[Federal Register Volume 80, Number 28 (Wednesday, February 11, 2015)]
[Proposed Rules]
[Pages 7770-7796]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-02125]



[[Page 7769]]

Vol. 80

Wednesday,

No. 28

February 11, 2015

Part III





 Bureau of Consumer Financial Protection





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12 CFR Part 1026





 Amendments Relating to Small Creditors and Rural or Underserved Areas 
Under the Truth in Lending Act (Regulation Z); Proposed Rule

  Federal Register / Vol. 80 , No. 28 / Wednesday, February 11, 2015 / 
Proposed Rules  

[[Page 7770]]


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BUREAU OF CONSUMER FINANCIAL PROTECTION

12 CFR Part 1026

[Docket No. CFPB-2015-0004]
RIN 3170-AA43


Amendments Relating to Small Creditors and Rural or Underserved 
Areas 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 
revises the Bureau's regulatory definitions of small creditor, and 
rural and underserved areas, for purposes of certain special provisions 
and exemptions from various requirements provided to certain small 
creditors under the Bureau's rules.

DATES: Comments must be received on or before March 30, 2015.

ADDRESSES: You may submit comments, identified by Docket No. CFPB-2015-
0004 or RIN 3170-AA43, by any of the following methods:
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Email: [email protected]. Include CFPB-
2015-0004 AND/OR RIN 3170-AA43 in the subject line of the message.
     Mail: Monica Jackson, Office of the Executive Secretary, 
Consumer Financial Protection Bureau, 1700 G Street NW., Washington, DC 
20552.
     Hand Delivery/Courier: Monica Jackson, Office of the 
Executive Secretary, Consumer Financial Protection Bureau, 1275 First 
Street NE., Washington, DC 20002.
    Instructions: All submissions should include the agency name and 
docket number or Regulatory Information Number (RIN) for this 
rulemaking. Because paper mail in the Washington, DC area and at the 
Bureau is subject to delay, commenters are encouraged to submit 
comments electronically. In general, all comments received will be 
posted without change to http://www.regulations.gov. In addition, 
comments will be available for public inspection and copying at 1275 
First Street NE., Washington, DC 20002, 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: Amanda Quester, Senior Counsel, or 
Paul Ceja, Senior Counsel and Special Advisor, Office of Regulations, 
at (202) 435-7700.

SUPPLEMENTARY INFORMATION: 

I. Summary of the 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 has clarified and revised those rules over the past two years. 
The purpose of those updates was to address important questions raised 
by industry, consumer groups, or other stakeholders. The Bureau has 
also indicated that it would revisit the Bureau's regulatory 
definitions of small creditor and rural and underserved areas 
promulgated in those rules and related amendments through study and 
possibly through additional rulemaking. For example, in promulgating a 
temporary two-year transition period in which certain small creditors 
are permitted to make balloon-payment qualified mortgages in its May 
2013 ATR Final Rule, the Bureau stated that it would study, during that 
transition period, whether the rural and underserved definitions should 
be adjusted.\2\ Similarly, the Bureau solicited comments on the small 
creditor definition in a proposal amending other regulatory 
provisions.\3\
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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) (January 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). 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) 
and, jointly with other agencies, issued Appraisals for Higher-
Priced Mortgage Loans, 78 FR 10367 (Feb. 13, 2013) (January 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).
    \2\ May 2013 ATR Final Rule; see also Amendments to the 2013 
Mortgage Rules Under the Equal Credit Opportunity Act (Regulation 
B), Real Estate Settlement Procedures Act (Regulation X), and the 
Truth in Lending Act (Regulation Z), 78 FR 60382 (Oct. 1, 2013) 
(September 2013 Final Rule) (extending application of the temporary 
two-year transition period to high-cost mortgages).
    \3\ Amendments to the 2013 Mortgage Rules Under the Truth in 
Lending Act (Regulation Z), 79 FR 25730 (May 6, 2014).
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    The Bureau is now proposing several additional amendments to the 
2013 Title XIV Final Rules to revise Regulation Z regulatory provisions 
and official interpretations relating to escrow requirements for 
higher-priced mortgage loans under the Bureau's January 2013 Escrows 
Final Rule and ability-to-repay/qualified mortgage requirements under 
the Bureau's January 2013 ATR Final Rule and May 2013 ATR Final 
Rule.\4\ The Bureau's proposal would also affect requirements under the 
Bureau's 2013 HOEPA Final Rule.\5\ The Bureau's proposal reflects 
feedback from stakeholders regarding the Bureau's definitions of small 
creditor and rural and underserved areas, as those definitions relate 
to special provisions and certain exemptions to requirements provided 
to small creditors under the Bureau's aforementioned rules.
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    \4\ See also 2013 September Final Rule.
    \5\ The January 2013 Interagency Appraisals Final Rule provides 
an exemption from the requirement to obtain a second appraisal for 
certain higher-priced mortgage loans if the loan is secured by a 
property in a ``rural county.'' This proposed rule would not affect 
the scope of that exemption because it would not change the counties 
that are defined as ``rural'' under Sec.  1026.35(b)(2)(iv)(A).
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    Specifically, the Bureau proposes the following with regard to the 
definitions of small creditor and rural and underserved areas (as 
currently provided in Sec. Sec.  1026.35(b)(2)(iii)(A), (B), (C), and 
(D), and 1026.35(b)(2)(iv)(A) and (B) and commentary, and cross-
referenced in Sec. Sec.  1026.43(e)(5) and (e)(6), 1026.43(f)(1) and 
(f)(2) and commentary, and Sec.  1026.32(d)(1)(ii)(C)):
     Raising the loan origination limit for determining 
eligibility for small-creditor status (based on the preceding calendar 
year's originations of the creditor and its affiliates) from 500 
originations of covered transactions secured by a first lien, to 2,000 
such originations, and excluding originated loans held in portfolio by 
the creditor

[[Page 7771]]

and its affiliates from that limit. The Bureau also proposes to provide 
a grace period from calendar year to calendar year to allow a creditor 
that exceeded the origination limit in the preceding calendar year to 
operate, in certain circumstances, as a small creditor with respect to 
applications received prior to April 1 of the current calendar year.
     Including in the calculation of the asset limit for small-
creditor status (i.e., less than $2 billion (adjusted annually) in 
assets as of the end of the preceding calendar year) the assets of the 
creditor's affiliates that originate mortgage loans. The Bureau also 
proposes to add a grace period to the annual asset limit, similar to 
the grace period added to the origination limit, to allow a creditor 
that exceeded that threshold in the preceding calendar year to operate, 
in certain circumstances, as a small creditor with respect to 
applications received before April 1 of the current calendar year.
     Adjusting the time period used in determining whether a 
creditor is operating predominantly in rural or underserved areas 
(i.e., whether the creditor extended more than 50 percent of its total 
first-lien covered transactions secured by properties located in rural 
or underserved areas) from any of the three preceding calendar years to 
the preceding calendar year. As with the origination and asset limits 
for small-creditor status, the Bureau proposes to add a grace period to 
allow a creditor that fails to meet this threshold in the preceding 
calendar year, to continue operating, in certain circumstances, as if 
it had met this threshold with respect to applications received before 
April 1 of the current calendar year.
     Amending the current exemption under Sec.  
1026.35(b)(2)(iii)(D)(1) provided to small creditors that operate 
predominantly in rural or underserved areas from the requirement for 
the establishment of escrow accounts for higher-priced mortgage loans, 
to prevent creditors that are currently ineligible for the exemption, 
but that might qualify if the proposed rule is finalized, from losing 
eligibility for the exemption because they established escrow accounts 
due to requirements under the current rule prior to the proposed 
changes in this rulemaking taking effect.
     Expanding the definition of rural to include either: (1) A 
county that meets the current definition of rural county, or (2) a 
census block that is not in an urban area as defined by the U.S. Census 
Bureau (Census Bureau).
     Conforming, through technical changes, the definition of 
``underserved'' to the proposals discussed above. The substance of the 
``underserved'' definition would remain the same.
     Adding two new safe harbor provisions related to the rural 
or underserved definition for certain automated tools that: (1) May be 
provided on the Bureau's Web site to allow creditors to determine 
whether properties are located in rural or underserved areas, or (2) 
may be provided on the Census Bureau's Web site to assess whether a 
particular property is located in an urban area according to the Census 
Bureau's definition. The Bureau also proposes to maintain the current 
safe harbor for lists of rural and underserved counties provided by the 
Bureau, with technical changes. The Bureau also proposes to add 
commentary clarifying the circumstances under which U.S. territories 
will be included on the lists.
     Extending the temporary two-year transition period that 
allows certain small creditors to make balloon-payment qualified 
mortgages (Sec.  1026.43(e)(6)) and balloon-payment high-cost mortgages 
(Sec.  1026.32(d)(1)(ii)(C)), regardless of whether they operate 
predominantly in rural or underserved areas to certain covered 
transactions for which the application was received before April 1, 
2016.

II. Background

    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, in 
the Bureau.\6\ 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.\7\
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    \6\ 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).
    \7\ 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.).
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    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.\8\ To avoid uncertainty and 
potential disruption in the national mortgage market at a time of 
economic vulnerability, the Bureau issued several final rules (the 2013 
Title XIV 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. These final rules include the January 2013 ATR Final Rule, 
the January 2013 Escrows Final Rule, the 2013 HOEPA Final Rule, and the 
January 2013 Interagency Appraisals Final Rule. Most of the mortgage 
rules released in January 2013 became effective on January 10, 2014.
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    \8\ See section 1400(c) of the Dodd-Frank Act, 15 U.S.C. 1601 
note.
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    Concurrent with the January 2013 ATR Final Rule, on January 10, 
2013, the Bureau issued the January 2013 ATR Proposal, which the Bureau 
adopted on May 29, 2013 in the May 2013 ATR Final Rule.\9\ The Bureau 
has issued additional corrections, revisions, and clarifications to the 
provisions adopted by the Bureau in the 2013 Title XIV Final Rules and 
the May 2013 ATR Final Rule over the past two years.\10\ This proposal 
concerns additional

[[Page 7772]]

revisions to the 2013 Title XIV Final Rules related to provisions 
regarding small creditors and rural and underserved areas.
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    \9\ 78 FR 6621 (Jan. 30, 2013); 78 FR 35429 (June 12, 2013) 
(providing a two-year transition period during which small creditors 
that do not operate predominantly in rural or underserved areas can 
offer balloon-payment qualified mortgages if they hold the loans in 
portfolio). In May 2013, the Bureau also finalized amendments to the 
January 2013 Escrows Final Rule. Amendments to the 2013 Escrows 
Final Rule under the Truth in Lending Act (Regulation Z), 78 FR 
30739 (May 23, 2013) (May 2013 Escrows Final Rule).
    \10\ See, e.g., 78 FR 44685 (July 24, 2013) (clarifying, among 
other things, 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 60382 (Oct. 1, 
2013) (revising, among other things, two exceptions available to 
small creditors operating predominantly in ``rural'' or 
``underserved'' areas, pending the Bureau's reexamination of the 
underlying definitions); 78 FR 62993 (Oct. 23, 2013) (clarifying the 
specific disclosures that must be provided before counseling for 
high cost mortgages can occur and proper compliance regarding 
servicing requirements when a consumer is in bankruptcy or sends a 
cease communication request under the Fair Debt Collection Practice 
Act). In the fall of 2014, the Bureau also made further amendments 
to the 2013 mortgage rules related to nonprofit entities and 
provided a cure mechanism for the points and fees limit that applies 
to qualified mortgages. 79 FR 65300 (Nov. 3, 2014).
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III. Legal Authority

    The Bureau is issuing this proposed rule pursuant to its authority 
under TILA and the Dodd-Frank Act. Section 1061 of the Dodd-Frank Act 
transferred to the Bureau the ``consumer financial protection 
functions'' previously vested in certain other Federal agencies, 
including the 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.'' \11\ Title X of the Dodd-Frank Act, including 
section 1061 of the Dodd-Frank Act, along with TILA and certain 
subtitles and provisions of title XIV of the Dodd-Frank Act, are 
Federal consumer financial laws.\12\
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    \11\ Dodd-Frank Act section 1061(a)(1)(A), 12 U.S.C. 
5581(a)(1)(A).
    \12\ 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).
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A. TILA-Specific Statutory Grants of Authority

    As discussed in more detail in the section-by-section analysis 
below, TILA as amended by the Dodd-Frank Act provides two specific 
statutory bases for the proposals in the Bureau's proposed rule. TILA 
section 129D(c) authorizes the Bureau to exempt, by regulation, a 
creditor from the requirement (in section 129D(a)) that escrow accounts 
be established for higher-priced mortgage loans if the creditor 
operates predominantly in rural or underserved areas, retains its 
mortgage loans in portfolio, does not exceed (together with all 
affiliates) a total annual mortgage loan origination limit set by the 
Bureau, and meets any asset size threshold, and any other criteria, the 
Bureau may establish. TILA section 129C(b)(2)(E) authorizes the Bureau 
to provide, by regulation, that certain balloon-payment mortgages 
originated by small creditors 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)(iv) are essentially the same as those for the 
higher-priced mortgage loan escrow exemption, including operating 
predominantly in rural or underserved areas, together with all 
affiliates not exceeding a total annual mortgage loan origination limit 
set by the Bureau, retaining the balloon-payment loans in portfolio, 
and meeting any asset size threshold, and any other criteria, the 
Bureau may establish.

B. Other Rulemaking and Exception Authority

    This proposed rule also relies on other rulemaking and exception 
authorities specifically granted to the Bureau by TILA and the Dodd-
Frank Act, including the authorities discussed below.
Truth in Lending Act
    As amended by the Dodd-Frank Act, 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, or abusive. 15 
U.S.C. 1639b(a)(2).
    Historically, TILA section 105(a) has served as a broad source of 
authority for rules that promote the informed use of credit through 
required disclosures and substantive regulation of certain practices. 
Dodd-Frank Act section 1100A clarified the Bureau's section 105(a) 
authority by amending that section to provide express authority to 
prescribe regulations that contain ``additional requirements'' that the 
Bureau finds are necessary or proper to effectuate the purposes of 
TILA, to prevent circumvention or evasion thereof, or to facilitate 
compliance therewith. This amendment clarified the Bureau's authority 
to exercise TILA section 105(a) to prescribe requirements beyond those 
specifically listed in the statute that meet the standards outlined in 
section 105(a), which include effectuating all of TILA's purposes. 
Therefore, the Bureau believes that its authority under TILA section 
105(a) to make exceptions, adjustments, and additional provisions that 
the Bureau finds are necessary or proper to effectuate the purposes of 
TILA applies with respect to the purpose of section 129D. That purpose 
is to ensure that consumers understand and appreciate the full cost of 
homeownership. The purpose of TILA section 129D is also informed by the 
findings articulated in section 129B(a) that economic stabilization 
would be enhanced by the protection, limitation, and regulation of the 
terms of residential mortgage credit and the practices related to such 
credit, while ensuring that responsible and affordable mortgage credit 
remains available to consumers. See 15 U.S.C. 1639b(a).
    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; are 
necessary and appropriate to effectuate the purposes of the ability-to-
repay and residential mortgage loan origination requirements; prevent 
circumvention or evasion thereof; or 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).
    TILA section 105(a) grants the Bureau authority to make adjustments 
and exceptions to the requirements of TILA for all transactions subject 
to TILA, except with respect to the substantive provisions of TILA 
section 129 that apply to high-cost mortgages. With respect to the 
high-cost mortgage provisions of TILA section 129, TILA section 129(p), 
15 U.S.C. 1639(p), as amended by the Dodd-Frank Act, grants the Bureau 
authority to create exemptions to the restrictions on high-cost 
mortgages and to expand the protections that apply to high-cost 
mortgages. Under TILA section 129(p)(1), the Bureau may exempt

[[Page 7773]]

specific mortgage products or categories from any or all of the 
prohibitions specified in TILA section 129(c) through (i), if the 
Bureau finds that the exemption is in the interest of the borrowing 
public and will apply only to products that maintain and strengthen 
homeownership and equity protections. Among these referenced provisions 
of TILA is section 129(e), the prohibition on balloon payments for 
high-cost mortgages.

C. The Dodd-Frank Act

    Section 1022(b)(1) of the Dodd-Frank Act authorizes the Bureau to 
prescribe rules ``as may be necessary or appropriate to enable the 
Bureau to administer and carry out the purposes and objectives of the 
Federal consumer financial laws, and to prevent evasions thereof.'' 12 
U.S.C. 5512(b)(1). TILA and title X and certain enumerated subtitles 
and provisions of title XIV of the Dodd-Frank Act are Federal consumer 
financial laws. 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, 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.

IV. Proposed Effective Date

    The Bureau proposes that all of the changes proposed in this notice 
take effect on January 1, 2016. Specifically, the Bureau's proposed 
amendments to Sec.  1026.35(b)(2)(iii)(A), (B), (C), and (D) and its 
commentary, to Sec.  1026.35(b)(2)(iv)(A), (B), and (C) and its 
commentary, to Sec.  1026.43(e)(6), and to the commentary to Sec. Sec.  
1026.43(e)(5) and 1026.43(f)(1) and (f)(2), take effect for covered 
transactions consummated on or after January 1, 2016. The Bureau 
believes this proposed effective date provides a date that is 
consistent with the end of the calendar year determinations required to 
be made with regard to the applicability of the special provisions and 
exemptions that apply to small creditors under the Bureau's 
regulations, as would be amended by the Bureau's proposal, and would 
therefore facilitate compliance by creditors. 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 of the Proposed Rule

Section 1026.35 Requirements for Higher-Priced Mortgage Loans

35(b) Escrow Accounts
35(b)(2) Exemptions
35(b)(2)(iii)
    Except as provided in Sec.  1026.35(b)(2)(v), Sec.  
1026.35(b)(2)(iii) provides that an escrow account need not be 
established for a transaction if four conditions identified in Sec.  
1026.35(b)(2)(iii)(A) through (D) are satisfied at the time of 
consummation. The Bureau proposes to make amendments to all of these 
conditions, as discussed below. As discussed in more detail above, the 
Bureau's authority to make these revisions rests in TILA as amended by 
the Dodd-Frank Act, and the Bureau believes the revisions carry out the 
Dodd-Frank Act's intent to treat certain small creditors differently 
than larger creditors. These proposed changes affect the eligibility of 
creditors for exemption from the higher-priced mortgage loan escrow 
requirements in the Bureau's January 2013 Escrows Final Rule. Because 
the requirements of Sec.  1026.35(b)(2)(iii) are cross-referenced in 
the Bureau's January 2013 ATR Final Rule and its 2013 HOEPA Final Rule, 
the proposed changes also affect eligibility for certain special 
provisions and exemptions provided in those rules. These special 
provisions and exemptions, in effect, facilitate the ability of certain 
small creditors that operate in rural and underserved areas, as well as 
certain small creditors that operate in areas that are neither rural 
nor underserved, to originate mortgage loans. As discussed in the 
section-by-section analysis of Sec.  1026.35(b)(2)(iii)(B) below, the 
special provisions and exemptions consequently help provide better 
access to credit for consumers served by those small creditors.
35(b)(2)(iii)(A)
Background--``Rural'' or ``Underserved'' Designation
    The Dodd-Frank Act amendments to TILA set forth two special 
provisions for small creditors operating predominantly in ``rural'' or 
``underserved'' areas, without defining those terms. TILA section 129D, 
as added and amended by Dodd-Frank Act sections 1461 and 1462 and 
implemented by Sec.  1026.35(b), generally requires that creditors 
establish escrow accounts for higher-priced mortgage loans secured by a 
first lien on a consumer's principal dwelling, but the statute also 
authorizes the Bureau to exempt from this requirement a creditor that, 
among other criteria, ``operates predominantly in rural or underserved 
areas.'' TILA section 129D(c)(1), 15 U.S.C. 1639d(c)(1). Similarly, the 
ability-to-repay provisions in Dodd-Frank Act section 1412 allow 
balloon-payment mortgages to be considered qualified mortgages if, 
among other criteria, the balloon-payment mortgages are originated and 
held in portfolio by certain creditors that operate predominantly in 
rural or underserved areas. TILA section 129C(b)(2)(E), 15 U.S.C. 
1639c(b)(2)(E).
    In the January 2013 Escrows Final Rule and the January 2013 ATR 
Final Rule, the Bureau implemented the section 1461 higher-priced 
mortgage loan escrows requirement and the section 1412 balloon-payment 
qualified mortgage provision through Sec. Sec.  1026.35(b)(2)(iii) and 
1026.43(f), respectively. In addition, as part of the 2013 HOEPA Final 
Rule, the Bureau adopted in Sec.  1026.32(d)(1)(ii)(C) an exemption to 
the general prohibition of balloon payments for high-cost mortgages 
when those mortgages meet the criteria for balloon-payment qualified 
mortgages set forth in Sec.  1026.43(f). The Bureau, the Board, the 
Federal Deposit Insurance Corporation, the Federal Housing Finance 
Agency, the National Credit Union Administration, and the Office of the 
Comptroller of the Currency also adopted an exemption from a 
requirement to obtain a second appraisal for certain higher-priced 
mortgage loans under the January 2013 Interagency Appraisals Final Rule 
for any credit transaction that finances a consumer's acquisition of 
property ``[l]ocated in a rural county, as defined in 12 CFR 
1026.35(b)(2)(iv)(A).'' See, e.g., Sec.  1026.35(c)(4)(vii)(H).
    Through the January 2013 Escrows Final Rule, the Bureau adopted 
Sec.  1026.35(b)(2)(iv)(A) and (B) to define which counties are 
``rural'' and ``underserved'' respectively for the purposes of the 
Bureau's rules discussed above. The January 2013 Escrows Final Rule 
also provided comment 35(b)(2)(iv)-1 to clarify the criteria for 
``rural'' and ``underserved'' counties and provided that the Bureau 
will annually update on its public Web site a list of counties that 
meet the definitions of rural and underserved in Sec.  
1026.35(b)(2)(iv). 78 FR 4725, 4741 (Jan. 22, 2013). In advance of the 
rule's effective date, the Bureau amended Sec.  1026.35(b)(2)(iv) and 
comment 35(b)(2)(iv)-1 to clarify further how to determine whether a 
county is rural or

[[Page 7774]]

underserved for the purposes of these provisions.\13\
---------------------------------------------------------------------------

    \13\ May 2013 Escrows Final Rule.
---------------------------------------------------------------------------

