[Federal Register Volume 78, Number 238 (Wednesday, December 11, 2013)]
[Rules and Regulations]
[Pages 75215-75238]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-29482]
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Rules and Regulations
Federal Register
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This section of the FEDERAL REGISTER contains regulatory documents
having general applicability and legal effect, most of which are keyed
to and codified in the Code of Federal Regulations, which is published
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The Code of Federal Regulations is sold by the Superintendent of Documents.
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Federal Register / Vol. 78, No. 238 / Wednesday, December 11, 2013 /
Rules and Regulations
[[Page 75215]]
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
24 CFR Parts 201, 203, 1005, and 1007
[Docket No. FR 5707-F-02]
RIN 2502-AJ18
Qualified Mortgage Definition for HUD Insured and Guaranteed
Single Family Mortgages
AGENCY: Office of Secretary, HUD.
ACTION: Final rule.
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SUMMARY: Through this final rule, HUD establishes a definition of
``qualified mortgage'' for the single family residential loans that HUD
insures, guarantees, or administers that aligns with the statutory
ability-to-repay criteria of the Truth-in-Lending Act (TILA) and the
regulatory criteria of the definition of ``qualified mortgage''
promulgated by the Consumer Financial Protection Bureau (CFPB). The
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank
Act) created new section 129C in TILA, which establishes minimum
standards for considering a consumer's repayment ability for creditors
originating certain closed-end, dwelling-secured mortgages, and
generally prohibits a creditor from making a residential mortgage loan
unless the creditor makes a reasonable and good-faith determination of
a consumer's ability to repay the loan according to its terms. Section
129C authorizes the agency with responsibility for compliance with
TILA, which is CFPB, to issue a rule implementing these requirements,
and the CFPB has issued its rule implementing these requirements.
The Dodd-Frank Act also charges HUD and three other Federal
agencies with prescribing regulations defining the types of loans that
these Federal agencies insure, guarantee, or administer, as may be
applicable, that are qualified mortgages. Through this rule, HUD
complies with this statutory directive for the single family
residential loans that HUD insures, guarantees, or administers.
DATES: Effective Date: January 10, 2014.
FOR FURTHER INFORMATION CONTACT: Michael P. Nixon, Office of Housing,
Department of Housing and Urban Development, 451 7th Street SW., Room
9278, Washington, DC 20410; telephone number 202-402-5216, ext. 3094
(this is not a toll-free number). Persons with hearing or speech
impairments may access this number through TTY by calling the Federal
Relay Service at 800-877-8339 (this is a toll-free number).
SUPPLEMENTARY INFORMATION:
I. Executive Summary
A. Purpose of the Regulatory Action
This rule meets HUD's charge under TILA, as amended by the Dodd-
Frank Act, to define, in regulation, the term ``qualified mortgage''
for the single family residential mortgages and loans that HUD insures,
guarantees, or otherwise administers. While the CFPB, in accordance
with statutory direction, has promulgated regulations that define
``qualified mortgage'' for the broader single family mortgage market,
HUD, through this rule, promulgates regulations that define this term
for HUD's single family insured or guaranteed mortgage programs.
The statutory purpose of defining ``qualified mortgage,'' whether
for the conventional mortgage market or for specific Federal programs,
as specified in the Dodd-Frank Act, is to identify single family
residential mortgages that take into consideration a borrower's ability
to repay the loan and provide certain protections for the lender from
liability. During the years preceding the mortgage crisis, too many
mortgages in the conventional mortgage market were made to borrowers
without regard to their ability to repay the loan and included risky
features such as ``no doc'' loans or ``interest only'' loans. As a
result, many homeowners defaulted on these loans and faced foreclosure,
contributing to the collapse in the housing market in 2008 and leading
to the Nation's most serious financial crisis since the Great
Depression.
In developing its definition of ``qualified mortgage'', HUD
reviewed its mortgage insurance and loan guarantee programs and
determined that all of the single family residential mortgage and loan
products offered under HUD programs should be defined as ``qualified
mortgages''; that is, they exclude risky features and are designed so
that the borrower can repay the loan. For certain of its mortgage
products, HUD establishes qualified mortgage standards similar to those
established by the CFPB in its definition of ``qualified mortgage.''
HUD has always required lenders to determine a borrower's ability to
repay a mortgage in its insured and guaranteed single family mortgage
programs. With ability-to-repay and qualified mortgage standards now in
place for conventional mortgage loans, HUD determined that all HUD
loans should be qualified mortgages and it could adjust its existing
standards to more closely align with the standards promulgated by the
CFPB, lessening future differences in standards for HUD's single family
residential insured mortgages and those governing conventional
mortgages to be designated qualified mortgage, but maintaining
standards that continue to support the mission of HUD's programs.
B. Summary of the Major Provisions of the Regulatory Action
In defining ``qualified mortgage'' in its rulemaking, the CFPB
established both a safe harbor and a rebuttable presumption of
compliance for transactions that are qualified mortgages. The label of
safe harbor qualified mortgage applies to those mortgages that are not
higher-priced covered transactions (that is the annual percentage rate
does not exceed the average prime offer rate by 1.5 percent). These are
considered to be the least risky loans and presumed to have
conclusively met the ability-to-repay requirements of TILA. The label
of rebuttable presumption qualified mortgage is applied to those
mortgages that are higher-priced transactions.
In this final rule, the definition of ``qualified mortgage,'' as
provided in HUD's September 30, 2013, proposed rule, published at 78 FR
59890, is retained with certain clarifications and exceptions HUD is
making in response to public comments. As proposed by HUD in the
September 30, 2013, proposed rule, this final rule designates Title I
(property improvement loans and manufactured home loans), Section 184
[[Page 75216]]
(Indian housing loans), and Section 184A (Native Hawaiian housing
loans) insured mortgages and guaranteed loans covered by this rule as
safe harbor qualified mortgages and no changes to the current
underwriting requirements of these mortgage and loan products are made
by this final rule. To this list, FHA adds manufactured housing insured
under Title II of the National Housing Act (Title II) and clarifies
that the Title I Manufactured Home Loan program is included in the
Title I exemption. However, for its largest volume of mortgage
products, those insured under Title II of the National Housing Act,
with certain exceptions, HUD retains the two categories of qualified
mortgages similar to the two categories created in the CFPB final
rule--a safe harbor qualified mortgage and a rebuttable presumption
qualified mortgage. HUD continues to exempt reverse mortgages insured
under section 255 of Title II from the ``qualified mortgage''
definition. HUD has also added to the list of exempted transactions
Title II insured mortgages made by housing finance agencies and certain
other governmental or nonprofit organizations providing home financing
under programs designed for low- and moderate-income individuals and
families, and discussed in more detail later in this preamble.
For the remaining Title II insured mortgages, this final rule,
consistent with the proposed rule, defines safe harbor qualified
mortgage as a mortgage insured under Title II of the National Housing
Act that meets the points and fees limit adopted by the CFPB in its
regulation at 12 CFR 1026.43(e)(3), and that has an annual percentage
rate for a first-lien mortgage relative to the average prime offer rate
that is no more than the sum of the annual mortgage insurance premium
and 1.15 percentage points. This final rule defines a rebuttable
presumption qualified mortgage as a single family mortgage insured
under Title II of the National Housing Act that meets the points and
fees limit adopted by the CFPB in its regulation at 12 CFR
1026.43(e)(3), but has an annual percentage rate that exceeds the
average prime offer rate for a comparable mortgage, as of the date the
interest rate is set, by more than the sum of the annual mortgage
insurance premium and 1.15 percentage points for a first-lien mortgage.
HUD requires that all loans, subject to the exceptions noted, be
insured under Title II of the National Housing Act and meet the CFPB's
points and fees limit at 12 CFR 1026.43(e)(3) in order to be either a
rebuttable presumption or safe harbor qualified mortgage. The CFPB set
a three percent points and fees limit for its definition of qualified
mortgage and allowed for adjustments of this limit to facilitate the
presumption of compliance for smaller loans.
As more fully discussed in HUD's September 30, 2013, proposed rule,
HUD establishes two categories of qualified mortgages for the majority
of National Housing Act mortgages to maintain consistency with the TILA
statutory criteria defining qualified mortgage, as well as the CFPB's
definition, to the extent consistent with the National Housing Act.
While the final rule makes no significant changes to HUD's proposed
core definition of qualified mortgage, as noted above, HUD is making
certain clarifications and exceptions.
For example, commenters stated that compliance with HUD regulations
would necessitate further and immediate system changes and that the
lending industry lacked sufficient time to make such changes by January
2014. HUD clarifies that HUD's definition of safe harbor qualified
mortgage incorporates CFPB's requirements for a safe harbor qualified
mortgage under the special provision for loans insured under the
National Housing Act while allowing for a higher APR threshold, so
compliance with HUD regulations does not necessitate immediate industry
changes for lenders to identify safe harbor qualified mortgages under
HUD's definition by January 2014. In other words, compared to the
CFPB's regulations, this rule allows more FHA mortgages to qualify as
safe harbor qualified mortgages; every FHA loan that would have
qualified as a safe harbor qualified mortgage under the CFPB
regulations for loans insured under the National Housing Act would
qualify as a safe harbor qualified mortgage under this HUD rule. Since
the lending industry must comply with CFPB's regulations by January
2014, and were given a full year to prepare for compliance with the
CFPB regulations, this clarification should ease concerns about
additional immediate compliance costs and the need for additional time
to comply with HUD's qualified mortgage regulations.
C. Costs and Benefits
HUD's final rule, in effect, reclassifies a sizeable group (about
19 percent) of Title II loans insured under the National Housing Act
from rebuttable presumption qualified mortgages under the CFPB
regulations to safe harbor qualified mortgages under HUD's regulation,
less than one percent would remain a rebuttable presumption qualified
mortgage. A small number (about 7 percent) of Title II loans would
continue to not qualify as qualified mortgage based on their exceeding
the points and fees limit, while the remaining FHA loans (about 74
percent) would qualify for qualified mortgage status with a safe harbor
presumption of compliance with the ability to repay requirements under
both the CFPB's rule and HUD's rule. The Title II loans that would be
non-qualified mortgages under the CFPB's rule would remain non-
qualified mortgage under the proposed rule. The difference is that HUD,
through this rule, will no longer insure loans with points and fees
above the CFPB level for qualified mortgage, but expects that most of
these loans will adapt to meet the points and fees to be insured.
In addition, HUD classifies all Title I, Title II manufactured
housing and Section 184 and Section 184A insured mortgages and
guaranteed loans as safe harbor qualified mortgages that would have
most likely been non-qualified mortgages under the CFPB's rule.
Classifying these programs as safe harbor recognizes the unique nature
of these loans. For these programs, HUD believes that providing safe
harbor status to these programs will not increase market share but
instead maintain availability of these products to the underserved
borrowers targeted, and allow HUD additional time to further examine
these programs and whether they should be covered by a definition of
``qualified mortgage'' similar to the definition provided in this rule
for Title II mortgages.
As a result of these reclassifications, HUD expects the following
economic impacts:
[[Page 75217]]
Table 1--Summary of Economic Effects: Changing the Rebuttable
Presumption Standard for Title I, Title II, Section 184, and Section
184A Loans
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Effect Distribution Effect size
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Benefits:
Lower legal costs through Lenders $12.2 to $40.7
an increase in the number (transfers to million.
of safe harbor loans. borrowers via
lower interest
rates).
Costs:
Foregone benefits from Borrowers........ Unquantified (the
ability-to-pay lawsuits likelihood of such
through incremental lawsuits has been
decrease in rebuttable reduced greatly by
presumption loans. changes in lending
practices stemming
from the Dodd-Frank
Act and the lawsuits
initiated by Federal
and State
governments).
Operational costs through Lenders De minimus.
the programming of a new (potential
HUD standard. transfers to
borrowers
through
increased loan
costs for
borrowers).
Transfers:
Lower interest rates for Lenders to Unquantified but will
FHA mortgages due to the Borrowers. be capped by legal
increased legal benefits benefits to lenders.
for lenders with the HUD
rule vs. CFPB patch.
Potential increase in the Borrowers to FHA. Unquantified as this
volume of loans due to theoretical increase
greater legal benefits to in volume is
lenders for HUD rule expected to be
relative to CFPB patch. minimal. (The
observable impact of
both the CFPB patch
and the HUD rule
will be a decrease
in volume relative
to HUD volume of
loans today).
Potential increase in the Borrowers to FHA. De minimus.
net present value of
premium revenues minus
mortgage insurance claims.
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Table 2--Summary of Economic Effects: Eliminating the Points and Fee
Limit for Title I, Section 184, Section 184A, and Title II Manufactured
Housing Loans
[All designated as safe harbor qualified mortgages]
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Effect Distribution Size
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Benefits:
Maintained Homeownership Borrowers (Indian Positive but
benefits for underserved and Native unquantified. Under
populations as loans Hawaiian the CFPB patch,
continue to be made. borrowers, home there could be a
improvement and slight decrease in
manufactured loans to these
housing populations as
borrowers). lenders would be
making non-QM loans
that are
nevertheless
guaranteed/insured
by HUD.
Lower legal costs......... Lenders.......... Positive but
unquantified.
Costs:
Foregone benefits from Borrowers........ Unquantified but
ability-to-pay lawsuits. expected to be
minimal (the
likelihood of such
lawsuits has been
reduced greatly by
changes in lending
practices stemming
from the Dodd-Frank
Act and the lawsuits
initiated by Federal
and State
governments).
Transfers:
Potential increase in the Borrowers to FHA. Unquantified but
volume of loans through expected to be
greater legal protection minimal.
for HUD rule relative to
CFPB patch.
Potential increase in the Borrowers to FHA. De minimus.
net present value of
premium revenues minus
mortgage insurance claims.
------------------------------------------------------------------------
II. Background
As noted in the Summary of this preamble, it is the Dodd-Frank Act
that charges HUD and other Federal agencies to define ``qualified
mortgage'' for the single family residential loans that meet statutory
ability-to-repay requirements. New section 129C(a) of TILA, added by
section 1411 of subtitle B of Title XIV of the Dodd-Frank Act (Pub. L.
111-203, 124 Stat. 1736, approved July 21, 2010), provides minimum
standards for considering a consumer's ability to repay a residential
mortgage. New section 129C(b), added by section 1412 of the Dodd-Frank
Act, establishes the presumption that the ability-to-repay requirements
of section 129C(a) are satisfied if a mortgage is a ``qualified
mortgage,'' and authorizes, initially, the Federal Reserve Board and,
ultimately, the CFPB,\1\ to prescribe regulations that revise, add to,
or subtract from the criteria in TILA that define a ``qualified
mortgage.''
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\1\ On July 21, 2011, rulemaking authority under TILA
transferred from the Federal Reserve Board to the CFPB.
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Section 129C(b)(2)(A) defines qualified mortgage as a mortgage that
meets the following requirements: (i) The transaction must have regular
periodic payments; (ii) the terms of the mortgage must not result in a
balloon payment; (iii) the income and financial resources of the
mortgagor are verified and documented; (iv) for a fixed rate loan, the
underwriting process fully amortizes the loan over the loan term; (v)
for an adjustable rate loan, the underwriting is based on the maximum
rate permitted under the loan during the
[[Page 75218]]
first 5 years and includes a payment schedule that fully amortizes the
loan over the loan term; (vi) the transaction must comply with any
regulations established by the CFPB relating to ratios of total monthly
debt to total monthly income; (vii) the total points and fees payable
in connection with the loan must not exceed 3 percent of the total loan
amount; and (viii) the mortgage must not exceed 30 years, except in
specific areas.\2\
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\2\ Section 129C also provides for a reverse mortgage to be a
qualified mortgage if the mortgage meets the CFPB's standards for a
qualified mortgage except to the extent that reverse mortgages are
statutorily exempted altogether from the ability-to-repay
requirements. The CFPB's regulations provide that the ability-to-
repay requirements of section 129C(a) do not apply to reverse
mortgages. In the preamble to its final rule published on January
30, 2013, the CPFB states: ``The Bureau notes that the final rule
does not define a `qualified' reverse mortgage. As described above,
TILA section 129C(a)(8) excludes reverse mortgages from the
repayment ability requirements. See section-by-section analysis of
Sec. 1026.43(a)(3)(i). However, TILA section 129C(b)(2)(ix)
provides that the term `qualified mortgage' may include a
`residential mortgage loan' that is `a reverse mortgage which meets
the standards for a qualified mortgage, as set by the Bureau in
rules that are consistent with the purposes of this subsection.' The
Board's proposal did not include reverse mortgages in the definition
of a `qualified mortgage.' '' See 78 FR 6516.
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New section 129C(b)(3)(B)(ii) of TILA, also added by section 1412
of the Dodd-Frank Act, requires that HUD, the Department of Veterans
Affairs (VA), and the Department of Agriculture (USDA) prescribe rules
in consultation with the Federal Reserve Board \3\ to define the types
of loans they insure, guarantee, or administer, as the case may be,
that are ``qualified mortgages,'' and revise, add to, or subtract from
the statutory criteria used to define a qualified mortgage.
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\3\ Rulemaking authority under TILA was transferred to the CFPB.
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The CFPB published a final rule on January 30, 2013, at 78 FR 6408,
entitled, ``Ability-to-Repay and Qualified Mortgage Standards under the
Truth in Lending Act (Regulation Z),'' which is referred to in this
preamble as the CFPB final rule. The CFPB final rule implemented
section 129C(b) by defining ``qualified mortgage'' with two degrees of
protections for creditors and assignees of a qualified mortgage. The
CFPB's regulations implementing section 129C(b) are codified at 12 CFR
part 1026. The CFPB regulations establish both a safe harbor and a
rebuttable presumption of compliance for transactions that are
``qualified mortgages.''
