[Federal Register Volume 81, Number 58 (Friday, March 25, 2016)]
[Rules and Regulations]
[Pages 16074-16084]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-06834]


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BUREAU OF CONSUMER FINANCIAL PROTECTION

12 CFR Part 1026

[Docket No. CFPB-2016-0013]
RIN 3170-AA59


Operations in Rural Areas Under the Truth in Lending Act 
(Regulation Z); Interim Final Rule

AGENCY: Bureau of Consumer Financial Protection.

ACTION: Interim final rule with request for public comment.

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SUMMARY: This interim final rule amends certain provisions of 
Regulation Z in light of title LXXXIX of the Fixing America's Surface 
Transportation Act, entitled the Helping Expand Lending Practices in 
Rural Communities Act, Public Law 114-94. The amendments to Regulation 
Z concern two matters: The eligibility of certain small creditors that 
operate in rural or underserved areas for special provisions that 
permit the origination of balloon-payment qualified mortgages and 
balloon-payment high cost mortgages and for an exemption from the 
requirement to establish an escrow account for higher-priced mortgage 
loans and the determination of whether an area is rural for the 
purposes of Regulation Z.

DATES: This final rule is effective on March 31, 2016. Comments may be 
submitted on or before April 25, 2016.

ADDRESSES: You may submit comments, identified by Docket No. CFPB-2016-
0013 or RIN 3170-AA59, by any of the following methods:
     Email: [email protected]. Include Docket 
No. CFPB-2016-0013 or RIN 3170-AA59 in the subject line of the email.
     Electronic: http://www.regulations.gov. Follow the 
instructions for submitting comments.
     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 
Consumer Financial Protection Bureau (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

[[Page 16075]]

personal information, such as account numbers or Social Security 
numbers, should not be included. Comments will not be edited to remove 
any identifying or contact information.

FOR FURTHER INFORMATION CONTACT: Carl Owens, Terry J. Randall, or James 
Wylie, Counsels, Office of Regulations, Consumer Financial Protection 
Bureau, 1700 G Street NW., Washington, DC 20552, at (202) 435-7700.

SUPPLEMENTARY INFORMATION: 

I. Summary of Interim Final Rule

    The Bureau is issuing this interim final rule to amend Regulation Z 
to address the Helping Expand Lending Practices in Rural Communities 
Act of 2015 (HELP Rural Communities Act or the Act), which was enacted 
on December 4, 2015.\1\ The Act has two substantive sections. First, 
the Act broadened the class of creditors that may be eligible under the 
Truth in Lending Act (TILA) for provisions that relieve burden for 
small, rural mortgage creditors.\2\ Second, it requires the Bureau to 
establish a process under which a person may apply to have an area 
designated by the Bureau as a rural area for purposes of a Federal 
consumer financial law.\3\ On March 3, 2016, the Bureau published a 
rule establishing the application process mandated by the Act.\4\ This 
interim final rule addresses the Act's amendments to TILA and defines 
the term ``area'' for purposes of the application process.
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    \1\ Public Law 114-94 (2015).
    \2\ Public Law 114-94, section 89003 (2015).
    \3\ Public Law 114-94, section 89002 (2015).
    \4\ Application Process for Designation of Rural Area under 
Federal Consumer Financial Law, 81 FR 11099 (Mar. 3, 2016).
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    This interim final rule is implementing Congress's intention to 
expand the cohort of small creditors that are eligible for a special 
provision of Regulation Z that permits origination of balloon-payment 
qualified mortgages under Sec.  1026.43(f) and for an exemption from 
the requirement to establish an escrow account for higher-priced 
mortgages (escrow exemption) under Sec.  1026.35(b)(2)(iii). The Act's 
amendments to TILA authorize the Bureau to extend the special provision 
and exemption to certain small creditors that operate in rural or 
underserved areas, and remove TILA's prior limitation that eligible 
creditors must operate predominantly in such areas.\5\ In addition to 
the special provision and escrow exemption addressed in the Act, to 
promote consistent regulatory requirements and reduce unwarranted 
burdens on small creditors, the interim final rule also expands 
eligibility for a special provision which allows rural, small creditors 
to originate high cost mortgages with balloon-payment terms (balloon-
payment high cost mortgages) under Sec.  1026.32(d)(1)(ii)(C).
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    \5\ Public Law 114-94, section 89003 (2015).
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    To expand eligibility for the special provisions and exemption, the 
interim final rule revises Sec.  1026.35(b)(2)(iii)(A), which specifies 
the level of operations in rural or underserved areas at which a 
creditor is eligible for the special provisions and exemption. Under 
the interim final rule, a creditor satisfies the rural-or-underserved 
component of the eligibility criteria if the creditor originated a 
covered transaction secured by a property located in a rural or 
underserved area in the preceding calendar year or, if the application 
for the transaction was received before April 1 of the current calendar 
year, during either of the two preceding calendar years. The interim 
final rule also amends the current eligibility criteria for the escrow 
exemption to ensure that creditors that established escrow accounts 
solely to comply with the current rule will be eligible for the 
exemption if they otherwise meet its criteria under this interim final 
rule.
    In addition to addressing the Act's amendments to TILA, this rule 
also amends Sec.  1026.35(b)(2)(iv)(A), which sets forth the rule for 
determining whether an area is rural for the purposes of Regulation Z, 
by inserting a reference to any areas designated as rural through the 
application process mandated by the Act. This amendment also 
establishes that, consistent with the current definition of rural area 
in Regulation Z, only counties or census blocks are eligible areas for 
the purpose of the application process established by the Bureau 
pursuant to the Act. The Bureau is soliciting comments on the interim 
final rule's amendments to Regulation Z.

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 Wall Street 
Reform and Consumer Protection Act (Dodd-Frank Act), signed into law on 
July 21, 2010.\6\ In the Dodd-Frank Act, Congress significantly amended 
the statutory requirements governing mortgage practices.\7\
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    \6\ Public Law 111-203, 124 Stat. 1376 (2010).
    \7\ See title XIV of the Dodd-Frank Act, Public Law 111-203, 124 
Stat. 1376 (2010) (codified in scattered sections of titles 12, 15, 
and 42 of the United States Code).
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    As part of these changes, Congress vested the Bureau with specific 
authority to modify certain requirements with respect to small 
creditors operating predominantly in rural or underserved areas. TILA 
sections 129C(b)(2)(E)(iv)(I) and 129D(c)(1) granted the Bureau the 
discretion to create a special provision allowing origination of 
balloon-payment qualified mortgages, even though balloon-payment 
mortgages are otherwise precluded from being considered qualified 
mortgages, and an exemption from the requirement to establish an escrow 
account for higher-priced mortgage loans.\8\ TILA limited the cohort of 
creditors to which the Bureau may grant the special provision and 
exemption to include only small creditors that operate predominantly in 
rural or underserved areas.
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    \8\ See Escrow Requirements Under the Truth in Lending Act 
(Regulation Z), 78 FR 4726, 4736 (Jan. 22, 2013) (January 2013 
Escrows Final Rule); Ability-to-Repay and Qualified Mortgage 
Standards Under the Truth in Lending Act (Regulation Z) January 2013 
ATR Final Rule, 78 FR 6408, 6538 (Jan. 30, 2013) (January 2013 ATR 
Final Rule).
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    The Bureau issued several rules in early 2013 to implement these 
new statutory requirements.\9\ As directed by Congress, the Bureau 
considered the issues facing rural, small creditors and determined that 
it was appropriate to exercise its discretion under TILA to reduce 
burden on certain small creditors that operate predominantly in rural 
or underserved areas. Accordingly, the Bureau established a special 
provision allowing origination of balloon-payment qualified mortgages, 
even though balloon-payment mortgages are otherwise precluded from 
being considered qualified mortgages, and an exemption from the pre-
existing requirement to establish an escrow account for higher-priced 
mortgage loans.\10\ To synchronize the treatment of balloon-payment 
loans for purposes of qualified mortgages and high cost mortgages, the 
Bureau exercised discretionary authority under TILA section 129(p)(1) 
to establish a special provision allowing creditors that satisfy

