# High-Cost Mortgage and Homeownership Counseling Amendments to the Truth in Lending Act (Regulation Z) and Homeownership Counseling Amendments to the Real Estate Settlement Procedures Act (Regulation X) > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2012-17059 ## Record - **Collection:** Federal Register - **Document type:** Proposed Rule - **Published:** August 15, 2012 - **Citation:** 77 FR 49090 ## Text BUREAU OF CONSUMER FINANCIAL PROTECTION 12 CFR Parts 1024 and 1026 [Docket No. CFPB-2012-0029] RIN 3170-AA12 High-Cost Mortgage and Homeownership Counseling Amendments to the Truth in Lending Act (Regulation Z) and Homeownership Counseling Amendments to the Real Estate Settlement Procedures Act (Regulation X) AGENCY: Bureau of Consumer Financial Protection. ACTION: Proposed rule; request for public comment. SUMMARY: The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) amends the Truth in Lending Act by expanding the types of mortgage loans that are subject to the protections of the Home Ownership and Equity Protection Act of 1994 (HOEPA), by revising and expanding the triggers for coverage under HOEPA, and by imposing additional restrictions on HOEPA mortgage loans, including a pre-loan counseling requirement. The Dodd-Frank Act also amends the Truth in Lending Act and the Real Estate Settlement Procedures Act by imposing certain other requirements related to homeownership counseling. The Bureau of Consumer Financial Protection (Bureau) is proposing to amend Regulation Z (Truth in Lending) and Regulation X (Real Estate Settlement Procedures Act) to implement the Dodd-Frank Act's amendments to the Truth in Lending Act and the Real Estate Settlement Procedures Act. DATES: Comments must be received on or before September 7, 2012, except that comments on the Paperwork Reduction Act analysis in part VIII of this Federal Register notice must be received on or before October 15, 2012. ADDRESSES: You may submit comments, identified by Docket No. CFPB-2012-0029 or RIN 3170-AA12, by any of the following methods: • Electronic: http://www.regulations.gov. Follow the instructions for submitting comments. • Mail: Monica Jackson, Office of the Executive Secretary, Bureau of Consumer Financial Protection, 1700 G Street NW., Washington, DC 20552. • Hand Delivery/Courier in Lieu of Mail: Monica Jackson, Office of the Executive Secretary, Bureau of Consumer Financial Protection, 1700 G Street NW., Washington, DC 20552. All submissions must include the agency name and docket number or Regulatory Information Number (RIN) for this rulemaking. In general, all comments received will be posted without change to http://www.regulations.gov. In addition, comments will be available for public inspection and copying at 1700 G Street NW., Washington, DC 20552, on official business days between the hours of 10 a.m. and 5 p.m. Eastern Time. You can make an appointment to inspect the documents by telephoning (202) 435-7275. All comments, including attachments and other supporting materials, will become part of the public record and subject to public disclosure. Sensitive personal information, such as account numbers or Social Security numbers, should not be included. Comments will not be edited to remove any identifying or contact information. FOR FURTHER INFORMATION CONTACT: Paul Ceja, Senior Counsel & Special Advisor; Stephen Shin and Pavneet Singh, Senior Counsels; and Courtney Jean, Counsel, Office of Regulations, at (202) 435-7700. SUPPLEMENTARY INFORMATION: I. Summary of Proposed Rule Background The Home Ownership and Equity Protection Act (HOEPA) was enacted in 1994 as an amendment to the Truth in Lending Act (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 borrowers in high-cost mortgages have enhanced remedies for violations of the law. 1 The provisions of TILA, including HOEPA, are implemented in the Bureau's Regulation Z. 2 1 For purposes of this notice of proposed rulemaking, the terms “high-cost mortgage,” “HOEPA-covered loan” or “HOEPA loan” refer interchangeably to mortgages that meet HOEPA's high-cost triggers. 2 12 CFR part 1026. In response to the recent mortgage crisis, Congress through the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) expanded HOEPA to apply to more types of mortgage transactions, including to 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. The Bureau is now proposing to amend Regulation Z to implement the Dodd-Frank Act amendments to HOEPA. The proposal also would implement other homeownership counseling-related requirements that Congress adopted in the Dodd-Frank Act, that are not amendments to HOEPA. The proposal would generally require lenders to distribute a list of homeownership counselors or counseling organizations to consumers within a few days after applying for any mortgage loan. The proposal also would implement a requirement that first-time borrowers receive homeownership counseling before taking out a negatively amortizing loan. Scope of HOEPA