Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act (Regulation Z)
Final Rule; Official Interpretations.
The Bureau of Consumer Financial Protection (Bureau) is amending Regulation Z, which implements the Truth in Lending Act (TILA). Regulation Z currently prohibits a creditor from making a higher-priced mortgage loan without regard to the consumer's ability to repay the loan. The final rule implements sections 1411 and 1412 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which generally require creditors to make a reasonable, good faith determination of a consumer's ability to repay any consumer credit transaction secured by a dwelling (excluding an open-end credit plan, timeshare plan, reverse mortgage, or temporary loan) and establishes certain protections from liability under this requirement for “qualified mortgages.” The final rule also implements section 1414 of the Dodd-Frank Act, which limits prepayment penalties. Finally, the final rule requires creditors to retain evidence of compliance with the rule for three years after a covered loan is consummated.
3 actions from May 11th, 2011 to April 2012
May 11th, 2011
July 22nd, 2011
- NPRM Comment Period End
- Final Rule
Table of Contents Back to Top
- FOR FURTHER INFORMATION CONTACT:
- SUPPLEMENTARY INFORMATION:
- I. Summary of the Final Rule
- Summary of Final Rule
- Summary of Concurrent Proposal
- II. Background
- A. The Mortgage Market
- Overview of the Market and the Mortgage Crisis
- Response and Government Programs
- Size and Volume of the Current Mortgage Origination Market
- Continued Fragility of the Mortgage Market
- B. TILA and Regulation Z
- C. The Home Ownership and Equity Protection Act (HOEPA) and HOEPA Rules
- D. 2006 and 2007 Interagency Supervisory Guidance
- E. 2008 HOEPA Final Rule
- F. The Dodd-Frank Act
- G. Qualified Residential Mortgage Rulemaking
- III. Summary of the Rulemaking Process
- A. The Board's Proposal
- B. Comments and Post-Proposal Outreach
- C. Other Rulemakings
- Coordinated Implementation of Title XIV Rulemakings
- More Inclusive Finance Charge Proposal
- IV. Legal Authority
- A. TILA Ability-to-Repay and Qualified Mortgage Provisions
- B. Other Rulemaking and Exception Authorities
- The Dodd-Frank Act
- V. Section-by-Section Analysis
- Section 1026.25Record Retention
- 25(a) General Rule
- 25(c) Records Related to Certain Requirements for Mortgage Loans
- Section 1026.32Requirements for High-Cost Mortgages
- 32(b) Definitions
- Points and Fees—General
- Points and Fees—Included in the Finance Charge
- Mortgage Insurance
- Bona Fide Third-Party Charges and Bona Fide Discount Points
- Proposed Provisions Not Adopted
- 32(b)(3) Bona Fide Discount Point
- 32(b)(3)(i) Closed-End Credit
- 32(b)(4) Total Loan Amount
- 32(b)(4)(i) Closed-End Credit
- 32(b)(6) Prepayment Penalty
- The Dodd-Frank Act's Amendments to TILA Relating to Prepayment Penalties
- Section 1026.43 Minimum Standards for Transactions Secured by a Dwelling 43(a) Scope
- 43(b) Definitions
- 43(c) Repayment Ability
- 43(c)(1) General Requirement
- 43(c)(2) Basis for Determination
- 43(c)(3) Verification Using Third-Party Records
- 43(c)(4) Verification of Income or Assets
- 43(c)(5) Payment Calculation
- 43(c)(5)(i) General Rule
- Final Rule
- 43(c)(5)(ii) Special Rules for Loans With a Balloon Payment, Interest-Only Loans, and Negative Amortization Loans
- Final Rule
- 43(c)(6) Payment Calculation for Simultaneous Loans
- 43(c)(7) Monthly Debt-to-Income Ratio or Residual Income
- 43(d) Refinancing of Non-Standard Mortgages
- 43(d)(1) Definitions
- 43(d)(1)(i) Non-Standard Mortgage
- 43(d)(1)(ii) Standard Mortgage
- 43(d)(2) Scope
- 43(d)(3) Exemption From Repayment Ability Requirements
- 43(d)(4) Offer of Rate Discounts and Other Favorable Terms
- 43(d)(5) Payment Calculations
- 43(d)(5)(i) Non-Standard mortgage
- 43(d)(5)(ii) Standard Mortgage
- 43(e) Qualified Mortgages
- Overview of Final Rule
- 43(e)(1) Safe Harbor and Presumption of Compliance
- The Board's Proposal
- Final Rule
- 43(e)(2) Qualified Mortgage Defined—General
- Final Rule
- Board's Proposal
- Final Rule
- 43(e)(3) Limits on Points and Fees for Qualified Mortgages
- $100,000 Threshold for Smaller Loans
- Limits on Points and Fees for Smaller Loans
- Impact on Rural Areas and Other Areas Where Home Values Are Lower
- Bona Fide Third-party Charges and Bona Fide Discount Points
- Indexing Points and Fees Limits for Inflation
- 43(e)(4) Qualified Mortgage Defined—Special Rules
- 43(f) Balloon-Payment Qualified Mortgages Made by Certain Creditors
- 43(f)(1) Exemption
- Scheduled Payments
- Fixed Interest Rate
- Loan Term of Five Years or Longer
- 43(f)(1)(v) and (vi)
- Holding of Balloon-Payment Mortgages in Portfolio
- “Operates Predominantly in Rural or Underserved Areas”
- Scope of Mortgage Operations
- Total Annual Residential Mortgage Loan Origination
- Asset-Size Threshold
- Criteria Creditor Also Must Satisfy in the Final Rule Adopted From the Board's 2011 Escrows Proposal
- 43(f)(2) Post-Consummation Transfer of Balloon-Payment Qualified Mortgage
- 43(g) Prepayment Penalties
- Scope; Reverse Mortgages and Temporary Loans
- 43(g)(1) When Permitted
- Balloon-Payment Mortgages
- Threshold for a Higher-Priced Mortgage Loan
- 43(g)(2) Limits on Prepayment Penalties
- 43(g)(3) Alternative Offer Required
- 43(g)(4) Offer Through a Mortgage Broker
- Provisions Not Adopted
- 43(g)(5) Creditor That Is a Loan Originator
- 43(g)(6) Applicability
- 43(h) Evasion; Open-End Credit
- VI. Effective Date
- VII. Dodd-Frank Act Section 1022(b)(2) Analysis
- A. Overview
- B. Data and Quantification of Benefits, Costs and Impacts
- C. Baseline for Analysis
- D. Coverage of the Final Rule
- E. Potential Benefits and Costs to Consumers and Covered Persons
- 1. Economics of Ability To Repay
- 2. Potential Benefits of the Ability-To-Repay Provisions for Consumers and Covered Persons
- 3. Potential Costs of the Ability-To-Repay Provisions to Consumers and Covered Persons
- a. Costs of the Documentation and Underwriting Requirements
- b. Liability Costs
- i. Size of the Market Segments
- ii. Liability Costs for Qualified Mortgages
- iii. Non-Qualified Mortgages and Estimation of Costs
- iv. Sensitivity Analysis
- v. Summary of Litigation Costs
- vi. Temporary Provisions for Qualified Mortgages
- c. Access to Credit
- 4. Potential impacts of other provisions
- a. Points and Fees Provisions
- b. Prepayment Penalties
- c. Definition of Small Lenders, Rural and Underserved
- d. Qualified Mortgages and Appraisals
- E. Potential Specific Impacts of the Final Rule
- 1. Depository Institutions and Credit Unions With $10 Billion or Less in Total Assets, as Described in Section 1026
- 2. Impact of the Provisions on Consumers in Rural Areas
- F. Alternatives Considered
- VIII. Final Regulatory Flexibility Act
- 1. A Statement of the Need for, and Objectives of, the Rule
- 2. Summary of Significant Issues Raised by Comments in Response to the Initial Regulatory Flexibility Analysis, Statement of the Assessment of the Bureau of Such Issues, and a Statement of Any Changes Made as a Result of Such Comments
- 3. Response to the Small Business Administration Chief Counsel for Advocacy
- 4. A Description of and an Estimate of the Number of Small Entities to Which the Rule Will Apply
- 5. Projected Reporting, Recordkeeping, and Other Compliance Requirements
- Recordkeeping Requirements
- Other Compliance Requirements
- Estimate of the Classes of Small Entities Which Will Be Subject to the Requirement
- 6-1. Description of the Steps the Agency has Taken To Minimize the Significant Economic Impact on Small Entities
- Qualified Mortgage Provisions
- Balloon-Payment Qualified Mortgage Provisions
- Concurrent Proposal for Portfolio Loans Made by Small Creditors
- 6-2. Description of the Steps the Agency Has Taken To Minimize Any Additional Cost of Credit for Small Entities
- IX. Paperwork Reduction Act Analysis
- A. Overview
- B. Information Collection Requirements
- 1. Ability-To-Repay Verification and Documentation Requirements
- 2. Record Retention Requirement
- C. Summary of Burden Hours
- List of Subjects in 12 CFR Part 1026
- Authority and Issuance
- PART 1026—TRUTH IN LENDING (REGULATION Z)
- Subpart D—Miscellaneous
- Subpart E—Special Rules for Certain Home Mortgage Transactions
- Appendix N to Part 1026—[Reserved]
- Appendix O to Part 1026—[Reserved]
- Appendix P to Part 1026—[Reserved]
- Appendix Q to Part 1026—Standards for Determining Monthly Debt and Income
- I. Consumer Eligibility
- II. Non-Employment Related Consumer Income
- III. Consumer Liabilities: Recurring Obligations
- IV. Consumer Liabilities: Contingent Liability
- V. Consumer Liabilities: Projected Obligations and Obligations Not Considered Debt
- Supplement I to Part 1026—Official Interpretations
- Subpart D—Miscellaneous
- Section 1026.25—Record Retention
- Subpart E—Special Rules for Certain Home Mortgage Transactions
- Section 1026.32—Requirements for High-Cost Mortgages
- Section 1026.43—Minimum Standards for Transactions Secured by a Dwelling
DATES: Back to Top
The rule is effective January 10, 2014.
FOR FURTHER INFORMATION CONTACT: Back to Top
Joseph Devlin, Gregory Evans, David Friend, Jennifer Kozma, Eamonn K. Moran, or Priscilla Walton-Fein, Counsels; Thomas J. Kearney or Mark Morelli, Senior Counsels; or Stephen Shin, Managing Counsel, Office of Regulations, at (202) 435-7700.
SUPPLEMENTARY INFORMATION: Back to Top
I. Summary of the Final Rule Back to Top
The Consumer Financial Protection Bureau (Bureau) is issuing a final rule to implement laws requiring mortgage lenders to consider consumers' ability to repay home loans before extending them credit. The rule will take effect on January 10, 2014.
The Bureau is also releasing a proposal to seek comment on whether to adjust the final rule for certain community-based lenders, housing stabilization programs, certain refinancing programs of the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac) (collectively, the GSEs) and Federal agencies, and small portfolio creditors. The Bureau expects to finalize the concurrent proposal this spring so that affected creditors can prepare for the January 2014 effective date.
During the years preceding the mortgage crisis, too many mortgages were made to consumers without regard to the consumer's ability to repay the loans. Loose underwriting practices by some creditors—including failure to verify the consumer's income or debts and qualifying consumers for mortgages based on “teaser” interest rates that would cause monthly payments to jump to unaffordable levels after the first few years—contributed to a mortgage crisis that led to the nation's most serious recession since the Great Depression.
In response to this crisis, in 2008 the Federal Reserve Board (Board) adopted a rule under the Truth in Lending Act which prohibits creditors from making “higher-price mortgage loans” without assessing consumers' ability to repay the loans. Under the Board's rule, a creditor is presumed to have complied with the ability-to-repay requirements if the creditor follows certain specified underwriting practices. This rule has been in effect since October 2009.
In the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress required that for residential mortgages, creditors must make a reasonable and good faith determination based on verified and documented information that the consumer has a reasonable ability to repay the loan according to its terms. Congress also established a presumption of compliance for a certain category of mortgages, called “qualified mortgages.” These provisions are similar, but not identical to, the Board's 2008 rule and cover the entire mortgage market rather than simply higher-priced mortgages. The Board proposed a rule to implement the new statutory requirements before authority passed to the Bureau to finalize the rule.
