Higher-Priced Mortgage Loan Escrow Exemption (Regulation Z)
| Published date | 22 July 2020 |
| Citation | 85 FR 44228 |
| Record Number | 2020-14692 |
| Section | Proposed rules |
| Court | Consumer Financial Protection Bureau |
Federal Register, Volume 85 Issue 141 (Wednesday, July 22, 2020)
[Federal Register Volume 85, Number 141 (Wednesday, July 22, 2020)]
[Proposed Rules]
[Pages 44228-44244]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-14692]
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BUREAU OF CONSUMER FINANCIAL PROTECTION
12 CFR Part 1026
[Docket No. CFPB-2020-0023]
RIN 3170-AA83
Higher-Priced Mortgage Loan Escrow Exemption (Regulation Z)
AGENCY: Bureau of Consumer Financial Protection.
ACTION: Proposed rule with request for public comment.
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SUMMARY: The Bureau of Consumer Financial Protection (Bureau) is
proposing to amend Regulation Z, which implements the Truth in Lending
Act, as mandated by section 108 of the Economic Growth, Regulatory
Relief, and Consumer Protection Act. The amendments would exempt
certain insured depository institutions and insured credit unions from
the requirement to establish escrow accounts for certain higher-priced
mortgage loans.
DATES: Comments on the proposed rule must be received on or before
September 21, 2020.
ADDRESSES: You may submit responsive information and other comments,
identified by Docket No. CFPB-2020-0023 or RIN 3170-AA83, by any of the
following methods:
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Email: [email protected]. Include Docket
No. CFPB-2020-0023 or RIN 3170-AA83 in the subject line of the message.
Mail/Hand Delivery/Courier: Comment Intake--Higher-Priced
Mortgage Loan Escrow Exemption, Bureau of Consumer Financial
Protection, 1700 G Street NW, Washington, DC 20552. Please note that
due to circumstances associated with the COVID-19 pandemic, the Bureau
discourages the submission of comments by mail, hand delivery, or
courier.
Instructions: The Bureau encourages the early submission of
comments. All submissions should include the agency name and docket
number or Regulatory Information Number (RIN) for this rulemaking.
Because paper mail in the Washington, DC area and at the Bureau is
subject to delay, and in light of difficulties associated with mail and
hand deliveries during the COVID-19 pandemic, commenters are encouraged
to submit comments electronically. In general, all comments received
will be posted without change to http://www.regulations.gov. In
addition, once the Bureau's headquarters reopens, comments will be
available for public inspection and copying at 1700 G Street NW,
Washington, DC 20552, on official business days between the hours of
10:00 a.m. and 5:00 p.m. Eastern Time. At that time, you can make an
appointment to inspect the documents by telephoning 202-435-9169.
All comments, including attachments and other supporting materials,
will become part of the public record and subject to public disclosure.
Proprietary information or sensitive personal information, such as
account numbers or Social Security numbers, or names of other
individuals, should not be included. Comments will not be edited to
remove any identifying or contact information.
FOR FURTHER INFORMATION CONTACT: Joseph Devlin, Senior Counsel, Office
of Regulations, at 202-435-7700 or https://reginquiries.consumerfinance.gov/. If you require this document in an
alternative electronic format, please contact
[email protected].
SUPPLEMENTARY INFORMATION:
I. Summary of the Proposed Rule
Regulation Z, 12 CFR part 1026, implements the Truth in Lending Act
(TILA), 15 U.S.C. 1601 et seq., and includes a requirement that
creditors establish an escrow account for certain higher-priced
mortgage loans (HPMLs),\1\ along with certain exemptions from this
requirement.\2\ In the 2018 Economic Growth, Regulatory Relief, and
Consumer Protection Act (EGRRCPA),\3\ Congress required the Bureau to
issue regulations to add a new exemption from TILA's escrow requirement
that exempts transactions by certain insured depository institutions
and insured credit unions. The proposed rule would implement the
EGRRCPA section 108 statutory directive, and would also remove certain
obsolete text from the
[[Page 44229]]
Official Interpretations to Regulation Z (commentary).\4\
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\1\ 12 CFR 1026.35(a) and (b). An HPML is defined in 12 CFR
1026.35(a)(1) and generally means a closed-end consumer credit
transaction secured by the consumer's principal dwelling with an
annual percentage rate (APR) that exceeds the average prime offer
rate (APOR) for a comparable transaction as of the date the interest
rate is set by (1) 1.5 percentage points or more for a first-lien
transaction at or below the Freddie Mac conforming loan limit; (2)
2.5 percentage points or more for a first-lien transaction above the
Freddie Mac conforming loan limit; or (3) 3.5 percentage points or
more for a subordinate-lien transaction. The escrow requirement only
applies to first-lien HPMLs.
\2\ 12 CFR 1026.35(b)(2)(i) and (iii).
\3\ Public Law 115-174, 132 Stat. 1296 (2018).
\4\ As discussed in more detail below, this obsolete text
includes, among other text, language related to a recently issued
interpretive rule. On June 23, 2020, the Bureau issued an
interpretive rule that describes the Home Mortgage Disclosure Act of
1975 (HMDA), Public Law 94-200, 89 Stat. 1125 (1975), data to be
used in determining that an area is ``underserved.'' As the Bureau
explained in the interpretive rule, certain parts of the methodology
described in comment 35(b)(2)(iv)-1.ii were obsolete because they
referred to HMDA data points replaced or otherwise modified by a
2015 Bureau final rule (2015 HMDA Final Rule). 80 FR 66128, 66256-58
(Oct. 28, 2015). The Bureau stated that it was issuing the
interpretive rule to supersede the outdated portions of the
commentary and to identify current HMDA data points it will use to
determine whether a county is underserved. In this proposed rule we
identify proposed changes to the comment to remove the obsolete
text.
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New Sec. 1026.35(b)(2)(vi) would exempt from the Regulation Z HPML
escrow requirement any loan made by an insured depository institution
or insured credit union and secured by a first lien on the principal
dwelling of a consumer if (1) the institution has assets of $10 billion
or less; (2) the institution and its affiliates originated 1,000 or
fewer loans secured by a first lien on a principal dwelling during the
preceding calendar year; and (3) certain of the existing HPML escrow
exemption criteria are met, as described below.\5\
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\5\ When amending commentary, the Office of the Federal Register
requires reprinting of certain subsections being amended in their
entirety rather than providing more targeted amendatory instructions
and related text. The sections of regulatory and commentary text
included in this document show the language of those sections if the
Bureau adopts its changes as proposed. In addition, the Bureau is
releasing an unofficial, informal redline to assist industry and
other stakeholders in reviewing the changes that it is proposing to
make to the regulatory and commentary text of Regulation Z. This
redline is posted on the Bureau's website with this proposed rule.
If any conflicts exist between the redline and the text of
Regulation Z or this proposal, the documents published in the
Federal Register and the Code of Federal Regulations are the
controlling documents.
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II. Background
A. Federal Reserve Board Escrow Rule and the Dodd-Frank Act
Prior to the enactment of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank Act),\6\ the Board of Governors of
the Federal Reserve System (Board) issued a rule \7\ requiring, among
other things, the establishment of escrow accounts for payment of
property taxes and insurance for certain ``higher-priced mortgage
loans,'' a category which the Board defined to capture what it deemed
to be subprime loans.\8\ The Board explained that this rule was
intended to reduce consumer and systemic risks by requiring the
subprime market to structure and price loans similarly to the prime
market.\9\
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\6\ Public Law 111-203, 124 Stat. 1376 (2010).
\7\ 73 FR 44522 (July 30, 2008).
\8\ Id. at 44532.
\9\ Id. at 44557-61.
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In 2010, Congress enacted the Dodd-Frank Act, which amended TILA
and transferred TILA rulemaking authority and other functions from the
Board to the Bureau.\10\ The Dodd-Frank Act added TILA section 129D(a),
which adopted the Board's rule requiring that creditors establish an
escrow account for higher-priced mortgage loans.\11\ The Dodd-Frank Act
also excluded certain loans, such as reverse mortgages, from this
escrow requirement. The Dodd-Frank Act further granted the Bureau
authority to structure an exemption based on asset size and mortgage
lending activity for creditors operating predominantly in rural or
underserved areas.\12\ In 2013, the Bureau exercised this authority to
exempt from the escrow requirement creditors with under $2 billion in
assets and meeting other criteria.\13\ In 2015, in the Helping Expand
Lending Practices in Rural Communities Act, Congress amended TILA
section 129D again by striking the term ``predominantly'' for creditors
operating in rural or underserved areas.\14\
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\10\ Dodd Frank Act sections 1022, 1061, 1100A and 1100B, 124
Stat. 1980, 2035-39, 2107-10.
\11\ Dodd-Frank Act section 1461(a); 15 U.S.C. 1639d.
\12\ Id.
\13\ 78 FR 4726 (Jan. 22, 2013).
\14\ Public Law 114-94, div. G, tit. LXXXIX, section 89003, 129
Stat. 1799, 1800 (2015).
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B. Economic Growth, Regulatory Relief, and Consumer Protection Act
Congress enacted EGRRCPA in 2018. In section 108 of the
EGRRCPA,\15\ Congress directed the Bureau to conduct a rulemaking to
create a new exemption, this one to exempt from TILA's escrow
requirement loans made by certain creditors with assets of $10 billion
or less and meeting other criteria. Specifically, section 108 of the
EGRRCPA amended TILA section 129D(c) to require the Bureau to exempt
certain loans made by certain insured depository institutions and
insured credit unions from the TILA section 129D(a) HPML escrow
requirement.
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\15\ EGRRCPA section 108, 132 Stat. 1304-05; 15 U.S.C.
1639d(c)(2).
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TILA section 129D(c)(2), as amended by EGGRCPA, requires the Bureau
to issue regulations to exempt from the HPML escrow requirement any
loan made by an insured depository institution or insured credit union
secured by a first lien on the principal dwelling of a consumer if: (1)
The institution has assets of $10 billion or less; (2) the institution
and its affiliates originated 1,000 or fewer loans secured by a first
lien on a principal dwelling during the preceding calendar year; and
(3) certain of the existing Regulation Z HPML escrow exemption
criteria, or those of any successor regulation, are met. The Regulation
Z provisions that the statute includes in the new exemption are: (1)
the requirement that the creditor extend credit in a rural or
underserved area (Sec. 1026.35(b)(2)(iii)(A)); (2) the exclusion from
exemption eligibility of transactions involving forward purchase
commitments (Sec. 1026.35(b)(2)(v)); and (3) the prerequisite that the
institution and its affiliates not maintain an escrow account other
than those established for HPMLs at a time when the creditor may have
been required by the regulation to do so or those established after
consummation as an accommodation to distressed consumers to assist such
consumers in avoiding default or foreclosure (Sec.
1026.35(b)(2)(iii)(D)).
III. Legal Authority
The Bureau is issuing this proposal pursuant to its authority under
the Dodd-Frank Act and TILA.
A. Dodd-Frank Act Section 1022(b)
Section 1022(b)(1) of the Dodd-Frank Act authorizes the Bureau to
prescribe rules ``as may be necessary or appropriate to enable the
Bureau to administer and carry out the purposes and objectives of the
Federal consumer financial laws, and to prevent evasions thereof.''
\16\ Among other statutes, TILA and title X of the Dodd-Frank Act are
Federal consumer financial laws.\17\ Accordingly, in setting forth this
proposal, the Bureau is exercising its authority under Dodd-Frank Act
section 1022(b) to prescribe rules that carry out the purposes and
objectives of TILA and title X of the Dodd-Frank Act and prevent
evasion of those laws.
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\16\ 12 U.S.C. 5512(b)(1).
\17\ Dodd-Frank Act section 1002(14), 12 U.S.C. 5481(14)
(defining ``Federal consumer financial law'' to include the
``enumerated consumer laws'' and the provisions of title X of the
Dodd-Frank Act); Dodd-Frank Act section 1002(12), 12 U.S.C. 5481(12)
(defining ``enumerated consumer laws'' to include TILA).
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B. TILA
A purpose of TILA is ``to assure a meaningful disclosure of credit
terms so that the consumer will be able to compare more readily the
various credit terms available to him and avoid the uninformed use of
credit.'' \18\ This stated purpose is tied to Congress's finding that
``economic stabilization would be
[[Page 44230]]
enhanced and the competition among the various financial institutions
and other firms engaged in the extension of consumer credit would be
strengthened by the informed use of credit.'' \19\ Thus, strengthened
competition among financial institutions is a goal of TILA, achieved
through the effectuation of TILA's purposes.
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\18\ 15 U.S.C. 1601(a).
\19\ Id.
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Congress in 2018 enacted EGRRCPA, and section 108 of EGRRCPA
amended section 129D of TILA.\20\ The exemption proposed in this
rulemaking would implement that amendment. In addition, in previous
rulemakings the Bureau issued two of the regulatory provisions this
proposed rule proposes to amend. In issuing these provisions, the
Bureau relied on one or more of the authorities discussed below, as
well as other authority.\21\ The Bureau is proposing amendments to
these provisions in reliance on the same authority, as discussed in
detail in the Legal Authority or Section-by-Section Analysis parts of
the Bureau's final rules titled ``Escrow Requirements Under the Truth
in Lending Act'' and ``Amendments Relating to Small Creditors and Rural
or Underserved Areas Under the Truth in Lending Act (Regulation Z).''
