------------------------
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 as well as the
information and analysis on which the January rules were based provide
insight into the benefits, costs and impacts and where relevant, the
analysis provides a qualitative discussion of the benefits, cost 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,\54\ an important benefit of
most of the provisions of this 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. Other benefits and costs
are considered below.
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\54\ 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.
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As described above, the Bureau is amending the commentary to Sec.
1024.35(c) and Sec. 1024.36(b). As adopted by the 2013 Mortgage
Servicing Rules, these provisions and accompanying commentary require a
servicer that has established an exclusive address at which it will
receive communications pursuant to Sec. 1024.35 and Sec. 1024.36 to
disclose that address whenever it provides a borrower any contact
information for assistance from the servicer. The Bureau is amending
the commentary so that the exclusive address need be provided on the
written notice that designates the specific address; the periodic
statement or coupon book required pursuant to 12 CFR 1026.41; any Web
site the servicer maintains in connection with the servicing of the
loan; and any notice required pursuant to Sec. Sec. 1024.39 or .41
that includes contact information for assistance.
These amendments reduce the costs to servicers of complying with
Sec. 1024.35(c) and Sec. 1024.36(b) of the final rule by reducing the
number of documents and other sources of information that must be
modified to include the designated address. The Bureau believes that
these amendments will cause at most a minimal reduction in the benefits
to consumers. A borrower looking for the address to which to send a
notice of error or a request for information would likely consult the
servicer's Web site, the borrower's statement or coupon book, any loss
mitigation documents, or perhaps the written notice designating the
specific address. Further, servicers have an obligation, established by
the January rule, to maintain policies and procedures reasonably
designed to achieve the objective of informing borrowers of the
procedures for submitting written notices of error and written
information requests. Thus, a servicer should provide the proper
address to a borrower who contacts the servicer for the address to
which to send a notice of error or a request for information. In light
of these two parallel requirements, the Bureau believes borrowers will
still have ready access to the exclusive address and are not likely to
send a notice of error or a request for information to an improper
address. Alternatives that would require the designated address on even
fewer documents or communications would further reduce the compliance
costs to servicers but would increase the risk that borrowers who wish
to send a notice of error or a request for information would consult a
document that did not include the exclusive address and would misroute
their notice or request accordingly.
The Bureau is amending Sec. 1024.35(g)(1)(iii)(B) (untimely
notices of error) and Sec. 1024.36(f)(1)(v)(B) (untimely requests for
information), which, as adopted in January, provided respectively that
the notice or request is untimely if it is delivered to the servicer
more than one year after a mortgage loan balance was paid in full.
Under the amended provisions, the one-year period designated by these
requirements will begin when a mortgage loan is discharged, such as
through foreclosure or deed in lieu of foreclosure, even if the loan
balance was not paid in full.
These amendments reduce costs to servicers by increasing the number
of situations in which a notice or request is untimely and servicers
are therefore not required to comply with certain requirements of Sec.
1024.35 or Sec. 1024.36. To the extent servicers no longer respond to
notices or requests that are untimely because of these amendments, the
lack of a response may impose some cost to consumers. The Bureau does
not have data on the frequency with which borrowers with a mortgage
that is terminated without being paid in full also assert an error or
request information (within the scope of these requirements) more than
one year after such termination, nor does the Bureau have information
on the subsequent outcomes for such borrowers. However, the Bureau
believes that one year after a mortgage loan is discharged generally
provides sufficient time for borrowers to assert errors or request
information. Consequently, an inability to obtain a response to such a
notice or request during the longer period the rule prescribed before
these amendments
[[Page 60433]]
would constitute at most a minimal impact on the benefits to consumers.
The Bureau is amending the commentary to Sec. 1024.41(b)(2)(i) and
adding new Sec. 1024.41(c)(2)(iv) to address the situation in which a
servicer determines that additional information from the borrower is
needed to complete an evaluation of a loss mitigation application after
the servicer has informed the borrower, via the notice pursuant to
Sec. 1026.41(b)(2)(i)(B), that the loss mitigation application is
complete or the borrower provided the particular information identified
as missing in an original notice. In summary, the servicer must request
the additional information and provide a reasonable time for the
borrower to respond. If the borrower provides the additional
information, the 30-day evaluation period within which to evaluate the
borrower for all loss mitigation options available to the borrower
begins as of the date the borrower provides the remaining information.
The borrower, on the other hand, receives the protections against
foreclosure during the period provided to gather the supplemental
information. If the borrower provides the additional information, the
borrower will also receive the right to appeal and other rights as
though the application were actually complete when either the borrower
submitted the original loss mitigation application (if the notice
informed the borrower that the application was complete) or the
borrower provided the particular information identified in the original
notice (if the notice informed the borrower that the application was
incomplete). In situations in which a servicer determines that
supplemental information from the borrower is needed after sending the
Sec. 1024.41(b)(2)(i)(B) notice, these dates will generally be earlier
than the date on which the borrower provides the supplemental
information to make the application complete. Accordingly, the amended
final rule provides greater consumer protections than the original
final rule or the proposal.
The costs to the servicer of these amendments are the costs of
complying that are incremental to the baseline costs arising from the
2013 Mortgage Servicing Final Rules. The Bureau believes that in all
cases these costs are small given other provisions of the 2013 Mortgage
Servicing Final Rules. As discussed above, under that final rule,
servicers are required to review a loss mitigation application to
determine whether it is complete or incomplete, to have policies and
procedures reasonably designed to achieve the objectives of identifying
documents and information that a borrower is required to submit to
complete an otherwise incomplete loss mitigation application, and to
exercise reasonable diligence in obtaining documents and information
necessary to complete an incomplete application. Thus, the 2013
Mortgage Servicing Final Rules already obligated the servicer to
exercise reasonable diligence to bring to completion an application
that was facially complete but in fact lacked information necessary for
review. The servicer would therefore, even absent the new provisions,
have the personnel and infrastructure needed to contact the borrower
for additional information and evaluate the application since these are
required to comply with the other obligations stated above. Thus, the
Bureau does not believe that the costs of complying with the amendment
are significant.
The benefits to consumers of these amendments are the benefits of
servicers following the procedures adopted by this final rule that are
incremental to the baseline benefits defined by the final servicing
rule. The amendment requires servicers to promptly request any
additional information or documents needed to complete a facially
complete loss mitigation application, and also provides borrowers with
a reasonable amount of time to provide any such documents or
information. The amendment delays the 30-day period during which a
servicer must evaluate a complete application until after the borrower
has provided such documents or information. This additional time
benefits consumers by encouraging thorough review of these
applications. Further, the rule will make clear that a servicer has
fulfilled its obligations if it follows the new procedure. This
encourages servicers to acknowledge and rectify their errors and
therefore increases the likelihood that servicers will make loss
mitigation decisions on the basis of complete information.
As an alternative, if borrowers receive protections from the date
on which the application is actually complete (instead of facially
complete), it is more likely the date would be past the 120th day of
delinquency or closer to the date of a foreclosure sale. Servicers
might have slightly lower costs under this alternative, perhaps from a
shorter period of providing continuity of contact and monitoring the
property, but borrowers would receive fewer protections against
foreclosure. Further, servicers that wanted to provide fewer
protections could more easily manipulate the date on which an
application is actually complete than the date on which it is facially
complete given that facial completeness is determined by a mandated
timeline and disclosure and by how quickly the consumer provides any
missing information identified in the disclosure.
The Bureau is amending the Sec. 1024.41(b)(2)(ii) time period
disclosure requirement, which requires a servicer to provide a date by
which a borrower should submit any missing documents and information
necessary to make a loss mitigation application complete. As explained
above, Sec. 1024.41(b)(2)(ii) as originally adopted requires the
servicer to notify the borrower that the borrower should submit such
missing documents and information by the earliest of certain dates.
This requirement would have applied even if the nearest date would
leave the borrower with very little time to assemble the missing
information. The amendment requires the servicer to provide a
reasonable date by which the borrower should submit the documents and
information necessary to make the loss mitigation application complete.
Commentary provides additional guidance and advises a servicer to
select the nearest of four key dates that is at least seven days in the
future. This change presents some tradeoff in benefits and costs for
consumers, but on balance the Bureau believes that it will be
beneficial to consumers. Consumers who would have been provided
impracticable dates for responding in the initial notice generally
benefit from this amendment by being provided with useful information.
In particular, the Bureau believes that some consumers who might have
failed to complete the loss mitigation application altogether when
faced with an impracticable date for submitting materials would be more
likely to complete the application by a reasonable date as determined
under the amended rule, and thus to secure consideration for
foreclosure alternatives and some of the important procedural rights
available to them under the loss mitigation regulations. Servicers will
incur one-time costs for changes to software to check whether the
nearest key date is closer than the rule permits and provide the later
date in this case. Servicers may also incur costs associated with
receiving additional complete loss mitigation applications.
The Bureau is adding a new provision in Sec. 1024.41(b)(3)
addressing how borrower protections are determined when no foreclosure
sale is scheduled as of the date a complete loss mitigation application
is received or when a foreclosure sale is rescheduled after receipt of
a complete application. Under the final servicing rule, a servicer
could,
[[Page 60434]]
arguably, initiate the foreclosure process on day 121 of delinquency,
receive a complete loss mitigation application from a borrower,
schedule a foreclosure sale within 90 days, and then provide fewer
protections than those afforded to loss mitigation applications
received at least 90 days before a scheduled foreclosure sale. The new
provisions provide that if no foreclosure sale has been scheduled as of
the date that a complete loss mitigation application is received, the
application shall be treated as if it were received at least 90 days
before a scheduled foreclosure sale. In addition, the new provisions
make clear that whether certain foreclosure protections and other
rights in the rule apply depends on the date for which a foreclosure
sale was scheduled at the time of a borrower's complete application. If
the scheduled date later changes, the foreclosure protections and other
rights that arose at the time of the complete application do not
change.
The Bureau recognizes that the new provisions may reduce some of
the flexibility servicers had under the 2013 Mortgage Servicing Rule.
This is a cost to servicers. Further, some servicers in possession of
an incomplete loss mitigation application on day 121 of delinquency who
would not have scheduled a foreclosure sale may now do so in order to
avoid the risk of a longer time to foreclosure. As a result, certain
borrowers may have less time to respond to a loss mitigation offer and
no right to appeal a denial. On the other hand, borrowers with
servicers that do not accelerate the scheduling of foreclosure sales
have clearer rights and most likely more time to respond to a loss
mitigation offer and a right to appeal a denial. The Bureau cannot
quantify these different effects, but believes that they are most
likely small given the wide range of other factors that determine the
time to foreclosure.
The Bureau is modifying Sec. 1024.41(c)(2) to allow servicers to
offer certain short-term forbearances to borrowers, notwithstanding the
prohibition on servicers offering a loss mitigation option to a
borrower based on the review of an incomplete loss mitigation
application. This provision imposes no costs on servicers because it
does not impose any new obligations on servicers relative to the final
rule. The provision benefits servicers by providing a relatively low-
cost way for servicers to provide borrowers with a particular loss
mitigation option. Similarly, the provision imposes no costs on
borrowers since the borrower can reject forbearance based on review of
an incomplete loss mitigation option, provide a complete loss
mitigation application, and be reviewed for all loss mitigation options
available to the borrower (and other protections) as under the final
rule. The provision benefits borrowers by providing borrowers with a
particular loss mitigation option on the basis of an incomplete
application and therefore without exhausting the option to have the
servicer review a complete loss mitigation application.
As discussed above, the Bureau is conscious of the fact that some
servicers have significantly exacerbated borrowers' financial
difficulties in the past by using short-term forbearance programs
inappropriately instead of reviewing the borrowers for long-term
options. Thus, in developing this provision, the Bureau has sought to
ensure that borrowers would receive significant benefits from
forbearance based on review of an incomplete loss mitigation option
with minimal additional risk or loss of consumer protections. However,
while a long forbearance period creates risks to consumers by
generating a significant debt and increasing the chance the borrower
might have been better off with an option that the servicer would have
offered after evaluating a complete loss mitigation application, the
comments received also emphasized heavily that very short forbearance
periods do not provide much benefit to borrowers in situations in which
forbearance is being used appropriately because they do not allow
sufficient time for borrowers to remedy the short-term problems that
created the need for forbearance and resume making payments on their
loans. The Bureau does not have data with which to identify the average
or maximum length of time of forbearance that would balance these
factors. Further, the risks to consumers from not specifying a maximum
length of time for forbearance are mitigated somewhat by the fact that
a borrower who receives a forbearance agreement without having
submitted a complete loss mitigation application can trigger a review
for loss mitigation options by submitting a complete application more
than 37 days before a scheduled foreclosure sale. Taking these factors
into account, the Bureau believes that borrowers benefit more from the
new forbearance provisions than they would from alternatives that
imposed a maximum length of time on forbearance.
The Bureau is also clarifying the ``first notice or filing''
standard in Sec. 1024.41(f). The 2013 Mortgage Servicing Final Rules
prohibited servicers from making the ``first notice or filing'' under
state law during the first 120 days of the borrower's delinquency, but
interpreted ``first notice or filing'' broadly to include notices of
default or other notices required by applicable law in order to pursue
acceleration of a mortgage loan obligation or the sale of a property
securing a mortgage loan obligation. The Bureau is modifying this
interpretation and adopting a narrower construction that more closely
tracks the Federal Housing Administration's ``first legal'' standard.
The Bureau also is clarifying how the rule works across states with
different foreclosure laws--such as in ``judicial'' states where
foreclosure requires an action filed in court and in ``non-judicial''
states where foreclosure requires notice or publication of sale.
The Bureau believes these amendments will benefit servicers by
clarifying the scope of actions prohibited during a borrower's first
120 days in accordance with a familiar standard. In addition, the
amendments will not unduly delay foreclosures in states that provide
statutory or other notice and cure processes in advance of a
foreclosure action or sale by forcing servicers to wait 120 days to
send such a notice. The Bureau believes these amendments will benefit
borrowers because they will allow notices that do not initiate
foreclosure, but instead are intended to provide borrowers with
information about counseling and other loss mitigation resources as a
means of avoiding foreclosure during the first 120 days of delinquency,
when those notices are most likely to benefit borrowers. The Bureau
recognizes the possibility that these amendments may, in certain
States, allow foreclosure to be initiated more quickly than under the
Final Rule, but the Bureau believes that the amendments are beneficial
to borrowers overall.
In addition, the Bureau is modifying or clarifying other Regulation
X loss mitigation provisions. The Bureau is amending Sec.
1024.41(c)(1)(ii) to state explicitly that the notice required by Sec.
1024.41(c)(1)(ii) must state the deadline for accepting or rejecting a
servicer's offer of a loss mitigation option. The Bureau is amending
Sec. 1024.41(h)(4) to provide expressly that the notice informing a
borrower of the determination of his or her appeal must also state the
amount of time the borrower has to accept or reject an offer of a loss
mitigation option after the notice is provided to the borrower. The
Bureau is amending Sec. 1024.41(f)(1), the prohibition on referral to
foreclosure until after the 120th day of delinquency, by exempting a
foreclosure based on a borrower's violation of a due-on-sale clause or
in which the servicer is joining the foreclosure action of a
subordinate
[[Page 60435]]
lienholder. Finally, the Bureau is clarifying the requirement in Sec.
1024.41(d)(1) (re-codified as Sec. 1024.41(d)) that a servicer must
disclose the reasons for the denial of any trial or permanent loan
modification option available to the borrower to make clear that this
provision requires the servicer to disclose only determinations
actually made by the servicer and does not require a servicer to
continue evaluating additional factors after a decision has been
established. The Bureau believes these modifications will only
minimally increase costs to servicers and the clarifications will
likely benefit both servicers and consumers, in part through reduced
implementation costs.