coverage The proposed rule would implement the Dodd-Frank Act's amendments that expanded the universe of loans potentially covered by HOEPA. Under the proposed rule, most types of mortgage loans secured by a consumer's principal dwelling, including purchase money mortgage loans, refinances, closed-end home-equity loans, and open-end credit plans ( i.e., home-equity lines of credit, or HELOCs) are potentially subject to HOEPA coverage. Reverse mortgages would still be excluded. Revised HOEPA thresholds Under the Dodd-Frank Act, HOEPA protections would be triggered where: • A loan's annual percentage rate (APR) exceeds the average prime offer rate by 6.5 percentage points for most first-lien mortgages and 8.5 percentage points for subordinate lien mortgages; • A loan's points and fees exceed 5 percent of the total transaction amount, or a higher threshold for loans below $20,000; or • The creditor may charge a prepayment penalty more than 36 months after loan consummation or account opening, or penalties that exceed more than 2 percent of the amount prepaid. The proposed rule would implement the Dodd-Frank Act's amendments to HOEPA's triggers for determining coverage and would provide guidance on how to apply the triggers. For instance, for purposes of the APR trigger, the interest rate used to determine HOEPA coverage for variable-rate loans or plans would generally be based on the maximum margin permitted at any time during the loan or plan, added to the index rate in effect at consummation or account opening. The average prime offer rate for open-end credit plans would be determined based on the average prime offer rate for the most closely comparable closed-end mortgage loan. The definition of “points and fees” would conform closely to what has previously been proposed to implement requirements of the Dodd-Frank Act concerning assessment of consumers' ability to repay mortgage loans, such as by including loan originator compensation for closed-end mortgage loans. The Bureau is also seeking comment on whether to adopt certain adjustments or accommodations in its HOEPA implementing regulations if it adopts a broader definition of “finance charge” under Regulation Z. That change, which the Bureau is proposing in connection with its proposal to integrate mortgage disclosures, 3 would otherwise cause more loans to exceed the APR and points and fees triggers and be classified as high-cost mortgages under HOEPA. 3 See the Bureau's 2012 TILA-RESPA Proposal, available at http://www.consumerfinance.gov/notice-and-comment/ . Restrictions on loan terms The proposed rule also would implement new Dodd-Frank Act restrictions and requirements concerning loan terms and origination practices for high-cost mortgages. For example: • Balloon payments would largely be banned, and creditors would be prohibited from charging prepayment penalties and financing points and fees. • Late fees would be restricted to four percent of the payment that is past due, fees for providing payoff statements would be restricted, and fees for loan modification or loan deferral would be banned. • Creditors originating open-end credit plans would be required to assess consumers' ability to repay the loans. (Creditors originating high-cost, closed-end mortgage loans already are required to assess consumers' ability to repay.) • Creditors and mortgage brokers would be prohibited from recommending or encouraging a consumer to default on a loan or debt to be refinanced by a high-cost mortgage. • Before making a high-cost mortgage, creditors would be required to obtain confirmation from a federally certified or approved homeownership counselor that the consumer has received counseling on the advisability of the loan. Other counseling-related requirements In addition to the proposed changes discussed above, the Bureau's proposal would implement two Dodd-Frank Act homeownership counseling-related provisions that are not amendments to HOEPA. • The proposed rule would amend Regulation X 4 to implement a requirement under the Real Estate Settlement Procedures Act (RESPA) that lenders provide a list of federally certified or approved homeownership counselors or organizations to consumers within three business days of applying for any mortgage loan. The Bureau expects to create a Web site portal to make it easy for lenders and consumers to obtain lists of homeownership counselors in their areas. 