[[Page 16076]]

the same eligibility criteria as the special provision and exemption to 
originate high cost mortgages with balloon-payment features.\11\
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    \9\ See, e.g., January 2013 Escrows Final Rule, 78 FR 4726 (Jan. 
22, 2013); January 2013 ATR Final Rule, 78 FR 6408 (Jan. 30, 2013); 
High Cost Mortgage and Homeownership Counseling Amendments to the 
Truth in Lending Act (Regulation Z) and Homeownership Counseling 
Amendments to the Real Estate Settlement Procedures Act (Regulation 
X), 78 FR 6856 (Jan. 31, 2013) (2013 HOEPA Final Rule); Ability-to-
Repay and Qualified Mortgage Standards Under the Truth in Lending 
Act (Regulation Z), 78 FR 35430 (June 12, 2013) (May 2013 ATR Final 
Rule); 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, 60416 (Oct. 1, 2013) (September 2013 Final Rule).
    \10\ See January 2013 Escrows Final Rule, 78 FR 4726, 4736 (Jan. 
22, 2013); January 2013 ATR Final Rule, 78 FR 6408, 6538 (Jan. 30, 
2013).
    \11\ Section 1026.32(d)(1)(ii)(C); 2013 HOEPA Final Rule, 78 FR 
6856, 6921-22 (Jan. 31, 2013) (adopting same criteria for 
eligibility as the 2013 ATR Final Rule to promote consistency and 
facilitate compliance).
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    The Bureau adopted a single test to determine whether a small 
creditor operated predominantly in rural or underserved areas for the 
purposes of eligibility for the special provisions and exemption.\12\ 
In adopting this test, the Bureau stated that it interpreted the use of 
``predominantly'' in the statute to ``[indicate] a portion greater than 
half'' \13\ and therefore conditioned eligibility on whether the small 
creditor extended more than 50 percent of its total first-lien covered 
transactions \14\ on properties that are located in areas designated as 
either rural or underserved.\15\
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    \12\ See Sec. Sec.  1026.35(b)(2)(iii)(A) (establishing test to 
determine whether the creditor operates predominantly in a rural or 
underserved area for purposes of escrow exemption); 
1026.43(f)(1)(vi) (referring to criterion set forth in Sec.  
1026.35(b)(2)(iii)(A) for purposes of eligibility to originate 
balloon-payment qualified mortgages); Sec.  1026.32(d)(1) (referring 
to the criteria set forth in Sec.  1026.43(f)(1)(i) through (vi) and 
1026.43(f)(2)).
    \13\ 2013 Escrows Final Rule, 78 FR 4726, 4736 (Jan. 22, 2013).
    \14\ ``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).
    \15\ 2013 Escrows Final Rule, 78 FR 4726, 4736 (Jan. 22, 2013).
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    In the spring of 2013, the Bureau adopted provisions establishing a 
two-year transition period during which small creditors that did not 
operate predominantly in rural or underserved areas could originate 
balloon-payment qualified mortgages. The Bureau explained that the 
transition period provided time for small creditors to make changes to 
their business practices, and noted the particular challenges posed by 
existing balloon-payment loans that would be due for renewal in the 
near term. The Bureau also stated that the transition period would give 
it time to study whether the definitions of rural or underserved should 
be adjusted.\16\ In the fall of 2013, the Bureau extended the same two-
year transition period to balloon-payment high cost mortgages for the 
same reasons that it established the transition period for balloon-
payment qualified mortgages.\17\ The Bureau did not make any changes to 
the escrow exemption in these rules.
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    \16\ May 2013 ATR Final Rule, 78 FR 35430, 35488-89 (June 12, 
2013) (adopting Sec.  1026.43(e)(6)).
    \17\ September 2013 Final Rule, 78 FR 60382, 60413 (Oct. 1, 
2013) (amending Sec.  1026.32(d)(1)(ii)(C)).
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    In the fall of 2015, the Bureau adopted revisions that affected the 
special provisions and the escrow exemption.\18\ As part of these 
revisions, the Bureau expanded eligibility for the exemption and 
special provisions by raising the loan origination limit for 
determining eligibility for small creditor status from no more than 500 
applicable loans to no more than 2,000 applicable loans. In addition, 
the Bureau broadened the definition of ``rural'' by adding census 
blocks that are not in urban areas as defined by the U.S. Census Bureau 
to the existing county-based definition. The Bureau noted that the 
special provisions and exemption facilitate the ability of rural, small 
creditors to provide access to mortgage credit for consumers they 
serve. At that time, the Bureau also extended the temporary provisions 
that allow certain small creditors to make balloon-payment qualified 
mortgages and balloon-payment high cost mortgages regardless of whether 
they operated predominantly in rural or underserved areas for an 
additional three and a half months.\19\ The Bureau explained that it 
extended the temporary provisions to provide time for small creditors 
to understand how the changes that the Bureau was making to the 
definition of rural would affect their status and to make any necessary 
adjustments to their business practices. The transition period expires 
on April 1, 2016.
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    \18\ Amendments Relating to Small Creditors and Rural or 
Underserved Areas Under the Truth in Lending Act (Regulation Z), 80 
FR 59944 (Oct. 2, 2015) (October 2015 Small Creditor Final Rule).
    \19\ Id.
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    Just over two months after the Bureau adopted these revisions, on 
December 4, 2015, the HELP Rural Communities Act was enacted into 
law.\20\ The Act broadened the class of creditors that may be eligible 
under TILA for the special provision allowing origination of balloon-
payment qualified mortgages and for the escrow exemption.\21\ Prior to 
the HELP Rural Communities Act amendments, both TILA sections 
129C(b)(2)(E)(iv)(I) and 129D(c)(1), the sections under which the 
Bureau exercised its authority to create the special provision and 
exemption, limited eligibility to small creditors that ``operate 
predominantly in rural or underserved areas.'' The Act struck the term 
``predominantly'' from both sections.\22\ In addition, the Act requires 
the Bureau to establish a temporary application process to have an area 
designated by the Bureau as a rural area for purposes of a Federal 
consumer financial law.\23\
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    \20\ Public Law 114-94 (2015).
    \21\ Public Law 114-94, section 89003 (2015); see also Joint 
Explanatory Statement of the Committee of the Conference, H.R. 22, 
Title LXXXIX--Helping Expand Lending Practices in Rural Communities 
at 55-56, http://transportation.house.gov/uploadedfiles/joint_explanatory_statement.pdf.
    \22\ Public Law 114-94, section 89003 (2015).
    \23\ Public Law 114-94, section 89002 (2015).
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    On March 3, 2016, the Bureau published a procedural rule in the 
Federal Register to establish the application process mandated by the 
Act.\24\ Pursuant to that process, the Bureau will begin accepting 
applications for areas to be designated as rural areas on March 31, 
2016, and the application process will terminate on December 4, 
2017.\25\ The Bureau is issuing this interim final rule to amend 
Regulation Z to exercise the authority granted to the Bureau by the 
Act's amendments to TILA and to insert a reference to rural areas 
designated through the application process mandated by the Act.
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    \24\ Application Process for Designation of Rural Area under 
Federal Consumer Financial Law, 81 FR 11099 (Mar. 3, 2016).
    \25\ The Bureau will consider any application received before 
April 8, 2017. The Bureau may not consider an application received 
on or after April 8, 2017, if it determines that it is not possible 
to complete the statutorily designed potential 240-day application 
process for that application by the sunset date, based on the time 
remaining, the complexity of the application, and any other relevant 
factors. Id.
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III. Legal Authority