Summary of Final Rule
The final rule contains the following key elements:
Ability-to-Repay Determinations. The final rule describes certain minimum requirements for creditors making ability-to-repay determinations, but does not dictate that they follow particular underwriting models. At a minimum, creditors generally must consider eight underwriting factors: (1) Current or reasonably expected income or assets; (2) current employment status; (3) the monthly payment on the covered transaction; (4) the monthly payment on any simultaneous loan; (5) the monthly payment for mortgage-related obligations; (6) current debt obligations, alimony, and child support; (7) the monthly debt-to-income ratio or residual income; and (8) credit history. Creditors must generally use reasonably reliable third-party records to verify the information they use to evaluate the factors.
The rule provides guidance as to the application of these factors under the statute. For example, monthly payments must generally be calculated by assuming that the loan is repaid in substantially equal monthly payments during its term. For adjustable-rate mortgages, the monthly payment must be calculated using the fully indexed rate or an introductory rate, whichever is higher. Special payment calculation rules apply for loans with balloon payments, interest-only payments, or negative amortization.
The final rule also provides special rules to encourage creditors to refinance “non-standard mortgages”—which include various types of mortgages which can lead to payment shock that can result in default—into “standard mortgages” with fixed rates for at least five years that reduce consumers' monthly payments.
Presumption for Qualified Mortgages. The Dodd-Frank Act provides that “qualified mortgages” are entitled to a presumption that the creditor making the loan satisfied the ability-to-repay requirements. However, the Act did not specify whether the presumption of compliance is conclusive (i.e., creates a safe harbor) or is rebuttable. The final rule provides a safe harbor for loans that satisfy the definition of a qualified mortgage and are not “higher-priced,” as generally defined by the Board's 2008 rule. The final rule provides a rebuttable presumption for higher-priced mortgage loans, as described further below.
The line the Bureau is drawing is one that has long been recognized as a rule of thumb to separate prime loans from subprime loans. Indeed, under the existing regulations that were adopted by the Board in 2008, only higher-priced mortgage loans are subject to an ability-to-repay requirement and a rebuttable presumption of compliance if creditors follow certain requirements. The new rule strengthens the requirements needed to qualify for a rebuttable presumption for subprime loans and defines with more particularity the grounds for rebutting the presumption. Specifically, the final rule provides that consumers may show a violation with regard to a subprime qualified mortgage by showing that, at the time the loan was originated, the consumer's income and debt obligations left insufficient residual income or assets to meet living expenses. The analysis would consider the consumer's monthly payments on the loan, loan-related obligations, and any simultaneous loans of which the creditor was aware, as well as any recurring, material living expenses of which the creditor was aware. Guidance accompanying the rule notes that the longer the period of time that the consumer has demonstrated actual ability to repay the loan by making timely payments, without modification or accommodation, after consummation or, for an adjustable-rate mortgage, after recast, the less likely the consumer will be able to rebut the presumption based on insufficient residual income.
With respect to prime loans—which are not currently covered by the Board's ability-to-repay rule—the final rule applies the new ability-to-repay requirements but creates a strong presumption for those prime loans that constitute qualified mortgages. Thus, if a prime loan satisfies the qualified mortgage criteria described below, it will be conclusively presumed that the creditor made a good faith and reasonable determination of the consumer's ability to repay.
General Requirements for Qualified Mortgages. The Dodd-Frank Act sets certain product-feature prerequisites and affordability underwriting requirements for qualified mortgages and vests discretion in the Bureau to decide whether additional underwriting or other requirements should apply. The final rule implements the statutory criteria, which generally prohibit loans with negative amortization, interest-only payments, balloon payments, or terms exceeding 30 years from being qualified mortgages. So-called “no-doc” loans where the creditor does not verify income or assets also cannot be qualified mortgages. Finally, a loan generally cannot be a qualified mortgage if the points and fees paid by the consumer exceed three percent of the total loan amount, although certain “bona fide discount points” are excluded for prime loans. The rule provides guidance on the calculation of points and fees and thresholds for smaller loans.
The final rule also establishes general underwriting criteria for qualified mortgages. Most importantly, the general rule requires that monthly payments be calculated based on the highest payment that will apply in the first five years of the loan and that the consumer have a total (or “back-end”) debt-to-income ratio that is less than or equal to 43 percent. The appendix to the rule details the calculation of debt-to-income for these purposes, drawing upon Federal Housing Administration guidelines for such calculations. The Bureau believes that these criteria will protect consumers by ensuring that creditors use a set of underwriting requirements that generally safeguard affordability. At the same time, these criteria provide bright lines for creditors who want to make qualified mortgages.
The Bureau also believes that there are many instances in which individual consumers can afford a debt-to-income ratio above 43 percent based on their particular circumstances, but that such loans are better evaluated on an individual basis under the ability-to-repay criteria rather than with a blanket presumption. In light of the fragile state of the mortgage market as a result of the recent mortgage crisis, however, the Bureau is concerned that creditors may initially be reluctant to make loans that are not qualified mortgages, even though they are responsibly underwritten. The final rule therefore provides for a second, temporary category of qualified mortgages that have more flexible underwriting requirements so long as they satisfy the general product feature prerequisites for a qualified mortgage and also satisfy the underwriting requirements of, and are therefore eligible to be purchased, guaranteed or insured by either (1) the GSEs while they operate under Federal conservatorship or receivership; or (2) the U.S. Department of Housing and Urban Development, Department of Veterans Affairs, or Department of Agriculture or Rural Housing Service. This temporary provision will phase out over time as the various Federal agencies issue their own qualified mortgage rules and if GSE conservatorship ends, and in any event after seven years.
Rural Balloon-Payment Qualified Mortgages. The final rule also implements a special provision in the Dodd-Frank Act that would treat certain balloon-payment mortgages as qualified mortgages if they are originated and held in portfolio by small creditors operating predominantly in rural or underserved areas. This provision is designed to assure credit availability in rural areas, where some creditors may only offer balloon-payment mortgages. Loans are only eligible if they have a term of at least five years, a fixed-interest rate, and meet certain basic underwriting standards; debt-to-income ratios must be considered but are not subject to the 43 percent general requirement.
Creditors are only eligible to make rural balloon-payment qualified mortgages if they originate at least 50 percent of their first-lien mortgages in counties that are rural or underserved, have less than $2 billion in assets, and (along with their affiliates) originate no more than 500 first-lien mortgages per year. The Bureau will designate a list of “rural” and “underserved” counties each year, and has defined coverage more broadly than originally had been proposed. Creditors must generally hold the loans on their portfolios for three years in order to maintain their “qualified mortgage” status.
Other Final Rule Provisions. The final rule also implements Dodd-Frank Act provisions that generally prohibit prepayment penalties except for certain fixed-rate, qualified mortgages where the penalties satisfy certain restrictions and the creditor has offered the consumer an alternative loan without such penalties. To match with certain statutory changes, the final rule also lengthens to three years the time creditors must retain records that evidence compliance with the ability-to-repay and prepayment penalty provisions and prohibits evasion of the rule by structuring a closed-end extension of credit that does not meet the definition of open-end credit as an open-end plan.
Summary of Concurrent Proposal
The concurrent proposal seeks comment on whether the general ability-to-repay and qualified mortgage rule should be modified to address potential adverse consequences on certain narrowly-defined categories of lending programs. Because those measures were not proposed by the Board originally, the Bureau believes additional public input would be helpful. Specifically, the proposal seeks comment on whether it would be appropriate to exempt designated non-profit lenders, homeownership stabilization programs, and certain Federal agency and GSE refinancing programs from the ability-to-repay requirements because they are subject to their own specialized underwriting criteria.
The proposal also seeks comment on whether to create a new category of qualified mortgages, similar to the one for rural balloon-payment mortgages, for loans without balloon-payment features that are originated and held on portfolio by small creditors. The new category would not be limited to lenders that operate predominantly in rural or underserved areas, but would use the same general size thresholds and other criteria as the rural balloon-payment rules. The proposal also seeks comment on whether to increase the threshold separating safe harbor and rebuttable presumption qualified mortgages for both rural balloon-payment qualified mortgages and the new small portfolio qualified mortgages, in light of the fact that small creditors often have higher costs of funds than larger creditors. Specifically, the Bureau is proposing a threshold of 3.5 percentage points above APOR for first-lien loans.
II. Background Back to Top
For over 20 years, consumer advocates, legislators, and regulators have raised concerns about creditors originating mortgage loans without regard to the consumer's ability to repay the loan. Beginning in about 2006, these concerns were heightened as mortgage delinquencies and foreclosure rates increased dramatically, caused in part by the loosening of underwriting standards. See 73 FR 44524 (July 30, 2008). The following discussion provides background information, including a brief summary of the legislative and regulatory responses to the foregoing concerns, which culminated in the enactment of the Dodd-Frank Act on July 21, 2010, the Board's May 11, 2011, proposed rule to implement certain amendments to TILA made by the Dodd-Frank Act, and now the Bureau's issuance of this final rule to implement sections 1411, 1412, and 1414 of that act.
A. The Mortgage Market
Overview of the Market and the Mortgage Crisis
The mortgage market is the single largest market for consumer financial products and services in the United States, with approximately $9.9 trillion in mortgage loans outstanding.  During the last decade, the market went through an unprecedented cycle of expansion and contraction that was fueled in part by the securitization of mortgages and creation of increasingly sophisticated derivative products. So many other parts of the American financial system were drawn into mortgage-related activities that, when the housing market collapsed in 2008, it sparked the most severe recession in the United States since the Great Depression. 
The expansion in this market is commonly attributed to both particular economic conditions (including an era of low interest rates and rising housing prices) and to changes within the industry. Interest rates dropped significantly—by more than 20 percent—from 2000 through 2003.  Housing prices increased dramatically—about 152 percent—between 1997 and 2006.  Driven by the decrease in interest rates and the increase in housing prices, the volume of refinancings increased rapidly, from about 2.5 million loans in 2000 to more than 15 million in 2003. 
In the mid-2000s, the market experienced a steady deterioration of credit standards in mortgage lending, with evidence that loans were made solely against collateral, or even against expected increases in the value of collateral, and without consideration of ability to repay. This deterioration of credit standards was particularly evidenced by the growth of “subprime” and “Alt-A” products, which consumers were often unable to repay.  Subprime products were sold primarily to consumers with poor or no credit history, although there is evidence that some consumers who would have qualified for “prime” loans were steered into subprime loans as well.  The Alt-A category of loans permitted consumers to take out mortgage loans while providing little or no documentation of income or other evidence of repayment ability. Because these loans involved additional risk, they were typically more expensive to consumers than “prime” mortgages, although many of them had very low introductory interest rates. In 2003, subprime and Alt-A origination volume was about $400 billion; in 2006, it had reached $830 billion. 
So long as housing prices were continuing to increase, it was relatively easy for consumers to refinance their existing loans into more affordable products to avoid interest rate resets and other adjustments. When housing prices began to decline in 2005, however, refinancing became more difficult and delinquency rates on subprime and Alt-A products increased dramatically.  More and more consumers, especially those with subprime and Alt-A loans, were unable or unwilling to make their mortgage payments. An early sign of the mortgage crisis was an upswing in early payment defaults—generally defined as borrowers being 60 or more days delinquent within the first year. Prior to 2006, 1.1 percent of mortgages would end up 60 or more days delinquent within the first two years.  Taking a more expansive definition of early payment default to include 60 days delinquent within the first two years, this figure was double the historic average during 2006, 2007 and 2008.  In 2006, 2007, and 2008, 2.3 percent, 2.1 percent, and 2.3 percent of mortgages ended up 60 or more days delinquent within the first two years, respectively. By the summer of 2006, 1.5 percent of loans less than a year old were in default, and this figure peaked at 2.5 percent in late 2007, well above the 1.0 percent peak in the 2000 recession.  First payment defaults—mortgages taken out by consumers who never made a single payment—exceeded 1.5 percent of loans in early 2007.  In addition, as the economy worsened, the rates of serious delinquency (90 or more days past due or in foreclosure) for the subprime and Alt-A products began a steep increase from approximately 10 percent in 2006, to 20 percent in 2007, to more than 40 percent in 2010. 