4 12 CFR part 1024. • The proposed rule would amend Regulation Z to implement a requirement under TILA that creditors obtain confirmation that a first-time borrower has received homeownership counseling from a federally certified or approved homeownership counselor or counseling organization before making a negative amortization loan to the borrower. (A negative amortization loan is one in which the payment schedule can cause the loan's principal balance to increase over time.) Effective date The Bureau's proposal seeks comment on when a final rule should be effective. Because the final rule will provide important benefits to consumers, the Bureau seeks to make it effective as soon as possible. However, the Bureau understands that the final rule will require lenders and brokers to make systems changes and to retrain their staff. In addition, industry will at approximately the same time be implementing a number of other changes relating to other Dodd-Frank Act provisions, some of which will take effect within one year after issuance of final implementing rules. Therefore, the Bureau is seeking comment on how much time industry needs to make these changes. II. Background A. HOEPA HOEPA was enacted as part of the Riegle Community Development and Regulatory Improvement Act of 1994, Public Law 103-325, 108 Stat. 2160, in response to evidence concerning abusive practices in mortgage loan refinancing and home-equity lending. 5 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 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. 5 HOEPA amended TILA by adding new sections 103(aa) and 129, 15 U.S.C. 1602(aa) and 1639. For high-cost loans meeting either of those thresholds, HOEPA required lenders to provide special pre-closing disclosures, restricted prepayment penalties and certain other loan terms, and regulated various lender 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 for increased liability to purchasers of HOEPA loans. Purchasers and assignees of loans not covered by HOEPA generally are liable only for legal violations apparent on the face of the disclosure statements, whereas purchasers of HOEPA loans generally are subject to all claims and defenses against the original creditor with respect to the mortgage. The Board of Governors of the Federal Reserve System (Board) first issued regulations implementing HOEPA in 1995. 60 FR 15463 (March 24, 1995). The Board published additional significant changes in 2001 that lowered HOEPA's APR trigger 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 HOEPA loans. See 66 FR 65604 (Dec. 20, 2001). 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” with APRs that are lower than those prescribed for HOEPA loans but that nevertheless exceed the average prime offer rate by prescribed amounts. 73 FR 44522 (July 30, 2008). With the enactment of the Dodd-Frank Act, general rulemaking authority for TILA, including HOEPA, transferred from the Board to the Bureau on July 21, 2011. 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. Sections 1026.31, 32 and 34 of the Bureau's Regulation Z implement the HOEPA provisions of TILA. B. RESPA Congress enacted RESPA, 12 U.S.C. 2601 et seq., in 1974 to provide consumers with greater and more timely information on the nature and costs of the residential real estate settlement process and to protect consumers from unnecessarily high settlement charges, including through the use of disclosures and the prohibition of kickbacks and referral fees. RESPA's disclosure requirements generally apply to “settlement services” for “federally related mortgage loans,” a term that includes virtually any purchase money or refinance loan secured by a first or subordinate lien on one-to-four family residential real property. 12 U.S.C. 2602(1). Section 5 of RESPA generally requires that lenders provide potential borrowers of federally related mortgage loans a home buying information booklet containing information about the nature and costs of real estate settlement services, a good faith estimate of charges the borrower is likely to incur during the settlement process, and, as a new requirement pursuant to the Dodd-Frank Act, a list of certified homeownership counselors. Id. 2604. The booklet, good faith estimate, and list of homeownership counselors must be provided not later than three business days after the lender receives an application, unless the lender denies the application for credit before the end of the three-day period. Id. 2604(d). Historically, Regulation X of the Department of Housing and Urban Development (HUD), 24 CFR part 3500, has implemented RESPA. The Dodd-Frank Act transferred rulemaking authority for RESPA to the Bureau, effective July 21, 2011. See sections 1061 and 1098 of the Dodd-Frank Act. Pursuant to the Dodd-Frank Act and RESPA, as amended, the Bureau published for public comment an interim final rule establishing a new Regulation X, 12 CFR part 1024, implementing RESPA. 76 FR 78978 (Dec. 20, 2011). This rule did not impose any new substantive obligations but did make certain technical, conforming, and stylistic changes to reflect the transfer of authority and certain other changes made by the Dodd-Frank Act. The Bureau's Regulation X took effect on December 30, 2011. C. The Dodd-Frank Act Congress enacted the Dodd-Frank Act after a cycle of unprecedented expansion and contraction in the mortgage market sparked the most severe U.S. recession since the Great Depression. 