[Federal Register Volume 86, Number 30 (Wednesday, February 17, 2021)]
[Rules and Regulations]
[Pages 9840-9857]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-01572]


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BUREAU OF CONSUMER FINANCIAL PROTECTION

12 CFR Part 1026

[Docket No. CFPB-2020-0023]
RIN 3170-AA83


Higher-Priced Mortgage Loan Escrow Exemption (Regulation Z)

AGENCY: Bureau of Consumer Financial Protection.

ACTION: Final rule; official interpretation.

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SUMMARY: The Bureau of Consumer Financial Protection (Bureau) is 
issuing this final rule to amend Regulation Z, which implements the 
Truth in Lending Act, as mandated by section 108 of the Economic 
Growth, Regulatory Relief, and Consumer Protection Act. The amendments 
exempt certain insured depository institutions and insured credit 
unions from the requirement to establish escrow accounts for certain 
higher-priced mortgage loans.

DATES: This rule is effective on February 17, 2021.

FOR FURTHER INFORMATION CONTACT: Joseph Devlin, Senior Counsel, Office 
of Regulations, at 202-435-7700 or https://reginquiries.consumerfinance.gov/. If you require this document in an 
alternative electronic format, please contact 
[email protected].

SUPPLEMENTARY INFORMATION:

I. Summary of the Final Rule

    Regulation Z, 12 CFR part 1026, implements the Truth in Lending Act 
(TILA), 15 U.S.C. 1601 et seq., and includes a requirement that 
creditors establish an escrow account for certain higher-priced 
mortgage loans (HPMLs),\1\ and also provides for certain exemptions 
from this requirement.\2\ In the 2018 Economic Growth, Regulatory 
Relief, and Consumer Protection Act (EGRRCPA),\3\ Congress directed the 
Bureau to issue regulations to add a new exemption from TILA's escrow 
requirement that exempts transactions by certain insured depository 
institutions and insured credit unions. This final rule implements the 
EGRRCPA section 108 statutory directive, removes certain obsolete text 
from the Official Interpretations to Regulation Z (commentary),\4\ and 
also corrects prior inadvertent deletions from and two scrivener's 
errors in existing commentary.\5\
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    \1\ 12 CFR 1026.35(a) and (b). An HPML is defined in 12 CFR 
1026.35(a)(1) and generally means a closed-end consumer credit 
transaction secured by the consumer's principal dwelling with an 
annual percentage rate (APR) that exceeds the average prime offer 
rate (APOR) for a comparable transaction as of the date the interest 
rate is set by: 1.5 percentage points or more for a first-lien 
transaction at or below the Freddie Mac conforming loan limit; 2.5 
percentage points or more for a first-lien transaction above the 
Freddie Mac conforming loan limit; or 3.5 percentage points or more 
for a subordinate-lien transaction. The escrow requirement only 
applies to first-lien HPMLs.
    \2\ 12 CFR 1026.35(b)(2)(i) and (iii).
    \3\ Public Law 115-174, 132 Stat. 1296 (2018).
    \4\ As discussed in more detail in the section-by-section 
analysis of Sec.  1026.35(b)(2)(iv), this obsolete text includes, 
among other text, language related to a recently issued interpretive 
rule. On June 23, 2020, the Bureau issued an interpretive rule that 
describes the Home Mortgage Disclosure Act of 1975 (HMDA), Public 
Law 94-200, 89 Stat. 1125 (1975), data to be used in determining 
that an area is ``underserved.'' 85 FR 38299 (June 26, 2020). As the 
Bureau explained in the interpretive rule, certain parts of the 
methodology described in comment 35(b)(2)(iv)-1.ii became obsolete 
because they referred to HMDA data points replaced or otherwise 
modified by a 2015 Bureau final rule (2015 HMDA Final Rule). 80 FR 
66128, 66256-58 (Oct. 28, 2015). The Bureau stated that it was 
issuing the interpretive rule to supersede the outdated portions of 
the commentary and to identify current HMDA data points it will use 
to determine whether a county is underserved. 85 FR at 38299. In 
this final rule the Bureau amends the comment to remove the obsolete 
text.
    \5\ As discussed in more detail in the section-by-section 
analysis of Sec.  1026.35(b)(2)(iii), the scrivener's errors that 
this rule corrects were in the commentary from Truth in Lending Act 
(Regulation Z) Adjustment to Asset-Size Exemption Threshold, 85 FR 
83411 (Dec. 22, 2020).
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    New Sec.  1026.35(b)(2)(vi) exempts from the Regulation Z HPML 
escrow requirement any loan made by an insured depository institution 
or insured credit union and secured by a first lien on the principal 
dwelling of a consumer if: (1) The institution has assets of $10 
billion or less; (2) the institution and its affiliates originated 
1,000 or fewer loans secured by a first lien on a principal dwelling 
during the preceding calendar year; and (3) certain of the existing 
HPML escrow exemption criteria are met, as described below in part 
V.\6\
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    \6\ When amending commentary, the Office of the Federal Register 
requires reprinting of certain subsections being amended in their 
entirety rather than providing more targeted amendatory instructions 
and related text. The sections of commentary text included in this 
document show the language of those sections with the changes as 
adopted in this final rule. In addition, the Bureau is releasing an 
unofficial, informal redline to assist industry and other 
stakeholders in reviewing the changes this final rule makes to the 
regulatory and commentary text of Regulation Z. This redline is 
posted on the Bureau's website with the final rule. If any conflicts 
exist between the redline and the text of Regulation Z or this final 
rule, the documents published in the Federal Register and the Code 
of Federal Regulations are the controlling documents.
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II. Background

A. Federal Reserve Board Escrow Rule and the Dodd-Frank Act

    Prior to the enactment of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (Dodd-Frank Act),\7\ the Board of Governors of 
the Federal Reserve System (Board) issued a rule \8\ requiring, among 
other things, the establishment of escrow accounts for payment of 
property taxes and insurance for certain ``higher-priced mortgage 
loans,'' a category which the Board defined to capture what it deemed 
to be subprime loans.\9\ The Board explained that this rule was 
intended to reduce consumer and systemic risks by requiring the 
subprime market to structure loans and disclose their pricing similarly 
to the prime market.\10\
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    \7\ Public Law 111-203, 124 Stat. 1376 (2010).
    \8\ 73 FR 44522 (July 30, 2008).
    \9\ Id. at 44532.
    \10\ Id. at 44557-61. Prime market loans generally include an 
escrow account, which may make the monthly payment appear higher 
than for a higher-priced loan that does not include an escrow 
account.
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    In 2010, Congress enacted the Dodd-Frank Act, which amended TILA 
and transferred TILA rulemaking authority and other functions from the 
Board to the Bureau.\11\ The Dodd-Frank Act added TILA section 129D(a), 
which adopted the Board's rule requiring that creditors establish an 
escrow account for higher-priced mortgage loans.\12\ The Dodd-Frank Act 
also excluded certain loans, such as reverse mortgages, from this 
escrow requirement. The Dodd-Frank Act further granted the Bureau 
authority to structure an exemption based on asset size and mortgage 
lending activity for creditors operating predominantly in rural or 
underserved areas.\13\ In 2013, the Bureau exercised this authority to 
exempt from the escrow requirement creditors with under $2 billion in 
assets and meeting other criteria.\14\ In the Helping Expand Lending 
Practices in Rural Communities Act of 2015, Congress amended TILA 
section 129D again by striking the term

[[Page 9841]]

``predominantly'' for creditors operating in rural or underserved 
areas.\15\
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    \11\ Dodd-Frank Act sections 1022, 1061, 1100A and 1100B, 124 
Stat. 1980, 2035-39, 2107-10.
    \12\ Dodd-Frank Act section 1461(a); 15 U.S.C. 1639d.
    \13\ Id.
    \14\ 78 FR 4726 (Jan. 22, 2013). This rule was subsequently 
amended several times, including in 2013 and 2015. See 78 FR 30739 
(May 23, 2013) and 80 FR 59944 (Oct. 2, 2015).
    \15\ Public Law 114-94, div. G, tit. LXXXIX, section 89003, 129 
Stat. 1799, 1800 (2015). In 2016, the Bureau amended Regulation Z to 
implement this change. 81 FR 16074 (Mar. 25, 2016).
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B. Economic Growth, Regulatory Relief, and Consumer Protection Act

    Congress enacted the EGRRCPA in 2018. In section 108 of the 
EGRRCPA,\16\ Congress directed the Bureau to conduct a rulemaking to 
create a new exemption, this one to exempt from TILA's escrow 
requirement loans made by certain creditors with assets of $10 billion 
or less and meeting other criteria. Specifically, section 108 of the 
EGRRCPA amended TILA section 129D(c) to require the Bureau to exempt 
certain loans made by certain insured depository institutions and 
insured credit unions from the TILA section 129D(a) HPML escrow 
requirement.
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    \16\ EGRRCPA section 108, 132 Stat. 1304-05; 15 U.S.C. 
1639d(c)(2).
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    TILA section 129D(c)(2), as amended by the EGRRCPA, requires the 
Bureau to issue regulations to exempt from the HPML escrow requirement 
any loan made by an insured depository institution or insured credit 
union secured by a first lien on the principal dwelling of a consumer 
if: (1) The institution has assets of $10 billion or less; (2) the 
institution and its affiliates originated 1,000 or fewer loans secured 
by a first lien on a principal dwelling during the preceding calendar 
year; and (3) certain of the existing Regulation Z HPML escrow 
exemption criteria, or those of any successor regulation, are met. The 
Regulation Z exemption criteria that the statute includes in the new 
exemption are: (1) The requirement that the creditor extend credit in a 
rural or underserved area (Sec.  1026.35(b)(2)(iii)(A)); (2) the 
exclusion from exemption eligibility of transactions involving forward 
purchase commitments (Sec.  1026.35(b)(2)(v)); and (3) the prerequisite 
that the institution and its affiliates not maintain an escrow account 
other than either (a) those established for HPMLs at a time when the 
creditor may have been required by the HPML escrow rule to do so, or 
(b) those established after consummation as an accommodation to 
distressed consumers (Sec.  1026.35(b)(2)(iii)(D)).

III. Summary of the Rulemaking Process

    The Bureau released a proposed rule to implement EGRRCPA section 
108 on July 2, 2020, and the proposal was published in the Federal 
Register on July 22, 2020.\17\ The comment period closed on September 
21, 2020. Twelve commenters explicitly supported the proposed rule and 
four were generally opposed to it. Almost all of the commenters who 
supported the rule suggested one or more changes, discussed below in 
the section-by-section analysis. The commenters were individuals and 
individual banks and credit unions, as well as State, regional and 
national trade associations representing banks and credit unions. There 
were also two anonymous comments. No community or consumer 
organizations commented on the proposed rule. As discussed in more 
detail below, the Bureau has considered these comments in finalizing 
this final rule as proposed, except that the final rule provides a 
transition period of 120 days, rather than the 90 days set forth in the 
proposed rule.\18\
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    \17\ 85 FR 44228 (July 22, 2020).
    \18\ The transition period is discussed in the section-by-
section analysis of Sec.  1026.35(b)(2)(iii). In addition to the 
comments described in the paragraph above, three trade association 
commenters requested that the Bureau reduce the scope of the general 
HPML definition by changing the interest rate trigger for non-jumbo 
first liens to 2 percent over the APOR. Because the proposed rule 
did not propose to change the statutory general HPML definition and 
doing so would affect regulatory provisions that are not affected by 
EGRRCPA section 108 or the proposed rule, the Bureau considers these 
comments beyond the scope of this rulemaking.
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IV. Legal Authority

    The Bureau is issuing this final rule pursuant to its authority 
under the Dodd-Frank Act and TILA.