The impact of this level of delinquencies was severe on creditors who held loans on their books and on private investors who purchased loans directly or through securitized vehicles. Prior to and during the bubble, the evolution of the securitization of mortgages attracted increasing involvement from financial institutions that were not directly involved in the extension of credit to consumers and from investors worldwide. Securitization of mortgages allows originating creditors to sell off their loans (and reinvest the funds earned in making new ones) to investors who want an income stream over time. Securitization had been pioneered by what are now called government-sponsored enterprises (GSEs), including the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). But by the early 2000s, large numbers of private financial institutions were deeply involved in creating increasingly complex mortgage-related investment vehicles through securities and derivative products. The private securitization-backed subprime and Alt-A mortgage market ground to a halt in 2007 in the face of the rising delinquencies on subprime and Alt-A products. 
Six years later, the United States continues to grapple with the fallout. The fall in housing prices is estimated to have resulted in about $7 trillion in household wealth losses.  In addition, distressed homeownership and foreclosure rates remain at unprecedented levels. 
Response and Government Programs
In light of these conditions, the Federal government began providing support to the mortgage markets in 2008 and continues to do so at extraordinary levels today. The Housing and Economic Recovery Act of 2008, which became effective on October 1, 2008, provided both new safeguards and increased regulation for Fannie Mae and Freddie Mac, as well as provisions to assist troubled borrowers and to the hardest hit communities. Fannie Mae and Freddie Mac, which supported the mainstream mortgage market, experienced heavy losses and were placed in conservatorship by the Federal government in 2008 to support the collapsing mortgage market.  Because private investors have withdrawn from the mortgage securitization market and there are no other effective secondary market mechanisms in place, the GSEs' continued operations help ensure that the secondary mortgage market continues to function and to assist consumers in obtaining new mortgages or refinancing existing mortgages. The Troubled Asset Relief Program (TARP), created to implement programs to stabilize the financial system during the financial crisis, was authorized through the Emergency Economic Stabilization Act of 2008 (EESA), as amended by the American Recovery and Reinvestment Act of 2009, and includes programs to help struggling homeowners avoid foreclosure.  Since 2008, several other Federal government efforts have endeavored to keep the country's housing finance system functioning, including the Treasury Department's and the Federal Reserve System's mortgage-backed securities (MBS) purchase programs to help keep interest rates low and the Federal Housing Administration's (FHA's) increased market presence. As a result, mortgage credit has remained available, albeit with more restrictive underwriting terms that limit or preclude some consumers' access to credit. These same government agencies together with the GSEs and other market participants have also undertaken a series of efforts to help families avoid foreclosure through loan-modification programs, loan-refinance programs and foreclosure alternatives. 
Size and Volume of the Current Mortgage Origination Market
Even with the economic downturn and tightening of credit standards, approximately $1.28 trillion in mortgage loans were originated in 2011.  In exchange for an extension of mortgage credit, consumers promise to make regular mortgage payments and provide their home or real property as collateral. The overwhelming majority of homebuyers continue to use mortgage loans to finance at least some of the purchase price of their property. In 2011, 93 percent of all home purchases were financed with a mortgage credit transaction. 
Consumers may obtain mortgage credit to purchase a home, to refinance an existing mortgage, to access home equity, or to finance home improvement. Purchase loans and refinancings together produced 6.3 million new first-lien mortgage loan originations in 2011.  The proportion of loans that are for purchases as opposed to refinances varies with the interest rate environment and other market factors. In 2011, 65 percent of the market was refinance transactions and 35 percent was purchase loans, by volume.  Historically the distribution has been more even. In 2000, refinances accounted for 44 percent of the market while purchase loans comprised 56 percent; in 2005, the two products were split evenly. 
With a home equity transaction, a homeowner uses his or her equity as collateral to secure consumer credit. The credit proceeds can be used, for example, to pay for home improvements. Home equity credit transactions and home equity lines of credit resulted in an additional 1.3 million mortgage loan originations in 2011. 
The market for higher-priced mortgage loans remains significant. Data reported under the Home Mortgage Disclosure Act (HMDA) show that in 2011 approximately 332,000 transactions, including subordinate liens, were reportable as higher-priced mortgage loans. Of these transactions, refinancings accounted for approximately 44 percent of the higher-priced mortgage loan market, and 90 percent of the overall higher-priced mortgage loan market involved first-lien transactions. The median first-lien higher-priced mortgage loan was for $81,000, while the interquartile range (quarter of the transactions are below, quarter of the transactions are above) was $47,000 to $142,000.
GSE-eligible loans, together with the other federally insured or guaranteed loans, cover the majority of the current mortgage market. Since entering conservatorship in September 2008, the GSEs have bought or guaranteed roughly three of every four mortgages originated in the country. Mortgages guaranteed by FHA make up most of the rest.  Outside of the securitization available through the Government National Mortgage Association (Ginnie Mae) for loans primarily backed by FHA, there are very few alternatives in place today to assume the secondary market functions served by the GSEs. 
Continued Fragility of the Mortgage Market
The current mortgage market is especially fragile as a result of the recent mortgage crisis. Tight credit remains an important factor in the contraction in mortgage lending seen over the past few years. Mortgage loan terms and credit standards have tightened most for consumers with lower credit scores and with less money available for a down payment. According to CoreLogic's TrueStandings Servicing, a proprietary data service that covers about two-thirds of the mortgage market, average underwriting standards have tightened considerably since 2007. Through the first nine months of 2012, for consumers that have received closed-end first-lien mortgages, the weighted average FICO  score was 750, the loan-to-value (LTV) ratio was 78 percent, and the debt-to-income (DTI) ratio was 34.5 percent.  In comparison, in the peak of the housing bubble in 2007, the weighted average FICO score was 706, the LTV was 80 percent, and the DTI was 39.8 percent. 
In this tight credit environment, the data suggest that creditors are not willing to take significant risks. In terms of the distribution of origination characteristics, for 90 percent of all the Fannie Mae and Freddie Mac mortgage loans originated in 2011, consumers had a FICO score over 700 and a DTI less than 44 percent.  According to the Federal Reserve's Senior Loan Officer Opinion Survey on Bank Lending Practices, in April 2012 nearly 60 percent of creditors reported that they would be much less likely, relative to 2006, to originate a conforming home-purchase mortgage  to a consumer with a 10 percent down payment and a credit score of 620—a traditional marker for those consumers with weaker credit histories.  The Federal Reserve Board calculates that the share of mortgage borrowers with credit scores below 620 has fallen from about 17 percent of consumers at the end of 2006 to about 5 percent more recently.  Creditors also appear to have pulled back on offering these consumers loans insured by the FHA, which provides mortgage insurance on loans made by FHA-approved creditors throughout the United States and its territories and is especially structured to help promote affordability. 
The Bureau is acutely aware of the high levels of anxiety in the mortgage market today. These concerns include the continued slow pace of recovery, the confluence of multiple major regulatory and capital initiatives, and the compliance burdens of the various Dodd-Frank Act rulemakings (including uncertainty on what constitutes a qualified residential mortgage (QRM), which, as discussed below, relates to the Dodd-Frank Act's credit risk retention requirements and mortgage securitizations). These concerns are causing discussion about whether creditors will consider exiting the business. The Bureau acknowledges that it will likely take some time for the mortgage market to stabilize and that creditors will need to adjust their operations to account for several major regulatory and capital regimes.
B. TILA and Regulation Z
In 1968, Congress enacted the Truth in Lending Act (TILA), 15 U.S.C. 1601 et seq., based on findings that the informed use of credit resulting from consumers' awareness of the cost of credit would enhance economic stability and competition among consumer credit providers. One of the purposes of TILA is to promote the informed use of consumer credit by requiring disclosures about its costs and terms. See 15 U.S.C. 1601. TILA requires additional disclosures for loans secured by consumers' homes and permits consumers to rescind certain transactions secured by their principal dwellings when the required disclosures are not provided. 15 U.S.C. 1635, 1637a. Section 105(a) of TILA directs the Bureau (formerly directed the Board of Governors of the Federal Reserve System) to prescribe regulations to carry out TILA's purposes and specifically authorizes the Bureau, among other things, to issue regulations that contain such additional requirements, classifications, differentiations, or other provisions, or that provide for such adjustments and exceptions for all or any class of transactions, that in the Bureau's judgment are necessary or proper to effectuate the purposes of TILA, facilitate compliance thereof, or prevent circumvention or evasion therewith. See 15 U.S.C. 1604(a).
General rulemaking authority for TILA transferred to the Bureau in July 2011, other than for certain motor vehicle dealers in accordance with the Dodd-Frank Act section 1029, 12 U.S.C. 5519. Pursuant to the Dodd-Frank Act and TILA, as amended, the Bureau published for public comment an interim final rule establishing a new Regulation Z, 12 CFR part 1026, implementing TILA (except with respect to persons excluded from the Bureau's rulemaking authority by section 1029 of the Dodd-Frank Act). 76 FR 79768 (Dec. 22, 2011). This rule did not impose any new substantive obligations but did make technical and conforming changes to reflect the transfer of authority and certain other changes made by the Dodd-Frank Act. The Bureau's Regulation Z took effect on December 30, 2011. The Official Staff Interpretations interpret the requirements of the regulation and provides guidance to creditors in applying the rules to specific transactions. See 12 CFR part 1026, Supp. I.
C. The Home Ownership and Equity Protection Act (HOEPA) and HOEPA Rules
In response to evidence of abusive practices in the home-equity lending market, in 1994 Congress amended TILA by enacting the Home Ownership and Equity Protection Act (HOEPA) as part of the Riegle Community Development and Regulatory Improvement Act of 1994. 103, 108 Stat. 2160. HOEPA was enacted as an amendment to TILA to address abusive practices in refinancing and home-equity mortgage loans with high interest rates or high fees.  Loans that meet HOEPA's high-cost triggers are subject to special disclosure requirements and restrictions on loan terms, and consumers with high-cost mortgages have enhanced remedies for violations of the law. 
The statute applied generally to closed-end mortgage credit, but excluded purchase money mortgage loans and reverse mortgages. Coverage was triggered where a loan's annual percentage rate (APR) exceeded comparable Treasury securities by specified thresholds for particular loan types, or where points and fees exceeded eight percent of the total loan amount or a dollar threshold. 
For high-cost loans meeting either of those thresholds, HOEPA required creditors to provide special pre-closing disclosures, restricted prepayment penalties and certain other loan terms, and regulated various creditor practices, such as extending credit without regard to a consumer's ability to repay the loan. HOEPA also provided a mechanism for consumers to rescind covered loans that included certain prohibited terms and to obtain higher damages than are allowed for other types of TILA violations. Finally, HOEPA amended TILA section 131, 15
U.S.C. 1641, to provide that purchasers of high-cost loans generally are subject to all claims and defenses against the original creditor with respect to the mortgage, including a creditor's failure to make an ability-to-repay determination before making the loan. HOEPA created special substantive protections for high-cost mortgages, such as prohibiting a creditor from engaging in a pattern or practice of extending a high-cost mortgage to a consumer based on the consumer's collateral without regard to the consumer's repayment ability, including the consumer's current and expected income, current obligations, and employment. TILA section 129(h); 15 U.S.C. 1639(h).
In addition to the disclosures and limitations specified in the statute, HOEPA expanded the Board's rulemaking authority, among other things, to prohibit acts or practices the Board found to be unfair and deceptive in connection with mortgage loans. 
In 1995, the Board implemented the HOEPA amendments at §§ 226.31, 226.32, and 226.33  of Regulation Z. See 60 FR 15463 (Mar. 24, 1995). In particular, § 226.32(e)(1)  implemented TILA section 129(h)'s ability-to-repay requirements to prohibit a creditor from engaging in a pattern or practice of extending a high-cost mortgage based on the consumer's collateral without regard to the consumer's repayment ability, including the consumer's current income, current obligations, and employment status.
In 2001, the Board published additional significant changes to expand both HOEPA's protections to more loans by revising the annual percentage rate (APR) threshold for first-lien mortgage loans, expanded the definition of points and fees to include the cost of optional credit insurance and debt cancellation premiums, and enhanced the restrictions associated with high-cost loans. See 66 FR 65604 (Dec. 20, 2001). In addition, the ability-to-repay provisions in the regulation were revised to provide for a presumption of a violation of the rule if the creditor engages in a pattern or practice of making high-cost mortgages without verifying and documenting the consumer's repayment ability.
