Vol. 78 Wednesday, No. 113 June 12, 2013

Part III

Bureau of Consumer Financial Protection

12 CFR Part 1026 Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act (Regulation Z); Final Rule

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BUREAU OF CONSUMER FINANCIAL final rule (the 2013 ATR Final Rule) to included in points and fees as PROTECTION implement these ability-to-repay originator compensation paid by the requirements and qualified mortgage consumer or the creditor to the mortgage 12 CFR Part 1026 provisions. See 78 FR 6407 (Jan. 30, broker. [Docket No. CFPB–2013–0002] 2013). At the same time, the Bureau The final rule excludes from points issued a proposed rule (the 2013 ATR and fees compensation paid by a RIN 3170–AA34 Proposed Rule or Bureau’s proposal) creditor to its loan officers. The Bureau related to certain proposed exemptions, concluded that there were significant Ability-to-Repay and Qualified modifications, and clarifications to the operational challenges to calculating Mortgage Standards Under the Truth in ability-to-repay requirements. See 78 FR individual employee compensation Lending Act (Regulation Z) 6621 (Jan. 30, 2013). This final rule accurately early in the loan origination AGENCY: Bureau of Consumer Financial addresses the issues put forth for public process, and that those challenges Protection. comment in the 2013 ATR Proposed would lead to anomalous results for consumers. In addition, the Bureau ACTION: Final rule; official Rule. See part II.B below and part II.B– concluded that structural differences interpretations. F of the 2013 ATR Final Rule for a complete discussion of the statutory and between the retail and wholesale SUMMARY: The Bureau of Consumer regulatory background to the ability-to- channels lessened risks to consumers. Financial Protection (Bureau) is repay requirements. The Bureau will continue to monitor the amending Regulation Z, which market to determine if additional implements the Truth in Lending Act Loan Originator Compensation and the protections are necessary and evaluate (TILA). Regulation Z generally prohibits Points and Fees Calculation whether there are different approaches a creditor from making a The Dodd-Frank Act generally for calculating retail loan officer unless the creditor determines that the provides that points and fees on a compensation consistent with the consumer will have the ability to repay qualified mortgage may not exceed 3 purposes of the statute. the loan. The final rule provides an percent of the loan balance and that The final rule retains an ‘‘additive’’ exemption to these requirements for points and fees in excess of 5 percent approach for calculating loan originator creditors with certain designations, will trigger the protections for high-cost compensation paid by a creditor to a pursuant to certain programs, mortgages under the Home Ownership loan originator other than an employee certain nonprofit creditors, and and Equity Protection Act (HOEPA).1 of creditor. Under the additive mortgage loans made in connection with The Dodd-Frank Act also included a approach, § 1026.32(b)(1)(ii) requires certain Federal emergency economic provision requiring that loan originator that a creditor include in points and fees stabilization programs. The final rule compensation be counted toward these compensation paid by the creditor to a also provides an additional definition of thresholds, even if it is not paid up-front mortgage broker, in addition to up-front a qualified mortgage for certain loans by the consumer directly to the loan charges paid by the consumer to the made and held in portfolio by small originator. creditor that are included in points and creditors and a temporary definition of The Bureau had solicited comment on fees under § 1026.32(b)(1)(i). a qualified mortgage for balloon loans. how to apply the statutory requirements Exemptions for Certain Creditors and Finally, the final rule modifies the in situations in which payments pass Lending Programs requirements regarding the inclusion of from one party to another over the Certain creditors and nonprofits. The loan originator compensation in the course of a mortgage transaction. The final rule provides an exemption from points and fees calculation. Bureau was particularly concerned the ability-to-repay requirements for DATES: This rule is effective January 10, about situations in which the creditor extensions of credit made by certain 2014. pays compensation to a mortgage broker types of creditors. Creditors designated FOR FURTHER INFORMATION CONTACT: or its own loan originator employees by the U.S. Department of the Treasury Jennifer B. Kozma or Eamonn K. Moran, because there is no simple way to as Community Development Financial Counsels; Thomas J. Kearney or Mark determine whether the compensation is Institutions and creditors designated by Morelli, Senior Counsels; or Stephen paid from money the creditor collected the U.S. Department of Housing and Shin, Managing Counsel, Office of from up-front charges to the consumer Urban Development as either a Regulations, at (202) 435–7700. (which would already be counted Community Housing Development against the points and fees thresholds) SUPPLEMENTARY INFORMATION: Organization or a Downpayment or from the rate on the loan Assistance Provider of Secondary I. Summary of the Final Rule (which would not be counted toward Financing are exempt from the ability- The Bureau is issuing this final rule the thresholds). to-repay requirements, under certain to adopt certain exemptions, The final rule excludes from points conditions. The final rule also generally modifications, and clarifications to and fees loan originator compensation exempts creditors designated as TILA’s ability-to-repay requirements. paid by a consumer to a mortgage broker nonprofit organizations under section TILA section 129C, as added by sections when that payment has already been 501(c)(3) of the Internal Revenue Code 1411, 1412, and 1414 of the Dodd-Frank counted toward the points and fees of 1986 (26 U.S.C. 501(c)(3)) that extend Wall Street Reform and Consumer thresholds as part of the finance charge credit no more than 200 times annually, Protection Act (Dodd-Frank Act), under § 1026.32(b)(1)(i). The final rule provide credit only to low-to-moderate generally requires creditors to make a also excludes from points and fees income consumers, and follow their reasonable, good faith determination of compensation paid by a mortgage broker own written procedures to determine a consumer’s ability to repay a mortgage to an employee of the mortgage broker that consumers have a reasonable ability loan and creates a presumption of because that compensation is already to repay their loans. compliance with these ability-to-repay Credit extended pursuant to certain 1 See title I subtitle B of the Riegle Community requirements for certain loans Development and Regulatory Improvement Act of lending programs. The final rule designated as ‘‘qualified mortgages.’’ On 1994, Public Law 103–325, 108 Stat. 2160 (Jan. 25, provides an exemption from the ability- January 10, 2013, the Bureau issued a 1994). to-repay requirements for extensions of

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credit made pursuant to programs intends to study whether the definitions began to decline in 2005, however, administered by a housing finance of ‘‘rural’’ or ‘‘underserved’’ should be refinancing became more difficult and agency and for an extension of credit adjusted and to work with small delinquency rates on subprime and Alt- made pursuant to an Emergency creditors to transition to other types of A products increased dramatically.4 By Economic Stabilization Act program, products, such as adjustable-rate the summer of 2006, 1.5 percent of loans such as extensions of credit made mortgages, that satisfy other qualified less than a year old were in default, and pursuant to a State Hardest Hit Fund mortgage definitions. this figure peaked at 2.5 percent in late program. The ability-to-repay rules as revised 2007.5 As the economy worsened, the by this final rule will take effect on rates of serious delinquency (90 or more Small Creditor Portfolio and Balloon- January 10, 2014, along with various days past due or in ) for the Payment Qualified Mortgages other rules implementing new mortgage subprime and Alt-A products began a The final rule contains several protections under the Dodd-Frank Act. steep increase from approximately 10 provisions that are designed to facilitate II. Background percent in 2006, to 20 percent in 2007, compliance and preserve access to to over 40 percent in 2010.6 Although credit from small creditors, which are A. Mortgage Market Background the mortgage market is recovering, defined as creditors with no more than The mortgage market is the single consumers today continue to feel the $2 billion in assets that (along with largest market for consumer financial effects of the financial crisis. affiliates) originate no more than 500 products and services in the United Community-Focused Lending Programs first-lien mortgages covered under the States. In 2007 and 2008 this market ability-to-repay rules per year. The collapsed, greatly diminishing the While governmental and nonprofit Bureau had previously exercised wealth of millions of American programs have always been an authority under the Dodd-Frank Act to consumers and sending the economy important source of assistance for low- allow certain balloon-payment into a severe recession. A primary cause to moderate-income (LMI) consumers, mortgages to be designated as qualified of the collapse was the steady these programs have taken on even mortgages if they were originated and deterioration of credit standards in greater significance in light of current held in portfolio by small creditors mortgage lending. Evidence tight mortgage credit standards and operating predominantly in rural or demonstrates that many mortgage loans Federal initiatives to stabilize the underserved areas. In this final rule, the were made solely against collateral and housing market. There are a variety of Bureau is: programs designed to assist LMI • Adopting a new, fourth category of without consideration of ability to repay, particularly in the markets for consumers with access to qualified mortgages for certain loans homeownership. These programs are originated and held in portfolio for at ‘‘subprime’’ and ‘‘Alt-A’’ products, which more than doubled from $400 generally offered through a nonprofit least three years (subject to certain entity, local government, or a housing limited exceptions) by small creditors, billion in originations in 2003 to $830 billion in originations in 2006.2 finance agency (HFA). These programs even if they do not operate play an important role in the housing predominantly in rural or underserved Subprime products were sold primarily to consumers with poor or no credit sector of the economy. areas. The loans must meet the general Types of financial assistance restrictions on qualified mortgages with history, while Alt-A loans were sold primarily to consumers who provided available. Community-focused lending regard to loan features and points and programs typically provide LMI fees, and creditors must evaluate little or no documentation of income or 3 consumers with assistance ranging from consumers’ -to-income ratio or other evidence of repayment ability. Because subprime and Alt-A loans housing counseling services to full residual income. However, the loans are mortgage loan financing. Some not subject to a specific debt-to-income involved additional risk, they were typically more expensive to consumers programs offer financial assistance ratio as they would be under the general through land trust programs, in which qualified mortgage definition. than ‘‘prime’’ mortgage loans, although • many of them had very low introductory the consumer the real Raising the threshold defining and takes ownership of only the which qualified mortgages receive a safe interest rates. While housing prices continued to increase, it was relatively improvements. Many organizations harbor under the ability-to-repay rules provide ‘‘downpayment assistance’’ in for loans that are made by small easy for consumers to refinance their existing loans into more affordable connection with mortgage loan creditors under the balloon-loan or financing. This can be a gift, grant, or small creditor portfolio categories of products to avoid interest rate resets and other adjustments. When housing prices loan to the consumer to assist with the qualified mortgages. Because small consumer’s down payment, or to pay for creditors often have higher cost of 2 some of the costs. These funds, the final rule shifts the threshold Inside Mortg. Fin., The 2011 Mortgage Market Statistical Annual (2011). programs often rely on subsidies from separating qualified mortgages that 3 There is evidence that some consumers who Federal government funds, local receive a safe harbor from those that would have qualified for ‘‘prime’’ loans were government funds, foundations, or receive a rebuttable presumption of steered into subprime loans as well. The Federal compliance with the ability-to-repay Reserve Board on July 18, 2011 issued a consent cease and desist order and assessed an $85 million 4 U.S. Fin. Crisis Inquiry Comm’n, The Financial rules from 1.5 percentage points above civil money penalty against Wells Fargo & Company Crisis Inquiry Report: Final Report of the National the average prime offer rate (APOR) on of San Francisco, a registered bank holding Commission on the Causes of the Financial and first-lien loans to 3.5 percentage points company, and Wells Fargo Financial, Inc., of Des Economic Crisis in the United States at 215–217 above APOR. Moines. The order addresses allegations that Wells (Official Gov’t ed. 2011) (FCIC Report), available at: • Fargo Financial employees steered potential prime- http://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO- Providing a two-year transition eligible consumers into more costly subprime loans FCIC.pdf. period during which small creditors that and separately falsified income information in 5 FCIC Report at 215. CoreLogic Chief Economist do not operate predominantly in rural or mortgage applications. In addition to the civil Mark Fleming told the FCIC that the early payment underserved areas can offer balloon- money penalty, the order requires that Wells Fargo default rate ‘‘certainly correlates with the increase compensate affected consumers. See Press Release, in the Alt-A and subprime shares and the turn of payment qualified mortgages if they Federal Reserve Board (July 20, 2011), available at: the housing market and the sensitivity of those loan hold the loans in portfolio. During the http://www.federalreserve.gov/newsevents/press/ products.’’ Id. two-period transition period, the Bureau enforcement/20110720a.htm. 6 FCIC Report at 217.

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employer funding.7 For example, many and Federal programs HFAs administer insure mortgage loans originated of these programs rely on funds do not provide administrative funds; pursuant to the program, thereby provided through the HUD Home others provide limited administrative permitting LMI consumers to avoid Investment Partnerships Program funds. Most HFAs operate private . HFAs may (HOME Program).8 independently and do not receive State also provide other assistance to LMI Some programs offer first-lien operating funds. These agencies are consumers, such as mortgage loan mortgage loans designed to meet the generally funded through tax-exempt payment subsidies or assistance with needs of LMI consumers. These first- bonds but may receive funding from the up-front costs of a mortgage loan. In lien mortgage loans may have a Federal, State, or other sources.12 HFAs 2010, HFAs provided about $10 billion discounted interest rate or limited issue these tax-exempt bonds, also in affordable financing.16 In 2010, 89 origination fees or may permit high known as mortgage revenue bonds, and percent of HFAs provided down loan-to-value ratios. Many programs use the proceeds of the bond sale to payment assistance loan or grant offer subordinate financing. finance affordable mortgage loans to assistance and 57 percent of HFAs Subordinate-financing options may be LMI consumers. As of June 2012, the 51 provided assistance in conjunction with simple, such as a relatively inexpensive State HFAs (including the District of programs offered by the Federal subordinate-lien loan to pay for closing Columbia) had $107 billion in Housing Administration (FHA) or the costs. Other methods of subordinate outstanding tax-free municipal debt U.S. Department of Agriculture 17 financing may be complex. For example, available. These mortgage revenue (USDA). However, HFAs generally do one HFA program offers a 30-year, bonds funded approximately 100,000 not provide direct financing to LMI fixed-rate, subordinate-lien mortgage first-time homeowners per year. HFAs consumers. Many HFAs are prohibited loan through partner creditors, with may also receive funding through by law from directly extending credit in interest-only payments for the first 11 Federal programs, such as the HOME an effort by State governments to avoid years of the loan’s term, and with an Program, which is the largest Federal competing with the private sector. HFAs 13 interest subsidy for the LMI consumer, block grant for affordable housing. generally partner with creditors, such as resulting in a graduated monthly HFAs employ several methods of local banks, that extend credit pursuant payment between the fifth and eleventh promoting affordable homeownership. to the HFA’s program guidelines. Most year of the loan; an additional 30-year These agencies may partner with local HFA programs are ‘‘mortgage purchase’’ deferred, 0 percent subordinate-lien governments to develop and implement programs in which the HFA establishes mortgage loan is extended by the HFA long-term community-development program requirements (e.g., income equal to the amount of the subsidy.9 strategies. For example, HFAs may limits, purchase price limits, interest Some of the loans offered by these provide tax credits to companies that rates, points and term limits, underwriting standards, etc.), and agrees programs, whether first-lien or build or rehabilitate affordable 14 to purchase loans made by private subordinate-financing, are structured as housing. These agencies may also administer affordable housing trust creditors that meet these requirements. hybrid grant products that are Many HFAs expand on the commonly forgiven. funds or other State programs to facilitate the affordable housing underwriting standards of GSEs or Housing finance agencies. For over 50 development.15 Many HFAs also Federal government agencies by years, HFAs have provided LMI provide education, counseling, or applying even stricter underwriting consumers with opportunities for standards than these guidelines or the 10 training courses to first-time or LMI affordable homeownership. HFAs are consumers. ability-to-repay requirements, such as governmental entities, chartered by HFAs also provide financial requiring mandatory counseling for all either a State or a municipality, that assistance directly to consumers. first-time homebuyers and strong loan engage in diverse housing financing Typically, HFAs offer the first-lien servicing. For example, the State of New activities for the promotion of affordable mortgage loan, subordinate financing, York Mortgage Agency (SONYMA)’s housing. Some HFAs are chartered to and downpayment assistance programs underwriting requirements generally promote affordable housing goals across described above. HFAs may also include a two-year, stable history of an entire State, while others’ establish pooled loss reserves to self- earned income, a monthly payment-to- jurisdiction extends to only particular income ratio not to exceed 40 percent, 11 cities or counties. Many of the State only in Orleans Parish. See www.lhfa.state.la.us and a monthly debt-to-income ratio not to www.financeauthority.org. exceed 45 percent, and review of the 7 Abigail Pound, Challenges and Changes in 12 Bonds issued by HFAs are tax-exempt if the consumer’s entire credit profile to Community-Based Lending for Homeownership, proceeds are used to provide assistance to first-time 18 NeighborWorks America, Joint Center for Housing determine acceptable credit. or LMI-homebuyers. See 26 U.S.C. 143. HFAs extend credit only after Studies of Harvard University (Feb. 2011), available 13 See www.hud.gov/homeprogram. at: http://www.jchs.harvard.edu/sites/ 14 conducting a lengthy and thorough _ The Tax Reform Act of 1986, Public Law 99– jchs.harvard.edu/files/w11-2 pound.pdf. 514, 100 Stat. 2085 (1986), included the Low- analysis of a consumer’s ability to repay. 8 The HOME Investment Partnerships Program is Income Housing Tax Credit Program. Under this HFAs generally employ underwriting authorized under title II of the Cranston-Gonzalez program, the IRS provides tax credits to HFAs. requirements that are uniquely tailored National Affordable Housing Act of 1990, Public HFAs may transfer these tax credits to developers Law 101–625, 104 Stat. 4079 (1990). See 24 CFR of affordable housing. Developers then sell these to meet the needs of LMI consumers, 92.1 through 92.618. credits to fund the development program. See and which often account for 9 See http://www.mhp.net/homeownership/home http://portal.hud.gov/hudportal/HUD?src=/program nontraditional underwriting criteria, buyer/soft_second_works.php, describing the _offices/comm_planning/affordablehousing/ extenuating circumstances, and other SoftSecond program offered by the Massachusetts training/web/lihtc/basics. elements that are indicative of Housing Partnership. 15 The Massachusetts Affordable Housing Trust 10 The first State housing finance agency was Fund provides funds to governmental subdivisions, established in New York in 1960. See New York nonprofit organizations, and other entities seeking 16 National Council of State Housing Agencies, State Housing Finance Agency Act, 1960 Laws of to provide for the development of affordable State HFA Factbook (2010), p. 33. New York, 183rd Session, Chap. 671. housing. See www.masshousing.com. New York 17 Id. at 21–22, 35–36. 11 For example, the Louisiana Housing State’s Mitchell-Lama program provides subsidies 18 See State of New York Mortgage Agency Corporation administers affordable housing such as property tax exemptions to affordable (SONYMA) Credit and Property Underwriting programs across all of Louisiana, while The Finance housing developers. See http://www.nyshcr.org/ Notes, available at: http://www.nyshcr.org/assets/ Authority of New Orleans administers programs Programs/mitchell-lama/. documents/1006.pdf.

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creditworthiness, ability to repay, and 501(c)(3) organizations are restricted promote nonprofit involvement in responsible homeownership. In certain from lobbying activities, while 501(c)(4) affordable housing programs.29 HUD- circumstances, some HFAs require the organizations, which must exist to approved nonprofits may participate in consideration of compensating factors promote social welfare, may engage in FHA single-family programs that allow and other elements that are different political campaigning and lobbying.23 them to purchase homes at a discount, from the factors required to be Most organizations that provide support finance FHA-insured mortgages with the considered and verified under the to LMI consumers are structured as same terms and conditions as owner- ability-to-repay requirements. For 501(c)(3) organizations. However, some occupants, or be able to finance example, the Connecticut Housing organizations are structured as nonprofit secondary loans for consumers Finance Agency (CHFA)’s underwriting 501(c)(4) organizations. obtaining FHA-insured mortgages.30 A requirements require the consideration Various Federal programs establish DAP must be approved by HUD if it is of certain compensating factors (e.g., eligibility requirements and provide a nonprofit or nonprofit instrumentality ability to make a large down payment, ongoing monitoring of specific types of of government that provides demonstrated ability to accumulate creditors that receive Federal grants and downpayment assistance as a lien in savings, substantial documented cash other support. For example, Community conjunction with an FHA first mortgage; reserves, etc.) for consumers with debt Development Financial Institutions government entity DAPs and gift ratios that exceed the maximum CHFA (CDFIs) are approved by the U.S. programs do not require approval.31 As monthly payment-to-income and debt- Department of the Treasury (Treasury of May 2013 HUD listed 228 nonprofit to-income ratio limits.19 In addition, to Department) to receive monetary awards agencies and nonprofit instrumentalities be eligible for Virginia Housing from the Treasury Department’s CDFI of government in the U.S. that are Development Authority (VHDA) Fund, which was established to promote authorized to provide secondary conventional financing, a consumer capital development and growth in financing.32 HUD performs field reviews must demonstrate the willingness and underserved communities. Promoting and requires annual reports of ability to repay the mortgage debt and homeownership and providing safe participating nonprofit agencies. creditors must consider: Employment lending alternatives are among the Additionally, HUD’s quality control and income; credit history; sufficient Fund’s main goals. The Treasury plan requires periodic review for funds to close; monthly housing Department created the CDFI deficient policies and procedures and expenses; and monthly payment-to- designation to identify and support corrective actions. These approval and income and debt-to-income ratios.20 small-scale creditors that are committed subsequent review procedures are VHDA underwriting guidelines allow to community-focused lending but have intended to ensure that DAPs operate in delegated underwriters to approve difficulty raising the capital needed to compliance with HUD requirements and 24 33 exceptions to the above debt-to-income provide affordable housing services. remain financially viable. However, ratios, provided that the ratios do not CDFIs may operate on a for-profit or HUD recognizes that these nonprofits exceed 2 percent above the guidelines. nonprofit basis, provided the CDFI has have limited resources and gives The exceptions must be justified with a primary mission of promoting consideration to DAP viability when 25 34 strong compensating factors, which community development. These crafting regulations. programs are also subject to other Creditors may also be certified by must indicate that the consumer can 26 afford the repayment of the increased eligibility requirements. As of July HUD as Community Housing 2012, there were 999 such organizations debt.21 Through careful and regular in the U.S., 62 percent of which were 29 ‘‘Nonprofit organizations are important oversight, however, HFAs help ensure classified as Community Development participants in HUD’s efforts to further affordable that their lenders follow the HFAs’ strict (CD) Loan Funds and 22 percent as CD housing opportunities for low- and moderate- underwriting standards. income persons through the FHA single family Credit Unions, while the rest were CD Private organizations. While entities programs. FHA’s single family regulations recognize Banks, Thrifts, or CD Venture Capital a special role for nonprofit organizations in such as HFAs develop and finance Funds.27 conjunction with the . . . provision of secondary affordable housing programs, these The U.S. Department of Housing and financing.’’ See 67 FR 39238 (June 6, 2002). 30 DAPs generally rely on FHA program mortgage loans are generally extended Urban Development (HUD) may by private organizations. These guidelines for underwriting purposes, but have designate nonprofits engaging in additional requirements for determining eligibility organizations often are structured as affordable housing activities as for assistance. For example, the Hawaii nonprofit 501(c)(3) organizations. Under Downpayment Assistance through Homeownership Center is a HUD-approved DAP Internal Revenue Code section 501(c)(3), with separate eligibility criteria, available at: http:// Secondary Financing Providers www.hihomeownership.org/pdf/ the designation is for nonprofit, tax- (DAPs).28 HUD established this DPAL5_FAQ_JAN2013.pdf. exempt, charitable organizations not designation as part of an effort to 31 See http://portal.hud.gov/hudportal/HUD?src=/ operated for the benefit of private program_offices/housing/sfh/np/sfhdap01. 22 32 . Under Federal tax law, 23 See https://entp.hud.gov/idapp/html/ See http://www.irs.gov/Charities-&-Non-Profits/ f17npdata.cfm. Other-Non-Profits/Social-Welfare-Organizations. 33 ‘‘It is vital that the Department periodically and 19 See Connecticut Housing Finance Agency 24 See 68 FR 5704 (Feb. 4, 2003). uniformly assess the management and financial Operating Manual, Section 5—Underwriting, 25 See 12 CFR 1805.201(b). ability of participating nonprofit agencies to ensure available at: http://www.chfa.org/content/ 26 Id. Treasury Department eligibility they are not overextending their capabilities and CHFA%20Documents/Operating%20Manual%20- requirements for CDFIs stipulate that an approved increasing HUD’s risk of loss as a mortgage %20Section%2005%20Underwriting.pdf. organization must: Be a legal entity at the time of insurance provider.’’ 65 FR 9285, 9286 (Feb. 24, 20 See Virginia Housing Development Authority certification application; have a primary mission of 2000). Origination Guide, Section 2.3 Underwriting promoting community development; be a financing 34 ‘‘HUD continues to strongly encourage the Requirements (Aug. 2011), available at: http:// entity; primarily serve one or more target markets; participation of nonprofit organizations, including www.vhda.com/BusinessPartners/Lenders/ provide development services in conjunction with community and faith-based organizations, in its LoanInfoGuides/ its financing activities; maintain accountability to programs. This proposed rule is not designed to Loan%20Information%20and%20Guidelines/ its defined target market; and be a non-government place particular burdens on participation by OriginationGuide.pdf. entity and not be under control of any government nonprofit organizations. Rather, the proposed rule 21 See id. entity (Tribal governments excluded). is designed to ensure that nonprofit organizations 22 See http://www.irs.gov/Charities-&-Non-Profits/ 27 See http://www.cdfifund.gov/docs/ have the capacity, experience, and interest to Charitable-Organizations/Exemption-Requirements- certification/cdfi/CDFI List-07-31-12.xls. participate in HUD’s housing programs.’’ 69 FR Section-501(c)(3)-Organizations. 28 See 24 CFR 200.194. 7324, 7325 (Feb. 13, 2004).

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Development Organizations (CHDOs) in CDFIs and CHDOs that provide System, Federal National Mortgage connection with HUD’s HOME Program, mortgage loans generally employ Association (), and Federal which provides grants to fund a wide underwriting guidelines tailored to the Home Loan Mortgage Corporation range of activities that promote needs of LMI consumers. Unlike (Freddie Mac) offer several programs to affordable homeownership.35 HUD creditors that rely on industry-wide support affordable housing by Participating Jurisdictions confer CHDO underwriting guidelines, which facilitating mortgage financing for LMI certification only on community- generally do not account for the unique consumers. For example, the FHLB focused nonprofits that are both credit characteristics of LMI consumers, Affordable Housing Program provides dedicated to furthering a community’s CDFI and CHDO underwriting grants to member banks to fund affordable housing goals and capable of requirements include a variety of programs that assist with closing costs complying with the requirements of the compensating factors. For example, or down payments, buy down principal HOME Program.36 Creditors designated these creditors often consider personal amounts or interest rates, refinance an as CHDOs are eligible to receive special narratives explaining prior financial existing loan, or assist with CHDO set-aside funds from the HOME difficulties, such as gaps in employment rehabilitation or construction costs.45 Program to fund local homebuyer or negative credit history.42 Others Fannie Mae and Freddie Mac also offer assistance programs.37 Applicants consider the amount of time a consumer two programs focused on community- seeking CHDO status must meet spends working on the construction or focused lending.46 rigorous requirements. For example, a rehabilitation of affordable homes.43 Other options exist for nonprofits CHDO must be designated as a nonprofit Some creditors also consider a seeking to develop and fund under section 501(c)(3) or (c)(4) of the consumer’s general reputation, relying community-focused lending programs. Internal Revenue Code, adhere to strict on references from a or persons For example, a nonprofit may originate standards of financial accountability, with whom the consumer does mortgage loans to LMI consumers and have among its purposes the provision business.44 In these transactions, a CDFI subsequently sell the loans to a bank, of decent and affordable housing for or CHDO may determine that the credit union, or other investor as part of LMI consumers, maintain accountability strength of these compensating a Community Reinvestment Act to the community, and have a proven characteristics outweigh weaknesses in partnership program.47 Other nonprofits record of capably and effectively serving other underwriting factors, such as may operate a limited affordable low-income communities.38 After the negative credit history or irregular housing assistance fund, funded entirely CHDO designation is obtained, CHDO income. Including these compensating by private donations, under which LMI creditors must operate under the factors in the underwriting process consumers may obtain subordinate supervision of a Participating enables CDFIs and CHDOs to more financing. Nonprofits such as these Jurisdiction and in accordance with the appropriately underwrite LMI often rely on the underwriting requirements of the HOME Program.39 consumers. performed by the creditor for the first- HUD conducts annual performance Nonprofit creditors may engage in lien mortgage loan, which is often a reviews to determine whether funds community-focused lending without bank or credit union, to process, have been used in accordance with obtaining one of the designations underwrite, and approve the LMI program requirements.40 While HUD described above. Such nonprofits often consumer’s application. In addition, continues to support affordable housing rely on HFA or Federal programs for some nonprofits are self-supporting and programs involving CHDOs, current funding, lending guidelines, and other offer full financing to LMI consumers. market conditions have affected CHDO support. However, some nonprofits offer These nonprofits often establish lending viability.41 credit to LMI consumers independent of programs with unique guidelines, such these State or Federal programs. For as requirements that LMI consumers 35 See http://portal.hud.gov/hudportal/HUD?src=/ example, nonprofits may make mortgage devote a minimum number of hours program_offices/comm_planning/ loans in connection with a GSE towards the construction of affordable affordablehousing/programs/home. affordable housing program. The housing. 36 ‘‘The Department believes that there was Federal Home Loan Bank (FHLB) specific statutory intent to create an entitlement for Homeownership Stabilization and community-based nonprofit organizations that Foreclosure Prevention Programs would own, sponsor or develop HOME assisted workforces throughout the Nation. These challenges housing. While partnerships with State and local have been magnified by current housing and credit During the early stages of the financial government are critical to the development of market conditions.’’ 76 FR 78343, 78345 (Dec. 16, crisis the mortgage market significantly affordable housing, these organizations are viewed 2011). 42 as private, independent organizations separate and Neighborworks Anchorage, which is designated as both a CDFI and CHDO, requires letters of 45 The Federal Home Loan Bank of Des Moines apart from State or local governments. One of the provides funds for member bank programs related major objectives of the Department’s technical explanation regarding gaps in employment or derogatory credit history. See http:// to rural homeownership, urban first-time assistance program is to increase the number of homebuyers, and Native American homeownership. capable, successful CHDOs able and willing to use www.nwanchorage.org/home-ownership/buying- home/getting-loan-affordable-loans-lending- See http://www.fhlbdm.com/community- the CHDO set-aside [fund].’’ 61 FR 48736, 48737 investment/down-payment-assistance-programs/. (Sept. 16, 1996). programs. 43 The Community Development Corporation of The Federal Home Loan Bank of Chicago provides 37 See 24 CFR 92.300 through 92.303. funds for member bank programs related to down 38 Brownsville, which is designated as a CHDO, See 24 CFR 92.2. requires consumers to contribute 11 months of payment and closing cost assistance or eligible 39 For example, no more than 5 percent of a labor, or ‘‘sweat equity,’’ as part of the approval rehabilitation costs for the purchase of a home. See _ Participating Jurisdiction’s fiscal year HOME process. See http://www.cdcb.org/h-h- http://ci.fhlbc.com/Grant Pgms/DPP.shtml. allocation may be used for CHDO operating programs.html#programs2. St. Lucie Habitat for 46 Fannie Mae offers first-lien mortgage loans expenses. 24 CFR 92.208(a). Humanity, which is designated as a CHDO, requires through the My Community Mortgage program and 40 See 24 CFR 92.550 through 92.552. 300 hours of labor as part of the approval process. subordinate-lien loans through the Community 41 ‘‘[Participating jurisdictions] have encountered See http://stluciehabitat.org/#. Seconds program. Freddie Mac offers both first- and new challenges in administering their programs and 44 Habitat for Humanity affiliates, many of which subordinate-lien mortgage loans through the Home in managing their growing portfolios of older are designated as a CHDO or CDFI, consider Possible program. HOME projects. These challenges include reduced references from current and former , 47 Under the Community Reinvestment Act (12 availability of states or local funding sources, creditors, and others. See Habitat for Humanity U.S.C. 2901), depository institutions may meet reduced private lending, changes in housing Affiliate Operations Manual, available at: http:// community reinvestment goals by directly property standards, and energy codes and www.medinahabitat.org/files/ originating or purchasing mortgage loans provided reductions in states and local government AffilOpFamilySelect.pdf. to LMI consumers. See 12 CFR 228.22.

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tightened mortgage loan underwriting As the crisis worsened, industry HAMP produced nearly 500,000 trial requirements in response to uncertainty stakeholders attempted to stop this self- modifications during the first six over the magnitude of potential losses reinforcing cycle through a series of months of the program.60 MHA offerings due to delinquencies, defaults, and measures intended to stabilize expanded with the creation of the .48 This restriction in credit homeownership and prevent Second Lien Modification Program in availability coincided with increasing foreclosure. Beginning in late 2008, the August 2009 and the Home Affordable unemployment, falling home values, Federal government, Federal agencies, Foreclosure Alternatives Program in and the onset of subprime ARM resets. and GSEs implemented programs November 2009.61 The Treasury As a result, many subprime ARM designed to facilitate refinancings and Department subsequently modified consumers could not afford their loan modifications. these programs several times in mortgage payments and were not able to The Troubled Asset Relief Program. response to the changing needs of obtain refinancings. This led to The U.S. government enacted and distressed consumers and the mortgage increases in delinquencies and implemented several programs intended market.62 foreclosures, which prompted further to promote economic recovery by MHA programs are currently tightening of underwriting standards. stabilizing homeownership and scheduled to expire on December 31, Other subprime ARM consumers were preventing foreclosure. The Emergency 2013, although there is continuing able to remain current, but were not able Economic Stabilization Act of 2008,53 as debate about whether to extend them.63 to refinance because of a decrease in amended by the American Recovery and As of December 2012, ten programs their loan-to-value ratio or an increase Reinvestment Act of 2009,54 authorizes have been established under MHA. The in their debt-to-income ratio.49 the Treasury Department to ‘‘use loan Treasury Department operates five MHA However, these consumers devoted guarantees and credit enhancements to programs.64 The remaining five MHA most of their disposable income to facilitate loan modifications to prevent programs are operated in conjunction mortgage payments, thereby lowering avoidable foreclosures.’’ 55 Pursuant to with U.S. Department of Veterans overall consumer demand and further this authority, the Treasury Department Affairs (VA), FHA, or USDA programs.65 weakening the national economy.50 established the Troubled Asset Relief Many consumers facing default or Policymakers became concerned that Program (TARP), under which two foreclosure have received assistance the losses incurred from foreclosures on programs were created to provide under these programs. For example, subprime mortgage loans would financial assistance directly to from the beginning of the HAMP 51 destabilize the entire mortgage market. homeowners in danger of losing their program to March 2013, over 1.1 million There was a particular concern that the homes: the Making Home Affordable permanent HAMP modifications have uncertainty surrounding exposure to (MHA) program and the Hardest Hit been completed, saving distressed these losses would lead to a fear- Fund (HHF) program. The MHA consumers an estimated $19.1 billion.66 induced downward economic spiral.52 program is operated by the Treasury Department and seeks to provide DTI ratio of 31 percent. See United States 48 A 2011 OCC survey shows that 56 percent of Federally-directed assistance to Department of the Treasury, ‘‘Home Affordable supervised banks participating in the survey consumers who are at risk of default, Modification Program, Base Net Present Value tightened residential underwriting (NPV) Model v5.02, Model Documentation’’ (April requirements between 2007 and 2008, and 73 foreclosure, or were otherwise harmed 1, 2012), available at: https://www.hmpadmin.com/ percent tightened underwriting requirements by the financial crisis.56 The HHF portal/programs/docs/hamp_servicer/ between 2008 and 2009. See Office of the program provides funds to certain HFAs npvmodeldocumentationv502.pdf. See also Comptroller of the Currency, Survey of Credit in States where the Treasury Consumer Compliance Outlook, Federal Reserve Underwriting Practices 2011, p. 11. Bank of Philadelphia (Third Quarter 2009), 49 ‘‘[W]ith prices becoming flat or declining Department has determined that locally- available at: http://www.philadelphiafed.org/bank- in many parts of the country during 2007, it has directed stabilization programs are resources/publications/consumer-compliance- become increasingly difficult for many subprime required.57 outlook/2009/third-quarter/q3_02.cfm. ARM borrowers to refinance. While many such MHA began with the introduction of 60 See Troubled Asset Relief Program (TARP) borrowers remain current on their loans or are still Monthly Report to Congress—September 2009. able to refinance at market rates or into FHA the Home Affordable Modification 61 See United States Department of the Treasury products, an increasing number have either fallen 58 Program (HAMP) in March 2009. Office of Financial Stability, ‘‘Troubled Asset Relief behind on their existing payments or face the HAMP is intended to assist employed Program: Two Year Retrospective’’ (Oct. 2010). prospect of falling behind when rates reset and they 62 are unable to refinance.’’ Accelerating Loan homeowners by replacing the See e.g., Supplemental Directive 10–02 (Mar. Modifications, Improving Foreclosure Prevention consumer’s current mortgage loan with 24, 2010), modifying HAMP, Supplemental and Enhancing Enforcement, 110th Cong. (Dec. 6, a more affordable mortgage loan.59 Directive 11–07 (July 25, 2011), expanding 2007) (testimony of John C. Dugan, Comptroller, eligibility for the Home Affordable Unemployment Office of the Comptroller of the Currency). Program, and Supplemental Directive 12–02 (Mar. 53 12 U.S.C. 5201 et. seq.; Public Law 110–343 50 By the third quarter of 2007, the ratio of 9, 2012), expanding HAMP eligibility. (Oct. 3, 2008). 63 mortgage-related financial obligations (which is Press Release, Treasury Department, Expanding 54 See Sec. 7002 of Public Law 111–5 (Jan. 6, comprised of mortgage debt, homeowners’ our Efforts to Help More Homeowners and 2009). insurance, and property tax) to disposable personal Strengthen Hard-hit Communities (Jan. 27, 2012), 55 income reached an all-time high of 11.3 percent. 12 U.S.C. 5219(a)(1). available at: http://www.treasury.gov/connect/blog/ See http://www.federalreserve.gov/releases/ 56 See www.makinghomeaffordable.gov. Pages/Expanding-our-efforts-to-help-more- housedebt/. 57 See http://www.treasury.gov/initiatives/ homeowners-and-strengthen-hard-hit- 51 ‘‘[A]nalysts are concerned that mortgage financial-stability/TARP-Programs/housing/hhf/ communities.aspx. foreclosures will climb significantly higher and, Pages/default.aspx. 64 In addition to HAMP, the Second Lien along with falling housing prices, overwhelm the 58 See Press Release, Treasury Department, Relief Modification Program, and the Home Affordable ability of mortgage markets to restructure or for Responsible Homeowners (Mar. 4, 2009), Foreclosure Alternatives Program, the Treasury refinance loans for creditworthy borrowers.’’ available at: http://www.treasury.gov/press-center/ Department also operates the Principal Reduction Congressional Budget Office, Options for press-releases/Pages/200934145912322.aspx. Alternative Program and the Home Affordable Responding to Short-Term Economic Weakness, p. 59 Generally speaking, a loan can be modified Unemployment Program. 21 (Jan. 2008). under HAMP only if it yields a positive net present 65 These programs are the FHA Home Affordable 52 ‘‘[A] breakdown of mortgage markets could put value using series of tests involving ‘‘waterfalls.’’ Modification Program, USDA Special Loan the economy on a self-reinforcing downward spiral Under the waterfall method, servicers must Servicing, Veterans Affairs Home Affordable of less lending, weaker economic activity, lower repeatedly project amortizations based on Modification, FHA Second Lien Modification house prices, more foreclosures, even less lending, sequential decreases in the interest rate and, if Program, and the FHA Short Refinance Program. and so on, either causing or significantly worsening necessary, principal forgiveness, until arriving at a 66 See March 2013 Making Home Affordable a recession.’’ Id. pp. 21–22. potential loan modification with a target front-end Program Performance Report.

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In March 2010 the Treasury 2012 the Nevada HHF program was These efforts have enabled many Department established the HHF amended for the tenth time.73 consumers to receive refinancings under program to enable the States most Federal agency programs. In response these programs. In 2011, the FHA affected by the financial crisis to to the financial crisis, the FHA, the VA, accounted for 5.6 percent of the develop innovative assistance and the USDA expanded existing mortgage refinance market, with 80 programs.67 Nineteen programs have programs and implemented new originations totaling $59 billion. been established under the HHF fund, programs intended to facilitate However, the number of consumers which is currently scheduled to expire refinancings for consumers at risk of receiving assistance under these on December 31, 2017. These programs delinquency or default. Some of these programs varies. For example, between provide assistance to homeowners in programs operate in conjunction with April 2009 and December 2011, the the District of Columbia and the 18 the Treasury Department’s MHA FHA started 5.6 million mortgage loan 81 States most affected by the economic program, while others are run solely by modifications. During a similar time crisis.68 The HHF provides funds the particular Federal agency. In 2008 period, nearly 997,000 FHA Streamline 82 directly to HFAs in these States, which Congress expanded access to Refinances were consummated. In are used to create foreclosure-avoidance refinancings under the VA’s Interest contrast, between February 2010 and September 2012, only 1,772 mortgage programs. As of April 2013, Rate Reduction Refinancing Loan loans were refinanced under the Short approximately $2.2 billion has been program by raising the maximum loan- Refinance Option program.83 Efforts allocated to support the 63 programs to-value ratio to 100 percent and increasing the maximum loan amount of continue to develop and enhance these established to assist distressed programs to assist distressed consumers in these localities.69 In loans eligible to be guaranteed under the program.74 In February 2009 HUD homeowners while improving the California alone, nearly 17,000 performance of existing mortgage loans consumers have received over $166 increased the maximum loan amount for FHA-insured mortgages.75 This change owned, insured, or guaranteed by these million in assistance since the agencies. beginning of the program.70 expanded access to refinancings available under the FHA’s Streamline HARP and other GSE refinancing As with the MHA programs discussed Refinance Program.76 Several months programs. After the GSEs were placed above, these HHF programs have later, the FHA created the Short into conservatorship in late 2008, the evolved over time. The Treasury Refinance Option program to assist Federal Housing Finance Agency Department originally encouraged HFAs consumers with non-FHA mortgage (FHFA) took immediate steps to reduce 84 to establish programs for mortgage loans.77 This program, which operates GSE losses by mitigating foreclosures. modifications, principal forbearance, in conjunction with TARP, permits In November 2008 FHFA and the GSEs, short sales, principal reduction for underwater consumers to refinance if in coordination with the Treasury consumers with high loan-to-value the current creditor agrees to write Department and other stakeholders, ratios, unemployment assistance, and down 10 percent of the outstanding announced the Streamlined second-lien mortgage loan reduction or principal balance. Similarly, in August Modification Program, which was modification.71 No HFAs were able to 2010 the Rural Housing Service of the intended to help delinquent consumers establish all of these programs in the USDA (RHS) adopted rules intended to avoid foreclosure by affordably 85 early stages of the HHF. However, facilitate loan modifications for restructuring mortgage payments. This through 2011 and 2012 State HHF consumers struggling to make payments program was the precursor to the Home programs were significantly modified on USDA Guaranteed Loans.78 The Affordable Refinance Program (HARP) and expanded.72 The 19 HFAs continue USDA subsequently created the Single Family Housing Guaranteed Rural 80 This number represents FHA’s market share by to modify these programs to develop dollar volume. By number of originations, the FHA more effective and efficient methods of Refinance Pilot Program, which was controlled 6.5 percent of the refinance market, with providing assistance to at-risk intended to refinance USDA borrowers 312,385 refinances originated. See FHA-Insured consumers. For example, in September into more stable and affordable Single-Family Mortgage Originations and Market mortgage loans.79 Share Report 2012—Q2, available at: http:// portal.hud.gov/hudportal/documents/huddoc?id= 67 See Hardest Hit Fund Program Guidelines fhamktq2_2012.pdf. Round 1, available at: http://www.treasury.gov/ 73 See Tenth Amendment to Commitment to 81 See Hearing on FY13 Federal Housing initiatives/financial-stability/TARP-Programs/ Purchase Financial Instrument and HFA Administration’s Budget Request, 112th Cong. (Mar. housing/Documents/HFA_Proposal_Guidelines_-_ Participation Agreement, available at: http:// 8, 2012) (testimony of Carol Galante, Acting 1st_Rd.pdf. www.treasury.gov/initiatives/financial-stability/ Assistant Secretary for Housing/Federal Housing 68 The HHF provides funds to HFAs located in TARP-Programs/housing/Pages/Program- Administration Commissioner for the U.S. Alabama, Arizona, California, Florida, Georgia, Documents.aspx. Department of Housing and Urban Development). Illinois, Indiana, Kentucky, Michigan, Mississippi, 74 See Sec. 504 of the Veterans’ Benefits 82 A total of 996,871 mortgage loans were Nevada, New Jersey, North Carolina, Ohio, Oregon, Improvement Act of 2008, Public Law 110–389 endorsed under the FHA Streamline Refinance Rhode Island, South Carolina, Tennessee, and (Oct. 10, 2008). program from Fiscal Year 2009 through 2012. See Washington, DC 75 See HUD Mortgagee Letter 2009–07. Section FHA Outlook Reports for Fiscal Years 2009, 2010, 69 See Troubled Asset Relief Program (TARP) 1202(b) of the American Recovery and 2011, and 2012, available at: http://portal.hud.gov/ Monthly Report to Congress—April 2013. Reinvestment Act of 2009, Public Law 111–5 (Jan. hudportal/HUD?src=/program_offices/housing/ 70 See Keep Your Home California 2012 Fourth 6, 2009), authorized the Secretary of Housing and rmra/oe/rpts/ooe/olmenu. Quarterly Report. Urban Development to increase the loan limit. 83 See Office of the Special Inspector General for 71 See Hardest Hit Fund Program Guidelines 76 The FHA Streamline Refinance Program the Troubled Asset Relief Program, Quarterly Round 1, available at: http://www.treasury.gov/ contains reduced underwriting requirements for Report to Congress, p. 64 (Oct. 25, 2012). initiatives/financial-stability/TARP-Programs/ consumers with FHA mortgage loans seeking to 84 See Press Release, FHFA, Statement of FHFA housing/Documents/HFA_Proposal_Guidelines_-_ refinance into a new FHA mortgage loan with a Director James B. Lockhart (Sept. 7, 2008), available 1st_Rd.pdf. reduced interest rate. The FHA has offered at: http://www.fhfa.gov/webfiles/23/ 72 From 2011–2012, the program agreements streamline refinances for over thirty years. See HUD FHFAStatement9708final.pdf. between the 19 HFAs and the Treasury Department Mortgagee Letter 1982–23. 85 See Press Release, FHFA, FHFA Announces were modified 55 times. See http:// 77 See HUD Mortgagee Letter 2010–23. Implementation Plans for Streamlined Loan www.treasury.gov/initiatives/financial-stability/ 78 See 75 FR 52429 (Aug. 26, 2010). Modification Program, (Dec. 18, 2008), available at: TARP-Programs/housing/hhf/Pages/Archival- 79 See Rural Dev. Admin. Notice No. 4615 (1980– http://www.fhfa.gov/webfiles/267/SMP information.aspx. D) (Feb. 1, 2012). implementation121808.pdf.

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that was announced in March 2009.86 significant share of GSE refinancing the interest revenue derived from the The HARP program was originally set to activity. From January through loan itself. expire in June 2010 and limited to September 2012, 45 percent of GSE Small community creditor access to consumers with a loan-to-value ratio streamline refinances were non-HARP the secondary mortgage market was that did not exceed 105 percent. refinances.93 FHFA and the GSEs limited. Many small creditors originated However, HARP was modified over time remain committed to continue ‘‘non-conforming’’ loans which could to account for the deteriorating mortgage modifying these programs to enhance not be purchased by the GSEs. Also, market. In July 2010 the maximum loan- access to refinancing credit for many community creditors chose to to-value ratio was increased from 105 distressed consumers.94 In April 2013, retain the relationship model of 87 percent to 125 percent. Nine months FHFA extended the HARP expiration underwriting, rather than fully adopting standardized data models popular with later FHFA extended the HARP date to December 31, 2015.95 expiration date by one year, to June 30, larger banks. Retaining these traditional 2011.88 The Mortgage Loan Market for Small business methods had important Many of the nearly five million Portfolio Creditors consequences during the subprime eligible consumers were expected to crisis. While large lending institutions receive refinancings under HARP.89 Traditionally, underwriting standards generally depended on the secondary However, by mid-2011 fewer than one were determined at the branch or local market for funding, small community million consumers had received HARP bank level. These practices heavily banks and credit unions generally refinances. Fannie Mae, Freddie Mac, emphasized the relationship between remained reliant on deposits to fund and FHFA responded by significantly the bank and the consumer.96 Starting in mortgage loans held in portfolio. As a altering the HARP program.90 Perhaps the mid-1990s, much of the mortgage result, community creditors were less most significantly, the maximum loan- market began to move toward affected by the contraction in the to-value ratio was removed, facilitating standardized underwriting practices secondary mortgage market during the refinances for all underwater consumers based on quantifiable and verifiable data financial crisis.99 For example, the who otherwise fit HARP’s criteria. More points, such as a consumer’s credit percentage of mortgage-backed HARP refinances were completed score.97 The shift toward standardized, securities in relation to the total assets during the first six months of 2012 than electronic underwriting lowered costs of credit unions actually declined by 91 in all of 2011. These changes were for creditors and consumers, thereby more than 1.5 percent as subprime 100 especially effective in assisting increasing access to mortgage credit. lending expanded. Furthermore, by retaining mortgage consumers with high loan-to-value Standardized loan-level data made it loans in portfolio community creditors ratios. In September 2012, consumers easier to analyze individual loans for with loan-to-value ratios in excess of also retain the risk of delinquency or compliance with underwriting 125 percent received 26 percent of all default on those loans. The presence of requirements, which facilitated the HARP refinances.92 portfolio lending within this market The GSEs have implemented other expansion of private mortgage remains an important influence on the streamline refinance programs intended securitizations. This shift from underwriting practices of community to facilitate the refinancing of existing portfolio-focused to securitization- banks and credit unions. These GSE consumers into more affordable focused mortgage lending also altered institutions generally rely on long-term mortgage loans. These programs are the traditional risk calculations relationships with a small group of available for consumers who are not undertaken by creditors, as creditors no consumers. Therefore, the reputation of eligible for a refinancing under HARP. longer retained the risks associated with these community banks and credit For example, a consumer with a loan-to- poorly underwritten loans.98 unions is largely dependent on serving value ratio of less than 80 percent is Additionally, in another departure from their community in ways that cause no eligible for a streamline refinancing the traditional mortgage lending model, harm. Thus, community creditors have through Fannie Mae’s Refi Plus program these creditors increasingly relied on an added incentive to engage in or Freddie Mac’s Relief Refinance the fees earned by originating and thorough underwriting to protect their program. These programs comprise a selling mortgage loans, as opposed to balance sheet as well as their reputation. To minimize portfolio performance risk, 86 See Press Release, Treasury Department, Relief 93 Id. small community creditors have for Responsible Homeowners (Mar. 4, 2009), 94 ‘‘Today, we continue to meet with lenders to developed underwriting standards that available at: http://www.treasury.gov/press-center/ ensure HARP is helping underwater borrowers are different than those employed by press-releases/Pages/200934145912322.aspx. refinance at today’s historical low interest rates. As larger institutions. Small creditors 87 See Press Release, FHFA, FHFA Authorized we continue to gain insight from the program we Fannie Mae and Freddie Mac to Expand Home will make additional operational adjustments as generally engage in ‘‘relationship Affordable Refinance Program to 125 Percent Loan- needed to enhance access to this program.’’ Edward banking,’’ in which underwriting to-Value (July 1, 2009), available at: http:// J. DeMarco, Acting Director Federal Housing decisions rely on qualitative www.fhfa.gov/webfiles/13495/125_LTV_release_ Finance Agency, Remarks at the American Mortgage and_fact_sheet_7_01_09%5B1%5D.pdf. Conference (Sept. 10, 2012), available at: http:// 99 88 See Press Release, FHFA, FHFA Extends www.fhfa.gov/webfiles/24365/ Between 2005 and 2008, while loan originations at banks with assets in excess of $10 Refinance Program By One Year (Mar. 1, 2010), 2012DeMarcoNCSpeechFinal.pdf. billion fell by 51 percent, loan originations at banks available at: http://www.fhfa.gov/webfiles/15466/ 95 See Press Release, FHFA, FHFA Extends HARP with assets between $1 and $10 billion declined by HARPEXTENDED3110%5B1%5D.pdf. to 2015 (Apr. 11, 2013), available at: http:// 31 percent, and loan originations at banks with less 89 See Treasury Department Press Release supra www.fhfa.gov/webfiles/22721/ _ _ _ than $1 billion in assets declined by only 10 note 94. HARP release 102411 Final.pdf. percent. See Federal Reserve Bank of Kansas City, 90 See Press Release, FHFA, FHFA, Fannie Mae 96 ‘‘[C]ommunity banks tend to base credit Financial Industry Perspectives (Dec. 2009). and Freddie Mac Announce HARP Changes to decisions on local knowledge and nonstandard data 100 In December 2003, the ratio of mortgage- Reach More Borrowers (Oct. 24, 2011), available at: obtained through long-term relationships and are backed securities to total assets at credit unions was http://www.fhfa.gov/webfiles/22721/ less likely to rely on the models-based underwriting 4.67 percent. By December 2006, this ratio had _ _ _ HARP release 102411 Final.pdf. used by larger banks.’’ Federal Deposit Insurance decreased to 3.21 percent. See Accelerating Loan 91 See Federal Housing Finance Agency Refinance Corporation, FDIC Community Banking Study, p. 1– Modifications, Improving Foreclosure Prevention Report (June 2012). 1 (Dec. 2012) (FDIC Community Banking Study). and Enhancing Enforcement, 110th Cong. (Dec. 6, 92 See Federal Housing Finance Agency Refinance 97 See FCIC Report at 72. 2007) (testimony of Gigi Hyland, Board Member of Report (Sept. 2012). 98 See FCIC Report at 89. the National Credit Union Administration).