\22\
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\20\ EGRRCPA section 108, 132 Stat. 1304.
\21\ Specifically, TILA section 129D(c) authorizes the Bureau to
exempt, by regulation, a creditor from the requirement (in section
129D(a)) that escrow accounts be established for higher-priced
mortgage loans if the creditor operates in rural or underserved
areas, retains its mortgage loans in portfolio, does not exceed
(together with all affiliates) a total annual mortgage loan
origination limit set by the Bureau, and meets any asset-size
threshold, and any other criteria the Bureau may establish. See 80
FR 59944, 59945-46 (Oct. 2, 2015).
\22\ See 78 FR 4726 and 80 FR 59944.
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As amended by the Dodd-Frank Act, TILA section 105(a) directs the
Bureau to prescribe regulations to carry out the purposes of TILA, and
provides that such regulations may contain additional requirements,
classifications, differentiations, or other provisions, and may provide
for such adjustments and exceptions for all or any class of
transactions, that the Bureau judges are necessary or proper to
effectuate the purposes of TILA, to prevent circumvention or evasion
thereof, or to facilitate compliance therewith.\23\
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\23\ 15 U.S.C. 1604(a).
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Historically, TILA section 105(a) has served as a broad source of
authority for rules that promote the informed use of credit through
required disclosures and substantive regulation of certain practices.
Dodd-Frank Act section 1100A clarified the Bureau's section 105(a)
authority by amending that section to provide express authority to
prescribe regulations that contain ``additional requirements'' that the
Bureau finds are necessary or proper to effectuate the purposes of
TILA, to prevent circumvention or evasion thereof, or to facilitate
compliance. The Dodd-Frank Act amendment clarified that the Bureau has
the authority to use TILA section 105(a) to prescribe requirements
beyond those specifically listed in TILA that meet the standards
outlined in section 105(a). As amended by the Dodd-Frank Act, TILA
section 105(a) authority to make adjustments and exceptions to the
requirements of TILA applies to all transactions subject to TILA,
except with respect to the provisions of TILA section 129 that apply to
the high-cost mortgages referred to in TILA section 103(bb).\24\
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\24\ 15 U.S.C. 1602(bb).
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The Bureau's authority under TILA section 105(a) to make
exceptions, adjustments, and additional provisions that the Bureau
finds are necessary or proper to effectuate the purposes of TILA
applies with respect to the purpose of TILA section 129D. That purpose
is to ensure that consumers understand and appreciate the full cost of
home ownership. The purpose of TILA section 129D is also informed by
the findings articulated in section 129B(a) that economic stabilization
would be enhanced by the protection, limitation, and regulation of the
terms of residential mortgage credit and the practices related to such
credit, while ensuring that responsible and affordable mortgage credit
remains available to consumers.\25\
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\25\ See 15 U.S.C. 1639b(a).
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For the reasons discussed in this document, the Bureau is proposing
amendments to Regulation Z to implement the EGRRCPA section 108 to
carry out the purposes of TILA and is proposing such additional
requirements, adjustments, and exceptions as, in the Bureau's judgment,
are necessary and proper to carry out the purposes of TILA, prevent
circumvention or evasion thereof, or to facilitate compliance. In
developing these aspects of the proposed rule pursuant to its authority
under TILA section 105(a), the Bureau has considered: (1) The purposes
of TILA, including the purpose of TILA section 129D; (2) the findings
of TILA, including strengthening competition among financial
institutions and promoting economic stabilization; and (3) the specific
findings of TILA section 129B(a)(1) that economic stabilization would
be enhanced by the protection, limitation, and regulation of the terms
of residential mortgage credit and the practices related to such
credit, while ensuring that responsible, affordable mortgage credit
remains available to consumers.
In addition, as noted elsewhere in this document, three of the
regulatory provisions this proposed rule proposes to amend were adopted
by the Bureau in previous rulemakings. In adopting those provisions,
the Bureau relied on one or more of the authorities discussed above, as
well as other authority.\26\ The Bureau is proposing amendments to
these existing provisions as applied to entities subject to the
original exemption in reliance on the same authorities.
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\26\ Specifically, TILA section 129D(c) authorizes the Bureau to
exempt a creditor that, among other factors, ``meets any other
criteria the Bureau may establish consistent with the purposes of''
Part B (Credit Transactions) of TILA. See 78 FR 4726 and 80 FR
59944.
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IV. Section-by-Section Analysis
Section 1026.35 Requirements for Higher-Priced Mortgage Loans
35(a) Definitions
35(a)(3) and (4)
The escrow requirement exemption in EGRRCPA section 108 is
available to ``insured credit unions'' and ``insured depository
institutions.'' Section 108 amends TILA to provide definitions for
these two terms, at TILA section 129D(i)(3) and (4). ``Insured credit
union'' has the meaning given the term in section 101 of the Federal
Credit Union Act (12 U.S.C. 1752), and ``insured depository
institution'' has the meaning given the term in section 3 of the
Federal Deposit Insurance Act (12 U.S.C. 1813).
The Bureau proposes to include these definitions along with the
existing definitions regarding HPMLs, in Sec. 1026.35(a).
35(b) Escrow accounts
35(b)(2) Exemptions
35(b)(2)(iii)
EGRRCPA section 108 amends TILA section 129D to provide that one of
the requirements for the new escrow exemption is that an exempted
transaction satisfy the criterion previously established by the Bureau
and codified at Regulation Z Sec. 1026.35(b)(2)(iii)(D) to qualify for
the existing escrow exemption.\27\ Section 1026.35(b)(2)(iii)(D)
establishes as a prerequisite to the exemption that a creditor or its
affiliate is not already maintaining an escrow account for any
[[Page 44231]]
extension of consumer credit secured by real property or a dwelling
that the creditor or its affiliate currently services.\28\ The purpose
of this prerequisite is to limit the exemption to institutions that do
not already provide escrow accounts. Instead, institutions that already
provide escrow accounts would bear the entire burden, with the burden
for them being lower because they are continuing to provide them rather
than commencing to provide them. This prerequisite, however, is subject
to two exceptions.
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\27\ The term ``existing'' or ``original'' HPML escrow exemption
refers throughout this document to the regulatory exemption at Sec.
1026.35(b)(2)(iii). It does not refer to the exemptions or
exclusions listed at Sec. 1026.35(b)(2)(i).
\28\ 78 FR 4726, 4738-39.
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First, under Sec. 1026.35(b)(2)(iii)(D)(2) a creditor would not
lose the exemption for providing escrow accounts as an accommodation to
distressed consumers to assist such consumers in avoiding default or
foreclosure. The Bureau is not proposing to amend this exception.
Second, under Sec. 1026.35(b)(2)(iii)(D)(1), the Bureau initially
granted an exception from the escrow requirement to creditors who
established escrow accounts for first-lien HPMLs on or after April 1,
2010 (the effective date of the Board's original HPML escrow rule), and
before June 1, 2013 (the effective date of the Bureau's first HPML
escrow rule that included the Dodd-Frank exemption for certain
creditors (original escrow exemption)). The purpose of this exception
was to avoid penalizing creditors that had not previously provided
escrow accounts but established them specifically to comply with the
regulation requiring escrows.\29\ Over time, as the Bureau amended the
HPML escrow exemption criteria and made more creditors eligible, the
Bureau also extended the end date for the exception to the prerequisite
against maintaining escrow accounts in Sec. 1026.35(b)(2)(iii)(D), so
that creditors that had established escrow accounts in order to comply
with the Bureau's regulations could still benefit from the relief
provided by the Bureau's amendments to the exemption criteria.\30\ The
Bureau most recently extended the date to May 1, 2016, consistent with
the effective date of the Bureau's latest amendment to the HPML
exemption criteria.\31\
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\29\ Id.
\30\ See, e.g., 80 FR 59944, 59968 (adjusting end date to
January 1, 2016).
\31\ See Operations in Rural Areas Under the Truth in Lending
Act (Regulation Z); Interim Final Rule, 81 FR 16074 (Mar. 25, 2016).
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The Bureau proposes to amend this exception. The dates in current
Sec. 1026.35(b)(2)(iii)(D)(1) between which creditors are allowed to
maintain escrow accounts for first-lien HPMLs without losing
eligibility for the exemption (April 1, 2010, until May 1, 2016) were
necessary to allow creditors to benefit fully from the existing HPML
escrow exemption. However, those same dates, if applied to EGRRCPA's
new exemption criteria would cause most insured depositories and
insured credit unions who would otherwise qualify under EGRRCPA's new
exemption criteria to be ineligible. The reason they would be
ineligible is that those depositories and credit unions presumably have
established escrows for HPMLs after May 1, 2016, in compliance with the
existing escrow rule's requirements.
The Bureau believes that very few insured depository institutions
and insured credit unions that do not meet the existing exemption
criteria would benefit from the section 108 exemption if implemented
without modification to the end date in existing Sec.
1026.35(b)(2)(iii)(D)(1). These would only be institutions that (1)
together with their affiliates, have more than approximately $2 billion
\32\ in assets and, without affiliates, less than $10 billion in
assets; (2) have not extended any HPMLs since May 1, 2016; and (3) do
not offer mortgage escrows in the normal course of business. Because
this approach would restrict access to the new HPML escrow exemption to
institutions that do not currently originate HPMLs, its usefulness
would be extremely limited. The Bureau believes it is unlikely that
Congress intended to provide an exemption for institutions that do not
engage in the business activity to which the exemption applies.
Consequently, to better implement what the Bureau believes is
Congress's intent, the Bureau proposes to replace the May 1, 2016, end
date for the prerequisite against establishing escrows with a new end
date that is approximately 90 days after the effective date of the
forthcoming section 108 escrow exemption final rule. The Bureau
believes that the extra 90 days would help otherwise exempt
institutions avoid inadvertently making themselves ineligible by
establishing escrow accounts before they have heard about the rule and
adjusted their compliance. In addition, the Bureau proposes to amend
comment 35(b)(2)(iii)-1.iv to conform to this change.
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\32\ After inflation adjustments, this figure is now $2.167
billion.
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The Bureau also proposes to amend comment 35(b)(2)(iii)(D)(1)-1 to
address the date change. Comment 35(b)(2)(iii)(D)(1)-1 and comment
35(b)(2)(iii)(D)(2)-1 were inadvertently deleted from the Code of
Federal Regulations in 2019 during an annual inflation adjustment, and
no change in interpretation of the associated regulatory provisions was
intended. The Bureau is correcting this deletion by proposing to
reinsert the two comments back into Supplement I, with comment
35(b)(2)(iii)(D)(1)-1 amended from its former language to reflect the
date change described above and with no changes being made to comment
35(b)(2)(iii)(D)(2)-1. In addition, a sentence describing the
definition of ``affiliate'' in comment 35(b)(2)(iii)-1.ii.C was also
inadvertently deleted from the Code of Federal Regulations in 2019, and
no change in interpretation was intended. The Bureau now proposes to
add the deleted sentence back into this comment.
Although the Bureau is proposing this date change in Sec.
1026.35(b)(2)(iii)(D)(1) and the related comment to implement the new
exemption specified by Congress, it is possible that creditors outside
of the scope of the proposed new exemption may now be eligible for the
existing exemption, in spite of having established escrow accounts
after May 1, 2016. Despite this potential change, the Bureau believes
that few creditors would newly qualify for, and few, if any, would take
advantage of the existing exemption as a result of the date change.
Newly eligible creditors would likely have been eligible during date
extensions in the past, and chose to forgo the exemption at those
times. The Bureau does not consider it likely that more than a very few
institutions would choose to change their business processes this time.
The Bureau initially adopted the criterion in Sec.
1026.35(b)(2)(iii)(D) under its broad discretionary authority, set
forth in 15 U.S.C. 1639d(c)(4), to establish ``criteria [for the escrow
exemption] consistent with the purposes'' of the escrow provisions. In
establishing the new exemption in section 108, Congress incorporated as
a prerequisite the criterion in Sec. 1026.35(b)(2)(iii)(D) or ``any
successor regulation.'' The Bureau interprets the reference to ``any
successor regulation'' to authorize the Bureau to make amendments to
existing Sec. 1026.35(b)(2)(iii)(D) consistent with the purposes of
the escrow provisions, the same standard under which the provision was
initially authorized. The Bureau believes the proposed amendment to the
end date in Sec. 1026.35(b)(2)(iii)(D)(1) is consistent with the
purposes of the escrow provisions to avoid disqualifying the vast
majority of institutions that otherwise would qualify for the new
exemption. The Bureau believes
[[Page 44232]]
Congress did not intend the new exemption to apply so narrowly.
In addition, the Bureau's proposed exemption is authorized under
the Bureau's TILA section 105(a) authority to make adjustments to
facilitate compliance with TILA and effectuate its purposes.\33\
Modifying the date would facilitate compliance with TILA for the
institutions that would qualify for the exemption but would not be
eligible without the modification, and the failure to adjust the date
would limit the exemption to an extremely small number of institutions.
The Bureau proposes to set the end date 90 days after the final rule is
published in the Federal Register because the Bureau proposes that the
rule become effective upon publication, as explained below. The small
to mid-size institutions affected by the rule may not be immediately
aware of the change and might make themselves ineligible for the
exemption by establishing escrow accounts. Such institutions would have
90 days to learn of the amendment and avoid that problem.