D. 2006 and 2007 Interagency Supervisory Guidance
In December 2005, the Federal banking agencies  responded to concerns about the rapid growth of nontraditional mortgages in the previous two years by proposing supervisory guidance. Nontraditional mortgages are mortgages that allow the consumer to defer repayment of principal and sometimes interest. The guidance advised institutions of the need to reduce “risk layering” with respect to these products, such as by failing to document income or lending nearly the full appraised value of the home. The final guidance issued in September 2006 specifically advised creditors that layering risks in nontraditional mortgage loans to consumers receiving subprime credit may significantly increase risks to consumers as well as institutions. See Interagency Guidance on Nontraditional Mortgage Product Risks, 71 FR 58609 (Oct. 4, 2006) (2006 Nontraditional Mortgage Guidance).
The Federal banking agencies addressed concerns about the subprime market in March 2007 with proposed supervisory guidance addressing the heightened risks to consumers and institutions of adjustable-rate mortgages with two- or three-year “teaser” interest rates followed by substantial increases in the rate and payment. The guidance, finalized in June of 2007, set out the standards institutions should follow to ensure consumers in the subprime market obtain loans they can afford to repay. Among other steps, the guidance advised creditors: (1) To use the fully indexed rate and fully-amortizing payment when qualifying consumers for loans with adjustable rates and potentially non-amortizing payments; (2) to limit stated income and reduced documentation loans to cases where mitigating factors clearly minimize the need for full documentation of income; and (3) to provide that prepayment penalty clauses expire a reasonable period before reset, typically at least 60 days. See Statement on Subprime Mortgage Lending, 72 FR 37569 (July 10, 2007) (2007 Subprime Mortgage Statement).  The Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators (AARMR) issued parallel statements for state supervisors to use with state-supervised entities, and many states adopted the statements.
E. 2008 HOEPA Final Rule
After the Board finalized the 2001 HOEPA rules, new consumer protection issues arose in the mortgage market. In 2006 and 2007, the Board held a series of national hearings on consumer protection issues in the mortgage market. During those hearings, consumer advocates and government officials expressed a number of concerns, and urged the Board to prohibit or restrict certain underwriting practices, such as “stated income” or “low documentation” loans, and certain product features, such as prepayment penalties. See 73 FR 44527 (July 30, 2008). The Board was also urged to adopt additional regulations under HOEPA, because, unlike the Interagency Supervisory Guidance, the regulations would apply to all creditors and would be enforceable by consumers through civil actions. As discussed above, in 1995 the Board implemented TILA section 129(h)'s ability-to-repay requirements for high-cost mortgage loans. In 2008, the Board exercised its authority under HOEPA to extend certain consumer protections concerning a consumer's ability to repay and prepayment penalties to a new category of “higher-priced mortgage loans” (HPMLs)  with APRs that are lower than those prescribed for high-cost loans but that nevertheless exceed the average prime offer rate by prescribed amounts. This new category of loans was designed to include subprime credit. Specifically, the Board exercised its authority to revise HOEPA's restrictions on high-cost loans based on a conclusion that the revisions were necessary to prevent unfair and deceptive acts or practices in connection with mortgage loans. 73 FR 44522 (July 30, 2008) (2008 HOEPA Final Rule). The Board determined that imposing the burden to prove “pattern or practice” on an individual consumer would leave many consumers with a lesser remedy, such as those provided under some State laws, or without any remedy for loans made without regard to repayment ability. In particular, the Board concluded that a prohibition on making individual loans without regard for repayment ability was necessary to ensure a remedy for consumers who are given unaffordable loans and to deter irresponsible lending, which injures individual consumers. The 2008 HOEPA Final Rule provides a presumption of compliance with the higher-priced mortgage ability-to-repay requirements if the creditor follows certain procedures regarding underwriting the loan payment, assessing the debt-to-income ratio or residual income, and limiting the features of the loan, in addition to following certain procedures mandated for all creditors. See§ 1026.34(a)(4)(iii) and (iv). However, the 2008 HOEPA Final Rule makes clear that even if the creditor follows the required and optional criteria, the creditor has merely obtained a presumption of compliance with the repayment ability requirement. The consumer can still rebut or overcome that presumption by showing that, despite following the required and optional procedures, the creditor nonetheless disregarded the consumer's ability the loan.
F. The Dodd-Frank Act
In 2007, Congress held numerous hearings focused on rising subprime foreclosure rates and the extent to which lending practices contributed to them.  Consumer advocates testified that certain lending terms or practices contributed to the foreclosures, including a failure to consider the consumer's ability to repay, low- or no-documentation loans, hybrid adjustable-rate mortgages, and prepayment penalties. Industry representatives, on the other hand, testified that adopting substantive restrictions on subprime loan terms would risk reducing access to credit for some consumers. In response to these hearings, the House of Representatives passed the Mortgage Reform and Anti-Predatory Lending Act, both in 2007 and again in 2009. H.R. 3915, 110th Cong. (2007); H.R. 1728, 111th Cong. (2009). Both bills would have amended TILA to provide consumer protections for mortgages, including ability-to-repay requirements, but neither bill was passed by the Senate. Instead, both houses shifted their focus to enacting comprehensive financial reform legislation.
In December 2009, the House passed the Wall Street Reform and Consumer Protection Act of 2009, its version of comprehensive financial reform legislation, which included an ability-to-repay and qualified mortgage provision. H.R. 4173, 111th Cong. (2009). In May 2010, the Senate passed its own version of ability-to-repay requirements in its own version of comprehensive financial reform legislation, called the Restoring American Financial Stability Act of 2010. S. 3217, 111th Cong. (2010). After conference committee negotiations, the Dodd-Frank Act was passed by both houses of Congress and was signed into law on July 21, 2010. Public Law 111-203, 124 Stat. 1376 (2010).
In the Dodd-Frank Act, Congress established the Bureau and, under sections 1061 and 1100A, generally consolidated the rulemaking authority for Federal consumer financial laws, including TILA and RESPA, in the Bureau.  Congress also provided the Bureau, among other things, with supervision authority for Federal consumer financial laws over certain entities, including insured depository institutions and credit unions with total assets over $10 billion and their affiliates, and mortgage-related non-depository financial services providers.  In addition, Congress provided the Bureau with authority, subject to certain limitations, to enforce the Federal consumer financial laws, including the 18 enumerated consumer laws. Title X of the Dodd-Frank Act, and rules thereunder. The Bureau can bring civil actions in court and administrative enforcement proceedings to obtain remedies such as civil penalties and cease-and-desist orders.
At the same time, Congress significantly amended the statutory requirements governing mortgage practices with the intent to restrict the practices that contributed to the crisis. Title XIV of the Dodd-Frank Act contains a modified version of the Mortgage Reform and Anti-Predatory Lending Act.  The Dodd-Frank Act requires the Bureau to propose consolidation of the major federal mortgage disclosures, imposes new requirements and limitations to address a wide range of consumer mortgage issues, and imposes credit risk retention requirements in connection with mortgage securitization.
Through the Dodd-Frank Act, Congress expanded HOEPA to apply to more types of mortgage transactions, including purchase money mortgage loans and home-equity lines of credit. Congress also amended HOEPA's existing high-cost triggers, added a prepayment penalty trigger, and expanded the protections associated with high-cost mortgages. 
In addition, sections 1411, 1412, and 1414 of the Dodd-Frank Act created new TILA section 129C, which establishes, among other things, new ability-to-repay requirements and new limits on prepayment penalties. Section 1402 of the Dodd-Frank Act states that Congress created new TILA section 129C upon a finding 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.” TILA section 129B(a)(1), 15 U.S.C. 1639b(a)(1). Section 1402 of the Dodd-Frank Act further states that the purpose of TILA section 129C is to “assure that consumers are offered and receive residential mortgage loans on terms that reasonably reflect their ability to repay the loans.” TILA section 129B(a)(2), 15 U.S.C. 1639b(a)(2).
Specifically, TILA section 129C:
- Expands coverage of the ability-to-repay requirements to any consumer credit transaction secured by a dwelling, except an open-end credit plan, credit secured by an interest in a timeshare plan, reverse mortgage, or temporary loan.
- Prohibits a creditor from making a mortgage loan unless the creditor makes a reasonable and good faith determination, based on verified and documented information, that the consumer has a reasonable ability to repay the loan according to its terms, and all applicable taxes, insurance, and assessments.
- Provides a presumption of compliance with the ability-to-repay requirements if the mortgage loan is a “qualified mortgage,” which does not contain certain risky features and does not exceed certain thresholds for points and fees on the loan and which meets such other criteria as the Bureau may prescribe.
- Prohibits prepayment penalties unless the mortgage is a fixed-rate qualified mortgage that is not a higher-priced mortgage loan, and the amount and duration of the prepayment penalty are limited.
The statutory ability-to-repay standards reflect Congress's belief that certain lending practices (such as low- or no-documentation loans or underwriting loans without regard to principal repayment) led to consumers having mortgages they could not afford, resulting in high default and foreclosure rates. Accordingly, new TILA section 129C generally prohibits a creditor from making a residential mortgage loan unless the creditor makes a reasonable and good faith determination, based on verified and documented information, that the consumer has a reasonable ability to repay the loan according to its terms.
To provide more certainty to creditors while protecting consumers from unaffordable loans, the Dodd-Frank Act provides a presumption of compliance with the ability-to-repay requirements for certain “qualified mortgages.” TILA section 129C(b)(1) states that a creditor or assignee may presume that a loan has met the repayment ability requirement if the loan is a qualified mortgage. Qualified mortgages are prohibited from containing certain features that Congress considered to increase risks to consumers and must comply with certain limits on points and fees.
The Dodd-Frank Act creates special remedies for violations of TILA section 129C. As amended by section 1416 of the Dodd-Frank Act, TILA provides that a consumer who brings a timely action against a creditor for a violation of TILA section 129C(a) (the ability-to-repay requirements) may be able to recover special statutory damages equal to the sum of all finance charges and fees paid by the consumer, unless the creditor demonstrates that the failure to comply is not material. TILA section 130(a). This recovery is in addition to: (1) Actual damages; (2) statutory damages in an individual action or class action, up to a prescribed threshold; and (3) court costs and attorney fees that would be available for violations of other TILA provisions. In addition, the statute of limitations for a violation of TILA section 129C is three years from the date of the occurrence of the violation (as compared to one year for most other TILA violations, except for actions brought under section 129 or 129B, or actions brought by a State attorney general to enforce a violation of section 129, 129B, 129C, 129D, 129E, 129F, 129G, or 129H, which may be brought not later than 3 years after the date on which the violation occurs, and private education loans under 15 U.S.C. 1650(a), which may be brought not later than one year from the due date of first regular payment of principal). TILA section 130(e). Moreover, as amended by section 1413 of the Dodd-Frank Act, TILA provides that when a creditor, or an assignee, other holder or their agent initiates a foreclosure action, a consumer may assert a violation of TILA section 129C(a) “as a matter of defense by recoupment or setoff.” TILA section 130(k). There is no time limit on the use of this defense and the amount of recoupment or setoff is limited, with respect to the special statutory damages, to no more than three years of finance charges and fees. For high-cost loans an assignee generally continues to be subject to all claims and defenses, not only in foreclosure, with respect to that mortgage that the consumer could assert against the creditor of the mortgage, unless the assignee demonstrates, by a preponderance of evidence, that a reasonable person exercising ordinary due diligence, could not determine that the mortgage was a high-cost mortgage. TILA section 131(d).
In addition to the foregoing ability-to-repay provisions, the Dodd-Frank Act established other new standards concerning a wide range of mortgage lending practices, including compensation of mortgage originators,  Federal mortgage disclosures,  and mortgage servicing.  Those and other Dodd-Frank Act provisions are the subjects of other rulemakings by the Bureau. For additional information on those other rulemakings, see the discussion below in part III.C.
G. Qualified Residential Mortgage Rulemaking
Section 15G of the Securities Exchange Act of 1934, added by section 941(b) of the Dodd-Frank Act, generally requires the securitizer of asset-backed securities (ABS) to retain not less than five percent of the credit risk of the assets collateralizing the ABS. 15 U.S.C. 78o-11. The Dodd-Frank Act's credit risk retention requirements are aimed at addressing weaknesses and failures in the securitization process and the securitization markets.  By requiring that the securitizer retain a portion of the credit risk of the assets being securitized, the Dodd-Frank Act provides securitizers an incentive to monitor and ensure the quality of the assets underlying a securitization transaction. Six Federal agencies (not including the Bureau) are tasked with implementing this requirement. Those agencies are the Board, Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation (FDIC), Securities and Exchange Commission (SEC), Federal Housing Finance Agency (FHFA), and Department of Housing and Urban Development (HUD) (collectively, the QRM agencies).