Two of the sets of modifications to the Regulation Z provisions
involve loan originator compensation. The Bureau is clarifying for
retailers of manufactured homes and their employees what compensation
can be attributed to a transaction at the time the interest rate is set
and must be included in the points and fees thresholds for qualified
mortgages and high-cost mortgages under HOEPA. As discussed above, the
final rule will exclude from points and fees of loan originator
compensation paid by a retailer of manufactured homes to its employees
and will clarify that the sales price of a manufactured home does not
include loan originator compensation that must be included in points
and fees. Both of these changes will reduce the burden for creditors in
manufactured home transactions by eliminating the need for them in
certain circumstances to attempt to determine what, if any, retailer
employee compensation and what, if any, part of the sales price will
count as loan originator compensation that must be included in points
and fees. This amendment is also likely to lower slightly the amount of
money counted toward the points and fees thresholds on the covered
loans. As a result, keeping all other provisions of a given loan fixed,
this will result in a greater number of loans to be eligible to be
qualified mortgages. For such loans, the costs of origination may be
slightly lower as a result of the slightly decreased liability for the
lender and any assignees and for possibly decreased compliance costs.
Consumers may benefit from slightly increased access to credit and
lower costs on the affected loans, however these consumers will also
not have the added consumer protections that accompany loans made under
the general ability-to-repay provisions. The lower amount of points and
fees may also lead fewer loans to be above the points and fees triggers
for high-cost mortgages under HOEPA: This should make these loans both
more available and offered at a lower cost to consumers, though
consumers will not have the added consumer protections that apply to
high-cost mortgages. A more detailed discussion of these effects is
contained in the discussion of benefits, costs, and impacts in part VII
of the 2013 ATR Final Rule and the 2013 HOEPA Final Rule.
The Bureau also is revising the commentary addressing when
employees of a creditor or loan originator in certain administrative or
clerical roles (e.g., tellers or greeters) may become ``loan
originators'' under the 2013 Loan Originator Compensation Rule, and
therefore subject to that Rule's requirements applicable to loan
originators, such as qualification requirements and restrictions on
certain compensation practices. As noted above, classifying such
individuals as loan originators would subject them to the requirements
applicable to loan originators with, in the Bureau's view, little
appreciable benefit for consumers. Removing them from this
classification should lower compliance costs including those related to
SAFE Act training, certification requirements, and compensation
restrictions.
The final rule's provisions regarding credit insurance clarify what
constitutes financing of such premiums by a creditor, and is therefore
generally prohibited under the Dodd-Frank Act with regard to credit
insurance on mortgage loans. The final rule will also clarify when
credit insurance premiums are considered to be calculated and paid on a
monthly basis for purposes of a statutory exclusion from the
prohibition for certain credit insurance premium calculation and
payment arrangements. As noted earlier, the Bureau believes that
language in the preamble to the 2013 Loan Originator Compensation Final
Rule led to some confusion among creditors and credit insurance
providers regarding whether credit insurance products were prohibited
under the rule based on how their premiums are calculated. The Bureau
is now clarifying that the prohibition only extends to creditors
financing credit insurance premiums, and providing additional guidance
on what constitutes creditor financing and what is excluded from the
prohibition. Specifically, the Bureau is finalizing a modified version
of the clarification it proposed that provides increased clarity
regarding the application of the rule to certain products--particularly
to insurance with ``level'' or ``levelized'' premiums--and this should
benefit both creditors and providers of credit insurance products. As
discussed above, the modification will, among other things, permit
creditors to continue providing credit insurance products, including
those with ``level'' or ``levelized'' premiums, so long as the premium
is not treated as an obligation owed by the consumer beyond the month
in which it is due. The Bureau also solicited comment on an alternative
clarification, and believes on the basis of comments that the
alternative is less clear and no more protective of consumers than the
provision the Bureau is finalizing.
The final rule will also make two adjustments to provisions that
provide certain exceptions for creditors operating predominantly in
``rural'' or ``underserved'' areas during the next two years, while the
Bureau reexamines the definitions of ``rural'' and ``underserved'' as
it recently announced in the May 2013 ATR Final Rule. Specifically, the
final rule will extend an exception to the general prohibition on
balloon features for high-cost mortgages under the 2013 HOEPA Final
Rule that is available to certain loans made by small creditors who
operate predominantly in rural or underserved areas temporarily to all
small creditors, regardless of their geographic operations. The final
rule will also amend an exemption from the requirement to maintain
escrows for higher-priced mortgage loans under the 2013 Escrow Final
Rule that is available to small creditors that extended more than 50
percent of their total covered transactions secured by a first lien in
``rural'' or ``underserved'' counties during the preceding calendar
year to allow small creditors to qualify for the exemption if they made
more than 50 percent of their covered transactions in ``rural'' or
``underserved'' counties during any of the previous three calendar
years.
As noted above, the Bureau believes expanding the balloon-payment
exception for high-cost mortgages to allow certain small creditors
operating in areas that do not qualify as ``rural'' or ``underserved''
to continue to originate certain high-cost mortgages with balloon
payments during the next two years will benefit creditors who might be
unable to convert to offering adjustable rate mortgages by the time the
final rules take effect in January 2014. The final rule will also
promote consistency between HOEPA requirements and the May 2013 ATR
Final Rule, thereby facilitating compliance for creditors. The Bureau
believes that the final rule will also benefit consumers by increasing
access to credit relative to the
[[Page 60436]]
2013 HOEPA Final Rule. Although balloon loans can in some cases
increase risks for consumers, the Bureau believes that those risks are
appropriately mitigated in these circumstances because the balloon
loans must meet the requirements for qualified mortgages in order to
qualify for the exception. This includes certain restrictions on the
amount of up-front points and fees and various loan features, as well
as a requirement that the loans be held on portfolio by the small
creditor. These requirements reduce the risk of potentially abusive
lending practices and provide strong incentives for the creditor to
underwrite the loan appropriately.
The amendment to the qualifications for the exemption from the
escrow requirements should minimize the disruptions from any changes in
the categorization of certain counties while the Bureau is reevaluating
the underlying definitions. This in turn should lower compliance costs
for certain creditors during the interim period. Consumers may benefit
from greater access to credit and lower costs, but in return will not
receive the benefits of an escrow account. A more detailed discussion
of these effects is contained in the discussion of benefits, costs, and
impacts in part VII of the 2013 Escrows Final Rule.
C. Impact on Depository Institutions and Credit Unions With $10 Billion
or Less in Total Assets, as Described in Section 1026; the Impact of
the Provisions on Consumers in Rural Areas; Impact on Access to
Consumer Financial Products and Services
The 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. The exceptions are
those provisions related to the definitions of ``rural'' and
``underserved'' which directly impact entities with under $2 billion in
total assets. The final rule may have some differential impacts on
consumers in rural areas. To the extent that manufactured housing
loans, higher-priced mortgage loans, high-cost loans or balloon loans
are more prevalent in these areas, the relevant provisions may have
slightly greater impacts. As discussed above, costs for creditors in
these areas should be reduced; consumers should benefit from increased
access to credit and lower costs, though they will not have access to
the heightened protections afforded by various provisions. Given the
nature and limited scope of the changes in the final rule, the Bureau
does not believe that the final rule will reduce consumers' access to
consumer financial products and services.
VIII. 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.\55\ These analyses must
``describe the impact of the proposed rule on small entities.'' \56\ 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,\57\ or if the agency considers a series of closely related
rules as one rule for purposes of complying with the IRFA or FRFA
requirements.\58\ 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.\59\
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\55\ 5 U.S.C. 601 et seq.
\56\ 5 U.S.C. 603(a). For purposes of assessing the impacts of
the proposed rule on small entities, ``small entities'' is defined
in the RFA to include small businesses, small not-for-profit
organizations, and small government jurisdictions. 5 U.S.C. 601(6).
A ``small business'' is determined by application of Small Business
Administration regulations and reference to the North American
Industry Classification System (NAICS) classifications and size
standards. 5 U.S.C. 601(3). A ``small organization'' is any ``not-
for-profit enterprise which is independently owned and operated and
is not dominant in its field.'' 5 U.S.C. 601(4). A ``small
governmental jurisdiction'' is the government of a city, county,
town, township, village, school district, or special district with a
population of less than 50,000. 5 U.S.C. 601(5).
\57\ 5 U.S.C. 605(b).
\58\ 5 U.S.C. 605(c).
\59\ 5 U.S.C. 609.
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This rulemaking is part of a series of rules that have revised and
expanded the regulatory requirements for entities that originate or
service mortgage loans. As noted above, in January, 2013, the Bureau
issued the 2013 ATR Final Rule, 2013 Escrows Final Rule, 2013 HOEPA
Final Rule, 2013 Mortgage Servicing Final Rules, and the 2013 Loan
Originator Compensation Final Rule. Since January 2013, the Bureau also
has issued the May 2013 ATR Final Rule, May 2013 Escrows Final Rule,
and the 2013 Effective Date Final Rule, along with Amendments to the
2013 Mortgage Rules under the Real Estate Settlement Procedures Act
(Regulation X) and Truth in Lending Act (Regulation Z).\60\ The
Supplementary Information to each of these rules set forth the Bureau's
analyses and determinations under the RFA with respect to those rules.
Because these rules qualify as ``a series of closely related rules,''
for purposes of the RFA, the Bureau relies on those analyses and
determines that it has met or exceeded the IRFA and FRFA requirements.
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\60\ 78 FR 44686 (July 24, 2013).
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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
rule and to the extent any changes are substantive, these changes will
not have a material impact on small entities. The provisions related to
servicing do not apply to many small entities under the small servicer
exemption (and to the extent that they do, small entities will benefit
from the same increased flexibility under the proposed provisions as
other servicers), while the provisions related to loan originator
compensation and the ``rural'' and ``underserved'' definitions lower
the regulatory burden and possible compliance costs for affected
entities. Therefore, the undersigned certifies that the rule will not
have a significant impact on a substantial number of small entities.
IX. Paperwork Reduction Act
This final rule amends 12 CFR Part 1002 (Regulation B) which
implements the Equal Credit Opportunity Act, 12 CFR Part 1026
(Regulation Z), which implements the Truth in Lending Act (TILA), and
12 CFR Part 1024 (Regulation X), which implements the Real Estate
Settlement Procedures Act (RESPA). Regulations B, Z and X currently
contain collections of information approved by OMB. The Bureau's OMB
control number for Regulation B is 3170-0013, for Regulation Z is 3170-
0015 and for Regulation X is 3170-0016. However, the Bureau has
determined that this proposed rule would not materially alter these
collections of information or 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 1002
Aged, Banks, Banking, Civil rights, Consumer protection, Credit,
Credit unions, Discrimination, Fair lending, Marital status
discrimination, National banks, National origin discrimination,
Penalties, Race discrimination, Religious discrimination, Reporting and
[[Page 60437]]
recordkeeping requirements, Savings associations, Sex discrimination.
12 CFR Part 1024
Condominiums, Consumer protection, Housing, Mortgage servicing,
Mortgages, Reporting and recordkeeping.
12 CFR Part 1026
Advertising, Consumer protection, Credit, Credit unions, Mortgages,
National banks, Reporting and recordkeeping requirements, Savings
associations, Truth in lending.
Authority and Issuance
For the reasons set forth in the preamble, the Bureau amends 12 CFR
parts 1002, 1024, and 1026 as set forth below:
PART 1002--EQUAL CREDIT OPPORTUNITY ACT (REGULATION B)
0
1. The authority citation for part 1002 continues to read as follows:
Authority: 12 U.S.C. 5512, 5581; 15 U.S.C. 1691b.
0
2. Appendix A to part 1002 is amended by revising paragraph 2.d to read
as follows:
Appendix A to Part 1002--Federal Agencies To Be Listed in Adverse
Action Notices
* * * * *
2. * * *
d. Federal Credit Unions: National Credit Union Administration,
Office of Consumer Protection, 1775 Duke Street, Alexandria, VA
22314.
* * * * *
0
3. In Supplement I to Part 1002, under Section 1002.14, under Paragraph
14(b)(3) Valuation, as amended January 31, 2013, at 78 FR 7250,
effective January 18, 2014, paragraphs 1.i and 3.v are revised and
paragraph 3.vi is added to read as follows:
Supplement I to Part 1002--Official Interpretations
* * * * *
Section 1002.14--Rules on Providing Appraisals and Valuations
* * * * *
14(b)(3) Valuation.
1. * * *
i. A report prepared by an appraiser (whether or not licensed or
certified) including the appraiser's estimate of the property's
value or opinion of value.
* * * * *
3. * * *
v. Reports reflecting property inspections that do not provide
an estimate of the value of the property and are not used to develop
an estimate of the value of the property.
vi. Appraisal reviews that do not include the appraiser's
estimate of the property's value or opinion of value.
* * * * *
PART 1024--REAL ESTATE SETTLEMENT PROCEDURES ACT (REGULATION X)
0
4. The authority citation for part 1024 continues to read as follows:
Authority: 12 U.S.C. 2603-2605, 2607, 2609, 2617, 5512, 5532,
5581.
Subpart A--General
0
5. Section 1024.30, as added February 14, 2013, at 78 FR 10695 is
amended by revising paragraph (a) to read as follows:
Sec. 1024.30 Scope.
(a) In general. Except as provided in paragraphs (b) and (c) of
this section, this subpart applies to any mortgage loan, as that term
is defined in Sec. 1024.31.
* * * * *
0
6. Section 1024.35, as added February 14, 2013, at 78 FR 10695 is
amended by revising paragraph (g)(1)(iii)(B) to read as follows:
Sec. 1024.35 Error resolution procedures.
* * * * *
(g) * * *
(1) * * *
(iii) * * *
(B) The mortgage loan is discharged.
* * * * *
0
7. Section 1024.36, as added February 14, 2013, at 78 FR 10695, is
amended by revising paragraph (f)(1)(v)(B) to read as follows:
Sec. 1024.36 Requests for information.
* * * * *
(f) * * *
(1) * * *
(v) * * *
(B) The mortgage loan is discharged.
* * * * *
0
8. Section 1024.39, as added February 14, 2013, at 78 FR 10695, is
amended by revising paragraphs (b)(1) and (3) to read as follows:
Sec. 1024.39 Early intervention requirements for certain borrowers.
* * * * *
(b) Written notice. (1) Notice required. Except as otherwise
provided in this section, a servicer shall provide to a delinquent
borrower a written notice with the information set forth in paragraph
(b)(2) of this section not later than the 45th day of the borrower's
delinquency. A servicer is not required to provide the written notice
more than once during any 180-day period.
* * * * *
(3) Model clauses. Model clauses MS-4(A), MS-4(B), and MS-4(C), in
appendix MS-4 to this part may be used to comply with the requirements
of this paragraph (b).
* * * * *
0
9. Section 1024.41, as added February 14, 2013, at 78 FR 10695, is
amended by revising paragraph (b)(2)(ii), adding paragraph (b)(3),
revising paragraphs (c)(1)(ii) and (c)(2)(i), adding paragraphs
(c)(2)(iii) and (iv), and revising paragraphs (d), (f)(1), (h)(4), and
(j) to read as follows:
Sec. 1024.41 Loss mitigation procedures.
* * * * *
(b) * * *
(2) * * *
(ii) Time period disclosure. The notice required pursuant to
paragraph (b)(2)(i)(B) of this section must include a reasonable date
by which the borrower should submit the documents and information
necessary to make the loss mitigation application complete.