    The Bureau is issuing this final rule pursuant to its authority 
under TILA and the Dodd-Frank Act. TILA, as amended by the Dodd-Frank 
Act and the HELP Rural Communities Act, provides specific statutory 
bases for the Bureau's interim final 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 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.
    With respect to the high cost mortgage provisions of TILA section 
129, TILA section 129(p), as amended by the Dodd-Frank Act, grants the 
Bureau the

[[Page 16077]]

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 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.
    In addition, as amended by the Dodd-Frank Act, TILA section 105(a) 
authorizes the Bureau to prescribe regulations to carry out the 
purposes of TILA. Under section 105(a), such regulations may contain 
such additional requirements, classifications, differentiations, or 
other provisions, and may provide for such adjustments and exceptions 
for all or any class of transactions, as in the judgment of the Bureau 
are necessary or proper to effectuate the purposes of TILA, to prevent 
circumvention or evasion thereof, or to facilitate compliance 
therewith. Dodd-Frank Act section 1100A clarified the Bureau's TILA 
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.
    In addition, 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.'' \26\ 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.\27\ In addition, 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.'' TILA is a Federal consumer financial law. 
Accordingly, the Bureau is exercising its authority under Dodd-Frank 
Act section 1022(b) to issue rules that carry out the purposes and 
objectives of TILA.
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    \26\ Dodd-Frank Act section 1061(a)(1)(A), 12 U.S.C. 
5581(a)(1)(A).
    \27\ 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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IV. Administrative Procedure Act

    To the extent that notice and comment would otherwise be required, 
the Bureau finds that there is good cause due to the exigencies created 
by the HELP Rural Communities Act to publish this interim final rule 
without notice and comment and for the rule to be effective less than 
30 days after publication.\28\ It is necessary to finalize the interim 
final rule before April 1, 2016, for the reasons discussed below. As a 
result, the Bureau finds that it is impracticable both to provide 
notice and accept comment on the amendments to Regulation Z before 
finalizing the rule and to provide a 30-day period between publication 
and when the rule is effective.\29\
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    \28\ 5 U.S.C. 553(b)(3)(B); 5 U.S.C. 553(d)(3).
    \29\ This finding also satisfies the requirements of 5 U.S.C. 
808(2), allowing the interim final rule to become effective 
notwithstanding the requirements of 5 U.S.C. 801 for the same 
reasons discussed in this section.
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A. Revisions to Effectuate the Amendments to TILA

    This interim final rule revises certain provisions in Regulation Z 
to effectuate the HELP Rural Communities Act's amendments to TILA, 
which broadened the cohort of creditors that may be eligible under TILA 
for the special provision permitting origination of balloon-payment 
qualified mortgages and for the escrow exemption.\30\ Prior to these 
amendments to TILA, eligibility was limited to creditors that operate 
predominantly in rural or underserved areas. Congress struck the word 
``predominantly'' from the TILA sections.\31\
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    \30\ Public Law 114-94, section 89003 (2015).
    \31\ Id.
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    These amendments to TILA, which were effective upon enactment on 
December 4, 2015, create uncertainty and confusion for creditors that 
are not currently eligible for the special provisions and exemption. 
For example, these creditors may question how the Act changes their 
eligibility for the special provisions and exemption. This uncertainty 
may lead these creditors to change their business practices, 
potentially imposing burden and costs on creditors to update their 
policies and procedures, make changes to their technology, and train 
staff. This uncertainty also creates legal risks for these creditors. 
They may mistakenly believe that the amendments to TILA automatically 
broadened the regulatory exemption and may take steps that might lead 
them out of compliance with the requirements in Regulation Z.
    With respect to the special provisions pertaining to balloon-
payment features, the consequences of this confusion can be avoided if 
the interim final rule is effective before April 1, 2016. Currently, 
the rural-or-underserved aspect of the eligibility criteria for the 
special provisions has no practical effect because, under temporary 
provisions that expire on April 1, 2016, creditors that meet all of the 
other eligibility criteria for the special provisions may originate 
balloon-payment qualified mortgages and balloon-payment high cost 
mortgages even if they do not satisfy the rural-or-underserved 
component of the test.\32\ If the temporary provisions expire before 
the Bureau resolves the uncertainty created by the amendments to TILA 
by revising the rural-or-underserved component of the eligibility 
criteria in Sec.  1026.35(b)(2)(iii)(A), creditors face significant 
confusion about the status of the exemptions, which may cause the 
potential legal risks described above and may impose unnecessary burden 
and costs on newly eligible creditors. The amendment to TILA, striking 
``predominantly,'' suggests that Congress intended to expand 
eligibility for the special provision to additional creditors that 
operate in rural or underserved areas, but that do not operate 
``predominantly'' in rural or underserved areas, and thereby reduce 
burden on this expanded cohort of small creditors. To exercise the 
Bureau's authority consistent with that intent while avoiding imposing 
unnecessary burden and costs on newly eligible small creditors, the 
revisions to the rural-or-underserved test in Sec.  
1026.35(b)(2)(iii)(A) must take effect prior to the April 1, 2016, 
expiration of the temporary provisions. If new Sec.  
1026.35(b)(2)(iii)(A) is not effective

[[Page 16078]]

before the temporary provisions expire, newly eligible small creditors 
would have to change their business practices temporarily to comply 
with the requirements imposed by the current rule and then, later, when 
the revisions to the rule were effective, would have to change their 
business practices again to reverse course. To avoid imposing these 
unnecessary burdens and costs, the amendment to the rural-or-
underserved test under Sec.  1026.35(b)(2)(iii)(A) and conforming 
changes to the commentary must take effect before April 1, 2016.
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    \32\ 12 CFR 1026.43(e)(6); 1026.32(d)(1)(ii)(C).
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    The need to clarify the amendment to TILA's effect on the escrow 
exemption is also urgent because the requirement that creditors operate 
predominantly in rural or underserved areas to be eligible for the 
escrow exemption currently applies and will continue to apply as long 
as the current version of Sec.  1026.35(b)(2)(iii)(A) is still in 
effect. In light of the Act, creditors now face uncertainty surrounding 
the status of their eligibility for the exemption. As noted above, some 
creditors that are not eligible for the current exemption may be under 
the mistaken impression that the amendments to TILA automatically 
broadened the regulatory exemption and that they are no longer required 
to establish escrow accounts for higher-priced mortgage loans. This 
confusion creates legal risks for these creditors. In addition, some 
creditors may be uncertain about whether establishing an escrow account 
to comply with current law will disqualify them from the escrow 
exemption in the future, because creditors generally are not eligible 
for the escrow exemption if they maintain escrow accounts for any 
extension of consumer credit secured by real property or a dwelling 
that it or its affiliate currently services that were established after 
January 1, 2016.\33\ Some creditors may be adjusting their business 
practices as a result of this uncertainty. To resolve this uncertainty, 
the interim final rule's revisions to both the rural-or-underserved 
test under Sec.  1026.35(b)(2)(iii)(A), discussed above, and the ``no 
harm'' provision under Sec.  1026.35(b)(2)(iii)(D)(1) must be 
effective. The ``no harm'' provision ensures that any creditors that 
are currently ineligible for the escrow exemption, but that would 
qualify under the interim final rule, do not lose eligibility for the 
escrow exemption because of escrow accounts they established pursuant 
to requirements in the current rule. The amendments to both sections 
must take effect urgently to resolve the uncertainty surrounding the 
exemption and eliminate the legal risks described above.
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    \33\ 12 CFR 1026.35(b)(2)(iii)(D)(1).
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B. Amendments Related to the Application Process