A. Dodd-Frank Act Section 1022(b)

    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.'' 
\19\ Among other statutes, TILA and title X of the Dodd-Frank Act are 
Federal consumer financial laws.\20\ Accordingly, in adopting this 
rule, the Bureau is exercising its authority under Dodd-Frank Act 
section 1022(b) to prescribe rules that carry out the purposes and 
objectives of TILA and title X of the Dodd-Frank Act and prevent 
evasion of those laws.
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    \19\ 12 U.S.C. 5512(b)(1).
    \20\ Dodd-Frank Act section 1002(14), 12 U.S.C. 5481(14) 
(defining ``Federal consumer financial law'' to include the 
``enumerated consumer laws'' and the provisions of title X of the 
Dodd-Frank Act); Dodd-Frank Act section 1002(12), 12 U.S.C. 5481(12) 
(defining ``enumerated consumer laws'' to include TILA).
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B. TILA

    As amended by the Dodd-Frank Act, TILA section 105(a) directs the 
Bureau to prescribe regulations to carry out the purposes of TILA, and 
provides that such regulations may contain additional requirements, 
classifications, differentiations, or other provisions, and may provide 
for such adjustments and exceptions for all or any class of 
transactions, that the Bureau judges are necessary or proper to 
effectuate the purposes of TILA, to prevent circumvention or evasion 
thereof, or to facilitate compliance therewith.\21\ A purpose of TILA 
is ``to assure a meaningful disclosure of credit terms so that the 
consumer will be able to compare more readily the various credit terms 
available to him and avoid the uninformed use of credit.'' \22\ This 
stated purpose is tied to Congress's finding that ``economic 
stabilization would be enhanced and the competition among the various 
financial institutions and other firms engaged in the extension of 
consumer credit would be strengthened by the informed use of credit.'' 
\23\ Thus, strengthened competition among financial institutions is a 
goal of TILA, achieved through the effectuation of TILA's purposes.
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    \21\ 15 U.S.C. 1604(a).
    \22\ 15 U.S.C. 1601(a).
    \23\ Id.
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    Historically, TILA section 105(a) has served as a broad source of 
authority for rules that promote the informed use of credit through 
required disclosures and substantive regulation of certain practices. 
Dodd-Frank Act section 1100A clarified the Bureau's section 105(a) 
authority by amending that section to provide express authority to 
prescribe regulations that contain ``additional requirements'' that the 
Bureau finds are necessary or proper to effectuate the purposes of 
TILA, to prevent circumvention or evasion thereof, or to facilitate 
compliance therewith. The Dodd-Frank Act amendment clarified that the 
Bureau has the authority to use TILA section 105(a) to prescribe 
requirements beyond those specifically listed in TILA that meet the 
standards outlined in section 105(a). As amended by the Dodd-Frank Act, 
TILA section 105(a) authority to make adjustments and exceptions to the 
requirements of TILA applies to all transactions subject to TILA, 
except with respect to the provisions of TILA section 129 that apply to 
the high-cost mortgages referred to in TILA section 103(bb).\24\
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    \24\ 15 U.S.C. 1602(bb).
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    The Bureau's authority under TILA section 105(a) to make 
exceptions, adjustments, and additional provisions that the Bureau 
finds are necessary or proper to effectuate the purposes of

[[Page 9842]]

TILA applies with respect to the purpose of TILA section 129D. That 
purpose is to ensure that consumers understand and appreciate the full 
cost of home ownership. The purpose of TILA section 129D is also 
informed by the findings articulated in TILA section 129B(a) that 
economic stabilization would be enhanced by the protection, limitation, 
and regulation of the terms of residential mortgage credit and the 
practices related to such credit, while ensuring that responsible and 
affordable mortgage credit remains available to consumers.\25\
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    \25\ See 15 U.S.C. 1639b(a).
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    For the reasons discussed in this document, the Bureau is amending 
Regulation Z to implement EGRRCPA section 108 to carry out the purposes 
of TILA and is adopting such additional requirements, adjustments, and 
exceptions as, in the Bureau's judgment, are necessary and proper to 
carry out the purposes of TILA, prevent circumvention or evasion 
thereof, or to facilitate compliance. In developing these aspects of 
the rule pursuant to its authority under TILA section 105(a), the 
Bureau has considered: (1) The purposes of TILA, including the purpose 
of TILA section 129D; (2) the findings of TILA, including strengthening 
competition among financial institutions and promoting economic 
stabilization; and (3) the specific findings of TILA section 129B(a)(1) 
that economic stabilization would be enhanced by the protection, 
limitation, and regulation of the terms of residential mortgage credit 
and the practices related to such credit, while ensuring that 
responsible, affordable mortgage credit remains available to consumers.
    In addition, in previous rulemakings, the Bureau adopted two of the 
regulatory provisions this rule now amends. In adopting those 
provisions, the Bureau relied on one or more of the authorities 
discussed above, as well as other authority.\26\ The Bureau is amending 
these provisions in reliance on the same authority, as discussed in 
detail in the Legal Authority or section-by-section analysis parts of 
the Bureau's final rules titled ``Escrow Requirements Under the Truth 
in Lending Act'' and ``Amendments Relating to Small Creditors and Rural 
or Underserved Areas Under the Truth in Lending Act (Regulation Z).'' 
\27\
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    \26\ Specifically, 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. 15 
U.S.C. 1639(c)(1).
    \27\ See 78 FR 4726 and 80 FR 59944, 59945-46.
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V. Section-by-Section Analysis

Section 1026.35--Requirements for Higher-Priced Mortgage Loans

35(a) Definitions
35(a)(3) and (4)
    The escrow requirement exemption in EGRRCPA section 108 is 
available to ``insured credit unions'' and ``insured depository 
institutions.'' Section 108 amends TILA to provide definitions for 
these two terms, at TILA section 129D(i)(3) and (4). ``Insured credit 
union'' has the meaning given the term in section 101 of the Federal 
Credit Union Act (12 U.S.C. 1752), and ``insured depository 
institution'' has the meaning given the term in section 3 of the 
Federal Deposit Insurance Act (12 U.S.C. 1813).
    The Bureau proposed to include these definitions with the existing 
definitions regarding HPMLs, in Sec.  1026.35(a). No commenters 
discussed these definitions or objected to the EGRRCPA's limitation of 
eligibility for the new exemption to insured credit unions and insured 
depository institutions. The Bureau now adopts these definitions as 
proposed.
35(b) Escrow Accounts
35(b)(2) Exemptions
35(b)(2)(iii)
    EGRRCPA section 108 amends TILA section 129D to provide that one of 
the requirements for the new escrow exemption is that an exempted 
transaction satisfy the criterion previously established by the Bureau 
and codified at Regulation Z Sec.  1026.35(b)(2)(iii)(D). Section 
1026.35(b)(2)(iii)(D) establishes as a prerequisite to the exemption 
that a creditor or its affiliate is not already maintaining an escrow 
account for any extension of consumer credit secured by real property 
or a dwelling that the creditor or its affiliate currently 
services.\28\ The purpose of this prerequisite is to limit the 
exemption to institutions that do not already provide escrow accounts 
and thus would have to incur the initial cost of setting up a system to 
provide such accounts. Instead, only institutions that are otherwise 
eligible for the exemption but already provide escrow accounts would 
bear the burden of providing such accounts, with the overall burden for 
them being lower because they are continuing to provide them rather 
than incurring the cost of starting them up. This prerequisite, 
however, is subject to two exceptions.
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    \28\ 78 FR 4726, 4738-39.
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    First, under Sec.  1026.35(b)(2)(iii)(D)(2), a creditor would not 
lose the exemption for providing escrow accounts as an accommodation to 
distressed consumers to assist such consumers in avoiding default or 
foreclosure. The Bureau did not propose to and is not amending this 
exception.
    Second, under Sec.  1026.35(b)(2)(iii)(D)(1), the Bureau in its 
original escrow exemption rule \29\ granted an exception from the non-
escrowing requirement to creditors who established escrow accounts for 
first-lien HPMLs on or after April 1, 2010 (the effective date of the 
Board's original HPML escrow rule), and before June 1, 2013 (the 
effective date of the Bureau's first HPML escrow rule that included the 
Dodd-Frank exemption for certain creditors (the original escrow 
exemption)). The purpose of this exception was to avoid penalizing 
creditors that had not previously provided escrow accounts but 
established them specifically to comply with the regulation requiring 
escrows.\30\ Over time, as the Bureau amended the HPML escrow exemption 
criteria and made more creditors eligible, the Bureau also extended the 
end date for the exception to the non-escrowing requirement in Sec.  
1026.35(b)(2)(iii)(D), so that creditors that had established escrow 
accounts in order to comply with the Bureau's regulations could still 
benefit from the relief provided by the Bureau's amendments to the 
exemption criteria.\31\ The Bureau most recently extended the date to 
May 1, 2016, consistent with the effective date of the Bureau's latest 
amendment to the HPML exemption criteria.\32\
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    \29\ The terms ``original'' and ``existing'' escrow exemption 
refer throughout this document to the regulatory exemption at Sec.  
1026.35(b)(2)(iii), either as implemented by the January 2013 final 
rule or as subsequently amended through 2016. They do not refer to 
the exemptions or exclusions listed at Sec.  1026.35(b)(2)(i).
    \30\ 78 FR at 4738-39.
    \31\ See, e.g., 80 FR 59944, 59968 (adjusting end date to 
January 1, 2016).
    \32\ See Operations in Rural Areas Under the Truth in Lending 
Act (Regulation Z); Interim Final Rule, 81 FR 16074 (Mar. 25, 2016).
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    The proposed rule proposed to amend this exception again, 
explaining that the dates in then-current Sec.  
1026.35(b)(2)(iii)(D)(1) between which creditors were allowed to 
maintain escrow accounts for first-lien HPMLs without losing 
eligibility for the exemption (April 1, 2010, until May 1, 2016) were 
necessary to allow creditors to benefit fully from the existing escrow 
exemption. However, those same dates

[[Page 9843]]

would have caused most insured depositories and insured credit unions 
who would otherwise qualify under the EGRRCPA's new exemption criteria 
to be ineligible for the exemption. The reason they would have been 
ineligible is that those depositories and credit unions presumably had 
established escrows for HPMLs after May 1, 2016, in compliance with the 
then-current escrow rule's requirements.
    In the proposed rule, to assist otherwise exempt institutions to 
avoid inadvertently making themselves ineligible by establishing escrow 
accounts before they had heard about the rule and adjusted their 
compliance, the Bureau proposed to replace the May 1, 2016, end date 
for the exception to the prerequisite against maintaining escrows with 
a new end date that was approximately 90 days after the effective date 
(proposed as the date of publication in the Federal Register) of the 
eventual section 108 escrow exemption final rule. In addition, the 
Bureau proposed to amend comment 35(b)(2)(iii)-1.iv to conform to this 
change.
    The Bureau also proposed to amend comment 35(b)(2)(iii)(D)(1)-1 to 
address the date change. Comments 35(b)(2)(iii)(D)(1)-1 and (2)-1 were 
inadvertently deleted from the Code of Federal Regulations in 2019 
during an annual inflation adjustment rulemaking, and no change in 
interpretation of the associated regulatory provisions was 
intended.\33\ The Bureau proposed to correct this deletion by 
reinserting the two comments back into Supplement I, with comment 
35(b)(2)(iii)(D)(1)-1 amended from its former language to reflect the 
date change described above and with no changes being made to comment 
35(b)(2)(iii)(D)(2)-1. In addition, a sentence describing the 
definition of ``affiliate'' in comment 35(b)(2)(iii)-1.ii.C was also 
inadvertently deleted from the Code of Federal Regulations in 2019, and 
no change in interpretation was intended.\34\ The Bureau also proposed 
to add the deleted sentence back into this comment.
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    \33\ 84 FR 1356 (Feb. 26, 2019).
    \34\ Id.
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    Two commenters supported the proposed extension of the non-
escrowing date to 90 days beyond the effective (i.e., publication) date 
of the rule and said they agreed with the Bureau's concern that small 
institutions might unintentionally become ineligible. Four other 
commenters requested that the Bureau allow 120 days instead of 90, 
stating that small institutions often lack the resources to adjust to 
new compliance requirements quickly and thus the extra time would be 
very important. Two other commenters asked for a longer transition 
period than 90 days but did not specify how many days the Bureau should 
provide. None of the commenters asking for more than 90 days provided 
factual evidence of the need for more time beyond their stated 
knowledge of creditor processes.
    The Bureau is amending Sec.  1026.35(b)(2)(iii)(D)(1) and comments 
35(b)(2)(iii)-1.iv and (iii)(D)(1)-1 generally as proposed, but 
finalizing the end date for the exception to the non-escrowing 
requirement as 120 days from the effective date (date of publication) 
instead of the proposed end date of 90 days from the effective date. 
The small- to mid-size institutions affected by the rule may not be 
immediately aware of the change and might make themselves ineligible 
for the exemption by establishing escrow accounts before they become 
aware of the change. With the final rule end date change, such 
institutions will have 120 days to learn of the amendment. The Bureau 
has no information that extending the non-escrowing date of the final 
rule from 90 to 120 days after the effective date would harm consumers 
or have an adverse impact on industry.
    The Bureau initially adopted the criterion in Sec.  
1026.35(b)(2)(iii)(D) under its broad discretionary authority, set 
forth in 15 U.S.C. 1639d(c)(4), to establish ``any other criteria [for 
the escrow exemption] consistent with the purposes'' of the escrow 
provisions. In establishing the new exemption in EGRRCPA section 108, 
Congress incorporated as a prerequisite to the new exemption the 
criterion in Sec.  1026.35(b)(2)(iii)(D) or ``any successor 
regulation.'' The Bureau interprets the reference to ``any successor 
regulation'' to authorize it to make amendments to existing Sec.  
1026.35(b)(2)(iii)(D) consistent with the purposes of the escrow 
provisions, the same standard under which the provision was initially 
authorized. The Bureau believes the amendment to the end date in Sec.  
1026.35(b)(2)(iii)(D)(1) is consistent with the purposes of the escrow 
provisions to avoid disqualifying the majority of institutions that 
otherwise would qualify for the new exemption. Without this amendment, 
the Bureau believes that very few insured depository institutions and 
insured credit unions would have been able to benefit from the new 
escrow exemption. Such institutions would only have been institutions 
that (1) together with their affiliates, had more than approximately $2 
billion in assets and, without affiliates, less than $10 billion in 
assets; (2) had not extended any HPMLs since May 1, 2016; and (3) did 
not offer mortgage escrows in the normal course of business. Because 
this approach would have restricted access to the new HPML escrow 
exemption to this limited group of institutions, the usefulness of the 
exemption would have been extremely limited. The Bureau acknowledges 
the possibility that creditors outside of the scope of the new escrow 
exemption might become eligible for the existing escrow exemption as a 
result of the end-date change. However, any such creditors were able to 
so during previous date extensions and chose not to. Therefore, the 
Bureau believes that few, if any, of such creditors would actually take 
advantage of the existing escrow exemption during this date extension.
    In addition, the Bureau's exemption is authorized under the 
Bureau's TILA section 105(a) authority to make adjustments to 
facilitate compliance with TILA and effectuate its purposes.\35\ 
Modifying the date will facilitate compliance with TILA for the 
institutions that would qualify for the exemption but for the previous 
end date.
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    \35\ 15 U.S.C. 1604(a).
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    Finally, in a recent annual inflation adjustment rulemaking, the 
Bureau erroneously amended comment 35(b)(2)(iii)-1.iii.E to include a 
reference to the year ``2019'' rather than the correct ``2020,'' and 
also erroneously amended comment 35(b)(2)(iii)-1.iii.E.8 to include a 
reference to the year ``2010'' rather than the correct ``2021.'' \36\ 
The Bureau considers these to be scrivener's errors that should be 
interpreted as references to the year ``2020'' and ``2021'' 
respectively, and the Bureau is now correcting the errors for clarity.
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    \36\ Truth in Lending Act (Regulation Z) Adjustment to Asset-
Size Exemption Threshold, 85 FR 83411, 83415 (Dec. 22, 2020).
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35(b)(2)(iv)
35(b)(2)(iv)(A)
    The proposed rule explained that existing Sec.  
1026.35(b)(2)(iv)(A)(3) provided that a county or census block could be 
designated as rural using an application process pursuant to section 
89002 of the Helping Expand Lending Practices in Rural Communities 
Act.\37\ Because the provision ceased to have any force or effect on 
December 4, 2017, the Bureau proposed to remove this provision and make 
conforming changes to Sec.  1026.35(b)(2)(iv)(A). The Bureau also 
proposed to remove references to the obsolete provision in comments