(3) Determining Protections. To the extent a determination of
whether protections under this section apply to a borrower is made on
the basis of the number of days between when a complete loss mitigation
application is received and when a foreclosure sale occurs, such
determination shall be made as of the date a complete loss mitigation
application is received.
(c) * * *
(1) * * *
(ii) Provide the borrower with a notice in writing stating the
servicer's determination of which loss mitigation options, if any, it
will offer to the borrower on behalf of the owner or assignee of the
mortgage. The servicer shall include in this notice the amount of time
the borrower has to accept or reject an offer of a loss mitigation
program as provided for in paragraph (e) of this section, if
applicable, and a notification, if applicable, that the borrower has
the right to appeal the denial of any loan modification option as well
as the amount of time the borrower has to file such an appeal and any
requirements for making an appeal, as provided for in paragraph (h) of
this section.
(2) * * *
(i) In general. Except as set forth in paragraphs (c)(2)(ii) and
(iii) of this section, a servicer shall not evade the requirement to
evaluate a complete loss mitigation application for all loss mitigation
options available to the borrower by offering a loss mitigation option
based upon an evaluation of any information provided by a borrower in
[[Page 60438]]
connection with an incomplete loss mitigation application.
* * * * *
(iii) Payment forbearance. Notwithstanding paragraph (c)(2)(i) of
this section, a servicer may offer a short-term payment forbearance
program to a borrower based upon an evaluation of an incomplete loss
mitigation application. A servicer shall not make the first notice or
filing required by applicable law for any judicial or non-judicial
foreclosure process, and shall not move for foreclosure judgment or
order of sale, or conduct a foreclosure sale, if a borrower is
performing pursuant to the terms of a payment forbearance program
offered pursuant to this section.
(iv) Facially complete application. If a borrower submits all the
missing documents and information as stated in the notice required
pursuant to Sec. 1026.41(b)(2)(i)(B), or no additional information is
requested in such notice, the application shall be considered facially
complete. If the servicer later discovers additional information or
corrections to a previously submitted document are required to complete
the application, the servicer must promptly request the missing
information or corrected documents and treat the application as
complete for the purposes of paragraphs (f)(2) and (g) of this section
until the borrower is given a reasonable opportunity to complete the
application. If the borrower completes the application within this
period, the application shall be considered complete as of the date it
was facially complete, for the purposes of paragraphs (d), (e), (f)(2),
(g), and (h) of this section, and as of the date the application was
actually complete for the purposes of paragraph (c). A servicer that
complies with this paragraph will be deemed to have fulfilled its
obligation to provide an accurate notice under paragraph (b)(2)(i)(B).
(d) Denial of loan modification options. If a borrower's complete
loss mitigation application is denied for any trial or permanent loan
modification option available to the borrower pursuant to paragraph (c)
of this section, a servicer shall state in the notice sent to the
borrower pursuant to paragraph (c)(1)(ii) of this section the specific
reason or reasons for the servicer's determination for each such trial
or permanent loan modification option and, if applicable, that the
borrower was not evaluated on other criteria.
* * * * *
(f) * * *
(1) Pre-foreclosure review period. A servicer shall not make the
first notice or filing required by applicable law for any judicial or
non-judicial foreclosure process unless:
(i) A borrower's mortgage loan obligation is more than 120 days
delinquent;
(ii) The foreclosure is based on a borrower's violation of a due-
on-sale clause; or
(iii) The servicer is joining the foreclosure action of a
subordinate lienholder.
* * * * *
(h) * * *
(4) Appeal determination. Within 30 days of a borrower making an
appeal, the servicer shall provide a notice to the borrower stating the
servicer's determination of whether the servicer will offer the
borrower a loss mitigation option based upon the appeal and, if
applicable, how long the borrower has to accept or reject such an offer
or a prior offer of a loss mitigation option. A servicer may require
that a borrower accept or reject an offer of a loss mitigation option
after an appeal no earlier than 14 days after the servicer provides the
notice to a borrower. A servicer's determination under this paragraph
is not subject to any further appeal.
* * * * *
(j) Small servicer requirements. A small servicer shall be subject
to the prohibition on foreclosure referral in paragraph (f)(1) of this
section. A small servicer shall not make the first notice or filing
required by applicable law for any judicial or non-judicial foreclosure
process and shall not move for foreclosure judgment or order of sale,
or conduct a foreclosure sale, if a borrower is performing pursuant to
the terms of an agreement on a loss mitigation option.
0
10. Appendix MS-3 to Part 1024, as added February 14, 2013, at 78 FR
10695, is amended by revising the entry for MS-3(D) in the table of
contents at the beginning of the appendix, and revising the heading of
MS-3(D) to read as follows:
Appendix MS-3 to Part 1024
* * * * *
MS-3(D)--Model Form for Renewal or Replacement of Force-Placed
Insurance Notice Containing Information Required by Sec. 1024.37(e)(2)
* * * * *
0
11. In Supplement I to Part 1024, as added February 14, 2013, at 78 FR
10695:
0
a. Under Section 1024.17--Escrow Accounts, the heading for 17(k)(5)(ii)
is revised.
0
b. Under Section 1024.33--Mortgage Servicing Transfers:
0
i. Under Paragraph 33(a) Servicing Disclosure Statement, paragraph 1 is
revised.
0
ii. Under Paragraph 33(c)(1) Payments not considered late, paragraph 2
is revised.
0
c. Under Section 1024.35--Error Resolution Procedures, Paragraph 35(c),
paragraph 2 is revised.
0
d. Under Section 1024.36--Request for Information, Paragraph 36(b),
paragraph 2 is revised.
0
e. Under Section 1024.38--General Servicing Policies, Procedures and
Requirements, Paragraph 38(b)(5),paragraph 3 is added.
0
f. The heading for Section 1024.41 is revised.
0
g. Under Section 1024.41--Loss Mitigation Procedures:
0
i. Paragraphs 41(b)(2), 41(b)(3), 41(c)(2)(iii), and 41(c)(2)(iv) are
added.
0
ii. The heading for paragraphs 41(c) is revised.
0
iii. Under newly designated 41(c), paragraph (c)(2)(iii) is added.
0
iv. The heading Paragraph 41(d)(1) is removed.
0
v. Under paragraph 41(d), paragraph 3 is redesignated as
Paragraph(c)(1), paragraph 4, and paragraph 4 is redesignated as
paragraph 3.
0
vii. Under paragraph 41(d), paragraph 4 is added.
0
viii. Under paragraph 41(f), new paragraph 1 is added.
The revisions and additions read as follows:
Supplement I to Part 1024--Official Bureau Interpretations
* * * * *
Subpart B--Mortgage Settlement and Escrow Accounts
* * * * *
Section 1024.17--Escrow Accounts
* * * * *
17(k)(5)(ii) Inability to disburse funds.
* * * * *
Subpart C--Mortgage Servicing
* * * * *
Section 1024.33--Mortgage Servicing Transfers
* * * * *
33(a) Servicing disclosure statement.
1. Terminology. Although the servicing disclosure statement must
be clear and conspicuous pursuant to Sec. 1024.32(a), Sec.
1024.33(a) does not set forth any specific rules for the format of
the statement, and the specific language of the servicing disclosure
statement in appendix MS-1 is not required to be used. The model
format may be supplemented with additional information that
clarifies or enhances the model language.
* * * * *
[[Page 60439]]
33(c) Borrower payments during transfer of servicing.
33(c)(1) Payments not considered late.
1. * * *
2. Compliance with Sec. 1024.39. A transferee servicer's
compliance with Sec. 1024.39 during the 60-day period beginning on
the effective date of a servicing transfer does not constitute
treating a payment as late for purposes of Sec. 1024.33(c)(1).
Section 1024.35--Error Resolution Procedures
* * * * *
35(c) Contact information for borrowers to assert errors.
* * * * *
2. Notice of an exclusive address. A notice establishing an
address that a borrower must use to assert an error may be included
with a different disclosure, such as a notice of transfer. The
notice is subject to the clear and conspicuous requirement in Sec.
1024.32(a)(1). If a servicer establishes an address that a borrower
must use to assert an error, a servicer must provide that address to
the borrower in the following contexts:
i. The written notice designating the specific address, required
pursuant to Sec. 1024.35(c) and Sec. 1024.36(b).
ii. Any periodic statement or coupon book required pursuant to
12 CFR 1026.41.
iii. Any Web site the servicer maintains in connection with the
servicing of the loan.
iv. Any notice required pursuant to Sec. Sec. 1024.39 or .41
that includes contact information for assistance.
* * * * *
Section 1024.36--Requests for Information
* * * * *
36(b) Contact information for borrowers to request information.
1. * * *
2. Notice of an exclusive address. A notice establishing an
address that a borrower must use to request information may be
included with a different disclosure, such as a notice of transfer.
The notice is subject to the clear and conspicuous requirement in
Sec. 1024.32(a)(1). If a servicer establishes an address that a
borrower must use to request information, a servicer must provide
that address to the borrower in the following contexts:
i. The written notice designating the specific address, required
pursuant to Sec. 1024.35(c) and Sec. 1024.36(b).
ii. Any periodic statement or coupon book required pursuant to
12 CFR 1026.41.
iii. Any Web site the servicer maintains in connection with the
servicing of the loan.
iv. Any notice required pursuant to Sec. Sec. 1024.39 or .41
that includes contact information for assistance.
* * * * *
Section 1024.38--General Servicing Policies, Procedures and
Requirements
38(b) Objectives.
38(b)(5) Informing Borrowers of the Written Error Resolution and
Information Request Procedures.
* * * * *
3. Notices of error incorrectly sent to addresses associated
with submission of loss mitigation applications or the continuity of
contact. A servicer's policies and procedures must be reasonably
designed to ensure that if a borrower incorrectly submits an
assertion of an error to any address given to the borrower in
connection with submission of a loss mitigation application or the
continuity of contact pursuant to Sec. 1024.40, the servicer will
inform the borrower of the procedures for submitting written notices
of error set forth in Sec. 1024.35, including the correct address.
Alternatively, the servicer could redirect such notices to the
correct address.
* * * * *
Section 1024.41--Loss Mitigation Procedures
41(b) Receipt of loss mitigation application.
41(b)(1) Complete loss mitigation application.
* * * * *
4. Diligence requirements. Although a servicer has flexibility
to establish its own requirements regarding the documents and
information necessary for a loss mitigation application, the
servicer must act with reasonable diligence to collect information
needed to complete the application. Further, a servicer must request
information necessary to make a loss mitigation application complete
promptly after receiving the loss mitigation application. Reasonable
diligence includes, without limitation, the following actions:
i. A servicer requires additional information from the
applicant, such as an address or a telephone number to verify
employment; the servicer contacts the applicant promptly to obtain
such information after receiving a loss mitigation application;
ii. Servicing for a mortgage loan is transferred to a servicer
and the borrower makes an incomplete loss mitigation application to
the transferee servicer after the transfer; the transferee servicer
reviews documents provided by the transferor servicer to determine
if information required to make the loss mitigation application
complete is contained within documents transferred by the transferor
servicer to the servicer; and
iii. A servicer offers a borrower a payment forbearance program
based on an incomplete loss mitigation application; the servicer
notifies the borrower that he or she is being offered a payment
forbearance program based on an evaluation of an incomplete
application, and that the borrower has the option of completing the
application to receive a full evaluation of all loss mitigation
options available to the borrower. If a servicer provides such a
notification, the borrower remains in compliance with the payment
forbearance program, and the borrower does not request further
assistance, the servicer could suspend reasonable diligence efforts
until near the end of the payment forbearance program. Near the end
of the program, and prior to the end of the forbearance period, it
may be necessary for the servicer to contact the borrower to
determine if the borrower wishes to complete the application and
proceed with a full loss mitigation evaluation.
* * * * *
41(b)(2)Review of loss mitigation application submission.
41(b)(2)(i) Requirements.
Paragraph 41(b)(2)(i)(B).
1. Later discovery of additional information required to
evaluate application. Even if a servicer has informed a borrower
that an application is complete (or notified the borrower of
specific information necessary to complete an incomplete
application), if the servicer determines, in the course of
evaluating the loss mitigation application submitted by the
borrower, that additional information or a corrected version of a
previously submitted document is required, the servicer must
promptly request the additional information or corrected document
from the borrower pursuant to the reasonable diligence obligation in
Sec. 1024.41(b)(1). See Sec. 1024.41(c)(2)(iv) addressing facially
complete applications.
41(b)(2)(ii) Time period disclosure.
1. Reasonable date. Section 1024.41(b)(2)(ii) requires that a
notice informing a borrower that a loss mitigation application is
incomplete must include a reasonable date by which the borrower
should submit the documents and information necessary to make the
loss mitigation application complete. In determining a reasonable
date, a servicer should select the deadline that preserves the
maximum borrower rights under Sec. 1024.41 based on the milestones
listed below, except when doing so would be impracticable to permit
the borrower sufficient time to obtain and submit the type of
documentation needed. Generally, it would be impracticable for a
borrower to obtain and submit documents in less than seven days. In
setting a date, the following milestones should be considered (if
the date of a foreclosure sale is not known, a servicer may use a
reasonable estimate of the date for which a foreclosure sale may be
scheduled):
i. The date by which any document or information submitted by a
borrower will be considered stale or invalid pursuant to any
requirements applicable to any loss mitigation option available to
the borrower;
ii. The date that is the 120th day of the borrower's
delinquency;
iii. The date that is 90 days before a foreclosure sale;
iv. The date that is 38 days before a foreclosure sale.
41(b)(3) Determining Protections.
1. Foreclosure sale not scheduled. If no foreclosure sale has
been scheduled as of the date that a complete loss mitigation
application is received, the application is considered to have been
received more than 90 days before any foreclosure sale.
2. Foreclosure sale re-scheduled. The protections under Sec.
1024.41 that have been determined to apply to a borrower pursuant to
Sec. 1024.41(b)(3) remain in effect thereafter, even if a
foreclosure sale is later scheduled or rescheduled.
41(c) Evaluation of loss mitigation applications.
* * * * *
41(c)(2) Incomplete loss mitigation application evaluation.
* * * * *
41(c)(2)(iii) Payment forbearance.
[[Page 60440]]
1. Short-term payment forbearance program. The exemption in
Sec. 1024.41(c)(2)(iii) applies to short-term payment forbearance
programs. A payment forbearance program is a loss mitigation option
for which a servicer allows a borrower to forgo making certain
payments or portions of payments for a period of time. A short-term
payment forbearance program allows the forbearance of payments due
over periods of no more than six months. Such a program would be
short-term regardless of the amount of time a servicer allows the
borrower to make up the missing payments.
2. Payment forbearance and incomplete applications. Section
1024.41(c)(2)(iii) allows a servicer to offer a borrower a short-
term payment forbearance program based on an evaluation of an
incomplete loss mitigation application. Such an incomplete loss
mitigation application is still subject to the other obligations in
Sec. 1024.41, including the obligation in Sec. 1024.41(b)(2) to
review the application to determine if it is complete, the
obligation in Sec. 1024.41(b)(1) to exercise reasonable diligence
in obtaining documents and information to complete a loss mitigation
application (see comment 41(b)(1)-4.iii), and the obligation to
provide the borrower with the Sec. 1024.41(b)(2)(i)(B) notice that
the servicer acknowledges the receipt of the application and has
determined the application is incomplete.
3. Payment forbearance and complete applications. Even if a
servicer offers a borrower a payment forbearance program based on an
evaluation of an incomplete loss mitigation application, the
servicer must still comply with all the requirements in Sec.
1024.41 if the borrower completes his or her loss mitigation
application.
41(c)(2)(iv) Facially complete application.