6 The Dodd-Frank Act created the Bureau and consolidated various rulemaking and supervisory authorities in the new agency, including the authority to implement HOEPA, TILA, and RESPA. 7 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. 6 For more discussion of the mortgage market, the financial crisis, and mortgage origination generally, see the Bureau's 2012 TILA-RESPA Proposal. 7 Sections 1011 and 1021 of title X of the Dodd-Frank Act, the “Consumer Financial Protection Act,” Public Law 111-203, sections 1001-1100H, codified at 12 U.S.C. 5491, 5511. The Consumer Financial Protection Act is substantially codified at 12 U.S.C. 5481-5603. As part of these changes, sections 1431 through 1433 of the Dodd-Frank Act significantly amended HOEPA to expand the types of loans potentially subject to HOEPA coverage, to revise the triggers for HOEPA coverage, and to strengthen and expand the restrictions that HOEPA imposes on those mortgages. 8 Several provisions of the Dodd-Frank Act also require and encourage consumers to obtain homeownership counseling. Sections 1433(e) and 1414 require creditors to obtain confirmation that a borrower has obtained counseling from a federally approved counselor prior to extending a high-cost mortgage under HOEPA or (in the case of first-time borrowers) a negatively amortizing loan. The Dodd-Frank Act also amended RESPA to require distribution of a housing counselor list as part of the general mortgage application process. The Bureau is proposing this rule to implement the HOEPA and counseling requirements. 9 8 As amended, the HOEPA provisions of TILA will be codified at 15 U.S.C. 1602(bb) and 1639. See § 1100A(1)(A) of the Dodd-Frank Act. 9 The Bureau notes that the Dodd-Frank Act renumbered existing TILA section 103(aa) concerning HOEPA's triggers as section 103(bb), 15 U.S.C. 1602(bb). See § 1100A(1)(A) of the Dodd-Frank Act. This proposal generally references TILA section 103(aa) to refer to the pre-Dodd-Frank provision, which is in effect until the Dodd-Frank Act's amendments take effect, and TILA section 103(bb) to refer to the provision as amended. D. The Market for High-Cost Mortgages Historically, originations of high-cost mortgages have accounted for an extremely small percentage of the market. This may be due to a variety of factors, including the fact that HOEPA's assignee liability provisions make the loans relatively unattractive to secondary market investors, as well as general compliance burden and stigma. Data collected under the Home Mortgage Disclosure Act (HMDA) further indicate that the percentage share of HOEPA loans has generally been declining since 2004, the first year that HMDA reporters were required to identify HOEPA loans. Between 2004 and 2010, HOEPA loans typically comprised about 0.2 percent of originations of home-secured refinance or home-improvement loans made by lenders that report in HMDA. This percentage peaked at 0.44 percent in 2005 when, of about 8.2 million originations potentially covered by HOEPA, approximately 36,000 HOEPA loans were made. The percentage fell to 0.06 percent by 2010 when, of 5.3 million originations potentially covered by HOEPA, about 3,400 HOEPA loans were made. Similarly, the number of HMDA-reporting lenders that originate HOEPA loans is relatively small. From 2004 through 2009, about 1,000 to 2,300 (roughly 12 to 24 percent) of such lenders extended HOEPA loans. The vast majority ( i.e., 97 percent or more) of those lenders made fewer than ten HOEPA loans in each year between 2004 and 2009. In 2010, only about 650 lenders (roughly 8 percent of HMDA filers) reported any HOEPA loans, with just under 60 lenders accounting for about 60 percent of HOEPA lending. 10 As discussed above, the Dodd-Frank Act expanded the types of loans potentially covered by HOEPA by including purchase money mortgage loans and HELOCs. Notwithstanding this expansion, the Bureau believes that HOEPA lending will continue to constitute a small percentage of the mortgage lending market. See part VII, below, for a detailed discussion of the likely impact of the Dodd-Frank Act's amendments on HOEPA lending. 10 These statistics are drawn from Federal Reserve Bulletin articles that summarize the HMDA data each year. For the most recent of these annual articles, see www.federalreserve.gov/pubs/bulletin/2011/pdf/2010_HMDA_final.pdf. E. Other Rulemakings In addition to this proposal, the Bureau currently is engaged in six other rulemakings relating to mortgage credit to implement requirements of the Dodd-Frank Act: • TILA-RESPA Integration: On the same day that this proposal is released by the Bureau, the Bureau is releasing a proposed rule and forms combining the TILA mortgage loan disclosures with the Good Faith Estimate (GFE) and settlement statement required under RESPA pursuant to Dodd-Frank Act section 1032(f) as well as sections 4(a) of RESPA and 105(b) of TILA, as amended by Dodd-Frank Act sections 1098 and 1100A, respectively (2012 TILA-RESPA Proposal). 