[[Page 9844]]

35(b)(2)(iv)(A)-1.i and -2.i, as well as comment 43(f)(1)(vi)-1.
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    \37\ 129 Stat. 1799.
---------------------------------------------------------------------------

    On June 23, 2020, the Bureau issued an interpretive rule that 
describes the HMDA data to be used in determining whether an area is 
``underserved.'' \38\ As the interpretive rule explained, certain parts 
of the methodology described in comment 35(b)(2)(iv)-1.ii became 
obsolete because they referred to HMDA data points replaced or 
otherwise modified by the 2015 HMDA Final Rule. In the proposed rule, 
the Bureau proposed to remove as obsolete the last two sentences from 
comment 35(b)(2)(iv)-1.ii and to remove references to publishing the 
annual rural and underserved lists in the Federal Register, based on 
its tentative conclusion that such publication does not increase the 
ability of financial institutions to access the information, and that 
posting the lists on the Bureau's public website is sufficient.
---------------------------------------------------------------------------

    \38\ Bureau of Consumer Fin. Prot., Truth in Lending (Regulation 
Z); Determining ``Underserved'' Areas Using Home Mortgage Disclosure 
Act Data (June 23, 2020), https://www.consumerfinance.gov/policy-compliance/rulemaking/final-rules/truth-lending-regulation-z-underserved-areas-home-mortgage-disclosure-act-data/.
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    The Bureau did not receive comments on these proposed changes to 
Sec.  1026.35(b)(2)(iv)(A), the related changes to the official 
commentary, or the changes to comment 35(b)(2)(iv)-1.\39\ For the 
reasons discussed above, the Bureau is finalizing these amendments as 
proposed.
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    \39\ Although the Bureau did not receive comments about the 
specific changes regarding rural or underserved status discussed 
here, commenters did express concern about the general rural or 
underserved requirement of the new escrow exemption. Those comments 
are discussed below in the section-by-section analysis of Sec.  
1026.35(b)(2)(vi)(C).
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35(b)(2)(v)
    EGRRCPA section 108 further amends TILA section 129D to provide 
that one of the requirements for the new escrow exemption is that an 
exempted loan satisfy the criterion in Regulation Z Sec.  
1026.35(b)(2)(v), a prerequisite to the original escrow exemption. 
Existing Sec.  1026.35(b)(2)(v) provides that, unless otherwise 
exempted by Sec.  1026.35(b)(2), the exemption to the escrow 
requirement would not be available for any first-lien HPML that, at 
consummation, is subject to a commitment to be acquired by a person 
that does not satisfy the conditions for an exemption in Sec.  
1026.35(b)(2)(iii) (i.e., no forward commitment). In adopting the 
original escrow exemption, the Bureau stated that the prerequisite of 
no forward commitments would appropriately implement the requirement in 
TILA section 129D(c)(1)(C) \40\ that the exemption apply only to 
portfolio lenders.\41\ The Bureau also reasoned that conditioning the 
exemption on a lack of forward commitments, rather than requiring that 
all loans be held in portfolio, would avoid consumers having to make 
unexpected lump sum payments to fund an escrow account.\42\
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    \40\ EGRRCPA section 108 redesignated this paragraph. It was 
previously TILA section 129D(c)(3).
    \41\ 78 FR 4726, 4741.
    \42\ Id. at 4741-42.
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    To implement section 108, the Bureau proposed to add references in 
Sec.  1026.35(b)(2)(v) to the new exemption to make clear that the new 
exemption would also not be available for transactions subject to 
forward commitments of the type described in Sec.  1026.35(b)(2)(v). 
The Bureau also proposed to add similar references to the new exemption 
in comment 35(b)(2)(v)-1 discussing ``forward commitments.'' The Bureau 
did not receive comments regarding these provisions and is finalizing 
them as proposed.
35(b)(2)(vi)
    As explained above in part I, section 108 of the EGRRCPA amends 
TILA section 129D to provide a new exemption from the HPML escrow 
requirement.\43\ The new exemption is narrower than the existing TILA 
section 129D exemption in several ways, including the following. First, 
the section 108 exemption is limited to insured depositories and 
insured credit unions that meet the statutory criteria, whereas the 
existing escrow exemption applies to any creditor (including a non-
insured creditor) that meets its criteria. Second, the originations 
limit in the section 108 exemption is specified to be 1,000 loans 
secured by a first lien on a principal dwelling originated by an 
insured depository institution or insured credit union and its 
affiliates during the preceding calendar year. In contrast, TILA 
section 129D(c)(1) (as redesignated) gave the Bureau discretion to 
choose the originations limit for the original escrow exemption, which 
the Bureau set at 500 covered transactions, and subsequently amended to 
2,000 covered transactions (other than portfolio loans).\44\ Third, 
TILA section 129D(c)(1) also gave the Bureau discretion to determine 
any asset size threshold (which the Bureau set at $2 billion) and any 
other criteria the Bureau may establish, consistent with the purposes 
of TILA. EGRRCPA section 108, on the other hand, specifies an asset 
size threshold of $10 billion and does not expressly state that the 
Bureau can establish other criteria. (However, as discussed above, 
section 108 does appear to allow for a more circumscribed ability to 
alter certain parameters of the new exemption by referencing the 
existing regulation ``or any successor regulation.'').\45\
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    \43\ EGRRCPA section 108 designates the new exemption as TILA 
section 129D(c)(2) and redesignates the paragraph that includes the 
existing escrow exemption, adopted pursuant to section 1461(a) of 
the Dodd-Frank Act, as TILA section 129D(c)(1).
    \44\ 12 CFR 1026.35(b)(2)(iii)(B).
    \45\ TILA section 129D(c)(2)(C).
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    As explained in the proposed rule, EGRRCPA section 108 carves out a 
carefully circumscribed exemption available to insured depository 
institutions and insured credit unions that do not pursue mortgage 
lending as a major business line. Congress provided an asset size limit 
of $10 billion, approximately eight billion dollars above the existing 
escrow exemption, but reduced the originations limit to 1,000 loans.
    The Bureau proposed to implement the EGRRCPA section 108 exemption 
consistent with this understanding of its limited scope. Proposed new 
Sec.  1026.35(b)(2)(vi) would have codified the section 108 exemption 
by imposing as a precondition a bar on its use with transactions 
involving forward commitments, as explained above in the discussion of 
the forward commitments provision, Sec.  1026.35(b)(2)(v), and limiting 
its use to insured depository institutions and insured credit unions. 
The other requirements for the exemption would have been implemented in 
proposed subparagraphs (A), (B) and (C), discussed below.
    Only one commenter, a national trade association, referred to the 
proposal's discussion of the nature and purpose of the new exemption. 
That commenter agreed with the Bureau's reading of the statute and 
supported the Bureau's implementation of the new exemption.
    To facilitate compliance, the Bureau also proposed to provide 
three-month grace periods \46\ for the annually applied requirements 
for the EGRRCPA section 108 escrow exemption, in Sec.  
1026.35(b)(2)(vi)(A), (B), and (C). The grace periods would allow 
exempt creditors to continue using the exemption for three months after 
they exceed a threshold in the previous year, to allow a transition 
period and facilitate compliance.\47\ The new

[[Page 9845]]

proposed exemption would have used the same type of grace periods as in 
the existing escrow exemption at Sec.  1026.35(b)(2)(iii).
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    \46\ See the discussion of Sec.  1026.35(b)(2)(vi)(A) below for 
further explanation of the Bureau's adoption of grace periods in the 
exemption.
    \47\ See 80 FR 59944, 59948-49, 59951, 59954.
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    Three commenters supported the proposed grace periods, citing 
compliance uncertainty and volume and asset fluctuations. Two of these 
commenters discussed the general use of grace periods for the different 
thresholds in the rule, and one discussed the use of a grace period 
with the 1,000-loan threshold specifically. No commenters opposed the 
use of grace periods. As explained further below in the section-by-
section analysis of Sec.  1026.35(b)(2)(vi)(A), the Bureau is now 
adopting the grace periods as proposed.
    In addition to the three-month grace periods, the proposed 
exemption had other important provisions in common with the existing 
escrow exemption, including the rural or underserved test, the 
definition of affiliates, and the application of the non-escrowing time 
period requirement. Thus, the Bureau proposed to add new comment 
35(b)(2)(vi)-1, which cross-references the commentary to Sec.  
1026.35(b)(2)(iii). Specifically, proposed comment 35(b)(2)(vi)-1 
explained that for guidance on applying the grace periods for 
determining asset size or transaction thresholds under Sec.  
1026.35(b)(2)(vi)(A) or (B), the rural or underserved requirement, or 
other aspects of the exemption in Sec.  1026.35(b)(2)(vi) not 
specifically discussed in the commentary to Sec.  1026.35(b)(2)(vi), an 
insured depository institution or insured credit union may, where 
appropriate, refer to the commentary to Sec.  1026.35(b)(2)(iii).
    No commenters discussed proposed comment 35(b)(2)(vi)-1 and its 
cross reference to the commentary to Sec.  1026.35(b)(2)(iii). For the 
reasons discussed above, the Bureau now adopts the comment as proposed.
35(b)(2)(vi)(A)
    EGRRCPA section 108(1)(D) amends TILA section 129D(c)(2)(A) to 
provide that the new escrow exemption is available only for 
transactions by an insured depository or credit union that ``has assets 
of $10,000,000,000 or less.'' The Bureau proposed to implement this 
provision in new Sec.  1026.35(b)(2)(vi)(A) by: (1) Using an 
institution's assets during the previous calendar year to qualify for 
the exemption, but allowing for a three-month grace period at the 
beginning of a new year if the institution loses the exemption it 
previously qualified for; and (2) adjusting the $10 billion threshold 
annually for inflation using the Consumer Price Index for Urban Wage 
Earners and Clerical Workers (CPI-W), not seasonally adjusted, for each 
12-month period ending in November, with rounding to the nearest 
million dollars.
    Two commenters opposed the $10 billion asset threshold, arguing 
that larger financial institutions should have access to the exemption. 
One of these commenters suggested that the Bureau make the exemption 
available to financial institutions with assets of $4 billion dollars 
or more that originate 100 or more mortgages per year. However, section 
108 of the EGRRCPA specifically sets a threshold of $10 billion as a 
maximum. The comment provided no basis for the Bureau to ignore the 
express language of the statute in its implementing regulations.
    The existing escrow exemption at Sec.  1026.35(b)(2)(iii) includes 
three-month grace periods for determination of asset size, loan volume, 
and rural or underserved status. As explained above in the section-by-
section analysis of Sec.  1026.35(b)(2)(vi), those grace periods allow 
exempt creditors to continue using the exemption for three months after 
they exceed a threshold in the previous year, so that there will be a 
transition period to facilitate compliance when they no longer qualify 
for the exemption.\48\ The use of grace periods therefore addresses 
potential concerns regarding the impact of asset size and origination 
volume fluctuations from year to year.\49\ As with the grace periods in 
the existing escrow exemption, the new proposed grace period in Sec.  
1026.35(b)(2)(vi)(A) would cover applications received before April 1 
of the year following the year that the asset threshold is exceeded, 
and allow institutions to continue to use their asset size from the 
year before the previous year.
---------------------------------------------------------------------------