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information gained from personal suggests that that these relationship- tends to be higher than the cost for relationships between creditors and based lending practices lead to more larger institutions.111 consumers.101 This qualitative accurate underwriting decisions during B. Statutory and Regulatory Background information, often referred to as ‘‘soft’’ cycles of both lending expansion and information, focuses on subjective contraction.106 For over 20 years, consumer factors such as consumer character and advocates, legislators, and regulators Although the number of community reliability, which ‘‘may be difficult to have raised concerns about creditors banks has declined in recent years, quantify, verify, and communicate originating mortgage loans without these institutions remain an important through the normal transmission regard to the consumer’s ability to repay source of nonconforming credit and of channels of a banking organisation.’’ 102 the loan. Beginning in about 2006, these Evidence suggests that underwriting mortgage credit generally in areas concerns were heightened as mortgage based on such ‘‘soft’’ information yields commonly considered ‘‘rural’’ or delinquencies and foreclosure rates loan portfolios that perform better than ‘‘underserved.’’ The Bureau’s estimates increased dramatically, caused in part those underwritten according to ‘‘hard’’ based on Home Mortgage Disclosure Act by the gradual deterioration in information, such as credit score and (HMDA) and the Consolidated Report of underwriting standards. See 73 FR consumer income levels.103 For Condition and Income (Call Report) data 44524 (Jul. 30, 2008). For detailed example, one recent study found that suggest that approximately one half of background information, including a delinquency and default rates were all nonconforming loans are originated summary of the legislative and significantly lower for consumers by creditors with assets less than $2 regulatory responses to this issue, which receiving mortgage loans from billion and approximately one quarter culminated in the enactment of the institutions relying on soft information are originated by creditors with total Dodd-Frank Act on July 21, 2010, the for underwriting decisions.104 This is assets less than $2 billion that originate Board of Governors of the Federal consistent with market-wide data fewer than 500 first-lien mortgages Reserve System’s (the Board) issuance of demonstrating that mortgage loan annually. In 2011, community banks a proposed rule on May 11, 2011 to delinquency and charge-off rates are held over 50 percent of all deposits in implement certain amendments to TILA significantly lower at smaller banks than micropolitan areas and over 70 percent made by the Dodd-Frank Act, and the larger ones.105 Current data also of all deposits held in rural areas.107 Bureau’s issuance of the 2013 ATR Final Similarly, in 2011, there were more than Rule, see the discussion in the 2013 101 ‘‘Many customers . . . value the intimate 600 counties where community banks ATR Final Rule. See 78 FR 6410–6420 knowledge their banker has of their business and/ operated offices but where no (Jan. 30, 2013). or total relationship and prefer dealing consistently with the same individuals whom they do not have noncommunity bank offices were The Bureau’s ATR Final Rule to frequently reeducate about their own unique present, and more than 600 additional The Bureau’s 2013 ATR Final Rule financial and business situations. Such customers counties where community banks implemented the ability-to-repay are consequently willing to pay relatively more for operated offices but where fewer than such service. Relationship lending thus provides a requirements under TILA section 129C. three noncommunity bank offices were niche for community institutions that many large Consistent with the statute, the Bureau’s banks find less attractive or are less capable of present.108 These counties have a 2013 ATR Final Rule adopted providing.’’ See Federal Reserve Bank of Atlanta, combined population of more than 16 On the Uniqueness of Community Banks (Oct. § 1026.43(a), which applies the ability- 2005). million people and include both rural 109 to-repay requirements to any consumer 102 and metropolitan areas. It is See Allen N. Berger and Gregory F. Udell, credit transaction secured by a dwelling, Small Business Credit Availability and Relationship important to note that the cost of credit Lending: The Importance of Bank Organisational except an open-end credit plan, offered by these community institutions timeshare plan, , or Structure, Economic Journal (2002). is generally higher than the cost of 103 ‘‘Moreover, a comparison of loss rates on temporary loan. individual loan categories suggests that community similar products offered by larger As adopted, § 1026.43(c) provides that banks may also do a better job of underwriting loans institutions. One reason for this a creditor is prohibited from making a than noncommunity institutions (see Table 4.4).’’ increased expense stems from the nature covered mortgage loan unless the FDIC Community Banking Study, p. 4–6. See also of relationship-based underwriting Sumit Agarwal, Brent W. Ambrose, Souphala creditor makes a reasonable and good Chomsisengphet, and Chunlin Liu, The Role of Soft decisions. Such qualitative evaluations faith determination, based on verified Information in a Dynamic Contract Setting: of creditworthiness tend to take more and documented information, that the Evidence from the Home Equity Market, 43 Journal time, and therefore are more expensive, consumer will have a reasonable ability of Money, Credit and Banking 633, 649 (Oct. 2011) than underwriting decisions based on (analyzing home equity lending, the authors ‘‘find to repay the loan, including any 110 that the lender’s use of soft information can standardized points of data. Also, the mortgage-related obligations (such as successfully reduce the risks associated with ex cost of funds for community banks property taxes and mortgage insurance). post credit losses.’’). Section 1026.43(c) describes certain 104 ‘‘In particular, we find evidence that selection default.htm. These data show that residential real and soft information prior to purchase are requirements for making ability-to-repay estate charge-offs were higher at large banks than significantly associated with reduced delinquency determinations, but does not provide small ones for 12 of the previous 87 quarters, dating and default. And, in line with relationship lending, to the start of the small bank survey in 1991. For comprehensive underwriting standards we find that this effect is most pronounced for example, in the fourth quarter of 2009 large banks to which creditors must adhere. At a borrowers with compromised credit (credit scores had a 3.16 percent charge-off rate, while the rate at below 660), who likely benefit the most from soft minimum, however, the creditor must small banks was 1.2 percent. Delinquency rates information in the lending relationship. This consider and verify eight underwriting demonstrate a similar effect. suggests that for higher risk borrowers, relationship 106 ‘‘In two retail loan categories—residential real factors: (1) Current or reasonably with a bank may be about more than the mortgage expected income or assets; (2) current transaction.’’ O. Emre Ergungor and Stephanie estate loans and loans to individuals—community Moulton, Beyond the Transaction: Depository banks consistently reported lower average loss rates employment status; (3) the monthly Institutions and Reduced Mortgage Default for Low- from 1991 through 2011, the period for which these data are available.’’ FDIC Community Banking Income Homebuyers, Federal Reserve Bank of 111 FDIC Community Banking Study, p. 4–5; Study, p. 4–6. Cleveland Working Paper 11–15 (Aug. 2011). Government Accountability Office, Community 107 105 Federal Reserve Board, Charge-Off and FDIC Community Banking Study, p. 3–6. Banks and Credit Unions: Impact of the Dodd- Delinquency Rates on Loans and Leases at 108 FDIC Community Banking Study, p. 3–5. Frank Act Depends Largely on Future Rulemakings, Commercial Banks (Nov. 2012), available at: http:// 109 Id. p. 10 (Sept. 2012) (GAO Community Banks and www.federalreserve.gov/releases/chargeoff/ 110 FCIC Report at 72. Credit Unions Report).

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payment on the covered transaction; (4) percentage points for subordinate-lien • The U.S. Department of Veterans the monthly payment on any loans). Section 1026.43(e)(1)(ii) provides Affairs (VA); simultaneous loan; (5) the monthly a rebuttable presumption for qualified • The U.S. Department of Agriculture payment for mortgage-related mortgage loans that are higher-priced (USDA); or obligations; (6) current debt obligations; covered transactions (i.e., the APR • The U.S. Department of Agriculture (7) the monthly debt-to-income ratio or exceeds APOR plus 1.5 percent for first Rural Housing Service (RHS). residual income; and (8) credit history. lien or 3.5 percent for subordinate lien). With respect to GSE-eligible loans, Section 1026.43(c)(3) generally Under the 2013 ATR Final Rule, this temporary provision expires when requires the creditor to verify the § 1026.43 also provides three options for conservatorship of the GSEs ends. With information relied on in determining a creditors to originate a qualified respect to each other category of loan, consumer’s repayment ability using mortgage: this provision expires on the effective reasonably reliable third-party records, Qualified mortgage—general. Under date of a rule issued by each respective with special rules for verifying a the general definition for qualified Federal agency pursuant to its authority consumer’s income or assets. Section mortgages in § 1026.43(e)(2), a creditor under TILA section 129C(b)(3)(ii) to 1026.43(c)(5)(i) requires the creditor to must satisfy the statutory criteria define a qualified mortgage. In any calculate the monthly mortgage restricting certain product features and event, this temporary provision expires payment based on the greater of the points and fees on the loan, consider no later than January 10, 2021. fully indexed rate or any introductory and verify certain underwriting Qualified mortgage—balloon-payment rate, assuming monthly, fully requirements that are part of the general loans by certain creditors. The third amortizing payments that are ability-to-repay standard, and confirm option for originating qualified substantially equal. Section that the consumer has a total (or ‘‘back- mortgages is included under 1026.43(c)(5)(ii) provides special end’’) debt-to-income ratio that is less § 1026.43(f), which provides that a small payment calculation rules for loans with than or equal to 43 percent. To creditor operating predominantly in balloon payments, interest-only loans, determine whether the consumer meets rural or underserved areas can originate and negative amortization loans. the specific debt-to-income ratio a balloon-payment qualified mortgage. Section 1026.43(d) provides special requirement, the creditor must calculate The Dodd-Frank Act generally prohibits rules for complying with the ability-to- the consumer’s monthly debt-to-income balloon-payment mortgages from being repay requirements for a creditor ratio in accordance with appendix Q. A qualified mortgages. However, the refinancing a ‘‘non-standard mortgage’’ loan that satisfies these criteria and is statute creates a limited exception, with into a ‘‘standard mortgage.’’ This not a higher-priced covered transaction special underwriting rules, for loans provision is based on TILA section receives a legal safe harbor from the made by a creditor that: (1) Operates 129C(a)(6)(E), which contains special ability-to-repay requirements. A loan predominantly in rural or underserved rules for the refinancing of a ‘‘hybrid that satisfies these criteria and is a areas; (2) together with affiliates, has loan’’ into a ‘‘standard loan.’’ The higher-priced covered transaction total annual residential mortgage loan purpose of this provision is to provide receives a rebuttable presumption of originations that do not exceed a limit flexibility for creditors to refinance a compliance with the ability-to-repay set by the Bureau; and (3) retains the consumer out of a risky mortgage into a requirements. balloon loans in portfolio. The purpose more stable one without undertaking a Qualified mortgage—special rules. of this definition is to preserve credit full underwriting process. Under The second option for originating a availability in rural or underserved § 1026.43(d), a non-standard mortgage is qualified mortgage provides a temporary areas by assuring that small creditors defined as an adjustable-rate mortgage alternative to the general definition in offering loans that cannot be sold on the with an introductory fixed interest rate § 1026.43(e)(2). This option is intended secondary market, and therefore must be for a period of one year or longer, an to avoid unnecessarily disrupting the placed on the creditor’s balance sheet, interest-only loan, or a negative mortgage market at a time when it is are able to use a balloon-payment amortization loan. Under this option, a especially fragile, as a result of the structure as a means of controlling creditor refinancing a non-standard recent mortgage crisis. Section interest rate risk. mortgage into a standard mortgage does 1026.43(e)(4) provides that a loan is a Section 1026.43(f)(1)(vi) limits not have to consider the eight specific qualified mortgage if it meets the eligibility to creditors that originated underwriting criteria listed under statutory limitations on product features 500 or fewer covered transactions § 1026.43(c), if certain conditions are and points and fees, satisfies certain secured by a first-lien in the preceding met. other requirements, and is eligible for calendar year and that have assets of no Section 1026.43(e) specifies purchase, guarantee, or insurance by more than $2 billion (to be adjusted requirements for originating ‘‘qualified one of the following entities: annually). In addition, to originate a mortgages,’’ as well as standards for • Fannie Mae or Freddie Mac, while balloon-payment qualified mortgage when the presumption of compliance operating under the conservatorship or more than 50 percent of a creditor’s total with ability-to-repay requirements can receivership of the Federal Housing first-lien covered transactions must have be rebutted. Section 1026.43(e)(1)(i) Finance Agency pursuant to section been secured by in counties provides a safe harbor under the ability- 1367 of the Federal Housing Enterprises that are ‘‘rural’’ or ‘‘underserved,’’ as to-repay requirements for loans that Financial Safety and Soundness Act of designated by the Bureau. A county is satisfy the definition of a qualified 1992; ‘‘rural’’ if, during a calendar year, it is mortgage and are not higher-priced • Any limited-life regulatory entity located in neither a metropolitan covered transactions (i.e., the APR does succeeding the charter of either Fannie statistical area nor a micropolitan not exceed APOR 112 plus 1.5 percentage Mae or Freddie Mac pursuant to section statistical area adjacent to a points for first-lien loans or 3.5 1367(i) of the Federal Housing metropolitan statistical area, as those Enterprises Financial Safety and terms are defined by the U.S. Office of 112 TILA section 129C(b)(2)(B) defines the average Soundness Act of 1992; Management and Budget. A county is prime offer rate as ‘‘the average prime offer rate for • The U.S. Department of Housing ‘‘underserved’’ if no more than two a comparable transaction as of the date on which the interest rate for the transaction is set, as and Urban Development under the creditors extend covered transactions published by the Bureau.’’ 15 U.S.C. 1639c(b)(2)B). National Housing Act (FHA); five or more times in that county during

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a calendar year. Also, except as would include certain loans originated members of Congress, creditors, provided, the balloon-payment qualified by small creditors 113 that: (1) Have total consumer groups, trade associations, mortgage must generally be held in assets of $2 billion or less at the end of mortgage and real estate market portfolio for at least three years. Balloon the previous calendar year; and (2) participants, and individual consumers. loans by such creditors are eligible for together with all affiliates, originated The comments focused on all aspects of qualified mortgage status if they meet 500 or fewer first-lien covered the proposal, including: the statutory limitations on product transactions during the previous • the calculation of loan originator features and points and fees, and if the calendar year. The proposed new compensation for inclusion in points creditor follows certain other category would include only loans held and fees for the qualified mortgage and requirements that are part of the general in portfolio by these creditors. The loans high-cost mortgage points and fees ability-to-repay standard. also would have to conform to all of the limits; The Bureau’s 2013 ATR Final Rule requirements under the general • the proposed exemptions from the added two additional requirements to definition of a qualified mortgage except ability-to-repay requirements for § 1026.43. Section 1026.43(g) the 43 percent limit on monthly debt-to- housing finance agencies, certain implements the Dodd-Frank Act limits income ratio. The Bureau also proposed nonprofit creditors, certain on prepayment penalties. Section to allow small creditors and small homeownership stabilization and 1026.43(h) prohibits a creditor from creditors operating predominantly in foreclosure prevention programs, and structuring a closed-end extension of rural and underserved areas to charge a certain Federal agency and GSE credit as an open-end plan to evade the higher for first- refinancing programs; ability-to-repay requirements. lien qualified mortgages in the proposed • the proposed definition of a fourth new category and still benefit from a category of qualified mortgages III. Summary of the Rulemaking conclusive presumption of compliance including loans originated and held in Process or ‘‘safe harbor.’’ A qualified mortgage portfolio by certain small creditors; and • A. The Bureau’s Proposal in the proposed new category would be the proposed amendments to the conclusively presumed to comply if the definition of higher-priced covered As discussed above, TILA section transaction with respect to qualified 129C, as added by sections 1411, 1412, annual percentage rate is equal to or less than APOR plus 3.5 percentage points mortgages that are originated and held and 1414 of the Dodd-Frank Act, in portfolio by small creditors and with generally requires creditors to make a for both first-lien and subordinate-lien loans. The Bureau also posed and respect to balloon-payment qualified reasonable, good faith determination of mortgages originated and held in a consumer’s ability to repay the loan. solicited comment on a specific question regarding whether there is a portfolio by small creditors operating On January 10, 2013, the Bureau issued predominantly in rural or underserved the 2013 ATR Final Rule to implement need for transition mechanisms for existing balloon loans that may end areas. these ability-to-repay requirements. See Materials submitted were filed in the 78 FR 6407 (Jan. 30, 2013). At the same soon after the new rule takes effect. Finally, the Bureau proposed several record and are publicly available at time, the Bureau issued the 2013 ATR http://www.regulations.gov. The Bureau Proposed Rule related to certain additional interpretive comments concerning the inclusion of loan also elected to consider the comments proposed exemptions, modifications, received after the expiration of the and clarifications to the ability-to-repay originator compensation in the points and fees calculation under the qualified comment period. As discussed in more requirements and qualified mortgage detail below, the Bureau has considered provisions. See 78 FR 6621 (Jan. 30, mortgage provisions and the high-cost mortgage provisions under HOEPA. The these comments in adopting this final 2013). The 2013 ATR Proposed Rule rule. contained three major elements. proposed comments addressed First, the Bureau proposed certain situations in which payments flow from IV. Legal Authority one party to another over the course of exemptions from the ability-to-repay The Bureau is issuing this final rule a mortgage transaction and whether to requirements for housing finance pursuant to its authority under TILA count compensation separately where it agencies, certain nonprofit creditors, and the Dodd-Frank Act. See 15 U.S.C. may already have been counted toward certain homeownership stabilization 1604(a), 12 U.S.C. 5512(b)(1). and foreclosure prevention programs, points and fees under another element and certain Federal agency and GSE of the regulatory definition. In addition, A. TILA Ability-to-Repay and Qualified refinancing programs. The Bureau was the Bureau sought feedback on whether Mortgage Provisions concerned that the ability-to-repay additional clarification was warranted As discussed above, the Dodd-Frank requirements were substantially in light of the Bureau’s separate Act amended TILA to provide that, in different from the underwriting rulemaking to implement provisions of accordance with regulations prescribed requirements employed by these the Dodd-Frank Act restricting certain by the Bureau, no creditor may make a creditors or required under these loan originator compensation practices. residential mortgage loan unless the programs, which would discourage B. Comments and Post-Proposal creditor makes a reasonable and good participation in and frustrate the Outreach faith determination based on verified and documented information that, at the purposes of these programs and In response to the proposed rule, the time the loan is consummated, the significantly impair access to Bureau received approximately 1,150 consumer has a reasonable ability to responsible, affordable credit for certain letters from commenters, including consumers. repay the loan, according to its terms, Second, the Bureau proposed 113 The $2 billion threshold reflects the purposes and all applicable taxes, insurance modifications related to certain small of the proposed category and the structure of the (including mortgage guarantee creditors. Specifically, the Bureau mortgage lending industry. The Bureau’s choice of insurance), and assessments. TILA proposed an additional definition of a $2 billion in assets as a threshold for purposes of section 129C(a)(1); 15 U.S.C. TILA section 129C does not imply that a threshold qualified mortgage for certain loans of that type or of that magnitude would be an 1639c(a)(1). As described below in part made and held in portfolio by small appropriate way to distinguish small firms for other IV.B, the Bureau has authority to creditors. The proposed new category purposes or in other industries. prescribe regulations to carry out the

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purposes of TILA pursuant to TILA mortgage credit remains available to consumers are offered and receive section 105(a). 15 U.S.C. 1604(a). In consumers in a manner consistent with residential mortgage loans on terms that particular, it is the purpose of TILA the purposes of TILA section 129C. reasonably reflect their ability to repay section 129C, as amended by the Dodd- TILA section 129C(b)(3)(A), 15 U.S.C. the loans.’’ This stated purpose is Frank Act, to assure that consumers are 1939c(b)(3)(A). As discussed in the informed by Congress’s finding that offered and receive residential mortgage section-by-section analysis below, the ‘‘economic stabilization would be loans on terms that reasonably reflect Bureau is issuing certain provisions of enhanced by the protection, limitation, their ability to repay the loans and that this rule pursuant to its authority under and regulation of the terms of are understandable and not unfair, TILA section 129C(b)(3)(B)(i). residential mortgage credit and the deceptive, or abusive. TILA section In addition, for purposes of defining practices related to such credit, while 129B(a)(2); 15 U.S.C. 1639b(a)(2). ‘‘qualified mortgage,’’ TILA section ensuring that responsible, affordable TILA, as amended by the Dodd-Frank 129C(b)(2)(A)(vi) provides the Bureau mortgage credit remains available to Act, also provides creditors originating with authority to establish guidelines or consumers.’’ Thus, ensuring that ‘‘qualified mortgages’’ special protection regulations relating to monthly debt-to- responsible, affordable mortgage credit from liability under the ability-to-repay income ratios or alternative measures of remains available to consumers is a goal requirements. TILA section 129C(b), 15 ability to repay. As discussed in the of TILA, achieved through the U.S.C. 1639c(b). TILA generally defines section-by-section analysis below, the effectuation of TILA’s purposes. a ‘‘qualified mortgage’’ as a residential Bureau is issuing certain provisions of Historically, TILA section 105(a) has mortgage loan for which: the loan does this rule pursuant to its authority under served as a broad source of authority for not contain negative amortization, TILA sections 129C(b)(2)(A)(vi). rules that promote the informed use of interest-only payments, or balloon credit through required disclosures and B. Other Rulemaking and Exception payments; the term does not exceed 30 substantive regulation of certain Authorities years; the points and fees generally do practices. However, Dodd-Frank Act not exceed 3 percent of the loan This final rule also relies on the section 1100A clarified the Bureau’s amount; the income or assets are rulemaking and exception authorities section 105(a) authority by amending considered and verified; and the specifically granted to the Bureau by that section to provide express authority underwriting is based on the maximum TILA and the Dodd-Frank Act, to prescribe regulations that contain rate during the first five years, uses a including the authorities discussed ‘‘additional requirements’’ that the payment schedule that fully amortizes below. Bureau finds are necessary or proper to the loan over the loan term, and takes TILA effectuate the purposes of TILA, to into account all mortgage-related prevent circumvention or evasion obligations. TILA section 129C(b)(2), 15 TILA section 105(a). As amended by thereof, or to facilitate compliance. This U.S.C. 1639c(b)(2). In addition, to the Dodd-Frank Act, TILA section amendment clarified the authority to constitute a qualified mortgage a loan 105(a), 15 U.S.C. 1604(a), directs the exercise TILA section 105(a) to must meet ‘‘any guidelines or Bureau to prescribe regulations to carry prescribe requirements beyond those regulations established by the Bureau out the purposes of TILA, and provides specifically listed in the statute that relating to ratios of total monthly debt that such regulations may contain meet the standards outlined in section to monthly income or alternative additional requirements, classifications, 105(a). The Dodd-Frank Act also measures of ability to pay regular differentiations, or other provisions, and clarified the Bureau’s rulemaking expenses after payment of total monthly may provide for such adjustments and authority over certain high-cost debt, taking into account the income exceptions for all or any class of mortgages pursuant to section 105(a). As levels of the borrower and such other transactions, that the Bureau judges are amended by the Dodd-Frank Act, TILA factors as the Bureau may determine are necessary or proper to effectuate the section 105(a) authority to make relevant and consistent with the purposes of TILA, to prevent adjustments and exceptions to the purposes described in [TILA section circumvention or evasion thereof, or to requirements of TILA applies to all 129C(b)(3)(B)(i)].’’ facilitate compliance therewith. A transactions subject to TILA, except TILA, as amended by the Dodd-Frank purpose of TILA is ‘‘to assure a with respect to the provisions of TILA Act, also provides the Bureau with meaningful disclosure of credit terms so section 129, 15 U.S.C. 1639, that apply authority to prescribe regulations that that the consumer will be able to to the high-cost mortgages defined in revise, add to, or subtract from the compare more readily the various credit TILA section 103(bb), 15 U.S.C. criteria that define a qualified mortgage terms available to him and avoid the 1602(bb). upon a finding that such regulations are uninformed use of credit.’’ TILA section As discussed in the section-by-section necessary or proper to ensure that 102(a), 15 U.S.C. 1601(a). This stated analysis below, the Bureau is issuing responsible, affordable mortgage credit purpose is informed by Congress’s regulations to carry out TILA’s remains available to consumers in a finding that ‘‘economic stabilization purposes, including such additional manner consistent with the purposes of would be enhanced and the competition requirements, adjustments, and the ability-to-repay requirements; or are among the various financial institutions exceptions as, in the Bureau’s judgment, necessary and appropriate to effectuate and other firms engaged in the are necessary and proper to carry out the purposes of the ability-to-repay extension of consumer credit would be the purposes of TILA, prevent requirements, to prevent circumvention strengthened by the informed use of circumvention or evasion thereof, or to or evasion thereof, or to facilitate credit[.]’’ TILA section 102(a). Thus, facilitate compliance. In developing compliance with TILA sections 129B strengthened competition among these aspects of the final rule pursuant and 129C. TILA section 129C(b)(3)(B)(i), financial institutions is a goal of TILA, to its authority under TILA section 15 U.S.C. 1639c(b)(3)(B)(i). In addition, achieved through the effectuation of 105(a), the Bureau has considered the TILA section 129C(b)(3)(A) provides the TILA’s purposes. purposes of TILA, including ensuring Bureau with authority to prescribe As amended by section 1402 of the that consumers are offered and receive regulations to carry out the purposes of Dodd-Frank Act, section 129B(a)(2) of residential mortgage loans on terms that the qualified mortgage provisions—to TILA provides that a purpose of section reasonably reflect their ability to repay ensure that responsible, affordable 129C of TILA is ‘‘to assure that the loans, ensuring meaningful

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disclosures, facilitating consumers’ The Dodd-Frank Act discount points in particular, TILA ability to compare credit terms, and Dodd-Frank Act section 1022(b). sections 129C(b)(2)(C)(ii)(I) and helping consumers avoid the Section 1022(b)(1) of the Dodd-Frank 103(dd)(1) provide for the exclusion of uninformed use of credit, and the Act authorizes the Bureau to prescribe up to and including two bona fide findings of TILA, including regulating rules ‘‘as may be necessary or discount points from points and fees for the terms of residential mortgage credit appropriate to enable the Bureau to qualified mortgages and high-cost and the practices related to such credit administer and carry out the purposes mortgages, respectively, but only if the to ensure that responsible, affordable and objectives of the Federal consumer interest rate for the transaction before mortgage credit remains available to financial laws, and to prevent evasions the discount does not exceed by more consumers, strengthening competition thereof.’’ 12 U.S.C. 5512(b)(1). TILA and than one percentage point the average among financial institutions, and title X of the Dodd-Frank Act are prime offer rate, as defined in promoting economic stabilization. Federal consumer financial laws. § 1026.35(a)(2). Similarly, TILA sections TILA section 105(f). Section 105(f) of Accordingly, the Bureau is exercising its 129C(b)(2)(C)(ii)(II) and 103(dd)(2) TILA, 15 U.S.C. 1604(f), authorizes the authority under Dodd-Frank Act section provide for the exclusion of up to and Bureau to exempt from all or part of 1022(b) to prescribe rules that carry out including one bona fide discount point TILA all or any class of transactions the purposes and objectives of TILA and from points and fees, but only if the (other than transactions involving any title X and prevent evasion of those interest rate for the transaction before mortgage described in TILA section laws. the discount does not exceed the 103(aa), which are high-cost mortgages) average prime offer rate by more than if the Bureau determines that TILA V. Section-by-Section Analysis two percentage points.115 The Bureau’s coverage does not provide a meaningful Section 1026.32 Requirements for 2013 ATR and HOEPA Final Rules benefit to consumers in the form of High-Cost Mortgages implemented the bona fide discount useful information or protection. In point exclusions from points and fees in exercising this authority, the Bureau 32(b) Definitions § 1026.32(b)(1)(i)(E) and (F) (closed-end must consider the factors identified in 32(b)(1) credit) and (b)(2)(i)(E) and (F) (open-end section 105(f) of TILA and publish its credit), respectively. rationale at the time it proposes an 32(b)(1)(ii) TILA section 129C(b)(2)(C) defines exemption for public comment. Background ‘‘points and fees’’ for qualified Specifically, the Bureau must consider: mortgages and high-cost mortgages to TILA section 129C(b)(2)(A)(vii), as (a) The amount of the loan and have the same meaning as set forth in added by section 1412 of the Dodd- whether the disclosures, right of TILA section 103(aa)(4) (renumbered as Frank Act, defines a ‘‘qualified rescission, and other provisions provide section 103(bb)(4)).116 Points and fees mortgage’’ as a loan for which, among a benefit to the consumers who are for the high-cost mortgage threshold are other things, the total ‘‘points and fees’’ parties to such transactions, as defined in § 1026.32(b)(1) (closed-end payable in connection with the determined by the Bureau; credit) and (2) (open-end credit), and transaction generally do not exceed 3 (b) The extent to which the § 1026.43(b)(9) provides that, for a percent of the total loan amount. requirements of TILA complicate, qualified mortgage, ‘‘points and fees’’ Section 1431(a) of the Dodd-Frank Act hinder, or make more expensive the has the same meaning as in amended HOEPA’s points and fees credit process for the class of § 1026.32(b)(1). coverage test to provide in TILA section transactions; Section 1431 of the Dodd-Frank Act 103(bb)(1)(A)(ii) that a mortgage is a (c) The status of the borrower, amended TILA to require that ‘‘all high-cost mortgage if the total points including— compensation paid directly or indirectly and fees payable in connection with the (1) Any related financial arrangements by a consumer or creditor to a mortgage transaction exceed 5 percent of the total of the borrower, as determined by the originator from any source, including a transaction amount (for transactions of Bureau; mortgage originator that is also the (2) The financial sophistication of the $20,000 or more), or the lesser of 8 creditor in a table-funded transaction,’’ borrower relative to the type of percent of the total transaction amount be included in points and fees. TILA transaction; and or $1,000 (for transactions of less than section 103(bb)(4)(B) (emphases added). (3) The importance to the borrower of $20,000) or other prescribed amount. Prior to the amendment, TILA had the credit, related supporting property, The Bureau finalized the Dodd-Frank provided that only compensation paid and coverage under TILA, as Act’s amendments to TILA concerning by a consumer to a mortgage broker at determined by the Bureau; the points and fees limit for qualified (d) Whether the loan is secured by the mortgages and the points and fees 115 The 2013 ATR and HOEPA Final Rules also principal residence of the consumer; coverage threshold for high-cost adopted the special calculation, prescribed under and mortgages in the 2013 ATR Final Rule TILA for high-cost mortgages, for completing the (e) Whether the goal of consumer and in the final rule implementing the bona fide discount point calculation for loans protection would be undermined by Dodd-Frank Act’s amendments to secured by personal property. 116 The Dodd-Frank Act renumbered existing such an exemption. 114 HOEPA, respectively. TILA section 103(aa), which contains the definition As discussed in the section-by-section Those rulemakings also adopted the of ‘‘points and fees,’’ for the high-cost mortgage analysis below, the Bureau is adopting Dodd-Frank Act’s amendments to TILA points and fees threshold, as section 103(bb). See exemptions for certain classes of concerning the exclusion of certain bona section 1100A(1)(A) of the Dodd-Frank Act. transactions from the requirements of However, in defining points and fees for the fide third-party charges and up to two qualified mortgage points and fees limits, TILA TILA pursuant to its authority under bona fide discount points from the section 129C(b)(2)(C) refers to TILA section TILA section 105(f). In determining points and fees calculation for both 103(aa)(4) rather than TILA section 103(bb)(4). To which classes of transactions to exempt qualified mortgages and high-cost give meaning to this provision, the Bureau under TILA section 105(f), the Bureau concluded that the reference to TILA section mortgages. With respect to bona fide 103(aa)(4) in TILA section 129C(b)(2)(C) is mistaken has considered the relevant factors and and therefore interpreted TILA section determined that the exemptions are 114 78 FR 6856 (Jan. 31, 2013) (2013 HOEPA Final 129C(b)(2)(C) as referring to the points and fees appropriate. Rule). definition in renumbered TILA section 103(bb)(4).

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or before closing should count toward § 1026.36(a)(1), that can be attributed to and the reference to ‘‘all’’ compensation the points and fees threshold for high- that transaction at the time the interest paid ‘‘directly or indirectly’’ and ‘‘from cost mortgages. Under amended TILA rate is set, is required to be included in any source’’ supports counting section 103(bb)(4)(B), however, points and fees. The commentary to compensation as it flows downstream compensation paid to anyone that § 1026.32(b)(1)(ii) as adopted in the from one party to another so that it is qualifies as a ‘‘mortgage originator’’ is to 2013 ATR Final Rule provides details counted each time that it reaches a loan be included in points and fees for the for applying this requirement for closed- originator, whatever the previous points and fees thresholds for both end credit transactions (e.g., by source. qualified mortgages and high-cost clarifying when compensation must be The Bureau stated that it believes the mortgages.117 Thus, in addition to known to be counted). The commentary statute would be read to require that mortgage brokerage firms, other to § 1026.32(b)(2)(ii) as adopted in the loan originator compensation be treated mortgage originators, including 2013 HOEPA Final Rule cross- as additive to the other elements of employees of a creditor (i.e., loan references the commentary adopted in points and fees and should be counted officers) or of a brokerage firm (i.e., § 1026.32(b)(1)(ii) for interpretive as it flows downstream from one party individual brokers) are included in guidance. to another so that it is included in ‘‘mortgage originator.’’ In addition, the In the 2013 ATR Final Rule, the points and fees each time it reaches a Dodd-Frank Act removed the phrase Bureau noted that, in response to the loan originator, whatever the previous ‘‘payable at or before closing’’ from the Board’s 2011 proposal (Board’s 2011 source. The Bureau indicated that it did high-cost mortgage points and fees test ATR Proposal or Board’s proposal) 118 not believe that an automatic literal and did not apply the ‘‘payable at or and the Bureau’s 2012 proposal to reading of the statute in all cases would before closing’’ limitation to the points implement the Dodd-Frank Act’s be in the best interest of either and fees cap for qualified mortgages. See amendments to HOEPA,119 the Bureau consumers or industry, but it did not TILA sections 103(bb)(1)(A)(ii) and received extensive feedback regarding believe that it yet had sufficient 129C(b)(2)(A)(vii) and (C). the inclusion of loan originator information with which to choose The 2013 ATR Final Rule. The compensation in the qualified mortgage definitively between the additive Bureau’s 2013 ATR Final Rule amended and high-cost mortgage points and fees approach provided for in the statutory § 1026.32(b)(1) to implement revisions calculation. In the context of both language and other potential methods of to the definition of ‘‘points and fees’’ rulemakings, several industry accounting for payments in all under section 1431 of the Dodd-Frank commenters argued that including loan circumstances, given the multiple Act, for the purposes of both HOEPA originator compensation in points and practical and complex policy and qualified mortgages. Among other fees would result in ‘‘double-counting’’ considerations involved. Accordingly, things, the Dodd-Frank Act added loan because creditors often compensate loan the Bureau finalized the rule without a originator compensation to the originators with funds collected from qualifying interpretation on this issue definition of ‘‘points and fees’’ that had consumers at consummation. The and included in the 2013 ATR Proposed previously applied to high-cost commenters argued that money Rule several comments to explain how mortgages under HOEPA. Section 1431 collected in up-front charges to to calculate loan originator of the Dodd-Frank Act also amended consumers should not be counted a compensation in connection with TILA to provide that open-end credit second time toward the points and fees particular payment streams between plans (i.e., home equity lines of credit or thresholds if it is passed on to a loan particular parties. However, the 2013 HELOCs) are covered by HOEPA. The originator. Consumer advocates urged ATR Final Rule itself implemented the Bureau’s 2013 HOEPA Final Rule thus the Bureau not to assume that loan additive approach of the statute. separately amended § 1026.32(b)(2) to originator compensation is funded The 2013 Loan Originator Final Rule. provide for the inclusion of loan through up-front consumer payments to Earlier this year, the Bureau issued a originator compensation in points and creditors rather than through the final rule to implement various fees for HELOCs, to the same extent as interest rate. They noted that, in the provisions of the Dodd-Frank Act that such compensation is required to be wholesale channel, if the parties to a addressed compensation paid to loan counted for closed-end credit transaction would like to fund loan originators. 78 FR 11280 (Feb. 15, 2013) transactions. Under § 1026.32(b)(1)(ii) originator compensation through up- (2013 Loan Originator Final Rule). As (for closed-end credit) and front payments, a consumer can pay the the Bureau noted, the Board had § 1026.32(b)(2)(ii) (for open-end credit), mortgage broker directly instead of proposed rules in 2009, that, among all compensation paid directly or paying origination charges to the other things, would have prohibited indirectly by a consumer or creditor to creditor and having the creditor pass payments to a loan originator based on a loan originator, as defined in through payments to the mortgage the transaction’s terms or conditions; broker. prohibited a loan originator from 117 ‘‘Mortgage originator’’ is generally defined to The literal language of TILA section receiving dual compensation (i.e., include ‘‘any person who, for direct or indirect 103(bb)(4) as amended by the Dodd- compensation from both a consumer compensation or gain, or in the expectation of Frank Act defines points and fees to and another person in the same direct or indirect compensation or gain—(i) takes a transaction); and prohibited a loan residential mortgage loan application; (ii) assists a include all items included in the consumer in obtaining or applying to obtain a finance charge (except interest or the originator from steering consumers to residential mortgage loan; or (iii) offers or negotiates time-price differential), all transactions not in their interest to terms of a residential mortgage loan.’’ TILA section compensation paid directly or indirectly increase the loan originator’s 103(cc)(2)(A). The statute excludes certain persons compensation. In section 1403 of the from the definition, including a person who by a consumer or creditor to a loan performs purely administrative or clerical tasks; an originator, ‘‘and’’ various other Dodd-Frank Act, Congress amended employee of a retailer of manufactured homes who enumerated items. The 2013 ATR Final TILA section 129B to codify significant does not take a residential mortgage application or Rule noted that both the use of ‘‘and’’ elements of the Board’s 2009 proposal. offer or negotiate terms of a residential mortgage In a final rule issued in 2010, the Board loan; and, subject to certain conditions, real estate brokers, sellers who finance three or fewer 118 76 FR 27390 (May 11, 2011). finalized its proposed rules, while properties in a 12-month period, and servicers. 119 77 FR 49090 (Aug. 15, 2012) (2012 HOEPA acknowledging that further rulemaking TILA section 103(cc)(2)(C) through (F). Proposal). would be required to address certain

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issues and adjustments made by the compensation directly from the necessary or appropriate to count Dodd-Frank Act. 75 FR 58509 (Sept. 24, consumer; and (2) the consumer did not separately funds that the broker then 2010) (2010 Loan Originator Final Rule). make an up-front payment of discount passes on to its individual employees. As discussed below, the Bureau’s 2013 points, origination points, or fees (other In each case, any costs and risks to the Loan Originator Final Rule than bona fide third-party charges not consumer from high loan originator implemented certain provisions of TILA retained by the loan originator, creditor, compensation are adequately captured section 129B, including rules expanding or an affiliate of either). Thus, the by counting the funds a single time and clarifying some of the prohibitions Bureau’s exemption permits the against the points and fees cap; thus, the adopted by the Board in the 2010 Loan consumer to pay origination charges or Bureau stated that it did not believe the Originator Final Rule. fees to the creditor in transactions in purposes of the statute would be served The Bureau’s 2013 Loan Originator which the creditor is paying by counting some or all of the funds a Final Rule clarified the scope of compensation to the mortgage broker. second time, and was concerned that § 1026.36(d)(1), which prohibits basing The Bureau also clarified the safe doing so could have negative impacts on a loan originator’s compensation on any harbor for loan originators to comply the price and availability of credit. of the transaction’s terms. This with existing § 1026.36(e)(1), which Proposed comment 32(b)(1)(ii)–5.i provision was intended to eliminate prohibits a loan originator from steering thus would have provided that a incentives for the loan originator to, for a consumer to consummate a particular payment from a consumer to a mortgage example, persuade the consumer to transaction so that the loan originator broker need not be counted toward accept a higher interest rate or a will receive greater compensation. The points and fees twice because it is both prepayment penalty, in exchange for the Bureau clarified how to determine part of the finance charge under loan originator receiving higher which loans a creditor must offer to § 1026.32(b)(1)(i) and loan originator compensation. The Bureau retained the consumers to take advantage of the safe compensation under § 1026.32(b)(1)(ii). core prohibition in § 1026.36(d)(1), but harbor. See § 1026.36(e)(3)(i)(C) and Similarly, proposed comment it clarified the meaning of a ‘‘term’’ of comment 36(e)(3)–3. The Bureau did 32(b)(1)(ii)–5.ii would have clarified the transaction and clarified the not, however, implement the portion of that § 1026.32(b)(1)(ii) does not require standard for determining when section 1403 of the Dodd-Frank Act that a creditor to include payments by a compensation is impermissibly based requires the Bureau to prescribe mortgage broker to its individual loan on a proxy for a term of the transaction. additional regulations to prohibit originator employee in the calculation It also permitted certain bonuses and certain types of steering, abusive or of points and fees. For example, assume retirement profit-sharing plans to be unfair lending practices, a consumer pays a $3,000 fee to a based on the terms of multiple loan mischaracterization of credit histories or mortgage broker, and the mortgage originators’ transactions and permitted a appraisals, and discouraging consumers broker pays a $1,500 commission to its loan originator to participate in a from shopping with other mortgage individual loan originator employee for defined benefit plan without restrictions originators. The Bureau noted that it that transaction. The $3,000 mortgage on whether the benefits may be based intends to prescribe those regulations in broker fee is included in points and on the terms of a loan originator’s a future rulemaking. See 78 FR 11292 fees, but the $1,500 commission is not transactions. See § 1026.36(d)(1)(iii) and n.55. included in points and fees because it (iv). Consistent with the statute, the has already been included in points and The 2013 ATR Proposed Rule Bureau also revised § 1026.36(d)(1) so fees as part of the $3,000 mortgage that it also applies in transactions in In the 2013 ATR Proposed Rule, the broker fee. The Bureau stated that it which the consumer pays a mortgage Bureau proposed commentary to believed that any costs to the consumer broker directly. address situations in which loan from loan originator compensation are The 2013 Loan Originator Final Rule originator compensation passes from adequately captured by counting the also clarified the scope of one party to another. The Bureau funds a single time against the points § 1026.36(d)(2), which prohibits a loan indicated that it believed that Congress and fees cap. The Bureau sought originator from receiving compensation included loan originator compensation comment regarding these proposed from both the consumer and other in points and fees because of concern comments. persons in the same transaction. This that loans with high loan originator The Bureau noted that determining provision was designed to address compensation may be more costly and the appropriate accounting method is consumer confusion over mortgage riskier to consumers. Despite the significantly more complicated when a broker loyalties when brokers received statutory language, the Bureau consumer pays some up-front charges to payments both from the consumer and questioned whether it would serve the the creditor and the creditor pays loan the creditor. The 2013 Loan Originator statutory purpose to apply a strict originator compensation to either its Final Rule retained this prohibition but additive rule that would automatically own employee or to a mortgage broker provided an exception to permit require that loan originator firm. As described in the 2013 ATR mortgage brokers to pay their employees compensation be counted against the Final Rule, a creditor can fund or contractors commissions (although points and fees thresholds even if it has compensation to its own loan officer or the commissions cannot be based on the already been included in points and to a mortgage broker in two different terms of the loans they originate). fees. The Bureau indicated that it did ways. First, the payment could be In addition, the Bureau used its not believe that it is necessary or funded by origination charges paid by exception authority to adopt a complete appropriate to count the same payment the consumer to the creditor. Second, exemption to the statutory ban on up- between a consumer and a mortgage the payment could be funded through front fees set forth in TILA section broker firm twice, simply because it is the interest rate, in which case the 129B(c)(2)(B)(ii). See § 1026.36(d)(2)(ii). both part of the finance charge and loan creditor forwards funds to the loan That statutory ban would have originator compensation. Similarly, the originator at consummation which the permitted a loan originator to receive an Bureau indicated that, where a payment creditor recovers through profit realized origination fee or charge from someone from either a consumer or a creditor to on the subsequent sale of the mortgage other than the consumer only if: (1) The a mortgage broker is counted toward or, for portfolio loans, through payments loan originator did not receive any points and fees, it would not be by the consumer over time. Because

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money is fungible, tracking how a origination charges and be charged an included in the points and fees creditor spends money it collects in up- interest rate sufficient to generate a 3 calculation under § 1026.32(b)(1)(i). front charges versus amounts collected percent loan originator commission, and This proposed comment contained an through the rate to cover both loan the loan could still fall within the 3 example to illustrate this principle: originator compensation and its other percent cap for qualified mortgages. The Assume that a consumer pays to the overhead expenses would be consumer could be charged five creditor a $3,000 origination fee and extraordinarily complex and percentage points in origination charges that the creditor pays to the loan cumbersome. The Bureau stated that, to and an interest rate sufficient to originator $1,500 in compensation facilitate compliance, it believed it generate a 5 percent loan originator attributed to the transaction. Assume would be appropriate and necessary to commission and still stay under the further that the consumer pays no other adopt generalized rules regarding the HOEPA points and fees trigger, thereby charges to the creditor that are included accounting of various payments, but did denying consumers the special in points and fees under not have sufficient information to make protections afforded to loans with high § 1026.32(b)(1)(i) and the loan originator those choices in the 2013 ATR Final up-front costs. In markets that are less receives no other compensation that is Rule. However, the 2013 ATR Final competitive, this would create an included in points and fees under Rule itself implemented the additive opportunity for creditors or brokerage § 1026.32(b)(1)(ii). For purposes of approach of the statute. firms to take advantage of their market calculating points and fees, the $3,000 The Bureau noted in the 2013 ATR power to harm consumers. origination fee would be included in Proposed Rule that the potential The Bureau sought comment on two points and fees under § 1026.32(b)(1)(i), downstream effects of different alternative versions of proposed but the $1,500 in loan originator accounting methods may be significant. comment 32(b)(1)(ii)–5.iii. The first— compensation need not be included in Under the ‘‘additive’’ approach where the additive approach—would have points and fees. If, however, the no netting of up-front consumer explicitly precluded netting, consistent consumer pays to the creditor a $1,000 payments against creditor-paid loan with the literal language of the statute, origination fee and the creditor pays to originator compensation is allowed, by specifying that § 1026.32(b)(1)(ii) the loan originator $1,500 in some loans might be precluded from requires a creditor to include compensation, then the $1,000 being qualified mortgages or may exceed compensation paid by a consumer or origination fee would be included in the high-cost mortgage threshold creditor to a loan originator in the points and fees under § 1026.32(b)(1)(i), because of the combination of loan calculation of points and fees in and $500 of the loan originator originator compensation with other addition to any fees or charges paid by compensation would be included in charges that are included in points and the consumer to the creditor. This points and fees under § 1026.32(b)(1)(ii), fees, such as fees paid to affiliates for proposed comment contained an equaling $1,500 in total points and fees, settlement services. In other cases, example to illustrate this principle: provided that no other points and fees creditors whose combined loan Assume that a consumer pays to the are paid or compensation received. originator compensation and up-front creditor a $3,000 origination fee and The Bureau solicited feedback charges would otherwise exceed the that the creditor pays to its loan officer regarding all aspects of both points and fees limits would have strong employee $1,500 in compensation alternatives. In addition, the Bureau incentives to cap their up-front charges attributed to the transaction. Assume specifically requested feedback for other overhead expenses under the further that the consumer pays no other regarding whether there are differences threshold and instead recover those charges to the creditor that are included in various types of loans, consumers, expenses by increasing interest rates to in points and fees under loan origination channels, or market generate higher gains on sale. This § 1026.32(b)(1)(i) and the loan officer segments which would justify applying would adversely affect consumers who receives no other compensation that is different netting or additive rules to prefer to pay a lower interest rate over included in points and fees under such categories. The Bureau also sought time in return for higher up-front costs § 1026.32(b)(1)(ii). For purposes of feedback as to whether, if netting were and, at the margins, could result in calculating points and fees, the $3,000 permitted, the creditor should be some consumers being unable to qualify origination fee would be included in allowed to reduce the loan originator for credit. Additionally, to the extent points and fees under § 1026.32(b)(1)(i) compensation by the full amount of creditors responded to an ‘‘additive’’ and the $1,500 in loan officer points and fees included in the finance rule by increasing interest rates, this compensation would be included in charge or whether the reduction should could increase the number of qualified points and fees under § 1026.32(b)(1)(ii), be limited to that portion of points and mortgages that receive a rebuttable equaling $4,500 in total points and fees, fees denominated as general origination presumption of compliance, rather than provided that no other points and fees charges. a safe harbor from liability, under the are paid or compensation received. The Bureau also sought comment on ability-to-repay provisions adopted by The second alternative—the netting the implications of each alternative on the 2013 ATR Final Rule. approach—would have provided that, in protecting consumers pursuant to the The Bureau noted that one alternative calculating the amount of loan ability-to-repay requirements, qualified would be to allow all consumer originator compensation to include in mortgage provisions, and the high-cost payments of up-front points and fees to points and fees, creditors would be mortgage provisions of HOEPA. The be netted against creditor-paid loan permitted to net consumer payments of Bureau also sought comment on the originator compensation. However, this up-front fees and points against creditor likely market reactions and impacts on ‘‘netting’’ approach would allow payments to the loan originator. the pricing of and access to credit of creditors to offset much higher levels of Specifically, it would have provided each alternative, particularly as to how up-front points and fees against that § 1026.32(b)(1)(ii) permits a creditor such reactions might affect interest rate expenses paid through rate before the to reduce the amount of loan originator levels, the safe harbor and rebuttable heightened consumer protections compensation included in the points presumption afforded to particular required by the Dodd-Frank Act would and fees calculation under qualified mortgages, and application of apply. For example, a consumer could § 1026.32(b)(1)(ii) by any amount paid the separate rate threshold for high-cost pay three percentage points in by the consumer to the creditor and mortgages under HOEPA and whether

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adjustment to the final rule would be Comments Received yet the loan could still be a qualified 120 appropriate. The Bureau further sought The Bureau received numerous mortgage. Similarly, loans of $20,000 comment on the implications of both of comments regarding the calculation of or more could have up-front charges of the above proposed alternatives in light loan originator compensation for 5 percent of the total loan amount and of the fact that both the qualified inclusion in points and fees for the creditor-paid compensation equal to mortgage and HOEPA provisions allow qualified mortgage and high-cost another 5 percent, yet the loan would certain bona fide discount points and still not qualify as a high-cost mortgage points and fees limits. Many of 121 bona fide third party charges to be the comments were substantially similar mortgage. Some consumer advocates also argued excluded from the calculation of points letters submitted by mortgage brokers. that consumers have difficulty and fees, but do not do so for affiliate Many of the comments responded to the understanding and evaluating the cost charges. Bureau’s proposed commentary of creditor-paid compensation to regarding potential double counting of The Bureau adopted in the 2013 mortgage brokers. They contend that, as loan originator compensation. As HOEPA Final Rule a requirement that a result, creditor-paid compensation described below, however, some creditors include compensation paid to historically has resulted in more costly comments also raised other issues originators of open-end credit plans in loans for consumers, with a higher risk points and fees, to the same extent that regarding loan originator compensation. of default, particularly when consumers Few commenters addressed the such compensation is required to be also have made up-front payments. Bureau’s proposed comments included for closed-end credit They argued that an additive rule 32(b)(1)(ii)–5.i and 32(b)(1)(ii)–5.ii, transactions. The Bureau did not receive provides important protection because which would have provided that comments in response to the 2012 the Bureau elected in the 2013 Loan payments by consumers to mortgage HOEPA Proposal indicating that Originator Final Rule to permit creditors brokers (where those payments already additional or different guidance would to continue charging up-front fees to be needed to calculate loan originator have been included in points and fees consumers when creditors compensate compensation in the open-end credit under § 1026.32(b)(1)(i)) and payments loan originators. They maintained that a context. The Bureau noted in the 2013 by mortgage brokers to their individual netting rule would encourage creditors ATR Proposed Rule that it would be loan originator employees need not be and mortgage brokers to combine useful to provide the public with an counted as loan originator creditor-paid compensation with up- additional opportunity to comment. compensation and included in points front charges paid by consumers to Thus, the Bureau solicited input on and fees. Nearly all commenters that creditors because such compensation what guidance, if any, beyond that addressed these proposed comments then would not be included in points provided for closed-end credit supported them. One industry and fees. They argued that this transactions, would be helpful for commenter, however, argued that the combination is less transparent and creditors in calculating loan originator Bureau should not adopt the proposed more confusing to consumers than a compensation in the open-end credit comments unless the Bureau also model in which the consumer pays a context. excludes from points and fees mortgage broker directly or pays all compensation paid by creditors to their charges through the rate. Finally, the Bureau sought comment own loan officers. That commenter generally on whether additional Some consumer advocates also argued claimed that it would be inequitable to that the additive approach was guidance or regulatory approaches exclude from points and fees regarding the inclusion of loan necessary to complement the compensation paid to individual loan protections contained in § 1026.36(d) originator compensation in points and originators employed by a mortgage and (e) prohibiting or restricting certain fees would be useful to protect broker firm but not to exclude loan originator compensation practices. consumers and facilitate compliance. In compensation paid to individual loan They contended that mortgage brokers particular, the Bureau sought comment originators employed by the creditor. could develop problematic business on whether it would be helpful to Many more commenters addressed models that would not violate the provide for additional adjustment of the the Bureau’s two alternatives for prohibition in § 1026.36(d)(1) against rules or additional commentary to proposed comment 32(b)(1)(ii)–5.iii. basing compensation on loan terms and clarify any overlaps in definitions Consumer advocates urged the Bureau the prohibition in § 1026.36(e) against between the points and fees provisions to adopt an additive approach for steering consumers to consummate in the ability-to-repay and HOEPA transactions in the wholesale channel, particular transactions to maximize loan rulemakings and the provisions that the i.e., transactions originated through a originator compensation. For example, Bureau was separately finalizing in mortgage broker. They argued that the some consumer advocates noted that, connection with the Bureau’s 2012 Loan statutory provision was intended to without violating these prohibitions, Originator Proposal (since adopted in limit the total up-front charges and loan mortgage brokers could specialize in the 2013 Loan Originator Final Rule). originator compensation in loans subprime transactions with high up- For example, the Bureau sought designated as qualified mortgages (and front charges and high interest rates and comment on whether additional to ensure that loans with charges and could induce creditors to compete for guidance would be useful with regard to compensation above the threshold are such transactions and offer high loan treatment of compensation by persons subject to the special protection as high- originator compensation, so long as the who are ‘‘loan originators’’ but are not cost mortgages). They maintained that a compensation did not vary with the employed by a creditor or mortgage netting rule would in essence double broker, given that the 2013 Loan the points and fees thresholds for 120 For loans less than $100,000, the qualified Originator Final Rule implemented qualified mortgages and high-cost mortgage points and fees limits are more than 3 provisions of the Dodd-Frank Act that mortgages. As a result, loans of $100,000 percent of the total loan amount. See specify when employees of retailers of or more could have up-front charges of § 1026.43(e)(3). 121 For loans less than $20,000, the points and manufactured homes, servicers, and 3 percent of the total loan amount and fees thresholds for high-cost mortgages are more other parties are loan originators for loan originator compensation paid by than 5 percent of the loan amount. See Dodd-Frank Act purposes. the creditor equal to another 3 percent, § 1026.32(a)(1)(ii).

