[Federal Register Volume 79, Number 87 (Tuesday, May 6, 2014)]
[Proposed Rules]
[Pages 25730-25753]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-10207]


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BUREAU OF CONSUMER FINANCIAL PROTECTION

12 CFR Part 1026

[Docket No. CFPB-2014-0009]
RIN 3170-AA43


Amendments to the 2013 Mortgage Rules Under the Truth in Lending 
Act (Regulation Z)

AGENCY: Bureau of Consumer Financial Protection.

ACTION: Proposed rule with request for public comment.

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SUMMARY: The Bureau of Consumer Financial Protection (Bureau) proposes 
amendments to certain mortgage rules issued in 2013. The proposed rule 
would provide an alternative small servicer definition for nonprofit 
entities that meet certain requirements, amend the existing exemption 
from the ability-to-repay rule for nonprofit entities that meet certain 
requirements, and provide a limited cure mechanism for the points and 
fees limit that applies to qualified mortgages.

DATES: Comments regarding the proposed amendments to 12 CFR 
1026.41(e)(4), 1026.43(a)(3), and 1026.43(e)(3) must be received on or 
before June 5, 2014. For the requests for comment regarding correction 
or cure of debt-to-income ratio overages and the credit extension limit 
for the small creditor definition, comments must be received on or 
before July 7, 2014.

ADDRESSES: You may submit comments, identified by Docket No. CFPB-2014-
0009 or RIN 3170-AA43, by any of the following methods:
     Electronic: http://www.regulations.gov. Follow the 
instructions for submitting comments.
     Mail/Hand Delivery/Courier: Monica Jackson, Office of the 
Executive Secretary, Consumer Financial Protection Bureau, 1700 G 
Street NW., Washington, DC 20552.
    Instructions: All submissions should include the agency name and 
docket number or Regulatory Information Number (RIN) for this 
rulemaking. Because paper mail in the Washington,

[[Page 25731]]

DC area and at the Bureau is subject to delay, commenters are 
encouraged to submit comments electronically. In general, all comments 
received will be posted without change to http://www.regulations.gov. 
In addition, comments will be available for public inspection and 
copying at 1700 G Street NW., Washington, DC 20552, on official 
business days between the hours of 10 a.m. and 5 p.m. Eastern Time. You 
can make an appointment to inspect the documents by telephoning (202) 
435-7275.
    All comments, including attachments and other supporting materials, 
will become part of the public record and subject to public disclosure. 
Sensitive personal information, such as account numbers or social 
security numbers, should not be included. Comments generally will not 
be edited to remove any identifying or contact information.

FOR FURTHER INFORMATION CONTACT: Pedro De Oliveira, Counsel; William R. 
Corbett, Nicholas Hluchyj, and Priscilla Walton-Fein, Senior Counsels, 
Office of Regulations, at (202) 435-7700.

SUPPLEMENTARY INFORMATION:

I. Summary of Proposed Rule

    In January 2013, the Bureau issued several final rules concerning 
mortgage markets in the United States (2013 Title XIV Final Rules), 
pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection 
Act (Dodd-Frank Act), Public Law 111-203, 124 Stat. 1376 (2010).\1\ The 
Bureau clarified and revised those rules through notice and comment 
rulemaking during the summer and fall of 2013. The purpose of those 
updates was to address important questions raised by industry, consumer 
groups, or other stakeholders. The Bureau is now proposing several 
additional amendments to the 2013 Title XIV Final Rules to revise 
regulatory provisions and official interpretations primarily relating 
to the Regulation Z ability-to-repay/qualified mortgage requirements 
and servicing rules, as well as seeking comment on additional issues. 
The Bureau expects to issue additional proposals to address other 
topics relating to the 2013 Title XIV Final Rules, such as the 
definition of ``rural and underserved'' for purposes of certain 
mortgage provisions affecting small creditors as discussed further 
below.
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    \1\ Specifically, on January 10, 2013, the Bureau issued Escrow 
Requirements Under the Truth in Lending Act (Regulation Z), 78 FR 
4725 (Jan. 22, 2013) (2013 Escrows Final Rule), High-Cost Mortgage 
and Homeownership Counseling Amendments to the Truth in Lending Act 
(Regulation Z) and Homeownership Counseling Amendments to the Real 
Estate Settlement Procedures Act (Regulation X), 78 FR 6855 (Jan. 
31, 2013) (2013 HOEPA Final Rule), and Ability to Repay and 
Qualified Mortgage Standards Under the Truth in Lending Act 
(Regulation Z), 78 FR 6407 (Jan. 30, 2013) (January 2013 ATR Final 
Rule). The Bureau concurrently issued a proposal to amend the 
January 2013 ATR Final Rule, which was finalized on May 29, 2013. 
See 78 FR 6621 (Jan. 30, 2013) (January 2013 ATR Proposal) and 78 FR 
35429 (June 12, 2013) (May 2013 ATR Final Rule). On January 17, 
2013, the Bureau issued the Real Estate Settlement Procedures Act 
(Regulation X) and Truth in Lending Act (Regulation Z) Mortgage 
Servicing Final Rules, 78 FR 10901 (Feb. 14, 2013) (Regulation Z) 
and 78 FR 10695 (Feb. 14, 2013) (Regulation X) (2013 Mortgage 
Servicing Final Rules). On January 18, 2013, the Bureau issued the 
Disclosure and Delivery Requirements for Copies of Appraisals and 
Other Written Valuations Under the Equal Credit Opportunity Act 
(Regulation B), 78 FR 7215 (Jan. 31, 2013) (2013 ECOA Valuations 
Final Rule) and, jointly with other agencies, issued Appraisals for 
Higher-Priced Mortgage Loans (Regulation Z), 78 FR 10367 (Feb. 13, 
2013) (2013 Interagency Appraisals Final Rule). On January 20, 2013, 
the Bureau issued the Loan Originator Compensation Requirements 
under the Truth in Lending Act (Regulation Z), 78 FR 11279 (Feb. 15, 
2013) (2013 Loan Originator Final Rule).
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    Specifically, the Bureau is proposing three amendments to the 2013 
Title XIV Final Rules:
     To provide an alternative definition of the term ``small 
servicer,'' that would apply to certain nonprofit entities that service 
for a fee loans on behalf of other nonprofit chapters of the same 
organization. Although the Bureau is proposing this change in 
Regulation Z, the change will also affect several provisions of 
Regulation X, which cross-reference the Regulation Z small servicer 
exemption.
     To amend the Regulation Z ability-to-repay requirements to 
provide that certain interest-free, contingent subordinate liens 
originated by nonprofit creditors will not be counted towards the 
credit extension limit that applies to the nonprofit exemption from the 
ability-to-repay requirements.
     To provide a limited, post-consummation cure mechanism for 
loans that are originated with the good faith expectation of qualified 
mortgage status but that actually exceed the points and fees limit for 
qualified mortgages.
    In addition to providing specific proposals on these issues, the 
Bureau is seeking comment on two additional topics:
     Whether and how to provide a limited, post-consummation 
cure or correction provision for loans that are originated with the 
good faith expectation of qualified mortgage status but that actually 
exceed the 43-percent debt-to-income ratio limit that applies to 
certain qualified mortgages.
     Feedback and data from smaller creditors regarding 
implementation of certain provisions in the 2013 Title XIV Final Rules 
that are tailored to account for small creditor operations and how 
their origination activities have changed in light of the new rules.

II. Background

A. Title XIV Rulemakings Under the Dodd-Frank Act

    In response to an unprecedented cycle of expansion and contraction 
in the mortgage market that sparked the most severe U.S. recession 
since the Great Depression, Congress passed the Dodd-Frank Act, which 
was signed into law on July 21, 2010. In the Dodd-Frank Act, Congress 
established the Bureau and generally consolidated the rulemaking 
authority for Federal consumer financial laws, including the Truth in 
Lending Act (TILA) and the Real Estate Settlement Procedures Act 
(RESPA), in the Bureau.\2\ At the same time, Congress significantly 
amended the statutory requirements governing mortgage practices, with 
the intent to restrict the practices that contributed to and 
exacerbated the crisis.\3\ Under the statute, most of these new 
requirements would have taken effect automatically on January 21, 2013, 
if the Bureau had not issued implementing regulations by that date.\4\ 
To avoid uncertainty and potential disruption in the national mortgage 
market at a time of economic vulnerability, the Bureau issued several 
final rules in a span of less than two weeks in January 2013 to 
implement these new statutory provisions and provide for an orderly 
transition.
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    \2\ See, e.g., sections 1011 and 1021 of the Dodd-Frank Act, 12 
U.S.C. 5491 and 5511 (establishing and setting forth the purpose, 
objectives, and functions of the Bureau); section 1061 of the Dodd-
Frank Act, 12 U.S.C. 5581 (consolidating certain rulemaking 
authority for Federal consumer financial laws in the Bureau); 
section 1100A of the Dodd-Frank Act (codified in scattered sections 
of 15 U.S.C.) (similarly consolidating certain rulemaking authority 
in the Bureau). But see Section 1029 of the Dodd-Frank Act, 12 
U.S.C. 5519 (subject to certain exceptions, excluding from the 
Bureau's authority any rulemaking authority over a motor vehicle 
dealer that is predominantly engaged in the sale and servicing of 
motor vehicles, the leasing and servicing of motor vehicles, or 
both).
    \3\ See title XIV of the Dodd-Frank Act, Public Law 111-203, 124 
Stat. 1376 (2010) (codified in scattered sections of 12 U.S.C., 15 
U.S.C., and 42 U.S.C.).
    \4\ See section 1400(c) of the Dodd-Frank Act, 15 U.S.C. 1601 
note.
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    On January 10, 2013, the Bureau issued the 2013 Escrows Final Rule, 
the January 2013 ATR Final Rule, and the 2013 HOEPA Final Rule. 78 FR 
4725 (Jan. 22, 2013); 78 FR 6407 (Jan. 30, 2013); 78 FR 6855 (Jan. 31, 
2013). On January 17, 2013, the Bureau issued the 2013 Mortgage 
Servicing Final Rules. 78 FR 10695 (Feb. 14, 2013); 78 FR 10901 (Feb. 
14, 2013). On January 18, 2013, the Bureau issued the 2013 ECOA 
Valuations Final Rule and, jointly with

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other agencies, the 2013 Interagency Appraisals Final Rule. 78 FR 7215 
(Jan. 31, 2013); 78 FR 10367 (Feb. 13, 2013). On January 20, 2013, the 
Bureau issued the 2013 Loan Originator Final Rule. 78 FR 11279 (Feb. 
15, 2013).\5\ Pursuant to the Dodd-Frank Act, which permitted a maximum 
of one year for implementation, most of these rules became effective on 
January 10, 2014.
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    \5\ Each of these rules was published in the Federal Register 
shortly after issuance.
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    Concurrent with the January 2013 ATR Final Rule, on January 10, 
2013, the Bureau issued proposed amendments to the rule (i.e., the 
January 2013 ATR Proposal), which the Bureau finalized on May 29, 2013 
(i.e., the May 2013 ATR Final Rule). 78 FR 6621 (Jan. 30, 2013); 78 FR 
35429 (June 12, 2013). The Bureau issued additional corrections and 
clarifications to the 2013 Mortgage Servicing Final Rules and the May 
2013 ATR Final Rule in the summer and fall of 2013.\6\
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    \6\ 78 FR 44685 (July 24, 2013) (clarifying which mortgages to 
consider in determining small servicer status and the application of 
the small servicer exemption with regard to servicer/affiliate and 
master servicer/subservicer relationships); 78 FR 45842 (July 30, 
2013); 78 FR 60381 (Oct. 1, 2013) (revising exceptions available to 
small creditors operating predominantly in ``rural'' or 
``underserved'' areas); 78 FR 62993 (Oct. 23, 2013) (clarifying 
proper compliance regarding servicing requirements when a consumer 
is in bankruptcy or sends a cease communication request under the 
Fair Debt Collection Practice Act).
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B. Implementation Plan for New Mortgage Rules

    On February 13, 2013, the Bureau announced an initiative to support 
implementation of its new mortgage rules (the Implementation Plan),\7\ 
under which the Bureau would work with the mortgage industry and other 
stakeholders to ensure that the new rules could be implemented 
accurately and expeditiously. The Implementation Plan included: (1) 
Coordination with other agencies, including the development of 
consistent, updated examination procedures; (2) publication of plain-
language guides to the new rules; (3) publication of additional 
corrections and clarifications of the new rules, as needed; (4) 
publication of readiness guides for the new rules; and (5) education of 
consumers on the new rules.
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    \7\ Press Release, Consumer Financial Protection Bureau, 
Consumer Financial Protection Bureau Lays Out Implementation Plan 
for New Mortgage Rules (Feb. 13, 2013), available at http://www.consumerfinance.gov/newsroom/consumer-financial-protection-bureau-lays-out-implementation-plan-for-new-mortgage-rules/.
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    This proposal concerns additional revisions to the new rules. The 
purpose of these updates is to address important questions raised by 
industry, consumer groups, or other stakeholders. As discussed below, 
the Bureau contemplates issuing additional updates on additional 
topics.

III. Legal Authority

    The Bureau is issuing this proposed rule pursuant to its authority 
under TILA, RESPA, and the Dodd-Frank Act. Section 1061 of the Dodd-
Frank Act transferred to the Bureau the ``consumer financial protection 
functions'' previously vested in certain other Federal agencies, 
including the Board of Governors of the Federal Reserve System (Board). 
The term ``consumer financial protection function'' is defined to 
include ``all authority to prescribe rules or issue orders or 
guidelines pursuant to any Federal consumer financial law, including 
performing appropriate functions to promulgate and review such rules, 
orders, and guidelines. Section 1061 of the Dodd-Frank Act also 
transferred to the Bureau all of the Department of Housing and Urban 
Development's (HUD) consumer protection functions relating to RESPA. 
Title X of the Dodd-Frank Act, including section 1061 of the Dodd-Frank 
Act, along with TILA, RESPA, and certain subtitles and provisions of 
title XIV of the Dodd-Frank Act, are Federal consumer financial 
laws.\8\
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    \8\ Dodd-Frank Act section 1002(14), 12 U.S.C. 5481(14) 
(defining ``Federal consumer financial law'' to include the 
``enumerated consumer laws,'' the provisions of title X of the Dodd-
Frank Act, and the laws for which authorities are transferred under 
title X subtitles F and H of the Dodd-Frank Act); Dodd-Frank Act 
section 1002(12), 12 U.S.C. 5481(12) (defining ``enumerated consumer 
laws'' to include TILA); Dodd-Frank section 1400(b), 12 U.S.C. 
5481(12) note (defining ``enumerated consumer laws'' to include 
certain subtitles and provisions of Dodd-Frank Act title XIV); Dodd-
Frank Act section 1061(b)(7), 12 U.S.C. 5581(b)(7) (transferring to 
the Bureau all of HUD's consumer protection functions relating to 
RESPA).
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A. TILA

    Section 105(a) of TILA authorizes the Bureau to prescribe 
regulations to carry out the purposes of TILA. 15 U.S.C. 1604(a). Under 
section 105(a), such regulations may contain such additional 
requirements, classifications, differentiations, or other provisions, 
and may provide for such adjustments and exceptions for all or any 
class of transactions, as in the judgment of the Bureau are necessary 
or proper to effectuate the purposes of TILA, to prevent circumvention 
or evasion thereof, or to facilitate compliance therewith. A purpose of 
TILA is ``to assure a meaningful disclosure of credit terms so that the 
consumer will be able to compare more readily the various credit terms 
available to him and avoid the uninformed use of credit.'' TILA section 
102(a), 15 U.S.C. 1601(a). In particular, it is a purpose of TILA 
section 129C, as added by the Dodd-Frank Act, to assure that consumers 
are offered and receive residential mortgage loans on terms that 
reasonably reflect their ability to repay the loans and that are 
understandable and not unfair, deceptive, and abusive. 15 U.S.C. 
1639b(a)(2).
    Section 105(f) of TILA authorizes the Bureau to exempt from all or 
part of TILA a class of transactions if the Bureau determines that TILA 
coverage does not provide a meaningful benefit to consumers in the form 
of useful information or protection. 15 U.S.C. 1604(f)(1). That 
determination must consider:
     The loan amount and whether TILA's provisions ``provide a 
benefit to the consumers who are parties to such transactions'';
     The extent to which TILA requirements ``complicate, 
hinder, or make more expensive the credit process'';
     The borrowers' ``status,'' including their ``related 
financial arrangements,'' their financial sophistication relative to 
the type of transaction, and the importance to the borrowers of the 
credit, related supporting property, and TILA coverage;
     Whether the loan is secured by the consumer's principal 
residence; and
     Whether consumer protection would be undermined by such an 
exemption. 15 U.S.C. 1604(f)(2).
    TILA section 129C(b)(3)(B)(i) provides the Bureau with authority to 
prescribe regulations that revise, add to, or subtract from the 
criteria that define a qualified mortgage upon a finding that such 
regulations are: necessary or proper to ensure that responsible, 
affordable mortgage credit remains available to consumers in a manner 
consistent with the purposes of the ability-to-repay requirements; 
necessary and appropriate to effectuate the purposes of the ability-to-
repay and residential mortgage loan origination requirements; to 
prevent circumvention or evasion thereof; or to facilitate compliance 
with TILA sections 129B and 129C. 15 U.S.C. 1639c(b)(3)(B)(i). In 
addition, TILA section 129C(b)(3)(A) requires the Bureau to prescribe 
regulations to carry out such purposes. 15 U.S.C. 1639c(b)(3)(A).

B. RESPA

    Section 19(a) of RESPA authorizes the Bureau to prescribe such 
rules and regulations, to make such interpretations, and to grant such 
reasonable exemptions for classes of transactions, as may be necessary 
to

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achieve the purposes of RESPA, which include RESPA's consumer 
protection purposes. 12 U.S.C. 2617(a). In addition, section 6(j)(3) of 
RESPA authorizes the Bureau to establish any requirements necessary to 
carry out section 6 of RESPA, and section 6(k)(1)(E) of RESPA 
authorizes the Bureau to prescribe regulations that are appropriate to 
carry out RESPA's consumer protection purposes. 12 U.S.C. 2605(j)(3) 
and (k)(1)(E). The consumer protection purposes of RESPA include 
responding to borrower requests and complaints in a timely manner, 
maintaining and providing accurate information, helping borrowers avoid 
unwarranted or unnecessary costs and fees, and facilitating review for 
foreclosure avoidance options.