1. Reasonable opportunity. Section 1024.41(c)(2)(iv) requires a
servicer to treat a facially complete application as complete for
the purposes of paragraphs (f)(2) and (g) until the borrower has
been given a reasonable opportunity to complete the application. A
reasonable opportunity requires the servicer to notify the borrower
of what additional information or corrected documents are required,
and to afford the borrower sufficient time to gather the information
and documentation necessary to complete the application and submit
it to the servicer. The amount of time that is sufficient for this
purpose will depend on the facts and circumstances.
2. Borrower fails to complete the application. If the borrower
fails to complete the application within the timeframe provided
under Sec. 1024.41(c)(2)(iv), the application shall be considered
incomplete.
41(d) Denial of loan modification options.
* * * * *
4. Reasons listed. A servicer is required to disclose the actual
reason or reasons for the denial. If a servicer's systems establish
a hierarchy of eligibility criteria and reach the first criterion
that causes a denial but do not evaluate the borrower based on
additional criteria, a servicer complies with the rule by providing
only the reason or reasons with respect to which the borrower was
actually evaluated and rejected as well as notification that the
borrower was not evaluated on other criteria. A servicer is not
required to determine or disclose whether a borrower would have been
denied on the basis of additional criteria if such criteria were not
actually considered.
41(f) Prohibition on foreclosure referral.
1. Prohibited activities. Section 1024.41(f) prohibits a
servicer from making the first notice or filing required by
applicable law for any judicial or non-judicial foreclosure process
under certain circumstances. Whether a document is considered the
first notice or filing is determined on the basis of foreclosure
procedure under the applicable State law.
i. Where foreclosure procedure requires a court action or
proceeding, a document is considered the first notice or filing if
it is the earliest document required to be filed with a court or
other judicial body to commence the action or proceeding (e.g., a
complaint, petition, order to docket, or notice of hearing).
ii. Where foreclosure procedure does not require an action or
court proceeding, such as under a power of sale, a document is
considered the first notice or filing if it is the earliest document
required to be recorded or published to initiate the foreclosure
process.
iii. Where foreclosure procedure does not require any court
filing or proceeding, and also does not require any document to be
recorded or published, a document is considered the first notice or
filing if it is the earliest document that establishes, sets, or
schedules a date for the foreclosure sale.
iv. A document provided to the borrower but not initially
required to be filed, recorded, or published is not considered the
first notice or filing on the sole basis that the document must
later be included as an attachment accompanying another document
that is required to be filed, recorded, or published to carry out a
foreclosure.
* * * * *
PART 1026--TRUTH IN LENDING (REGULATION Z)
0
12. The authority citation for part 1026 continues to read as follows:
Authority: 12 U.S.C. 2601, 2603-2605, 2607, 2609, 2617, 5511,
5512, 5532, 5581; 15 U.S.C. 1601 et seq.
* * * * *
Subpart C--Closed-End Credit
0
13. Section 1026.23 is amended by revising paragraph (a)(3)(ii) to read
as follows:
Sec. 1026.23 Right of rescission.
(a) * * *
(3) * * *
(ii) For purposes of this paragraph (a)(3), the term ``material
disclosures'' means the required disclosures of the annual percentage
rate, the finance charge, the amount financed, the total of payments,
the payment schedule, and the disclosures and limitations referred to
in Sec. Sec. 1026.32(c) and (d) and 1026.43(g).
* * * * *
Subpart E--Special Rules for Certain Home Mortgage Transactions
0
14. Section 1026.31, as amended January 31, 2013, at 78 FR 6856 is
amended by revising paragraphs (g), (h)(1)(iii)(A), and (h)(2)(iii)(A)
to read as follows:
Sec. 1026.31 General rules.
* * * * *
(g) Accuracy of annual percentage rate. For purposes of section
1026.32, the annual percentage rate shall be considered accurate, and
may be used in determining whether a transaction is covered by section
1026.32, if it is accurate according to the requirements and within the
tolerances under section 1026.22 for closed-end credit transactions or
1026.6(a) for open-end credit plans. The finance charge tolerances for
rescission under section 1026.23(g) or (h) shall not apply for this
purpose.
(h) * * *
(1) * * *
(iii) * * *
(A) Make the loan or credit plan satisfy the requirements of 15
U.S.C. 1631-1651; or
* * * * *
(2) * * *
(iii) * * *
(A) Make the loan or credit plan satisfy the requirements of 15
U.S.C. 1631-1651; or
* * * * *
0
15. Section 1026.32 is amended by:
0
a. Revising paragraph (a)(2)(iii), as amended January 31, 2013, at 78
FR 6856;
0
b. Revising paragraph (b)(1)(ii), as amended June 12, 2013, at 78 FR
35430;
0
c. Revising paragraph (b)(1)(vi), as amended January 30, 2013, at 78 FR
6408;
0
d. Revising paragraph (b)(2)(ii), as amended June 12, 2013, at 78 FR
35430; and
0
e. Revising paragraphs (b)(2)(vi), (b)(6)(ii), and (d)(1)(ii)(C), as
amended January 31, 2013, at 78 FR 6856.
The revisions read as follows:
Sec. 1026.32 Requirements for high-cost mortgages.
(a) * * *
(2) * * *
(iii) A transaction originated by a Housing Finance Agency, where
the Housing Finance Agency is the creditor for the transaction; or
* * * * *
(b) * * *
[[Page 60441]]
(1) * * *
(ii) All compensation paid directly or indirectly by a consumer or
creditor to a loan originator, as defined in Sec. 1026.36(a)(1), that
can be attributed to that transaction at the time the interest rate is
set unless:
(A) That compensation is paid by a consumer to a mortgage broker,
as defined in Sec. 1026.36(a)(2), and already has been included in
points and fees under paragraph (b)(1)(i) of this section;
(B) That compensation is paid by a mortgage broker, as defined in
Sec. 1026.36(a)(2), to a loan originator that is an employee of the
mortgage broker;
(C) That compensation is paid by a creditor to a loan originator
that is an employee of the creditor; or
(D) That compensation is paid by a retailer of manufactured homes
to its employee.
* * * * *
(vi) The total prepayment penalty, as defined in paragraph
(b)(6)(i) or (ii) of this section, as applicable, incurred by the
consumer if the consumer refinances the existing mortgage loan, or
terminates an existing open-end credit plan in connection with
obtaining a new mortgage loan, with the current holder of the existing
loan or plan, a servicer acting on behalf of the current holder, or an
affiliate of either.
(2) * * *
(ii) All compensation paid directly or indirectly by a consumer or
creditor to a loan originator, as defined in Sec. 1026.36(a)(1), that
can be attributed to that transaction at the time the interest rate is
set unless:
(A) That compensation is paid by a consumer to a mortgage broker,
as defined in Sec. 1026.36(a)(2), and already has been included in
points and fees under paragraph (b)(2)(i) of this section;
(B) That compensation is paid by a mortgage broker, as defined in
Sec. 1026.36(a)(2), to a loan originator that is an employee of the
mortgage broker;
(C) That compensation is paid by a creditor to a loan originator
that is an employee of the creditor; or
(D) That compensation is paid by a retailer of manufactured homes
to its employee.
* * * * *
(vi) The total prepayment penalty, as defined in paragraph
(b)(6)(i) or (ii) of this section, as applicable, incurred by the
consumer if the consumer refinances an existing closed-end credit
transaction with an open-end credit plan, or terminates an existing
open-end credit plan in connection with obtaining a new open-end credit
plan, with the current holder of the existing transaction or plan, a
servicer acting on behalf of the current holder, or an affiliate of
either;
* * * * *
(6) * * *
(ii) Open-end credit. For an open-end credit plan, prepayment
penalty means a charge imposed by the creditor if the consumer
terminates the open-end credit plan prior to the end of its term, other
than a waived, bona fide third-party charge that the creditor imposes
if the consumer terminates the open-end credit plan sooner than 36
months after account opening.
* * * * *
(d) * * *
(1) * * *
(ii) * * *
(C) A loan that meets the criteria set forth in Sec. Sec.
1026.43(f)(1)(i) through (vi) and 1026.43(f)(2), or the conditions set
forth in Sec. 1026.43(e)(6).
* * * * *
0
16. Section 1026.35 is amended by revising paragraphs (b)(2)(i)(D),
(b)(2)(iii)(A), and (b)(2)(iii)(D)(1) to read as follows:
Sec. 1026.35 Requirements for higher-priced mortgage loans.
* * * * *
(b) * * *
(2) * * *
(i) * * *
(D) A reverse mortgage transaction subject to Sec. 1026.33.
* * * * *
(iii) * * *
(A) During any of the three preceding calendar years, the creditor
extended more than 50 percent of its total covered transactions, as
defined by Sec. 1026.43(b)(1), secured by a first lien, on properties
that are located in counties that are either ``rural'' or
``underserved,'' as set forth in paragraph (b)(2)(iv) of this section;
* * * * *
(D) * * *
(1) Escrow accounts established for first-lien higher-priced
mortgage loans on or after April 1, 2010, and before January 1, 2014;
or
* * * * *
0
17. Section 1026.36, as amended February 15, 2013, at 78 FR 11280, is
amended by revising paragraphs (a)(1)(i)(A) and (B), adding paragraphs
(a)(6), and (b), and revising paragraphs (f)(3)(i) introductory text,
(f)(3)(ii), (i), and (j)(2) to read as follows:
Sec. 1026.36 Prohibited acts or practices and certain requirements
for credit secured by a dwelling.
(a) * * *
(1) * * *
(i) * * *
(A) A person who does not take a consumer credit application or
offer or negotiate credit terms available from a creditor to that
consumer selected based on the consumer's financial characteristics,
but who performs purely administrative or clerical tasks on behalf of a
person who does engage in such activities.
(B) An employee of a manufactured home retailer who does not take a
consumer credit application, offer or negotiate credit terms, or advise
a consumer on credit terms.
* * * * *
(6) Credit terms. For purposes of this section, the term ``credit
terms'' includes rates, fees, and other costs. Credit terms are
selected based on the consumer's financial characteristics when those
terms are selected based on any factors that may influence a credit
decision, such as debts, income, assets, or credit history.
* * * * *
(b) Scope. Paragraphs (c)(1) and (2) of this section apply to
closed-end consumer credit transactions secured by a consumer's
principal dwelling. Paragraph (c)(3) of this section applies to a
consumer credit transaction secured by a dwelling. Paragraphs (d)
through (i) of this section apply to closed-end consumer credit
transactions secured by a dwelling. This section does not apply to a
home equity line of credit subject to Sec. 1026.40, except that
paragraphs (h) and (i) of this section apply to such credit when
secured by the consumer's principal dwelling and paragraph (c)(3)
applies to such credit when secured by a dwelling. Paragraphs (d)
through (i) of this section do not apply to a loan that is secured by a
consumer's interest in a timeshare plan described in 11 U.S.C.
101(53D).
* * * * *
(f) * * *
(3) * * *
(i) Obtain for any individual whom the loan originator organization
hired on or after January 1, 2014 (or whom the loan originator
organization hired before this date but for whom there were no
applicable statutory or regulatory background standards in effect at
the time of hire or before January 1, 2014, used to screen the
individual) and for any individual regardless of when hired who, based
on reliable information known to the loan originator organization,
likely does not meet the standards under Sec. 1026.36(f)(3)(ii),
before the individual acts as a loan originator in a consumer credit
transaction secured by a dwelling:
* * * * *
[[Page 60442]]
(ii) Determine on the basis of the information obtained pursuant to
paragraph (f)(3)(i) of this section and any other information
reasonably available to the loan originator organization, for any
individual whom the loan originator organization hired on or after
January 1, 2014 (or whom the loan originator organization hired before
this date but for whom there were no applicable statutory or regulatory
background standards in effect at the time of hire or before January 1,
2014, used to screen the individual) and for any individual regardless
of when hired who, based on reliable information known to the loan
originator organization, likely does not meet the standards under this
paragraph (f)(3)(ii), before the individual acts as a loan originator
in a consumer credit transaction secured by a dwelling, that the
individual loan originator:
* * * * *
(i) Prohibition on financing credit insurance. (1) A creditor may
not finance, directly or indirectly, any premiums or fees for credit
insurance in connection with a consumer credit transaction secured by a
dwelling (including a home equity line of credit secured by the
consumer's principal dwelling). This prohibition does not apply to
credit insurance for which premiums or fees are calculated and paid in
full on a monthly basis.
(2) For purposes of this paragraph (i):
(i) ``Credit insurance'':
(A) Means credit life, credit disability, credit unemployment, or
credit property insurance, or any other accident, loss-of-income, life,
or health insurance, or any payments directly or indirectly for any
debt cancellation or suspension agreement or contract, but
(B) Excludes credit unemployment insurance for which the
unemployment insurance premiums are reasonable, the creditor receives
no direct or indirect compensation in connection with the unemployment
insurance premiums, and the unemployment insurance premiums are paid
pursuant to a separate insurance contract and are not paid to an
affiliate of the creditor;
(ii) A creditor finances premiums or fees for credit insurance if
it provides a consumer the right to defer payment of a credit insurance
premium or fee owed by the consumer beyond the monthly period in which
the premium or fee is due; and
(iii) Credit insurance premiums or fees are calculated on a monthly
basis if they are determined mathematically by multiplying a rate by
the actual monthly outstanding balance.
(j) * * *
(2) For purposes of this paragraph (j), ``depository institution''
has the meaning in section 1503(3) of the SAFE Act, 12 U.S.C. 5102(3).
For purposes of this paragraph (j), ``subsidiary'' has the meaning in
section 3 of the Federal Deposit Insurance Act, 12 U.S.C. 1813.
* * * * *
0
18. Section 1026.43, as added January 30, 2013, at 78 FR 6408, is
amended by revising paragraphs (a)(2) and (e)(4)(ii) introductory text
and (e)(4)(ii)(C) to read as follows:
Sec. 1026.43 Minimum standards for transactions secured by a
dwelling.
(a) * * *
(2) A mortgage transaction secured by a consumer's interest in a
timeshare plan, as defined in 11 U.S.C. 101(53(D); or
* * * * *
(e) * * *
(4) * * *
(ii) Eligible loans. A qualified mortgage under this paragraph
(e)(4) must be one of the following at consummation:
* * * * *
(C) A loan that is eligible to be guaranteed by the U.S. Department
of Veterans Affairs;
* * * * *
0
19. Appendix H to Part 1026, as amended February 14, 2013, at 78 FR
10901, is amended by revising the entry for H-30(C) in the table of
contents at the beginning of the appendix, and revising the heading of
H-30(C) to read as follows:
Appendix H to Part 1026--Closed-End Model Forms and Clauses
* * * * *
H-30(C) Sample Form of Periodic Statement for a Payment-Option Loan
* * * * *
0
20. In Supplement I to Part 1026:
0
a. Under Section 1026.25--Record Retention
0
i. Under Paragraph 25(c)(2) Records related to requirements for loan
originator compensation, as amended February 15, 2013, at 78 FR 11280,
paragraph 1 is revised.
0
ii. Under Paragraph 25(c)(3) Records related to minimum standards for
transactions secured by a dwelling, as added January 30, 2013, at 78 FR
6408, paragraph 1 is revised.
0
b. Under Section 1026.32--Requirements for High-Cost Mortgages:
0
i. Under Paragraph 32(b)(1), as amended January 30, 2013, at 78 FR
6408, paragraph 2 is added.
0
ii. Under Paragraph 32(b)(1)(ii), as amended June 12, 2013, at 78 FR
35430, paragraph 5 is added.
0
iii. Paragraph 32(b)(2) and paragraph 1 are added.