    Since publication of the 2013 Title XIV Final Rules, the Bureau has 
received extensive feedback on the definitions of ``rural'' and 
``underserved'' that it adopted for purposes of the 2013 Title XIV 
Final Rule provisions described above. Many commenters criticized the 
Bureau for defining ``rural'' and ``underserved'' too narrowly and 
urged the Bureau to consider alternative definitions. Commenters were 
particularly critical of the Bureau's definition of ``rural,'' which 
they asserted excluded many communities that are considered rural under 
other legal or regulatory definitions or that are commonly viewed as 
rural because of their small size or isolated or agricultural 
characteristics.
    In light of the feedback received, the Bureau added Sec.  
1026.43(e)(6) in the May 2013 ATR Final Rule to allow small creditors 
during the period from January 10, 2014, to January 10, 2016, to make 
balloon-payment qualified mortgages even if they do not operate 
predominantly in rural or underserved areas.\14\ Section 1026.43(e)(6) 
applies only to loans consummated on or before January 10, 2016, two 
years after the effective date of the January 2013 ATR Final Rule. The 
Bureau announced that it would reexamine the ``rural'' and 
``underserved'' definitions during this period to determine whether 
further adjustments were appropriate. The Bureau also indicated that it 
would explore how it can best facilitate the transition of small 
creditors that do not operate predominantly in rural or underserved 
areas from balloon-payment loans to adjustable-rate mortgages as 
Congress intended under the Dodd-Frank Act. 78 FR 35430, 35489 (June 
12, 2013).
---------------------------------------------------------------------------

    \14\ Section 1026.43(e)(6) requires that all of the same 
criteria be satisfied as the balloon-payment qualified mortgage 
definition in Sec.  1026.43(f) except the requirement that the 
creditor extend more than 50 percent of its total first-lien covered 
transactions in counties that are ``rural'' or ``underserved.'' 78 
FR 35430, 35489-90 (June 12, 2013).
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    The Bureau subsequently proposed revisions to Sec.  
1026.32(d)(1)(ii)(C) to allow small creditors to carry over the 
flexibility provided by the May 2013 ATR Final Rule into the HOEPA 
balloon-loan provisions.\15\ In the September 2013 Final Rule, the 
Bureau extended the exception to the general prohibition on balloon 
features for high-cost mortgages under Sec.  1026.32(d)(1)(ii)(C) to 
allow small creditors, regardless of whether they operate predominantly 
in ``rural'' or ``underserved'' areas, to continue originating balloon 
high-cost mortgages if the loans meet the requirements for qualified 
mortgages under Sec. Sec.  1026.43(e)(6) or 1026.43(f). 78 FR 60382, 
60414 (Oct. 1, 2013).
---------------------------------------------------------------------------

    \15\ Amendments to the 2013 Mortgage Rules Under the Equal 
Credit Opportunity Act (Regulation B), Real Estate Settlement 
Procedures Act (Regulation X), and the Truth in Lending Act 
(Regulation Z), 78 FR 39902, 39903 (July 2, 2013).
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    During the definitional review period leading up to January 10, 
2016, the Bureau also sought to minimize volatility in the exemption 
provided by Sec.  1026.35(b)(2)(iii) to the general requirement that 
creditors establish an escrow account for first-lien higher-priced 
mortgage loans. The first year-to-year transition under the ``rural'' 
definition for purposes of this exemption coincided with the decennial 
redesignation of Urban Influence Codes (UIC) assigned to counties by 
the United States Department of Agriculture's Economic Research Service 
(USDA-ERS) following the 2010 census, which determine which counties 
are considered ``rural'' in a particular year under the Bureau's 
current definition. As a result, there was a potential that a 
significant number of otherwise eligible creditors during 2013 would 
lose their eligibility for the escrow exemption for 2014 if an 
adjustment was not made to stabilize the exemption during the 
definitional review period.\16\
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    \16\ Because of updated information from the 2010 Census, 
numerous counties' status under the Bureau's definition changed 
between 2013 and 2014, with a small number of new counties meeting 
the definition of ``rural'' and approximately 82 counties no longer 
meeting that definition. In proposing revisions to Sec.  1026.35(b) 
and its commentary, the Bureau estimated that approximately 200-300 
otherwise eligible creditors during 2013 might lose their 
eligibility for 2014 solely because of changes in the status of the 
counties in which they operate (assuming the geographical 
distribution of their mortgage originations did not change 
significantly over the relevant period). Setpember 2013 Final Rule, 
78 FR 60382 at 60415-16.
---------------------------------------------------------------------------

    To reduce volatility in the escrow exemption as the definitions are 
being reevaluated, the Bureau revised Sec.  1026.35(b)(2)(iii) and its 
commentary to allow creditors to meet the condition in Sec.  
1026.35(b)(2)(iii)(A) for a particular calendar year based on loans 
made in ``rural'' or ``underserved'' counties in any of the three 
preceding calendar years. In instituting this three-year lookback 
period, the Bureau noted that the revisions to Sec.  
1026.35(b)(2)(iii)(A) would loosely approximate the two-year extension 
of the balloon special provision for qualified mortgages under Sec.  
1026.43(e)(6) and the two-year extension of the HOEPA balloon exemption 
under revised Sec.  1026.32(d)(1)(ii)(C). 78 FR 60382, 60415-16 (Oct. 
1, 2013). To satisfy the first of the four conditions in Sec.  
1026.35(b)(2)(iii) for exemption from the escrow requirement, Sec.  
1026.35(b)(2)(iii)(A) thus currently requires that during any of the 
three preceding calendar years, the creditor extended more than 50 
percent of its total first-lien covered transactions, as defined by 
Sec.  1026.43(b)(1),\17\ on properties that are located in counties 
that are either ``rural'' or ``underserved,'' as set forth in paragraph 
(b)(2)(iv) of the section (the ``more than 50 percent'' test).
---------------------------------------------------------------------------

    \17\ ``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).
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Bureau Proposal
    In advance of the sunset date for Sec.  1026.43(e)(6), the Bureau 
proposes to amend Sec.  1026.35(b)(2)(iii)(A) and comment 
35(b)(2)(iii)-1 to adjust the time period used in assessing whether the 
rural or underserved test is met. The Bureau proposes to eliminate the 
three-year lookback period in Sec.  1026.35(b)(2)(iii)(A) and to 
establish the preceding calendar year as the relevant time period for 
assessing whether the ``more than 50 percent'' test is satisfied as a 
general matter. The Bureau's proposal also creates a grace period to 
allow otherwise eligible creditors whose first-lien covered 
transactions in the preceding year failed to meet the ``more than 50 
percent'' test to continue to operate with the benefit of the exemption 
with respect to applications received before April 1 of the current 
calendar year if their first-lien covered transactions during the next-
to-last calendar year met the test.
    Proposed Sec.  1026.35(b)(2)(iii)(A) also substitutes the word 
``areas'' for ``counties'' to conform to proposed changes to the 
``rural'' definition in Sec.  1026.35(b)(2)(iv)(A) that are discussed 
below.
    As explained above, the Bureau adopted the three-year lookback 
period in Sec.  1026.35(b)(2)(iii)(A) to minimize any negative impact 
on creditors from volatility in the ``rural'' and ``underserved'' 
definitions during the period in which the Bureau is reconsidering the 
definitions. As originally adopted in the January 2013 Escrows Final 
Rule, Sec.  1026.35(b)(2)(iii)(A) considered only the preceding year. 
The Bureau instituted the three-year lookback period to stabilize the 
escrow exemption during the period from 2013 to 2015 while the 
definitions were under

[[Page 7775]]

review. 78 FR 60382, 60416 (Oct. 1, 2013). This change guaranteed 
eligibility (for a creditor that was eligible during 2013 with respect 
to operating predominantly in rural or underserved areas, and met the 
other applicable criteria) through 2015. Stability in this specific 
period was a particular concern because during the definitional review 
the first year-to-year transition in the ``rural'' definition for 
purposes of this exemption was to coincide with the shift in USDA-ERS 
county UIC designations that occur once every decade.
    Once the definitional review period ends, the Bureau does not 
believe that it would advance the overall purposes of the special 
provisions and exemptions to allow creditors to continue utilizing them 
for up to three years after their activity stops meeting the applicable 
test. Using a three-year lookback period on a permanent basis would 
allow creditors to maintain eligibility even if their first-lien 
covered transactions do not meet the ``more than 50 percent'' test in 
most calendar years, which seems contrary to the goal of identifying 
creditors that focus their activity in rural or underserved areas.
    Although the three-year lookback period allows creditors to 
anticipate whether they will be eligible for the exemption at least two 
years into the future, the Bureau does not believe that such extended 
notice will be necessary once the proposed revisions to the definitions 
are finalized. As explained in the section-by-section analysis of 
proposed Sec.  1026.35(b)(2)(iv)(A) below, the areas that are rural 
under the proposed definition would only change once or twice a 
decade.\18\ While the counties defined as underserved could change each 
year, such shifts are unlikely to affect many creditors' eligibility 
for the special provisions and exemptions because there are very few 
counties that would be underserved but not rural under the Bureau's 
proposed definitions. The Bureau therefore believes that creditors that 
meet the ``more than 50 percent'' test in a typical calendar year are 
unlikely to fail to meet the test in the next calendar year unless 
their geographic service area and offerings change substantially.
---------------------------------------------------------------------------

    \18\ As noted in the discussion of comment 35(b)(2)(iv)-2 below, 
the Census Bureau released its list of urban areas based on the 2010 
decennial census in 2012, and the USDA-ERS released its UIC 
designations based on the 2010 decennial census in 2013. If the 
USDA-ERS continues to incorporate decennial census results into its 
UIC county designations in a different year than the Census Bureau 
finalizes its rural-urban classification, as in 2012 and 2013, the 
effects of each decennial census would be incorporated into the 
Bureau's proposed ``rural'' definition over the course of two years, 
which would afford additional transition time to some of the 
creditors affected by the changes.
---------------------------------------------------------------------------

    Furthermore, creditors can monitor the first-lien covered 
transactions that they originate throughout the year and should 
generally be able to anticipate any change in their eligibility well 
before the end of the year. Any changes that would be made in the rural 
definition after each decennial census is completed would be based on 
demographic shifts that have unfolded over the preceding decade (which 
may, in many instances, be evident to creditors serving those areas) 
and would be announced well before they become effective, allowing time 
for creditors to assess their status and make appropriate transitions. 
Once the definitional review is completed, the Bureau therefore 
believes that the preceding calendar year will be the appropriate time 
period to utilize as a general rule in assessing whether the ``more 
than 50 percent'' test is met.
    Notwithstanding these considerations, a creditor could find out on 
or close to December 31st that it was not operating predominantly in 
rural or underserved areas during that calendar year. Such a creditor 
might have difficulty transitioning from balloon-payment loans to 
adjustable-rate mortgages and complying with the higher-priced mortgage 
loan escrow requirements by January 1 if eligibility for the special 
provisions and exemptions is based solely on transactions in the 
preceding calendar year. The Bureau therefore proposes a grace period 
that allows a creditor making a higher-priced mortgage loan based on an 
application received before April 1 to rely on its transactions from 
either the preceding calendar year or the next-to-last calendar year to 
meet the condition in Sec.  1026.35(b)(2)(iii)(A).
    Under the proposal, a creditor that is otherwise eligible and that 
met the ``more than 50 percent'' test in calendar year one but fails to 
meet it in calendar year two remains eligible with respect to 
applications received before April 1 of calendar year three. The Bureau 
believes that a short grace period of this nature would facilitate the 
transition of creditors that no longer operate predominantly in rural 
or underserved areas and would properly balance the importance of the 
substantive consumer protections provided by the higher-priced mortgage 
loan escrows requirement, the ability-to-repay requirement, and HOEPA 
(for high-cost mortgages) with concerns that have been raised regarding 
their potential impact on access to credit.
    The Bureau also proposes conforming and technical changes to the 
rule and commentary. Because the Bureau proposes to revise the 
``rural'' definition in Sec.  1026.35(b)(2)(iv)(A) to encompass certain 
areas that are not counties, the Bureau also proposes to substitute the 
word ``areas'' for ``counties'' in Sec.  1026.35(b)(2)(iii)(A) where it 
appears.
    Proposed comment 35(b)(2)(iii)-1.i incorporates changes that align 
with the changes that the Bureau proposes to the regulation text in 
Sec. Sec.  1026.35(b)(2)(iii)(A) and 1026.35(b)(2)(iv)(A). The Bureau 
also proposes to remove from comment 35(b)(2)(iii)-1.i all discussion 
of the lists that the Bureau publishes of ``rural'' or ``underserved'' 
counties pursuant to Sec.  1026.35(b)(2)(iv), in order to centralize 
updated commentary regarding such lists in proposed comment 
35(b)(2)(iv)-1.iii.
    The Bureau proposes a new comment 35(b)(2)(iii)-1.i.A that explains 
the relevant time period to use in assessing whether the ``more than 50 
percent'' test in proposed Sec.  1026.35(b)(2)(iii)(A) is met. As the 
proposed comment explains, whether this condition is satisfied 
generally depends on the creditor's activity during the preceding 
calendar year. However, if the application for the loan in question was 
received before April 1, the creditor may instead meet this condition 
based on its activity during the next-to-last calendar year.
    Proposed comment 35(b)(2)(iii)-1.i.B explains further how the test 
works. It states that a creditor meets the ``more than 50 percent'' 
test for any higher-priced mortgage loan consummated during the 
calendar year if a majority of its first-lien covered transactions in 
the preceding calendar year are secured by properties located in rural 
or underserved areas. The proposed comment further explains that, if 
the creditor's transactions in the preceding calendar year do not meet 
the ``more than 50 percent'' test, the creditor meets this condition 
for a higher-priced mortgage loan that is consummated during the 
current calendar year only if the application for the loan was received 
before April 1 and a majority of the creditor's first-lien covered 
transactions during the next-to-last calendar year are secured by 
properties located in rural or underserved areas. Proposed comment 
35(b)(2)(iii)-1.i.B also provides illustrative examples to replace the 
example that currently appears in comment 35(b)(2)(iii)-1.i.
    The Bureau invites comment on whether it should eliminate the 
three-year lookback period as proposed and whether it is appropriate to 
rely on the preceding calendar year in determining as a general matter 
whether the ``more than 50 percent'' test is met. The Bureau

[[Page 7776]]

also seeks feedback on whether it should provide a grace period to 
creditors that meet this test in one calendar year but fail to do so in 
the next calendar year and, if so, whether such a grace period should 
apply to all applications received before April 1 as proposed.
35(b)(2)(iii)(B)
    The Bureau proposes to revise the loan origination limit in Sec.  
1026.35(b)(2)(iii)(B). Section 1026.35(b)(2)(iii)(B) limits eligibility 
for the special provisions and exemptions to creditors that, together 
with their affiliates, in the preceding calendar year originated 500 or 
fewer covered transactions, as defined by Sec.  1026.43(b)(1), secured 
by a first lien (origination limit). Section 1026.35(b)(2)(iii)(C) also 
requires such creditors to have less than $2 billion in assets (or 
other current yearly adjusted limit) at the end of the preceding 
calendar year (asset limit). The Bureau proposes to raise the 
origination limit from 500 loans to 2,000 loans, and to apply the limit 
only to loans not held in portfolio by the creditor or its affiliates. 
That is, under the proposal, the origination limit only applies to 
loans that were sold, assigned, or otherwise transferred by the 
creditor or its affiliates to another person, or subject at the time of 
consummation to a commitment to be acquired by another person. The 
Bureau's proposal also adds a ``grace period'' from calendar year to 
calendar year to allow an otherwise eligible creditor that exceeded the 
origination limit in the preceding calendar year to continue to operate 
as a small creditor with respect to applications received before April 
1 of the current calendar year--with the benefit of the special 
provisions and exemptions--as if it had not exceeded the origination 
limit in the preceding year.
Background
    The special provisions and exemptions for small creditors included 
in the 2013 Title XIV Final Rules and related amendments (discussed in 
more detail below) are principally based on TILA sections 129D(c) and 
129C(b)(2)(E), as adopted by sections 1461 and 1412, respectively, of 
the Dodd-Frank Act. TILA section 129D(c) authorizes the Bureau to 
exempt a creditor from the requirement (in section 129D(a)) that escrow 
accounts be established for higher-priced mortgage loans if the 
creditor operates predominantly in rural or underserved areas, retains 
its mortgage loans in portfolio, does not exceed (together with its 
affiliates) a total annual mortgage loan origination limit set by the 
Bureau, and meets any asset size threshold, and any other criteria the 
Bureau may establish, consistent with the purposes of TILA. TILA 
section 129C(b)(2)(E) permits certain balloon-payment mortgages to 
receive qualified mortgage status if they are originated by small 
creditors that, among other things, operate predominantly in rural or 
underserved areas, even though qualified mortgages are otherwise 
prohibited from having balloon-payment features.
    The creditor qualifications under TILA section 129C(b)(2)(E) 
essentially mirror the criteria for the higher-priced mortgage loan 
escrow exemption, including (together with all affiliates) not 
exceeding a total annual mortgage loan origination limit set by the 
Bureau, retaining the balloon-payment loans in portfolio, meeting any 
asset size threshold, and any other criteria, the Bureau may establish, 
consistent with the purposes of TILA.
    Both of these statutory provisions therefore provide that in order 
for a creditor to qualify as a ``small creditor'' for the exemptions 
from and special provisions related to the respective escrow and 
qualified mortgage requirements the following criteria must be met: (1) 
Together with all affiliates, does not exceed a total annual loan 
origination limit to be set by the Bureau; (2) a requirement that the 
originated loans be retained in portfolio (for TILA section 
129C(b)(2)(E) this requirement applies only to the creditor's 
originated balloon loans); and (3) any asset size threshold that the 
Bureau may establish. The statute requires the Bureau to set an annual 
loan origination limit--but provides the Bureau with some flexibility 
in establishing that limit. The statute authorizes, but does not 
require, the Bureau to establish an asset size threshold. The Bureau 
has established an asset limit to determine small-creditor status.
Board Proposal
    Prior to the transfer by the Dodd-Frank Act of rulemaking authority 
for these statutory provisions to the Bureau, the Board issued 
proposals implementing TILA sections 129D(c) and 129C(b)(2)(E). With 
regard to 129D(c), providing 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.\19\ In 
issuing this proposal, the Board stated that it sought to limit the 
exemption to creditors that maintain servicing portfolios too small to 
escrow cost effectively. 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 
approximately five years. The Board believed therefore 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 lookback period--providing that the test would be 
satisfied as long as the creditor's (and its affiliates') servicing-
retained originations did not exceed 100 during either of the preceding 
two calendar years. 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.
---------------------------------------------------------------------------

    \19\ 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.
---------------------------------------------------------------------------

    The Board, with regard to the balloon-payment qualified mortgage 
definition to implement TILA section 129C(b)(2)(E), proposed two 
alternative annual origination limits and an asset-size limit of $2 
billion.\20\ The Board interpreted the qualified mortgage provision as 
designed to facilitate access to credit in areas where consumers may be 
able to obtain credit only from community banks offering balloon-
payment mortgages. Under alternative 1, the creditor, together with all 
affiliates, extended covered transactions of some dollar amount or less 
during the preceding calendar year; 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 origination limit in connection with TILA 
section 129C(b)(2)(E), but the Board sought comment on the issue--for 
example, whether the threshold should be 100 loans per year or 
something greater or something less, or whether the threshold should be 
$100 million in aggregate covered-transaction loan

[[Page 7777]]

amounts per year, or something greater or something less.
---------------------------------------------------------------------------

    \20\ 76 FR 27390 (May 11, 2011).
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Bureau Rulemaking
    Prior to the Board finalizing the above-described proposals, 
rulemaking authority to implement these sections of TILA passed to the 
Bureau in July 2011. The Bureau considered the Board's proposals and 
public comment before finalizing those rules,\21\ as part of its 
rulemakings implementing title XIV of the Dodd-Frank Act, in January 
2013.\22\ In coming to a determination on the appropriate small 
creditor thresholds, the Bureau stated its belief that TILA section 
129D(c)(2) reflects a recognition that larger creditors have the 
systems capability and operational scale to establish cost-efficient 
escrow accounts.\23\ In addition, the Bureau stated its belief that 
TILA section 129C(b)(2)(E)(iv)(II) reflects a recognition that larger 
creditors that operate in rural or underserved areas should be able to 
make credit available without resorting to balloon-payment 
mortgages.\24\
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    \21\ The Bureau also conducted further analysis to try to 
determine the most appropriate thresholds, although it was 
significantly constrained by data limitations with regard to 
mortgage originations in rural areas generally and in particular 
with regard to originations of balloon-payment mortgages. See 
January 2013 ATR Final Rule, 78 FR 6407, 6545.
    \22\ January 2013 Escrows Final Rule; January 2013 ATR Final 
Rule; 2013 HOEPA Final Rule.
    \23\ 78 FR 4726, 4737 (Jan. 22, 2013).
    \24\ Id.
---------------------------------------------------------------------------

    The Bureau, after further analysis to determine the appropriate 
thresholds, adopted an annual origination limit of 500 first-lien 
covered transactions in the preceding calendar year and an asset-size 
limit of $2 billion, adjusted annually for inflation (Sec.  
1026.35(b)(2)(iii)(B) and (C)). Specifically, the origination limit in 
Sec.  1026.35 (b)(2)(iii)(B) provides that, during the preceding 
calendar year, creditors, together with their affiliates, must have 
originated 500 or fewer covered transactions, as defined by Sec.  
1026.43(b)(1), secured by a first lien. The asset limit in Sec.  
1026.35(b)(2)(iii)(C) requires creditors to have had less than $2 
billion in assets (or other current yearly adjusted threshold) at the 
end of the preceding calendar year.
    The Bureau believed that it would be preferable to use the same 
annual originations and asset-size limits 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.\25\ The Bureau noted that both provisions are focused in a 
broad sense on accommodating creditors whose systems constraints might 
otherwise cause them to exit the market.\26\
---------------------------------------------------------------------------

    \25\ Id.
    \26\ Id.
---------------------------------------------------------------------------

    The Bureau adopted a threshold of 500 or fewer annual originations 
of first-lien transactions to provide greater 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.\27\ The Bureau 
believed that an origination limit was the most accurate means of 
confining the special provisions to the class of small creditors with a 
business model the Bureau believed would best facilitate consumers' 
access to responsible, affordable credit, i.e., creditors that focus 
primarily on a relationship-lending model. 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 that lack the scale to make compliance 
less burdensome.
---------------------------------------------------------------------------

    \27\ The preamble to the January 2013 Escrows Final Rule noted 
that the increased threshold was not as limiting as it might first 
appear 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 origination threshold in combination with the other 
requirements would still ensure that the balloon-payment qualified 
mortgage special provisions and escrow exemptions are available only 
to small creditors that focus primarily on a relationship lending 
model and face significant systems constraints. Id.
---------------------------------------------------------------------------

    Based on publicly available Home Mortgage Disclosure Act (HMDA) and 
Call Report data, the Bureau estimated 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.\28\
---------------------------------------------------------------------------

    \28\ In a later rulemaking, extending the same 500 first-lien 
origination threshold (as well as the $ 2 billion asset threshold) 
to a new category of qualified mortgages originated by small 
creditors (Sec.  1026.43(e)(5)) the Bureau stated in support of the 
threshold it was adopting that as the size of an institution 
increases it is expected that the scale of its lending business will 
increase as well. In addition, the Bureau noted that as the scale of 
a creditor's lending business increases, the likelihood that the 
institution is engaged in relationship-based lending and employing 
qualitative or local knowledge in its underwriting decreases. May 
2013 ATR Final Rule, 78 FR 35429, 35486.
---------------------------------------------------------------------------

    The Bureau also provided small creditor special provisions and 
exemptions, using the limits established in Sec.  1026.35(b)(2)(iii)(B) 
and (C), beyond the small creditor exemption from the requirement for 
the establishment of escrow accounts for first-lien higher-priced 
mortgage loans, and the special provision permitting certain balloon-
payment mortgages to receive qualified mortgage status if originated by 
small creditors operating predominantly in rural or underserved areas. 
The Bureau extended these limits to create a small creditor exemption 
from the balloon-payment prohibition for high-cost loans, and to create 
a special qualified mortgage definition for portfolio loans made by 
small creditors.
    Specifically, the special provisions and exemptions provided under 
the Bureau's 2013 Title XIV Final Rules--available only to small 
creditors--include the following:
     A qualified mortgage definition for certain loans made and 
held in portfolio (small creditor portfolio loans), which are not 
subject to the 43 percent debt-to-income ratio limit that applies to 
general qualified mortgage loans under Sec.  1026.43(e)(2)) (Sec.  
1026.43(e)(5)). A first-lien qualified mortgage under this category 
also provides a safe harbor from ability-to-repay claims, if the 
mortgage's annual percentage rate (APR) does not exceed the applicable 
Average Prime Offer Rate (APOR) by 3.5 or more percentage points. In 
contrast, general qualified mortgage loans under Sec.  1026.43(e)(2) 
provide safe harbors if their APRs do not exceed the applicable APOR by 
1.5 or more percentage points.\29\
---------------------------------------------------------------------------

    \29\ Specifically, for purposes of determining whether a loan 
has a safe harbor with regard to 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 applicable APOR plus 3.5 
percentage points, rather than plus 1.5 percentage points.