Under the CFPB's regulation, a qualified mortgage falls into the
safe harbor category and is conclusively presumed to have met the
ability-to-repay requirements if it is not a ``higher-priced covered
transaction.'' \4\ A qualified mortgage that is a higher-priced covered
transaction has only a rebuttable presumption of compliance with the
ability-to-repay requirement, even though each element of the
``qualified mortgage'' definition is met. See 12 CFR
1026.43(e)(1)(ii)(B). The CFPB's rule is intended to provide greater
protection for borrowers by providing only a rebuttable presumption of
compliance for higher-priced covered transactions.
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\4\ A ``higher-priced covered transaction'' is a transaction
that has an annual percentage rate (APR) that exceeds the average
prime offer rate (APOR) for a comparable transaction as of the date
the interest rate is set by 1.5 or more percentage points for a
first-lien covered transaction, or by 3.5 or more percentage points
for a subordinate-lien covered transaction.
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The preamble to HUD's September 30, 2013, proposed rule discussed
the CFPB's qualified mortgage regulations in more detail. Members of
the public interested in more detail about the CFPB's regulations may
refer to the preamble of HUD's September 30, 2013, proposed rule (see
78 FR 59892-59893) but more importantly should refer to the preamble to
the CFPB's final rule published in the Federal Register on January 30,
2013, at 78 FR 6409.\5\
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\5\ Various provisions of CFPB's January 2013, final rule were
amended by rules published in the Federal Register on June 13, 2013,
at 78 FR 35430, July 24, 2013, at 78 FR 44686, July 30, 2013, at 78
FR 45842, October 1, 2013, at 78 FR 60382, and October 23, 2013, at
78 FR 62993.
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III. HUD's September 30, 2013, Proposed Rule
In its September 30, 2013, proposed rule, HUD submitted for public
comment regulations defining qualified mortgage for its insured and
guaranteed single family loan programs. The covered programs consist of
single family loans insured under the National Housing Act (12 U.S.C.
1701 et seq.), and section 184 loans for Indian housing under the
Housing and Community Development Act of 1992 (12 U.S.C. 1715z-13a)
(Section 184 guaranteed loans) and section 184A loans for Native
Hawaiian housing under the Housing and Community Development Act of
1992 (1715z-13b) (Section 184A guaranteed loans). Of these programs,
the single family loans insured under Title II of the National Housing
Act (12 U.S.C. 1701 et seq.) (Title II) present the largest volume of
mortgages insured by HUD, through FHA.
In the September 30, 2013, proposed rule, HUD proposed to define
all FHA-insured single family mortgages to be qualified mortgages,
except for reverse mortgages insured under HUD's Home Equity Conversion
Mortgage (HECM) program (section 255 of the National Housing Act (12
U.S.C. 1715z-20)), which are exempt from the ability-to-repay
requirements. Mortgages insured under the Title I Property Improvement
Loan Insurance program and Manufactured Home Loan program (Title I),
authorized by section 2 of the National Housing Act (12 U.S.C. 1703),
and Section 184 guaranteed loans and Section 184A guaranteed loans,
would be designated safe harbor qualified mortgages, with no specific
points and fees limits and with no annual percentage rate (APR) limits.
See 78 FR 59895 and 59897.
Similar to the CFPB's regulations, HUD proposed to provide for two
types of qualified mortgages for FHA Title II mortgages: (1) A safe
harbor qualified mortgage and (2) a rebuttable presumption qualified
mortgage. For the Title II mortgages, HUD proposed to modify the APR
limit used in the ``higher-priced covered transaction'' element as
defined by the CFPB to distinguish between HUD's safe harbor qualified
mortgages and rebuttable presumption qualified mortgages.
For Title II mortgages, HUD proposed to add a new Sec. 203.19 to
its regulations in 24 CFR part 203 \6\ that would require, through the
proposed definition of ``qualified mortgage,'' all FHA-insured single
family mortgages, except for HECMs, to be ``qualified mortgages.'' HUD
proposed to incorporate the safe harbor and rebuttable presumption
standards within the definition of a ``qualified mortgage'' rather than
create subsets based on defining whether a mortgage is a higher-priced
covered transaction, as provided in the CFPB's regulations. HUD also
proposed to adopt the CFPB's points and fees limitations at 12 CFR
1026.43(e)(3). HUD advised, in the proposed rule, that it considered
the adoption of the points and fees limit as established by statute and
adopted by the CFPB in its final rule to be appropriate.\7\
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\6\ All single family mortgages insured by FHA under the
National Housing Act are governed by regulations in 24 CFR part 203
except for property improvement and manufactured home loans under
Title I and the HECM program.
\7\ As noted in the proposed rule, HUD's upfront mortgage
insurance premium (UFMIP) is not included in the points and fees.
---------------------------------------------------------------------------
HUD's proposed rule defined ``safe harbor qualified mortgage'' for
Title II mortgages as one that meets the requirements for insurance
under the National Housing Act, meets the CFPB's points and fees limit,
and has an APR for a first-lien mortgage relative to the average prime
offer rate (APOR) that
[[Page 75219]]
does not exceed the combined annual mortgage insurance premium (MIP)
and 1.15 percentage points. HUD's proposed definition of ``safe harbor
qualified mortgage'' for Title II mortgages provides a different APR
relative to APOR threshold than under the CFPB's regulation. The APR
relative to APOR threshold is higher than CFPB's and fluctuates
according to the product's MIP. The CFPB's construct for determining a
higher-priced covered transaction captured a number of FHA loans as a
result of the MIP which HUD believes needs to be addressed.
As provided in the preamble to HUD's proposed rule, because all
FHA-insured mortgages include a MIP that may vary from time to time to
address HUD's financial soundness responsibilities, including the MIP
as an element of the threshold that distinguishes safe harbor from
rebuttable presumption allows the threshold to ``float'' in a manner
that allows HUD to fulfill its responsibilities that would not be
feasible if HUD adopted a threshold based only on the amount that APR
exceeds APOR. As noted in the proposed rule, if a straight APR over
APOR threshold were adopted by HUD, every time HUD would change the MIP
to ensure the financial soundness of its insurance fund and reduce risk
to the fund or to reflect a more positive market, HUD would also have
to consider changing the threshold APR limit. HUD also provides for a
higher overall APR relative to APOR to remove the impact of the MIP on
the designation of ``safe harbor qualified mortgage'' and ``rebuttable
presumption qualified mortgage'' definitions.
In the September 30, 2013, proposed rule, HUD proposed to define a
``rebuttable presumption qualified mortgage'' for Title II mortgages as
a single family mortgage that is insured under the National Housing
Act, does not exceed the CFPB's limits on points and fees, and has an
APR that exceeds the APOR for a comparable mortgage, as of the date the
interest rate is set, by more than the combined annual MIP and 1.15
percentage points for a first-lien mortgage. HUD's proposed rule
provided that a mortgage that meets the requirements for a rebuttable
presumption qualified mortgage would be presumed to comply with the
ability to repay requirements in 15 U.S.C. 1639c(a). The proposed rule
further provided that any rebuttal of such presumption of compliance
must show that despite meeting the ``rebuttable presumption qualified
mortgage'' requirements, the mortgagee did not make a reasonable and
good-faith determination of the mortgagor's repayment ability at the
time of consummation when underwriting the mortgage in accordance with
HUD requirements.
In the September 30, 2013, proposed rule, HUD proposed to require
FHA streamlined refinances to comply with HUD's qualified mortgage
rule; that is, to require streamlined refinances to meet the points and
fees requirements. Section 129C(a)(5) of TILA grants HUD the authority
to exempt streamlined refinancing from the income verification
requirements of section 129C(a)(4), subject to certain conditions. In
the proposed rule, HUD advised that it did not consider it necessary to
exercise this authority because HUD's qualified mortgage definition
results in an exemption similar to the one contemplated under section
129C(a)(5). HUD requirements only exempt lenders from verifying income
if the loan is originated consistent with the FHA-streamlined
refinancing requirements, which means that the mortgage must be
current, the loan is designed to lower the monthly principal and
interest payment, and the loan involves no cash back to the borrower
except for minor adjustments.\8\
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\8\ Handbook 4155.1, Ch. 6, Sec. C (Mortgage Credit Analysis for
Mortgage Insurance on One-to-Four Unit Mortgage Loans--Streamline
Refinances) http://portal.hud.gov/hudportal/HUD?src=/program_offices/administration/hudclips/handbooks/hsgh/4155.1.
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HUD's proposed rule provided a detailed description of the policy
and factors that HUD considered in developing a definition of
``qualified mortgage'' for the mortgages that it insures, guarantees,
or otherwise administers. HUD is not repeating such description in the
preamble to this final rule, and refers interested parties to the
preamble of the September 30, 2013, proposed rule, for more detailed
information about the proposed rule choices.
IV. This Final Rule
As noted earlier in this preamble, HUD retains its core definition
of qualified mortgage, as provided in the September 30, 2013, proposed
rule. However, in response to public comments, HUD makes certain
clarifications and provides certain exemptions to compliance with HUD's
qualified mortgage regulations in this final rule. Changes to the
regulatory text made by this final rule and certain clarifications are
as follows:
Compliance timeframe. As HUD notes in greater detail in
the responses to public comments below, this rule should allow lenders
to make the same number of insured safe harbor qualified mortgages,
using systems they have already been putting in place, than if HUD had
taken no action. By taking the action of issuing this rule, HUD also
provides an opportunity for lenders to modify their systems further on
their own timetable to take full advantage of the potential increase in
the number of insured safe harbor qualified mortgages allowed by this
rule. HUD expects in accordance with a lender's own timetable and
allocation of resources a lender will update its systems to increase
the number of HUD-insured safe harbor qualified mortgages so to track
any future revisions to HUD's MIP.
Designation of manufactured home mortgages as FHA safe
harbor qualified mortgages. HUD designates mortgages on manufactured
homes insured under Title I and Title II to be safe harbor qualified
mortgages with no changes, at this time, to the underwriting
requirements for this category of housing. HUD's proposed rule was
silent on the treatment of Title II manufactured housing, but HUD's
intention was to exempt Title II manufactured housing mortgages from
meeting the points and fees requirements of HUD's definition of
qualified mortgage. HUD's designation of Title I loans as safe harbor
qualified mortgages was also meant to encompass not only the Title I
property improvement loans but also the Title I Manufactured Home Loan
program. Similar to HUD's approach to Title I, HUD insurance of
manufactured housing under Title II is a specialized product that
necessitates further study.
Transactions exempted from compliance with HUD's qualified
mortgage definition. HUD is exempting certain mortgage transactions
from compliance with HUD's qualified mortgage definition, which means
that unlike all other FHA-insured mortgages, these mortgages are not
subject to the requirements in Sec. 203.19(b). These exemptions are
the same exemptions provided by the CFPB in its regulations (see 12 CFR
1026.43(a)(3)). In exempting some of these transactions, the CFPB
stated that the institutions involved in these transactions employ a
traditional model of relationship lending that did not succumb to the
general deterioration in lending standards that contributed to the
financial crisis, they have particularly strong incentives to maintain
positive reputations in their communities, and they often keep the
loans they make in their own portfolios in order to pay appropriate
attention to the borrower's ability to repay the loan. Therefore,
consistent with the CFPB, HUD exempts from compliance with its
definition of qualified mortgage the following insured mortgages:
[[Page 75220]]
(1) A reverse mortgage subject to 12 CFR 1026.33;
(2) a temporary or ``bridge'' loan with a term of 12 months or
less;
(3) a construction phase of 12 months or less of a construction-to-
permanent loan;
(4) a mortgage made by:
(a) A housing finance agency (HFA), as defined in HUD's regulations
at 24 CFR 266.5;
(b) a creditor designated as a Community Development Financial
Institution, as defined in the regulations of the Department of
Treasury's Community Development Financial Institutions program at 12
CFR 1805.104(h);
(c) a creditor designated as a Downpayment Assistance through
Secondary Financing Provider, pursuant to HUD's regulations in 24 CFR
200.194(a), operating in accordance with HUD regulations as applicable
to such creditors;
(d) a creditor designated as a Community Housing Development
Organization provided that the creditor has entered into a commitment
with a participating jurisdiction and is undertaking a project under
the HOME Investment Partnerships (HOME) program, pursuant to HUD's
regulations at 24 CFR 92.300(a);
(e) a creditor with a tax exemption ruling or determination letter
from the Internal Revenue Service under section 501(c)(3) of the
Internal Revenue Code of 1986 (26 U.S.C. 501(c)(3); 26 CFR 1.501(c)(3)-
1), provided that:
(i) During the calendar year preceding receipt of the consumer's
application, the creditor extended credit secured by a dwelling no more
than 200 times;
(ii) during the calendar year preceding receipt of the consumer's
application, the creditor extended credit secured by a dwelling only to
consumers with income that did not exceed the low- and moderate-income
household limit as established pursuant to section 102 of the Housing
and Community Development Act of 1974 (42 U.S.C. 5302(a)(20)) and
amended from time to time by HUD pursuant to HUD's regulations at 24
CFR 570.3;
(iii) the extension of credit is to a consumer with income that
does not exceed the household limit specified in the applicable FHA
program; and
(iv) the creditor determines, in accordance with written
procedures, that the consumer has a reasonable ability to repay the
extension of credit; and
(5) an extension of credit made pursuant to a program authorized by
sections 101 and 109 of the Emergency Economic Stabilization Act of
2008 (12 U.S.C. 5211; 5219).
All of these mortgages were exempt by the CFPB from compliance with its
ability to repay regulations and HUD agrees that the single family
mortgages with which these governmental and nonprofit organizations are
involved, many under HUD programs as noted above, should be exempt from
compliance with HUD's qualified mortgage regulations while otherwise
meeting HUD requirements.
Adoption of the CFPB's guidance definitions for APR, APOR,
and points and fees. For purposes of clarity, this final rule adopts,
through cross-reference, the CFPB's definitions of APOR, APR, and
points and fees. The CFPB defines APOR at 12 CFR 1026.35, APR at
1026.22, and points and fees at 12 CFR 1026.32(b)(1). In addition to
these definitions, the CFPB provides guidance for APR calculations in
Appendix J to 12 CFR part 1026; guidance for points and fees is
provided in Paragraph 32(b) of CFPB's Official Interpretation, which is
Supplement I to 12 CFR part 1026; and guidance for APOR is provided in
Paragraph 35 of Supplement I to 12 CFR part 1026. HUD adopts this
guidance for consistency with the CFPB.
Adoption of CFPB's definition of points and fees and
clarification on non-affiliated fees. HUD clarifies the points and fees
calculation that applies in this final rule by incorporating the CFPB's
points and fees definition at 12 CFR 1026.32(b). In adopting the CFPB's
points and fees definition, HUD clarifies for commenters that housing
counseling fees and rehabilitation consultant fees under HUD's 203(k)
program may be excluded from points and fees if made by a third-party
and is not retained by the creditor, loan originator, or an affiliate
of either. HUD-approved housing counseling for borrowers seeking FHA-
insured mortgages, whether such counseling is voluntary or required, is
not part of the points and fees calculation. HUD-approved housing
counseling agencies are not permitted to be affiliated with either a
creditor or loan originator and, therefore, fees that were paid for
counseling would be exempt from the points and fees calculation for the
transaction. Additionally, exempt from the points and fees calculation
are consultant fees for ensuring program compliance and for drafting
the required architectural exhibits for the 203(k) program by non-
affiliated entities. HUD requires the use of a HUD consultant to ensure
203(k) program compliance and strongly encourages the use of an
independent consultant to prepare the required architectural exhibits.
Both types of consultation fees, if obtained by non-affiliated entities
on the 203(k) consultant list, are not included in the points and fees
calculation, and therefore adoption of the CFPB points and fees
definition should not reduce access to the 203(k) program
Clarification of the rebuttable presumption standard. HUD
amends the rebuttable presumption standard to clarify the elements of
such standard are consistent with HUD's existing underwriting
requirements for rebutting the presumption. The proposed rule stated
that to rebut the presumption a borrower must prove that ``the mortgage
exceeded the points and fees limit in paragraph (b)(1) of this section
or that, despite the mortgage being insured under the National Housing
Act, the mortgagee did not make a reasonable and good-faith
determination of the mortgagor's repayment ability at the time of
consummation, by failing to consider the mortgagor's income, debt
obligations, alimony, child support, monthly payment on any
simultaneous loans, and monthly payment (including mortgage-related
obligations) on the mortgage, as applicable to the type of mortgage,
when underwriting the mortgage in accordance with HUD requirements.''
HUD adopted the list of the CFPB's factors (mortgagor's income, debt
obligations, alimony, child support, monthly payment on any
simultaneous loans, and monthly payment) to remain consistent with the
CFPB's rebuttable presumption standard, but intended those factors to
harmonize with HUD's existing underwriting requirements. In response to
commenters, HUD believes listing HUD's specific underwriting categories
is more helpful than solely citing to the list provided by the CFPB.
HUD replaces the CFPB's list with FHA's ``income, credit and assets''
underwriting categories, found in FHA's Underwriting Handbook.
Additionally, HUD clarifies that the entity is required to do more than
consider the list of ability to repay indicators for the borrower, but
evaluate the mortgagor's income, credit, and assets in accordance with
HUD underwriting requirements.