    \48\ 80 FR 59944, 59948-49, 59951, 59954.
    \49\ See 80 FR 7770, 7781 (Feb. 11, 2015).
---------------------------------------------------------------------------

    The Bureau has determined that, although new TILA section 
129D(c)(2)(A) does not expressly provide for a grace period, the Bureau 
is justified in using the same type of grace period in the new 
exemption as provided for in the existing regulatory exemption. EGRRCPA 
section 108 specifically cites to and relies on aspects of the existing 
regulatory exemption, which uses grace periods for certain factors. In 
fact, section 108 incorporates one requirement from the existing escrow 
exemption, the rural or underserved requirement at Sec.  
1026.35(b)(2)(iii)(A), that uses a grace period. The Bureau believes 
that grace periods are authorized under its TILA section 105(a) 
authority.\50\ The Bureau concludes that the proposed grace periods for 
the asset threshold, and the loan origination limit in Sec.  
1026.35(b)(2)(vi)(B),\51\ would facilitate compliance with TILA for 
institutions that formerly qualified for the exemption but then 
exceeded the threshold in the previous year. Those institutions would 
have three months to adjust their compliance management systems to come 
into compliance and provide the required escrow accounts. The grace 
periods would reduce uncertainties caused by yearly fluctuations in 
assets or originations and make the timing of the new and existing 
exemptions consistent. They would also ease the aggregate compliance 
burden of the escrow provisions, consistent with the overall purpose of 
the statutory amendments.
---------------------------------------------------------------------------

    \50\ 15 U.S.C. 1604(a).
    \51\ The Bureau also believes that the use of a grace period 
with the rural or underserved requirement is appropriate and the 
Bureau is proposing to include one by citing to existing Sec.  
1026.35(b)(2)(iii)(A). However, because the regulation already 
provides for that grace period, the discussion of the use of 
exception and adjustment authority does not list it.
---------------------------------------------------------------------------

    As explained in the section-by-section analysis of Sec.  
1026.35(b)(2)(vi), all comments received that referred to grace periods 
supported their use. For the reasons discussed in that section-by-
section analysis and immediately above, the Bureau now finalizes as 
proposed the three-month grace period for the asset threshold provision 
in Sec.  1026.35(b)(2)(vi)(A).
    Congress restricted the EGRRCPA section 108 exemption to insured 
depositories and credit unions with assets of $10 billion or less. 
Although section 108 does not expressly state that this figure should 
be adjusted for inflation, the Bureau proposed this adjustment to 
effectuate the purposes of TILA and facilitate compliance with TILA. 
EGRRCPA section 108 specifically cites to and relies on criteria in the 
existing escrow exemption, whose asset threshold is adjusted for 
inflation. Furthermore, monetary threshold amounts are adjusted for 
inflation in numerous places in Regulation Z.\52\ In addition, 
inflation adjustment keeps the threshold value at the same level in 
real terms as when adopted, thereby ensuring the same effect over time 
as provided for initially in the statute. Therefore, adjusting the 
threshold value to account for inflation is necessary or proper under 
TILA section 105(a) to effectuate the purposes

[[Page 9846]]

of TILA and facilitate compliance with TILA.\53\ The Bureau believes 
that adjusting the threshold for inflation would facilitate compliance 
by allowing the institutions to remain exempt despite inflation, and 
that failure to adjust for inflation would interfere with the purpose 
of TILA by reducing the availability of the exemption over time to 
fewer institutions than the provision was meant to cover.
---------------------------------------------------------------------------

    \52\ See, e.g., Sec.  1026.3(b)(1)(ii) (Regulation Z exemption 
for credit over applicable threshold), Sec.  1026.35(c)(2)(ii) 
(appraisal exemption threshold); Sec.  1026.6(b)(2)(iii) (CARD Act 
minimum interest charge threshold); Sec.  1026.43(e)(3)(ii)(points 
and fees thresholds for qualified mortgage status).
    \53\ 15 U.S.C. 1604(a).
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    In order to facilitate compliance with Sec.  1026.35(b)(2)(vi)(A), 
the Bureau proposed to add comment 35(b)(2)(vi)(A)-1. Comment 
35(b)(2)(vi)(A)-1 would explain the method by which the asset threshold 
will be adjusted for inflation, that the assets of affiliates are not 
considered in calculating compliance with the threshold (consistent 
with EGRRCPA section 108), and that the Bureau will publish notice of 
the adjusted asset threshold each year.
    The Bureau did not receive any comments on the proposed annual 
inflation adjustment to the asset threshold. For the reasons discussed 
above, the Bureau now is finalizing this provision and comment 
35(b)(2)(vi)(A)-1 as proposed.
35(b)(2)(vi)(B)
    EGRRCPA section 108 limits use of its escrow exemption to insured 
depositories and insured credit unions that, with their affiliates, 
``during the preceding calendar year . . . originated 1,000 or fewer 
loans secured by a first lien on a principal dwelling.'' This threshold 
is half the limit in the existing regulatory exemption and does not 
exclude portfolio loans from the total.
    The Bureau proposed to implement the 1,000-loan threshold in new 
Sec.  1026.35(b)(2)(vi)(B), with a three-month grace period similar to 
the one provided in proposed Sec.  1026.35(b)(2)(vi)(A) and the ``rural 
or underserved'' requirement in proposed Sec.  1026.35(b)(2)(vi)(C) 
(discussed in more detail in the relevant section-by-section analysis 
below). (For the Bureau's reasoning regarding the adoption of grace 
periods with the new exemption, see the section-by-section analyses of 
Sec.  1026.35(b)(2)(vi) and (vi)(A) above.)
    There are important differences between the 2,000-loan transaction 
threshold in existing Sec.  1026.35(b)(2)(iii)(B) and the 1,000-loan 
transaction threshold in proposed Sec.  1026.35(b)(2)(vi)(B). Proposed 
comment 35(b)(2)(vi)(B)-1 would aid compliance by explaining the 
differences between the transactions to be counted toward the two 
thresholds for their respective exemptions.
    Four commenters discussed the proposed loan-limit threshold. As 
explained above in the section-by-section analysis of Sec.  
1026.35(b)(2)(vi)(A), one commenter suggested that the Bureau make the 
exemption available to financial institutions with assets of $4 billion 
dollars or more that originate 100 or more mortgages per year. Two 
commenters stated that the threshold should be 2,000 loans a year, the 
same as the existing escrow exemption, in order to reduce costs and 
allow them to better serve their customers. However, EGRRCPA section 
108 specifies the 1,000 loan limit, and does not cite to the 2,000 loan 
limit in the existing escrow exemption, even though it does cite to the 
existing escrow exemption for other requirements.\54\ In other words, 
Congress specifically addressed this issue and chose not to use the 
numbers suggested by the commenters.
---------------------------------------------------------------------------

    \54\ A different commenter acknowledged that the statute would 
not allow an increase to a 2,000 loan limit, but requested that the 
Bureau support future legislation that would do so. The Bureau 
generally does not take a position on pending or future legislation.
---------------------------------------------------------------------------

    For the reasons discussed above, the Bureau is finalizing Sec.  
1026.35(b)(2)(vi)(B) and comment 35(b)(2)(vi)(B)-1 as proposed.
35(b)(2)(vi)(C)
    EGRRCPA section 108 requires that, in order to be eligible for the 
new exemption, an insured depository institution or insured credit 
union must, among other things, satisfy the criteria in Sec.  
1026.35(b)(2)(iii)(A) and (D), or any successor regulation. The Bureau 
proposed to implement these requirements in new Sec.  
1026.35(b)(2)(vi)(C).
    Section 1026.35(b)(2)(iii)(A) requires that 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 has 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 Sec.  1026.35(b)(2)(iv). As discussed 
above in the section-by-section analysis of Sec.  1026.35(b)(2)(vi)(A), 
the current regulation includes a three-month grace period at the 
beginning of a calendar year to allow a transition period for 
institutions that lose the existing escrow exemption, and EGRRCPA 
section 108 incorporates that provision, including the grace period, 
into the new exemption. By following the EGRRCPA and citing to the 
current regulation, the Bureau proposed to include the criteria for 
extending credit in a rural or underserved area, including the grace 
period, in the new exemption.
    Four commenters stated that the final rule should exclude small 
manufactured housing loans from the ``rural or underserved'' 
requirement. These commenters raised concerns that the cost of 
escrowing was taking lenders out of this market and making these loans 
less available, and they indicated that the requirement would interfere 
with many institutions' ability to make appropriate use of the new 
exemption. Two of these commenters suggested that the Bureau eliminate 
the rural or underserved requirement for loans under $100,000, which 
they said would generally be manufactured housing loans, as long as the 
lender meets all of the other requirements for the new HPML escrow 
exemption. The commenters did not provide any data or specific 
information to support their statements.
    The rural or underserved provision is a TILA statutory requirement 
incorporated in the existing regulatory exemption.\55\ EGRRCPA section 
108 expressly cites to and adopts this requirement,\56\ and the 
proposed rule proposed to do the same. The Bureau does not believe that 
partial elimination of this statutory requirement would implement 
EGRRCPA section 108 appropriately. Furthermore, the statutory EGRRCPA 
provision did not differentiate between manufactured housing and other 
real estate, the Bureau's proposal did not discuss the rule's potential 
effects on manufactured housing loans, and the proposal did not 
consider or include a loan amount based carve-out. The commenters did 
not provide any evidence that Congress intended a carve-out targeted at 
manufactured housing as they propose, and such a carve-out could affect 
the existing escrow exemption if adopted fully. Moreover, these 
commenters did not provide data demonstrating that the escrow 
requirement interferes with the availability of manufactured housing 
loans, and the Bureau does not have such data. For these reasons, the 
Bureau declines to alter the rural or underserved requirement for the 
new exemption and finalizes the provision as proposed. However, the 
Bureau will continue to monitor the market regarding this issue.
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    \55\ 12 CFR 1026.35(b)(2)(iii)(A).
    \56\ TILA section 129D(c)(2)(C).

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[[Page 9847]]

    Section 1026.35(b)(2)(iii)(D) of the existing escrow exemption, 
which EGRRCPA section 108 makes a requirement for the new exemption, 
generally provides that a creditor may not use the exemption if it or 
its affiliate maintains an escrow account for any extension of consumer 
credit secured by real property or a dwelling that the creditor or its 
affiliate currently services. The Bureau proposed to implement this 
requirement in Sec.  1026.35(b)(2)(vi)(C). See the section-by-section 
analysis of Sec.  1026.35(b)(2)(iii) above for a discussion of this 
requirement and the exception to this requirement for escrows 
established between certain dates.
    One mortgage lender commenter stated that it now uses escrows often 
for its customers, because it did not previously qualify for an 
exemption from the escrow rule. The commenter further stated that 
stopping all escrows would interfere with its current level of service, 
and that the customer and the lender should decide if an escrow is 
appropriate for a given loan. For these reasons, the commenter 
suggested that the Bureau eliminate the non-escrowing requirement from 
the new exemption.
    EGRRCPA section 108 cites to and adopts the non-escrowing 
requirement in the Bureau's existing regulation, making the non-
escrowing requirement in the new exemption statutory. The commenter did 
not provide any factual or legal evidence to support its suggestion 
that the Bureau's regulations not follow the statutory requirement. For 
these reasons and the reasons explained above in the discussion of 
Sec.  1026.35(b)(2)(iii)(D), the Bureau declines to eliminate the non-
escrowing requirement in this final rule. The Bureau will, however, 
continue to monitor the market regarding this issue. The Bureau now 
finalizes the provision as proposed, with the extension of the end date 
for non-escrowing described below and discussed above in regard to 
Sec.  1026.35(b)(2)(iii)(D)(1).
    There are two exclusions from the non-escrowing requirement in the 
existing escrow exemption and that, therefore, were proposed for the 
new escrow exemption. First, escrow accounts established after 
consummation as an accommodation to distressed consumers to assist such 
consumers in avoiding default or foreclosure are excluded from this 
prohibition. In addition, escrow accounts established between certain 
dates during which the creditor would have been required to provide 
escrows to comply with the regulation are also excluded. As explained 
in the section-by-section analysis of Sec.  1026.35(b)(2)(iii)(D) 
above, the Bureau proposed to change the end date of this second 
exclusion to accommodate the new section 108 exemption. Because the 
Bureau proposed to make the final rule effective upon publication in 
the Federal Register (see part VI below), the Bureau proposed to extend 
the end date in Sec.  1026.35(b)(2)(iii)(D)(1) to 90 days after such 
publication. The Bureau believed that the extra 90 days would help 
potentially exempt institutions avoid inadvertently making themselves 
ineligible.
    As explained above in regard to Sec.  1026.35(b)(2)(iii)(D)(1), the 
Bureau is adopting an end date for the non-escrowing requirement that 
is 120 days after the effective date (i.e., publication date).