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[[Page 7778]]

     Two qualified mortgage definitions (i.e., a permanent and 
a temporary definition) for certain loans made and held in portfolio 
that have balloon-payment features--an exception from the limitation on 
balloon-payment features on general qualified mortgage loans (Sec.  
1026.43(e)(6) and (f)).\30\ As with the category of first-lien 
qualified mortgages discussed above (i.e., small creditor portfolio 
loans defined in Sec.  1026.43(e)(5)) these qualified mortgages are 
also subject to a higher APR threshold for defining a higher-priced 
covered transaction, allowing small creditors of such qualified 
mortgages to receive a safe harbor under the Bureau's ability-to-repay 
rule.
---------------------------------------------------------------------------

    \30\ Specifically these provisions allow: (1) On a permanent 
basis, balloon-payment qualified mortgage loans made and held in 
portfolio by certain small creditors operating predominantly in 
rural or underserved areas; and (2) for a temporary two year 
transition period--from January 10, 2014 to January 10, 2016--
balloon-payment qualified mortgages originated by small creditors 
even if they do not operate predominantly in rural or underserved 
areas. To meet the ``operating predominantly'' in ``rural'' or 
``underserved'' areas 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), 
the further section-by-section analysis of this requirement, and the 
Bureau's proposal to modify this provision.
---------------------------------------------------------------------------

     An exception from the prohibition on balloon-payment 
features for certain high-cost mortgages (Sec.  1026.32(d)(1)(ii)(C))--
also on a permanent and temporary basis.\31\
---------------------------------------------------------------------------

    \31\ Specifically, this provision allows: (1) On a permanent 
basis, small creditors that operate predominantly in rural or 
underserved areas to originate high-cost loans with balloon-payment 
features; and (2) for loans made on or before January 10, 2016, 
small creditors to originate high-cost mortgages with balloon-
payment features even if they do not operate predominantly in rural 
or underserved areas, under certain conditions. See Sec.  
1026.32(d)(1)(ii)(C).
---------------------------------------------------------------------------

     An exception from the requirement to establish escrow 
accounts for certain higher-priced mortgage loans for small creditors 
that operate predominantly in rural or underserved areas (Sec.  
1026.35(b)(2)(iii)).
    The Bureau's special provisions for and exemption of small 
creditors from certain requirements of the 2013 Title XIV Final Rules 
are consistent with the different treatment accorded under the Dodd-
Frank Act to small creditors versus larger creditors and were a 
recognition by the Bureau of the important role that small creditors 
play in providing mortgage credit to consumers. It was the Bureau's 
belief that small creditors' size and relationship lending model often 
provide them with better ability than large institutions to assess 
ability to repay. The Bureau recognized that many small creditors use a 
lending model based on maintaining ongoing relationships with their 
customers--and therefore may have a more comprehensive understanding of 
the financial circumstances of their customers. And since the lending 
activities of small creditors are often limited to a single community, 
they may have an in-depth understanding of the economic and other 
circumstances of that community.\32\ The Bureau's special provisions 
and exemptions were also a recognition that small creditors lack 
economies of scale necessary to offset the cost of certain regulatory 
requirements--unlike larger creditors.\33\
---------------------------------------------------------------------------

    \32\ Lending activities of many creditors that currently qualify 
as small are generally limited to a single community. However, 
creditors that would qualify as small if the proposed provisions are 
adopted generally lend and have branches (in the case of depository 
institutions) in several communities and counties.
    \33\ However, the Bureau notes that, from the perspective of 
consumers, potential lack of economies of scale matters only to the 
extent that it affects access to credit.
---------------------------------------------------------------------------

    Prior to and after the effective dates of the 2013 Title XIV Final 
Rules, the Bureau heard repeated expressions of concern that the 
Bureau's definition of small creditor was under-inclusive and did not 
cover a significant number of institutions that met the rationale 
underlying the special provisions and exemptions. Accordingly, on May 
6, 2014, in a Notice of Proposed Rulemaking with proposals addressing 
other elements of the 2013 Title XIV Final Rules, the Bureau also 
sought comment on the 500 total first-lien origination limit--and the 
requirement that the limit be determined for any given calendar year 
based upon results during the immediately prior calendar year.\34\ 
Specifically, the Bureau solicited feedback and data from (1) creditors 
designated as small creditors under the Bureau's 2013 Title XIV Final 
Rules; and (2) creditors with less than $2 billion in assets but that 
were not small creditors under the Bureau's 2013 Title XIV Final Rules 
because their total annual first-lien mortgage originations exceeded 
the 500-loan limit. For such creditors, the Bureau requested 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. The Bureau was 
particularly 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 had fixed rates, adjustable 
rates, or balloon-payment features), both as to loans originated for 
the secondary market and for portfolio.
---------------------------------------------------------------------------

    \34\ Amendments to the 2013 Mortgage Rules Under the Truth in 
Lending Act (Regulation Z), 79 FR 25730 (May 6, 2014).
---------------------------------------------------------------------------

    The Bureau also solicited feedback on the implementation efforts of 
such small creditors with respect to the Bureau's 2013 Title XIV Final 
Rules. The Bureau was interested in the challenges that creditors might 
face when transitioning from originating balloon-payment loans to 
originating adjustable-rate loans. Finally, the Bureau solicited 
comment on whether the 500 total first-lien origination limit is 
sufficient to serve the purposes of the small creditor designation and, 
to the extent it may be insufficient, the reasons why it is 
insufficient and the range of appropriate limits.
Comments Received
    In response to the Bureau's solicitation of comments in its May 6, 
2014 proposal regarding the origination limit, industry commenters, 
including national and state bank trade associations, and national and 
state credit union associations, generally supported an increase in the 
500 loan origination limit. Consumer groups generally did not support 
an increase, absent clear evidence that the current limit was 
significantly harming consumers. These commenters asserted that 
evidence of consumer harm does not exist.
    Specifically, one major bank trade association for example 
suggested a $10 billion asset limit and a 2,000 per year loan 
origination limit. It stated that it believed that the 500 annual loan 
origination limit unnecessarily restricts credit to qualified 
borrowers. It stated that lenders, especially smaller lenders, faced 
with this limitation on gaining qualified mortgage status will make 
fewer loans than they otherwise would have, particularly for lower loan 
amounts, making it more difficult for rural and underserved borrowers--
particularly those who are seeking smaller loans ($40,000 or less), 
which are generally not purchased on the secondary market. This 
commenter also stated that while its numbers were the product of 
anecdotal reports, consultation with banks in the $500 to $750 million 
asset range revealed that 1,000 loan originations per year is a common 
amount at this asset size, and that the 500-loan limit is unnecessarily 
restricting.

[[Page 7779]]

    One community banking association recommended that all community 
bank mortgage loans that are held in portfolio for the life of the loan 
receive qualified mortgage safe harbor status and exemption from escrow 
requirements if they are higher-priced mortgage loans. This commenter 
noted that a limit of 500 total first-lien originations per year is 
only 41 first-lien mortgages per month, or nine per week, an amount 
that a small creditor could easily exceed. It stated further that most 
community banks that exceed either or both the asset limit or 
origination limit have all the attributes of traditional, relationship-
based community banks, and that it found that the origination limit, 
which it noted is extremely low for most community banks, is not 
consistent with the asset limit. The commenter urged the Bureau, at a 
minimum, to increase the origination limit to at least 2,000 first-lien 
mortgage loans, or to disregard loans sold into the secondary market 
when applying the annual loan limit.
    Other industry commenters supported increasing the origination 
limit to 1,000 loans per year--asserting, for example, that: (1) This 
would increase the number of small creditors covered by 10 percent; (2) 
a 1,000 loan threshold more appropriately matches the $2 billion asset 
limit, i.e., entities with $2 billion in assets have at least 500 
annual originations and a number originate more than 500 loans; and (3) 
a number of entities operate close to the 500 origination limit, and a 
1,000 limit will provide smaller creditors with a cushion for 
fluctuation in mortgage volume, saving them the expense of preventative 
compliance measures in anticipation of exceeding the limit.
    A residential mortgage industry consulting firm commenter asserted 
that a bank with under 500 originations per year and another bank with 
originations between 500 and 1,000--but still under $2 billion in 
assets--are both likely to be community banks with the virtues of an 
elevated level of service and personal attention to borrowers. Both 
banks, this commenter noted, are equally unable to spread the costs of 
compliance across an organization in the way a very large institution 
is able to do--another fact, this commenter asserted, that is a reason 
for the small creditor exception in the first place.
    Some industry commenters in advocating for a higher loan 
origination limit argued that the Bureau's reliance on HMDA data for 
the 500 origination limit was flawed. For example, one state bankers 
association noted that the Bureau stated that, based on HMDA data, the 
small creditor definition would include: 95 percent of creditors with 
less than $500 million in assets; 74 percent of creditors with assets 
between $500 million and $1 billion; and 50 percent of creditors with 
assets between $1 billion and $2 billion. It then stated that it polled 
its member banks and did not find this to be true in its state and 
reminded the Bureau, because of that state's limited number of 
metropolitan statistical areas (MSAs) and rural nature, many creditors 
are not HMDA reporters. It concluded that basing small-creditor status 
on HMDA origination numbers is flawed when attempting to analyze rural 
lending patterns.
    Another state bankers association (in advocating for an increase of 
the origination limit to 1500 loans) noted that the Bureau has 
recognized that its adoption of annual origination limits and asset 
size limits were significantly constrained by data limitations. It 
stated further that, as the Bureau relied on its analysis of HMDA data 
to set the requirements for small-creditor status, data from 
institutions not subject to HMDA reporting (i.e., institutions with 
less than $43 million in assets, under the calendar year 2014 asset 
size threshold for HMDA reporting) were not considered.
    In addition to recommending increasing the origination limit, some 
commenters alternatively suggested that the origination limit either be 
applied to originated loans only if held in portfolio or that the limit 
exclude loans held in portfolio.
    In the first category of these commenters, i.e., those suggesting 
that the origination limit be applied to originated loans only if held 
in portfolio, one state credit union association stated that, due to 
the legal liability risk that surrounds non-qualified mortgages, some 
small credit unions (under $2 billion in assets) have made the business 
decision to offer only qualified mortgages. It stated that, of these 
small credit unions, a portion sell loans on the secondary market, 
which causes them to exceed the 500 total first-lien origination limit. 
If the loan does not meet the general definition of qualified mortgage, 
this commenter noted, it cannot be sold on the secondary market and the 
alternative definitions of qualified mortgage generally requires the 
credit union to keep the loan in portfolio for three years, unless an 
exception is met. It recommended therefore that the 500 loan 
origination limit is more properly placed on first-lien covered 
transactions originated in the preceding year kept in portfolio versus 
all first-lien covered transactions originated in the preceding year 
which would include those sold on the secondary market. Alternatively, 
this organization recommended that the 500 loan origination limit needs 
to be significantly increased for creditors that sell on the secondary 
market and also keep loans in portfolio.
    Also in this first category of commenters (i.e., those suggesting 
the origination limit only include portfolio loans) was a non-profit 
research and policy organization which commented that the 500-loan 
origination limit could be increased in narrow circumstances, such as 
increasing the loan origination limit for rural banks, or redefining 
the 500 limit to loans held in portfolio. And, as noted, a community 
banking association recommended that the Bureau, as an alternative to 
increasing the origination limit to 2,000 loans, disregard loans sold 
into the secondary market when applying the origination threshold 
number.
    In the second category of commenters (i.e., those suggesting that 
loans held in portfolio be excluded from the origination limit), a 
state bankers association strongly recommended that the Bureau 
expressly state that loans held in an institution's portfolio are not 
counted toward the origination limit for small-creditor status, in 
addition to recommending that the origination limit be raised to 1,500 
loans in a calendar year. This commenter stated that expansion of the 
small creditor category would help avoid contraction of the 
availability of mortgage credit. It stated that many creditors that 
currently qualify as small creditors are given the incentive to limit 
their mortgage lending to remain within the small creditor category--
due to the exemptions afforded to small creditors.
    Among other industry recommendations for revising the loan 
origination limit was a recommendation by a state bankers association 
that the Bureau revise the provision in which the loan origination 
limit must include originations by all the creditor's affiliates, in 
addition to the creditor. This commenter suggested that the Bureau 
revise the definition so that the origination limit includes only 
originations by the creditor and its non[hyphen]depository financial 
institution affiliates, such as finance companies, mortgage companies, 
and brokers. The organization stated that, in doing this, small 
creditors that are owned by the same bank holding company, but operate 
independently, will be more likely to continue to meet the lending 
needs of their communities and still enjoy creditor protections from 
regulatory and legal risk offered by the

[[Page 7780]]

small creditor qualified mortgage safe harbor.
    As noted, consumer group commenters generally did not support an 
increase in the 500-loan origination limit, at least without evidence 
of harm justifying an increase. Two consumer group commenters in their 
joint comment letter stated, for example, that creditors making 500 or 
more loans (and likely even fewer) should be able to comply with the 
Bureau's ability-to-repay/qualified mortgage requirements. They noted 
that 500 loans likely involve millions of dollars and this exception 
will already affect thousands of borrowers. Expanding this exception 
any further, they asserted, will substantially weaken the Bureau's 
ability-to-repay/qualified mortgage requirements and should not be done 
without an overwhelmingly clear and urgent justification. Such a 
justification does not currently exist, they stated. For that reason 
they recommended that the Bureau should leave the current limit 
unchanged. Another fair housing organization commenter mirrored the 
comment of these two organizations.
    As noted, a non-profit research and policy organization stated that 
an increase in the origination limit might be justified but only with 
more data showing the current limit is creating problems for small 
creditors to conduct business and reach underserved markets. In 
addition the commenter urged the Bureau to continue to examine the 
appropriate models to determine if the 500 origination limit is in fact 
harming bona fide small creditors or serving as a barrier for small 
creditors to reach more credit worthy borrowers. It stated that any 
increase in the origination limit should be reasonable both to ensure 
that small creditors can continue to do business (in particular with 
underserved markets) and to ensure that larger entities will not have 
an opportunity to take undue advantage of a change in the rule. Unless 
there is substantial evidence, however, that the loan origination limit 
is too low, the commenter supported keeping the exception narrow and 
limited.
Bureau Proposal
    As discussed, the Bureau proposes to revise the origination limit 
in Sec.  1026.35(b)(2)(iii)(B). Specifically, the Bureau proposes to 
raise the origination limit from 500 covered transactions secured by a 
first-lien (or ``loans'') originated by the creditor and its affiliates 
to 2,000 such loans. The Bureau's proposal also makes the limit 
applicable only to loans not held in portfolio by the creditor or its 
affiliates. That is, under the proposal, the limit does not apply to 
loans that were not sold, assigned, or otherwise transferred by the 
creditor or its affiliates to another person, or subject to a 
commitment to be acquired by another person. The Bureau's proposal also 
adds a ``grace period'' from calendar year to calendar year to allow an 
otherwise eligible creditor that exceeded either the origination limit 
or the asset limit in the preceding calendar year to continue to 
operate as a small creditor with respect to applications received prior 
to April 1 of the current calendar year--with the benefit of the 
special provisions and exemptions--as if it had not exceeded the limits 
in the preceding year. This proposed grace period is available to 
creditors that exceeded the respective limits in the preceding calendar 
year but had not exceeded them in the calendar year prior to the 
preceding calendar year.
    Proposed comment 35(b)(2)(iii)-1.ii explains that only originated 
loans not retained by the creditor or its affiliates in portfolio are 
counted toward the new 2,000 origination limit. The proposed comment 
also makes clear that a loan transferred by a creditor to its affiliate 
is a loan not retained in portfolio (it is a loan transferred to 
``another person'') and therefore is counted toward the 2,000 
origination limit. The proposed comment explains and adds examples on 
applying the grace period to the origination limit.
    Given the comments received to date on the origination limit, the 
Bureau believes that an adjustment of the current origination limit, as 
proposed, is justified. Small creditors serve a particularly critical 
function for consumers in rural and underserved areas, especially when 
these creditors make portfolio loans for which there may be no 
secondary market. At the same time, the Bureau recognizes consumer 
groups' concerns that an expansion of the origination limit could 
undermine the Bureau's Dodd-Frank Act title XIV regulatory protections. 
Specifically, the Bureau also wants to ensure that the origination 
limit is not set at a level that will allow larger creditors to take 
advantage of small-creditor status to avoid important regulatory 
requirements that protect consumers--regulatory requirements that those 
larger creditors, unlike many smaller creditors, have the capacity to 
implement effectively.
    Comments received from industry commenters are consistent and 
clear--the current origination limit, as currently constructed, may 
have the effect of limiting smaller creditors' ability to provide 
credit to qualified borrowers. According to commenters, the current 
origination limit does this by, for example, moving creditors to 
originate fewer loans than they otherwise would (including fewer loans 
for lower loan amounts that serve rural and underserved borrowers), to 
achieve or preserve small-creditor status. In addition, creditors that 
have the relationship lending models and community ties--the attributes 
of a creditor that the Bureau believes should be accorded small-
creditor status--say that they simply have a volume of business that 
exceeds the current origination limit (even though they may meet the 
asset limit for small-creditor status).
    Industry commenters consistently noted the mismatch between the 
origination limit and asset limit. They also stated that the 
origination limit was clearly the more problematic of the two limits 
for community banks, credit unions, and other relationship lenders. 
Industry commenters stated that the current origination limit is 
particularly difficult for those creditors that operate at the margins 
of the origination limit and small-creditor status. These creditors 
face concerns about the impact of origination volume fluctuations from 
year to year, which may move them from small-creditor status to non-
small-creditor status on short-notice without sufficient time to modify 
systems and products to address such a change. This shifting status 
from year to year would force such creditors to incur an additional 
expense to plan for meeting the regulatory requirements otherwise faced 
by creditors without small-creditor status.
    The issues cited by these commenters are clearly not the result the 
Bureau was seeking when it set the limits for according special status 
for small creditors. The Bureau's intent was not to exclude small 
creditors that could provide responsible, affordable credit to 
consumers, such as small community lenders, and thereby potentially 
limit the access of those consumers to creditors with a lending model, 
operations, and products that may meet their particular needs.
    The Bureau believes its proposed origination limit addresses these 
issues in an effective and responsible way that is consistent with the 
intent of the Dodd-Frank Act in according small creditors different 
treatment with regard to certain requirements. Expanding the 
origination limit to 2,000 loan originations, and not including 
portfolio loans in that originations count, would increase the number 
of creditors that receive small-creditor status by 700 creditors, from 
approximately 9,700 to approximately 10,400 (as further

