[Federal Register Volume 84, Number 246 (Monday, December 23, 2019)]
[Rules and Regulations]
[Pages 70410-70413]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-27523]


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BUREAU OF CONSUMER FINANCIAL PROTECTION

12 CFR Part 1026


Truth in Lending Act (Regulation Z) Adjustment To Asset-Size 
Exemption Threshold

AGENCY: Bureau of Consumer Financial Protection.

ACTION: Final rule; official interpretation.

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SUMMARY: The Bureau of Consumer Financial Protection (Bureau) is 
amending the official commentary that interprets the requirements of 
the Bureau's Regulation Z (Truth in Lending) to reflect a change in the 
asset-size threshold for certain creditors to qualify for an exemption 
to the requirement to establish an escrow

[[Page 70411]]

account for a higher-priced mortgage loan. This amendment is based on 
the annual percentage change in the average of the Consumer Price Index 
for Urban Wage Earners and Clerical Workers (CPI-W). Based on the 1.6 
percent increase in the average of the CPI-W for the 12-month period 
ending in November 2019, the exemption threshold is adjusted to $2.202 
billion from $2.167 billion. Therefore, creditors with assets of less 
than $2.202 billion (including assets of certain affiliates) as of 
December 31, 2019, are exempt, if other requirements of Regulation Z 
also are met, from establishing escrow accounts for higher-priced 
mortgage loans in 2020.

DATES: This rule is effective on January 1, 2020.

FOR FURTHER INFORMATION CONTACT: Rachel Ross, Attorney-Advisor; Kristen 
Phinnessee, Senior Counsel, Office of Regulations, at (202) 435-7700. 
If you require this document in an alternative electronic format, 
please contact [email protected].

SUPPLEMENTARY INFORMATION: 

I. Background

    Section 129D of the Truth in Lending Act (TILA) contains a general 
requirement that an escrow account be established by a creditor to pay 
for property taxes and insurance premiums for certain first-lien 
higher-priced mortgage loan transactions. TILA section 129D also 
generally permits an exemption from the higher-priced mortgage loan 
escrow requirement for a creditor that meets certain requirements, 
including any asset-size threshold the Bureau may establish.
    In the 2013 Escrows Final Rule,\1\ the Bureau established such an 
asset-size threshold of $2 billion, which would adjust automatically 
each year, based on the year-to-year change in the average of the CPI-W 
for each 12-month period ending in November, with rounding to the 
nearest million dollars.\2\ In 2015, the Bureau revised the asset-size 
threshold for small creditors and how it applies. The Bureau included 
in the calculation of the asset-size threshold the assets of the 
creditor's affiliates that regularly extended covered transactions 
secured by first liens during the applicable period and added a grace 
period to allow an otherwise eligible creditor that exceeded the asset 
limit in the preceding calendar year (but not in the calendar year 
before the preceding year) to continue to operate as a small creditor 
with respect to transactions with applications received before April 1 
of the current calendar year.\3\ For 2019, the threshold was $2.167 
billion.
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    \1\ 78 FR 4726 (Jan. 22, 2013).
    \2\ See 12 CFR 1026.35(b)(2)(iii)(C).
    \3\ See 80 FR 59943, 59951 (Oct. 2, 2015). The Bureau also 
issued an interim final rule in March 2016 to revise certain 
provisions in Regulation Z to effectuate the Helping Expand Lending 
Practices in Rural Communities Act's amendments to TILA (Pub. L. 
114-94, section 89003, 129 Stat. 1312, 1800-01 (2015)). The rule 
broadened the cohort of creditors that may be eligible under TILA 
for the special provisions allowing origination of balloon-payment 
qualified mortgages and balloon-payment high-cost mortgages, as well 
as for the escrow exemption. See 81 FR 16074 (Mar. 25, 2016).
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    During the 12-month period ending in November 2019, the average of 
the CPI-W increased by 1.6 percent. As a result, the exemption 
threshold is increased to $2.202 billion for 2020. Thus, if the 
creditor's assets together with the assets of its affiliates that 
regularly extended first-lien covered transactions during calendar year 
2019 are less than $2.202 billion on December 31, 2019, and it meets 
the other requirements of Sec.  1026.35(b)(2)(iii), it will be exempt 
from the escrow-accounts requirement for higher-priced mortgage loans 
in 2020 and will also be exempt from the escrow-accounts requirement 
for higher-priced mortgage loans for purposes of any loan consummated 
in 2021 with applications received before April 1, 2021. The adjustment 
to the escrows asset-size exemption threshold will also increase the 
threshold for small-creditor portfolio and balloon-payment qualified 
mortgages under Regulation Z. The requirements for small-creditor 
portfolio qualified mortgages at Sec.  1026.43(e)(5)(i)(D) reference 
the asset threshold in Sec.  1026.35(b)(2)(iii)(C). Likewise, the 
requirements for balloon-payment qualified mortgages at Sec.  
1026.43(f)(1)(vi) reference the asset threshold in Sec.  
1026.35(b)(2)(iii)(C). Under Sec.  1026.32(d)(1)(ii)(C), balloon-
payment qualified mortgages that satisfy all applicable criteria in 
Sec.  1026.43(f)(1)(i) through (vi) and (f)(2), including being made by 
creditors that have (together with certain affiliates) total assets 
below the threshold in Sec.  1026.35(b)(2)(iii)(C), are also excepted 
from the prohibition on balloon payments for high-cost mortgages.