Section 15G of the Securities Exchange Act of 1934 provides that the credit risk retention requirements shall not apply to an issuance of ABS if all of the assets that collateralize the ABS are “qualified residential mortgages” (QRMs). See 15 U.S.C. 78o-11(c)(1)(C)(iii), (4)(A) and (B). Section 15G requires the QRM agencies to jointly define what constitutes a QRM, taking into consideration underwriting and product features that historical loan performance data indicate result in a lower risk of default. See 15 U.S.C. 78o-11(e)(4). Notably, section 15G also provides that the definition of a QRM shall be “no broader than” the definition of a “qualified mortgage,” as the term is defined under TILA section 129C(b)(2), as amended by the Dodd-Frank Act, and regulations adopted thereunder. 15 U.S.C. 78o-11(e)(4)(C).
On April 29, 2011, the QRM agencies issued joint proposed risk retention rules, including a proposed QRM definition (2011 QRM Proposed Rule). See 76 FR 24090 (Apr. 29, 2011). The proposed rule has not been finalized. Among other requirements, the 2011 QRM Proposed Rule incorporates the qualified mortgage restrictions on negative amortization, interest-only, and balloon payments, limits points and fees to three percent of the loan amount, and prohibits prepayment penalties. The proposed rule also establishes underwriting standards designed to ensure that QRMs have high credit quality, including:
- A maximum “front-end” monthly debt-to-income ratio (which looks at only the consumer's mortgage payment relative to income, but not at other debts) of 28 percent;
- A maximum “back-end” monthly debt-to-income ratio (which includes all of the consumer's debt, not just the mortgage payment) of 36 percent;
- A maximum loan-to-value (LTV) ratio of 80 percent in the case of a purchase transaction (with a lesser combined LTV permitted for refinance transactions);
- A 20 percent down payment requirement in the case of a purchase transaction; and
- Credit history verification and documentation requirements.
The proposed rule also includes appraisal requirements, restrictions on the assumability of the mortgage, and requires the creditor to commit to certain servicing policies and procedures regarding loss mitigation. See 76 FR at 24166-67.
To provide clarity on the definitions, calculations, and verification requirements for the QRM standards, the 2011 QRM Proposed Rule incorporates certain definitions and key terms established by HUD and required to be used by creditors originating FHA-insured residential mortgages. See 76 FR at 24119. Specifically, the 2011 QRM Proposed Rule incorporates the definitions and standards set out in the HUD Handbook 4155.1 (New Version), Mortgage Credit Analysis for Mortgage Insurance, as in effect on December 31, 2010, for determining and verifying the consumer's funds and the consumer's monthly housing debt, total monthly debt, and monthly gross income. 
The qualified mortgage and QRM definitions are distinct and relate to different parts of the Dodd-Frank Act with different purposes, but both are designed to address problems that had arisen in the mortgage origination process. The qualified mortgage standard provides creditors with a presumption of compliance with the requirement in TILA section 129C(a) to assess a consumer's ability to repay a residential mortgage loan. The purpose of these provisions is to ensure that consumers are offered and receive residential mortgage loans on terms that reasonably reflect their ability to repay the loans. See TILA section 129B(a)(2). The Dodd-Frank Act's credit risk retention requirements are intended to address problems in the securitization markets and in mortgage markets by requiring that securitizers, as a general matter, retain an economic interest in the credit risk of the assets they securitize. The QRM credit risk retention requirement was meant to incentivize creditors to make more responsible loans because they will need to keep some skin in the game. 
Nevertheless, as discussed above, the Dodd-Frank Act requires that the QRM definition be “no broader than” the qualified mortgage definition. Therefore, in issuing the 2011 QRM Proposed Rule, the QRM agencies sought to incorporate the statutory qualified mortgage standards, in addition to other requirements, into the QRM definition. 76 FR at 24118. This approach was designed to minimize the potential for conflicts between the QRM standards in the proposed rule and the qualified mortgage definition that the Bureau would ultimately adopt in a final rule.
In the 2011 QRM Proposed Rule, the QRM agencies stated their expectation to monitor the rules adopted by the Bureau under TILA to define a qualified mortgage and to review those rules to ensure that the definition of QRM in the final rule is “no broader” than the definition of a qualified mortgage and to appropriately implement the Dodd-Frank Act's credit risk retention requirement. See 76 FR at 24118. In preparing this final rule, the Bureau has consulted regularly with the QRM agencies to coordinate the qualified mortgage and qualified residential mortgage definitions. However, while the Bureau's qualified mortgage definition will set the outer boundary of a QRM, the QRM agencies have discretion under the Dodd-Frank Act to define QRMs in a way that is stricter than the qualified mortgage definition.
III. Summary of the Rulemaking Process Back to Top
A. The Board's Proposal
In 2011, the Board published for public comment a proposed rule amending Regulation Z to implement the foregoing ability-to-repay amendments to TILA made by the Dodd-Frank Act. See 76 FR 27390 (May 11, 2011) (2011 ATR Proposal, the Board's proposal or the proposal). Consistent with the Dodd-Frank Act, the Board's proposal applied the ability-to-repay requirements to any consumer credit transaction secured by a dwelling (including vacation home loans and home equity loans), except an open-end credit plan, extension of credit secured by a consumer's interest in a timeshare plan, reverse mortgage, or temporary loan with a term of 12 months or less.
The Board's proposal provided four options for complying with the ability-to-repay requirement, including by making a “qualified mortgage.” First, the proposal would have allowed a creditor to meet the general ability-to-repay standard by originating a covered mortgage loan for which the creditor considered and verified eight underwriting factors in determining repayment ability, and, for adjustable rate loans, the mortgage payment calculation is based on the fully indexed rate.  Second, the proposal would have allowed a creditor to refinance a “non-standard mortgage” into a “standard mortgage.”  Under this option, the proposal would not have required the creditor to verify the consumer's income or assets. Third, the proposal would have allowed a creditor to originate a qualified mortgage, which provides special protection from liability for creditors. Because the Board determined that it was unclear whether that protection is intended to be a safe harbor or a rebuttable presumption of compliance with the repayment ability requirement, the Board proposed two alternative definitions of a qualified mortgage.  Finally, the proposal would have allowed a small creditor operating predominantly in rural or underserved areas to originate a balloon-payment qualified mortgage if the loan term is five years or more, and the payment calculation is based on the scheduled periodic payments, excluding the balloon payment.  The Board's proposal also would have implemented the Dodd-Frank Act's limits on prepayment penalties, lengthened the time creditors must retain evidence of compliance with the ability-to-repay and prepayment penalty provisions, and prohibited evasion of the rule by structuring a closed-end extension of credit that does not meet the definition of an open-end plan. As discussed above, rulemaking authority under TILA generally transferred from the Board to the Bureau in July 2011, including the authority under Dodd-Frank Act section 1412 to prescribe regulations to carry out the purposes of the qualified mortgage rules. 12 U.S.C. 5512; 12 U.S.C. 5581; 15 U.S.C. 1639c. As discussed above, TILA section 105(a) directs the Bureau to prescribe regulations to carry out the purposes of TILA. Except with respect to the substantive restrictions on high-cost mortgages provided in TILA section 129, TILA section 105(a) authorizes the Bureau to prescribe regulations that 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 determines are necessary or proper to effectuate the purposes of TILA, to prevent circumvention or evasion thereof, or to facilitate compliance therewith.
B. Comments and Post-Proposal Outreach
The Board received numerous comments on the proposal, including comments regarding the criteria for a “qualified mortgage” and whether a qualified mortgage provides a safe harbor or a presumption of compliance with the repayment ability requirements. As noted above, in response to the proposed rule, the Board received approximately 1,800 letters from commenters, including members of Congress, creditors, consumer groups, trade associations, mortgage and real estate market participants, and individual consumers. As of July 21, 2011, the Dodd-Frank Act generally transferred the Board's rulemaking authority for TILA, among other Federal consumer financial laws, to the Bureau. Accordingly, all comment letters on the proposed rule were also transferred to the Bureau. Materials submitted were filed in the record and are publicly available at http://www.regulations.gov.
Through various comment letters and the Bureau's own collection of data, the Bureau received additional information and new data pertaining to the proposed rule. Accordingly, in May 2012, the Bureau reopened the comment period in order to solicit further comment on data and new information, including data that may assist the Bureau in defining loans with characteristics that make it appropriate to presume that the creditor complied with the ability-to-repay requirements or assist the Bureau in assessing the benefits and costs to consumers, including access to credit, and covered persons, as well as the market share covered by, alternative definitions of a “qualified mortgage.” The Bureau received approximately 160 comments in response to the reopened comment period from a variety of commenters, including creditors, consumer groups, trade associations, mortgage and real estate market participants, individuals, small entities, the SBA's Office of Advocacy, and FHA. As discussed in more detail below, the Bureau has considered these comments in adopting this final rule.
C. Other Rulemakings
In addition to this final rule, the Bureau is adopting several other final rules and issuing one proposal, all relating to mortgage credit to implement requirements of title XIV of the Dodd-Frank Act. The Bureau is also issuing a final rule jointly with other Federal agencies to implement requirements for mortgage appraisals in title XIV. Each of the final rules follows a proposal issued in 2011 by the Board or in 2012 by the Bureau alone or jointly with other Federal agencies. Collectively, these proposed and final rules are referred to as the Title XIV Rulemakings.
- Ability to Repay: Simultaneously with this final rule (the 2013 ATR Final Rule), the Bureau is issuing a proposal to amend certain provisions of the final rule, including by the addition of exemptions for certain nonprofit creditors and certain homeownership stabilization programs and a definition of a “qualified mortgage” for certain loans made and held in portfolio by small creditors (the 2013 ATR Concurrent Proposal). The Bureau expects to act on the 2013 ATR Concurrent Proposal on an expedited basis, so that any exceptions or adjustments can take effect simultaneously with this final rule.
- Escrows: The Bureau is finalizing a rule, following a March 2011 proposal issued by the Board (the Board's 2011 Escrows Proposal),  to implement certain provisions of the Dodd-Frank Act expanding on existing rules that require escrow accounts to be established for higher-priced mortgage loans and creating an exemption for certain loans held by creditors operating predominantly in rural or underserved areas, pursuant to TILA section 129D as established by Dodd-Frank Act sections 1461. 15 U.S.C. 1639d. The Bureau's final rule is referred to as the 2013 Escrows Final Rule.
- HOEPA: Following its July 2012 proposal (the 2012 HOEPA Proposal),  the Bureau is issuing a final rule to implement Dodd-Frank Act requirements expanding protections for “high-cost mortgages” under the Homeownership and Equity Protection Act (HOEPA), pursuant to TILA sections 103(bb) and 129, as amended by Dodd-Frank Act sections 1431 through 1433. 15 U.S.C. 1602(bb) and 1639. The Bureau also is finalizing rules to implement certain title XIV requirements concerning homeownership counseling, including a requirement that creditors provide lists of homeownership counselors to applicants for federally related mortgage loans, pursuant to RESPA section 5(c), as amended by Dodd-Frank Act section 1450. 12 U.S.C. 2604(c). The Bureau's final rule is referred to as the 2013 HOEPA Final Rule.
- Servicing: Following its August 2012 proposals (the 2012 RESPA Servicing Proposal and 2012 TILA Servicing Proposal),  the Bureau is adopting final rules to implement Dodd-Frank Act requirements regarding force-placed insurance, error resolution, information requests, and payment crediting, as well as requirements for mortgage loan periodic statements and adjustable-rate mortgage reset disclosures, pursuant to section 6 of RESPA and sections 128, 128A, 129F, and 129G of TILA, as amended or established by Dodd-Frank Act sections 1418, 1420, 1463, and 1464. 12 U.S.C. 2605; 15 U.S.C. 1638, 1638a, 1639f, and 1639g. The Bureau also is finalizing rules on early intervention for troubled and delinquent consumers, and loss mitigation procedures, pursuant to the Bureau's authority under section 6 of RESPA, as amended by Dodd-Frank Act section 1463, to establish obligations for mortgage servicers that it finds to be appropriate to carry out the consumer protection purposes of RESPA, and its authority under section 19(a) of RESPA to prescribe rules necessary to achieve the purposes of RESPA. The Bureau's final rule under RESPA with respect to mortgage servicing also establishes requirements for general servicing standards policies and procedures and continuity of contact pursuant to its authority under section 19(a) of RESPA. The Bureau's final rules are referred to as the 2013 RESPA Servicing Final Rule and the 2013 TILA Servicing Final Rule, respectively.