[[Page 7781]]

discussed in the Section 1022(b) Analysis below). The Bureau believes 
that this increase would include creditors with responsible lending 
models and economies of scale that fit the purpose of small-creditor 
status.
    In particular, the proposed exclusion from the origination limit 
count of loans held in portfolio by the creditor (and its affiliates) 
is a recognition that smaller institutions that originate loans to be 
funded out of their own assets and held in portfolio have different 
interests than creditors, including smaller institutions, that 
originate loans to sell them into the secondary market. The interests 
of smaller institutions making portfolio loans are more likely to be 
aligned with the interests of those consumers with whom they do 
business. The proposed exclusion of portfolio loans is also consistent 
with the rationale behind the additional requirements under the 
Bureau's rules for application of the small creditor special provisions 
to only those qualified mortgages that creditors retain in portfolio 
(see, e.g., TILA section 129C(b)(2)(E) and Sec.  1026.43(e)(5), (e)(6) 
and (f)). The rationale articulated by the Bureau in that instance 
applies here--that the discipline imposed when small creditors make 
loans that they will hold in their portfolios is important to protect 
the consumers' interest and to prevent evasion. In other words, the 
Bureau's proposal not to include portfolio loans in the origination 
limit count is based on a recognition not only of the small creditor's 
community-based focus and commitment to relationship lending, but also 
the inherent incentives associated with portfolio lending by smaller 
institutions.
    The proposed grace period also addresses industry commenters' 
concerns regarding the impact of origination volume fluctuations from 
year to year. These commenters noted that small creditors on the 
margins of the origination limit could lose small-creditor status on 
short notice. The proposed grace period allows an otherwise eligible 
creditor that exceeded the origination limit in the preceding calendar 
year to continue to operate with respect to applications received 
before April 1 of the current calendar year with the benefit of the 
small creditor exemptions. Such a creditor could operate as if it had 
not exceeded the limits in the preceding year, as long as the creditor 
did not exceed the origination limit in the year prior to the preceding 
calendar year. This proposed grace period should provide the time for 
creditors to make any needed adjustments to change their systems to 
come into compliance with the Bureau's regulatory requirements. It also 
helps alleviate additional preparation burdens creditors might 
otherwise confront in anticipation of not meeting the small creditor 
origination limit.
    The Bureau's primary goal is to draw the appropriate line between 
small and large creditors, and to strike the right balance between 
preserving consumer access to credit, eliminating regulatory 
requirements that would hinder the ability of small creditors to 
provide that access to credit to potential borrowers, and maintaining 
effective consumer protections. The Bureau therefore continues to seek 
comment on alternative methods of achieving the purposes underlying 
small-creditor status and, specifically, for setting the origination 
limit and alternatives to the proposed grace period.
35(b)(2)(iii)(C)
    The Bureau proposes to amend Sec.  1026.35(b)(2)(iii)(C) to include 
in the calculation of the $2 billion asset limit the assets of the 
creditor's affiliates that originate covered transactions secured by a 
first lien. Proposed comment 35(b)(2)(iii)-1.iii provides that, for 
purposes of Sec.  1026.35(b)(2)(iii)(C), in addition to the creditor's 
assets, only the assets of a creditor's ``affiliate'' as defined in 
Sec.  1026.32(b)(5) that originates covered transactions (as defined by 
Sec.  1026.43(b)(1)) secured by a first lien are counted toward the 
asset limit. Thus, under the proposed rule, only assets of affiliates 
that engage in the type of mortgage lending covered by Regulation Z's 
ability-to-repay provisions are counted toward the asset limit.
    Counting both the creditor's assets and the assets of the 
creditor's affiliates that originate mortgage loans would make the 
tests for determining small-creditor status consistent between the 
asset limit in Sec.  1026.35(b)(2)(iii)(C) and the origination limit in 
Sec.  1026.35(b)(2)(iii)(B), which currently includes the originations 
of the creditor's affiliates in determining whether the limit has been 
exceeded. This additional consistency between the two tests may 
facilitate creditor compliance with the special provisions and 
exemptions for small creditors, including those that operate 
predominantly in rural or underserved areas, of which the two tests are 
a part. More significantly, the Bureau believes that this change 
follows logically from the other changes being proposed here.
    As noted, only the assets of the creditor's affiliates that 
originate mortgage loans are counted toward the asset limit under the 
proposed rule. Given the proposed change to the origination limit to 
exclude the creditor's and its affiliate's portfolio loans from 
counting toward that limit, the Bureau believes the proposed change to 
the asset limit is necessary to ensure that small-creditor status does 
not become a means for larger creditors to evade important requirements 
that provide consumer protections.
    As noted previously, although it was not required to do so, the 
Bureau established an asset limit because it believed that it 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. 
The Bureau wants to prevent a situation where creditors with 
substantially more than $2 billion in assets (but that did not exceed 
the proposed origination limit of 2,000 non-portfolio loans) could 
create affiliate relationships with a number of entities--all under the 
$2 billion asset limit--that could then originate an unlimited number 
of loans to be held in portfolio and maintain status as small 
creditors. Such a creditor is not the type of small entity that the 
Bureau intended to take advantage of the special provisions and 
exemptions provided to smaller creditors.
    The Bureau is seeking comment on this proposed change to Sec.  
1026.35(b)(2)(iii)(C) (and the corresponding change to comment 
35(b)(2)(iii)-1.iii) to include in the calculation of the $2 billion 
asset limit the assets of the creditor's affiliates that originate 
covered transactions secured by a first lien. In particular the Bureau 
is interested in comments on the potential impact of this change on 
creditors and access to credit, and the potential for larger creditors 
to obtain small-creditor status without this change and the possible 
impact on consumers. In addition, the Bureau seeks comment on its 
proposal to count only the assets of the creditor's affiliates that 
originate covered transactions secured by a first lien toward the 
origination limit--and not the assets of other affiliates of the 
creditor.
    The Bureau also proposes to add a grace period to the $2 billion 
asset limit in Sec.  1026.35(b)(2)(iii)(C). This proposed grace period 
allows an otherwise eligible creditor that exceeded the asset limit in 
the preceding calendar year to continue to operate as a small creditor 
with respect to applications received before April 1 of the current 
calendar year. Such a creditor could operate with the benefit of the 
small creditor special provisions and exemptions (assuming

[[Page 7782]]

the origination limit and other applicable regulatory requirements are 
met) with respect to such applications. This proposed grace period is 
available to creditors that exceeded the asset limit in the preceding 
calendar year but had not exceeded it in the calendar year prior to the 
preceding calendar year.
    Proposed comment 35(b)(2)(iii)-1.iii explains that creditors meet 
the asset limit for any higher-priced mortgage loan consummated during 
calendar year 2016 if the creditors' total assets (which include, in 
addition to the creditors' assets, the assets of the creditors' 
affiliates that originate mortgage loans) are under the applicable 
asset limit on December 31, 2015. The proposed comment explains further 
that creditors that did not satisfy the applicable asset limit on 
December 31, 2015 satisfy the asset limit criterion for a higher-priced 
mortgage loan consummated during 2016 if the application for the loan 
was received before April 1, 2016 and the creditors had total assets 
under the applicable asset limit on December 31, 2014. The proposed 
comment also adds to the 2013 calendar year asset limit currently 
listed in the comment the thresholds for calendar year 2014 and for 
calendar year 2015. In providing the threshold for calendar year 2015 
($2,060,000,000), the proposed comment explains that creditors that had 
total assets of less than $2,060,000,000 on December 31, 2014, satisfy 
this criterion for purposes of (1) any loan consummated during 2015 and 
(2) any loan consummated during 2016 for which the application was 
received before April 1, 2016.
    The Bureau proposes the grace period to provide consistency in 
requirements for creditors seeking and maintaining small-creditor 
status. The Bureau is seeking comment, however, on the need for the 
grace period for the asset limit, in light of industry comments 
indicating that the origination limit was the main focus of concern 
regarding failure to meet small-creditor status and the impact of 
origination volume fluctuations causing failure to meet that limit with 
possible little advance notice.
35(b)(2)(iii)(D)
    In general, Sec.  1026.35(b)(2)(iii)(D) currently prohibits any 
creditor from availing itself of the exemption from escrow requirements 
in Sec.  1026.35(b)(2)(iii) if the creditor maintains escrow accounts 
for any extension of consumer credit secured by real property or a 
dwelling that it or its affiliate currently services. However, Sec.  
1026.35(b)(2)(iii)(D) generally provides that a creditor may qualify 
for the exemption if such escrow accounts were established for first-
lien higher-priced mortgage loans on or after April 1, 2010, and before 
January 1, 2014, or were established after consummation as an 
accommodation for distressed consumers.\35\ In light of the proposed 
expansion of the ``small'' and ``rural'' definitions in Sec. Sec.  
1026.35(b)(2)(iii)(B) and 1026.35(b)(2)(iv)(A) discussed above and 
below, the Bureau proposes to substitute January 1, 2016 for January 1, 
2014 where it appears in Sec.  1026.35(b)(2)(iii)(D)(1) and its 
commentary. This proposed change prevents any creditors that are 
currently ineligible for the escrow exemption, but that would qualify 
if the proposed definitional changes are adopted, from losing 
eligibility for the escrow exemption because of escrow accounts they 
established for first-lien higher-priced mortgage loans pursuant to 
requirements in the current rule.
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    \35\ Comment 35(b)(2)(iii)(D)(1)-1 clarifies that the date 
ranges provided in Sec.  1026.35(b)(2)(iii)(D)(1) apply to 
transactions for which creditors received applications on or after 
April 1, 2010, and before January 1, 2014.
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    Creditors that do not currently meet the requirements in Sec.  
1026.35(b)(2)(iii)(A) through (D) are generally required under Sec.  
1026.35(b) to establish escrow accounts for any higher-priced mortgage 
loans those creditors make. However, if the expansions of the 
origination limit and rural definitions in proposed Sec. Sec.  
1026.35(b)(2)(iii)(B) and 1026.35(b)(2)(iv)(A) are finalized, it is 
possible that some creditors that currently are ineligible under Sec.  
1026.35(b)(2)(iii)(A) or (B) would meet the conditions in Sec.  
1026.35(b)(2)(iii)(A) and (B) after the changes take effect. Even if 
such creditors satisfy the condition set forth in Sec.  
1026.35(b)(2)(iii)(C), however, current Sec.  1026.35(b)(2)(iii)(D) 
would generally deem them ineligible for exemption after the effective 
date if they maintain an escrow account that they were required to set 
up prior to the effective date.
    If the proposed changes to Sec.  1026.35(b)(2)(iii) and (iv) are 
finalized, the Bureau does not believe that such creditors should lose 
the exemption simply because they were required by applicable 
regulations to establish escrow accounts prior to January 1, 2016. As 
the Bureau discussed in the Supplementary Information to the January 
2013 Escrows Final Rule and again in finalizing amendments to the 
January 2013 Escrows Final Rule in the September 2013 Final Rule, the 
Bureau believes creditors should not be penalized for compliance with 
the current regulation.\36\ The Bureau thus believes it is appropriate 
to amend Sec.  1026.35(b)(2)(iii)(D)(1) and comment 
35(b)(2)(iii)(D)(1)-1 to exclude escrow accounts established on or 
after April 1, 2010 and before January 1, 2016. This proposed change 
makes creditors eligible for the exemption provided under proposed 
Sec.  1026.35(b)(2)(iii) if they otherwise meet the requirements of 
Sec.  1026.35(b)(2)(iii) and they do not establish new escrow accounts 
for transactions for which they receive applications on or after 
January 1, 2016, other than those described in Sec.  
1026.35(b)(2)(iii)(D)(2).
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    \36\ With respect to loans where escrows were established on or 
after April 1, 2010, and before June 1, 2013, the Supplementary 
Information to the January 2013 Escrows Final Rule explained that 
creditors should not be penalized for compliance with the then 
current regulation, which would have required any such loans to be 
escrowed after April 1, 2010, and prior to June 1, 2013--the date 
the exemption took effect. January 2013 Escrows Final Rule, 78 FR 
4725, 4739; see also September 2013 Final Rule, 78 FR 60382, 60416.
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    To conform the commentary to this change, the Bureau also proposes 
to change January 1, 2014 to January 1, 2016 where it appears in 
comment 35(b)(2)(iii)(D)(1)-1. Proposed comment 35(b)(2)(iii)(D)(1)-1 
thus clarifies that the date ranges provided in Sec.  
1026.35(b)(2)(iii)(D)(1) apply to transactions for which creditors 
received applications on or after April 1, 2010, and before January 1, 
2016.
    The Bureau solicits comment on the Bureau's proposed amendments to 
Sec.  1026.35(b)(2)(iii)(D)(1) and comment 35(b)(2)(iii)(D)(1)-1, and 
specifically the exclusion of escrow accounts established on or after 
April 1, 2010 and before January 1, 2016 from the limitation in Sec.  
1026.35(b)(2)(iii)(D). In particular, the Bureau seeks comment on the 
need for the proposed changes and the impact on consumers of extending 
the exemption to the escrow requirements in Sec.  1026.35(b)(1).
35(b)(2)(iv)(A)
``Rural''
    Section 1026.35(b)(2)(iv)(A) currently defines a county as 
``rural'' during a calendar year if it is neither in an MSA nor in a 
micropolitan statistical area that is adjacent to an MSA, as those 
terms are defined by the U.S. Office of Management and Budget and as 
they are applied under currently applicable UICs, established by the 
USDA-ERS. It further provides that a creditor may rely as a safe harbor 
on the list of counties published by the Bureau to determine whether a 
county qualifies as ``rural'' for a particular calendar year. Comments 
35(b)(2)(iv)-1 and -2 provide additional

[[Page 7783]]

clarification about how to determine which counties fall within this 
definition and examples.
    The Bureau proposes to expand the ``rural'' definition in Sec.  
1026.35(b)(2)(iv)(A) to capture additional areas classified as 
``rural'' by the Census Bureau, without affecting the status of any 
counties that would be deemed rural under the Bureau's existing 
definition. For technical reasons, the Bureau also proposes to move the 
discussion of the safe harbor list of counties provided by the Bureau 
that is currently in Sec.  1026.35(b)(2)(iv)(A) and comment 
35(b)(2)(iv)(A)-1 to new Sec.  1026.35(b)(2)(iv)(C) and proposed 
comment 35(b)(2)(iv)(A)-1.iii, which are discussed below.\37\
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    \37\ This proposed move is consistent with a similar move that 
the Bureau proposes with respect to the safe harbor discussion that 
currently appears with the ``underserved'' definition in Sec.  
1026.35(b)(2)(iv)(B).
---------------------------------------------------------------------------

    In response to the January 2013 ATR Proposal and to proposed 
amendments to the January 2013 Escrows Final Rule, the Bureau received 
a number of comments regarding how ``rural'' and ``underserved'' should 
be defined for purposes of the balloon-payment qualified mortgage 
provisions and the escrow exemption. 78 FR 30739, 30741 (May 23, 2013); 
78 FR 35430, 35491 (June 12, 2013). Commenters including national and 
State trade groups representing creditors and dozens of small creditors 
argued that the current definitions of rural and underserved are too 
restrictive and do not adequately preserve consumers' access to credit.
    Some of these commenters proposed that the Bureau adopt alternate 
definitions of ``rural,'' such as those used by the U.S. Department of 
Agriculture's Rural Housing Loan Program or the Farm Credit System. One 
industry trade association suggested that the rural definition should 
include all non-metropolitan counties, as well as communities with 
populations of less than 50,000. Another commenter suggested that any 
place not within one of the Census Bureau's ``urbanized areas,'' which 
contain 50,000 or more people, should be considered rural. A credit 
union association suggested that credit unions with ``rural'' community 
charters should be exempt. It also objected to the current rule's 
provision that a county designated as a micropolitan statistical area 
is not ``rural'' if it is adjacent to an MSA.
    Several commenters criticized the current definition's assumption 
that an entire county is either rural or non-rural. These commenters 
noted that many counties are in fact made up of a mix of rural and non-
rural areas. One industry trade association commenter noted that by 
excluding entire counties the Bureau is excluding many rural 
communities where community banks provide much of the mortgage 
financing through loans they originate and retain in portfolio. 
According to the commenter, many of these loans are balloon-payment 
loans, and many community banks do not escrow for taxes and insurance.
    Many commenters cited examples of areas that they believe are truly 
rural but that are not classified as rural by the current regulation. 
Two trade association commenters noted, for example, that only 3 
counties in Maryland qualified as rural, even though many of the 
remaining areas in Maryland are serviced by the Farm Credit System. 
Other commenters noted that less than a third of Louisiana parishes 
qualified as ``rural,'' even though by many measures Louisiana is a 
very rural state.
    A number of commenters expressed concern that if the rural 
definition is not expanded, the number of new lenders entering markets 
that appear to be rural in nature but that fall outside of the 
definition will decrease. They indicated that some existing lenders 
will either exit these markets or curtail certain types of lending, 
leaving consumers in these areas with few choices. Commenters noted 
that the ability to originate mortgages with balloon payments is 
important to small creditors, who often have unique product pricing 
risks and also may not have adequate staff or training to produce the 
additional disclosures required by adjustable-rate mortgages.\38\
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    \38\ In its comments in 2013, one industry trade association 
reported that in a recent survey of approximately 400 members that 
are community banks, 75 percent indicated they currently make 
balloon-payment mortgages, and only 46 percent would be able to use 
the balloon mortgage exemption to the ability-to-repay rule. It also 
noted that, of the banks that responded to the survey that 
considered themselves to be rural or in a rural community, 44 
percent did not meet the Bureau's definition of rural.
---------------------------------------------------------------------------

    Since the Bureau announced that the definition was under review, it 
has received additional feedback on the rural definition outside of the 
formal comment process. For example, one industry trade association 
urged the Bureau to expand the rural definition if it did not make the 
special provisions and exemptions more broadly available in other ways. 
The association noted that the current definition of ``rural'' adopted 
by the January 2013 ATR Final Rule and the January 2013 Escrows Final 
Rule covers only about 7 percent of the U.S. population, whereas the 
Census Bureau recognizes about 20 percent of the U.S. population as 
living in a rural area.
    The Bureau believes that its current county-based approach 
facilitates application of the ``rural'' definition because it is easy 
to discern the county in which a property is located and to check 
whether that county appears on the lists published by the Bureau. 
However, the Bureau also appreciates the concern that has been raised 
by commenters that the current definition excludes from the definition 
certain areas that might otherwise be identified as rural, solely on 
the basis of the county in which the area is located. Many counties are 
large and may include both rural and urban areas, as commenters have 
noted.
    The Bureau has considered a variety of possible approaches that 
could be used to identify areas that are smaller than counties that may 
be rural in nature. Of these, the Bureau believes that the urban-rural 
classification completed by the Census Bureau every ten years may be 
the most suitable for the Bureau's current purposes. This 
classification is done at the level of the census block, which is the 
smallest geographic area for which the Census Bureau collects and 
tabulates decennial census data. While there are only about 3,000 
counties in the United States, there are approximately 11 million 
census blocks.\39\ The Census Bureau delineates census blocks as 
``urban'' or ``rural'' based on each decennial census and most recently 
released its list of urban areas based on the 2010 Census in 2012. For 
the 2010 Census, an urban area consists of ``a densely settled core of 
census tracts and/or census blocks that meet minimum population density 
requirements, along with adjacent territory containing non-residential 
urban land uses as well as territory with low population density 
included to link outlying densely settled territory with the densely 
settled core.'' \40\ The Census Bureau identifies two types of urban 
areas: ``urbanized areas'' of 50,000 or more people, and ``urban 
clusters'' of at least 2,500 and less than 50,000 people. Under the 
Census Bureau's classification, ``rural'' encompasses all population, 
housing, and territory not

[[Page 7784]]

included within either type of urban area.
---------------------------------------------------------------------------

    \39\ Census Bureau, 2010 Census Tallies of Census Tracts, Block 
Groups & Blocks, https://www.census.gov/geo/maps-data/data/tallies/tractblock.html.
    \40\ Census Bureau, 2010 Census Urban and Rural Classification 
and Urban Area Criteria, https://www.census.gov/geo/reference/ua/urban-rural-2010.html. To qualify as an urban area, the territory 
identified must encompass at least 2,500 people, of which at least 
1,500 must reside outside institutional group quarters such as 
correctional facilities, group homes for juveniles, and mental 
(psychiatric) hospitals.
---------------------------------------------------------------------------

    The Bureau proposes to ensure that areas with rural characteristics 
that are located in counties with both rural and urban characteristics 
are included within the Bureau's definition. The proposal adds a second 
prong to the definition in Sec.  1026.35(b)(2)(iv)(A), which includes 
areas designated as ``rural'' by the Census Bureau in the urban-rural 
classification it completes after each decennial census. To implement 
this change, proposed Sec.  1026.35(b)(2)(iv)(A) provides that an area 
is rural during a calendar year if it is either (1) a county that meets 
the Bureau's current rural definition (i.e., a county that is neither 
in an MSA nor in a micropolitan statistical area that is adjacent to an 
MSA, as those terms are defined by the U.S. Office of Management and 
Budget and as they are applied under currently applicable UICs, 
established by USDA-ERS), or (2) a census block that is not in an urban 
area, as defined by the Census Bureau using the latest decennial census 
of the United States. The proposed definition affects the exemption to 
the escrow requirement for higher-priced mortgage loans in Sec.  
1026.35(b)(2)(iii), the allowance for balloon-payment qualified 
mortgages in Sec.  1026.43(f), and the exemption from the balloon-
payment prohibition on high-cost mortgages in Sec.  
1026.32(d)(1)(ii)(C).\41\
---------------------------------------------------------------------------

    \41\ The proposed addition of a census block prong in Sec.  
1026.35(b)(2)(iv)(A)'s ``rural'' definition would not affect the 
scope of the exemption from a requirement to obtain a second 
appraisal for certain higher-priced mortgage loans in the January 
2013 Interagency Appraisals Final Rule, since that exemption applies 
to credit transactions made by a creditor in a ``rural county'' as 
defined in Sec.  1026.35(b)(2)(iv)(A). This definition of ``rural 
county'' would be retained in Sec.  1026.35(b)(2)(iv)(A) as proposed 
Sec.  1026.35(b)(2)(iv)(A)(1).
---------------------------------------------------------------------------

    The proposed definition of ``rural'' maintains the bright-line, 
easy-to-apply county-based test from the current definition, while also 
bringing into the definition rural pockets within counties that are 
non-rural under the current rule.\42\ Because the Census Bureau's 
classification is done at the census block level, it provides much more 
granularity than any county-based metric. To prepare the rural-urban 
classification, the Census Bureau uses measures based primarily on 
population counts and residential population density, but also 
considers a variety of criteria that account for nonresidential urban 
land uses, such as commercial, industrial, transportation, and open 
space that are part of the urban landscape.\43\ Since the 1950 Census, 
the Census Bureau has reviewed and revised these criteria as necessary 
for each decennial census. The Census Bureau completes its rural-urban 
classification every ten years based on the results of the decennial 
census, on roughly the same schedule that the USDA-ERS uses in updating 
its UIC designations, which should provide a relatively stable but up-
to-date measure.
---------------------------------------------------------------------------