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)
    As explained above in the section-by-section analysis of Sec.  
1026.35(b)(2)(iv)(A), the Bureau proposed to remove an obsolete 
provision from that section and remove references to that obsolete 
provision in comments 35(b)(2)(iv)-1.i and -2.i, as well as comment 
43(f)(1)(vi)-1. The Bureau did not receive any comments on this change. 
For the reasons described in that section-by-section analysis and 
immediately above, the Bureau now removes the obsolete language in 
comment 43(f)(1)(vi)-1.

VI. Effective Date

    The Bureau proposed that the amendments included in the proposed 
rule would take effect for mortgage applications received by an exempt 
institution on the date of the final rule's publication in the Federal 
Register. Under section 553(d) of the Administrative Procedure Act, the 
required publication or service of a substantive rule must be made not 
less than 30 days before its effective date except for certain 
instances, including when a substantive rule grants or recognizes an 
exemption or relieves a restriction.\57\ The final rule will grant an 
exemption from a requirement to provide escrow accounts for certain 
HPMLs and relieve a restriction against providing certain HPMLs without 
such accounts. The final rule is therefore a substantive rule that 
grants an exemption and relieves requirements and restrictions.
---------------------------------------------------------------------------

    \57\ 5 U.S.C. 553(d).
---------------------------------------------------------------------------

    Two commenters discussed the proposal to make the rule effective 
upon publication and supported it. Another commenter requested that the 
Bureau extend the effective date indefinitely and study the effect of 
the escrow rule on community banks. To make the benefits of the new 
EGRRCPA section 108 exemption available to eligible financial 
institutions as soon as possible, the Bureau is making this final rule 
effective on the date of its publication in the Federal Register.

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

A. Overview

    The Bureau is finalizing this rule to implement EGRRCPA section 
108. See the section-by-section analysis above for a full description 
of the final rule. In developing the final rule, the Bureau has 
considered the rule's potential benefits, costs, and impacts as 
required by section 1022(b)(2)(A) of the Dodd-Frank Act.\58\ In 
addition, the Bureau has consulted, or offered to consult, with the 
appropriate prudential regulators and other Federal agencies, including 
regarding consistency of this final rule with any prudential, market, 
or systemic objectives administered by such agencies as required by 
section 1022(b)(2)(B) of the Dodd-Frank Act.
---------------------------------------------------------------------------

    \58\ Specifically, section 1022(b)(2)(A) of the Dodd-Frank Act 
requires the Bureau to consider the potential benefits and costs of 
the regulation to consumers and covered persons, including the 
potential reduction of access by consumers to consumer financial 
products and services; the impact of proposed rules on insured 
depository institutions and insured credit unions with less than $10 
billion in total assets as described in section 1026 of the Dodd-
Frank Act; and the impact on consumers in rural areas.
---------------------------------------------------------------------------

B. Data Limitations and Quantification of Benefits, Costs, and Impacts

    The discussion in this part VII relies on information that the 
Bureau has obtained from industry, other regulatory agencies, and 
publicly available sources. These sources form the basis for the 
Bureau's consideration of the likely impacts of the final rule. The 
Bureau provides the best estimates possible of the potential benefits 
and costs to consumers and covered persons of this rule given available 
data. However, as discussed further below in this part VII, the data 
with which to quantify the potential costs, benefits, and impacts of 
the final rule are generally limited.
    In light of these data limitations, the analysis below generally 
provides a qualitative discussion of the benefits, costs, and impacts 
of the final rule.

[[Page 9848]]

General economic principles and the Bureau's expertise in consumer 
financial markets, together with the limited data that are available, 
provide insight into these benefits, costs, and impacts.

C. Baseline for Analysis

    In evaluating the potential benefits, costs, and impacts of the 
final rule, the Bureau takes as a baseline the existing regulations 
requiring the establishment of escrow accounts for certain HPMLs and 
the existing exemption from these regulations. The final rule will 
create a new exemption so that some entities that are currently subject 
to the regulations requiring the establishing of these escrow accounts 
will no longer be subject to those regulations. Therefore, the baseline 
for the analysis of the final rule is those entities remaining subject 
to those requirements. The Bureau received no comments regarding this 
choice of baseline for its section 1022(b) analysis.
    The final rule should affect the market as described in part VII.D 
below as long as it is in effect. However, the costs, benefits, and 
impacts of any rule are difficult to predict far into the future. 
Therefore, the analysis in part VII.D of the benefits, costs, and 
impacts of the final rule is most likely to be accurate for the first 
several years following implementation of the final rule.

D. Benefits and Costs to Consumers and Covered Persons

    The Bureau has relied on a variety of data sources to analyze the 
potential benefits, costs, and impacts of the final rule. To estimate 
the number of mortgage lenders that may be impacted by the rule and the 
number of HPMLs originated by those lenders, the Bureau has analyzed 
the 2019 HMDA data.\59\ While the HMDA data have some shortcomings that 
are discussed in more detail below, they are the best source available 
to the Bureau to quantify the impact of the final rule. For some 
portions of the analysis, the requisite data are not available or are 
quite 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.
---------------------------------------------------------------------------

    \59\ For information on the 2019 HMDA data, see Feng Liu et al., 
An Updated Review of the New and Revised Data Points in HMDA: 
Further Observations using the 2019 HMDA Data (Aug. 2020), https://files.consumerfinance.gov/f/documents/cfpb_data-points_updated-review-hmda_report.pdf. The section 1022(b) analysis of the proposal 
for this rule analyzed 2018 HMDA data.
---------------------------------------------------------------------------

    For entities that currently exist, the final rule will have a 
direct effect mainly on those entities that are not currently exempt 
and will become exempt under the final rule. The Bureau estimates that 
in the 2019 HMDA data there are 154 insured depositories or insured 
credit unions with assets between $2 billion and $10 billion that 
originated at least one mortgage in a rural or underserved area and 
originated fewer than 1,000 mortgages secured by a first lien on a 
primary dwelling, and as a result are likely to be impacted by the 
final rule. Together, these institutions reported originating 120,904 
mortgages in 2019. The Bureau estimates that less than 3,000 of these 
were HPMLs.\60\
---------------------------------------------------------------------------

    \60\ Some of the 154 entities described above were exempt under 
the EGRRCPA from reporting many variables for their loans. Non-
exempt entities originated 2,601 first-lien closed-end mortgages 
with APOR spreads above 150 basis points. Such mortgages below the 
conforming loan limit were HPMLs. Such mortgages above the 
conforming limit loan limit may not have been HPMLs if their APOR 
spreads were less than 250 basis points. To derive an upper limit on 
the number of HPMLs originated, all such mortgages are included in 
the calculations. The Bureau does not have data on the number of 
potential HPMLs originated by entities exempt under the EGRRCPA from 
reporting rate spread data. Assuming the ratio of HPMLs to first-
lien mortgages is the same for these entities as it was for non-
exempt entities yields an estimate of 347 HPMLs originated by exempt 
entities, for a total conservative estimate of 2,948 HPMLs in the 
sample.
---------------------------------------------------------------------------

    Because of the amendment to the end date in proposed 
1026.35(b)(2)(iii)(D)(1), it is possible that the final rule will also 
affect entities that established escrow accounts after May 1, 2016, but 
would otherwise already be exempt under existing regulations. These 
could be entities that voluntarily established escrow accounts after 
May 1, 2016, even though they were not required to, or entities that, 
together with certain affiliates, had more than $2 billion in total 
assets, adjusted for inflation, before 2016 but less than $2 billion, 
adjusted for inflation, afterwards. The Bureau does not possess the 
data to evaluate the number of such creditors but believes there to be 
very few of them.
    The final rule could encourage entry into the HPML market, 
expanding the number of entities exempted. However, the limited number 
of existing insured depository institutions and insured credit unions 
who will be exempt under the final rule may be an indication that the 
total potential market for such institutions of this size engaging in 
mortgage lending of less than 1,000 loans per year is small. This could 
indicate that few such institutions would enter the market due to the 
final rule.\61\ Moreover, the volume of lending they could engage in 
while maintaining the exemption is limited. The impact of this final 
rule on such institutions that are not exempt and would remain not 
exempt, or that are already exempt, will likely be very small. The 
impact of this final rule on consumers with HPMLs from institutions 
that are not exempt and will remain not exempt, or that are already 
exempt, will also likely be very small. Therefore, the analysis in this 
part VII.D focuses on entities that will be affected by the final rule 
and consumers at those entities. Because few entities are likely to be 
affected by the final rule, and these entities originate a relatively 
small number of mortgages, the Bureau notes that the benefits, costs, 
and impacts of the final rule are likely to be small. However, in 
localized areas some newly exempt community banks and small credit 
unions may increase mortgage lending to consumers who may be 
underserved at present.
---------------------------------------------------------------------------

    \61\ For evidence that the original escrow requirement did not 
cause many lenders to exit the market, see Alexei Alexandrov & 
Xiaoling Ang, Regulations, Community Bank and Credit Union Exits, 
and Access to Mortgage Credit (rev. Oct. 2018), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2462128. This provides 
suggestive evidence that a limited exemption from the escrow 
requirement will cause few lenders to enter the market.
---------------------------------------------------------------------------

1. Benefits and Costs to Consumers
    For consumers with HPMLs originated by affected insured depository 
institutions and insured credit unions, the main effect of the final 
rule will be that those institutions will no longer be required to 
provide escrow accounts for HPMLs. As described in part VII.D above, 
the Bureau estimates that fewer than 3,000 HPMLs were originated in 
2019 by institutions likely to be impacted by the rule. Institutions 
that will be affected by the final rule could choose to provide or not 
provide escrow accounts. If affected institutions decide not to provide 
escrow accounts, then consumers who would have escrow accounts under 
the baseline will instead not have escrow accounts. Affected consumers 
will experience both benefits and costs as a result of the final rule. 
These benefits and costs will vary across consumers. The discussion of 
these benefits and costs below focuses on the effects of escrow 
accounts on monthly payments. However, one commenter noted that, 
because creditors often require borrowers to make two upfront monthly 
payments of escrowed items when obtaining a loan, escrow accounts also 
increase the amount consumers must pay upfront to obtain a loan 
(although these upfront payments can often themselves be financed). 
Therefore, many of the costs and benefits discussed in this part 
VII.D.1 should also be

[[Page 9849]]

interpreted as applying to these upfront payments.
    Affected consumers would have mortgage escrow accounts under the 
baseline but will not under the final rule. The potential benefits to 
consumers of not having mortgage escrow accounts include: (1) More 
budgetary flexibility, (2) interest or other earnings on capital,\62\ 
(3) decreased prices passed through from decreased servicing costs, and 
(4) greater access to credit resulting from lower mortgage servicing 
costs.
---------------------------------------------------------------------------

    \62\ Some States require the paying of interest on escrow 
account balances. But even in those States the consumer might be 
able to arrange a better return than the escrow account provides.
---------------------------------------------------------------------------