- Loan Originator Compensation: Following its August 2012 proposal (the 2012 Loan Originator Proposal),  the Bureau is issuing a final rule to implement provisions of the Dodd-Frank Act requiring certain creditors and loan originators to meet certain duties of care, including qualification requirements; requiring the establishment of certain compliance procedures by depository institutions; prohibiting loan originators, creditors, and the affiliates of both from receiving compensation in various forms (including based on the terms of the transaction) and from sources other than the consumer, with specified exceptions; and establishing restrictions on mandatory arbitration and financing of single premium credit insurance, pursuant to TILA sections 129B and 129C as established by Dodd-Frank Act sections 1402, 1403, and 1414(a). 15 U.S.C. 1639b, 1639c. The Bureau's final rule is referred to as the 2013 Loan Originator Final Rule.
- Appraisals: The Bureau, jointly with other Federal agencies,  is issuing a final rule implementing Dodd-Frank Act requirements concerning appraisals for higher-risk mortgages, pursuant to TILA section 129H as established by Dodd-Frank Act section 1471. 15 U.S.C. 1639h. This rule follows the agencies' August 2012 joint proposal (the 2012 Interagency Appraisals Proposal).  The agencies' joint final rule is referred to as the 2013 Interagency Appraisals Final Rule. In addition, following its August 2012 proposal (the 2012 ECOA Appraisals Proposal),  the Bureau is issuing a final rule to implement provisions of the Dodd-Frank Act requiring that creditors provide applicants with a free copy of written appraisals and valuations developed in connection with applications for loans secured by a first lien on a dwelling, pursuant to section 701(e) of the Equal Credit Opportunity Act (ECOA) as amended by Dodd-Frank Act section 1474. 15 U.S.C. 1691(e). The Bureau's final rule is referred to as the 2013 ECOA Appraisals Final Rule.
The Bureau is not at this time finalizing proposals concerning various disclosure requirements that were added by title XIV of the Dodd-Frank Act, integration of mortgage disclosures under TILA and RESPA, or a simpler, more inclusive definition of the finance charge for purposes of disclosures for closed-end mortgage transactions under Regulation Z. The Bureau expects to finalize these proposals and to consider whether to adjust regulatory thresholds under the Title XIV Rulemakings in connection with any change in the calculation of the finance charge later in 2013, after it has completed quantitative testing, and any additional qualitative testing deemed appropriate, of the forms that it proposed in July 2012 to combine TILA mortgage disclosures with the good faith estimate (RESPA GFE) and settlement statement (RESPA settlement statement) required under the Real Estate Settlement Procedures Act, pursuant to Dodd-Frank Act section 1032(f) and sections 4(a) of RESPA and 105(b) of TILA, as amended by Dodd-Frank Act sections 1098 and 1100A, respectively (the 2012 TILA-RESPA Proposal).  Accordingly, the Bureau already has issued a final rule delaying implementation of various affected title XIV disclosure provisions.  The Bureau's approaches to coordinating the implementation of the Title XIV Rulemakings and to the finance charge proposal are discussed in turn below.
Coordinated Implementation of Title XIV Rulemakings
As noted in all of its foregoing proposals, the Bureau regards each of the Title XIV Rulemakings as affecting aspects of the mortgage industry and its regulations. Accordingly, as noted in its proposals, the Bureau is coordinating carefully the Title XIV Rulemakings, particularly with respect to their effective dates. The Dodd-Frank Act requirements to be implemented by the Title XIV Rulemakings generally will take effect on January 21, 2013, unless final rules implementing those requirements are issued on or before that date and provide for a different effective date. See Dodd-Frank Act section 1400(c), 15 U.S.C. 1601 note. In addition, some of the Title XIV Rulemakings are to take effect no later than one year after they are issued. Id.
The comments on the appropriate effective date for this final rule are discussed in detail below in part VI of this notice. In general, however, consumer advocates requested that the Bureau put the protections in the Title XIV Rulemakings into effect as soon as practicable. In contrast, the Bureau received some industry comments indicating that implementing so many new requirements at the same time would create a significant cumulative burden for creditors. In addition, many commenters also acknowledged the advantages of implementing multiple revisions to the regulations in a coordinated fashion.  Thus, a tension exists between coordinating the adoption of the Title XIV Rulemakings and facilitating industry's implementation of such a large set of new requirements. Some have suggested that the Bureau resolve this tension by adopting a sequenced implementation, while others have requested that the Bureau simply provide a longer implementation period for all of the final rules.
The Bureau recognizes that many of the new provisions will require creditors to make changes to automated systems and, further, that most administrators of large systems are reluctant to make too many changes to their systems at once. At the same time, however, the Bureau notes that the Dodd-Frank Act established virtually all of these changes to institutions' compliance responsibilities, and contemplated that they be implemented in a relatively short period of time. And, as already noted, the extent of interaction among many of the Title XIV Rulemakings necessitates that many of their provisions take effect together. Finally, notwithstanding commenters' expressed concerns for cumulative burden, the Bureau expects that creditors actually may realize some efficiencies from adapting their systems for compliance with multiple new, closely related requirements at once, especially if given sufficient overall time to do so.
Accordingly, the Bureau is requiring that, as a general matter, creditors and other affected persons begin complying with the final rules on January 10, 2014. As noted above, section 1400(c) of the Dodd-Frank Act requires that some provisions of the Title XIV Rulemakings take effect no later than one year after the Bureau issues them. Accordingly, the Bureau is establishing January 10, 2014, one year after issuance of this final rule and the Bureau's 2013 Escrows and HOEPA Final Rules (i.e., the earliest of the title XIV final rules), as the baseline effective date for most of the Title XIV Rulemakings. The Bureau believes that, on balance, this approach will facilitate the implementation of the rules' overlapping provisions, while also affording creditors sufficient time to implement the more complex or resource-intensive new requirements.
The Bureau has identified certain rulemakings or selected aspects thereof, however, that do not present significant implementation burdens for industry. Accordingly, the Bureau is setting earlier effective dates for those final rules or certain aspects thereof, as applicable. Those effective dates are set forth and explained in the Federal Register s notices for those final rules.
More Inclusive Finance Charge Proposal
As noted above, the Bureau proposed in the 2012 TILA-RESPA Proposal to make the definition of finance charge more inclusive, thus rendering the finance charge and annual percentage rate a more useful tool for consumers to compare the cost of credit across different alternatives. 77 FR 51116, 51143 (Aug. 23, 2012). Because the new definition would include additional costs that are not currently counted, it would cause the finance charges and APRs on many affected transactions to increase. This in turn could cause more such transactions to become subject to various compliance regimes under Regulation Z. Specifically, the finance charge is central to the calculation of a transaction's “points and fees,” which in turn has been (and remains) a coverage threshold for the special protections afforded “high-cost mortgages” under HOEPA. Points and fees also will be subject to a 3-percent limit for purposes of determining whether a transaction is a “qualified mortgage” under this final rule. Meanwhile, the APR serves as a coverage threshold for HOEPA protections as well as for certain protections afforded “higher-priced mortgage loans” under § 1026.35, including the mandatory escrow account requirements being amended by the 2013 Escrows Final Rule. Finally, because the 2013 Interagency Appraisals Final Rule uses the same APR-based coverage test as is used for identifying higher-priced mortgage loans, the APR affects that rulemaking as well. Thus, the proposed more inclusive finance charge would have had the indirect effect of increasing coverage under HOEPA and the escrow and appraisal requirements for higher-priced mortgage loans, as well as decreasing the number of transactions that may be qualified mortgages—even holding actual loan terms constant—simply because of the increase in calculated finance charges, and consequently APRs, for closed-end mortgage transactions generally.
As noted above, these expanded coverage consequences were not the intent of the more inclusive finance charge proposal. Accordingly, as discussed more extensively in the Escrows Proposal, the HOEPA Proposal, the ATR Proposal, and the Interagency Appraisals Proposal, the Board and subsequently the Bureau (and other agencies) sought comment on certain adjustments to the affected regulatory thresholds to counteract this unintended effect. First, the Board and then the Bureau proposed to adopt a “transaction coverage rate” for use as the metric to determine coverage of these regimes in place of the APR. The transaction coverage rate would have been calculated solely for coverage determination purposes and would not have been disclosed to consumers, who still would have received only a disclosure of the expanded APR. The transaction coverage rate calculation would exclude from the prepaid finance charge all costs otherwise included for purposes of the APR calculation except charges retained by the creditor, any mortgage broker, or any affiliate of either. Similarly, the Board and Bureau proposed to reverse the effects of the more inclusive finance charge on the calculation of points and fees; the points and fees figure is calculated only as a HOEPA and qualified mortgage coverage metric and is not disclosed to consumers. The Bureau also sought comment on other potential mitigation measures, such as adjusting the numeric thresholds for particular compliance regimes to account for the general shift in affected transactions' APRs.
The Bureau's 2012 TILA-RESPA Proposal sought comment on whether to finalize the more inclusive finance charge proposal in conjunction with the Title XIV Rulemakings or with the rest of the TILA-RESPA Proposal concerning the integration of mortgage disclosure forms. 77 FR 51116, 51125 (Aug. 23, 2012). Upon additional consideration and review of comments received, the Bureau decided to defer a decision whether to adopt the more inclusive finance charge proposal and any related adjustments to regulatory thresholds until it later finalizes the TILA-RESPA Proposal. 77 FR 54843 (Sept. 6, 2012); 77 FR 54844 (Sept. 6, 2012).  Accordingly, this final rule and the 2013 Escrows, HOEPA, and Interagency Appraisals Final Rules all are deferring any action on their respective proposed adjustments to regulatory thresholds.
IV. Legal Authority Back to Top
The final rule was issued on January 10, 2013, in accordance with 12 CFR 1074.1. The Bureau issued this final rule pursuant to its authority under TILA and the Dodd-Frank Act. See TILA section 105(a), 15 U.S.C. 1604(a). On July 21, 2011, section 1061 of the Dodd-Frank Act transferred to the Bureau the “consumer financial protection functions” previously vested in certain other Federal agencies, including the Board. The term “consumer financial protection function” is defined to include “all authority to prescribe rules or issue orders or guidelines pursuant to any Federal consumer financial law, including performing appropriate functions to promulgate and review such rules, orders, and guidelines.”  TILA is defined as a Federal consumer financial law.  Accordingly, the Bureau has authority to issue regulations pursuant to TILA.
A. TILA Ability-to-Repay and Qualified Mortgage Provisions
As discussed above, the Dodd-Frank Act amended TILA to generally prohibit a creditor from making a residential mortgage loan without a reasonable and good faith determination that, at the time the loan is consummated, the consumer has a reasonable ability to repay the loan, along with taxes, insurance, and assessments. TILA section 129C(a), 15 U.S.C. 1639c(a). As described below in part IV.B, the Bureau has authority to prescribe regulations to carry out the purposes of TILA pursuant to TILA section 105(a). 15 U.S.C. 1604(a). In particular, it is the purpose of TILA section 129C, as amended by the Dodd-Frank Act, to assure that consumers are offered and receive residential mortgage loans on terms that reasonably reflect their ability to repay the loans and that are understandable and not unfair, deceptive, and abusive. TILA section 129B(a)(2); 15 U.S.C. 1639b(a)(2).
The Dodd-Frank Act also provides creditors originating “qualified mortgages” special protection from liability under the ability-to-repay requirements. TILA section 129C(b), 15 U.S.C. 1639c(b). TILA generally defines a “qualified mortgage” as a residential mortgage loan for which: the loan does not contain negative amortization, interest-only payments, or balloon payments; the term does not exceed 30 years; the points and fees generally do not exceed three percent of the loan amount; the income or assets are considered and verified; and the underwriting is based on the maximum rate during the first five years, uses a payment schedule that fully amortizes the loan over the loan term, and takes into account all mortgage-related obligations. TILA section 129C(b)(2), 15 U.S.C. 1639c(b)(2). In addition, to constitute a qualified mortgage a loan must meet “any guidelines or regulations established by the Bureau relating to ratios of total monthly debt to monthly income or alternative measures of ability to pay regular expenses after payment of total monthly debt, taking into account the income levels of the borrower and such other factors as the Bureau may determine are relevant and consistent with the purposes described in [TILA section 129C(b)(3)(B)(i)].”