Clarification of relationship between indemnification and
qualified mortgage status. HUD adds at this final rule stage a section
clarifying that a demand for indemnification or the occurrence of
indemnification does not per se remove qualified mortgage status. The
final rule includes an indemnification clause for both Title I and
Title II loans, which clarifies that an indemnification demand or
resolution
[[Page 75221]]
of a demand that relates to whether the loan satisfied relevant
eligibility and underwriting requirements at time of consummation may
result from facts that could allow a change in qualified mortgage
status, but the existence of an indemnification does not per se remove
qualified mortgage status.
Flexibility to respond to lender or borrower needs
consistent with the FHA mission. HUD also adds language to its
qualified mortgage regulations to give FHA flexibility to make
adjustments, including to the points and fees definition and the list
of exempted transactions, that may be necessary to address situations
where the FHA Commissioner determines such adjustments are necessary,
including in times of significant decrease of available credit,
increase in foreclosures, or disaster situations that adversely affect
the availability of housing finance. The changes would provide for
notice and the opportunity for comment prior to implementing any
changes, and HUD contemplates that changes made through this notice
process would be temporary not permanent changes. For example, the
housing mortgage crisis that emerged late in 2008 resulted in mortgage
products designed to keep homeowners from losing their homes. These
mortgage products were largely temporary without a permanent regulatory
structure. In a situation such as this, the notice process provided in
this rule would allow the Commissioner to determine whether such
products would be subject to FHA's qualified mortgage definition or be
exempt. The notice process would not, however, apply to the rebuttable
presumption/safe harbor thresholds in Sec. 203.19(b)(2) and (3).
In the preamble to the September 30, 2013, proposed rule, HUD
committed to further study the parameters for distinguishing between a
safe harbor qualified mortgage and a rebuttable presumption qualified
mortgage for the Title I, Section 184 and Section 184A loans, and makes
this same commitment for Title II loans that are subject to HUD's
qualified mortgage regulations in this final rule. HUD will monitor how
the two subsets of qualified mortgages work for FHA Title II loans
subject to these regulations, primarily in relationship to the two
subset approach provided for the conventional mortgage market. Given
current and expected MIPs, HUD also reiterates that a mortgage that is
a safe harbor qualified mortgage under the CFPB's special rules for HUD
loans as a safe harbor qualified mortgage would satisfy HUD's
regulations.
V. HUD's Responses to Key Issues Raised by Public Commenters
This section of the preamble discusses the key issues raised by the
comments submitted in response to the September 30, 2013, proposed
rule. All public comments can be viewed at the following Web site,
www.regulations.gov, under docket number HUD-2013-0093.
Comment: Delay implementation of HUD's rule: The majority of
commenters expressed support for HUD's proposed rule but the majority
also stated that an implementation date of January 2014 was too soon
and would not allow sufficient time for lenders to modify their systems
to include the specific features of HUD requirements for qualified
mortgages. Commenters stated that industry would find it extremely
challenging to be ready to originate loans without a robust compliance
infrastructure in place. Commenters suggested that if HUD is intent in
implementing qualified mortgage regulations by January 2014, HUD should
do so through a staged approach. Commenters suggested that HUD begin
with all HUD insured and guaranteed single family mortgages being
designated as safe harbor qualified mortgages and provide for
implementation of HUD rebuttable presumption qualified mortgages at a
later date. Another commenter requested that HUD withdraw its rule
until HUD had taken more time to assess the impacts of its proposed
rule.
Response: HUD understands that the lending industry may need more
time to adjust systems to fully implement HUD's qualified mortgage
regulations. However, HUD considers that all lenders will be in a
position to substantially implement HUD's regulations immediately
because of system modifications that were already required under CFPB's
regulations and which lenders have been given a full year to implement.
If HUD had taken no action at all, lenders making FHA-insured loans
that are qualified mortgages would have to have systems in place to
account for loans that (1) have regular periodic payments and do not
have certain risky features, (2) do not exceed a term of 30 years, and
(3) do not exceed certain specified limits on points and fees. HUD's
rule is not changing any of these requirements and, therefore, no
system changes to address any of these requirements because of HUD's
rule should be necessary. Further, systems that lenders have put in
place to identify safe harbor qualified mortgages under the CFPB's 1.5
percent APR threshold should also identify the substantial majority of
safe harbor qualified mortgages under HUD's APR threshold. A loan that
meets the 1.5 percent threshold will also be in compliance with the HUD
threshold. Only HUD safe harbor loans that exceed the 1.5 percent
threshold would not be picked up by such systems. Thus, lenders are no
worse off under HUD's rule in terms of making safe harbor qualified
mortgages, using systems already required to be in place, than they
would be if HUD had taken no action. To the extent that lenders take
steps to conform their systems to identify the higher APR safe harbor
threshold allowed under the HUD rule, they will be better off in terms
of making safe harbor qualified mortgages than they would have been if
HUD had taken no action. The HUD rule provides an immediate opportunity
for lenders to increase the number of HUD-insured safe harbor qualified
mortgages they make in accordance with a timetable and allocation of
resources of their choosing, but HUD does not consider it necessary for
any lender to change systems immediately to adapt to HUD's requirements
in order to make the same number of insured safe harbor qualified
mortgages as a lender would otherwise make.
Comment: Unnecessary to establish two types of qualified mortgages
for FHA loans: Designate all FHA loans as safe harbor qualified
mortgages to reduce burden and costs: Commenters stated that
bifurcation between qualified mortgage safe harbor loans and qualified
mortgage rebuttable presumption loans under CFPB's rule is intended to
provide greater protection for borrowers with higher-priced mortgage
loans. The commenters stated that unlike the CFPB's rule, which governs
the wider market of private prime and higher-priced lending, HUD's rule
covers only FHA loans. The commenters stated that this protection is
unnecessary in the context of FHA loans, which are subject to strict
oversight, control, and regulation. Commenters stated that FHA's sound
underwriting process ensures consumer access to safe mortgage loans and
the recent steps FHA has undertaken to strengthen its underwriting
standards have reduced risks.
A commenter similarly stated that its view is that there are
safeguards and practices in place, unique to FHA lending and its
mission, to lessen the need to copy the CFPB's two-tiered qualified
mortgage approach and HUD should instead classify all FHA loans as safe
harbor qualified mortgages. The commenter stated that other than a
desire to mirror the CFPB's final rule,
[[Page 75222]]
HUD's proposed rule provides no basis that such a distinction is needed
for the FHA market. The commenter stated that HUD acknowledges (in the
costs and benefits discussion of the preamble to the proposed rule)
that the vast majority of FHA loans will meet the proposed safe harbor
parameters; and for most of those that do not, it would be attributable
to the limit on points and fees. The commenter stated that this
suggests that there are no market indications that the two-tiered
approach is warranted.
Another commenter stated that HUD defended its proposal to adopt
the same points/fees measure for FHA-insured loans as the CFPB
qualified mortgage final rule on the basis that it would not give a
lender an incentive to choose on the basis of a different (and perhaps
higher) points/fees measure for FHA-insured loans. The commenter stated
that HUD should consider the potential loss of additional price,
product, and service choices for the borrower that might be reduced by
the use of a different qualified mortgage standard.
A few commenters stated that FHA's mission is to correct, not
create, market failure. The commenter stated that HUD's proposed rule
establishes a materially different qualified mortgage standard for FHA
insured mortgages than the CFPB qualified mortgage standard for
conventional mortgage loans. The commenters stated that HUD seems to
rely upon an overly expansive ``mission'' justification for creating a
different qualified mortgage rule than the one established by the CFPB.
The commenters stated that to the extent the mission of FHA is to
ensure credit access to under-served people, such a distinction may be
appropriate, but that the great majority of FHA-insured lending in
recent years has been related to a different purpose, which is to
provide backstop countercyclical liquidity in a housing market decline.
The commenters stated this countercyclical activity is not discussed in
the proposed rule, so it is unclear how this activity relates to the
mission justification cited. The commenter stated that substantially
different qualified mortgage rules distort markets and delay the return
of FHA to its primary mission.
Commenters stated that HUD's proposed qualified mortgage structure
for FHA loans adds significant regulatory burden and cost to the lender
and borrower. Commenters stated that differentiating safe harbor from
rebuttable presumption loans for only 3 percent of the current FHA
market would require extensive system changes, staff training and
monitoring and compliance systems, which will be an expense that
saddles the 97 percent of FHA borrowers, whereas, treating all loans as
safe harbors will present little compliance cost or regulatory burden.
The industry is already burdened with extensive and significant changes
that are estimated to increase origination costs.
Response: HUD's position is that in addition to prospective
borrowers of FHA-insured mortgages the overall mortgage market benefits
from FHA loans being closely aligned with the statutory criteria
applicable to a borrower's ability to repay, and the regulations
promulgated by the CFPB. Section 1402 of the Dodd-Frank Act states that
Congress created new section 129C of TILA upon a finding that
``economic stabilization would be enhanced by the protection,
limitation, and regulation of the terms of residential mortgage credit
and the practices related to such credit, while ensuring that
responsible, affordable mortgage credit remains available to
consumers.'' \9\ Section 1402 of the Dodd-Frank Act further states that
the purpose of section 129C of TILA is to ``assure that consumers are
offered and receive residential mortgage loans on terms that reasonably
reflect their ability to repay the loans.'' The CFPB, in its
regulations, distinguishes between a safe harbor qualified mortgage and
a rebuttable presumption qualified mortgage based on whether the
mortgages are prime loans (safe harbor) or subprime loans (rebuttable
presumption).\10\
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\9\ See TILA section 129B(a)(1), 15 U.S.C. 1639b(a)(1).
\10\ See 78 FR 6408.
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Although section 129C(b)(3)(B)(ii) of TILA authorizes HUD to
revise, add to, or subtract from the statutory criteria used to define
a qualified mortgage in defining ``qualified mortgage'' for the
mortgages that HUD insures, guarantees or otherwise administers, HUD
respects the analysis that the CFPB undertook in defining ``qualified
mortgage'' for the conventional mortgage market, and sees value in
having a safe harbor qualified mortgage and a rebuttable presumption
qualified mortgage as established in regulation by the CFPB. HUD's
regulation differs from the CFBP's regulation in distinguishing between
the two types of qualified mortgages for FHA Title II mortgages based
on the mortgage's APR. HUD incorporates the APR as an internal element
of HUD's definition of qualified mortgages to distinguish safe harbor
qualified mortgages from the rebuttable presumption qualified
mortgages. The CFPB's ``higher-priced covered transaction'' is an
external element that is applied to a single definition of ``qualified
mortgage.''
As proposed in HUD's September 30, 2013, proposed rule, HUD's
``safe harbor qualified mortgage'' provides a different APR relative to
APOR threshold than the CFPB's requirement that a first-lien covered
transaction have an APR of less than 1.5 percentage points above the
APOR. Under this final rule, for a Title II FHA mortgage to meet the
``safe harbor qualified mortgage'' definition, the mortgage is required
to have an APR that does not exceed the APOR for a comparable mortgage
by more than the combined annual mortgage insurance premium (MIP) and
1.15 percentage points. HUD adopts the higher APR to remediate the fact
that some FHA loans would fall under the CFPB's ``higher-priced covered
transaction'' as a result of the MIP. The MIP by itself should not be
the factor that determines whether a loan is a higher-priced
transaction.
Because all FHA-insured mortgages include a MIP that may vary from
time to time to address HUD's financial soundness responsibilities,
including the MIP as an element of the threshold that distinguishes
safe harbor from rebuttable presumption allows the threshold to
``float'' in a manner that allows HUD to fulfill its responsibilities
that would not be feasible if HUD adopted a threshold based only on the
amount that APR exceeds APOR. If a straight APR over APOR threshold
were adopted by HUD, every time HUD would change the MIP to ensure the
financial soundness of its insurance fund and reduce risk to the fund
or to reflect a more positive market, HUD would also have to consider
changing the threshold APR limit.
In addition to the benefit of having a construct similar to the
CFPB's construct, HUD expects that a rebuttable presumption category
could place downward pressure on the APRs of FHA mortgages. This
downward pressure would result in transfers from some FHA lenders to
some FHA borrowers, and would also provide social benefits (more
sustainable homeowners due to lower rates) in the aggregate. These
transfers from lenders arise from legal protections they receive from
achieving safe harbor rather than rebuttable presumption status under
the HUD rule. Moreover, HUD, through proposing its own rebuttable
presumption standard keeps conventional lenders from sending loans to
HUD to take advantage of what would otherwise be no APR threshold and
forces conventional lenders to keep APR within the limit for the CFPB's
standard or HUD's standard for safe harbor. For example, a
[[Page 75223]]
consumer who applies for a higher risk conventional loan may not meet
the CFPB's qualified mortgage on the basis of high points and fees, or
if the points and fees are reduced to 3 percent, the APR may become too
high for safe harbor under the CFPB rules. However, the consumer might
instead be offered a higher interest rate FHA loan in return for lower
points and fees, and the lender could achieve qualified mortgage with
safe harbor status as an FHA loan with a very high APR in the absence
of an FHA rebuttable presumption standard. Additionally, HUD believes
that the loans that require a higher APR should be treated with more
caution and borrowers should retain the right to challenge on ability-
to-repay grounds. HUD's rule attempts to strike a balance between
providing lenders legal protections and providing borrowers with access
to redress when a loan is more risky.
HUD carefully reviewed the public comments requesting that HUD
adopt a single standard--a safe harbor standard, but for the reasons
presented in this response and in the preamble to HUD's September 30,
2013, proposed rule, HUD maintains that this is the right approach.
Comment: Designate all FHA loans rebuttable presumption qualified
mortgages: A few comments opposed the establishment of a safe harbor
for most FHA loans. The commenters stated that the proposed rule
provides less protection to consumers than the CFPB's rule. The
commenters expressed concern that a consequence would be the
reemergence of abusive FHA lending. The commenters stated that a
rebuttable presumption means that a homeowner can hold a lender to the
basic promise of the CFPB's rule, which is that lenders will reasonably
assess a person's ability to afford a loan before that loan is made. A
commenter stated that only a rebuttable presumption standard can
provide consumers with the legal protection needed to preempt
unforeseen predatory practices.
Another commenter stated that those who support a safe harbor
emphasize the additional cost associated with a rebuttable presumption.
The commenter stated that an examination of the structure of TILA and
the litigation facts associated with claims under TILA makes clear
these claims are unfounded. The commenter stated that TILA's pre-
existing general rules on liability already carefully calibrate the
interests of the industry and its customers, and are applicable even
where there is a rebuttable presumption for ability-to-pay claims. The
commenter disputed that there are substantial legal costs associated
with defending rebuttable presumption loans. The commenter stated that
most homeowners will not have counsel to seek redress, the remedy is
circumscribed, the amount of proof is substantial and the objective
amount of litigation in this area is very small. The commenter urged
HUD to look behind claims of substantial compliance costs associated
with a rebuttable presumption.
Response: HUD disagrees that that the inclusion of a safe harbor
qualified mortgage, as opposed to making all FHA-insured loans
rebuttable presumption mortgages, will result in ``abusive FHA
lending.'' The inclusion of a safe harbor qualified mortgage offers
lenders an incentive to make qualified mortgages while maintaining the
borrower protections required by the Dodd-Frank Act. HUD further notes
that a safe harbor qualified mortgage is not exempt from any legal
challenge. A borrower can continue to file a legal claim against a
lender if the borrower finds or believes that the lender did not meet
statutory or regulatory requirements applicable to a mortgage. However,
for a safe harbor mortgage, the bar in challenging a lender meeting
ability to repay requirements will be higher. Additionally, the
borrower benefits from lower loan costs because lender's face lower
legal risk with a safe harbor qualified mortgage and, as a result, the
lender does not need to build in the cost of the higher legal risk
associated with a rebuttable presumption loan. HUD believes, therefore,
that the loans labeled safe harbor have met the ability-to-repay
requirements and that HUD's structure, that is consistent with CFPB's
structure, is appropriate for FHA-insured loans.
Comment: HUD's adoption of the CFPB's points and fees features will
adversely affect the FHA mortgage market and reduce available credit
for the very populations FHA was established to serve: Commenters
stated that HUD's cap on points and fees will destroy the lending
options for the exact group FHA and HUD were intended to assist.
Commenters stated that lenders are not likely to adapt to meet the
points and fees requirements to insure the loan, but instead the points
and fees threshold will result in preventing some borrowers from
obtaining loans. Commenters requested that HUD increase the 3 percent
limit on points and fees to ensure that low- and moderate-income
borrowers can continue to access a variety of affordable loan products.
A commenter expressed support for protecting borrowers from
excessive and unnecessary fees, but stated that the proposed cap was
too low and could make ineligible for FHA-insurance many responsibly
underwritten loans that are in the borrowers' best interest. A few
commenters stated that HUD's adoption of points and fees is contrary to
other FHA actions. The commenters stated that HUD is returning to an
age where discount points were controlled and limitations were placed
on origination points and this is contrary to action taken by FHA a
year ago when FHA decided to ``deactivate the 1% ceiling to what was
prudent and customary in our region.'' Another commenter stated that
HUD should exclude MIP from the points and fees calculation.