    \42\ For example, Culpeper County, Virginia is part of the 
Washington-Arlington-Alexandria, DC-VA-MD-WV MSA and does not 
currently qualify as ``rural'' under existing Sec.  
1026.35(b)(2)(iv)(A). Because the Census Bureau defined some census 
blocks within Culpeper County as rural in its most recent rural-
urban classification, those portions of the county qualify as rural 
under proposed Sec.  1026.35(b)(2)(iv)(A) until the next Census 
Bureau rural-urban classification.
    \43\ See Qualifying Urban Areas for the 2010 Census, 77 FR 18652 
(March 27, 2012); Urban Area Criteria for the 2010 Census, 76 FR 
53030 (Aug. 24, 2011); Proposed Urban Area Criteria for the 2010 
Census, 75 FR 52174 (Aug. 24, 2010).
---------------------------------------------------------------------------

    In light of the changes proposed to the structure of Sec.  
1026.35(b)(2)(iv)(A), the Bureau proposes for technical reasons to move 
the discussion of the lists of counties provided by the Bureau from 
Sec.  1026.35(b)(2)(iv)(A) and comment 35(b)(2)(iv)-1 to new proposed 
Sec.  1026.35(b)(2)(iv)(C) and comment 35(b)(2)(iv)-1.iii.A, which are 
discussed below. The Bureau also proposes revisions to comment 
35(b)(2)(iv)-1 that: (1) Conform to the changes made to Sec.  
1026.35(b)(2)(iv), (2) add a cross-reference to comment 35(b)(2)(iii)-
1, and (3) make technical changes for clarity.
    The Bureau also proposes to update the example provided in comment 
35(b)(2)(iv)-2.i to reflect the new prong that the Bureau proposes to 
add to the definition. Proposed comment 35(b)(2)(iv)-2.i explains that 
an area is considered ``rural'' for a given calendar year based on the 
most recent available UIC designations by the USDA-ERS and the most 
recent available delineations of urban areas by the Census Bureau that 
are available at the beginning of the calendar year. As the proposed 
comment notes, these designations and delineations are updated by the 
USDA-ERS and the Census Bureau respectively once every ten years. The 
comment provides an illustrative example.
    The Bureau solicits comment on whether it should add a second prong 
to the rural definition based on the Census Bureau's urban-rural 
classification and, if so, whether it should make any modifications to 
the Census Bureau's classification in doing so. Although the Bureau 
proposes to maintain the current county-based test as part of the new 
definition, the Bureau also solicits comment on whether the counties 
included in the current definition should be expanded, contracted, 
eliminated, or maintained as is. The Bureau also requests feedback on 
any alternative approaches to defining ``rural'' areas in Sec.  
1026.35(b)(2)(iv)(A) that commenters believe might be preferable to the 
Bureau's proposal.
35(b)(2)(iv)(B)
``Underserved''
    Section 1026.35(b)(2)(iv)(B) defines a county as ``underserved'' 
during a calendar year if, according to HMDA data for the preceding 
calendar year, no more than two creditors extended covered 
transactions, as defined in Sec.  1026.43(b)(1), secured by a first 
lien, five or more times in the county. It further provides that a 
creditor may rely as a safe harbor on the list of counties published by 
the Bureau to determine whether a county qualifies as ``underserved'' 
for a particular calendar year. For technical reasons, the Bureau 
proposes to move the discussion of the lists of counties provided by 
the Bureau that appears in Sec.  1026.35(b)(2)(iv)(B) and comment 
35(b)(2)(iv)-1 to proposed new Sec.  1026.35(b)(2)(iv)(C) and comment 
35(b)(2)(iv)-1.iii.A.\44\ The Bureau also proposes other technical 
changes to Sec.  1026.35(b)(2)(iv)(B) and comments 35(b)(2)(iv)-1 and 
35(b)(2)(iv)-2.ii and proposes to add a reference in comment 
35(b)(2)(iv)-2.ii to the new grace period under Sec.  
1026.35(b)(2)(iii)(A).
---------------------------------------------------------------------------

    \44\ This proposed move is consistent with a similar move that 
the Bureau proposes with respect to the safe harbor discussion that 
currently appears with the ``rural'' definition in Sec.  
1026.35(b)(2)(iv)(A).
---------------------------------------------------------------------------

    Although most of the feedback that the Bureau has received relating 
to the definition of ``rural or underserved'' has focused on the 
definition of ``rural,'' some commenters have also suggested that the 
Bureau's definition of ``underserved'' is under-inclusive and have 
urged the Bureau to consider alternative definitions of 
``underserved.'' The proposed changes to the ``rural'' definition 
discussed above expand the term ``rural or underserved'' for purposes 
of the exemption to the escrow requirement for higher-priced mortgage 
loans in Sec.  1026.35(b)(2)(iii), the allowance for balloon-payment 
qualified mortgages in Sec.  1026.43(f), and the exemption from the 
balloon-payment prohibition on high-cost mortgages in Sec.  
1026.32(d)(1)(ii)(C). Because these provisions only mention 
``underserved'' when ``rural'' is listed in the alternative (rural or 
underserved), the Bureau believes that expanding the ``rural'' 
definition as proposed would address the concerns that have been raised 
by commenters about the overall coverage of ``rural or underserved.'' 
The Bureau has considered alternative definitions but believes that the 
current

[[Page 7785]]

definition of ``underserved'' appropriately identifies areas where the 
withdrawal of a creditor from the market could leave no meaningful 
competition for consumers' mortgage business. The Bureau therefore does 
not propose any substantive changes to the definition of 
``underserved'' at this time.
35(b)(2)(iv)(C)
    Section 1026.35(b)(2)(iv)(A) and (B) and comment 35(b)(2)(iv)-1 
currently provide that a creditor may rely as a safe harbor on the list 
of counties published by the Bureau to determine whether a county 
qualifies as ``rural'' or ``underserved'' for a particular calendar 
year. As noted above, the Bureau proposes to move the discussion of 
these county lists to new Sec.  1026.35(b)(2)(iv)(C)(1) and comment 
35(b)(2)(iv)-1.iii.A. In light of the expanded definition of ``rural,'' 
the Bureau also proposes to add two new safe harbor provisions in Sec.  
1026.35(b)(2)(iv)(C)(2) and (3) relating to automated online tools that 
may be provided by the Bureau or the Census Bureau.
    The Bureau proposes technical changes to the safe harbor provision 
relating to its county lists and also proposes to publish its county 
lists in the Federal Register. Proposed comment 35(b)(2)(iv)-1.iii.A 
also states that, to the extent that U.S. territories are treated by 
the Census Bureau as counties and are neither MSAs nor micropolitan 
statistical areas adjacent to MSAs, such territories will be included 
on these lists as rural areas in their entireties.
    Because the proposed changes to Sec.  1026.35(b)(2)(iv) create the 
possibility that some counties would include both rural and non-rural 
areas, the Bureau has also adjusted the discussion of the county lists 
in proposed Sec.  1026.35(b)(2)(iv)(C)(1) to make it clear that the 
lists would not include counties that are partially rural and partially 
non-rural. The Bureau does not believe it would be practical to publish 
lists of the census blocks that would qualify as rural under proposed 
Sec.  1026.35(b)(2)(iv)(A)(2) because there are approximately 11 
million census blocks in the United States.
    To assist creditors in implementing the proposed rural definition, 
the Bureau may develop an automated tool that allows creditors to enter 
property addresses, both individually and in batches, on the Bureau's 
public Web site to determine whether the properties are located in a 
rural or underserved area for the relevant calendar years. The Bureau 
does not anticipate that such a tool would be available prior to the 
proposed effective date for this rule, but it proposes that such a tool 
could provide a safe harbor if and when it becomes available. 
Specifically, proposed Sec.  1026.35(b)(2)(iv)(C)(2) provides that a 
property shall be deemed to be in an area that is ``rural'' or 
``underserved'' in a particular calendar year if the property is 
designated as rural or underserved for that calendar year by any 
automated tool that the Bureau provides on its public Web site.
    Until any tool that the Bureau may develop becomes available, the 
Bureau anticipates that creditors would use resources provided by the 
Census Bureau to determine whether proposed Sec.  
1026.35(b)(2)(iv)(A)(2) is satisfied--i.e., whether a property or batch 
of properties is not located in an urban area (defined as either an 
urbanized area or an urban cluster), as delineated by the Census 
Bureau. The Census Bureau publishes maps, lists, and other reference 
materials on its Web site.\45\ It also currently provides on its Web 
site an address search function that allows users to enter a property 
address to obtain census information about the property, including a 
designation that the property is in an urban area if that is the 
case.\46\ The Bureau proposes that this tool or any similar tool 
provided by the Census Bureau could be relied on as a safe harbor. 
Specifically, proposed Sec.  1026.35(b)(2)(iv)(C)(3) provides that a 
property shall be deemed to be in an area that is ``rural'' or 
``underserved'' in a particular calendar year if the property is not 
designated as located in an urban area as defined by the most recent 
delineation of urban areas announced by the Census Bureau by any 
automated address search tool that the Census Bureau provides on its 
public Web site for that purpose.
---------------------------------------------------------------------------

    \45\ Census Bureau, 2010 Census Urban and Rural Classification 
and Urban Area Criteria, https://www.census.gov/geo/reference/ua/urban-rural-2010.html.
    \46\ See generally Census Bureau, Frequently Asked Questions: 
How can I determine if my address is urban or rural?, https://ask.census.gov/faq.php?id=5000&faqId=6405 (``The 2010 Urban Areas 
can be viewed using Reference maps and the TIGERweb interactive web 
mapping system. In addition, beginning in the fall of 2012, the 
American FactFinder Address Search Tool will contain urban and rural 
information.''); see also Census Bureau, American FactFinder, http://factfinder2.census.gov/faces/nav/jsf/pages/index.xhtml (providing a 
link to an address search function that allows users to find Census 
data by entering a street address).
---------------------------------------------------------------------------

    Proposed comments 35(b)(2)(iv)-1.iii.B and C discuss the safe 
harbors related to these online tools. Proposed comment 35(b)(2)(iv)-
1.iii.C clarifies the calendar years for which the Census Bureau's 
address search tool can be used, by noting that for any calendar year 
that begins after the date on which the Census Bureau announced its 
most recent delineation of urban areas, a property is deemed to be in a 
rural area if the search results provided for the property by any such 
tool available on the Census Bureau's public Web site do not designate 
the property as being in an urban area. This is consistent with 
proposed comment 35(b)(2)(iv)-2.i, which explains that an area is 
considered ``rural'' for a given calendar year based on the most recent 
available UIC designations by the USDA-ERS and the most recent 
available delineations of urban areas by the Census Bureau that are 
available at the beginning of the calendar year.
    The Bureau solicits comment on whether Regulation Z should provide 
a safe harbor for automated tools of this nature. The Bureau is also 
interested in any feedback relating to how it could make the automated 
tool it is considering developing most useful to industry and other 
stakeholders as they implement the rural and underserved definitions.
Section 1026.43 Minimum Standards for Transactions Secured by a 
Dwelling
43(e) Qualified Mortgages
43(e)(5) Qualified Mortgage Defined--Small Creditor Portfolio Loans
    Section 1026.43(e)(5) defines a category of qualified mortgages 
originated by certain small creditors that enjoy special treatment in 
the ability-to-repay rules. These mortgages must be originated by 
creditors that meet the origination limit and asset limit in Sec.  
1026.35(b)(2)(iii)(B) and (C), and the creditors must hold the loans in 
portfolio for at least three years after consummation, with certain 
exceptions. Such a small creditor portfolio loan can be a qualified 
mortgage even if the borrower's total debt-to-income ratio exceeds the 
43 percent debt-to-income ratio limit that otherwise applies to general 
qualified mortgage loans under Sec.  1026.43(e)(2). Qualified mortgages 
originated by small creditors are entitled to a safe harbor under the 
Bureau's ability-to-repay rule if the loan's APR does not exceed the 
applicable APOR by 3.5 or more percentage points--in contrast to the 
general qualified mortgage safe harbor which covers loans with APRs 
that do not exceed APOR by 1.5 or more percentage points.
    The Bureau proposes several changes to the commentary to Sec.  
1026.43(e)(5) to conform to the Bureau's proposed changes to the 
origination limit and the asset limit in Sec.  1026.35(b)(2)(iii)(B) 
and (C). Proposed comment 43(e)(5)-4

[[Page 7786]]

regarding creditor qualifications provides that to be eligible to make 
a qualified mortgage under Sec.  1026.43(e)(5) the creditor has to 
satisfy the requirements of Sec.  1026.35(b)(2)(iii)(B) and (C), 
including the Bureau's proposed changes to the origination limit and 
the asset limit, respectively, and the addition of the grace periods. 
The Bureau proposes to revise comment 43(e)(5)-8, regarding the 
transfer of a qualified mortgage to another qualifying creditor prior 
to three years after consummation, to conform to the proposed 
origination limit and asset limit in Sec.  1026.35(b)(2)(iii)(B) and 
(C).
43(e)(6)(ii)
    Section 1026.43(e)(6) provides for a temporary balloon-payment 
qualified mortgage that requires all of the same criteria to be 
satisfied as the balloon-payment qualified mortgage definition in Sec.  
1026.43(f) except the requirement that the creditor extend more than 50 
percent of its total first-lien covered transactions in counties that 
are ``rural'' or ``underserved.'' Pursuant to Sec.  1026.43(e)(6)(ii), 
this temporary provision applies only to covered transactions 
consummated on or before January 10, 2016 (the sunset date). The Bureau 
now proposes to change Sec.  1026.43(e)(6)(ii) to provide that the 
temporary provision applies only to covered transactions for which the 
application was received before April 1, 2016. This proposed change 
gives small creditors more time to understand how any changes that the 
Bureau may make to the rural definition and lookback period will affect 
their status, if at all, and to make any required changes to their 
business practices.\47\ It also expands the scope of the temporary 
balloon-payment qualified mortgage provision to include certain 
transactions that have not been consummated as of the sunset date but 
for which the creditor has already received applications. This proposed 
change also affects the HOEPA balloon-loan provisions, because the 
Bureau extended the exception to the general prohibition on balloon 
features for high-cost mortgages under Sec.  1026.32(d)(1)(ii)(C) to 
allow small creditors, regardless of whether they operate predominantly 
in ``rural'' or ``underserved'' areas, to continue originating balloon 
high-cost mortgages if the loans meet the requirements for qualified 
mortgages under Sec. Sec.  1026.43(e)(6) or 1026.43(f).
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    \47\ Qualified mortgages consummated under Sec.  1026.43(e)(6) 
based on applications received before April 1, 2016 would retain 
their qualified mortgage status after that date, as long as the 
other requirements of Sec.  1026.43(e)(6) are met.
---------------------------------------------------------------------------

    The Bureau anticipates finalizing any changes to the rural 
definition and lookback period in the fall of 2015. Proposed Sec.  
1026.43(e)(6)(ii) allows small creditors that are benefiting from the 
temporary qualified mortgage balloon-loan expansions but that will not 
meet the rural or underserved definition for calendar year 2016 more 
time to transition their business practices.\48\ The Bureau solicits 
comment on whether it should change the sunset date in Sec.  
1026.43(e)(6)(ii) and whether Sec.  1026.43(e)(6)(ii) should use the 
date the application was received or the consummation date in applying 
the sunset date.
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    \48\ For ease of reference for industry participants, this 
proposed new sunset date under Sec.  1026.43(e)(6)(ii) coincides 
with the end of the new proposed grace periods in Sec.  
1026.35(b)(2)(iii) for otherwise-eligible creditors whose covered 
first-lien transactions meet all of the applicable tests in Sec.  
1026.35(b)(2)(iii)(A) through (C) in calendar year 2014 but not in 
calendar year 2015.
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43(f)
    Section 1026.43(f)(1) provides an exemption to the general 
prohibition on qualified mortgages having balloon-payment features 
(under Sec.  1026.43(e)(2)(C)) if the creditor satisfies the 
requirements stated in Sec.  1026.35(b)(2)(iii)(A), (B), and (C) and 
other criteria are met. Pursuant to Sec.  1026.43(f)(2), a qualified 
mortgage made under this section, known as a balloon-payment qualified 
mortgage, immediately loses its qualified mortgage status upon transfer 
in the first three years after consummation, unless the transfer is to 
a creditor that satisfies the requirements in Sec.  
1026.35(b)(2)(iii)(A), (B), and (C) or one of the other exceptions 
listed in Sec.  1026.43(f)(2) applies.
    The Bureau proposes to revise comments 43(f)(1)(vi)-1 and 
43(f)(2)(ii)-1 to reflect the proposed revisions that are described in 
the section-by-section of analysis of Sec.  1026.35 above, including 
the new grace periods and expanded tests that the Bureau proposes in 
Sec.  1026.35(b)(2)(iii)(A), (B), and (C), the broader rural definition 
that the Bureau proposes in Sec.  1026.35(b)(2)(iv)(A), and the safe 
harbor provisions that the Bureau proposes in Sec.  
1026.35(b)(2)(iv)(C). Proposed comment 43(f)(1)(vi)-1.i.A and B also 
includes updated examples to reflect these changes in the regulation 
text.
    In lieu of listing out the asset limits in comment 43(f)(1)(vi)-
1.iii, the Bureau also proposes to include a cross-reference in comment 
43(f)(1)(vi)-1.iii indicating that the Bureau publishes notice of the 
asset limit each year by amending comment 35(b)(2)(iii)-1.iii. The 
Bureau also proposes technical changes to comments 43(f)(1)(vi)-1, 
43(f)(2)-2, and 43(f)(2)(ii)-1.

VI. Dodd-Frank Act Section 1022(b) Analysis

A. Overview

    In developing the proposed rule, the Bureau has considered 
potential benefits, costs, and impacts.\49\ The Bureau requests comment 
on the preliminary discussion presented below as well as submissions of 
additional data that could inform the Bureau's consideration of the 
benefits, costs, and impacts. The Bureau has consulted, or offered to 
consult with, the prudential regulators, the Federal Housing Finance 
Agency, the Federal Trade Commission, the U.S. Department of 
Agriculture, the U.S. Department of Housing and Urban Development, the 
U.S. Department of the Treasury, the U.S. Department of Veterans 
Affairs, and the U.S. Securities and Exchange Commission, including 
regarding consistency with any prudential, market, or systemic 
objectives administered by such agencies. The Bureau has also consulted 
with the Census Bureau on proposed Sec.  1026.35(b)(2)(iv)(A)(2).
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    \49\ Specifically, section 1022(b)(2)(A) of the Dodd-Frank Act 
calls for the Bureau to consider the potential benefits and costs of 
a regulation to consumers and covered persons, including the 
potential reduction of access by consumers to consumer financial 
products or services; the impact on depository institutions and 
credit unions with $10 billion or less in total assets as described 
in section 1026 of the Dodd-Frank Act; and the impact on consumers 
in rural areas.
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    As discussed in greater detail elsewhere throughout this 
Supplementary Information, the Bureau proposes several amendments to 
the Bureau's Regulation Z and official interpretations relating to 
escrow requirements for higher-priced mortgage loans under the Bureau's 
January 2013 Escrows Final Rule and ability-to-repay/qualified mortgage 
requirements under the Bureau's January 2013 ATR Final Rule and May 
2013 ATR Final Rule. Since publication of the 2013 Title XIV Final 
Rules, the Bureau has received extensive feedback on the definitions of 
``small creditor'' and ``rural and underserved areas'' with many 
commenters criticizing the Bureau for defining ``rural'' and 
``underserved'' too narrowly and urging the Bureau to consider 
alternative definitions. This proposed rule reflects feedback from 
stakeholders regarding the Bureau's definitions of small creditor and 
rural and underserved areas as those definitions relate to special 
provisions

[[Page 7787]]

and certain exemptions provided to small creditors under the Bureau's 
aforementioned rules.
    The discussion below considers the benefits, costs, and impacts of 
the following key provisions of the proposed rule (proposed 
provisions):
     Raising the loan origination limit for determining 
eligibility for small-creditor status;
     An expansion of the definition of ``rural area'' to 
include (1) a county that meets the current definition of rural county 
or (2) a census block that is not in an urban area as defined by the 
Census Bureau; and
     An extension of the temporary two-year transition period 
that allows certain small creditors to make balloon-payment qualified 
mortgages and balloon-payment high cost mortgages regardless of whether 
they operate predominantly in rural or underserved areas.
    With respect to these provisions, the discussion considers costs 
and benefits to consumers and costs and benefits to covered persons. 
The discussion also addresses certain alternative provisions that were 
considered by the Bureau in the development of the proposed rule. The 
Bureau has chosen to evaluate the benefits, costs, and impacts of the 
proposed rule against the current state of the world.\50\ That is, the 
Bureau's analysis below considers the benefits, costs, and impacts of 
the 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 January 2013 Escrows Final Rule.\51\ The 
baseline considers economic attributes of the relevant market and the 
existing regulatory structure.
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    \50\ In particular, the Bureau compares the impacts of the 
proposed provisions against the state of the world after January 
2016 if the proposed provisions do not come into effect.
    \51\ 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.
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    The Bureau has relied on a variety of data sources to consider the 
potential benefits, costs and impacts of the proposed provisions, 
including the public comment record of various Board and Bureau 
rules.\52\ However, in some instances, the requisite data are not 
available or are quite limited. Data with which to quantify the 
benefits of the rule are particularly limited. As a result, portions of 
this analysis rely in part on general economic principles to provide a 
qualitative discussion of the benefits, costs, and impacts of the 
proposed rule.
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    \52\ The quantitative estimates in this analysis are based upon 
data and statistical analyses performed by the Bureau. To estimate 
counts and properties of mortgages for entities that do not report 
under HMDA, the Bureau has matched HMDA data to Call Report data and 
National Mortgage Licensing System data and has statistically 
projected estimated loan counts for those depository institutions 
that do not report these data either under HMDA or on the NCUA Call 
Report. The Bureau has projected originations of higher-priced 
mortgage loans in a similar fashion for depositories that do not 
report under HMDA. These projections use Poisson regressions that 
estimate loan volumes as a function of an institution's total 
assets, employment, mortgage holdings, and geographic presence.
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    The primary source of data used in this analysis is 2013 data 
collected under HMDA. The empirical analysis also uses data from the 
4th quarter 2013 bank and thrift Call Reports,\53\ and the 4th quarter 
2013 credit union Call Reports from the NCUA, to identify financial 
institutions and their characteristics. Unless otherwise specified, the 
numbers provided include appropriate projections made to account for 
any missing information, for example, any institutions that do not 
report under HMDA. The Bureau also utilized the data from the Bureau's 
Consumer Credit Panel.\54\
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    \53\ Every national bank, State member bank, and insured 
nonmember bank is required by its primary Federal regulator to file 
consolidated Reports of Condition and Income, also known as Call 
Reports, for each quarter as of the close of business on the last 
day of each calendar quarter (the report date). The specific 
reporting requirements depend upon the size of the bank and whether 
it has any foreign offices. For more information, see http://www2.fdic.gov/call_tfr_rpts/.
    \54\ The Consumer Credit Panel is a longitudinal, nationally 
representative sample of approximately 5 million deidentified credit 
records from one of the nationwide consumer reporting agencies. The 
sample provides tradeline-level information for all of the 
tradelines associated with each credit report record each month, 
including a commercially-available credit score. This information 
was used for the analysis of how consumers' credit scores differ 
depending on the size of the financial institution originating the 
consumers' mortgage loans.
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    Especially in light of some of the comments received by the Bureau 
that were discussed in the section-by-section analysis, it is worth 
emphasizing that the Bureau analyzes data from all creditors, both the 
ones that report under HMDA and the ones that do not, with the 
exception of non-depository institutions that do not report under HMDA. 
For HMDA reporters, the Bureau uses the data reported. For HMDA non-
reporters, the Bureau uses projections based on the match of the Call 
Report data with HMDA.
    The proposed provisions would expand the number of institutions 
that are eligible to originate certain types of qualified mortgages and 
to take advantage of certain special provisions under the January 2013 
ATR Final Rule, the May 2013 ATR Final Rule, the January 2013 Escrows 
Final Rule, and the 2013 HOEPA Final Rule.\55\ The first set of special 
provisions is tailored to creditors deemed as small (small creditors) 
without regard to the location of their originations. Small creditors 
can originate qualified mortgages without regard to the bright-line 
debt-to-income ratio limit that is otherwise required to meet the 
Bureau's general qualified mortgage requirements (small creditor 
portfolio special provision). Qualified mortgages originated by small 
creditors are entitled to a safe harbor with an APR over 1.5 percentage 
points over APOR, as long as these loans have an APR of less than 3.5 
percentage points over APOR (small creditor portfolio SH special 
provision).
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    \55\ As explained in the section-by-section analysis above, the 
exception to the general prohibition on balloon-payment features for 
high-cost mortgages in the 2013 HOEPA Final Rule would also be 
affected by the proposed provisions. However, the Bureau believes 
that the effect of the proposed rule on the rural balloon-payment 
provision in the 2013 HOEPA Final Rule is relatively small, in terms 
of both the consumers and covered persons affected, and thus the 
Bureau does not discuss this effect of the proposed rule in this 
1022(b) analysis.
---------------------------------------------------------------------------