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\33\ 15 U.S.C. 1604(a).
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The Bureau solicits comment on the Bureau's proposed amendments to
Sec. 1026.35(b)(2)(iii)(D)(1) and comments 35(b)(2)(iii)-1.iv and
35(b)(2)(iii)(D)(1)-1, and specifically the exclusion of escrow
accounts established on or after April 1, 2010, and before [DATE 90
DAYS AFTER THE EFFECTIVE DATE OF THE FINAL RULE] from the limitation in
Sec. 1026.35(b)(2)(iii)(D)(1). In particular, the Bureau seeks comment
on the need for the proposed changes and the impact on consumers of
extending the exemption to the escrow requirements in Sec.
1026.35(b)(1).
35(b)(2)(iv)
35(b)(2)(iv)(A)
Section 1026.35(b)(2)(iv)(A)(3) provides that a county or census
block could be designated as rural using an application process
pursuant to section 89002 of the Helping Expand Lending Practices in
Rural Communities Act, Public Law 114-94, title LXXXIX (2015). Because
the provision ceased to have any force or effect on December 4, 2017,
the Bureau proposes to remove this provision and make conforming
changes to Sec. 1026.35(b)(2)(iv)(A). The Bureau also proposes to
remove references to the obsolete provision in comments
35(b)(2)(iv)(A)-1.i and -2.i, as well as comment 43(f)(1)(vi)-1.
On June 23, 2020, the Bureau issued an interpretive rule that
describes the HMDA data to be used in determining whether an area is
``underserved.'' \34\ As the interpretive rule explained, certain parts
of the methodology described in comment 35(b)(2)(iv)-1.ii became
obsolete because they referred to HMDA data points replaced or
otherwise modified by the 2015 HMDA Final Rule. The Bureau proposes to
remove the last two sentences from comment 35(b)(2)(iv)-1.ii. In
addition to removing the obsolete language referring to HMDA data, the
Bureau would also remove references to publishing the annual rural and
underserved lists in the Federal Register. The Bureau does not believe
that such publication would increase the ability of financial
institutions to access the information, and that posting the lists on
the Bureau's public website is sufficient.
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\34\ https://www.consumerfinance.gov/policy-compliance/rulemaking/final-rules/truth-lending-regulation-z-underserved-areas-home-mortgage-disclosure-act-data/.
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35(b)(2)(v)
EGRRCPA section 108 further amends TILA section 129D to provide
that one of the requirements for the new escrow exemption is that an
exempted transaction satisfy the criterion in Regulation Z Sec.
1026.35(b)(2)(v), a prerequisite to the existing HPML escrow exemption.
Section 1026.35(b)(2)(v) currently states that, unless otherwise
exempted by Sec. 1026.35(b)(2), the exemption to the escrow
requirement will not be available for any first-lien HPML that, at
consummation, is subject to a commitment to be acquired by a person
that does not satisfy the conditions for an exemption in Sec.
1026.35(b)(2)(iii) (i.e., no forward commitment). In adopting the
original escrow exemption, the Bureau stated that the prerequisite of
no forward commitments would appropriately implement the requirement in
TILA section 129D(c)(1)(C) \35\ that the exemption apply to portfolio
lenders.\36\ The Bureau also reasoned that conditioning the exemption
on a lack of forward commitments, rather than requiring that all loans
be held in portfolio, would avoid consumers having to make unexpected
lump sum payments to fund an escrow account.\37\ To implement section
108, the Bureau now proposes to add references in Sec.
1026.35(b)(2)(v) to the new exemption to make clear that the new
exemption would also not be available for transactions subject to
forward commitments of the type described. The Bureau also proposes to
add similar references to the new exemption in comment 35(b)(2)(v)-1
discussing ``forward commitments.''
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\35\ EGRRCPA section 108 redesignated this paragraph. It was
previously TILA section 129D(c)(3).
\36\ 78 FR 4726, 4741.
\37\ Id. at 4741-42.
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35(b)(2)(vi)
As explained above, section 108 of EGRRCPA amends TILA section 129D
to provide a new exemption from the HPML escrow requirement.\38\ The
new exemption is narrower than the existing TILA section 129D exemption
in several ways, including the following. First, the section 108
exemption is limited to insured depositories and insured credit unions
that meet the statutory criteria, whereas the existing exemption
applies to any creditor (including a non-insured creditor) that meets
its criteria. Second, the originations limit in the section 108
exemption is specified to be 1,000 loans secured by a first lien on a
principal dwelling originated by an insured depository institution or
insured credit union and its affiliates during the preceding calendar
year. In contrast, TILA section 129D(c)(1) (as redesignated) gave the
Bureau discretion to choose the originations limit for the original
exemption, which the Bureau set at 2,000 originations (other than
portfolio loans).\39\ Third, TILA section 129D(c)(1) also gave the
Bureau discretion to determine any asset size threshold and any other
criteria the Bureau may establish, consistent with the purposes of
TILA. Section 108, on the other hand, specifies an asset size threshold
of $10 billion and does not expressly state that the Bureau can
establish other criteria.\40\
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\38\ EGRRCPA section 108 designates the new exemption as section
129D(c)(2) and redesignates the paragraph that includes the existing
exemption, adopted pursuant to section 1461(a) of the Dodd-Frank
Act, as section 129D(c)(1).
\39\ 12 CFR 1026.35(b)(2)(iii)(B).
\40\ However, as discussed above, EGRRCPA section 108 does
appear to allow for a more circumscribed ability to alter certain
parameters of the new exemption by referencing the existing
regulation ``or any successor regulation.'' TILA section
129D(c)(2)(C).
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The Bureau believes that EGRRCPA section 108 is meant to carve out
a carefully circumscribed exemption available to insured depository
institutions and insured credit unions that do not pursue mortgage
lending as a major business line. Congress provided an asset size limit
of $10 billion, approximately eight billion above the existing
exemption, but reduced the originations limit to 1,000 loans. This
suggests that the institutions Congress intended to exempt do not need
to be as small as those benefiting from the original exemption, but
their mortgage lending business should be small enough that they do not
benefit
[[Page 44233]]
from economies of scale in providing escrow accounts.
The Bureau now proposes to implement the section 108 exemption
consistent with this understanding of its limited scope. Proposed new
Sec. 1026.35(b)(2)(vi) would codify the section 108 exemption by
imposing as a precondition a bar on its use with transactions involving
forward commitments, as explained above in the discussion of the
forward commitments provision, Sec. 1026.35(b)(2)(v), and limiting its
use to insured depository institutions and insured credit unions. The
other requirements for the exemption would be implemented in proposed
subparagraphs (A), (B) and (C), discussed below.
In addition, the Bureau proposes to provide three-month grace
periods \41\ for the annually applied requirements for the section 108
escrow exemption, in Sec. 1026.35(b)(2)(vi)(A), (B) and (C). The grace
periods would allow exempt creditors to continue using the exemption
for three months after they exceed a threshold in the previous year, to
allow a transition period to facilitate compliance.\42\ The new
proposed exemption would use the same type of grace periods as in the
existing escrow exemption at Sec. 1026.35(b)(2)(iii).
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\41\ See the discussion of Sec. 1026.35(b)(2)(vi)(A) below for
further explanation of the Bureau's proposed adoption of grace
periods in the proposed exemption.
\42\ See 80 FR 59944, 59948-49, 59951, 59954.
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In addition to the three-month grace periods, the new proposed
exemption has other important provisions in common with the existing
exemption, including the rural or underserved test, the definition of
affiliates, and the application of the non-escrowing time period
requirement. Thus, the Bureau proposes to add new comment 35(b)(2)(vi)-
1, which cross-references the commentary to Sec. 1026.35(b)(2)(iii).
Specifically, proposed comment 35(b)(2)(vi)-1 would explain that for
guidance on applying the grace periods for determining asset size or
transaction thresholds under Sec. 1026.35(b)(2)(vi)(A) or (B), the
rural or underserved requirement, or other aspects of the exemption in
Sec. 1026.35(b)(2)(vi) not specifically discussed in the commentary to
Sec. 1026.35(b)(2)(vi), an insured depository institution or insured
credit union may, where appropriate, refer to the commentary to Sec.
1026.35(b)(2)(iii).
35(b)(2)(vi)(A)
EGRRCPA section 108(1)(D) amends TILA section 129D(c)(2)(A) to
provide that the new escrow exemption is available only for
transactions by an insured depository or credit union that ``has assets
of $10,000,000,000 or less.'' The Bureau proposes to implement this
provision in new Sec. 1026.35(b)(2)(vi)(A) by: (1) Using an
institution's assets during the previous calendar year to qualify for
the exemption, but allowing for a three-month grace period at the
beginning of a new year if the institution loses the exemption it
previously qualified for; and (2) adjusting the $10 billion threshold
annually for inflation using the Consumer Price Index for Urban Wage
Earners and Clerical Workers (CPI-W), not seasonally adjusted, for each
12-month period ending in November, with rounding to the nearest
million dollars.
The existing escrow exemption at Sec. 1026.35(b)(2)(iii) includes
three-month grace periods for determination of asset size, loan volume,
and rural or underserved status. As explained above, the grace periods
allow exempt creditors to continue using the exemption for three months
after they exceed a threshold in the previous year, so that there will
be a transition period to facilitate compliance when they no longer
qualify for the exemption.\43\ The use of grace periods therefore
addresses potential concerns regarding the impact of asset size and
origination volume fluctuations from year to year.\44\ The grace
periods in the existing exemption, and the new proposed grace period in
Sec. 1026.35(b)(2)(vi)(A), cover applications received before April 1
of the year following the year that the asset threshold is exceeded,
and allow institutions to continue to use their asset size from the
year before the previous year.
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\43\ 80 FR 59944, 59948-49, 59951, 59954.
\44\ See 80 FR 7770, 7781 (Feb. 11, 2015).
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The Bureau believes that, although new TILA section 129D(c)(2)(A)
does not expressly provide for a grace period, proposing the same type
of grace period provided for in the existing regulatory exemption is
justified. EGRRCPA section 108 specifically cites to and relies on
aspects of the existing regulatory exemption, which uses grace periods
for certain factors. In fact, section 108 incorporates one requirement
from the existing exemption, the rural or underserved requirement at
Sec. 1026.35(b)(2)(iii)(A), that uses a grace period. The Bureau
believes that a grace period is authorized under its TILA 105(a)
authority \45\ to effectuate the purposes of TILA and to facilitate
compliance. The Bureau believes that the proposed grace periods for the
asset threshold, and the loan origination limit discussed below,\46\
would facilitate compliance with TILA for institutions that formerly
qualified for the exemption but then exceeded the threshold in the
previous year. Those institutions would have three months to adjust
their compliance management systems to provide the required escrow
accounts. The grace periods would reduce uncertainties caused by yearly
fluctuations in assets or originations, and they would make the timing
of the new and existing exemptions consistent.
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\45\ 15 U.S.C. 1604(a).
\46\ The Bureau also believes that the use of a grace period
with the rural or underserved requirement is appropriate and the
Bureau is proposing to include one by citing to existing Sec.
1026.35(b)(2)(iii)(A). However, because the regulation already
provides for that grace period, the discussion of the use of
exception and adjustment authority does not list it.
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The new section 108 exemption is restricted to insured depositories
and credit unions with assets of $10 billion or less. Although section
108 does not expressly state that this figure should be adjusted for
inflation, the Bureau proposes this adjustment to effectuate the
purposes of TILA and facilitate compliance. EGRRCPA section 108
specifically cites to and relies on criteria in the existing exemption,
whose asset threshold is adjusted for inflation. In fact, monetary
threshold amounts are adjusted for inflation in numerous places in
Regulation Z.\47\ In addition, because inflation adjustment keeps the
threshold value at the same level in real terms as when adopted,
adjusting for inflation avoids undermining the objective that Congress
intended to achieve with the threshold value. To effectuate the
purposes of TILA and facilitate compliance, the Bureau is proposing to
use its TILA section 105(a) authority to adjust the threshold value to
account for inflation. The Bureau is proposing this adjustment to
facilitate compliance with TILA and effectuate its purposes.\48\ The
Bureau believes that failure to adjust for inflation would interfere
with the purpose of TILA by reducing the availability of the exemption
over time to fewer institutions than the provision was meant to cover.
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\47\ See, e.g., Sec. 1026.3(b)(1)(ii) (Regulation Z exemption
for credit over applicable threshold), Sec. 1026.35(c)(2)(ii)
(appraisal exemption threshold), Sec. 1026.6(b)(2)(iii) (CARD Act
minimum interest charge threshold), Sec. 1026.43(e)(3)(ii)(points
and fees thresholds for qualified mortgage status).
\48\ 15 U.S.C. 1604(a).
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In order to facilitate compliance with Sec. 1026.35(b)(2)(vi)(A),
the Bureau proposes to add comment 35(b)(2)(vi)(A)-1. Comment
35(b)(2)(vi)(A)-1 would explain the method by which the asset threshold
will be adjusted for inflation, that the
[[Page 44234]]
assets of affiliates are not considered in calculating compliance with
the threshold (consistent with EGRRCPA section 108), and that the
Bureau will publish notice of the adjusted asset threshold each year.