    The amendment to the definition of rural area under Sec.  
1026.35(b)(2)(iv)(A) must take effect by March 31, 2016. New Sec.  
1026.35(b)(2)(iv)(A)(3) amends Regulation Z to refer to the application 
process mandated by the Act, which requires the Bureau to establish the 
application process by March 3, 2016.\34\ The statute's inclusion of a 
deadline for establishing the application process suggests that 
Congress intended the Bureau to begin accepting applications as 
promptly after March 3, 2016, as possible. Accordingly, the Bureau's 
procedural rule established March 31, 2016, as the date when it would 
begin accepting applications. To provide potential applicants with 
notice of the types of areas for which they may submit applications 
before the Bureau begins accepting applications, it is necessary for 
new Sec.  1026.35(b)(2)(iv)(A)(3) to be effective by March 31, 2016.
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    \34\ Public Law 114-94, section 89002 (2015).
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V. Section-by-Section Analysis

Section 1026.35 Requirements for Higher-Priced Mortgage Loans

35(b) Escrow Accounts
35(b)(2)(iii)
35(b)(2)(iii)(A)
    Section 1026.35(b)(2)(iii) currently provides that an escrow 
account need not be established for a higher-priced mortgage loan by 
small creditors if four conditions identified in Sec.  
1026.35(b)(2)(iii)(A) through (D) are satisfied at the time of 
consummation. Under current Sec.  1026.35(b)(2)(iii)(A), a creditor 
satisfies the rural-or-underserved component of the eligibility 
criteria if, during the preceding calendar year or, if the application 
for the transaction was received before April 1 of the current calendar 
year, during either of the two preceding calendar years, a creditor 
extended more than 50 percent of its total covered transactions secured 
by first liens on properties that are located in rural or underserved 
areas. This provision is consistent with the statutory provision as 
adopted by the Dodd-Frank Act requiring that, in order for the Bureau 
to have the authority to grant the exemption, the creditor must operate 
predominantly in rural or underserved areas. The Bureau is revising 
Sec.  1026.35(b)(2)(iii)(A) to remove the ``more than 50 percent'' 
aspect of the test and condition eligibility on a creditor extending 
one covered transaction secured by a first lien on a property located 
in a rural or underserved area.
    The Bureau is revising Sec.  1026.35(b)(2)(iii)(A) to reflect 
Congress's intent to expand the cohort of small creditors eligible for 
the special provision and exemptions by amending TILA sections 
129C(b)(2)(E)(iv)(I) and 129D(c)(1) by removing ``predominantly'' from 
the statute. These sections of TILA relate to special provisions and an 
exemption that applies to certain small creditors operating in rural or 
underserved areas. Previously, TILA section 129C(b)(2)(E)(iv)(I) 
permitted the Bureau, by regulation, to define qualified mortgage as 
including a balloon loan for certain small creditors that operate 
predominantly in rural or underserved areas. Similarly, TILA section 
129D(c)(1) permitted the Bureau, by regulation, to exempt certain small 
creditors that operate predominantly in rural or underserved areas from 
the requirement to establish an escrow account under TILA section 
129D(a) in certain circumstances. The Act amended both provisions of 
TILA by striking the word ``predominantly'' and thereby extending the 
class of eligible creditors under TILA for the special provisions that 
permit balloon-payment qualified mortgages and for the escrow 
exemption.\35\
---------------------------------------------------------------------------

    \35\ Public Law 114-94, section 89003 (2015).
---------------------------------------------------------------------------

    The Bureau previously issued regulations exercising its authority 
under TILA sections 129C(b)(2)(E)(iv)(I) and 129D(c)(1).\36\ In 
addition, the Bureau also issued regulations using discretionary 
authority under TILA section 129(p)(1) to allow certain small creditors 
that operate predominantly in rural or underserved areas to originate 
balloon-payment high cost mortgages.\37\ In October 2015, the Bureau 
finalized amendments to Regulation Z that broadened the definition of 
small creditor and rural area and thereby expanded the number of 
eligible creditors.\38\
---------------------------------------------------------------------------

    \36\ See January 2013 Escrows Final Rule, 78 FR 4726 (Jan. 22, 
2013); January 2013 ATR Final Rule, 78 FR 6408 (Jan. 30, 2013); May 
2013 ATR Final Rule, 78 FR 35430 (June 12, 2013); October 2015 Small 
Creditor Final Rule, 80 FR 59944 (Oct. 2, 2015).
    \37\ Section 1026.32(d)(1)(ii)(C); 2013 HOEPA Final Rule, 78 FR 
6856, 6921-22 (Jan. 31, 2013) (adopting same criteria for 
eligibility as the 2013 ATR Final Rule to promote consistency and 
``facilitate compliance'').
    \38\ October 2015 Small Creditor Final Rule, 80 FR 59944 (Oct. 
2, 2015).
---------------------------------------------------------------------------

    Regulation Z uses a single test to determine whether a small 
creditor

[[Page 16079]]

operates predominantly in rural or underserved areas for the purposes 
of eligibility for the two balloon-payment special provisions and the 
escrow exemption.\39\ In adopting this test, the Bureau stated that it 
interpreted the use of ``predominantly'' in the statute to ``[indicate] 
a portion greater than half'' and therefore conditioned eligibility on 
whether the small creditor extended more than 50 percent of its total 
first-lien covered transactions on properties that are located in areas 
designated as either rural or underserved.\40\ The Bureau is revising 
Sec.  1026.35(b)(2)(iii)(A) to remove the ``more than 50 percent'' 
aspect of the current test for purposes of the eligibility for the 
escrow exemption, the eligibility to originate balloon-payment 
qualified mortgages, and the eligibility to originate balloon-payment 
high cost mortgages.\41\ Under these revisions, a creditor operates in 
a rural or underserved area if the creditor extended at least one 
first-lien covered transaction on a property that is located in a rural 
or underserved area in the previous calendar year, or if the 
application for the transaction was received before April 1 of the 
current calendar year, during either of the two preceding calendar 
years. The Bureau is also making conforming revisions to comment 
35(b)(2)(iii)-1.
---------------------------------------------------------------------------