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terms of individual loans. Alternatively, which creditor-paid compensation is obligated to provide them with the they suggested that mortgage brokers combined with up-front charges paid by lowest cost loan. could do business with a mix of high- the consumer. Some consumer Some consumer advocates also argued cost creditors that pay high advocates also suggested that double- that the double-counting concerns are compensation and creditors offering counting concerns could be addressed more pronounced in the retail channel more competitive loans that pay lower by permitting creditors to net because consumers do not have the compensation to brokers. For consumers origination payments from consumers option to pay retail loan officers that mortgage brokers believe would be against loan originator compensation, so directly. Under an additive approach, more likely to agree to more costly long as the creditors provided more any loan originator compensation paid loans, mortgage brokers could take detailed disclosures to consumers when by the creditor to its loan officers would advantage of the safe harbor in the anti- such payments would be passed be included in points and fees in steering rules by providing three quotes through as compensation to loan addition to any up-front charges paid by from high-cost creditors but could originators. the consumer to the creditor. Because continue providing other customers Some consumer advocates argued that the consumer cannot pay up-front with more competitive loans through the Bureau should treat all loan charges directly to the retail loan officer, other creditors. Consumer advocates originators the same and should the consumer would have less flexibility argued that an additive approach would therefore also adopt an additive rule for to pay up-front charges to receive a deter such practices because creditors transactions in the retail channel. They lower interest rate and still remain charging high up-front fees and paying maintained that, while problematic loan under the points and fees limits. high compensation to mortgage brokers originator compensation practices In developing the final rule, the would find it more difficult to remain historically may have been more Bureau consulted with several Federal agencies, as required by section below the qualified mortgage points and prevalent in the wholesale channel, 1022(b)(2)(B) of the Dodd-Frank Act. fees limits and the high-cost mortgage there were also similar problems in the Three agencies, the Federal Deposit points and fees threshold. retail channel. They also argued that, Insurance Corporation (FDIC), HUD, and Some consumer advocates also argued despite the prohibitions on steering and the Office of the Comptroller of the that the Bureau lacks the authority to term-based compensation, creditors will Currency (OCC) submitted formal adopt a netting approach for high-cost find ways to encourage retail loan comment letters. The FDIC and HUD mortgages under HOEPA. They claimed officers to steer consumers to higher- submitted a joint comment stating their that the Bureau would need to use its cost loans. For example, they suggested exception authority to adopt the netting view that compensation paid to that creditors may use deferred approach and that TILA section 105(a) mortgage brokers should be included in compensation plans to provide some does not permit the Bureau to use its points and fees whether the consumer incentives for retail loan officers to steer exception authority to modify the items pays such compensation directly consumers toward higher cost loans. included in points and fees for high-cost through up-front charges or indirectly They therefore argued that the same mortgages. Thus, they argued that the through the creditor and funded through protections provided by an additive Bureau can adopt a netting approach the interest rate. The FDIC and HUD approach are necessary in the retail only for calculating loan originator stated that yield spread premiums channel. compensation for the qualified mortgage (YSPs), i.e., compensation paid by a points and fees limits. They maintained Some consumer advocates, however, creditor and funded out of the interest that creating different measures for loan argued that the Bureau should adopt a rate, have been offered as a payment originator compensation for qualified different rule for transactions in the option for consumers that prefer lower mortgages and high-cost mortgages retail channel. They argued that up-front costs and a higher interest rate would be confusing and create Congress was particularly concerned but that a consumer’s choice to use a compliance difficulties. with transactions with creditor-paid YSP to compensate a broker should not Some consumer advocates also argued compensation to mortgage brokers and affect the calculation of loan originator that double-counting concerns could be that such transactions historically compensation for points and fees. The addressed simply by having the tended to be more costly and to have FDIC and HUD maintained that the consumer pay the mortgage broker higher rates of default. They claimed netting approach would undercount directly. They noted that this approach that the risks of consumer injury from points and fees. They also stated that a to structuring mortgage pricing would loan originator compensation practices netting approach would create permit a consumer to pay up-front are significantly lower in the retail incentives for transactions to include charges to reduce the amount of the channel. They contended that, in the both up-front origination charges and interest rate. The consumer payment to retail channel, creditors and their loan YSPs because the up-front charges could the broker would be counted in points officers would have far greater be netted against the YSPs to reduce or and fees only one time. Some consumer difficulties in structuring their eliminate the loan originator advocates maintained that there is little businesses to evade the prohibitions compensation that would be included in justification for combining creditor-paid against steering and term-based points and fees. The FDIC and HUD compensation to mortgage brokers with compensation in § 1026.36(d)(1) and argued that evidence shows that up-front charges paid by consumers. § 1026.36(e). They noted that retail loan transactions with both up-front charges They claimed that, historically, the officers cannot pick and choose and ‘‘back-end’’ payments tend to be the rationale for creditor-paid compensation different loans from different creditors most costly for consumers and are the for mortgage brokers was that it offering different levels of loan most difficult for them to evaluate when provided an option for consumers that originator compensation. They also shopping for a mortgage. did not have sufficient funds or did not argued that mortgage brokers may be The FDIC and HUD supported the want to pay a mortgage broker directly more successful in convincing proposal to exclude compensation paid and instead preferred to pay such consumers to accept more costly loans by a mortgage broker to its employees compensation through a higher interest because consumers perceive that their but argued that the Bureau should also rate. They noted that such a rationale mortgage broker is a trusted advisor and exclude compensation paid by a does not make sense in a transaction in mistakenly believe that the broker is creditor to its employees. The FDIC and

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HUD argued that including in points loan officers. The OCC noted that the Bureau should consider whether and fees compensation paid by a banking industry expressed concerns compensation paid by a creditor to a creditor to its employee would increase about the operational burden of mortgage broker should be included in compliance costs and make it difficult attempting to track compensation and points and fees only for higher-priced for them to create compliant systems by about the potential uncertainty of mortgage loans because competition the January 2014 effective date. They whether, because of changes in loan may not be as robust for such loans. The also stated that including such originator compensation, a transaction commenter suggested that the Bureau compensation in points and fees could would be a qualified mortgage. The OCC consider excluding such compensation result in variations in points and fees for argued that excluding from points and entirely from points and fees for loans with identical costs to the fees compensation paid by a creditor to mortgage loans in the prime market and consumer, merely because, for example, its loan officers would not adversely excluding only a certain amount for one transaction involved a high- affect consumer protection. The OCC higher-priced mortgage loans. performing loan officer. They argued noted that individual employees in both Many industry commenters advocated that excluding from points and fees the retail and wholesale channels are that, if the Bureau declines to exclude compensation paid by a creditor to its prohibited from steering a consumer to loan originator compensation altogether, employees would not compromise the a more costly loan to increase their the Bureau should exclude from points consumer protection goals of the points compensation but that there is an added and fees any compensation paid to loan and fees provision because of the loan layer of protection because a creditor’s originator employees. Many creditors originator compensation restrictions in loan officers generally do not have the and their representatives argued that § 1026.36(d). They noted that employees ability to select from different creditors compensation paid to loan originators of creditors have no ability to choose when presenting loan options to employed by creditors, as well as loan among creditors, further reducing the consumers. originators employed by mortgage risk that consumers would be steered Repeating arguments they made in brokers, should be excluded from points toward more costly loans. response to the Board’s 2011 ATR and fees. They raised a number of The OCC also submitted a comment Proposal, many industry commenters, different arguments to support stating its support for excluding from including creditors and their excluding compensation paid to points and fees loan originator representatives and mortgage brokers individual loan originators, including compensation paid by a consumer to a and their representatives, again urged retail loan officers. mortgage broker when that payment the Bureau to exclude loan originator First, they asserted that calculating already is included in points and fees as compensation from points and fees loan originator compensation for part of the finance charge; excluding altogether. They argued that loan individual loan originators would from points and fees compensation paid originator compensation has little or no impose a substantial burden, by a mortgage broker to its employees; bearing on a consumer’s ability to repay particularly for employees of creditors. excluding from points and fees a mortgage and that it therefore is They noted that retail loan officers often compensation paid by a creditor to its unnecessary to include such receive a substantial part of their employees; and using an additive compensation in points and fees. They compensation after a mortgage loan is approach to include in points and fees also maintained that other regulatory consummated, making it difficult to both origination charges paid by a protections, including the prohibition in track and attribute compensation to a consumer to a creditor and loan § 1026.36(d)(1) on compensating loan transaction before that transaction is originator compensation paid by a originators based on the terms of the consummated. They argued that, for creditor to a mortgage broker. The OCC transaction and the prohibition in retail loan officers, it would create stated that a netting approach would § 1026.36(e) on steering consumers to significant compliance burdens to track permit YSPs and origination fees to be consummate particular transactions to compensation paid to each loan officer charged in the same transaction without increase loan originator compensation, and attribute that compensation to each including both in points and fees and are sufficient to protect consumers transaction. They noted that their argued that this would not serve the against problematic loan originator existing systems are unable to track and interest of consumers or of a compensation practices. They claimed attribute compensation for each loan transparent, competitive mortgage that including loan originator officer for each transaction, and stated market. The OCC noted that a netting compensation in points and fees would that they would have to develop new approach would permit a qualified impose a significant compliance burden systems that could track compensation mortgage to have up-front charges equal and make it far more difficult to offer in real time and communicate with loan to 3 percent of the loan amount and an qualified mortgages, leading to higher origination systems to calculate points interest rate sufficient to generate a 3 costs for credit and reduced access to and fees. They also asserted that it percent loan origination commission; credit. would impose substantial compliance similarly, a netting approach would A trade group representing mortgage risk because of the difficulty in permit a mortgage loan to have up-front brokers and many individual mortgage accurately calculating such charges equal to 5 percent of the loan brokers submitted substantially similar compensation. amount and an interest rate sufficient to comments recommending that the Second, they argued that calculating generate a 5 percent loan origination Bureau exclude all compensation paid loan originator compensation at the time commission. The OCC also maintained by creditors to loan originators. They the interest rate is set would result in an that including both origination charges argued that the Board’s 2010 Loan inaccurate measure of compensation and YSPs increases the complexity of Originator Final Rule already restricted and would result in significant mortgage transactions and confuses loan originator compensation to prevent anomalies. They noted that various consumers, particularly those who are steering of consumers to more costly types of compensation, including salary most vulnerable and have the fewest mortgages. and bonuses based on factors such as credit choices. One industry commenter loan quality and customer satisfaction, As noted above, the OCC supported recommended that, if the Bureau would not be included in loan excluding from points and fees declines to exclude all loan originator originator compensation because they compensation paid by a creditor to its compensation from points and fees, the cannot be attributed to a particular

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transaction. However, they asserted that points and fees altogether, or to exclude had engaged in activities that would the amount of compensation that is compensation paid to loan originator require their compensation to be included in points and fees may have employees, the Bureau should adopt the included in points and fees. They little bearing on how much the netting rule in proposed alternative 2 of therefore urged the Bureau to adopt a consumer actually pays for a given comment 32(b)(1)(ii)–5.iii. They argued bright-line rule under which transaction. For example, they noted that the additive rule in proposed compensation would be included in that two transactions with identical alternative 1 of comment 32(b)(1)(ii)– points and fees only if paid to an interest rates and up-front charges may 5.iii would result in significant double employee of a creditor or a mortgage nevertheless have different loan counting and could cause many loans to broker. originator compensation merely because exceed the qualified mortgage points Industry commenters also requested one transaction involved an and fees limits and could cause some that the Bureau clarify what experienced, more highly compensated loans to exceed the high-cost mortgage compensation must be included in loan officer or because the interest rate threshold. points and fees when a manufactured in a transaction was set at the end of the One commenter asserted that the home retailer and its employees qualify month when a loan officer had qualified inclusion of loan originator as loan originators. They argued that it for a higher commission. compensation in points and fees, along is not clear whether the sales price or Finally, they argued that employee with limitations on the number of the sales commission in a transaction compensation is merely another discount points that may be excluded should be considered, at least in part, overhead cost that already is captured in from points and fees, would limit the loan originator compensation. They the interest rate or in origination charges ability of nonprofit organizations to urged the Bureau to clarify that and has little, if any, bearing on a assist consumers in obtaining affordable compensation paid to a retailer and its consumer’s ability to repay a mortgage. mortgages. The commenter argued that employees in connection with the sale They argued that compensation the Bureau should adopt a rule of a manufactured home should not be typically is already captured in points permitting creditors to exclude counted as loan originator and fees as origination charges and that payments to loan originators if the costs compensation. including employee loan originator of such payments are absorbed by Finally, a number of industry compensation would constitute double creditors and not passed along to commenters again advocated excluding counting. consumers. As an alternative, the certain other items from points and fees. One industry commenter commenter supported comments In particular, several industry recommended that, if the Bureau 32(b)(1)(ii)–5.i and 32(b)(1)(ii)–5.ii, and commenters urged the Bureau to declines to exclude compensation paid the second alternative of comment exclude from points and fees real-estate to individual loan originators from 32(b)(1)(ii)–5.iii, arguing that these related charges paid to affiliates of the points and fees, the Bureau should comments minimize double-counting. creditor and up-front charges to recover consider other methods to simplify the The commenter also urged the Bureau to the costs of loan-level price adjustments calculation of loan originator permit consumers to exclude from (LLPAs) imposed by the GSEs. compensation. That commenter points and fees more than two bona fide The Final Rule suggested that the Bureau permit a discount points, recommending that the creditor to include as loan originator Bureau exclude from points and fees The Bureau addresses below various compensation a fixed amount based on any amounts used to buy down an issues regarding the inclusion of loan average costs for loan originator interest rate that starts at or below the originator compensation in points and compensation over a prior period of average 30-year fixed prime offer rate. fees. Specifically, the final rule provides time. The commenter noted that such an Commenters also raised other issues that payments by consumers to approach would ease the burden and related to loan originator compensation. mortgage brokers need not be counted as complexity of tracking compensation for Several industry and nonprofit loan originator compensation where each loan. commenters requested additional such payments already have been A trade group representing mortgage guidance regarding the calculation of included in points and fees as part of brokers and many individual mortgage loan originator compensation for the finance charge. In addition, brokers submitted substantially similar transactions involving manufactured compensation paid by a mortgage broker comments urging the Bureau to include homes. They noted that, under to its employees need not be included in points and fees only compensation § 1026.36(a), as amended by the in points and fees. The Bureau also received by the originating entity for Bureau’s 2013 Loan Originator Final concludes that compensation paid by a loan origination activities. They argued Rule, manufactured home retailers and creditor to its own loan officers need not that fees associated with creditors or their employees could qualify as loan be included in points and fees. The wholesale lenders should not be originators. Industry commenters Bureau determines, however, that it included in points and fees. They also requested additional guidance on what should not use its exception authority to maintained that originators should be activities would cause a manufactured alter the requirement that compensation permitted to charge various percentages home retailer and its employees to paid by a creditor to a mortgage broker for their loan origination activities, qualify as loan originators. They stated is included in points and fees in provided they do not exceed the that it remains unclear what activities a addition to any origination charges paid qualified mortgage 3 percent cap and retailer and its employees could engage by a consumer to the creditor. Finally, that non-bank originators should be in without qualifying as loan originators the Bureau provides further guidance on permitted to receive compensation from and causing their compensation to be how to calculate the amount of loan the consumer, creditor, or a included in points and fees. Industry originator compensation for transactions combination of both, as long as total commenters also noted that, because the involving manufactured homes. compensation does not exceed 3 percent creditor had limited knowledge of and Compensation paid by consumers to of the loan amount. control over the activities of the mortgage brokers. In the 2013 ATR Many industry commenters argued retailer’s employees, it would be Proposed Rule, the Bureau stated that that, if the Bureau elects not to exclude difficult for the creditor to know the broad statutory language requiring loan originator compensation from whether the retailer and its employees inclusion of ‘‘all’’ compensation paid

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‘‘directly or indirectly’’ and ‘‘from any § 1026.36(a)(2) to mean any loan section 129C and necessary and source’’ supports counting originator other than an employee of a appropriate to effectuate the purposes of compensation in points and fees each creditor. Under this definition, persons this section and to facilitate compliance time it is paid to a loan originator. Thus, whose primary business is not with section 129C. With respect to its the Bureau reads the express language of originating mortgage loans may use of TILA section 129C(b)(3)(B) here the statute as providing for the inclusion nevertheless be mortgage brokers if they and elsewhere in this section, the of loan originator compensation in qualify as a ‘‘loan originator’’ under Bureau believes this authority includes points and fees, even if some or all of § 1026.36(a)(1) and are not employees of adjustments and exceptions to the that compensation may already have a creditor. The use of the term definitions of the criteria for qualified been included in points and fees under ‘‘mortgage broker’’ in mortgages and that it is consistent with other elements of the definition, and the § 1026.32(b)(1)(ii)(A) is appropriate the purpose of facilitating compliance to 2013 ATR Final Rule adopted this because compensation is excluded from extend use of this authority to the points statutory approach. points and fees under and fees definitions for high-cost However, as noted in the 2013 ATR § 1026.32(b)(1)(ii)(A) only if such mortgage in order to preserve the Proposed Rule, the Bureau does not compensation already has been consistency of the qualified mortgage believe it would be in the interest of included in points and fees under and high-cost mortgage definitions. As consumers or industry to adhere to this § 1026.32(b)(1)(i). noted above, by helping to ensure that ‘‘additive’’ approach when it is clear The Bureau is adopting new the points and fees calculation is not that the compensation already has been § 1026.32(b)(1)(ii)(A) pursuant to its artificially inflated by counting a single captured in points and fees. Thus, as authority under TILA section 105(a) to payment to a mortgage broker twice, the explained below, the Bureau is using its make such adjustments and exceptions Bureau is helping to ensure that adjustment and exception authority and for any class of transactions as the responsible, affordable mortgage credit its authority to revise the criteria that Bureau finds necessary or proper to remains available to consumers. define a qualified mortgage to eliminate Some consumer advocates argued that facilitate compliance with TILA and to double counting in such situations. the Bureau lacks exception authority to effectuate the purposes of TILA, As noted above, the Bureau proposed exclude loan originator compensation including the purposes of TILA section in the 2013 ATR Proposed Rule three from the points and fees calculation for 129C of ensuring that consumers are different examples (one of which had the high-cost mortgage threshold under offered and receive residential mortgage two alternatives) for calculating loan HOEPA.122 However, while the Bureau’s loans that reasonably reflect their ability originator compensation when such authority under TILA section 105(a) to repay the loans. The Bureau’s compensation may already have been does not extend to the substantive understanding of this purpose is included in points and fees. The first protections for high-cost mortgages in informed by the findings related to the example, proposed comment TILA section 129, the provision that purposes of section 129C of ensuring 32(b)(1)(ii)–5.i, would have provided defines high-cost mortgages, including that responsible, affordable mortgage that a consumer payment to a mortgage the points and fees definitions, is part credit remains available to consumers. broker that is included in points and of TILA section 103. Thus, although the The Bureau believes that using its fees under § 1026.32(b)(1)(i) (because it Bureau cannot use its authority under exception authorities to ensure that a is included in the finance charge) does TILA section 105(a) to alter the single payment to a mortgage broker not have to be counted in points and substantive protections accorded to will not be counted twice in points and fees again under § 1026.32(b)(1)(ii) (as high-cost mortgages under TILA section fees will facilitate compliance with the loan originator compensation). The 129, it can use that authority to adjust points and fees regulatory regime by Bureau noted in the 2013 ATR Proposed the criteria used to define a high-cost allowing creditors to count the payment Rule that it did not believe that counting mortgage, including the method for to a broker once without requiring a single payment to a mortgage broker calculating points and fees, as specified further investigation into the mortgage twice would advance the purpose of the elsewhere in TILA. broker’s employee compensation points and fees limits. Few comments Compensation paid by mortgage practices, and by making sure that all addressed this proposed example, and, brokers to their loan originator creditors apply the provision with one exception, which is discussed employees. The second example, consistently. It will also effectuate the below in connection with proposed proposed comment 32(b)(1)(ii)–5.ii, purposes of TILA by preventing the comment 32(b)(1)(ii)–5.ii, those would have provided that compensation points and fees calculation from being comments supported the Bureau’s paid by a mortgage broker to its artificially inflated, thereby helping to proposal that such payments should not individual loan originator employees is keep mortgage loans available and be included in points and fees under not included in points and fees under affordable by ensuring that they are § 1026.32(b)(1)(ii) if they already are § 1026.32(b)(1)(ii). The Bureau stated in subject to the appropriate regulatory included in points and fees under the 2013 ATR Proposed Rule that the framework with respect to qualified § 1026.32(b)(1)(i). exclusion from points and fees was mortgages and the high-cost mortgage The Bureau is therefore adopting warranted because a payment from comment 32(b)(1)(ii)–5.i as proposed threshold. The Bureau is also invoking and renumbered as 32(b)(1)(ii)–4.i. The its authority under TILA section 122 The consumer advocate commenters made this Bureau also is adopting new 129C(b)(3)(B) to revise, add to, or argument to oppose the Bureau’s using exception § 1026.32(b)(1)(ii)(A) to provide that subtract from the criteria that define a authority to exclude from points and fees (or use loan originator compensation paid by a qualified mortgage consistent with a netting approach for) compensation paid by creditors to loan originators. However, because this consumer to a mortgage broker, as applicable standards. For the reasons argument would also apply to the Bureau’s use of defined in § 1026.36(a)(2), is not explained above, the Bureau has exception authority to exclude from points and fees included in points and fees if it already determined that it is necessary and compensation paid by a consumer to a mortgage has been included in points and fees proper to ensure that responsible, broker or by a mortgage broker to its employees, the Bureau addresses this argument here with respect because it is included in the finance affordable mortgage credit remains to this and other uses of its exception authority in charge under § 1026.32(b)(1)(i). The available to consumers in a manner this rulemaking to exclude certain loan originator term ‘‘mortgage broker’’ is defined in consistent with the purposes of TILA compensation from points and fees.

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either a consumer or creditor to a points and fees if it is paid ‘‘directly or originator compensation to either its mortgage broker firm already is counted indirectly’’ by a consumer or creditor own loan officer or to a mortgage broker. in points and fees, and that it would not ‘‘from any source.’’ Because That is because the creditor can fund be necessary or appropriate to also compensation by a mortgage broker firm the compensation in two different ways: include in points and fees any funds to its employees is funded from either through origination charges paid that the mortgage broker firm passes on consumer or creditor payments, such by the consumer (which would be to its individual loan originator compensation could be interpreted as included in points and fees) or through employees. Again, few commenters being paid indirectly by a consumer or the interest rate (which would not be addressed this example, and, with one creditor. included in points and fees). There is no exception, they supported the Bureau’s Given the ambiguity, the Bureau is practicable method for the Bureau to proposed comment. also invoking its authority under TILA determine by rule the extent to which As noted above, one creditor argued section 105(a) to make such adjustments compensation paid by the creditor was that it would be unfair to adopt and exceptions for a class of funded through origination charges and, proposed comments 32(b)(1)(ii)–5.i and transactions as the Bureau finds thereby, already captured in the points 32(b)(1)(ii)–5.ii without adopting a necessary or proper to facilitate and fees calculation. The Bureau similar exclusion for compensation paid compliance with TILA and to effectuate therefore indicated that it believed that by a creditor to its employee loan the purposes of TILA, including the bright-line rules would be necessary to originators (i.e., its own loan officers). purposes of TILA section 129C of facilitate compliance. For the reasons set forth below, the ensuring that consumers are offered and As discussed below, the Bureau Bureau is using its exception authority receive residential mortgage loans that concludes that it is appropriate to apply to permit creditors to exclude from reasonably reflect their ability to repay different requirements to loan originator points and fees compensation paid to the loans. The Bureau’s understanding compensation paid by the creditor to its their own loan officers. of this purpose is informed by the own loan officers and to compensation Accordingly, the Bureau is adopting findings related to the purposes of paid by the creditor to other loan comment 32(b)(1)(ii)–5.ii substantially section 129C of ensuring that originators. Specifically, the Bureau is as proposed and renumbered as responsible, affordable mortgage credit using its exception authority to exclude 32(b)(1)(ii)–4.ii, and is adopting new remains available to consumers. from points and fees compensation paid § 1026.32(b)(1)(ii)(B) to provide that a Because payments by mortgage brokers by the creditor to its own loan officers. payment from a mortgage broker, as to their employees already have been Compensation paid by the creditor to defined in § 1026.36(a)(2), to a loan captured in the points and fees other loan originators is included in originator who is an employee of the calculation, excluding such payments points and fees, and such compensation mortgage broker is not included in will facilitate compliance with the must be counted in addition to any up- points and fees. As noted above, the points and fees regulatory regime by front charges that are included in points term ‘‘mortgage broker’’ is defined in eliminating the need for further and fees. § 1026.36(a)(2) to mean any loan investigation into the mortgage brokers’ Compensation paid by creditors to originator other than an employee of a employee compensation practices, and their own loan officers. In response to creditor. Under this definition, persons by making sure that all creditors apply the Board’s 2011 ATR Proposal, many whose primary business is not the provision consistently. It will also creditors and organizations representing originating mortgage loans may effectuate the purposes of TILA by creditors urged the Bureau to exclude nevertheless be mortgage brokers if they preventing the points and fees all compensation paid to individual qualify as a ‘‘loan originator’’ under calculation from being artificially loan originators. Among other things, § 1026.36(a)(1) and are not employees of inflated, thereby helping to keep these commenters had argued that a creditor. To qualify as a loan mortgage loans available and affordable compensation paid to loan originators originator under § 1026.36(a)(1), a by ensuring that they are subject to the already is included in the cost of loan, person must engage in loan origination appropriate regulatory framework with either in the interest rate or in activities in expectation of respect to qualified mortgages and the origination charges; that having to track compensation. The use of the term high-cost mortgage threshold. The individual loan originators’ ‘‘mortgage broker’’ in Bureau is also invoking its authority compensation and attribute it to specific § 1026.32(b)(1)(ii)(B) is appropriate under TILA section 129C(b)(3)(B) to transactions would impose a significant because, as discussed above, revise, add to, or subtract from the compliance burden; and that including compensation that a mortgage broker criteria that define a qualified mortgage compensation paid to individual loan receives from a consumer or creditor is consistent with applicable standards. originators would cause anomalous included in points and fees, and this For the reasons explained above, the results, with otherwise identical loans compensation provides the funds for Bureau has determined that it is having different amounts of loan any compensation that is paid by the necessary and proper to ensure that originator compensation included in mortgage broker to its employee. responsible, affordable mortgage credit points and fees because of the timing of TILA section 103(bb)(4)(B) provides remains available to consumers in a the loan or the identity of the loan that compensation paid by a ‘‘consumer manner consistent with the purposes of originator. See 78 FR 6433–34 (Jan. 30, or creditor’’ to a loan originator is TILA section 129C and necessary and 2013). included in points and fees. The Bureau appropriate to effectuate the purposes of In the 2013 ATR Final Rule, the notes that a mortgage broker firm is this section and to facilitate compliance Bureau acknowledged the concerns neither a consumer nor a creditor, so the with section 129C. about including in points and fees statute could plausibly be read so that Compensation paid by creditors. As compensation paid to individual loan points and fees would not include noted in the 2013 ATR Proposed Rule, originators. Nevertheless, the Bureau payments from a mortgage broker firm it is significantly more complicated to declined to exclude such compensation, to loan originators who work for the devise a rule for calculating loan noting that the statutory language firm. However, TILA section originator compensation when the provided that points and fees include 103(bb)(4)(B) provides that consumer pays some up-front charges to compensation paid to ‘‘mortgage compensation must be included in the creditor and the creditor pays loan originators,’’ which is defined to

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include individual loan officers. Id. at compensation in points and fees would known in advance it can be built into 6436. The Bureau also noted that not effectuate the purposes of the statute the price of the loan, either through up- excluding from points and fees and in fact would frustrate efforts to front charges or through the interest compensation paid by creditors to their implement and comply with the points rate. loan officers would exacerbate the and fees limits and with the broader The calculation of loan originator differential treatment between the retail statutory and regulatory regime for compensation is significantly more and wholesale channels, as creditors in qualified mortgages and high-cost complicated for retail loan officers.124 mortgages that must be implemented by retail transactions would not be As noted by industry commenters, required to include any loan originator January 2014. The Bureau has decided compensation for retail loan officers compensation in points and fees, while at this time to exclude compensation often is not determined until after the creditors in wholesale transactions paid by creditors to their own loan end of the month or some other, longer would be required to include in points officers. The Bureau will continue to time period (such as a quarter) and in and fees compensation paid by either gather data to determine the need for consumers or creditors to mortgage and the best method for counting many cases is based upon the number brokers. Id. compensation paid by creditors to their or dollar volume of the transactions that The Bureau notes that, in responding loan officers consistent with the have been consummated during the to the Board’s 2011 ATR Proposal, purpose of the statute. The Bureau will preceding month or other time period. commenters did not have the benefit of closely monitor the market as it However, for purposes of determining considering how including loan considers this issue to determine if whether a particular transaction is a originator compensation in points and further action is warranted. qualified mortgage (or a high-cost fees would interact with the rules As indicated above, several factors mortgage), the calculation of points and regarding loan originator compensation support this conclusion.123 Attributing fees (and thus loan originator that were proposed by the Bureau in the overall individual loan officer compensation) must be performed prior 2012 Loan Originator Proposal and compensation to specific transactions is to consummation. Thus, to calculate finalized in the 2013 Loan Originator an extraordinarily difficult task. The loan originator compensation for retail Final Rule. In response to the 2013 ATR Bureau considered these difficulties in loan officers for purposes of applying Proposed Rule, the Bureau received the 2013 ATR Final Rule, when it the qualified mortgage and high-cost detailed comments analyzing whether, revised § 1026.32(b)(1)(ii) to provide mortgage thresholds, creditors would in light of the protections in the 2013 that creditors must include in points have to determine, at the time the Loan Originator Final Rule, it would be and fees loan originator compensation interest rate is set, what compensation appropriate to include various types of that can be attributed to that transaction a retail loan officer would be entitled to loan originator compensation in points at the time the interest rate is set. The receive if a particular transaction were and fees. The Bureau also received more requirement that the compensation is consummated. As noted above, this extensive explanations from creditors included only if it can be attributed to calculation often would be based on the and organizations representing creditors the transaction at the time the interest number or dollar amount of transactions about the difficulties of calculating rate is set was intended to permit already consummated during the time compensation paid by creditors to their creditors to calculate compensation period in which compensation is set own loan officers. sufficiently early in the process so that (e.g., the month or quarter or other time After carefully considering the they could know well before period). This calculation may produce comments received in response to the consummation whether a loan would be an artificial measure of compensation 2013 ATR Proposed Rule, the Bureau a qualified mortgage or a high-cost because, for the transaction for which believes it is appropriate to reconsider mortgage. See 78 FR 6437 (Jan. 30, compensation is being calculated, the whether compensation paid to 2013). This calculation is date the interest rate is set may fall in individual loan originators should be straightforward for compensation paid a different time period than the date the excluded from points and fees. As noted by creditors to mortgage brokers: For transaction is consummated and actual above, the Bureau already has each transaction, creditors typically pay compensation is set.125 If the interest determined that compensation paid by a a commission to mortgage brokers rate were to be reset (if, for example, a mortgage broker to its loan originator pursuant to a pre-existing contract rate lock expires or underwriting employees need not be included in between the creditor and the broker, and identifies risk factors which leads to an points and fees. The Bureau concludes that commission is known at the time increase in the interest rate), the that it should use its exception authority the interest rate is set. Furthermore, compensation would have to be to exclude the compensation that because the commission structure is recalculated. creditors pay to their loan officers from 123 points and fees as well. As discussed in Some creditors and organizations representing 124 The calculation of compensation paid by creditors had argued that it would be appropriate more detail below, the Bureau mortgage brokerage firms to their individual loan to exclude from points and fees compensation paid originator employees could be similarly determines that including compensation by creditors to their loan officers because complicated. However, as discussed above, the paid by creditors to their loan officers in compensation paid to loan originator employees of Bureau is excluding such compensation from points a mortgage brokerage firm would also be excluded. points and fees at this time not only and fees because such compensation already has would impose a severe compliance As noted above, compensation paid to employees of mortgage brokerage firms is excluded from points been captured in the points and fees calculation. burden on the industry, but also would and fees because such compensation already is 125 The Bureau recognizes that a more accurate lead to distortions in the market for captured in points and fees in the payments by measure of compensation could be calculated at the mortgage loans and produce anomalous consumers or creditors to the mortgage brokerage time of consummation. However, as noted in the results for consumers. The Bureau also firms. By contrast, as noted above, compensation 2013 ATR Final Rule, creditors need to know in paid to a retail loan officer may be funded either advance of consummation whether a transaction believes that there are structural and through origination charges or through the interest will be a qualified mortgage or a high-cost mortgage operational reasons why not including rate, so there is no guarantee that such and therefore need to be able to calculate loan in points and fees compensation paid to compensation already has been included in points originator compensation, and points and fees retail loan officers poses a limited risk and fees. As discussed below, however, the Bureau generally, prior to consummation. Thus, the Bureau concludes that additional factors justify excluding does not believe that is appropriate to require that of harm to consumers. As a result, the from points and fees compensation paid by loan originator compensation be calculated at Bureau believes that including such creditors to their own loan officers. consummation.

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The Bureau understands from the terms of the transaction are fees would become even less industry comments that creditors’ renegotiated after underwriting. In those meaningful or consistent over time. existing systems generally do not track cases, a transaction that was expected to Second, because of the limitations on compensation for each loan officer for be a qualified mortgage may lose that calculating compensation, counting each specific transaction. Thus, status because the loan originator retail loan originator compensation in creditors would have to develop new compensation is recalculated at the time points and fees would produce arbitrary systems or reprogram existing systems the interest rate is finally set. The outcomes because the amount of to track and attribute compensation for uncertainty of calculating compensation compensation that would be attributed each transaction. Depending on the highlights the difficulty creditors would to a particular transaction often will be compensation structure, these systems face in complying with a rule that unrelated to the costs or risks borne by would have to be dynamic so that they includes compensation to the creditors’ the consumer. For example, two retail could track at the time the interest rate employees in points and fees, and the transactions with identical interest rates is set what compensation a loan officer Bureau is concerned that this and up-front charges could have would be entitled to receive if a given uncertainty could be disruptive to the different loan originator compensation, transaction were consummated.126 market. and therefore different points and fees, Further, the systems would have to feed The burden and uncertainty of simply because a senior, more highly into the creditors’ origination systems so requiring creditors to calculate loan compensated loan officer was involved that the points-and-fee calculation could originator compensation for their loan in one of the transactions. Similarly, be made. The Bureau is also concerned officers with respect to each individual two transactions involving the same that creditors may have difficulty in transaction as of the time the interest loan officer could have different loan implementing these systems by January rate is set are of particular concern originator compensation amounts 2014, when the ATR Final Rule because it does not appear that this depending on whether the interest rates becomes effective. calculation would further the purposes are set at the end of the month, when In addition, the Bureau is concerned of the statute. The Bureau believes that the loan officer might qualify for a that requiring creditors to calculate loan Congress expanded the scope of loan higher commission for meeting a originator compensation for their loan originator compensation to be included monthly quota for loans closed, rather officers may create uncertainty about in points and fees because of concerns than at the beginning of the month, the points and fees calculations and that a loan with high loan originator when such a quota is unlikely to have been met.127 thus about whether loans satisfy the compensation is likely to be more costly By contrast, the costs to the standards for qualified mortgages and consumer, as reflected in origination and may pose greater risk for remain below the threshold for high- charges and the interest rate, are not consumers. However, for the reasons cost mortgages. As noted above, if likely to vary based on the seniority of discussed below, the Bureau does not compensation paid to creditors’ loan the loan originator handling the believe that calculating at the time the officers were included in points and transaction or the loan officer’s interest rate is set the compensation to fees, creditors would have to calculate satisfaction of the creditor’s monthly be paid by creditors to their own loan at the time the interest rate is set what quota for obtaining a higher officers is likely to be an accurate compensation a loan officer would be commission. measure of the actual compensation the entitled to receive in the future. This The Bureau is also concerned that loan officer will receive if the loan is compensation often would depend on including in points and fees the timing of other loans (i.e., how many consummated or of the costs passed compensation paid by a creditor to its loans have been consummated or the along to consumers. own loan officer would place additional dollar value of loans consummated by First, the compensation as calculated limits on consumers’ ability to structure the loan officer at the time the interest may be inaccurate and incomplete. As their preferred combination of up-front rate is set), introducing complexity and noted above, compensation would be charges and interest rate. The points and potential for errors into the calculation. calculated at the time the interest rate is fees limits themselves restrict Moreover, counting retail compensation set, so the actual compensation that a consumers’ ability to pay up-front in points and fees would introduce loan officer would receive may be charges and still obtain a qualified significant uncertainty into transactions different from the amount that would be mortgage (or avoid a high-cost in which the interest rate is not locked included in points and fees. Moreover, mortgage). However, these limits would well in advance of consummation. For various types of compensation, such as permit even less flexibility in the retail instance, if the consumer elected at the salary and bonuses for factors such as channel because consumers cannot pay time of application to allow the interest loan performance and customer retail loan officers directly. For rate to float, the interest rate may not be satisfaction, cannot be attributed to example, assume a consumer is seeking set until several days before specific transactions and therefore a $100,000 loan and wants to pay $2,500 consummation. In such cases, the would not be included in loan in up-front charges at closing rather creditor might be uncertain as to originator compensation for calculating than paying those costs through a higher whether the transaction was a qualified points and fees. As a result, the mortgage or a high-cost mortgage until calculation would produce an 127 Another arbitrary result could occur when a incomplete measure of compensation, consumer relocks at a lower interest rate. At the that time. Similarly, even if the interest time of the initial rate set, the creditor could rate is locked in early in the process, it and creditors would have substantial calculate loan originator compensation and may subsequently be re-set, either flexibility to restructure their determine that points and fees do not exceed the because the rate lock expires or because compensation systems to reduce the qualified mortgage points and fees limit or the high- amount of loan originator compensation cost mortgage threshold. However, after the rate is reset, the creditor would have to recalculate loan 126 Moreover, the Bureau understands that some that they would have to include in originator compensation, and, if the loan originator consumers prefer to float the interest rate and other points and fees. To the extent that has satisfied a creditor’s monthly quota for consumers lock their interest rate but have the right increasing numbers of creditors were to obtaining a higher commission, it is possible that to relock one time at a lower rate. Thus, in these restructure compensation to avoid the the higher loan originator compensation could circumstances, creditors would have to calculate (or cause the points and fees to exceed the qualified recalculate) loan originator compensation later in impact of the rules, the inclusion of loan mortgage limits (or the high-cost mortgage the process. originator compensation in points and threshold).

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interest rate. Assume that the up-front § 1026.36(d)(1) prevents a creditor from 1022(d) five-year review, the Bureau charges would all be included in points paying higher compensation to its loan will assess how the exclusion from and fees and that the transaction is officer for a transaction that, for points and fees of compensation paid by being originated through a creditor’s example, has a higher interest rate or creditors to their loan officers is loan officer, whose compensation is higher up-front charges. Moreover, the affecting consumers. If the Bureau were $1,500. Under an additive approach, if Bureau agrees with consumer advocate to find that the exclusion for retail loan the consumer pays $2,500 in origination commenters and comments by the FDIC officer compensation was harming charges to the creditor and the creditor and HUD and by the OCC that argue that consumers, the Bureau could issue a pays $1,500 to its loan officer, the points retail loan officers would have greater new proposal to narrow or eliminate the and fees would be $4,000 and the loan difficulty than mortgage brokers in exclusion. The Bureau is aware that could not be a qualified mortgage. In trying to maneuver around the margins problematic loan originator contrast with a transaction originated of § 1026.36(d)(1). Unlike a mortgage compensation practices occurred in the broker, a retail loan officer works with through a mortgage broker, the past in the retail channel and that consumer would not have the option of only one creditor and therefore cannot questionable practices may occur again. paying $1,500 directly to the loan choose among different creditors paying The Bureau will carefully monitor the officer. The $1,500 in loan originator different compensation in deciding marketplace to respond to any such compensation would count toward the which loans to offer a consumer. abusive practices, including through the points and fees limits, so the consumer As noted above, some consumer therefore would not be able to pay all advocates argued that creditors would use of its supervisory and enforcement of the $2,500 up-front without still be able to structure loan originator authority. exceeding the points and fees limit for compensation to create incentives for The Bureau stated in the 2013 ATR a qualified mortgage.128 The consumer their loan officers to direct consumers Final Rule that it was reluctant to would have to pay other costs through toward higher-cost loans. For example, exclude from points and fees a higher interest rate and the resulting they noted that the 2013 Loan compensation paid to individual loan higher monthly payments. Thus, under Originator Final Rule adopted originators because it would treat the an additive rule, consumers in the retail § 1026.36(d)(1)(iii) and (iv), which retail and wholesale channels channel would have less flexibility to permit creditors to offer, under certain differently. As discussed above, pay up-front charges to achieve a lower conditions, deferred compensation however, after considering the interest rate and have the transaction plans and non-deferred profits-based information received in response to the compensation to their loan officers that remain below the points and fees limits 2013 ATR Proposed Rule, the Bureau otherwise would violate the prohibition for qualified mortgages and below the believes there are significant difficulties on term-based compensation. They threshold for high-cost mortgages. For in calculating loan originator certain consumers, such as those who suggested that such arrangements could be structured to encourage loan officers compensation in the retail channel. By do not qualify for a higher interest rate, contrast, in transactions involving the impact could affect their access to to induce consumers to accept more costly loans. The Bureau is sensitive to mortgage brokers, there is little credit. Excluding from points and fees compliance burden in calculating loan loan originator compensation paid by a the risk that unscrupulous creditors may look for gaps and loopholes in originator compensation, and creditor to its loan officers would compensation typically can be address this concern. regulations; however, the Bureau notes calculated with relative ease and The Bureau recognizes that creditors that the referenced provisions of may earn greater profits when § 1026.36(d)(1) were carefully crafted to accuracy. Moreover, the Bureau believes consumers receive more costly loans attenuate any incentives for directing that there is less risk of consumer injury and that, in the absence of regulatory consumers to higher-cost loans to from excluding loan originator protections, creditors could adopt increase compensation. The Bureau compensation from points and fees in compensation arrangements that create recognizes that creditors have the retail channel. The Bureau is incentives for their loan officers to significant incentives to work around concerned that that mortgage brokers originate loans that are more costly for the margins of the rules and, as noted may have the flexibility to structure consumers. Including loan officer above, is committed to monitoring their business model to evade the compensation in points and fees would compensation practices closely for prohibitions of § 1026.36(d)(1) and have imposed some limits on the ability problematic developments that may § 1026.36(e) and that the risk of of creditors to offer higher require further action. consumer injury from problematic loan In light of these concerns about the compensation to its loan officers. The originator compensation practices is significant compliance burden and the Bureau believes, however, that the therefore higher in the wholesale questionable accuracy of the calculation prohibition on terms-based channel than in the retail channel. The for retail loan officer compensation, the compensation in § 1026.36(d)(1) will Bureau is also concerned that Bureau believes it is appropriate at this unscrupulous creditors seeking to provide substantial protection against time to exclude such compensation originate more costly loans could use problematic loan originator from points and fees. The Bureau will the wholesale channel to expand their compensation practices in the retail continue to monitor and gather operations more rapidly and with channel. The Bureau concludes that information about loan originator these protections will significantly compensation practices to determine if limited investment. Historical evidence diminish the risk of consumer injury there are methods that are practicable also suggests that the risks of consumer from excluding from points and fees and consistent with the purposes of the injury may be greater in the wholesale compensation paid by creditors to their statute for including in points and fees channel. As noted above, some retail loan officers. The prohibition in loan originator compensation paid by consumer advocates cited evidence that, creditors to their loan officers. As part particularly in the subprime market, 128 If the consumer’s payments satisfy the of the Bureau’s ongoing monitoring of loans originated with mortgage brokers standards of § 1026.32(b)(1)(i)(E) or (F), the up-front were on average more expensive and fees could be excluded from points and fees as bona the mortgage market and for the fide discount points. purposes of the Dodd-Frank Act section more likely to default than loans

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originated in the retail channel.129 Thus, considered such an approach as an § 1026.32(b)(1)(ii)(C), the Bureau is for the reasons discussed above, the alternative for alleviating the excluding compensation paid by Bureau believes that it is necessary and compliance burden and eliminating creditors to their loan officers pursuant proper to use its exception authority to some of the anomalies between to its authority under TILA section exclude from points and fees transactions. However, the Bureau has 105(a) to make such adjustments and compensation paid by creditors to their concerns about whether this approach is exceptions for a class of transactions as loan officers. consistent with the statutory purpose of the Bureau finds necessary or proper to The Bureau considered options other identifying transactions that, because of facilitate compliance with TILA and its than excluding from points and fees high up-front charges and high loan purposes and to effectuate the purposes compensation paid by a creditor to its originator compensation, should not be of TILA, including the purposes of TILA loan officers. The Bureau considered eligible for the presumption of section 129C of ensuring that consumers adopting a netting rule for compliance of a qualified mortgage or are offered and receive residential compensation paid by a creditor to its that should receive the protections for mortgage loans that reasonably reflect loan officers. This approach would have high-cost mortgages. Moreover, their ability to repay the loans. The addressed the concern that an additive permitting creditors to employ an Bureau’s understanding of this purpose methodology would unduly restrict a average measure of loan originator is informed by the findings related to consumers’ ability to structure their compensation would raise significant the purposes of section 129C of ensuring preferred combination of up-front issues. For example, the Bureau would that responsible, affordable mortgage charges and interest rate. However, a have to determine what compensation credit remains available to consumers. netting rule would not alleviate the would be included in the measure of The Bureau has determined that compliance burden or address the other average compensation, the period for excluding compensation paid to retail implementation concerns associated which the average would be calculated, loan officers will facilitate compliance with including in points and fees and whether the average would be for with TILA and these purposes by compensation paid by creditors to their an entire firm, for a business unit, for a helping to reduce the burden and loan officers. One industry commenter limited geographic area, or even for uncertainty of calculating points and recommended that, if the Bureau individual loan originators. In light of fees in the retail context and by helping declines to exclude compensation paid the limited time remaining before the to assure that, as of the effective date of to retail loan officers from points and effective date of the rules, the Bureau the rule, creditors will have systems in fees, it should consider permitting does not believe it would be practicable place that are capable of making this creditors to include in points and fees to attempt to implement this alternative. calculation. At the same time, the an average measure of loan originator To implement the exclusion from Bureau has determined that excluding compensation over a prior period of points and fees of compensation paid by compensation paid to retail loan officers time as an alternative to calculating a creditor to its loan officers, the Bureau will effectuate the purposes of TILA by compensation on a transaction-by- is adding new § 1026.32(b)(1)(ii)(C), helping to ensure that loans are not transaction basis. The Bureau which excludes compensation paid by a arbitrarily precluded from satisfying the creditor to a loan originator that is an criteria for a qualified mortgage or 129 See, e.g., Keith Ernst, Debbie Bocian, Wei Li, employee of the creditor. The Bureau arbitrarily designated as high-cost Ctr. for Responsible Lending, Steered Wrong: also is adding language to comment mortgages because of potential Brokers, Borrowers, and Subprime Loans (2008); Antje Berndt, Burton Hollifield, and Patrik Sandas, 32(b)(1)(ii)-1 to clarify that anomalies in how loan originator What Broker Charges Reveal About Mortgage Credit compensation paid by a creditor to a compensation would be calculated for Risk, (2012); Susan E. Woodward, A Study of loan originator that is an employee of the points and fees limits. Thus, the Closing Costs for FHA Mortgages available at http:// the creditor is not included in points exclusion will help ensure the www.huduser.org/Publications/pdf/ FHA_closing_cost.pdf. The Bureau’s review of and fees. availability of reasonably repayable studies generally supports this view, though the As the Bureau noted in the 2013 ATR credit, given that the points and fees evidence is not unequivocal. Wei Jiang, Ashlyn Final Rule, the Dodd-Frank Act threshold will continue to provide Aiko Nelson, and Edward Vytacil, Liar’s Loan? provides that points and fees include all limits, apart from compensation not Effects of Origination Channel and Information Falsification on Mortgage Delinquency, SSRN compensation paid by a consumer or included in finance charge, on costs working paper 142162 (2009) use a dataset from one creditor to a ‘‘mortgage originator.’’ In related to loans. bank with approximately 700,000 loans originated addition, as noted above, the Bureau The Bureau is also relying upon its between 2004 and 2008. They report that ‘‘the reads the statutory language as requiring authority under TILA section Broker subsamples have delinquency probabilities that are 10–14 percentage points (or more than that loan originator compensation be 129C(b)(3)(B) to revise, add to, or 50%) higher than the Bank subsamples, a included in points and fees in addition subtract from the criteria that define a manifestation of the misalignment of incentives for to any other items that are included in qualified mortgage consistent with brokers who issue loans on the bank’s behalf for points and fees, even if the loan applicable standards. For the reasons commissions but do not bear the long-term consequences of low-quality loans.’’ They also originator compensation may have been explained above, the Bureau has show that loan pricing does not compensate for the funded through charges that already are determined that it is necessary and loan performance differences. Michael LaCour- included in points and fees. Moreover proper to ensure that responsible, Little, The Pricing of Mortgages by Brokers: An the Bureau reads the statutory provision affordable mortgage credit remains Agency Problem?, J. of Real Estate Research, 31(2), 235–263 (2009) showcases the agency problems in on compensation as meaning that available to consumers in a manner the brokerage channel, and provides a deep compensation is added as it flows consistent with the purposes of TILA literature review. This paper’s results ‘‘suggest downstream from one party to another section 129C and necessary and loans originated by brokers cost borrowers about 20 so that it is counted each time that it appropriate to effectuate the purposes of basis points more, on average, than retail loans and that this premium is higher for lower-income and reached a loan originator, whatever its this section and to facilitate compliance lower credit score borrowers.’’ In contrast, Amany previous source. Given this statutory with section 129C. El-Anshany, Gregory Elliehausen, and Yoshiaki language, the Bureau believes that, to Certain commentary adopted in the Shimazaki, Mortgage Brokers and the Subprime exclude from points and fees 2013 ATR Final Rule is no longer Mortgage Market, Proceedings, Federal Reserve Bank of Chicago (2005), find that consumers buying compensation paid by a creditor to its necessary in light of the Bureau’s through brokers paid less for their loans, by a loan officers, the Bureau must use its decisions discussed above. Comment similar magnitude as in the LaCour-Little paper. exception authority. As provided in new 32(b)(1)(ii)–2 describes certain types of

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compensation that would and would compensation paid by creditors to loan creditors to mortgage brokers should not be included in points and fees for originators). Repeating many of the help reduce those risks. Accordingly, individual loan originators. Portions of same arguments made in response to the the Bureau declines to use its exception comment 32(b)(1)(ii)–3 discuss how the Board’s 2011 ATR Proposal, these authority to exclude such compensation timing affects what compensation paid commenters argued that loan originator from points and fees. to individual loan originators must be compensation already is included in the The Bureau also does not believe it is included in points and fees. Comment cost of the loan and has little or no appropriate to use its exception 32(b)(1)(ii)–4 provides examples for effect on consumers’ ability to repay the authority to exclude loan originator calculating compensation for individual loan. They claimed that other compensation payments from creditors loan originators. Because compensation protections adopted by the Bureau and to mortgage brokers in certain types of paid by mortgage brokers to their the Board adequately protect consumers transactions. As noted above, one individual loan originator employees against harmful loan originator industry commenter urged the Bureau to and compensation paid by creditors to compensation practices and that it consider whether compensation paid by their loan officers is no longer included therefore is unnecessary to include loan creditors to mortgage brokers should be in points and fees, the guidance for originator compensation in points and included in points and fees only in calculating compensation for individual fees. Finally, they argued that including subprime transactions. The commenter loan originators is no longer necessary. loan originator compensation in points did not provide data or other evidence Accordingly, the Bureau is deleting and fees would cause many loans to to support this approach. In addition, portions of comments 32(b)(1)(ii)–2.ii exceed the qualified mortgage points subprime transactions already have less and –3, and, the entirety of comment and fees cap or the high-cost mortgage flexibility than prime transactions under 32(b)(1)(ii)–4. threshold and that, as a result, many the points and fees limits because bona Compensation paid by creditors to loans would not be made, including in fide discount points may not excluded mortgage brokers. In response to the particular smaller loans. from points and fees for transactions Board’s 2011 ATR Proposal, many The Bureau does not believe that it is with interest rates greater than 2 industry commenters urged the Bureau consistent with the standards for its use percentage points above APOR, see to exclude loan originator compensation of exception and adjustment authority § 1026.32(b)(1)(i)(E) and (F), and the from points and fees altogether. See 78 to exclude from points and fees Bureau is concerned about widening the FR 6433 (Jan. 30, 2013). Among other compensation paid by creditors to loan disparity in treatment under the points things, industry commenters had argued originators that are not employees of and fees limits. Accordingly, the Bureau that compensation paid to loan creditors. As noted above, in excluding does not believe it is appropriate to use originators already is included in the from points and fees compensation paid its exception authority to create cost of the loan and has little, if any by creditors to their loan originator different requirements for loan bearing on a consumer’s ability to repay employees, the Bureau invoked its originator compensation in the prime a mortgage loan. They also argued that exception and adjustment authority to and subprime markets. Another other statutory provisions and rules facilitate compliance and, generally commenter requested that, to avoid already provide adequate protection speaking, to meet purposes of ensuring impairing affordable lending programs from abusive loan originator that credit is available to consumers on offered by nonprofit organizations, the compensation practices and that it reasonably repayable terms. These Bureau exclude such payments when therefore is unnecessary to include loan factors do not support excluding the creditor absorbs the costs of the originator compensation in points and compensation paid by creditors to loan payments and does not pass along the fees. Finally, they argued that including originators not employed by creditors. costs to consumers.131 The Bureau loan originator compensation in points The compliance burden of calculating believes it would be difficult, if not and fees would cause many loans to compensation paid by creditors to loan impossible, to determine when a exceed the qualified mortgage points originators other than their own creditor was in fact not passing along and fees limits, which would result in employees is minimal and does not loan origination costs to consumers and an increase in the cost of credit and provide a basis for exclusion based on that any exemption, even if well- diminished access to credit. intentioned, could be susceptible to In the 2013 ATR Final Rule, the a rationale related to facilitating abuse. Bureau acknowledged the concerns compliance. As noted above, this In the 2013 ATR Proposed Rule, the about including loan originator calculation is straightforward for Bureau proposed two alternatives—an compensation in points and fees. compensation paid by creditors to ‘‘additive’’ approach and a ‘‘netting’’ However, the Bureau noted that, in light mortgage brokers: For each transaction, approach— for calculating of the express statutory language and creditors typically pay a commission to compensation. As discussed above, Congress’s evident concern with mortgage brokers pursuant to a pre- proposed alternative 1 of comment increasing consumer protections in existing contract between the creditor 32(b)(1)(ii)–5.iii would have adopted an connection with loan originator and the broker, and that commission is additive approach in which loan compensation practices, the Bureau did known at the time the interest rate is not believe it appropriate to use its set.130 Moreover, as discussed below, originator compensation would have exception authority to exclude loan the Bureau believes that there remain been included in points and fees in originator compensation entirely from some risks of consumer injury from addition to any charges paid by the points and fees. In response to the 2013 business models in which mortgage consumer to the creditor. Proposed ATR Proposed Rule, many industry brokers attempt to steer consumers to alternative 2 of comment 32(b)(1)(ii)– commenters, including mortgage more costly transactions. Including in 5.iii would have permitted creditors to brokers and their representatives and points and fees compensation paid by net origination charges against loan some creditors and their representatives, originator compensation to calculate the again urged the Bureau to exclude loan 130 As discussed above, the compliance burden of calculating compensation paid by creditors to their 131 As discussed below, the Bureau is adopting originator compensation from points own loan officers is substantial and offsets the § 1026.43(a)(3)(v), which exempts certain creditors, and fees altogether (or to at least limited potential consumer protection benefits of including certain nonprofit creditors, from the exclude from points and fees all including such compensation in points and fees. ability-to-repay requirements.

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amount of loan originator compensation 32(b)(1)(ii)–5.i, the consumer’s payment pays the mortgage broker directly, the that is included in points and fees. As to the mortgage broker would be consumer’s payment to the mortgage discussed above, a creditor’s payments included in points and fees only one broker would be included in points and to a loan originator may be funded by time. For example, assume a consumer fees in addition to any origination up-front charges to the consumer, is seeking a $100,000 loan and wants to charges imposed by the creditor. Thus, through the interest rate, or through pay $2,500 in up-front charges at closing a netting rule likely would provide some combination. The up-front charges rather than paying those costs through creditors with a greater ability to charge to the consumer would be captured in a higher interest rate. The transaction is up-front fees and still remain under the points and fees, but compensation being originated through a mortgage points and fees limits.134 The Bureau funded through the interest rate would broker firm, which charges $1,500. believes it would be anomalous to treat not be captured. Thus, when a Under an additive approach, if the wholesale transactions differently for consumer pays up-front charges, it is consumer pays $2,500 in origination purposes of the qualified mortgage and not clear whether a creditor’s payments charges to the creditor and the creditor high-cost mortgage points and fees to a loan originator are captured in such pays $1,500 to the mortgage broker firm, limits simply because in one transaction points and fees.132 the points and fees would be $4,000 and the consumer paid compensation As noted above, the Bureau reads the the loan could not be a qualified directly to the mortgage broker and in statutory language as requiring that loan mortgage. However, if the consumer another transaction the consumer paid originator compensation be included in pays $1,500 directly to the mortgage the compensation indirectly. Such an points and fees in addition to any other broker firm and then pays $1,000 in anomaly would actually disserve the items that are included in points and origination charges to the creditor, then broad purposes of TILA to inform fees, even if the loan originator the points and fees would be $2,500 and consumers because in the transaction compensation may have been funded would not prevent the loan from being that would be favored (i.e., the through charges that already are a qualified mortgage. Moreover, if the transaction in which the broker’s included in points and fees. Moreover consumer pays the mortgage broker commission is bundled in the fees paid the Bureau reads the statutory provision directly, then the creditor would no to the creditor or in the interest rate) the on compensation as meaning that longer be responsible for the cost of costs would be less transparent than in compensation is added as it flows compensating the mortgage broker; as a the disfavored transaction (i.e., the downstream from one party to another result, the interest rate should be the transaction in which the consumer paid so that it is counted each time that it same whether the consumer pays $1,500 the compensation directly to the reached a loan originator, whatever its to the mortgage broker and $1,000 to the broker). previous source. After carefully creditor or the consumer pays $2,500 to Finally, an additive approach would considering the comments, the Bureau the creditor and the creditor pays $1,500 place some additional limits on the has determined that, for calculating to the mortgage broker. In light of the ability of mortgage brokers to obtain compensation paid by creditors to options that direct consumer payments high compensation for loans that are mortgage brokers, it is not necessary or provide in the wholesale channel, the more costly to consumers. As noted proper to revise the additive approach Bureau believes that affordable credit above, consumer advocates have prescribed by the statute and adopted in will continue to be available in identified two ways in which mortgage the 2013 ATR Final Rule. connection with wholesale loans and brokers potentially could extract high For creditor payments to loan that use of adjustment authorities to compensation for delivering loans that originators not employed by creditors, achieve statutory purposes is not are more costly to consumers (and calculating loan originator necessary. possibly more profitable for creditors) compensation under an additive The Bureau is concerned that, as would not appear to violate the approach does not impose a significant noted by the FDIC and HUD, by the prohibitions on steering and compliance burden. As noted above, OCC, and by some consumer advocate compensating loan originators based on this calculation is straightforward for commenters, a netting rule in the loan terms. First, mortgage brokers compensation paid by creditors to wholesale channel could create could specialize in providing creditors mortgage brokers: For each transaction, incentives for mortgage brokers and with loans that are more costly to creditors typically pay a commission to creditors to structure transactions so consumers in exchange for high mortgage brokers pursuant to a pre- that loan originator compensation is compensation, so long as that existing contract between the creditor paid by the creditor to the mortgage compensation does not vary based on and the broker, and that commission is broker, rather than by the consumer to the terms of individual loans. known at the time the interest rate is set. the mortgage broker. Under a netting Second, mortgage brokers could do For transactions in the wholesale rule, creditors could impose origination business with a mix of creditors, some channel, brokers and creditors can charges on the consumer and net those offering more costly loans (and paying obviate double counting concerns by charges against the compensation the high compensation to mortgage brokers) having consumers pay brokers creditor pays the mortgage broker when and some offering loans with more directly.133 Under new comment calculating points and fees. By contrast, favorable terms (and paying lower in a transaction in which the consumer compensation to brokers). Mortgage 132 It is doubtful that Congress contemplated this issue because, as noted above, absent the Bureau’s so that they could disclose that they are recovering 134 As consumer advocates noted in their use of exception authority, TILA section loan originator compensation through up-front comments, mortgage brokers historically have 129B(c)(2)(B)(ii) would have prohibited a creditor charges and other origination costs through the defended arrangements in which creditors pay from imposing origination fees or charges if the interest rate. Thus, this disclosure-based approach compensation to mortgage brokers by arguing that creditor were compensating a loan originator. would permit creditors to reduce the amount of this approach permits consumers to obtain 133 The Bureau does not believe that the potential loan originator compensation they include in points mortgage loans when they do not have sufficient double counting of loan originator compensation and fees without changing the amount of up-front funds to compensate mortgage brokers directly. See and origination charges could be adequately fees or the interest rate they charge. Moreover, given Nat’l Assoc. of Mortgage Brokers v. Fed. Reserve addressed by permitting a netting approach in the complex interaction between loan originator Bd., 773 F.Supp. 2d 151, 158 (D.D.C 2011). This combination with more detailed disclosures to compensation, up-front charges, and the interest rationale for creditors’ paying compensation to consumers. The Bureau notes that, because money rate, the Bureau has concerns that consumers would mortgage brokers has little if any force if the is fungible, creditors could adjust their accounting not understand the disclosures. consumer is paying up-front charges to the creditor.