II. Procedural Requirements

A. Administrative Procedure Act

    Under the Administrative Procedure Act (APA), notice and 
opportunity for public comment are not required if the Bureau finds 
that notice and public comment are impracticable, unnecessary, or 
contrary to the public interest. 5 U.S.C. 553(b)(B). Pursuant to this 
final rule, comment 35(b)(2)(iii)-1 in Regulation Z (12 CFR part 1026) 
is amended to update the exemption threshold. The amendment in this 
final rule is technical and merely applies the formula previously 
established in Regulation Z for determining any adjustments to the 
exemption threshold. For these reasons, the Bureau has determined that 
publishing a notice of proposed rulemaking and providing opportunity 
for public comment are unnecessary. Therefore, the amendment is adopted 
in final form.
    Section 553(d) of the APA generally requires publication of a final 
rule not less than 30 days before its effective date, except (1) a 
substantive rule which grants or recognizes an exemption or relieves a 
restriction; (2) interpretive rules and statements of policy; or (3) as 
otherwise provided by the agency for good cause found and published 
with the rule. 5 U.S.C. 553(d). At a minimum, the Bureau believes the 
amendments fall under the third exception to section 553(d). The Bureau 
finds that there is good cause to make the amendments effective on 
January 1, 2020. The amendment in this final rule is technical and non-
discretionary, and it applies the method previously established in the 
agency's regulations for automatic adjustments to the threshold.

B. 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.\4\
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    \4\ 5 U.S.C. 603(a), 604(a).
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C. Paperwork Reduction Act

    The Bureau has determined that this final rule does not impose any 
new or revise any existing recordkeeping, reporting, or disclosure 
requirements on covered entities or members of the public that would be 
collections of information requiring approval by the Office of 
Management and Budget under the Paperwork Reduction Act.\5\
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    \5\ 44 U.S.C. 3501-3521.
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D. Congressional Review Act

    Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.), 
the Bureau will submit a report containing this rule and other required 
information to the United States Senate, the United States House of 
Representatives, and the Comptroller General of the United States prior 
to the rule taking effect. The Office of Information and Regulatory 
Affairs (OIRA) has designated this rule as not a ``major rule'' as 
defined by 5 U.S.C. 804(2).

[[Page 70412]]

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 above, 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.