    \39\ 12 CFR 1026.35(b)(2)(iii).
    \40\ January 2013 Escrows Final Rule, 78 FR 4726, 4736 (Jan. 22, 
2013); January 2013 ATR Final Rule, 78 FR 6408, 6543 (Jan. 30, 
2013).
    \41\ Allowing Sec.  1026.35(b)(2)(iii)(A), as revised by this 
rule, to continue to apply for purposes of eligibility to originate 
balloon-payment high cost mortgages promotes consistency between the 
Bureau's ability-to-repay requirements and the high cost mortgage 
requirements and facilitates compliance for creditors who operate in 
these areas. See 2013 HOEPA Final Rule, 78 FR 6856, 6921-22 (Jan. 
31, 2013). The special provisions and exemptions facilitate the 
ability of small creditors that operate in rural or underserved 
areas to provide access to mortgage credit for consumers they serve.
---------------------------------------------------------------------------

    When the Bureau adopted the ``more than 50 percent'' aspect of the 
test, it stated that it was implementing the use of ``predominantly'' 
in the statute.\42\ The amendments in section 89003 of the Act, 
striking ``predominantly,'' suggest that Congress intended to expand 
eligibility for the exemption to additional creditors that operate in 
rural or underserved areas, but that do not operate ``predominantly'' 
in those areas by currently making ``more than 50 percent'' of their 
covered transactions in such areas, and to thereby reduce burden on 
this expanded cohort of small creditors.
---------------------------------------------------------------------------

    \42\ January 2013 Escrows Final Rule, 78 FR 4726, 4736 (Jan. 22, 
2013); January 2013 ATR Final Rule, 78 FR 6408, 6543 (Jan. 30, 
2013).
---------------------------------------------------------------------------

    The Bureau believes that TILA sections 129C(b)(2)(E)(iv)(I) and 
129D(c)(1), as revised by the Act, are ambiguous with respect to what 
it means to ``operate in a rural area,'' and are subject to various 
possible reasonable interpretations. The Bureau believes that the one-
loan test adopted by revised Sec.  1026.35(b)(2)(iii)(A) is a 
reasonable interpretation of these provisions of TILA and is 
appropriate at this time in light of the recent regulatory context, 
including Congress's decision to remove the term that the Bureau had 
relied on to establish the ``more than 50 percent'' aspect of the test 
from the statute and the limited data currently available upon which to 
base consideration of other potentially reasonable interpretations. 
Furthermore, as discussed above in part IV, the Bureau believes that 
the amendments must take effect before April 1, 2016, to provide timely 
guidance for creditors who may have uncertainty about the effect of the 
Act on Sec.  1026.35(b)(2)(iii)(A) and need to make prompt decisions 
for the near term about their business operations in light of the Act's 
amendments, including whether to apply for an area to be designated as 
rural.\43\ This certainty is critical to such creditors now, for 
purposes of making near-term business decisions, notwithstanding the 
Bureau's intent to monitor and potentially to revisit this 
interpretation in the future, as discussed below. The Bureau requests 
comment concerning any information or data relevant to the revisions to 
Sec.  1026.35(b)(2)(iii)(A) in addition to the information or data 
discussed in part VII below.
---------------------------------------------------------------------------

    \43\ Application Process for Designation of Rural Area under 
Federal Consumer Financial Law, 81 FR 11099 (Mar. 3, 2016).
---------------------------------------------------------------------------

    The nearer term practical effect of the revisions to Sec.  
1026.35(b)(2)(iii)(A) is that they will likely preserve, for the most 
part, the current status of many small creditors eligible for the 
special provisions. As discussed above, under temporary provisions that 
expire on April 1, 2016, creditors that meet all of the other 
eligibility criteria for the special provisions may originate balloon-
payment qualified mortgages and balloon-payment high cost mortgages 
even if they do not satisfy the rural-or-underserved component of the 
test.\44\ Consequently, this final rule effectively adds to the special 
provisions' eligibility criteria a new prerequisite that the entity 
issue at least one loan in a rural or underserved area.
---------------------------------------------------------------------------

    \44\ 12 CFR 1026.43(e)(6); Sec.  1026.32(d)(1)(ii)(C).
---------------------------------------------------------------------------

    The Bureau intends to monitor the market closely and thoroughly for 
negative effects on consumers or unintended effects on the mortgage 
market as a result of these revisions to Sec.  1026.35(b)(2)(iii)(A). 
The Bureau expects to have better information available for analyzing 
these effects and considering other potentially reasonable 
interpretations of ``operates in rural or underserved areas'' in the 
future, including more data available from the National Survey of 
Mortgage Borrowers (NSMB), as well as the National Mortgage Database 
(NMDB).\45\
---------------------------------------------------------------------------

    \45\ See http://www.fhfa.gov/Homeownersbuyer/Pages/National-Survey-of-Mortgage-Borrowers.aspx. See also http://www.consumerfinance.gov/reports/technical-reports-national-survey-of-mortgage-borrowers-and-national-mortgage-database/. The NSMB is 
one component of the NMDB project, a multi-year project being 
jointly undertaken by the Federal Housing Finance Agency and the 
Bureau. For the Bureau, the NMDB project will support policymaking 
and research efforts and help identify and understand emerging 
mortgage and housing market trends. The Bureau expects to use the 
NMDB, among other purposes, in support of the market monitoring 
called for by the Dodd-Frank Act, including understanding how 
mortgage debt affects consumers and for retrospective rule review 
required by the statute. The Bureau can use the NSMB to gather 
additional information about balloon-payment loans, escrow accounts, 
and creditors operating rural or underserved areas and the NMDB to 
provide additional data relevant to a future rulemaking involving 
creditors that operate in rural areas. For example, the Bureau may 
be able to use NSMB data to monitor the self-reported number of 
consumers that have a mortgage with a balloon feature. The Bureau 
can monitor the self-reported number of consumers that had an escrow 
account at origination. The Bureau can track the areas where either 
mortgages with balloon features or loans without escrow accounts are 
prevalent. The Bureau may also be able to extrapolate the number of 
loans that the creditor providing the loan originated, allowing the 
Bureau to focus on creditors operating predominantly in rural or 
underserved areas if necessary.
---------------------------------------------------------------------------

    At least one year after the effective date of this rule, and 
further dependent on when the Bureau believes newly available 
information may support considering additional rulemaking related to 
Sec.  1026.35(b)(2)(iii)(A), the Bureau intends to invite public 
comment on the effect of these revisions to Sec.  
1026.35(b)(2)(iii)(A). If better information available to the Bureau, 
including further information provided by the public, shows that the 
revisions to Sec.  1026.35(b)(2)(iii)(A) have had unintended effects on 
the mortgage market or negative effects on consumers, the Bureau 
intends to publish a notice of proposed rulemaking to exercise its 
authority to implement a revised test under Sec.  
1026.35(b)(2)(iii)(A). The Bureau requests comment on the optimal scope 
of the exemption for these creditors that the Bureau should consider as 
new data becomes available, and in what timeframe the Bureau should 
consider undertaking additional rulemaking related to the exemption. 
The Bureau also requests comment, including relevant data, on whether 
the