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brokers could attempt to steer borrowers For the reasons discussed above, the originator compensation for open-end that are less sophisticated and less Bureau believes that it is neither credit plans. The Bureau received few likely to shop for better terms to the necessary nor appropriate to deviate comments that addressed open-end creditors with more costly loans, and from the additive approach prescribed credit plans, and they did not advocate they potentially could evade the anti- by the statute and adopted in the 2013 for different or additional guidance. steering prohibition by offering quotes ATR Final Rule to calculate Accordingly, the Bureau believes that it from at least three such creditors.135 An compensation paid by creditors to is appropriate to continue to apply the additive approach likely would reduce mortgage brokers. The Bureau believes same requirements for calculating loan the potential consumer injury by that affordable credit will continue to be originator compensation for points and limiting the ability of creditors to available in connection with loans in fees in closed-end credit transactions impose high up-front charges and pay the wholesale channel and that use of and open-end credit plans. The Bureau high loan originator compensation, adjustment authorities to achieve is therefore revising § 1026.32(b)(2)(ii), unless creditors are willing to exceed statutory purposes is not necessary and which addresses loan originator the qualified mortgage points and fees proper. As noted above, the Bureau compensation for open-end credit plans, limits and, potentially, to bear the believes that, to the extent that the to incorporate the same exclusions from burden of originating high-cost additive approach limits the ability of points and fees as those discussed above mortgages under HOEPA.136 mortgage brokers to steer consumers for closed-end credit transactions in toward more costly loans, the additive The Bureau recognizes that an § 1026.32(b)(1)(ii). The Bureau is not approach is consistent with the additive approach makes it more adopting additional guidance for open- statutory purposes. Accordingly, the difficult for creditors to impose up-front end credit plans. Bureau concludes that it should not charges and still remain under the Calculation of loan originator exercise its exception authority to alter qualified mortgage points and fees compensation for manufactured home the additive approach prescribed by the limits and the high-cost mortgage transactions. As noted above, several statute. Accordingly, as adopted by this threshold. Commenters provided industry and nonprofit commenters final rule, comment 32(b)(1)(ii)–4.iii limited data regarding the magnitude of requested clarification of what clarifies that, for loan originators that compensation must be included in the effects of an additive approach. are not employees of the creditor, (i.e., points and fees in connection with Nevertheless, even in transactions in mortgage brokers, as defined in transactions involving manufactured which a mortgage broker’s § 1026.36(a)(2)) loan originator homes. They requested additional compensation is two percentage points compensation is included in points and guidance on what activities would cause of the loan amount—which the Bureau fees in addition to any origination a manufactured home retailer and its understands to be at the high end of charges that are paid by the consumer employees to qualify as loan originators. mortgage broker commissions—the to the creditor. creditor would still be able to charge up As noted above, the term ‘‘mortgage The 2013 Loan Originator Final Rule to one point in up-front charges that broker’’ is defined in § 1026.36(a)(2) to had provided additional guidance on would count toward the qualified mean any loan originator other than an what activities would cause such a mortgage points and fees limits. As employee of a creditor. The Bureau retailer and its employees to qualify as noted above, the creditor may reduce believes that the additive approach is loan originators in light of language in the costs it needs to recover from appropriate for all mortgage brokers, the Dodd-Frank Act creating an origination charges or through the including persons whose primary exception from the definition of loan interest rate by having the consumer pay business is not originating mortgage originator for employees of the mortgage broker directly. In loans but who nevertheless qualify as a manufactured home retailers performing addition, creditors in the wholesale ‘‘mortgage broker’’ under certain limited activities. See channel that prefer to originate only § 1026.36(a)(2). In general, calculating § 1026.36(a)(1)(i)(B) and comments qualified mortgages in many cases will compensation paid by a consumer or 36(a)-1.i.A and 36(a)-4. The commenters have the flexibility to recover more of creditor to such persons for loan nevertheless argued that it remains their origination costs through the origination activities should be unclear what activities a retailer and its interest rate to ensure that their straightforward and would impose little employees could engage in without transactions remain below the points compliance burden. However, as qualifying as loan originators and and fees limits.137 discussed below, the Bureau intends to causing their compensation to be provide additional guidance for included in points and fees. Industry 135 Competitive market pressures and the calculating loan originator commenters also noted that, because a difficulties of specializing in (or at least identifying creditor has limited knowledge of and and steering) vulnerable consumers may constrain compensation for manufactured home mortgage brokers’ ability to exploit gaps in the transactions. control over the activities of a retailer regulatory structure. Nevertheless, the Bureau is Loan originator compensation for and its employees, it would be difficult concerned about the potential for consumer injury, open-end credit plans. For the high-cost for a creditor to know whether a retailer particularly for consumers who are less and its employees had engaged in sophisticated or less likely to shop for competitive mortgage points and fees threshold, the terms. 2013 HOEPA Final Rule applied the activities that would require their 136 The Bureau recognizes that an additive same requirements for including loan compensation to be included in points approach would not preclude creditors from paying originator compensation in points and and fees. Industry commenters therefore mortgage brokers above-market compensation (up to fees in open-end credit plans as for urged the Bureau to adopt a bright-line the points and fees limits) and recovering the costs rule that would exclude from points and of compensating the mortgage brokers and other closed-end credit transactions. In the costs through an above-market interest rate. 2013 ATR Proposed Rule, the Bureau fees compensation paid to manufactured However, as consumer advocates noted in their solicited comment about whether home retailers and their employees. comments, consumers may shop more effectively different or additional guidance is They also requested that the Bureau when comparing a single variable, such as the clarify that, in any event, compensation interest rate. appropriate for calculating loan 137 Moreover, to the extent that consumers prefer received by the manufactured home to pay up-front charges to reduce the interest rate, bona fide discount points under retailer or its employee for the sale of creditors may be able to exclude as many as two § 1026.32(b)(1)(i)(E) or (F). the home should not be counted as loan

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originator compensation and included points and fees. The Bureau also covered transactions per year, and has in points and fees. declines to reconsider its decision that, total assets of less than $2 billion The Bureau does not believe it is where a creditor recovers the costs of (adjusted annually for inflation), in appropriate to exclude compensation LLPAs through up-front charges to the addition to other escrow account that is paid to a manufactured home consumer, those charges are included in limitations. retailer for loan origination activities. In points and fees. Finally, the Bureau is The Bureau did not propose to make such circumstances, the retailer is not reconsidering its decision that, as any specific amendments to the escrows functioning as a mortgage broker and provided in the statute, creditors may provision in § 1026.35(b)(2), but compensation for the retailer’s loan exclude no more than two bona fide indicated that if the provisions creating origination activities should be captured discount points from points and fees. a new type of small creditor portfolio in points and fees. The Bureau Many individual mortgage brokers qualified mortgage in proposed recognizes, however, that it may be and a trade group representing mortgage § 1026.43(e)(5) were adopted with difficult for a creditor to ascertain brokers urged the Bureau to reconsider changes inconsistent with whether a retailer engages in loan certain restrictions on loan originator § 1026.35(b)(2), the Bureau would origination activities and, if so, what compensation in § 1026.36(d)(1) and (2), consider and might adopt parallel compensation that retailer receives for arguing that these restrictions are amendments to § 1026.35(b)(2) to keep those activities, at least when such unnecessary because the points and fees these sections of the regulation compensation was not paid directly by limits for qualified mortgages effectively consistent. the creditor itself. Accordingly, the cap loan origination compensation at 3 The Bureau solicited comment on the Bureau intends to propose additional percent of the loan amount.138 The 2013 advantages and disadvantages of guidance on these issues prior to the Loan Originator Final Rule clarified and maintaining consistency between effective date of the 2013 ATR Final expanded § 1026.36(d)(1) and (2), and § 1026.35(b)(2) and § 1026.43(e)(5). Rule to facilitate compliance. the Bureau declines to revisit those Commenters did not specifically With respect to employees of provisions in this rulemaking. address the importance of consistency. manufactured home retailers, the Section 1026.35 Prohibited Acts or However, several small creditors and a Bureau believes that, in most small creditor trade group raised circumstances, new Practices in Connection With Higher- Priced Mortgage Loans concerns regarding the cost and burden § 1026.32(b)(1)(ii)(B) will make it associated with the escrow requirements unnecessary for creditors to determine 35(b) Escrow Accounts and urged the Bureau to expand or whether employees of retailers have 35(b)(2) Exemptions adopt exceptions to those requirements. engaged in loan origination activities For example, commenters suggested that would cause them to qualify as loan 35(b)(2)(iii) broadening the § 1026.35(b)(2)(iii) originators. As discussed above, As discussed further below, the exemption and exempting home § 1026.32(b)(1)(ii)(B) excludes Bureau proposed § 1026.43(e)(5) to improvement loans and loans secured compensation paid by mortgage brokers create a new type of qualified mortgage by mobile homes. to their loan originator employees. In As discussed below in the section-by- the usual case, when an employee of a for certain portfolio loans originated and section analysis of § 1026.43(e)(5), the retailer would qualify as a loan held by small creditors. The Bureau Bureau is adopting § 1026.43(e)(5) originator, the retailer would qualify as proposed to adopt the same parameters consistent with existing § 1026.35(b)(2) a mortgage broker. If the retailer is a defining small creditor for purposes of with regard to the asset size and annual mortgage broker, any compensation paid the new category of qualified mortgage loan origination thresholds defining a by the retailer to the employee would be as it had used in implementing excluded from points and fees under provisions of the Dodd-Frank Act that small creditor. The Bureau did not § 1026.32(b)(1)(ii)(B). Nevertheless, as allow certain balloon loans to receive propose and did not solicit comment part of its proposal to provide additional qualified mortgage status and an regarding other amendments to the guidance as noted above, the Bureau exemption from the requirement to escrow provisions in § 1026.35(b)(2). intends to request comment on whether maintain an escrow accounts for certain The Bureau therefore is not additional guidance is necessary for higher priced mortgage loans where reconsidering the issues raised by calculating loan originator such loans are made by small creditors commenters at this time and is not compensation for employees of operating predominantly in rural or adopting any changes to § 1026.35(b)(2) manufactured home retailers. underserved areas. The size thresholds in this rulemaking. Other issues related to points and for purposes of the rural balloon and Section 1026.43 Minimum Standards fees. As noted above, many commenters escrow provisions are set forth in for Transactions Secured by a Dwelling requested that the Bureau reconsider § 1026.35(b)(2)(iii), as adopted by the whether certain items should be 2013 Escrows Final Rule, which 43(a) Scope included in points and fees. In provides that an escrow account need 43(a)(3) particular, many commenters urged that not be established in connection with a real-estate related charges paid to mortgage if the creditor, within Background affiliates and up-front charges imposed applicable time periods, annually Section 129C(a)(1) of TILA, as added by creditors on consumers to recover the extends more than 50 percent of its by section 1411 of the Dodd-Frank Act, costs of LLPAs should not be included covered first-lien transactions on states that, in accordance with in points and fees. Commenters also properties that are located in rural or regulations prescribed by the Bureau, no asked the Bureau to permit the creditor underserved counties, originates (with creditor may make a residential to exclude more than two bona fide its affiliates) 500 or fewer first-lien mortgage loan unless the creditor makes discount points from points and fees. a reasonable and good faith The Bureau is not reconsidering its 138 The Bureau notes that the general 3 percent determination based on verified and points and fees limit applies only to qualified decision that, as provided in the statute, mortgages and would not restrict the loan originator documented information that, at the real-estate related charges paid to compensation paid to mortgage brokers in mortgage time the loan is consummated, the affiliates of the creditor are included in transactions that are not qualified mortgages. consumer has a reasonable ability to

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repay the loan, according to its terms, reducing access to credit. The Bureau an HFA. The Bureau solicited comment and all applicable taxes, insurance was also concerned that some of these on every aspect of this approach. In (including mortgage guarantee creditors would not have the resources particular, the Bureau sought comment insurance), and assessments. Section to implement and comply with the on the premise that the ability-to-repay 1401 of the Dodd-Frank Act adds new ability-to-repay requirements, and may requirements could impose significant TILA section 103(cc)(5), which defines have ceased or severely limited implementation and compliance ‘‘residential mortgage loan’’ to mean, extending credit to low- to moderate- burdens on HFA programs even if credit with some exceptions, any consumer income consumers, which would result extended under the HFA programs were credit transaction secured by a in the denial of responsible, affordable granted a presumption of compliance as mortgage, of trust, or other mortgage credit. In addition, the Bureau qualified mortgages. The Bureau also equivalent consensual security interest was concerned that the ability-to-repay sought comment on whether HFAs have on ‘‘a dwelling or on residential real requirements may have frustrated the sufficiently rigorous underwriting property that includes a dwelling.’’ purposes of certain homeownership standards and monitoring processes to TILA section 103(v) defines ‘‘dwelling’’ stabilization and foreclosure prevention protect the interests of consumers in the to mean a residential structure or mobile programs, such as Hardest-Hit-Fund absence of TILA’s ability-to-repay home which contains one- to four- (HHF) programs and the Home requirements. The Bureau also family housing units, or individual Affordable Refinance Program (HARP). requested data related to the units of condominiums or cooperatives. Accordingly, the Bureau proposed delinquency, default, and foreclosure Thus, a ‘‘residential mortgage loan’’ several exemptions intended to ensure rates of consumers participating in these generally includes all mortgage loans, that responsible, affordable mortgage programs. In addition, the Bureau except mortgage loans secured by a credit remained available for LMI and solicited feedback regarding whether structure with more than four financially distressed consumers. such an exemption could harm residential units. However, TILA section consumers, such as by denying 43(a)(3)(iv) 103(cc)(5) specifically excludes from the consumers the ability to pursue claims term ‘‘residential mortgage loan’’ an The Bureau’s Proposal arising under violations of § 1026.43(c) through (f) against creditors extending open-end credit plan and an extension As discussed above, neither TILA nor credit in connection with these of credit secured by an interest in a Regulation Z provide an exemption to programs. Finally, the Bureau also timeshare plan, for purposes of the the ability-to-repay requirements for requested feedback on any alternative ability-to-repay requirements under extensions of credit made pursuant to a TILA section 129C as well as provisions approaches that would preserve the program administered by a Housing availability of credit under HFA concerning prepayment penalties and Finance Agency (HFA), as defined other restrictions. In addition, TILA programs while ensuring that under 24 CFR 266.5. However, the consumers receive mortgage loans that section 129C(a)(8) exempts reverse Bureau was concerned that the ability- mortgages and temporary or ‘‘bridge’’ reasonably reflect consumers’ ability to to-repay requirements may repay. loans with a term of 12 months or less unnecessarily impose additional from the ability-to-repay requirements. requirements onto the underwriting Comments Received Thus, taken together, the ability-to- requirements of HFA programs and In response to the proposed rule, repay requirements of TILA section impede access to credit available under some commenters completely opposed 129C(a) apply to all closed-end these programs. The Bureau was the proposed exemption from the mortgage loans secured by a one- to especially concerned that the costs of ability-to-repay requirements for four-unit dwelling, except loans secured implementing and complying with the extensions of credit made pursuant to by a consumer’s interest in a timeshare requirements of § 1026.43(c) through (f) programs administered by HFAs. These plan, reverse mortgages, or temporary or would endanger the viability and commenters generally argued that the ‘‘bridge’’ loans with a term of 12 months effectiveness of these programs. The rules should apply equally to all or less. Bureau was concerned that the burden creditors. These commenters contended The Bureau’s 2013 ATR Final Rule could prompt some HFAs to severely that granting exemptions to certain adopted provisions on scope that are curtail their programs and some private creditors would create market substantially similar to the statute, creditors that partner with HFAs to distortions and steer consumers towards which included modifications to cease participation in such programs, certain creditors, thereby reducing conform to the terminology of both of which could reduce mortgage consumer choice and ability to shop. Regulation Z. However, feedback credit available to LMI consumers. The Other commenters suggested alternative provided to the Bureau suggested that Bureau was also concerned that the modifications to address HFA programs. the ability-to-repay requirements would ability-to-repay requirements may affect One industry commenter favored impose an unsustainable burden on the ability of HFAs to apply customized creating special ability-to-repay certain creditors, such as housing underwriting criteria or offer requirements tailored to the unique finance agencies (HFAs) and certain customized credit products that are underwriting characteristics of LMI nonprofit organizations, offering designed to meet the needs of LMI consumers. Another industry mortgage loan programs for low- to consumers while promoting long-term commenter supported some type of moderate-income (LMI) consumers. The housing stability. exemption from the ability-to-repay Bureau was concerned that the ability- Based on these concerns and to obtain requirements but advocated for to-repay requirements adopted in the additional information regarding these conditions or the provision of authority 2013 ATR Final Rule would undermine potential effects, the Bureau proposed to HFAs to impose their own ability-to- or frustrate application of the uniquely an exemption and solicited feedback on repay standards, as various Federal tailored underwriting requirements several issues. Proposed agencies (the Department of Housing employed by these creditors and § 1026.43(a)(3)(iv) would have provided and Urban Development, the programs, and would require a an exemption to the ability-to-repay Department of Veterans Affairs, and the significant diversion of resources to requirements for credit extended Department of Agriculture), are compliance, thereby significantly pursuant to a program administered by authorized to do. The majority of

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industry and consumer group score, which allows it to help those Agencies (NCSHA) study of HFA- commenters, however, asserted that the consumers who may have a lower credit financed and non-HFA-financed loans proposed exemption to the ability-to- score due to a prior financial hardship. insured by FHA that found that, in a repay requirements for credit extended Whereas creditors do not need to engage large majority of States, HFA-financed pursuant to a program administered by in separate verification where a loans had lower long-term delinquency an HFA is necessary because these consumer’s application lists a debt that and foreclosure rates than non-HFA programs meet the customized needs of is not apparent from the consumer’s loans. LMI consumers who are creditworthy credit report pursuant to § 1026.43(c), A number of commenters argued that, but may not otherwise qualify for comments provided to the Bureau also in the absence of an exemption, HFA mortgage credit under the Bureau’s state that the Pennsylvania Housing homeowner assistance programs would ability-to-repay requirements. Finance Agency’s underwriting not be able to continue to meet the The latter group of commenters standards require that the creditor needs of LMI consumers or distressed generally supported the Bureau’s goal of provide a separate verification of that borrowers as intended. Commenters preserving access to affordable credit for obligation, indicating the current generally stated that requiring HFAs to LMI consumers and favored the balance, the monthly payment, and the comply with the ability-to-repay Bureau’s proposal to exempt payment history of the account. requirements would be unduly community-focused lending programs Commenters also provided data burdensome and would have a negative from the ATR requirements altogether. related to the relative performance of impact on their ability to offer HFA loans as further justification to These commenters contended that HFA consumers loan products that fit their support the proposed exemption from unique needs, thereby endangering the loan products balance access to the ability-to-repay requirements for viability and effectiveness of these residential mortgage credit for LMI extensions of credit made pursuant to a programs. Commenters also argued that consumers with a focus on the program administered by a HFA. HFAs, which are governmental entities consumer’s ability to repay. Consumer Although comprehensive data for HFA chartered by either a State or a group commenters argued that HFA loan performance are not available, municipality and are taxpayer- lending programs typically offer low- commenters reported that the supported, may not have sufficient cost mortgage products, require full delinquency, default, and foreclosure resources to implement and comply documentation of income and statistics for consumers who receive with the ability-to-repay requirements. demonstrated ability to repay, and often mortgage loans from HFA programs are According to commenters, some HFAs include extensive financial counseling generally lower than for those of the may respond to the burden by severely with the consumer. Commenters argued general populace, which demonstrates curtailing the credit offered under these that HFA homeowner assistance that HFA programs ensure that programs and others may divert programs are tailored to the credit consumers are extended credit on resources from lending to compliance, characteristics of LMI consumers that reasonably repayable terms.139 which may also reduce access to credit HFAs serve and noted that these Commenters reported that a limited for LMI consumers. organizations only extend credit after review of HFA loan data conducted by Commenters noted that, because most conducting their own lengthy and Fannie Mae in 2011 found that HFA- HFAs operate in partnership with thorough analysis of an applicant’s financed loans performed significantly private creditors who participate ability to repay, which often account for better than other Fannie Mae affordable voluntarily in HFA programs, the nontraditional underwriting criteria, housing loans. Also, comments cited a Bureau’s proposed HFA exemption income sources that do not fall within 2011 National Council of State Housing would help encourage eligible creditors typical mortgage underwriting criteria, to continue making loans that might not extenuating circumstances, and other 139 For example, as of September 30, 2012, just otherwise be originated due to subjective factors that are indicative of 3.7 percent of SONYMA’s single-family borrowers constraints under, or concerns about, responsible homeownership and ability were 60 or more days delinquent, compared with the Bureau’s ability-to-repay to repay. An industry commenter noted 10.9 percent of all borrowers. Data from the Pennsylvania Housing Finance Agency show that requirements. Commenters argued that that, for first-time homebuyer lending, for the third quarter of 2012, its conventional loans the ability-to-repay requirements would HFAs use a combination of low-cost had 90-plus day delinquency and foreclosure rates impose significant implementation and financing and traditional fixed-rate, of 2.98 percent and .99 percent, respectively, which compliance burdens on participating long-term products; flexible, but are well below the equivalent rates for all private creditors, and this would likely conventional loans in the State of Pennsylvania. prudent, underwriting with careful Data from the Massachusetts Housing Partnership’s discourage creditors from participating credit evaluation; diligent loan SoftSecond Program show that the foreclosure rate in HFA programs and would result in documentation and income verification; for program loans is substantially lower than the the denial of mortgage credit to LMI down payment and closing cost rate for prime loans in the State of Massachusetts consumers. (0.87 percent for SoftSecond loans as compared to assistance; homeownership counseling; 1.72 percent for prime loans). FHA-insured loans A number of industry commenters and proactive counseling and servicing. purchased by the Connecticut Housing Finance argued that the proposed exemption This commenter stated that many HFAs Agency have lower foreclosure rates than from the ability-to-repay requirements is elaborate beyond the underwriting comparable FHA loans in the northeast, and loans in the best interests of consumers and financed by the Delaware State Housing Authority standards of Federal government and serviced by U.S. Bank have a 60 days or more the nation as a whole, as the exemption agencies, such as FHA, USDA, or RHS delinquency rate of just over 2 percent, compared will allow homeowners to remain in loans, and that HFAs also oversee with a national 60 days or more rate of 8.3 percent. their homes and help stabilize creditors involved in these programs Finally, Virginia Housing Development Authority communities that were harmed by the loan foreclosure rates on FHA and conventional carefully by ensuring the HFA’s strict loans both fall under 1 percent. This is 3.2 mortgage crisis and limit the degree to underwriting standards and lending percentage points under the national FHA which future LMI consumers have requirements are followed. Comments foreclosure rate and 2.5 percentage points lower difficulty obtaining access to credit. provided to the Bureau state that a New than the national foreclosure rate for conventional Creditors also generally supported loans in New York State, according to the Mortgage York State HFA considers the Bankers Association. Prior to the recent mortgage clarifying that the exemption applies consumer’s entire credit history rather crisis, SONYMA’s 60-plus day default rate had regardless of whether the credit is than consider only a consumer’s credit never exceeded 2 percent. extended directly by an HFA to the

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consumer or through an intermediary significantly reduce the resources alternative requirements by regulation that is operating pursuant to a program available to HFAs for the purpose of would curtail this flexibility and administered by an HFA, and to include providing homeowner assistance. As ultimately reduce access to responsible all HFA programs regardless of structure discussed above in part II.A, many of and affordable credit for this (e.g., mortgage revenue bonds or the State and Federal programs that population. mortgage credit certificates). HFAs administer do not provide No commenters addressed whether administrative funds; others provide credit extended pursuant to a program The Final Rule limited administrative funds. Most administered by an HFA should be Based on these comments and HFAs operate independently and do not granted a presumption of compliance as considerations, the Bureau believes that receive State operating funds. qualified mortgages, and, if so, under it is appropriate to exempt credit Consequently, HFAs may not have what conditions. However, the Bureau extended pursuant to an HFA program enough resources to increase does not believe that extending from the ability-to-repay requirements. compliance efforts without negatively qualified mortgage status to these loans The comments received confirm that impacting their missions. In the absence would be as effective in addressing the HFA programs generally employ of an exemption from the ability-to- concerns raised above as an exemption. underwriting requirements that are repay requirements, HFAs would have Even if credit extended under the HFA uniquely tailored to meet the needs of to dedicate substantially more time and programs were granted a presumption of LMI consumers, such that applying the resources to ensure their programs and compliance as qualified mortgages, HFA more generalized statutory ability-to- lending partners are in compliance. programs could be impacted by repay requirements would provide little Moreover, because many HFAs must significant implementation and or no net benefit to consumers and conduct their programs through compliance burdens. Furthermore, as instead could be unnecessarily partnerships with private creditors, the discussed above, many loans extended burdensome by diverting the focus of Bureau is concerned that absent an under these programs would not appear HFAs and their private creditor partners exemption private creditor volunteers to satisfy the qualified mortgage from mission activities to managing would determine that complying with standards under § 1026.43(e)(2). Thus, a compliance and legal risk from two both the ability-to-repay requirements creditor extending such a mortgage loan overlapping sets of underwriting and the specialized HFA program would still be required to comply with requirements. The Bureau is concerned requirements is too burdensome or the the ability-to-repay requirements of that absent an exemption, this diversion liability risks too great. For example, § 1026.43(c) and the potential liability of of resources would significantly reduce needing to comply with both the HFA noncompliance would cease or severely access to responsible mortgage credit for underwriting requirements that often curtail mortgage lending. many LMI borrowers. account for (and sometimes require the The Bureau received a number of As discussed above in part II.A, many consideration of) nontraditional comments completely opposed to the HFAs expand on the underwriting underwriting criteria, extenuating proposed exemptions from the ability- standards of GSEs or Federal circumstances, and compensating to-repay requirements on the grounds government agencies by applying even factors, as discussed above in part II.A, that the rules should apply equally to all stricter underwriting standards than and the ability-to-repay requirements creditors. However, pursuant to section these guidelines, such as requiring may cause some private creditors to 105(a) of TILA, the Bureau generally mandatory counseling for all first-time cease participation in such programs. may prescribe regulations that provide homebuyers and strong loan servicing. This too would reduce access to for such adjustments and exceptions for As HFAs extend credit to promote long- mortgage credit to LMI consumers. all or any class of transactions that the term housing stability, rather than for With respect to the comment Bureau judges are necessary or proper to profit, HFAs generally extend credit suggesting that a better approach would effectuate the purposes of TILA, among after performing a complex and lengthy be to allow HFAs to establish their own other things. In addition, pursuant to analysis of a consumer’s ability to repay. ability-to-repay and qualified mortgage TILA section 105(f) the Bureau may As also discussed above in part II.A, the guidelines, the Bureau notes that exempt by regulation from all or part of Bureau finds that, as compared to Congress has the authority to determine this title all or any class of transactions traditional underwriting criteria, under which agencies and programs have the for which in the determination of the which LMI borrowers may be less likely authority under TILA to prescribe rules Bureau coverage does not provide a to qualify for credit, the underwriting related to the ability-to-repay meaningful benefit to consumers in the standards of some HFAs allow greater requirements or the definition of form of useful information or protection, weight for (and sometimes require) the qualified mortgage. The Bureau is if certain conditions specified in that consideration of nontraditional mindful that Congress has not section are met. For the reasons underwriting elements, extenuating authorized HFAs to prescribe rules discussed in each relevant section, the circumstances, and other subjective related to the ability-to-repay Bureau believes that the exemptions compensating factors that are indicative requirements or the definition of adopted in this final rule are necessary of responsible homeownership. The qualified mortgage. and proper to effectuate the purposes of Bureau notes, however, that HFAs do Regarding the comment favoring the TILA, which include purposes of conduct regular and careful oversight of creation of special ability-to-repay section 129C, by ensuring that their lenders, helping ensure that they requirements tailored to the unique consumers are offered and receive follow the HFAs’ strict underwriting underwriting characteristics of LMI residential mortgage loans on terms that standards. consumers, the Bureau does not believe reasonably reflect their ability to repay. The Bureau is concerned that HFAs, it is appropriate to establish alternative Furthermore, without the exemptions which are governmental entities and conditions. HFA programs have strong the Bureau believes that consumers in taxpayer-supported, may not have but flexible ability-to-repay these demographics are at risk of being sufficient resources to implement and requirements tailored to the unique denied access to the responsible, comply with the ability-to-repay needs and credit characteristics of the affordable credit offered under these requirements, or that the additional LMI consumers they serve. The Bureau programs, which is contrary to the compliance burdens would at least is concerned that imposing uniform purposes of TILA.

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Accordingly, the Bureau believes that including funding through Federal an HFA because coverage under the the proposed exemption for credit made programs such as the HOME Program, ability-to-repay regulations does not pursuant to programs administered by which is the largest Federal block grant provide a meaningful benefit to an HFA is appropriate under the for affordable housing. The Bureau consumers in the form of useful circumstances. The Bureau believes that intended the exemption to apply to protection in light of the nature of the consumers who receive extensions of extensions of credit made pursuant to a credit extended through HFAs. credit made pursuant to a program program administered by an HFA, Consistent with its rationale in the administered by an HFA do so after a regardless of the funding source. The proposed rule, the Bureau believes that determination of ability to repay using comment clarifies that the creditor is the exemption is appropriate for all specially tailored criteria. The exempt from the requirements of affected consumers to which the exemption adopted by the Bureau is § 1026.43(c) through (f) regardless of exemption would apply, regardless of limited to creditors or transactions with whether the program administered by their other financial arrangements, certain characteristics and qualifications an HFA receives funding from Federal, financial sophistication, or the that ensure consumers are offered State, or other sources. importance of the loan to them. responsible, affordable credit on Section 1026.43(a)(3)(iv) is adopted Similarly, the Bureau believes that the reasonably repayable terms. The Bureau pursuant to the Bureau’s authority exemption is appropriate for all affected thus finds that coverage under the under section 105(a) and (f) of TILA. loans covered under the exemption, ability-to-repay requirements provides Pursuant to section 105(a) of TILA, the regardless of the amount of the loan and little if any meaningful benefit to Bureau generally may prescribe whether the loan is secured by the consumers in the form of useful regulations that provide for such principal residence of the consumer. protection, given the nature of the credit adjustments and exceptions for all or Furthermore, the Bureau believes that, extended through HFAs. At the same any class of transactions that the Bureau on balance, the exemption will simplify time, the Bureau is concerned that the judges are necessary or proper to the credit process without undermining narrow class of creditors subject to the effectuate the purposes of TILA, among the goal of consumer protection, exemption may either cease or severely other things. For the reasons discussed denying important benefits to curtail mortgage lending if the ability-to- in more detail above, the Bureau consumers, or increasing the expense of repay requirements are applied to their believes that this exemption is the credit process. Based on these transactions, resulting in a denial of necessary and proper to effectuate the considerations and the analysis access to credit. Accordingly, the purposes of TILA, which include discussed elsewhere in this final rule, Bureau is adopting § 1026.43(a)(3)(iv) as purposes of section 129C, by ensuring the Bureau believes that the exemptions proposed, which provides that an that consumers are offered and receive are appropriate. Therefore all credit extension of credit made pursuant to a residential mortgage loans on terms that extended through the Housing Finance program administered by an HFA, as reasonably reflect their ability to repay. Agencies is subject to the exemption. defined under 24 CFR 266.5, is exempt The Bureau believes that mortgage loans 43(a)(3)(v) from § 1026.43(c) through (f). originated pursuant to programs administered by HFAs sufficiently Background The Bureau is adopting new comment account for a consumer’s ability to 43(a)(3)(iv)–1 to provide additional repay, and the exemption ensures that As discussed above, neither TILA nor clarification which will facilitate consumers are able to receive assistance Regulation Z provides an exemption to compliance. As discussed above, the under these programs. Furthermore, the ability-to-repay requirements for Bureau understands that most HFA without the exemption the Bureau creditors, such as nonprofits, that programs are ‘‘mortgage purchase’’ believes that consumers in this primarily engage in community programs in which the HFA establishes demographic are at risk of being denied development lending. However, program requirements (e.g., income access to the responsible, affordable feedback provided to the Bureau limits, purchase price limits, interest credit offered under these programs, suggested that the ability-to-repay rates, points and term limits, which is contrary to the purposes of requirements might impose an underwriting standards, etc.), and agrees TILA. This exemption is consistent with unsustainable burden on certain to purchase loans made by private the findings of TILA section 129C by creditors offering mortgage loan creditors that meet these requirements. ensuring that consumers are able to programs for LMI consumers. The As a result, the success of these obtain responsible, affordable credit Bureau was concerned that these programs in large part depends upon the from the creditors discussed above. creditors would not have the resources participation of private creditors. The The Bureau has considered the factors to implement and comply with the Bureau intended the exemption to apply in TILA section 105(f) and believes that, ability-to-repay requirements, and to both extensions of credit by HFAs for the reasons discussed above, an would have ceased or severely limited and extensions of credit by private exemption is appropriate under that extending credit to LMI consumers, creditors under a mortgage purchase or provision. Pursuant to TILA section which would result in the unavailability similar HFA program. The comment 105(f) the Bureau may exempt by of responsible, affordable mortgage clarifies that both extensions of credit regulation from all or part of this title all credit. Accordingly, the Bureau made by HFAs directly to consumers as or any class of transactions for which in proposed several exemptions intended well as extensions of credit made by the determination of the Bureau to ensure that responsible, affordable other creditors pursuant to a program coverage does not provide a meaningful mortgage credit remained available for administered by an HFA are exempt benefit to consumers in the form of LMI consumers. from the requirements of § 1026.43(c) useful information or protection. In through (f). In addition, as discussed determining which classes of Credit Extended by CDFIs, CHDOs, and above in part II.A, the Bureau transactions to exempt the Bureau must DAPs understands that HFAs are generally consider certain statutory factors. For The Bureau’s proposal. The Bureau funded through tax-exempt bonds (also the reasons discussed above, the Bureau proposed to exempt from the ability-to- known as mortgage revenue bonds), but exempts an extension of credit made repay requirements several types of may receive other types of funding, pursuant to a program administered by creditors that focus on extending credit

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to LMI consumers. Proposed chartered members of the loan performance reflect the low default § 1026.43(a)(3)(v)(A) would have NeighborWorks Network, while other levels associated with these creditors’ exempted an extension of credit made commenters requested an exemption for programs, which strongly suggest that by a creditor designated as a creditors approved as Counseling consumers are extended credit on Community Development Financial Intermediaries by HUD. reasonably repayable terms. Finally, Institution (CDFI), as defined under 12 The Bureau received feedback from commenters confirmed that these CFR 1805.104(h). Proposed several industry commenters requesting creditors serve consumers that have § 1026.43(a)(3)(v)(B) would have that the Bureau provide an exemption difficulty obtaining responsible and exempted an extension of credit made for credit unions designated as low- affordable credit, and that the burdens by a creditor designated as a income credit unions (LICUs) by the imposed by the ability-to-repay Downpayment Assistance Provider of National Credit Union Administration requirements would significantly impair Secondary Financing (DAP) operating in (NCUA). These commenters explained the ability of these creditors to continue accordance with regulations prescribed that the NCUA’s LICU designation is serving this market. Taken together, this by the U.S. Department of Housing and similar to the Treasury Department’s feedback demonstrates that creditors Urban Development applicable to such CDFI designation. However, these with these designations provide persons. Proposed § 1026.43(a)(3)(v)(C) commenters stated that most credit residential mortgage loans on would have exempted an extension of unions choose to obtain the LICU reasonably repayable terms, that these credit made by a creditor designated as designation instead of the CDFI exemptions are necessary and proper to a Community Housing Development designation. Some commenters ensure that responsible, affordable Organization (CHDO), as defined under suggested that many credit unions are mortgage credit remains available to 24 CFR 92.2, operating in accordance not eligible for CDFI status. consumers served by these creditors, with regulations prescribed by the U.S. The final rule. The Bureau is adopting and that the government approval and Department of Housing and Urban the exemptions in a form that is oversight associated with these Development applicable to such substantially similar to the version designations ensures that there is little persons. The Bureau requested feedback proposed. For the reasons discussed risk that consumers would be subject to regarding whether the requirements below, the Bureau has concluded that a abusive lending practices. Thus, the imposed in connection with obtaining creditor designated as a CDFI or DAP Bureau has determined that it is and maintaining these designations should be exempt from the ability-to- appropriate to adopt were sufficient to ensure that such repay requirements, provided these § 1026.43(a)(3)(v)(A) and (B) as creditors provide consumers with creditors meet certain other applicable proposed. responsible and affordable credit, and requirements. As comments confirmed, The Bureau has also concluded that a regarding whether unscrupulous or creditors seeking these designations creditor designated as a CHDO should irresponsible creditors would be able to must undergo a screening process be exempt from the ability-to-repay use these designations to evade the related to the ability of applicants to requirements. Comments illustrated requirements of TILA, extend credit provide affordable, responsible credit to that, like CDFIs and DAPs, CHDOs without regard to the consumer’s ability obtain the designation and must operate generally extend credit on reasonably to repay, or otherwise harm consumers. in accordance with the requirements of repayable terms and ensure that LMI Comments received. The Bureau these programs, including periodic consumers have access to responsible, 140 received many comments addressing the recertification. Comments provided affordable mortgage credit. However, proposed exemptions for creditors to the Bureau also confirmed that the HUD provided comments to the Bureau designated as a CDFI, CHDO, or DAP. A ability-to-repay requirements generally suggesting that the exemption be large number of industry commenters differ from the unique underwriting narrowed. A person may obtain a CHDO completely opposed the proposed criteria which are related to the designation for reasons unrelated to exemptions. These commenters characteristics of the consumers served residential mortgage lending, such as to generally argued that the rules should by these creditors. The ability-to-repay acquire tax credits to assist in the apply equally to all creditors. However, requirements primarily consist of development of affordable rental many industry and consumer advocate quantitative underwriting properties. The Bureau believes that it is commenters supported the proposed considerations, such as an analysis of appropriate to narrow the exemption to exemptions. Twenty-five commenters the consumer’s debt-to-income ratio. In only those persons that obtain the supported the proposed exemption for contrast, as discussed in part II.A above, CHDO designation for purposes of creditors designated as CDFIs. Also, in the Bureau understands that creditors residential mortgage lending. A person response to the Bureau’s request for with these designations typically engage seeking CHDO status to engage in feedback, several commenters provided in a lengthy underwriting process that is residential mortgage lending must enter data related to CDFI underwriting specifically tailored to the needs of into a commitment with the requirements and loan performance. these consumers by incorporating a participating jurisdiction developing the Some commenters specifically variety of compensating factors. Also, project under the HOME Program. The discussed and supported the proposed although market-wide data is not Bureau also believes that providing exemption for CHDOs. While several available for the delinquency rates of specific citations to the relevant commenters supported the proposed credit extended by CHDOs, comments regulations prescribed by HUD would exemption for DAPs, the Bureau provided to the Bureau related to CDFI facilitate compliance. Thus, the Bureau received no specific feedback related to is adopting § 1026.43(a)(3)(v)(C) with 140 24 CFR 200.194(d) provides that HUD these creditors. A few commenters certification as an approved nonprofit expires after language similar to that proposed, but asked the Bureau to consider two years, and nonprofits must reapply for approval with the additional condition that the exemptions for other types of prior to the expiration of the two year period. Also, creditor designated as a CHDO has designations or lending programs. For on February 4, 2013 the CDFI Fund required entered into a commitment with a recertification of most CDFIs. See http:// example, a few commenters requested www.cdfifund.gov/news_events/CDFI-2013-06- participating jurisdiction and is that the Bureau provide a similar CDFI_Fund_Releases_Mandatory_ undertaking a project under the HOME exemption for creditors that are Recertification_Guidelines_for_CDFIs.asp. Program, pursuant to the provisions of

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24 CFR 92.300(a), and as the terms accommodate the needs of small moderate-income families, as specified community housing development creditors, such as LICUs, while in regulations prescribed by HUD organization, commitment, participating providing consumers with valuable pursuant to section 8 of the United jurisdiction, and project are defined protections. Therefore, the Bureau does States Housing Act of 1937. For under 24 CFR 92.2. not believe that it would be appropriate example, a creditor has satisfied the The Bureau acknowledges that to provide an exemption for creditors requirements of § 1026.43(a)(3)(v)(D)(2) creditors with other types of with an LICU designation. if the creditor demonstrates that the designations also provide valuable Credit Extended by Certain Nonprofits creditor extended credit only to homeownership assistance to certain consumers with income that did not types of consumers or communities. The Bureau’s proposal. Proposed exceed the qualifying limit in effect on However, the Bureau does not believe § 1026.43(a)(3)(v)(D) would have the dates the creditor received each that it would be appropriate to provide exempted an extension of credit made consumer’s individual application. The exemptions for the designations by a creditor with a tax exemption condition specified in suggested by commenters. For example, ruling or determination letter from the § 1026.43(a)(3)(v)(D)(3), which relates to while Counseling Intermediaries must Internal Revenue Service under section the current extension of credit, provides be approved by HUD, this approval is 501(c)(3) of the Internal Revenue Code that the extension of credit must be to not related to the ability of an applicant of 1986 (26 CFR 1.501(c)(3)–1), provided a consumer with income that does not to provide consumers with responsible that certain other conditions were exceed the qualifying limit specified in and affordable mortgage credit. satisfied. Under proposed § 1026.43(a)(3)(v)(D)(2) in effect on the Furthermore, the Bureau is unaware of § 1026.43(a)(3)(iv)(D)(1), the exemption date the creditor received the evidence suggesting that approval as a would have been available only if the consumer’s application. For example, Counseling Intermediary is sufficient to creditor extended credit secured by a assume that a creditor with a tax ensure that consumers are offered and dwelling no more than 100 times in the exemption ruling under section receive residential mortgage loans on calendar year preceding receipt of the 501(c)(3) of the Internal Revenue Code reasonably repayable terms. With consumer’s application. Proposed of 1986 has satisfied the conditions respect to the feedback suggesting that § 1026.43(a)(3)(v)(D)(2) would have identified in § 1026.43(a)(3)(v)(D)(1) and the Bureau consider providing an further conditioned the exemption on (2). If, on May 21, 2014, the creditor in exemption for creditors that are the creditor, in the calendar year this example extends credit secured by chartered members of the preceding receipt of the consumer’s a dwelling to a consumer whose application, extending credit secured by NeighborWorks Network, the Bureau application reflected income in excess a dwelling only to consumers with acknowledges that these creditors are of the qualifying limit identified in income that did not exceed the also subject to government oversight § 1026.43(a)(3)(v)(D)(2), the creditor has qualifying limit for moderate-income and seem to provide responsible and not satisfied the condition in families, as established pursuant to affordable mortgage credit. However, the § 1026.43(a)(3)(v)(D)(3) and this section 8 of the United States Housing Bureau does not believe that providing extension of credit is not exempt from Act of 1937 and amended from time to an exemption to these creditors would the requirements of § 1026.43(c) through time by the U.S. Department of Housing be necessary to ensure access to (f). responsible and affordable credit, as and Urban Development. Proposed many of these creditors would qualify § 1026.43(a)(3)(v)(D)(3) would have The Bureau solicited comment for one of the exemptions adopted in made the proposed exemption available regarding whether the proposed § 1026.43(a)(3)(v)(A) through (D). only if the extension of credit was to a exemption was appropriate. The Bureau Therefore, the Bureau declines to adopt consumer with income that did not also specifically requested feedback on exemptions for the other designations or exceed this qualifying limit. Finally, whether the proposed 100 transaction lending programs suggested by proposed § 1026.43(a)(3)(v)(D)(4) would limitation was appropriate, on the costs commenters. have made the proposed exemption of implementing and complying with In response to feedback provided contingent upon the creditor the ability-to-repay requirements that regarding creditors designated as low- determining, in accordance with written would be incurred by creditors that income credit unions, the Bureau procedures, that the consumer had a extend credit secured by a dwelling conducted additional research and reasonable ability to repay the extension more than 100 times a year, the extent analysis to determine whether an of credit. to which this proposed condition would exemption for these creditors would be Proposed comment 43(a)(3)(v)(D)–1 affect access to responsible, affordable appropriate. LICUs, like CDFIs, provide would have clarified that an extension credit, and whether the limit of 100 credit to low-income consumers. of credit is exempt from the transactions per year should be However, NCUA regulations require requirements of § 1026.43(c) through (f) increased or decreased. The Bureau also LICUs to serve only ‘‘predominantly’’ if the credit is extended by a creditor requested comment regarding the costs low-income consumers, thereby described in § 1026.43(a)(3)(v)(D), that nonprofit creditors would incur in permitting LICUs to extend credit to provided the conditions specified in connection with the ability-to-repay many consumers with higher that section are satisfied. The conditions requirements, the extent to which these incomes.141 Thus, such an exemption specified in § 1026.43(a)(3)(v)(D)(1) and additional costs would affect the ability would be too broad and would affect (2) are determined according to activity of nonprofit creditors to extend credit to consumers for whom access to credit is that occurred in the calendar year LMI consumers, and whether consumers not a concern. In addition, the Bureau preceding the calendar year in which could be harmed by the proposed believes that the small creditor portfolio the consumer’s application was exemption. The Bureau solicited qualified mortgage loan provisions received. Section 1026.43(a)(3)(v)(D)(2) comment regarding whether the adopted in § 1026.43(e)(5) will address provides that, during the preceding proposed exemption should be the concerns raised by commenters and calendar year, the creditor must have extended to creditors designated as extended credit only to consumers with nonprofits under section 501(c)(4) of the 141 ‘‘The term predominantly is defined as a income that did not exceed the Internal Revenue Code of 1986. The simple majority.’’ 12 CFR 701.34(a)(3). qualifying limit then in effect for Bureau also requested financial reports

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and mortgage lending activity data remove the limitation completely. For nonprofits, so that consumers would be supporting the argument that the example, one commenter argued that provided legal recourse against marginal cost of implementing and the Bureau’s proposed limit of 100 unscrupulous creditors operating sham complying with the ability-to-repay extensions of credit would harm LMI nonprofits. Further, this commenter requirements would cause 501(c)(4) consumers by raising the cost of credit suggested that the Bureau should nonprofit creditors to cease, or severely obtained from larger-scale nonprofit expand the anti-evasion provisions of limit, extending credit to LMI organizations. § 1026.43(h) to include the adoption of consumers. One commenter argued that the nonprofit status for purposes of Comments received. The Bureau proposed exemption was too narrow avoiding the ability-to-repay received many comments addressing and urged the Bureau to expand the requirements. This commenter argued this proposed exemption. Many exemption in several ways. First, this that such modifications would provide commenters completely opposed the commenter argued that the exemption genuine nonprofits with relief from the proposed exemption for community- should not be limited to extensions of regulatory and compliance burdens focused creditors. These commenters credit by creditors, but rather should be associated with the ability-to-repay generally argued that the rules should extended to all transactions in which a requirements, while enabling consumers apply equally to all creditors. One nonprofit organization dedicated to to seek recourse against abusive, sham industry commenter argued that a better providing opportunities for affordable, nonprofits. approach would be to create special long-term homeownership is involved, The Bureau did not receive feedback ability-to-repay requirements tailored to but is not the creditor. This commenter regarding whether the proposed the unique underwriting characteristics also asked the Bureau to provide no- exemption should be extended to of LMI consumers. Many other action letters that would provide a safe creditors designated as nonprofits under commenters approved of the proposed harbor for certain mortgage lending section 501(c)(4) of the Internal Revenue exemption, including the Bureau’s programs. In addition, this commenter Code of 1986. However, several credit proposed conditions. Several argued that the proposed references to unions and State credit union commenters stated that an exemption the low- to moderate-income threshold associations requested that the Bureau for certain nonprofits was necessary, but under section 8 of the National Housing expand the nonprofit exemption to all requested various modifications. Most Act was inappropriate because use of credit unions, as credit unions are of the commenters that approved of the the threshold would result in the denial designated as nonprofits under sections proposed exemption were concerned of credit to consumers with income 501(c)(1) and 501(c)(14) of the Internal that the exemption could be used as a slightly above the threshold. Revenue Code of 1986. These loophole to harm consumers and agreed Furthermore, this commenter asserted commenters generally explained that that conditions were needed to address that it would be arbitrary and credit unions, like the nonprofit this potential risk. unjustified for the Bureau to extend an creditors addressed in the Bureau’s Many commenters, including exemption to State HFAs but not proposal, are often small businesses that industry, consumer advocate, and provide an exemption to organizations have difficulty complying with nonprofit commenters, explicitly that rely on underwriting criteria similar regulatory burdens. Industry supported the proposed limitation of to those used by State HFAs, such as the commenters also requested an 100 extensions of credit. These consideration of a consumer’s life exemption for certain creditors that commenters generally explained that circumstances. Finally, this commenter extend credit to LMI consumers, or for the 100-extension limitation was an disputed the Bureau’s justification for certain programs intended to facilitate appropriate limit that would make it the proposed exemptions—that access access to credit for LMI consumers. For difficult for sham nonprofit creditors to to credit for LMI consumers would be example, some commenters argued that harm consumers. However, several impaired if certain creditors did not the Bureau should provide an commenters asked the Bureau to raise have the resources to implement and exemption for credit unions operating in the transaction limitation. The comply with the ability-to-repay certain areas, such as areas defined as commenters were primarily concerned requirements and ceased or severely ‘‘underserved’’ under the Federal Credit that the limitation would force limited extending credit—by arguing Union Act, while others argued that the nonprofits to limit certain types lending. that LMI consumers are harmed when Bureau should provide an exemption for For example, a few commenters stated any creditor, regardless of size, spends loans that meet the regulatory that nonprofits that offer both home- money on regulatory compliance that requirements of the Community purchase mortgage loans and small- would otherwise have been lent to LMI Reinvestment Act or similar programs. dollar mortgage loans, such as for home consumers. These commenters generally argued that energy improvement, would limit small- One consumer advocate group such an exemption would facilitate dollar lending to remain under the 100- opposed providing an exemption for access to credit for LMI consumers by extension limitation. One nonprofit nonprofit creditors and instead minimizing the regulatory burdens commenter argued that, for creditors suggested several modifications to the imposed by the ability-to-repay that provide first- and subordinate-lien ability-to-repay requirements intended requirements. financing to LMI consumers on the same to address the Bureau’s concerns A few industry and consumer transaction, the 100-extension limit is regarding nonprofits. This commenter advocate commenters asked the Bureau effectively a 50-transaction limit. argued that, rather than providing an to establish a publicly accessible Another nonprofit commenter suggested exemption for the proposed categories database of all nonprofits that qualified that the Bureau either apply the 100- of nonprofit creditor, the Bureau should for the exemption. These commenters extension limit to first-lien mortgage provide a rebuttable presumption of argued that such a database would loans, or raise the limit to 500 for total compliance for these nonprofit facilitate compliance and allow transactions. One consumer advocate creditors, without requiring the consumers to determine if nonprofit commenter suggested raising the limit to nonprofits to satisfy the requirements of creditors were actually exempt from the 250 transactions per calendar year to § 1026.43(c) through (f). Also, this requirements. A State attorney general address these concerns. A few commenter argued, these provisions expressed concern about potential abuse commenters asked that the Bureau should apply to only bona fide and asked the Bureau to consider

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vigorous oversight of nonprofits eligible doubling the 100-extension limit to of extending credit in a harmful, for the exemption. capture creditors making first- and reckless, or abusive manner. Therefore, The final rule. The Bureau is adopting subordinate-lien loans on the same the Bureau declines to adopt an § 1026.43(a)(3)(v)(D) in a form that is transaction, would address the concerns additional bona fide nonprofit substantially similar to the version raised by commenters while achieving requirement at this time. As with the proposed, except that the Bureau is the original intent of the proposed other exemptions to the ability-to-repay increasing the annual originations limit condition. The Bureau does not agree requirements, the Bureau will monitor from 100 to 200 extensions of credit. For with the suggestions proposed by some the mortgage market and may reevaluate the reasons discussed below, the Bureau commenters that separate limits for first- this issue if circumstances warrant has concluded that the exemption and subordinate-lien loans should be reconsideration. should apply provided that, in implemented. The Bureau believes that As discussed above, one commenter additional to the annual originations such a restriction would be needlessly suggested that the Bureau adopt a limit: (1) The creditor is designated as restrictive, and it would be more qualified mortgage definition with a a nonprofit organization under section efficient to allow nonprofit creditors to rebuttable presumption of compliance 501(c)(3) of the Internal Revenue Code; determine the most efficient allocation instead of an exemption to the ability- (2) the extension of credit is to a of funds between primary and to-repay requirements. The Bureau does consumer with income that does not subordinate financing. Furthermore, the not believe it is necessary to adopt a exceed the limit for low- and moderate- Bureau does not agree with the qualified mortgage definition for income households as established arguments raised by commenters that nonprofit creditors meeting the pursuant regulations prescribed by the the threshold should be raised above conditions of § 1026.43(a)(3)(v)(D). The U.S. Department of Housing and Urban 200, such as to 500 transactions. As Bureau believes that an exemption is a Development; (3) during the calendar explained in the 2013 ATR Proposed more effective method of addressing the year preceding receipt of the consumer’s Rule, the Bureau intended to narrowly concerns discussed above. The Bureau application the creditor extended credit tailor the exemption to small nonprofits believes that a rebuttable presumption only to consumers with income that did that did not have the resources to bear would re-introduce the compliance not exceed the above limit; and (4) the the burdens associated with the ability- burdens on certain nonprofits that the creditor determines, in accordance with to-repay requirements, and solicited Bureau seeks to alleviate. Furthermore, written procedures, that the consumer feedback regarding whether a 100 the line between a safe harbor and a has a reasonable ability to repay the extension of credit limit was indicative rebuttable presumption was determined extension of credit. Comments provided of such a resource limitation.142 While based on pricing thresholds and to the Bureau generally confirmed that feedback indicated that a 200-extension providing a rebuttable presumption these conditions were reasonable and limitation would more appropriately based on other criteria is inconsistent appropriate measures to ensure that the address the Bureau’s intentions, the with the approach taken in the 2013 exemption would not be used as a Bureau received no feedback indicating ATR Final Rule. Nor does the Bureau loophole to avoid the ability-to-repay that nonprofit creditors making more believe that modifying the anti-evasion requirements. Thus, the Bureau has than 200 extensions of credit lacked the provisions of § 1026.43(h) is necessary. determined that it is appropriate to resources to implement and comply Either approach would increase adopt § 1026.43(a)(3)(v)(D)(2), (3), and with the ability-to-repay requirements. regulatory complexity for these (4) generally as proposed, but with The Bureau believes that creditors creditors, and may frustrate the goals technical modifications to paragraphs originating such a number of mortgage the Bureau seeks to achieve in (a)(3)(v)(D)(2) and (3), as discussed loans likely have the resources to bear accommodating nonprofit creditors. The below. the implementation and compliance Bureau also has decided that it is However, upon further consideration burden associated with the ability-to- inappropriate to provide no-action of the comments received, the Bureau repay requirements, unlike smaller letters for certain creditors, as suggested has determined that it is appropriate to nonprofit creditors that make fewer by one commenter. For the reasons raise the threshold in proposed loans. Therefore, as adopted, discussed in this section, the Bureau § 1026.43(a)(3)(v)(D)(1) from 100 to 200 § 1026.43(a)(3)(v)(D)(1) conditions the believes that the exemptions adopted in extensions of credit. Most commenters exemption from the ability-to-repay this final rule are the optimal approach agreed with the rationale advanced in requirements on the creditor extending for providing access to responsible, the 2013 ATR Proposed Rule that a credit secured by a dwelling no more affordable credit while ensuring that limitation is necessary to prevent the than 200 times during the calendar year consumers are offered and receive exemption from being exploited by preceding receipt of the consumer’s mortgage credit on reasonably repayable unscrupulous creditors seeking to harm application. terms. consumers. The Bureau strongly As discussed above, one commenter The Bureau has also determined that believes that this risk outweighs the argued that the Bureau should limit the it is appropriate to limit the exemption costs that a limitation may impose on exemption to bona fide nonprofit to creditors designated as nonprofits some nonprofit creditors. While many creditors. Adding a bona fide nonprofit under section 501(c)(3), but not commenters approved of the proposed condition would provide another 501(c)(4), of the Internal Revenue Code 100-extension limitation, the Bureau is avenue for consumers to seek redress of 1986. The Bureau recognizes that concerned that this limitation could against harmful lending practices, these creditors also may be affected by lead to unintended consequences. The which may deter persons from using the the ability-to-repay requirements. Bureau is particularly concerned that exemption as a loophole. However, the However, the Bureau believes that this nonprofit creditors providing primary Bureau believes that the requirements of distinction is appropriate. As discussed and subordinate financing on the same § 1026.43(a)(3)(v)(D) are narrowly in the 2013 ATR Proposed Rule, this transaction effectively would be limited tailored to protect consumers and limit exemption is premised on the belief that to 50 transactions per year. The Bureau the risk that an unscrupulous creditor the additional costs imposed by the did not intend to propose such a strict could create a nonprofit for the purpose ability-to-repay requirements will force limitation. The Bureau has concluded certain nonprofit creditors to cease that a 200-extension limitation, 142 See 78 FR 6644 (Jan. 30, 2013). extending credit, or substantially limit