C. The Dodd-Frank Act

    Section 1405(b) of the Dodd-Frank Act provides that, ``in order to 
improve consumer awareness and understanding of transactions involving 
residential mortgage loans through the use of disclosures,'' the Bureau 
may exempt from disclosure requirements, ``in whole or in part . . . 
any class of residential mortgage loans'' if the Bureau determines that 
such exemption ``is in the interest of consumers and in the public 
interest.'' 15 U.S.C. 1601 note.\9\ Notably, the authority granted by 
section 1405(b) applies to ``disclosure requirements'' generally, and 
is not limited to a specific statute or statutes. Accordingly, Dodd-
Frank Act section 1405(b) is a broad source of authority for exemptions 
from the disclosure requirements of TILA and RESPA.
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    \9\ ``Residential mortgage loan'' is generally defined as any 
consumer credit transaction (other than open-end credit plans) that 
is secured by a mortgage (or equivalent security interest) on ``a 
dwelling or on residential real property that includes a dwelling'' 
(except, in certain instances, timeshare plans). 15 U.S.C. 
1602(cc)(5).
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    Moreover, section 1022(b)(1) of the Dodd-Frank Act authorizes the 
Bureau to prescribe rules ``as may be necessary or appropriate to 
enable the Bureau to administer and carry out the purposes and 
objectives of the Federal consumer financial laws, and to prevent 
evasions thereof.'' 12 U.S.C. 5512(b)(1). Accordingly, the Bureau is 
exercising its authority under Dodd-Frank Act section 1022(b) to 
propose rules that carry out the purposes and objectives of TILA, 
RESPA, title X of the Dodd-Frank Act, and certain enumerated subtitles 
and provisions of title XIV of the Dodd-Frank Act, and to prevent 
evasion of those laws.
    The Bureau is proposing to amend rules that implement certain Dodd-
Frank Act provisions. In particular, the Bureau is proposing to amend 
provisions of Regulation Z (and, by reference, Regulation X) adopted by 
the 2013 Mortgage Servicing Final Rules (including July 2013 amendments 
thereto), the January 2013 ATR Final Rule, and the May 2013 ATR Final 
Rule.

IV. Proposed Effective Date

    The Bureau proposes that all of the changes proposed herein take 
effect thirty days after publication of a final rule in the Federal 
Register. The proposed changes would expand exemptions and provide 
relief from regulatory requirements; therefore the Bureau believes an 
effective date of 30 days after publication may be appropriate. The 
Bureau seeks comment on whether the proposed effective date is 
appropriate, or whether the Bureau should adopt an alternative 
effective date.

V. Section-by-Section Analysis

Section 1026.41 Periodic Statements for Residential Mortgage Loans

41(e) Exemptions
41(e)(4) Small Servicers
    The Bureau is proposing to revise the scope of the exemption for 
small servicers that is set forth in Sec.  1026.41 of Regulation Z and 
incorporated by cross-reference in certain provisions of Regulation X. 
The proposal would add an alternative definition of small servicer 
which would apply to certain nonprofit entities that service for a fee 
only loans for which the servicer or an associated nonprofit entity is 
the creditor.
    The Bureau's 2013 Mortgage Servicing Final Rules exempt small 
servicers from certain mortgage servicing requirements. Specifically, 
Regulation Z exempts small servicers, defined in Sec.  
1026.41(e)(4)(ii), from the requirement to provide periodic statements 
for residential mortgage loans.\10\ Regulation X incorporates this same 
definition by reference to Sec.  1026.41(e)(4) and thereby exempts 
small servicers from: (1) Certain requirements relating to obtaining 
force-placed insurance,\11\ (2) the general servicing policies, 
procedures, and requirements,\12\ and (3) certain requirements and 
restrictions relating to communicating with borrowers about, and 
evaluation of applications for, loss mitigation options.\13\
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    \10\ 12 CFR 1026.41(e) (requiring delivery each billing cycle of 
a periodic statement, with specific content and form). For loans 
serviced by a small servicer, a creditor or assignee is also exempt 
from the Regulation Z periodic statement requirements. 12 CFR 
1026.41(e)(4)(i).
    \11\ 12 CFR 1024.17(k)(5) (prohibiting purchase of force-placed 
insurance in certain circumstances).
    \12\ 12 CFR 1024.30(b)(1) (exempting small servicers from 
Sec. Sec.  1024.38 through 41, except as otherwise provided under 
41(j), as discussed in note 13, infra). Sections 1024.38 through 40 
respectively impose general servicing policies, procedures, and 
requirements; early intervention requirements for delinquent 
borrowers; and policies and procedures to maintain continuity of 
contact with delinquent borrowers).
    \13\ See 12 CFR 1024.41 (loss mitigation procedures). Though 
exempt from most of the rule, small servicers are subject to the 
prohibition of foreclosure referral before the loan obligation is 
more than 120 days delinquent and may not make the first notice or 
filing for foreclosure if a borrower is performing pursuant to the 
terms of an agreement on a loss mitigation option. 12 CFR 
1024.41(j).
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    Current Sec.  1026.41(e)(4)(ii) defines the term ``small servicer'' 
as a servicer that either: (A) Services, together with any affiliates, 
5,000 or fewer mortgage loans, for all of which the servicer (or an 
affiliate) is the creditor or assignee; or (B) is a Housing Finance 
Agency, as defined in 24 CFR 266.5. ``Affiliate'' is defined in Sec.  
1026.32(b)(5) as any company that controls, is controlled by, or is 
under common control with another company, as set forth in the Bank 
Holding Company Act of 1956, 12 U.S.C. 1841 et seq. (BHCA).\14\
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    \14\ Under the BHCA, a company has ``control'' over another 
company if it (i) ``directly or indirectly . . . owns, controls, or 
has power to vote 25 per centum or more of any class of voting 
securities'' of the other company; (ii) ``controls . . . the 
election of a majority of the directors or trustees'' of the other 
company; or (iii) ``directly or indirectly exercises a controlling 
influence over the management or policies'' of the other company 
(based on a determination by the Board). 12 U.S.C. 1841(a)(2).
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    Generally, under Sec.  1026.41(e)(4)(ii)(A), a servicer cannot be a 
small servicer if it services any loan for which the servicer or its 
affiliate is not the creditor or assignee. However, current Sec.  
1026.41(e)(4)(iii) excludes from consideration certain types of 
mortgage loans for purposes of determining whether a servicer qualifies 
as a small servicer: (A) Mortgage loans voluntarily serviced by the 
servicer for a creditor or assignee that is not an affiliate of the 
servicer and for which the servicer does not receive any compensation 
or fees; (B) reverse mortgage transactions; and (C) mortgage loans 
secured by consumers' interests in timeshare plans. In the 2013 
Mortgage Servicing Final Rules, the Bureau concluded that a separate 
exemption for nonprofits was not necessary because the Bureau believed 
that nonprofits would likely fall within the small servicer exemption. 
See 78 FR 10695, 10720 (Feb. 14, 2013).
    As part of the Bureau's Implementation Plan, the Bureau has learned 
that certain nonprofit entities may, for a fee, service loans for 
another nonprofit entity that is the creditor on

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the loan. The Bureau understands that, in some cases, these nonprofit 
entities are part of a larger association of nonprofits that are 
separately incorporated but operate under mutual contractual 
obligations to serve the same charitable mission, and that use a common 
name, trademark, or servicemark. These entities likely do not meet the 
definition of ``affiliate'' under the BHCA due to the limits imposed on 
nonprofits with respect to ownership and control. Accordingly, these 
nonprofits likely do not qualify for the small servicer exemption 
because they service, for a fee, loans on behalf of an entity that is 
not an affiliate as defined under the BHCA (and because the servicer is 
neither the creditor for, nor an assignee of, those loans).
    The Bureau understands that groups of nonprofit entities that are 
associated with one another may consolidate servicing activities to 
achieve economies of scale necessary to service loans cost-effectively, 
and that such costs savings may reduce the cost of credit or enable the 
nonprofit to extend a greater number of loans overall. However, because 
of their corporate structures, such groups of nonprofit entities have a 
more difficult time than related for-profit servicers qualifying for 
the small servicer exemption. For the reasons discussed below, the 
Bureau believes that the ability of such nonprofit entities to 
consolidate servicing activities may be beneficial to consumers--e.g., 
to the extent servicing cost savings are passed on to consumers and/or 
lead to increased credit availability--and may outweigh the consumer 
protections provided by the servicing rules to those consumers affected 
by this proposal.
    Accordingly, the Bureau is proposing an alternative definition of 
small servicer that would apply to nonprofit entities that service 
loans on behalf of other nonprofits within a common network or group of 
nonprofit entities. Specifically, proposed Sec.  1026.41(e)(4)(ii)(C) 
provides that a small servicer is a nonprofit entity that services 
5,000 or fewer mortgage loans, including any mortgage loans serviced on 
behalf of associated nonprofit entities, for all of which the servicer 
or an associated nonprofit entity is the creditor. Proposed Sec.  
1026.41(e)(4)(ii)(C)(1) provides that, for purposes of proposed Sec.  
1026.41(e)(4)(ii)(C), the term ``nonprofit entity'' means an entity 
having a tax exemption ruling or determination letter from the Internal 
Revenue Service under section 501(c)(3) of the Internal Revenue Code of 
1986. See 26 U.S.C. 501(c)(3); 26 CFR 1.501(c)(3)-1. Proposed Sec.  
1026.41(e)(4)(ii)(C)(2) defines ``associated nonprofit entities'' to 
mean nonprofit entities that by agreement operate using a common name, 
trademark, or servicemark to further and support a common charitable 
mission or purpose.
    The Bureau is also proposing technical changes to Sec.  
1026.41(e)(4)(iii), which addresses the timing of the small servicer 
determination and also excludes certain loans from the 5,000-loan 
limitation. The proposed changes would add language to the existing 
timing requirement to limit its application to the small servicer 
determination for purposes of Sec.  1026.41(e)(4)(ii)(A) and insert a 
separate timing requirement for purposes of determining whether a 
nonprofit servicer is a small servicer pursuant to Sec.  
1026.41(e)(4)(ii)(C). Specifically, that requirement would provide that 
the servicer is evaluated based on the mortgage loans serviced by the 
servicer as of January 1 and for the remainder of the calendar year.
    The Bureau is proposing technical changes to comment 41(e)(4)(ii)-2 
in light of proposed Sec.  1026.41(e)(4)(ii)(C). In addition, the 
Bureau is proposing to add a comment to parallel existing comment 
41(e)(4)(ii)-2 (that addresses the requirements to be a small servicer 
under the existing definition in Sec.  1026.41(e)(4)(ii)(A)). 
Specifically, new comment 41(e)(4)(ii)-4 would clarify that there are 
two elements to satisfying the nonprofit small creditor definition in 
proposed Sec.  1026.41(e)(4)(ii)(C). First, the comment would clarify 
that a nonprofit entity must service 5,000 or fewer mortgage loans, 
including any mortgage loans serviced on behalf of associated nonprofit 
entities. For each associated nonprofit entity, the small servicer 
determination is made separately without consideration of the number of 
loans serviced by another associated nonprofit entity. Second, the 
comment would further explain that the nonprofit entity must service 
only mortgage loans for which the servicer (or an associated nonprofit 
entity) is the creditor. To be the creditor, the servicer (or an 
associated nonprofit entity) must have been the entity to which the 
mortgage loan obligation was initially payable (that is, the originator 
of the mortgage loan). The comment would explain that a nonprofit 
entity is not a small servicer under Sec.  1026.41(e)(4)(ii)(C) if it 
services any mortgage loans for which the servicer or an associated 
nonprofit entity is not the creditor (that is, for which the servicer 
or an associated nonprofit entity was not the originator). The comment 
would provide two examples to demonstrate the application of the small 
servicer definition under Sec.  1026.41(e)(4)(ii)(C).
    The Bureau is also proposing to revise existing comment 
41(e)(4)(iii)-3 to specify that it explains the application of Sec.  
1026.41(e)(4)(iii) to the small servicer determination under Sec.  
1026.41(e)(4)(ii)(A) specifically. As revised, comment 41(e)(4)(iii)-3 
would explain that mortgage loans that are not considered pursuant to 
Sec.  1026.41(e)(4)(iii) for purposes of the small servicer 
determination under Sec.  1026.41(e)(4)(ii)(A) are not considered 
either for determining whether a servicer (together with any 
affiliates) services 5,000 or fewer mortgage loans or whether a 
servicer is servicing only mortgage loans that it (or an affiliate) 
owns or originated. The proposal would also make clarifying changes to 
the example provided in comment 41(e)(4)(iii)-3 and would move language 
in existing comment 41(e)(4)(iii)-3 regarding the limited role of 
voluntarily serviced mortgage loans to new proposed comment 
41(e)(4)(iii)-5. The Bureau is also proposing technical changes to 
comment 41(e)(4)(iii)-2 in light of proposed Sec.  
1026.41(e)(4)(ii)(C).
    In addition, the Bureau is proposing a new comment 41(e)(4)(iii)-4 
to explain the application of Sec.  1026.41(e)(4)(iii) to the nonprofit 
small servicer determination under proposed Sec.  1026.41(e)(4)(ii)(C) 
specifically. The proposed comment would explain that mortgage loans 
that are not considered pursuant to Sec.  1026.41(e)(4)(iii) for 
purposes of the small servicer determination under Sec.  
1026.41(e)(4)(ii)(C) are not considered either for determining whether 
a nonprofit entity services 5,000 or fewer mortgage loans, including 
any mortgage loans serviced on behalf of associated nonprofit entities, 
or whether a nonprofit entity is servicing only mortgage loans that it 
or an associated nonprofit entity originated. The comment would provide 
an example of a nonprofit entity that services 5,400 mortgage loans. Of 
these mortgage loans, it originated 2,800 mortgage loans and associated 
nonprofit entities originated 2,000 mortgage loans. The nonprofit 
entity receives compensation for servicing the loans originated by 
associated nonprofits. The nonprofit entity also voluntarily services 
600 mortgage loans that were originated by an entity that is not an 
associated nonprofit entity, and receives no compensation or fees for 
servicing these loans. The voluntarily serviced mortgage loans are not 
considered in determining whether the servicer qualifies as a small 
servicer. Thus,

[[Page 25735]]

because only the 4,800 mortgage loans originated by the nonprofit 
entity or associated nonprofit entities are considered in determining 
whether the servicer qualifies as a small servicer, the servicer 
qualifies for the small servicer exemption pursuant to Sec.  
1026.41(e)(4)(ii)(C) with regard to all 5,400 mortgage loans it 
services.
    The Bureau believes that nonprofit entities are an important source 
of credit, particularly for low- and moderate-income consumers. The 
Bureau understands that nonprofit entities, while they may operate 
under a common name, trademark, or servicemark, are not typically 
structured to meet the definition of affiliate under the BHCA. However, 
nonprofit entities derive less revenue than other creditors or 
servicers from their lending activities, and therefore the Bureau 
believes associated nonprofit entities may seek to coordinate 
activities--including loan servicing--as a means of achieving economies 
of scale.
    Under the existing rule, a servicer qualifies for the small 
servicer exemption if it services for a fee a loan for which another 
entity is the creditor or assignee, so long as both entities are 
affiliates under the BHCA and the servicer and its affiliates together 
service 5,000 or fewer mortgage loans. Since nonprofit entities are not 
typically structured to meet the definition of affiliate under the 
BHCA, a nonprofit entity that services, for a fee, even a single loan 
of an associated nonprofit entity likely would not qualify as a small 
servicer under the current rule. The Bureau is proposing an alternative 
small servicer definition for nonprofits to permit associated nonprofit 
entities to enter into the type of servicing arrangements, such as 
consolidation of servicing activities, that are available to affiliates 
under the current rule.
    The limitation in the current rule to BHCA affiliates may 
discourage consolidation of servicing among associated nonprofits, even 
though such consolidation may benefit consumers by increasing access to 
credit and reducing the cost of credit for low- and moderate-income 
consumers for whom nonprofits are an important source of credit. In 
addition, consolidating servicing in one entity within the associated 
nonprofit structure may enhance the nonprofit's ability to promptly 
credit payments, administer escrow account obligations, or handle error 
requests or other requirements under Regulations X and Z, which are 
applicable regardless of small servicer status. In addition, though 
small servicers are exempt from the requirements of Sec. Sec.  1024.38 
through 1024.40, as well as most of the loss mitigation provisions 
under Sec.  1024.41, the Bureau believes that delinquent borrowers may 
nonetheless benefit from consolidated nonprofit servicers' enhanced 
ability to devote trained staff to their situation.
    The Bureau is concerned that if nonprofit servicers are subject to 
all of the servicing rules, low- and moderate-income consumers may face 
increased costs or reduced access to credit. Although the Bureau 
believes the servicing rules provide important protections for 
consumers, the Bureau is concerned that these protections may not 
outweigh the risk of reduction in credit access for low- and moderate-
income consumers served by nonprofit entities that qualify for the 
proposed Sec.  1026.41(e)(4)(ii)(C) exemption. Furthermore, the Bureau 
believes these nonprofit entities, because of their scale and 
community-focused lending programs, already have incentives to provide 
high levels of customer contact and information--incentives that 
warrant exempting those servicers from complying with the periodic 
statement requirements under Regulation Z and certain requirements of 
Regulation X discussed above.
    The Bureau has narrowly tailored the proposed small servicer 
definition for nonprofits to prevent evasion of the servicing rules. 
For example, the proposed definition contains restrictions on 
nonprofits and requires that a substantial relationship exist among the 
associated nonprofits to qualify for the exemption. As noted above, the 
definition would be limited to groups of nonprofits that share a common 
name, trademark, or servicemark to further and support a common 
charitable mission or purpose. The Bureau believes that requiring such 
commonality reduces the risk that the small servicer definition will be 
used to circumvent the servicing rules. However, the Bureau seeks 
comment on whether the proposed definition of ``associated nonprofit 
entities'' is appropriate.
    The Bureau has further limited the scope of the proposed nonprofit 
small servicer definition to entities designated with an exemption 
under 501(c)(3) of the Internal Revenue Code. As the Bureau noted in 
the January 2013 ATR Proposal, the Bureau believes that 501(c)(3)-
designated entities face particular constraints on resources that other 
tax-exempt organizations may not. See 78 FR 6621, 6644-45 (Jan. 30, 
2013). As a result, these entities may have fewer resources to comply 
with additional rules. In addition, tax-exempt status under section 
501(c)(3) requires a formal determination by the government, in 
contrast to other types of tax-exempt status. Accordingly, limiting the 
proposed nonprofit small servicer provision to those entities with IRS 
tax exempt determinations for wholly charitable organizations may help 
to ensure that the nonprofit small servicer status is not used to evade 
the servicing rules. However, the Bureau solicits comment on whether 
limitation of the definition of ``nonprofit entity'' for purposes of 
Sec.  1026.41(e)(4)(ii)(C) to entities with a tax exemption ruling or 
determination letter from the Internal Revenue Service under section 
501(c)(3) of the Internal Revenue Code is appropriate. The Bureau also 
seeks comment on whether it is appropriate to include additional 
criteria regarding the nonprofit entity's activities or the loans' 
features or purposes, such as those in the nonprofit exemption from the 
ability to repay requirements in Sec.  1026.43(a)(3)(v)(D) or in other 
statutory or regulatory schemes.
    As noted above, the proposed alternative small servicer definition 
in Sec.  1026.41(e)(4)(ii)(C) would apply to nonprofit entities that 
service 5,000 or fewer mortgage loans. The Bureau believes that it is 
necessary, in general, to limit the number of loans serviced by small 
servicers to prevent evasion of the servicing rules and because the 
Bureau believes that entities servicing more than 5,000 mortgage loans 
are of a sufficient size to comply with the full set of servicing 
rules. However, the proposed rule would apply that loan limitation to 
associated nonprofit entities differently than to affiliates. 
Specifically, the definition of small servicer in Sec.  
1026.41(e)(4)(ii)(A) counts towards the 5,000-loan limitation all loans 
serviced by the servicer together with all loans serviced by any 
affiliates. In contrast, the proposed rule for nonprofit entities would 
count towards the 5,000-loan limitation only the loans serviced by a 
given nonprofit entity (including loans it services on behalf of 
associated nonprofit entities), and would not consider loans serviced 
by associated nonprofit entities. As noted above, the Bureau is 
concerned that small servicers generally lack the ability to cost-
effectively comply with the full set of servicing rules, a concern that 
is heightened in the context of nonprofit small servicers which derive 
less revenue than other creditors or servicers from their lending 
activities. Some nonprofits may consolidate servicing activities to 
achieve economies of scale across associated nonprofits. However, the 
Bureau is also concerned that other nonprofits may be structured 
differently and that for these nonprofit entities