Response: In developing the September 30, 2013, proposed rule, HUD
gave careful consideration to the percentage limit that should be
placed on points and fees. The 3 percent points and fees limit is one
of the statutory criteria used to define a qualified mortgage, and the
CFPB retained this criterion in its regulatory definition with
adjustments to facilitate the presumption of compliance for smaller
loans. HUD considers the proposed adoption of the points and fees
limit, as established by statute and adopted by the CFPB in its rule,
to be appropriate for FHA Title II loans that HUD has identified as
subject to its qualified mortgage definition. In this final rule, HUD
has clarified the points and fees are applicable to FHA-approved
lenders by adopting, through cross-reference, the CFPB's definition of
``points and fees.'' Included in the definition is the exclusion of
``any premium or other charge imposed in connection with any Federal or
State agency program for any guaranty or insurance that protects the
creditor against the consumer's default or other credit loss.'' 12 CFR
1026.32(b)(1)(i)(B).
As stated in the preamble to HUD's September 30, 2013, proposed
rule, HUD's practice prior to this rule was that points and fees would
be individually negotiated.\11\ Although HUD has not established a firm
cap for points and fees for HUD-insured mortgages, they have been
limited to reasonable and customary amounts not to exceed the actual
costs of specific items and reasonable and customary charges as may be
approved by the Federal Housing Commissioner (see 24 CFR 203.27(a)).
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\11\ Generally, the term ``points'' refers to points charged
against interest so that a higher up-front payment results in a
lower interest rate or vice versa.
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As stated in HUD's September 30, 2013, proposed rule, as the market
[[Page 75224]]
adopts the CFPB's 3-percent cap on points and fees for qualified
mortgages, FHA lenders would be required to cap points and fees at
about 3 percent, as a result of HUD's existing reasonable and customary
standard. However, if HUD simply maintained its existing reasonable and
customary standard for FHA lenders, FHA lenders would be forced to
determine if charging an amount a little over 3-percent points and fees
would mean the loan is a qualified mortgage, which could result in
higher litigation costs to prove that the loan was a qualified mortgage
based solely on whether the points and fees of the loan were reasonable
and customary. By HUD adopting the cap of 3- percent points and fees,
lenders would not be forced to determine what is reasonable and
customary, thereby, providing certainty in the market and setting a
clear enforcement standard. Many commenters argued for a bright line
test and the points and fees cap adopted from CFPB accommodates that
request. Additionally, the 3-percent points and fees cap is consistent
with the conventional market's qualified mortgage definition and
adopting the same will provide consistency for FHA lenders. HUD
believes that if it did not adopt the same 3-percent points and fees
caps for the majority of HUD's portfolio FHA could see an increase of
market share.
With respect to concerns about loss of access to mortgage credit by
low- and moderate-income borrowers that FHA has traditionally served,
HUD submits that the exemption of certain transactions from compliance
with HUD's qualified mortgage definition (transactions made on behalf
of entities with missions similar to HUD which assist low- and
moderate-income borrowers in obtaining homeownership financing) helps
ensure that low- and moderate-income borrowers can continue to access a
variety of affordable loan products. HUD also takes the opportunity at
the final rule stage to clarify that HUD-approved housing counseling
fees and rehabilitation consultant fees that are required by HUD and
provided by non-affiliated entities are third party charges, and as
such, would not be included in points and fees under the CFPB's
exemption of bona fide third-party charges at 24 CFR
1026.32(b)(1)(i)(D).\12\
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\12\ Exceptions to this exemption include when the charge is for
a guaranty or insurance that is not in connection with any Federal
or State agency program, is a real-estate related fee, or is a
premium or other charge for insurance for which the creditor is the
beneficiary. 12 CFR 1026.32(b)(1)(i)(D).
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HUD also adds language to its qualified mortgage regulations to
give FHA flexibility to make any adjustments to the points and fees
calculation where the FHA Commissioner determines such adjustments are
necessary.
Comment: The inclusion of mortgage broker's and affiliate's fees in
the cap on point and fees limits consumer choice and makes it difficult
for small lenders and mortgage brokers to compete in the mortgage
market: Several commenters stated that HUD's rule will limit the number
of lenders who can offer mortgage products to borrowers. The primary
objection was the inclusion of mortgage broker fees or affiliate fees
in the points and fees cap in the CFPB's definition of points and fees.
Commenters stated that applying the 3 percent points and fees cap to
mortgage brokers creates a distinct and unfair competitive advantage to
the banks and large lenders. Commenters stated that the points and fees
cap limit adversely impacts lenders with affiliates without apparent
reason.
Commenters stated that the 3 percent cap is too low, and makes it
unprofitable for lenders and brokers to engage in mortgage business.
The commenters stated that, by including compensation paid by a
creditor to any loan originator other than an employee (e.g., a
mortgage brokerage company or a lender acting as a mortgage broker) in
the points and fees calculation, non-depository direct lenders and
other bank owned companies are given a distinct and arguably unfair
competitive advantage over those in the wholesale channel. The
commenters stated that the retail lender can build compensation into
its loan, where the broker and a direct lender cannot, by effect making
a double-standard. Commenters stated that inclusion of the lender-paid
compensation in the 3 percent cap will all but eliminate broker
participation in small loans. The adverse treatment of affiliated fees
has a disproportionate effect on lower dollar transactions, and
consequently, the availability of lower dollar mortgages will be
somewhat limited, which goes against the mission of FHA lending.
One commenter stated that it is important to remember that the
largest third-party fee, often provided by an affiliated title agent,
is title insurance. The commenter stated that the cost for title
insurance to the consumer does not vary from title agent to title agent
whether there is or is not an affiliation because agents are bound by
their title insurance underwriter's filed rates for the state where the
property is located. The commenter stated that the title agent charges
the rate filed by the underwriter. Nonetheless, the current definition
would include the title insurance charge in the points and fees if the
title agent is an affiliate.
One commenter stated that in place of the inclusion of mortgage
broker's and affiliate's fees in the cap on points and fees, HUD could
limit adverse selection by including in its regulation that ``any
lender participating in the FHA program may not pay or compensate a
loan originator or broker differently for originating an FHA loan than
any other loan type, through any compensation mechanism, whether such
compensation is paid directly or indirectly to the originator.''
Response: HUD recognizes that this issue, which was raised in the
CFPB's rulemaking on the definition of ``qualified mortgage,'' remains
an issue among industry commenters. This issue was discussed by CFPB in
the preamble to its January 2013 final rule. CFPB responded to comments
submitted on the May 11, 2011, proposed rule of the Federal Reserve
Board, which had initial responsibility for proposing regulations to
implement section 129C of TILA,\13\ As explained by the CFPB in the
preamble to the final rule, TILA, as amended by the Dodd-Frank Act,
contemplates that compensation paid to mortgage brokers and other loan
originators after consummation of a loan transaction is to be counted
toward the points and fees threshold.
The CFPB noted that the Dodd-Frank Act removed the phrase ``payable
at or before closing'' from the high-cost mortgage points and fees test
and did not apply the ``payable at or before closing'' limitation to
the points and fees cap for qualified mortgages. See 78 FR 6432 and
sections 103(bb)(1)(A)(ii) and 129C(b)(2)(A)(vii), (b)(2)(C) of TILA.
The CFPB stated that in light of evident concern by Congress with loan
originator compensation practices, it would not be appropriate to waive
the statutory requirement that loan originator compensation be included
in points and fees, but that the CFPB would provide detailed guidance
to clarify what compensation must be included in points and fees. See
78 FR 6434-6435. Additionally, CFPB stated that throughout the Dodd-
Frank Act amendments Congress made clear that affiliate fees should be
treated the same way as fees paid to loan originators. See 78 FR 6439.
Given the detailed response that CFBP provided in its rule on this
issue, the submission of these same comments in response to HUD's
rulemaking does not adequately rebut CFPB's justification for the
differing treatment, which focuses on potential competition issues. At
this final rule stage, HUD will not take a position that differs from
that taken by
[[Page 75225]]
the CFPB, which was based on direction from Congress that loan
origination compensation and affiliated fees are to be included in
points and fees. HUD needs time to examine this issue further, and see
whether HUD has discretion to take action that differs from the
position taken by CFPB and whether a departure from CFPB on this issue
would be in the interest of promoting HUD's mission.
Comment: Failure to meet the point and fee structure disqualifies a
loan from insurance and requires a more careful analysis: Commenters
stated that if HUD will not insure non-qualified mortgages, HUD's
regulation should provide for adjustment of the points and fees limits
for lower balances. One of the commenters expressed support for a
higher percentage for lower balance loans and wrote that the threshold
of 3 percent for FHA becomes a problem at the $100,000 range. The
commenter recommended amending the cap to allow loans between $100,000
and $150,000, up to $4,500 in points and fees. The commenter stated
that the additional rate would ``more accurately reflect the fixed
costs of originating these smaller balance loans,'' and avoid the
denial of loans to otherwise qualified FHA borrowers.
Another commenter stated that HUD's rule provides that a failure to
meet the points and fees limit and for any of the qualified mortgage
requirements not only disqualifies a loan from qualified mortgage
status but also disqualifies a loan from qualifying for FHA insurance.
The commenter stated that if FHA does go in this direction it is
important for FHA to ensure that qualified mortgage requirements are
appropriately adjusted in light of their role as program requirements.
The commenter urged HUD to adjust the points and fees limit for lower
balance FHA-insured loans. Another commenter stated that, as a result
of only being able to originate qualified mortgage loans lenders will
likely leave the market place and that will disproportionately hurt
underserved populations.
Response: As addressed above, HUD believes aligning with the CFPB's
limit on points and fees is appropriate. TILA section 129C(b)(2)
defined the points and fees limit for a qualified mortgage at 3 percent
and tasked the CFPB to come up with adjustments to the limit for
smaller loans. The CFPB analyzed the differences between loan amounts
to determine that a $100,000 loan cap was the appropriate place to
limit the definition for a smaller loan for the points and fees
threshold. See 78 FR 6531-6532. HUD does not currently have data on
points and fees to determine whether a different threshold would be
appropriate for defining smaller loans for FHA loans. HUD needs time to
examine this issue further, and determine whether HUD has discretion to
take action that differs from the position taken by CFPB and whether a
departure from CFPB on this issue would be in the interest of promoting
HUD's mission.
Comment: Capping points and fees is irrelevant to a borrower's
ability to repay a mortgage: A few commenters stated that capping
points and fees does not have a direct connection to whether a borrower
can repay a mortgage loan. A commenter stated that the APOR and APR
have nothing to do with the actual ability of the borrower to repay the
loan.
Response: The 3 percent points and fees limit is one of the
statutory criteria used to define a qualified mortgage. As the CFPB
noted in the preamble to its January 2013 final rule, Congressional
intent in amending TILA was not solely to require lenders to take the
necessary steps to try and ensure that a borrower can repay a
residential mortgage loan but that a qualified mortgage is a products
with limited fees and safe features which preserves the availability of
affordable credit to consumers. See the CFPB's final rule at 78 FR
6426.
Comment: Replace HUD's proposed 1.15 percentage point with the
CFPB's 1.5 percentage point: Several commenters recommended that HUD's
safe harbor APR standard for FHA be adopted with the standard 1.5
percentage point in place of the proposed 1.15 percentage point. The
commenters stated that such a change would bring consistency with the
CFPB's regulation, reduce confusion in the lending community, and
broaden the scope of loans that meet the safe harbor definition. Other
commenters stated that this ``structure will more adequately address
the needs of low- and moderate-income borrowers, borrowers from
underserved areas, and minority borrowers.'' A commenter stated that
adopting the 1.5 percentage point ratio would allow lenders more
flexibility to offer lender credits to help first time and underserved
buyers without exceeding the qualified mortgage limits.
A commenter questioned HUD's basis for the APR for FHA safe
harbor's to exceed the APR of the CFPB's safe harbor standard. The
commenter stated that HUD's first justification seems to rest on lower
lender compliance costs and lower litigation costs which will pass on
savings to borrowers. The commenter stated that the second factor that
HUD points to is the perceived need to allow its APR to APOR spread
rate to float with the MIP rate. The commenter stated that the overall
purpose of Dodd-Frank ability-to-repay requirements, of which the CFPB
and HUD qualified mortgage rules are subsets, is to strike a balance
between providing lenders with legal protection when making relatively
safe loans that the borrower reasonably can be expected to repay, and
providing borrowers with appropriate legal recourse when lenders do not
do so. The commenter stated that while HUD's mission to facilitate
lending to traditionally underserved borrowers is relevant here, so too
must be preserving the legal rights of borrowers where lenders fail to
meet their obligations to ensure the borrower's reasonable ability to
repay the loan. The commenter further stated that while the inclusion
of the MIP may be a legitimate concern it can be included within the
calculation already provided by the CFPB's safe harbor definition.
Response: As stated in HUD's September 30, 2013, proposed rule, and
accompanying regulatory impact analysis, HUD's qualified mortgage
standard increases the number of FHA-insured mortgages that are safe
harbor. As provided in the proposed rule and maintained in this final
rule, FHA's MIP is explicitly included in the APR to APOR spread
calculation but the limit on the spread itself, prior to the addition
of the MIP, is reduced from 150 basis points (in the CFPB final rule)
to 115 basis points (in HUD's rule). The inclusion of the MIP and the
reduction in basis points results in a reduction of the pool of FHA-
insured mortgages that would be designated rebuttable presumption under
the CFPB's standard while increasing the number of FHA-insured
mortgages that would be designated safe harbor. As noted in the
regulatory impact analysis that accompanied HUD's September 30, 2013,
proposed rule, HUD estimated that there were 129,500 (about 19 percent)
FHA-insured mortgages (with relatively high APRs) insured between July
2012 and December 2012 that would have been rebuttable presumption
under the CFPB's qualified mortgage standard but qualify as safe harbor
qualified mortgages under HUD's regulation. If HUD adopted a basis
point metric higher than 115 percent plus MIP more loans would be
designated safe harbor. HUD's analysis shows that adoption of a higher
initial basis point, such as 150 percent, would result in only a few
additional loans being designated a safe harbor qualified mortgage, but
that the loans that would are the ones that HUD believes would receive
greater benefit from having
[[Page 75226]]
access to the protections afforded a rebuttable presumption loan.
Therefore, HUD maintains that the 115 basis points plus MIP is the
appropriate standard.
HUD reiterates that the compliance mechanisms to identify a safe
harbor qualified mortgage under the special rules for HUD loans will
similarly identify a safe harbor qualified mortgage for FHA insured
loans under HUD's final rule.
Comment: Provide a clear distinction between safe harbor and
rebuttable presumption: Some commenters expressed support for HUD's
proposal to adopt an APR relative to the APOR that accounts for the
annual MIP. Other commenters, however, requested that HUD clarify how
the threshold between FHA's safe harbor qualified mortgage and
rebuttable presumption would work, specifically what the MIP is and how
it is to be incorporated. The commenters stated that it is not entirely
clear how lenders would combine the annual MIP with 1.15% to calculate
the FHA safe harbor threshold. The commenters stated that it appears
that HUD intends the lender to calculate the sum of the annual MIP rate
and 1.15% (e.g., 1.35 + 1.15 = 2.50) and then determine whether the
loan's APR exceeds the applicable APOR by that amount.
Several commenters suggested that the distinction between an FHA
safe harbor qualified mortgage and a rebuttable presumption qualified
mortgage should be keyed to a bright line standard, not a rate cut-off
that incorporates a floating MIP component. The commenters stated that
HUD should consider moving from a floating threshold incorporating any
of several MIP premiums to the CFPB standard of 150 bps with the
addition of 135 bps to reflect the maximum MIP for FHA loans, or 285
bps over APOR. The commenters stated that this standard would be pegged
to the CFPB threshold and FHA's maximum MIP going forward so it could
be adjusted as needed for all loans but it would not float or vary
depending on the individual loan. The commenter stated that this
approach has the benefit of employing a widely known and widely
programmed standard--the CFPB threshold between safe harbor and
rebuttable presumption loans. The commenter stated that taking such an
approach would especially be helpful for smaller lenders, as the rule
would be simpler and consequently less costly. It will also negate the
necessity for the HUD to change its qualified mortgage rule every time
FHA changes its maximum allowable MIP. Another commenter recommended
that HUD establish a fixed threshold of 2.5 percentage points, which
would include the annual MIP at approximately 135 basis points. The
commenter stated that FHA loans would receive the safe harbor if the
loan APR is no more than the 2.5 percentage points. The commenter
stated that this would alleviate the complexities of complying with a
fluctuating MIP.
Commenters stated that clear standards without a floating component
will simplify lender implementation as well as compliance oversight and
accountability. Other commenters encouraged HUD to adopt a simpler
approach that uses a single percentage point amount (while still taking
the MIP into consideration), similar to the CFPB's approach. A
commenter stated that it will be hard for lenders to know when to use
the FHA standard and when to use the CFPB standard. A simpler approach
that is also consistent with the CFPB's qualified mortgage regulations
would minimize confusion and make it easier for both lenders and the
FHA to oversee. Another set of commenters, however, stated that
allowing the threshold for an FHA safe harbor qualified mortgage to
potentially fluctuate in relation to the MIP could result in errors by
lenders attempting to comply with the HUD's requirements. Some of the
commenters stated that when a change in the threshold were to occur,
then a certain period of time would be required to amend policies and
procedures, re-program hardware and software systems, and re-train
staff on the new threshold requirements and calculations. Several
commenters suggested that HUD should provide at least 6 months advance
notice prior to the effective date of any MIP change. Commenters also
stated that industry needs more clarity and guidance from HUD about how
the changes to MIP rates will be instituted going forward.