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credit activities, thereby harming low- terms and does not believe it would be appropriate to refer to these qualifying to moderate-income consumers.143 The appropriate to assume that any income limits. Furthermore, the Bureau Bureau solicited comment regarding involvement by a nonprofit organization intends to monitor these qualifying whether the exemption should be is sufficient to ensure that consumers income limits in the future to ensure extended to creditors designated as were not harmed by the exemption. that the exemption remains narrowly nonprofits under section 501(c)(4) of the Therefore, the Bureau declines to extend tailored. The Bureau has determined Internal Revenue Code of 1986. The the exemption to transactions involving that it is necessary to make a technical Bureau also requested financial reports nonprofit organizations that are change to the proposed language. and mortgage lending activity data dedicated to providing opportunities for Although HUD’s qualifying income supporting the argument that the affordable homeownership. limits are colloquially referred to as marginal cost of implementing and With respect to the comment ‘‘section 8 limits,’’ the thresholds were complying with the ability-to-repay disputing the Bureau’s justification for established by section 102 of the requirements would cause 501(c)(4) the proposed exemptions, the Bureau Housing and Community Development nonprofit creditors to cease, or severely believes that this criticism results from Act of 1974, which amended the limit, extending credit to low- to a misunderstanding of the Bureau’s National Housing Act of 1937. The moderate-income consumers. The rationale for the proposed exemptions. Bureau believes that it is appropriate to Bureau received no comment in As explained in the 2013 ATR Proposed identify the thresholds by the exact response to this request. Thus, the Rule, the Bureau may provide an statutory and regulatory reference. Bureau concludes that it is appropriate exemption to the ability-to-repay Accordingly, the Bureau is adopting to limit the exemption to creditors requirements if the statutory conditions § 1026.43(a)(3)(v)(D)(2) and (3) generally designated as nonprofits under section for the use of such an exemption are as proposed, but with a technical 501(c)(3) of the Internal Revenue Code met.144 Providing an exemption for a modification that refers to the low- and of 1986, and adopts § 1026.43(a)(3)(v)(D) particular class of creditors requires a moderate-income household limit as as proposed. careful balancing of considerations, established pursuant to section 102 of As noted above, the Bureau received including the nature of credit extended, the Housing and Community a comment suggesting that the safeguards or other factors that may Development Act of 1974. exemption should not be limited to protect consumers from harm, and the As discussed above, several extensions of credit by a creditor but, extent to which application of the commenters asked the Bureau to remain rather, should be extended to other regulatory requirements would affect engaged with the nonprofit community transactions in which a nonprofit access to responsible, affordable credit. to ensure that the exemption is not used organization that is dedicated to As discussed in the Bureau’s proposal, as a loophole to harm consumers. For providing opportunities for affordable, the Bureau was concerned about example, some commenters asked the long-term homeownership is involved, creditors that would be forced to cease Bureau to establish a database of but is not the creditor. While the Bureau or severely limit lending to LMI creditors that qualify for the believes that such organizations provide consumers.145 Based on feedback § 1026.43(a)(3)(v)(D) exemption. The valuable assistance to LMI consumers, provided in response to this question, Bureau intends to keep abreast of the Bureau has determined that it would the Bureau has adopted an exemption developments in the mortgage market, be inappropriate to extend the narrowly tailored to the situations including lending programs offered by exemption in this manner. The where an exemption is necessary and nonprofit creditors pursuant to this exemptions adopted by the Bureau are proper. exemption. However, the Bureau does limited to creditors or transactions The Bureau also disagrees with the not believe that it is necessary to where the Bureau believes that arguments advanced that limiting the develop a formal oversight mechanism, consumers are offered and receive exemption to creditors extending credit such as a database of creditors eligible residential mortgage loans on to consumers with income below the for this exemption, at this time. Instead, reasonably repayable terms. The qualifying limit for moderate income the Bureau will continue to collect proposed exemption involves creditors families as established pursuant to information related to the effectiveness with certain characteristics that ensure section 8 of the United States Housing of the ability-to-repay requirements, consumers are offered responsible, Act of 1937 is arbitrary. The Bureau including the § 1026.43(a)(3)(v)(D) affordable credit on reasonably acknowledges that there may be cases exemption, and will pursue additional repayable terms. In these narrow where a consumer with income slightly rulemakings or data collections if the circumstances the Bureau has above the LMI threshold is unable to Bureau determines in the future that determined that there is little risk of secure credit. However, most such action is necessary. harm to consumers. However, adopting commenters agreed that these The Bureau has also carefully the approach suggested in this comment conditions helped ensure that the considered the comments requesting a effectively would expand the exemption proposed exemption would not become full or limited exemption from the to all creditors, as any creditor could a regulatory loophole by which ability-to-repay requirements for certain involve such a nonprofit organization in consumers could be harmed. Thus, the creditors or for certain programs some capacity during the origination Bureau believes that it is necessary to intended to facilitate access to credit for process. Such a broad expansion would draw a line, and the section 8 income LMI consumers. For example, as not be necessary or proper to effectuate limitations are clear and well-known. discussed above, several industry the purposes of TILA; to the contrary, it Such an approach will facilitate commenters argued that the Bureau would instead exempt a potentially compliance while ensuring that the should provide an exemption for all large number of creditors from the exemption is narrowly tailored to credit unions, which are designated as ability-to-repay requirements. The address the consumers for whom access nonprofit organizations under sections Bureau would not be able to determine to credit is a concern. Therefore, the 501(c)(1) and 501(c)(14) of the Internal if each potential creditor extended Bureau has concluded that it is Revenue Code of 1986. Other industry credit only on reasonably repayable commenters argued that the Bureau 144 See 78 FR 6635–36 (Jan. 30, 2013). should provide an exemption for credit 143 See 78 FR 6645 (Jan. 30, 2013). 145 Id. at 6643. unions operating in certain areas, such

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as areas defined as ‘‘underserved’’ under application, the creditor extended credit The Bureau has considered the factors the Federal Credit Union Act. The secured by a dwelling only to in TILA section 105(f) and has Bureau agrees with the arguments consumers with income that did not concluded that, for the reasons advanced by commenters that credit exceed the low- and moderate-income discussed above, an exemption is unions were not the source of the household limit as established pursuant appropriate under that provision. financial crisis, have historically to section 102 of the Housing and Pursuant to TILA section 105(f) the employed responsible underwriting Community Development Act of 1974 Bureau may exempt by regulation from requirements, and are often an (42 U.S.C. 5302(a)(20)) and amended all or part of this title all or any class important source of credit for LMI from time to time by the U.S. of transactions for which in the consumers. However, the Bureau does Department of Housing and Urban determination of the Bureau coverage not believe that any of the requested Development, pursuant to 24 CFR 570.3. does not provide a meaningful benefit to exemptions for credit unions are Section 1026.43(a)(3)(v)(D)(3) consumers in the form of useful necessary. The Bureau understands that conditions the exemption on the information or protection. In many credit unions will qualify for the requirement that the extension of credit determining which classes of additional qualified mortgage is to a consumer with income that does transactions to exempt, the Bureau must definitions discussed below in the not exceed the above limit. Section consider certain statutory factors. For section-by-section analyses of 1026.43(a)(3)(v)(D)(4) conditions the the reasons discussed above, the Bureau § 1026.43(e)(5) and (e)(6). Also, given exemption on the requirement that the exempts an extension of credit made by the thoroughness of the traditional creditor determines, in accordance with the creditors and under conditions underwriting methods employed by written procedures, that the consumer provided in § 1026.43(a)(3)(v) because credit unions, the Bureau does not has a reasonable ability to repay the coverage under the ability-to-repay believe that larger credit unions will extension of credit. The Bureau is also requirements does not provide a have difficulty complying with the adopting comment 43(a)(3)(v)(D)–1 meaningful benefit to consumers in the general ability-to-repay requirements or generally as proposed, but with form of useful protection in light of the qualified mortgage provisions. Further, technical modifications that reflect the protection the Bureau believes that the absent evidence suggesting that the appropriate references to HUD’s low- credit extended by these creditors ability-to-repay requirements would and moderate-income household limit, already provides to consumers. force these credit unions to cease or as described above. Consistent with its rationale in the 2013 severely curtail extending credit to LMI Legal Authority ATR Proposed Rule, the Bureau believes consumers, the Bureau does not believe that the exemptions are appropriate for Section 1026.43(a)(3)(v) is adopted that an exemption would be all affected consumers to which the pursuant to the Bureau’s authority appropriate. For similar reasons, the exemption applies, regardless of their under section 105(a) and (f) of TILA. Bureau declines to expand the other financial arrangements and Pursuant to section 105(a) of TILA, the exemption to loans that meet the financial sophistication and the Bureau generally may prescribe regulatory requirements of the importance of the loan to them. regulations that provide for such Community Reinvestment Act or similar Similarly, the Bureau believes that the adjustments and exceptions for all or programs. The Bureau is not persuaded exemptions are appropriate for all any class of transactions that the Bureau affected loans covered under the that such an expansive exemption is judges are necessary and proper to necessary to ensure that LMI consumers effectuate the purposes of TILA, among exemption, regardless of the amount of have access to responsible, affordable other things. For the reasons discussed the loan and whether the loan is secured credit. in more detail above, the Bureau has by the principal residence of the To summarize, the Bureau has concluded that this exemption is consumer. Furthermore, the Bureau determined that an exemption to the necessary and proper to effectuate the believes that, on balance, the ability-to-repay requirements is purposes of TILA, which include the exemptions will simplify the credit appropriate for certain nonprofit purposes of TILA section 129C. By process without undermining the goal of creditors. The Bureau has modified the ensuring the viability of the low- to consumer protection, denying important proposed exemption in a manner that moderate-income mortgage market, this benefits to consumers, or increasing the addressed the concerns raised by exemption would ensure that expense of the credit process. The various commenters. As adopted, consumers are offered and receive Bureau recognizes that its exemption § 1026.43(a)(3)(v)(D) exempts an residential mortgage loans on terms that and exception authorities apply to a extension of credit made by a creditor reasonably reflect their ability to repay. class of transactions, and has decided to with a tax exemption ruling or The Bureau also believes that mortgage apply these authorities to the loans determination letter from the Internal loans originated by these creditors covered under the final rule of the Revenue Service under section 501(c)(3) generally account for a consumer’s entities subject to the adopted of the Internal Revenue Code of 1986 ability to repay. Without the exemption exemptions. (26 U.S.C. 501(c)(3); 26 CFR 1.501(c)(3)– the Bureau believes that low- to 43(a)(3)(vi) 1), provided that all of the conditions in moderate-income consumers are at risk § 1026.43(a)(3)(v)(D)(1) through (4) are of being denied access to the The Bureau’s Proposal satisfied. Section 1026.43(a)(3)(v)(D)(1) responsible and affordable credit offered As discussed above, neither TILA nor conditions the exemption on the by these creditors, which is contrary to Regulation Z provides an exemption to requirement that, during the calendar the purposes of TILA. This exemption is the ability-to-repay requirements for year preceding receipt of the consumer’s consistent with the finding of TILA Federal programs designed to stabilize application, the creditor extended credit section 129C by ensuring that homeownership or mitigate the risks of secured by a dwelling no more than 200 consumers are able to obtain foreclosure. However, the Bureau was times. Section 1026.43(a)(3)(v)(D)(2) responsible, affordable credit from the concerned that the ability-to-repay conditions the exemption on the nonprofit creditors discussed above requirements would inhibit the requirement that, during the calendar which inform the Bureau’s effectiveness of these Federal programs. year preceding receipt of the consumer’s understanding of its purposes. As a result, the Bureau proposed

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§ 1026.43(a)(3)(vi), which would have provide an exemption for homeownership stabilization programs. provided that an extension of credit homeownership stabilization and While the Bureau believes that these made pursuant to a program authorized foreclosure prevention programs, other programs likely benefit many by sections 101 and 109 of the than those authorized by sections 101 consumers, the Bureau has determined Emergency Economic Stabilization Act and 109 of EESA, such as a creditor’s that an exemption from the ability-to- of 2008 (12 U.S.C. 5211; 5219) (EESA) proprietary program intended to provide repay requirements is inappropriate. is exempt from § 1026.43(c) through (f). assistance to consumers who have Proprietary programs are not under the Proposed comment 43(a)(3)(vi)–1 experienced a loss of employment or jurisdiction of the U.S. Department of would have explained that the other financial difficulty. the Treasury, as EESA programs are. requirements of § 1026.43(c) through (f) This lack of accountability increases the The Final Rule did not apply to a mortgage loan risk that an unscrupulous creditor could modification made in connection with a The Bureau is adopting harm consumers. Furthermore, EESA program authorized by sections 101 and § 1026.43(a)(3)(vi) and comment programs will expire by 2017 and are 109 of EESA. If a creditor is 43(a)(3)(vi)–1 as proposed. For the intended to provide assistance to a underwriting an extension of credit that reasons discussed below, the Bureau has narrow set of distressed consumers. In is a refinancing, as defined by determined that an exemption from the contrast, the exemption suggested by § 1026.20(a), that will be made pursuant ability-to-repay requirements is commenters is potentially indefinite to a program authorized by sections 101 necessary and appropriate for and indeterminate. Also, the Bureau and 109 of the Emergency Economic extensions of credit made pursuant to a believes that creditors seeking to Stabilization Act of 2008, the creditor program authorized by sections 101 and provide assistance to consumers in also need not comply with § 1026.43(c) 109 of EESA. Commenters agreed with distress without incurring the through (f). Thus, a creditor need not the Bureau that the ability-to-repay obligations associated with the ability- determine whether the mortgage loan requirements would interfere with, or to-repay requirements may do so by modification is considered a refinancing are inapplicable to, these programs, providing a consumer with a workout or under § 1026.20(a) for purposes of which are intended to address the similar modification that does not determining applicability of § 1026.43; unique underwriting requirements of constitute a refinancing under if the transaction is made in connection certain consumers at risk of default or § 1026.20(a). Thus, the Bureau declines with these programs, the requirements foreclosure. By significantly impairing to provide an exemption for these of § 1026.43(c) through (f) do not apply. the effectiveness of these programs, the proprietary programs. The Bureau solicited general feedback Bureau believes that there is a No commenters addressed whether regarding whether this proposed considerable risk that the ability-to- credit extended pursuant to an EESA exemption was appropriate. In repay requirements would actually program should be granted a particular, the Bureau sought comment prevent at-risk consumers from presumption of compliance as qualified regarding whether applicability of the receiving mortgage credit provided in an mortgages, and, if so, under what ability-to-repay requirements would affordable and responsible manner. conditions. However, the Bureau does constrict the availability of credit With respect to the feedback provided not believe that extending qualified offered under these programs and opposing this exemption, the Bureau mortgage status to these loans would be whether consumers have suffered believes that, based on the existence of as effective in addressing the concerns financial loss or other harm by creditors Federal oversight and the EESA raised above as an exemption. Even if participating in these programs. The requirements, the risk of consumer harm credit extended under EESA programs Bureau also requested information on is low. Additionally, as discussed in were granted a presumption of the extent to which the requirements of part II.A above, the Bureau understands compliance as qualified mortgages, these Federal programs account for a that these EESA programs have highly creditors extending credit pursuant to consumer’s ability to repay. The Bureau detailed requirements, created and these programs could be impacted by also sought comment regarding whether, maintained by the Treasury Department, significant implementation and if the Bureau determined that a full to determine whether EESA assistance compliance burdens. Furthermore, as 146 exemption is not warranted, what will benefit distressed consumers. In discussed above, many loans extended modifications to the general ability-to- addition to satisfying these Treasury under these programs would not appear repay standards would be warranted Department requirements, consumers to satisfy the qualified mortgage and whether qualified mortgage status receiving assistance under an EESA standards under § 1026.43(e)(2). For should be granted instead, and, if so, program must meet EESA eligibility example, consumers receiving under what conditions. requirements and creditor program assistance under EESA programs may requirements.147 Thus, the Bureau Comments Received have DTI ratios in excess of the believes that credit available under § 1026.43(e)(2)(vi) threshold.148 Thus, a The Bureau received several these programs is extended on creditor extending such a mortgage comments addressing this proposed reasonably repayable terms and loan—assuming the loan does not exemption. One consumer advocate conditions. qualify for another qualified mortgage commenter opposed the exemption and Several industry commenters asked definitions—would be required to stated that these programs lack the Bureau to consider an exemption for comply with the ability-to-repay meaningful underwriting guidance. proprietary foreclosure mitigation and requirements of § 1026.43(c) and, in Many industry and consumer advocate response to the potential liability for commenters supported the exemption. 146 See United States Department of the Treasury, ‘‘Home Affordable Modification Program, Base Net These commenters generally argued that Present Value (NPV) Model v5.02, Model 148 Consumers receiving assistance under EESA the ability-to-repay requirements would Documentation’’ (April 1, 2012). programs may have back-end DTI ratios in excess make these programs unworkable, 147 See http://www.makinghomeaffordable.gov/ of 50 percent. See United States Department of the which would frustrate the public policy programs/Pages/default.aspx. For example, the Treasury, Making Home Affordable Program purposes of EESA and harm consumers EESA PRA program contains several eligibility Performance Report (March 2013), page 9, available requirements in addition to program requirements. at: http://www.treasury.gov/initiatives/financial- in need of assistance. A few industry See http://www.makinghomeaffordable.gov/ stability/reports/Documents/ commenters requested that the Bureau programs/lower-payments/Pages/pra.aspx. March%202013%20MHA%20Report%20Final.pdf.

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noncompliance, would cease or severely purposes of TILA. This exemption is the ability-to-repay requirements for curtail lending under the voluntary consistent with the finding of TILA refinancing programs offered by the EESA programs. section 129C by ensuring that Department of Housing and Urban Accordingly, the Bureau believes that consumers are able to obtain Development (HUD), the Department of the proposed exemption for credit made responsible, affordable credit from the Veterans Affairs (VA), or the U.S. pursuant to an EESA program is nonprofit creditors discussed above Department of Agriculture (USDA). appropriate under the circumstances. which inform the Bureau’s However, comments provided to the The Bureau believes that consumers understanding of its purposes. Bureau during the development of the who receive extensions of credit made The Bureau has considered the factors 2013 ATR Final Rule suggested that the pursuant to an EESA program do so in TILA section 105(f) and has ability-to-repay requirements would after a determination of ability to repay concluded that, for the reasons restrict access to credit for consumers using criteria unique to the distressed discussed above, an exemption is seeking to obtain a refinancing under consumers seeking assistance under the appropriate under that provision. certain Federal agency refinancing program. The exemption adopted by the Pursuant to TILA section 105(f) the programs, that the ability-to-repay Bureau is limited to creditors or Bureau may exempt by regulation from requirements adopted by the Bureau transactions with certain characteristics all or part of this title all or any class should account for the requirements of and qualifications that ensure of transactions for which in the Federal agency refinancing programs, consumers are offered responsible, determination of the Bureau coverage and that Federal agency refinancing affordable credit on reasonably does not provide a meaningful benefit to programs should be exempt from several repayable terms. The Bureau thus finds consumers in the form of useful of the ability-to-repay requirements. that coverage under the ability-to-repay information or protection. In TILA section 129C(b)(3)(B)(ii), as requirements provides little if any determining which classes of amended by section 1411 of the Dodd- meaningful benefit to consumers in the transactions to exempt, the Bureau must Frank Act, requires these Federal form of useful protection, given the consider certain statutory factors. The agencies to prescribe rules related to the nature of the credit offered under EESA Bureau exempts an extension of credit definition of qualified mortgage. These programs. At the same time, the Bureau pursuant to a program authorized by Federal agencies have not yet prescribed is concerned that the narrow class of sections 101 and 109 of the Emergency rules related to the definition of creditors subject to the exemption may Economic Stabilization Act of 2008 qualified mortgage. Section 1411 of the either cease or severely curtail mortgage because coverage under the ability-to- Dodd-Frank Act addresses refinancing lending if the ability-to-repay repay requirements does not provide a of existing mortgage loans under the requirements are applied to their meaningful benefit to consumers in the ability-to-repay requirements. As transactions, resulting in a denial of form of useful protection in light of the amended by the Dodd-Frank Act, TILA access to credit. Accordingly, the protection the Bureau believes that the section 129C(a)(5) provides that Federal Bureau is adopting § 1026.43(a)(3)(vi) as credit extended through these programs agencies may create an exemption from proposed. already provides to consumers. the income and verification Section 1026.43(a)(3)(vi) is adopted Consistent with its rationale in the 2013 requirements for certain streamlined pursuant to the Bureau’s authority ATR Proposed Rule, the Bureau believes refinancings of loans made, guaranteed, under section 105(a) and (f) of TILA. that the exemptions are appropriate for or insured by various Federal agencies. Pursuant to section 105(a) of TILA, the all affected consumers to which the 15 U.S.C. 1639(a)(5). These Federal Bureau generally may prescribe exemption applies, regardless of their agencies also have not yet prescribed regulations that provide for such other financial arrangements and rules related to the ability-to-repay adjustments and exceptions for all or financial sophistication and the any class of transactions that the Bureau requirements for refinancing programs. importance of the loan to them. judges are necessary and proper to Section 1026.43(e)(4), as adopted in the Similarly, the Bureau believes that the effectuate the purposes of TILA, among 2013 ATR Final Rule, provides exemptions are appropriate for all other things. As discussed in more temporary qualified mortgage status for affected loans covered under the detail above, the Bureau has concluded mortgage loans eligible to be insured, that this exemption is necessary and exemption, regardless of the amount of guaranteed, or made pursuant to a proper to effectuate the purposes of the loan and whether the loan is secured program administered by one of these TILA, which include the purposes of by the principal residence of the Federal agencies, until the effective date TILA section 129C. This exemption consumer. Furthermore, the Bureau of the agencies’ qualified mortgage rules would ensure that consumers are believes that, on balance, the prescribed pursuant to TILA section offered and receive residential mortgage exemptions will simplify the credit 129C(b)(3)(B)(ii). However, the Bureau loans on terms that reasonably reflect process without undermining the goal of was concerned that the ability-to-repay their ability to repay. In the Bureau’s consumer protection, denying important requirements would impede access to judgment extensions of credit made benefits to consumers, or increasing the credit available under these programs. pursuant to a program authorized by expense of the credit process. The Based on these concerns and to gather sections 101 and 109 of the Emergency Bureau recognizes that its exemption more information about the potential Economic Stabilization Act of 2008 and exception authorities apply to a effect of the ability-to-repay sufficiently account for a consumer’s class of transactions, and has decided to requirements on Federal agency ability to repay, and the exemption apply these authorities to the loans refinancing programs, the Bureau ensures that consumers are able to covered under the final rule of the proposed an exemption for certain receive assistance under these programs. entities subject to the adopted refinancings under specified Federal Furthermore, without the exemption the exemptions. programs and solicited feedback on several issues. Bureau believes that consumers at risk 43(a)(3)(vii) of default or foreclosure would be Specifically, proposed denied access to the responsible, The Bureau’s Proposal § 1026.43(a)(3)(vii) would have affordable credit offered under these As discussed above, neither TILA nor provided that an extension of credit that programs, which is contrary to the Regulation Z provide an exemption to is a refinancing, as defined under

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§ 1026.20(a) but without regard for component of the housing market originator seeking more business. whether the creditor is the creditor, recovery, and in light of the improving, Consumer group commenters argued holder, or servicer of the original but continued fragile state, of the that Federal agency refinance guidelines obligation, that is eligible to be insured, housing market and broader economy, do not contain adequate assurances of guaranteed, or made pursuant to a help support market stability. Industry ability to repay, and asserted that FHA program administered by the FHA, VA, commenters argued that the exemption streamlined refinances are available or USDA, is exempt from § 1026.43(c) would provide more certainty for with no requirement to underwrite for through (f), provided that the agency creditors, which would lead to more of affordability and VA streamlined administering the program under which these types of loans being originated. refinances are also available without the extension of credit is eligible to be Several commenters asked the Bureau any proof of income or appraisal. One insured, guaranteed, or made has not to clarify which Federal agency consumer group commenter stressed prescribed rules pursuant to section refinancing programs would qualify, as that the ability-to-repay requirements 129C(a)(5) or 129C(b)(3)(B)(ii) of TILA. programs change, may be replaced, and were intended to protect consumers The Bureau solicited comment new programs may develop in the from equity-stripping or other forms of regarding whether this exemption is future. In addition, an industry predatory refinancing practices that appropriate, whether there are any commenter suggested clarifying that harmed so many consumers, and that additional conditions that should be events occurring after closing of a loan refinancing an unaffordable loan with required, whether the ability-to-repay would not remove the exemption from other loans that are not responsible or requirements would negatively affect the ability-to-repay requirements, in affordable does not help consumers. the availability of credit offered under order to provide greater certainty for This commenter argued that consumers Federal agency programs, and whether creditors. An industry trade group do not benefit when they receive loans consumers could be harmed by commenter also argued that the Bureau they cannot afford, nor do they benefit exempting these extensions of credit should exempt not only loans that are when a refinance that costs money and from the ability-to-repay requirements. eligible for a Federal agency refinancing strips the consumer of equity simply program, but also loans that are or Comments Received delays the inevitable reality that the would be accepted into such program consumer cannot afford his or her home. In response to the proposed rule, most except for a good faith mistake, because This commenter also stated that the commenters supported the proposed otherwise creditors will underwrite to proposed exemption would immunize exemption. Industry commenters stated the ability-to-repay requirements in all creditors from TILA liability with that the Federal agency refinancing cases and the benefits of exemption will respect to refinancings offered to some programs have successfully provided be severely diminished, if not lost of the most vulnerable consumers, significant benefits to many individual completely. enabling unscrupulous creditors to consumers and have helped stabilize the No commenters addressed whether engage in serial refinancings that harm housing and real estate markets. Federal agency refinancings should or consumers. This commenter also Industry commenters and an association should not be exempt from the ability- disputed the contention raised by others of State bankers noted that Federal to-repay requirements given that FHA, that the ability-to-repay requirements agency refinancing programs are subject VA, and USDA loans, including are costly and burdensome by asserting to comprehensive requirements and refinances, are afforded qualified that the Bureau’s provisions comprise limitations that account for a mortgage status under the Bureau’s 2013 basic underwriting requirements that all consumer’s ability to repay (e.g., ATR Final Rule. Specifically, no creditors should consider before demonstrated payment history), and commenters addressed the premise that extending refinancing credit. This participating creditors must document the ability-to-repay requirements could and certify program compliance. These impose significant implementation and commenter argued that it is not difficult commenters also noted that these compliance burdens on the designated to determine a consumer’s ability to refinancing programs are in the interest creditors and programs even if credit repay a loan, and that the Bureau’s of consumers because they specifically extended by the designated creditors or ability-to-repay requirements are require a demonstrated consumer under the designated programs were straightforward, streamlined, and benefit such as a lower interest rate, granted a presumption of compliance as should become the industry standard for lower payment amount, shorter loan qualified mortgages. all loans, whether purchase money or term, or more stable mortgage product. Some consumer advocate commenters refinancings. A State attorney general Industry commenters and an association were strongly opposed to the also argued that the proposed of State bankers argued that subjecting exemption, asserting that assessment of exemption would affect a large segment these Federal agency refinancing a consumer’s ability to repay is of of the mortgage market, thereby programs to the ability-to-repay paramount importance under the potentially placing a large number of requirements would conflict with the statutory scheme. These commenters consumers at risk while undermining objectives of the programs, limit contended that consumers could be the Bureau’s goal of providing uniform participation and access to these harmed by exempting these extensions standards for the entire mortgage loan programs, and raise the cost for of credit from the ability-to-repay industry. consumers. Without an exemption from requirements. The primary arguments Consumer group commenters and a the ability-to-repay requirements, they were that serial refinancings (and the State attorney general also observed that feared that most Federal agency resulting equity-stripping) were a root these Federal agencies have not yet refinancing programs would not be cause of the financial crisis, and that the prescribed rules related to the ability-to- used, causing communities and proposed exemption would leave repay requirements for refinances, homeowners to suffer. Industry consumers with no recourse. These pursuant to TILA section 129C(a)(5), or commenters noted that the exemption commenters argued that such serial the definition of qualified mortgage, from the ability-to-repay requirements refinancings were often not voluntarily pursuant to TILA section for Federal agency refinancing programs chosen by the consumer, but, instead, 129C(b)(3)(B)(ii), but that they have would encourage broad participation in were temporary measures that delayed nearly a year before the 2013 Final Rule such programs, which are a critical foreclosure or were driven by a loan goes into effect, which is ample time for

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them to issue their own rules under the did not address the costs and benefits of thresholds in § 1026.43(e)(3). However, Dodd-Frank Act. Accordingly, the State the proposed exemption in light of the while some Federal agency refinancings attorney general argued that consumers’ qualified mortgage status granted to may not be eligible for qualified access to credit will not be seriously loans that are eligible for purchase, mortgage status, the Bureau does not prejudiced by a temporary application insurance, or guarantee by the specified believe that many Federal agency of the ability-to-repay requirements Federal agencies under the Bureau’s refinancings would fail to meet these because these Federal agency rules are 2013 ATR Final Rule. Specifically, even minimum requirements. Although some likely forthcoming. Consumer group absent an exemption from the ability-to- Federal agency refinancings may commenters and the State attorney repay requirements, FHA, VA, and contain the risky features identified in general argued that Federal agencies USDA loans, including refinancings, are § 1026.43(e)(2)(i) and provide for loan should be bound by the ability-to-repay given qualified mortgage status under terms in excess of 30 years, the Bureau requirements between now and the time the Bureau’s 2013 ATR Final Rule, does not believe that many consumers they issue their own new rules. These which provides for a temporary category receive such loans. Further, while commenters argued that exempting of qualified mortgages for loans that market-wide data regarding points and Federal agency refinancing programs satisfy the underwriting requirements fees on Federal agency refinancings is from the ability-to-repay requirements of, and are therefore eligible to be not available, the Bureau does not before they have promulgated their own purchased, guaranteed, or insured by believe that many Federal agency rules removes an incentive for the HUD, VA, USDA, or RHS. This refinancings would provide for points agencies to promulgate their own rules temporary provision will expire when and fees in excess of the § 1026.43(e)(3) in a timely manner while opening up qualified mortgage regulations issued by thresholds. Refinancings are usually less the possibility that creditors acting the various Federal agencies become complicated than purchase transactions. pursuant to Federal agency refinancing effective, and in any event after seven Therefore, refinancings generally programs could originate loans that are years. require fewer costs, which makes it not responsible or affordable in the Section 1026.43(e)(4) addresses any unlikely that a Federal agency interim, thereby endangering the most inconsistencies that may occur between refinancing would exceed the points vulnerable consumers who receive these the general ability-to-repay and and fees thresholds and loans under loans. qualified mortgage provisions of the these programs. In addition, the Bureau 2013 ATR Final Rule and Federal The Final Rule did not receive comment suggesting that agency requirements, which should points and fees on Federal agency The Bureau is withdrawing the maintain the status quo in the Federal refinancings exceed the § 1026.43(e)(3) proposed exemption for the reasons agency refinancing market and ensure thresholds. In any event, to the extent below. Upon further review and that consumers are able to obtain that eligibility for qualified mortgage consideration of the comments received, responsible, affordable refinancing status based upon these minimum the Bureau has determined that the credit under these programs. Under the requirements becomes an issue, the proposed exemption would be temporary qualified mortgage provisions Bureau notes that the various Federal inappropriate. As discussed in the in § 1026.43(e)(4), for instance, creditors agencies can address any eligibility Bureau’s proposal, the Bureau was need only comply with the concerns when they prescribe their own concerned that the ability-to-repay documentation and underwriting detailed regulations concerning requirements and qualified mortgage requirements established by the qualified mortgages and refinancings. provisions would restrict access to respective Federal agencies, and need Importantly, as discussed in the 2013 credit for certain consumers seeking to not apply the 43 percent debt-to-income ATR Final Rule, the Bureau believes obtain a refinancing. After performing ratio or follow the documentation and that Congress intended for loans with additional analysis prompted by the underwriting procedures applicable to these risky features, long loan terms, or comments received, the Bureau believes the general category of qualified high points and fees to be excluded that the qualified mortgage provision mortgages under § 1026.43(e)(3) and from the scope of the qualified mortgage under § 1026.43(e)(4), which generally appendix Q. Since the Federal agency definition. As the Bureau believes that provides qualified mortgage status to eligibility generally satisfies the few Federal agency refinancings would loans that are eligible for purchase, requirements of § 1026.43(e)(4), the fail to meet these minimum statutory insurance, or guarantee by the specified Bureau does not believe that the Federal agencies, including qualified mortgage provisions are requirements, the Bureau does not refinancings, strikes the appropriate inconsistent with the requirements of believe that a modification is necessary balance between preserving consumers’ Federal agency refinancing programs. to ensure access to responsible, rights to seek redress for violations of Under the qualified mortgage affordable credit. TILA and ensuring access to provision in § 1026.43(e)(4), a loan that The Bureau believes that the responsible, affordable credit during the is eligible to be purchased, guaranteed, temporary qualified mortgage provisions current transition period. or insured by the specified Federal will help ensure that Federal agency The Bureau agrees with the arguments agencies would still need to meet refinancing programs will continue to raised by commenters that Federal certain minimum requirements imposed be used and provide more certainty for agency refinancing programs have by the Dodd-Frank Act. To receive creditors, which will lead to more of helped stabilize the housing and real qualified mortgage status, in addition to these types of loans being originated, estate markets. The Bureau also Federal agency-eligibility, and encourage broad participation in acknowledges that these programs are § 1026.43(e)(4)(i)(A) provides that a such programs, which will help support subject to comprehensive underwriting mortgage loan may not include the market stability. Thus, the Bureau requirements that account for a higher-risk loan terms identified in disagrees with the concerns raised by consumer’s ability to repay, which helps § 1026.43(e)(2)(i) (e.g., negative some commenters that the withdrawal ensure that consumers receive access to amortization and interest-only of the exemption would conflict with credit. Although many commenters payments), may not have a loan term the objectives of the programs, limit approved of the proposed exemption for that exceeds 30 years, and may not participation and access to these the above reasons, these commenters impose points and fees in excess of the programs, impair the effectiveness of

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such programs, or raise the cost for concerns about overlapping requirements on programs such as consumers. The Bureau believes that it underwriting requirements while also HARP and explore a potential has provided a sufficient transition preserving consumers’ rights to seek exemption, the Bureau proposed mechanism until the various Federal redress if an abuse occurs. Accordingly, § 1026.43(a)(3)(viii), which would have agencies can prescribe their own the Bureau concludes that this provided that an extension of credit that regulations concerning qualified temporary exemption is not necessary to is a refinancing, as defined under mortgages and refinancings. preserve access to affordable and § 1026.20(a) but without regard for In addition, the Bureau believes that responsible credit, and, therefore, is whether the creditor is the creditor, the temporary qualified mortgage withdrawing the proposed exemption. holder, or servicer of the original definition more appropriately balances As discussed above, several industry obligation, that is eligible for purchase risks to consumers than a full commenters requested various or guarantee by Fannie Mae or Freddie exemption until such time as the modifications to the proposed language. Mac is exempt from § 1026.43(c) Federal agencies can address the For example, some commenters asked through (f). This proposed exemption concerns raised by commenters in their the Bureau to clarify which Federal would have applied provided that: (1) own detailed rulemakings. The Bureau agency refinancing programs would The refinancing is made pursuant to an agrees that the ability-to-repay qualify for the exemption from the eligible targeted refinancing program, as requirements were intended, in part, to ability-to-repay requirements, as defined under 12 CFR 1291.1; (2) such prevent harmful practices such as equity programs change, may be replaced, and entities are operating under the stripping and other forms of predatory new programs may develop in the conservatorship or receivership of the refinancings. The Bureau’s temporary future. An industry commenter FHFA pursuant to section 1367 of the qualified mortgage provision provides suggested clarifying that events Federal Housing Enterprises Financial additional protection to consumers and occurring after closing of a loan would Safety and Soundness Act of 1992 (12 preserves potential claims in the event not remove the exemption from the U.S.C. 4617(i)) on the date the of abuse. For higher-priced qualified ability-to-repay requirements, in order refinancing is consummated; (3) the mortgages, consumers will still have the to provide greater certainty for creditors. existing obligation satisfied and ability to assert a claim under TILA In addition, an industry trade group replaced by the refinancing is owned by section 130(a) and (k) and prove that, commenter argued that the Bureau Fannie Mae or Freddie Mac; (4) the despite the presumption of compliance should exempt not only loans that are existing obligation satisfied and attached to the qualified mortgage, the eligible for a Federal agency refinance replaced by the refinancing was not creditor nonetheless failed to comply program, but also loans that are or consummated on or after January 10, with the ability-to-repay requirements. would be accepted into such program 2014; and (5) the refinancing was not A consumer who prevails on such a except for a good faith mistake. As the consummated on or after January 10, claim may be able to recover special Bureau has decided to withdraw 2021. statutory damages equal to the sum of proposed § 1026.43(a)(3)(vii), the issues Proposed comment 43(a)(3)(viii)-1 all finance charges and fees paid within addressed in these and similar would have explained that the first three years after consummation, comments are moot. As discussed § 1026.43(a)(3)(viii) provides an among other damages and costs, and above, mortgage loans that are eligible exemption from the requirements of may be able to assert the creditor’s for purchase, insurance, or guarantee by § 1026.43(c) through (f) for certain failure to comply to obtain recoupment the specified Federal agencies receive extensions of credit that are considered or setoff in a foreclosure action even the temporary qualified mortgage status refinancings, as defined in § 1026.20(a) after the statute of limitations for under § 1026.43(e)(4), provided the but without regard for whether the affirmative claims has passed. The requirements of that paragraph are met. creditor is the creditor, holder, or Bureau received no persuasive evidence servicer of the original obligation, that 43(a)(3)(viii) that the qualified mortgage provisions of are eligible for purchase or guarantee by § 1026.43(e)(4) fail to strike the The Bureau’s Proposal Fannie Mae or Freddie Mac. The appropriate balance between consumer As discussed above, neither TILA nor comment would also have explained protection and the needs of the Regulation Z provides an exemption to that the exemption provided by mortgage lending market during the the ability-to-repay requirements for § 1026.43(a)(3)(viii) would be available current transition period. particular lending programs. However, only while these entities remain in Based on these considerations, the comments provided to the Bureau conservatorship. The proposed Bureau has determined that the during the development of the 2013 comment also contained illustrative withdrawal of this proposed exemption ATR Final Rule suggested that the examples of this provision. would ensure that consumers are ability-to-repay requirements would The Bureau expressed concern that offered and receive residential mortgage restrict access to credit for consumers unscrupulous creditors would be able to loans on terms that reasonably reflect seeking to obtain a refinancing under use the exemption to engage in loan- their ability to repay. Based on the certain GSE programs for mortgage loans or other harmful practices. qualified mortgage status, the Bureau with high loan-to-value ratios or for Thus, the Bureau requested feedback on does not believe that the ability-to-repay consumers harmed by the financial whether this exemption was generally requirements would significantly crisis. These programs include HARP, appropriate. In particular, the Bureau interfere with requirements of these which was defined as an ‘‘eligible requested feedback regarding whether Federal agency refinancing programs, targeted refinancing program’’ in consumers could be harmed by the make it more difficult for many regulations promulgated by FHFA, to proposed exemption and whether this consumers to qualify for these programs, replace high loan-to-value mortgage exemption would ensure access to or increase the cost of credit for those loans with affordable refinancings.149 responsible and affordable refinancing who do. The Bureau believes that the To gather more information about the credit. The Bureau also requested temporary qualified mortgage definition potential effect of the ability-to-repay feedback regarding the reference to for loans that are eligible for purchase, eligible targeted refinancing programs insurance, or guarantee by the specified 149 See, e.g., 12 CFR 1291.1; 74 FR 38514, 38516 under proposed § 1026.43(a)(3)(viii)(A). Federal agencies adequately addresses (Aug. 4, 2009). Specifically, the Bureau requested

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comment regarding whether it would be refinancings eligible for non-GSE mortgage status, in addition to GSE- more appropriate to refer to another streamlined refinancing programs. eligibility, § 1026.43(e)(4)(i)(A) provides public method of identifying One consumer advocate commenter that a mortgage loan may not include refinancing programs similar to HARP, strongly opposed the proposed the higher-risk loan terms identified in and, if so, what method of public exemption. This commenter stressed § 1026.43(e)(2)(i) (e.g., negative identification would be appropriate. that predatory refinancings were one of amortization and interest-only The Bureau also solicited feedback the primary causes of the financial crisis payments), may not have a loan term regarding whether reference to a notice and that the ability-to-repay that exceeds 30 years, and may not published by FHFA pursuant to 12 CFR requirements were intended to protect impose points and fees in excess of the 1253.3 or 1253.4 would facilitate consumers from the abusive equity- thresholds in § 1026.43(e)(3). However, stripping practices that harmed so many compliance more effectively than the while some HARP refinancings may not consumers. This commenter stated that proposed reference in be eligible for this qualified mortgage § 1026.43(a)(3)(viii)(A). the proposed exemption would immunize creditors from TILA liability status, the Bureau does not believe that Comments Received with respect to refinancings offered to many HARP loans would fail to meet some of the most vulnerable consumers, these minimum requirements. Many commenters supported the Currently, HARP refinancings generally proposed exemption. Several industry enabling unscrupulous creditors to engage in serial refinancings that harm may not contain the risky features commenters argued that the exemption 150 consumers. This commenter also identified in § 1026.43(e)(2)(i). While, was necessary to prevent the imposition disputed the contention raised by others HARP programs permit refinancings of unnecessary costs on consumers. that the ability-to-repay requirements that provide for loan terms in excess of These commenters generally believed are costly and burdensome by asserting 30 years, the Bureau does not believe that the ability-to-repay requirements that the Bureau’s provisions comprise that many consumers receive such were too burdensome and that creditors basic underwriting requirements that all loans.151 Furthermore, while market- would be forced to raise costs to comply creditors should consider before wide data regarding points and fees on with the regulations. One government- extending refinancing credit. A State HARP loans is not available, the Bureau sponsored enterprise commenter argued attorney general also opposed the that the exemption was necessary to does not believe that many HARP loans proposed exemption for similar reasons. preserve access to credit for consumers would provide for points and fees in This commenter also argued that the excess of the § 1026.43(e)(3) thresholds. eligible for a refinancing under HARP. proposed exemption would affect a This commenter argued that many Refinancings are usually less large segment of the mortgage market, complicated than purchase transactions. HARP loans would be subject to the thereby potentially placing a large rebuttable presumption of compliance, Therefore, refinancings generally number of consumers at risk while require fewer costs, which makes it and that industry would refuse to make undermining the Bureau’s goal of any loans that fell outside of the safe unlikely that a HARP loan would providing uniform standards for the exceed the points and fees thresholds, harbor for qualified mortgages. Several entire mortgage loan industry. industry commenters and a Federal and loans under this program would not agency commenter argued that the The Final Rule likely be subject to some types of Bureau’s proposed reference to FHFA The Bureau is withdrawing the pricing abuses related to refinancings regulations was unnecessary. These proposed exemption for the reasons generally. In addition, the Bureau did commenters asserted that FHFA discussed below. Upon further review not receive comment suggesting that oversight was sufficient to ensure that and consideration of the comments points and fees on HARP loans exceed consumers would not be harmed by received, the Bureau has determined the § 1026.43(e)(3) thresholds. creditors offering mortgage loans that the proposed exemption would be Importantly, as discussed in the 2013 eligible for purchase or guarantee by the inappropriate. As discussed in the ATR Final Rule, the Bureau believes GSEs. For similar reasons, these Bureau’s proposal, the Bureau was that Congress intended for loans with commenters argued that the Bureau’s concerned that the ability-to-repay these risky features, long loan terms, or proposed date on which the exemption requirements and qualified mortgage high points and fees to be excluded would expire was unnecessary, as provisions would restrict access to from the scope of the qualified mortgage consumers would always benefit from a credit for certain consumers seeking to definition.152 As the Bureau believes GSE-eligible refinancing, regardless of obtain a refinancing. After performing that few HARP loans would fail to meet when the consumer’s original loan was additional analysis prompted by the these minimum statutory requirements, consummated or when the consumer comments received, the Bureau believes the Bureau does not believe that a obtained the refinancing. Finally, that the special qualified mortgage several industry commenters and a provision under § 1026.43(e)(4), which 150 As of April, 2013, HARP refinancings offered Federal agency commenter argued that generally provides qualified mortgage by Fannie Mae may not include negative limiting the refinancing exemption to status to GSE-eligible mortgage loans, amortization or interest-only features. See Fannie Mae, Single-Family Selling Guide, Chapter 5 (April HARP-eligible consumers was including refinancings, strikes the 9, 2013), available at https://www.fanniemae.com/ unnecessary, as all consumers could appropriate balance between preserving content/guide/sel040913.pdf. Freddie Mac does not benefit from a GSE refinancing program consumers’ rights to seek redress for offer mortgage loans with interest-only features and and limiting the exemption to HARP- violations of TILA and ensuring access prohibits negative amortization on refinancings made under its HARP program. See Freddie Mac, eligible consumers would impose to responsible, affordable credit during Single-Family Seller/Servicer Guide, Vol. I, needless costs on all other consumers. the current transition period. Chapters 22.4 and A24.3, available at: http:// Some of these commenters also asked The Bureau acknowledges that, under www.freddiemac.com/sell/guide/. the Bureau to define eligible the qualified mortgage provision in 151 Data on HARP loans with 40-year loan terms refinancings by reference to the Fannie § 1026.43(e)(4), a HARP loan would still is not publicly available. See Federal Housing Finance Agency Refinance Report (June 2012), Mae or Freddie Mac selling or servicing need to meet certain minimum available at: http://www.fhfa.gov/webfiles/25164/ guides, and some asked the Bureau to requirements imposed by the Dodd- Feb13RefiReportFinal.pdf. expand the exemption to include Frank Act. To receive qualified 152 See 78 FR 6516–20 (Jan. 30, 2013).

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modification is necessary to ensure qualified mortgage provisions of proper, and proposed access to responsible, affordable credit. § 1026.43(e)(4) as opposed to the § 1026.43(a)(3)(viii) is withdrawn. Although many commenters approved exemption under proposed As discussed above, several industry of the proposed exemption, these § 1026.43(a)(3)(viii). Absent evidence commenters and a Federal agency commenters generally did not address that the special qualified mortgage commenter requested various the costs and benefits of the proposed provisions for GSE-eligible loans impose modifications to the proposed language. exemption in light of the special significant costs on creditors, the For example, some commenters argued qualified mortgage status granted to Bureau does not believe that consumers that the exemption should refer to the GSE-eligible loans under the Bureau’s are at risk of being denied responsible, Fannie Mae or Freddie Mac selling January 2013 ATR Final Rule. For affordable mortgage credit. guide, some commenters requested that example, several commenters asserted the Bureau provide an exemption for all that the ability-to-repay requirements On the other hand, there is a risk that streamlined refinancing programs, and were incompatible with HARP program consumers could be harmed by the some commenters asked the Bureau to requirements. However, given that GSE proposed exemption. The Bureau is adopt the proposed exemption without eligibility generally satisfies the persuaded by the arguments that the the time limitations in proposed requirements of § 1026.43(e)(4), the proposed exemption could potentially § 1026.43(a)(3)(viii)(D) and (E). As the Bureau does not believe that the special enable unscrupulous creditors to harm Bureau has decided to withdraw qualified mortgage provisions are consumers. The Bureau agrees that the proposed § 1026.43(a)(3)(viii), the issues inconsistent with the requirements of ability-to-repay requirements were addressed in these and similar HARP or similar programs. For the same intended, in part, to prevent harmful comments are moot. As discussed reasons, the Bureau does not agree with practices such as equity-stripping. above, mortgage loans made under a the arguments advanced by several While the abuses of the past are streamlined refinancing program are commenters that the ability-to-repay seemingly absent from today’s mortgage eligible for the temporary qualified requirements would add costs that market, the Bureau does not believe it mortgage status under § 1026.43(e)(4), would make these programs would be appropriate to deny provided the requirements of that unsustainable. These comments did not consumers the means to seek redress for paragraph are met. explain what additional costs would be TILA violations. As discussed above, 43(b) Definitions imposed by the regulation beyond the the § 1026.43(e)(4) qualified mortgage costs creditors would incur in provision provides additional protection 43(b)(4) determining GSE eligibility, which to consumers and preserves potential Background would be required even in the absence claims in the event of abuse. For higher- TILA section 129C(a)(1) through (4) of the Bureau’s requirements. Based on priced qualified mortgages, consumers the comments provided, the Bureau and the Bureau’s rules thereunder, will still have the ability to assert a § 1026.43(c), prohibit a creditor from does not believe that the requirements claim under TILA section 130(a) and (k) of § 1026.43(e)(4) impose any additional making a residential mortgage loan and prove that, despite the presumption unless the creditor makes a reasonable, meaningful costs on creditors. Thus, it of compliance attached to the qualified does not appear that the ability-to-repay good faith determination, based on mortgage, the creditor nonetheless failed verified and documented information, requirements would impair the to comply with the ability-to-repay effectiveness of programs such as HARP. that the consumer has a reasonable requirements. Thus the cost to ability to repay the loan. TILA section While one GSE commenter addressed consumers of an exemption could be the potential difference between the 129C(b) provides a presumption of significant, as opposed to the relatively proposed exemption and the qualified compliance with regard to these ability- insignificant costs associated with mortgage provisions, the Bureau is not to-repay requirements if a loan is a complying with the special qualified persuaded by the arguments that qualified mortgage. Creditors may view mortgage provisions. Furthermore, given creditors would rather cease extending qualified mortgage status as important at credit than make a qualified mortgage the detailed GSE eligibility least in part because TILA section 130(a) loan subject to the rebuttable requirements, the Bureau does not and (k) provide that, if a creditor fails presumption. As discussed above, as believe it is likely that a creditor to comply with the ability-to repay GSE eligibility generally satisfies the operating a legitimate mortgage lending requirements, a consumer may be able requirements of § 1026.43(e)(4), the operation would face meaningful to recover special statutory damages Bureau does not believe that creditors litigation risk by originating qualified equal to the sum of all finance charges making qualified mortgages would incur mortgages, even those subject to the and fees paid within the first three years any meaningful additional risk by rebuttable presumption. The Bureau after consummation, among other making mortgage loans pursuant to the received no persuasive comments damages and costs, and may be able to eligibility requirements prescribed by contradicting the Bureau’s belief that assert the creditor’s failure to comply to GSEs. The Bureau believes that the the special qualified mortgage obtain recoupment or setoff in a ability-to-repay requirements and provisions of § 1026.43(e)(4) strikes the foreclosure action even after the statute qualified mortgage provisions reflect appropriate balance between consumer of limitations for affirmative claims has standard industry underwriting protection and the needs of the passed. TILA section 129C(b)(3)(B)(i) practices, and that creditors that make a mortgage lending market during the authorizes the Bureau to prescribe reasonable effort to determine a current transition period. Absent regulations that revise, add to, or consumer’s ability to repay would not persuasive evidence that the qualified subtract from the criteria that define a be concerned with potential litigation mortgage provisions would endanger qualified mortgage upon a finding that risk that may result from the rebuttable access to credit for the consumers such regulations are, among other presumption. Thus, based on the addressed by the proposal, the Bureau things, necessary or proper to ensure feedback provided, the Bureau does not does not believe that permitting this risk that responsible, affordable credit believe that a creditor would incur of consumer abuse is appropriate. Thus, remains available to consumers in a much, if any, additional cost by the Bureau concludes that the proposed manner consistent with the purposes of extending refinancing credit under the exemption is neither necessary nor TILA section 129C.