12 U.S.C. 2603(a); 15 U.S.C. 1604(b). • Servicing: The Bureau is in the process of developing a proposal to implement Dodd-Frank Act requirements regarding force-placed insurance, error resolution, and payment crediting, as well as forms for mortgage loan periodic statements and “hybrid” adjustable-rate mortgage reset disclosures, pursuant to sections 6 of RESPA and 128, 128A, 129F, and 129G of TILA, as amended or established by Dodd-Frank Act sections 1418, 1420, 1463, and 1464. The Bureau has publicly stated that in connection with the servicing rulemaking the Bureau is considering proposing rules on reasonable information management, early intervention for troubled and delinquent borrowers, and continuity of contact, pursuant to the Bureau's authority to carry out the consumer protection purposes of RESPA in section 6 of RESPA, as amended by Dodd-Frank Act section 1463. 12 U.S.C. 2605; 15 U.S.C. 1638, 1638a, 1639f, and 1639g. • Loan Originator Compensation: The Bureau is in the process of developing a proposal to implement provisions of the Dodd-Frank Act requiring certain creditors and mortgage loan originators to meet duty of care qualifications and prohibiting mortgage 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, pursuant to TILA section 129B as established by Dodd-Frank Act sections 1402 and 1403. 15 U.S.C. 1639b. • Appraisals: The Bureau, jointly with Federal prudential regulators and other Federal agencies, is in the process of developing a proposal to implement Dodd-Frank Act requirements concerning appraisals for higher-risk mortgages, appraisal management companies, and automated valuation models, pursuant to TILA section 129H as established by Dodd-Frank Act section 1471, 15 U.S.C. 1639h, and sections 1124 and 1125 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) as established by Dodd-Frank Act sections 1473(f), 12 U.S.C. 3353, and 1473(q), 12 U.S.C. 3354, respectively. In addition, the Bureau is developing rules to implement section 701(e) of the Equal Credit Opportunity Act (ECOA), as amended by Dodd-Frank Act section 1474, to require 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 (collectively, Appraisals Rulemaking). 15 U.S.C. 1691(e). • Ability to Repay: The Bureau is in the process of finalizing a proposal issued by the Board to implement provisions of the Dodd-Frank Act requiring creditors to determine that a consumer can repay a mortgage loan and establishing standards for compliance, such as by making a “qualified mortgage,” pursuant to TILA section 129C as established by Dodd-Frank Act sections 1411 and 1412 (Ability to Repay Rulemaking). 15 U.S.C. 1639c. • Escrows: The Bureau is in the process of finalizing a proposal issued by the Board to implement provisions of the Dodd-Frank Act requiring certain escrow account disclosures and exempting from the higher-priced mortgage loan escrow requirement loans made by certain small creditors, among other provisions, pursuant to TILA section 129D as established by Dodd-Frank Act sections 1461 and 1462 (Escrow Rulemaking). 15 U.S.C. 1639d. With the exception of the requirements being implemented in the TILA-RESPA rulemaking, the Dodd-Frank Act requirements referenced above 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. To provide an orderly, coordinated, and efficient comment process for these rulemakings, the Bureau is setting the deadline for comments on this proposed rule 60 days after the date the proposal is issued (September 7, 2012), instead of 60 days after this notice is published in the Federal Register . Because the precise date of publication cannot be predicted in advance, this method will allow interested parties that intend to comment on multiple proposals to plan accordingly and will ensure that the Bureau receives comments with sufficient time remaining to issue final rules by January 21, 2013. However, consistent with the requirements of the Paperwork Reduction Act, the comment period for the proposed analysis under that Act will end 60 days after publication of this notice in the Federal Register . The Bureau regards the foregoing rulemakings as components of a larger undertaking; many of them intersect with one or more of the others. Accordingly, the Bureau is coordinating carefully the development of the proposals and final rules identified above. Each rulemaking will adopt new regulatory provisions to implement the various Dodd-Frank Act mandates described above. In addition, each of them may include other provisions the Bureau considers necessary or appropriate to ensure that the overall undertaking is accomplished efficiently and that it ultimately yields a comprehensive regulatory scheme for mortgage credit that achieves the statutory purposes set forth by Congress, while avoiding unnecessary burdens on industry. Thus, many of the rulemakings listed above involve issues that extend across two or more rulemakings. In this context, each rulemaking may raise concerns that might appear unaddressed if that rulemaking were viewed in isolation. For