Similar to comments pertaining to points and fees, a commenter
recommended that the APR over APOR calculation, if retained, should
increase for lower balance loans that have fixed costs. A commenter
stated that, specifically, for loans between $100,000 and $150,000, an
additional 50 basis points spread should be added to CFPB's points and
fees basis of 150 basis points (1.5 percent)--resulting in a standard
of 200 basis points over the APOR, plus the MIP; and for loans below
$100,000, a further additional 50 basis points spread should be added
to the CFPB's points and fees basis of 150 basis points--resulting in a
standard of 250 basis points over the APOR, plus the MIP. The commenter
stated that this tiered system would prevent many otherwise qualified
FHA borrowers from being denied a loan because of the inability of a
lender to meet the APOR standard in the proposed rule.
One commenter suggested that HUD grant safe harbor designation to
FHA loans that receive approval through FHA's TOTAL Scorecard. Related
to this comment, another suggested that HUD update FHA's Total
Scorecard system to allow lenders to use the FHA system, rather than
their own, to determine at the front end if a loan qualifies as a safe
harbor or rebuttable presumption qualified mortgage.
Another commenter stated that a clear distinction between an FHA
safe harbor qualified mortgage and an FHA rebuttable presumption
qualified mortgage can be achieved by establishing a clear definition
for each term. The commenter stated that HUD should define safe harbor
qualified mortgages as loans with APRs equal to or less than APOR +
115bps + on-going MIP, and define rebuttable presumption qualified
mortgages as loans with an APR greater than APOR + 115 basis points
(bps) + on-going MIP. Similar to this comment, another commenter stated
that it is essential that HUD's qualified mortgage rule define the
applicable MIP.
Response: HUD's qualified mortgage standard is structured to
recognize FHA's mission to serve a population that is somewhat riskier
than the market in general and that the cost of providing mortgage
insurance to this population is higher as well. This is accomplished by
including FHA's MIP in the calculation. Without such accommodation, a
high share of FHA-insured mortgages would be considered ``higher-priced
covered transactions'' and, under the CFPB's standard, would be
designated as rebuttable presumption qualified mortgages.
As discussed in the regulatory impact analysis that accompanied
HUD's proposed rule, under the CFPB's qualified mortgage regulations, a
portion of FHA-insured mortgages would not qualify as qualified
mortgages based on their exceeding the points and fees limit in the
CFPB's regulation. As the regulatory impact analysis stated, a larger
portion would be designated as qualified mortgages under the CFPB's
regulation, but about 20 percent would only meet the CFPB's standard as
a rebuttable presumption qualified mortgage. These FHA-insured
mortgages would not qualify for safe harbor status under CFPB's
regulations because of the 150 basis point limitation on the spread
between APR and APOR, in large part because this spread for FHA-insured
mortgages includes FHA's annual MIP
[[Page 75227]]
that is currently135 basis points for most loans.
HUD recognizes concerns of some commenters that a standard which is
tied to FHA's MIP, resulting in a floating threshold, may cause
operational difficulties and delay the ability of lenders' to comply
with FHA's qualified mortgage standards. As HUD stated in the preamble
to its proposed rule, if a straight APR over APOR threshold were
adopted by HUD, in lieu of inclusion of the MIP, then every time FHA
changes the MIP, for purposes of ensuring the financial soundness of
its insurance fund and reducing risk to the fund or to reflect a more
positive market, FHA would also have to consider changing the threshold
APR limit. This would be a less dynamic approach than that proposed by
HUD in its September 30, 2013, proposed rule. HUD believes that the
qualified mortgage standard proposed in the September 30, 2013,
proposed rule and adopted as final in this rule will be, when systems
have been adjusted, easy to administer, and HUD is providing the time
for lenders to adjust their systems. Again, a mortgage that would be
designated a safe harbor qualified mortgage under the special rules for
eligible loans under the National Housing Act in the CFPB's regulations
receives the same designated under HUD's definition if insured by HUD.
Comment: The APOR is not an appropriate metric: A few commenters
stated that the APOR is not the appropriate metric for FHA to use to
determine what constitutes a baseline for the safe harbor/rebuttable
presumption distinction, and that an APOR, derived from the Freddie Mac
Primary Mortgage Market Survey (PMMS), is not the best metric for
determining the dichotomy for FHA. The commenter stated that ``The PMMS
index contains only conventional conforming loans; no government
insured loans are included. Additionally, in recent quarters the PMMS
has fallen well below [the Mortgage Bankers Association] survey rates,
at times by as much as 20 basis points.'' The commenter suggested
additional study on what is the most useful index for FHA loans.
Response: The Dodd-Frank Act provides for use of the APOR in
calculating points and fees and has been adopted by the CFPB in its
qualified mortgage regulation. As HUD stated in its September 30, 2013,
proposed rule and in this rule, it is HUD's objective to establish
qualified mortgage standards that align to the statutory ability-to-
repay criteria of TILA and the regulatory criteria of the CFPB's
qualified mortgage standard to the extent feasible without departing
from FHA's statutory mission. HUD recognizes that the APOR is a rate
that is derived from average interest rates, points, and other loan
pricing terms currently offered to consumers by a representative sample
of creditors for mortgage transactions that have low-risk pricing
characteristics, and that the representative sample may not include
government-insured loans. However, as a result of the ability-to-repay
requirements and enhanced consumer protections of the Dodd-Frank Act,
the differences between conventional mortgage products and the
government mortgage products are lessened.
Comment: Clarify the APR and APOR calculation: A commenter stated
that HUD's final rule should specify the APR being examined. The
commenter asked HUD to clarify that the APR is the actual APR on the
loan and not the high cost APR calculation used for purposes of
``Section 32 High Cost testing.'' The commenter also stated that the
final rule should clarify the effective date of the APOR to be used for
testing. The commenter asked whether or not this is the APOR in effect
at the time the lock is set (which is consistent with the Section 32
High Cost and Section 35 higher-priced mortgage loans (HPML) testing),
or HUD expects the test to use the APOR in effect at the time of case
number assignment, or some other time frame. The commenter also asked
that HUD's final rule clarify that if the APR is calculated to three or
more places, HUD will require a specific rounding or truncation method
for the purposes of this test. The commenter asked, for instance, if
the APR is 6.225 and the APOR is 2.860 would the difference between
them be calculated at 3.36 (the result truncated) or would the result
be 3.370 (the result using standard rounding)?
Response: As noted earlier in this preamble, the final rule adopts
the CFPB's definition of APR and APOR, and therefore the CFPB's
guidance on the determination of each of these rates is applicable to
FHA's qualified mortgage regulation. The CFPB provides detailed
guidance on each of these calculations. Appendix J to the CFPB's
regulations in 12 CFR part 1026 provides guidance on the APR
computations for closed-end credit transactions. The guidance notes
that the CFPB's regulation at 12 CFR 1026.22(a) provides that the APR
for other than open-end credit transactions shall be determined in
accordance with either the actuarial method or the United States Rule
method, and provides that Appendix J contains an explanation of the
actuarial method as well as equations, instructions and examples of how
this method applies to single advance and multiple advance
transactions. Supplement I (Official Interpretations) to the CFPB's
part 1026 regulations, provides guidance on calculation of APOR, under
the heading for Section 1026.35. By following the CFPB with respect to
the APR and APOR calculations, HUD eliminates any inconsistency between
APR/APOR calculations to be undertaken by FHA-approved lenders
originating FHA qualified mortgages and lenders originating
conventional qualified mortgages in accordance with the CFPB's
regulations.
Comment: Exclusion of debt-to-income could increase the number of
riskier borrowers coming to FHA--a residual income test should be
included: The majority of commenters, commenting on debt-to-income
(DTI) limits, stated that HUD's proposal to use its existing
underwriting and income verification requirements and to not adopt the
CFPB's 43 percent total monthly debt-to-income ratio requirements is
the right approach. The commenters stated that HUD's underwriting
standards have historically been the industry bench mark for
documenting a consumer's ability to repay a mortgage debt. A commenter
stated that a fixed DTI would only further limit credit availability
especially to borrowers living in high-cost underserved communities.
Another commenter stated that HUD's decision to not include a DTI
limit in its qualified mortgage regulations could increase the number
of riskier credit quality borrowers to the FHA in an origination
environment where conventional loans must meet the more stringent CFPB
qualified mortgage standard. The commenter stated that this result is
inconsistent with HUD's stated goal to foster private market, not FHA,
activity as steps are taken to reduce Fannie Mae and Freddie Mac's
position in the market.
Other commenters stated that adoption of a residual income test
would substantially improve the sustainability of FHA lending,
particularly for low-income borrowers. The commenter stated that it
understands that the purposes of FHA differ from those of the CFPB and
the adoption of the DTI requirement would likely restrict opportunities
for credit for many of the FHA constituencies specifically mentioned in
its statute. The commenter urged HUD to work with the Department of
Veterans Affairs and the CFPB to develop a residual income test that
would be uniform
[[Page 75228]]
across these agencies. The commenter stated that such a test, clear and
easily integrated into automated systems, would permit good loans to be
made to FHA's constituencies at DTIs of 43 percent or higher. The
commenter stated that if such a rule were also adopted by the CFPB,
then all loans above DTIs or 43 percent would not flow to FHA, thereby
satisfying another accepted public policy goal.
Response: HUD appreciates the commenters' suggestions about a
residual income test that would be adopted by all agencies, and this
may well be something to further examine. For this final rule, HUD
retains the approach provided in the proposed rule. However, HUD will
add this issue to HUD's plan for retrospective review of regulatory
actions.\14\
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\14\ See HUD's plan at http://portal.hud.gov/hudportal/HUD?src=/program_offices/general_counsel/Review_of_Regulations.
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Comment: Treat certain other loans similarly to proposed treatment
of Title I and Sections 184 and 184A loans: The majority of commenters
expressed support for HUD's decision to designate all Title 1, Section
184 and Section 184A mortgages as safe harbor qualified mortgages,
without any change in underwriting requirements for these loan
products. One commenter, however, stated that loans without points and
fees caps encourage the assessment of junk fees and these incentives
should not be part of loan programs meant to shore up needs in
vulnerable communities. The commenter stated that the Title I loan
program in particular has had a long history of abusive lending,
primarily in low-income communities.
Other commenters, however, identified various loan products that
they stated should be treated by HUD similarly to the proposed
treatment of Title I, Sections 184, and Section 184A loans. Commenters
recommended that HUD automatically make Section 203(k) repair and
rehabilitation loans, energy efficient mortgages, and mortgages
involving real estate-owned (REO) properties safe harbor qualified
mortgages. One of the commenters stated that these types of loans,
especially 203(k) loans, require more work for the lender, and
consequently, the lender is compensated more. The commenter stated that
this higher compensation could jeopardize the qualified mortgage status
of the loan if the rule does not permit a higher points and fees
threshold for such loans. Another commenter stated that housing finance
agencies (HFAs) often use 203(k) loans ``to support the purchase of
affordable homes in need of repair or modernization for traditionally
underserved consumers.'' The commenter stated that because of the
increased costs associated with these loans, HFAs often pay lenders
higher levels of compensation for originating them and also have to
charge higher fees to borrowers. The commenter stated that ``if these
loans are subject to HUD's proposed qualified mortgage requirements, it
would become cost-prohibitive for HFAs, or other lenders, to continue
originating these loans.''
Response: HUD's final rule will continue to designate Title I,
Section 184 and Section 184A loans as safe harbor qualified mortgages.
HUD believes that the final rule HUD published on November 7, 2001,
entitled, ``Strengthening the Title I Property Improvement and
Manufactured Home Loan Insurance Programs and Title I Lender/Title II
Mortgagee Approval Requirements'' (66 FR 56410) strengthened the Title
I program and that the Title I program is sound. The Title I loan
program insures maximum loan amounts of $25,000 for single family home
loans to finance the light or moderate rehabilitation of properties, as
well as the construction of nonresidential buildings on the property.
Additionally, Title I covers the Manufactured Home Loan program which
provides a source of financing for buyers of manufactured homes and
allows buyers to finance their home purchase at a longer term and lower
interest rate than with conventional loans. Considering the small size
of the Title I property improvement loans and the limited access to
conventional financing otherwise available to manufactured home loans,
HUD believes these loans should be designated as safe harbor qualified
mortgages until further study can be conducted on how to apply the
qualified mortgage definition.
HUD declines to designate Section 203(k) repair and rehabilitation
loans as safe harbor qualified mortgages. HUD does clarify that non-
affiliated consultation fees authorized under the Section 203(k)
program are exempt from the CFPB's points and fees calculation, adopted
by HUD. Section 203(k) mortgages cover both the acquisition of a
property and its rehabilitation. While Section 203(k) loans involve
minimal financing amounts, Section 203(k) mortgages can cover the
virtual reconstruction of a property. For example, a home that has been
demolished or will be razed as part of rehabilitation is eligible for
financing under FHA's Section 203(k) mortgage program provided that the
existing foundation remains in place. HUD also declines to designate an
FHA-insured mortgage on property acquired by a borrower through FHA's
REO process as a safe harbor qualified mortgage. An FHA-insured
mortgage on a REO property is a standard single family-insured
mortgage, and therefore would need to meet the qualifications for
either a safe harbor qualified mortgage or a rebuttable presumption
qualified mortgage. In addition, HUD exempts housing finance agencies
from the qualified mortgage rule, consistent with the CFPB's rule, as
explained further in Section IV of the preamble.
Comment: Provide an exemption for HFAs as exempted under CFPB's
rule: With respect to loans originated by HFAs, certain commenters
requested that HFAs should be exempt from ability-to-repay requirements
and FHA should classify all HFAs loans as safe harbor qualified
mortgages. The commenters stated that HFAs have a consistent record of
providing good lending for affordable housing, have never engaged in
subprime or other risky lending, and the revenues generated are
reinvested in furtherance of their affordable housing mission. The
commenter stated that recently, 75 percent of HFA mortgages funded by
tax-exempt Mortgage Revenue Bonds have been FHA-insured.
Another commenter stated that the proposed safe harbor qualified
mortgage APR to APOR rate of 1.15 percentage points plus MIP would
hinder the ability of an HFA to finance FHA-insured loans. The
commenter stated many lenders are reluctant to finance HFA loans
because the HFA requirements already add extra costs to HFA loans. Some
of the extra costs which lenders might try to pass onto borrowers with
slightly higher interest rates reflect a legitimate business expense
incurred by the lender but could cause a loan to exceed the safe harbor
APR cap. As a result, HFA lending could be curtailed, particularly when
the CFPB allows for a more flexible APR limit on conventional loans.
Response: As noted earlier in this preamble, HUD agrees with the
commenters and has exempted HFAs from the requirement to comply with
FHA's qualified mortgage regulations, consistent with the CFPB.
Comment: Exempt FHA streamlined refinancing from qualified mortgage
requirements: Commenters stated that streamlined refinances should be
excluded from the higher-priced mortgage loan limitations or the APR
threshold increased to meet the unique needs of refinancing. The
commenter
[[Page 75229]]
stated that the rates on streamlined refinances are higher because
lenders include the closing cost in the rate and may, therefore, result
in some streamlined refinances losing safe harbor qualified mortgage
status.
A commenter stated that under TILA, HUD has been granted the
authority to exempt streamlined refinancings from the income
verification requirements of the ability-to-repay rule, as long as the
refinancings meet certain requirements. The commenter stated that HUD,
however, intimates that including streamlined refinancings in the
proposed qualified mortgage requirements would meet similar objectives
of a broader exemption, as the proposed qualified mortgage definition
would still require these types of loans to meet the three percent
points and fees requirements and HUD's existing requirements for
streamlined refinances.
In contrast to these commenters, a commenter expressed support for
HUD's inclusion of the points and fees cap in the FHA qualified
mortgage definition for streamline refinancings and for all Title II
loans. The commenter stated that this will help ensure that FHA
borrowers obtain loans in a more fair and transparent market while
discouraging price gouging. The commenter stated that the points and
fees cap ensures that homeowners are not subject to inflated costs and
junk fees associated with the initial making of the loan. The commenter
stated that while the streamlined refinance program provides needed
access to capital for many homeowners, HUD's guidelines assume that a
borrower making payments on the previous loan can actually afford those
payments. The commenter stated that the program does not account for
instances where the previous loan's payments were paid out of proceeds
from that loan (and therefore out of equity from the property).
Response: HUD declines to exempt streamlined refinances from the
safe harbor and rebuttable presumption qualified mortgage definition.
As HUD stated in the proposed rule, HUD advised that it did not
consider it necessary to exercise this authority because HUD's
qualified mortgage definition results in an exemption similar to the
one contemplated under section 129C(a)(5) of TILA. HUD also believes
that the points and fees requirement is appropriate for streamlined
refinances just as it is for other Title II products, and that the
revised APR to APOR threshold will benefit refinances the same as other
Title II products. While HUD maintains that subjecting streamlined
refinances to the qualified mortgage definition is appropriate now, HUD
recognizes that in times of stress, the current qualified mortgage
definition may inhibit access to streamlined refinancing, and if this
were to occur, HUD will reexamine whether streamlined refinances should
be exempt.
Comment: Establish clear criteria for rebutting the presumption of
a rebuttable presumption loan: Several commenters stated that HUD needs
to establish clear criteria on the basis for a borrower rebutting the
presumption of one's ability to repay a mortgage. A commenter stated
that the proposed rule appears to significantly change the requirements
for a borrower to rebut the presumption of compliance from the CFPB's
relatively narrow focus on whether the borrower had sufficient residual
income to one that is a far broader inquiry of whether the general
ability to repay test was satisfied. The commenter stated that a
qualified mortgage is designed to provide a means for a lender, by
meeting product and underwriting standards, to gain a presumption that
the lender has satisfied the ability to repay requirements without
undergoing the statute's factor by factor analysis and demonstrating
that the borrower had a ``reasonable ability to repay.'' The commenter
stated that HUD's rebuttable presumption definition, however, appears
to render the presumption nearly meaningless by returning the inquiry
to whether the lender made a reasonable and good faith determination
that the borrower had the ability to repay the loan. The commenter
stated that if the proposed rule goes forward, it is unlikely that
lenders that participate in the FHA program will be willing to assume
the greater liability that comes with a relatively unbounded rebuttable
presumption. The commenter stated that lenders are more likely to
confine their lending to safe harbor loans and in some cases will
choose to operate well within qualified mortgage's safe harbor
standards to avoid liability.