0
iv. Under Paragraph 32(b)(2)(i), as amended January 30, 2013, at 78 FR
6408, paragraph 1 is revised.
0
v. Under Paragraph 32(b)(2)(i)(D), as amended January 30, 2013, at 78
FR 6408, paragraph 1 is revised.
0
vi. Under Paragraph 32(d)(8)(ii), as amended January 30, 2013, at 78 FR
6408, paragraph 1 is revised.
0
c. Under Section 1026.34--Prohibited Acts or Practices in Connection
with High-Cost Mortgages, under Paragraph 34(a)(5)(v), as amended
January 30, 2013, at 78 FR 6408, paragraph 1 is revised.
0
d. Under Section 1026.35--Requirements for Higher-Priced Mortgage Loans
0
i. Under Paragraph 35(b)(2)(iii), paragraph 1 is revised.
0
ii. Under Paragraph 35(b)(2)(iii)(D(1), paragraph 1 is revised.
0
e. Under Section 1026.36--Prohibited Acts or Practices in Connection
With Credit Secured by a Dwelling
0
i. Under Paragraph 36(a), as amended February 15, 2013, at 78 FR 11280,
paragraphs 1, 4, and 5 are revised.
0
ii. Paragraph 36(a)(1)(i)(B) and paragraph 1 are added.
0
iii. Under Paragraph 36(b), as amended February 15, 2013, at 78 FR
11280, paragraph 1 is revised.
0
iv. Under Paragraph 36(d)(1), as amended February 15, 2013, at 78 FR
11280, paragraphs 1, 3, and 6 are revised.
0
v. Under Paragraph 36(f)(3)(i), as amended February 15, 2013, at 78 FR
11280, paragraphs 1 and 2 are revised.
0
vi. Under Paragraph 36(f)(3)(ii), as amended February 15, 2013, at 78
FR 11280, paragraphs 1 and 2 are revised.
0
f. Under Section 1026.41--Periodic Statements for Residential Mortgage
Loans
0
i. Under Paragraph 41(b), as amended February 14, 2013, at 78 FR 10901,
paragraph 1 is revised.
0
ii. Under Paragraph 41(d), as amended February 14, 2013, at 78 FR
10901, paragraph 3 is revised.
0
iii. Under Paragraph 41(d)(4), as amended February 14, 2013, at 78 FR
10901, paragraph 1 is revised.
0
iv. Under Paragraph 41(e)(3), as amended February 14, 2013, at 78 FR
10901, paragraph 1 is revised.
0
v. Under Paragraph 41(e)(4)(iii), as amended February 14, 2013, at 78
FR 10901, paragraph 1 is revised.
0
g. Under Section 1026.43--Minimum Standards for Transactions Secured by
a Dwelling:
0
i. Under Paragraph 43(b)(8), as added January 30, 2013, at 78 FR 6408,
paragraph 4 is revised.
[[Page 60443]]
0
ii. Under Paragraph 43(c)(3), as added January 30, 2013, at 78 FR 6408,
paragraph 6 is revised.
0
iii. Under Paragraph 43(e)(4), as added January 30, 2013, at 78 FR
6408, paragraph 1 is revised.
0
iv. Under Paragraph 43(e)(5), as amended June 12, 2013, at 78 FR 35430,
paragraph 8 is revised.
0
v. Under Paragraph 43(f)(2)(iii), as added January 30, 2013, at 78 FR
6408, paragraph 1 is revised.
The revisions read as follows:
Supplement I to Part 1026--Official Interpretations
* * * * *
Subpart D--Miscellaneous
Section 1026.25--Record Retention
* * * * *
25(c) Records related to certain requirements for mortgage
loans.
25(c)(2) Records related to requirements for loan originator
compensation.
1. * * *
i. Records sufficient to evidence payment and receipt of
compensation. Records are sufficient to evidence payment and receipt
of compensation if they demonstrate the following facts: The nature
and amount of the compensation; that the compensation was paid, and
by whom; that the compensation was received, and by whom; and when
the payment and receipt of compensation occurred. The compensation
agreements themselves are to be retained in all circumstances
consistent with Sec. 1026.25(c)(2)(i). The additional records that
are sufficient necessarily will vary on a case-by-case basis
depending on the facts and circumstances, particularly with regard
to the nature of the compensation. For example, if the compensation
is in the form of a salary, records to be retained might include
copies of required filings under the Internal Revenue Code that
demonstrate the amount of the salary. If the compensation is in the
form of a contribution to or a benefit under a designated tax-
advantaged plan, records to be maintained might include copies of
required filings under the Internal Revenue Code or other applicable
Federal law relating to the plan, copies of the plan and amendments
thereto in which individual loan originators participate and the
names of any loan originators covered by the plan, or determination
letters from the Internal Revenue Service regarding the plan. If the
compensation is in the nature of a commission or bonus, records to
be retained might include a settlement agent ``flow of funds''
worksheet or other written record or a creditor closing instructions
letter directing disbursement of fees at consummation. Where a loan
originator is a mortgage broker, a disclosure of compensation or
broker agreement required by applicable State law that recites the
broker's total compensation for a transaction is a record of the
amount actually paid to the loan originator in connection with the
transaction, unless actual compensation deviates from the amount in
the disclosure or agreement. Where compensation has been decreased
to defray the cost, in whole or part, of an unforeseen increase in
an actual settlement cost over an estimated settlement cost
disclosed to the consumer pursuant to section 5(c) of RESPA (or
omitted from that disclosure), records to be maintained are those
documenting the decrease in compensation and reasons for it.
ii. Compensation agreement. For purposes of Sec. 1026.25(c)(2),
a compensation agreement includes any agreement, whether oral,
written, or based on a course of conduct that establishes a
compensation arrangement between the parties (e.g., a brokerage
agreement between a creditor and a mortgage broker or provisions of
employment contracts between a creditor and an individual loan
originator employee addressing payment of compensation). Where a
compensation agreement is oral or based on a course of conduct and
cannot itself be maintained, the records to be maintained are those,
if any, evidencing the existence or terms of the oral or course of
conduct compensation agreement. Creditors and loan originators are
free to specify what transactions are governed by a particular
compensation agreement as they see fit. For example, they may
provide, by the terms of the agreement, that the agreement governs
compensation payable on transactions consummated on or after some
future effective date (in which case, a prior agreement governs
transactions consummated in the meantime). For purposes of applying
the record retention requirement to transaction-specific
commissions, the relevant compensation agreement for a given
transaction is the agreement pursuant to which compensation for that
transaction is determined.
* * * * *
25(c)(3) Records related to minimum standards for transactions
secured by a dwelling.
1. Evidence of compliance with repayment ability provisions. A
creditor must retain evidence of compliance with Sec. 1026.43 for
three years after the date of consummation of a consumer credit
transaction covered by that section. (See comment 25(c)(3)-2 for
guidance on the retention of evidence of compliance with the
requirement to offer a consumer a loan without a prepayment penalty
under Sec. 1026.43(g)(3).) If a creditor must verify and document
information used in underwriting a transaction subject to Sec.
1026.43, the creditor shall retain evidence sufficient to
demonstrate compliance with the documentation requirements of the
rule. Although a creditor need not retain actual paper copies of the
documentation used in underwriting a transaction subject to Sec.
1026.43, to comply with Sec. 1026.25(c)(3), the creditor must be
able to reproduce such records accurately. For example, if the
creditor uses a consumer's Internal Revenue Service (IRS) Form W-2
to verify the consumer's income, the creditor must be able to
reproduce the IRS Form W-2 itself, and not merely the income
information that was contained in the form.
* * * * *
Subpart E--Special Rules for Certain Home Mortgage Transactions
* * * * *
Section 1026.32--Requirements for High-Cost Mortgages
* * * * *
32(b) Definitions.
* * * * *
Paragraph 32(b)(1).
* * * * *
2. Charges paid by parties other than the consumer. Under Sec.
1026.32(b)(1), points and fees may include charges paid by third
parties in addition to charges paid by the consumer. Specifically,
charges paid by third parties that fall within the definition of
points and fees set forth in Sec. 1026.32(b)(1)(i) through (vi) are
included in points and fees. In calculating points and fees in
connection with a transaction, creditors may rely on written
statements from the consumer or third party paying for a charge,
including the seller, to determine the source and purpose of any
third-party payment for a charge.
i. Examples--included in points and fees. A creditor's
origination charge paid by a consumer's employer on the consumer's
behalf that is included in the finance charge as defined in Sec.
1026.4(a) or (b), must be included in points and fees under Sec.
1026.32(b)(1)(i), unless other exclusions under Sec. 1026.4 or
Sec. 1026.32(b)(1)(i)(A) through (F) apply. In addition, consistent
with comment 32(b)(1)(i)-1, a third-party payment of an item
excluded from the finance charge under a provision of Sec. 1026.4,
while not included in the total points and fees under Sec.
1026.32(b)(1)(i), may be included under Sec. 1026.32(b)(1)(ii)
through (vi). For example, a payment by a third party of a creditor-
imposed fee for an appraisal performed by an employee of the
creditor is included in points and fees under Sec.
1026.32(b)(1)(iii). See comment 32(b)(1)(i)-1.
ii. Examples--not included in points and fees. A charge paid by
a third party is not included in points and fees under Sec.
1026.32(b)(1)(i) if the exclusions to points and fees in Sec.
1026.32(b)(1)(i)(A) through (F) apply. For example, certain bona
fide third-party charges not retained by the creditor, loan
originator, or an affiliate of either are excluded from points and
fees under Sec. 1026.32(b)(1)(i)(D), regardless of whether those
charges are paid by a third party or the consumer.
iii. Seller's points. Seller's points, as described in Sec.
1026.4(c)(5) and commentary, are excluded from the finance charge
and thus are not included in points and fees under Sec.
1026.32(b)(1)(i). However, charges paid by the seller for items
listed in Sec. 1026.32(b)(1)(ii) through (vi) are included in
points and fees.
iv. Creditor-paid charges. Charges that are paid by the
creditor, other than loan originator compensation paid by the
creditor that is required to be included in points and fees under
Sec. 1026.32(b)(1)(ii), are excluded from points and fees. See
[[Page 60444]]
Sec. Sec. 1026.32(b)(1)(i)(A), 1026.4(a), and comment 4(a)-(2).
* * * * *
Paragraph 32(b)(1)(ii).
* * * * *
4. Loan originator compensation--calculating loan originator
compensation in connection with other charges or payments included
in the finance charge or made to loan originators.
* * * * *
iii. Creditor's origination fees--loan originator not employed
by creditor. Compensation paid by a creditor to a loan originator
who is not employed by the creditor is included in the calculation
of points and fees under Sec. 1026.32(b)(1)(ii). Such compensation
is included in points and fees in addition to any origination fees
or charges paid by the consumer to the creditor that are included in
points and fees under Sec. 1026.32(b)(1)(i). For example, assume
that a consumer pays to the creditor a $3,000 origination fee and
that the creditor pays a mortgage broker $1,500 in compensation
attributed to the transaction. Assume further that the consumer pays
no other charges to the creditor that are included in points and
fees under Sec. 1026.32(b)(1)(i) and that the mortgage broker
receives no other compensation that is included in points and fees
under Sec. 1026.32(b)(1)(ii). For purposes of calculating points
and fees, the $3,000 origination fee is included in points and fees
under Sec. 1026.32(b)(1)(i) and the $1,500 in loan originator
compensation is included in points and fees under Sec.
1026.32(b)(1)(ii), equaling $4,500 in total points and fees,
provided that no other points and fees are paid or compensation
received.
* * * * *
5. Loan originator compensation--calculating loan originator
compensation in manufactured home transactions. i. If a manufactured
home retailer qualifies as a loan originator under Sec.
1026.36(a)(1), then compensation that is paid by a consumer or
creditor to the retailer for loan origination activities and that
can be attributed to the transaction at the time the interest rate
is set must be included in points and fees. For example, assume a
manufactured home retailer takes a residential mortgage loan
application and is entitled to receive at consummation a $1,000
commission from the creditor for taking the mortgage loan
application. The $1,000 commission is loan originator compensation
that must be included in points and fees.
ii. If the creditor has knowledge that the sales price of a
manufactured home includes loan originator compensation, then such
compensation can be attributed to the transaction at the time the
interest rate is set and therefore is included in points and fees
under Sec. 1026.32(b)(1)(ii). However, the creditor is not required
to investigate the sales price of a manufactured home to determine
if the sales price includes loan originator compensation.
iii. As provided in Sec. 1026.32(b)(1)(ii)(D), compensation
paid by a manufactured home retailer to its employees is not
included in points and fees under Sec. 1026.32(b)(1)(ii).
* * * * *
Paragraph 32(b)(2).
1. See comment 32(b)(1)-2 for guidance concerning the inclusion
in points and fees of charges paid by parties other than the
consumer.
* * * * *
Paragraph 32(b)(2)(i).
1. Finance charge. The points and fees calculation under Sec.
1026.32(b)(2) generally does not include items that are included in
the finance charge but that are not known until after account
opening, such as minimum monthly finance charges or charges based on
account activity or inactivity. Transaction fees also generally are
not included in the points and fees calculation, except as provided
in Sec. 1026.32(b)(2)(vi). See comments 32(b)(1)-1 and 32(b)(1)(i)-
1 for additional guidance concerning the calculation of points and
fees.
* * * * *
Paragraph 32(b)(2)(i)(D).
1. For purposes of Sec. 1026.32(b)(2)(i)(D), the term loan
originator means a loan originator as that term is defined in Sec.
1026.36(a)(1), without regard to Sec. 1026.36(a)(2). See comments
32(b)(1)(i)(D)-1 through -4 for further guidance concerning the
exclusion of bona fide third-party charges from points and fees.
* * * * *
Paragraph 32(d)(8)(ii).
1. Failure to meet repayment terms. A creditor may terminate a
loan or open-end credit agreement and accelerate the balance when
the consumer fails to meet the repayment terms resulting in a
default in payment under the agreement; a creditor may do so,
however, only if the consumer actually fails to make payments
resulting in a default in the agreement. For example, a creditor may
not terminate and accelerate if the consumer, in error, sends a
payment to the wrong location, such as a branch rather than the main
office of the creditor. If a consumer files for or is placed in
bankruptcy, the creditor may terminate and accelerate under Sec.
1026.32(d)(8)(ii) if the consumer fails to meet the repayment terms
resulting in a default of the agreement. Section 1026.32(d)(8)(ii)
does not override any State or other law that requires a creditor to
notify a consumer of a right to cure, or otherwise places a duty on
the creditor before it can terminate a loan or open-end credit
agreement and accelerate the balance.
* * * * *
Section 1026.34--Prohibited Acts or Practices in Connection With
High-Cost Mortgages
* * * * *
34(a)(5) Pre-loan counseling.
* * * * *
Paragraph 34(a)(5)(v) Counseling fees.
1. Financing. Section 1026.34(a)(5)(v) does not prohibit a
creditor from financing the counseling fee as part of the
transaction for a high-cost mortgage, if the fee is a bona fide
third-party charge as provided by Sec. 1026.32(b)(1)(i)(D) and
(b)(2)(i)(D).
* * * * *
Section 1026.35--Requirements for Higher-Priced Mortgage Loans
* * * * *
35(b) Escrow accounts.
* * * * *
35(b)(2) Exemptions.
* * * * *
Paragraph 35(b)(2)(iii).