[[Page 25736]]

maintaining servicing at the individual nonprofit level may be more 
appropriate. For this reason, the Bureau does not believe it is 
appropriate to consider all loans serviced across the associated 
nonprofit enterprise towards the 5,000-loan limitation. The Bureau 
seeks comment on whether it is appropriate to count only loans serviced 
by a single nonprofit or whether the small servicer determination 
should be made based upon all loans serviced among a group of 
associated nonprofits.
    The proposed exemption would also apply only to a nonprofit entity 
that services loans for which it or an associated nonprofit entity is 
the creditor. In contrast with the exemption under Sec.  
1026.41(e)(4)(ii)(A), the proposed exemption would not apply to a 
nonprofit entity that services loans for which it or an associated 
nonprofit entity is the assignee of the loans being serviced. The 
Bureau believes that nonprofit entities typically do not service loans 
for which an entity other than that nonprofit entity or an associated 
nonprofit is the creditor, nor does the Bureau believe that nonprofit 
entities typically take an assignment of a loan originated by an entity 
other than an associated nonprofit entity. Further, the Bureau is 
concerned that a rule that permits a nonprofit servicer to service for 
a fee loans that were originated by someone other than itself or an 
associated nonprofit entity while retaining the benefit of the 
exemption could be used to evade the servicing rules, particularly 
since the proposed rule would not consider loans serviced by associated 
nonprofit entities as counting towards the 5,000-loan limit. The Bureau 
seeks comment on whether limiting the exemption to loans for which the 
servicer or an associated nonprofit entity is the creditor is 
appropriate.
Legal Authority
    The Bureau is proposing to exempt nonprofit small servicers from 
the periodic statement requirement under TILA section 128(f) pursuant 
to its authority under TILA section 105(a) and (f), and Dodd-Frank Act 
section 1405(b).
    For the reasons discussed above, the Bureau believes the proposed 
exemption is necessary and proper under TILA section 105(a) to 
facilitate TILA compliance. The purpose of the periodic statement 
requirement is to ensure that consumers receive ongoing customer 
contact and account information. As discussed above, the Bureau 
believes that nonprofit entities that qualify for the exemption have 
incentives to provide ongoing consumer contact and account information 
that would exist absent a regulatory requirement to do so. The Bureau 
also believes that such nonprofits may consolidate servicing functions 
in an associated nonprofit entity to cost-effectively provide this high 
level of customer contact and otherwise comply with applicable 
regulatory requirements. As described above, the Bureau is concerned 
that the current rule may discourage consolidation of servicing 
functions. As a result, the current rule may result in nonprofits being 
unable to provide high-contact servicing or to comply with other 
applicable regulatory requirements due to the costs that would be 
imposed on each individual servicer. Accordingly, the Bureau believes 
the proposed nonprofit small servicer definition facilitates compliance 
with TILA by allowing nonprofit small servicers to consolidate 
servicing functions, without losing status as a small servicer, in 
order to cost-effectively service loans in compliance with applicable 
regulatory requirements.
    In addition, consistent with TILA section 105(f) and in light of 
the factors in that provision, for a nonprofit entity servicing 5,000 
or fewer loans, including those serviced on behalf of associated 
nonprofits, all of which that servicer or an associated nonprofit 
originated, the Bureau believes that requiring them to comply with the 
periodic statement requirement in TILA section 128(f) would not provide 
a meaningful benefit to consumers in the form of useful information or 
protection. The Bureau believes, as noted above, that these nonprofit 
servicers have incentives to provide consumers with necessary 
information, and that requiring provision of periodic statements would 
impose significant costs and burden. Specifically, the Bureau believes 
that the proposal will not complicate, hinder, or make more expensive 
the credit process--and is proper without regard to the amount of the 
loan, to the status of the consumer (including related financial 
arrangements, financial sophistication, and the importance to the 
consumer of the loan or related supporting property), or to whether the 
loan is secured by the principal residence of the consumer. In 
addition, consistent with Dodd-Frank Act section 1405(b), for the 
reasons discussed above, the Bureau believes that exempting nonprofit 
small servicers from the requirements of TILA section 128(f) would be 
in the interest of consumers and in the public interest.
    As noted above, current Regulation X cross-references the 
definition of small servicer in Sec.  1026.41(e)(4) for the purpose of 
exempting small servicers from several mortgage servicing requirements. 
Accordingly, in proposing to amend that definition, the Bureau is also 
proposing to amend the current Regulation X exemptions for small 
servicers. For this purpose, the Bureau is relying on the same 
authorities on which it relied in promulgating the current Regulation X 
small servicer exemptions. Specifically, the Bureau is proposing to 
exempt nonprofit small servicers from the requirements of Regulation X 
Sec. Sec.  1024.38 through 41, except as otherwise provided in Sec.  
1024.41(j), see Sec.  1024.30(b)(1), as well as certain requirements of 
Sec.  1024.17(k)(5), pursuant to its authority under section 19(a) of 
RESPA to grant such reasonable exemptions for classes of transactions 
as may be necessary to achieve the consumer protection purposes of 
RESPA. The consumer protection purposes of RESPA include helping 
borrowers avoid unwarranted or unnecessary costs and fees. The Bureau 
believes that the proposed rule would ensure consumers avoid 
unwarranted and unnecessary costs and fees by encouraging nonprofit 
small servicers to consolidate servicing functions.
    In addition, the Bureau relies on its authority pursuant to section 
1022(b) of the Dodd-Frank Act to prescribe regulations necessary or 
appropriate to carry out the purposes and objectives of Federal 
consumer financial law, including the purposes and objectives of Title 
X of the Dodd-Frank Act. Specifically, the Bureau believes that the 
proposed rule is necessary and appropriate to carry out the purpose 
under section 1021(a) of the Dodd-Frank Act of ensuring that all 
consumers have access to markets for consumer financial products and 
services that are fair, transparent, and competitive, and the objective 
under section 1021(b) of the Dodd-Frank Act of ensuring that markets 
for consumer financial products and services operate transparently and 
efficiently to facilitate access and innovation.
    With respect to Sec. Sec.  1024.17(k)(5), 39, and 41 (except as 
otherwise provided in Sec.  1024.41(j)), the Bureau is also proposing 
the nonprofit small servicer definition pursuant to its authority in 
section 6(j)(3) of RESPA to set forth requirements necessary to carry 
out section 6 of RESPA and in section 6(k)(1)(E) of RESPA to set forth 
obligations appropriate to carry out the consumer protection purposes 
of RESPA.

[[Page 25737]]

Section 1026.43 Minimum Standards for Transactions Secured by a 
Dwelling

43(a) Scope
43(a)(3)
    The Bureau is proposing to amend the nonprofit small creditor 
exemption from the ability-to-repay rule that is set forth in Sec.  
1026.43(a)(3)(v)(D) of Regulation Z. To qualify for this exemption, a 
creditor must have extended credit secured by a dwelling no more than 
200 times during the calendar year preceding receipt of the consumer's 
application. The proposal would exclude certain subordinate-lien 
transactions from this credit extension limit.
    Section 129C(a)(1) of TILA states that no creditor may make a 
residential mortgage loan unless the creditor makes a reasonable and 
good faith determination (based on verified and documented information) 
that, at the time the loan is consummated, the consumer has a 
reasonable ability to repay the loan, according to its terms, and all 
applicable taxes, insurance (including mortgage guarantee insurance), 
and assessments. 15 U.S.C. 1639c(a)(1). Section 1026.43 of Regulation Z 
implements the ability-to-repay provisions of section 129C of TILA.
    The January 2013 ATR Final Rule implemented statutory exemptions 
from the ability-to-repay provisions for home equity lines of credit 
subject to 12 CFR 1026.40, and for mortgage transactions secured by a 
consumer's interest in a timeshare plan, as defined in 11 U.S.C. 
101(53D). See 12 CFR 1026.43(a). The rule also exempted from the 
ability-to-repay requirements (1) a transaction that is a reverse 
mortgage subject to 12 CFR 1026.33, (2) temporary or ``bridge'' loans 
with a term of 12 months or less, and (3) a construction phase of 12 
months or less of a construction-to-permanent loan.
    The January 2013 ATR Final Rule did not provide additional 
exemptions sought by certain commenters in response to an earlier 
proposal published by the Board in 2011. See 76 FR 27389 (May 11, 2011) 
(2011 ATR Proposal). However, the January 2013 ATR Proposal sought 
additional input on some of those exemptions, and contained a specific 
proposal to exempt certain nonprofit creditors from the ability-to-
repay requirements. The Bureau believed that limiting the proposed 
exemption to creditors designated as nonprofits was appropriate because 
of the difference in lending practices between nonprofit and other 
creditors. The proposed exemption was premised on the belief that the 
additional costs imposed by the ability-to-repay requirements might 
prompt some nonprofit creditors to cease extending credit, or 
substantially limit their credit activities, thereby possibly harming 
low- to moderate-income consumers. The Bureau further stated that for-
profit creditors derive more revenue from mortgage lending activity 
than nonprofit creditors, and therefore presumably are more likely to 
have the resources to comply with the ability-to-repay requirements.
    The Bureau was concerned that an exemption for all nonprofit 
creditors could allow irresponsible creditors to intentionally 
circumvent the ability-to-repay requirements and harm consumers. Thus, 
under the January 2013 ATR Proposal, the exemption would have been 
available only if the creditor and the loan met certain criteria. 
First, the creditor would have been required to have a tax exemption 
ruling or determination letter from the Internal Revenue Service under 
section 501(c)(3) of the Internal Revenue Code of 1986 to be eligible 
for the proposed exemption. Second, the creditor could not have 
extended credit secured by a dwelling more than 100 times in the 
calendar year preceding receipt of the consumer's application. Third, 
the creditor, in the calendar year preceding receipt of the consumer's 
application, must have extended credit only to consumers whose income 
did not exceed the low- and moderate-income household limit established 
by HUD. Fourth, the extension of credit must have been to a consumer 
with income that does not exceed HUD's low- and moderate-income 
household limit. Fifth, the creditor must have determined, in 
accordance with written procedures, that the consumer has a reasonable 
ability to repay the extension of credit.
    The Bureau believed that, in contrast to for-profit creditors and 
other nonprofit creditors, the nonprofit creditors identified in Sec.  
1026.43(a)(3)(v)(D) appeared to elevate long-term community stability 
over the creditor's economic considerations and to have stronger 
incentives to determine whether a consumer has the ability to repay a 
mortgage loan. The Bureau solicited comment regarding whether the 
proposed exemption was appropriate. The Bureau also specifically 
requested feedback on whether the proposed credit extension limit of 
100 transactions was appropriate or should be increased or decreased. 
The Bureau also requested comment on the costs that would be incurred 
by nonprofit creditors that exceed that limit; the extent to which 
these additional costs would affect the ability of nonprofit creditors 
to extend responsible, affordable credit to low- and moderate-income 
consumers; and whether consumers could be harmed by the proposed 
exemption.
Comments Concerning the 100-Credit Extension Limit
    The Bureau received many comments regarding the proposed nonprofit 
exemption. See 78 FR 35429, 35466-67 (June 12, 2013). Most commenters 
who supported the proposed exemption urged the Bureau to adopt 
conditions to prevent creditors from using the exemption to circumvent 
the rule. While many industry representatives, consumer advocates, and 
nonprofits believed that a 100-credit extension limit would discourage 
sham nonprofit creditors from exploiting the exemption, several of 
these commenters asked the Bureau to raise the limit. The commenters 
were primarily concerned that, in response to the proposed limit, 
nonprofit creditors would limit certain types of lending. Specifically, 
a few commenters stated that nonprofit creditors that offer both home-
purchase mortgage loans and small-dollar mortgage loans, such as for 
home energy improvement, would limit small-dollar lending to remain 
under the 100-credit extension limitation.
The Nonprofit Exemption as Adopted
    The May 2013 ATR Final Rule finalized the nonprofit exemption 
substantially as proposed, but raised the credit extension limit from 
100 to 200 credit extensions in the calendar year preceding receipt of 
the consumer's application. See 78 FR 35429, 35467-69 (June 12, 2013). 
In finalizing the exemption, the Bureau noted that most commenters 
believed a credit extension limitation was necessary to prevent 
unscrupulous creditors from exploiting the exemption. The Bureau 
concluded that the risks of evasion warranted adopting the limit. The 
Bureau was concerned, however, that the proposed 100-credit extension 
limit would effectively restrict nonprofits to 50 home-purchase 
transactions per year, because nonprofits frequently provide 
simultaneous primary- and subordinate-lien financing for such 
transactions. Also, the Bureau was concerned that the proposed limit 
would reduce certain types of small-dollar lending by nonprofits, 
including financing home energy improvements.
    Accordingly, the Bureau included a 200-credit extension limit in 
the final rule to address the concerns raised by commenters regarding 
access to credit. Some commenters had suggested limits as high as 500 
credit extensions per

[[Page 25738]]

year; however, the Bureau believed that creditors originating more than 
200 dwelling-secured credit extensions per year generally have the 
resources to bear the implementation and compliance burden associated 
with the ability-to-repay requirements, such that they can continue to 
lend without negative impacts on consumers. The final rule did not 
distinguish between first- and subordinate-liens for purposes of the 
exemption, as some commenters suggested. The Bureau believed that such 
a distinction would be needlessly restrictive and it would be more 
efficient to allow nonprofit creditors to determine the most efficient 
allocation of funds between primary- and subordinate-lien financing.
Response to the May 2013 ATR Final Rule and Further Proposal
    Since the adoption of the May 2013 ATR Final Rule, the Bureau has 
heard concerns from some nonprofit creditors about the treatment of 
certain subordinate-lien programs under the nonprofit exemption from 
the ability-to-repay requirements. These creditors are concerned that 
they may be forced to curtail these subordinate-lien programs or more 
generally limit their lending activities to avoid exceeding the 200-
credit extension limit. In particular, these entities have indicated 
concern with the treatment of subordinate-lien transactions that charge 
no interest and for which repayment is generally either forgivable or 
of a contingent nature. The Bureau understands that, absent an amended 
nonprofit exemption from the May 2013 ATR Final Rule, these nonprofit 
creditors may not have the resources to comply with the rule and 
therefore are likely to curtail their lending to stay within the 200-
credit extension limit.
    In light of these concerns, the Bureau is proposing to exclude 
certain deferred or contingent, interest-free subordinate liens from 
the 200-credit extension limit for purposes of the nonprofit exemption 
in Sec.  1026.43(a)(3)(v)(D). Specifically, proposed Sec.  
1026.43(a)(3)(vii) would provide that consumer credit transactions that 
meet the following criteria are not considered in determining whether a 
creditor meets the requirements of Sec.  1026.43(a)(3)(v)(D)(1): (A) 
The transaction is secured by a subordinate lien; (B) the transaction 
is for the purpose of downpayment, closing costs, or other similar home 
buyer assistance, such as principal or interest subsidies, property 
rehabilitation assistance, energy efficiency assistance, or foreclosure 
avoidance or prevention; (C) the credit contract does not require 
payment of interest; (D) the credit contract provides that the 
repayment of the amount of credit extended is (1) forgiven 
incrementally or in whole, at a date certain, and subject only to 
specified ownership and occupancy conditions, such as a requirement 
that the consumer maintain the property as the consumer's principal 
dwelling for five years, (2) deferred for a minimum of 20 years after 
consummation of the transaction, (3) deferred until sale of the 
property securing the transaction, or (4) deferred until the property 
securing the transaction is no longer the principal dwelling of the 
consumer; (E) the total of costs payable by the consumer in connection 
with the transaction at consummation is less than 1 percent of the 
amount of credit extended and includes no charges other than fees for 
recordation of security instruments, deeds, and similar documents; a 
bona fide and reasonable application fee; and a bona fide and 
reasonable fee for housing counseling services; and (F) in connection 
with the transaction, the creditor complies with all other applicable 
requirements of Regulation Z.
    Proposed comment 43(a)(3)(vii)-1 would provide that the terms of 
the credit contract must satisfy the conditions that the transaction 
not require the payment of interest under Sec.  1026.43(a)(3)(vii)(C) 
and that repayment of the amount of credit extended be forgiven or 
deferred in accordance with Sec.  1026.43(a)(3)(vii)(D). The comment 
would further provide that the other requirements of Sec.  
1026.43(a)(3)(vii) need not be reflected in the credit contract, but 
the creditor must retain evidence of compliance with those provisions, 
as required by the record retention provisions of Sec.  1026.25(a). In 
particular, the creditor must have information reflecting that the 
total of closing costs imposed in connection with the transaction are 
less than 1 percent of the amount of credit extended--and include no 
charges other than recordation, application, and housing counseling 
fees, in accordance with Sec.  1026.43(a)(3)(vii)(E). Unless an 
itemization of the amount financed sufficiently details this 
requirement, the creditor must establish compliance with Sec.  
1026.43(a)(3)(vii)(E) by some other written document and retain it in 
accordance with Sec.  1026.25(a).
    Proposed Sec.  1026.43(a)(3)(vii) and the accompanying comment 
largely mirror a provision that was finalized as part of the Bureau's 
December 2013 TILA-RESPA Final Rule. See 78 FR 79729 (Dec. 31, 2013). 
That provision, which was finalized in both Regulation X, at Sec.  
1024.5(d), and Regulation Z, at Sec.  1026.3(h)--and which will take 
effect on August 1, 2015, provides a partial exemption from the 
integrated disclosure requirements for loans that meet the above-
described criteria. The Bureau finalized this partial exemption in the 
December 2013 TILA-RESPA Final Rule to preserve an existing exemption 
from Regulation X issued by HUD and to facilitate compliance with TILA 
and RESPA. See 78 FR 79729, 79758 and 79772 (Dec. 31, 2013). In 
proposing that exemption, the Bureau explained that the exemption was 
intended to describe criteria associated with certain housing 
assistance loan programs for low- and moderate-income persons. See 77 
FR 51115, 51138 (Aug. 23, 2012). The Bureau believes the same criteria 
describe the class of transactions that may appropriately be excluded 
from the 200-credit extension limit in the ability-to-repay exemption 
for nonprofits. The Bureau also believes that defining a single class 
of transactions for purposes of Sec.  1024.5(d), Sec.  1026.3(h), and 
Sec.  1026.43(a)(3)(vii) may facilitate compliance for creditors.
    The Bureau believes the Sec.  1026.43(a)(3)(v)(D) exemption as 
amended by the proposal would be limited to creditors with 
characteristics that ensure consumers are offered responsible, 
affordable credit on reasonably repayable terms. The Bureau also 
believes that subordinate-lien transactions meeting the proposed 
exclusion's criteria pose low risk to consumers, and that excluding 
these transactions from the credit extension limit is consistent with 
TILA's purposes. For example, in transactions that would be covered by 
proposed Sec.  1026.43(a)(3)(vii), consumers often benefit from a 
reduction in their repayment obligations on an accompanying first-lien 
mortgage and often control the triggering of any subordinate-lien 
repayment requirement for at least a twenty-year period. Therefore, the 
subordinate-lien transactions may enhance the consumer's ability to 
repay their monthly mortgage obligations. Further, the prohibition 
against charging interest and strict limitation on fees reduces the 
likelihood that borrowers will be misled about the extent of their 
financial obligations, as the amounts of their obligations (if at all 
repayable) remain essentially fixed. The Bureau believes that limiting 
the exclusion to loans with these characteristics may also reduce the 
likelihood that the provision would be used to evade the ability-to-
repay requirements.
    The Bureau also believes the proposed exclusion would facilitate 
access to credit for low- and moderate-