The Dodd-Frank Act also provides the Bureau with authority to prescribe regulations that revise, add to, or subtract from the criteria that define a qualified mortgage upon a finding that such regulations are necessary or proper to ensure that responsible, affordable mortgage credit remains available to consumers in a manner consistent with the purposes of the ability-to-repay requirements; or are necessary and appropriate to effectuate the purposes of the ability-to-repay requirements, to prevent circumvention or evasion thereof, or to facilitate compliance with TILA sections 129B and 129C. TILA section 129C(b)(3)(B)(i), 15 U.S.C. 1639c(b)(3)(B)(i). In addition, TILA section 129C(b)(3)(A) provides the Bureau with authority to prescribe regulations to carry out the purposes of the qualified mortgage provisions, such as to ensure that responsible, affordable mortgage credit remains available to consumers in a manner consistent with the purposes of TILA section 129C. TILA section 129C(b)(3)(A), 15 U.S.C. 1939c(b)(3)(A). As discussed in the section-by-section analysis below, the Bureau is issuing certain provisions of this rule pursuant to its authority under TILA section 129C(b)(3)(B)(i).
The Dodd-Frank Act provides the Bureau with other specific grants of rulewriting authority with respect to the ability-to-repay and qualified mortgage provisions. With respect to the ability-to-repay provisions, TILA section 129C(a)(6)(D)(i) through (iii) provides that when calculating the payment obligation that will be used to determine whether the consumer can repay a covered transaction, the creditor must use a fully amortizing payment schedule and assume that: (1) The loan proceeds are fully disbursed on the date the loan is consummated; (2) the loan is repaid in substantially equal, monthly amortizing payments for principal and interest over the entire term of the loan with no balloon payment; and (3) the interest rate over the entire term of the loan is a fixed rate equal to the fully indexed rate at the time of the loan closing, without considering the introductory rate. 15 U.S.C. 1639c(a)(6)(D)(i) through (iii). However, TILA section 129C(a)(6)(D) authorizes the Bureau to prescribe regulations for calculating the payment obligation for loans that require more rapid repayment (including balloon payments), and which have an annual percentage rate that does not exceed a certain rate threshold. 15 U.S.C. 1639c(a)(6)(D).
With respect to the qualified mortgage provisions, the Dodd-Frank Act contains several specific grants of rulewriting authority. First, as described above, for purposes of defining “qualified mortgage,” TILA section 129C(b)(2)(A)(vi) provides the Bureau with authority to establish guidelines or regulations relating to monthly debt-to-income ratios or alternative measures of ability to pay. Second, TILA section 129C(b)(2)(D) provides that the Bureau shall prescribe rules adjusting the qualified mortgage points and fees limits described above to permit creditors that extend smaller loans to meet the requirements of the qualified mortgage provisions. 15 U.S.C. 1639c(b)(2)(D)(ii). In prescribing such rules, the Bureau must consider their potential impact on rural areas and other areas where home values are lower. Id. Third, TILA section 129C(b)(2)(E) provides the Bureau with authority to include in the definition of “qualified mortgage” loans with balloon payment features, if those loans meet certain underwriting criteria and are originated by creditors that operate predominantly in rural or underserved areas, have total annual residential mortgage originations that do not exceed a limit set by the Bureau, and meet any asset size threshold and any other criteria as the Bureau may establish, consistent with the purposes of TILA. 15 U.S.C. 1639c(b)(2)(E). As discussed in the section-by-section analysis below, the Bureau is issuing certain provisions of this rule pursuant to its authority under TILA sections 129C(a)(6)(D), (b)(2)(A)(vi), (b)(2)(D), and (b)(2)(E).
B. Other Rulemaking and Exception Authorities
This final rule also relies on other rulemaking and exception authorities specifically granted to the Bureau by TILA and the Dodd-Frank Act, including the authorities discussed below.
TILA section 105(a). As amended by the Dodd-Frank Act, TILA section 105(a), 15 U.S.C. 1604(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. 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.” TILA section 102(a), 15 U.S.C. 1601(a). This stated purpose is informed by Congress's finding that “economic stabilization would be enhanced and the competition among the various financial institutions and other firms engaged in the extension of consumer credit would be strengthened by the informed use of credit[.]” TILA section 102(a). Thus, strengthened competition among financial institutions is a goal of TILA, achieved through the effectuation of TILA's purposes.
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. However, Dodd-Frank Act section 1100A clarified the Bureau's section 105(a) authority by amending that section to provide express authority to prescribe regulations that contain “additional requirements” that the Bureau finds are necessary or proper to effectuate the purposes of TILA, to prevent circumvention or evasion thereof, or to facilitate compliance therewith. This amendment clarified the authority to exercise TILA section 105(a) to prescribe requirements beyond those specifically listed in the statute that meet the standards outlined in section 105(a). The Dodd-Frank Act also clarified the Bureau's rulemaking authority over high-cost mortgages under HOEPA pursuant to 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 substantive provisions of TILA section 129, 15 U.S.C. 1639, that apply to the high-cost mortgages defined in TILA section 103(bb), 15 U.S.C. 1602(bb).
TILA, as amended by the Dodd-Frank Act, states that it is the purpose of the ability-to-repay requirements of TILA section 129C to assure that consumers are offered and receive residential mortgage loans on terms that reasonably reflect their ability to repay the loans and that are understandable and not unfair, deceptive, or abusive. TILA section 129B(a)(2). The Bureau interprets this addition as a new purpose of TILA. Therefore, the Bureau believes that its authority under TILA section 105(a) to make exceptions, adjustments, and additional provisions, among other things, that the Bureau finds are necessary or proper to effectuate the purposes of TILA, to prevent circumvention or evasion thereof, or to facilitate compliance therewith applies with respect to the purpose of section 129C as well as the purpose described in section TILA section 129B(a)(2).
The purpose of TILA section 129C is 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.
As discussed in the section-by-section analysis below, the Bureau is issuing regulations to carry out TILA's purposes, including 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 therewith. In developing these aspects of the final rule pursuant to its authority under TILA section 105(a), the Bureau has considered the purposes of TILA, including the purposes of TILA section 129C, and the findings of TILA, including strengthening competition among financial institutions and promoting economic stabilization, and the 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. The Bureau believes that ensuring that mortgage credit is offered and received on terms consumers can afford ensures the availability of responsible, affordable mortgage credit.
TILA section 129B(e). Dodd-Frank Act section 1405(a) amended TILA to add new section 129B(e), 15 U.S.C. 1639B(e). That section authorizes the Bureau to prohibit or condition terms, acts, or practices relating to residential mortgage loans that the Bureau finds to be abusive, unfair, deceptive, predatory, necessary or proper to ensure that responsible, affordable mortgage credit remains available to consumers in a manner consistent with the purposes of TILA section 129C, necessary or proper to effectuate the purposes of sections 129B and 129C, to prevent circumvention or evasion thereof, or to facilitate compliance with such sections, or are not in the interest of the consumer. In developing rules under TILA section 129B(e), the Bureau has considered whether the rules are in the interest of the consumer, as required by the statute. As discussed in the section-by-section analysis below, the Bureau is issuing portions of this rule pursuant to its authority under TILA section 129B(e).
The Dodd-Frank Act
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.” 12 U.S.C. 5512(b)(1). TILA and title X of the Dodd-Frank Act are Federal consumer financial laws. Accordingly, 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 and prevent evasion of those laws.
V. Section-by-Section Analysis Back to Top
Section 1026.25Record Retention
25(a) General Rule
Section 1416 of the Dodd-Frank Act revised TILA section 130(e) to extend the statute of limitations for civil liability for a violation of TILA section 129C, as well as sections 129 and 129B, to three years after the date a violation occurs. Existing § 1026.25(a) requires that creditors retain evidence of compliance with Regulation Z for two years after disclosures must be made or action must be taken. Accordingly, the Board proposed to revise § 226.25(a)  to require that creditors retain records that show compliance with proposed § 226.43, which would implement TILA section 129C, for at least three years after consummation. The Board did not propose to alter the regulation's existing clarification that administrative agencies responsible for enforcing Regulation Z may require creditors under the agency's jurisdiction to retain records for a longer period, if necessary to carry out the agency's enforcement responsibilities under TILA section 108, 15 U.S.C. 1607. Under TILA section 130(e), as amended by Dodd-Frank, the statute of limitations for civil liability for a violation of other sections of TILA remains one year after the date a violation occurs, except for private education loans under 15 U.S.C. 1650(a), actions brought under section 129 or 129B, or actions brought by a State attorney general to enforce a violation of section 129, 129B, 129C, 129D, 129E, 129F, 129G, or 129H. 15 U.S.C. 1640(e). Moreover, as amended by section 1413 of the Dodd-Frank Act, TILA provides that when a creditor, an assignee, other holder or their agent initiates a foreclosure action, a consumer may assert a violation of TILA section 129C(a) “as a matter of defense by recoupment or setoff.” TILA section 130(k). There is no time limit on the use of this defense.
As discussed below, the Bureau is adopting minor modifications to § 1026.25(a) and adding in new § 1026.25(c) to reflect section 1416 of the Dodd-Frank Act, in § 1026.25(c)(3) as well as other exceptional record retention requirements related to mortgage loans.
25(c) Records Related to Certain Requirements for Mortgage Loans
The Bureau is adopting the revision proposed in § 226.25(a) to require a creditor to retain records demonstrating compliance with § 1026.43 consistent with the extended statute of limitations for violations of that section, though the Bureau is adopting this requirement in § 1026.25(c)(3) to provide additional clarity. As the 2012 TILA-RESPA Proposal proposed new § 1026.25(c)(1) and the 2012 Loan Originator Proposal proposed new § 1026.25(c)(2), the Bureau concludes that adding new § 1026.25(c)(3) eases compliance burden by placing all record retention requirements that are related to mortgage loans and which differ from the general record retention in one section, § 1026.25(c). Likewise, the Bureau is amending § 1026.25(a) to reflect that certain record retention requirements, such as records related to minimum standards for transactions secured by a dwelling, are governed by § 1026.43(c).
Commenters did not provide the Bureau with significant, specific feedback with respect to proposed § 226.25(a), although industry commenters generally expressed concern with respect to the compliance burden of the 2011 ATR Proposal. Increasing the period a creditor must retain records from two to three years may impose some marginal increase in the creditor's compliance burden in the form of incremental cost of storage. However, the Bureau believes that even absent the rule, responsible creditors will likely elect to retain records of compliance with § 1026.43 for a period of time well beyond three years, given that the statute allows consumers to bring a defensive claim for recoupment or setoff in the event that a creditor or assignee initiates foreclosure proceedings. Indeed, at least one commenter noted this tension and requested that the Bureau provide further regulatory instruction, although the Bureau does not deem it necessary to mandate recordkeeping burdens beyond what is required by section 1416 of the Dodd-Frank Act. Furthermore, the record-keeping burden imposed by the rule is tailored only to show compliance with § 1026.43, and the Bureau believes is justified to protect the interests of both creditors and consumers in the event that an affirmative claim is brought during the first three years after consummation.
The Bureau believes that calculating the record retention period under § 1026.43 from loan consummation facilitates compliance by establishing a single, clear start to the period, even though a creditor will take action (e.g., underwriting the covered transaction and offering a consumer the option of a covered transaction without a prepayment penalty) over several days or weeks prior to consummation. The Bureau is thus adopting the timeframe as proposed to reduce compliance burden.
Existing comment 25(a)-2 clarifies that, in general, a creditor need retain only enough information to reconstruct the required disclosures or other records. The Board proposed, and the Bureau is adopting, amendments to comment 25(a)-2 and a new comment 25(c)(3)-1 to clarify that, if a creditor must verify and document information used in underwriting a transaction subject to § 1026.43, the creditor must retain evidence sufficient to demonstrate having done so, in compliance with § 1026.25(a) and § 1026.25(c)(3). In an effort to reduce compliance burden, comment 25(c)(3)-1 also clarifies that creditors need not retain actual paper copies of the documentation used to underwrite a transaction but that creditors must be able to reproduce those records accurately.