    The second set of special provisions applies only to small 
creditors that operate predominantly in rural or underserved areas 
(rural small creditors). Rural small creditors can originate qualified 
mortgages with balloon-payment features, as long as these loans are 
kept in portfolio (rural qualified mortgage balloon-payment special 
provision) and other requirements are met.\56\ These qualified 
mortgages with balloon-payment features are entitled to a safe harbor 
as long as these loans have an APR of less than 3.5 percentage points 
over APOR. Also, rural small creditors are generally allowed to 
originate higher-priced mortgage loans without setting up an escrow 
account for property taxes and insurance (rural higher-priced mortgage 
loan escrow special provision).
---------------------------------------------------------------------------

    \56\ As discussed in the section-by-section analysis, there is 
also a temporary two-year provision that allows small creditors, 
regardless of whether they operate predominantly in rural or 
underserved areas, to originate qualified mortgage balloon-payment 
loans and high-cost mortgages with balloon-payment features. This 
proposed rule extends the end-date for that temporary provision.
---------------------------------------------------------------------------

    Among other things, the proposed provisions expand the number of 
small creditors by changing the origination limit on the number of 
loans that a small creditor could have originated annually together 
with its affiliates from no more than 500 to no more than 2,000. The 
proposed rule's origination limit would also count only loans not held 
in portfolio by the creditor and its affiliates that originate covered 
transactions secured by first liens toward that limit. Similar to the 
currently effective

[[Page 7788]]

provisions, the proposed provisions include a requirement that 
creditors have less than $2 billion in total assets (adjusted 
annually), but under the proposed rule this threshold would apply to 
the creditor's assets combined with the assets of the creditor's 
affiliates that originate covered transactions secured by first liens 
rather than just the creditor's own assets.\57\
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    \57\ All the numbers below are presented considering the 
affiliates' assets to the extent that the affiliates' assets are 
aggregated in the Call Reports, thus the number of newly exempted 
institutions and the number of loans that they originated could be 
slightly different from what the Bureau is reporting. The Bureau 
does not believe that aggregating assets of affiliates that 
originate covered transactions secured by first liens for the 
purposes of the $2 billion asset prong would result in many, if any, 
creditors that would be considered small under the currently 
effective rule, but would not be considered small under the proposed 
rule.
---------------------------------------------------------------------------

    Based on 2013 data, the Bureau estimates that the number of small 
creditors would increase from approximately 9,700 to approximately 
10,400 if these proposed provisions are adopted (out of the 11,150 
creditors in the United States that the Bureau estimates are engaged in 
mortgage lending). In 2013, the approximately 700 additional creditors 
originated about 720,000 loans (roughly 10 percent of the overall 
residential mortgage market), of which about 175,000 were kept in 
portfolio. Of these 175,000 portfolio loans, the Bureau estimates that 
about 15,000 were portfolio higher-priced mortgage loans and 88 percent 
of those had an APR between 1.5 and 3.5 percentage points over 
APOR.\58\
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    \58\ The percentage of loans with an APR that was 1.5 to 3.5 
percentage points over APOR is based exclusively on HMDA data.
---------------------------------------------------------------------------

    The proposed provisions also expand the areas deemed rural for the 
purposes of the rural small creditor special provisions described 
above. Currently, areas deemed rural are counties that are neither in 
an MSA nor in a micropolitan statistical area that is adjacent to an 
MSA. In addition to the current definition, the proposed provisions 
also count as rural areas census blocks that are deemed rural by the 
Census Bureau.\59\ Based on 2013 data, the Bureau estimates that the 
number of rural small creditors would increase from about 2,400 to 
about 4,100 if the proposed provisions are adopted.\60\ The additional 
1,700 creditors originated about 220,000 loans, out of which 120,000 
are estimated to be portfolio loans and about 26,000 of those are 
estimated to be higher-priced mortgage loans. The Bureau is not able to 
estimate currently what percentage of these 120,000 portfolio loans are 
balloon-payment loans.
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    \59\ As discussed further above, census blocks deemed rural are 
census blocks that are not in an urban area (i.e., neither in an 
urbanized area nor in an urban cluster) as defined by the Census 
Bureau.
    \60\ The Bureau used data from several sources to estimate 
whether a given creditor would be considered rural in 2013 according 
to both the current state of the world and if the proposed rule were 
adopted. The Bureau used HMDA data for the creditors that report to 
the dataset. Since creditors only have to report the census tract of 
the property's location, the Bureau assumed that a property in a 
particular census tract has the same chance of being rural as the 
percentage of that tract's population that lives in rural census 
blocks (this information is available from the Census Bureau). For 
the depository institutions that did not report under HMDA, the 
Bureau is aware of the location of the creditors' branches. The 
Bureau assumed that mortgage lending is spread equally across a 
creditor's branches. The Bureau also assumed that if a branch is in 
a given county, then the same proportion of loans in this branch 
originated to consumers living in rural or underserved areas as the 
percentage of population living in rural or underserved areas in 
that county.
    Note that the 4,100 includes creditors that would not have 
qualified as small but for the proposed rule. However, out of the 
700 creditors that would not have qualified as small but for the 
proposed rule, only around 10 percent qualify as rural even if the 
proposed provisions expanding rural areas are adopted.
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B. Potential Benefits and Costs to Consumers and Covered Persons

Consumer Benefits
    Consumer benefit from the proposed provisions is a potential 
expansion in access to credit. Access to credit concerns meant to be 
addressed by the rural small creditor provisions and the small creditor 
provisions are interrelated, thus the Bureau discusses them jointly in 
this subsection.\61\
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    \61\ Note that there is a difference in the current effect of 
the rules: currently, the creditors that are small, but not rural, 
enjoy the same special provisions as rural small creditors under the 
January 2013 ATR Final Rule and the May 2013 ATR Final Rule due to a 
temporary two-year provision in the May 2013 ATR Final Rule. This 
temporary provision is discussed in the section-by-section analysis 
above.
---------------------------------------------------------------------------

    In general, most consumer protection regulations have two effects 
on consumers. Regulations restrict particular practices, or require 
firms to provide additional services, in order to make consumers better 
off. However, restricting firms' practices or requiring additional 
services might result in firms increasing their prices or discontinuing 
certain product offerings, potentially resulting in reduced access to 
credit.
    The aforementioned small and rural small creditor special 
provisions were included in the January 2013 ATR Final Rule and the 
January 2013 Escrows Final Rule (along with the May 2013 ATR Final 
Rule) in order to alleviate any potential access to credit concerns. 
Note that some of these provisions were Congressionally mandated. The 
proposed provisions expand the number of financial institutions that 
qualify for these special provisions. Accordingly, there are two 
effects on consumers that originate their mortgage loans with the 
creditors that would be exempted if the proposed provisions were 
finalized: A potential benefit from an increase in access to credit and 
a potential cost from reduction of certain consumer protections.
    As noted above, the potential benefit of the proposed provisions 
for consumers is a potential increase in access to credit. The 
magnitude of this potential increase depends on whether, but for the 
provisions in the proposed rule affecting rural small creditors: (1) 
Financial institutions that would be covered by the proposed provisions 
would stop or curtail originating mortgage loans in particular market 
segments or would increase the price of credit in those market segments 
in numbers sufficient to have an adverse impact on those market 
segments, (2) the financial institutions that would remain in those 
market segments would not provide a sufficient quantum of mortgage loan 
origination 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 the proposed rule, all three of these 
scenarios would be realized, then the proposed rule increases access to 
credit.
    Analogously, the magnitude of this potential increase in access to 
credit depends on whether, in the absence of the provisions in the 
proposed rule affecting small creditors and escrow accounts: \62\ (1) 
Financial institutions that would be covered by the proposed provisions 
have already stopped or curtailed originating mortgage loans in 
particular market segments or increased the price of credit in those 
market segments in numbers sufficient to have an adverse impact on 
those market segments, (2) the financial institutions that remained in 
those market segments do not provide a sufficient quantum of mortgage 
loan origination at the non-increased price, and (3) there has not been 
a significant new entry into the market segments left by the departed 
institutions. If, but for the proposed rule, all three of these 
scenarios are realized, then the proposed rule increases access to 
credit.
---------------------------------------------------------------------------

    \62\ Note the difference in baselines: currently, due to the 
temporary two-year provision discussed in the section-by-section, 
all the small creditors are eligible for the special provisions that 
apply to rural small creditors, except for the provisions in the 
January 2013 Escrows Final Rule.
---------------------------------------------------------------------------

    The Bureau received comments suggesting that access to credit will 
indeed be curtailed but for the proposed provisions (or is already 
curtailed, but

[[Page 7789]]

would be increased if a rule similar to this proposal is finalized). 
These comments are discussed in the section-by-section analysis. The 
evidence provided in these comments appears to be largely anecdotal. 
The Bureau's data do not refute the commenters' assertions; however, 
the Bureau does not have the direct evidence to estimate the degree to 
which the proposed provisions would increase access to credit.
    In a series of analyses, the Bureau did not find specific evidence 
that the proposed provisions would increase access to credit when 
analyzing data on various consumers' characteristics (credit 
scores,\63\ loan amounts relative to income,\64\ availability of 
smaller amount loans,\65\ and pricing \66\), collateral (census tracts 
with portfolio-only lending \67\), and competition (number of creditors 
active in a county, even assuming that all the creditors that would be 
small,\68\ or small and rural, due to the proposed rule would exit if 
the proposed rule is not adopted).
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    \63\ Using the Bureau's Consumer Credit Panel for 2013, the 
Bureau analyzed borrowers' credit score distributions at creditors 
with various yearly origination counts. There was no significant 
difference between the creditors that would qualify as small if the 
proposed rule was finalized and larger creditors, including both the 
median credit scores and the lower tails of the distribution (for 
example, the 10th percentile of FICO scores).
    \64\ A relationship lender might help consumers by, potentially, 
originating loans with a higher DTI ratio because, for example, the 
relationship lender is aware that the consumer is at a high DTI only 
temporarily. Using HMDA data, and analyzing the loan-to-income ratio 
as a proxy for DTI (since both variables are available in HMDA), 
shows that the median consumer of a small creditor has a loan-to-
income ratio of 2.3. The figure is the same for larger creditors.
    \65\ A commenter suggested that smaller creditors might be 
originating more loans for smaller amounts (the commenter suggested 
a threshold of $40,000). According to the Bureau's analysis, while 
it might be true that smaller creditors make a disproportionate 
number of smaller amount loans, the majority of the smaller loans 
are made by larger creditors, and a sizable portion of smaller loans 
are made by creditors that already enjoy the special provisions 
under the currently effective rules.
    \66\ Instead of extending more credit, relationship lenders 
might be extending cheaper credit if they believe that their 
consumers are, effectively, less risky. In that case, given similar 
credit-risk profiles, the Bureau could expect that smaller creditors 
provide cheaper loans. However, higher-priced mortgage loans 
comprise on average 8.3 percent of the portfolio of creditors that 
would be deemed small due to the proposed rule and 22.2 percent of 
the portfolio of creditors that would be deemed small and rural due 
to the proposed rule. In comparison, the figure for larger creditors 
is 4.0 percent.
    \67\ If the area nearby a property is sparsely populated, a lack 
of comparable properties for appraisal can be a concern. In 2013, 
there were about 400 tracts where the only HMDA-reported loans 
originated were portfolio loans (out of the roughly 73,000 tracts in 
HMDA). About 200 of these tracts had more than one loan originated 
in 2013. These 400 tracts had fewer than 1,000 loans between them; 
of these loans, about 400 were made by creditors that originate over 
5,000 loans a year and about 300 were made by creditors that made 
fewer than 500 loans a year.
    \68\ The Bureau analyzed HMDA 2013 county-level data. For 
purposes of the statistics here and below, ``counties'' is used to 
refer to counties and county equivalents. The Bureau considered 
counties where there are currently at most five creditors operating, 
and at least one of these creditors would qualify as small only if 
the proposed rule is adopted. The Bureau's analysis shows that there 
are only a few counties like this, both for the purposes of the 
small creditor special provisions and for the purposes of the rural 
small creditor special provisions.
    The cutoff of five competitors is arguably enough to ensure a 
sufficient amount of competition for a close-to-homogenous product. 
However, the Bureau does not mean to imply that, for example, first-
lien covered transactions in a county constitute a market in the 
antitrust sense.
---------------------------------------------------------------------------

    However, the Bureau's data are not complete and do not permit the 
Bureau to analyze various relevant hypotheses. For example, one 
possible theory that the Bureau's data do not confirm or negate is that 
there might be a lack of access to credit due to the particular 
idiosyncrasies of a property despite the fact that other properties in 
the same census tract are eligible for government-sponsored entity 
(GSE) backing. These idiosyncrasies could include, for instance, the 
absence of a septic tank on the property or the availability of running 
water only on some properties in that census tract.
    Note that the presence of competition raises an important point 
related to some of the industry comments provided to the Bureau. While 
many commenters asserted access to credit issues, the implicit proof 
was that some smaller financial institutions could be originating fewer 
loans. However, even if true, that could simply mean that the same 
consumer would get a loan from a larger creditor instead. The Bureau's 
analysis of the data implies that this is at least a possibility.\69\
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    \69\ To the extent that the effect of the already effective 
rules might shed light on this topic, the January 2013 Escrows Final 
Rule has a special provision allowing rural small creditors to 
originate higher-priced mortgage loans without providing an escrow 
account. Available evidence indicates that, after the rule went into 
effect in June 2013, rural small creditors were just as likely to 
begin originating higher-priced mortgage loans as other creditors. 
Moreover, the counties where rural small creditors that started 
originating loans operate did not experience an increase in access 
to credit. See Alexei Alexandrov & Xiaoling Ang, Identifying a 
Suitable Control Group Based on Microeconomic Theory: The Case of 
Escrows in the Subprime Market, SSRN working paper (Dec. 30, 2014), 
available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2462128.
---------------------------------------------------------------------------

    Similarly, many commenters raised concerns that smaller financial 
institutions lack the economies of scale necessary for effective 
compliance and implementation of, for example, adjustable-rate mortgage 
disclosures or escrows. While this might be true, to the extent that 
outsourcing and contracting have not alleviated this issue, this is 
only a concern to consumers to the extent that larger creditors would 
not originate these loans. In other words, the lack of economies of 
scale is a concern to consumers only to the extent that the market 
would be less competitive than it would otherwise be if the proposed 
provisions are finalized.
Consumer Costs
    The potential cost to consumers of the proposed provisions is the 
reduction of certain consumer protections as compared to the baseline 
established by the January 2013 ATR Final Rule, the May 2013 ATR Final 
Rule, and the January 2013 Escrows Final Rule. These consumer 
protections include a consumer's private cause of action against a 
creditor for violating the general ability-to-repay requirements and 
the requirement that every higher-priced mortgage loan has an 
associated escrow account for the payment of property taxes and 
insurance for five years.
    In addition, under the January 2013 ATR Final Rule, after January 
10, 2016, creditors that do not meet the definition of ``small'' and 
``rural or underserved'' will not be able to claim qualified mortgage 
status for any newly-originated balloon-payment loans. Classifying a 
loan as a qualified mortgage when it would not have been a qualified 
mortgage otherwise (utilizing the small creditor portfolio special 
provision or the rural qualified mortgage balloon-payment special 
provision) or making a loan a safe harbor qualified mortgage loan when 
it would have otherwise been a rebuttable presumption qualified 
mortgage (utilizing the small creditor portfolio SH special provision) 
makes it more difficult for consumers to sue their creditor 
successfully for failing to properly evaluate the consumers' ability to 
repay while originating the loans.
    A creditor may have an incentive to originate loans without 
considering ability to repay to the full extent. As the Bureau noted in 
the January 2013 ATR Final Rule, there are at least three reasons why 
these incentives exist. First, the creditor might re-sell the loan to 
the secondary market or might have at least a portion of the default 
risk insured by a third party. In this case, the creditor does not have 
the privately optimal incentive to verify ability to repay. The 
December 2014 Credit Risk Retention Final Rule's requirement of ``skin 
in the game'' is designed to

[[Page 7790]]

ameliorate this issue.\70\ Second, the loan officer might not have the 
right incentive to verify a consumer's ability to repay due to internal 
organization issues: the loan officer might be benefiting from the 
creditor's eventual profit due to the loan only proximately and, 
potentially, the loan officer might have a suboptimal compensation 
scheme (for example, compensating simply based on the volume 
originated). Third, the creditor is unlikely to consider a consumer's 
private costs of foreclosure and the negative externality arising from 
the foreclosure process.\71\ In particular, since the Great Depression, 
balloon-payment loans have been seen by economists and consumer 
advocates as raising particular risks of foreclosure.\72\ The provision 
of a private cause of action solves, to an extent, this negative 
externality issue.
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    \70\ 79 FR 77602 (Dec. 24, 2014).
    \71\ See John Y. Campbell et al., Consumer Financial Protection, 
25(1) Journal of Economic Perspectives 91, 96 (2011). ``[A] 
rationale for government mortgage policy is a public interest in 
reducing the incidence of foreclosures, which, as we mentioned, 
reduce not only the value of foreclosed properties, but also the 
prices of neighboring properties [. . .]. The negative effect on the 
neighborhood is an externality that will not be taken into account 
by private lenders even if their foreclosure decisions are privately 
optimal.''
    \72\ Id. ``In the late 1920s, the dominant mortgage form was a 
short-term balloon loan that required frequent refinancing. Low 
house prices and reduced bank lending capacity in the early 1930s 
prevented many homeowners from refinancing, causing a wave of 
foreclosures that exacerbated the Depression.''
---------------------------------------------------------------------------

    Counting only the loans that are not kept in portfolio towards the 
origination limit ensures that a small creditor can always originate 
more portfolio loans without being concerned with the possibility of 
crossing the origination limit. The fact that a creditor keeps the loan 
in portfolio gives the creditor more incentives not to originate a loan 
that a consumer would not be able to repay: it potentially deals with 
the ``skin in the game'' issue described above.
    However, a creditor keeping a loan in portfolio does not fully 
ensure that the creditor will only originate loans that consumers are 
able to repay. First, as noted above, ``the negative effect on the 
neighborhood is an externality that will not be taken into account by 
private lenders even if their foreclosure decisions are privately 
optimal.'' \73\ Second, it is important to note that a loan can be in 
portfolio (and thus eligible for special provisions provided by the 
proposed rule), yet fully or almost fully insured by a third party. In 
these cases, the creditor does not bear the risk for these loans even 
though the loan is in portfolio: there is no or little ``skin in the 
game.'' \74\ Finally, the loan officer might not be compensated 
optimally, although advocates of relationship lending suggest that 
smaller creditors do not suffer from the internal organization problems 
described above to the same extent as larger creditors. The Bureau 
requests comment and any data shedding light on the degree of such 
concerns, particularly at creditors that would be deemed small solely 
due to the proposed rule.
---------------------------------------------------------------------------

    \73\ Id. at 96.
    \74\ Note that if the third party is, for example, the FHA, then 
the loan would currently be a qualified mortgage regardless of 
whether this proposed rule is finalized.
---------------------------------------------------------------------------

    Escrow accounts protect consumers from a financial shock (sometimes 
unexpected, especially for first-time buyers) of having to pay the 
first lump-sum property tax bill all at once, possibly soon after 
spending much of the household's savings on the downpayment and closing 
costs. Recent research argues that postponing that payment by nine 
months (which an escrow account approximates by spreading payments over 
time) decreases the probability of an early payment default by 3 to 4 
percent.\75\ As noted in the January 2013 Escrows Final Rule, costs to 
consumers of not having escrow accounts also include the inconvenience 
of paying several bills instead of one; the lack of a budgeting device 
to enable consumers not to incur a major expense later on; and the 
possibility of underestimating the overall cost of maintaining a 
residence.
---------------------------------------------------------------------------