[[Page 25739]]

income consumers. As noted above, the proposed exclusion would apply to 
subordinate-lien financing extended only for specified purposes, 
including home buyer assistance, property rehabilitation, or 
foreclosure avoidance. The Bureau believes that such financing plays a 
critical role in nonprofit lending to low- and moderate-income 
consumers, and in particular homeownership programs designed for such 
consumers. In purchase-money transactions, subordinate-lien financing 
may reduce the amortizing payment on first-lien mortgages, improving 
low- and moderate-income consumers' ability to repay, especially in 
jurisdictions where housing costs are high. Similarly, the Bureau 
believes such financing may play a critical role in nonprofit 
creditors' efforts to provide property-rehabilitation, energy-
efficiency, and foreclosure-avoidance assistance.
    The Bureau believes that, without the proposed exclusion for these 
transactions, nonprofit creditors may limit such extensions of credit, 
or may limit their overall credit activity. As a result, low- and 
moderate-income consumers who would otherwise qualify for a nonprofit 
creditor's program may be denied credit. As noted in the January 2013 
ATR Proposal, the current exemption for nonprofit creditors was 
premised on the belief that the additional costs imposed by the 
ability-to-repay requirements might prompt certain nonprofit creditors 
to cease extending credit, or substantially limit their credit 
activities, thereby possibly harming low- and moderate-income 
consumers. See 78 FR 6621, 6645 (Jan. 30, 2013). Because of their 
limited resources to bear the compliance burden of the ability-to-repay 
rule, the Bureau believes at least some nonprofit creditors may limit 
lending activity to maintain their exemption. The proposed amendment to 
the Sec.  1026.43(a)(3)(v)(D) exemption is intended to minimize this 
effect by allowing nonprofit creditors to originate subordinate-lien 
transactions meeting the proposed Sec.  1026.43(a)(3)(vii) criteria 
without the risk of losing that exemption.
    In addition, the Bureau believes that excluding these subordinate-
lien transactions from the transaction-count limitation may be 
appropriate because the origination of these loans is not necessarily 
indicative of a creditor's capacity to comply with the ability-to-repay 
requirements. As noted above, the Bureau believes that creditors 
extending credit in more than 200 dwelling-secured transactions per 
year are likely to have the resources and capacity to comply with the 
ability-to-repay requirements. However, subordinate-lien transactions 
typically involve small loan amounts and, as limited by the proposed 
exclusion's criteria, would generate little revenue to support a 
creditor's capacity to comply. Absent the exclusion, those creditors 
might curtail lending--with potential negative impacts for consumer's 
access to credit. Particularly when such a subordinate-lien transaction 
is originated in connection with a first-lien transaction, counting 
both transactions towards the 200-credit extension limit may not 
provide the appropriate indication of a creditor's capacity to comply.
    As noted above, in adopting the current nonprofit exemption in 
Sec.  1026.43(a)(3)(v)(D), the Bureau did not distinguish between 
first- and subordinate-lien transactions for purposes of the credit 
extension limit out of concerns that doing so would affect creditors' 
allocations of loans. However, the Bureau does not believe the proposed 
exclusion is likely to significantly affect such allocations. As noted 
above, the proposed exclusion permits nonprofit creditors to allocate 
resources to subordinate-lien transactions without risking their 
exemption from the ability-to-repay rule. To the extent the proposed 
exclusion encourages origination of these subordinate-lien 
transactions, the Bureau believes that the limitations on the 
borrower's repayment obligations as well as on the creditor's ability 
to charge interest and fees may minimize the risk that, as a result of 
the exclusion, creditors would allocate greater amounts of their 
lending to these transactions. In fact, to the extent many affordable 
homeownership programs use such subordinate-lien transactions in tandem 
with first-lien mortgages, excluding these subordinate-lien 
transactions from the credit extension limit count may reduce the 
current Sec.  1026.43(a)(3)(v)(D) exemption's impact on nonprofit 
creditors' allocation of financing between first- and subordinate-lien 
transactions.
    To address nonprofit creditor concerns, the Bureau also considered 
whether it would be appropriate to remove the credit extension 
limitation from the Sec.  1026.43(a)(3)(v)(D) nonprofit exemption 
altogether. The Bureau believes that nonprofit creditors who originate 
200 or more dwelling-secured transactions in a year generally have the 
resources necessary to comply with TILA ability-to-repay requirements. 
The Bureau believes that the exemption properly balances relevant 
considerations, including the nature of credit extended, safeguards and 
other factors that may protect consumers from harm, and the extent to 
which application of the regulatory requirements would affect access to 
responsible, affordable credit. Accordingly, the Bureau continues to 
believe that the credit extension limit is necessary to prevent 
evasion, but is proposing to exclude from the 200-credit extension 
limit a narrow class of subordinate-lien transactions to address 
concerns expressed by nonprofit creditors and avoid potential negative 
impacts on access to credit, particularly for low- and moderate-income 
consumers.
Legal Authority
    The current Sec.  1026.43(a)(3)(v)(D) exemption from the ability-
to-repay requirements was adopted pursuant to the Bureau's authority 
under section 105(a) and (f) of TILA. Pursuant to section 105(a) of 
TILA, the Bureau generally may prescribe regulations that provide for 
such adjustments and exceptions for all or any class of transactions 
that the Bureau judges are necessary or proper to effectuate, among 
other things, the purposes of TILA. For the reasons discussed in more 
detail above, the Bureau believes that the proposed amendment of the 
current Sec.  1026.43(a)(3)(v)(D) exemption from the TILA ability-to-
repay requirements is necessary and proper to effectuate the purposes 
of TILA, which include the purposes of TILA section 129C. The Bureau 
believes that the proposed amendment of the exemption ensures that 
consumers are offered and receive residential mortgage loans on terms 
that reasonably reflect their ability to repay by helping to ensure the 
viability of the mortgage market for low- and moderate-income 
consumers. The Bureau believes that the mortgage loans originated by 
nonprofit creditors identified in Sec.  1026.43(e)(4)(v)(D) generally 
account for a consumer's ability to repay. Without the proposed 
amendment to the exemption, the Bureau believes that low- and moderate-
income consumers might be at risk of being denied access to the 
responsible and affordable credit offered by these creditors, which is 
contrary to the purposes of TILA. The proposed amendment to the 
exemption is consistent with the purposes of TILA by ensuring that 
consumers are able to obtain responsible, affordable credit from the 
nonprofit creditors discussed above.
    The Bureau has considered the factors in TILA section 105(f) and 
believes that, for the reasons discussed above, the proposed amendment 
of the exemption is appropriate under that provision. For the reasons 
discussed above, the Bureau believes that the proposed amendment to 
Sec.  1026.43(a)(3)(v)(D) would exempt

[[Page 25740]]

extensions of credit for which coverage under the ability-to-repay 
requirements does not provide a meaningful benefit to consumers (in the 
form of useful information or protection) in light of the protection 
that the Bureau believes the credit extended by these creditors already 
provides to consumers. The Bureau believes that the proposed amendment 
to the Sec.  1026.43(a)(3)(v)(D) exemption is appropriate for all 
affected consumers, regardless of their other financial arrangements 
and financial sophistication and the importance of the loan and 
supporting property to them. Similarly, the Bureau believes that the 
proposed amendment to the Sec.  1026.43(a)(3)(v)(D) exemption is 
appropriate for all affected loans covered under the exemption, 
regardless of the amount of the loan and whether the loan is secured by 
the principal residence of the consumer. Furthermore, the Bureau 
believes that, on balance, the proposed amendment to the Sec.  
1026.43(a)(3)(v)(D) exemption will simplify the credit process without 
undermining the goal of consumer protection, denying important benefits 
to consumers, or increasing the expense of (or otherwise hindering) the 
credit process.
43(e) Qualified Mortgages
43(e)(3) Limits on Points and Fees for Qualified Mortgages
    The Dodd-Frank Act provides that ``qualified mortgages'' are 
entitled to a presumption that the creditor making the loan satisfied 
the ability-to-repay requirements. The qualified mortgage provisions 
are implemented in Sec.  1026.43(e). Current Sec.  1026.43(e)(3)(i) 
provides that a covered transaction is not a qualified mortgage if the 
transaction's total points and fees exceed certain limits set forth in 
Sec.  1026.43(e)(3)(i)(A) through (E). For the reasons set forth below, 
the Bureau is proposing to permit a creditor or assignee to cure an 
inadvertent excess over the qualified mortgage points and fees limits 
by refunding to the consumer the amount of excess, under certain 
conditions. As discussed in part VI.A. below, the Bureau is also 
requesting comment on issues related to inadvertent debt-to-income 
ratio overages, but at this time is not proposing a specific change to 
the regulation. For purposes of these discussions, ``cure'' means a 
procedure to reduce points and fees or debt-to-income ratios after 
consummation when the qualified mortgage limits have been inadvertently 
exceeded, while ``correction'' means post-consummation revisions to 
documentation or calculations, or both, to reflect conditions as they 
actually existed at consummation.
43(e)(3)(i)
    As discussed below, the Bureau is proposing a new Sec.  
1026.43(e)(3)(iii) to establish a cure procedure where a creditor 
inadvertently exceeds the qualified mortgage points and fees limits, 
under certain conditions. As a conforming change, the Bureau is also 
proposing to amend Sec.  1026.43(e)(3)(i), to add the introductory 
phrase ``Except as provided in paragraph (e)(3)(iii) of this section'' 
to Sec.  1026.43(e)(3)(i), to specify that the cure provision in 
proposed Sec.  1026.43(e)(3)(iii) is an exception to the general rule 
that a covered transaction is not a qualified mortgage if the 
transaction's total points and fees exceed the applicable limit set 
forth in Sec.  1026.43(e)(3)(i)(A) through (E).
43(e)(3)(iii)
    Section 1411 of the Dodd-Frank Act added new TILA section 129C to 
require a creditor making a residential mortgage loan to make a 
reasonable and good faith determination (based on verified and 
documented information) that, at the time the loan is consummated, the 
consumer has a reasonable ability to repay the loan. 15 U.S.C. 1639c. 
TILA section 129C(b) further provides that the ability-to-repay 
requirements are presumed to be met if the loan is a qualified 
mortgage. TILA section 129C(b)(2) sets certain product-feature and 
underwriting requirements for qualified mortgages, including a 3-
percent limit on points and fees, but gives the Bureau authority to 
revise, add to, or subtract from these requirements.\15\ Those 
requirements are implemented by the January 2013 ATR Final Rule, as 
amended by the May 2013 ATR Final Rule.
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    \15\ See TILA section 129C(b)(3)(B)(i). TILA section 
129C(b)(2)(D) requires the Bureau to prescribe rules adjusting the 
3-percent points and fees limit to ``permit lenders that extend 
smaller loans to meet the requirements of the presumption of 
compliance.''
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    The current ability-to-repay rule provides for four categories of 
qualified mortgages: a ``general'' qualified mortgage definition that 
is available to any creditor; \16\ a temporary qualified mortgage 
definition for loans eligible for sale to or guarantee by a government 
sponsored enterprise (GSE) or eligible for guarantee by or insurance 
under certain Federal agency programs; \17\ and two qualified mortgage 
definitions available to small creditors.\18\ The current rule provides 
that for all types of qualified mortgages, the up-front points and fees 
charged in connection with the mortgage must not exceed 3 percent of 
the total loan amount, with higher thresholds specified for various 
categories of loans below $100,000.\19\ Pursuant to Sec.  
1026.32(b)(1), points and fees are the ``fees or charges that are known 
at or before consummation.''
---------------------------------------------------------------------------

    \16\ 12 CFR 1026.43(e)(2). Under the general qualified mortgage 
definition, the loan must meet certain restrictions on loan 
features, points and fees, and underwriting.
    \17\ Section 1026.43(e)(4). The temporary GSE/agency qualified 
mortgage definition will sunset on the earlier of January 10, 2021, 
or, with respect to GSE-eligible loans, when the GSEs exit 
government conservatorship, or, with respect to agency-eligible 
loans, when those agencies' qualified mortgage definitions take 
effect.
    \18\ Section 1026.43(e)(5) contains a special qualified mortgage 
definition for small creditors that hold loans in portfolio, while 
Sec.  1026.43(f) permits small creditors that operate predominantly 
in rural or underserved areas to originate qualified mortgages with 
balloon-payment features, despite the general prohibition on 
qualified mortgages containing balloon payments. For a two-year 
transitional period, Sec.  1026.43(e)(6) permits all small 
creditors, regardless of their areas of operation, to originate 
qualified mortgages with balloon-payment features. ``Small 
creditor'' is defined in Sec.  1026.35(b)(2)(iii)(B) and (C), and 
generally includes creditors that, in the preceding calendar year, 
originated 500 or fewer covered transactions, including transactions 
originated by affiliates, and had less than $2 billion in assets.
    \19\ See Sec.  1026.43(e)(2) and (3). For loans of $60,000 up to 
$100,000, Sec.  1026.43(e)(3)(i) allows points and fees of no more 
than $3,000. For loans of $20,000 up to $60,000, Sec.  
1026.43(e)(3)(i) allows points and fees of no more than 5 percent of 
the total loan amount. For loans of $12,500 up to $20,000, Sec.  
1026.43(e)(3)(i) allows points and fees of no more than $1,000. For 
loan amounts less than $12,500, Sec.  1026.43(e)(3)(i) allows points 
and fees of no more than 8 percent of the total loan amount.
---------------------------------------------------------------------------

    The calculation of points and fees is complex and can involve the 
exercise of judgment that may lead to inadvertent errors with respect 
to charges imposed at or before consummation. For example, discount 
points may be mistakenly excluded from, or included in, the points and 
fees calculation as bona fide third-party charges, or bona fide 
discount points, under Sec.  1026.32(b)(1)(i)(D) or (E). Mortgage 
insurance premiums under Sec.  1026.32(b)(1)(i)(C) or loan originator 
compensation under Sec.  1026.32(b)(1)(ii) may also mistakenly be 
excluded from, or included in, the points and fees calculation. A 
rigorous post-consummation review by the creditor or assignee of loans 
originated with the good faith expectation of qualified mortgage status 
may uncover such inadvertent errors. However, the current rule does not 
provide a mechanism for curing such inadvertent points and fees 
overages that are discovered after consummation.
    Based on information received in the course of outreach in 
connection with the Bureau's Implementation Plan, the Bureau 
understands that some creditors

[[Page 25741]]