    Escrow accounts generally require consumers to save for infrequent 
liabilities, such as property tax and insurance, by making equal 
monthly payments. Standard economic theory predicts that many consumers 
may value the budgetary flexibility to manage tax and insurance 
payments in other ways. Even without an escrow account, those consumers 
who prefer to make equal monthly payments towards escrow liabilities 
may still do so by, for example, creating a savings account for the 
purpose. Other consumers who do not like this payment structure can 
come up with their own preferred payment plans. For example, a consumer 
with $100 per month in mortgage escrow payments and $100 per month in 
discretionary income might have to resort to taking on high-interest 
debt to cover an emergency $200 expense. If the same consumer were not 
required to make escrow payments, she could pay for the emergency 
expense immediately without taking on high-interest debt and still 
afford her property tax and insurance payments by increasing her 
savings for that purpose by an additional $100 the following month.
    Another benefit for consumers may be the ability to invest their 
money and earn a return on amounts that might, depending on State 
regulations, be forgone when using an escrow. The Bureau does not have 
the data to estimate the interest consumers forgo because of escrow 
accounts, but numerical examples may be illustrative. Assuming a 0 
percent annual interest rate on savings, a consumer forgoes no interest 
because of escrow. Assuming a 5 percent annual interest rate on 
savings, a consumer with property tax and insurance payments of $2,500 
every six months forgoes about $65 per year in interest because of 
escrow.
    Finally, consumers may benefit from the final rule from the pass-
through of lower costs incurred in servicing the loan under the final 
rule compared to under the baseline. The benefit to consumers will 
depend on whether fixed or marginal costs, or both, fall because of the 
final rule. Typical economic theory predicts that existing firms should 
pass through only decreases in marginal rather than fixed costs. The 
costs to servicers of providing escrow accounts for consumers are 
likely to be predominantly fixed rather than marginal, which may limit 
the pass-through of lower costs on to consumers in the form of lower 
prices or greater access to credit. Research also suggests that the 
mortgage market may not be perfectly competitive and therefore that 
creditors may not fully pass through reductions even in marginal 
costs.\63\ Therefore, the benefit to consumers from receiving decreased 
costs at origination because decreased servicing costs are passed 
through is likely to be small. Lower servicing costs could also benefit 
consumers by encouraging new originators to enter the market. New 
exempt originators may be better able to compete with incumbent 
originators and potentially provide mortgages to underserved consumers 
because they will not have to incur the costs of establishing and 
maintaining escrow accounts. They in turn could provide more credit at 
lower costs to consumers. However, recent research suggests that the 
size of this benefit may be small.\64\
---------------------------------------------------------------------------

    \63\ Jason Allen et al., The Effect of Mergers in Search 
Markets: Evidence from the Canadian Mortgage Industry, Am. Econ. 
Rev. 2013, 104(10), at 3365-96.
    \64\ See Alexandrov & Ang, supra note 61.
---------------------------------------------------------------------------

    One commenter suggested an additional benefit to consumers of not 
having escrow accounts. This commenter noted that some consumers with 
escrow accounts may erroneously believe they still have to make their 
property insurance or tax payments themselves. Consumers who 
unnecessarily make these payments may then have to spend time and 
effort to get their payments refunded. The commenter did not provide, 
and the Bureau does not have, data to quantify this benefit.
    The potential costs to consumers of not having access to an escrow 
account include: (1) The difficulty of paying several bills instead of 
one, (2) a loss of a commitment and budgeting device, and (3) reduced 
transparency of mortgage costs potentially leading some consumers to 
spend more on house payments than they want, need, or can afford.
    Consumers may find it less convenient to separately pay a mortgage 
bill, an insurance bill, and potentially several tax bills, instead of 
one bill from the mortgage servicer with all required payments 
included. Servicers who maintain escrow accounts effectively assume the 
burden of tracking whom to pay, how much, and when, across multiple 
payees. Consumers without escrow accounts assume this burden 
themselves. This cost varies across consumers, and there is no current 
research to estimate it. An approximation may be found, however, in an 
estimate of around $20 per month per consumer, depending on the 
household's income, coming from the value of paying the same bill for 
phone, cable television, and internet.\65\
---------------------------------------------------------------------------

    \65\ Hongju Liu et al., Complementarities and the Demand for 
Home Broadband internet Services, Marketing Science, 29(4), 701-20 
(Feb. 2010), https://pubsonline.informs.org/doi/abs/10.1287/mksc.1090.0551.
---------------------------------------------------------------------------

    The loss of escrow accounts may hurt consumers who value the 
budgetary predictability and commitment that escrow accounts provide. 
Recent research finds that many homeowners do not pay full attention to 
property taxes,\66\ and are more likely to pay property tax bills on 
time if sent reminders to plan for these payments.\67\ Other research 
suggests that many consumers, in order to limit their spending, prefer 
to pay more for income taxes than necessary through payroll deductions 
and receive a tax refund check from the IRS in the spring, even though 
consumers who do this forgo interest they could have earned on the 
overpaid taxes.\68\ This could suggest that some consumers may value 
mortgage escrow accounts because they provide a form of savings 
commitment. The Bureau recognizes that the budgeting and commitment 
benefits of mortgage escrow accounts vary across consumers. These 
benefits will be particularly large for consumers who would otherwise 
miss payments or even experience foreclosure. Research suggests that a 
nontrivial fraction of consumers may be

[[Page 9850]]

in this group.\69\ One commenter who argued against the general escrow 
requirement reported that none of its customers defaulted on property 
taxes or insurance payments, but that commenter currently provides 
escrow accounts for its customers with HPMLs, and so the commenter 
provided little evidence regarding tax and insurance default rates when 
escrows are not established. As discussed previously, some consumers 
may assign no benefit to escrow accounts, or even consider the 
budgeting and commitment aspects of escrow accounts to be a cost to 
them.
---------------------------------------------------------------------------

    \66\ Francis Wong, Mad as Hell: Property Taxes and Financial 
Distress (Dec. 15, 2020), available at https://www.dropbox.com/sh/55dcwuztmo8bwuv/AADfEOFVXZ8zVGzj0-Od5GCKa?dl=0.
    \67\ Stephanie Moulton et al., Reminders to Pay Property Tax 
Payments: A Field Experiment of Older Adults with Reverse Mortgages 
(Sept. 6, 2019), https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID3445419_code1228972.pdf?abstractid=3445419&mirid=1.
    \68\ Michael S. Barr & Jane K. Dokko, Paying to Save: Tax 
Withholding and Asset Allocation Among Low- and Moderate-Income 
Taxpayers, Finance and Economics Discussion Series, Federal Reserve 
Board (2008), http://www.federalreserve.gov/pubs/feds/2008/200811/200811pap.pdf.
    \69\ Moulton et al., supra note 67. See also Nathan B. Anderson 
& Jane K. Dokko, Liquidity Problems and Early Payment Default Among 
Subprime Mortgages, Finance and Economics Discussion Series, Federal 
Reserve Board (2011), http://www.federalreserve.gov/pubs/feds/2011/201109/201109pap.pdf.
---------------------------------------------------------------------------

    Finally, escrow accounts may make it easier for consumers to shop 
for mortgages by reducing the number of payments consumers have to 
compare. Consumers considering mortgages without escrow accounts may 
not be fully aware of the costs they would be assuming and may end up 
paying more on mortgage and housing costs than they want, need, or can 
afford. Research suggests that some consumers make suboptimal decisions 
when obtaining a mortgage, in part because of the difficulty of 
comparing different mortgage options across a large number of 
dimensions, and that consumers presented with simpler mortgage choices 
make better decisions.\70\ For example, if a consumer compares a 
monthly mortgage payment that includes an escrow payment, as most 
consumer mortgages do, with a payment that does not include an escrow 
payment, the consumer may mistakenly believe the non-escrow loan is 
less expensive, even though the non-escrow loan may in fact be more 
expensive. In practice, the magnitude and frequency of these mistakes 
likely depend in part on the effectiveness of cost disclosures 
consumers receive while shopping for mortgages. As one commenter noted, 
estimated insurance and tax payments must be disclosed under existing 
regulations.
---------------------------------------------------------------------------

    \70\ Susan E. Woodward & Robert E. Hall, Consumer Confusion in 
the Mortgage Market: Evidence of Less than a Perfectly Transparent 
and Competitive Market, Am. Econ. Rev.: Papers & Proceedings, 
100(2), 511-15 (2010).
---------------------------------------------------------------------------

2. Costs and Benefits to Affected Creditors
    For affected creditors, the main effect of the final rule is that 
they will no longer be required to establish and maintain escrow 
accounts for HPMLs. As described in part VII.D above, the Bureau 
estimates that fewer than 3,000 HPMLs were originated in 2019 by 
institutions likely to be impacted by the rule. Of the 154 institutions 
that are likely to be impacted by the final rule as described above, 
103 were not exempt under the EGRRCPA from reporting APOR rate spreads. 
Of these 103, no more than 70 originated at least one HPML in 2019.
    The main benefit of the rule on affected entities will be cost 
savings. There are startup and operational costs of providing escrow 
accounts.
    Operational costs of maintaining escrow accounts for a given time 
period (such as a year) can be divided into costs associated with 
maintaining any escrow account for that time period and marginal costs 
associated with maintaining each escrow account for that time period. 
The cost of maintaining software to analyze escrow accounts for under- 
or overpayments is an example of the former. Because the entities 
affected by the rule are small and do not originate large numbers of 
mortgages, this kind of cost will not be spread among many loans. The 
per-letter cost of mailing consumers escrow statements is an example of 
the latter. The Bureau does not have data to estimate these costs.
    The startup costs associated with creating the infrastructure to 
establish and maintain escrow accounts may be substantial. However, 
many creditors who will not be required to establish and maintain 
escrow accounts under the final rule are currently required to do so 
under the existing regulation. These creditors have already paid these 
startup costs and will therefore not benefit from lower startup costs 
under the final rule. However, the final rule will lower startup costs 
for new firms that enter the market. The final rule will also lower 
startup costs for insured depositories and insured credit unions that 
are sufficiently small that they are currently exempt from mortgage 
escrow requirements under the existing regulation, but that will grow 
in size such that they would no longer be exempt under the existing 
regulation, but will still be exempt under the final rule.
    Affected creditors could still provide escrow accounts for 
consumers if they choose to do so. Therefore, the final rule will not 
impose any cost on creditors. However, the benefits to firms of the 
final rule will be partially offset by forgoing the benefits of 
providing escrow accounts. The two main benefits to creditors of 
providing escrow accounts to consumers are (1) decreased default risk 
for consumers, and (2) the loss of interest income from escrow 
accounts.
    As noted previously, research suggests that escrow accounts reduce 
mortgage default rates.\71\ Eliminating escrow accounts may therefore 
increase default rates, offsetting some of the benefits to creditors of 
lower servicing costs.\72\ In the event of major damage to the 
property, the creditor might end up with little or nothing if the 
homeowner had not been paying home insurance premiums. If the homeowner 
had not been paying taxes, there might be a claim or lien on the 
property interfering with the creditor's ability to access the full 
collateral. Therefore, the costs to creditors of foreclosures may be 
especially severe in the case of homeowners without mortgage escrow 
accounts.
---------------------------------------------------------------------------

    \71\ See Moulton et al., supra note 67; see also Anderson & 
Dokko, supra note 69.
    \72\ Because of this potential, many creditors currently verify 
that consumers without escrow accounts make the required insurance 
and tax payments. The final rule may increase these monitoring costs 
for creditors by increasing the number of consumers without escrow 
accounts, even if many of these consumers do not default.
---------------------------------------------------------------------------

    The other cost to creditors of eliminating escrow accounts is the 
interest that they otherwise would have earned on escrow account 
balances. Depending on the State, creditors might not be required to 
pay interest on the money in the escrow account or might be required to 
pay a fixed interest rate that is less than the market rate.\73\ The 
Bureau does not have the data to determine the interest that creditors 
earn on escrow account balances, but numerical examples may be 
illustrative. One commenter reported earning interest of around 0.1 
percent on escrow account balances. Assuming a 0 percent annual 
interest rate, the servicer earns no interest because of escrow. 
Assuming a 5 percent annual interest rate and a mortgage account with 
property tax and insurance payments of $2,500 every six months, the 
servicer earns about $65 a year in interest because of escrow.
---------------------------------------------------------------------------

    \73\ Some States may require interest rates that are higher than 
market rates, imposing a cost on creditors who provide escrow 
accounts.
---------------------------------------------------------------------------

    The Bureau does not have the data to estimate the benefits of lower 
default rates or escrow account interest for creditors. However, the 
Bureau believes that for most lenders the marginal benefits of 
maintaining escrow accounts outweigh the marginal costs, on average, 
because in the current market lenders and servicers often do not 
relieve consumers of the obligation to have escrow accounts unless 
those consumers meet requirements related to credit scores, home 
equity, and other measures of default risk. In addition,

[[Page 9851]]

creditors often charge consumers a fee for eliminating escrow accounts, 
in order to compensate the creditors for the increase in default risk 
associated with the removal of escrow accounts. However, for small 
lenders that do not engage in a high volume of mortgage lending and 
could benefit from the final rule, the analysis may be different.