35(b)(2)(vi)(B)
EGRRCPA section 108 limits use of its escrow exemption to insured
depositories and insured credit unions that, with their affiliates,
``during the preceding calendar year . . . originated 1,000 or fewer
loans secured by a first lien on a principal dwelling.'' This threshold
is half the limit in the existing regulatory exemption and does not
exclude portfolio loans from the total. As discussed above, the Bureau
believes that Congress intended the provision to limit the new
exemption to depositories of less than $10 billion that do not pursue
mortgage lending as a significant line of business.
The Bureau proposes to implement the 1,000 loan threshold in new
Sec. 1026.35(b)(2)(vi)(B), with a three-month grace period similar to
the one provided in proposed Sec. 1026.35(b)(2)(vi)(A) and the ``rural
or underserved'' requirement in proposed Sec. 1026.35(b)(2)(vi)(C)
(discussed in more detail below). For the Bureau's reasoning regarding
the adoption of grace periods with the new exemption, see the
discussion of Sec. 1026.35(b)(2)(vi)(A) above.
There are important differences between the 2,000-loan transaction
threshold in Sec. 1026.35(b)(2)(iii)(B) of the existing exemption and
the 1,000-loan transaction threshold in proposed Sec.
1026.35(b)(2)(vi)(B) of the new exemption that would go beyond the
number of loans. Proposed comment 35(b)(2)(vi)(B)-1 would aid
compliance by explaining the differences between the transactions to be
counted toward the two thresholds for their respective exemptions.
35(b)(2)(vi)(C)
EGRRCPA section 108 requires that, in order to be eligible for the
new exemption, an insured depository or insured credit union must
satisfy the criteria in Sec. 1026.35(b)(2)(iii)(A) and Sec.
1026.35(b)(2)(iii)(D), or any successor regulation. The Bureau proposes
to implement these requirements in new Sec. 1026.35(b)(2)(vi)(C).
Section 1026.35(b)(2)(iii)(A) requires that during the preceding
calendar year, or, if the application for the transaction was received
before April 1 of the current calendar year, during either of the two
preceding calendar years, a creditor has extended a covered
transaction, as defined by Sec. 1026.43(b)(1), secured by a first lien
on a property that is located in an area that is either ``rural'' or
``underserved,'' as set forth in Sec. 1026.35(b)(2)(iv). As discussed
above, the current regulation includes a three-month grace period at
the beginning of a calendar year to allow a transition period for
institutions that lose the existing exemption, and EGRRCPA section 108
incorporates that provision, including the grace period, into the new
exemption. By following EGRRCPA and citing to the current regulation,
the Bureau proposes to include the criteria for extending credit in a
rural or underserved area, including the grace period, in the new
exemption.
Section 1026.35(b)(2)(iii)(D) of the existing escrow exemption
generally provides that a creditor may not use the exemption if it or
its affiliate maintains an escrow account for any extension of consumer
credit secured by real property or a dwelling that the creditor or its
affiliate currently services. However, escrow accounts established
after consummation as an accommodation to distressed consumers to
assist such consumers in avoiding default or foreclosure are excluded
from this prohibition. In addition, escrow accounts established between
certain dates during which the creditor would have been required to
provide escrows to comply with the regulation are also excluded. As
explained in the section-by-section discussion of Sec.
1026.35(b)(2)(iii)(D) above, the Bureau proposes to change the end date
of this exclusion to accommodate the new section 108 exemption. Because
the Bureau is proposing to make the final rule effective upon
publication in the Federal Register (see part V below), the Bureau
proposes to extend the end date in Sec. 1026.35(b)(2)(iii)(D)(1) to 90
days after such publication. The Bureau believes that the extra 90 days
will help potentially exempt institutions avoid inadvertently making
themselves ineligible.
Section 1026.43 Minimum Standards for Transactions Secured by a
Dwelling
43(f) Balloon-Payment Qualified Mortgages Made by Certain Creditors
43(f)(1) Exemption
43(f)(1)(vi)
As explained above, the Bureau proposes to remove an obsolete
provision in Sec. 1026.35(b)(2)(iv)(A) and remove references to that
provision in comments 35(b)(2)(iv)-1.i and -2.i, as well as comment
43(f)(1)(vi)-1.
V. Proposed Effective Date for Final Rule
The Bureau proposes that the amendments included in this proposal
take effect for mortgage applications received by an exempt institution
on the date of the final rule's publication in the Federal Register.
Under section 553(d) of the Administrative Procedure Act (APA), the
required publication or service of a substantive rule must be made not
less than 30 days before its effective date except for certain
instances, including when a substantive rule grants or recognizes an
exemption or relieves a restriction.\49\ This proposed rule would grant
an exemption from a requirement to provide escrow accounts for certain
HPMLs and would relieve a restriction against providing certain HPMLs
without such accounts. The proposed rule therefore would lead to a
final rule that would be a substantive rule that would grant an
exemption and relieve requirements and restrictions. Thus, the Bureau
proposes to make the final rule effective on the same day as
publication. The Bureau seeks comment on whether the proposed effective
date is appropriate, or whether the Bureau should adopt an alternative
effective date.
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\49\ 5 U.S.C. 553(d).
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VI. Dodd-Frank Act Section 1022(b)(2) Analysis
A. Overview
In developing the proposed rule, the Bureau has considered the
proposed rule's potential benefits, costs, and impacts as required by
section 1022(b)(2)(A) of the Dodd-Frank Act.\50\ The Bureau requests
comment on the preliminary analysis presented below as well as
submissions of additional data that could inform the Bureau's analysis
of the benefits, costs, and impacts. In developing the proposed rule,
the Bureau has consulted, or offered to consult with, the appropriate
prudential regulators and other Federal agencies, including regarding
consistency with any prudential, market, or systemic objectives
administered by such agencies as required by section 1022(b)(2)(B) of
the Dodd-Frank Act.
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\50\ Specifically, section 1022(b)(2)(A) of the Dodd-Frank Act
requires the Bureau to consider the potential benefits and costs of
the regulation to consumers and covered persons, including the
potential reduction of access by consumers to consumer financial
products and services; the impact of proposed rules on insured
depository institutions and insured credit unions with less than $10
billion in total assets as described in section 1026 of the Dodd-
Frank Act; and the impact on consumers in rural areas.
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The Bureau is proposing this rule to implement EGRRCPA section 108.
See
[[Page 44235]]
the Section-by-Section discussion above for a full description of the
proposed rule.
B. Data Limitations and Quantification of Benefits, Costs, and Impacts
The discussion below relies on information that the Bureau has
obtained from industry, other regulatory agencies, and publicly
available sources. These sources form the basis for the Bureau's
consideration of the likely impacts of the proposed rule. The Bureau
provides the best estimates possible of the potential benefits and
costs to consumers and covered persons of this proposal given available
data. However, as discussed further below, the data with which to
quantify the potential costs, benefits, and impacts of the proposed
rule are generally limited.
In light of these data limitations, the analysis below generally
provides a qualitative discussion of the benefits, costs, and impacts
of the proposed rule. General economic principles and the Bureau's
expertise in consumer financial markets, together with the limited data
that are available, provide insight into these benefits, costs, and
impacts. The Bureau requests additional data or studies that could help
quantify the benefits and costs to consumers and covered persons of the
proposed rule.
C. Baseline for Analysis
In evaluating the potential benefits, costs, and impacts of the
proposal, the Bureau takes as a baseline the existing regulations
requiring the establishment of escrow accounts for HPMLs and the
existing exemption from these regulations. If finalized, the proposed
rule would create a new exemption so that some entities that are
currently subject to the regulations requiring the establishing of
escrow accounts for HPMLs would no longer be subject to those
regulations. Therefore, the baseline for the analysis of the proposed
rule is those entities remaining subject to those requirements.
If finalized as proposed, the rule should affect the market as
described below as long as it is in effect. However, the costs,
benefits, and impacts of any rule are difficult to predict far into the
future. Therefore, the analysis below of the benefits, costs, and
impacts of the proposed rule is most likely to be accurate for the
first several years following implementation of the proposed rule.
D. Potential Benefits and Costs to Consumers and Covered Persons
The Bureau has relied on a variety of data sources to analyze the
potential benefits, costs, and impacts of the proposed rule. To
estimate the number of mortgage lenders that may be impacted by the
rule and the number of HPMLs originated by those lenders, the Bureau
has analyzed the 2018 HMDA data.\51\ While the HMDA data have some
shortcomings that are discussed in more detail below, they are the best
source available to the Bureau to quantify the impact of the proposed
rule. For some portions of the analysis, the requisite data are not
available or are quite limited. As a result, portions of this analysis
rely in part on general economic principles to provide a qualitative
discussion of the benefits, costs, and impacts of the proposed rule.
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\51\ See Feng Liu et al., Introducing New and Revised Data
Points in HMDA (Aug. 2019), https://files.consumerfinance.gov/f/documents/cfpb_new-revised-data-points-in-hmda_report.pdf.
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Of entities that currently exist, the proposed rule would have a
direct effect mainly on those entities that are not currently exempt
and would become exempt under the proposal. The Bureau estimates that
in the 2018 HMDA data there are 147 insured depositories or insured
credit unions with assets between $2 billion and $10 billion that
originated at least one mortgage in a rural or underserved area and
originated fewer than 1000 mortgages secured by a first lien on a
primary dwelling, and so are likely to be impacted by the proposed
rule. Together, these depositories reported originating 69,519
mortgages in 2018. The Bureau estimates that less than 3,000 of these
were HPMLs.\52\
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\52\ Some of the 147 entities described above were exempt under
EGRRCPA from reporting many variables for their loans. Non-exempt
entities originated 2,644 first-lien closed-end mortgages with APOR
spreads above 150 basis points. Such mortgages below the conforming
loan limit were HPMLs. Such mortgages above the conforming limit
loan limit may not have been HPMLs if their APOR spreads were less
than 250 basis points. To derive an upper limit on the number of
HPMLs originated, all such mortgages are included in the
calculations. The Bureau does not have data on the number of
potential HPMLs originated by entities exempt under EGRRCPA from
reporting rate spread data. Assuming the ratio of HPMLs to first-
lien mortgages is the same for these entities as it was for non-
exempt entities yields an estimate of 330 HPMLs originated by exempt
entities, for a total conservative estimate of 2,974 HPMLs in the
sample.
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Because of the amendment to the end date in proposed
1026.35(b)(2)(iii)(D)(1), it is possible that the proposed rule could
also affect entities that established escrow accounts after May 1,
2016, but would otherwise already be exempt under existing regulations.
These could be entities that voluntarily established escrow accounts
after May 1, 2016, even though they were not required to, or entities
that, together with certain affiliates, had more than $2 billion in
total assets, adjusted for inflation, before 2016 but less than $2
billion, adjusted for inflation, afterwards. The Bureau does not
possess the data to evaluate the number of such creditors but believes
there to be very few of them.
The proposed rule, if finalized, could encourage entry into the
HPML market, expanding the number of entities exempted. However, the
limited number of existing insured depository institutions and insured
credit unions who would be exempt under the proposed rule may be an
indication that the total potential market for such institutions of
this size engaging in mortgage lending of less than 1,000 loans per
year is small. This could indicate that few such institutions would
enter the market due to the proposed rule. Moreover, the volume of
lending they could engage in while maintaining the exemption is
limited. The impact of this proposed rule on such institutions that are
not exempt and would remain not exempt, or that are already exempt,
would likely be very small. The impact of this proposed rule on
consumers with HPMLs from institutions that are not exempt and will
remain not exempt, or that are already exempt, would also likely be
very small. Therefore, the analysis below focuses on entities that
would be affected by the proposed rule and consumers at those entities.
Because few entities are likely to be affected by the proposed rule,
and these entities originate a relatively small number of mortgages,
the Bureau notes that the benefits, costs, and impacts of the proposed
rule are likely to be small. However, in localized areas some newly
exempt community banks and small credit unions may increase mortgage
lending to consumers who may be underserved at present.
1. Potential Benefits and Costs to Consumers
For consumers with HPMLs originated by affected insured depository
institutions and insured credit unions, the main effect of the proposed
rule would be that those institutions would no longer be required to
provide escrow accounts for HPMLs. As described above, the Bureau
estimates that fewer than 3,000 HPMLs were originated in 2018 by
institutions likely to be impacted by the rule. Institutions that would
be affected by the proposed rule could choose to provide or not provide
escrow accounts. If affected institutions decide not to provide escrow
accounts, then consumers who would have escrow accounts under the
baseline would instead not have escrow accounts. Affected consumers
would experience
[[Page 44236]]
both benefits and costs as a result of the proposed rule. These
benefits and costs would vary across consumers.
Affected consumers would have mortgage escrow accounts under the
baseline, but not under the proposed rule. The benefits to consumers of
not having mortgage escrow accounts include: (1) More budgetary
flexibility, (2) interest earnings,\53\ (3) potentially decreased
prices, and (4) greater access to credit resulting from lower mortgage
servicing costs.
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\53\ Some states require the paying of interest on escrow
account balances. But even in those states the consumer might be
able to arrange a better return than the escrow account provides.