[[Page 16080]]

revisions will result in expanded access to credit.
35(b)(2)(iii)(D)
35(b)(2)(iii)(D)(1)
    Section 1026.35(b)(1) generally requires a creditor to establish an 
escrow account for a higher-priced mortgage loan secured by a first 
lien on a consumer's principal dwelling. Section 1026.35(b)(2)(iii) 
provides an exemption from that requirement for certain small 
creditors. Section 1026.35(b)(2)(iii)(D) makes creditors that maintain 
existing escrow accounts ineligible for that exemption, with certain 
exceptions. One such exception, Sec.  1026.35(b)(2)(iii)(D)(1), 
currently excludes escrow accounts established on or after April 1, 
2010, and before January 1, 2016, from counting for purposes of the 
limitation in Sec.  1026.35(b)(2)(iii)(D). The Bureau is revising Sec.  
1026.35(b)(2)(iii)(D)(1) to extend the excluded period to May 1, 2016. 
The Bureau believes that the period should be extended to accommodate 
creditors who established escrow accounts after January 1, 2016, to 
comply with the previous requirement. Some of these creditors who did 
not previously satisfy the rural-or-underserved test under Sec.  
1026.35(b)(2)(iii)(A) may now qualify under the newly revised rural-or-
underserved test. Creditors should not be precluded from qualifying 
under the newly revised test based solely on their having established 
escrow accounts to comply with requirements that the Bureau is now 
revising.
35(b)(2)(iv)(A)
35(b)(2)(iv)(A)(3)
    Section 1026.35(b)(2)(iv)(A) currently considers an area as 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. The Bureau is 
adding new Sec.  1026.35(b)(2)(iv)(A)(3) to add to this definition an 
area that has been designated as rural pursuant to the application 
process established under section 89002 of the Act.\46\
---------------------------------------------------------------------------

    \46\ Public Law 114-94, title LXXXIX (2015).
---------------------------------------------------------------------------

    As discussed above, on March 3, 2016, the Bureau published a 
procedural rule in the Federal Register establishing an application 
process through which a person may apply to have an area designated by 
the Bureau as a rural area for purposes of a Federal consumer financial 
law.\47\ New Sec.  1026.35(b)(2)(iv)(A)(3) defines rural area to 
include a county or a census block that has been designated as rural by 
the Bureau pursuant to the application process established under 
section 89002 of the Act. This amendment is necessary to incorporate 
areas designated as rural through that application process into the 
definition of rural area set forth in Regulation Z. Per the statute, 
designations through this process are time-limited and expire on 
December 4, 2017.
---------------------------------------------------------------------------

    \47\ Application Process for Designation of Rural Area under 
Federal Consumer Financial Law, 81 FR 11099 (Mar. 3, 2016).
---------------------------------------------------------------------------

    The Bureau interprets the term ``rural area,'' as that term is used 
in section 89002 of the Act, to be an area comprising counties or 
census blocks. For reasons set forth in the section-by-section analysis 
of the October 2015 amendments to Sec.  1026.35(b)(2)(iv)(A), the 
Bureau adopted counties or census blocks as the appropriate units of 
analysis for its rural classification scheme and rejected alternative 
proposals.\48\ Because the Act did not define the term ``rural area'' 
and did not revise this interpretation, the Bureau believes that 
Congress intended for the new designation process to be consistent with 
the current rural designation scheme and thus intended for the 
continued use of counties and census blocks as the units of analysis 
for defining rural areas for purposes of Sec.  1026.35(b)(2)(iv)(A). 
Accordingly, only counties or census blocks are eligible for 
designation as rural under the application process, consistent with the 
interpretation of rural area already set forth in Regulation Z.
---------------------------------------------------------------------------

    \48\ October 2015 Small Creditor Final Rule, 80 FR 59943, 59955 
(Oct. 2, 2015).
---------------------------------------------------------------------------

    The Bureau is also making conforming changes to comments 
35(b)(2)(iv)-1.i and -2.i.

Section 1026.43 Minimum Standards for Transactions Secured by a 
Dwelling

43(f) Balloon-Payment Qualified Mortgages Made by Certain Creditors
43(f)(1) Exemption
43(f)(1)(vi)
    The Bureau is revising comment 43(f)(1)(vi)-1 to remove references 
to the ``more than 50 percent'' test and replace them with references 
to the test under revised Sec.  1026.35(b)(2)(iii)(A) for the reasons 
discussed above in the section-by-section analysis of that section and 
to add references to new Sec.  1026.35(b)(2)(iv)(A)(3) for the reasons 
discussed above in the section-by-section analysis of that section. The 
Bureau is revising the examples provided in the comment to reflect the 
revised test.
43(f)(2)(ii)
    The Bureau is revising comment 43(f)(2)(ii)-1 to remove references 
to the ``more than 50 percent'' test and replace them with references 
to the revised test under Sec.  1026.35(b)(2)(iii)(A) for the reasons 
discussed above in the section-by-section analysis of that section.

VI. Effective Date

    This interim final rule is effective on March 31, 2016.

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

A. Overview

    In developing the final rule, the Bureau has considered potential 
benefits, costs, and impacts.\49\ 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.
---------------------------------------------------------------------------

    \49\ Specifically, Sec.  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.
---------------------------------------------------------------------------

    The discussion below considers the benefits, costs, and impacts of 
expanding eligibility of certain small creditors that operate in rural 
or underserved areas for special provisions that permit originations of 
balloon-payment qualified mortgages and for the escrow exemption for 
higher-priced mortgage loans (HPMLs).\50\ The Bureau

[[Page 16081]]

does not possess the data to evaluate the number of creditors that 
would benefit from the amendment to the extension of the ``no harm 
provision'' \51\ for the escrow exemption. This rule also applies the 
current definition of eligible ``areas'' (i.e., counties or census 
blocks) used for existing rural designations to the new application 
process to have an area designated as rural by the Bureau. The impacts 
of that definition were previously considered and discussed in the 
October 2015 Small Creditor Final Rule. This 1022(b) analysis assumes 
this existing definition of area for purposes of analyzing the costs, 
benefits, and impacts of this rule.
---------------------------------------------------------------------------

    \50\ 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 is also affected by 
the final provisions. The Bureau estimates that there were about 
1,000 high cost mortgage loans across all creditors in the U.S. in 
2014. The Bureau believes that the number of high cost loans that 
also had a balloon feature and were originated by a small creditor 
that was not already qualified for this provision is negligible. The 
Bureau does not expect this to change in the future. Therefore, the 
Bureau believes that the effect of the final 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 does not merit further discussion in this 1022(b) analysis.
    \51\ 12 CFR 1026.35(b)(2)(iii)(D)(1).
---------------------------------------------------------------------------

    The Bureau has chosen to evaluate the benefits, costs, and impacts 
of this rule relative to the current regulatory structure, including 
the October 2015 Small Creditor Final Rule.\52\ The baseline considers 
economic attributes of the relevant market.
---------------------------------------------------------------------------

    \52\ The Bureau has discretion in future rulemakings to choose 
the relevant provisions to discuss and to choose the most 
appropriate baseline for that particular rulemaking.
---------------------------------------------------------------------------

    The Bureau has relied on a variety of data sources to consider the 
potential benefits, costs and impacts of this rule.\53\ However, in 
some instances, the requisite data are not available or are quite 
limited. Data with which to quantify the benefits of this 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 final rule.
---------------------------------------------------------------------------

    \53\ 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.
---------------------------------------------------------------------------

    The primary source of data used in this analysis is 2013 data 
collected under the Home Mortgage Disclosure Act (HMDA). The empirical 
analysis also uses data from the 4th quarter 2013 bank and thrift Call 
Reports \54\ and the 4th quarter 2013 credit union Call Reports from 
the National Credit Union Administration (NCUA) to identify financial 
institutions and their characteristics. Appropriate projections have 
been made to account for gaps in the data, including, for example, 
institutions that do not report under HMDA. The Bureau also used data 
from the National Survey of Mortgage Borrowers.\55\
---------------------------------------------------------------------------