E. Specific Impacts of the Final Rule

1. Insured Depository Institutions and Credit Unions With $10 Billion 
or Less in Total Assets, as Described in Section 1026
    The final rule will apply only to insured depository instructions 
and credit unions with $10 billion or less in assets. Therefore, the 
consideration of the benefits, costs, and impacts of the final rule on 
covered persons presented in part VII.D represents in full the Bureau's 
analysis of the benefits, costs, and impacts of the final rule on 
insured depository institutions and credit unions with $10 billion or 
less in assets.
2. Impact of the Final Provisions on Consumer Access to Credit and on 
Consumers in Rural Areas
    The final rule will affect insured depositories and insured credit 
unions that operate at least in part in rural or underserved areas. As 
discussed in part VII.D, the Bureau does not expect the costs, 
benefits, or impacts of the rule to be large in aggregate, but because 
affected entities must operate in rural or underserved areas, the 
costs, benefits, and impacts of the rule may be expected to be larger 
in rural areas. Entities likely to be affected by the final rule 
originated roughly 0.6 percent of all mortgages reported to HMDA in 
2019. Such entities originated roughly 1.0 percent of all mortgages in 
rural areas reported to HMDA in 2019.\74\ Therefore, entities likely to 
be affected by the final rule have a small share of the overall market, 
and a small but somewhat larger share of the rural market. This 
suggests the costs, benefits, and impacts of the rule will be small in 
rural areas, but larger in rural areas than in other areas.
---------------------------------------------------------------------------

    \74\ In 2018, entities likely to be affected by the final rule 
originated roughly 0.9 percent of all mortgages reported to HMDA. In 
2018, such entities originated roughly 1.6 percent of all mortgages 
in rural areas reported to HMDA.
---------------------------------------------------------------------------

    As discussed in part VII.D, the final rule may increase consumer 
access to credit. It may also present other costs, benefits, and 
impacts for affected consumers. Because creditors likely to be affected 
by this rule have a disproportionately large market share in rural 
areas, the Bureau expects that the costs, benefits, and impacts of the 
final rule on rural consumers will be proportionally larger than the 
costs, benefits, and impacts of the final rule on other consumers.

VIII. Regulatory Flexibility Act Analysis

    The Regulatory Flexibility Act (RFA),\75\ as amended by the Small 
Business Regulatory Enforcement Fairness Act of 1996,\76\ generally 
requires an agency to conduct an initial regulatory flexibility 
analysis (IRFA) and a final regulatory flexibility analysis (FRFA) of 
any rule subject to notice-and-comment rulemaking requirements, unless 
the agency certifies that the rule will not have a significant economic 
impact on a substantial number of small entities. The Bureau also is 
subject to certain additional procedures under the RFA involving the 
convening of a panel to consult with small business representatives 
prior to proposing a rule for which an IRFA is required.\77\
---------------------------------------------------------------------------

    \75\ 5 U.S.C. 601 et seq.
    \76\ Public Law 104-121, tit. II, 110 Stat. 857 (1996).
    \77\ 5 U.S.C. 609.
---------------------------------------------------------------------------

    A depository institution is considered ``small'' if it has $600 
million or less in assets.\78\ Under existing regulations, most 
depository institutions with less than $2 billion in assets are already 
exempt from the mortgage escrow requirement, and there would be no 
difference if they chose to use the new exemption. The final rule will 
affect only insured depository institutions and insured credit unions, 
and in general will affect only certain of such institutions with over 
approximately $2 billion in assets. Since depository institutions with 
over $2 billion in assets are not small under the SBA definition, the 
final rule will affect very few, if any, small entities.
---------------------------------------------------------------------------

    \78\ The current SBA size standards can be found on SBA's 
website at https://www.sba.gov/sites/default/files/2019-08/SBA%20Table%20of%20Size%20Standards_Effective%20Aug%2019%2C%202019_Rev.pdf.
---------------------------------------------------------------------------

    Furthermore, affected institutions could still provide escrow 
accounts for their consumers if they chose to. Therefore, the final 
rule will not impose any substantial burden on any entities, including 
small entities.
    Accordingly, the Director hereby certifies that this final rule 
will not have a significant economic impact on a substantial number of 
small entities. Thus, a FRFA of the final rule is not required.

IX. Paperwork Reduction Act

    Under the Paperwork Reduction Act of 1995 (PRA),\79\ Federal 
agencies are generally required to seek the Office of Management and 
Budget's (OMB's) approval for information collection requirements prior 
to implementation. The collections of information related to Regulation 
Z have been previously reviewed and approved by OMB and assigned OMB 
Control number 3170-0015. 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.
---------------------------------------------------------------------------

    \79\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    The Bureau has determined that this final rule will 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.

X. Congressional Review Act

    Pursuant to the Congressional Review Act,\80\ the Bureau will 
submit a report containing this rule and other required information to 
the U.S. Senate, the U.S. House of Representatives, and the Comptroller 
General of the United States prior to the rule's taking effect. The 
Office of Information and Regulatory Affairs has designated this rule 
as not a ``major rule'' as defined by 5 U.S.C. 804(2).
---------------------------------------------------------------------------

    \80\ 5 U.S.C. 801 et seq.
---------------------------------------------------------------------------

XI. Signing Authority

    Director of the Bureau Kathleen L. Kraninger, having reviewed and 
approved this document, is delegating the authority to electronically 
sign this document to Grace Feola, Bureau Federal Register Liaisons, 
for purposes of publication in the Federal Register.

List of Subjects in 12 CFR Part 1026

    Advertising, Banks, Banking, 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:


[[Page 9852]]


    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. Amend Sec.  1026.35 by:
0
a. Adding paragraphs (a)(3) and (4);
0
b. Revising paragraphs (b)(2)(iii)(D)(1), (iv)(A), and (v); and
0
c. Adding paragraph (b)(2)(vi).
    The additions and revisions read as follows:


Sec.  1026.35  Requirements for higher-priced mortgage loans.

    (a) * * *
    (3) ``Insured credit union'' has the meaning given in Section 101 
of the Federal Credit Union Act (12 U.S.C. 1752).
    (4) ``Insured depository institution'' has the meaning given in 
Section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813).
    (b) * * *
    (2) * * *
    (iii) * * *
    (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 June 17, 2021; or
* * * * *
    (iv) * * *
    (A) An area is ``rural'' during a calendar year if it is:
    (1) A county that is neither in a metropolitan statistical area nor 
in a micropolitan statistical area that is adjacent to a metropolitan 
statistical area, as those terms are defined by the U.S. Office of 
Management and Budget and as they are applied under currently 
applicable Urban Influence Codes (UICs), established by the United 
States Department of Agriculture's Economic Research Service (USDA-
ERS); or
    (2) A census block that is not in an urban area, as defined by the 
U.S. Census Bureau using the latest decennial census of the United 
States.
* * * * *
    (v) Notwithstanding paragraphs (b)(2)(iii) and (vi) of this 
section, an escrow account must be established pursuant to paragraph 
(b)(1) of this section for any first-lien higher-priced mortgage loan 
that, at consummation, is subject to a commitment to be acquired by a 
person that does not satisfy the conditions in paragraph (b)(2)(iii) or 
(vi) of this section, unless otherwise exempted by this paragraph 
(b)(2).
    (vi) Except as provided in paragraph (b)(2)(v) of this section, an 
escrow account need not be established for a transaction made by a 
creditor that is an insured depository institution or insured credit 
union if, at the time of consummation:
    (A) As of the preceding December 31st, or, if the application for 
the transaction was received before April 1 of the current calendar 
year, as of either of the two preceding December 31sts, the insured 
depository institution or insured credit union had assets of 
$10,000,000,000 or less, adjusted annually for inflation using the 
Consumer Price Index for Urban Wage Earners and Clerical Workers, not 
seasonally adjusted, for each 12-month period ending in November (see 
comment 35(b)(2)(vi)(A)-1 for the applicable threshold);
    (B) 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 
and its affiliates, as defined in Sec.  1026.32(b)(5), together 
extended no more than 1,000 covered transactions secured by a first 
lien on a principal dwelling; and
    (C) The transaction satisfies the criteria in paragraphs 
(b)(2)(iii)(A) and (D) of this section.
* * * * *

0
3. Amend supplement I to part 1026 by:
0
a. Under Section 1026.35--Requirements for Higher-Priced Mortgage 
Loans:
0
i. Revising paragraph 35(b)(2)(iii);
0
ii. Adding paragraphs 35(b)(2)(iii)(D)(1) and 35(b)(2)(iii)(D)(2);
0
iv. Revising paragraphs 35(b)(2)(iv) and 35(b)(2)(v);
0
vi. Adding paragraphs 35(b)(2)(vi) and 35(b)(2)(vi)(A).
0
b. Under Section 1026.43--Minimum Standards for Transactions Secured by 
a Dwelling, revising paragraph 43(f)(1)(vi).
    The revisions and additions read as follows:

Supplement I to Part 1026--Official Interpretations

* * * * *

Section 1026.35--Requirements for Higher-Priced Mortgage Loans

* * * * *
35(b) Escrow Accounts
* * * * *
35(b)(2) Exemptions
* * * * *
    Paragraph 35(b)(2)(iii).
    1. Requirements for exemption. Under Sec.  1026.35(b)(2)(iii), 
except as provided in Sec.  1026.35(b)(2)(v), a creditor need not 
establish an escrow account for taxes and insurance for a higher-priced 
mortgage loan, provided the following four conditions are satisfied 
when the higher-priced mortgage loan is consummated:
    i. During the preceding calendar year, or during either of the two 
preceding calendar years if the application for the loan was received 
before April 1 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

[[Page 9853]]

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. 
``Affiliate'' is defined in Sec.  1026.32(b)(5) as ``any company that 
controls, is controlled by, or is under common control with another 
company, as set forth in the Bank Holding Company Act of 1956 (12 
U.S.C. 1841 et seq.).'' 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 ``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,

[[Page 9854]]

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 2021, the asset 
threshold is $2,230,000,000. A creditor that together with the assets 
of its affiliates that regularly extended first-lien covered 
transactions during calendar year 2020 has total assets of less than 
$2,230,000,000 on December 31, 2020, satisfies this criterion for 
purposes of any loan consummated in 2021 and for purposes of any loan 
consummated in 2022 for which the application was received before April 
1, 2022. 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.
    8. For calendar year 2020, the asset threshold was $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 had total assets of less than $2,202,000,000 on December 31, 2019, 
satisfied 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.
    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) (or, 
if applicable, the conditions for the exemption in Sec.  
1026.35(b)(2)(vi)) 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 exemptions in 
Sec.  1026.35(b)(2)(iii) and (vi) 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) and (vi), 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.
    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 June 17, 2021, are not 
counted for purposes of Sec.  1026.35(b)(2)(iii)(D). For applications 
received on and after June 17, 2021, 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 
exemptions provided under Sec.  1026.35(b)(2)(iii) and (vi). 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 
June 17, 2021, still qualify for the exemptions provided under Sec.  
1026.35(b)(2)(iii) and (vi) so long as they do not establish new escrow 
accounts for transactions for which they received applications on or 
after June 17, 2021, other than those described in Sec.  
1026.35(b)(2)(iii)(D)(2), and they otherwise qualify under Sec.  
1026.35(b)(2)(iii) or (vi).
    Paragraph 35(b)(2)(iii)(D)(2).
    1. Exception for post-consummation escrow accounts for distressed