0
2. In supplement I to part 1026, under Section 1026.35--Requirements 
for Higher-Priced Mortgage Loans, 35(b)(2) Exemptions, Paragraph 
35(b)(2)(iii) is revised to 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)(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 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.
    ii. The creditor and its affiliates together extended no more 
than 2,000 covered transactions, as defined in Sec.  1026.43(b)(1), 
secured by first liens, 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, 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. 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 of the current calendar year, 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 in 2015 a creditor and its 
affiliates together extended 1,500 loans 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 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.
    C. For purposes of Sec.  1026.35(b)(2)(iii)(B), extensions of 
first-lien covered transactions, during the applicable time period, 
by all of a creditor's affiliates, as ``affiliate'' is defined in 
Sec.  1026.32(b)(5), are counted toward the threshold in this 
section. Under the Bank Holding Company Act, a company has control 
over a bank or another company if it directly or indirectly or 
acting through one or more persons owns, controls, or has power to 
vote 25 per centum or more of any class of voting securities of the 
bank or company; it controls in any manner the election of a 
majority of the directors or trustees of the bank or company; or the 
Federal Reserve Board determines, after notice and opportunity for 
hearing, that the company directly or indirectly exercises a 
controlling influence over the management or policies of the bank or 
company. 12 U.S.C. 1841(a)(2).
    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 of the current calendar 
year, the creditor and its affiliates that regularly extended 
covered transactions secured by first liens, together, had total 
assets that are less than the applicable annual asset threshold.
    A. 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 by Sec.  1026.32(b)(5)) that regularly extended covered 
transactions (as defined by Sec.  1026.43(b)(1)) secured by first 
liens, are counted toward the applicable annual asset threshold. See 
comment 35(b)(2)(iii)-1.ii.C for discussion of definition of 
``affiliate.''
    B. Only the assets of a creditor's affiliate that regularly 
extended first-lien covered transactions during the applicable 
period are included in calculating the creditor's assets. The 
meaning of ``regularly extended'' is based on the number of times a 
person extends consumer credit for purposes of the definition of 
``creditor'' in Sec.  1026.2(a)(17). Because covered transactions 
are

[[Page 70413]]