Another commenter stated that it understood that the CFPB's
rebuttable presumption standard is not appropriate for FHA because
residual income calculations are not currently required by FHA, but
nevertheless, it is important for HUD to establish a limited, objective
and clear inquiry into the presumption. In a similar vein, a commenter
stated that FHA underwriting requirements do not contain a residual
income requirement and do not require that a creditor assess a
consumer's residual income on an FHA loan. The commenter stated that,
therefore, a consumer cannot challenge the creditor's assessment of
their ability to repay on an FHA loan based on a claim of insufficient
residual income, even if that loan is a higher priced mortgage as
defined under Regulation Z. The commenter stated that to avoid any
possible confusion among creditors and to ensure the greatest number of
creditworthy consumers are served by FHA, the commenter asked that HUD
confirm this understanding is accurate in the final rule.
A commenter stated that under HUD's rebuttable presumption
standard, the borrower may prove the lender did not make a reasonable
and good faith determination of the borrower's repayment ability. The
commenter stated that it is not clear, however, whether this requires
the lender to show it followed the specific HUD requirements or whether
the borrower can use other evidence to prove the lender did not
consider the borrower's ability to repay, even if the lender followed
HUD requirements.
Another commenter stated that HUD needs to elaborate on what is
meant by a reasonable and good faith determination of the borrower's
ability to repay.3
A few commenters stated that HUD's rebuttable presumption standard
appears to permit rebuttal of the presumption of compliance based on
lending standards that are in addition to FHA underwriting
requirements, and therefore HUD is establishing new underwriting
requirements. The commenters stated that, as proposed, the presumption
of compliance could be rebutted in two ways: One relates to points and
fees and the other basis is a showing that, ``despite the mortgage
being insured under the National Housing Act, the mortgagee did not
make a reasonable and good-faith determination of the mortgagor's
repayment ability at the time of consummation, by failing to consider
the mortgagor's income, debt obligations, alimony, child support,
monthly payment on any simultaneous loans, and monthly payment
(including mortgage-related obligations) on the mortgage, as applicable
to the type of mortgage, when underwriting the mortgage in accordance
with HUD requirements.''
The commenters stated that if underwriting in accordance with HUD's
requirements is insufficient to establish sufficient repayment ability
under TILA, and if FHA does not revise its requirements to correct that
problem, then this language appears to create a new FHA underwriting
requirement for rebuttable presumption FHA loans. The commenters stated
that the quoted
[[Page 75230]]
language in the rule differs from FHA underwriting standards, yet this
aspect of the rebuttal standard can only apply to loans that are FHA-
insured. The commenters stated that the list of factors in HUD's
qualified mortgage rule differs from the list in the FHA Handbook
monthly housing expense as defined in section 4155.1 4.C.4.b of the
Handbook. The commenters stated that HUD uses, in its rule, mortgage-
related obligations, which is undefined in FHA's Handbook. The
commenters stated that all the types of income and all the types of
obligations that are relevant to rebutting the presumption need to be
clearly defined, and mortgagees need to know how and be able to
quantify them. The commenters suggested that HUD use standards that do
not differ from existing FHA loan underwriting requirements.
A commenter suggested that HUD establish a clear standard for
rebutting the presumption by adopting the following language: ``The
mortgagee did not make a reasonable and good-faith determination of the
mortgagor's repayment ability at the time of consummation, by failing
to consider, to the extent required by applicable HUD requirements, the
mortgagor's income, debt obligations, alimony, child support, monthly
payment on any simultaneous loans and monthly payment (including
mortgage-related obligations) on the mortgage, as applicable to the
type of mortgage.''
Other commenters stated that HUD proposed to permit rebuttal of the
presumption by showing points and fees. The commenters stated that such
a standard is meaningless because, under HUD's regulation, any loan
with points and fees above the cap cannot be an FHA loan or a qualified
mortgage loan. One of the commenters stated that even if HUD's
regulations were to apply to a non-FHA loan, a showing of points and
fees above the qualified mortgage cap cannot establish a violation of
the ability-to-repay requirement. The commenter requested that HUD
clarify that it did not intend to imply that points and fees above the
cap, without more, could establish a violation of TILA's ability-to-
repay requirement.
Another commenter stated that HUD should establish a
``materiality'' standard by which only uncured underwriting errors that
make a material difference to a borrower's ability to repay a loan
should be a permissible basis for rebutting a presumption of compliance
with the ability-to-repay requirement.
Response: In response to the comments, HUD has sought to clarify
the rebuttable presumption language in this final rule. As addressed
above in Section IV, HUD adopted the list of the CFPB's factors,
mortgagor's income, debt obligations, alimony, child support, monthly
payment on any simultaneous loans, and monthly payment, to remain
consistent with the CFPB's rebuttable presumption standard, but
intended those factors to harmonize with HUD's existing underwriting
requirements. In response to the comments, HUD will reference FHA's
underwriting categories as the applicable categories and believes that
this better clarifies that HUD-specific underwriting requirements shall
be used for rebutting the presumption, rather than the list provided by
CFPB. The applicable categories can be found in FHA Handbook 4155.1,
Mortgage Credit Analysis for Mortgage Insurance on One-to-Four Unit
Mortgage Loans. Additionally, HUD clarifies that instead of merely
considering the factors listed, the mortgagee must evaluate the factors
as required by HUD underwriting requirements for each applicable
transaction.
Comment: HUD's rule will delay lender compliance with foreclosure
timeframes during prolonged rebuttable presumption litigation: A
commenter suggested that protracted litigation resulting from the
rebuttable presumption could result in the curtailment of an interest
claim by a lender because ``lenders are required to meet `reasonable
diligence' timeframes in prosecuting foreclosure proceedings and
acquiring title as set forth in 24 CFR 203.356.'' The commenter stated
that it is unclear whether litigation resulting from a rebuttable
presumption challenge would be viewed as lender error and thus lenders
would be ineligible for a timeframe extension.
Response: Litigation resulting from a rebuttable presumption
challenge will not in and of itself make a lender ineligible for
timeframe extension for submission of a claim. The existence of a
challenge to rebuttable presumption does not necessarily indicate
lender error rendering the lender ineligible for an extension of the
deadline. However, where the presumption is successfully rebutted, FHA
will not entertain requests for extensions of foreclosures and claim
deadlines.
Comment: Rule needs a cure provision; indemnification demand is not
dispositive of loan's qualified mortgage status: Several commenters
requested that HUD establish a mechanism by which lenders can cure
loans where there was a miscalculation in points and fees or any other
failure to satisfy the qualified mortgage test. The commenters stated
that a ``cure provision'' is necessary for those situations when
technical violations are discovered by lenders and can be easily
corrected. The commenters stated that this is particularly important if
qualified mortgage status is to equate with FHA eligibility. The
commenters stated that these types of procedures encourage early action
by lenders and foster more advantageous loans for borrowers. One of the
commenters stated that if HUD does not create a mechanism to cure loans
where there are qualified mortgage defects, such loans will simply
become uninsurable by FHA in the short run and cause greater caution
and lack of credit to consumers over the long term. A commenter asked
whether FHA would allow lenders to correct a points and fees violation
by refunding the excess costs to bring the loan in compliance.
Another commenter requested that HUD continue to insure mortgages
which were originated as qualified mortgage loans, but through audit or
self-discovery were later found to have certain errors. The commenter
stated, for example, if the 3 percent threshold of fees was exceeded,
that in lieu of requiring indemnification, HUD allow for the lender to
cure the overage. The commenter stated that this would allow the loan
to maintain its qualified mortgage status. The commenter requested that
if the error was related to an alternative matter (i.e., income/asset
related) it would request that HUD allow a lender to indemnify a loan,
and through that indemnification, allow for the loan to maintain its
qualified mortgage status. The commenter stated that this would allow
lenders to continue to treat the loan as a qualified mortgage to avoid
unnecessary secondary market ramifications.
Another commenter suggested that HUD should adopt an approach
similar to that adopted by Fannie Mae which was that, during the
initial roll-out of its qualified mortgage standard, at least during an
initial twelve month roll-out period, Fannie Mae would allow the
industry to adjust systems and take corrective actions to comply.
Without this leniency, the commenter stated that it is concerned that
the consumers served will be faced with increased costs, extensive
delays and, unfortunately, may find they are unable to obtain the
financing they need to secure the American dream.
A commenter stated that recently, the CFPB explained that a defect
under the underwriting procedures of the government-sponsored
enterprises (GSEs) that is unrelated to the ability to repay should not
affect qualified mortgage status.
[[Page 75231]]
Another commenter requested clarification of the impact on
qualified mortgage status if FHA insurance of a loan is subsequently
revoked. The commenter requested that as such revocation may be wholly
unrelated to the applicant's ability to repay the loan or to the
creditor's compliance with the underwriting requirements, the commenter
requested that HUD include in its final rule a statement that such a
loan will retain qualified mortgage status following revocation of FHA
insurance, provided that all pertinent underwriting criteria had been
met.
To address the qualified mortgage status concerns, one commenter
requested that Sec. 203.19 include a new paragraph (b)(4) to read as
follows: ``(b)(4) Indemnification Demands-An indemnification demand by
HUD is not dispositive of qualified mortgage status. Qualified mortgage
status depends on whether a loan is guaranteed or insured, provided
that other requirements under this section are satisfied. Even where an
indemnification demand relates to whether the loan satisfied relevant
eligibility requirements at time of consummation, the mere fact that a
demand has been made, or even resolved, between a creditor and HUD is
not dispositive for purposes of establishing a loan's qualified
mortgage status.''
Response: As addressed above in Section IV, HUD adds at the final
rule stage a section clarifying that a demand for indemnification or an
indemnification does not per se remove qualified mortgage status in the
regulations for Title I and Title II.
Requested clarifications: The final rule needs to provide
clarification in a number of areas: Several commenters requested that
HUD clarify its position in certain areas.
Clarify that this rule preempts CFPB's rule in its entirety for FHA
loans:
Response: Except to the extent that FHA's regulation cross-
references to terms defined by CFPB, FHA's underwriting requirements
and qualified mortgage definition govern FHA insurance of single family
mortgages.
Clarify the presumption afforded a safe harbor qualified mortgage:
Response: A safe harbor qualified mortgage is one that provides a
conclusive presumption of compliance with the ability to repay
requirements for loans that satisfy the definition of a safe harbor
qualified mortgage.
Clarify eligibility for insurance versus actual insurance: A
commenter stated that HUD's proposed rule appears to base qualified
mortgage status on whether a loan is actually insured by FHA, rather
than whether the loan is eligible for insurance. The commenter stated
that if the commenter is understanding HUD correctly, HUD's position is
inconsistent with the transitional qualified mortgage category created
by the CFPB in Sec. 1026.43(e)(4) of Regulation Z for loans eligible
for purchase, guarantee or insurance by various government agencies and
government-sponsored enterprises. The commenter stated that the FHA
guidelines impose a variety of requirements relating not only to
underwriting, but to the procedures of sale, guarantee, and insurance,
as well as to post-consummation activities, which may be wholly
unrelated to the applicant's ability to repay. The commenter stated
that to avoid basing qualified mortgage status on the actual insurance
status of a loan, the commenter requested that HUD clarify in its final
rule that the qualified mortgage status of a loan is based on whether
the loan is eligible for insurance by FHA. Other commenters also
supported that HUD provide qualified mortgage status for FHA Title II
loans eligible for FHA insurance. One of the commenters requested that
the qualified mortgage coverage be based on whether the loan qualifies
or is eligible for FHA insurance so that any transaction defects that
are not related to ``ability to repay'' would not affect qualified
mortgage coverage.
Response: The commenters' understanding is correct. Under HUD's
regulations, as promulgated through this final rule, qualified mortgage
status for FHA Title II loans is provided only for loans that FHA
insures. FHA's responsibility and oversight is only for the mortgages
that it insures, not for those that may be eligible for FHA insurance
but have not been insured by FHA.
Clarify that there is no preemption of State fair lending laws: Two
commenters requested that HUD make clear that it does not preempt State
claims for fair lending abuses. The commenters stated that State
enforcement of fair and responsible lending is essential to prevent
unintended consequences.
Response: This final rule does not preempt any claims a borrower
may bring for violation of fair lending laws.
Clarify that FHA's regulatory framework is unchanged: Commenters
asked that the final rule specify that the regulatory framework of
current FHA programs would remain the same with the addition of the
``qualified mortgage'' definition applied, specifically in reference to
ability-to-repay.
Response: The commenters are correct that HUD is not changing the
regulatory framework for its FHA programs with regard to ability to
repay other than to establish the requirements for designation of a
safe harbor qualified mortgage or rebuttable presumption qualified
mortgage. It should be noted, however, that FHA will not insure a
mortgage that is not a qualified mortgage but this is not a departure
from existing standards since FHA has always had ability to repay
standards and mortgages insured by FHA were based on these standards.
Clarify which FHA loans are covered by HUD's qualified mortgage
regulations when the regulations become effective: A commenter
requested that HUD clarify if the intended January 10, 2014 effective
date will apply to loans with an application date on or after January
10th (consistent with the CFPB effective date for ability-to-repay/
qualified mortgage applicability) or with case number assignment dates
on or after January 10, 2014.
Response: This rule applies to all case numbers assigned on or
after the effective date of this rule.
Clarify whether escrows for taxes and insurance are included in the
points and fees limitation: Another commenter stated that there is
considerable confusion about whether escrows for taxes and insurance
are included in the points and fees limitation. The commenter stated
that these are just pass-through amounts that have no risk of imposing
excessive costs on consumers, and they should not be included. The
commenter stated that the CFPB was not clear on this matter. The
commenter urged HUD to clarify that it will interpret the definition of
points and fees to exclude escrows for taxes and insurance.
Response: HUD is adopting the CFPB's definition of points and fees,
and defers to CFPB's interpretations and guidance on that definition.
The CFPB's regulation at 12 CFR 1026.32(b)(1) excludes amounts held for
future payment of taxes from the calculation of points and fees. See 12
CFR 1026.32(b)(1)(iii). The CFPB also excludes from the calculation of
points and fees any premium or other charge imposed in connection with
any Federal or State agency program for any guaranty or insurance that
protects the creditor against the consumer's default or other credit
loss, and any guaranty or insurance that protects the creditor against
the consumer's default or other credit loss and that is not in
connection with any Federal or State agency program. See 12 CFR
1026.32(b)(1)(i)(B) and (C). However, the CFPB includes in
[[Page 75232]]
the calculation of points and fees any premiums or other charges
payable at or before consummation for any credit life, credit
disability, credit unemployment, or credit property insurance, or any
other life, accident, health, or loss-of-income insurance for which the
creditor is a beneficiary, or any payments directly or indirectly for
any debt cancellation or suspension agreement or contract. See 12 CFR
1026.32(b)(1)(iv).
Clarify meaning of reasonable ability to repay: A commenter stated
that HUD's rule includes a statement that ``the monthly payments on a
mortgage must not be in excess of a borrower's reasonable ability to
repay.'' The commenter stated that this is too vague and subject to
subjective interpretation. The commenter stated that what is reasonable
for one person may not be reasonable for another in a similar financial
position. The commenter stated that there would be almost no ``safe
harbor'' for lenders on FHA loans. The commenter requested that HUD
clarify the meaning of ``reasonable'' in this context.
Response: The guiding basis for whether a determination has been
made of a borrower's reasonable ability to repay a mortgage is by the
lender following the underwriting guidelines in FHA Handbook 4155.1,
Mortgage Credit Analysis for Mortgage Insurance on One-to-Four Unit
Mortgage Loans, or subsequent handbook.
Recommendations: Several commenters offered recommendations for
additional provisions to be included in HUD's rule:
Mandate prepurchase counseling: A commenter stated that ``pre-
purchase counseling by a HUD-certified housing counselor should become
a mandatory component of all FHA qualified mortgage loans. The
commenter stated that housing counseling has proven to be an invaluable
tool for creating successful homeowners. The commenter stated that a
study of counseling programs found that prepurchase counseling can help
reduce the likelihood of default and foreclosures from the start by
helping prospective homeowners determine if they are ready to buy.''
Response: As a result of changes made to HUD's housing counseling
program by the Dodd-Frank Act, and counseling requirements, HUD is
examining a variety of counseling issues, several of which will be
addressed through separate rulemaking.
Enforce loss mitigation requirements: Two commenters stated that
rigorous loss mitigation requirements and compliance with those rules
is essential to a sustainable system. The commenters stated that HUD
should fully review its loss mitigation options and compliance programs
to maximize beneficial outcomes for homeowners, communities, investors
and the FHA insurance fund.
Response: FHA has strong loss mitigation requirements and
undertakes periodic review of them. HUD invites the commenters to view
the following Web site which identifies mortgagee letters addressing
the subject of loss mitigation, recently and previously issued by FHA.
See http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/nsc/lmmltrs.