1. Requirements for exemption. Under Sec. 1026.35(b)(2)(iii),
except as provided in Sec. 1026.35(b)(2)(v), a creditor need not
establish an escrow account for taxes and insurance for a higher-
priced mortgage loan, provided the following four conditions are
satisfied when the higher-priced mortgage loan is consummated:
i. During any of the three preceding calendar years, more than
50 percent of the creditor's total first-lien covered transactions,
as defined in Sec. 1026.43(b)(1), are secured by properties located
in counties that are either ``rural'' or ``underserved,'' as set
forth in Sec. 1026.35(b)(2)(iv). Pursuant to that section, a
creditor may rely as a safe harbor on a list of counties published
by the Bureau to determine whether counties in the United States are
rural or underserved for a particular calendar year. Thus, for
example, if a creditor originated 90 covered transactions, as
defined by Sec. 1026.43(b)(1), secured by a first lien, during
2011, 2012, or 2013, the creditor meets this condition for an
exemption in 2014 if at least 46 of those transactions in one of
those three calendar years are secured by first liens on properties
that are located in such counties.
* * * * *
Paragraph 35(b)(2)(iii)(D)(1).
1. Exception for certain accounts. Escrow accounts established
for first-lien higher-priced mortgage loans for which applications
were received on or after April 1, 2010, and before January 1, 2014,
are not counted for purposes of Sec. 1026.35(b)(2)(iii)(D). For
applications received on and after January 1, 2014, creditors,
together with their affiliates, that establish new escrow accounts,
other than those described in Sec. 1026.35(b)(2)(iii)(D)(2), do not
qualify for the exemption provided under Sec. 1026.35(b)(2)(iii).
Creditors, together with their affiliates, that continue to maintain
escrow accounts established for first-lien higher-priced mortgage
loans for which applications were received on or after April 1,
2010, and before January 1, 2014, still qualify for the exemption
provided under Sec. 1026.35(b)(2)(iii) so long as they do not
establish new escrow accounts for transactions for which they
received applications on or after January 1, 2014, other than those
described in Sec. 1026.35(b)(2)(iii)(D)(2), and they otherwise
qualify under Sec. 1026.35(b)(2)(iii).
* * * * *
Section 1026.36--Prohibited Acts or Practices in Connection With
Credit Secured by a Dwelling
36(a) Definitions.
1. Meaning of loan originator. i. General. A. Section 1026.36(a)
defines the set of activities or services any one of which, if done
for or in the expectation of compensation or gain, makes the person
doing such activities or
[[Page 60445]]
performing such services a loan originator, unless otherwise
excluded. The scope of activities covered by the term loan
originator includes:
1. Referring a consumer to any person who participates in the
origination process as a loan originator. Referring is an activity
included under each of the activities of offering, arranging, or
assisting a consumer in obtaining or applying to obtain an extension
of credit. Referring includes any oral or written action directed to
a consumer that can affirmatively influence the consumer to select a
particular loan originator or creditor to obtain an extension of
credit when the consumer will pay for such credit. See comment
36(a)-4 with respect to certain activities that do not constitute
referring.
2. Arranging a credit transaction, including initially
contacting and orienting the consumer to a particular loan
originator's or creditor's origination process or particular credit
terms that are or may be available to that consumer selected based
on the consumer's financial characteristics, assisting the consumer
to apply for credit, taking an application, offering particular
credit terms to the consumer selected based on the consumer's
financial characteristics, negotiating credit terms, or otherwise
obtaining or making an extension of credit.
3. Assisting a consumer in obtaining or applying for consumer
credit by advising on particular credit terms that are or may be
available to that consumer based on the consumer's financial
characteristics, filling out an application form, preparing
application packages (such as a credit application or pre-approval
application or supporting documentation), or collecting application
and supporting information on behalf of the consumer to submit to a
loan originator or creditor. A person who, acting on behalf of a
loan originator or creditor, collects information or verifies
information provided by the consumer, such as by asking the consumer
for documentation to support the information the consumer provided
or for the consumer's authorization to obtain supporting documents
from third parties, is not collecting information on behalf of the
consumer. See also comment 36(a)z4.i through iv with respect to
application-related administrative and clerical tasks and comment
36(a)-1.v with respect to third-party advisors.
4. Presenting particular credit terms for the consumer's
consideration that are selected based on the consumer's financial
characteristics, or communicating with a consumer for the purpose of
reaching a mutual understanding about prospective credit terms.
* * * * *
4. * * *
i. Application-related administrative and clerical tasks. The
definition of loan originator does not include a loan originator's
or creditor's employee who provides a credit application form from
the entity for which the person works to the consumer for the
consumer to complete or, without assisting the consumer in
completing the credit application, processing or analyzing the
information, or discussing particular credit terms that are or may
be available from a creditor or loan originator to that consumer
selected based on the consumer's financial characteristics, delivers
the credit application from a consumer to a loan originator or
creditor. A person does not assist the consumer in completing the
application if the person explains to the consumer filling out the
application the contents of the application or where particular
consumer information is to be provided, or generally describes the
credit application process to a consumer without discussing
particular credit terms that are or may be available from a creditor
or loan originator to that consumer selected based on the consumer's
financial characteristics.
ii. Responding to consumer inquiries and providing general
information. The definition of loan originator does not include
persons who:
A. * * *
B. As employees of a creditor or loan originator, provide loan
originator or creditor contact information of the loan originator or
creditor entity for which he or she works, or of a person who works
for that the same entity to a consumer, provided that the person
does not discuss particular credit terms that are or may be
available from a creditor or loan originator to that consumer
selected based on the consumer's financial characteristics and does
not direct the consumer, based on his or her assessment of the
consumer's financial characteristics, to a particular loan
originator or particular creditor seeking to originate credit
transactions to consumers with those financial characteristics;
C. Describe other product-related services (for example, persons
who describe optional monthly payment methods via telephone or via
automatic account withdrawals, the availability and features of
online account access, the availability of 24-hour customer support,
or free mobile applications to access account information); or
D. * * *
iii. Loan processing. The definition of loan originator does not
include persons who, acting on behalf of a loan originator or a
creditor:
A. * * *
B. * * *
C. Coordinate consummation of the credit transaction or other
aspects of the credit transaction process, including by
communicating with a consumer about process deadlines and documents
needed at consummation, provided that any communication that
includes a discussion about credit terms available from a creditor
to that consumer selected based on the consumer's financial
characteristics only confirms credit terms already agreed to by the
consumer;
* * * * *
iv. Underwriting, credit approval, and credit pricing. The
definition of loan originator does not include persons who:
A. * * *
B. Approve particular credit terms or set particular credit
terms available from a creditor to that consumer selected based on
the consumer's financial characteristics in offer or counter-offer
situations, provided that only a loan originator communicates to or
with the consumer regarding these credit terms, an offer, or
provides or engages in negotiation, a counter-offer, or approval
conditions; or
* * * * *
5. Compensation.
* * * * *
iv. Amounts for charges for services that are not loan
origination activities.
A. * * *
B. Compensation includes any salaries, commissions, and any
financial or similar incentive to an individual loan originator,
regardless of whether it is labeled as payment for services that are
not loan origination activities.
* * * * *
36(a)(1)(i)(B) Employee of a retailer of manufactured homes.
1. The definition of loan originator does not include an
employee of a manufactured home retailer that ``assists'' a consumer
in obtaining or applying for consumer credit as defined in comment
36(a)-1.i.A.3, provided the employee does not advise the consumer on
specific credit terms, or otherwise engage in loan originator
activity as defined in Sec. 1026.36(a)(1). The following examples
describe activities that, in the absence of other activities, do not
define a manufactured home retailer employee as a loan originator:
i. Generally describing the credit application process to a
consumer without advising on credit terms available from a creditor.
ii. Preparing residential mortgage loan packages, which means
compiling and processing loan application materials and supporting
documentation, and providing general application instructions to
consumers so consumers can complete an application, without
interacting or communicating with the consumer regarding transaction
terms, but not filling out a consumer's application, inputting the
information into an online application or other automated system, or
taking information from the consumer over the phone to complete the
application.
iii. Collecting information on behalf of the consumer with
regard to a residential mortgage loan. Collecting information ``on
behalf of the consumer'' would include gathering information or
supporting documentation from third parties on behalf of the
consumer to provide to the consumer, for the consumer then to
provide in the application or for the consumer to submit to the loan
originator or creditor.
iv. Providing or making available general information about
creditors or loan originators that may offer financing for
manufactured homes in the consumer's general area, when doing so
does not otherwise amount to ``referring'' as defined in comment
36(a)-1.i.A.1. This includes making available, in a neutral manner,
general brochures or information about the different creditors or
loan originators that may offer financing to a consumer, but does
not include recommending a particular creditor or loan originator or
otherwise influencing the consumer's decision.
* * * * *
36(b) Scope.
1. Scope of coverage. Section 1026.36(c)(1) and (c)(2) applies
to closed-end consumer
[[Page 60446]]
credit transactions secured by a consumer's principal dwelling.
Section 1026.36(c)(3) applies to a consumer credit transaction,
including home equity lines of credit under Sec. 1026.40, secured
by a consumer's dwelling. Paragraphs (h) and (i) of Sec. 1026.36
apply to home equity lines of credit under Sec. 1026.40 secured by
a consumer's principal dwelling. Paragraphs (d), (e), (f), (g), (h),
and (i) of Sec. 1026.36 apply to closed-end consumer credit
transactions secured by a dwelling. Closed-end consumer credit
transactions include transactions secured by first or subordinate
liens, and reverse mortgages that are not home equity lines of
credit under Sec. 1026.40. See Sec. 1026.36(b) for additional
restrictions on the scope of Sec. 1026.36, and Sec. Sec. 1026.1(c)
and 1026.3(a) and corresponding commentary for further discussion of
extensions of credit subject to Regulation Z.
* * * * *
36(d) Prohibited payments to loan originators.
* * * * *
36(d)(1) Payments based on a term of a transaction.
1. * * *
ii. Single or multiple transactions. The prohibition on payment
and receipt of compensation under Sec. 1026.36(d)(1)(i) encompasses
compensation that directly or indirectly is based on the terms of a
single transaction of a single individual loan originator, the terms
of multiple transactions by that single individual loan originator,
or the terms of multiple transactions by multiple individual loan
originators. Compensation to an individual loan originator that is
based upon profits determined with reference to a mortgage-related
business is considered compensation that is based on the terms of
multiple transactions by multiple individual loan originators. For
clarification about the exceptions permitting compensation based
upon profits determined with reference to mortgage-related business
pursuant to either a designated tax-advantaged plan or a non-
deferred profits-based compensation plan, see comment 36(d)(1)-3.
For clarification about ``mortgage-related business,'' see comments
36(d)(1)-3.v.B and -3.v.E.
A. Assume that a creditor pays a bonus to an individual loan
originator out of a bonus pool established with reference to the
creditor's profits and the profits are determined with reference to
the creditor's revenue from origination of closed-end consumer
credit transactions secured by a dwelling. In such instance, the
bonus is considered compensation that is based on the terms of
multiple transactions by multiple individual loan originators.
Therefore, the bonus is prohibited under Sec. 1026.36(d)(1)(i),
unless it is otherwise permitted under Sec. 1026.36(d)(1)(iv).
B. Assume that an individual loan originator's employment
contract with a creditor guarantees a quarterly bonus in a specified
amount conditioned upon the individual loan originator meeting
certain performance benchmarks (e.g., volume of originations
monthly). A bonus paid following the satisfaction of those
contractual conditions is not directly or indirectly based on the
terms of a transaction by an individual loan originator, the terms
of multiple transactions by that individual loan originator, or the
terms of multiple transactions by multiple individual loan
originators under Sec. 1026.36(d)(1)(i) as clarified by this
comment 36(d)(1)-1.ii, because the creditor is obligated to pay the
bonus, in the specified amount, regardless of the terms of
transactions of the individual loan originator or multiple
individual loan originators and the effect of those terms of
multiple transactions on the creditor's profits. Because this type
of bonus is not directly or indirectly based on the terms of
multiple transactions by multiple individual loan originators, as
described in Sec. 1026.36(d)(1)(i) (as clarified by this comment
36(d)(1)-1.ii), it is not subject to the 10-percent total
compensation limit described in Sec. 1026.36(d)(1)(iv)(B)(1).
iii. * * *
* * * * *
D. The fees and charges described above in paragraphs B and C
can only be a term of a transaction if the fees or charges are
required to be disclosed in the Good Faith Estimate, the HUD-1, or
the HUD-1A (and subsequently in any integrated disclosures
promulgated by the Bureau under TILA section 105(b) (15 U.S.C.
1604(b)) and RESPA section 4 (12 U.S.C. 2603) as amended by sections
1098 and 1100A of the Dodd-Frank Act).
* * * * *
3. Interpretation of Sec. 1026.36(d)(1)(iii) and (iv). Subject
to certain restrictions, Sec. 1026.36(d)(1)(iii) and Sec.
1026.36(d)(1)(iv) permit contributions to or benefits under
designated tax-advantaged plans and compensation under a non-
deferred profits-based compensation plan even if the contributions,
benefits, or compensation, respectively, are based on the terms of
multiple transactions by multiple individual loan originators.
i. Designated tax-advantaged plans. Section 1026.36(d)(1)(iii)
permits an individual loan originator to receive, and a person to
pay, compensation in the form of contributions to a defined
contribution plan or benefits under a defined benefit plan provided
the plan is a designated tax-advantaged plan (as defined in Sec.
1026.36(d)(1)(iii)), even if contributions to or benefits under such
plans are directly or indirectly based on the terms of multiple
transactions by multiple individual loan originators. In the case of
a designated tax-advantaged plan that is a defined contribution
plan, Sec. 1026.36(d)(1)(iii) does not permit the contribution to
be directly or indirectly based on the terms of that individual loan
originator's transactions. A defined contribution plan has the
meaning set forth in Internal Revenue Code section 414(i), 26 U.S.C.
414(i). A defined benefit plan has the meaning set forth in Internal
Revenue Code section 414(j), 26 U.S.C. 414(j).
ii. Non-deferred profits-based compensation plans. As used in
Sec. 1026.36(d)(1)(iv), a ``non-deferred profits-based compensation
plan'' is any compensation arrangement where an individual loan
originator may be paid variable, additional compensation based in
whole or in part on the mortgage-related business profits of the
person paying the compensation, any affiliate, or a business unit
within the organizational structure of the person or the affiliate,
as applicable (i.e., depending on the level within the person's or
affiliate's organization at which the non-deferred profits-based
compensation plan is established). A non-deferred profits-based
compensation plan does not include a designated tax-advantaged plan
or other forms of deferred compensation that are not designated tax-
advantaged plans, such as those created pursuant to Internal Revenue
Code section 409A, 26 U.S.C. 409A. Thus, if contributions to or
benefits under a designated tax-advantaged plan or compensation
under another form of deferred compensation plan are determined with
reference to the mortgage-related business profits of the person
making the contribution, then the contribution, benefits, or other
compensation, as applicable, are not permitted by Sec.
1026.36(d)(1)(iv) (although, in the case of contributions to or
benefits under a designated tax-advantaged plan, the benefits or
contributions may be permitted by Sec. 1026.36(d)(1)(iii)). Under a
non-deferred profits-based compensation plan, the individual loan
originator may, for example, be paid directly in cash, stock, or
other non-deferred compensation, and the compensation under the non-
deferred profits-based compensation plan may be determined by a
fixed formula or may be at the discretion of the person (e.g., the
person may elect not to pay compensation under a non-deferred
profits-based compensation plan in a given year), provided the
compensation is not directly or indirectly based on the terms of the
individual loan originator's transactions. As used in Sec.
1026.36(d)(1)(iv) and this commentary, non-deferred profits-based
compensation plans include, without limitation, bonus pools, profits
pools, bonus plans, and profit-sharing plans. Compensation under a
non-deferred profits-based compensation plan could include, without
limitation, annual or periodic bonuses, or awards of merchandise,
services, trips, or similar prizes or incentives where the bonuses,
contributions, or awards are determined with reference to the
profits of the person, business unit, or affiliate, as applicable.