    \54\ 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/.
    \55\ See http://files.consumerfinance.gov/f/201508_cfpb_national-survey-of-mortgage-borrowers-technical-report-15-02.pdf.
---------------------------------------------------------------------------

    This rule expands the number of institutions that, under special 
provisions, are eligible to originate certain types of qualified 
mortgages and to take advantage of an exemption from the requirement to 
establish an escrow account for HPMLs under the January 2013 ATR Final 
Rule, the May 2013 ATR Final Rule, the January 2013 Escrows Final Rule, 
and the 2015 October Small Creditor Final Rule.\56\
---------------------------------------------------------------------------

    \56\ See, January 2013 ATR Final Rule, 78 FR 6408 (Jan. 30, 
2013); May 2013 ATR Final Rule, 78 FR 35430 (June 12, 2013); January 
2013 Escrows Final Rule, 78 FR 4726 (Jan. 22, 2013); October 2015 
Small Creditor Final Rule, 80 FR 59944 (Oct. 2, 2015).
---------------------------------------------------------------------------

    These special provisions and exemption are only available to small 
creditors that operate 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 and other requirements are met. These qualified mortgages 
with balloon-payment features are deemed to comply with the ability-to-
repay requirement as long as these loans have an APR of less than 3.5 
percentage points over APOR for a comparable transaction.\57\ Also, 
rural small creditors are generally allowed to originate higher-priced 
mortgage loans without setting up an escrow account for property taxes 
and insurance.
---------------------------------------------------------------------------

    \57\ Note that currently, due to a temporary exemption in the 
May 2013 Qualified Mortgage Final Rule, all small creditors are 
allowed to originate qualified mortgages with balloon-payment 
features.
---------------------------------------------------------------------------

    The Bureau discussed the benefits and costs of expanding the number 
of creditors eligible for the special provisions and exemption in 
detail in its 2015 October Small Creditor Final Rule Section 1022(b)(2) 
discussion.\58\ Thus, the Bureau refers to that discussion for detailed 
explanations of effects and only provides here the numerical estimates 
of creditors and consumers affected.
---------------------------------------------------------------------------

    \58\ October 2015 Small Creditor Final Rule, 80 FR 59944, 59961-
67 (Oct. 2, 2015).
---------------------------------------------------------------------------

B. Potential Benefits and Costs to Consumers and Covered Persons

Covered Persons Benefits and Costs
    Based on the 2013 data, the Bureau estimated in its 2015 October 
Small Creditor Final Rule that about 4,100 out of the 10,400 small 
creditors would qualify as rural based on the revised definitions and 
``predominantly'' test as it had been defined by the Bureau. Based on 
the same data, roughly an additional 6,000 small creditors will qualify 
as rural under the new provisions. Approximately 300 small creditors 
did not make any loans in rural or underserved areas in 2013, but may 
do so going forward.
    The roughly 6,000 small creditors that will qualify as rural under 
this rule originated approximately 1.1 million loans, including 360,000 
portfolio loans and 70,000 HPMLs in 2013. The Bureau is unaware of how 
many of these loans were balloon loans. However, estimates from the 
National Survey of Mortgage Borrowers indicate that about 4 percent of 
the loans in rural areas had a balloon feature and about 2 percent of 
the loans in non-rural areas had a balloon feature. The Bureau does not 
know and lacks a method for estimating how many creditors who are newly 
eligible for the escrow exemption will choose to stop providing escrow 
accounts when originating HPMLs.
    All methods of compliance under current law remain available to 
covered persons when this rule becomes effective.\59\ Thus, a covered 
person that is in compliance with current law will not need to take any 
additional action under the final rule; however, it might choose to do 
so to benefit from the special provisions and exemption.
---------------------------------------------------------------------------

    \59\ This discussion takes into account the temporary provisions 
that expire on April 1, 2016, that allow small creditors to 
originate balloon-payment qualified mortgages and balloon-payment 
high cost mortgages regardless of their operations in rural or 
underserved areas.
---------------------------------------------------------------------------

Consumer Benefits and Costs
    As the Bureau noted in its 2015 October Small Creditor Final Rule 
that similarly expanded the set of creditors eligible for the special 
provisions, consumer benefit from the final provisions of this rule is 
a potential expansion or avoidance of contraction in access to credit. 
The Bureau outlined its analysis of the available data on access to 
credit in its 2015 October Small Creditor Final Rule, and that analysis 
still applies. Prior to its 2015 October Small Creditor Final Rule, the

[[Page 16082]]

Bureau received numerous comments suggesting that more creditors should 
be eligible for the special provisions and exemption above in order to 
expand access to credit.
    As noted in the 2015 October Small Creditor Final Rule, the 
potential cost to consumers 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. This rule would further reduce consumer protections 
from the 2015 October Small Creditor Final Rule. These consumer 
protections include a consumer's private cause of action against a 
creditor for violating the general ability-to-repay requirements for 
balloon loans and the requirement that every higher-priced mortgage 
loan have an associated escrow account for the payment of property 
taxes and insurance for five years.
    The number of consumers affected is the same as the number of loans 
discussed above.

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

    The only covered persons affected by this rule 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 final provisions. Moreover, it is 
possible that there will be an expansion of access to credit.

E. Impact on Rural Areas

    Despite the Bureau's estimate that balloon loans are about twice as 
frequent in rural areas, this rule is not likely to disproportionately 
impact non-rural areas. The approximately 4,100 small creditors that 
operate predominantly in rural areas are already eligible for the 
special provisions and for the exemption due to the 2015 October Small 
Creditor Final Rule, and are thus unaffected by this rule.

VIII. Regulatory Flexibility Act

    Because no notice of proposed rulemaking is required, the 
Regulatory Flexibility Act does not require an initial or final 
regulatory flexibility analysis.\60\
---------------------------------------------------------------------------

    \60\ 5 U.S.C. 603(a), 604(a).
---------------------------------------------------------------------------

IX. Paperwork Reduction Act

    Under the Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 3501 et 
seq.), Federal agencies are generally required to obtain Office of 
Management and Budget (OMB) approval for information collection 
requirements before 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.
    Consistent with the discussion in Section 1022(b)(2), the Bureau 
has determined that this 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.