may not originate, and some secondary market participants may not 
purchase, mortgage loans that are near the qualified mortgage limits on 
points and fees because of concern that the limits may be inadvertently 
exceeded at the time of consummation. Specifically, the Bureau 
understands that some creditors seeking to originate qualified 
mortgages may establish buffers, set at a level below the points and 
fees limits in Sec.  1026.43(e)(3)(i), to avoid exceeding those limits. 
Those creditors may simply refuse to extend mortgage credit to 
consumers whose loans would exceed the buffer threshold, either due to 
the creditors' concerns about the potential liability attending loans 
originated under the general ability-to-repay standard or the risk of 
repurchase demands from the secondary market if the qualified mortgage 
points and fees limit is later found to have been exceeded. Where such 
buffers are established, the Bureau is concerned that access to credit 
for consumers seeking loans at the margins of the limits might be 
negatively affected. The Bureau is also concerned that creditors may 
increase the cost of credit for consumers seeking loans at the margins 
of the limits due to compliance or secondary market repurchase risk.
    In light of these concerns, the Bureau is proposing to permit a 
creditor or assignee to cure an inadvertent excess over the qualified 
mortgage points and fees limit under certain defined conditions, 
including the requirement that the loan was originated in good faith as 
a qualified mortgage and that the cure be provided in the form of a 
refund to the consumer within 120 days after consummation. The Bureau 
notes that, where the loan was originated in good faith as a qualified 
mortgage, consumers likely received the benefit of qualified mortgage 
treatment by receiving lower overall loan pricing. For this reason, the 
Bureau believes that a cure provision, if appropriately limited, would 
reflect the expectations of both consumers and creditors at the time of 
consummation, would not result in significant consumer harm, and may 
increase access to credit by encouraging creditors to extend credit to 
consumers seeking loans at the margins of the points and fees limits. 
In addition, the Bureau believes that a limited cure provision may 
promote consistent pricing within the qualified mortgage range by 
decreasing the market's perceived need for higher pricing (due to 
compliance or secondary market repurchase risk) at the margins of the 
points and fees limits. The Bureau also believes this would promote 
stability in the market by limiting the need for repurchase demands 
that may otherwise be triggered without the proposed cure option.
    The Bureau expects that, over time, creditors will develop greater 
familiarity with, and capabilities for, originating loans that are not 
qualified mortgages under the general ability-to-repay requirements, as 
well as greater confidence in general compliance systems. As they do 
so, creditors may relax internal buffers regarding points and fees that 
are predicated on the qualified mortgage threshold. However, the Bureau 
believes the impacts on access to credit may make a points and fees 
cure provision appropriate at this time. In addition, the Bureau 
believes that the cure provision will encourage post-consummation 
quality control review of loans, which will improve the origination 
process over time.
    Accordingly, proposed Sec.  1026.43(e)(3)(iii) would provide that 
if the creditor or assignee determines after consummation that the 
total points and fees payable in connection with a loan exceed the 
applicable limit under Sec.  1026.43(e)(3)(i), the loan is not 
precluded from being a qualified mortgage if certain conditions, 
discussed below, are met.
43(e)(3)(iii)(A)
    First, new Sec.  1026.43(e)(3)(iii)(A) would require that the 
creditor originated the loan in good faith as a qualified mortgage and 
the loan otherwise meets the requirements of Sec.  1026.43(e)(2), 
(e)(4), (e)(5), (e)(6), or (f), as applicable. Comment 43(e)(3)(iii)-1 
would provide examples of circumstances that may be evidence that a 
loan was or was not originated in good faith as a qualified mortgage. 
First, the comment would provide that maintaining and following 
policies and procedures designed to ensure that points and fees are 
correctly calculated and do not exceed the applicable limit under Sec.  
1026.43(e)(3)(i) may be evidence that the creditor originated the loan 
in good faith as a qualified mortgage. In addition, the comment would 
provide that if the pricing on the loan is consistent with pricing on 
qualified mortgages originated contemporaneously by the same creditor, 
that may be evidence that the loan was originated in good faith as a 
qualified mortgage. The comment would also provide examples of 
circumstances that may be evidence that the loan was not originated in 
good faith as a qualified mortgage. Specifically, the comment would 
provide that, if a creditor does not maintain--or has but does not 
follow--policies and procedures designed to ensure that points and fees 
are correctly calculated and do not exceed the applicable limit 
described in Sec.  1026.43(e)(3)(i), that may be evidence that the 
creditor did not originate the loan in good faith as a qualified 
mortgage. If the pricing on the loan is not consistent with pricing on 
qualified mortgages originated contemporaneously by the same creditor, 
that may also be evidence that a loan was not originated in good faith 
as a qualified mortgage.
    The Bureau is proposing to allow for a post-consummation cure of 
points and fees overages only where the loan was originated in good 
faith as a qualified mortgage to ensure that the cure provision is 
available only to creditors who make inadvertent errors in the 
origination process and to prevent creditors from exploiting the cure 
provision by intentionally exceeding the points and fees limits. 
However, the Bureau seeks comment on whether the good faith element of 
Sec.  1026.43(e)(3)(iii)(A) is necessary in light of the other proposed 
limitations on the cure provision. The Bureau also seeks comment on the 
proposed examples in comment 43(e)(3)(iii)-1, specifically including 
whether additional guidance regarding the term ``contemporaneously'' in 
comments 43(e)(3)-1.i.B and 43(e)(3)-1.ii.B is necessary, and whether 
additional examples would be useful.
43(e)(3)(iii)(B)
    Second, to cure a points and fees overage, proposed Sec.  
1026.43(e)(3)(iii)(B) would require that within 120 days after 
consummation, the creditor or assignee refunds to the consumer the 
dollar amount by which the transaction's points and fees exceeded the 
applicable limit under Sec.  1026.43(e)(3)(i) at consummation.
    The Bureau believes that requiring a refund to occur within a short 
period after consummation is consistent with the requirement that the 
loan be originated in good faith as a qualified mortgage. The Bureau 
understands that many creditors and secondary market purchasers conduct 
audits or quality control reviews of loan files in the period 
immediately following consummation to ensure, among other things, 
compliance with regulatory requirements. During this review phase, a 
creditor that originated a loan in good faith as a qualified mortgage 
(or the creditor's assignee) may discover an inadvertent points and 
fees overage. Indeed, providing a reasonable but limited time period 
for cure may actually promote strong post-consummation quality control 
efforts,

[[Page 25742]]

which may, in turn, improve a creditor's origination procedures and 
compliance, thereby reducing the use of the cure mechanism over time. 
Strong post-consummation quality control and improved origination 
procedures may also reduce costs over time and decrease the incidence 
of repurchase demands after a loan is sold into the secondary market.
    The Bureau believes that the proposed 120-day period would result 
in reasonably prompt refunds to affected consumers and provide 
sufficient time to accommodate communication with the consumer. A 120-
day period should also allow sufficient time for creditors and 
secondary market participants to conduct post-consummation reviews that 
may uncover inadvertent points and fees overages. In contrast, a longer 
period would not result in prompt refunds and would provide less 
incentive for rigorous review immediately after consummation. In 
outreach to industry stakeholders prior to this proposal, the Bureau 
learned that 120 days is a time period within which post-consummation 
quality control reviews generally are completed. The Bureau 
specifically requests comment more broadly, however, on whether 120 
days is an appropriate time period for post-consummation cure of a 
points and fees overage, or whether a longer or shorter period should 
be provided; what factors would support any recommended time period; 
and, if the cure were available for a longer period, whether additional 
conditions should be applied beyond those in this proposal.
    The Bureau considered whether the cure provision should run from 
the date of discovery of the points and fees overage or within a 
limited number of days after transfer of the loan, rather than the time 
of consummation, but the Bureau believes that such alternative 
provisions would be inappropriate. The Bureau is concerned that 
allowing an extended period of time for cure would create incentives 
for bad faith actors to intentionally violate the points and fees limit 
and selectively wait for discovery to cure the violation only when it 
would be to their advantage to do so. Such actions would not be 
consistent with the statutory requirement of making a good faith 
determination of a consumer's ability-to-repay. Similarly, the Bureau 
is concerned that, particularly later in the life of the loan, giving 
the creditor a unilateral option to change the status of the loan to a 
qualified mortgage, thereby providing the creditor with enhanced 
protection from liability, would facilitate evasion of regulatory 
requirements by the creditor.
    The Bureau also considered whether it would be appropriate to limit 
a creditor's or assignee's ability to cure points and fees overages for 
qualified mortgage purposes to the time prior to the receipt of written 
notice of the error from or the institution of any action by the 
consumer. The Bureau believes that such a requirement may not be 
necessary because the points and fees cure must occur within 120 days 
after consummation such that it is unlikely that the consumer would 
provide such notice or institute such action during that period. 
Further, the Bureau believes that such a requirement might undercut the 
purposes of the cure provision--to encourage both lending up to the 
points and fees limits and post-consummation quality control review of 
loans--since creditors and assignees could not be certain of their 
ability to review the loan post-consummation and provide a refund, if 
appropriate. However, the Bureau solicits comment on whether cure 
should be permitted only prior to receipt of written notice of the 
error from or the institution of any action by the consumer.
    The Bureau recognizes that, where points and fees have been 
financed as part of the loan amount and an overage is refunded to the 
consumer after consummation, the consumer will continue to pay interest 
on a loan amount that includes the overage. As a result, the consumer 
may pay more interest over the life of the loan than would have been 
paid absent the inadvertent points and fees overage. Although the 
Bureau believes such circumstances will be limited, the Bureau 
acknowledges that a post-consummation refund of the amount of points 
and fees overage alone would not make the consumer whole in most such 
cases.\20\ For this reason, the Bureau considered whether the cure 
provision should require other means of restitution to the consumer, 
such as restructuring the loan to provide a lower loan amount 
commensurate with deducting the points and fees overage, or requiring 
any refund to the consumer to include the present value of excess 
interest that the consumer would pay over the life of the loan. 
However, the Bureau believes there are complications to these 
approaches. For example, the Bureau expects that creditors would have 
difficulty systematically restructuring loans within a short time after 
consummation, especially where the loan has already been, or shortly 
will be, securitized. The Bureau also notes potential difficulties in 
determining the period over which excess interest should be calculated, 
since few consumers hold their loans for the entire loan term. In light 
of these considerations, the Bureau is not proposing that the cure 
provision require any means of restitution other than a refund of the 
actual overage amount to the consumer. However, the Bureau solicits 
comment on other appropriate means of restitution and in what 
circumstances they may be appropriate.
---------------------------------------------------------------------------

    \20\ There may be circumstances where the consumer pays discount 
points to obtain a lower interest rate and the post-consummation 
review determines the payments do not qualify as bona fide discount 
points. In such cases, a refund of the discount points, without 
additional changes to the loan, may result in a net benefit to the 
consumer.
---------------------------------------------------------------------------

43(e)(3)(iii)(C)
    The third criteria for a cure is set forth in proposed Sec.  
1026.43(e)(3)(iii)(C), which would provide that the creditor or 
assignee must maintain and follow policies and procedures for post-
consummation review of loans and for refunding to consumers amounts 
that exceed the applicable limit under Sec.  1026.43(e)(3)(i). Comment 
43(e)(3)(iii)-2 would provide that a creditor or assignee satisfies 
Sec.  1026.43(e)(3)(iii) if it maintains and follows policies and 
procedures for post-consummation quality control loan review and for 
curing (by providing a refund) errors in points and fees calculations 
that occur at or before consummation.
    The Bureau believes this requirement will provide an incentive for 
creditors to maintain rigorous quality control measures on a consistent 
and continuing basis. The Bureau believes that conditioning a cure on a 
consistently applied policy promotes and incentivizes good faith 
efforts to identify and minimize errors that may occur at or before 
consummation, with resulting benefits to consumers, as well as 
creditors and assignees.
    The Bureau requests comment on all aspects of the proposal to 
permit creditors to cure inadvertent excesses over the points and fees 
limit, including whether a post-consummation cure should be permitted, 
and whether different, additional, or fewer conditions should be 
imposed upon its availability, such as whether the consumer must be 
current on loan payments at the time of the cure.
Legal Authority
    The Bureau proposes Sec.  1026.43(e)(3)(iii) pursuant to its 
authority under TILA section 129C(b)(3)(B)(i) to promulgate regulations 
that revise, add to, or subtract from the criteria that define a 
qualified mortgage. For the reasons discussed above, the Bureau 
believes

[[Page 25743]]

that the proposed provision is warranted under TILA section 
129C(b)(3)(B)(i) because the proposal is necessary and proper to ensure 
that responsible, affordable mortgage credit remains available to 
consumers in a manner consistent with purposes of section 129C of TILA, 
and also necessary and appropriate to facilitate compliance with 
section 129C of TILA. For example, the Bureau believes the proposed 
limited post-consummation cure provision will facilitate compliance 
with TILA section 129C by encouraging strict, post-consummation quality 
control loan reviews that will, over time, improve the origination 
process.
    In addition, because proposed Sec.  1026.43(e)(3)(iii) permits 
creditors to cure inadvertent non-compliance with the general qualified 
mortgage points and fees limitation up to 120 days after consummation, 
the Bureau also proposes Sec.  1026.43(e)(3)(iii) pursuant to its 
authority under section 105(a) and (f) of TILA. Pursuant to section 
105(a) of TILA, the Bureau generally may prescribe regulations that 
provide for such adjustments and exceptions for all or any class of 
transactions that the Bureau judges are necessary or proper to, among 
other things, effectuate the purposes of TILA. For the reasons 
discussed above, the Bureau believes that exempting the class of 
qualified mortgages that involve a post-consummation points and fees 
cure from the statutory requirement that the creditor make a good faith 
determination that the consumer has the ability to repay ``at the time 
the loan is consummated'' is necessary and proper to effectuate the 
purposes of TILA. The Bureau believes that limited post-consummation 
cure of points and fees overages will preserve access to credit to the 
extent it encourages creditors to extend credit to consumers seeking 
loans with points and fees up to the 3-percent limit. Without a points 
and fees cure provision, the Bureau believes that some consumers might 
be at risk of being denied access to responsible, affordable credit, 
which is contrary to the purposes of TILA. The Bureau also believes a 
limited post-consummation cure provision will facilitate compliance 
with TILA section 129C by encouraging strict, post-consummation quality 
control loan reviews that will, over time, improve the origination 
process.
    The Bureau has considered the factors in TILA section 105(f) and 
believes that a limited points and fees cure provision is appropriate 
under that provision. The Bureau believes that the exemption, with the 
specific conditions required by the proposal, is appropriate for all 
affected consumers; specifically, those seeking loans at the margins of 
the points and fees limit whose access to credit may be affected 
adversely without the exemption. Similarly, the Bureau believes that 
the exemption is appropriate for all affected loans covered under the 
exemption, i.e. those made in good faith as qualified mortgages, 
regardless of the amount of the loan and whether the loan is secured by 
the principal residence of the consumer. Furthermore, the Bureau 
believes that, on balance, the exemption would not undermine the goal 
of consumer protection or increase the complexity or expense of (or 
otherwise hinder) the credit process, because costs may actually 
decrease, as noted above. While the exemption may result in consumers 
in affected transactions losing some of TILA's benefits, potentially 
including some aspects of a foreclosure legal defense, the Bureau 
believes such potential losses are outweighed by the potentially 
increased access to responsible, affordable credit, an important 
benefit to consumers. The Bureau believes that is the case for all 
affected consumers, regardless of their other financial arrangements, 
their financial sophistication, and the importance of the loan and 
supporting property to them.

VI. Other Requests for Comment

A. Request for Comment on Cure or Correction of Debt-to-Income Overages

    To satisfy the general qualified mortgage definition in Sec.  
1026.43(e)(2), the consumer's total monthly debt-to-income ratio--
verified, documented, and calculated in accordance with Sec.  
1026.43(e)(2)(vi)(B) and appendix Q--cannot exceed 43 percent at the 
time of consummation.\21\ Similar to an error made in calculating 
points and fees, errors made in calculating debt-to-income ratios could 
jeopardize a loan's qualified mortgage status under Sec.  
1026.43(e)(2). Some industry stakeholders have suggested that creditors 
seeking to originate Sec.  1026.43(e)(2) qualified mortgages may 
establish buffers that relate to debt-to-income ratios--i.e., buffers 
set at a level below the rule's 43-percent debt-to-income ratio limit. 
Some creditors may, in turn, refuse to extend mortgage credit to 
consumers whose loans would exceed the buffer threshold, either due to 
concerns about potential liability associated with loans originated 
under the general ability-to-repay standard or the risk of repurchase 
demands from the secondary market, if the debt-to-income ratio limit is 
exceeded. Such practices may reduce access to credit to consumers at 
the margins of the debt-to-income ratio limit.
---------------------------------------------------------------------------

    \21\ In contrast to the 3-percent cap on points and fees, which 
applies to all qualified mortgages, the 43-percent debt-to-income 
ratio limit applies only to the ``general'' qualified mortgage 
category (Sec.  1026.43(e)(2)), and not to the temporary GSE/agency 
category (Sec.  1026.43(e)(4)) or the small creditor categories 
(Sec.  1026.43(e)(5), (e)(6), and (f)).
---------------------------------------------------------------------------

    As explained above, the Bureau is proposing Sec.  
1026.43(e)(3)(iii) to permit cure of inadvertent points and fees 
overages by refunding to the consumer the dollar amount that exceeds 
the applicable points and fees limit, under certain defined conditions. 
The Bureau is also considering whether a similar cure provision may be 
appropriate in the context of debt-to-income overages. As discussed 
above, the proposed points and fees cure procedure may benefit 
consumers and the market in various ways. A debt-to-income cure 
provision has the potential to benefit consumers and the market in a 
similar manner. However, as discussed below, the Bureau believes that 
miscalculations of debt-to-income ratios are fundamentally different in 
nature than errors in calculating points and fees, and may be less 
suitable to a cure provision similar to proposed Sec.  
1026.43(e)(3)(iii).
    The Bureau is also considering whether it may be appropriate to 
address the more limited scenario where debt-to-income overages result 
from errors in calculation or documentation, or both, of debt or 
income. Specifically, the Bureau is considering whether, in such 
situations, it would be feasible to permit post-consummation 
corrections to the documentation, which would result in a corresponding 
recalculation of the debt-to income ratio. While such a correction 
mechanism has the potential to benefit consumers and the market, there 
are a number of reasons, discussed below, why it may be inappropriate 
and impracticable.
    In light of these difficulties and concerns, the Bureau is not 
proposing a specific debt-to-income ratio cure or correction provision 
at this time. However, to aid its ongoing consideration of these 
options, the Bureau is requesting comment on any and all aspects of 
potential cure and correction provisions for debt-to-income overages 
described below.
Debt-to-Income Cure
    As noted, the Bureau recognizes that a debt-to-income cure 
mechanism has the potential to benefit consumers and the market. 
However, the Bureau is concerned that such a procedure may be 
inappropriate because a miscalculation of debt-to-income ratios cannot 
be remedied in a manner similar to, or as equally practicable as, 
remedying a

[[Page 25744]]

miscalculation of points and fees. The Bureau believes that debt-to-
income overages commonly would result from creditors incorrectly, but 
inadvertently, including income or failing to consider debts in 
accordance with the rule--i.e., understating the numerator or 
overstating the denominator in the mathematical equation that derives 
the debt-to-income ratio. In these situations, a creditor or secondary 
market purchaser would need to alter the consumer's debts and/or income 
to bring the debt-to-income ratio within the 43-percent limit or the 
ratio would exceed qualified mortgage limits.
    It is unclear how creditors could raise consumers' incomes or lower 
their debts systematically to bring the ratio within the 43-percent 
limit. Of course, creditors cannot increase a consumer's income. It may 
be possible in some situations for creditors to modify the underlying 
mortgage and lower the consumer's monthly payment on the loan so that 
the ``debt'' is low enough to bring the ratio back within the 43-
percent limit--or to pay down other debts of the consumer to achieve 
the same result. However, the Bureau believes this approach would 
require a complex restructuring of the loan, which may itself trigger a 
repurchase demand from the secondary market, and possibly require a 
refund of excess payments collected from the time of consummation.
    For any such cure provision to be considered, creditors would need 
to maintain and follow policies and procedures of post-consummation 
review of loans to restructure them and refund amounts as necessary to 
bring the debt-to-income ratio within the 43-percent limit. However, 
based on the Bureau's current information, the Bureau does not believe 
creditors could realistically meet such a requirement, and expects that 
creditors would have difficulty systematically restructuring loans, or 
systematically paying down debts on the consumer's behalf, within a 
short time after consummation. Moreover, in some cases the consumer's 
other debts (when properly considered) could be too substantial, or the 
corrected income too low, for any viable modification of the mortgage 
to reduce the debt-to-income ratio below the prescribed limit.
Debt-to-Income Correction
    The Bureau is also considering whether it may be appropriate to 
address the more limited scenario where debt-to-income overages result 
solely from errors in documentation of debt or income. For example, a 
creditor may have considered but failed to properly document certain 
income in accordance with the rule. Such an error may feasibly be 
remedied by submission of corrected documentation (and a corresponding 
recalculation of the debt-to-income ratio) without the need for a 
monetary cure or loan restructuring. A correction also could be 
effective in situations in which the creditor erred in calculating the 
consumer's debts and as a result verified and documented only certain 
income if that income alone appeared sufficient to satisfy the 43-
percent limit.
    Certain sources of income (e.g., salary) are generally considered 
easier to document than others (e.g., rental or self-employment 
income), and satisfaction of the general qualified mortgage definition 
does not require creditors to document and consider every potential 
source of income, so long as the debt-to-income ratio based on the 
income considered (and calculated in accordance with the rule) does not 
exceed 43 percent. Creditors may, for the sake of expediency, only 
consider easy-to-document income when that income alone satisfies the 
debt-to-income ratio--a practice permitted under the regulation.\22\ 
Where a creditor or secondary market purchaser later discovers that 
income relied upon was overstated or additional debts existed that were 
not considered, it may be feasible for a creditor to correct a 
resulting debt-to-income ratio overage by collecting documentation and 
considering the additional income it knew about at the time of 
consummation but chose not to consider for the sake of expediency.
---------------------------------------------------------------------------