---------------------------------------------------------------------------
Escrow accounts generally require consumers to save for infrequent
liabilities, such as property tax and insurance, by making equal
monthly payments. Standard economic theory predicts that many consumers
may value the budgetary flexibility to manage tax and insurance
payments in other ways. Even without an escrow account, those consumers
who prefer to make equal monthly payments towards escrow liabilities
may still do so, by, for example, creating a savings account for the
purpose. Other consumers who do not like this payment structure can
come up with their own preferred payment plans. For example, a consumer
with $100 a month in mortgage escrow payments and $100 a month in
discretionary income might have to resort to taking on high-interest
debt to cover an emergency $200 expense. If the same consumer were not
required to make escrow payments, she could pay for the emergency
expense this month without taking on high-interest debt and still
afford her property tax and insurance payments by increasing her
savings for that purpose by an additional $100 next month.
Another benefit for consumers may be the ability to invest their
money and earn a return on amounts that might, depending on State
regulations, be forgone under an escrow. The Bureau does not have the
data to estimate the interest consumers forgo because of escrow
accounts, but numerical examples may be illustrative. Assuming a two
percent annual interest rate on savings, a consumer with property tax
and insurance payments of $500 every six months foregoes about $5 a
year in interest because of escrow. Assuming a five percent annual
interest rate on savings, a consumer with property tax and insurance
payments of $2,500 every six months foregoes about $65 a year in
interest because of escrow.
Finally, consumers may benefit from the proposed rule from the
pass-through of lower costs incurred by servicers under the proposed
rule compared to under the baseline. The benefit to consumers would
depend on whether fixed or marginal costs, or both, fall because of the
proposed rule. Typical economic theory predicts that existing firms
should pass through only decreases in marginal rather than fixed costs.
The costs to servicers of providing escrow accounts for consumers are
likely to be predominantly fixed rather than marginal, which may limit
the pass-through of lower costs on to consumers in the form of lower
prices or greater access to credit. Research also suggests that the
mortgage market may not be perfectly competitive and therefore that
creditors may not fully pass through reductions even in marginal
costs.\54\ Therefore, the benefit to consumers from receiving decreased
costs at origination because decreased servicing costs are passed
through is likely to be small. Lower servicing costs could also benefit
consumers by encouraging new originators to enter the market. New
exempt originators may be better able to compete with incumbent
originators and potentially provide mortgages to underserved consumers
because they will not have to incur the costs of establishing and
maintaining escrow accounts. They in turn could provide more credit at
lower costs to consumers. However, recent research suggests that the
size of this benefit may be small.\55\
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\54\ Jason Allen et al., The Effect of Mergers in Search
Markets: Evidence from the Canadian Mortgage Industry, Am. Econ.
Rev. 2013, 104(10), at 3365-96.
\55\ Alexei Alexandrov and Xiaoling An, Regulations, Community
Bank and Credit Union Exits, and Access to Mortgage Credit, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2462128.
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The costs to consumers of not having access to an escrow account
include: (1) The difficulty of paying several bills instead of one, (2)
a loss of a commitment and budgeting device, and (3) reduced
transparency of mortgage costs potentially leading some consumers to
spend more on house payments than they want, need, or can afford.
Consumers may find it less convenient to separately pay a mortgage
bill, an insurance bill, and potentially several tax bills, instead of
one bill from the mortgage servicer with all requirement payments
included. Servicers who maintain escrow accounts effectively assume the
burden of tracking whom to pay, how much, and when, across multiple
payees. Consumers without escrow accounts assume this burden
themselves. This cost varies across consumers, and there is no current
research to estimate it. An approximation may be found, however, in an
estimate of around $20 per month per consumer, depending on the
household's income, coming from the value of paying the same bill for
phone, cable television, and internet.\56\
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\56\ H. Liu et al., Complementarities and the Demand for Home
Broadband internet Services, Marketing Science, 29(4), 701-20
(2010).
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The loss of escrow accounts may hurt consumers who value the
budgetary predictability and commitment that escrow accounts provide.
Recent research finds that many homeowners do not pay full attention to
property taxes,\57\ and are more likely to pay property tax bills on
time if sent reminders to plan for these payments.\58\ Other research
suggests that many consumers, in order to limit their spending, prefer
to pay more for taxes than necessary through payroll deductions and
receive a tax refund check from the IRS in the spring, even though
consumers who do this forgo interest they could have earned on the
overpaid taxes.\59\ This could suggest that some consumers may value
mortgage escrow accounts because they provide a form of savings
commitment. The Bureau recognizes that the budgeting and commitment
benefits of mortgage escrow accounts vary across consumers. These
benefits will be particularly large for consumers who would otherwise
miss payments or even experience foreclosure. Research suggests that a
nontrivial fraction of consumers may be in this group.\60\ Conversely,
as discussed previously, some consumers may assign no benefit to or
consider the budgeting and commitment aspects of escrow accounts to be
a cost to them.
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\57\ Francis Wong, The Financial Burden of Property Taxes,
https://www.dropbox.com/sh/55dcwuztmo8bwuv/AADfEOFVXZ8zVGzj0-Od5GCKa?dl=0.
\58\ Stephanie Moulton et al., Reminders to Pay Property Tax
Payments: A Field Experiment of Older Adults with Reverse Mortgages,
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3445419.
\59\ Michael A. Barr and Jane B. Dokko, Paying to Save: Tax
Withholding and Asset Allocation Among Low- and Moderate-Income
Taxpayers, Finance and Economics Discussion Series, Federal Reserve
Board (2008), http://www.federalreserve.gov/pubs/feds/2008/200811/200811pap.pdf.
\60\ Moulton et al., supra note 58. See also Nathan B. Anderson
and Jane B. Dokko, Liquidity Problems and Early Payment Default
Among Subprime Mortgages, Finance and Economics Discussion Series,
Federal Reserve Board (2011), http://www.federalreserve.gov/pubs/feds/2011/201109/201109pap.pdf (Anderson and Dokko).
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Finally, escrow accounts may make it easier for consumers to shop
for mortgages by reducing the number of payments consumers have to
compare. Consumers considering mortgages
[[Page 44237]]
without escrow accounts may not be fully aware of the costs they would
be assuming and so may end up paying more on mortgage and housing costs
than they want, need, or can afford. Research suggests that some
consumers make suboptimal decisions when obtaining a mortgage, in part
because of the difficulty of comparing different mortgage options
across a large number of dimensions, and that consumers presented with
simpler mortgage choices make better decisions.\61\ For example, if a
consumer compares a monthly mortgage payment that includes an escrow
payment, as most consumer mortgages do, with a payment that does not
include an escrow payment, the consumer may mistakenly believe the non-
escrow loan is less expensive, even though the non-escrow loan may in
fact be more expensive. In practice, the magnitude and frequency of
these mistakes likely depend in part on the effectiveness of cost
disclosures consumers receive while shopping for mortgages.
---------------------------------------------------------------------------
\61\ Susan E. Woodward and Robert E. Hall, Consumer Confusion in
the Mortgage Market: Evidence of Less than a Perfectly Transparent
and Competitive Market, Am. Econ. Rev.: Papers & Proceedings,
100(2), 511-15.
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2. Potential Costs and Benefits to Affected Creditors
For affected creditors, the main effect of the proposed rule is
that they would no longer be required to establish and maintain escrow
accounts for HPMLs. As described above, the Bureau estimates that fewer
than 3,000 HPMLs were originated in 2018 by institutions likely to be
impacted by the rule. Of the 147 institutions that are likely to be
impacted by the proposed rule as described above, 101 were not exempt
under EGRRCPA from reporting APOR rate spreads. Of these 101, no more
than 80 originated at least one HPML in 2018.
The main benefit of the rule on affected entities would be cost
savings. There are startup and operational costs of providing escrow
accounts.
Operational costs of maintaining escrow accounts for a given time
period (such as a year) can be divided into costs associated with
maintaining any escrow account for that time period and marginal costs
associated with maintaining each escrow account for that time period.
The cost of maintaining software to analyze escrow accounts for under-
or overpayments is an example of the former. Because the entities
affected by the rule are small and do not originate large numbers of
mortgages, this kind of cost will not be spread among many loans. The
per-letter cost of mailing consumers escrow statements is an example of
the latter. The Bureau does not have data to estimate these costs.
The startup costs associated with creating the infrastructure to
establish and maintain escrow accounts may be substantial. However,
many creditors who would not be required to establish and maintain
escrow accounts under the proposed rule are currently required to do so
under the existing regulation. These creditors have already paid these
startup costs and would therefore not benefit from lower startup costs
under the proposed rule. The proposed rule would lower startup costs
for new firms that enter the market. The proposed rule would also lower
startup costs for insured depositories and insured credit unions that
are sufficiently small that they are currently exempt from mortgage
escrow requirements under the existing regulation, but that would grow
in size such that they would no longer be exempt under the existing
regulation, but still be exempt under the proposed rule.
Affected creditors could still provide escrow accounts for
consumers if they choose to do so. Therefore, the proposed rule would
not impose any cost on creditors. However, the benefits to firms of the
proposed rule would be partially offset by forgoing the benefits of
providing escrow accounts. The two main benefits to creditors of
providing escrow accounts to consumers are (1) decreased default risk
for consumers, and (2) the loss of interest income from escrow
accounts.
As noted previously, research suggests that escrow accounts reduce
mortgage default rates.\62\ Eliminating escrow accounts may therefore
increase default rates, offsetting some of the benefits to creditors of
lower servicing costs.\63\ In the event of major damage to the
property, the creditor might end up with little or nothing if the
homeowner had not been paying home insurance premiums. If the homeowner
had not been paying taxes, there might be a claim or lien on the
property interfering with the creditor's ability to access the full
collateral. Therefore, the costs to creditors of foreclosures may be
especially severe in the case of homeowners without mortgage escrow
accounts.
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\62\ See Moulton et al., supra note 58; see also Anderson and
Dokko, supra note 60.
\63\ Because of this potential, many creditors currently verify
whether or not the consumer made the requisite insurance premiums
and tax payments every year even where the consumer did not set up
an escrow account. The proposed rule would allow creditors to forego
this verification process as the funds would be escrowed.
---------------------------------------------------------------------------
The other cost to creditors of eliminating escrow accounts is the
interest that they otherwise would have earned on escrow account
balances. Depending on the State, creditors might not be required to
pay interest on the money in the escrow account or might be required to
pay a fixed interest rate that is less than the market rate.\64\ The
Bureau does not have the data to determine the interest that creditors
earn on escrow account balances, but numerical examples may be
illustrative. Assuming a two percent annual interest rate and a
mortgage account with property tax and insurance payments of $500 every
six months, the servicer earns about $5 a year in interest because of
escrow. Assuming a five percent annual interest rate and a mortgage
account with property tax and insurance payments of $2,500 every six
months, the servicer earns about $65 a year in interest because of
escrow.
---------------------------------------------------------------------------
\64\ Some states may require interest rates that are higher than
market rates, imposing a cost on creditors who provide escrow
accounts.
---------------------------------------------------------------------------
The Bureau does not have the data to estimate the benefits of lower
default rates or escrow account interest for creditors. However, the
Bureau believes that for most lenders the marginal benefits of
maintaining escrow accounts outweigh the marginal costs, on average,
because in the current market lenders and servicers often do not
relieve consumers of the obligation to have escrow accounts unless
those consumers meet requirements related to credit scores, home
equity, and other measures of default risk. In addition, creditors
often charge consumers a fee for eliminating escrow accounts, in order
to compensate the creditors for the increase in default risk associated
with the removal of escrow accounts. However, for small lenders that do
not engage in a high volume of mortgage lending and could benefit from
the proposed rule, the analysis may be different.
E. Potential Specific Impacts of the Proposed Rule
Insured Depository Institutions and Credit Unions With $10 Billion or
Less in Total Assets, As Described in Section 1026
The proposed rule would apply to insured depository instructions
and credit unions with $10 billion or less in assets. Therefore, the
consideration of the benefits, costs, and impacts of the proposed rule
on covered persons presented above represents in full the Bureau's
analysis of the benefits, costs,
[[Page 44238]]
and impacts of the proposed rule on insured depository institutions and
credit unions with $10 billion or less in assets.
Impact of the Proposed Provisions on Consumer Access to Credit and on
Consumers in Rural Areas
The proposed rule would affect insured depositories and insured
credit unions that operate at least in part in rural or underserved
areas. As discussed above, the Bureau does not expect the costs,
benefits, or impacts of the rule to be large in aggregate, but because
affected entities must operate in rural or underserved areas, the
costs, benefits, and impacts of the rule may be expected to be larger
in rural areas. Entities likely to be affected by the proposed rule
originated roughly 0.9 percent of all mortgages reported to HMDA in
2018. Such entities originated roughly 1.6 percent of all mortgages in
rural areas reported to HMDA in 2018. Therefore, entities likely to be
affected by the proposed rule have a small share of the overall market,
and a small but somewhat larger share of the rural market. This
suggests the costs, benefits, and impacts of the rule will be
disproportionately large in rural areas.
As discussed above, the proposed rule may increase consumer access
to credit. It may also present other costs, benefits, and impacts for
affected consumers. Because creditors likely to be affected by this
rule have a disproportionately large market share in rural areas, the
Bureau expects that the costs, benefits, and impacts of the proposed
rule on rural consumers would be proportionally larger than the costs,
benefits, and impacts of the proposed rule on other consumers.