    \75\ See Nathan B. Anderson & Jane Dokko, Liquidity Problems and 
Early Payment Default Among Subprime Mortgages, Federal Reserve's 
Finance and Economics Discussion Series, available at http://www.federalreserve.gov/pubs/feds/2011/201109/201109pap.pdf.
---------------------------------------------------------------------------

    The extent of the potential cost to consumers depends on whether, 
but for the proposed provisions expanding the special provisions of the 
January 2013 ATR Final Rule and May 2013 ATR Final Rule: (1) Creditors 
that would qualify for special provisions solely due to the proposed 
provisions would have incentives to originate loans that do not 
consider consumers' ability to repay despite these loans being in the 
creditors' portfolios; (2) consumers of these creditors who proved 
unable to repay would be unable to secure effective loss mitigation 
options from the creditors that would leave consumers as well off as 
they would have been without getting a loan that they proved to be 
unable to repay; and (3) absent the proposed provisions, these 
creditors would have stronger incentives to consider consumers' ability 
to repay or the consumers would elect to sue their local lender, would 
succeed in obtaining counsel to represent them, and would prevail in 
such suits. The Bureau does not possess evidence to confirm or deny 
whether these conditions are satisfied. Anecdotal evidence suggests 
that smaller lenders' loans performed better than larger lenders loans 
through the crisis.
    Similarly, the extent of the potential cost to consumers from 
expanding the special provisions of the January 2013 Escrows Final Rule 
depends on whether but for the proposed provisions: (1) The creditors 
that would be exempted solely due to the proposed provisions would not 
provide escrow accounts for five years despite these loans being in the 
creditors' portfolios; (2) consumers of these creditors who experienced 
a shock due to the first-time lump-sum payment and proved to be unable 
to repay were unable to secure effective loss mitigation options from 
the creditors that would leave the consumers as well off as they 
otherwise would have been with an escrow account; and (3) consumers of 
these creditors actually experience such shocks.
    As noted above, the Bureau estimates that the about 1,700 creditors 
that would be small and rural under the proposed provisions, but not 
under the currently effective rule, originated about 220,000 loans and 
120,000 portfolio loans in 2013. Out of those 120,000 portfolio loans, 
26,000 were portfolio higher-priced mortgage loans. The Bureau does not 
possess a good estimate of what percentage of these 120,000 portfolio 
loans are balloon-payment loans. Assuming HPML lending continued at the 
same level among these creditors, about 26,000 loans would lose the 
mandatory escrow protections; however, many of these creditors might 
extend escrow protections despite not being subject to a requirement to 
do so.
    The Bureau believes that the approximately 700 creditors that would 
be small under the proposed provisions, but not under the currently 
effective rule, originated 720,000 loans, including 175,000 portfolio 
loans, in 2013. Out of those 175,000 portfolio loans the Bureau 
estimates that about 15,000 were portfolio higher-priced mortgage loans 
and 88 percent of those had an APR between 1.5 and 3.5 percentage 
points over APOR.\76\ The Bureau believes that about 13,000 loans would 
be deemed safe harbor qualified mortgages due to the proposed 
provisions. The Bureau does not possess a good estimate of what 
percentage of these 175,000 portfolio loans would not have been

[[Page 7791]]

qualified mortgages but for the small creditor special provision.
---------------------------------------------------------------------------

    \76\ The percentage of loans with an APR that was 1.5 to 3.5 
percentage points over APOR is based exclusively on HMDA data.
---------------------------------------------------------------------------

Covered Person Benefits and Costs
    The creditors that would enjoy the special provisions due to the 
proposed provisions would experience benefits roughly symmetric to the 
protections that consumers lose. In particular, creditors that would 
qualify as rural small creditors would be able to originate qualified 
mortgage balloon-payment portfolio loans and pass the risk onto 
consumers, and small creditors could originate portfolio loans that 
would not be qualified mortgages or safe harbor qualified mortgages 
otherwise, resulting in a reduced probability of a successful 
lawsuit.\77\ Additionally, rural small creditors would reduce 
accounting and compliance costs of providing escrow accounts. To be 
eligible for these benefits, the firms might need to spend a nominal 
amount on checking whether they qualify for the special provision.
---------------------------------------------------------------------------

    \77\ There are two types of risk that creditors avoid by 
originating, for example, a succession of five-year balloon loans as 
opposed to a 30-year fixed rate loan. The first type of risk is the 
interest rate risk: cost of funds may increase and the fixed rate 
will be too cheap, in a sense, for current market conditions. This 
type of risk is almost fully hedged by choosing an appropriate index 
for a 5/5 adjustable-rate mortgage. The second type of risk is the 
risk of the deterioration of the consumer's idiosyncratic 
conditions. For example, if the consumer's credit profile 
deteriorates or the consumer loses their job, their fixed rate will 
be too cheap for that consumer's current conditions. Arguably, 
creditors can project this risk better than individual consumers and 
are the lowest cost-avoiders, especially if one assumes that moral 
hazard is not a major concern in this situation (that consumers are 
not more likely to lose a job simply because they know that their 
mortgage is a 30-year loan as opposed to a 5-year balloon loan).
---------------------------------------------------------------------------

    Some of these firm benefits could be passed through to consumers in 
terms of lower prices or better service. Economic theory suggests that 
the pass-through rate should be higher the more competitive markets 
are, all else being equal.\78\ However, a market being competitive 
would suggest lesser access to credit concerns. The Bureau does not 
possess the data required to estimate the applicable pass-through 
rates, and will therefore not discuss the pass-through possibilities 
further.
---------------------------------------------------------------------------

    \78\ See Alexei Alexandrov & Sergei Koulayev, Using the 
Economics of the Pass Through in Proving Antitrust Injury in 
Robinson-Patman Cases, SSRN working paper (Jan. 26, 2015), available 
at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2555952.
---------------------------------------------------------------------------

    The benefit of originating balloon-payment loans to the firms is 
cheaper risk management. With balloon-payment loans, both the interest 
rate risk and the risk of the consumers' credit files deteriorating are 
borne by the consumers. While the creditor is arguably the lowest cost 
avoider in both cases, consumers might not realize the riskiness 
involved in balloon-payment loans, encouraging the creditor to pass on 
the risk to consumers. The Bureau does not possess a good estimate of 
what percentage of these creditors' portfolio loans are balloon-payment 
loans.
    The Bureau believes that an additional 1,700 creditors would 
qualify as small and rural were the proposed provisions adopted. These 
creditors would not have to provide consumers with escrow accounts when 
originating higher-priced mortgage loans; however, the Bureau believes 
that about 1,300 of the 1,700 creditors already originate higher-priced 
mortgage loans, thus these savings might be small (or none) for these 
firms since these firms currently have to provide escrow accounts. 
Note, that the marginal costs of providing an escrow account are small, 
if not negative: For various reasons, a creditor that has an escrow 
system established generally prefers consumers to establish an escrow 
account even if one is not required by government regulations.
    Approximately 700 creditors would be deemed as small due to the 
proposed provisions. These creditors originated approximately 175,000 
portfolio loans in 2013, out of which about 13,000 loans would be 
deemed safe harbor qualified mortgages due to the proposed provisions. 
The Bureau does not possess sufficient data to estimate what percentage 
of these loans would be qualified mortgages solely due to the proposed 
provisions. Loans being deemed qualified mortgages or safe harbor 
qualified mortgages imply a reduced risk of losing consumer-initiated 
ability-to-repay litigation. The Bureau previously estimated that this 
risk would account for, at most, 0.1 percent of the loan amount.
    Note that all 700 creditors are currently not eligible for the 
small creditor special provision, and thus any sunk costs necessary to 
transition to originating non-qualified mortgage loans have already 
been incurred, except for those creditors that have decided not to 
originate any non-qualified mortgage loans.
    To be eligible for these benefits, the creditors might need to 
spend a nominal amount on checking whether they qualify for the special 
provisions. Since the proposed provisions would be expanding special 
provisions and extending qualified mortgage status, covered persons 
would not experience any costs other than, potentially, a nominal 
amount to check whether they qualify for the exemptions or extensions 
of qualified mortgage status.
Temporary Balloon-Payment Qualified Mortgage Period--Benefits and Costs 
to Consumers and Covered Persons
    The Bureau is proposing to provide an extension of the two-year 
temporary special provision that effectively deemed all small creditors 
rural for the purposes of the rural qualified mortgage balloon-payment 
special provision. This proposed temporary special provision, allowing 
these creditors to make qualified mortgage balloon-payment loans, is 
applicable (for transactions with mortgage applications received in the 
first three months of 2016) to any creditor that is currently small 
regardless of whether they operate predominantly in rural or 
underserved areas. The Bureau estimates that there are about 5,700 such 
creditors, and that they originated about 430,000 loans, out of which 
about 220,000 were portfolio loans in 2013. Note, that only the 
transactions with applications received in the first quarter of 2016 
would be eligible for this special provision. The Bureau does not 
possess a good estimate of what percentage of these portfolio loans are 
balloon-payment loans.
    The benefits and costs to consumers and to covered persons are 
identical to the ones discussed above during the discussion of the 
rural balloon-payment qualified mortgage special provision. Note that 
various property idiosyncrasies that might make access to credit an 
issue in rural areas are less likely for the consumers of these 5,700 
creditors since they do not operate predominantly in rural areas, even 
as defined by the proposed rule.
    The Bureau is also proposing an annual grace period for creditors 
that stop qualifying as either small creditors or small and rural 
creditors.\79\ Given the proposed origination limit, the Bureau 
believes that the number of these transitions is likely to be low from 
year-to-year: the number of the creditors that are close to the 
proposed threshold of small is minimal in comparison to the total 
number qualified (approximately 10,400 small creditors and 
approximately 4,100 rural small

[[Page 7792]]

creditors if the proposed provisions are adopted) and rural areas would 
change only after each decennial Census. Thus the Bureau does not 
estimate the effect of this provision in this 1022(b)(2) analysis.
---------------------------------------------------------------------------

    \79\ Currently, creditors qualify as operating predominantly in 
rural or underserved areas based on a three-year lookback period: a 
creditor is considered as operating predominantly in rural or 
underserved areas as long as the creditor operated predominantly in 
rural or underserved areas in any of the three preceding years. 
Thus, this proposed provision could potentially deem a creditor that 
would be rural in January 2016 not rural if the proposed rule is 
adopted. However, the Bureau believes that this possibility will not 
actually occur or, in other words, any small creditor that was 
operating in predominantly rural or underserved areas in any of the 
preceding three years according to the current definition would 
qualify as rural small under the proposed rule.
---------------------------------------------------------------------------

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

    The only covered persons affected by the proposed provisions are 
those with no more than $10 billion in assets. The effect on these 
covered persons is described above.

D. Impact on Access to Credit

    The Bureau does not believe that there will be an adverse impact on 
access to credit resulting from the proposed provisions. Moreover, as 
described above, the Bureau received comments strongly suggesting that 
there will be an expansion of access to credit.

E. Impact on Rural Areas

    The rural small creditor proposed provisions affect only creditors 
operating predominantly in rural or underserved areas, as defined 
according to the definition that the Bureau is proposing. These 
creditors predominantly originate loans to consumers that live in rural 
areas, thus the vast majority of the up to 120,000 consumers that would 
be affected by these provisions live in rural areas. The effect of 
these proposed provisions is described above.
    The creditors that would qualify as small if the proposed 
provisions were adopted are about as well represented in rural as in 
non-rural counties, according to the current definition of rural, thus 
there would be no disproportionate effect on rural areas.\80\
---------------------------------------------------------------------------

    \80\ If anything, these creditors are overrepresented in non-
rural counties.
---------------------------------------------------------------------------

F. Discussion of Significant Alternatives

    Instead of proposing that a property is in a rural area if the 
property is either in one of the counties currently designated as rural 
by the Bureau or if the property is not in an urban area as designated 
by the Census Bureau, the Bureau considered proposing that a property 
is in a rural area only if the property is not in an urban area as 
designated by the Census Bureau. The effective difference between the 
two definitions is that under the proposed definition areas designated 
as urban areas by the Census Bureau that are located in counties 
currently designated as rural by the Bureau would be classified as 
rural, but these urban areas would not be classified as rural under the 
alternative.
    For example, Wise County in Virginia (population of about 40,000, 
density of about 100 people per square mile) is currently designated as 
a rural area by the Bureau. Under the proposed definition the whole 
county remains rural. However, under the alternative definition, some 
census blocks in that county, including most of the census blocks that 
comprise the town of Wise, Virginia (population of about 3,000, density 
of about 1,000 people per square mile) would stop being classified as 
rural areas. A similar example is Gillespie County in Texas (population 
of about 25,000, density of about 25 people per square mile), which is 
entirely rural under the current definition and under the proposed 
definition. Most of the city of Fredericksburg (population of about 
11,000, density of about 1,500 people per square mile) in Gillespie 
County would not be considered rural under the alternative. Overall, 
about 22 percent of the U.S. population lives in areas that would be 
deemed as rural if the proposed provisions are finalized. About 19 
percent of the U.S. population lives in census blocks that are not in 
an urban area according to the Census Bureau.
    In comparison to this alternative, the proposed provisions allow 
several hundred small creditors to continue to enjoy the special 
provisions for creditors operating predominantly in rural or 
underserved areas. Under the alternative, these creditors would have to 
incur the cost of adapting to originating mortgages without enjoying 
the provisions that they currently enjoy. Moreover, under the 
alternative, compliance might become more burdensome for the remaining 
creditors that would qualify as rural small creditors even if the 
proposed rule is not finalized: They would not be able to simply check 
a list of rural counties (as they do now), since parts of these 
counties would cease to be rural. These costs, both the cost of 
adaptation for some creditors and the cost of more complicated 
compliance for others, are likely fixed, and economic theory suggests 
that these creditors would not pass these costs on to consumers.
    Other consumer benefits and costs and covered persons benefits and 
costs of these several hundred small creditors ceasing to qualify as 
rural are similar to the ones described above for the proposed 
provisions in general.

VII. Regulatory Flexibility Act Analysis

    The Regulatory Flexibility Act (RFA), as amended by the Small 
Business Regulatory Enforcement Fairness Act of 1996, requires each 
agency to consider the potential impact 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 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.\81\ 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.\82\
---------------------------------------------------------------------------

    \81\ 5 U.S.C. 601 et seq.
    \82\ 5 U.S.C. 609.
---------------------------------------------------------------------------

    Neither an IRFA nor a small business review panel is required for 
this proposal because the proposal, if adopted, would not have a 
significant impact on a substantial number of small entities.
    The proposed rule does not have a significant economic impact on 
any small entities.\83\ As noted in the Section 1022(b)(2) Analysis, 
above, the Bureau does not expect that the proposed rule would impose 
costs on covered persons, including small entities. All methods of 
compliance under current law would remain available to small entities 
should these provisions become effective. Thus, a small entity that is 
in compliance with current law would not need to take any additional 
action if the proposal were adopted. The Bureau requests comments on 
this analysis and any relevant data.
---------------------------------------------------------------------------

    \83\ It is theoretically possible that a creditor qualifies as 
small under the current definition, but would fail to qualify as 
small due to the proposed rule provision including in the 
calculation of the asset limit for small-creditor status the assets 
of the creditor's affiliates that originate mortgage loans. The 
Bureau is unaware of any such creditors and the proposed rule 
requests comments on their prevalence.
---------------------------------------------------------------------------

Certification

    Accordingly, the undersigned certifies that this proposed rule, if 
adopted, does not have a significant economic impact on a substantial 
number of small entities.

VIII. 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

[[Page 7793]]

collection requirements prior to implementation. The collections of 
information related to Regulation Z have been previously reviewed and 
approved by OMB in accordance with the PRA and assigned OMB Control 
Number 3170-0015 (Regulation Z). 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 does 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 seeks comment on 
whether the proposed rule imposes any new or revised information 
collection requirements.

List of Subjects in 12 CFR Part 1026

    Advertising, Consumer protection, Credit, Credit Unions, Mortgages, 
National Banks, Savings Associations, Recordkeeping requirements, 
Reporting, Truth in lending.

Authority and Issuance

    For the reasons set forth in the preamble, the Bureau proposes to 
amend Regulation Z, 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 1026.35 is amended by revising paragraphs (b)(2)(iii)(A), 
(B), (C), and (D) introductory text, (D)(1), (b)(2)(iv)(A) and (B), and 
adding paragraph (b)(2)(iv)(C) to read as follows:


Sec.  1026.35  Requirements for higher-priced mortgage loans.

* * * * *
    (b) * * *
    (2) * * *
    (iii) * * *
    (A) During the preceding calendar year, or, if the application for 
the transaction was received before April 1, during either of the two 
preceding calendar years, the creditor extended more than 50 percent of 
its total covered transactions, as defined by Sec.  1026.43(b)(1), 
secured by first liens on properties that are located in areas that are 
either ``rural'' or ``underserved,'' as set forth in paragraph 
(b)(2)(iv) of this section;
    (B) During the preceding calendar year, or, if the application for 
the transaction was received before April 1, during either of the two 
preceding calendar years, the creditor and its affiliates together 
originated no more than 2,000 covered transactions, as defined by Sec.  
1026.43(b)(1), secured by first liens, that were sold, assigned, or 
otherwise transferred to another person, or that were subject at the 
time of consummation to a commitment to be acquired by another person;
    (C) As of the preceding December 31st, or, if the application for 
the transaction was received before April 1, as of either of the two 
preceding December 31sts, the creditor and its affiliates that 
originate covered transactions, as defined by Sec.  1026.43(b)(1), 
secured by a first lien, together, had total assets of less than 
$2,000,000,000; this asset threshold shall adjust automatically each 
year, based on the year-to-year change in the average of the Consumer 
Price Index for Urban Wage Earners and Clerical Workers, not seasonally 
adjusted, for each 12-month period ending in November, with rounding to 
the nearest million dollars (see comment 35(b)(2)(iii)-1.iii for the 
applicable threshold); and
    (D) Neither the creditor nor its affiliate maintains an escrow 
account of the type described in paragraph (b)(1) of this section for 
any extension of consumer credit secured by real property or a dwelling 
that the creditor or its affiliate currently services, other than:
    (1) Escrow accounts established for first-lien higher-priced 
mortgage loans on or after April 1, 2010, and before January 1, 2016; 
or
* * * * *
    (iv) * * *
    (A) An area is ``rural'' during a calendar year if it is:
    (1) A county that is neither in a metropolitan statistical area nor 
in a micropolitan statistical area that is adjacent to a metropolitan 
statistical area, as those terms are defined by the U.S. Office of 
Management and Budget and as they are applied under currently 
applicable Urban Influence Codes (UICs), established by the United 
States Department of Agriculture's Economic Research Service (USDA-
ERS); or
    (2) A census block that is not in an urban area, as defined by the 
U.S. Census Bureau using the latest decennial census of the United 
States.
    (B) An area is ``underserved'' during a calendar year if, according 
to Home Mortgage Disclosure Act (HMDA) data for the preceding calendar 
year, it is a county in which no more than two creditors extended 
covered transactions, as defined in Sec.  1026.43(b)(1), secured by a 
first lien on property in the county five or more times.
    (C) A property shall be deemed to be in an area that is ``rural'' 
or ``underserved'' in a particular calendar year if the property is:
    (1) Located in a county that appears on the lists published by the 
Bureau of counties that are entirely rural or underserved for that 
calendar year,
    (2) Designated as rural or underserved for that calendar year by 
any automated tool that the Bureau provides on its public Web site, or
    (3) Not designated as located in an urban area as defined by the 
most recent delineation of urban areas announced by the Census Bureau 
by any automated address search tool that the U.S. Census Bureau 
provides on its public Web site for that purpose.
* * * * *
0
3. Section 1026.43 is amended by revising paragraph (e)(6) to read as 
follows:


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

* * * * *
    (e) * * *
    (6) Qualified mortgage defined--temporary balloon-payment qualified 
mortgage rules. (i) Notwithstanding paragraph (e)(2) of this section, a 
qualified mortgage is a covered transaction:
    (A) That satisfies the requirements of paragraph (f) of this 
section other than the requirements of paragraph (f)(1)(vi); and
    (B) For which the creditor satisfies the requirements stated in 
Sec.  1026.35(b)(2)(iii)(B) and (C).
    (ii) The provisions of this paragraph (e)(6) apply only to covered 
transactions for which the application was received before April 1, 
2016.
0
4. In Supplement I to Part 1026--Official Interpretations:
0
A. Under Section 1026.35--Requirements for Higher-Priced Mortgage 
Loans:
0
i. Under Paragraph 35(b)(2)(iii), paragraph 1 is revised.
0
ii. Under Paragraph 35(b)(2)(iii)(D)(1), paragraph 1 is revised.
0
iii. Under Paragraph 35(b)(2)(iv), paragraphs 1 and 2 are revised.
0
B. Under Section 1026.43--Minimum Standards for Transactions Secured by 
a Dwelling:

[[Page 7794]]

0
i. Under Paragraph 43(e)(5), paragraphs 4 and 8 are revised.
0
ii. Under Paragraph 43(f)(1)(vi), paragraph 1 is revised.
0
iii. Under Paragraph 43(f)(2), paragraph 2 is revised.
0
iv. Under Paragraph 43(f)(2)(ii), paragraph 1 is revised.
    The revisions read as follows:

Supplement I to Part 1026--Official Interpretations

Subpart E--Special Rules for Certain Home Mortgage Transactions

* * * * *

Section 1026.35--Requirements for Higher-Priced Mortgage Loans

* * * * *

35(b) Escrow Accounts

* * * * *

35(b)(2) Exemptions

* * * * *

Paragraph 35(b)(2)(iii)