    \22\ See comment 43(c)(2)(i)-5; see also Appendix Q (noting that 
a creditor may always ``exclude the income or include the debt'' 
when unsure if the debt or the income should be considered).
---------------------------------------------------------------------------

    While these means of correcting debt-to-income ratio overages may 
be feasible, the Bureau is concerned that a provision tailored toward 
these situations may be inappropriate and believes any such provision 
could result in unintended consequences. The Bureau is concerned about 
the risk of creating any disincentives for creditors to exercise due 
diligence in carrying out their statutory obligations. In addition, the 
Bureau is concerned that allowing creditors to supplement required 
documentation after consummation could raise factual questions of what 
income and documentation the creditor was aware of at the time of 
consummation, and what income and documentation were discovered only 
after an intensive investigation following discovery of a debt-to-
income overage. The Bureau is also concerned that, in some instances a 
correction provision could allow loans to be deemed qualified mortgages 
based on post hoc documentation, notwithstanding that the creditor, in 
fact, would not have made the loan had it correctly calculated the 
consumer's debt-to-income ratio.
    Although the Bureau has received requests from industry noting that 
it would be useful to permit corrections in situations where a creditor 
did not document all known income at the time of consummation, it is 
not clear how often this will happen in practice. Furthermore, the 
Bureau believes that amending the rule to allow for correction in those 
instances may be unnecessary because creditors could avoid such debt-
to-income ratio overages by verifying additional sources of income 
prior to consummation, at least in loans where the debt-to-income ratio 
would otherwise be near the 43-percent limit.
    As discussed above with respect to points and fees, the Bureau 
expects that, over time, creditors will develop greater familiarity 
with, and capabilities for, originating loans that are not qualified 
mortgages under the ability-to-repay requirements, as well as greater 
confidence in general compliance systems. As they do so, the Bureau 
believes creditors may relax internal debt-to-income ratio buffers that 
are predicated on the qualified mortgage threshold. Although the Bureau 
is considering whether the impacts on access to credit during the 
interim period (when such capabilities are being developed) may make a 
debt-to-income cure provision appropriate, the 43-percent debt-to-
income ratio limit applies only to one category of qualified mortgages, 
unlike the points and fees limit, which applies to all qualified 
mortgages. Small creditors making qualified mortgages under Sec.  
1026.43(e)(5), (e)(6), and (f) are not subject to the 43-percent debt-
to-income limit. Further, creditors of any size currently have the 
option of originating GSE/agency-eligible loans under the temporary 
qualified mortgage definition without regard to the 43-percent debt-to-
income limit.\23\ For this reason, the Bureau believes that a 
relatively small number of loans are currently affected by the debt-to-
income limit.
---------------------------------------------------------------------------

    \23\ Pursuant to Sec.  1026.43(e)(4)(ii) and (iii), the 
temporary GSE/agency qualified mortgage definition will sunset on 
the earlier of January 10, 2021 or, with respect to GSE-eligible 
loans, when the GSEs (or any limited-life regulatory entity 
succeeding the charters of the GSEs) exit government 
conservatorship, or, with respect to agency-eligible loans, when 
those agencies' qualified mortgage definitions take effect.

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[[Page 25745]]

    For these reasons, the Bureau is not proposing a specific cure or 
correction provision related to the 43-percent debt-to-income limit for 
qualified mortgages under Sec.  1026.43(e)(2) at this time. However, to 
aid its ongoing consideration of such provisions, the Bureau requests 
comment on all aspects of the debt-to-income cure or correction 
approaches discussed above and, in particular, requests commenters to 
provide specific and practical examples of where such approaches may be 
applied and how they may be implemented. The Bureau also requests 
comment on what conditions should appropriately apply to cure or 
correction of the qualified mortgage debt-to-income limits, including 
the time periods (such as the 120-day period included in the proposed 
points and fees cure provision) when such provisions may be available. 
The Bureau also requests comment on whether or how a debt-to-income 
cure or correction provision might be exploited by unscrupulous 
creditors to undermine consumer protections and undercut incentives for 
strict compliance efforts by creditors or assignees.

B. Request for Comment on the Credit Extension Limit for the Small 
Creditor Definition

    Under the Bureau's 2013 Title XIV Final Rules, there are four types 
of exceptions and special provisions available only to small creditors:
     A qualified mortgage definition for certain loans made and 
held in portfolio, which are not subject to a bright-line debt-to-
income ratio limit and are subject to a higher annual percentage rate 
(APR) threshold for defining which first-lien qualified mortgages 
receive a safe harbor under the ability-to-repay rule (Sec.  
1026.43(e)(5)); \24\
---------------------------------------------------------------------------

    \24\ For purposes of determining whether a loan has a safe 
harbor with TILA's ability-to-repay requirements (or instead is 
categorized as ``higher-priced'' with only a rebuttable presumption 
of compliance with those requirements), for first-lien covered 
transactions, the special qualified mortgage definitions in Sec.  
1026.43(e)(5), (e)(6) and (f) receive an APR threshold of the 
average prime offer rate plus 3.5 percentage points, rather than 
plus 1.5 percentage points.
---------------------------------------------------------------------------

     Two qualified mortgage definitions (i.e., a temporary and 
an ongoing definition) for certain loans made and held in portfolio 
that have balloon-payment features, which are also subject to the 
higher APR threshold for defining which first-lien qualified mortgages 
receive a safe harbor under the ability-to-repay rule (Sec.  
1026.43(e)(6) and (f));
     An exception from the requirement to establish escrow 
accounts for certain higher-priced mortgage loans (HPMLs) for small 
creditors that operate predominantly in rural or underserved areas 
(Sec.  1026.35(b)(2)(iii)); \25\ and
---------------------------------------------------------------------------

    \25\ To meet the ``rural'' or ``underserved'' requirement, 
during any of the preceding three calendar years, the creditor must 
have extended more than 50 percent of its total covered 
transactions, as defined by Sec.  1026.43(b)(1) and secured by a 
first lien, on properties that are located in counties that are 
either ``rural'' or ``underserved,'' as defined by Sec.  
1026.35(b)(2)(iv). See Sec.  1026.35(b)(2)(iii)(A).
---------------------------------------------------------------------------

     An exception from the prohibition on balloon-payment 
features for certain high-cost mortgages (Sec.  
1026.32(d)(1)(ii)(C)).\26\
---------------------------------------------------------------------------

    \26\ For loans made on or before January 10, 2016, small 
creditors may originate high-cost mortgages with balloon-payment 
features even if the creditor does not operate predominantly in 
rural or underserved areas, under certain conditions. See Sec. Sec.  
1026.32(d)(1)(ii)(C) and 1026.43(e)(6).
---------------------------------------------------------------------------

    These special rules and exceptions recognize that small creditors 
are an important source of non-conforming mortgage credit. Small 
creditors' size and relationship lending model often provide them with 
better ability than large institutions to assess ability-to-repay. At 
the same time, small creditors lack economies of scale necessary to 
offset the cost of certain regulatory burdens. To be a small creditor 
for purposes of these exceptions and special provisions, the creditor 
must have (1) together with its affiliates, originated 500 or fewer 
covered transactions \27\ secured by a first lien in the preceding 
calendar year; and (2) had total assets of less than $2 billion at the 
end of the preceding calendar year. As discussed in more detail below, 
the Bureau is requesting comment on certain aspects of the annual 
first-lien origination limit under the small creditor test.
---------------------------------------------------------------------------

    \27\ ``Covered transaction'' is defined in Sec.  1026.43(b)(1) 
to mean a consumer credit transaction that is secured by a dwelling, 
as defined in Sec.  1026.2(a)(19), including any real property 
attached to a dwelling, other than a transaction exempt from 
coverage under Sec.  1026.43(a).
---------------------------------------------------------------------------

    These special rules for small creditors are largely based on TILA 
sections 129D(c) and 129C(b)(2)(E), respectively. TILA section 129D(c) 
authorizes the Bureau to exempt a creditor from the higher-priced 
mortgage loan escrow requirement if the creditor operates predominantly 
in rural or underserved areas, retains its mortgage loans in portfolio, 
and meets certain asset size and annual mortgage loan origination 
thresholds set by the Bureau. TILA section 129C(b)(2)(E) permits 
certain balloon-payment mortgages originated by small creditors to 
receive qualified mortgage status, even though qualified mortgages are 
otherwise prohibited from having balloon-payment features. The creditor 
qualifications under TILA section 129C(b)(2)(E) generally mirror the 
criteria for the higher-priced mortgage loan escrow exemption, 
including meeting certain asset size and annual mortgage loan 
origination thresholds set by the Bureau.
    The Board proposed to implement TILA sections 129D(c) and 
129C(b)(2)(E) before TILA rulemaking authority transferred to the 
Bureau. Although the creditor qualification criteria under these 
provisions are similar, the Board proposed to implement the provisions 
in slightly different ways.
    To implement TILA section 129D(c), the exemption from the higher-
priced mortgage loan escrow requirements, the Board proposed to limit 
the exemption to creditors that (1) during either of the preceding two 
calendar years, together with affiliates, originated and retained 
servicing rights to 100 or fewer loans secured by a first lien on real 
property or a dwelling; and (2) together with affiliates, do not 
maintain escrow accounts for loans secured by real property or a 
dwelling that the creditor or its affiliates currently service.\28\ The 
Board interpreted the escrow provision as intending to exempt creditors 
that do not possess economies of scale to escrow cost-effectively. In 
proposing the transaction count limit, the Board estimated that a 
minimum servicing portfolio size of 500 is necessary to escrow cost-
effectively, and assumed that the average life expectancy of a mortgage 
loan is about five years. Based on this reasoning, the Board believed 
that creditors would no longer need the benefit of the exemption if 
they originated and serviced more than 100 first-lien transactions per 
year. The Board proposed a two-year coverage test to afford an 
institution sufficient time after first exceeding the threshold to 
acquire an escrowing capacity. The Board did not propose an asset-size 
threshold to qualify for the escrow exemption, but sought comment on 
whether such a threshold should be established and, if so, what it 
should be.
---------------------------------------------------------------------------

    \28\ 76 FR 11597 (Mar. 2, 2011) (2011 Escrows Proposal). The 
proposed exemption also would have required that, during the 
preceding calendar year, the creditor extended more than 50 percent 
of its total first-lien higher-priced mortgage loans in counties 
designated as rural or underserved, among other requirements.
---------------------------------------------------------------------------

    For the balloon-payment qualified mortgage definition to implement 
TILA section 129C(b)(2)(E), the Board proposed an asset-size limit of 
$2 billion and two alternative annual originations thresholds. The 
Board interpreted the qualified mortgage provision as being designed to 
ensure access to credit in areas where consumers may be able to obtain 
credit only from community banks offering balloon-payment

[[Page 25746]]

mortgages. Accordingly, the Board proposed two alternatives for the 
total annual originations portion of the test: Under alternative 1, the 
creditor, together with all affiliates, extended covered transactions 
of some dollar amount or less during the preceding calendar year, 
whereas under alternative 2, the creditor, together with all 
affiliates, extended some number of covered transactions or fewer 
during the preceding calendar year. The Board did not propose a 
specific annual originations threshold in connection with TILA section 
129C(b)(2)(E), but the Board sought comment on the issue.
    Rulemaking authority for TILA passed to the Bureau in July 2011, 
before the Board finalized the above-described proposals. The Bureau 
considered the Board's proposals and responsive public comments before 
finalizing those rules in January 2013. The Bureau also conducted 
further analysis to try to determine the appropriate thresholds, 
although such effort was significantly constrained by data limitations. 
The Bureau ultimately adopted an annual originations limit of 500 or 
fewer first-lien covered transactions in the preceding calendar year 
and an asset-size limit of less than $2 billion, adjusted annually for 
inflation.\29\ The Bureau believed that it would be preferable to use 
the same annual originations and asset-size thresholds for the 
qualified mortgage and escrow provisions to reflect the consistent 
statutory language, to facilitate compliance by not requiring 
institutions to track multiple metrics, and to promote consistent 
application of the two exemptions. The Bureau also applied these limits 
to the exception from the balloon-payment prohibition for high-cost 
loans, to the qualified mortgage definition for small portfolio 
creditors, and to the qualified mortgage definition for loans with 
balloon-payment features.
---------------------------------------------------------------------------

    \29\ The higher-priced mortgage loan escrows exemption also 
requires that the creditor operate predominantly in rural or 
underserved areas. See Sec.  1026.35(b)(2)(iii)(A). For loans made 
on or before January 10, 2016, small creditors may originate 
qualified mortgages, and high-cost mortgages, with balloon-payment 
features even if the creditor does not operate predominantly in 
rural or underserved areas, under certain conditions. See Sec. Sec.  
1026.32(d)(1)(ii)(C) and 1026.43(e)(6).
---------------------------------------------------------------------------

    The Bureau adopted a threshold of 500 or fewer annual originations 
of first-lien transactions to provide flexibility and reduce concerns 
that the threshold in the Board's 2011 Escrows Proposal would reduce 
access to credit by excluding creditors that need special 
accommodations in light of their capacity constraints.\30\ The Bureau 
believed that an originations limit is the most accurate means of 
limiting the special provisions to the class of small creditors with a 
business model the Bureau believes will best facilitate access to 
responsible, affordable credit. The Bureau also believed that an asset 
limit is important to preclude a very large creditor with relatively 
modest mortgage operations from taking advantage of a provision 
designed for much smaller creditors with much different characteristics 
and incentives, and that lack the scale to make compliance less 
burdensome.
---------------------------------------------------------------------------

    \30\ The preamble to the January 2013 Escrows Final Rule noted 
that the increased threshold was likely not very dramatic because 
the Bureau's analysis of HMDA data suggested that even small 
creditors are likely to sell a significant number of their 
originations in the secondary market and, assuming that most 
mortgage transactions that are retained in portfolio are also 
serviced in-house, the Bureau estimated that a creditor originating 
no more than 500 first-lien transactions per year would maintain and 
service a portfolio of about 670 mortgage obligations over time 
(assuming an average obligation life expectancy of five years). 
Thus, the Bureau believed the higher threshold in the January 2013 
Escrows Final Rule would help to ensure that creditors that are 
subject to the escrow requirement would in fact maintain portfolios 
of sufficient size to maintain the escrow accounts on a cost-
efficient basis over time, in the event that the Board's 500-loan 
estimate of a minimum cost-effective servicing portfolio size was 
too low. At the same time, however, the Bureau believed that the 500 
annual originations threshold in combination with the other 
requirements would still ensure that the balloon-payment qualified 
mortgage and escrow exemptions are available only to small creditors 
that focus primarily on a relationship lending model and face 
significant systems constraints.
---------------------------------------------------------------------------

    Based on estimates from publicly available Home Mortgage Disclosure 
Act (HMDA) and call report data, the Bureau understood that the small 
creditor provisions as finalized would include approximately 95 percent 
of creditors with less than $500 million in assets, approximately 74 
percent of creditors with assets between $500 million and $1 billion, 
and approximately 50 percent of creditors with assets between $1 
billion and $2 billion. The Bureau believed these percentages were 
consistent with the rationale for providing special accommodation for 
small creditors and would be appropriate to ensure that consumers have 
access to responsible, affordable mortgage credit.
    Consistent with the Bureau's ongoing Implementation Plan, the 
Bureau is seeking comment on the 500 total first-lien originations 
limit--and the requirement that the limit be determined for any given 
calendar year based upon results during the immediately prior calendar 
year. Specifically, the Bureau solicits feedback and data from (1) 
creditors designated as small creditors under the Bureau's 2013 Title 
XIV Final Rules; and (2) creditors with assets that are not at or above 
the $2 billion limitation but that do not qualify for small creditor 
treatment under the Bureau's 2013 Title XIV Final Rules because of 
their total annual first-lien mortgage originations. For such 
creditors, the Bureau requests data on the number and type of mortgage 
products offered and originated to be held in portfolio during the 
years prior to the effective date of the 2013 Title XIV Final Rules and 
subsequent to that date. In particular, the Bureau is interested in how 
such creditors' origination mix changed in light of the Bureau's 2013 
Title XIV Final Rules (including, but not limited to, the percentage of 
loans that are fixed-rate, are adjustable-rate, or have a balloon-
payment feature) and, similarly, how such creditors' origination mix 
changed when only considering loans originated for the purposes of 
keeping them in portfolio. The Bureau also solicits feedback on such 
small creditors' implementation efforts with respect to the Bureau's 
2013 Title XIV Final Rules. The Bureau is interested in detailed 
descriptions of the challenges that creditors might face when 
transitioning from originating balloon-payment loans to originating 
adjustable-rate loans. Finally, the Bureau solicits comment on whether 
the 500 total first-lien originations limit is sufficient to serve the 
above-described purposes of the provision and, to the extent it may be 
insufficient, the reasons why it is insufficient and the range of 
appropriate limits.
    As noted above, certain of the special provisions applicable to 
small creditors are limited to small creditors in ``rural'' or 
``underserved'' areas. The Bureau finalized a definition of ``rural'' 
or ``underserved'' in the 2013 Escrows Final Rule. 78 FR 4725 (Jan. 22, 
2013). The Bureau recognizes that concerns have been raised by some 
stakeholders that the Bureau's definition is under-inclusive and fails 
to cover certain counties or portions of counties that are typically 
thought of as rural or underserved in nature. The Bureau is considering 
whether to propose modifications to the definition of ``rural'' or 
``underserved'' at a later date and is not requesting comment at this 
time on this issue.