VII. Regulatory Flexibility Act Analysis
The Regulatory Flexibility Act (RFA) generally requires an agency
to conduct an initial regulatory flexibility analysis (IRFA) and a
final regulatory flexibility analysis of any rule subject to notice-
and-comment rulemaking requirements, unless the agency certifies that
the rule will not have a significant economic impact on a substantial
number of small entities.\65\ The Bureau also is subject to certain
additional procedures under the RFA involving the convening of a panel
to consult with small business representatives prior to proposing a
rule for which an IRFA is required.\66\
---------------------------------------------------------------------------
\65\ 5 U.S.C. 601 et seq.
\66\ 5 U.S.C. 609.
---------------------------------------------------------------------------
A depository institution is considered ``small'' if it has $600
million or less in assets.\67\ Under existing regulations, most
depository institutions with less than $2 billion in assets are already
exempt from the mortgage escrow requirement, and there would be no
difference if they chose to use the new exemption. The proposed rule
would affect only insured depository institutions and insured credit
unions, and it would affect only certain of such institutions with over
approximately $2 billion in assets. Since depository institutions with
over $2 billion in assets are not small under the SBA definition, the
proposed rule would not affect any small entities.
---------------------------------------------------------------------------
\67\ The current SBA size standards can be found on SBA's
website at https://www.sba.gov/sites/default/files/2019-08/SBA%20Table%20of%20Size%20Standards_Effective%20Aug%2019%2C%202019_Rev.pdf.
---------------------------------------------------------------------------
Furthermore, affected institutions could still provide escrow
accounts for their consumers if they chose to. Therefore, the proposed
rule would not impose any substantial burden on any entities, including
small entities.
Accordingly, the Director hereby certifies that this proposal, if
adopted, would not have a significant economic impact on a substantial
number of small entities. Thus, neither an IRFA nor a small business
review panel is required for this proposal. The Bureau requests comment
on the analysis above and requests any relevant data.
VIII. Paperwork Reduction Act
Under the Paperwork Reduction Act of 1995 (PRA),\68\ Federal
agencies are generally required to seek the Office of Management and
Budget's (OMB's) approval for information collection requirements prior
to implementation. The collections of information related to Regulation
Z have been previously reviewed and approved by OMB and assigned OMB
Control number 3170-0015. Under the PRA, the Bureau may not conduct or
sponsor and, notwithstanding any other provision of law, a person is
not required to respond to an information collection unless the
information collection displays a valid control number assigned by OMB.
---------------------------------------------------------------------------
\68\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------
The Bureau has determined that this proposed rule would not impose
any new or revised information collection requirements (recordkeeping,
reporting, or disclosure requirements) on covered entities or members
of the public that would constitute collections of information
requiring OMB approval under the PRA.
IX. Signing Authority
The Director of the Bureau, having reviewed and approved this
document, is delegating the authority to electronically sign this
document to Laura Galban, a Bureau Federal Register Liaison, for
purposes of publication in the Federal Register.
List of Subjects in 12 CFR Part 1026
Advertising, Appraisal, Appraiser, Banking, Banks, Consumer
protection, Credit, Credit unions, Mortgages, National Banks, Reporting
and recordkeeping requirements, Savings associations, Truth-in-lending.
Authority and Issuance
For the reasons set forth above, the Bureau proposes to amend
Regulation Z, 12 CFR part 1026, as set forth below:
PART 1026--TRUTH IN LENDING (REGULATION Z)
0
1. The authority citation for part 1026 continues to read as follows:
Authority: 12 U.S.C. 2601, 2603-2605, 2607, 2609, 2617, 3353,
5511, 5512, 5532, 5581; 15 U.S.C. 1601 et seq.
Subpart E--Special Rules for Certain Home Mortgage Transactions
0
2. Amend Sec. 1026.35 by:
0
a. Adding paragraphs (a)(3) and (4);
0
b. Revising paragraphs (b)(2)(iii)(D)(1), (b)(2)(iv)(A), and (b)(2)(v);
and
0
c. Adding paragraph (b)(2)(vi).
The additions and revisions read as follows:
Sec. 1026.35 Requirements for higher-priced mortgage loans.
(a) * * *
(3) ``Insured credit union'' has the meaning given in Section 101
of the Federal Credit Union Act (12 U.S.C. 1752).
(4) ``Insured depository institution'' has the meaning given in
Section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813).
(b) * * *
(2) * * *
(iii) * * *
(D) * * *
(1) Escrow accounts established for first-lien higher-priced
mortgage loans for which applications were received on or after April
1, 2010, and before [DATE 90 DAYS AFTER THE EFFECTIVE DATE OF THE FINAL
RULE]; or
* * * * *
(iv) * * *
(A) An area is ``rural'' during a calendar year if it is:
(1) A county that is neither in a metropolitan statistical area nor
in a micropolitan statistical area that is adjacent to a metropolitan
statistical area, as those terms are defined by the U.S. Office of
Management and Budget
[[Page 44239]]
and as they are applied under currently applicable Urban Influence
Codes (UICs), established by the United States Department of
Agriculture's Economic Research Service (USDA-ERS); or
(2) A census block that is not in an urban area, as defined by the
U.S. Census Bureau using the latest decennial census of the United
States.
* * * * *
(v) Notwithstanding paragraphs (b)(2)(iii) and (vi) of this
section, an escrow account must be established pursuant to paragraph
(b)(1) of this section for any first-lien higher-priced mortgage loan
that, at consummation, is subject to a commitment to be acquired by a
person that does not satisfy the conditions in paragraph (b)(2)(iii) or
(vi) of this section, unless otherwise exempted by this paragraph
(b)(2).
(vi) Except as provided in paragraph (b)(2)(v) of this section, an
escrow account need not be established for a transaction made by a
creditor that is an insured depository institution or insured credit
union if, at the time of consummation:
(A) As of the preceding December 31st, or, if the application for
the transaction was received before April 1 of the current calendar
year, as of either of the two preceding December 31sts, the insured
depository institution or insured credit union had assets of
$10,000,000,000 or less, adjusted annually for inflation using the
Consumer Price Index for Urban Wage Earners and Clerical Workers, not
seasonally adjusted, for each 12-month period ending in November (see
comment 35(b)(2)(vi)(A)-1 for the applicable threshold);
(B) During the preceding calendar year, or, if the application for
the transaction was received before April 1 of the current calendar
year, during either of the two preceding calendar years, the creditor
and its affiliates, as defined in Sec. 1026.32(b)(5), together
extended no more than 1,000 covered transactions secured by a first
lien on a principal dwelling; and
(C) The transaction satisfies the criteria in paragraphs
(b)(2)(iii)(A) and (D) of this section.
* * * * *
0
3. Amend supplement I to part 1026 by:
0
a. Under Section 1026.35--Requirements for Higher-Priced Mortgage
Loans:
0
i. Revising Paragraph 35(b)(2)(iii);
0
ii. Adding Paragraph 35(b)(2)(iii)(D)(1) and Paragraph
35(b)(2)(iii)(D)(2);
0
iv. Revising Paragraph 35(b)(2)(iv);
0
v. Revising Paragraph 35(b)(2)(v); and
0
vi. Adding Paragraph 35(b)(2)(vi) and Paragraph 35(b)(2)(vi)(A).
0
b. Under Section 1026.43--Minimum Standards for Transactions Secured by
a Dwelling, revising Paragraph 43(f)(1)(vi).
The revisions and additions read as follows:
Supplement I to Part 1026--Official Interpretations
* * * * *
Section 1026.35--Requirements for Higher-Priced Mortgage Loans
* * * * *
35(b) Escrow Accounts
* * * * *
35(b)(2) Exemptions
* * * * *
Paragraph 35(b)(2)(iii)
1. Requirements for exemption. Under Sec. 1026.35(b)(2)(iii),
except as provided in Sec. 1026.35(b)(2)(v), a creditor need not
establish an escrow account for taxes and insurance for a higher-priced
mortgage loan, provided the following four conditions are satisfied
when the higher-priced mortgage loan is consummated:
i. During the preceding calendar year, or during either of the two
preceding calendar years if the application for the loan was received
before April 1 of the current calendar year, a creditor extended a
first-lien covered transaction, as defined in Sec. 1026.43(b)(1),
secured by a property located in an area that is either ``rural'' or
``underserved,'' as set forth in Sec. 1026.35(b)(2)(iv).
A. In general, whether the rural-or-underserved test is satisfied
depends on the creditor's activity during the preceding calendar year.
However, if the application for the loan in question was received
before April 1 of the current calendar year, the creditor may instead
meet the rural-or-underserved test based on its activity during the
next-to-last calendar year. This provides creditors with a grace period
if their activity meets the rural-or-underserved test (in Sec.
1026.35(b)(2)(iii)(A)) in one calendar year but fails to meet it in the
next calendar year.
B. A creditor meets the rural-or-underserved test for any higher-
priced mortgage loan consummated during a calendar year if it extended
a first-lien covered transaction in the preceding calendar year secured
by a property located in a rural-or-underserved area. If the creditor
does not meet the rural-or-underserved test in the preceding calendar
year, the creditor meets this condition for a higher-priced mortgage
loan consummated during the current calendar year only if the
application for the loan was received before April 1 of the current
calendar year and the creditor extended a first-lien covered
transaction during the next-to-last calendar year that is secured by a
property located in a rural or underserved area. The following examples
are illustrative:
1. Assume that a creditor extended during 2016 a first-lien covered
transaction that is secured by a property located in a rural or
underserved area. Because the creditor extended a first-lien covered
transaction during 2016 that is secured by a property located in a
rural or underserved area, the creditor can meet this condition for
exemption for any higher-priced mortgage loan consummated during 2017.
2. Assume that a creditor did not extend during 2016 a first-lien
covered transaction secured by a property that is located in a rural or
underserved area. Assume further that the same creditor extended during
2015 a first-lien covered transaction that is located in a rural or
underserved area. Assume further that the creditor consummates a
higher-priced mortgage loan in 2017 for which the application was
received in November 2017. Because the creditor did not extend during
2016 a first-lien covered transaction secured by a property that is
located in a rural or underserved area, and the application was
received on or after April 1, 2017, the creditor does not meet this
condition for exemption. However, assume instead that the creditor
consummates a higher-priced mortgage loan in 2017 based on an
application received in February 2017. The creditor meets this
condition for exemption for this loan because the application was
received before April 1, 2017, and the creditor extended during 2015 a
first-lien covered transaction that is located in a rural or
underserved area.
ii. The creditor and its affiliates together extended no more than
2,000 covered transactions, as defined in Sec. 1026.43(b)(1), secured
by first liens, that were sold, assigned, or otherwise transferred by
the creditor or its affiliates to another person, or that were subject
at the time of consummation to a commitment to be acquired by another
person, during the preceding calendar year or during either of the two
preceding calendar years if the application for the loan was received
before April 1 of the current calendar year. For purposes of Sec.
1026.35(b)(2)(iii)(B), a transfer of a first-lien covered transaction
to
[[Page 44240]]
``another person'' includes a transfer by a creditor to its affiliate.
A. In general, whether this condition is satisfied depends on the
creditor's activity during the preceding calendar year. However, if the
application for the loan in question is received before April 1 of the
current calendar year, the creditor may instead meet this condition
based on activity during the next-to-last calendar year. This provides
creditors with a grace period if their activity falls at or below the
threshold in one calendar year but exceeds it in the next calendar
year.
B. For example, assume that in 2015 a creditor and its affiliates
together extended 1,500 loans that were sold, assigned, or otherwise
transferred by the creditor or its affiliates to another person, or
that were subject at the time of consummation to a commitment to be
acquired by another person, and 2,500 such loans in 2016. Because the
2016 transaction activity exceeds the threshold but the 2015
transaction activity does not, the creditor satisfies this condition
for exemption for a higher-priced mortgage loan consummated during 2017
if the creditor received the application for the loan before April 1,
2017, but does not satisfy this condition for a higher-priced mortgage
loan consummated during 2017 if the application for the loan was
received on or after April 1, 2017.
C. For purposes of Sec. 1026.35(b)(2)(iii)(B), extensions of
first-lien covered transactions, during the applicable time period, by
all of a creditor's affiliates, as ``affiliate'' is defined in Sec.
1026.32(b)(5), are counted toward the threshold in this section.
``Affiliate'' is defined in Sec. 1026.32(b)(5) as ``any company that
controls, is controlled by, or is under common control with another
company, as set forth in the Bank Holding Company Act of 1956 (12
U.S.C. 1841 et seq.).'' Under the Bank Holding Company Act, a company
has control over a bank or another company if it directly or indirectly
or acting through one or more persons owns, controls, or has power to
vote 25 per centum or more of any class of voting securities of the
bank or company; it controls in any manner the election of a majority
of the directors or trustees of the bank or company; or the Federal
Reserve Board determines, after notice and opportunity for hearing,
that the company directly or indirectly exercises a controlling
influence over the management or policies of the bank or company. 12
U.S.C. 1841(a)(2).
iii. As of the end of the preceding calendar year, or as of the end
of either of the two preceding calendar years if the application for
the loan was received before April 1 of the current calendar year, the
creditor and its affiliates that regularly extended covered
transactions secured by first liens, together, had total assets that
are less than the applicable annual asset threshold.