efficiency's sake, however, the Bureau is publishing and soliciting comment on proposed answers to certain issues raised by two or more of its mortgage rulemakings in whichever rulemaking is most appropriate, in the Bureau's judgment, for addressing each specific issue. Accordingly, the Bureau urges the public to review this and the other mortgage proposals identified above, including those previously published by the Board, together. Such a review will ensure a more complete understanding of the Bureau's overall approach and will foster more comprehensive and informed public comment on the Bureau's several proposals, including provisions that may have some relation to more than one rulemaking but are being proposed for comment in only one of them. For example, as discussed in detail in the section-by-section analysis under proposed § 1026.32(a) and (b) below, the Bureau's 2012 TILA-RESPA Proposal is proposing a simpler, more inclusive definition of the finance charge for closed-end, dwelling-secured credit transactions, similar to the definition that the Board proposed in its August 2009 proposed rulemaking concerning closed-end credit. See 74 FR 43232, 43241-45 (Aug. 26, 2009) (2009 Closed-End Proposal). The Board recognized at that time that the more inclusive finance charge would expand the coverage of HOEPA and similar State laws. Id. at 43244-45. To address that issue, among others, the Board in 2010 proposed to retain the existing treatment of third-party charges in the points and fees definition for HOEPA, notwithstanding the proposed expansion of the finance charge for disclosure purposes. See 75 FR 58539, 58637-38 (Sept. 24, 2010) (2010 Mortgage Proposal). Similarly, the Board's 2010 Mortgage Proposal introduced a new metric for determining coverage of the “higher-priced mortgage loan” protections of Regulation Z 11 to be used in place of a transaction's APR, known as the “transaction coverage rate” (TCR), which does not reflect the additional charges that are reflected in the disclosed APR under the more inclusive finance charge definition. Id. at 58660-62. 11 12 CFR 1026.35. The Bureau recognizes, as did the Board, that the proposed more inclusive finance charge could affect the coverage of higher-priced mortgage loan and HOEPA protections. The Bureau is also aware that, consequently, a more inclusive finance charge has implications for the HOEPA, Appraisals, Ability to Repay, and Escrows rulemakings identified above. Those impacts are analyzed in the 2012 TILA-RESPA Proposal, but the Bureau believes that it is also helpful to analyze potential impacts and modifications to particular regulatory triggers on a rule-by-rule basis. Accordingly, this proposal seeks comment on whether and how to account for the implications of the more inclusive finance charge on the scope of HOEPA coverage. See the section-by-section analysis to proposed § 1026.32(a) and (b), below. F. The Board's Proposals As noted above, the Bureau inherited rulemaking authority for Regulation Z from the Board in July 2011, including the authority to finalize several mortgage-related rulemakings that the Board proposed between 2009 and 2011 in part to respond to the mortgage crisis and to begin implementing new Dodd-Frank Act requirements. Several of the Board's pending mortgage-related proposals relate directly to provisions addressed in this proposal. As discussed in detail in the section-by-section analysis, below, this proposal re-publishes or otherwise incorporates certain portions of the Board's proposals. 2009 Closed-End Proposal. On August 26, 2009, the Board published proposed amendments to Regulation Z containing comprehensive changes to the disclosures for closed-end credit secured by real property or a consumer's dwelling. 74 FR 43232 (Aug. 26, 2009) (2009 Closed-End Proposal). In addition to the simpler, more inclusive definition of the finance charge discussed above, the Board's 2009 Closed-End Proposal proposed to establish a new § 1026.38(a)(5) for disclosure of prepayment penalties for closed-end mortgage loans. See id. at 43334, 43413. In doing so, the Board proposed several examples of prepayment penalties, including charges determined by treating the loan balance as outstanding for a period after prepayment in full and applying the interest rate to such “balance,” a minimum finance charge in a simple-interest transaction, and charges that a creditor waives unless the consumer prepays the obligation. The Board also proposed loan guarantee fees and fees imposed for preparing a payoff statement or other documents in connection with a prepayment as examples of charges that are not prepayment penalties. 2009 Open-End Proposal. On August 26, 2009, the Board published proposed amendments to Regulation Z containing comprehensive changes to the disclosures for HELOCs. 74 FR 43428 (Aug. 26, 2009) (2009 Open-End Proposal). Among other things, the Board's 2009 Open-End Proposal addressed the types of charges that should be disclosed as prepayment penalties for home equity lines of credit. 