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

A. Overview

    In developing the proposed rule, the Bureau has considered 
potential

[[Page 25747]]

benefits, costs, and impacts.\31\ The Bureau requests comment on the 
preliminary analysis presented below as well as submissions of 
additional data that could inform the Bureau's analysis of the 
benefits, costs, and impacts. The Bureau has consulted, or offered to 
consult with, the prudential regulators, the Securities and Exchange 
Commission, the Department of Housing and Urban Development, the 
Federal Housing Finance Agency, the Federal Trade Commission, the U.S. 
Department of Veterans Affairs, the U.S. Department of Agriculture, and 
the Department of the Treasury, including regarding consistency with 
any prudential, market, or systemic objectives administered by such 
agencies.
---------------------------------------------------------------------------

    \31\ Specifically, section 1022(b)(2)(A) of the Dodd-Frank Act 
calls for the Bureau to consider the potential benefits and costs of 
a regulation to consumers and covered persons, including the 
potential reduction of access by consumers to consumer financial 
products or services; the impact on depository institutions and 
credit unions with $10 billion or less in total assets as described 
in section 1026 of the Dodd-Frank Act; and the impact on consumers 
in rural areas.
---------------------------------------------------------------------------

    There are three main provisions in this rulemaking proposal. The 
first provision extends the small servicer exemption from certain 
provisions of the 2013 Mortgage Servicing Final Rules to nonprofit 
servicers that service 5,000 or fewer loans on behalf of themselves and 
associated nonprofits, all of which were originated by the nonprofit or 
an associated nonprofit. The second provision excludes certain non-
interest bearing, contingent subordinate liens that meet the 
requirements of proposed Sec.  1026.43(a)(3)(v)(D) (``contingent 
subordinate liens'') from the 200-loan limit calculation for purposes 
of qualifying for the nonprofit exemption from the ability-to-repay 
requirements. The third provision affords creditors an option, in 
limited circumstances, to cure certain mistakes in cases where a 
creditor originated a loan with an expectation of qualified mortgage 
status, but the loan actually exceeded the points and fees limit for 
qualified mortgages at consummation (``points and fees cure'').
    The Bureau has chosen to evaluate the benefits, costs, and impacts 
of these proposed provisions against the current state of the world. 
That is, the Bureau's analysis below considers the benefits, costs, and 
impacts of the three proposed provisions relative to the current 
regulatory regime, as set forth primarily in the January 2013 ATR Final 
Rule, the May 2013 ATR Final Rule, and the 2013 Mortgage Servicing 
Final Rules.\32\ The baseline considers economic attributes of the 
relevant market and the existing regulatory structure.
---------------------------------------------------------------------------

    \32\ The Bureau has discretion in future rulemakings to choose 
the relevant provisions to discuss and to choose the most 
appropriate baseline for that particular rulemaking.
---------------------------------------------------------------------------

    The main benefit of each of these proposed provisions to consumers 
is a potential increase in access to credit and a potential decrease in 
the cost of credit. It is possible that, but for these provisions, (1) 
financial institutions would stop or curtail originating or servicing 
in particular market segments or would increase the cost of credit or 
servicing in those market segments in numbers sufficient to adversely 
impact those market segments, (2) the financial institutions that would 
remain in those market segments would not provide a sufficient quantum 
of mortgage loan origination or servicing at the non-increased price, 
and (3) there would not be significant new entry into the market 
segments left by the departing institutions. If, but for these proposed 
provisions, all three of these scenarios would be realized, then the 
three proposed provisions will increase access to credit. The Bureau 
does not possess any data, aside from anecdotal comments, to refute or 
confirm any of these scenarios for any of the proposed exemptions. 
However, the Bureau notes that, at least in some market segments, these 
three scenarios could be realized by just one creditor or servicer 
stopping or curtailing originating or servicing or increasing the cost 
of credit. This would occur, for example, if that creditor or servicer 
is the only one willing to extend credit or provide servicing to this 
market segment (for example, to low- and moderate-income consumers), no 
other creditor or servicer would enter the market even if the incumbent 
exits, and the incumbent faces higher costs that would lead it to 
either increase the cost of credit or curtail access to credit.
    The main cost to consumers of the proposed small nonprofit servicer 
and small nonprofit originator provisions is that, for some 
transactions, creditors or servicers will not have to provide consumers 
some of the protections provided by the ability-to-repay and mortgage 
servicing rules. The main cost of the points and fees cure provision to 
consumers is that a creditor could reimburse a consumer for a points 
and fees overage after consummation--with the creditor thereby 
obtaining the safe harbor or rebuttable presumption of TILA ability-to-
repay compliance afforded by a qualified mortgage, and the consumer 
having less ability to challenge the mortgage on ability-to-repay 
grounds. As noted above, the Bureau does not possess data to provide a 
precise estimate of the number of transactions affected. However, the 
Bureau believes that the number will be relatively small.
    The main benefit of each of these proposed provisions to covered 
persons is that the affected covered persons do not have to incur 
certain expenses associated with the ability-to-repay and mortgage 
servicing rules, or will not be forced either to exit the market or to 
curtail origination or servicing activities to maintain certain 
regulatory exemptions. Given the currently available data, it is 
impossible for the Bureau to estimate the number of transactions 
affected with any useful degree of precision; that is also the case for 
estimating the amount of monetary benefits for such covered persons.
    There is no major cost of these proposed provisions to covered 
persons--each of the provisions is an option that a financial 
institution is free to undertake or not to undertake. The only 
potential costs for covered persons is that other financial 
institutions that would have complied with the ability-to-repay and 
mortgage servicing rules with or without the proposed provisions may 
lose profits to the institutions that are able to continue operating in 
a market segment by virtue of one of the proposed provisions. However, 
these losses are likely to be small and are difficult to estimate.

B. Potential Benefits and Costs to Consumers and Covered Persons

Small Servicer Exemption Extension for Servicing Associated Nonprofits' 
Loans
    The Bureau's 2013 Mortgage Servicing Final Rules were designed to 
address the market failure of consumers not choosing their servicers 
and of servicers not having sufficient incentives to invest in quality 
control and consumer satisfaction. The demand for larger loan 
servicers' services comes from originators, not from consumers. Smaller 
servicers, however, have an additional incentive to provide ``high-
touch'' servicing that focuses on ensuring consumer satisfaction. 78 FR 
10695, 10845-46 (Feb. 14, 2013); 78 FR 10901, 10980-82 (Feb. 14, 2013).
    The Bureau's 2013 Mortgage Servicing Final Rules provide many 
benefits to consumers: for example, detailed periodic statements. These 
benefits tend to present potential costs to servicers: for example, 
changing their software systems to include additional information on 
the periodic statements to consumers. These benefits and costs are 
further described in the ``Dodd-Frank Act Section 1022(b)(2) Analysis'' 
sections of the 2013 Mortgage Servicing

[[Page 25748]]

Final Rules. 78 FR 10695, 10842-61 (Feb. 14, 2013); 78 FR 10901, 10978-
94 (published concurrently).
    Smaller servicers are generally community banks and credit unions 
that have a built-in incentive to manage their reputation with 
consumers carefully because they are servicing loans in communities in 
which they also originate loans. This incentive is reinforced if they 
are servicing only loans that they originate. Under current Sec.  
1026.41(e)(4)(ii), a small servicer is a servicer that either (A) 
services, together with any affiliates, 5,000 or fewer mortgage loans 
for all of which the servicer (or an affiliate) is the creditor or 
assignee; or (B) is a Housing Finance Agency, as defined in 24 CFR 
266.5. The definition of the term ``affiliate'' is the definition 
provided in the Bank Holding Company Act (BHCA). The rationale for the 
small servicer exemption is provided in the Bureau's 2013 Mortgage 
Servicing Final Rules. 78 FR 10695, 10845-46 (Feb. 14, 2013); 78 FR 
10901, 10980-82 (published concurrently).
    The proposed revision of the exemption allows a nonprofit servicer 
to service loans on behalf of ``associated nonprofit entities'' that do 
not meet the BHCA ``affiliate'' definition and still qualify as a 
``small servicer,'' as long as certain other conditions are met (for 
example, it has no more than 5,000 loans in its servicing portfolio). 
The Bureau believes nonprofit servicers typically follow the same 
``high-touch'' servicing model followed by the small servicers 
described in the Dodd-Frank Act Section 1022(b)(2) Analysis in the 2013 
Mortgage Servicing Final Rules. While these nonprofit servicers are not 
motivated by the profit incentive that motivates community banks and 
small credit unions, they nonetheless have a reputation incentive and a 
mission incentive to provide ``high-touch'' servicing, neither of which 
is diminished when they service associated nonprofits' loans. Because 
it is limited to entities sharing a common name, trademark, or 
servicemark, proposed Sec.  1026.41(e)(4)(ii)(C) further ensures that 
the reputation incentive remains intact. In addition, the 5,000-loan 
servicing portfolio limit ensures that nonprofit servicers are still 
sufficiently small to provide ``high-touch'' servicing. Another 
rationale for the proposed revision of the exemption is that it would 
create a more level playing field for nonprofits. Currently, for-profit 
affiliates can take advantage of economies of scale to service their 
loans together, but related nonprofits cannot because they typically 
are not ``affiliates'' as defined by the BHCA.
    Overall, the primary benefit to consumers of the proposed amendment 
to the small servicer definition is a potential increase in access to 
credit and a potential decrease in the cost of credit. The primary cost 
to consumers is losing some of the protections of the Bureau's 2013 
Mortgage Servicing Final Rules. The primary benefit to covered persons 
is exemption from certain provisions of those rules, and the attendant 
cost savings of not having to comply with those provisions while still 
being able to achieve a certain degree of scale by taking on servicing 
for associated nonprofits. See also 78 FR 10695, 10842-61 (Feb. 14, 
2013); 78 FR 10901, 10978-94 (published concurrently). There are no 
significant costs to covered persons.
    Finally, the Bureau does not possess any data that would enable it 
to report the number of transactions affected, but from anecdotal 
evidence and taking into account the size of the nonprofit servicers 
that are the most likely to take advantage of this exemption, it is 
unlikely that there will be a significant number of loans affected each 
year. Several nonprofit servicers might be affected as well.
Ability-to-Repay Exemption for Contingent Subordinate Liens
    The Bureau's ability-to-repay rule was designed to address the 
market failure of mortgage loan originators not internalizing the 
effects of consumers not being able to repay their loans: effects both 
on the consumers themselves and on the consumers' neighbors, whose 
houses drop in value due to foreclosures nearby.
    The May 2013 ATR Final Rule added a nonprofit exemption from the 
ability-to-repay requirements. The rationale of that exemption is 
preserving low- and moderate-income consumers' access to credit 
available from nonprofit organizations, which might have stopped or 
curtailed originating loans but for this exemption. The main benefit of 
the exemption for consumers is in potential expansion of access to 
credit and a potential decrease in the cost of credit; the main cost 
for consumers is not receiving protections provided by the ability-to-
pay rule. The May 2013 ATR Final Rule exempted only nonprofit creditors 
that originated 200 or fewer loans a year, based on the Bureau's belief 
that these institutions do internalize the effects of consumers not 
being able to repay their loans and that the loan limitation is 
necessary to prevent the exemption from being exploited by unscrupulous 
creditors seeking to harm consumers.
    Proposed Sec.  1026.43(a)(3)(vii) excludes contingent subordinate 
liens from the 200-credit extension limit for purposes of the May 2013 
ATR Final Rule's nonprofit exemption. Given the numerous limitations on 
contingent subordinate liens, including but not limited to the 1-
percent cap on upfront costs payable by the consumer--and given the 
200-loan limit for other loans, the Bureau believes that the potential 
for creditors to improperly exploit the amended rule is low. The Bureau 
also believes that this exemption will allow a greater number of 
nonprofit creditors to originate more loans than under the current 
rule, or to remain in the low- and moderate-income consumer market 
without passing through cost increases to consumers.
    Overall, the primary benefit to consumers of the proposed exclusion 
is a potential increase in access to credit and a potential decrease in 
the cost of credit. The primary cost to consumers is losing some of the 
protections provided by the Bureau's ability-to-repay rule. The primary 
benefit to covered persons is exemption from that same rule. See 78 FR 
6407, 6555-75 (Jan. 30, 2013); (``Dodd-Frank Act Section 1022(b)(2) 
Analysis'' part in the January 2013 ATR Final Rule); 78 FR 35429, 
35492-97 (June 12, 2013) (similar part in the May 2013 ATR Final Rule). 
There are no significant costs to covered persons.
    Finally, the Bureau does not possess any data that would enable it 
to report the number of transactions affected, but from anecdotal 
evidence and taking into account the size of the nonprofit creditors 
that are most likely to take advantage of this exemption, it is 
unlikely that there will be a significant number of loans affected each 
year, and it is possible that virtually no loans will be affected in 
the near future. Several nonprofit creditors might be affected as well, 
but it is possible that no nonprofit creditors will be affected in the 
near future.
Cure for Points and Fees Over the Qualified Mortgage Threshold
    To originate a qualified mortgage, a creditor must satisfy various 
conditions, including the condition of charging at most 3 percent of 
the total loan amount in points and fees, not including up to two bona-
fide discount points, and with higher thresholds for lower loan 
amounts. However, origination processes are not perfect and creditors 
might be concerned about any potential unintended errors that result in 
a loan that the creditor believed to be a qualified mortgage at 
origination but that actually was over the 3-percent

[[Page 25749]]

points and fees threshold upon further, post-consummation review.
    The three most likely responses by a creditor concerned about such 
inadvertent errors would be either to originate loans with points and 
fees well below TILA's 3-percent limit, to insert additional quality 
control in its origination process, or to charge a premium for the risk 
of a loan being deemed not to be a qualified mortgage, especially on 
loans with points and fees not well below TILA's 3-percent limit. The 
first solution is not what the Bureau, or presumably Congress, 
intended; otherwise the statutory limit would have been set lower than 
3 percent. The second solution could result in more than the socially 
optimal amount of effort expended on quality control, especially since 
most loans will be securitized and thus re-examined shortly after 
origination. The savings from forgoing additional quality control might 
be passed through to consumers, to the extent that costs saved are 
marginal (as opposed to fixed) and the markets are sufficiently 
competitive. The third solution is, effectively, a less stark version 
of the first solution, with loans close to TILA's 3-percent limit still 
being originated, albeit at higher prices simply due to being close to 
the limit. Like the first potential solution, this would be an 
unintended consequence of the limit.
    The primary potential drawback of the proposal to allow creditors 
to cure inadvertent points and fees errors is the risk of inappropriate 
exploitation by creditors. However, the conditions the Bureau has 
placed on the proposed cure mechanism help to ensure that creditors 
will not abuse this mechanism and thus that consumers are unlikely to 
experience negative side-effects.
    One such potential gaming scenario involves a creditor originating 
risky loans with high points and fees while hoping to avoid a massive 
wave of foreclosures. In this case, the possibility of cure could be 
thought of as an option that the creditor could exercise to strengthen 
its position for foreclosure litigation, but only if the creditor 
foresees the wave of foreclosures. The elements of proposed Sec.  
1026.43(e)(3)(iii) requiring that the loan be originated in good faith 
as a qualified mortgage and that the overage be cured within 120 days 
after consummation should discourage this type of gaming. Another 
gaming scenario is a creditor that only cures overages on loans that go 
into foreclosure. This possibility is limited by the proposed 120-day 
cure window, as well as by the proposed requirement that the creditor 
or assignee, as applicable, maintains and follows policies and 
procedures for post-consummation review and refunding overages.
    The primary benefit to consumers of the proposed cure provision is 
a potential increase in access to credit and a potential decrease of 
the cost of credit. Another potential benefit is that, when a creditor 
discovers the inadvertent points and fees overage, the creditor may 
reimburse the consumer for the overage. However, this is a benefit only 
for consumers who place greater value on being reimbursed than on the 
additional legal protections that a non-qualified mortgage would afford 
them. The primary cost to consumers is that, without the consumer's 
consent, a creditor could reimburse the consumer for a points and fees 
overage after consummation--with the creditor thereby obtaining the 
safe harbor (or rebuttable presumption) of TILA ability-to-repay 
compliance. However, the Bureau believes that the safeguards included 
in the proposed rule will mitigate this potential concern as creditors 
are unlikely to be able to game the system and thereby deprive 
consumers of the protections provided by the ability-to-pay rule.
    The primary benefit to covered persons is being able to originate 
qualified mortgages without engaging in inefficient additional quality 
control processes, with the attendant reduction in legal risk. Some 
larger creditors might have sufficiently robust compliance procedures 
that largely prevent inadvertent points and fees overages. These 
creditors might lose some market share to creditors for whom this 
provision will be more useful. The Bureau cannot meaningfully estimate 
the magnitude of this effect.
    Finally, the Bureau does not possess any data that would enable it 
to report the number of transactions affected. For some creditors, the 
proposed provision might save additional verification and quality 
control in the loan origination process for every qualified mortgage 
transaction that they originate \33\ and/or allow them to originate 
loans with points and fees close to the 3-percent threshold at lower 
prices that do not reflect the risk of the loan inadvertently turning 
out not to be a qualified mortgage. The Bureau seeks comment on this 
issue and, in particular, any detailed descriptions regarding the 
processes that might be simplified due to the proposed cure provision 
and monetary and time savings involved.
---------------------------------------------------------------------------

    \33\ While a result of the proposed points and fees cure is that 
creditors have less of an incentive to perform rigorous quality 
control before consummation, there is also an alleviating effect. 
Any errors uncovered in the post-consummation review might help 
creditors improve their pre-consummation review by immediately 
pointing out areas to focus on.
---------------------------------------------------------------------------

C. Impact on Covered Persons With No More Than $10 Billion in Assets

    Covered persons with no more than $10 billion in assets likely will 
be the only covered persons affected by the two proposed exemptions 
regarding associated nonprofits and contingent subordinate liens: The 
respective loan limits of each provision virtually ensure that any 
creditor or servicer with over $10 billion in assets would not qualify 
for these two exemptions. For the third proposed provision, regarding 
points and fees, smaller creditors might benefit more than larger 
creditors. Larger creditors are more likely to have sufficiently robust 
compliance procedures that largely prevent inadvertent points and fees 
overages. Thus, this proposed provision might not benefit them as much. 
The third proposed provision may lead smaller creditors to extend a 
greater number of qualified mortgages near the 3-percent points and 
fees limit, to extend them for a lower price, and/or to forgo 
inefficient pre-consummation quality control. To the extent that 
possibility is realized, smaller creditors would benefit from the 
liability protection afforded by qualified mortgages.

D. Impact on Access to Credit

    The Bureau does not believe that there will be an adverse impact on 
access to credit resulting from any of the three provisions. Moreover, 
it is possible that there will be an expansion of access to credit.

E. Impact on Rural Areas

    The Bureau believes that rural areas might benefit from these three 
provisions more than urban areas, to the extent that there are fewer 
active creditors or servicers operating in rural areas than in urban 
areas. Thus, any creditors or servicers exiting the market or 
curtailing lending or servicing in rural areas--or restricting 
originating loans with points and fees close to the TILA 3-percent 
limit--might negatively affect access to credit more than similar 
behavior by creditors or servicers operating in more urban areas. A 
similar argument applies to any increases in the cost of credit.

VIII. Regulatory Flexibility Act Analysis

    The Regulatory Flexibility Act (the RFA), as amended by the Small 
Business Regulatory Enforcement Fairness Act of 1996, requires each 
agency to consider the potential impact

[[Page 25750]]

of its regulations on small entities, including small businesses, small 
governmental units, and small nonprofit organizations. The RFA defines 
a ``small business'' as a business that meets the size standard 
developed by the Small Business Administration pursuant to the Small 
Business Act.
    The RFA generally requires an agency to conduct an initial 
regulatory flexibility analysis (IRFA) and a final regulatory 
flexibility analysis (FRFA) of any rule subject to notice-and-comment 
rulemaking requirements, unless the agency certifies that the rule will 
not have a significant economic impact on a substantial number of small 
entities. The Bureau also is subject to certain additional procedures 
under the RFA involving the convening of a panel to consult with small 
business representatives prior to proposing a rule for which an IRFA is 
required.
    An IRFA is not required for this proposal because the proposal, if 
adopted, would not have a significant economic impact on any small 
entities. The Bureau does not expect the proposal to impose costs on 
covered persons. All methods of compliance under current law will 
remain available to small entities if the proposal is adopted. Thus, a 
small entity that is in compliance with current law need not take any 
additional action if the proposal is adopted. Accordingly, the 
undersigned certifies that this proposal, if adopted, would not have a 
significant economic impact on a substantial number of small entities.