As used in Sec. 1026.36(d)(1)(iv) and this commentary, a business
unit is a division, department, or segment within the overall
organizational structure of the person or the person's affiliate
that performs discrete business functions and that the person or the
affiliate treats separately for accounting or other organizational
purposes. For example, a creditor that pays its individual loan
originators bonuses at the end of a calendar year based on the
creditor's average net return on assets for the calendar year is
operating a non-deferred profits-based compensation plan under Sec.
1026.36(d)(1)(iv). A bonus that is paid to an individual loan
originator from a source other than a non-deferred profits-based
compensation plan (or a deferred compensation plan where the bonus
is determined with reference to mortgage-related business profits),
such as a retention bonus budgeted for in advance or a performance
bonus paid out of a bonus pool set aside at the beginning of the
[[Page 60447]]
company's annual accounting period as part of the company's
operating budget, does not violate the prohibition on payment of
compensation based on the terms of multiple transactions by multiple
individual loan originators under Sec. 1026.36(d)(1)(i), as
clarified by comment 36(d)(1)-1.ii; therefore, Sec.
1026.36(d)(1)(iv) does not apply to such bonuses.
iii. Compensation that is not directly or indirectly based on
the terms of multiple transactions by multiple individual loan
originators. The compensation arrangements addressed in Sec.
1026.36(d)(1)(iii) and (iv) are permitted even if they are directly
or indirectly based on the terms of multiple transactions by
multiple individual loan originators. See comment 36(d)(1)-1 for
additional interpretation. If a loan originator organization's
revenues are exclusively derived from transactions subject to Sec.
1026.36(d) (whether paid by creditors, consumers, or both) and that
loan originator organization pays its individual loan originators a
bonus under a non-deferred profits-based compensation plan, the
bonus is not directly or indirectly based on the terms of multiple
transactions by multiple individual loan originators if Sec.
1026.36(d)(1)(i) is otherwise complied with.
iv. Compensation based on terms of an individual loan
originator's transactions. Under both Sec. 1026.36(d)(1)(iii), with
regard to contributions made to a defined contribution plan that is
a designated tax-advantaged plan, and Sec. 1026.36(d)(1)(iv)(A),
with regard to compensation under a non-deferred profits-based
compensation plan, the payment of compensation to an individual loan
originator may not be directly or indirectly based on the terms of
that individual loan originator's transaction or transactions.
Consequently, for example, where an individual loan originator makes
loans that vary in their interest rate spread, the compensation
payment may not take into account the average interest rate spread
on the individual loan originator's transactions during the relevant
calendar year.
v. Compensation under non-deferred profits-based compensation
plans. Assuming that the conditions in Sec. 1026.36(d)(1)(iv)(A)
are met, Sec. 1026.36(d)(1)(iv)(B)(1) permits certain compensation
to an individual loan originator under a non-deferred profits-based
compensation plan. Specifically, if the compensation is determined
with reference to the profits of the person from mortgage-related
business, compensation under a non-deferred profits-based
compensation plan is permitted provided the compensation does not,
in the aggregate, exceed 10 percent of the individual loan
originator's total compensation corresponding to the time period for
which compensation under the non-deferred profits-based compensation
plan is paid. The compensation restrictions under Sec.
1026.36(d)(1)(iv)(B)(1) are sometimes referred to in this commentary
as the ``10-percent total compensation limit'' or the ``10-percent
limit.''
A. Total compensation. For purposes of Sec.
1026.36(d)(1)(iv)(B)(1), the individual loan originator's total
compensation consists of the sum total of: (1) All wages and tips
reportable for Medicare tax purposes in box 5 on IRS form W-2 (or,
if the individual loan originator is an independent contractor,
reportable compensation on IRS form 1099-MISC) that are actually
paid during the relevant time period (regardless of when the wages
and tips are earned), except for any compensation under a non-
deferred profits-based compensation plan that is earned during a
different time period (see comment 36(d)(1)-3.v.C); (2) at the
election of the person paying the compensation, all contributions
that are actually made during the relevant time period by the
creditor or loan originator organization to the individual loan
originator's accounts in designated tax-advantaged plans that are
defined contribution plans (regardless of when the contributions are
earned); and (3) at the election of the person paying the
compensation, all compensation under a non-deferred profits-based
compensation plan that is earned during the relevant time period,
regardless of whether the compensation is actually paid during that
time period (see comment 36(d)(1)-3.v.C). If an individual loan
originator has some compensation that is reportable on the W-2 and
some that is reportable on the 1099-MISC, the total compensation is
the sum total of what is reportable on each of the two forms.
B. Profits of the Person. Under Sec. 1026.36(d)(1)(iv), a plan
is a non-deferred profits-based compensation plan if compensation is
paid, based in whole or in part, on the profits of the person paying
the compensation. As used in Sec. 1026.36(d)(1)(iv), ``profits of
the person'' include, as applicable depending on where the non-
deferred profits-based compensation plan is set, the profits of the
person, the business unit to which the individual loan originators
are assigned for accounting or other organizational purposes, or any
affiliate of the person. Profits from mortgage-related business are
profits determined with reference to revenue generated from
transactions subject to Sec. 1026.36(d). Pursuant to Sec.
1026.36(b) and comment 36(b)-1, Sec. 1026.36(d) applies to closed-
end consumer credit transactions secured by dwellings. This revenue
includes, without limitation, and as applicable based on the
particular sources of revenue of the person, business unit, or
affiliate, origination fees and interest associated with dwelling-
secured transactions for which individual loan originators working
for the person were loan originators, income from servicing of such
transactions, and proceeds of secondary market sales of such
transactions. If the amount of the individual loan originator's
compensation under non-deferred profits-based compensation plans
paid for a time period does not, in the aggregate, exceed 10 percent
of the individual loan originator's total compensation corresponding
to the same time period, compensation under non-deferred profits-
based compensation plans may be paid under Sec.
1026.36(d)(1)(iv)(B)(1) regardless of whether or not it was
determined with reference to the profits of the person from
mortgage-related business.
C. Time period for which the compensation under the non-deferred
profits-based compensation plan is paid and to which the total
compensation corresponds. Under Sec. 1026.36(d)(1)(iv)(B)(1),
determination of whether payment of compensation under a non-
deferred profits-based compensation plan complies with the 10-
percent limit requires a calculation of the ratio of the
compensation under the non-deferred profits-based compensation plan
(i.e., the compensation subject to the 10-percent limit) and the
total compensation corresponding to the relevant time period. For
compensation subject to the 10-percent limit, the relevant time
period is the time period for which a person makes reference to
profits in determining the compensation (i.e., when the compensation
was earned). It does not matter whether the compensation is actually
paid during that particular time period. For total compensation, the
relevant time period is the same time period, but only certain types
of compensation may be included in the total compensation amount for
that time period (see comment 36(d)(1)-3.v.A). For example, assume
that during calendar year 2014 a creditor pays an individual loan
originator compensation in the following amounts: $80,000 in
commissions based on the individual loan originator's performance
and volume of loans generated during the calendar year; and $10,000
in an employer contribution to a designated tax-advantaged defined
contribution plan on behalf of the individual loan originator. The
creditor desires to pay the individual loan originator a year-end
bonus of $10,000 under a non-deferred profits-based compensation
plan. The commissions are paid and employer contributions to the
designated tax-advantaged defined contribution plan are made during
calendar year 2014, but the year-end bonus will be paid in January
2015. For purposes of the 10-percent limit, the year-end bonus is
counted toward the 10-percent limit for calendar year 2014, even
though it is not actually paid until 2015. Therefore, for calendar
year 2014 the individual loan originator's compensation that is
subject to the 10-percent limit would be $10,000 (i.e., the year-end
bonus) and the total compensation would be $100,000 (i.e., the sum
of the commissions, the designated tax-advantaged plan contribution
(assuming the creditor elects to include it in total compensation
for calendar year 2014), and the bonus (assuming the creditor elects
to include it in total compensation for calendar year 2014)); the
bonus would be permissible under Sec. 1026.36(d)(1)(iv) because it
does not exceed 10 percent of total compensation. The determination
of total compensation corresponding to 2014 also would not take into
account any compensation subject to the 10-percent limit that is
actually paid in 2014 but is earned during a different calendar year
(e.g., an annual bonus determined with reference to mortgage-related
business profits for calendar year 2013 that is paid in January
2014). If the employer contribution to the designated tax-advantaged
plan is earned in 2014 but actually made in 2015, however, it may
not be included in total compensation for 2014. A company, business
unit, or affiliate, as applicable, may pay compensation subject to
the 10-percent limit during different time periods falling within
its annual accounting period for keeping records and reporting
income and expenses,
[[Page 60448]]
which may be a calendar year or a fiscal year depending on the
annual accounting period. In such instances, however, the 10-percent
limit applies both as to each time period and cumulatively as to the
annual accounting period. For example, assume that a creditor uses a
calendar-year accounting period. If the creditor pays an individual
loan originator a bonus at the end of each quarter under a non-
deferred profits-based compensation plan, the payment of each
quarterly bonus is subject to the 10-percent limit measured with
respect to each quarter. The creditor can also pay an annual bonus
under the non-deferred profits-based compensation plan that does not
exceed the difference of 10 percent of the individual loan
originator's total compensation corresponding to the calendar year
and the aggregate amount of the quarterly bonuses.
D. Awards of merchandise, services, trips, or similar prizes or
incentives. If any compensation paid to an individual loan
originator under Sec. 1026.36(d)(1)(iv) consists of an award of
merchandise, services, trips, or similar prize or incentive, the
cash value of the award is factored into the calculation of the 10-
percent total compensation limit. For example, during a given
calendar year, individual loan originator A and individual loan
originator B are each employed by a creditor and paid $40,000 in
salary, and $45,000 in commissions. The creditor also contributes
$5,000 to a designated tax-advantaged defined contribution plan for
each individual loan originator during that calendar year, which the
creditor elects to include in the total compensation amount. Neither
individual loan originator is paid any other form of compensation by
the creditor. In December of the calendar year, the creditor rewards
both individual loan originators for their performance during the
calendar year out of a bonus pool established with reference to the
profits of the mortgage origination business unit. Individual loan
originator A is paid a $10,000 cash bonus, meaning that individual
loan originator A's total compensation is $100,000 (assuming the
creditor elects to include the bonus in the total compensation
amount). Individual loan originator B is paid a $7,500 cash bonus
and awarded a vacation package with a cash value of $3,000, meaning
that individual loan originator B's total compensation is $100,500
(assuming the creditor elects to include the reward in the total
compensation amount). Under Sec. 1026.36(d)(1)(iv)(B)(1),
individual loan originator A's $10,000 bonus is permissible because
the bonus would not constitute more than 10 percent of individual
loan originator A's total compensation for the calendar year. The
creditor may not pay individual loan originator B the $7,500 bonus
and award the vacation package, however, because the total value of
the bonus and the vacation package would be $10,500, which is
greater than 10 percent (10.45 percent) of individual loan
originator B's total compensation for the calendar year. One way to
comply with Sec. 1026.36(d)(1)(iv)(B)(1) would be if the amount of
the bonus were reduced to $7,000 or less or the vacation package
were structured such that its cash value would be $2,500 or less.
E. Compensation determined only with reference to non-mortgage-
related business profits. Compensation under a non-deferred profits-
based compensation plan is not subject to the 10-percent total
compensation limit under Sec. 1026.36(d)(1)(iv)(B)(1) if the non-
deferred profits-based compensation plan is determined with
reference only to profits from business other than mortgage-related
business, as determined in accordance with reasonable accounting
principles. Reasonable accounting principles reflect an accurate
allocation of revenues, expenses, profits, and losses among the
person, any affiliate of the person, and any business units within
the person or affiliates, and are consistent with the accounting
principles applied by the person, the affiliate, or the business
unit with respect to, as applicable, its internal budgeting and
auditing functions and external reporting requirements. Examples of
external reporting and filing requirements that may be applicable to
creditors and loan originator organizations are Federal income tax
filings, Federal securities law filings, or quarterly reporting of
income, expenses, loan origination activity, and other information
required by government-sponsored enterprises. As used in Sec.
1026.36(d)(1)(iv)(B)(1), profits means positive profits or losses
avoided or mitigated.
F. Additional examples. 1. Assume that, during a given calendar
year, a loan originator organization pays an individual loan
originator employee $40,000 in salary and $125,000 in commissions,
and makes a contribution of $15,000 to the individual loan
originator's 401(k) plan. At the end of the year, the loan
originator organization wishes to pay the individual loan originator
a bonus based on a formula involving a number of performance
metrics, to be paid out of a profit pool established at the level of
the company but that is determined in part with reference to the
profits of the company's mortgage origination unit. Assume that the
loan originator organization derives revenues from sources other
than transactions covered by Sec. 1026.36(d). In this example, the
performance bonus would be directly or indirectly based on the terms
of multiple individual loan originators' transactions as described
in Sec. 1026.36(d)(1)(i), because it is being determined with
reference to profits from mortgage-related business. Assume,
furthermore, that the loan originator organization elects to include
the bonus in the total compensation amount for the calendar year.
Thus, the bonus is permissible under Sec. 1026.36(d)(1)(iv)(B)(1)
if it does not exceed 10 percent of the loan originator's total
compensation, which in this example consists of the individual loan
originator's salary and commissions, the contribution to the 401(k)
plan (if the loan originator organization elects to include the
contribution in the total compensation amount), and the performance
bonus. Therefore, if the loan originator organization elects to
include the 401(k) contribution in total compensation for these
purposes, the loan originator organization may pay the individual
loan originator a performance bonus of up to $20,000 (i.e., 10
percent of $200,000 in total compensation). If the loan originator
organization does not include the 401(k) contribution in calculating
total compensation, or the 401(k) contribution is actually made in
January of the following calendar year (in which case it cannot be
included in total compensation for the initial calendar year), the
bonus may be up to $18,333.33. If the loan originator organization
includes neither the 401(k) contribution nor the performance bonus
in the total compensation amount, the bonus may not exceed $16,500.
2. Assume that the compensation during a given calendar year of
an individual loan originator employed by a creditor consists of
only salary and commissions, and the individual loan originator does
not participate in a designated tax-advantaged defined contribution
plan. Assume further that the creditor uses a calendar-year
accounting period. At the end of the calendar year, the creditor
pays the individual loan originator two bonuses: A ``performance''
bonus based on the individual loan originator's aggregate loan
volume for a calendar year that is paid out of a bonus pool
determined with reference to the profits of the mortgage origination
business unit, and a year-end ``holiday'' bonus in the same amount
to all company employees that is paid out of a company-wide bonus
pool. Because the performance bonus is paid out of a bonus pool that
is determined with reference to the profits of the mortgage
origination business unit, it is compensation that is determined
with reference to mortgage-related business profits, and the bonus
is therefore subject to the 10-percent total compensation limit. If
the company-wide bonus pool from which the ``holiday'' bonus is paid
is derived in part from profits of the creditor's mortgage
origination business unit, then the combination of the ``holiday''
bonus and the performance bonus is subject to the 10-percent total
compensation limit. The ``holiday'' bonus is not subject to the 10-
percent total compensation limit if the bonus pool is determined
with reference only to the profits of business units other than the
mortgage origination business unit, as determined in accordance with
reasonable accounting principles. If the ``performance'' bonus and
the ``holiday'' bonus in the aggregate do not exceed 10 percent of
the individual loan originator's total compensation, the bonuses may
be paid under Sec. 1026.36(d)(1)(iv)(B)(1) without the necessity of
determining from which bonus pool they were paid or whether they
were determined with reference to the profits of the creditor's
mortgage origination business unit.