Prohibit prepayment penalties: A commenter stated that under the
CFPB's regulation, covered transactions, including FHA loans that are
covered transactions, ``must not include a prepayment penalty'' unless
the loan is a qualified mortgage loan, and prepayment penalties are
payable only during the first three years after consummation. The
commenter urged FHA to amend its notes to be clear that they do not
permit any interest charge for any time after a loan is fully paid,
even for a partial month.
Response: HUD is developing a proposed rule that addresses
prepayment penalties for an FHA-insured loan.
Provide better lending oversight: A commenter stated the industry
does not need more restrictions. The commenter stated that instead of
rewarding institutions that have always adhered to the HUD regulations,
HUD is treating the good the same as the bad actors. Other commenters
stated that government enforcement is a key component to securing
widespread industry compliance with regulation. One of the commenters
stated that HUD should engage in active oversight of FHA lending,
including direct endorsement lenders, with aggressive consequences for
non-compliance. The commenter stated that oversight should include
proactive resolution of consumer complaints, including requirements for
lenders and servicers to document answers to HUD in response to
consumer complaints. Another commenter stated that HUD must adopt
strong compliance and enforcement provisions to ensure that the
required minimum standards are being met in practice and to ensure
borrowers have appropriate recourse when these standards are not
actually complied with.
Another commenter recommended that HUD avoid unnecessary regulation
of FHA lending and that it rely on its existing standards to continue
to ensure that FHA loans are appropriate and affordable. The commenter
stated that it does not believe another layer of ability-to-repay
regulation similar to existing FHA underwriting standards would improve
or even alter the quality of FHA loans. The commenter stated that,
instead, it would run the risk of constraining lending unless the
additional standard is substantially clearer than the proposed
rebuttable presumption standard.
Response: FHA continually strives to strengthen its oversight of
FHA-approved lenders. HUD values the input of its FHA-approved lenders
and other interested parties and members of the public and is
considering recommendations offered by the commenters on this notice.
HUD also believes that implementation of the final rule improves the
quality of FHA loans, which protects borrowers from higher priced
loans.
HUD questions in the preamble--feedback offered by commenters:
The preamble to HUD's September 30, 2013, proposed rule included
several questions for which HUD specifically sought comment. One
question which received the most feedback was HUD's question of whether
lenders participating in FHA's mortgage insurance and loan guarantee
programs would lower the APR relative to the APOR such that the lenders
in essence always opt for the safe harbor qualified mortgage and never
make a rebuttable presumption qualified mortgage. HUD asked if
commenters thought that was the case, and welcomed comments on the
effect this incentive may have on lenders, borrowers, and the broader
economy.
Feedback: Several stated that it would be extremely difficult to
find lenders to make rebuttable presumption mortgages for the 7 percent
\15\ of Title II loans that will not qualify as safe harbor qualified
mortgages. The commenter stated that mortgage professionals will favor
safe harbor qualified mortgages and will avoid the potential legal risk
associated with rebuttable presumption qualified mortgages. This will
result in disparate impact of homeownership throughout the country.
Another commenter agreed that lenders are likely to elect only to offer
safe harbor qualified mortgages due to the uncertainty surrounding
lending outside of the safe harbor qualified mortgage category. The
[[Page 75233]]
commenter stated that if this occurs, the result will mean less
available credit.
---------------------------------------------------------------------------
\15\ The 7 percent referred to by the commenter is in fact the
number of loans that would not be considered a qualified mortgage
under FHA's rule or eligible for insurance as a result of the points
and fees. Only 1 percent of Title II loans would be designated
rebuttable presumption under the proposed and final rule.
---------------------------------------------------------------------------
Another commenter stated that due to the high legal fees related to
making a rebuttable presumption loan, lenders are more likely not to
make loans that would be rebuttable presumption. The commenter stated
that the result will be that some borrowers are prevented from
obtaining loans due to the risk aversion of lenders.
A commenter stated that the consequences of the 1.15% threshold set
by FHA is that loans above that amount will not be made and or will
have a disparate impact on minorities who often present somewhat higher
risks.
A commenter stated that, after polling its members, the consensus
was that, at least in the beginning, members would not make rebuttable
presumption loans because of the risk of substantial liability if the
courts interpreted rebuttable presumption in an adverse manner. As for
lowering the APR to be a safe harbor loan, the commenter stated that a
small number may be in the margins, but for a substantially larger
number, especially small balance loans, it will not be profitable to
lower the APR and lenders will simply not make the loans to an
otherwise qualified borrower.
A commenter stated that it believes the majority of FHA qualified
mortgages made will qualify for the safe harbor due to the pricing of
the loan and the level of protection that such status provides, much
the same as under the CFPB's qualified mortgage rule. The commenter
also stated that it is possible that lenders may make a small reduction
in the APR if that is the only requirement standing in the way of a
loan qualifying as a safe harbor.
Another commenter expressed disagreement with HUD's hypothesis that
the APR standard would put pressure on the conventional market because
HUD's MIP is so high in relation to conventional private mortgage
insurance (PMI) or loans without PMI. The commenter stated that FHA's
market share is likely to decrease and only people who could not obtain
conventional insurance will turn to FHA, presenting danger to the fund.
The commenter further stated that HUD's lower threshold for exceeding
the safe harbor is also a negative incentive for originating an FHA
loan versus a conventional loan and is compounded by excluding the
annual MIP in the APOR calculation.
Another commenter stated that, with respect to interest rates, FHA
is a relatively competitive market, and the purported benefits of the
dichotomy is marginal at best and less effective than FHA's current
protections. The commenter stated that it will, however, have the
result of limiting some otherwise eligible borrowers from receiving an
FHA loan.
Response: HUD appreciates all the feedback provided in response to
this question. As HUD stated in the preamble to its September 30, 2013,
proposed rule and reiterates in this final rule, HUD will carefully
monitor how HUD's definition of safe harbor qualified mortgage and
rebuttable presumption qualified mortgage for the majority of its Title
II programs works. HUD will also study, as it has committed to do so,
the HUD mortgage insurance and guarantee programs whose mortgages have
been designated safe harbor qualified mortgage, and the appropriateness
of such designation. HUD recognized that there may be a transition
period before the one percent of rebuttable presumption loans in FHA
portfolio are made, but HUD's changes to the rebuttable presumption
definition should clarify for lenders and borrowers the standard that
applies for rebuttable presumption qualified mortgage loans. The
transition period should be similar to that of the conventional market
where the market will assess the legal risk and costs of making a
rebuttable presumption loan before proceeding. Additionally, as
provided in HUD's accompanying regulatory impact analysis, while there
may be programming changes needed to comply with HUD's definition of
qualified mortgage, HUD estimates that the costs are de minimis.
Procedural Issues: A few commenters raised concerns with certain
procedural issues pertaining to the rule:
Comment: Additional public comment should be provided: A few
commenters stated that the 30-day comment period was too short to fully
identify and compare policy alternatives and the likely consequences,
especially when compared to the time used by the CFPB to explore the
issues involved in creating a qualified mortgage rule. The commenters
requested HUD extend the comment period for at least 60 days after the
CFPB issues its final integrated disclosure rule and clarifies the APR
calculation.
Response: HUD recognizes that the comment period provided for its
qualified mortgage rule was an abbreviated one. However, since HUD
strived to closely align its definition of safe harbor qualified
mortgage and rebuttable presumption qualified mortgage, HUD had the
advantage of reviewing the comments submitted to the CFPB on issues and
approaches that HUD considered in its proposed rule, and the benefit of
reviewing the CFPB's analysis of such issues. As HUD stated in its
proposed rule, HUD accepted and reviewed comments submitted after the
30-day public comment period closed.
Comment: HUD's regulatory impact analysis did not support the
policy taken in HUD's rule: A few commenters stated that HUD's
assessment of the probable effects of its rule on important mortgage
market stakeholders is not well supported. The commenter stated that
borrowers, lenders, U.S. taxpayers, and other private market
participants have important interests that have not been analyzed
within a robust cost/benefit framework.
Another commenter stated that HUD's supporting economic analysis
did not consider the broader mortgage market context, the interaction
between HUD's proposed rule and the CFPB qualified mortgage rule, and
lender incentives to minimize litigation risk. The commenter suggested
that HUD examine the likely credit risk management and loan performance
consequences to FHA of reduced conventional access to higher loan-to-
value (LTV) loans, combined with the more expansive qualified mortgage
standard included in HUD's proposed rule.
A commenter stated that significant questions remain unanswered
regarding the likely effect of HUD's rule on the size and allocation of
the insured low down-payment market. HUD should examine those questions
before issuing a final rule.
Another commenter stated that the economic analysis in the preamble
to HUD's rule posits that lenders will have an incentive to keep their
costs low to minimize the number of loans that would be ineligible for
FHA insurance, in light of lower compliance and litigation costs under
the FHA program that HUD expects to result from its proposal. The
commenter stated that it believes that lenders are likely to reduce the
points and fees to 3 percent or less in more cases, further minimizing
the impact even on the 7 percent. The commenter stated that if the APOR
or 3 percent cap tests turn out to have onerous effects on first-time
homebuyers and other potential FHA borrowers, it trusts HUD will
reconsider the rule and take action to eliminate such unintended
consequences.
Response: HUD appreciates the comments raised in response to HUD's
regulatory analysis. HUD acknowledges that, without a qualified
structure yet in place for the majority of FHA Title II loans as
provided in this final rule, and without the CFPB's qualified mortgage
regulations yet in operation, the data provided in the regulatory
impact
[[Page 75234]]
analysis are estimates to the best of HUD's ability on how the impact
will play out when both sets of regulations are in effect. HUD does not
believe that this final rule will have an impact on the LTV in the
conventional market and the regulatory impact analysis does not analyze
the effect of the CFPB's rule on the number of high loan-to-value (LTV)
ratio loans made in the conventional market. The regulatory impact
analysis uses a base case scenario in which the CFPB rule is in effect
on January 10, 2014. In the regulatory impact analysis that accompanies
this final rule, HUD strives to address some of the questions raised by
the commenters, but a more accurate analysis may not be possible until
the annual actuarial report for FHA prepared in the fall of each year,
is prepared in the fall of 2014.
Comment: HUD's Regulatory Flexibility Act analysis failed to
discuss the impact on small mortgage brokers: Two commenters stated
that data from mortgage broker operations and business models indicate
a significant impact on small business mortgage broker firms if the
rule is finalized. The commenters stated that HUD's rule could cause a
high percentage of mortgage broker firms to change business models,
merge with lending operations or cease operations in order to remain in
business based on HUD's qualified mortgage proposed rule.
Response: Please see HUD's Regulatory Flexibility Act analysis
provided in the preamble of this final rule. HUD continues to maintain
that this final rule will not have a significant economic impact on a
substantial number of small entities, but HUD addresses the comments
raised by the commenters.
VI. Findings and Certifications
Consultation With the Consumer Financial Protection Bureau
In accordance with section 129C(b)(3)(B)(ii) of TILA, HUD consulted
with CFPB regarding this final rule.
Executive Order 12866, Regulatory Planning and Review
The Office of Management and Budget (OMB) reviewed this rule under
Executive Order 12866 (entitled ``Regulatory Planning and Review'').
This proposed rule was determined to be a ``significant regulatory
action,'' as defined in section 3(f) of the Order (although not
economically significant, as provided in section 3(f)(1) of the Order).
The docket file is available for public inspection in the Regulations
Division, Office of General Counsel, Department of Housing and Urban
Development, 451 7th Street SW., Room 10276, Washington, DC 20410-0500.
As already discussed in the preamble, this rule would define
``qualified mortgage'' for loans insured, guaranteed, or otherwise
administered by HUD and, in so defining this term, replace application
of CFPB's qualified mortgage regulation to these loans. Neither the
economic costs nor the benefits of this proposed rule are greater than
the $100 million threshold that determines economic significance under
Executive Orders 12866 and 13563. The expected impact of the rule is no
greater than an annual reduction of lenders' legal costs of $40.7
million on the high end to $12.2 million on the low end, and may even
fall below this range.
HUD's final rule, in effect, reclassifies a sizeable group (about
19 percent) of Title II loans insured under the National Housing Act
from rebuttable presumption qualified mortgages under the CFPB
regulations to safe harbor qualified mortgages under HUD's regulation.
A small percentage (about 1 percent) of Title II loans insured under
the National Housing Act would remain rebuttable presumption qualified
mortgages under HUD's rule based on HUD's APR threshold. Some HUD
insured or guaranteed loans, the same number under the CFPB's
definition of ``qualified mortgage'', would be non-qualified mortgage
due to points and fees rising above the CFPB points and fees limit.
Under HUD's rule, these loans would also be non-qualified mortgage. The
difference is that HUD, as provided in HUD's proposed rule and retained
in this final rule, will no longer insure loans with points and fees
above the CFPB level for qualified mortgage. This policy provides a
very strong incentive for HUD mortgagees to reduce points and fees to
comply with HUD's qualified mortgage requirements. A vast majority of
these loans could be expected to be made as lenders could be expected
to find ways to comply with the QM requirement and still originate the
loan with HUD insurance. As a result, HUD believes only a fraction of
the 7 percent of non-qualified mortgage loans that HUD would have
insured prior to this rulemaking (from HUD's 2012 analysis) would have
to find alternatives to FHA, or not be made at all, once HUD's
qualified mortgage rule is issued and effective. However, most of the 7
percent of the non-qualified loans (from HUD's 2012 analysis) are
expected to comply and to continue to be insured by HUD, once the rule
is in place.
In addition, HUD classifies all Title I, Title II manufactured
housing and Section 184 and Section 184A insured mortgages and
guaranteed loans as safe harbor qualified mortgages that would have
most likely been non-qualified mortgages under the CFPB's rule.
Classifying these programs as safe harbor recognizes the unique nature
of these loans. For these programs, HUD believes that providing safe
harbor status to these programs will not increase market share but
instead maintain availability of these products to the underserved
borrowers targeted. In addition, HUD considers the additional benefit
of homeownership provided under these programs, which might otherwise
be lost if HUD applied the points and fees and APR requirements to
these programs, justifies the loss of some borrowers access to the
broader ability-to-repay challenge afforded a rebuttable presumption
loan. Assuming that all of these loans are re-classified from non-QMs
or rebuttable presumptions QMs to safe harbor QMs, the expected
reduction in costs is no greater than an annual reduction of lenders'
legal costs of $2.8 million on the high end to $900 thousand on the low
end, and may even fall below this range.
A difference between HUD's proposed rule and this final rule is
that this final rule exempts certain institutions such as state and
local housing finance agencies (HFAs) from the TILA ability-to-pay
requirements, thereby aligning with CFPB's regulations in this regard.
Since the loans from these institutions would be exempt under both the
CFPB's regulation and HUD's regulation, it is reasonable to expect a
symmetric effect in both scenarios. Typically, the loans from HFAs are
made to lower income families with some form of downpayment assistance,
and often with below market interest rates. By HUD's estimate, about
1.3 percent (or 0.9 percent as a share of aggregate principal balance)
of its fiscal year (FY) 2012 endorsements were funded by HFAs.
Although HUD is exempting certain institutions from the TILA
ability-to-repay requirements, the analysis made at the proposed rule
stage and the analysis made at this final rule stage remains the same
in that the majority of HUD loans insured or guaranteed prior to the
implementation of this rule will qualify as safe harbor qualified
mortgage under this final rule. HUD does not expect FHA's loan volume
to increase nor does it expect the volume of conventional loans to be
materially affected as a result of this rule, and consequently HUD's
market share is not expected to increase as a result of this rule.
[[Page 75235]]
While HUD considered whether it should make all loans safe harbor
as requested by a number of commenters, HUD believes that if the
largest category of FHA loans, Title II non-manufactured housing loans,
were all designated safe harbor than FHA would see an increase in
market share and borrowers would be charged higher APRs than those in
the conventional market. HUD does not believe that this alternative
would benefit borrowers. As a result of these reclassifications, HUD
continues to maintain that lenders face lower costs of compliance under
HUD's regulations than under the CFPB regulations and therefore receive
incentives to continue making these loans without having to pass on
their increased compliance costs to borrowers.
While, under HUD's regulations, borrowers benefit from not having
to pay for the higher lender costs, HUD acknowledges that they also
face less opportunity to challenge the lender with regard to ability to
repay. Given that litigation involves many wasteful costs, HUD expects
that almost all borrowers will gain from the reduction in litigation
and that the reduction of the interest rate will compensate for the
loss of the option to more easily challenge a lender. As a result of
the reclassification of some of HUD loans, the expected impact of the
rule is an annual reduction of legal costs from $12.2 to $40.7 million,
and may even fall below this range, as the range was derived from the
CFPB's estimate of the range of legal cost differences between a
qualified mortgage loan and a non-qualified mortgage loan.
Thus, the FHA qualified mortgage rule would not have an economic
impact above $100 million, and the rule is not economically
significant.
HUD's full economic analysis of the costs and benefits and possible
impacts of this rule is available on www.regulations.gov.
Due to security measures at the HUD Headquarters building, please
schedule an appointment to review the docket file by calling the
Regulations Division at 202-708-3055 (this is not a toll-free number).
Individuals with speech or hearing impairments may access this number
via TTY by calling the Federal Relay Service at 800-877-8339 (this is a
toll-free number).
Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.)
generally requires an agency to conduct a regulatory flexibility
analysis of any rule subject to notice and comment rulemaking
requirements, unless the agency certifies that the rule will not have a
significant economic impact on a substantial number of small entities.
For the reasons provided in the preamble to this final rule and further
discussed in this section, this rule will not have a significant
economic impact on a substantial number of small entities.