IX. Paperwork Reduction Act

    Under the Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 3501 et 
seq.), Federal agencies are generally required to seek the Office of 
Management and Budget (OMB) approval for information collection 
requirements prior to implementation. The collections of information 
related to Regulations Z and X have been previously reviewed and 
approved by OMB in accordance with the PRA and assigned OMB Control 
Number 3170-0015 (Regulation Z) and 3170-0016 (Regulation X). Under the 
PRA, the Bureau may not conduct or sponsor, and, notwithstanding any 
other provision of law, a person is not required to respond to an 
information collection unless the information collection displays a 
valid control number assigned by OMB.
    The Bureau has determined that this Proposed Rule would not impose 
any new or revised information collection requirements (recordkeeping, 
reporting, or disclosure requirements) on covered entities or members 
of the public that would constitute collections of information 
requiring OMB approval under the PRA. The Bureau welcomes comments on 
this determination or any other aspect of this proposal for purposes of 
the PRA. Comments should be submitted as outlined in the ADDRESSES 
section above. All comments will become a matter of public record.

List of Subjects in 12 CFR Part 1026

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

Authority and Issuance

    For the reasons set forth in the preamble, the Bureau proposes to 
amend 12 CFR part 1026 as set forth below:

PART 1026--TRUTH IN LENDING (REGULATION Z)

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

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

Subpart E--Special Rules for Certain Home Mortgage Transactions

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


Sec.  1026.41  Periodic statements for residential mortgage loans.

* * * * *
    (e) * * *
    (4) * * *
    (ii) Small servicer defined. A small servicer is a servicer that:
    (A) Services, together with any affiliates, 5,000 or fewer mortgage 
loans, for all of which the servicer (or an affiliate) is the creditor 
or assignee;
    (B) Is a Housing Finance Agency, as defined in 24 CFR 266.5; or
    (C) Is a nonprofit entity that services 5,000 or fewer mortgage 
loans, including any mortgage loans serviced on behalf of associated 
nonprofit entities, for all of which the servicer or an associated 
nonprofit entity is the creditor. For purposes of this paragraph 
(e)(4)(ii)(C), the following definitions apply:
    (1) The term ``nonprofit entity'' means an entity having 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), and;
    (2) The term ``associated nonprofit entities'' means nonprofit 
entities that by agreement operate using a common name, trademark, or 
servicemark to further and support a common charitable mission or 
purpose.
    (iii) Small servicer determination. In determining whether a 
servicer is a small servicer pursuant to paragraph (e)(4)(ii)(A) of 
this section, the servicer is evaluated based on the mortgage loans 
serviced by the servicer and any affiliates as of January 1 and for the 
remainder of the calendar year. In determining whether a servicer is a 
small servicer pursuant to paragraph (e)(4)(ii)(C) of this section, the 
servicer is evaluated based on the mortgage loans serviced by the 
servicer as of January 1 and for the remainder of the calendar year. A 
servicer that ceases to qualify as a small servicer will have six 
months from the time it ceases to qualify or until the next January 1, 
whichever is later, to comply with any requirements from which the 
servicer is no longer exempt as a small servicer. The following 
mortgage loans are not considered in determining whether a servicer 
qualifies as a small servicer:
* * * * *
0
3. Section 1026.43 is amended by revising paragraph (a)(3)(v)(D)(1) and 
the introductory text of paragraph (e)(3)(i) and adding new paragraphs 
(a)(3)(vii) and (e)(3)(iii) to read as follows:


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

    (a) * * *
    (3) * * *
    (v) * * *
    (D) * * *
    (1) During the calendar year preceding receipt of the consumer's 
application, the creditor extended credit secured by a dwelling no more 
than 200 times, except as provided in paragraph (a)(3)(vii) of this 
section;
* * * * *
    (vii) Consumer credit transactions that meet the following criteria 
are not considered in determining whether a creditor exceeds the credit 
extension limitation in paragraph (a)(3)(v)(D)(1) of this section:
    (A) The transaction is secured by a subordinate lien;
    (B) The transaction is for the purpose of:
    (1) Downpayment, closing costs, or other similar home buyer 
assistance, such as principal or interest subsidies;
    (2) Property rehabilitation assistance;
    (3) Energy efficiency assistance; or
    (4) Foreclosure avoidance or prevention;
    (C) The credit contract does not require payment of interest;

[[Page 25751]]

    (D) The credit contract provides that repayment of the amount of 
the credit extended is:
    (1) Forgiven either incrementally or in whole, at a date certain, 
and subject only to specified ownership and occupancy conditions, such 
as a requirement that the consumer maintain the property as the 
consumer's principal dwelling for five years;
    (2) Deferred for a minimum of 20 years after consummation of the 
transaction;
    (3) Deferred until sale of the property securing the transaction; 
or
    (4) Deferred until the property securing the transaction is no 
longer the principal dwelling of the consumer;
    (E) The total of costs payable by the consumer in connection with 
the transaction at consummation is less than 1 percent of the amount of 
credit extended and includes no charges other than:
    (1) Fees for recordation of security instruments, deeds, and 
similar documents;
    (2) A bona fide and reasonable application fee; and
    (3) A bona fide and reasonable fee for housing counseling services; 
and
    (F) The creditor complies with all other applicable requirements of 
this part in connection with the transaction.
* * * * *
    (e) * * *
    (3) * * *. (i) Except as provided in paragraph (e)(3)(iii) of this 
section, a covered transaction is not a qualified mortgage unless the 
transaction's total points and fees, as defined in Sec.  1026.32(b)(1), 
do not exceed:
* * * * *
    (iii) If the creditor or assignee determines after consummation 
that the total points and fees payable in connection with a loan exceed 
the applicable limit under paragraph (e)(3)(i) of this section, the 
loan is not precluded from being a qualified mortgage, provided:
    (A) The creditor originated the loan in good faith as a qualified 
mortgage and the loan otherwise meets the requirements of paragraphs 
(e)(2), (e)(4), (e)(5), (e)(6), or (f) of this section, as applicable;
    (B) Within 120 days after consummation, the creditor or assignee 
refunds to the consumer the dollar amount by which the transaction's 
points and fees exceeded the applicable limit under paragraph (e)(3)(i) 
of this section at consummation; and
    (C) The creditor or assignee, as applicable, maintains and follows 
policies and procedures for post-consummation review of loans and 
refunding to consumers amounts that exceed the applicable limit under 
paragraph (e)(3)(i) of this section.
* * * * *
0
4. In Supplement I to part 1026:
0
a. Under Section 1026.41--Periodic Statements for Residential Mortgage 
Loans:
0
i. Under Paragraph 41(e)(4)(ii) Small servicer defined, paragraph 2 is 
revised and paragraph 4 is added.
0
ii. Under Paragraph 41(e)(4)(iii) Small servicer determination, 
paragraphs 2 and 3 are revised and paragraphs 4 and 5 are added.
0
b. Under Section 1026.43--Minimum Standards for Transactions Secured by 
a Dwelling:
0
i. New subheading Paragraph 43(a)(3)(vii) and paragraph 1 under that 
subheading are added.
0
ii. New subheading Paragraph 43(e)(3)(iii) and paragraphs 1 and 2 under 
that subheading are added.
    The revisions read as follows:

Supplement I to Part 1026--Official Interpretations

* * * * *

Subpart E--Special Rules for Certain Home Mortgage Transactions

* * * * *
    Section 1026.41--Periodic Statements for Residential Mortgage Loans
* * * * *
    41(e)(4)(ii) Small servicer defined.
* * * * *
    2. Services, together with affiliates, 5,000 or fewer mortgage 
loans. To qualify as a small servicer under Sec.  1026.41(e)(4)(ii)(A), 
a servicer must service, together with any affiliates, 5,000 or fewer 
mortgage loans, for all of which the servicer (or an affiliate) is the 
creditor or assignee. There are two elements to satisfying Sec.  
1026.41(e)(4)(ii)(A). First, a servicer, together with any affiliates, 
must service 5,000 or fewer mortgage loans. Second, a servicer must 
service only mortgage loans for which the servicer (or an affiliate) is 
the creditor or assignee. To be the creditor or assignee of a mortgage 
loan, the servicer (or an affiliate) must either currently own the 
mortgage loan or must have been the entity to which the mortgage loan 
obligation was initially payable (that is, the originator of the 
mortgage loan). A servicer is not a small servicer under Sec.  
1026.41(e)(4)(ii)(A) if it services any mortgage loans for which the 
servicer or an affiliate is not the creditor or assignee (that is, for 
which the servicer or an affiliate is not the owner or was not the 
originator). The following two examples demonstrate circumstances in 
which a servicer would not qualify as a small servicer under Sec.  
1026.41(e)(4)(ii)(A) because it did not meet both requirements under 
Sec.  1026.41(e)(4)(ii)(A) for determining a servicer's status as a 
small servicer:
* * * * *
    4. Nonprofit entity that services 5,000 or fewer mortgage loans. To 
qualify as a small servicer under Sec.  1026.41(e)(4)(ii)(C), a 
servicer must be a nonprofit entity that services 5,000 or fewer 
mortgage loans, including any mortgage loans serviced on behalf of 
associated nonprofit entities, for all of which the servicer or an 
associated nonprofit entity is the creditor. There are two elements to 
satisfying Sec.  1026.41(e)(4)(ii)(C). First, a nonprofit entity must 
service 5,000 or fewer mortgage loans, including any mortgage loans 
serviced on behalf of associated nonprofit entities. For each 
associated nonprofit entity, the small servicer determination is made 
separately, without consideration of the number of loans serviced by 
another associated nonprofit entity. Second, a nonprofit entity must 
service only mortgage loans for which the servicer (or an associated 
nonprofit entity) is the creditor. To be the creditor, the servicer (or 
an associated nonprofit entity) must have been the entity to which the 
mortgage loan obligation was initially payable (that is, the originator 
of the mortgage loan). A nonprofit entity is not a small servicer under 
Sec.  1026.41(e)(4)(ii)(C) if it services any mortgage loans for which 
the servicer (or an associated nonprofit entity) is not the creditor 
(that is, for which the servicer or an associated nonprofit entity was 
not the originator). The first of the following two examples 
demonstrates circumstances in which a nonprofit entity would qualify as 
a small servicer under Sec.  1026.41(e)(4)(ii)(C) because it meets both 
requirements for determining a nonprofit entity's status as a small 
servicer under Sec.  1026.41(e)(4)(ii)(C). The second example 
demonstrates circumstances in which a nonprofit entity would not 
qualify as a small servicer under Sec.  1026.41(e)(4)(ii)(C) because it 
does not meet both requirements under Sec.  1026.41(e)(4)(ii)(C).
    i. Nonprofit entity A services 3,000 of its own mortgage loans, and 
1,500 mortgage loans on behalf of associated nonprofit entity B. All 
4,500 mortgage loans were originated by A or B. Associated nonprofit 
entity C services 2,500 mortgage loans, all of which it originated. 
Because the number of mortgage loans serviced by a nonprofit entity is 
determined by counting the

[[Page 25752]]

number of mortgage loans serviced by the nonprofit entity (including 
mortgage loans serviced on behalf of associated nonprofit entities) but 
not counting any mortgage loans serviced by an associated nonprofit 
entity, A and C are both small servicers.
    ii. A nonprofit entity services 4,500 mortgage loans--3,000 
mortgage loans it originated, 1,000 mortgage loans originated by 
associated nonprofit entities, and 500 mortgage loans neither it nor an 
associated nonprofit entity originated. The nonprofit entity is not a 
small servicer because it services mortgage loans for which neither it 
nor an associated nonprofit entity is the creditor, notwithstanding 
that it services fewer than 5,000 mortgage loans.
    41(e)(4)(iii) Small servicer determination.
* * * * *
    2. Timing for small servicer exemption. The following examples 
demonstrate when a servicer either is considered or is no longer 
considered a small servicer for purposes of Sec.  1026.41(e)(4)(ii)(A) 
and (C):
    i. Assume a servicer (that as of January 1 of the current year 
qualifies as a small servicer) begins servicing more than 5,000 
mortgage loans on October 1, and services more than 5,000 mortgage 
loans as of January 1 of the following year. The servicer would no 
longer be considered a small servicer on January 1 of that following 
year and would have to comply with any requirements from which it is no 
longer exempt as a small servicer on April 1 of that following year.
    ii. Assume a servicer (that as of January 1 of the current year 
qualifies as a small servicer) begins servicing more than 5,000 
mortgage loans on February 1, and services more than 5,000 mortgage 
loans as of January 1 of the following year. The servicer would no 
longer be considered a small servicer on January 1 of that following 
year and would have to comply with any requirements from which it is no 
longer exempt as a small servicer on that same January 1.
    iii. Assume a servicer (that as of January 1 of the current year 
qualifies as a small servicer) begins servicing more than 5,000 
mortgage loans on February 1, but services fewer than 5,000 mortgage 
loans as of January 1 of the following year. The servicer is considered 
a small servicer for that following year.
    3. Mortgage loans not considered in determining whether a servicer 
is a small servicer. Mortgage loans that are not considered pursuant to 
Sec.  1026.41(e)(4)(iii) for purposes of the small servicer 
determination under Sec.  1026.41(e)(4)(ii)(A) are not considered 
either for determining whether a servicer (together with any 
affiliates) services 5,000 or fewer mortgage loans or whether a 
servicer is servicing only mortgage loans that it (or an affiliate) 
owns or originated. For example, assume a servicer services 5,400 
mortgage loans. Of these mortgage loans, the servicer owns or 
originated 4,800 mortgage loans, voluntarily services 300 mortgage 
loans that neither it (nor an affiliate) owns or originated and for 
which the servicer does not receive any compensation or fees, and 
services 300 reverse mortgage transactions. The voluntarily serviced 
mortgage loans and reverse mortgage loans are not considered in 
determining whether the servicer qualifies as a small servicer. Thus, 
because only the 4,800 mortgage loans owned or originated by the 
servicer are considered in determining whether the servicer qualifies 
as a small servicer, the servicer qualifies for the small servicer 
exemption pursuant to Sec.  1026.41(e)(4)(ii)(A) with regard to all 
5,400 mortgage loans it services.
    4. Mortgage loans not considered in determining whether a nonprofit 
entity is a small servicer. Mortgage loans that are not considered 
pursuant to Sec.  1026.41(e)(4)(iii) for purposes of the small servicer 
determination under Sec.  1026.41(e)(4)(ii)(C) are not considered 
either for determining whether a nonprofit entity services 5,000 or 
fewer mortgage loans, including any mortgage loans serviced on behalf 
of associated nonprofit entities, or whether a nonprofit entity is 
servicing only mortgage loans that it or an associated nonprofit entity 
originated. For example, assume a servicer that is a nonprofit entity 
services 5,400 mortgage loans. Of these mortgage loans, the nonprofit 
entity originated 2,800 mortgage loans and associated nonprofit 
entities originated 2,000 mortgage loans. The nonprofit entity receives 
compensation for servicing the loans originated by associated 
nonprofits. The nonprofit entity also voluntarily services 600 mortgage 
loans that were originated by an entity that is not an associated 
nonprofit entity, and receives no compensation or fees for servicing 
these loans. The voluntarily serviced mortgage loans are not considered 
in determining whether the servicer qualifies as a small servicer. 
Thus, because only the 4,800 mortgage loans originated by the nonprofit 
entity or associated nonprofit entities are considered in determining 
whether the servicer qualifies as a small servicer, the servicer 
qualifies for the small servicer exemption pursuant to Sec.  
1026.41(e)(4)(ii)(C) with regard to all 5,400 mortgage loans it 
services.
    5. Limited role of voluntarily serviced mortgage loans. Reverse 
mortgages and mortgage loans secured by consumers' interests in 
timeshare plans, in addition to not being considered in determining 
small servicer qualification, are also exempt from the requirements of 
Sec.  1026.41. In contrast, although voluntarily serviced mortgage 
loans, as defined by Sec.  1026.41(e)(4)(iii)(A), are likewise not 
considered in determining small servicer status, they are not exempt 
from the requirements of Sec.  1026.41. Thus, a servicer that does not 
qualify as a small servicer would not have to provide periodic 
statements for reverse mortgages and timeshare plans because they are 
exempt from the rule, but would have to provide periodic statements for 
mortgage loans it voluntarily services.
* * * * *
Section 1026.43--Minimum Standards for Transactions Secured by a 
Dwelling
* * * * *
Paragraph 43(a)(3)(vii).
    1. Requirements of exclusion. Section 1026.43(a)(3)(vii) excludes 
certain transactions from the credit extension limit set forth in Sec.  
1026.43(a)(3)(v)(D)(1), provided a transaction meets several 
conditions. The terms of the credit contract must satisfy the 
conditions that the transaction not require the payment of interest 
under Sec.  1026.43(a)(3)(vii)(C) and that repayment of the amount of 
credit extended be forgiven or deferred in accordance with Sec.  
1026.43(a)(3)(vii)(D). The other requirements of Sec.  
1026.43(a)(3)(vii) need not be reflected in the credit contract, but 
the creditor must retain evidence of compliance with those provisions, 
as required by Sec.  1026.25(a). In particular, the creditor must have 
information reflecting that the total of closing costs imposed in 
connection with the transaction is less than 1 percent of the amount of 
credit extended and include no charges other than recordation, 
application, and housing counseling fees, in accordance with Sec.  
1026.43(a)(3)(vii)(E). Unless an itemization of the amount financed 
sufficiently details this requirement, the creditor must establish 
compliance with Sec.  1026.43(a)(3)(vii)(E) by some other written 
document and retain it in accordance with Sec.  1026.25(a).
* * * * *
Paragraph 43(e)(3)(iii)
    1. Originated in good faith as a qualified mortgage. i. The 
following

[[Page 25753]]

may be evidence that a creditor originated a loan in good faith as a 
qualified mortgage:
    A. A creditor maintains and follows policies and procedures 
designed to ensure that points and fees are correctly calculated and do 
not exceed the applicable limit under Sec.  1026.43(e)(3)(i); or
    B. The pricing for the loan is consistent with pricing on qualified 
mortgages originated contemporaneously by the same creditor.
    ii. In contrast, the following may be evidence that a loan was not 
originated in good faith as a qualified mortgage:
    A. A creditor does not maintain, or the creditor has, but does not 
follow, policies and procedures designed to ensure that points and fees 
are correctly calculated and do not exceed the applicable limit under 
Sec.  1026.43(e)(3)(i); or
    B. The pricing for the loan is not consistent with pricing on 
qualified mortgages originated contemporaneously by the same creditor.
    2. Policies and procedures for post-consummation review and 
refunding. A creditor or assignee satisfies Sec.  1026.43(e)(3)(iii)(C) 
if it maintains and follows policies and procedures for post-
consummation quality control loan review and for curing (by providing a 
refund) errors in points and fees calculations that occur at or before 
consummation.
* * * * *

    Dated: April 30, 2014.
Richard Cordray,
Director, Bureau of Consumer Financial Protection.
[FR Doc. 2014-10207 Filed 5-5-14; 8:45 am]
BILLING CODE 4810-AM-P