[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.
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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.
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\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.
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\48\ 80 FR 59944, 59948-49, 59951, 59954.
\49\ See 80 FR 7770, 7781 (Feb. 11, 2015).
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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.
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\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.
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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.
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\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.
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\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.
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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.
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\57\ 5 U.S.C. 553(d).
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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.
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\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.
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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.
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\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\
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\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
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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