List of Subjects in 12 CFR Part 1026

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

Authority and Issuance

    For the reasons set forth in the preamble, the Bureau amends 
Regulation 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, 3353, 
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)(2)(iii)(D)(1), and (b)(2)(iv)(A) 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 of the current calendar 
year, during either of the two preceding calendar years, the creditor 
extended a covered transaction, as defined by Sec.  1026.43(b)(1), 
secured by a first lien on a property that is located in an area that 
is either ``rural'' or ``underserved,'' as set forth in paragraph 
(b)(2)(iv) of this section;
* * * * *
    (D) * * *
    (1) Escrow accounts established for first-lien higher-priced 
mortgage loans for which applications were received on or after April 
1, 2010, and before May 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);
    (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; or
    (3) A county or a census block that has been designated as rural by 
the Bureau pursuant to the application process established under 
section 89002 of the Helping Expand Lending Practices in Rural 
Communities Act, Public Law 114-94, title LXXXIX (2015). The provisions 
of this paragraph (b)(2)(iv)(A)(3) shall cease to have any force or 
effect on December 4, 2017.
* * * * *

0
3. 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.i 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.i and 2.i are revised.
0
B. Under Section 1026.43--Minimum Standards for Transactions Secured by 
a Dwelling:
0
i. Under Paragraph 43(f)(1)(vi), paragraph 1.i is revised.
0
ii. Under Paragraph 43(f)(2)(ii), paragraph 1 is revised.
    The revisions read as follows:

[[Page 16083]]

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. * * *
    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 of the current calendar year, a creditor extended a 
first-lien covered transaction, as defined in Sec.  1026.43(b)(1), 
secured by a property located in an area that is either ``rural'' or 
``underserved,'' as set forth in Sec.  1026.35(b)(2)(iv).
    A. In general, whether the rural-or-underserved 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 of the current calendar year, the creditor may instead 
meet the rural-or-underserved test based on its activity during the 
next-to-last calendar year. This provides creditors with a grace period 
if their activity meets the rural-or-underserved 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 rural-or-underserved test for any higher-
priced mortgage loan consummated during a calendar year if it extended 
a first-lien covered transaction in the preceding calendar year secured 
by a property located in a rural-or-underserved area. If the creditor 
does not meet the rural-or-underserved test in the preceding calendar 
year, 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 of the current 
calendar year and the creditor extended a first-lien covered 
transaction during the next-to-last calendar year that is secured by a 
property located in a rural or underserved area. The following examples 
are illustrative:
    1. Assume that a creditor extended during 2016 a first-lien covered 
transaction that is secured by a property located in a rural or 
underserved area. Because the creditor extended a first-lien covered 
transaction during 2016 that is secured by a property located in a 
rural or underserved area, the creditor can meet this condition for 
exemption for any higher-priced mortgage loan consummated during 2017.
    2. Assume that a creditor did not extend during 2016 a first-lien 
covered transaction secured by a property that is located in a rural or 
underserved area. Assume further that the same creditor extended during 
2015 a first-lien covered transaction that is located in a rural or 
underserved area. Assume further that the creditor consummates a 
higher-priced mortgage loan in 2017 for which the application was 
received in November 2017. Because the creditor did not extend during 
2016 a first-lien covered transaction secured by a property that is 
located in a rural or underserved area, and the application was 
received on or after April 1, 2017, the creditor does not meet this 
condition for exemption. However, assume instead that the creditor 
consummates a higher-priced mortgage loan in 2017 based on an 
application received in February 2017. The creditor meets this 
condition for exemption for this loan because the application was 
received before April 1, 2017, and the creditor extended during 2015 a 
first-lien covered transaction that is located in a rural or 
underserved area.
* * * * *
Paragraph 35(b)(2)(iii)(D)(1)
    1. Exception for certain accounts. Escrow accounts established for 
first-lien higher-priced mortgage loans for which applications were 
received on or after April 1, 2010, and before May 1, 2016, are not 
counted for purposes of Sec.  1026.35(b)(2)(iii)(D). For applications 
received on and after May 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 May 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 May 
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. * * *
    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; 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; or a county or a census block 
that has been designated as ``rural'' by the Bureau pursuant to the 
application process established in 2016. See Application Process for 
Designation of Rural Area under Federal Consumer Financial Law; 
Procedural Rule, 81 FR 11099 (Mar. 3, 2016). 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 under Sec.  
1026.35(b)(2)(iv)(A)(1) 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.
* * * * *
    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-

[[Page 16084]]

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 for the 2010 
Census, 77 FR 18652 (Mar. 27, 2012). To determine whether County Y is 
rural under the Bureau's definition during calendar year 2017, the 
creditor can use USDA-ERS's 2013 UIC designations. If County Y is not 
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). 
In addition, an area is considered ``rural'' if it is a county or a 
census block that has been designated as rural by the Bureau using the 
application process established in 2016. See Application Process for 
Designation of Rural Area under Federal Consumer Financial Law; 
Procedural Rule, 81 FR 11099 (Mar. 3, 2016). Designations under this 
process are time-limited and expire on December 4, 2017.
* * * * *

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

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

43(f)(1) Exemption.

* * * * *
Paragraph 43(f)(1)(vi)
    1. * * *
    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 of the current calendar year, the creditor 
extended a first-lien covered transaction, as defined in Sec.  
1026.43(b)(1), on a property that is located in an area that is 
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) (the rural-or-underserved test). 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; 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; or a county or a census block that has been designated as 
``rural'' by the Bureau pursuant to the application process established 
in 2016. See Application Process for Designation of Rural Area under 
Federal Consumer Financial Law; Procedural Rule, 81 FR 11099 (Mar. 3, 
2016). An area is considered to be underserved during a calendar year 
if, according to HMDA data for the preceding calendar year, it is a 
county in which no more than two creditors extended covered 
transactions secured by first liens on properties in the county five or 
more times.
    A. The Bureau determines annually which counties in the United 
States are rural or underserved as defined by Sec.  
1026.35(b)(2)(iv)(A)(1) or Sec.  1026.35(b)(2)(iv)(B) and publishes on 
its public Web site lists of those counties to assist creditors in 
determining whether they meet the criterion at Sec.  
1026.35(b)(2)(iii)(A). Creditors may also use an automated tool 
provided on the Bureau's public Web site 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. In addition, the U.S. Census Bureau may 
also provide on its public Web site an automated address search tool 
that specifically indicates if a 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 automated address search 
tool available on the Census Bureau's public Web site do not identify 
the property as being in an urban area. A property is also located in 
an area that qualifies as ``rural,'' if the Bureau has designated that 
area as rural under Sec.  1026.35(b)(2)(iv)(A)(3) and published that 
determination in the Federal Register. See Application Process for 
Designation of Rural Area under Federal Consumer Financial Law; 
Procedural Rule, 81 FR 11099 (Mar. 3, 2016).
    B. For example, if a creditor extended during 2017 a first-lien 
covered transaction that is secured by a property that is located in an 
area that meets the definition of rural or underserved under Sec.  
1026.35(b)(2)(iv), the creditor meets this element of the exception for 
any transaction consummated during 2018.
    C. Alternatively, if the creditor did not extend in 2017 a 
transaction that meets the definition of rural or underserved test 
under Sec.  1026.35(b)(2)(iv), the creditor satisfies this criterion 
for any transaction consummated during 2018 for which it received the 
application before April 1, 2018, if it extended during 2016 a first-
lien covered transaction that is secured by a property that is located 
in an area that meets the definition of rural or underserved under 
Sec.  1026.35(b)(2)(iv).
* * * * *

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) Extended 
a first-lien covered transaction, as defined in Sec.  1026.43(b)(1), on 
a property located in a rural or underserved area; (2) together with 
all affiliates, extended no more than 2,000 first-lien covered 
transactions that were 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; and (3) have, together with its affiliates that regularly 
extended covered transactions secured by first liens, total assets less 
than $2 billion (as adjusted for inflation). These tests are assessed 
based on transactions and assets from the calendar year preceding the 
current calendar year or from either of the two calendar years 
preceding the current calendar year if the application for the 
transaction was received before April 1 of the current calendar year. 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: March 21, 2016.
Richard Cordray,
Director, Bureau of Consumer Financial Protection.
[FR Doc. 2016-06834 Filed 3-22-16; 4:15 pm]
 BILLING CODE 4810-AM-P