    1. Requirements for exemption. Under Sec.  1026.35(b)(2)(iii), 
except as provided in Sec.  1026.35(b)(2)(v), a creditor need not 
establish an escrow account for taxes and insurance for a higher-
priced mortgage loan, provided the following four conditions are 
satisfied when the higher-priced mortgage loan is consummated:
    i. During the preceding calendar year, or during either of the 
two preceding calendar years if the application for the loan was 
received before April 1, more than 50 percent of the creditor's 
total covered transactions, as defined in Sec.  1026.43(b)(1), are 
secured by first liens on properties located in areas that are 
either ``rural'' or ``underserved,'' as set forth in Sec.  
1026.35(b)(2)(iv).
    A. In general, whether this condition (the ``more than 50 
percent'' test) is satisfied depends on the creditor's activity 
during the preceding calendar year. However, if the application for 
the loan in question was received before April 1, the creditor may 
instead meet the ``more than 50 percent'' test based on its activity 
during the next-to-last calendar year. This provides creditors with 
a grace period if their activity meets the ``more than 50 percent'' 
test (in Sec.  1026.35(b)(2)(iii)(A)) in one calendar year but fails 
to meet it in the next calendar year.
    B. A creditor meets the ``more than 50 percent'' test for any 
higher-priced mortgage loan consummated during a calendar year if a 
majority of its first-lien covered transactions in the preceding 
calendar year are secured by properties located in rural or 
underserved areas. If the creditor's transactions in the preceding 
calendar year do not meet the ``more than 50 percent'' test, the 
creditor meets this condition for a higher-priced mortgage loan 
consummated during the current calendar year only if the application 
for the loan was received before April 1 and a majority of the 
creditor's first-lien covered transactions during the next-to-last 
calendar year are secured by properties located in rural or 
underserved areas. The following examples are illustrative:
    1. Assume that a creditor originated 180 first-lien covered 
transactions during 2015 and that 91 of these are secured by 
properties located in rural or underserved areas. Because a majority 
of the creditor's first-lien covered transactions during 2015 are 
secured by properties located in rural or underserved areas, the 
creditor can meet this condition for exemption for any higher-priced 
mortgage loan consummated during 2016.
    2. Assume that a creditor originated 180 first-lien covered 
transactions during 2015, including 90 transactions secured by 
properties that are located in rural or underserved areas. Assume 
further that the same creditor originated 200 first-lien covered 
transactions during 2014, including 101 transactions secured by 
properties that are located in rural or underserved areas. Assume 
further that the creditor consummates a higher-priced mortgage loan 
in 2016 for which the application was received in November 2016. 
Because the majority of the creditor's first-lien covered 
transactions during 2015 are not secured by properties that are 
located in rural or underserved areas, and the application was 
received on or after April 1, 2016, the creditor does not meet this 
condition for exemption. However, assume instead that this creditor 
consummates a higher-priced mortgage loan in 2016 based on an 
application received in February 2016. The creditor meets this 
condition for exemption for this loan because the application was 
received before April 1, 2016, and the majority of the creditor's 
first-lien covered transactions in 2014 are secured by properties 
that are located in areas that were rural or underserved.
    ii. The creditor and its affiliates together originated no more 
than 2,000 covered transactions, as defined in Sec.  1026.43(b)(1), 
secured by first liens, that were not sold, assigned, or otherwise 
transferred by the creditor or its affiliates to another person, or 
that were subject at the time of consummation to a commitment to be 
acquired by another person, during the preceding calendar year or 
during either of the two preceding calendar years if the application 
for the loan was received before April 1. For purposes of Sec.  
1026.35(b)(2)(iii)(B), a transfer of a first-lien covered 
transaction to ``another person'' includes a transfer by a creditor 
to its affiliate.
    A. In general, whether this condition is satisfied depends on 
the creditor's activity during the preceding calendar year. However, 
if the application for the loan in question is received before April 
1, the creditor may instead meet this condition based on activity 
during the next-to-last calendar year. This provides creditors with 
a grace period if their activity falls at or below the threshold in 
one calendar year but exceeds it in the next calendar year.
    B. For example, assume that a creditor and its affiliates 
together originated 1,500 loans that were not retained in the 
portfolio of the creditor or its affiliates in 2015 and 2,500 such 
loans in 2016. Because the 2016 transaction activity exceeds the 
threshold but the 2015 transaction activity does not, the creditor 
satisfies this condition for exemption for a higher-priced mortgage 
loan consummated during 2017 if the creditor received the 
application for the loan before April 1, 2017, but does not satisfy 
this condition for a higher-priced mortgage loan consummated during 
2017 if the application for the loan was received on or after April 
1, 2017.
    iii. As of the end of the preceding calendar year, or as of the 
end of either of the two preceding calendar years if the application 
for the loan was received before April 1, the creditor and its 
affiliates that originate covered transactions secured by a first 
lien, together, had total assets that are less than the applicable 
annual asset threshold(s). For purposes of Sec.  
1026.35(b)(2)(iii)(C), in addition to the creditor's assets, only 
the assets of a creditor's ``affiliate'' as defined in Sec.  
1026.32(b)(5) that originates covered transactions (as defined by 
Sec.  1026.43(b)(1)) secured by a first lien, are counted toward the 
applicable annual asset threshold. A creditor satisfies this 
criterion for purposes of any higher-priced mortgage loan 
consummated during 2016, for example, if the creditor (together with 
its affiliates that originate first-lien covered transactions) had 
total assets of less than the applicable asset threshold on December 
31, 2015. A creditor that (together with its affiliates that 
originate first-lien covered transactions) did not meet the 
applicable asset threshold on December 31, 2015 satisfies this 
criterion for a higher-priced mortgage loan consummated during 2016 
if the application for the loan was received before April 1, 2016 
and the creditor (together with its affiliates that originate first-
lien covered transactions) had total assets of less than the 
applicable asset threshold on December 31, 2014, which is 
$2,060,000,000. The asset threshold shall adjust automatically each 
year based on the year-to-year change in the average of the Consumer 
Price Index for Urban Wage Earners and Clerical Workers, not 
seasonally adjusted, for each 12-month period ending in November, 
with rounding to the nearest million dollars. The Bureau will 
publish notice of the asset threshold each year by amending this 
comment. For historical purposes, the prior asset thresholds were:
    A. For calendar year 2013, the asset threshold was 
$2,000,000,000. Creditors that had total assets of less than 
$2,000,000,000 on December 31, 2012, satisfied this criterion for 
purposes of the exemption during 2013.
    B. For calendar year 2014, the asset threshold was 
$2,028,000,000. Creditors that had total assets of less than 
$2,028,000,000 on December 31, 2013, satisfied this criterion for 
purposes of the exemption during 2014.
    C. For calendar year 2015, the asset threshold was 
$2,060,000,000. Creditors that had total assets of less than 
$2,060,000,000 on December 31, 2014, satisfied this criterion for 
purposes of (1) any loan consummated in 2015 and (2) any loan 
consummated in 2016 for which the application was received before 
April 1, 2016.
* * * * *

Paragraph 35(b)(2)(iii)(D)(1)

    1. Exception for certain accounts. Escrow accounts established 
for first-lien higher-priced mortgage loans for which applications

[[Page 7795]]

were received on or after April 1, 2010, and before January 1, 2016, 
are not counted for purposes of Sec.  1026.35(b)(2)(iii)(D). For 
applications received on and after January 1, 2016, creditors, 
together with their affiliates, that establish new escrow accounts, 
other than those described in Sec.  1026.35(b)(2)(iii)(D)(2), do not 
qualify for the exemption provided under Sec.  1026.35(b)(2)(iii). 
Creditors, together with their affiliates, that continue to maintain 
escrow accounts established for first-lien higher-priced mortgage 
loans for which applications were received on or after April 1, 
2010, and before January 1, 2016, still qualify for the exemption 
provided under Sec.  1026.35(b)(2)(iii) so long as they do not 
establish new escrow accounts for transactions for which they 
received applications on or after January 1, 2016, other than those 
described in Sec.  1026.35(b)(2)(iii)(D)(2), and they otherwise 
qualify under Sec.  1026.35(b)(2)(iii).
* * * * *

Paragraph 35(b)(2)(iv)

    1. Requirements for ``rural'' or ``underserved'' status. An area 
is considered to be ``rural'' or ``underserved'' during a particular 
calendar year for purposes of Sec.  1026.35(b)(2)(iii)(A) if it 
satisfies either the test for ``rural'' or the test for 
``underserved'' in Sec.  1026.35(b)(2)(iv). A creditor's 
originations of covered transactions, as defined by Sec.  
1026.43(b)(1), secured by first liens on properties located in such 
areas are considered in determining whether the creditor satisfies 
the condition in Sec.  1026.35(b)(2)(iii)(A). See comment 
35(b)(2)(iii)-1.
    i. Under Sec.  1026.35(b)(2)(iv)(A), an area is rural during a 
calendar year if it is: a county that is neither in a metropolitan 
statistical area nor in a micropolitan statistical area that is 
adjacent to a metropolitan statistical area; or a census block that 
is not in an urban area, as defined by the U.S. Census Bureau using 
the latest decennial census of the United States. Metropolitan 
statistical areas and micropolitan statistical areas are defined by 
the Office of Management and Budget and applied under currently 
applicable Urban Influence Codes (UICs), established by the United 
States Department of Agriculture's Economic Research Service (USDA-
ERS). For purposes of Sec.  1026.35(b)(2)(iv)(A)(1), ``adjacent'' 
has the meaning applied by the USDA-ERS in determining a county's 
UIC; as so applied, ``adjacent'' entails a county not only being 
physically contiguous with a metropolitan statistical area but also 
meeting certain minimum population commuting patterns. A county is a 
``rural'' area if the USDA-ERS categorizes the county under UIC 4, 
6, 7, 8, 9, 10, 11, or 12. Descriptions of UICs are available on the 
USDA-ERS Web site at http://www.ers.usda.gov/data-products/urban-influence-codes/documentation.aspx. A county for which there is no 
currently applicable UIC (because the county has been created since 
the USDA-ERS last categorized counties) is a rural area only if all 
counties from which the new county's land was taken are themselves 
rural under currently applicable UICs.
    ii. Under Sec.  1026.35(b)(2)(iv)(B), an area is underserved 
during a calendar year if, according to Home Mortgage Disclosure Act 
(HMDA) data for the preceding calendar year, it is a county in which 
no more than two creditors extended covered transactions, as defined 
in Sec.  1026.43(b)(1), secured by a first lien, five or more times 
in the county. Specifically, a county is an ``underserved'' area if, 
in the applicable calendar year's public HMDA aggregate dataset, no 
more than two creditors have reported five or more first-lien 
covered transactions with HMDA geocoding that places the properties 
in that county. For purposes of this determination, because only 
covered transactions are counted, all first-lien originations (and 
only first-lien originations) reported in the HMDA data are counted 
except those for which the owner-occupancy status is reported as 
``Not owner-occupied'' (HMDA code 2), the property type is reported 
as ``Multifamily'' (HMDA code 3), the applicant's or co-applicant's 
race is reported as ``Not applicable'' (HMDA code 7), or the 
applicant's or co-applicant's sex is reported as ``Not applicable'' 
(HMDA code 4). The most recent HMDA data are available at http://www.ffiec.gov/hmda.
    iii. A. Each calendar year, the Bureau applies the 
``underserved'' area test and the ``rural'' area test to each county 
in the United States. If the entire county satisfies either test, 
the Bureau will include the county on a published list of entirely 
``rural'' or ``underserved'' counties for a particular calendar 
year. To facilitate compliance with appraisal requirements in Sec.  
1026.35(c), the Bureau will also create a list of those counties 
that are entirely ``rural,'' without regard to whether the counties 
are ``underserved.'' These lists will not include counties that are 
partially rural and partially non-rural. To the extent that U.S. 
territories are treated by the Census Bureau as counties and are 
neither metropolitan statistical areas nor micropolitan statistical 
areas adjacent to metropolitan statistical areas, such territories 
will be included on these lists as rural areas in their entireties. 
The Bureau will post on its public Web site the applicable lists for 
each calendar year by the end of that year and publish such lists in 
the Federal Register, to assist creditors in ascertaining the 
availability to them of the exemption during the following year. Any 
county that the Bureau includes on its published lists of counties 
that are entirely ``rural'' or ``underserved'' for a particular year 
is deemed to qualify as a ``rural'' or ``underserved'' area for that 
calendar year for purposes of Sec.  1026.35(b)(2)(iv).
    B. The Bureau may provide on its public Web site an automated 
tool that allows creditors to determine whether properties are 
located in areas that are rural or underserved according to the 
definitions in Sec.  1026.35(b)(2)(iv) for a particular calendar 
year. A property is deemed to be in a rural or underserved area 
during a particular calendar year if it is identified as being in a 
rural or underserved area by any such tool that may be provided on 
the Bureau's public Web site.
    C. The U.S. Census Bureau may provide on its public Web site an 
automated address search tool that indicates if a property is 
located in an urban area for purposes of the Census Bureau's most 
recent delineation of urban areas. For any calendar year that began 
after the date on which the Census Bureau announced its most recent 
delineation of urban areas, a property is deemed to be in a rural 
area if the search results provided for the property by any such 
tool available on the Census Bureau's public Web site do not 
designate the property as being in an urban area.
    2. Examples. i. An area is considered ``rural'' for a given 
calendar year based on the most recent available UIC designations by 
the USDA-ERS and the most recent available delineations of urban 
areas by the U.S. Census Bureau that are available at the beginning 
of the calendar year. These designations and delineations are 
updated by the USDA-ERS and the U.S. Census Bureau respectively once 
every ten years. As an example, assume a creditor makes first-lien 
covered transactions in Census Block X that is located in County Y 
during calendar year 2017. As of January 1, 2017, the most recent 
UIC designations were published in the second quarter of 2013, and 
the most recent delineation of urban areas was announced in the 
Federal Register in 2012, see U.S. Census Bureau, Qualifying Urban 
Areas, 77 FR 18652 (Mar. 27, 2012). To determine whether County Y is 
entirely rural during calendar year 2017, the creditor can use USDA-
ERS's 2013 UIC designations. If County Y is not entirely rural, the 
creditor can use the U.S. Census Bureau's 2012 delineation of urban 
areas to determine whether Census Block X is rural and is therefore 
a ``rural'' area for purposes of Sec.  1026.35(b)(2)(iv)(A).
    ii. A county is considered an ``underserved'' area for a given 
calendar year based on the most recent available HMDA data. For 
example, assume a creditor makes first-lien covered transactions in 
County Y during calendar year 2016, and the most recent HMDA data 
are for calendar year 2015, published in the third quarter of 2016. 
The creditor will use the 2015 HMDA data to determine 
``underserved'' area status for County Y in calendar year 2016 for 
the purposes of qualifying for the ``rural or underserved'' 
exemption for (1) any higher-priced mortgage loans consummated in 
calendar year 2017 or (2) any higher-priced mortgage loan 
consummated during 2018 for which the application was received prior 
to April 1, 2018.
* * * * *

Section 1026.43--Minimum Standards for Transactions Secured by a 
Dwelling

* * * * *

Paragraph 43(e)(5)

* * * * *
    4. Creditor qualifications. To be eligible to make qualified 
mortgages under Sec.  1026.43(e)(5), a creditor must satisfy the 
requirements stated in Sec.  1026.35(b)(2)(iii)(B) and (C). Section 
1026.35(b)(2)(iii)(B) requires that, during the preceding calendar 
year, or, if the application for the transaction was received before 
April 1, during either of the two preceding calendar years, the 
creditor and its affiliates together originated no more than 2,000 
covered transactions, as defined by Sec.  1026.43(b)(1), secured by 
first liens, that

[[Page 7796]]

were sold, assigned, or otherwise transferred to another person, or 
that were subject at the time of consummation to a commitment to be 
acquired by another person. Section 1026.35(b)(2)(iii)(C) requires 
that, as of the preceding December 31st, or, if the application for 
the transaction was received before April 1, as of either of the two 
preceding December 31sts, the creditor and its affiliates that 
originate covered transactions, as defined by Sec.  1026.43(b)(1), 
secured by a first lien, together, had total assets of less than $2 
billion, adjusted annually by the Bureau for inflation.
* * * * *
    8. Transfer to another qualifying creditor. Under Sec.  
1026.43(e)(5)(ii)(B), a qualified mortgage under Sec.  1026.43(e)(5) 
may be sold, assigned, or otherwise transferred at any time to 
another creditor that meets the requirements of Sec.  
1026.43(e)(5)(i)(D). A qualified mortgage under Sec.  1026.43(e)(5) 
transferred to a creditor that meets these criteria would retain its 
qualified mortgage status even if it is transferred less than three 
years after consummation.
* * * * *

43(f) Balloon-Payment Qualified Mortgages Made by Certain Creditors

43(f)(1) Exemption

* * * * *

Paragraph 43(f)(1)(vi)

    1. Creditor qualifications. Under Sec.  1026.43(f)(1)(vi), to 
make a qualified mortgage that provides for a balloon payment, the 
creditor must satisfy three criteria that are also required under 
Sec.  1026.35(b)(2)(iii)(A), (B) and (C), which require:
    i. During the preceding calendar year or during either of the 
two preceding calendar years if the application for the transaction 
was received before April 1, the creditor extended over 50 percent 
of its total first-lien covered transactions, as defined in Sec.  
1026.43(b)(1), on properties that are located in areas that are 
designated either ``rural'' or ``underserved,'' as defined in Sec.  
1026.35(b)(2)(iv), to satisfy the requirement of Sec.  
1026.35(b)(2)(iii)(A). Pursuant to Sec.  1026.35(b)(2)(iv), an area 
is considered to be rural if it is: a county that is neither in a 
metropolitan statistical area, nor a micropolitan statistical area 
adjacent to a metropolitan statistical area, as those terms are 
defined by the U.S. Office of Management and Budget; or a census 
block that is not in an urban area, as defined by the U.S. Census 
Bureau using the latest decennial census of the United States. A 
county is considered to be an underserved area if no more than two 
creditors extend covered transactions secured by a first lien five 
or more times in that county during a calendar year.
    A. The Bureau determines annually which counties in the United 
States are entirely rural or underserved and publishes on its public 
Web site lists of those counties to assist creditors in determining 
whether they meet this criterion. The Bureau may also provide an 
automated tool on its public Web site that can be used to determine 
whether specific properties are located in areas that qualify as 
``rural'' or ``underserved'' according to the definitions in Sec.  
1026.35(b)(2)(iv) for a particular calendar year. The U.S. Census 
Bureau may also provide on its public Web site an automated address 
search tool that indicates if a specific property address is located 
in an urban area for purposes of the Census Bureau's most recent 
delineation of urban areas. For any calendar year that begins after 
the date on which the Census Bureau announced its most recent 
delineation of urban areas, a property is located in an area that 
qualifies as ``rural'' according to the definitions in Sec.  
1026.35(b)(2)(iv) if the search results provided for the property by 
any such tool available on the Census Bureau's public Web site do 
not identify the property as being in an urban area.
    B. For example, if a creditor originated 100 first-lien covered 
transactions during 2016 and 90 first-lien covered transactions 
during 2017, the creditor meets this element of the exception for 
any transaction consummated during 2018 if at least 46 of its 2017 
covered transactions are secured by first liens on properties that 
are located in one or more counties on the Bureau's lists for 2017 
or are located in one or more census blocks that are not in an urban 
area, as defined by the Census Bureau.
    C. Alternatively, if the creditor's 2017 transactions do not 
meet the test, the creditor satisfies this criterion for any 
transaction consummated during 2018 for which it received the 
application before April 1 if at least 51 of its 2016 covered 
transactions are secured by first liens on properties that are 
located in one or more counties on the Bureau's lists for 2016 or 
are located in one or more census blocks that are not in an urban 
area.
    ii. During the preceding calendar year, or, if the application 
for the transaction was received before April 1, during either of 
the two preceding calendar years, the creditor together with its 
affiliates originated no more than 2,000 covered transactions, as 
defined by Sec.  1026.43(b)(1), secured by first liens, that were 
sold, assigned, or otherwise transferred to another person, or that 
were subject at the time of consummation to a commitment to be 
acquired by another person, to satisfy the requirement of Sec.  
1026.35(b)(2)(iii)(B).
    iii. As of the preceding December 31st, or, if the application 
for the transaction was received before April 1, as of either of the 
two preceding December 31sts, the creditor and its affiliates that 
originate covered transactions secured by a first lien, together, 
had total assets that do not exceed the applicable asset threshold 
established by the Bureau, to satisfy the requirement of Sec.  
1026.35(b)(2)(iii)(C). The Bureau publishes notice of the asset 
threshold each year by amending comment 35(b)(2)(iii)-1.iii.

43(f)(2) Post-Consummation Transfer of Balloon-Payment Qualified 
Mortgage

* * * * *
    2. Application to subsequent transferees. The exceptions 
contained in Sec.  1026.43(f)(2) apply not only to an initial sale, 
assignment, or other transfer by the originating creditor but to 
subsequent sales, assignments, and other transfers as well. For 
example, assume Creditor A originates a qualified mortgage under 
Sec.  1026.43(f)(1). Six months after consummation, Creditor A sells 
the qualified mortgage to Creditor B pursuant to Sec.  
1026.43(f)(2)(ii) and the loan retains its qualified mortgage status 
because Creditor B complies with the conditions relating to 
operating in rural or underserved areas, asset size, and number of 
transactions. If Creditor B sells the qualified mortgage, it will 
lose its qualified mortgage status under Sec.  1026.43(f)(1) unless 
the sale qualifies for one of the Sec.  1026.43(f)(2) exceptions for 
sales three or more years after consummation, to another qualifying 
institution, as required by supervisory action, or pursuant to a 
merger or acquisition.
* * * * *

Paragraph 43(f)(2)(ii)

    1. Transfer to another qualifying creditor. Under Sec.  
1026.43(f)(2)(ii), a balloon-payment qualified mortgage under Sec.  
1026.43(f)(1) may be sold, assigned, or otherwise transferred at any 
time to another creditor that meets the requirements of Sec.  
1026.43(f)(1)(vi). That section requires that a creditor: (1) Extend 
over 50 percent of its total first-lien covered transactions, as 
defined in Sec.  1026.43(b)(1), on properties located in rural or 
underserved areas; (2) together with all affiliates, originate no 
more than 2,000 first-lien covered transactions not retained in the 
portfolio of the creditor or its affiliates; and (3) have, together 
with its affiliates that originate covered transactions secured by a 
first lien, total assets less than $2 billion (as adjusted for 
inflation) at the end of the calendar year. These tests are assessed 
based on transactions and assets from the calendar year preceding 
consummation of the transaction or from either of the two calendar 
years preceding consummation if the application for the transaction 
was received before April 1 of the calendar year in which the loan 
was consummated. A balloon-payment qualified mortgage under Sec.  
1026.43(f)(1) transferred to a creditor that meets these criteria 
would retain its qualified mortgage status even if it is transferred 
less than three years after consummation.
* * * * *

    Dated: January 27, 2015.
Richard Cordray,
Director, Bureau of Consumer Financial Protection.
[FR Doc. 2015-02125 Filed 2-10-15; 8:45 am]
BILLING CODE 4810-AM-P