``transactions secured by a dwelling,'' consistent with Sec.  
1026.2(a)(17)(v), an affiliate regularly extended covered 
transactions if it extended more than five covered transactions in a 
calendar year. Also consistent with Sec.  1026.2(a)(17)(v), because 
a covered transaction may be a high-cost mortgage subject to Sec.  
1026.32, an affiliate regularly extends covered transactions if, in 
any 12-month period, it extends more than one covered transaction 
that is subject to the requirements of Sec.  1026.32 or one or more 
such transactions through a mortgage broker. Thus, if a creditor's 
affiliate regularly extended first-lien covered transactions during 
the preceding calendar year, the creditor's assets as of the end of 
the preceding calendar year, for purposes of the asset limit, take 
into account the assets of that affiliate. If the creditor, together 
with its affiliates that regularly extended first-lien covered 
transactions, exceeded the asset limit in the preceding calendar 
year--to be eligible to operate as a small creditor for transactions 
with applications received before April 1 of the current calendar 
year--the assets of the creditor's affiliates that regularly 
extended covered transactions in the year before the preceding 
calendar year are included in calculating the creditor's assets.
    C. If multiple creditors share ownership of a company that 
regularly extended first-lien covered transactions, the assets of 
the company count toward the asset limit for a co-owner creditor if 
the company is an ``affiliate,'' as defined in Sec.  1026.32(b)(5), 
of the co-owner creditor. Assuming the company is not an affiliate 
of the co-owner creditor by virtue of any other aspect of the 
definition (such as by the company and co-owner creditor being under 
common control), the company's assets are included toward the asset 
limit of the co-owner creditor only if the company is controlled by 
the co-owner creditor, ``as set forth in the Bank Holding Company 
Act.'' If the co-owner creditor and the company are affiliates (by 
virtue of any aspect of the definition), the co-owner creditor 
counts all of the company's assets toward the asset limit, 
regardless of the co-owner creditor's ownership share. Further, 
because the co-owner and the company are mutual affiliates the 
company also would count all of the co-owner's assets towards its 
own asset limit. See comment 35(b)(2)(iii)-1.ii.C for discussion of 
the definition of ``affiliate.''
    D. A creditor satisfies the criterion in Sec.  
1026.35(b)(2)(iii)(C) for purposes of any higher-priced mortgage 
loan consummated during 2016, for example, if the creditor (together 
with its affiliates that regularly extended 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 regularly extended 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 regularly extended first-lien covered transactions) had total 
assets of less than the applicable asset threshold on December 31, 
2014.
    E. Under Sec.  1026.35(b)(2)(iii)(C), the $2,000,000,000 asset 
threshold adjusts 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 calendar year 
2020, the asset threshold is $2,202,000,000. A creditor that 
together with the assets of its affiliates that regularly extended 
first-lien covered transactions during calendar year 2019 has total 
assets of less than $2,202,000,000 on December 31, 2019, satisfies 
this criterion for purposes of any loan consummated in 2020 and for 
purposes of any loan consummated in 2021 for which the application 
was received before April 1, 2021. For historical purposes:
    1. 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.
    2. 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.
    3. 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 any loan consummated in 2015 and, if the creditor's 
assets together with the assets of its affiliates that regularly 
extended first-lien covered transactions during calendar year 2014 
were less than that amount, for purposes of any loan consummated in 
2016 for which the application was received before April 1, 2016.
    4. For calendar year 2016, the asset threshold was 
$2,052,000,000. A creditor that together with the assets of its 
affiliates that regularly extended first-lien covered transactions 
during calendar year 2015 had total assets of less than 
$2,052,000,000 on December 31, 2015, satisfied this criterion for 
purposes of any loan consummated in 2016 and for purposes of any 
loan consummated in 2017 for which the application was received 
before April 1, 2017.
    5. For calendar year 2017, the asset threshold was 
$2,069,000,000. A creditor that together with the assets of its 
affiliates that regularly extended first-lien covered transactions 
during calendar year 2016 had total assets of less than 
$2,069,000,000 on December 31, 2016, satisfied this criterion for 
purposes of any loan consummated in 2017 and for purposes of any 
loan consummated in 2018 for which the application was received 
before April 1, 2018.
    6. For calendar year 2018, the asset threshold was 
$2,112,000,000. A creditor that together with the assets of its 
affiliates that regularly extended first-lien covered transactions 
during calendar year 2017 had total assets of less than 
$2,112,000,000 on December 31, 2017, satisfied this criterion for 
purposes of any loan consummated in 2018 and for purposes of any 
loan consummated in 2019 for which the application was received 
before April 1, 2019.
    7. For calendar year 2019, the asset threshold was 
$2,167,000,000. A creditor that together with the assets of its 
affiliates that regularly extended first-lien covered transactions 
during calendar year 2018 had total assets of less than 
$2,167,000,000 on December 31, 2018, satisfied this criterion for 
purposes of any loan consummated in 2019 and for purposes of any 
loan consummated in 2020 for which the application was received 
before April 1, 2020.
    iv. The creditor and its affiliates do not maintain an escrow 
account for any mortgage transaction being serviced by the creditor 
or its affiliate at the time the transaction is consummated, except 
as provided in Sec.  1026.35(b)(2)(iii)(D)(1) and (2). Thus, the 
exemption applies, provided the other conditions of Sec.  
1026.35(b)(2)(iii) are satisfied, even if the creditor previously 
maintained escrow accounts for mortgage loans, provided it no longer 
maintains any such accounts except as provided in Sec.  
1026.35(b)(2)(iii)(D)(1) and (2). Once a creditor or its affiliate 
begins escrowing for loans currently serviced other than those 
addressed in Sec.  1026.35(b)(2)(iii)(D)(1) and (2), however, the 
creditor and its affiliate become ineligible for the exemption in 
Sec.  1026.35(b)(2)(iii) on higher-priced mortgage loans they make 
while such escrowing continues. Thus, as long as a creditor (or its 
affiliate) services and maintains escrow accounts for any mortgage 
loans, other than as provided in Sec.  1026.35(b)(2)(iii)(D)(1) and 
(2), the creditor will not be eligible for the exemption for any 
higher-priced mortgage loan it may make. For purposes of Sec.  
1026.35(b)(2)(iii), a creditor or its affiliate ``maintains'' an 
escrow account only if it services a mortgage loan for which an 
escrow account has been established at least through the due date of 
the second periodic payment under the terms of the legal obligation.
* * * * *

    Dated: December 17, 2019.
Thomas Pahl,
Policy Associate Director, Bureau of Consumer Financial Protection.
[FR Doc. 2019-27523 Filed 12-19-19; 8:45 am]
 BILLING CODE 4810-AM-P