2010 Mortgage Proposal. On September 24, 2010, the Board proposed further amendments to Regulation Z regarding rescission rights, disclosure requirements in connection with modifications of existing mortgage loans, escrow requirements for higher-priced mortgage loans, and disclosures and requirements for reverse mortgage loans. This proposal was the second stage of the comprehensive review conducted by the Board of TILA's rules for home-secured credit. 75 FR 58539 (Sept. 24, 2010) (2010 Mortgage Proposal). As discussed above, the Board revisited in the 2010 Mortgage Proposal the effect of adopting a simpler, more inclusive definition of the finance charge for purposes of disclosing the APR to consumers. To ensure that loans would not be inappropriately classified as higher-priced mortgage loans under Regulation Z, the Board proposed to adopt the TCR. Under the proposal, the TCR would have been calculated solely to determine coverage under the Board's higher-priced mortgage rule. 12 As proposed, the TCR would have been calculated consistently with how the current APR is calculated, except that prepaid finance charges not paid to the creditor, its affiliate, or a mortgage broker would not have been included. Id. at 58660-62. 12 12 CFR 1026.35. The Board's 2010 Mortgage Proposal also revisited the definition of prepayment penalty. The Board proposed to amend commentary to Regulation Z to clarify that, on a closed-end transaction, assessing interest for a period after the loan balance has been paid in full is a prepayment penalty, even if the charge results from the normal interest accrual amortization method used on the transaction. The amendment was intended to clarify a question that had been raised in connection with FHA loans and other lending programs, which, for purposes of allocating a consumer's payment to accrued interest and principal, treated all loan payments as being made on the scheduled due date even if payment was made prior to its scheduled due date. The amendment clarified that, in the case of a prepayment in full of any outstanding loan balance, such an interest accrual amortization method would be considered a prepayment penalty, even if it was the normal method for other payments on the transaction. See id. at 58586, 58756, 58781. 2011 Escrow Proposal. On March 2, 2011, the Board proposed to amend Regulation Z to implement amendments made by sections 1461 and 1462 of the Dodd-Frank Act to TILA relating to escrow accounts. 76 FR 11598 (March 2, 2011) (2011 Escrow Proposal). Among other things, the Board's 2011 Escrow Proposal proposed escrow-related disclosure requirements for higher-priced mortgage loans. In doing so, the Board proposed to use the TCR proposed in the 2010 Mortgage Proposal to determine whether a transaction is a higher-priced mortgage loan. The Board also proposed to use the “average prime offer rate,” as defined in current § 1026.35(a)(2), as the benchmark rate for higher-priced mortgage loan coverage See id. at 11609. 2011 ATR Proposal. On May 11, 2011, the Board proposed amendments to Regulation Z to implement section 1411 of the Dodd-Frank Act, which amended TILA to prohibit creditors from making mortgage loans without regard to the consumer's ability to repay. 76 FR 27390 (May 11, 2011) (2011 ATR Proposal). Section 1411 of the Dodd-Frank Act added section 129C to TILA, codified at 15 U.S.C. 1639c, which 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 will have a reasonable ability to repay the loan, including any mortgage-related obligations (such as property taxes). The Board's 2011 ATR Proposal also proposed to implement section 1412 of the Dodd-Frank Act, which created a new type of closed-end, dwelling-secured mortgage—a “qualified mortgage”—to which, among other things, certain restrictions on points and fees and prepayment penalties apply. The Board's 2011 ATR Proposal also enumerated examples of prepayment penalties, drawing from both the 2009 Closed-End Proposal and the 2010 Mortgage Proposal. See id. at 27415-16. The proposal also proposed to implement the statutory definition of points and fees to be used in determining whether a mortgage is a qualified mortgage, which in turn incorporates the definition of points and fees in HOEPA. Id. at 27398-406. 13 13 15 U.S.C. 1639c(b)(2)(C). As discussed in detail throughout the section-by-section analysis below, the current proposal of the Bureau to implement the Dodd-Frank HOEPA amendments draws on the Board's 2009 Closed-End Proposal, 2009 Open-End Proposal, 2010 Mortgage Proposal, 2011 Escrow Proposal, and 2011 ATR Proposal. III. Legal Authority The Bureau is issuing this proposed rule pursuant to its authority under TILA, RESPA, and the Dodd-Frank Act. On July 21, 2011, section 1061 of the Dodd-Frank Act transferred to the Bureau all of the HUD Secretary's consumer protection functions relating to RESPA. 