As provided in this final rule (and as proposed in the September
30, 2013, rule), HUD makes no change to the current requirements
governing its Title I loans, its Section 184 and 184A guaranteed loans,
and HECM loans. Therefore, this rule has no impact on either lenders or
prospective borrowers under these programs. In addition to the
exemptions provided in the proposed rule, and as discussed in the
preamble to this final rule, HUD is also exempting Title I and Title II
manufactured home mortgages, and certain transactions from compliance
with HUD's qualified mortgage regulations. (See the second and third
bulleted paragraphs in Section IV of the preamble to this final rule.)
Consequently, there is also no impact on either lenders or prospective
borrowers under these programs or transactions. These exemptions
address several of the concerns raised by small entities in public
comments submitted in response to HUD's September 30, 2013, proposed
rule.
In this final rule, HUD also provides clarifications that address
certain other issues raised by small entities. HUD clarifies that
housing counseling fees and rehabilitation consultant fees under HUD's
203(k) program may be excluded from points and fees if made by a third-
party and is not retained by the creditor, loan originator, or an
affiliate of either. HUD-approved housing counseling for borrowers
seeking FHA-insured mortgages, whether such counseling is voluntary or
required, is not part of the points and fees calculation. HUD also
clarifies that exempt from the points and fees calculation are
consultant fees for ensuring program compliance and for drafting the
required architectural exhibits for the 203(k) program by non-
affiliated entities. HUD requires the use of a HUD consultant to ensure
203(k) program compliance and strongly encourages the use of an
independent consultant to prepare the required architectural exhibits.
Both consultation fees, if obtained by non-affiliated entities on the
203(k) consultant list, are not included in the points and fees
calculation, and therefore adoption of the CFPB points and fees
definition should not reduce access to the 203(k) program.
The primary concern, however, of commenter raising small entity
concerns was the time needed to adjust systems in order to be able to
comply with HUD's qualified mortgage regulation. The commenters were
particularly concerned about changes that would need to be made to
address the rebuttable presumption distinction for FHA loans. The
commenters questioned why such a distinction was needed since, as they
stated per HUD's own analysis, this category would cover only a small
percentage of FHA loans. This concern was reiterated in a November 4,
2013, letter to HUD's FHA Commissioner from the Office of Advocacy of
the Small Business Administration (SBA).
As stated earlier in the preamble to this final rule, HUD respects
the analysis that CFPB undertook in defining ``qualified mortgage'' for
the conventional mortgage market, and sees value in having a safe
harbor qualified mortgage and a rebuttable presumption qualified
mortgage as established in regulation by the CFPB. HUD's regulation
differs from CFPB's regulation in distinguishing between the two types
of qualified mortgages for FHA Title II mortgages based on the
mortgage's APR. HUD incorporates the APR as an internal element of
HUD's definition of qualified mortgages to distinguish safe harbor
qualified mortgages from the rebuttable presumption qualified
mortgages. The CFPB's ``higher-priced covered transaction'' is an
external element that is applied to a single definition of ``qualified
mortgage.''
Under this final rule, for a Title II FHA mortgage to meet the
``safe harbor qualified mortgage'' definition, the mortgage is required
to have an APR that does not exceed the APOR for a comparable mortgage
by more than the combined annual mortgage insurance premium (MIP) and
1.15 percentage points. HUD adopts a higher APR than that adopted by
CFPB to remediate the fact that some FHA loans would fall under CFPB's
``higher-priced covered transaction'' as a result of the MIP. The MIP
by itself should not be the factor that determines whether a loan is a
higher-priced transaction. By reclassifying some loans that would have
been rebuttable presumption loans under CFPB's ``higher-priced covered
transaction'' definition to safe harbor qualified mortgage loans under
HUD's rule, HUD thus reduces the potential cost of litigation for those
loans. The reclassification will result in lenders facing lower costs
under HUD's regulations than under the CFPB regulations and therefore
receive incentives to continue making these loans without having to
pass on their increased compliance costs to borrowers.
[[Page 75236]]
Because all FHA-insured mortgages include a MIP that may vary from
time to time to address HUD's financial soundness responsibilities,
including the MIP as an element of the threshold that distinguishes
safe harbor from rebuttable presumption allows the threshold to
``float'' in a manner that allows HUD to fulfill its responsibilities
that would not be feasible if HUD adopted a threshold based only on the
amount that APR exceeds APOR. If a straight APR over APOR threshold
were adopted by HUD, every time HUD would change the MIP, to ensure the
financial soundness of its insurance fund and reduce risk to the fund
or to reflect a more positive market, HUD would also have to consider
changing the threshold APR limit.
As further stated in the preamble of this final rule HUD expects
that a rebuttable presumption category could place downward pressure on
the APRs of FHA mortgages. This downward pressure could have positive
implications for FHA borrowers. Moreover, HUD, through having its own
rebuttable presumption standard, keeps pressure on conventional lenders
to keep APR within the limit for CFPB's standard for safe harbor as
well. For example, a consumer who applies for a higher risk
conventional loan may not meet the CFPB's QM on the basis of high
points and fees, or if the points and fees are reduced to 3 percent,
the APR may become too high for safe harbor under CFPB rules. However,
the consumer might instead be offered a higher interest rate FHA loan
in return for lower points and fees, and the lender could achieve QM
with safe harbor status as an FHA loan in the absence of an FHA
rebuttable presumption standard. With the FHA rebuttable presumption
standard, the conventional lender would have incentive to work within
the CFPB's APR-APOR spread to maintain a safe harbor status. It is for
these reasons that HUD believes it is important to retain a rebuttable
presumption category for Title II mortgages.
With respect to concerns about insufficient time to adjust systems
to accommodate the different categories of loans, HUD has clarified
that lenders can identify a safe harbor qualified mortgage for Title II
loans under HUD's regulations by using the same compliance mechanisms
for identifying ``qualified mortgages'' under the CFPB's definition.
Systems that lenders have put in place to identify safe harbor
qualified mortgages under the CFPB's 1.5 percent APR threshold should
also identify the substantial majority of safe harbor qualified
mortgages under HUD's APR threshold. A loan that meets the 1.5 percent
threshold will also be in compliance with the HUD threshold. Only HUD
safe harbor loans that exceed the 1.5 percent threshold and rebuttable
presumption loans would not be picked up by such systems. Thus, lenders
are no worse off under HUD's rule in terms of making safe harbor
qualified mortgages, using systems already required to be in place,
than they would be if HUD had taken no action.
HUD has heard from the industry that a change to the system would
require resources but not that the specific system as proposed would be
more costly than any other system. A system to identify HUD safe harbor
qualified mortgage would need to pull the MIP from a specific source or
be manually inputted by the individual lender to calculate an APR to
APOR threshold similar to CFPB's metric. All system changes require
resources and time, but, in accordance with a timetable and allocation
of resources of their choosing, when lenders do implement HUD's rule it
provides an immediate opportunity for lenders to increase the number of
HUD-insured safe harbor qualified mortgages they make in accordance
with a timetable and allocation of resources of their choosing. HUD
does not consider it necessary for any lender to change systems
immediately to adapt to HUD's requirements in order to make the same
number of insured safe harbor qualified mortgages as a lender would
otherwise make.
For the reasons provided above and in this preamble overall, the
undersigned certifies that this rule would not have a significant
economic impact on a substantial number of small entities.
Environmental Impact
A Finding of No Significant Impact (FONSI) with respect to the
environment was made at the proposed rule stage in accordance with HUD
regulations at 24 CFR part 50, which implement section 102(2)(C) of the
National Environmental Policy Act of 1969 (42 U.S.C. 4332(2)(C)). That
FONSI remains applicable to this final rule and is available for public
inspection between 8 a.m. and 5 p.m., weekdays, in the Regulations
Division, Office of General Counsel, Department of Housing and Urban
Development, 451 7th Street SW., Room 10276, Washington, DC 20410-0500.
Due to security measures at the HUD Headquarters building, an advance
appointment to review the docket file must be scheduled by calling the
Regulations Division at 202-708-3055 (this is not a toll-free number).
Hearing-or speech-impaired individuals may access this number through
TTY by calling the Federal Relay Service at 800-877-8339 (this is a
toll-free number).
Executive Order 13132, Federalism
Executive Order 13132 (entitled ``Federalism'') prohibits an agency
from publishing any rule that has federalism implications if the rule
either (i) imposes substantial direct compliance costs on state and
local governments and is not required by statute, or (ii) preempts
state law, unless the agency meets the consultation and funding
requirements of section 6 of the Executive Order. This rule will not
have federalism implications and will not impose substantial direct
compliance costs on state and local governments or preempt state law
within the meaning of the Executive Order.
Unfunded Mandates Reform Act
Title II of the Unfunded Mandates Reform Act of 1995 (2 U.S.C.
1531-1538) (UMRA) establishes requirements for Federal agencies to
assess the effects of their regulatory actions on state, local, and
tribal governments, and on the private sector. This rule does not
impose any Federal mandates on any state, local, or tribal governments,
or on the private sector, within the meaning of the UMRA.
Catalog of Federal Domestic Assistance
The Catalog of Federal Domestic Assistance number for Mortgage
Insurance-Homes is 14.117; for the Section 184 Loan Guarantees for
Indian Housing is 14.865, and for the Section 184A Loan Guarantees
is 14.874.
List of Subjects
24 CFR Part 201
Claims, Health facilities, Historic preservation, Home improvement,
Loan programs--housing and community development, Manufactured homes,
Mortgage insurance, Reporting and recording requirements.
24 CFR Part 203
Hawaiian Natives, Home improvement, Indians-lands, Loan programs-
housing and community development, Mortgage insurance, Reporting and
recordkeeping requirements, Solar energy.
24 CFR Part 1005
Indians, Loan programs--Indians, Reporting and recordkeeping
requirements.
24 CFR Part 1007
Loan programs--Native Hawaiians, Native Hawaiians, Reporting and
recordkeeping requirements.
[[Page 75237]]
Accordingly, for the reasons stated above, HUD amends 24 CFR parts
201, 203, 1005 and 1007 as follows:
PART 201--TITLE I PROPERTY IMPROVEMENT AND MANUFACTURED HOME LOANS
0
1. The authority citation for part 201 is revised to read as follows:
Authority: 12 U.S.C. 1703; 15 U.S.C. 1639c; 42 U.S.C. 3535(d).
0
2. A new Sec. 201.7 is added to subpart A to read as follows:
Sec. 201.7 Qualified mortgage.
(a) Qualified mortgage. A mortgage insured under section 2 of title
I of the National Housing Act (12 U.S.C. 1703), except for mortgage
transactions exempted under Sec. 203.19(c)(2), is a safe harbor
qualified mortgage that meets the ability to repay requirements in 15
U.S.C. 1639c(a).
(b) Effect of indemnification on qualified mortgage status. An
indemnification demand or resolution of a demand that relates to
whether the loan satisfied relevant eligibility and underwriting
requirements at the time of consummation may result from facts that
could allow a change to qualified mortgage status, but the existence of
an indemnification does not per se remove qualified mortgage status.
PART 203--SINGLE FAMILY MORTGAGE INSURANCE
0
3. The authority citation for part 203 is revised to read as follows:
Authority: 12 U.S.C. 1709, 1710, 1715b, 1715z-16, 1715u, and
1717z-21; 15 U.S.C. 1639c; 42 U.S.C. 3535(d).
0
4. A new Sec. 203.19 is added to read as follows:
Sec. 203.19 Qualified mortgage.
(a) Definitions. As used in this section:
(1) Average prime offer rate means an annual percentage rate that
is derived from average interest rates, points, and other loan pricing
terms currently offered to mortgagors by a representative sample of
mortgagees for mortgage transactions that have low-risk pricing
characteristics as published by the Consumer Financial Protection
Bureau (CFPB) from time to time in accordance with the CFPB's
regulations at 12 CFR 1026.35, pertaining to prohibited acts or
practices in connection with higher-priced mortgage loans.
(2) Annual percentage rate is the measure of the cost of credit,
expressed as a yearly rate, that relates the amount and timing of value
received by the mortgagor to the amount and timing of payments made and
is the rate required to be disclosed by the mortgagee under 12 CFR
1026.18, pertaining to disclosure of finance charges for mortgages.
(3) Points and fees has the meaning given to ``points and fees'' in
12 CFR 1026.32(b)(1) as of January 10, 2014. Any changes made by the
CFPB to the points and fees definition may be adopted by HUD through
publication of a notice and after providing FHA-approved mortgagees
with time, as may be determined necessary, to implement.
(b) Qualified mortgage. (1) Limit. For a single family mortgage to
be insured under title II of the National Housing Act (12 U.S.C. 1701
et seq.), except for mortgages for manufactured housing and mortgages
under paragraph (c) of this section, the total points and fees payable
in connection with a loan used to secure a dwelling shall not exceed
the CFPB's limit on points and fees for qualified mortgage in its
regulations at 12 CFR 1026.43(e)(3) as of January 10, 2014. Any changes
made by the CFPB to the limit on points and fees may be adopted by HUD
through publication of a notice and after providing FHA-approved
mortgagees with time, as may be determined necessary, to implement.
(2) Rebuttable presumption qualified mortgage. (i) A single family
mortgage insured under title II of the National Housing Act (12 U.S.C.
1701 et seq.), except for mortgages for manufactured housing and
mortgages under paragraph (c) of this section, that has an annual
percentage rate that exceeds the average prime offer rate for a
comparable mortgage, as of the date the interest rate is set, by more
than the combined annual mortgage insurance premium and 1.15 percentage
points for a first-lien mortgage is a rebuttable presumption qualified
mortgage that is presumed to comply with the ability to repay
requirements in 15 U.S.C. 1639c(a).
(ii) To rebut the presumption of compliance, it must be proven that
the mortgage exceeded the points and fees limit in paragraph (b)(1) of
this section or that, despite the mortgage having been endorsed for
insurance under the National Housing Act, the mortgagee did not make a
reasonable and good-faith determination of the mortgagor's repayment
ability at the time of consummation, by failing to evaluate the
mortgagor's income, credit, and assets in accordance with HUD
underwriting requirements.
(3) Safe harbor qualified mortgage. (i) A mortgage for manufactured
housing that is insured under Title II of the National Housing Act (12
U.S.C. 1701 et seq.) is a safe harbor qualified mortgage that meets the
ability to repay requirements in 15 U.S.C. 1639c(a); and
(ii) A single family mortgage insured under title II of the
National Housing Act (12 U.S.C. 1701 et seq.), except for mortgages
under paragraph (c) of this section, that has an annual percentage rate
that does not exceed the average prime offer rate for a comparable
mortgage, as of the date the interest rate is set, by more than the
combined annual mortgage insurance premium and 1.15 percentage points
for a first-lien mortgage is a safe harbor qualified mortgage that
meets the ability to repay requirements in 15 U.S.C. 1639c(a).
(4) Effect of indemnification on qualified mortgage status. An
indemnification demand or resolution of a demand that relates to
whether the loan satisfied relevant eligibility and underwriting
requirements at the time of consummation may result from facts that
could allow a change to qualified mortgage status, but the existence of
an indemnification does not per se remove qualified mortgage status.
(c) Exempted transactions. The following transactions are exempted
from the requirements in paragraph (b) of this section:
(1) Home Equity Conversion Mortgages under section 255 of the
National Housing Act (12 U.S.C. 1715z-20); and
(2) Mortgage transactions exempted by the CFPB in its regulations
at 12 CFR 1026.43(a)(3) as of January 10, 2014. Any changes made by
CFPB to the list of exempted transactions may be adopted by HUD through
publication of a notice and after providing FHA-approved mortgagees
with time, as may be determined necessary, to implement.
(d) Ability to make adjustments to this section by notice. The FHA
Commissioner may make adjustments to this section, including the
calculations of fees or the list of transactions excluded from
compliance with the requirements of this section as the Commissioner
determines necessary for purposes of meeting FHA's mission, after
solicitation and consideration of public comments.
PART 1005--LOAN GUARANTEES FOR INDIAN HOUSING
0
5. The authority citation for part 1005 is revised to read as follows:
Authority: 12 U.S.C. 1715z-13a; 15 U.S.C. 1639c; 42 U.S.C.
3535(d).
0
6. A new Sec. 1005.120 is added to read as follows:
Sec. 1005.120 Qualified mortgage.
A mortgage guaranteed under section 184 of the Housing and
Community
[[Page 75238]]
Development Act of 1992 (12 U.S.C. 1715z-13a), except for mortgage
transactions exempted under Sec. 203.19(c)(2), is a safe harbor
qualified mortgage that meets the ability-to-repay requirements in 15
U.S.C. 1639c(a).
PART 1007--SECTION 184A LOAN GUARANTEES FOR NATIVE HAWAIIAN HOUSING
0
7. The authority citation for part 1007 is revised to read as follows:
Authority: 12 U.S.C. 1715z-13b; 15 U.S.C. 1639c; 42 U.S.C.
3535(d).
0
8. A new Sec. 1007.80 is added to read as follows:
Sec. 1007.80 Qualified mortgage.
A mortgage guaranteed under section 184A of the Housing and
Community Development Act of 1992 (1715z-13b), except for mortgage
transactions exempted under Sec. 203.19(c)(2), is a safe harbor
qualified mortgage that meets the ability-to-repay requirements in 15
U.S.C. 1639c(a).
Dated: December 5, 2013.
Shaun Donovan,
Secretary.
[FR Doc. 2013-29482 Filed 12-10-13; 8:45 am]
BILLING CODE 4210-10-P