G. Reasonable reliance by individual loan originator on
accounting or statement by person paying compensation. An individual
loan originator is deemed to comply with its obligations regarding
receipt of compensation under Sec. 1026.36(d)(1)(iv)(B)(1) if the
individual loan originator relies in good faith on an accounting or
a statement provided by the person who determined the individual
loan originator's compensation under a non-deferred profits-based
compensation plan pursuant to Sec. 1026.36(d)(1)(iv)(B)(1) and
where the statement or accounting is provided within a reasonable
time period following the person's determination.
[[Page 60449]]
vi. Individual loan originators who originate ten or fewer
transactions. Assuming that the conditions in Sec.
1026.36(d)(1)(iv)(A) are met, Sec. 1026.36(d)(1)(iv)(B)(2) permits
compensation to an individual loan originator under a non-deferred
profits-based compensation plan even if the payment or contribution
is directly or indirectly based on the terms of multiple individual
loan originators' transactions if the individual is a loan
originator (as defined in Sec. 1026.36(a)(1)(i)) for ten or fewer
consummated transactions during the 12-month period preceding the
compensation determination. For example, assume a loan originator
organization employs two individual loan originators who originate
transactions subject to Sec. 1026.36 during a given calendar year.
Both employees are individual loan originators as defined in Sec.
1026.36(a)(1)(ii), but only one of them (individual loan originator
B) acts as a loan originator in the normal course of business, while
the other (individual loan originator A) is called upon to do so
only occasionally and regularly performs other duties (such as
serving as a manager). In January of the following calendar year,
the loan originator organization formally determines the financial
performance of its mortgage business for the prior calendar year.
Based on that determination, the loan originator organization on
February 1 decides to pay a bonus to the individual loan originators
out of a company bonus pool. Assume that, between February 1 of the
prior calendar year and January 31 of the current calendar year,
individual loan originator A was the loan originator for eight
consummated transactions, and individual loan originator B was the
loan originator for 15 consummated transactions. The loan originator
organization may award the bonus to individual loan originator A
under Sec. 1026.36(d)(1)(iv)(B)(2). The loan originator
organization may not award the bonus to individual loan originator B
relying on the exception under Sec. 1026.36(d)(1)(iv)(B)(2) because
it would not apply, although it could award a bonus pursuant to the
10-percent total compensation limit under Sec.
1026.36(d)(1)(iv)(B)(1) if the requirements of that provision are
complied with.
* * * * *
6. Periodic changes in loan originator compensation and terms of
transactions. Section 1026.36 does not limit a creditor or other
person from periodically revising the compensation it agrees to pay
a loan originator. However, the revised compensation arrangement
must not result in payments to the loan originator that are based on
the terms of a credit transaction. A creditor or other person might
periodically review factors such as loan performance, transaction
volume, as well as current market conditions for loan originator
compensation, and prospectively revise the compensation it agrees to
pay to a loan originator. For example, assume that during the first
six months of the year, a creditor pays $3,000 to a particular loan
originator for each loan delivered, regardless of the terms of the
transaction. After considering the volume of business produced by
that loan originator, the creditor could decide that as of July 1,
it will pay $3,250 for each loan delivered by that particular loan
originator, regardless of the terms of the transaction. No violation
occurs even if the loans made by the creditor after July 1 generally
carry a higher interest rate than loans made before that date, to
reflect the higher compensation.
* * * * *
36(f) Loan originator qualification requirements.
* * * * *
Paragraph 36(f)(3).
* * * * *
Paragraph 36(f)(3)(i).
1. Criminal and credit histories. Section 1026.36(f)(3)(i)
requires the loan originator organization to obtain, for any of its
individual loan originator employees who is not required to be
licensed and is not licensed as a loan originator pursuant to the
SAFE Act, a criminal background check, a credit report, and
information related to any administrative, civil, or criminal
determinations by any government jurisdiction. The requirement
applies to individual loan originator employees who were hired on or
after January 1, 2014 (or whom the loan originator organization
hired before this date but for whom there were no applicable
statutory or regulatory background standards in effect at the time
of hire or before January 1, 2014, used to screen the individual). A
credit report may be obtained directly from a consumer reporting
agency or through a commercial service. A loan originator
organization with access to the NMLSR can meet the requirement for
the criminal background check by reviewing any criminal background
check it receives upon compliance with the requirement in 12 CFR
1007.103(d)(1) and can meet the requirement to obtain information
related to any administrative, civil, or criminal determinations by
any government jurisdiction by obtaining the information through the
NMLSR. Loan originator organizations that do not have access to
these items through the NMLSR may obtain them by other means. For
example, a criminal background check may be obtained from a law
enforcement agency or commercial service. Information on any past
administrative, civil, or criminal findings (such as from
disciplinary or enforcement actions) may be obtained from the
individual loan originator.
2. Retroactive obtaining of information not required. Section
1026.36(f)(3)(i) does not require the loan originator organization
to obtain the covered information for an individual whom the loan
originator organization hired as a loan originator before January 1,
2014, and screened under applicable statutory or regulatory
background standards in effect at the time of hire. However, if the
individual subsequently ceases to be employed as a loan originator
by that loan originator organization, and later resumes employment
as a loan originator by that loan originator organization (or any
other loan originator organization), the loan originator
organization is subject to the requirements of Sec.
1026.36(f)(3)(i).
* * * * *
Paragraph 36(f)(3)(ii).
1. Scope of review. Section 1026.36(f)(3)(ii) requires the loan
originator organization to review the information that it obtains
under Sec. 1026.36(f)(3)(i) and other reasonably available
information to determine whether the individual loan originator
meets the standards in Sec. 1026.36(f)(3)(ii). Other reasonably
available information includes any information the loan originator
organization has obtained or would obtain as part of a reasonably
prudent hiring process, including information obtained from
application forms, candidate interviews, other reliable information
and evidence provided by a candidate, and reference checks. The
requirement applies to individual loan originator employees who were
hired on or after January 1, 2014 (or whom the loan originator
organization hired before this date but for whom there were no
applicable statutory or regulatory background standards in effect at
the time of hire or before January 1, 2014, used to screen the
individual).
2. Retroactive determinations not required. Section
1026.36(f)(3)(ii) does not require the loan originator organization
to review the covered information and make the required
determinations for an individual whom the loan originator
organization hired as a loan originator on or before January 1, 2014
and screened under applicable statutory or regulatory background
standards in effect at the time of hire. However, if the individual
subsequently ceases to be employed as a loan originator by that loan
originator organization, and later resumes employment as a loan
originator by that loan originator organization (or any other loan
originator organization), the loan originator organization employing
the individual is subject to the requirements of Sec.
1026.36(f)(3)(ii).
* * * * *
36(i) Prohibition on financing credit insurance.
1. Financing credit insurance premiums or fees. In the case of
single-premium credit insurance, a creditor violates Sec.
1026.36(i) by adding the credit insurance premium or fee to the
amount owed by the consumer at closing. In the case of monthly-pay
credit insurance, a creditor violates Sec. 1026.36(i) if, upon the
close of the monthly period in which the premium or fee is due, the
creditor includes the premium or fee in the amount owed by the
consumer.
* * * * *
Section 1026.41--Periodic Statements for Residential Mortgage Loans
* * * * *
41(b) Timing of the periodic statement.
1. Reasonably prompt time. Section 1026.41(b) requires that the
periodic statement be delivered or placed in the mail no later than
a reasonably prompt time after the payment due date or the end of
any courtesy period. Delivering, emailing or placing the periodic
statement in the mail within four days of the close of the courtesy
period of the previous billing cycle generally would be considered
reasonably prompt.
* * * * *
[[Page 60450]]
41(d) Content and layout of the periodic statement.
* * * * *
3. Terminology. A servicer may use terminology other than that
found on the sample periodic statements in appendix H-30, so long as
the new terminology is commonly understood. For example, servicers
may take into consideration regional differences in terminology and
refer to the account for the collection of taxes and insurance,
referred to in Sec. 1026.41(d) as the ``escrow account,'' as an
``impound account.''
* * * * *
41(d)(4) Transaction Activity.
1. Meaning. Transaction activity includes any transaction that
credits or debits the amount currently due. This is the same amount
that is required to be disclosed under Sec. 1026.41(d)(1)(iii).
Examples of such transactions include, without limitation:
* * * * *
41(e)(3) Coupon book exemption.
1. Fixed rate. For guidance on the meaning of ``fixed rate'' for
purposes of Sec. 1026.41(e)(3), see Sec. 1026.18(s)(7)(iii) and
its commentary.
* * * * *
41(e)(4) Small servicers.
* * * * *
41(e)(4)(iii) Small servicer determination.
1. Loans obtained by merger or acquisition. Any mortgage loans
obtained by a servicer or an affiliate as part of a merger or
acquisition, or as part of the acquisition of all of the assets or
liabilities of a branch office of a creditor, should be considered
mortgage loans for which the servicer or an affiliate is the
creditor to which the mortgage loan is initially payable. A branch
office means either an office of a depository institution that is
approved as a branch by a Federal or State supervisory agency or an
office of a for-profit mortgage lending institution (other than a
depository institution) that takes applications from the public for
mortgage loans.
* * * * *
Corrections to FR Doc. 2013-16962
In FR Doc. 2013-16962 appearing on page 44685 in the Federal
Register on Wednesday July 24, 2013, the following correction is made:
Supplement I to Part 1026 [Corrected]
1. On page 44725, in the second column, amendatory instruction
11.A.i.b is corrected to read ``Under Paragraph 41(e)(4)(iii) Small
servicer determination, paragraph 2 is amended and paragraph 3 is
added.''
Section 1026.43--Minimum Standards for Transactions Secured by a
Dwelling
* * * * *
43(b) Definitions.
* * * * *
43(b)(8) Mortgage-related obligations.
* * * * *
4. Mortgage insurance, guarantee, or similar charges. Section
1026.43(b)(8) includes in the evaluation of mortgage-related
obligations premiums or charges protecting the creditor against the
consumer's default or other credit loss. This includes all premiums
or similar charges, whether denominated as mortgage insurance,
guarantee, or otherwise, as determined according to applicable State
or Federal law. For example, monthly ``private mortgage insurance''
payments paid to a non-governmental entity, annual ``guarantee fee''
payments required by a Federal housing program, and a quarterly
``mortgage insurance'' payment paid to a State agency administering
a housing program are all mortgage-related obligations for purposes
of Sec. 1026.43(b)(8). Section 1026.43(b)(8) includes these charges
in the definition of mortgage-related obligations if the creditor
requires the consumer to pay them, even if the consumer is not
legally obligated to pay the charges under the terms of the
insurance program. For example, if a mortgage insurance program
obligates the creditor to make recurring mortgage insurance
payments, and the creditor requires the consumer to reimburse the
creditor for such recurring payments, the consumer's payments are
mortgage-related obligations for purposes of Sec. 1026.43(b)(8).
However, if a mortgage insurance program obligates the creditor to
make recurring mortgage insurance payments, and the creditor does
not require the consumer to reimburse the creditor for the cost of
the mortgage insurance payments, the recurring mortgage insurance
payments are not mortgage-related obligations for purposes of Sec.
1026.43(b)(8).
* * * * *
43(c) Repayment ability.
* * * * *
43(c)(3) Verification using third-party records.
* * * * *
6. Verification of current debt obligations. Section
1026.43(c)(3) does not require creditors to obtain additional
records to verify the existence or amount of obligations shown on a
consumer's credit report or listed on the consumer's application,
absent circumstances described in comment 43(c)(3)-3. Under Sec.
1026.43(c)(3)(iii), if a creditor relies on a consumer's credit
report to verify a consumer's current debt obligations and the
consumer's application lists a debt obligation not shown on the
credit report, the creditor may consider the existence and amount of
the obligation as it is stated on the consumer's application. The
creditor is not required to further verify the existence or amount
of the obligation, absent circumstances described in comment
43(c)(3)-3.
* * * * *
43(e) Qualified mortgages.
* * * * *
43(e)(4) Qualified mortgage defined--special rules.
1. Alternative definition. Subject to the sunset provided under
Sec. 1026.43(e)(4)(iii), Sec. 1026.43(e)(4) provides an
alternative definition of qualified mortgage to the definition
provided in Sec. 1026.43(e)(2). To be a qualified mortgage under
Sec. 1026.43(e)(4), the transaction must satisfy the requirements
under Sec. 1026.43(e)(2)(i) through (iii), in addition to being one
of the types of loans specified in Sec. 1026.43(e)(4)(ii)(A)
through (E).
* * * * *
Paragraph 43(e)(5).
* * * * *
8. Transfer to another qualifying creditor. Under Sec.
1026.43(e)(5)(ii)(B), a qualified mortgage under Sec. 1026.43(e)(5)
may be sold, assigned, or otherwise transferred at any time to
another creditor that meets the requirements of Sec.
1026.43(e)(5)(i)(D). That section requires that a creditor, during
the preceding calendar year, together with all affiliates,
originated 500 or fewer first-lien covered transactions and had
total assets less than $2 billion (as adjusted for inflation) at the
end of the preceding calendar year. A qualified mortgage under Sec.
1026.43(e)(5) transferred to a creditor that meets these criteria
would retain its qualified mortgage status even if it is transferred
less than three years after consummation.
* * * * *
43(f) Balloon-Payment qualified mortgages made by certain
creditors.
* * * * *
Paragraph 43(f)(2)(iii).
1. Supervisory sales. Section 1026.43(f)(2)(iii) facilitates
sales that are deemed necessary by supervisory agencies to revive
troubled creditors and resolve failed creditors. A balloon-payment
qualified mortgage under Sec. 1026.43(f)(1) retains its qualified
mortgage status if it is sold, assigned, or otherwise transferred to
another person pursuant to: (1) A capital restoration plan or other
action under 12 U.S.C. 1831o; (2) the actions or instructions of any
person acting as conservator, receiver, or bankruptcy trustee; (3)
an order of a State or Federal government agency with jurisdiction
to examine the creditor pursuant to State or Federal law; or (4) an
agreement between the creditor and such an agency. A balloon-payment
qualified mortgage under Sec. 1026.43(f)(1) that is sold, assigned,
or otherwise transferred under these circumstances retains its
qualified mortgage status regardless of how long after consummation
it is sold and regardless of the size or other characteristics of
the transferee. Section 1026.43(f)(2)(iii) does not apply to
transfers done to comply with a generally applicable regulation with
future effect designed to implement, interpret, or prescribe law or
policy in the absence of a specific order by or a specific agreement
with a governmental agency described in Sec. 1026.43(f)(2)(iii)
directing the sale of one or more qualified mortgages under Sec.
1026.43(f)(1) held by the creditor or one of the other circumstances
listed in Sec. 1026.43(f)(2)(iii). For example, a balloon-payment
qualified mortgage under Sec. 1026.43(f)(1) that is sold pursuant
to a capital restoration plan under 12 U.S.C. 1831o would retain its
status as a qualified mortgage following the sale. However, if the
creditor simply chose to sell the same qualified mortgage as one way
to comply with general regulatory capital requirements in the
absence of supervisory action or agreement the transaction would
lose its status as a qualified mortgage following the
[[Page 60451]]
sale unless it qualifies under another definition of qualified
mortgage.
* * * * *
Dated: September 12, 2013.
Richard Cordray,
Director, Bureau of Consumer Financial Protection.
[FR Doc. 2013-22752 Filed 9-19-13; 4:15 pm]
BILLING CODE 4810-AM-P