A. For purposes of Sec. 1026.35(b)(2)(iii)(C), in addition to the
creditor's assets, only the assets of a creditor's ``affiliate'' (as
defined by Sec. 1026.32(b)(5)) that regularly extended covered
transactions (as defined by Sec. 1026.43(b)(1)) secured by first
liens, are counted toward the applicable annual asset threshold. See
comment 35(b)(2)(iii)-1.ii.C for discussion of definition of
``affiliate.''
B. Only the assets of a creditor's affiliate that regularly
extended first-lien covered transactions during the applicable period
are included in calculating the creditor's assets. The meaning of
``regularly extended'' is based on the number of times a person extends
consumer credit for purposes of the definition of ``creditor'' in Sec.
1026.2(a)(17). Because covered transactions are ``transactions secured
by a dwelling,'' consistent with Sec. 1026.2(a)(17)(v), an affiliate
regularly extended covered transactions if it extended more than five
covered transactions in a calendar year. Also consistent with Sec.
1026.2(a)(17)(v), because a covered transaction may be a high-cost
mortgage subject to Sec. 1026.32, an affiliate regularly extends
covered transactions if, in any 12-month period, it extends more than
one covered transaction that is subject to the requirements of Sec.
1026.32 or one or more such transactions through a mortgage broker.
Thus, if a creditor's affiliate regularly extended first-lien covered
transactions during the preceding calendar year, the creditor's assets
as of the end of the preceding calendar year, for purposes of the asset
limit, take into account the assets of that affiliate. If the creditor,
together with its affiliates that regularly extended first-lien covered
transactions, exceeded the asset limit in the preceding calendar year--
to be eligible to operate as a small creditor for transactions with
applications received before April 1 of the current calendar year--the
assets of the creditor's affiliates that regularly extended covered
transactions in the year before the preceding calendar year are
included in calculating the creditor's assets.
C. If multiple creditors share ownership of a company that
regularly extended first-lien covered transactions, the assets of the
company count toward the asset limit for a co-owner creditor if the
company is an ``affiliate,'' as defined in Sec. 1026.32(b)(5), of the
co-owner creditor. Assuming the company is not an affiliate of the co-
owner creditor by virtue of any other aspect of the definition (such as
by the company and co-owner creditor being under common control), the
company's assets are included toward the asset limit of the co-owner
creditor only if the company is controlled by the co-owner creditor,
``as set forth in the Bank Holding Company Act.'' If the co-owner
creditor and the company are affiliates (by virtue of any aspect of the
definition), the co-owner creditor counts all of the company's assets
toward the asset limit, regardless of the co-owner creditor's ownership
share. Further, because the co-owner and the company are mutual
affiliates the company also would count all of the co-owner's assets
towards its own asset limit. See comment 35(b)(2)(iii)-1.ii.C for
discussion of the definition of ``affiliate.''
D. A creditor satisfies the criterion in Sec.
1026.35(b)(2)(iii)(C) for purposes of any higher-priced mortgage loan
consummated during 2016, for example, if the creditor (together with
its affiliates that regularly extended first-lien covered transactions)
had total assets of less than the applicable asset threshold on
December 31, 2015. A creditor that (together with its affiliates that
regularly extended first-lien covered transactions) did not meet the
applicable asset threshold on December 31, 2015 satisfies this
criterion for a higher-priced mortgage loan consummated during 2016 if
the application for the loan was received before April 1, 2016 and the
creditor (together with its affiliates that regularly extended first-
lien covered transactions) had total assets of less than the applicable
asset threshold on December 31, 2014.
E. Under Sec. 1026.35(b)(2)(iii)(C), the $2,000,000,000 asset
threshold adjusts automatically each year based on the year-to-year
change in the average of the Consumer Price Index for Urban Wage
Earners and Clerical Workers, not seasonally adjusted, for each 12-
month period ending in November, with rounding to the nearest million
dollars. The Bureau will publish notice of the asset threshold each
year by amending this comment. For calendar year 2020, the asset
threshold is $2,202,000,000. A creditor that together with the assets
of its affiliates that regularly extended first-lien covered
transactions during calendar year 2019 has total assets of less than
$2,202,000,000 on December 31, 2019, satisfies this criterion for
purposes of any loan consummated in 2020 and for purposes of any loan
consummated in 2021 for which the
[[Page 44241]]
application was received before April 1, 2021. For historical purposes:
1. For calendar year 2013, the asset threshold was $2,000,000,000.
Creditors that had total assets of less than $2,000,000,000 on December
31, 2012, satisfied this criterion for purposes of the exemption during
2013.
2. For calendar year 2014, the asset threshold was $2,028,000,000.
Creditors that had total assets of less than $2,028,000,000 on December
31, 2013, satisfied this criterion for purposes of the exemption during
2014.
3. For calendar year 2015, the asset threshold was $2,060,000,000.
Creditors that had total assets of less than $2,060,000,000 on December
31, 2014, satisfied this criterion for purposes of any loan consummated
in 2015 and, if the creditor's assets together with the assets of its
affiliates that regularly extended first-lien covered transactions
during calendar year 2014 were less than that amount, for purposes of
any loan consummated in 2016 for which the application was received
before April 1, 2016.
4. For calendar year 2016, the asset threshold was $2,052,000,000.
A creditor that together with the assets of its affiliates that
regularly extended first-lien covered transactions during calendar year
2015 had total assets of less than $2,052,000,000 on December 31, 2015,
satisfied this criterion for purposes of any loan consummated in 2016
and for purposes of any loan consummated in 2017 for which the
application was received before April 1, 2017.
5. For calendar year 2017, the asset threshold was $2,069,000,000.
A creditor that together with the assets of its affiliates that
regularly extended first-lien covered transactions during calendar year
2016 had total assets of less than $2,069,000,000 on December 31, 2016,
satisfied this criterion for purposes of any loan consummated in 2017
and for purposes of any loan consummated in 2018 for which the
application was received before April 1, 2018.
6. For calendar year 2018, the asset threshold was $2,112,000,000.
A creditor that together with the assets of its affiliates that
regularly extended first-lien covered transactions during calendar year
2017 had total assets of less than $2,112,000,000 on December 31, 2017,
satisfied this criterion for purposes of any loan consummated in 2018
and for purposes of any loan consummated in 2019 for which the
application was received before April 1, 2019.
7. For calendar year 2019, the asset threshold was $2,167,000,000.
A creditor that together with the assets of its affiliates that
regularly extended first-lien covered transactions during calendar year
2018 had total assets of less than $2,167,000,000 on December 31, 2018,
satisfied this criterion for purposes of any loan consummated in 2019
and for purposes of any loan consummated in 2020 for which the
application was received before April 1, 2020.
iv. The creditor and its affiliates do not maintain an escrow
account for any mortgage transaction being serviced by the creditor or
its affiliate at the time the transaction is consummated, except as
provided in Sec. 1026.35(b)(2)(iii)(D)(1) and (2). Thus, the exemption
applies, provided the other conditions of Sec. 1026.35(b)(2)(iii) (or,
if applicable, the conditions for the exemption in Sec.
1026.35(b)(2)(vi)) are satisfied, even if the creditor previously
maintained escrow accounts for mortgage loans, provided it no longer
maintains any such accounts except as provided in Sec.
1026.35(b)(2)(iii)(D)(1) and (2). Once a creditor or its affiliate
begins escrowing for loans currently serviced other than those
addressed in Sec. 1026.35(b)(2)(iii)(D)(1) and (2), however, the
creditor and its affiliate become ineligible for the exemptions in
Sec. 1026.35(b)(2)(iii) and (vi) on higher-priced mortgage loans they
make while such escrowing continues. Thus, as long as a creditor (or
its affiliate) services and maintains escrow accounts for any mortgage
loans, other than as provided in Sec. 1026.35(b)(2)(iii)(D)(1) and
(2), the creditor will not be eligible for the exemption for any
higher-priced mortgage loan it may make. For purposes of Sec.
1026.35(b)(2)(iii) and (vi), a creditor or its affiliate ``maintains''
an escrow account only if it services a mortgage loan for which an
escrow account has been established at least through the due date of
the second periodic payment under the terms of the legal obligation.
Paragraph 35(b)(2)(iii)(D)(1)
1. Exception for certain accounts. Escrow accounts established for
first-lien higher-priced mortgage loans for which applications were
received on or after April 1, 2010, and before [DATE 90 DAYS AFTER THE
EFFECTIVE DATE OF THE FINAL RULE], are not counted for purposes of
Sec. 1026.35(b)(2)(iii)(D). For applications received on and after
[DATE 90 DAYS AFTER THE EFFECTIVE DATE OF THE FINAL RULE], creditors,
together with their affiliates, that establish new escrow accounts,
other than those described in Sec. 1026.35(b)(2)(iii)(D)(2), do not
qualify for the exemptions provided under Sec. 1026.35(b)(2)(iii) and
(vi). Creditors, together with their affiliates, that continue to
maintain escrow accounts established for first-lien higher-priced
mortgage loans for which applications were received on or after April
1, 2010, and before [DATE 90 DAYS AFTER THE EFFECTIVE DATE OF THE FINAL
RULE], still qualify for the exemptions provided under Sec.
1026.35(b)(2)(iii) and (vi) so long as they do not establish new escrow
accounts for transactions for which they received applications on or
after [DATE 90 DAYS AFTER THE EFFECTIVE DATE OF THE FINAL RULE], other
than those described in Sec. 1026.35(b)(2)(iii)(D)(2), and they
otherwise qualify under Sec. 1026.35(b)(2)(iii) or Sec.
1026.35(b)(2)(vi).
Paragraph 35(b)(2)(iii)(D)(2)
1. Exception for post-consummation escrow accounts for distressed
consumers. An escrow account established after consummation for a
distressed consumer does not count for purposes of Sec.
1026.35(b)(2)(iii)(D). Distressed consumers are consumers who are
working with the creditor or servicer to attempt to bring the loan into
a current status through a modification, deferral, or other
accommodation to the consumer. A creditor, together with its
affiliates, that establishes escrow accounts after consummation as a
regular business practice, regardless of whether consumers are in
distress, does not qualify for the exception described in Sec.
1026.35(b)(2)(iii)(D)(2).
Paragraph 35(b)(2)(iv)
1. Requirements for ``rural'' or ``underserved'' status. An area is
considered to be ``rural'' or ``underserved'' during a calendar year
for purposes of Sec. 1026.35(b)(2)(iii)(A) if it satisfies either the
definition for ``rural'' or the definition for ``underserved'' in Sec.
1026.35(b)(2)(iv). A creditor's extensions of covered transactions, as
defined by Sec. 1026.43(b)(1), secured by first liens on properties
located in such areas are considered in determining whether the
creditor satisfies the condition in Sec. 1026.35(b)(2)(iii)(A). See
comment 35(b)(2)(iii)-1.
i. Under Sec. 1026.35(b)(2)(iv)(A), an area is rural during a
calendar year if it is: A county that is neither in a metropolitan
statistical area nor in a micropolitan statistical area that is
adjacent to a metropolitan statistical area; or a census block that is
not in an urban area, as defined by the U.S. Census Bureau using the
latest decennial census of the United States. Metropolitan statistical
areas and micropolitan statistical areas are defined
[[Page 44242]]
by the Office of Management and Budget and applied under currently
applicable Urban Influence Codes (UICs), established by the United
States Department of Agriculture's Economic Research Service (USDA-
ERS). For purposes of Sec. 1026.35(b)(2)(iv)(A)(1), ``adjacent'' has
the meaning applied by the USDA-ERS in determining a county's UIC; as
so applied, ``adjacent'' entails a county not only being physically
contiguous with a metropolitan statistical area but also meeting
certain minimum population commuting patterns. A county is a ``rural''
area under Sec. 1026.35(b)(2)(iv)(A)(1) if the USDA-ERS categorizes
the county under UIC 4, 6, 7, 8, 9, 10, 11, or 12. Descriptions of UICs
are available on the USDA-ERS website at http://www.ers.usda.gov/data-products/urban-influence-codes/documentation.aspx. A county for which
there is no currently applicable UIC (because the county has been
created since the USDA-ERS last categorized counties) is a rural area
only if all counties from which the new county's land was taken are
themselves rural under currently applicable UICs.
ii. Under Sec. 1026.35(b)(2)(iv)(B), an area is underserved during
a calendar year if, according to Home Mortgage Disclosure Act (HMDA)
data for the preceding calendar year, it is a county in which no more
than two creditors extended covered transactions, as defined in Sec.
1026.43(b)(1), secured by first liens, five or more times on properties
in the county. Specifically, a county is an ``underserved'' area if, in
the applicable calendar year's public HMDA aggregate dataset, no more
than two creditors have reported five or more first-lien covered
transactions, with HMDA geocoding that places the properties in that
county.
iii. A. Each calendar year, the Bureau applies the ``underserved''
area test and the ``rural'' area test to each county in the United
States. If a county satisfies either test, the Bureau will include the
county on a list of counties that are rural or underserved as defined
by Sec. 1026.35(b)(2)(iv)(A)(1) or Sec. 1026.35(b)(2)(iv)(B) for a
particular calendar year, even if the county contains census blocks
that are designated by the Census Bureau as urban. To facilitate
compliance with appraisal requirements in Sec. 1026.35(c), the Bureau
also creates a list of those counties that are rural under the Bureau's
definition without regard to whether the counties are underserved. To
the extent that U.S. territories are treated by the Census Bureau as
counties and are neither metropolitan statistical areas nor
micropolitan statistical areas adjacent to metropolitan statistical
areas, such territories will be included on these lists as rural areas
in their entireties. The Bureau will post on its public website the
applicable lists for each calendar year by the end of that year to
assist creditors in ascertaining the availability to them of the
exemption during the following year. Any county that the Bureau
includes on these lists of counties that are rural or underserved under
the Bureau's definitions for a particular year is deemed to qualify as
a rural or underserved area for that calendar year for purposes of
Sec. 1026.35(b)(2)(iv), even if the county contains census blocks that
are designated by the Census Bureau as urban. A property located in
such a listed county is deemed to be located in a rural or underserved
area, even if the census block in which the property is located is
designated as urban.