[[Page 9855]]

consumers. An escrow account established after consummation for a 
distressed consumer does not count for purposes of Sec.  
1026.35(b)(2)(iii)(D). Distressed consumers are consumers who are 
working with the creditor or servicer to attempt to bring the loan into 
a current status through a modification, deferral, or other 
accommodation to the consumer. A creditor, together with its 
affiliates, that establishes escrow accounts after consummation as a 
regular business practice, regardless of whether consumers are in 
distress, does not qualify for the exception described in Sec.  
1026.35(b)(2)(iii)(D)(2).
    Paragraph 35(b)(2)(iv).
    1. Requirements for ``rural'' or ``underserved'' status. An area is 
considered to be ``rural'' or ``underserved'' during a calendar year 
for purposes of Sec.  1026.35(b)(2)(iii)(A) if it satisfies either the 
definition for ``rural'' or the definition for ``underserved'' in Sec.  
1026.35(b)(2)(iv). A creditor's extensions of covered transactions, as 
defined by Sec.  1026.43(b)(1), secured by first liens on properties 
located in such areas are considered in determining whether the 
creditor satisfies the condition in Sec.  1026.35(b)(2)(iii)(A). See 
comment 35(b)(2)(iii)-1.
    i. Under Sec.  1026.35(b)(2)(iv)(A), an area is rural during a 
calendar year if it is: A county that is neither in a metropolitan 
statistical area nor in a micropolitan statistical area that is 
adjacent to a metropolitan statistical area; or a census block that is 
not in an urban area, as defined by the U.S. Census Bureau using the 
latest decennial census of the United States. Metropolitan statistical 
areas and micropolitan statistical areas are defined by the Office of 
Management and Budget and applied under currently applicable Urban 
Influence Codes (UICs), established by the United States Department of 
Agriculture's Economic Research Service (USDA-ERS). For purposes of 
Sec.  1026.35(b)(2)(iv)(A)(1), ``adjacent'' has the meaning applied by 
the USDA-ERS in determining a county's UIC; as so applied, ``adjacent'' 
entails a county not only being physically contiguous with a 
metropolitan statistical area but also meeting certain minimum 
population commuting patterns. A county is a ``rural'' area 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 website at http://www.ers.usda.gov/data-products/urban-influence-codes/documentation.aspx. A county for which there is no 
currently applicable UIC (because the county has been created since the 
USDA-ERS last categorized counties) is a rural area only if all 
counties from which the new county's land was taken are themselves 
rural under currently applicable UICs.
    ii. Under Sec.  1026.35(b)(2)(iv)(B), an area is underserved during 
a calendar year if, according to Home Mortgage Disclosure Act (HMDA) 
data for the preceding calendar year, it is a county in which no more 
than two creditors extended covered transactions, as defined in Sec.  
1026.43(b)(1), secured by first liens, five or more times on properties 
in the county. Specifically, a county is an ``underserved'' area if, in 
the applicable calendar year's public HMDA aggregate dataset, no more 
than two creditors have reported five or more first-lien covered 
transactions, with HMDA geocoding that places the properties in that 
county.
    iii. A. Each calendar year, the Bureau applies the ``underserved'' 
area test and the ``rural'' area test to each county in the United 
States. If a county satisfies either test, the Bureau will include the 
county on a list of counties that are rural or underserved as defined 
by Sec.  1026.35(b)(2)(iv)(A)(1) or Sec.  1026.35(b)(2)(iv)(B) for a 
particular calendar year, even if the county contains census blocks 
that are designated by the Census Bureau as urban. To facilitate 
compliance with appraisal requirements in Sec.  1026.35(c), the Bureau 
also creates a list of those counties that are rural under the Bureau's 
definition without regard to whether the counties are underserved. To 
the extent that U.S. territories are treated by the Census Bureau as 
counties and are neither metropolitan statistical areas nor 
micropolitan statistical areas adjacent to metropolitan statistical 
areas, such territories will be included on these lists as rural areas 
in their entireties. The Bureau will post on its public website the 
applicable lists for each calendar year by the end of that year to 
assist creditors in ascertaining the availability to them of the 
exemption during the following year. Any county that the Bureau 
includes on these lists of counties that are rural or underserved under 
the Bureau's definitions for a particular year is deemed to qualify as 
a rural or underserved area for that calendar year for purposes of 
Sec.  1026.35(b)(2)(iv), even if the county contains census blocks that 
are designated by the Census Bureau as urban. A property located in 
such a listed county is deemed to be located in a rural or underserved 
area, even if the census block in which the property is located is 
designated as urban.
    B. A property is deemed to be in a rural or underserved area 
according to the definitions in Sec.  1026.35(b)(2)(iv) during a 
particular calendar year if it is identified as such by an automated 
tool provided on the Bureau's public website. A printout or electronic 
copy from the automated tool provided on the Bureau's public website 
designating a particular property as being in a rural or underserved 
area may be used as ``evidence of compliance'' that a property is in a 
rural or underserved area, as defined in Sec.  1026.35(b)(2)(iv)(A) and 
(B), for purposes of the record retention requirements in Sec.  
1026.25.
    C. The U.S. Census Bureau may provide on its public website an 
automated address search tool that specifically indicates if a property 
is located in an urban area for purposes of the Census Bureau's most 
recent delineation of urban areas. For any calendar year that began 
after the date on which the Census Bureau announced its most recent 
delineation of urban areas, a property is deemed to be in a rural area 
if the search results provided for the property by any such automated 
address search tool available on the Census Bureau's public website do 
not designate the property as being in an urban area. A printout or 
electronic copy from such an automated address search tool available on 
the Census Bureau's public website designating a particular property as 
not being in an urban area may be used as ``evidence of compliance'' 
that the property is in a rural area, as defined in Sec.  
1026.35(b)(2)(iv)(A), for purposes of the record retention requirements 
in Sec.  1026.25.
    D. For a given calendar year, a property qualifies for a safe 
harbor if any of the enumerated safe harbors affirms that the property 
is in a rural or underserved area or not in an urban area. For example, 
the Census Bureau's automated address search tool may indicate a 
property is in an urban area, but the Bureau's rural or underserved 
counties list indicates the property is in a rural or underserved 
county. The property in this example is in a rural or underserved area 
because it qualifies under the safe harbor for the rural or underserved 
counties list. The lists of counties posted on the Bureau's public 
website, the automated tool on its public website, and the automated 
address search tool available on the Census Bureau's public website, 
are not the exclusive means by which a creditor can demonstrate that a 
property is in a rural or underserved area as defined in Sec.  
1026.35(b)(2)(iv)(A) and (B). However, creditors are required to retain 
``evidence of compliance'' in accordance

[[Page 9856]]

with Sec.  1026.25, including determinations of whether a property is 
in a rural or underserved area as defined in Sec.  1026.35(b)(2)(iv)(A) 
and (B).
    2. Examples. i. An area is considered ``rural'' for a given 
calendar year based on the most recent available UIC designations by 
the USDA-ERS and the most recent available delineations of urban areas 
by the U.S. Census Bureau that are available at the beginning of the 
calendar year. These designations and delineations are updated by the 
USDA-ERS and the U.S. Census Bureau respectively once every ten years. 
As an example, assume a creditor makes first-lien covered transactions 
in Census Block X that is located in County Y during calendar year 
2017. As of January 1, 2017, the most recent UIC designations were 
published in the second quarter of 2013, and the most recent 
delineation of urban areas was announced in the Federal Register in 
2012, see U.S. Census Bureau, Qualifying Urban Areas 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).
    ii. A county is considered an ``underserved'' area for a given 
calendar year based on the most recent available HMDA data. For 
example, assume a creditor makes first-lien covered transactions in 
County Y during calendar year 2016, and the most recent HMDA data are 
for calendar year 2015, published in the third quarter of 2016. The 
creditor will use the 2015 HMDA data to determine ``underserved'' area 
status for County Y in calendar year 2016 for the purposes of 
qualifying for the ``rural or underserved'' exemption for any higher-
priced mortgage loans consummated in calendar year 2017 or for any 
higher-priced mortgage loan consummated during 2018 for which the 
application was received before April 1, 2018.
    Paragraph 35(b)(2)(v).
    1. Forward commitments. A creditor may make a mortgage loan that 
will be transferred or sold to a purchaser pursuant to an agreement 
that has been entered into at or before the time the loan is 
consummated. Such an agreement is sometimes known as a ``forward 
commitment.'' Even if a creditor is otherwise eligible for an exemption 
in Sec.  1026.35(b)(2)(iii) or Sec.  1026.35(b)(2)(vi), a first-lien 
higher-priced mortgage loan that will be acquired by a purchaser 
pursuant to a forward commitment is subject to the requirement to 
establish an escrow account under Sec.  1026.35(b)(1) unless the 
purchaser is also eligible for an exemption in Sec.  1026.35(b)(2)(iii) 
or Sec.  1026.35(b)(2)(vi), or the transaction is otherwise exempt 
under Sec.  1026.35(b)(2). The escrow requirement applies to any such 
transaction, whether the forward commitment provides for the purchase 
and sale of the specific transaction or for the purchase and sale of 
mortgage obligations with certain prescribed criteria that the 
transaction meets. For example, assume a creditor that qualifies for an 
exemption in Sec.  1026.35(b)(2)(iii) or Sec.  1026.35(b)(2)(vi) makes 
a higher-priced mortgage loan that meets the purchase criteria of an 
investor with which the creditor has an agreement to sell such mortgage 
obligations after consummation. If the investor is ineligible for an 
exemption in Sec.  1026.35(b)(2)(iii) or Sec.  1026.35(b)(2)(vi), an 
escrow account must be established for the transaction before 
consummation in accordance with Sec.  1026.35(b)(1) unless the 
transaction is otherwise exempt (such as a reverse mortgage or home 
equity line of credit).
    Paragraph 35(b)(2)(vi).
    1. For guidance on applying the grace periods for determining asset 
size or transaction thresholds under Sec.  1026.35(b)(2)(vi)(A), (B) 
and (C), the rural or underserved requirement, or other aspects of the 
exemption in Sec.  1026.35(b)(2)(vi) not specifically discussed in the 
commentary to Sec.  1026.35(b)(2)(vi), an insured depository 
institution or insured credit union may refer to the commentary to 
Sec.  1026.35(b)(2)(iii), while allowing for differences between the 
features of the two exemptions.
    Paragraph 35(b)(2)(vi)(A).
    1. The asset threshold in Sec.  1026.35(b)(2)(vi)(A) will adjust 
automatically each year, based on the year-to-year change in the 
average of the Consumer Price Index for Urban Wage Earners and Clerical 
Workers, not seasonally adjusted, for each 12-month period ending in 
November, with rounding to the nearest million dollars. Unlike the 
asset threshold in Sec.  1026.35(b)(2)(iii) and the other thresholds in 
Sec.  1026.35(b)(2)(vi), affiliates are not considered in calculating 
compliance with this threshold. The Bureau will publish notice of the 
asset threshold each year by amending this comment. For calendar year 
2021, the asset threshold is $10,000,000,000. A creditor that during 
calendar year 2020 had assets of $10,000,000,000 or less on December 
31, 2020, satisfies this criterion for purposes of any loan consummated 
in 2021 and for purposes of any loan secured by a first lien on a 
principal dwelling of a consumer consummated in 2022 for which the 
application was received before April 1, 2022.
    Paragraph 35(b)(2)(vi)(B).
    1. The transaction threshold in Sec.  1026.35(b)(2)(vi)(B) differs 
from the transaction threshold in Sec.  1026.35(b)(2)(iii)(B) in two 
ways. First, the threshold in Sec.  1026.35(b)(2)(vi)(B) is 1,000 loans 
secured by first liens on a principal dwelling, while the threshold in 
Sec.  1026.35(b)(2)(iii)(B) is 2,000 loans secured by first liens on a 
dwelling. Second, all loans made by the creditor and its affiliates 
secured by a first lien on a principal dwelling count toward the 1,000-
loan threshold in Sec.  1026.35(b)(2)(vi)(B), whether or not such loans 
are held in portfolio. By contrast, under Sec.  1026.35(b)(2)(iii)(B), 
only loans secured by first liens on a dwelling that were sold, 
assigned, or otherwise transferred to another person, or that were 
subject at the time of consummation to a commitment to be acquired by 
another person, are counted toward the 2,000-loan threshold.
* * * * *

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. Creditor qualifications. Under Sec.  1026.43(f)(1)(vi), to make 
a qualified mortgage that provides for a balloon payment, the creditor 
must satisfy three criteria that are also required under Sec.  
1026.35(b)(2)(iii)(A), (B) and (C), which require:
    i. During the preceding calendar year or during either of the two 
preceding calendar years if the application for the transaction was 
received before April 1 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

[[Page 9857]]

statistical area adjacent to a metropolitan statistical area, as those 
terms are defined by the U.S. Office of Management and Budget; or a 
census block that is not in an urban area, as defined by the U.S. 
Census Bureau using the latest decennial census of the United States. 
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 website 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 website 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 website 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 website do not identify 
the property as being in an urban area.
    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).
    ii. 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 
together with its affiliates extended no more than 2,000 covered 
transactions, as defined by Sec.  1026.43(b)(1), secured by first 
liens, that were sold, assigned, or otherwise transferred to another 
person, or that were subject at the time of consummation to a 
commitment to be acquired by another person, to satisfy the requirement 
of Sec.  1026.35(b)(2)(iii)(B).
    iii. As of the preceding December 31st, or, if the application for 
the transaction was received before April 1 of the current calendar 
year, as of either of the two preceding December 31sts, the creditor 
and its affiliates that regularly extended covered transactions secured 
by first liens, together, had total assets that do not exceed the 
applicable asset threshold established by the Bureau, to satisfy the 
requirement of Sec.  1026.35(b)(2)(iii)(C). The Bureau publishes notice 
of the asset threshold each year by amending comment 35(b)(2)(iii)-
1.iii.
* * * * *

    Dated: January 19, 2021.
Grace Feola,
Federal Register Liaison, Bureau of Consumer Financial Protection.
[FR Doc. 2021-01572 Filed 2-16-21; 8:45 am]
BILLING CODE 4810-AM-P