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Section 1026.43(e)(1) specifies the • Together with all affiliates, often charge higher rates and fees than strength of presumption of compliance extended 500 or fewer first-lien larger creditors for reasons including regardless of which regulatory mortgages during the preceding their higher cost of funds. The Bureau definition of qualified mortgage applies. calendar year; and proposed this amendment to Under § 1026.43(e)(1)(i), a qualified • Extended more than 50 percent of § 1026.43(b)(4) because it believes that mortgage that is not a higher-priced its total mortgages secured by properties many loans made by small creditors will covered transaction as defined in that are in rural or underserved areas exceed the existing qualified mortgage § 1026.43(b)(4) is subject to a conclusive during the preceding calendar year. safe harbor threshold. Without the presumption of compliance, or safe Section 1026.43(f) includes only proposed amendment to § 1026.43(b)(4), harbor. In contrast, under balloon-payment loans held in portfolio these loans would be considered higher- § 1026.43(e)(1)(ii) a qualified mortgage for at least three years by these small priced covered transactions and would fall under the rebuttable presumption of that is a higher-priced covered creditors, subject to certain exceptions. transaction is subject to a rebuttable compliance described in Further, it includes only loans that were presumption of compliance. § 1026.43(e)(1)(ii). The Bureau was not subject, at consummation, to a Section 1026.43(b)(4) defines a concerned that small creditors would be commitment to be acquired by any higher-priced covered transaction to less likely to make such loans due to person other than another qualified mean a transaction within the scope of concerns about liability risk, thereby small creditor. § 1026.43 with an annual percentage reducing access to responsible credit. rate that exceeds the average prime offer As discussed in the section-by-section rate for a comparable transaction as of analysis of § 1026.43(e)(5) below, the Comments Received the date the interest rate is set by 1.5 or Bureau proposed and is adopting an The Bureau solicited comment on more percentage points for a first-lien additional fourth category of qualified several issues related to the proposed covered transaction or by 3.5 or more mortgages that includes certain loans amendments to § 1026.43(b)(4). First, percentage points for a subordinate-lien originated and held in portfolio by small the Bureau solicited comment regarding covered transaction. The average prime creditors. Like § 1026.43(f), whether the proposed amendments to offer rates are published weekly by the § 1026.43(e)(5) includes loans originated § 1026.43(b)(4) are necessary to preserve Federal Financial Institutions and held in portfolio by creditors that access to responsible, affordable Examination Council based on a had total assets less than $2 billion mortgage credit and regarding any national survey of creditors, the Freddie (adjusted annually for inflation) as of adverse effects the proposed Mac Primary Mortgage Market Survey®. the end of the preceding calendar year amendments would have on consumers. The average prime offer rates estimate and, together with all affiliates, Most commenters agreed that small the national average APR for first-lien extended 500 or fewer first-lien creditors may charge more than larger mortgages offered to consumers with mortgages during the preceding creditors for legitimate business reasons; good credit histories and low-risk calendar year. Unlike § 1026.43(f), new that amending the definition of higher- transaction features (e.g., loan-to-value § 1026.43(e)(5) is not limited to creditors priced covered transaction for these ratios of 80 percent or less). The higher- that operate predominantly in rural or types of qualified mortgages is necessary priced covered transaction thresholds underserved areas and does not include to preserve access to responsible, generally conform to the thresholds for loans with a balloon payment. affordable mortgage credit; and that the ‘‘higher-priced mortgage loans’’ under Proposal Regarding Higher-Priced rule would provide appropriate § 1026.35, which contains escrow Covered Transactions protection for consumers even with a requirements and other special higher interest rate threshold. protections adopted after the financial The Bureau proposed to amend the Commenters expressing this view crisis for loans that have traditionally definition of higher-priced covered included some consumer advocacy been considered subprime. transaction in § 1026.43(b)(4) with organizations, coalitions of State Section 1026.43(e) and (f) defines respect to qualified mortgages that are regulators, national and State trade three categories of qualified mortgages. originated and held in portfolio by small groups representing creditors, national First, § 1026.43(e)(2) provides a general creditors as described in § 1026.43(e)(5) and State mortgage bankers associations, definition of a qualified mortgage. and with respect to balloon-payment a national association representing Second, § 1026.43(e)(4) provides that qualified mortgages originated and held home builders, one very large creditor, loans that are eligible to be purchased, in portfolio by small creditors operating and many small creditors. guaranteed, or insured by certain predominantly in rural or underserved A much smaller number of government agencies or Fannie Mae or areas as described in § 1026.43(f). The commenters opposed the proposed Freddie Mac are qualified mortgages, Bureau proposed to amend amendments. These included other subject to certain restrictions including § 1026.43(b)(4) to provide that a first- consumer advocacy organizations, a restrictions on product features and lien loan that is a qualified mortgage trade group representing very large points and fees. Section 1026.43(e)(4) under § 1026.43(e)(5) or (f) is a higher- creditors, a national organization expires after seven years and may expire priced covered transaction if the annual representing mortgage brokers, a letter sooner with respect to some loans if percentage rate exceeds APOR for a submitted in substantially similar form other government agencies exercise comparable transaction by 3.5 or more by several individual mortgage brokers, their rulemaking authority under TILA percentage points. This would have the and one very large creditor. These section 129C or if Fannie Mae or effect of extending the qualified commenters generally argued that a Freddie Mac exit conservatorship. mortgage safe harbor described in consumer’s ability to repay does not Third, § 1026.43(f) provides that § 1026.43(e)(1)(i) to first-lien loans that depend on the creditor’s size and that certain balloon-payment loans are are qualified mortgages under the same standards therefore should qualified mortgages if they are made by § 1026.43(e)(5) or (f) that have an annual apply to all creditors. One of these a small creditor that: percentage rate between 1.5 and 3.5 commenters argued that small creditors • Had total assets less than $2 billion percentage points above APOR. As do not need to charge higher rates and (adjusted annually for inflation) as of discussed in more detail below, the fees because their higher costs are offset the end of the preceding calendar year; Bureau understands that small creditors by lower default rates.

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The Bureau also solicited comment on conforming and therefore entail greater reasonable and good faith determination the proposed 3.5 percentage point risk. For similar reasons, the Bureau based on verified and documented threshold and whether another understands that larger creditors may be evidence that a consumer has a threshold would be more appropriate. unwilling to purchase such loans. Small reasonable ability to repay would entail While many commenters supported the creditors often are willing to evaluate significant litigation risk for small proposed 3.5 percentage point the merits of unique consumers and creditors, especially where their loan threshold, several commenters argued properties using flexible underwriting meets a qualified mortgage definition that the proposed 3.5 percentage point criteria and make highly individualized and qualifies for a rebuttable threshold was not sufficient and should underwriting decisions. Small creditors presumption of compliance. As be raised. Commenters expressing this often hold these loans on their balance discussed in part II.A above, small view included a national trade group sheets, retaining the associated credit, creditors as a group have consistently representing creditors, State bankers liquidity, and other risks. experienced lower credit losses for associations, and several small The Bureau also understands that residential mortgage loans than larger creditors. These commenters generally small creditors are a significant source creditors. The Bureau believes this is suggested thresholds between 4.0 and of credit in rural and underserved areas. strong evidence that small creditors 5.5 percentage points above APOR. As discussed above in part II.A, small have historically engaged in responsible Several of these commenters, including creditors are significantly more likely mortgage underwriting that includes the national trade group, cited the than larger creditors to operate offices in considered determinations of traditional principle that small creditors rural areas, and there are hundreds of consumers’ ability to repay, at least in generally must charge consumers 4.0 counties nationwide where the only part because they bear the risk of default percentage points above the creditor’s creditors are small creditors and associated with loans held in their cost of funds in order to operate safely hundreds more where larger creditors portfolios. The Bureau also believes that and soundly. have only a limited presence. because many small creditors use a Finally, the Bureau solicited comment The Bureau also understands that lending model based on maintaining on whether, to preserve access to small creditors, including those ongoing relationships with their mortgage credit, the Bureau also should operating in rural and underserved customers and have specialized raise the threshold for subordinate-lien areas, may charge consumers higher knowledge of the community in which covered transactions that are qualified interest rates and fees than larger they operate, they therefore may have a mortgages under § 1026.43(e)(5) and (f), creditors for several legitimate business more comprehensive understanding of and, if so, what threshold would be reasons. As discussed above in part II.A, their customers’ financial circumstances appropriate for those loans. A small small creditors may pay more for funds and may be better able to assess ability number of commenters, including a than larger creditors. Small creditors to repay than larger creditors. In State bankers association and several generally rely heavily on deposits to addition, the Bureau believes that small small creditors, urged the Bureau to fund lending activities and therefore creditors operating in limited adopt a higher threshold for pay more in expenses per dollar of geographical areas may face significant subordinate-lien covered transactions. revenue as interest rates fall and the risk of harm to their reputation within These commenters generally argued that spread between loan yields and deposit their community if they make loans that subordinate-lien loans entail inherently costs narrows. Small creditors also may consumers cannot repay. At the same greater credit risk and that a higher rely more on interest income than larger time, because of the relationship small threshold was needed to account for this creditors, as larger creditors obtain creditors have with their customers, the additional risk. Most commenters did higher percentages of their income from Bureau believes that the likelihood of not address the threshold for noninterest sources such as trading, litigation between a customer and his or subordinate-lien loans. investment banking, and fiduciary her community bank or credit union is services. The Final Rule low. In addition, small creditors may find However, the Bureau acknowledges The amendments to § 1026.43(b)(4) it more difficult to limit their exposure that due to their size small creditors are adopted as proposed. The Bureau to interest rate risk than larger creditors may find even a remote prospect of believes the amendments are warranted and therefore may charge higher rates to litigation risk to be so daunting that they to preserve access to responsible, compensate for that exposure. Similarly, may change their business models to affordable mortgage credit for some any individual loan poses a avoid it. The Bureau also believes that consumers, including consumers who proportionally more significant credit the exit of small creditors from the do not qualify for conforming mortgage risk to a smaller creditor than to a larger residential mortgage market could create credit and consumers in rural and creditor, and small creditors may charge substantial short-term access to credit underserved areas, as described below. higher rates or fees to compensate for issues. As discussed above in part II.A, the that risk. Consumers obtaining loans The Bureau continues to believe that Bureau understands that small creditors that cannot readily be sold into the raising the interest rate threshold as are a significant source of loans that do securitization markets also may pay proposed is necessary and appropriate not conform to the requirements for higher interest rates and fees to to preserve access to responsible, government guarantee and insurance compensate for the risk associated with affordable credit for consumers that are programs or purchase by entities such as the illiquidity of such loans. unable to obtain loans from other Fannie Mae and Freddie Mac. The Small creditors, including those creditors because they do not qualify for Bureau also understands that larger operating in rural and underserved conforming loans or because they live in creditors may be unwilling to make at areas, have repeatedly asserted to the rural or underserved areas. The existing least some of these loans because the Bureau and to other regulators that they qualified mortgage safe harbor applies to consumers or properties involved are unable or unwilling to assume the first-lien loans only if the annual cannot be accurately assessed using the risk of litigation associated with lending percentage rate is less than 1.5 standardized underwriting criteria outside the qualified mortgage safe percentage points above APOR for employed by larger creditors or are harbor. The Bureau does not believe that comparable transactions. The Bureau illiquid because they are non- the regulatory requirement to make a believes that many loans made by small

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creditors, including those operating in commenters have provided no evidence to provide that a first-lien loan that is a rural and underserved areas, will exceed to challenge the Bureau’s view, as qualified mortgage under § 1026.43(e)(6) that threshold but will not pose risks to described in the proposal, above, and in is a higher priced covered transaction if consumers. These small creditors have the section-by-section analysis of the annual percentage rate exceeds repeatedly asserted to the Bureau and § 1026.43(e)(5) below, that the APOR for a comparable transaction by other regulators that they will not combination of the small creditors’ 3.5 or more percentage points. This continue to extend mortgage credit relationship lending model, local provision would apply to the same unless they can make loans that are knowledge, and other characteristics creditors and loans as § 1026.43(e)(5) covered by the qualified mortgage safe and the inherent incentives of portfolio and (f). The Bureau therefore believes harbor. The Bureau therefore believes lending are sufficient to protect that the rationales regarding raising the that, unless § 1026.43(b)(4) is amended consumers. interest rate threshold for qualified as proposed, small creditors operating The Bureau does not believe, mortgages under § 1026.43(e)(5) and (f) in rural and underserved areas may however, that it is necessary to raise the described above apply with equal force reduce the number of mortgage loans threshold for first-lien covered to qualified mortgages under this new they make or stop making mortgage transactions above APOR plus 3.5 provision. loans altogether, limiting the availability percentage points for either first-lien or Accordingly, the Bureau is exercising of nonconforming mortgage credit and subordinate-lien loans as suggested by its authority under TILA sections 105(a) of mortgage credit in rural and some commenters. The Bureau to amend § 1026.43(b)(4) substantially underserved areas. estimated the average cost of funds for as proposed, with conforming The Bureau is sensitive to concerns small creditors from publicly available amendments as described above. about the consistency of protections for call reports filed by small creditors Pursuant to TILA section 105(a) the all consumers and about maintaining a between 2000 and 2012. These estimates Bureau generally may prescribe level playing field for market suggest that the majority of first-lien regulations that provide for such participants, but believes that a mortgage loans priced by a small adjustments and exceptions for all or differentiated approach is justified here. creditor at the creditor’s cost of funds any class of transactions that the Bureau The commenters who suggested that plus 4.0 percentage points, the judges are necessary or proper to consumers’ interests are best served by traditional principle of small creditor effectuate the purposes of TILA, among subjecting all creditors to the same safe and sound lending noted by several other things. In the 2013 ATR Final Rule standards provided nothing substantive commenters, would fall below even the the Bureau stated that it interpreted that refutes the points raised in the original threshold of APOR plus 1.5 TILA section 129C(b)(1) to create a Bureau’s proposal regarding the lending percentage points. However, the Bureau rebuttable presumption for qualified track records and business models of acknowledges that its estimates are mortgages generally and exercised its small creditors, their concerns about averages that do not reflect individual or adjustment authority under TILA 105(a) litigation risk and compliance burden, regional differences in cost of funds and with respect to prime loans (loans with and the potential access to credit do not reflect the additional credit risk an APR that do not exceed APOR by 1.5 problems the Bureau believes will arise associated with subordinate-lien loans. percentage points for first liens and 3.5 if § 1026.43(b)(4) is not amended. For The Bureau believes that the additional percentage points for second liens), to example, these commenters have not 2.0 percentage points afforded by the provide a conclusive presumption (e.g., indicated that large creditors would be APOR plus 3.5 percentage point safe harbor).154 In this final rule the able and willing to fulfill the role standard are sufficient to address these Bureau uses its TILA section 105(a) currently played by small creditors in differences. The Bureau therefore adjustment authority to further expand providing access to responsible, believes that amending § 1026.43(b)(4) the safe harbor to include certain affordable nonconforming credit or as proposed will allow small creditors covered transactions (those subject to credit in rural and underserved areas, to lend at a sustainable rate and still fall the qualified mortgage definition under nor have they provided evidence that within the qualified mortgage safe paragraph (e)(5), (e)(6) or (f)) that have the Bureau’s concerns about limitations harbor, thereby preserving access to an APR that exceeds the prime offer rate on access to credit if the interest rate affordable, responsible credit. for a comparable transaction as of the threshold is not raised are unfounded. As discussed below in the section-by- date the interest rate is set by 3.5 One commenter asserted that small section analysis of § 1026.43(e)(6), the percentage points for a first-lien covered creditors’ lower credit losses are Bureau is providing a two-year transaction. sufficient to offset their higher costs, transition period during which small The Bureau believes that this making it unnecessary to raise the creditors may make balloon-payment adjustment to also provide a safe harbor interest rate threshold. While the qualified mortgages regardless of for these loans is necessary and proper Bureau understands that small creditors whether they operate predominantly in to facilitate compliance with and to have historically had lower credit rural or underserved areas. The Bureau effectuate the purposes of TILA, losses, this commenter provided no therefore is amending § 1026.43(b)(4) to including to assure that consumers are evidence that these lower losses are include references to § 1026.43(e)(6) and offered and receive residential mortgage sufficient to offset small creditors’ loans on terms that reasonably reflect higher cost of funds and greater reliance that despite their lower credit losses and lower non- 155 interest expenses, community banks on average their ability to repay the loans. As on interest income and the greater risks have lower (worse) pre-tax return on assets and a associated with holding loans in a higher and increasing (worse and deteriorating) 154 See 78 FR 6514. comparatively small portfolio, and the ratio of noninterest expense to net operating 155 These adjustments are also consistent with the Bureau is not aware of any such revenue than noncommunity banks. The study Bureau’s authority under TILA section 153 attributes these in large part to community banks’ 129C(b)(3)(B)(i) to prescribe regulations that revise, evidence. In addition, these reliance on interest income and the narrowing of add to, or subtract from the criteria that define a the spread between asset yields and funding costs qualified mortgage upon a finding that such 153 The FDIC Community Banking Study, to due to a prolonged period of historically low regulations are necessary or proper to ensure that which the Bureau has referred as authority for the interest rates. FDIC Community Banking Study, p. responsible, affordable mortgage credit remains point that small creditors have historically incurred IV–V, 4–1–4–11. See also GAO Community Banks available to consumers in a manner consistent with lower credit losses than larger creditors, indicates and Credit Unions Report, p. 10–11. Continued

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described above, the Bureau believes 43(e)(5) Qualified Mortgage Defined— creditors operating predominantly in that, unless § 1026.43(b)(4) is amended, Small Creditor Portfolio Loans rural or underserved areas are qualified small creditors will be less likely to Background mortgages. make residential mortgage loans. TILA section 129C(a)(1) through (4) The Bureau’s Proposal Because small creditors are a significant and the Bureau’s rules thereunder, source of nonconforming mortgage The Bureau proposed to define a § 1026.43(c), prohibit a creditor from fourth category of qualified mortgages credit and mortgage credit generally in making a residential mortgage loan including loans originated and held in rural or underserved areas, this would unless the creditor makes a reasonable, portfolio by certain small creditors in significantly limit access to mortgage good faith determination, based on new § 1026.43(e)(5). This additional credit for some consumers. The Bureau verified and documented information, category of qualified mortgages would also believes that the relationship that the consumer has a reasonable have been similar in several respects to lending model, qualitative local ability to repay the loan. TILA section § 1026.43(f), which provides that certain knowledge, and size of small creditors, 129C(b) provides that a creditor or balloon loans made by small creditors combined with the intrinsic incentives assignee may presume that a loan has operating predominantly in rural or of portfolio lending, provide strong met the ability-to-repay requirements if underserved areas are qualified assurances that these creditors will a loan is a qualified mortgage. Creditors mortgages. As under § 1026.43(f), the make reasonable and good faith may view qualified mortgage status as additional category would have determinations of consumers’ ability to important at least in part because TILA included loans originated by small repay. Providing a safe harbor for these section 130 provides that, if a creditor creditors, as defined by asset-size and loans facilitates compliance with the fails to comply with the ability-to-repay transaction thresholds, and held in ability-to-repay standards in a manner requirements, a consumer may be able portfolio by those creditors for at least consistent with the purposes of TILA. to recover special statutory damages three years, subject to certain equal to the sum of all finance charges exceptions. However, proposed 43(e) Qualified Mortgages and fees paid within the first three years § 1026.43(e)(5) would have included 43(e)(1) Safe Harbor and Presumption of after consummation, among other small creditors that do not operate damages and costs, and may be able to Compliance predominantly in rural or underserved assert the creditor’s failure to comply to areas and would not have included The Bureau is adopting two obtain recoupment or setoff in a loans with a balloon payment. additional provisions regarding foreclosure action even after the statute Specifically, the new category would qualified mortgages, as discussed in the of limitations on affirmative claims has have included certain loans originated section-by-section analyses of expired. TILA section 129C(b)(2)(A)(vi) by creditors that: § 1026.43(e)(5) and (6) below. The authorizes, but does not require, the • Have total assets that do not exceed Bureau to establish limits on debt-to- Bureau therefore is adopting conforming $2 billion as of the end of the preceding income ratio or other measures of a changes to § 1026.43(e)(1) to include calendar year (adjusted annually for consumer’s ability to pay regular references to these new provisions. Like inflation); and expenses after making payments on • other qualified mortgages, qualified Together with all affiliates, mortgage and other . TILA section extended 500 or fewer first-lien mortgages under § 1026.43(e)(5) and (6) 129C(b)(3)(B)(i) authorizes the Bureau to mortgages during the preceding are covered by the safe harbor described revise, add to, or subtract from the calendar year. in § 1026.43(e)(1)(i) if they are not criteria that define a qualified mortgage The proposed additional category higher-priced covered transactions and upon a finding that such regulations are, would have included only loans held in are subject to the rebuttable among other things, necessary or proper portfolio by these creditors. Specifically, presumption of compliance described in to ensure that responsible, affordable proposed § 1026.43(e)(5) would have § 1026.43(e)(1)(ii) if they are higher- credit remains available to consumers in provided that a loan would lose its priced covered transactions. However, a manner consistent with the purposes qualified mortgage status under the Bureau is adopting a different of TILA section 129C or necessary and § 1026.43(e)(5) if it is sold, assigned, or definition of higher-priced covered appropriate to effectuate the purposes of otherwise transferred, subject to transaction to first-lien qualified TILA sections 129B and 129C. exceptions for transfers that are made mortgages under § 1026.43(e)(5) and (6). Section 1026.43(e) and (f) defines three or more years after consummation, The section-by-section analysis of three categories of qualified mortgages. to another qualifying institution, as § 1026.43(b)(4), above, describes the First, § 1026.43(e)(2) prescribes the required by a supervisory action, or alternate definition of higher-priced general definition of a qualified pursuant to a merger or acquisition. In covered transactions. mortgage. Second, § 1026.43(e)(4) addition, proposed § 1026.43(e)(5) provides that certain loans that are would have provided that a loan must 43(e)(2) Qualified Mortgage Defined— eligible to be purchased, guaranteed, or not be subject at consummation to a General insured by certain Federal government commitment to be acquired by any agencies or Fannie Mae or Freddie Mac The Bureau is adopting conforming person other than a person that also while operating under conservatorship meets the above asset and origination amendments to § 1026.43(e)(2) to are qualified mortgages. Section include references to § 1026.43(e)(5) and criteria. 1026.43(e)(4) expires seven years after The loan also would have had to (6), as described in the section-by- its effective date and may expire earlier conform to all of the requirements under section analyses of those sections, with respect to certain loans if other the § 1026.43(e)(2) general definition of below. Federal government agencies exercise a qualified mortgage except with regard their rulemaking authority under TILA to debt-to-income ratio. In other words, the purposes of this section, necessary and section 129C or if the GSEs exit the loan could not have: appropriate to effectuate the purposes of TILA • section 129B and section 129C, to prevent conservatorship. Third, § 1026.43(f) Negative-amortization, interest- circumvention or evasion thereof, or to facilitate provides that certain loans with a only, or balloon-payment features; compliance with such section. balloon payment made by small • A term longer than 30 years; or

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• Points and fees greater than 3 proposed and is adopting an alternate information used to calculate the debt- percent of the total loan amount (or, for definition of higher-priced covered to-income ratio or residual income in smaller loans, a specified amount). transaction for first-lien covered accordance with § 1026.43(c)(3) and (4). When underwriting the loan the transactions that are qualified mortgages The proposed comment would have creditor would have been required to under proposed § 1026.43(e)(5). explained that § 1026.43(c)(7) refers take into account the monthly payment Amended as proposed, § 1026.43(b)(4) creditors to § 1026.43(c)(5) for for any mortgage-related obligations, provides that a first-lien covered instructions on calculating the payment and: transaction that is a qualified mortgage on the covered transaction and that • Use the maximum interest rate that under proposed § 1026.43(e)(5) is a § 1026.43(c)(5) requires creditors to may apply during the first five years and higher-priced covered transaction if the calculate the payment differently than periodic payments of principal and annual percentage rate exceeds APOR § 1026.43(e)(2)(iv). The proposed interest that will repay the full for a comparable transaction by 3.5 or comment would have clarified that, for principal; more percentage points. This extends purposes of the qualified mortgage • Consider and verify the consumer’s the qualified mortgage safe harbor definition in § 1026.43(e)(5), creditors current and reasonably expected income described in § 1026.43(e)(1)(i) to first- must base their calculation of the or assets other than the value of the lien qualified mortgages defined under consumer’s debt-to-income ratio or property securing the loan; and proposed § 1026.43(e)(5) even if those residual income on the payment on the • Consider and verify the consumer’s loans have annual percentage rates covered transaction calculated current debt obligations, alimony, and between 1.5 and 3.5 percentage points according to § 1026.43(e)(2)(iv) instead child support. higher than APOR. Without the of according to § 1026.43(c)(5). Finally, The creditor also would have been amendment to § 1026.43(b)(4), such the proposed comment would have required to consider the consumer’s loans would have been covered by the clarified that creditors are not required debt-to-income ratio or residual income rebuttable presumption of compliance to calculate the consumer’s monthly and to verify the underlying information described in § 1026.43(e)(1)(ii). debt-to-income ratio in accordance with generally in accordance with The Bureau proposed ten comments appendix Q as is required under the § 1026.43(c)(7). Section 1026.43(c)(7) to clarify the requirements described in general definition of qualified mortgages describes how creditors must calculate proposed § 1026.43(e)(5). Proposed by § 1026.43(e)(2)(vi). a consumers’ debt-to-income ratio or comment 43(e)(5)–1 would have Proposed comment 43(e)(5)–3 would residual income for purposes of provided additional guidance regarding have noted that the term ‘‘forward complying with the ability-to-repay the requirement to comply with the commitment’’ is sometimes used to rules set forth in § 1026.43(c). Section general definition of a qualified describe a situation where a creditor 1026.43(c)(7) specifies that a creditor mortgage under § 1026.43(e)(2). The originates a mortgage loan that will be must consider the ratio of or difference proposed comment would have restated transferred or sold to a purchaser between a consumer’s total monthly the regulatory requirement that a pursuant to an agreement that has been debt obligations and total monthly covered transaction must satisfy the entered into at or before the time the income. Section 1026.43(c)(7)(i)(A) requirements of the § 1026.43(e)(2) transaction is consummated. The specifies that a consumer’s total general definition of qualified mortgage, proposed comment would have clarified monthly debt obligations includes the except with regard to debt-to-income that a mortgage that will be acquired by payment on the covered transaction as ratio, to be a qualified mortgage under a purchaser pursuant to a forward calculated according to § 1026.43(c)(5). § 1026.43(e)(5). As an example, the commitment does not satisfy the However, for purposes of proposed comment would have requirements of § 1026.43(e)(5), whether § 1026.43(e)(5), the calculation of the explained that a qualified mortgage the forward commitment provides for payment on the covered transaction under § 1026.43(e)(5) may not have a the purchase and sale of the specific must be determined in accordance with loan term in excess of 30 years because transaction or for the purchase and sale § 1026.43(e)(2)(iv) instead of longer terms are prohibited for qualified of transactions with certain prescribed § 1026.43(c)(5). mortgages under § 1026.43(e)(2)(ii). As criteria that the transaction meets. In contrast, the general definition of a another example, the proposed However, the proposed comment also qualified mortgage in § 1026.43(e)(2) comment would have explained that a would have clarified that a forward requires a creditor to calculate the qualified mortgage under § 1026.43(e)(5) commitment to another person that also consumer’s debt-to-income ratio may not result in a balloon payment meets the requirements of according to instructions in appendix because § 1026.43(e)(2)(i)(C) provides § 1026.43(e)(5)(i)(D) is permitted. The that qualified mortgages may not have proposed comment would have given Q 156 and specifies that the consumer’s balloon payments except as provided the following example: Assume a debt-to-income ratio must be 43 percent under § 1026.43(f). Finally, the creditor that is eligible to make qualified or less. proposed comment would have clarified mortgages under § 1026.43(e)(5) makes a As with all qualified mortgages, a that a covered transaction may be a mortgage. If that mortgage meets the qualified mortgage under § 1026.43(e)(5) qualified mortgage under § 1026.43(e)(5) purchase criteria of an investor with would have received either a rebuttable even though the consumer’s monthly which the creditor has an agreement to presumption of compliance with, or a debt-to-income ratio exceeds 43 percent, sell such loans after consummation, safe harbor from liability for violating, § 1026.43(e)(2)(vi) notwithstanding. then the loan does not meet the the ability-to-repay requirements in Proposed comment 43(e)(5)–2 would definition of a qualified mortgage under § 1026.43(c), depending on the annual have clarified that § 1026.43(e)(5) does § 1026.43(e)(5). However, if the investor percentage rate. However, as described not prescribe a specific monthly debt-to- meets the requirements of above in the section-by-section analysis income ratio with which creditors must § 1026.43(e)(5)(i)(D), the mortgage will of § 1026.43(b)(4), the Bureau also comply. Instead, creditors must be a qualified mortgage if all other consider a consumer’s debt-to-income applicable criteria also are satisfied. 156 The Bureau has proposed certain revisions to Appendix Q. See 78 FR 25638–25662 (May 2, 2013). ratio or residual income calculated Proposed comment 43(e)(5)–4 would Comments on this proposal must be received on or generally in accordance with have reiterated that, to be eligible to before June 3, 2013. § 1026.43(c)(7) and verify the make qualified mortgages under

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§ 1026.43(e)(5), a creditor must satisfy comment would have clarified that this with a generally applicable regulation the requirements of is true even if the transferee is not itself with future effect designed to § 1026.35(b)(2)(iii)(B) and (C). For ease eligible to originate qualified mortgages implement, interpret, or prescribe law of reference, the comment would have under § 1026.43(e)(5). The proposed or policy in the absence of a specific stated that § 1026.35(b)(2)(iii)(B) comment would have clarified that, order by or a specific agreement with a requires that, during the preceding once three or more years after government agency described in calendar year, the creditor and its consummation have passed, the § 1026.43(e)(5)(ii)(C) mandating the sale affiliates together originated 500 or qualified mortgage will continue to be a of one or more qualified mortgages fewer first-lien covered transactions and qualified mortgage throughout its life, under § 1026.43(e)(5) held by the that § 1026.35(b)(2)(iii)(C) requires that, and a transferee, and any subsequent creditor, or one of the other as of the end of the preceding calendar transferees, may invoke the circumstances listed in year, the creditor had total assets of less presumption of compliance for qualified § 1026.43(e)(5)(ii)(C). As an example, than $2 billion, adjusted annually for mortgages under § 1026.43(e)(1). the proposed comment would have inflation. Proposed comment 43(e)(5)–8 would explained that a qualified mortgage Proposed comment 43(e)(5)–5 would have clarified that, under under § 1026.43(e)(5) that is sold have clarified that creditors generally § 1026.43(e)(5)(ii)(B), a qualified pursuant to a capital restoration plan must hold a loan in portfolio to mortgage under § 1026.43(e)(5) may be under 12 U.S.C. 1831o would retain its maintain the transaction’s status as a sold, assigned, or otherwise transferred status as a qualified mortgage following qualified mortgage under at any time to another creditor that the sale. However, if the creditor simply § 1026.43(e)(5), subject to four meets the requirements of chose to sell the same qualified exceptions. The proposed comment § 1026.43(e)(5)(v). The proposed mortgage as one way to comply with would have clarified that, unless one of comment would have noted that section general regulatory capital requirements these exceptions applies, a loan is no § 1026.43(e)(5)(v) requires that a in the absence of supervisory action or longer a qualified mortgage under creditor, together with all affiliates agreement, the mortgage would lose its § 1026.43(e)(5) once legal title to the during the preceding calendar year, status as a qualified mortgage following debt obligation is sold, assigned, or originated 500 or fewer first-lien the sale unless it qualifies under another otherwise transferred to another person. covered transactions and had total definition of qualified mortgage. Accordingly, unless one of the assets less than $2 billion (adjusted Proposed comment 43(e)(5)–10 would exceptions applies, the transferee could annually for inflation) at the end of the have clarified that a qualified mortgage not benefit from the presumption of preceding calendar year. The proposed under § 1026.43(e)(5) retains its compliance for qualified mortgages comment would have clarified that a qualified mortgage status if a creditor under § 1026.43(e)(1) unless the loan qualified mortgage under § 1026.43(e)(5) merges with or is acquired by another also met the requirements of another that is transferred to a creditor that person regardless of whether the qualified mortgage definition. Proposed meets these criteria would retain its creditor or its successor is eligible to comment 43(e)(5)–6 would have qualified mortgage status even if it is originate new qualified mortgages under clarified that § 1026.43(e)(5)(ii) applies transferred less than three years after § 1026.43(e)(5) after the merger or not only to an initial sale, assignment, consummation. acquisition. However, the proposed or other transfer by the originating Proposed comment 43(e)(5)–9 would comment also would have clarified that creditor but to subsequent sales, have clarified that § 1026.43(e)(5)(ii)(C) the creditor or its successor can assignments, and other transfers as well. facilitates sales that are deemed originate new qualified mortgages under The proposed comment would have necessary by supervisory agencies to § 1026.43(e)(5) after the merger or given the following example: Assume revive troubled creditors and resolve acquisition only if the creditor or its Creditor A originates a qualified failed creditors. The proposed comment successor complies with all of the mortgage under § 1026.43(e)(5). Six would have noted that this section requirements of § 1026.43(e)(5) at that months after consummation, Creditor A provides that a qualified mortgage under time. The proposed comment would sells the qualified mortgage to Creditor § 1026.43(e)(5) retains its qualified have provided the following example: B pursuant to § 1026.43(e)(5)(ii)(B) and mortgage status if it is sold, assigned, or Assume a creditor that originates 250 the loan retains its qualified mortgage otherwise transferred to: another person covered transactions each year and status because Creditor B complies with pursuant to a capital restoration plan or originates qualified mortgages under the limits on asset size and number of other action under 12 U.S.C. 1831o; the § 1026.43(e)(5) is acquired by a larger transactions. If Creditor B sells the actions or instructions of any person creditor that originates 10,000 covered qualified mortgage, it will lose its acting as conservator, receiver or transactions each year. Following the qualified mortgage status under bankruptcy trustee; an order of a State acquisition, the small creditor would no § 1026.43(e)(5) unless the sale qualifies or Federal government agency with longer be able to originate for one of the § 1026.43(e)(5)(ii) jurisdiction to examine the creditor § 1026.43(e)(5) qualified mortgages exceptions for sales three or more years pursuant to State or Federal law; or an because, together with its affiliates, it after consummation, to another agreement between the creditor and would originate more than 500 covered qualifying institution, as required by such an agency. The proposed comment transactions each year. However, the supervisory action, or pursuant to a would have clarified that a qualified § 1026.43(e)(5) qualified mortgages merger or acquisition. mortgage under § 1026.43(e)(5) that is originated by the small creditor before Proposed comment 43(e)(5)–7 would sold, assigned, or otherwise transferred the acquisition would retain their have clarified that, under under these circumstances retains its qualified mortgage status. § 1026.43(e)(5)(ii)(A), if a qualified qualified mortgage status regardless of mortgage under § 1026.43(e)(5) is sold, how long after consummation it is sold Comments Received assigned, or otherwise transferred three and regardless of the size or other A large number and broad range of years or more after consummation, the characteristics of the transferee. The commenters expressed support for loan retains its status as a qualified proposed comment also would have proposed § 1026.43(e)(5). These mortgage under § 1026.43(e)(5) clarified that § 1026.43(e)(5)(ii)(C) does commenters included national, State, following the transfer. The proposed not apply to transfers done to comply and regional trade groups representing

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banks and credit unions, more than 90 creditors are uniquely able and have These commenters argued that the 500 small and mid-size creditors from more strong incentives to make accurate annual first-lien originations limit is than two dozen States, one very large determinations of ability to repay, that significantly more restrictive than the $2 creditor, coalitions of State regulators, the incentives to make these billion asset limit and should therefore consumer advocacy organizations, a determinations accurately and either be raised or be eliminated. national trade group representing conservatively are particularly strong Commenters suggested alternate limits mortgage bankers, national trade groups with respect to portfolio loans, and that such as 1,000 portfolio loans or between representing homebuilders and real the combination of these factors would 2,000 and 5,000 total first-lien estate agents, a tribally designated provide ample protection for originations. Some commenters, housing entity, and representatives of consumers. Commenters opposing including trade groups representing the manufactured housing industry. proposed § 1026.43(e)(5) did not refute creditors and individual small and mid- These commenters generally agreed the points raised by the Bureau in the size creditors, urged the Bureau to raise with the points made by the Bureau in proposal. These commenters did not the $2 billion asset limit to $5 billion or its proposal. offer evidence or substantive arguments $10 billion. These commenters argued A much smaller number of that access to credit would be preserved that this change is necessary to facilitate commenters objected to proposed without the proposed amendments, did access to nonconforming credit and § 1026.43(e)(5). These creditors not suggest meaningful alternative ways access to credit in areas that are served included a consumer advocacy of preserving access to credit, and did only by mid-sized banks with assets organization, a national trade group not offer substantive arguments or greater than $2 billion. representing very large creditors, one evidence that credit made available Third, the Bureau solicited comment very large creditor, a national trade pursuant to proposed § 1026.43(e)(5) regarding the requirement that loans be group representing mortgage brokers, likely would be irresponsible or held in portfolio generally, including and several individual mortgage unaffordable. One commenter argued whether the proposed exemptions were brokers. These commenters generally that proposed § 1026.43(e)(5) would not appropriate and whether other criteria, argued that the Bureau should not adopt preserve access to credit because it guidance, or exemptions should be special rules for small creditors because would not provide significant regulatory included regarding the requirement to a consumer’s ability to repay does not relief to small creditors and because it hold loans in portfolio, either in lieu of depend on the size of the creditor. was limited to a small number of loans or in addition to those included in the These commenters also raised other per small creditor and therefore would proposal. Commenters generally did not arguments, such as that proposed not benefit consumers. object to the requirement that loans be § 1026.43(e)(5) would encourage Second, the Bureau solicited held in portfolio as described in regulatory arbitrage and charter comment on the following issues proposed § 1026.43(e)(5) and the shopping by creditors or that the relating to the criteria describing small accompanying comments. In addition, Bureau’s proposal to provide an creditors: Whether the Bureau should many commenters agreed with the additional qualified mortgage definition adopt criteria consistent with those used Bureau that the requirement that loans is evidence that the ability-to-repay and in § 1026.35(b) and in the § 1026.43(f) be held in portfolio provides important qualified mortgage provisions of the definition of qualified mortgages which protections for consumers because it Dodd-Frank Act are fundamentally applies to certain balloon loans made by aligns consumers’ and creditors’ flawed and should be abandoned in small creditors operating predominantly interests regarding ability to repay. One favor of further study. in rural or underserved areas; whether commenter, a consumer advocacy The Bureau solicited comments on a the proposed $2 billion asset limit is organization, argued against the number of specific issues related to appropriate and whether the limit proposed provision allowing loans to be proposed § 1026.43(e)(5). First, the should be higher or lower; and whether transferred less than three years after Bureau solicited comment on whether to include a limitation on the number of origination because of a creditor’s non-conforming mortgage credit is first-lien covered transactions extended bankruptcy or failure. This commenter likely to be unavailable if the rule is not by the creditor and its affiliates and, if argued that bankruptcy or failure may amended and whether amending the so, whether the proposed 500- be indicative of poor underwriting rule as proposed would ensure that such transaction limit is appropriate. leading to high default rates and that credit is made available in a Most commenters urged the Bureau to consumers therefore should retain the responsible, affordable way. expand the scope of proposed right to make claims against the creditor Commenters supporting proposed § 1026.43(e)(5) by adjusting the asset or in bankruptcy, conservatorship, or § 1026.43(e)(5) generally agreed with the originations limits or both.157 Many receivership. Bureau’s assessment that, without commenters, including national and Fourth, the Bureau solicited comment amendment, the ability-to-repay and State trade groups representing banks on the loan feature and underwriting qualified mortgage rules would and credit unions and many individual requirements with which qualified significantly limit access to small creditors, asserted that 500 annual mortgages under proposed nonconforming credit and access to first-lien originations is more typical of § 1026.43(e)(5) would have to comply. credit in rural and underserved areas. a creditor with assets of $500 million The Bureau solicited comment on Many individual small creditors than a creditor with assets of $2 billion. whether qualified mortgages under asserted that they would limit the proposed § 1026.43(e)(5) should be number of residential mortgage loans 157 Several commenters, including representatives exempt from additional provisions of they made or cease mortgage lending of creditors that finance manufactured housing and § 1026.43(e)(2) or should be subject to two creditors that provide low-documentation altogether if the rule was not amended mortgage loans predominantly to Asian immigrants any other loan feature or underwriting and that this would severely limit in California, argued that the Bureau should adopt requirements, either in lieu of or in access to credit in their communities. additional qualified mortgage definitions that addition to those proposed. In National and State trade groups would include their mortgage loan products. The particular, the Bureau solicited Bureau did not propose and did not solicit representing creditors expressed similar comment regarding such additional qualified comment on whether these qualified views on behalf of their members. These mortgage definitions and is not adopting such mortgages should be exempt from the commenters generally agreed that small definitions at this time. requirement to consider debt-to-income

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ratio calculated according to appendix comment on the extent and significance preserve access to credit for some Q and the prohibition on debt-to-income of this risk generally. Specifically, the consumers, including consumers who ratios in excess of 43 percent and Bureau solicited comment on whether do not qualify for conforming mortgage whether other requirements related to consumers who obtain small creditor credit, and will ensure that this credit debt-to-income ratio or residual income portfolio loans likely could have is provided in a responsible, affordable should be provided, either in lieu of or obtained credit from other sources and way. in addition to those proposed. Most on the extent to which a consumer who As discussed above in part II.A and in commenters supported relaxing obtains a portfolio loan from a small the section-by-section analysis of underwriting restrictions on portfolio creditor would be disadvantaged by the § 1026.43(b)(4), the Bureau understands loans made by small creditors generally inability to make an affirmative claim of that small creditors are a significant and exempting these loans from both noncompliance with the ability-to-repay source of nonconforming mortgage the requirement to consider debt-to- rules or to assert noncompliance in a credit. The Bureau believes that many of income ratio calculated according to foreclosure action. these loans would not be made by larger appendix Q and the prohibition on debt- Most commenters, including national creditors because the consumers or to-income ratios in excess of 43 percent and State trade groups representing properties involved are not accurately specifically.158 These commenters, banks and credit unions, as well as assessed by the standardized including consumer advocacy many individual small creditors, stated underwriting criteria used by larger organizations, national and State trade that small creditors make portfolio loans creditors or because larger creditors are groups representing banks and credit almost exclusively to consumers who do unwilling to make loans that cannot be unions, and many small creditors, not qualify for secondary market sold to the securitization markets. The agreed that small creditors are financing for reasons unrelated to ability Bureau therefore believes that access to particularly able to make accurate to repay, including: comparable sales mortgage credit for some consumers determinations of ability to repay that are not sufficiently similar, too would be restricted if small creditors without a specific numeric limit and distant, or too old; irregular , lack stopped making nonconforming loans or that the requirement to calculate debt- of zoning, or problems with land significantly reduced the number of to-income ratio according to appendix Q records; condominiums that do not nonconforming loans they make. would present a significant burden to comply with secondary market owner- Such an impact could be particularly many small creditors with little or no occupancy requirements; loan-to-value significant in rural areas, where small corresponding benefit to consumers. In ratio; self-employed and seasonally- creditors are a significant source of addition, many small creditors and employed consumers who cannot prove credit. As discussed above in part II.A, national and State trade groups continuance to the satisfaction of the small creditors are significantly more representing creditors argued that all secondary market; consumers with a likely than larger creditors to operate small creditors should be eligible to new job; and small dollar loans that fall offices in rural areas, and there are make balloon-payment qualified below secondary market thresholds. hundreds of counties nationwide where mortgages if the loan is held in These commenters noted that these the only creditors are small creditors portfolio. issues may be particularly problematic and hundreds more where larger Fifth, and last, the Bureau solicited in rural areas but that they are common creditors have only a limited presence. comment on the following issue. in suburban and urban areas as well. The Bureau also continues to believe Section 1026.43(e)(5) could provide These commenters stated that that small creditors are particularly well different legal status to loans with consumers who qualify for secondary suited to originate responsible, identical terms based solely on the market financing generally obtain affordable mortgage credit. As discussed creditor’s size and intention to hold the secondary market loans that are not held above in part II.A, the small creditors loan in portfolio. The Bureau stated its in portfolio and would be unaffected by often are better able to assess ability to belief that the size of and relationship proposed § 1026.43(e)(5). repay because they are more likely to lending model employed by small Two commenters, a national trade base underwriting decisions on local creditors provide significant assurances group representing very large creditors knowledge and qualitative data and less that the mortgage credit they extend will and a very large creditor, argued that likely to rely on standardized be responsible and affordable. However, consumers would be disadvantaged by underwriting criteria. Because many to the extent that consumers may have proposed § 1026.43(e)(5) because the small creditors use a lending model a choice of creditors, some of whom are rule would apply even in geographic based on maintaining ongoing not small, it was not clear that areas where there are other creditors relationships with their customers, they consumers shopping for mortgage loans and because consumers comparing often have a more comprehensive would be aware that their choice of loans from different creditors would understanding of their customer’s creditor could significantly affect their have to compare different legal rights financial circumstances. Small legal rights. The Bureau solicited that are difficult to value. creditors’ lending activities often are limited to a single community, allowing 158 One commenter, a consumer advocacy The Final Rule the creditor to have an in-depth organization, urged the Bureau to adopt a lower Section 1026.43(e)(5) and the related understanding of the economic and debt-to-income ratio limit, such as 41 percent, for comments are adopted as proposed. For other circumstances of that community. low-income borrowers for all qualified mortgages. In contrast, other commenters urged the Bureau to the reasons stated below, the Bureau In addition, because small creditors raise or eliminate the debt-to-income ratio limit for believes that § 1026.43(e)(5) is necessary often consider a smaller volume of all qualified mortgages secured by property in and appropriate to preserve access to applications for mortgage credit, small Puerto Rico and Hawaii. These commenters argued creditors may be more willing and able that the 43 percent debt-to-income ratio limit would responsible, affordable credit for some limit access to mortgage credit in Puerto Rico and consumers, including consumers who to consider the unique facts and Hawaii because debt-to-income ratios in these areas do not qualify for conforming mortgage circumstances attendant to each often are more than 43 percent. The Bureau did not credit. consumer and property, and senior propose and did not solicit comment regarding Access to affordable, responsible personnel are more likely to be able to changes to the debt-to-income ratio limit for other categories of qualified mortgages and is not credit. The Bureau continues to believe bring their judgment to bear regarding reconsidering this issue at this time. that § 1026.43(e)(5) is necessary to individual underwriting decisions.

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Small creditors also have particularly and portfolio lending described above, national trade group representing small strong incentives to make careful the credit provided generally will be creditors and several other commenters assessments of a consumer’s ability to responsible and affordable. argued that the originations limit in repay because small creditors bear the The Bureau is sensitive to concerns § 1026.43(e)(5) should be based on risk of default associated with loans about the consistency of protections for portfolio loans originated annually held in portfolio and because each loan all consumers and about maintaining a rather than all first-lien originations. represents a proportionally greater risk level playing field for market These commenters argued that to a small creditor than to a larger one. participants, but nevertheless believes including loans sold to the secondary In addition, small creditors operating in that a differentiated approach is market in the origination threshold was limited geographical areas may face justified here. The commenters that not appropriate because the purpose of significant risk of harm to their suggested that consumers’ interests are § 1026.43(e)(5) is to encourage portfolio reputations within their communities if best served by subjecting all creditors to lending and thereby preserve they make loans that consumers cannot the same standards provided nothing consumers’ access to nonconforming repay. that refutes the points raised in the credit. As many commenters reiterated, small Bureau’s proposal regarding the low On its face, the rationale advanced by creditors have repeatedly asserted that credit losses and unique business these commenters argues against any they will not lend outside the qualified models of small creditors, their limitation on the number of portfolio mortgage safe harbor. The Bureau does concerns about litigation risk and loans, as any limit would discourage not believe that small creditors face compliance burden, and the potential portfolio lending in excess of that limit significant litigation risk from the access to credit problems the Bureau and all portfolio loans appear to carry ability-to-repay requirements. For the believes will arise if the rule is not with them a greater inherent incentive reasons stated above, the Bureau amended. The Bureau also disagrees to exercise care in determining ability to believes that small creditors as a group that § 1026.43(e)(5) would not benefit repay than loans sold to the secondary generally are better positioned to assess consumers because it is limited to a market. However, one of the lessons ability to repay than larger creditors, small number of loans per creditor. learned in the recent financial crisis is have particularly strong incentives to Because there are thousands of small that in the heat of a housing bubble, accurately assess ability to repay creditors as defined by § 1026.43(e)(5) in even portfolio lending standards can independent of the threat of ability-to- the United States, the Bureau believes become too lax and standards that repay litigation, and historically have that § 1026.43(e)(5) is likely to preserve ensure responsible, affordable lending been very successful at accurately access to affordable, responsible may be threatened. assessing ability to repay, as mortgage credit for hundreds of Thus, the Bureau did not propose to demonstrated by their comparatively thousands of consumers annually. provide qualified mortgage treatment to low credit losses. In addition, the Asset and originations limits. Section all portfolio loans, but rather only to Bureau believes that because many 1026.43(e)(5) includes portfolio loans portfolio loans made by small creditors small creditors use a lending model made by creditors that have assets of $2 on the theory that both the based on maintaining ongoing billion or less (adjusted annually for characteristics of the creditor—its small relationships with their customers, inflation) and, together with all size, community-based focus, and those customers may be more likely to affiliates, originate 500 or fewer first- commitment to relationship lending— pursue alternatives to litigation in the lien mortgages each year. The Bureau and the inherent incentives associated event that difficulties with a loan arise. proposed these thresholds to maintain with portfolio lending together would The Bureau therefore believes that it is consistency with the § 1026.43(f) justify extending qualified mortgage unlikely that small creditors will face qualified mortgage definition, which status to a loan that would not meet the significant liability for claims of includes certain balloon loans made and ordinary qualified mortgage criteria. noncompliance filed by their customers held in portfolio by small creditors Given this rationale, the Bureau does or will be significantly disadvantaged by operating predominantly in rural or not believe it is appropriate to adopt an recoupment and setoff claims in underserved areas, and with thresholds originations limit under which a foreclosure actions. used in § 1026.35 as adopted by the creditor would be treated as a small, However, the Bureau acknowledges Bureau’s 2013 Escrows Final Rule. In relationship-based creditor no matter that due to their size small creditors the proposal, the Bureau emphasized how many loans it is selling to the may find even a remote prospect of the importance of maintaining secondary market. litigation risk to be so daunting that they consistent criteria, particularly between Using publicly available HMDA data may change their business models to § 1026.43(e)(5) and (f), to avoid creating and call report data, the Bureau avoid it. The Bureau also believes that undesirable regulatory incentives (such estimated the impact of adopting a limit the exit of small creditors from the as an incentive to make balloon loans based on portfolio loan originations residential mortgage market could create where a creditor has the capability of instead of total first-lien originations. substantial short-term access to credit making other mortgages that better This change would add nearly one issues. protect consumers’ interests) and to thousand creditors to the scope of The Bureau therefore believes that, minimize compliance burdens by § 1026.43(e)(5). These creditors appear absent an amendment to the ability-to- minimizing the number of metrics to hold a significantly smaller repay and qualified mortgage rules, creditors must track to determine their percentage of the loans they originate in many small creditors will reduce or eligibility for various regulatory portfolio than creditors that would fall cease their mortgage lending activities, provisions. The Bureau continues to within § 1026.43(e)(5) as proposed, which would cause many consumers to believe that it is important to maintain raising questions about the extent to face constraints on their access to credit consistency between these provisions. which these creditors can be considered that are entirely unrelated to their Many commenters urged the Bureau relationship lenders. This reinforces the ability to repay. The Bureau believes to raise the limit above 500 first-lien point that the relationship lending that § 1026.43(e)(5) will preserve originations for § 1026.43(e)(5), for model underlying the Bureau’s rationale consumers’ access to credit and, because instance by changing the types of loans for § 1026.43(e)(5) cannot be defined by of the characteristics of small creditors counted or the numeric threshold. A reference only to a subset of a creditor’s

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originations, but rather based on the the institution is engaged in appropriate to ensure that consumers nature of its overall operations. The relationship-based lending and have access only to affordable, Bureau therefore continues to believe employing qualitative or local responsible credit. that an originations limit based on total knowledge in its underwriting Portfolio requirements. The Bureau first-lien originations is the most decreases. The Bureau therefore continues to believe that the discipline appropriate way to ensure that the new continues to believe that the proposed imposed when small creditors make category of qualified mortgages is limit of 500 total first-lien originations loans that they will hold in their appropriately cabined. is consistent with the rationale portfolio is important to protect In addition, many commenters underlying § 1026.43(e)(5) and consumers’ interests and to prevent recommended increasing the appropriate to ensure that consumers evasion. The Bureau proposed that originations limit from 500 first-lien have access only to responsible, qualified mortgages under mortgages to between 2,000 and 5,000. affordable mortgage credit. § 1026.43(e)(5) must be held in portfolio The principal rationale offered by these Finally, some commenters argued that for three years to retain their status as commenters is that banks with assets the Bureau should increase the asset qualified mortgages, thus matching the over $500 million often originate more limit from $2 billion to $5 billion or $10 statute of limitations for affirmative than 500 first-lien mortgages per year billion. The Bureau does not believe this claims for violations of the ability-to- and that the limitation on originations is change is necessary to preserve access to repay rules. If a small creditor holds a not consistent with (i.e., is significantly credit. The traditional definition of a qualified mortgage in portfolio for three more restrictive than) the $2 billion community bank has long been regarded years, it retains all of the litigation risk asset limit. as an institution with less than $1 for potential violations of the ability-to- The Bureau intended and believes billion in assets.159 The Bureau’s repay rules except in the event of a that both elements of the threshold play estimates show that § 1026.43(e)(5) as subsequent foreclosure. independent and important roles. The proposed includes over 90 percent of The Bureau is extending qualified Bureau believes that an originations institutions with assets less than $1 mortgage status only to portfolio loans limit is the most accurate means of billion. In its recent Community Bank made by small creditors, rather than all limiting § 1026.43(e)(5) to the class of Study, the FDIC employed a more portfolio loans, because, as discussed small creditors the business model of complex definition that excluded a above, the Bureau believes that small which the Bureau believes will best small number of institutions with assets creditors are a unique and important assure that the qualified mortgage under $1 billion based primarily on the source of non-conforming mortgage definition facilitates access only to nature of their assets and added a credit and mortgage credit in rural areas responsible, affordable credit. However, modest number of banks with assets for which there is no readily available the Bureau believes that an asset limit greater than $1 billion based on a multi- replacement, that small creditors are is nonetheless important to preclude a factor test including criteria such as the likely to be particularly burdened by the very large creditor with relatively geographic scope of the institution’s litigation risk associated with the modest mortgage operations from taking operations and focus on core banking ability-to-repay requirements and are advantage of a provision designed for activities.160 The Bureau has concluded particularly likely to reduce or cease much smaller creditors with much that the FDIC’s definition is too complex mortgage lending if subjected to these different characteristics and incentives. for regulatory purposes and no rules without accommodation, and that Due to general scale, such a creditor commenters advocated that the Bureau small creditors have both strong would not have the same type of adopt it. However, the Bureau notes that incentives and particular ability to make community focus and reputational and the larger banks added by the FDIC’s these loans in a way that ensures that balance-sheet incentives to assess ability more nuanced definition of community consumers are able to repay that may to repay with sufficient care as smaller, bank had average assets of $1.9 billion. not be present for larger creditors. community-based creditors, and is In addition, the Bureau notes that a As the Bureau acknowledged in the generally better able from a systems creditor with assets between $1 billion proposal, limitations on the ability of a perspective to handle compliance and $2 billion has, on average, 16 creditor to sell loans in its portfolio may functions. branches, 252 employees, and limit the creditor’s ability to manage its Based on estimates from publicly operations in 5 counties. In contrast, a regulatory capital levels by adjusting the available HMDA and call report data, creditor with between $2 billion and value of its assets, may affect the creditor’s ability to manage interest rate the Bureau understands that, under the $10 billion in assets has, on average, 34 proposed criteria, the likelihood of risk by preventing sales of seasoned branches, 532 employees, and falling within the scope of loans, and may present other safety and operations in 12 counties. As the staff § 1026.43(e)(5) decreases as a creditor’s soundness concerns. The Bureau has and geographic scope of an institution size increases. The proposed limits consulted with prudential regulators on increases, it becomes less and less likely include approximately 95 percent of these issues and continues to believe the that a creditor will engage in creditors with less than $500 million in proposed exceptions address these relationship lending or use qualitative assets, approximately 74 percent of concerns without sacrificing the or local knowledge in its underwriting. creditors with assets between $500 consumer protection provided by the In addition, as an institution adds staff million and $1 billion, and portfolio requirement. and branches, it is more likely from a approximately 50 percent of creditors One commenter, a consumer systems perspective to handle with assets between $1 billion and $2 advocacy organization, argued that the compliance functions. The Bureau billion. These percentages are entirely Bureau should not adopt the proposed therefore believes that the proposed $2 consistent with the Bureau’s rationale exception that would allow a qualified billion asset limit is consistent with the for § 1026.43(e)(5), as described above. mortgage under § 1026.43(e)(5) to retain rationale underlying § 1026.43(e)(5) and As the size of an institution increases, its qualified mortgage status if it is it is to be expected that the scale of its transferred less than three years after 159 See, e.g., FDIC Community Banking Study, p. lending business will increase as well. 1–1. origination because of a bank failure. As the scale of a creditor’s lending 160 FDIC Community Banking Study, p. 1–1—1– The commenter argued that the need for business increases, the likelihood that 5. supervisory action strongly suggests that