B. A property is deemed to be in a rural or underserved area
according to the definitions in Sec. 1026.35(b)(2)(iv) during a
particular calendar year if it is identified as such by an automated
tool provided on the Bureau's public website. A printout or electronic
copy from the automated tool provided on the Bureau's public website
designating a particular property as being in a rural or underserved
area may be used as ``evidence of compliance'' that a property is in a
rural or underserved area, as defined in Sec. 1026.35(b)(2)(iv)(A) and
(B), for purposes of the record retention requirements in Sec.
1026.25.
C. The U.S. Census Bureau may provide on its public website an
automated address search tool that specifically indicates if a property
is located in an urban area for purposes of the Census Bureau's most
recent delineation of urban areas. For any calendar year that began
after the date on which the Census Bureau announced its most recent
delineation of urban areas, a property is deemed to be in a rural area
if the search results provided for the property by any such automated
address search tool available on the Census Bureau's public website do
not designate the property as being in an urban area. A printout or
electronic copy from such an automated address search tool available on
the Census Bureau's public website designating a particular property as
not being in an urban area may be used as ``evidence of compliance''
that the property is in a rural area, as defined in Sec.
1026.35(b)(2)(iv)(A), for purposes of the record retention requirements
in Sec. 1026.25.
D. For a given calendar year, a property qualifies for a safe
harbor if any of the enumerated safe harbors affirms that the property
is in a rural or underserved area or not in an urban area. For example,
the Census Bureau's automated address search tool may indicate a
property is in an urban area, but the Bureau's rural or underserved
counties list indicates the property is in a rural or underserved
county. The property in this example is in a rural or underserved area
because it qualifies under the safe harbor for the rural or underserved
counties list. The lists of counties posted on the Bureau's public
website, the automated tool on its public website, and the automated
address search tool available on the Census Bureau's public website,
are not the exclusive means by which a creditor can demonstrate that a
property is in a rural or underserved area as defined in Sec.
1026.35(b)(2)(iv)(A) and (B). However, creditors are required to retain
``evidence of compliance'' in accordance with Sec. 1026.25, including
determinations of whether a property is in a rural or underserved area
as defined in Sec. 1026.35(b)(2)(iv)(A) and (B).
2. Examples. i. An area is considered ``rural'' for a given
calendar year based on the most recent available UIC designations by
the USDA-ERS and the most recent available delineations of urban areas
by the U.S. Census Bureau that are available at the beginning of the
calendar year. These designations and delineations are updated by the
USDA-ERS and the U.S. Census Bureau respectively once every ten years.
As an example, assume a creditor makes first-lien covered transactions
in Census Block X that is located in County Y during calendar year
2017. As of January 1, 2017, the most recent UIC designations were
published in the second quarter of 2013, and the most recent
delineation of urban areas was announced in the Federal Register in
2012, see U.S. Census Bureau, Qualifying Urban Areas for the 2010
Census, 77 FR 18652 (Mar. 27, 2012). To determine whether County Y is
rural under the Bureau's definition during calendar year 2017, the
creditor can use USDA-ERS's 2013 UIC designations. If County Y is not
rural, the creditor can use the U.S. Census Bureau's 2012 delineation
of urban areas to determine whether Census Block X is rural and is
therefore a ``rural'' area for purposes of Sec. 1026.35(b)(2)(iv)(A).
ii. A county is considered an ``underserved'' area for a given
calendar year based on the most recent available HMDA data. For
example, assume a creditor makes first-lien covered transactions in
County Y during calendar year 2016, and the most recent HMDA data are
for calendar year 2015, published in the third quarter of 2016.
[[Page 44243]]
The creditor will use the 2015 HMDA data to determine ``underserved''
area status for County Y in calendar year 2016 for the purposes of
qualifying for the ``rural or underserved'' exemption for any higher-
priced mortgage loans consummated in calendar year 2017 or for any
higher-priced mortgage loan consummated during 2018 for which the
application was received before April 1, 2018.
Paragraph 35(b)(2)(v)
1. Forward commitments. A creditor may make a mortgage loan that
will be transferred or sold to a purchaser pursuant to an agreement
that has been entered into at or before the time the loan is
consummated. Such an agreement is sometimes known as a ``forward
commitment.'' Even if a creditor is otherwise eligible for an exemption
in Sec. 1026.35(b)(2)(iii) or Sec. 1026.35(b)(2)(vi), a first-lien
higher-priced mortgage loan that will be acquired by a purchaser
pursuant to a forward commitment is subject to the requirement to
establish an escrow account under Sec. 1026.35(b)(1) unless the
purchaser is also eligible for an exemption in Sec. 1026.35(b)(2)(iii)
or Sec. 1026.35(b)(2)(vi), or the transaction is otherwise exempt
under Sec. 1026.35(b)(2). The escrow requirement applies to any such
transaction, whether the forward commitment provides for the purchase
and sale of the specific transaction or for the purchase and sale of
mortgage obligations with certain prescribed criteria that the
transaction meets. For example, assume a creditor that qualifies for an
exemption in Sec. 1026.35(b)(2)(iii) or Sec. 1026.35(b)(2)(vi) makes
a higher-priced mortgage loan that meets the purchase criteria of an
investor with which the creditor has an agreement to sell such mortgage
obligations after consummation. If the investor is ineligible for an
exemption in Sec. 1026.35(b)(2)(iii) or Sec. 1026.35(b)(2)(vi), an
escrow account must be established for the transaction before
consummation in accordance with Sec. 1026.35(b)(1) unless the
transaction is otherwise exempt (such as a reverse mortgage or home
equity line of credit).
Paragraph 35(b)(2)(vi)
1. For guidance on applying the grace periods for determining asset
size or transaction thresholds under Sec. 1026.35(b)(2)(vi)(A), (B)
and (C), the rural or underserved requirement, or other aspects of the
exemption in Sec. 1026.35(b)(2)(vi) not specifically discussed in the
commentary to Sec. 1026.35(b)(2)(vi), an insured depository
institution or insured credit union may refer to the commentary to
Sec. 1026.35(b)(2)(iii), while allowing for differences between the
features of the two exemptions.
Paragraph 35(b)(2)(vi)(A)
1. The asset threshold in Sec. 1026.35(b)(2)(vi)(A) will adjust
automatically each year, based on the year-to-year change in the
average of the Consumer Price Index for Urban Wage Earners and Clerical
Workers, not seasonally adjusted, for each 12-month period ending in
November, with rounding to the nearest million dollars. Unlike the
asset threshold in Sec. 1026.35(b)(2)(iii) and the other thresholds in
Sec. 1026.35(b)(2)(vi), affiliates are not considered in calculating
compliance with this threshold. The Bureau will publish notice of the
asset threshold each year by amending this comment. For calendar year
2020, the asset threshold is $10,000,000,000. A creditor that during
calendar year 2019 had assets of $10,000,000,000 or less on December
31, 2019, satisfies this criterion for purposes of any loan consummated
in 2020 and for purposes of any loan secured by a first lien on a
principal dwelling of a consumer consummated in 2021 for which the
application was received before April 1, 2021.
35(b)(2)(vi)(B)
1. The transaction threshold in Sec. 1026.35(b)(2)(vi)(B) differs
from the transaction threshold in Sec. 1026.35(b)(2)(iii)(B) in two
ways. First, the threshold in Sec. 1026.35(b)(2)(vi)(B) is 1,000 loans
secured by first liens on a principal dwelling, while the threshold in
Sec. 1026.35(b)(2)(iii)(B) is 2,000 loans secured by first liens on a
dwelling. Second, all loans made by the creditor and its affiliates
secured by a first lien on a principal dwelling count toward the 1,000
loan threshold in Sec. 1026.35(b)(2)(vi)(B), whether or not such loans
are held in portfolio. By contrast, under Sec. 1026.35(b)(2)(iii)(B),
only loans secured by first liens on a dwelling that were sold,
assigned, or otherwise transferred to another person, or that were
subject at the time of consummation to a commitment to be acquired by
another person, are counted toward the 2,000 loan threshold.
* * * * *
Section 1026.43--Minimum Standards for Transactions Secured by a
Dwelling
* * * * *
43(f) Balloon-Payment Qualified Mortgages Made by Certain Creditors
* * * * *
43(f)(1) Exemption
* * * * *
Paragraph 43(f)(1)(vi)
1. Creditor qualifications. Under Sec. 1026.43(f)(1)(vi), to make
a qualified mortgage that provides for a balloon payment, the creditor
must satisfy three criteria that are also required under Sec.
1026.35(b)(2)(iii)(A), (B) and (C), which require:
i. During the preceding calendar year or during either of the two
preceding calendar years if the application for the transaction was
received before April 1 of the current calendar year, the creditor
extended a first-lien covered transaction, as defined in Sec.
1026.43(b)(1), on a property that is located in an area that is
designated either ``rural'' or ``underserved,'' as defined in Sec.
1026.35(b)(2)(iv), to satisfy the requirement of Sec.
1026.35(b)(2)(iii)(A) (the rural-or-underserved test). Pursuant to
Sec. 1026.35(b)(2)(iv), an area is considered to be rural if it is: A
county that is neither in a metropolitan statistical area, nor a
micropolitan statistical area adjacent to a metropolitan statistical
area, as those terms are defined by the U.S. Office of Management and
Budget; or a census block that is not in an urban area, as defined by
the U.S. Census Bureau using the latest decennial census of the United
States. An area is considered to be underserved during a calendar year
if, according to HMDA data for the preceding calendar year, it is a
county in which no more than two creditors extended covered
transactions secured by first liens on properties in the county five or
more times.
A. The Bureau determines annually which counties in the United
States are rural or underserved as defined by Sec.
1026.35(b)(2)(iv)(A)(1) or Sec. 1026.35(b)(2)(iv)(B) and publishes on
its public website lists of those counties to assist creditors in
determining whether they meet the criterion at Sec.
1026.35(b)(2)(iii)(A). Creditors may also use an automated tool
provided on the Bureau's public website to determine whether specific
properties are located in areas that qualify as ``rural'' or
``underserved'' according to the definitions in Sec. 1026.35(b)(2)(iv)
for a particular calendar year. In addition, the U.S. Census Bureau may
also provide on its public website an automated address search tool
that specifically indicates if a property address is located in an
urban area for purposes of the Census Bureau's most recent delineation
of urban areas. For any calendar year that begins after the date on
which the Census Bureau
[[Page 44244]]
announced its most recent delineation of urban areas, a property is
located in an area that qualifies as ``rural'' according to the
definitions in Sec. 1026.35(b)(2)(iv) if the search results provided
for the property by any such automated address search tool available on
the Census Bureau's public website do not identify the property as
being in an urban area.
B. For example, if a creditor extended during 2017 a first-lien
covered transaction that is secured by a property that is located in an
area that meets the definition of rural or underserved under Sec.
1026.35(b)(2)(iv), the creditor meets this element of the exception for
any transaction consummated during 2018.
C. Alternatively, if the creditor did not extend in 2017 a
transaction that meets the definition of rural or underserved test
under Sec. 1026.35(b)(2)(iv), the creditor satisfies this criterion
for any transaction consummated during 2018 for which it received the
application before April 1, 2018, if it extended during 2016 a first-
lien covered transaction that is secured by a property that is located
in an area that meets the definition of rural or underserved under
Sec. 1026.35(b)(2)(iv).
ii. During the preceding calendar year, or, if the application for
the transaction was received before April 1 of the current calendar
year, during either of the two preceding calendar years, the creditor
together with its affiliates extended no more than 2,000 covered
transactions, as defined by Sec. 1026.43(b)(1), secured by first
liens, that were sold, assigned, or otherwise transferred to another
person, or that were subject at the time of consummation to a
commitment to be acquired by another person, to satisfy the requirement
of Sec. 1026.35(b)(2)(iii)(B).
iii. As of the preceding December 31st, or, if the application for
the transaction was received before April 1 of the current calendar
year, as of either of the two preceding December 31sts, the creditor
and its affiliates that regularly extended covered transactions secured
by first liens, together, had total assets that do not exceed the
applicable asset threshold established by the Bureau, to satisfy the
requirement of Sec. 1026.35(b)(2)(iii)(C). The Bureau publishes notice
of the asset threshold each year by amending comment 35(b)(2)(iii)-
1.iii.
Dated: June 29, 2020.
Laura Galban,
Federal Register Liaison, Bureau of Consumer Financial Protection.
[FR Doc. 2020-14692 Filed 7-21-20; 8:45 am]
BILLING CODE 4810-AM-P