The Board proposed comment 25(a)-7 to provide guidance on retaining records evidencing compliance with the requirement to offer a consumer an alternative covered transaction without a prepayment penalty, as discussed below in the section-by-section analysis of § 1026.43(g)(3) through (5). The Bureau believes the requirement to offer a transaction without a prepayment penalty under TILA section 129C(c)(4) is intended to ensure that consumers who choose an alternative covered transaction with a prepayment penalty do so voluntarily. The Bureau further believes it is unnecessary, and contrary to the Bureau's efforts to streamline its regulations, facilitate regulatory compliance, and minimize compliance burden, for a creditor to document compliance with the requirement to offer an alternative covered transaction without a prepayment penalty when a consumer does not choose a transaction with a prepayment penalty or if the covered transaction is not consummated. Accordingly, the Bureau is adopting as proposed comment 25(a)-7 as comment 25(c)(3)-2, to clarify that a creditor must retain records that document compliance with that requirement if a transaction subject to § 1026.43 is consummated with a prepayment penalty, but need not retain such records if a covered transaction is consummated without a prepayment penalty or a covered transaction is not consummated. See§ 1026.43(g)(6).
The Board proposed comment 25(a)-7 also to provide specific guidance on retaining records evidencing compliance with the requirement to offer a consumer an alternative covered transaction without a prepayment penalty when a creditor offers a transaction through a mortgage broker. As discussed in detail below in the section-by-section analysis of § 1026.43(g)(4), the Board proposed that if the creditor offers a covered transaction with a prepayment penalty through a mortgage broker, the creditor must present the mortgage broker an alternative covered transaction without a prepayment penalty. Also, the creditor must provide, by agreement, for the mortgage broker to present to the consumer that transaction or an alternative covered transaction without a prepayment penalty offered by another creditor that has a lower interest rate or a lower total dollar amount of origination points or fees and discount points than the creditor's presented alternative covered transaction. The Bureau did not receive significant comment on this clarification, and is adopting the comment largely as proposed, renumbered as comment 25(c)(3)-2. Comment 25(c)(3)-2 also clarifies that, to demonstrate compliance with § 1026.43(g)(4), the creditor must retain a record of (1) the alternative covered transaction without a prepayment penalty presented to the mortgage broker pursuant to § 1026.43(g)(4)(i), such as a rate sheet, and (2) the agreement with the mortgage broker required by § 1026.34(g)(4)(ii).
Section 1026.32Requirements for High-Cost Mortgages
Points and Fees—General
Section 1412 of the Dodd-Frank Act added TILA section 129C(b)(2)(A)(vii), which defines a “qualified mortgage” as a loan for which, among other things, the total “points and fees” do not exceed 3 percent of the total loan amount. The limits on points and fees for qualified mortgages are implemented in new § 1026.43(e)(3).
TILA section 129C(b)(2)(C) generally defines “points and fees” for qualified mortgages to have the same meaning as in TILA section 103(aa)(4) (renumbered as section 103(bb)(4)), which defines “points and fees” for the purpose of determining whether a transaction qualifies as a high-cost mortgage under HOEPA.  TILA section 103(aa)(4) is implemented in current § 1026.32(b)(1). Accordingly, the Board proposed in § 226.43(b)(9) that, for a qualified mortgage, “points and fees” has the same meaning as in § 226.32(b)(1).
The Board also proposed in the 2011 ATR Proposal to amend § 226.32(b)(1) to implement revisions to the definition of “points and fees” under section 1431 of the Dodd-Frank Act. Among other things, the Dodd-Frank Act excluded certain private mortgage insurance premiums from, and added loan originator compensation and prepayment penalties to, the definition of “points and fees” that had previously applied to high-cost mortgage loans under HOEPA. In the Bureau's 2012 HOEPA Proposal, the Bureau republished the Board's proposed revisions to § 226.32(b)(1), with only minor changes, in renumbered § 1026.32(b)(1).
The Bureau noted in its 2012 HOEPA Proposal that it was particularly interested in receiving comments concerning any newly-proposed language and the application of the definition in the high-cost mortgage context. The Bureau received numerous comments from both industry and consumer advocacy groups, the majority of which were neither specific to newly-proposed language nor to the application of the definition to high-cost mortgages. These comments largely reiterated comments that the Board and the Bureau had received in the ATR rulemaking docket. The Bureau is addressing comments received in response to 2012 HOEPA Proposal in the 2013 HOEPA Final Rule. Similarly, comments received in response to the Board's 2011 ATR Proposal are discussed in this final rule. The Bureau is carefully coordinating the 2013 HOEPA and ATR Final Rules to ensure a consistent and cohesive regulatory framework. The Bureau is now finalizing § 1026.32(b)(1), (b)(3), (b)(4)(i), (b)(5), and (b)(6)(i) in this rule in response to the comments received on both proposals. The Bureau is finalizing § 1026.32(b)(2), (b)(4)(ii), and (b)(6)(ii) in the 2013 HOEPA Final Rule.
Existing § 1026.32(b)(1) defines “points and fees” by listing included charges in § 1026.32(b)(1)(i) through (iv). As discussed below, the Board proposed revisions to § 226.32(b)(1)(i) through (iv) and proposed to add new § 226.32(b)(1)(v) and (vi). In the 2012 HOEPA Proposal, the Bureau proposed to add the phrase “in connection with a closed-end mortgage loan” to § 1026.32(b)(1) to clarify that its definition of “points and fees” would have applied only for closed-end mortgages. The Bureau also proposed to define “points and fees” in § 1026.32(b)(3) for purposes of defining which open-end credit plans qualify as “high-cost mortgages” under HOEPA. However, that section is not relevant to this rulemaking because the ability-to-repay requirement in TILA section 129C does not apply to open-end credit. Accordingly, the Bureau is adopting § 1026.32(b)(1) with the clarification that its definition of “points and fees” is “in connection with a closed-end mortgage loan.”
Payable at or before consummation. In the 2011 ATR Proposal, the Board noted that the Dodd-Frank Act removed the phrase “payable at or before closing” from the high-cost mortgage points and fees test in TILA section 103(aa)(1)(B). See TILA section 103(bb)(1)(A)(ii). Prior to the Dodd-Frank Act, fees and charges were included in points and fees for the high-cost mortgage points and fees test only if they were payable at or before closing. The phrase “payable at or before closing” is also not in TILA's provisions on the points and fees cap for qualified mortgages. See TILA section 129C(b)(2)(A)(vii), (b)(2)(C). Thus, the Board stated that, with a few exceptions, the statute provides that any charge that falls within the “points and fees” definition must be counted toward the limits on points and fees for both high-cost mortgages and qualified mortgages, even if it is payable after loan closing. The Board noted that the exceptions are mortgage insurance premiums and charges for credit insurance and debt cancellation and suspension coverage. The statute expressly states that these premiums and charges are included in points and fees only if payable at or before closing. See TILA section 103(bb)(1)(C) (for mortgage insurance) and TILA section 103(bb)(4)(D) (for credit insurance and debt cancellation and suspension coverage).
The Board expressed concern that some fees that occur after closing, such as fees to modify a loan, might be deemed to be points and fees. If so, the Board cautioned that calculating the points and fees to determine whether a transaction is a qualified mortgage may be difficult because the amount of future fees (e.g., loan modification fees) cannot be known prior to closing. The Board noted that creditors might be exposed to excessive litigation risk if consumers were able at any point during the life of a mortgage to argue that the points and fees for the loan exceed the qualified mortgage limits due to fees imposed after loan closing. The Board expressed concern that creditors therefore might be discouraged from making qualified mortgages, which would undermine Congress's goal of increasing incentives for creditors to make more stable, affordable loans. The Board requested comment on whether any other types of fees should be included in points and fees only if they are “payable at or before closing.”
Several industry commenters stated that charges paid after closing should not be included in points and fees and requested that the Bureau clarify whether such charges are included. For example, some industry commenters sought confirmation that charges for a subsequent loan modification would not be included in points and fees. More generally, industry commenters argued that they would have difficulty calculating charges that would be paid after closing and that including such charges in points and fees would create uncertainty and litigation risk. In response to the Bureau's 2012 HOEPA Proposal, one consumer advocate noted that there are inconsistent and confusing standards for when charges must be payable to be included in points and fees. This commenter recommended that the Bureau adopt a “known at or before closing” standard, arguing that this standard would clarify that financed points are included, would prevent creditors from evading the points and fees test by requiring consumers to pay charges after consummation, and would provide certainty to creditors that must know the amount of points and fees at or before closing.
The Bureau appreciates that creditors need certainty in calculating points and fees so they can ensure that they are originating qualified mortgages (or are not exceeding the points and fees thresholds for high-cost mortgages). The Dodd-Frank Act provides that for the points and fees tests for both qualified mortgages and high-cost mortgages, only charges “payable in connection with” the transaction are included in points and fees. See TILA sections 103(bb)(1)(A)(ii) (high-cost mortgages) and 129C(b)(2)(A)(vii) (qualified mortgages). The Bureau interprets this “in connection with” requirement as limiting the universe of charges that need to be included in points and fees. To clarify when charges or fees are “in connection with” a transaction, the Bureau is specifying in § 1026.32(b)(1) that fees or charges are included in points and fees only if they are “known at or before consummation.”
The Bureau is also adding new comment 32(b)(1)-1, which provides examples of fees and charges that are and are not known at or before consummation. The comment explains that charges for a subsequent loan modification generally would not be included in points and fees because, at consummation, the creditor would not know whether a consumer would seek to modify the loan and therefore would not know whether charges in connection with a modification would ever be imposed. Indeed, loan modification fees likely would not be included in the finance charge under § 1026.4, as they would not be charges imposed by creditor as an incident to or a condition of the extension of credit. Thus, this clarification is consistent with the definition of the finance charge. Comment 32(b)(1)-1 also clarifies that the maximum prepayment penalties that may be charged or collected under the terms of a mortgage loan are included in points and fees under § 1026.32(b)(1)(v). In addition, comment 32(b)(1)-1 notes that, under § 1026.32(b)(1)(i)(C)(1) and (iv), premiums or other charges for private mortgage insurance and credit insurance payable after consummation are not included in points and fees. This means that such charges may be included in points and fees only if they are payable at or before consummation. Thus, even if the amounts of such premiums or other charges are known at or before consummation, they are included in points and fees only if they are payable at or before consummation.
Points and Fees—Included in the Finance Charge
TILA section 103(aa)(4)(A) specifies that “points and fees” includes all items included in the finance charge, except interest or the time-price differential. This provision is implemented in current § 1026.32(b)(1)(i). Section 1431 of the Dodd-Frank Act added TILA section 103(bb)(1)(C), which excludes from points and fees certain types and amounts of mortgage insurance premiums.
The Board proposed to revise § 226.32(b)(1)(i) to implement these provisions. The Board proposed to move the exclusion of interest or the time-price differential to new § 226.32(b)(1)(i)(A). The Board also proposed to add § 226.32(b)(1)(i)(B) to implement the new exclusion for certain mortgage insurance. In § 226.32(b)(1)(i), the Board proposed to revise the phrase “all items required to be disclosed under § 226.4(a) and 226.4(b)” to read “all items considered to be a finance charge under § 226.4(a) and 226.4(b)” because § 226.4 does not itself require disclosure of the finance charge.
One industry commenter argued that the definition of points and fees was overbroad because it included all items considered to be a finance charge. The commenter asserted that several items that are included in the finance charge under § 1026.4(b) are vague or inapplicable in the context of mortgage transactions or duplicate items specifically addressed in other provisions. Several industry commenters also requested clarification about whether certain types of fees and charges are included in points and fees. At least two commenters asked that the Bureau clarify that closing agent costs are not included in points and fees.
The Bureau is adopting renumbered § 1026.32(b)(1)(i) and (i)(A) substantially as proposed, with certain clarifications in the commentary and in other parts of the rule as discussed below to address commenters' requests for clarification. For consistency with the language in § 1026.4, the Bureau is revising § 1026.32(b)(1)(i) to refer to “items included in the finance charge” rather than “items considered to be a finance charge.”
As noted above, several commenters requested clarification regarding whether certain types of charges would be included in points and fees. With respect to closing agent charges, § 1026.4(a)(2) provides a specific rule for when such charges must be included in the finance charge. If they are not included in the finance charge