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loans should not be entitled to the and financial circumstances of a believes that small creditors’ historically presumption of compliance associated particular consumer. While the Bureau low credit losses demonstrate that the with qualified mortgage status. The believes that many creditors can make size and other characteristics of and commenter further asserted that mortgage loans with consumer debt-to- relationship lending model employed agencies charged with resolving failed income ratios above 43 percent that by small creditors provide significant creditors have sufficient authority to consumers are able to repay, the Bureau assurances that the mortgage credit they protect transferees from consumers’ also believes that portfolio loans made extend will be responsible and claims. The Bureau understands that by small creditors are particularly likely affordable. Because consumers are creditors fail for many different reasons, to be made responsibly and to be unlikely to receive loans from small many of which are entirely unrelated to affordable for the consumer even if such creditors that result in default or underwriting practices for residential loans exceed the 43-percent threshold. foreclosure, it appears unlikely that mortgage loans. The Bureau also The Bureau therefore believes that it is consumers will be significantly continues to believe that this exception appropriate to presume compliance disadvantaged by the inability to make is necessary to ensure that resolutions even above the 43-percent threshold for an affirmative claim of noncompliance are not impeded. The Bureau therefore small creditors who meet the criteria set with the ability-to-repay rules or to declines to adopt the commenter’s forth in § 1026.43(e)(5). The Bureau assert noncompliance in a foreclosure suggestion. believes that the discipline imposed action. The Bureau therefore believes Underwriting requirements and debt- when small creditors make loans that that this issue is not sufficient to to-income ratio. Qualified mortgages they will hold in their portfolio is outweigh the significant benefit of under § 1026.43(e)(5) differ from sufficient to protect consumers’ interests § 1026.43(e)(5) in preserving access to qualified mortgages under the in this regard. Because the Bureau is not credit. § 1026.43(e)(2) general definition in two adopting a specific limit on consumers’ Legal authority. Accordingly, the key respects. First, as discussed above debt-to-income ratio, the Bureau does Bureau is exercising its authority under in the section-by-section analysis of not believe it is necessary to require TILA sections 105(a), 129C(b)(2)(vi), and § 1026.43(b)(4), qualified mortgages creditors to calculate debt-to-income 129C(b)(3)(B)(i) to adopt § 1026.43(e)(5) under § 1026.43(e)(5) are subject to a ratio in accordance with a particular as proposed for the reasons summarized higher annual percentage rate threshold standard such as that set forth in below and discussed in more detail for the qualified mortgage safe harbor. appendix Q. above. Under TILA section 105(a) the Second, creditors are required to The Bureau does not believe it is Bureau generally may prescribe consider the consumer’s debt-to-income appropriate to permit all small creditors regulations that provide for such ratio or residual income and to verify to make balloon-payment qualified adjustments and exceptions for all or the underlying information generally in mortgages under § 1026.43(e)(5) as any class of transactions that the Bureau accordance with § 1026.43(c), but are suggested by some commenters. The judges are necessary and proper to not required to calculate the consumer’s Bureau believes that Congress clearly effectuate the purposes of TILA, which debt-to-income ratio according to indicated in the Dodd-Frank Act that include the purposes of TILA 129C, and appendix Q and there is no numeric only small creditors operating facilitate compliance with these limit on the consumers’ debt-to-income predominantly in rural or underserved purposes, among other things. The ratio. areas should be eligible to originate Bureau believes that these amendments The Bureau continues to believe that balloon-payment qualified mortgages. are necessary and proper to ensure that consideration of debt-to-income ratio or However, as discussed below in the consumers are offered and receive residual income is fundamental to any section-by-section analyses of residential mortgage loans on terms that determination of ability to repay. A § 1026.43(e)(6) and (f), the Bureau is reasonably reflect their ability to repay consumer is able to repay a loan if he providing a two-year transition period the loans. This provision is consistent or she has sufficient funds to pay his or during which all small creditors may with the findings of TILA section 129C her other obligations and expenses and originate balloon-payment qualified by ensuring that consumers are able to still make the payments required by the mortgages. This transition period will obtain responsible affordable credit, terms of the loan. Arithmetically allow the Bureau to study the existing which informs the Bureau’s comparing the funds to which a definitions of rural and underserved to understanding of its purposes. consumer has recourse with the amount determine whether they adequately Furthermore, the Bureau revises the of those funds the consumer has already preserve consumers’ access to qualified mortgage criteria in the statute committed to spend or is committing to responsible, affordable mortgage credit to adopt this new definition by finding spend in the future is necessary to and will facilitate creditors’ transition to that this provision is necessary and determine whether sufficient funds alternatives to balloon-payment proper to ensure that responsible, exist. mortgages, such as adjustable-rate affordable mortgage credit remains However, for the same reasons that mortgages. available to consumers in a manner the Bureau declined to impose a specific Valuation of legal rights by consistent with the purposes of TILA 43-percent threshold for balloon- consumers. Finally, the Bureau is section 129C, necessary and appropriate payment qualified mortgages under the convinced that small creditor portfolio to effectuate the purposes of TILA balloon loan provision in § 1026.43(f), loans covered by § 1026.43(e)(5) are section 129C and to facilitate the Bureau does not believe it is unlikely to be provided to consumers compliance with TILA section129C. As necessary to impose a specific debt-to- who qualify for secondary market described above, the Bureau believes income ratio or residual income financing or who can otherwise obtain that, unless § 1026.43(e)(5) is adopted, threshold for this category of qualified mortgage credit. The Bureau therefore small creditors will be less likely to mortgages. As discussed above, the concludes that the risk that comparison make residential mortgage loans. Bureau believes that small creditors shopping consumers will be unable to Because small creditors are a significant often are particularly able to make assess the value of the right to sue in the source of nonconforming mortgage highly individualized determinations of event of default or foreclosure is credit nationally and mortgage credit ability to repay that take into unlikely to be significant in practice. generally in rural or underserved areas, consideration the unique characteristics Also, as discussed above, the Bureau this would significantly limit access to

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mortgage credit for some consumers. As discussed above in the section-by- regarding their own portfolios reported The Bureau also believes that the section analysis of § 1026.43(e)(5), the that between 90 and 100 percent of their relationship lending model, qualitative Bureau proposed and is adopting a portfolio mortgage loans include a local knowledge, and size of small fourth category of qualified mortgage balloon-payment feature. creditors, combined with the intrinsic which includes loans originated and These commenters also stated that incentives of portfolio lending, provide held in portfolio by small creditors that small creditors that rely on balloon- strong assurances that these creditors meet the same asset and originations payment features generally do not have typically will make reasonable and good criteria regardless of whether they the capability at this time to originate faith determinations of consumers’ operate predominantly in rural and and service adjustable-rate mortgages, ability to repay when originating loans underserved areas. Qualified mortgages also known as ARMs. Adjustable-rate pursuant to § 1026.43(e)(5). This in this category are subject to different, mortgages would serve as an alternate provision is also necessary and proper more relaxed requirements regarding way to manage interest rate risk and are to facilitate compliance with the debt-to-income ratio and are covered by permissible under § 1026.43(e)(5) as purposes of TILA by easing the ability the regulatory safe harbor at a higher proposed and finalized. However, of small creditors to make qualified annual percentage rate than other commenters expressed concerns that mortgages. The Bureau also believes that qualified mortgages. However, because adjustable-rate mortgages are more the provisions of § 1026.43(e)(5) relating TILA section 129C(b)(2)(A)(ii) specifies difficult for small creditors to originate to debt-to-income ratio or residual that qualified mortgages generally may and service because of the systems and income are authorized by TILA section not have a balloon payment, disclosures required. 129C(b)(2)(vi), which authorizes, but § 1026.43(e)(5) does not include Finally, these commenters reiterated does not require, the Bureau to adopt mortgages with a balloon payment. that small creditors generally will be guidelines or regulations relating to The Bureau’s Proposal and Comments unwilling or unable to lend outside the debt-to-income ratio or alternative Received qualified mortgage safe harbor because measures of ability to pay regular of the associated litigation risk. As such, Prohibition on balloon payments expenses after payment of total monthly argued these commenters, the generally. As discussed above, in debt. prohibition on balloon-payments under proposing the new category of qualified § 1026.43(e)(5) would cause a significant 43(e)(6) Qualified Mortgage Defined— mortgage for certain small creditor reduction in consumers’ access to Temporary Balloon-Payment Qualified portfolio loans under § 1026.43(e)(5), Mortgage Rules Background the Bureau solicited comment regarding nonconforming credit. As discussed above, TILA section the loan feature and underwriting These commenters also asserted that 129C(b) and the Bureau’s rules requirements with which qualified small creditors have been originating thereunder, § 1026.43(e), provide that a mortgages under proposed balloon-payment loans for many years creditor or assignee may presume that a § 1026.43(e)(5) would have to comply. without significant harm to consumers loan has met the ability-to-repay Specifically, the Bureau solicited and that balloon-payment loans made requirements described in TILA section comment on whether qualified by small creditors generally have very 129C(a)(1) through (4) and the Bureau’s mortgages under proposed low default rates that are a fraction of rules thereunder, § 1026.43(c), if a loan § 1026.43(e)(5) should be exempt from average default rates for mortgage loans is a qualified mortgage. TILA section provisions of § 1026.43(e)(2) in addition generally. These commenters added that 129C(b)(2)(A)(ii) provides that qualified to those related to debt-to-income ratio portfolio mortgage loans are a mortgages generally cannot include a or should be subject to any other loan significant portion of assets and a balloon payment. Accordingly, feature or underwriting requirements, significant revenue stream for most § 1026.43(e)(2) of the Bureau’s rules either in lieu of or in addition to those small creditors. Therefore, the provides a general qualified mortgage proposed. commenters argued, the inability to definition that excludes loans with a A large number of commenters, make balloon-payment loans within the balloon payment. In addition, including national and State trade qualified mortgage safe harbor will § 1026.43(e)(4) provides a temporary groups representing creditors and many cause serious financial harm to many qualified mortgage definition that also individual small creditors, argued that small creditors, further reducing excludes balloon-payment loans. § 1026.43(e)(5) would not have the consumers’ access to nonconforming However, TILA section 129C(b)(2)(E) intended effect of preserving access to and other mortgage credit. permits the Bureau to provide by nonconforming mortgage credit and Rollover balloons. The Bureau also regulation an alternate qualified mortgage credit in rural areas unless solicited comment regarding consumers mortgage definition that includes § 1026.43(e)(5) permitted small creditors with balloon-payment loans originated certain balloon payment mortgages to make balloon-payment mortgages before the January 10, 2014, effective originated and held in portfolio by small within the qualified mortgage safe date of the 2013 ATR Final Rule for creditors operating predominantly in harbor regardless of whether they which the balloon payment will become rural or underserved areas. The Bureau operate predominantly in rural or due after the effective date. The Bureau exercised this authority in adopting underserved areas. noted that small creditors that use § 1026.43(f). Section 1026.43(f) allows These commenters argued that small balloon-payment loans to manage creditors with less than $2 billion in creditors rely on balloon-payment interest rate risk generally refinance the assets that originate, together with all provisions to manage interest rate risk remaining principal when the balloon affiliates, fewer than 500 first-lien for the overwhelming majority of their payment becomes due. In other words, mortgages annually to originate balloon- residential mortgage portfolio loans. the small creditors who follow this payment qualified mortgages if the One national trade group representing practice generally use the balloon creditor operates predominantly in rural small creditors estimated that 75 payment feature as an opportunity to or underserved areas and if certain other percent of all residential mortgages in adjust the loan’s interest rate, not requirements are met. The Bureau small creditors’ portfolios have a because they expect the consumer will adopted definitions of rural and balloon-payment feature. Many small repay the loan in full before the balloon underserved in § 1026.35(b)(2)(iv). creditors who reported information payment becomes due.

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In the proposal, the Bureau stated its payment loan originated before the • Points and fees greater than 3 belief that the balloon-payment effective date from the ability-to-repay percent of the total loan amount (or, for qualified mortgage provision in and qualified mortgage rules or smaller loans, a specified amount). § 1026.43(f) and the small creditor significantly broaden the ability of The creditor must consider and verify portfolio exemption in proposed creditors to make balloon loans within the consumer’s current or reasonably § 1026.43(e)(5) would be adequate to the qualified mortgage safe harbor such expected income or assets (other than facilitate refinancing of balloon- that a greater portion of these the dwelling and attached payment loans for which the balloon- refinancing loans would be covered. that secure the loan) and the consumer’s payment becomes due after January 10, current debt obligations, alimony, and 2014. However, the Bureau solicited The Final Rule child support. The creditor also must feedback regarding whether these The Bureau is adopting new consider the consumer’s monthly debt- provisions were adequate for this § 1026.43(e)(6), which provides a two- to-income ratio or residual income. As purpose or whether creditors would year transition period during which with § 1026.43(e)(5) and (f), there is no need additional time beyond the small creditors as defined by numeric limit on a consumer’s debt-to- January 10, 2014, effective date or § 1026.43(e)(5) can originate balloon- income ratio and creditors are not would require any additional payment qualified mortgages even if required to calculate debt-to-income accommodations, modifications, or they do not operate predominantly in ratio according to appendix Q. In exemptions. rural or underserved areas. The Bureau addition, the loan must provide for Several commenters, including small is adopting new § 1026.43(e)(6) because scheduled payments that are creditors and creditor trade groups, it believes that doing so is necessary to substantially equal and calculated using specifically acknowledged the preserve access to responsible, an amortization period that does not difficulties presented by balloon- affordable mortgage credit for some exceed 30 years, an interest rate that payment loans originated before the consumers. As discussed further below does not increase over the term of the effective date. These commenters stated and in connection with § 1026.43(f), loan, and a term of 5 years or longer. the balloon-payment mortgages offered during the two-year period in which A loan must not be subject at by small creditors generally have § 1026.43(e)(6) is in place, the Bureau consummation to a commitment to be payments (other than the balloon) that intends to review whether the acquired by any person other than a amortize the loan over 30 years. These definitions of ‘‘rural’’ or ‘‘underserved’’ person that also meets the above asset- commenters stated that consumers most should be further adjusted for purposes size and number of transactions criteria. often take these loans not because they of the qualified mortgage rule and to A loan loses its qualified mortgage expect to repay the loan before the explore how it can best facilitate the status under § 1026.43(e)(6) if it is sold, balloon payment becomes due but based transition of small creditors’ who do not assigned, or otherwise transferred, on creditors’ assurances that they will operate predominantly in rural or subject to exceptions for transfers that be able to refinance the loan, albeit at underserved areas from balloon- are made three or more years after a different rate. In other words, these payment loans to adjustable-rate consummation, to another qualifying commenters confirmed that small mortgages as Congress intended under institution, as required by a supervisory action, or pursuant to a merger or creditors use balloons in a way that is the Dodd-Frank Act. At the end of the acquisition. functionally similar to a long-term period, however, the Bureau expects adjustable-rate mortgage. These As with all qualified mortgages, a that the statutory framework will take qualified mortgage under § 1026.43(e)(6) commenters asserted that small full effect such that balloon-payment creditors generally are committed to receives either a rebuttable or loans are treated as qualified mortgages conclusive presumption of compliance refinancing these loans for their only where originated by small creditors customers. They stated, however, that with the ability-to repay requirements in operating predominantly in rural or § 1026.43(c), depending on the annual they will be unable or unwilling to do underserved areas under § 1026.43(f). so after the effective date unless changes percentage rate. However, as described New § 1026.43(e)(6) defines an are made to permit them to originate above in the section-by-section analysis additional category of qualified new balloon-payment loans within the of § 1026.43(b)(4), the Bureau is mortgages that, like § 1026.43(e)(5), qualified mortgage safe harbor. adopting an alternate definition of These commenters stated that, if the includes loans originated and held in higher-priced covered transaction for portfolio by creditors that: first-lien covered transactions that are small creditors who originated these • loans are unable or unwilling to Have total assets that do not exceed qualified mortgages under refinance them, consumers will be $2 billion as of the end of the preceding § 1026.43(e)(5) and (f). As also is forced to seek refinancing elsewhere. calendar year (adjusted annually for discussed above in the section-by- According to these commenters, inflation); and section analysis of § 1026.43(b)(4), this • consumers with balloon-payment loans Together with all affiliates, alternate definition applies to qualified from small creditors generally do not extended 500 or fewer first-lien covered mortgages under § 1026.43(e)(6) as well. qualify for secondary market financing, transactions during the preceding As such, § 1026.43(b)(4) provides that a and many of these consumers therefore calendar year. first-lien covered transaction that is a will have difficulty finding other New § 1026.43(e)(6) is not limited to qualified mortgage under proposed refinancing or restructuring options. small creditors operating predominantly § 1026.43(e)(6) is a higher-priced The commenters asserted that in in rural or underserved areas. However, covered transaction if the annual extreme circumstances some consumers the new provision incorporates by percentage rate exceeds APOR for a who are unable to refinance or make the reference all other requirements under comparable transaction by 3.5 or more balloon payment might face foreclosure the § 1026.43(f) balloon-payment percentage points. This extends the if they were unable to secure qualified mortgage definition. The loan qualified mortgage safe harbor described refinancing. therefore cannot have: in § 1026.43(e)(1)(i) to first-lien Commenters who raised this issue • Payments that result in an increase qualified mortgages defined under generally argued that the Bureau should of the principal balance; proposed § 1026.43(e)(6) even if those exempt loans that refinance a balloon- • A term longer than 30 years; and loans have annual percentage rates

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between 1.5 and 3.5 percentage points exempt from the ability-to-repay rules or particularly risky for consumers because higher than APOR. Such loans within the qualified mortgage safe the consumer must rely on the creditors’ otherwise would be covered by the harbor. As discussed further below with nonbinding assurances that the loan rebuttable presumption of compliance regard to § 1026.43(f), the Bureau will be refinanced before the balloon described in § 1026.43(e)(1)(ii). believes it is appropriate to use the two- payment becomes due. Even a creditor As discussed below, § 1026.43(e)(6) is year transition period to consider with the best of intentions may find intended to provide a temporary whether it can develop more accurate or itself unable to refinance a loan when a transition period during which small precise definitions of rural and balloon payment becomes due. Changes creditors that do not operate underserved. However, the Bureau in the consumer’s credit profile may predominantly in rural and underserved believes that Congress made a deliberate affect the creditor’s willingness to areas can originate balloon-payment policy choice in the Dodd-Frank Act not refinance or the price of the loan, and qualified mortgages. Section to extend qualified mortgage status to consumers may be unable to anticipate 1026.43(e)(6) therefore applies only to balloon-payment products outside of the new rate that will be offered and loans consummated on or before such areas. The Bureau believes that suddenly find that they are unable to January 10, 2016, two years after the with appropriate transition time, and afford it. Consumers with balloon- effective date of the 2013 ATR Final perhaps implementation support, small payment mortgages therefore face the Rule. Qualified mortgages originated creditors can develop adjustable-rate periodic possibility of losing their under § 1026.43(e)(6) on or before mortgage products that will enable them property even if they perform their January 10, 2016, will retain their to manage interest rate risk in a manner obligations under the terms of the loan. qualified mortgage status after January that poses less risk for consumers. Adjustable-rate mortgages present less 10, 2016, as long as all other Accordingly, the Bureau also will focus risk to consumers because they do not requirements, such as the requirement during the two-year transition period on require refinancing and because interest to retain the loan in portfolio subject to facilitating small creditors’ conversion rate adjustments are calibrated over the certain exceptions, are met. to adjustable-rate mortgage products. life of the loan and therefore are more The Bureau believes § 1026.43(e)(6) The Bureau understands that predictable. appropriately balances consumer adjustable-rate mortgages offered today Publicly available data from reports protection and access to credit issues. by many creditors would fall within that filed with the National Credit Union As discussed above in the section-by- qualified mortgage safe harbor and Administration indicate that around 20 section analyses of § 1026.43(b)(4) and incorporate interest rate adjustment percent of small credit unions, (e)(5), the Bureau believes that small features similar to those of the balloon- including some with assets below $150 creditors are an important source of payment mortgages used by many small million, originate adjustable-rate mortgage credit, including creditors. For example, the interest rate mortgages and only 18 percent of small nonconforming mortgage credit, and of a 5/5 ARM adjusts five years after credit unions originate balloon-payment that there would be a significant consummation and every five years mortgages but not adjustable-rate reduction in consumers’ access to credit thereafter for the duration of the loan mortgages. This suggests that small if small creditors were to substantially term, paralleling the interest rate creditors can manage interest rate risk, reduce the number of residential adjustment terms of an amortizing 5- lend safely and soundly, and afford the mortgage loans they make or cease year balloon-payment mortgage that is expense and compliance burden mortgage lending altogether. The Bureau expected to be refinanced until it is paid associated with originating adjustable- also understands that small creditors off. The Bureau also understands that rate mortgages. generally do not originate long-term there are differences between The Bureau believes that Congress fixed-rate portfolio loans because of the adjustable-rate and balloon-payment made a clear policy choice in the Dodd- associated interest rate risk, that many mortgages that may be significant for Frank Act that small creditors not small creditors do not offer ARMs some creditors. Interest rate adjustments operating predominantly in rural or because they do not have the for adjustable-rate mortgages are tied to underserved areas must ultimately compliance and other systems in place changes in an index rate, and commonly conduct their residential mortgage to originate and service them, and that used index rates (e.g., the London business using adjustable-rate mortgages many small creditors have expressed Interbank Offered Rate or ‘‘LIBOR’’) may or other alternatives to balloon-payment reluctance to offer balloon-payment not track small creditors’ cost of funds. mortgages. However, as discussed below mortgages outside the qualified Interest rates for adjustable-rate in the section-by-section analysis of mortgage safe harbor because of the mortgages generally are capped at a § 1026.43(f), the Bureau believes that associated litigation risk. The Bureau certain amount above the initial rate, further study of the existing definitions also understands that some consumers and this cap makes managing interest of rural and underserved is warranted. may find it more inconvenient, more rate risk more complex. In addition, In addition, the Bureau acknowledges costly, or more difficult to refinance creditors that do not currently originate that many small creditors are not their existing balloon-payment loans if ARMs are likely to incur costs for equipped to offer alternatives to small creditors are unable or unwilling developing the capability to do so (such balloon-payment mortgages today and to refinance these loans because these as by purchasing additional modules for are unlikely to be so equipped by the consumers would have to seek financing existing lending platforms), and there January 10, 2014, effective date. If small from other creditors. The Bureau also is are additional expenses associated with creditors are unable or unwilling to sensitive to concerns that some servicing adjustable-rate mortgages, as originate new loans as of that date, the consumers may be unable to find consumers must be notified before each Bureau believes there will be alternative financing and therefore interest rate adjustment and servicing deleterious effects on access to could face foreclosure. systems must be equipped to adjust the nonconforming credit and possible Commenters’ preferred solution is for interest rate and payment amount. harm to consumers with balloon- the Bureau to significantly and However, adjustable-rate mortgages payment mortgages originated before the permanently broaden the ability of all also pose significantly less risk to effective date that expect to refinance small creditors to make balloon- consumers. The Bureau believes that their loans with the same creditor when payment mortgages that are either balloon-payment mortgages are the balloon payment becomes due.

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The Bureau therefore believes that, in source of nonconforming mortgage which they asserted excluded many order to preserve access to affordable, credit nationally and mortgage credit communities that are considered rural responsible credit, it is necessary and generally in rural or underserved areas, under other legal or regulatory appropriate to provide small creditors, this would significantly limit access to definitions or that are commonly as defined in § 1026.43(e)(5), with a mortgage credit for some consumers. viewed as rural because of their small, two-year transition period after the The Bureau also believes that the isolated, agricultural or undeveloped effective date during which they can relationship lending model, qualitative characteristics. Some of these continue to originate balloon loans. The local knowledge, and size of small commenters proposed that the Bureau Bureau believes that this two-year creditors, combined with the intrinsic adopt alternate definitions of ‘‘rural,’’ period will enable the Bureau to re- incentives of portfolio lending, provide such as those used by the U.S. examine the definitions of rural or strong assurances that these creditors Department of Agriculture’s Rural underserved to determine, among other typically will make reasonable and good Housing Loan Program or the Farm things, whether these definitions faith determinations of consumers’ Credit System. Others suggested that all accurately identify communities in ability to repay when originating loans creditors or all small creditors should be which there are limitations on access to pursuant to § 1026.43(e)(6). This eligible to make balloon-payment credit and whether it is possible to provision is also necessary and proper qualified mortgages if the loan is held in develop definitions that are more to facilitate compliance with the portfolio, or that a balloon-payment accurate or more precise. The Bureau purposes of TILA by easing the ability mortgage should be considered a may consider proposing changes to the of small creditors to make qualified qualified mortgage if the consumer and definitions of rural or underserved mortgages. The Bureau also believes that property have certain characteristics based on the results of its inquiry. The the provisions of § 1026.43(e)(6) relating that suggest the loan would not be two-year transition period also will to debt-to-income ratio or residual eligible for sale to the secondary market. facilitate small creditors’ conversion to income are authorized by TILA section Other commenters raised concerns adjustable-rate mortgage products or 129C(b)(2)(vi), which authorizes, but about the requirement that balloon- other alternatives to balloon-payment does not require, the Bureau to adopt payment qualified mortgages have a loans. guidelines or regulations relating to loan term of five years or longer. These Accordingly, the Bureau is exercising debt-to-income ratio or alternative commenters asserted that many small its authority under TILA sections 105(a), measures of ability to pay regular creditors currently originate balloon- 129C(b)(2)(vi), and 129C(b)(3)(B)(i) to expenses after payment of total monthly payment loans with shorter terms and adopt § 1026.43(e)(6) for the reasons debt. would be unable to manage interest rate summarized below and discussed in risk using balloon-payment loans with a more detail above. Under TILA section 43(f) Balloon-Payment Qualified five-year term. 105(a) the Bureau generally may Mortgages Made by Certain Creditors One commenter, a consumer prescribe regulations that provide for Section 1026.43(f) provides that advocacy organization, argued that all such adjustments and exceptions for all certain balloon loans made and held in qualified mortgages should be long- or any class of transactions that the portfolio by certain small creditors term, fixed-rate loans and that the Bureau judges are necessary and proper operating predominantly in rural or § 1026.43(f) definition of balloon- to effectuate the purposes of TILA, underserved areas are qualified payment qualified mortgages should be which include the purposes of TILA mortgages. The Bureau did not propose abandoned. 129C, and facilitate compliance with specific amendments to § 1026.43(f), but As discussed above in the section by these purposes, among other things. The explained that if proposed section analysis of § 1026.43(e)(5), Bureau believes that these amendments § 1026.43(e)(5) were adopted with § 1026.43(e)(5) as adopted is consistent are necessary and proper to ensure that changes inconsistent with § 1026.43(f), with existing § 1026.43(f). The Bureau consumers are offered and receive the Bureau would consider and might did not propose and did not solicit residential mortgage loans on terms that adopt parallel amendments to comment regarding amendments reasonably reflect their ability to repay § 1026.43(f) in order to keep these § 1026.43(f) except with respect to the loans. This provision is consistent sections of the regulation consistent. preserving consistency with with the findings of TILA section 129C The Bureau solicited comment on the § 1026.43(e)(5), and the Bureau is not by ensuring that consumers are able to advantages and disadvantages of reconsidering the definitions of rural obtain responsible affordable credit, maintaining consistency between and underserved and the § 1026.43(f) which informs the Bureau’s § 1026.43(e)(5) and (f). Commenters restrictions on the terms of balloon- understanding of its purposes. generally did not specifically discuss payment qualified mortgages at this Furthermore, the Bureau revises the the importance of consistency, although time. The Bureau is therefore not qualified mortgage criteria in the statute most commenters advocating for adopting any changes to § 1026.43(f) in to adopt this new definition by finding changes to § 1026.43(e)(5) stated that this rulemaking. that this provision is necessary and conforming changes should be made to However, the Bureau is sensitive to proper to ensure that responsible, § 1026.43(f) as well. However, many concerns expressed by commenters that affordable mortgage credit remains commenters raised concerns regarding the existing definitions of rural and available to consumers in a manner the scope of the Bureau’s definitions of underserved may not include some consistent with the purposes of TILA rural and underserved under communities in which there are section 129C, necessary and appropriate § 1026.43(f). Commenters including limitations on access to credit related to to effectuate the purposes of TILA national and State trade groups the community’s rural character or the section 129C and to facilitate representing creditors and dozens of small number of creditors operating in compliance with TILA section129C. As small creditors argued that the Bureau’s the community. For example, the described above, the Bureau believes definitions of rural and underserved are Bureau is aware that there are that, unless § 1026.43(e)(6) is adopted, too restrictive and do not adequately drawbacks to a county-based system for small creditors will be less likely to preserve consumers’ access to credit. defining ‘‘rural’’ and ‘‘undeserved,’’ make residential mortgage loans. Commenters were particularly critical of such as in western States where Because small creditors are a significant the Bureau’s definition of ‘‘rural,’’ counties may cover extremely large

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areas. As discussed above in the section- time to implement the more complex or consistent with the statute and 2013 by-section analysis of § 1026.43(e)(6), resource-intensive new requirements.161 ATR Final Rule, compensation paid by a creditor to a mortgage broker the Bureau is providing a two-year VII. Dodd-Frank Act Section 1022(b)(2) continues to be included in points and transition period during which small Analysis creditors can originate balloon payment fees in addition to any origination qualified mortgages even if they do not In developing the final rule, the charges paid by a consumer to the Bureau has considered potential creditor. operate predominantly in rural or 162 underserved areas. In addition to benefits, costs, and impacts. In The final rule also provides certain addition, the Bureau has consulted, or providing time for small creditors to exemptions from the ATR requirements. offered to consult with, the prudential further develop their capacity to offer These include exemptions for regulators, SEC, HUD, FHFA, the extensions of credit made by certain adjustable-rate mortgages, the Bureau Federal Trade Commission, and the types of creditors, in accordance with expects to re-examine the definitions of Department of the Treasury, including applicable conditions, including rural or underserved during this time to regarding consistency with any creditors designated by the U.S. determine, among other things, whether prudential, market, or systemic Department of the Treasury as these definitions accurately identify objectives administered by such Community Development Financial communities in which there are agencies. The Bureau also held Institutions; creditors designated by the limitations on access to credit and discussions with or solicited feedback U.S. Department of Housing and Urban whether it is possible to develop from the United States Department of Development as either a Community definitions that are more accurate or Agriculture, Rural Housing Service, the Housing Development Organization or a more precise. The Bureau may consider Federal Housing Administration, and Downpayment Assistance Provider of proposing changes to the definitions of the Department of Veterans Affairs Secondary Financing; and certain rural or underserved based on the regarding the potential impacts of the creditors designated as nonprofit results of its inquiry. final rule on those entities’ loan organizations under section 501(c)(3) of programs. the Internal Revenue Code. The final 43(g) Prepayment Penalties The Bureau is issuing this final rule rule also exempts from the ability-to- to adopt certain exemptions, The Bureau is adopting conforming repay requirements extensions of credit modifications, and clarifications to amendments to § 1026.43(g) to include made pursuant to a program TILA’s ability-to-repay rule. On January references to § 1026.43(e)(5) and (6), as administered by a housing finance 10, 2013, the Bureau issued the 2013 agency (HFA) and extensions of credit described in the section-by-section ATR Final Rule to implement the analyses of those sections, above. made pursuant to an Emergency ability-to-repay requirements of the Economic Stabilization Act program. VI. Effective Date Dodd-Frank Act that generally require a The final rule creates two new creditor to make a reasonable, good faith definitions for loans that can be This final rule is effective on January determination of a consumer’s ability to qualified mortgages. The final rule 10, 2014. The rule applies to repay a mortgage loan and other creates a new category of qualified transactions for which the creditor statutory provisions. See 78 FR 6407 mortgages that includes, among other received an application on or after that (Jan. 30, 2013). At the same time, the conditions, certain loans originated and date. The Bureau received several Bureau issued the 2013 ATR Proposed held on portfolio by creditors that have comments requesting various delays in Rule related to certain proposed total assets of less than $2 billion at the the effective date. For example, one exemptions, modifications, and end of the previous calendar year and, commenter asked the Bureau to delay clarifications to the ability-to-repay rule. together with all affiliates, originated the effective date for all of § 1026.43 by See 78 FR 6621 (Jan. 30, 2013). 500 or fewer first-lien covered six months to provide sufficient time to The final rule provides exceptions to mortgages during the previous calendar implement the processes, procedures, the 2013 ATR Final Rule, which year. In addition, the final rule creates and systems changes needed to comply implements the statute’s inclusion of a two-year transition period during with the ability-to-repay requirements. loan originator compensation in points which balloon loans originated and held The Bureau has considered these and fees. Specifically, in the final rule, on portfolio by small creditors (as comments, but declines to delay the payments by consumers to mortgage defined above) who do not operate effective date. The Bureau brokers need not be counted as loan predominantly in rural or underserved originator compensation where such acknowledges the challenges identified areas can be qualified mortgages under payments already have been included in by commenters, but believes that an defined conditions. Such loans would points and fees as part of the finance effective date of January 10, 2014 not be eligible for qualified mortgage charge. In addition, compensation paid provides sufficient time to implement status under section 1026.43(f) because by a mortgage broker to its employee under the statute, that provision is the required changes. Also, as discussed loan originator need not be included in in the 2013 ATR Final Rule, the Bureau limited to creditors that operate points and fees, nor does compensation predominantly in rural or underserved believes that this effective date will paid by a creditor to its own loan areas. The final rule also allows small ensure that consumers receive the originator employees. However, creditors to charge a higher annual protections in these rules as soon as percentage rate of 3.5 percentage points reasonably practicable, taking into 161 See 78 FR 6555 (Jan. 30, 2013). above the Average Prime Offer Rate for account the timeframes established in 162 Specifically, section 1022(b)(2)(A) of the first-lien qualified mortgages, and still section 1400(c) of the Dodd-Frank Act, Dodd-Frank Act calls for the Bureau to consider the benefit from a conclusive presumption the overlapping provisions of the other potential benefits and costs of a regulation to consumers and covered persons, including the of compliance (or safe harbor). This title XIV final rules, the Bureau’s efforts potential reduction of access by consumers to higher threshold applies to the new at facilitating regulatory consumer financial products or services; the impact small creditor portfolio qualified implementation, and the need to afford on depository institutions and credit unions with mortgages just described, to first-lien creditors, other affected entities, and $10 billion or less in total assets as described in section 1026 of the Dodd-Frank Act; and the impact balloon-payment qualified mortgages other industry participants sufficient on consumers in rural areas. originated by small creditors operating

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predominantly in rural or underserved mortgage broker to its employee loan qualified mortgage regime, the general areas and, to balloon mortgages originator need not be included in discussion of the impacts from the originated by other small creditors points and fees, nor does compensation January 2013 rule is informative for during the two-year transition period. paid by a creditor to its own loan each of the various provisions. This analysis generally examines the originator employees. However, The exclusion (inclusion) of benefits, costs, and impacts of the final compensation paid by a creditor to a additional loan originator compensation rule against the baseline of the January mortgage broker is included in points amounts in points and fees may 2013 ATR Rule.163 For the analyses and fees in addition to any origination similarly lead fewer (more) loans to considered here, the Bureau believes charges paid by a consumer to the exceed the points and fees triggers and that the baseline of the 2013 ATR Final creditor. rate triggers for high-cost mortgages Rule is the most appropriate and As noted above, the Bureau believes under HOEPA. Based on the history of informative. Because the final rule that the most appropriate baseline high-cost mortgage loans, the Bureau includes amendments and clarifications against which to consider these changes believes that loans exceeding the high- to the January 2013 ATR Rule, a is the 2013 ATR Final Rule. Consistent cost thresholds are less likely to be comparison to the January baseline with the literal language of the statute, offered unless they can be restructured focuses precisely on the impacts of such the 2013 ATR Final Rule provided that with lower up front points and fees. provisions. The analyses in this section loan originator compensation be treated Consumers who are offered and accept rely on data that the Bureau have as additive to other elements of points loans above the high-cost mortgage obtained, the record including and fees and that compensation is threshold will have the added consumer comments received in the proposed added as it flows downstream to the protections that accompany high-cost rule, and the record established by the loan originator. As discussed in the mortgage loans; other consumers may Board and Bureau during the section-by-section analyses above, the still able to take out their loan by paying development of the 2013 ATR Final Bureau is now invoking its exception a higher interest rate and less up- Rule. However, the Bureau notes that for and revision authorities to alter the front.165 The January 2013 HOEPA rule some analyses, there are limited data statutory additive approach to exclude discussed the impacts of the high-cost available with which to quantify the certain compensation. mortgage regime on consumers in depth potential costs, benefits, and impacts of At a general level, the exclusion including the nature of the liability the proposal. Still, general economic (inclusion) of additional sources of regime. To the extent that the impact of principles together with the limited data compensation in the points and fees various provisions of this rule on that are available provide insight into calculation decreases (increases) the consumers is essentially to expand or the benefits, costs, and impacts and in total amount of points and fees. As contract coverage of the high cost these cases, the analysis provides a explained in the 2013 ATR Final Rule, mortgage regime, the general discussion qualitative discussion of the benefits, keeping all other provisions of a given of the impacts from the January 2013 costs, and impacts of the final rule. loan fixed, calculations that exclude HOEPA rule is informative for each of Commenters on the proposed rule did additional amounts of compensation the various provisions. not submit comments specifically will result in a greater number of loans Measured against the 2013 ATR Final addressing the analyses under Section being eligible as qualified mortgages. Rule baseline, the final rule excludes 1022 contained in the Supplemental Conversely, calculations that include certain compensation from the points Information accompanying the proposal. additional amounts of compensation are and fees calculation in both the However, several did address the overall less likely to achieve qualified mortgage wholesale and retail channels. In the benefits, costs and impacts of the status. For loans that are not eligible to wholesale channel, two types of proposal.164 The comments are be qualified mortgages, the costs of compensation are excluded: Payments discussed throughout the section-by- origination may be slightly higher as a by consumers to mortgage brokers section analyses above. result of the slightly increased liability where such payments are already for the lender and any assignees and of included in points and fees as part of A. Potential Benefits and Costs to possibly increased compliance costs the finance charge and compensation Consumers and Covered Persons related to the origination and paid by a mortgage broker to its 1. Points and Fees Calculation documentation of the loan. If these costs employee loan originator. In the retail are passed along, consumers’ costs for channel, compensation paid by a In the final rule, payments by these loans may also increase. However, creditor to its own loan originator consumers to mortgage brokers need not these consumers will also have the employees is also excluded. Because of be counted as loan originator added consumer protections that these exclusions, more loans will satisfy compensation where such payments accompany loans made under the the points and fees threshold for already have been included in points general ability-to-repay provisions. In qualified mortgages and fewer loans will and fees as part of the finance charge. some instances, such up-front points exceed the points and fees threshold for In addition, compensation paid by a and fees could be folded into the high-cost mortgages. As described interest rate in order to maintain loans’ above, for covered persons, the costs of 163 The Bureau has discretion in future rulemakings to choose the relevant provisions to status as qualified mortgages, which in supplying such loans should be slightly discuss and to choose the most appropriate baseline turn could move loans out of the safe reduced; consumers with such loans for that particular rulemaking. harbor and into the rebuttable should therefore benefit from greater 164 In conducting the interagency consultation presumption. The 2013 ATR Final Rule access to credit and lower costs, but process under section 1022(b)(2)(B), the Bureau discussed the impacts of the ability-to- would have a more restricted ability to received communications for the public record regarding the proposed rule. The FDIC, HUD, and repay/qualified mortgage regime on challenge violations of the ability-to- OCC wrote the Bureau regarding the proposed consumers in depth including the repay rules and would not benefit from provisions on loan originator compensation and nature of the liability regime. To the FHFA and HUD wrote the Bureau regarding the extent that the impact of various 165 The ability to cover up-front costs in the proposed exemptions from the ability-to-repay provisions of this rule on consumers is interest rate depends on the characteristics of the requirements. These comments are discussed in borrower and the loan. The interest rate threshold more detail in the section-by-section analyses essentially to expand or contract for high-cost mortgages under HOEPA could also above. coverage of the ability-to-repay/ potentially limit this option.

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the protections afforded to high-cost originated under the general ability-to- the retail channel.168 Each creditor mortgages. repay standards or to high-cost originating loans through the retail The magnitude of both of these mortgages. channel would have to devise internal effects—changes in the status of loans as This provision of the rule may also policies and systems regarding which qualified mortgages or high cost alter the competitive dynamics between components of loan officers’ mortgages and the extent to which the wholesale channel and the retail compensation (and that of any other lenders may adjust pricing and channel. As noted above, the Bureau employees occasionally performing compensation practices in response to recognizes that an additive approach some of the loan officers’ functions) to such provisions—will determine the makes it more difficult for creditors to include under the rule and a method of costs, benefits, and impacts on covered impose up-front charges and still remain tracking such compensation in real time persons and consumers. As noted under the qualified mortgage points and for the purpose of determining whether earlier, comprehensive and fees limits and the high-cost mortgage a particular loan is eligible for the representative data that include points threshold. For certain loans originated qualified mortgage status or is a high- and fees as well as loan originator through the brokerage channel, the cost mortgage. The Bureau believes that compensation is not readily available. inclusion of compensation paid by the the labor and investments to develop The Bureau did receive some data, creditor to the brokerage firm in the such systems would be substantial. As however, in response to its requests points and fees calculation may have described above, the Bureau was also included in the proposed rule. In a the effect of denying the loan qualified concerned that this alternative would communication that has been made part mortgage status while a loan ostensibly have provided little benefit to of the record, one industry trade group similar in terms of interest rate and up- consumers, in part due to the anomalies submitted data to the Bureau that front charges but that has no broker in counting individual loan originator contained loan-level information for commission because it is offered compensation that is specific to the three anonymous retail lenders. These through the retail channel might be a retail transaction as of the time that the data included information on points and qualified mortgage. However, for loans interest rate is set. fees and estimates of loan originator in the brokerage channel, this impact The other major alternative discussed compensation. Based on the limited could be mitigated by having the in the proposed rule would have data in this submission, excluding consumer pay the broker directly, by permitted creditors to net origination compensation paid by retail lenders to shifting other origination charges into charges against loan originator their loan officers has a minor impact on the rate, and/or by shifting from a compensation paid to brokers (and the number of loans below the qualified settlement services provider affiliated creditors’ own loan originator mortgage points and fees or high-cost with the creditor to a non-affiliated employees) to calculate the amount of mortgage thresholds.166 The Bureau is provider. loan originator compensation that is not able to determine precisely how The major alternative that the Bureau included in points and fees. As noted, representative these data are of the considered to address the competitive under such an approach (as compared to overall retail mortgage market, however. impact of the final rule was including in the final rule), fewer loans originated The Bureau therefore did not rely on points and fees compensation from through the wholesale channel would these data, although the overall patterns creditors to their loan originator exceed the qualified mortgage and high- in these data and the general employees in retail transactions (either cost points and fees thresholds. In the magnitudes of any effects align with the under an additive or netting approach). wholesale context, comprehensive data Bureau’s general understanding of the This alternative, however, also could that includes points and fees as well as level of loan originator compensation have altered the nature of competition loan originator compensation is also not and the level of up-front charges in the between retail and the wholesale readily available. However, as discussed market. This general understanding channels. On the one hand, if this above, the Bureau was concerned that informs the Bureau’s analysis and leads alternative had been implemented, such an approach would reduce the the Bureau to believe that the economic fewer loans made through the retail benefits to consumers of the qualified impact of these outcomes should be channel would have fallen within the 167 mortgage status and high-cost mortgage small. On the whole, the final rule will regulatory points and fees thresholds. protections by allowing higher On the other hand, the compliance slightly reduce costs related to combined loan originator compensation burden on creditors originating retail supplying these loans as well as and up-front points and fees. transactions would have been compliance costs for covered persons as Particularly in markets that are not fully significant, which could have given the compared to the 2013 ATR Final Rule. competitive or in transactions involving wholesale channel a competitive The Bureau believes that consumers less sophisticated consumers or advantage over the retail channel due to will benefit from slightly increased consumers who are less likely to shop the cost of complying with this access to credit and lower costs on the for competitive pricing, the Bureau was affected loans, but in return will not alternative. As noted above, the concerned that the netting approach receive the protections afforded to loans Bureau’s general understanding of the would provide greater flexibility to market suggests that this alternative structure loan originator compensation 166 The precise magnitudes of the effects depend would not materially change which critically on whether third-party charges are loans are qualified mortgages in the to provide incentives for mortgage provided by an affiliate of the loan originator. retail channel. However, the Bureau brokers to deliver more costly loans. In Assuming that affiliates are not involved in the addition, the Bureau was concerned that transaction, the rule has almost no effect, with received numerous industry comments fewer than 0.5% of loans in this sample dropping asserting that counting loan officer such an approach would have created below the relevant thresholds. Under the compensation in retail transactions strong incentives for creditors and assumption that affiliates provided all settlement would impose a significant burden on mortgage brokers to structure loan services, roughly 6% of loans that would exceed the originator compensation to be paid limits are projected to no longer do so once loan originator compensation is excluded. However, this 167 The extent that payments from creditors to figure is very likely an overestimate: Even for those brokerage firms must cover overhead, which is not 168 The wholesale channel does not experience creditors that use affiliates, it is rare that all included in payments from creditor to their own nearly the same burden due to this rule. Both the settlement charges would be provided by affiliated employees, limits the degree to which this creditor to broker and the consumer to creditor fees third parties. alternative could achieve a fully equal impact. are already routinely calculated by the industry.

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through the creditor to take advantage of circumstances, namely loans or loan financing,171 267 creditors certified by the netting approach, which is not programs that serve certain consumers HUD as Community Housing available where the consumer pays the or communities and that typically assess Development Organizations (CHDOs) in mortgage broker directly. repayment ability in ways that do not connection with HUD’s HOME Other combinations of the additive necessarily comport with the Investment Partnership Program,172 and approach, the netting approach, and the requirements of the Act and the 2013 231 organizations certified as approach of excluding all compensation ATR Final Rule. Downpayment Assistance through in either channel are also possible; the As described earlier, mortgage lending Secondary Financing Providers.173 The impacts are derived as combinations of by community-focused creditors, Bureau is not aware and commenters the ones discussed here. programs operated by housing finance did not provide a comprehensive list of agencies, nonprofit organizations, and these institutions. However, the Bureau 2. Exemptions From Ability-to-Repay housing stabilization programs, varies believes that there may be substantial Requirements widely in the form of financing, the overlap among these institutions. A As described in the Section 1022 products offered, and the precise nature large number of creditors participate in Analysis of the 2013 ATR Final Rule, of underwriting. In particular, the the housing stabilization programs there are a number of situations where Bureau understands that many of these covered by the final rule. creditors may engage in lending with creditors do not use documentation and Data regarding the number or volume too little regard for the consumer’s verification procedures closely aligned of loans made by housing finance ability to repay. The 2013 Final ATR with the requirements of the 2013 ATR agencies and community-focused Rule is designed to minimize such Final Rule or consider all of the lending programs is limited. There is activity by ensuring proper underwriting factors specified in the some data suggesting that HFA bonds documentation and verification related rule. The benefits of the final rule derive funded approximately 67,000 loans in to extensions of credit and by requiring from eliminating the costs of imposing 2010 with a value of just over $8 consideration of a number of factors these requirements on these particular billion.174 Data regarding CDFIs indicate including the consumer’s debt-to- extensions of credits and assuring that that these institutions funded just under income ratio and credit history. credit remains available through these $4 billion in loans; however, data on the Creditors who fail to follow any of these programs without regard to the rule’s type of housing supported is requirements, or who extend credit underwriting factors. Access to credit is unavailable.175 Lending at CHDOs without a ‘‘reasonable and good faith a specific concern for the populations totaled $64 million in 2011 with just 176 determination’’ of the consumer’s ability generally served by these lenders and under 500 loans. to repay, are subject to liability.169 programs. The Bureau had proposed an However, as described above, the As explained in the 2013 ATR Final exemption to the ability-to-repay Bureau was concerned that the ability- Rule, in general, consumers and others requirements for refinancing programs to-repay requirements adopted in the could be harmed by this action as it offered by the Department of Housing 2013 ATR Final Rule would undermine removes particular consumer and Urban Development (HUD), the or frustrate application of the uniquely protections and could allow some Department of Veterans Affairs (VA), or tailored underwriting requirements deleterious lending to occur. However, the U.S. Department of Agriculture employed by certain creditors and in all of the cases discussed above, the (USDA). Similarly, the Bureau had programs, and would require a Bureau believes that the community- proposed an exemption to the ability-to- significant diversion of resources to focused mission of the creditor repay requirements for certain GSE compliance, thereby significantly organizations and/or programs through refinancing programs. However, as reducing access to credit. The Bureau which credit is extended, the close noted above, the Bureau has concluded was also concerned that some of these interaction between creditors and after further deliberation that the creditors would not have the resources consumers in these instances, and other proposed exemptions from the ability- to implement and comply with the safeguards (including government to-repay requirements are unnecessary ability-to-repay requirements, and may monitoring of certain categories and the because, even absent an exemption from have ceased or severely limited origination thresholds for the general the ability-to-repay requirements, FHA, extending credit to low- to moderate- nonprofit category) should mitigate any 171 See U.S. Dep’t of Hous. and Urban income consumers, which would result potential harms to consumers and costs Development: Nonprofits, https://entp.hud.gov/ in the denial of responsible, affordable from the rule. idapp/html/f17npdata.cfm. mortgage credit. The exemptions from Data regarding the exact scope of 172 Includes 2011 data for institutions with CHDO the ability-to-repay requirements are lending through these channels are reservations and CHDO loans without a rental designed to eliminate these limited, as are data regarding the tenure type. See U.S. Dep’t of Hous. and Urban Development: HOME Participating Jurisdiction’s requirements and thereby to limit performance of these loans. There are 51 Open Activities Reports, http://www.hud.gov/ creditors’ costs and protect credit HFAs and approximately 1,000 CDFIs, offices/cpd/affordablehousing/reports/open/. availability in carefully defined 62 percent of which are classified as 173 Includes data for institutions shown to offer Community Development (CD) Loan secondary financing. See U.S. Dep’t of Hous. and 169 The liability regime extends beyond creditors. Funds, 22 percent as CD Credit Unions, Urban Development: Nonprofits, https:// As amended by section 1413 of the Dodd-Frank Act, entp.hud.gov/idapp/html/f17npdata.cfm. while the rest are CD Banks, Thrifts, or 174 See National Council of State Housing TILA provides that when a creditor, an assignee, 170 other holder or their agent initiates a foreclosure CD Venture Capital Funds. There are Agencies, State HFA Factbook (2010), http:// action, a consumer may assert a violation of TILA 233 501(c)(3) nonprofit agencies and www.ncsha.org/story/ncsha-releases- section 129C(a) ‘‘as a matter of defense by nonprofit instrumentalities of comprehensive-survey-hfa-program-activity. recoupment or setoff.’’ TILA section 130(k). There government in the U.S. that are 175 See U.S. Dep’t of the Treas., Community is no time limit on the use of this defense and the Development Financial Institutions Fund: amount of recoupment or setoff is limited, with authorized to provide secondary Awardees/Allocatees, http://www.cdfifund.gov/ respect to the special statutory damages, to no more awardees/db/basicSearchResults.asp. than three years of finance charges and fees. The 170 See U.S. Dep’t of the Treas., Community 176 See U.S. Dep’t of Hous. and Urban impacts of the liability regime applicable to covered Development Financial Institutions Fund, http:// Development: HOME Participating Jurisdiction’s mortgages are discussed in more detail in the 1022 www.cdfifund.gov/docs/certification/cdfi/CDFI List Open Activities Reports, http://www.hud.gov/ analysis for the 2013 ATR Final Rule. -07-31-12.xls. offices/cpd/affordablehousing/reports/open.

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VA, and USDA loans, including these creditors and most expected Based on the Bureau’s estimates, on refinancings, as well as GSE litigation costs. The final rule may also average, 16.7 percent of portfolio loans refinancings, are given qualified provide greater flexibility with regard to at these institutions are estimated to mortgage status under the Bureau’s 2013 certain documentation, verification, and have a DTI ratio above 43 percent. For ATR Final Rule. Under the temporary underwriting practices in certain the subset of these loans that also do not category of qualified mortgages in circumstances.177 These cost reductions contain any of the prohibited features § 1026.43(e)(4), the final rule already in turn could enhance the willingness of for the general definition for qualified incorporates the refinancing programs’ such creditors to make these loans or mortgages (assuming other conditions specific underwriting criteria and reduce the amount the creditors would are met), the final rule grants the affords these loans a presumption (in otherwise charge for these loans.178 creditor a conclusive or rebuttable some cases, conclusive) of compliance Consumers, too, will benefit to the presumption of compliance with the with the ability-to-repay requirements, extent that the expanded qualified ability-to-repay requirements. The so long as they meet certain product mortgage status makes creditors more Bureau is unable to estimate the feature requirements and limitations on willing to continue extending such percentage of these loans that would not points and fees. The small difference credit and to do so at a lower price than qualify for the temporary expansion of between the proposed exemption and they might charge for non-qualified the qualified mortgage definition in the the 2013 ATR Final Rule temporary mortgages under the new regulations. In final rule under § 1026.43(e)(4). category for QMs involves loan features return, however, consumers will have Similarly, the Bureau is unable to (e.g., negative amortization and interest narrower grounds on which to challenge estimate the number of balloon only features) and the cap on points and any violations of the ability-to-repay mortgages originated by lenders not fees under § 1026.43(e)(2). Under the rules as discussed in more detail in the operating in rural areas that are eligible 2013 ATR Final Rule, loans with those Section 1022 analysis of the 2013 Final for qualified mortgage status under the features or above the points and fees ATR Rule. final rule’s temporary provision. threshold (that otherwise meet the Given the lower default and Similar tradeoffs are involved in the conditions of the QM definition) cannot delinquency rates at these smaller increase in the qualified mortgage be originated as qualified mortgages and community-focused institutions, the threshold from 1.5 percentage points therefore must meet the ability-to-repay avoided costs related to liability and above the average prime offer rate requirements, while under the proposed litigation are likely small. However, the (APOR) to 3.5 percentage points above exemption they would have been lower default and delinquency rates at APOR for first lien mortgages originated exempted from those requirements as these institutions, the relationship and held by small creditors and for the well. The Bureau believes that very few lending that they engage in, and qualified balloon mortgages originated refinancings would be excluded on restrictions on reselling the loans on the and held by small creditors these grounds and therefore that these secondary market for at least three predominantly operating in rural or restrictions should not impose any years, together also suggest that the risk underserved areas. For loans in this additional meaningful costs on creditors of consumer harm (and therefore the APR range, whether they meet the or impede consumers’ access to costs of this provisions) are also very definition of qualified mortgage under responsible, affordable mortgage credit. small.179 While the mathematical the 2013 Final ATR Rule or under the Qualified mortgage refinancings that impacts of litigation costs/risks may be new definitions provided in this final trigger the threshold for higher-priced limited, the Bureau believes that the rule, the presumption of compliance mortgage loans are also another small broader impacts on access to credit with the ability-to-repay requirements area of difference: under the 2013 ATR could be significant particularly in would be strengthened. The Bureau Final Rule, these loans have a rebuttable individual communities. estimates that roughly 8–10 percent of presumption of compliance with the Based on data from 2011, roughly portfolio loans at these institutions are ability-to-repay requirements while 9,200 institutions with approximately likely to be affected by this change. under the exemption there would have 450,000 loans on portfolio are likely to Strengthening the presumption of been no such requirements. As be affected by the extension of qualified compliance for these loans will benefit described, costs for covered persons mortgages for certain small creditors.180 consumers and/or covered persons to offering these loans could be slightly the extent doing so improves credit higher. However, as discussed above, in 177 For example, the final rule requires that small access or reduces costs. Strengthening light of the history of refinancings, the creditors assess either the debt-to-income ratio or the presumption will have a cost to the residual income of the borrower, but does not Bureau believes that it is a meaningful consumers to the extent consumers who benefit to consumers to preserve their require that the consumer’s DTI not exceed 43 percent as determined pursuant to appendix Q nor find themselves unable to afford their ability to seek redress in the event of that the loan be eligible for purchase, guarantee, or abuse. insurance by the GSEs or by specified federal HMDA, the Bureau has matched HMDA data to Call agencies. 3. Extension of Qualified Mortgage Report data and MCR data and has statistically 178 To the extent that the cost advantage is projected estimated loan counts for those Status material, this provision could give some smaller depository institutions that do not report these data The benefits to covered persons from institutions a slight advantage over lenders not either under HMDA or on the NCUA call report. eligible to make qualified mortgages using this The Bureau has projected originations of higher- extending qualified mortgage status to definition. priced mortgage loans for depositories that do not certain loans made by smaller creditors 179 The possibility that small creditors qualifying report HMDA in a similar fashion. These and held on portfolio also derive from for this exemption can make certain mortgages as projections use Poisson regressions that estimate maintaining access to credit and qualified mortgages, while their larger competitors loan volumes as a function of an institution’s total can only make these loans subject to the ability-to- assets, employment, mortgage holdings, and limiting potential increases in the costs repay provisions, may allow them to offer these geographic presence. Neither HMDA nor the Call of these loans. By granting creditors that loans at lower rates. However, as discussed in the Report data have loan level estimates of the DTI. To qualify under the new qualified 2013 ATR Final Rule, any effects on pricing are estimate these figures, the Bureau has matched the mortgage definition a conclusive or likely to be small. HMDA data to data on the HLP dataset provided by 180 The estimates in this analysis are based upon the FHFA. This allows estimation of coefficients in rebuttable presumption of compliance data and statistical analyses performed by the a probit model to predict DTI using loan amount, with the ability-to-repay provisions, the Bureau. To estimate counts and properties of income, and other variables. This model is then final rule limits the legal liability of mortgages for entities that do not report under used to estimate DTI for loans in HMDA.

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mortgage, and would otherwise be able loans held in portfolio by certain published in the Federal Register in to make out a claim and recover their institutions to receive qualified January 2013 (78 FR 6408) (2013 ATR losses, would be unable to do so under mortgage status and by raising the Final Rule). That final rule implements the expanded safe harbor. rebuttable presumption threshold for certain amendments to TILA that were those loans, the final rule will likely added by sections 1411, 1412, and 1414 B. Potential Specific Impacts of the have a greater relative effect on rural of the Dodd-Frank Wall Street Reform Final Rule consumers than on their non-rural and Consumer Protection Act (Dodd- 1. Potential Impact on Consumer Access counterparts: more loans will meet the Frank Act), which created new TILA to Consumer Financial Products or definitions for qualified mortgages and section 129C. These changes were made Services within that group, more loans will have in response to the recent foreclosure the safe harbor presumption of The Bureau does not anticipate that crisis to address certain lending compliance with the ability-to-repay the final rule would reduce consumers’ practices (such as low- or no- requirements. To the extent that these access to consumer financial products documentation loans or underwriting changes expand access to credit, rural and services. Rather, as discussed mortgages without including any consumers will benefit. While the above, the Bureau believes that the final principal repayments in the relationship model of lending prevalent underwriting determination) that led to rule would in fact enhance certain in this area makes both delinquency and consumers’ access to mortgage credit as consumers having mortgages they could litigation less likely overall, these not afford, thereby contributing to high compared to the 2013 ATR Final Rule. changes will also limit some of the The Bureau believes that the exclusion default and foreclosure rates. Among protections for these consumers as other things, the Dodd-Frank Act of certain compensation from the well.181 calculation of points and fees allows requires creditors to make a reasonable, more mortgages under the qualified VIII. Regulatory Flexibility Act good faith determination of a mortgage and high-cost mortgage Analysis consumer’s ability to repay any consumer credit transaction secured by thresholds; the exemption from the A. Overview ability-to-repay requirements should a dwelling (excluding an open-end facilitate lending under various The Regulatory Flexibility Act (RFA) credit plan, timeshare plan, reverse programs and by various creditors; and, generally requires an agency to conduct mortgage, or temporary loan) and the new and expanded qualified an initial regulatory flexibility analysis establishes certain protections from mortgage definitions should also expand (IRFA) and a final regulatory flexibility liability under this provision for responsible lending. analysis (FRFA) of any rule subject to ‘‘qualified mortgages.’’ notice-and-comment rulemaking As discussed above, the Bureau 2. Depository Institutions and Credit requirements.182 These analyses must believes that the 2013 ATR Final Rule Unions With $10 Billion or Less in Total ‘‘describe the impact of the proposed should be modified to address potential Assets, as Described in Section 1026 rule on small entities.’’ 183 An IRFA or adverse consequences on certain The Bureau believes the final rule will FRFA is not required if the agency narrowly-defined categories of lending have differential impacts on some certifies that the rule will not have a programs. Specifically, the final rule depository institutions and credit significant economic impact on a adopts certain amendments to the 2013 184 unions with $10 billion or less in total substantial number of small entities. ATR Final Rule implementing these assets as described in Section 1026. The The Bureau also is subject to certain requirements, including exemptions for depository institutions and credit additional procedures under the RFA certain nonprofit and community- unions that are CDFIs, and are therefore involving the convening of a panel to focused lending creditors and certain covered under the exemption from the consult with small business homeownership stabilization and representatives prior to proposing a rule foreclosure prevention programs. The ability-to-repay requirements, and the 185 institutions covered by new definition for which an IRFA is required. final rule also creates a new category of The final rule amends Regulation Z, of qualified mortgages and the higher- qualified mortgages, similar to the one which implements the Truth in Lending rate threshold for small creditor for rural balloon-payment loans, for Act (TILA) and is related to a final rule portfolio loans are all in this group and loans without balloon-payment features are therefore uniquely impacted by the that are originated and held on portfolio 181 Relationship lending refers to underwriting rule as discussed above. decisions predicated on more tacit information and by small creditors. The new category personal relationships, in particular, relative to will not be limited to creditors that 3. Impact of the Provisions on more automated and formula-based forms of operate predominantly in rural or Consumers in Rural Areas underwriting. underserved areas, but will use the same 182 The final rule will have some 5 U.S.C. 601 et. seq. general size thresholds and other 183 5 U.S.C. 603(a); 5 U.S.C. 604(a). For purposes differential impacts on consumers in of assessing the impacts of the proposed rule on criteria as the rural or underserved rural areas. In these areas, a greater small entities, ‘‘small entities’’ is defined in the balloon-payment rules. In light of the fraction of loans are made by smaller RFA to include small businesses, small not-for- fact that small creditors often have institutions and carried on portfolio and profit organizations, and small government higher costs of funds than larger jurisdictions. 5 U.S.C. 601(6). A ‘‘small business’’ is therefore the small creditor portfolio determined by application of Small Business creditors, the final rule also increases exemption would be likely to have Administration regulations and reference to the the threshold separating safe harbor and greater impacts. The Bureau North American Industry Classification System rebuttable presumption qualified (NAICS) classifications and size standards. 5 U.S.C. understands that mortgage loans in 601(3). A ‘‘small organization’’ is any ‘‘not-for-profit mortgages for balloon-payment qualified these areas and by these institutions are enterprise which is independently owned and mortgages, the new small portfolio less standardized and often cannot be operated and is not dominant in its field.’’ 5 U.S.C. qualified mortgages, and balloon- sold into the secondary market. These 601(4). A ‘‘small governmental jurisdiction’’ is the payment qualified mortgages originated government of a city, county, town, township, differences may result in slightly higher village, school district, or special district with a under the new temporary two-year interest rates on average for loans to population of less than 50,000. 5 U.S.C. 601(5). balloon mortgage provision. Finally, the rural consumers and more higher priced 184 5 U.S.C. 605(b). final rule provides additional mortgage loans. By making it easier for 185 5 U.S.C. 609. clarifications and exclusions regarding

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the inclusion of loan originator a significant impact on a substantial determined by application of SBA compensation in the points and fees number of small entities. Further, the regulations and reference to the North calculation for all categories of qualified commenters provided little reasoning American Industry Classification mortgage. and no data to support the claim that System (NAICS) classifications and size In the proposal, the Bureau certified the rule would have such an effect. The standards.187 Under such standards, that the rule would not have a Bureau believes that the final rule will depository institutions with $175 significant economic impact on a not have a significant impact on a million or less in assets are considered substantial number of small entities and substantial number of small entities and small; other financial businesses are therefore did not prepare an IRFA. therefore neither a SBREFA panel nor a considered small if such entities have Approximately 100 commenters argued FRFA is required. average annual receipts (i.e., annual that the Bureau should conduct a The analysis below evaluates the revenues) that do not exceed $7 million. SBREFA panel to learn more about how potential economic impact of the final Thus, commercial banks, savings the rule will impact the thousands of rule on small entities as defined by the institutions, and credit unions with small business entities that originate RFA. The analysis generally examines $175 million or less in assets are small mortgage loans. These commenters the regulatory impact of the provisions businesses, while other creditors noted that while the Bureau stated that of the final rule against the baseline of extending credit secured by real an initial regulatory flexibility analysis the 2013 ATR Final Rule published in property or a dwelling are small (IRFA) was not necessary under the January 2013, however some of the businesses if average annual receipts do Regulatory Flexibility Act (RFA) discussion includes consideration of not exceed $7 million. because the proposal would not have a alternative baselines. As a result of this The Bureau can identify through data significant economic impact on a analysis, the Bureau certifies that the under the Home Mortgage Disclosure substantial number of small entities, the final rule would not have a significant Act, Reports of Condition and Income Bureau’s own methodology showed that economic impact on a substantial (Call Reports), and data from the the rule would apply to 9,373 small number of small entities. entities out of 14,194 total entities that National Mortgage Licensing System B. Number and Classes of Affected originate mortgage loans. These (NMLS) the approximate numbers of Entities commenters contended that the Bureau small depository institutions that will use its authority under the Dodd-Frank The final rule will apply to all be subject to the final rule. Origination Act to delay the effective date of the creditors that extend closed-end credit data is available for entities that report 2013 ATR Final Rule and conduct secured by a dwelling, including real in HMDA, NMLS or the credit union further analysis of the mortgage loan property attached to a dwelling, subject call reports; for other entities, the origination market and how loan to certain exemptions. All small entities Bureau has estimated their origination originators are currently assessing and that extend these loans are potentially activities using statistical projection determining consumers’ ability to subject to at least some aspects of the methods. repay.186 final rule. This rule may impact small The following table provides the While the Bureau acknowledges that businesses, small nonprofit Bureau’s estimate of the number and the exemption applies to many small organizations, and small government types of entities to which the rule will entities, this does not imply that it has jurisdictions. A ‘‘small business’’ is apply:

Entities that Small NAICS Total Small enti- originate entities that Category Code entities ties any mort- originate b any mort- gage loans gage loans

Commercial Banking ...... 522110 6,505 3,601 a 6,307 a 3,466 Savings Institutions ...... 522120 930 377 a 922 a 373 Credit Unions c ...... 522130 7,240 6,296 a 4,178 a 3,240 Real Estate Credit de ...... 522292 2,787 2,294 2,787 a 2,294

Total ...... 17,462 12,568 14,194 9,373 Source: 2011 HMDA, Dec 31, 2011 Bank and Thrift Call Reports, Dec 31, 2011 NCUA Call Reports, Dec 31, 2011 NMLSR Mortgage Call Re- ports. a For HMDA reporters, loan counts from HMDA 2011. For institutions that are not HMDA reporters, loan counts projected based on Call Report data fields and counts for HMDA reporters. b Entities are characterized as originating loans if they make one or more loans. c Does not include cooperativas operating in Puerto Rico. The Bureau has limited data about these institutions or their mortgage activity. d NMLSR Mortgage Call Report (MCR) for 2011. All MCR reporters that originate at least one loan or that have positive loan amounts are con- sidered to be engaged in real estate credit (instead of purely mortgage brokers). For institutions with missing revenue values, the probability that institution was a small entity is estimated based on the count and amount of originations and the count and amount of brokered loans. e Data do not distinguish nonprofit from for-profit organizations, but Real Estate Credit presumptively includes nonprofit organizations.

It is difficult to determine the number of November 2012 there are 233 institutions designated as Community of small nonprofits that would be nonprofit agencies and nonprofit Housing Development Organizations subject to the regulation. Nonprofits do instrumentalities of government in the that provided credit in 2011, and 231 not generally file Call Reports or HMDA U.S. that are authorized by HUD to institutions designated as reports. As explained in part II above, as provide secondary financing,188 267 Downpayment Assistance through

186 78 FR 6663–6666. http://www.sba.gov/content/table-small-business- 188 See U.S. Dep’t of Hous. and Urban 187 5 U.S.C. 601(3). The current SBA size size-standards. Development: Nonprofits, https://entp.hud.gov/ standards are located on the SBA’s Web site at idapp/html/f17npdata.cfm.

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Secondary Financing Providers. A purposes of HOEPA. The Bureau’s to small entities of having to develop comprehensive list of these institutions exercise of its exception and adjustment and maintain policies and procedures to is not available; however the Bureau authority in the final rule, however, will monitor compliance with the ability-to- believes that there may be substantial reduce burden on small entities and repay requirements. Regulatory burdens overlap among these institutions and facilitate compliance. Compared to the may be associated with obtaining and that most of these institutions would January 2013 baseline, where such maintaining one of the designations qualify as small entities. compensation is included in the points required to qualify for the exemption. Also, as of July 2012 there were 999 and fees calculation, the final rule However, this decision is voluntary and organizations designated by the reduces burden on certain small the Bureau presumes that a small entity Treasury Department as CDFIs, 356 of entities: for retail originators, fewer would not do so unless the burden which are depository institutions or loans will exceed the points and fees reduction resulting from the exemption credit unions counted above. Among the limits for qualified mortgages and high outweighed the additional burden remaining, some are nonprofits and cost mortgages, and firms will face imposed by obtaining and maintaining most likely small.189 lowered compliance costs.190 the designation. Thus, additional burdens would still be part of an overall D. Exemptions from the Ability-to-Repay C. Clarification Regarding Loan burden reduction. Originator Compensation in the Points Requirements The final rule also exempts from the and Fees Calculation The provisions related to community- ability-to-repay requirements extensions As discussed in detail above, the focused lending programs discussed of credit made by a creditor with a tax Dodd-Frank Act requires creditors to above all provide exemptions from the exemption ruling or determination letter include all compensation paid directly ability-to-repay requirements. Measured from the Internal Revenue Service under or indirectly by a consumer or creditor against the baseline of the Bureau’s 2013 section 501(c)(3) of the Internal Revenue to a mortgage originator from any ATR Final Rule, these provisions Code of 1986 (26 U.S.C. 501(c)(3) source, including a mortgage originator impose either no or insignificant provided that: during the calendar year that is also the creditor in a table-funded additional burdens on small entities. preceding receipt of the consumer’s transaction, in the calculation of points More specifically, these provisions will application, the creditor extended credit and fees. The statute does not express reduce the burdens associated with secured by a dwelling no more than 200 any limitation on this requirement, and implementation costs, additional times; during the calendar year thus, the Bureau adopted in the 2013 underwriting costs, and compliance preceding receipt of the consumer’s ATR Final Rule that loan originator costs stemming from the ability-to-repay application, the creditor extended credit compensation be treated as additive to requirements. secured by a dwelling only to up-front charges paid by the consumer Section 1026.43(a)(3)(iv) provides that consumers with income that did not an extension of credit made pursuant to and the other elements of points and exceed the low- and moderate-income a program administered by a housing fees and that compensation is added as household limits; the extension of credit finance agency, as defined by 24 CFR it flows downstream to the loan is to a consumer with income that does 266.5, is exempt from the requirements originator. not exceed the above limit; and, the of § 1026.43(c) through (f). For any The final rule provides that payments creditor determines, in accordance with housing finance agencies and their by consumers to mortgage brokers need written procedures, that the consumer partner creditors that meet the not be counted as loan originator has a reasonable ability to repay the definition of ‘‘small entity,’’ this compensation where such payments extension of credit. provision will remove the burden of already have been included in points For eligible entities, this provision having to modify the underwriting and fees as part of the finance charge. will remove the burden of complying practices associated with these with the ability-to-repay requirements. The final rule also provides that programs to implement the ability-to- This provision will also remove the compensation paid by a mortgage broker repay requirements. This provision will burden to small entities of having to to its employee loan originator need not also remove the burden to small entities develop and maintain policies and be included in points and fees. In the of having to develop and maintain procedures to monitor compliance with final rule, compensation paid by a policies and procedures to monitor the ability-to-repay requirements in the creditor to a mortgage broker is included compliance with the ability-to-repay 2013 ATR Final Rule. While eligible in points and fees in addition to any requirements. nonprofit creditors will need to origination charges paid by a consumer The final rule also exempts from the maintain documentation of their own to the creditor. Compensation paid by a ability-to-repay requirements an procedures regarding the determination creditor to its own loan originator extension of credit made by a creditor of a consumer’s ability to repay, the employees need not be included in designated as a Community Bureau believes that such small points and fees. Development Financial Institution, a nonprofits already have written policies The statute requires loan originator Downpayment Assistance through and procedures. In any case, the compensation to be treated as additive Secondary Financing Provider, or a decision to use the exemption is to the other elements of points and fees Community Housing Development voluntary and entities are expected to and the 2013 ATR Final Rule adopted Organization (CHDO) if the CHDO meets use it only if reduces overall burden. this approach. This places a burden on certain additional criteria. This Regulatory burdens may be associated small creditors, since it makes it more provision will remove the burden to with obtaining and maintaining the likely that mortgage loans will not be small entities of having to implement 501(c)(3) designation required to qualify eligible as qualified mortgages under the the ability-to-repay requirements. This for the exemption. However, this ability-to-repay rules or will be provision will also remove the burden decision is voluntary and the Bureau classified as high-cost mortgages for presumes that a small entity would not 190 The Bureau notes that the ability-to-repay do so unless the burden reduction 189 See U.S. Dep’t of the Treas., Community requirements as well as the rules applying to high- Development Financial Institutions Fund, http:// cost mortgages generally apply to creditors and not resulting from the exemption www.cdfifund.gov/docs/certification/cdfi/CDFIList- to other classes of small entities including mortgage outweighed the additional burden 07–31–12.xls. brokers. imposed by obtaining and maintaining

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the designation. Thus, additional ability-to-repay requirements; rough and therefore the reduced burden from burdens would still be part of an overall estimates indicate that three quarters of this final rule, should be small. burden reduction. these loans will gain a conclusive The Bureau acknowledges the The final rule provides that an presumption and the remaining loans possibility that this final rule may extension of credit made pursuant to a will gain the rebuttable presumption. increase small creditor burden to the program authorized by sections 101 and The final rule also temporarily allows extent that creditors need to maintain 109 of the Emergency Economic small creditors that do not operate records relating to eligibility for the Stabilization Act of 2008 is exempt from predominantly in rural or underserved exemption, but the Bureau believes that the ability-to-repay requirements. This areas to offer balloon-payment qualified these costs are negligible, as creditor provision will remove the burden to mortgages, with the same presumptions asset size and origination activity are participating small entities of having to of compliance, if they hold the loans in data that all depository institutions and modify the underwriting practices portfolio. credit unions are likely to maintain for associated with these programs to The Bureau also is allowing small routine business or supervisory implement the ability-to-repay creditors to charge a higher annual purposes. Thus, the Bureau believes that requirements. This provision will also percentage rate for first-lien qualified the burden reduction stemming from a remove the burden to small entities of mortgages in the new category and still reduction in liability costs would having to develop and maintain policies benefit from a conclusive presumption outweigh any potential recordkeeping and procedures to monitor compliance of compliance or ‘‘safe harbor.’’ In costs, resulting in overall burden with these ability-to-repay addition, the Bureau also is allowing reduction. Small entities for which such requirements. small creditors operating predominantly cost reductions are outweighed by E. Portfolio Loans Made by Small in rural or underserved areas to offer additional record keeping costs may Creditors and Balloon-Payment first-lien balloon loans with a higher choose not to utilize the exemption. Qualified Mortgages annual percentage rate and still benefit F. Conclusion from a conclusive presumption of As discussed above, the Bureau is Each element of this final rule results compliance with the ability-to-repay finalizing certain amendments to the in an economic burden reduction for rules or ‘‘safe harbor.’’ The increase in 2013 ATR Final Rule, including an these small entities. The exemptions for the threshold from the average prime additional definition of a qualified nonprofit creditors would lessen any offer rate (APOR) plus 1.5 percentage mortgage for certain loans made and economic impact resulting from the points to APOR plus 3.5 percentage held in portfolio by small creditors. The ability-to-repay requirements. The points will reduce burden for the loans new category includes certain loans exemptions for homeownership at these institutions between these rates, originated by small creditors that: (1) stabilization and foreclosure prevention as these loans will now qualify for a Have total assets less than $2 billion at programs would also soften any conclusive, rather than a rebuttable the end of the previous calendar year; economic impact on small entities presumption. and (2) together with all affiliates, extending credit pursuant to those originated 500 or fewer covered The regulatory requirement to make a programs. The new categories of transactions, secured by first-liens reasonable and good faith determination qualified mortgage would make it easier during the previous calendar year. The based on verified and documented for small entities to originate qualified $2 billion asset threshold in the evidence that a consumer has a mortgages. The Bureau’s clarifications definition will be adjusted annually reasonable ability to repay may entail ensuring consumer-paid compensation based on the year-to-year change in the litigation risk for small creditors. It is to brokers is counted only once and the average of the Consumer Price Index for difficult to estimate the reduction in exclusion of retail loan officer and Urban Wage Earners and Clerical potential future liability costs associated broker employee compensation will Workers, not seasonally adjusted. These with the changes. However, the Bureau reduce burden on small entities and loans must generally conform to the notes that lending practices at smaller make it more likely that mortgage loans requirements under the general institutions are often based on a more will be eligible for a presumption of definition of a qualified mortgage in personal relationship based model and compliance as qualified mortgages § 1026.43(e)(2), except that a loan with that historically, delinquency rates on under the ability-to-repay rules and not a consumer debt-to-income ratio higher mortgages at smaller institutions are be classified as high-cost mortgages for than 43 percent could be a qualified lower than the average in the industry. purposes of HOEPA. While all of these mortgage if all other criteria are met. The Bureau believes that small creditors provisions may entail some additional Small creditors are required to consider have historically engaged in responsible recordkeeping costs, the Bureau believes the consumer’s debt-to-income ratio or mortgage underwriting that includes that these costs are minimal and residual income in underwriting the thorough and thoughtful determinations outweighed by the cost reductions loans, but are not required to follow of consumers’ ability to repay, at least resulting from the final rule. Small appendix Q or subject to any specific in part because they bear the risk of entities for which such cost reductions threshold. default associated with loans held in are outweighed by additional record This provision would reduce burden their portfolios. The Bureau also keeping costs may choose not to utilize on small creditors by removing the 43 believes that because small creditors’ the exemptions. percent debt-to-income limitation for lending model is based on maintaining qualified mortgages, as well as ongoing, mutually beneficial Certification providing more flexibility in the relationships with their customers, they Accordingly, the undersigned certifies assessment of debt-to-income ratios. At therefore have a more comprehensive that this proposal will not have a the small creditors identified, 16.7 understanding of their customers’ significant economic impact on a percent of mortgage loans on portfolio financial circumstances and are better substantial number of small entities. are estimated to have a debt to income able to assess ability to repay than larger ratios above 43 percent. For these loans, creditors. As such, the expected IX. Paperwork Reduction Act Analysis the final rule grants creditors a litigation costs from the ability-to-repay Certain provisions of this final rule presumption of compliance with the provisions of the 2013 ATR Final Rule, contain ‘‘collection of information’’

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requirements within the meaning of the mortgage loans on terms that reasonably compensation where such payments Paperwork Reduction Act of 1995 (44 reflect their ability to repay the loans already have been included in points U.S.C. 3501 et seq.) (Paperwork and that are not understandable and not and fees as part of the finance charge. Reduction Act or PRA). On January 30, unfair, deceptive or abusive. TILA In addition, compensation paid by a 2013, the Bureau published notice of the section 129B(a)(2); 15 U.S.C. mortgage broker to its employee loan proposed rule in the Federal Register 1639b(a)(2). Prior to the Dodd-Frank originator need not be included in (78 FR 6622). The Bureau received no Act, existing Regulation Z provided points and fees, nor does compensation PRA-related comments on the ability-to-repay requirements for high- paid by a creditor to its own loan information collections in § 1026.43(c). cost and higher-priced mortgage loans. originator employees. However, This final rule amends 12 CFR part The Dodd-Frank Act expanded the consistent with the statute and 2013 1026 (Regulation Z), which implements scope of the ability-to-repay ATR Final Rule, compensation paid by the Truth in Lending Act (TILA). requirement to cover all residential a creditor to a mortgage broker Regulation Z currently contains mortgage loans with its scope. continues to be included in points and collections of information approved by The 2013 ATR Final Rule establishes fees in addition to any origination the Office of Management and Budget standards for complying with the charges paid by a consumer to the (OMB). The Bureau’s OMB control ability-to-repay requirement, including creditor. number for Regulation Z is 3170–0015. defining ‘‘qualified mortgage.’’ In The information collection in the final The PRA (44 U.S.C. 3507(a), (a)(2) and addition to the ability-to-repay and rule is required to provide benefits for (a)(3)) requires that a Federal agency qualified mortgage provisions, the 2013 consumers and would be mandatory. may not conduct or sponsor a collection ATR Final Rule implements the Dodd- See 15 U.S.C. 1601 et seq.; 12 U.S.C. of information unless OMB approved Frank Act limits on prepayment 2601 et seq. Because the Bureau does the collection under the PRA and the penalties and lengthens the time not collect any information under the OMB control number obtained is creditors must retain records that final rule, no issue of confidentiality displayed. Further, notwithstanding any evidence compliance with the ability-to- arises. The likely respondents would be other provisions of law, no person is repay and prepayment penalty depository institutions (i.e., commercial required to comply with, or is subject to provisions. banks, savings institutions and credit any penalty for failure to comply with, This final rule adopts certain unions) and non-depository institutions a collection of information that does not amendments to the 2013 ATR Final (i.e., mortgage companies or other non- display a currently valid OMB control Rule implementing these ability-to- bank creditors) subject to Regulation number (44 U.S.C. 3512). The collection repay requirements, including Z.191 of information contained in this rule, exemptions for certain community- Under the final rule, the Bureau focused creditors, housing finance and identified as such, has been generally accounts for the paperwork agencies, nonprofit organizations and submitted to OMB for review under burden associated with Regulation Z for housing stabilization programs; an section 3507(d) of the PRA. the following respondents pursuant to additional definition of a qualified its administrative enforcement A. Overview mortgage for certain loans made and authority: insured depository As described below, the final rule held in portfolio by small creditors that institutions with more than $10 billion amends the collections of information have total assets less than $2 billion at in total assets and their depository currently in Regulation Z to implement the end of the previous calendar year institution affiliates; privately insured amendments to TILA made by the and, together with all affiliates, credit unions; and certain Dodd-Frank Act. This final rule is originated 500 or fewer first-lien related to the Ability-to-Repay/Qualified covered transactions during the nondepository creditors. The Bureau Mortgage final rule (2013 ATR Final previous calendar year. The final rule and the FTC generally both have Rule) published in the Federal Register also temporarily allows small creditors enforcement authority over non- in January 2013 (78 FR 6408). The 2013 that do not operate predominantly in depository institutions for Regulation Z. ATR Final Rule implements sections rural or underserved areas to offer Accordingly, the Bureau has allocated to 1411, 1412, and 1414 of the Dodd-Frank balloon-payment qualified mortgages if itself half of the estimated burden to Wall Street Reform and Consumer they hold the loans in portfolio. The non-depository institutions. Other Protection Act (the Dodd-Frank Act), Bureau also is allowing small creditors Federal agencies are responsible for which creates new TILA section 129C. to charge a higher annual percentage estimating and reporting to OMB the Among other things, the Dodd-Frank rate for first-lien qualified mortgages in total paperwork burden for the Act requires creditors to make a the new category and still benefit from institutions for which they have reasonable, good faith determination, a conclusive presumption of compliance administrative enforcement authority. based on verified and documented or ‘‘safe harbor,’’ and to allow small They may, but are not required to, use information, that the consumer will creditors operating predominantly in the Bureau’s burden estimation have a reasonable ability to repay any rural or underserved areas to offer first- methodology. consumer credit transaction secured by lien balloon loans with a higher annual Using the Bureau’s burden estimation a dwelling (excluding an open-end percentage rate and still benefit from a methodology, there is no change to the credit plan, timeshare plan, reverse conclusive presumption of compliance total estimated burden under Regulation mortgage, or temporary loan), including with the ability-to-repay rules or ‘‘safe Z as a result of the final rule. any mortgage-related obligations (such harbor.’’ as property taxes), and establishes The final rule also provides 191 For purposes of this PRA analysis, references to ‘‘creditors’’ or ‘‘lenders’’ shall be deemed to refer certain protections from liability under exceptions to the 2013 ATR Final Rule, collectively to commercial banks, savings this requirement for ‘‘qualified which implements the statute’s institutions, credit unions, and mortgage companies mortgages.’’ TILA section 129C(a); 15 inclusion of loan originator (i.e., non-depository lenders), unless otherwise U.S.C. 1639c(a). The stated purpose of compensation in points and fees. stated. Moreover, reference to ‘‘respondents’’ shall generally mean all categories of entities identified the Dodd-Frank Act ability-to-repay Specifically, in the final rule, payments in the sentence to which this footnote is appended, requirement is to assure that consumers by consumers to mortgage brokers need except as otherwise stated or if the context indicates are offered and receive residential not be counted as loan originator otherwise.

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B. Information Collection Requirements and documentation requirements of the (A) That compensation is paid by a 2013 ATR Final Rule will not result in consumer to a mortgage broker, as Ability-to-Repay Verification and additional ongoing costs for most defined in § 1026.36(a)(2), and already Documentation Requirements covered persons. As such, it would be has been included in points and fees As discussed above, the 2013 ATR inappropriate to credit any reduction in under paragraph (b)(1)(i) of this section; Final Rule published in January 2013 burden to the final rule. (B) That compensation is paid by a contains specific criteria that a creditor mortgage broker, as defined in C. Summary of Burden Hours must consider in assessing a consumer’s § 1026.36(a)(2), to a loan originator that repayment ability while different As noted, the Bureau does not believe is an employee of the mortgage broker; verification requirements apply to the final rule results in any changes in or qualified mortgages. As described in the the burdens under Regulation Z (C) That compensation is paid by a relevant sections of the final rule, the associated with information collections creditor to a loan originator that is an Bureau does not believe that the for Bureau respondents under the PRA. employee of the creditor. verification and documentation * * * * * requirements of the final rule result in D. Comments (2) * * * additional ongoing costs for most The Consumer Financial Protection (ii) All compensation paid directly or covered persons. However, for some Bureau has a continuing interest in the indirectly by a consumer or creditor to creditors, notably the community- public’s opinions of our collections of a loan originator, as defined in focused lending programs, housing information. At any time, comments § 1026.36(a)(1), that can be attributed to finance agencies, and not-for profit regarding the burden estimate, or any that transaction at the time the interest organizations exempted in the final rule, other aspect of this collection of rate is set unless: lending can vary widely, in the form of information, including suggestions for (A) That compensation is paid by a financing, the products offered and the reducing the burden, may be sent to: consumer to a mortgage broker, as precise nature of underwriting. These The Consumer Financial Protection defined in § 1026.36(a)(2), and already processes may not involve the more Bureau (Attention: PRA Office), 1700 G has been included in points and fees traditional products covered by the Street NW., Washington, DC, 20552, or under paragraph (b)(2)(i) of this section; qualified mortgage definition nor do by the internet to (B) That compensation is paid by a these creditors use documentation and [email protected]. verification procedures closely aligned mortgage broker, as defined in with the requirements of the 2013 ATR List of Subjects in 12 CFR Part 1026 § 1026.36(a)(2), to a loan originator that Final Rule. Advertising, Consumer protection, is an employee of the mortgage broker; For these creditors, the final rule Mortgages, Reporting and recordkeeping or should eliminate any costs from requirements, Truth in Lending. (C) That compensation is paid by a imposing these requirements on these creditor to a loan originator that is an particular extensions of credits. The Authority and Issuance employee of the creditor. Bureau estimates one-time and ongoing For the reasons set forth in the * * * * * costs to respondents of complying with preamble, the Bureau amends ■ 3. Section 1026.43 is amended by the final rule as follows. Regulation Z, 12 CFR part 1026, as revising paragraphs (a)(3)(ii) and (iii), One-time costs. The Bureau estimates amended by the final rules published on (b)(4), (e)(1), (e)(2), and (g)(1)(ii)(B), and that covered persons will incur one-time January 30, 2013 (78 FR 6408), and adding new paragraphs (a)(3)(iv) costs associated with reviewing the January 31, 2013 (78 FR 6962), as set through (vi), (e)(5) and (e)(6), to read as relevant sections of the Federal Register forth below: follows: and training relevant employees. In general, the Bureau estimates these costs PART 1026—TRUTH IN LENDING § 1026.43 Minimum standards for to include, for each covered person, the (REGULATION Z) transactions secured by a dwelling. costs for one attorney and one (a) * * * compliance officer to read and review ■ 1. The authority citation for part 1026 (3) * * * the sections of the final rule that continues to read as follows: (ii) A temporary or ‘‘bridge’’ loan with describe the verification and Authority: 12 U.S.C. 2601, 2603–2605, a term of 12 months or less, such as a documentation requirements for loans, 2607, 2609, 2617, 5511, 5512, 5532, 5581; 15 loan to finance the purchase of a new the exemptions from the ability-to-repay U.S.C. 1601 et seq. dwelling where the consumer plans to requirements, and the costs for each sell a current dwelling within 12 Subpart E—Special Rules for Certain loan officer or other loan originator to months or a loan to finance the initial Home Mortgage Transactions receive training concerning the construction of a dwelling; requirements. However, the Bureau ■ 2. Section 1026.32 is amended by (iii) A construction phase of 12 believes that respondents will review revising paragraphs (b)(1)(ii) and months or less of a construction-to- the relevant sections of this final rule (b)(2)(ii) to read as follows: permanent loan; along with the 2013 ATR Final Rule to (iv) An extension of credit made best understand any new regulatory § 1026.32 Requirements for high-cost pursuant to a program administered by requirements and their coverage. As mortgages. a Housing Finance Agency, as defined such, there is no additional one-time * * * * * under 24 CFR 266.5; burden attributed to the final rule. (b) * * * (v) An extension of credit made by: Ongoing costs. The exemptions for the (1) * * * (A) A creditor designated as a covered institutions should reduce any (ii) All compensation paid directly or Community Development Financial burden related to these provisions. indirectly by a consumer or creditor to Institution, as defined under 12 CFR However, in the 2013 ATR Final Rule, a loan originator, as defined in 1805.104(h); the Bureau did not attribute any § 1026.36(a)(1), that can be attributed to (B) A creditor designated as a paperwork burden to these provisions that transaction at the time the interest Downpayment Assistance through on the assumption that the verification rate is set unless: Secondary Financing Provider, pursuant

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to 24 CFR 200.194(a), operating in percentage points for a subordinate-lien (e)(2)(vi) and without regard to the accordance with regulations prescribed covered transaction. standards in appendix Q to this part; by the U.S. Department of Housing and * * * * * (B) For which the creditor considers Urban Development applicable to such (e) Qualified mortgages. (1) Safe at or before consummation the persons; harbor and presumption of compliance. consumer’s monthly debt-to-income (C) A creditor designated as a (i) Safe harbor for loans that are not ratio or residual income and verifies the Community Housing Development higher-priced covered transactions. A debt obligations and income used to Organization provided that the creditor creditor or assignee of a qualified determine that ratio in accordance with has entered into a commitment with a mortgage, as defined in paragraphs paragraph (c)(7) of this section, except participating jurisdiction and is (e)(2), (e)(4), (e)(5), (e)(6), or (f) of this that the calculation of the payment on undertaking a project under the HOME section, that is not a higher-priced the covered transaction for purposes of program, pursuant to the provisions of covered transaction, as defined in determining the consumer’s total 24 CFR 92.300(a), and as the terms paragraph (b)(4) of this section, monthly debt obligations in paragraph community housing development complies with the repayment ability (c)(7)(i)(A) shall be determined in organization, commitment, participating requirements of paragraph (c) of this accordance with paragraph (e)(2)(iv) of jurisdiction, and project are defined section. this section instead of paragraph (c)(5) under 24 CFR 92.2; or (ii) Presumption of compliance for of this section; (D) A creditor with a tax exemption higher-priced covered transactions. (A) (C) That is not subject, at ruling or determination letter from the A creditor or assignee of a qualified consummation, to a commitment to be Internal Revenue Service under section mortgage, as defined in paragraph (e)(2), acquired by another person, other than 501(c)(3) of the Internal Revenue Code (e)(4), (e)(5), (e)(6), or (f) of this section, a person that satisfies the requirements of 1986 (26 U.S.C. 501(c)(3); 26 CFR that is a higher-priced covered of paragraph (e)(5)(i)(D) of this section; 1.501(c)(3)–1), provided that: transaction, as defined in paragraph and (1) During the calendar year preceding (b)(4) of this section, is presumed to (D) For which the creditor satisfies the receipt of the consumer’s application, comply with the repayment ability requirements stated in the creditor extended credit secured by requirements of paragraph (c) of this § 1026.35(b)(2)(iii)(B) and (C). a dwelling no more than 200 times; section. (ii) A qualified mortgage extended (2) During the calendar year preceding (B) To rebut the presumption of pursuant to paragraph (e)(5)(i) of this receipt of the consumer’s application, compliance described in paragraph section immediately loses its status as a the creditor extended credit secured by (e)(1)(ii)(A) of this section, it must be qualified mortgage under paragraph a dwelling only to consumers with proven that, despite meeting the (e)(5)(i) if legal title to the qualified income that did not exceed the low- and prerequisites of paragraph (e)(2), (e)(4), mortgage is sold, assigned, or otherwise moderate-income household limit as (e)(5), (e)(6), or (f) of this section, the transferred to another person except established pursuant to section 102 of creditor did not make a reasonable and when: the Housing and Community (A) The qualified mortgage is sold, good faith determination of the Development Act of 1974 (42 U.S.C. assigned, or otherwise transferred to consumer’s repayment ability at the 5302(a)(20)) and amended from time to another person three years or more after time of consummation, by showing that time by the U.S. Department of Housing consummation of the qualified the consumer’s income, debt and Urban Development, pursuant to 24 mortgage; obligations, alimony, child support, and CFR 570.3; (B) The qualified mortgage is sold, (3) The extension of credit is to a the consumer’s monthly payment assigned, or otherwise transferred to a consumer with income that does not (including mortgage-related obligations) creditor that satisfies the requirements exceed the household limit specified in on the covered transaction and on any of paragraph (e)(5)(i)(D) of this section; paragraph (a)(3)(v)(D)(2) of this section; simultaneous loans of which the (C) The qualified mortgage is sold, and creditor was aware at consummation assigned, or otherwise transferred to (4) The creditor determines, in would leave the consumer with another person pursuant to a capital accordance with written procedures, insufficient residual income or assets restoration plan or other action under 12 that the consumer has a reasonable other than the value of the dwelling U.S.C. 1831o, actions or instructions of ability to repay the extension of credit. (including any real property attached to any person acting as conservator, (vi) An extension of credit made the dwelling) that secures the loan with receiver, or bankruptcy trustee, an order pursuant to a program authorized by which to meet living expenses, of a State or Federal government agency sections 101 and 109 of the Emergency including any recurring and material with jurisdiction to examine the creditor Economic Stabilization Act of 2008 (12 non-debt obligations of which the pursuant to State or Federal law, or an U.S.C. 5211; 5219); creditor was aware at the time of agreement between the creditor and (b) * * * consummation. such an agency; or (4) Higher-priced covered transaction (2) Qualified mortgage defined— (D) The qualified mortgage is sold, means a covered transaction with an general. Except as provided in assigned, or otherwise transferred annual percentage rate that exceeds the paragraph (e)(4), (e)(5), (e)(6), or (f) of pursuant to a merger of the creditor with average prime offer rate for a this section, a qualified mortgage is a another person or acquisition of the comparable transaction as of the date covered transaction: creditor by another person or of another the interest rate is set by 1.5 or more * * * * * person by the creditor. percentage points for a first-lien covered (5) Qualified mortgage defined—small (6) Qualified mortgage defined— transaction, other than a qualified creditor portfolio loans. (i) temporary balloon-payment qualified mortgage under paragraph (e)(5), (e)(6), Notwithstanding paragraph (e)(2) of this mortgage rules. (i) Notwithstanding or (f) of this section; by 3.5 or more section, a qualified mortgage is a paragraph (e)(2) of this section, a percentage points for a first-lien covered covered transaction: qualified mortgage is a covered transaction that is a qualified mortgage (A) That satisfies the requirements of transaction: under paragraph (e)(5), (e)(6), or (f) of paragraph (e)(2) of this section other (A) That satisfies the requirements of this section; or by 3.5 or more than the requirements of paragraph paragraph (f) of this section other than

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the requirements of paragraph (f)(1)(vi); that is paid by a consumer or creditor to a origination fee and that the creditor pays a and loan originator that can be attributed to that mortgage broker $1,500 in compensation (B) For which the creditor satisfies the particular transaction. The amount of attributed to the transaction. Assume further requirements stated in compensation that can be attributed to a that the consumer pays no other charges to particular transaction is the dollar value of the creditor that are included in points and § 1026.35(b)(2)(iii)(B) and (C). compensation that the loan originator will fees under § 1026.32(b)(1)(i) and that the (ii) The provisions of this paragraph receive if the transaction is consummated. As mortgage broker receives no other (e)(6) apply only to covered transactions explained in comment 32(b)(1)(ii)–3, the compensation that is included in points and consummated on or before January 10, amount of compensation that a loan fees under § 1026.32(b)(1)(ii). For purposes of 2016. originator will receive is calculated as of the calculating points and fees, the $3,000 * * * * * date the interest rate is set and includes origination fee is included in points and fees (g) * * * compensation that is paid before, at, or after under § 1026.32(b)(1)(i) and the $1,500 in (1) * * * consummation. loan originator compensation is included in 3. Loan originator compensation—timing. points and fees under § 1026.32(b)(1)(ii), (ii) * * * Compensation paid to a loan originator that equaling $4,500 in total points and fees, (B) Is a qualified mortgage under can be attributed to a transaction must be provided that no other points and fees are paragraph (e)(2), (e)(4), (e)(5), (e)(6), or included in the points and fees calculation paid or compensation received. (f) of this section; and for that loan regardless of whether the * * * * * * * * * * compensation is paid before, at, or after Section 1026.43—Minimum Standards for ■ consummation. The amount of loan 4. In Supplement I to Part 1026— originator compensation that can be Transactions Secured by a Dwelling Official Interpretations: attributed to a transaction is determined as of 43(a) Scope. ■ A. Under Section 1026.32— the date the interest rate is set. Thus, loan Requirements for High-Cost Mortgages: originator compensation for a transaction * * * * * Paragraph 43(a)(3)(iv). ■ i. Under 32(b) Definitions: includes compensation that can be attributed 1. General. The requirements of ■ a. Under Paragraph 32(b)(1)(ii), to that transaction at the time the creditor § 1026.43(c) through (f) do not apply to an sets the interest rate for the transaction, even paragraphs 1, 2, 3, and 4 are revised. extension of credit made pursuant to a if that compensation is not paid until after ■ B. Under Section 1026.43—Minimum program administered by a Housing Finance consummation. Standards for Transactions Secured by Agency, as defined under 24 CFR 266.5. 4. Loan originator compensation— a Dwelling: Under the exemption, the requirements of calculating loan originator compensation in ■ § 1026.43(c) through (f) do not apply to i. Under 43(a) Scope: connection with other charges or payments ■ extensions of credit made by housing finance a. Paragraph 43(a)(3)(iv) and included in the finance charge or made to agencies and extensions of credit made by paragraph 1 are added. loan originators. i. Consumer payments to ■ b. Paragraph 43(a)(3)(v)(D) and intermediaries (e.g., private creditors) mortgage brokers. As provided in pursuant to a program administered by a paragraph 1 are added. § 1026.32(b)(1)(ii)(A), consumer payments to ■ housing finance agency. For example, if a c. Paragraph 43(a)(3)(vi) and a mortgage broker already included in the creditor is extending credit, including a paragraph 1 are added. points and fees calculation under subordinate-lien covered transaction, that ■ ii. Under 43(e) Qualified Mortgages: § 1026.32(b)(1)(i) need not be counted again will be made pursuant to a program ■ a. Paragraph 43(e)(5) and paragraphs under § 1026.32(b)(1)(ii). For example, administered by a housing finance agency, 1 through 10 are added. assume a consumer pays a mortgage broker the creditor is exempt from the requirements The revisions and additions read as a $3,000 fee for a transaction. The $3,000 of § 1026.43(c) through (f). Similarly, the mortgage broker fee is included in the follows: creditor is exempt from the requirements of finance charge under § 1026.4(a)(3). Because § 1026.43(c) through (f) regardless of whether Supplement I to Part 1026—Official the $3,000 mortgage broker fee is already the program administered by a housing Interpretations included in points and fees under finance agency is funded by Federal, State, or § 1026.32(b)(1)(i), it is not counted again other sources. * * * * * under § 1026.32(b)(1)(ii). Paragraph 43(a)(3)(v)(D). ii. Payments by a mortgage broker to its Subpart E—Special Rules for Certain Home 1. General. An extension of credit is individual loan originator employee. As Mortgage Transactions exempt from the requirements of § 1026.43(c) provided in § 1026.32(b)(1)(ii)(B), through (f) if the credit is extended by a * * * * * compensation paid by a mortgage broker to creditor described in § 1026.43(a)(3)(v)(D), Section 1026.32—Requirements for High-Cost its individual loan originator employee is not provided the conditions specified in that Mortgages included in points and fees under section are satisfied. The conditions specified § 1026.32(b)(1)(ii). For example, assume a * * * * * in § 1026.43(a)(3)(v)(D)(1) and (2) are consumer pays a $3,000 fee to a mortgage determined according to activity that 32(b) Definitions. broker, and the mortgage broker pays a occurred in the calendar year preceding the * * * * * $1,500 commission to its individual loan calendar year in which the consumer’s Paragraph 32(b)(1)(ii). originator employee for that transaction. The application was received. Section 1. Loan originator compensation—general. $3,000 mortgage broker fee is included in 1026.43(a)(3)(v)(D)(2) provides that, during Compensation paid by a consumer or creditor points and fees, but the $1,500 commission the preceding calendar year, the creditor to a loan originator, other than an employee is not included in points and fees because it must have extended credit only to consumers of the creditor, is included in the calculation has already been included in points and fees with income that did not exceed the limit of points and fees for a transaction, provided as part of the $3,000 mortgage broker fee. then in effect for low- and moderate-income that such compensation can be attributed to iii. Creditor’s origination fees—loan households, as specified in regulations that particular transaction at the time the originator not employed by creditor. prescribed by the U.S. Department of interest rate is set. Compensation paid to an Compensation paid by a consumer or creditor Housing and Urban Development pursuant to employee of a creditor is not included in to a loan originator who is not employed by 24 CFR 570.3. For example, a creditor has points and fees. Loan originator the creditor is included in the calculation of satisfied the requirement in compensation includes amounts the loan points and fees under § 1026.32(b)(1)(ii). § 1026.43(a)(3)(v)(D)(2) if the creditor originator retains and is not dependent on Such compensation is included in points and extended credit only to consumers with the label or name of any fee imposed in fees in addition to any origination fees or incomes that did not exceed the limit in connection with the transaction. charges paid by the consumer to the creditor effect on the dates the creditor received each 2. Loan originator compensation— that are included in points and fees under consumer’s individual application. The attributable to a particular transaction. Loan § 1026.32(b)(1)(i). For example, assume that a condition specified in originator compensation is compensation consumer pays to the creditor a $3,000 § 1026.43(a)(3)(v)(D)(3), which relates to the

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current extension of credit, provides that the even though the consumer’s monthly debt-to- portfolio to maintain the transaction’s status extension of credit must be to a consumer income ratio is greater than 43 percent. as a qualified mortgage under § 1026.43(e)(5), with income that does not exceed the limit 2. Debt-to-income ratio or residual income. subject to four exceptions. Unless one of specified in § 1026.43(a)(3)(v)(D)(2) in effect Section 1026.43(e)(5) does not prescribe a these exceptions applies, a loan is no longer on the date the creditor received the specific monthly debt-to-income ratio with a qualified mortgage under § 1026.43(e)(5) consumer’s application. For example, assume which creditors must comply. Instead, once legal title to the debt obligation is sold, that a creditor with a tax exemption ruling creditors must consider a consumer’s debt-to- assigned, or otherwise transferred to another under section 501(c)(3) of the Internal income ratio or residual income calculated person. Accordingly, unless one of the Revenue Code of 1986 has satisfied the generally in accordance with § 1026.43(c)(7) exceptions applies, the transferee could not conditions identified in and verify the information used to calculate benefit from the presumption of compliance § 1026.43(a)(3)(v)(D)(1) and (2). If, on May 21, the debt-to-income ratio or residual income for qualified mortgages under § 1026.43(e)(1) 2014, the creditor in this example extends in accordance with § 1026.43(c)(3) and (4). unless the loan also met the requirements of credit secured by a dwelling to a consumer However, § 1026.43(c)(7) refers creditors to another qualified mortgage definition. whose application reflected income in excess § 1026.43(c)(5) for instructions on calculating 6. Application to subsequent transferees. of the limit identified in the payment on the covered transaction. The exceptions contained in § 1026.43(a)(3)(v)(D)(2) in effect on the date Section 1026.43(c)(5) requires creditors to § 1026.43(e)(5)(ii) apply not only to an initial the creditor received that consumer’s calculate the payment differently than sale, assignment, or other transfer by the application, the creditor has not satisfied the § 1026.43(e)(2)(iv). For purposes of the originating creditor but to subsequent sales, condition in § 1026.43(a)(3)(v)(D)(3) and this qualified mortgage definition in assignments, and other transfers as well. For extension of credit is not exempt from the § 1026.43(e)(5), creditors must base their example, assume Creditor A originates a requirements of § 1026.43(c) through (f). calculation of the consumer’s debt-to-income qualified mortgage under § 1026.43(e)(5). Six Paragraph 43(a)(3)(vi). ratio or residual income on the payment on months after consummation, Creditor A sells 1. General. The requirements of the covered transaction calculated according the qualified mortgage to Creditor B pursuant § 1026.43(c) through (f) do not apply to a to § 1026.43(e)(2)(iv) instead of according to to § 1026.43(e)(5)(ii)(B) and the loan retains mortgage loan modification made in § 1026.43(c)(5). Creditors are not required to its qualified mortgage status because Creditor connection with a program authorized by calculate the consumer’s monthly debt-to- B complies with the limits on asset size and sections 101 and 109 of the Emergency income ratio in accordance with appendix Q number of transactions. If Creditor B sells the Economic Stabilization Act of 2008. If a to this part as is required under the general qualified mortgage, it will lose its qualified creditor is underwriting an extension of definition of qualified mortgages by mortgage status under § 1026.43(e)(5) unless credit that is a refinancing, as defined by § 1026.43(e)(2)(vi). the sale qualifies for one of the § 1026.20(a), that will be made pursuant to a 3. Forward commitments. A creditor may § 1026.43(e)(5)(ii) exceptions for sales three program authorized by sections 101 and 109 make a mortgage loan that will be transferred or more years after consummation, to another of the Emergency Economic Stabilization Act or sold to a purchaser pursuant to an qualifying institution, as required by of 2008, the creditor also need not comply agreement that has been entered into at or supervisory action, or pursuant to a merger with § 1026.43(c) through (f). A creditor need before the time the transaction is or acquisition. not determine whether the mortgage loan consummated. Such an agreement is 7. Transfer three years after modification is considered a refinancing sometimes known as a ‘‘forward consummation. Under § 1026.43(e)(5)(ii)(A), under § 1026.20(a) for purposes of commitment.’’ A mortgage that will be if a qualified mortgage under § 1026.43(e)(5) determining applicability of § 1026.43; if the acquired by a purchaser pursuant to a is sold, assigned, or otherwise transferred transaction is made in connection with these forward commitment does not satisfy the three years or more after consummation, the programs, the requirements of § 1026.43(c) requirements of § 1026.43(e)(5), whether the loan retains its status as a qualified mortgage through (f) do not apply. In addition, if a forward commitment provides for the under § 1026.43(e)(5) following the transfer. creditor underwrites a new extension of purchase and sale of the specific transaction The transferee need not be eligible to credit, such as a subordinate-lien mortgage or for the purchase and sale of transactions originate qualified mortgages under loan, that will be made pursuant to a program with certain prescribed criteria that the § 1026.43(e)(5). The loan will continue to be authorized by sections 101 and 109 of the transaction meets. However, a forward a qualified mortgage throughout its life, and Emergency Economic Stabilization Act of commitment to another person that also the transferee, and any subsequent 2008, the creditor need not comply with the meets the requirements of transferees, may invoke the presumption of requirements of § 1026.43(c) through (f). § 1026.43(e)(5)(i)(D) is permitted. For compliance for qualified mortgages under example, assume a creditor that is eligible to § 1026.43(e)(1). * * * * * make qualified mortgages under 8. Transfer to another qualifying creditor. 43(e) Qualified mortgages. § 1026.43(e)(5) makes a mortgage. If that Under § 1026.43(e)(5)(ii)(B), a qualified * * * * * mortgage meets the purchase criteria of an mortgage under § 1026.43(e)(5) may be sold, Paragraph 43(e)(5). investor with which the creditor has an assigned, or otherwise transferred at any time 1. Satisfaction of qualified mortgage agreement to sell loans after consummation, to another creditor that meets the requirements. For a covered transaction to be then the loan does not meet the definition of requirements of § 1026.43(e)(5)(v). That a qualified mortgage under § 1026.43(e)(5), a qualified mortgage under § 1026.43(e)(5). section requires that a creditor, during the the mortgage must satisfy the requirements However, if the investor meets the preceding calendar year, together with all for a qualified mortgage under requirements of § 1026.43(e)(5)(i)(D), the affiliates, 500 or fewer first-lien covered § 1026.43(e)(2), other than the requirements mortgage will be a qualified mortgage if all transactions and had total assets less than $2 regarding debt-to-income ratio. For example, other applicable criteria also are satisfied. billion (as adjusted for inflation) at the end a qualified mortgage under § 1026.43(e)(5) 4. Creditor qualifications. To be eligible to of the preceding calendar year. A qualified may not have a loan term in excess of 30 make qualified mortgages under mortgage under § 1026.43(e)(5) transferred to years because longer terms are prohibited for § 1026.43(e)(5), a creditor must satisfy the a creditor that meets these criteria would qualified mortgages under § 1026.43(e)(2)(ii). requirements stated in § 1026.35(b)(2)(iii)(B) retain its qualified mortgage status even if it Similarly, a qualified mortgage under and (C). Section 1026.35(b)(2)(iii)(B) requires is transferred less than three years after § 1026.43(e)(5) may not result in a balloon that, during the preceding calendar year, the consummation. payment because § 1026.43(e)(2)(i)(C) creditor and its affiliates together originated 9. Supervisory sales. Section provides that qualified mortgages may not 500 or fewer first-lien covered transactions. 1026.43(e)(5)(ii)(C) facilitates sales that are have balloon payments except as provided Section 1026.35(b)(2)(iii)(C) requires that, as deemed necessary by supervisory agencies to under § 1026.43(f). However, a covered of the end of the preceding calendar year, the revive troubled creditors and resolve failed transaction need not comply with creditor had total assets of less than $2 creditors. A qualified mortgage under § 1026.43(e)(2)(vi), which prohibits consumer billion, adjusted annually by the Bureau for § 1026.43(e)(5) retains its qualified mortgage monthly debt-to-income ratios in excess of 43 inflation. status if it is sold, assigned, or otherwise percent. A covered transaction therefore can 5. Requirement to hold in portfolio. transferred to another person pursuant to: A be a qualified mortgage under § 1026.43(e)(5) Creditors generally must hold a loan in capital restoration plan or other action under

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12 U.S.C. 1831o; the actions or instructions qualified mortgage under § 1026.43(e)(5) that a creditor that originates 250 covered of any person acting as conservator, receiver is sold pursuant to a capital restoration plan transactions each year and originates or bankruptcy trustee; an order of a State or under 12 U.S.C. 1831o would retain its status qualified mortgages under § 1026.43(e)(5) is Federal government agency with jurisdiction as a qualified mortgage following the sale. acquired by a larger creditor that originates to examine the creditor pursuant to State or However, if the creditor simply chose to sell 10,000 covered transactions each year. Federal law; or an agreement between the the same qualified mortgage as one way to creditor and such an agency. A qualified comply with general regulatory capital Following the acquisition, the small creditor mortgage under § 1026.43(e)(5) that is sold, requirements in the absence of supervisory would no longer be able to originate assigned, or otherwise transferred under action or agreement it would lose its status § 1026.43(e)(5) qualified mortgages because, these circumstances retains its qualified as a qualified mortgage following the sale together with its affiliates, it would originate mortgage status regardless of how long after unless it qualifies under another definition of more than 500 covered transactions each consummation it is sold and regardless of the qualified mortgage. year. However, the § 1026.43(e)(5) qualified size or other characteristics of the transferee. 10. Mergers and acquisitions. A qualified mortgages originated by the small creditor Section 1026.43(e)(5)(ii)(C) does not apply to mortgage under § 1026.43(e)(5) retains its before the acquisition would retain their transfers done to comply with a generally qualified mortgage status if a creditor merges qualified mortgage status. applicable regulation with future effect with, is acquired by, or acquires another designed to implement, interpret, or person regardless of whether the creditor or * * * * * prescribe law or policy in the absence of a its successor is eligible to originate new Dated: May 29, 2013. specific order by or a specific agreement with qualified mortgages under § 1026.43(e)(5) a governmental agency described in after the merger or acquisition. However, the Richard Cordray, § 1026.43(e)(5)(ii)(C) directing the sale of one creditor or its successor can originate new Director, Bureau of Consumer Financial or more qualified mortgages under qualified mortgages under § 1026.43(e)(5) Protection. § 1026.43(e)(5) held by the creditor or one of only if it complies with all of the [FR Doc. 2013–13173 Filed 6–11–13; 8:45 am] the other circumstances listed in requirements of § 1026.43(e)(5) after the § 1026.43(e)(5)(ii)(C). For example, a merger or acquisition. For example, assume BILLING CODE 4810–AM–P

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