14 Accordingly, effective July 21, 2011 the authority of HUD to issue regulations pursuant to RESPA transferred to the Bureau. Section 1061 of the Dodd-Frank Act also 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.” 15 TILA, HOEPA (which is codified as part of TILA), RESPA, and title X of the Dodd-Frank Act are Federal consumer financial laws. 16 Accordingly, the Bureau has authority to issue regulations pursuant to TILA, RESPA, and title X of the Dodd-Frank Act. 14 Dodd-Frank Act section 1061(b)(7); 12 U.S.C. 5581(b)(7). 15 12 U.S.C. 5581(a)(1). 16 Dodd-Frank Act section 1002(14), 12 U.S.C. 5481(14) (defining “Federal consumer financial law” to include the “enumerated consumer laws” and the provisions of title X of the Dodd-Frank Act); Dodd-Frank Act section 1002(12), 12 U.S.C. 5481(12) (defining “enumerated consumer laws” to include TILA, HOEPA, and RESPA). A. RESPA Section 19(a) of RESPA, 12 U.S.C. 2617(a), authorizes the Bureau to prescribe such rules and regulations and to make such interpretations and grant such reasonable exemptions for classes of transactions as may be necessary to achieve the purposes of RESPA. One purpose of RESPA is to effect certain changes in the settlement process for residential real estate that will result in more effective advance disclosure to home buyers and sellers of settlement costs. RESPA section 2(b), 12 U.S.C. 2601(b). In addition, in enacting RESPA, Congress found that consumers are entitled to be “provided with greater and more timely information on the nature and costs of the settlement process and [to be] protected from unnecessarily high settlement charges caused by certain abusive practices * * * .” RESPA section 2(a), 12 U.S.C. 2601(a). In the past, section 19(a) has served as a broad source of authority to prescribe disclosures and substantive requirements to carry out the purposes of RESPA. B. TILA 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 the Act. 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. 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). 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. 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 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 provisions of the TILA section 129 that apply to high-cost mortgages, as noted above. For the reasons discussed in this notice, the Bureau is proposing regulations to carry out TILA's purposes and is proposing such additional requirements, adjustments, and exceptions as, in the Bureau's judgment, are necessary and proper to carry out the purposes of TILA, prevent circumvention or evasion thereof, or to facilitate compliance. Pursuant to TILA section 103(bb)(2), 15 U.S.C. 1602(bb)(2), the Bureau may prescribe regulations to adjust the statutory percentage points for the APR threshold to determine whether a transaction is covered as a high-cost mortgage, if the Bureau determines that such an increase or decrease is consistent with the statutory consumer protections for high-cost mortgages and is warranted by the need for credit. Under TILA section 103(bb)(4), the Bureau may adjust the definition of points and fees for purposes of that threshold to include such charges that the Bureau determines to be appropriate. With respect to the high-cost mortgage provisions of TILA section 129, TILA section 129(p), 15 U.S.C. 1639(p), as amended by the Dodd-Frank Act, grants the Bureau authority to create exemptions to the restrictions on high-cost mortgages and expand the protections that apply to high-cost mortgages. Under TILA section 129(p)(1), the Bureau may exempt specific mortgage products or categories from any or all of the prohibitions specified in subsections (c) through (i) of TILA section 129, 17 if the Bureau finds that the exemption is in the interest of the borrowing public and will apply only to products that maintain and strengthen home ownership and equity protections. 17 These subsections are: § 129(c) (No prepayment penalty); § 129(d) (Limitations after default); § 129(e) (No balloon payments); § 129(f) (No negative amortization); § 129(g) (No prepaid payments); § 129(h) (Prohibition on extending credit without regard to payment ability of consumer); and § 129(i) (Requirements for payments under home improvement contracts). TILA section 129(p)(2) grants the Bureau the authority to prohibit acts or practices in connection with: • Mortgage loans that the Bureau finds to be unfair, deceptive, or designed to evade the provisions of HOEPA; and • Refinancing of mortgage loans the Bureau finds to be associated with abusive lending practices or that are otherwise not in the interest of the borrower. The authority granted to the Bureau under TILA section 129(p)(2) is broad. The provision is not limited to acts or practices by creditors. TILA section 129(p)(2) authorizes protections against unfair or deceptive practices “in connection with mortgage loans,” and it authorizes protections against abusive practices “in connection with * * * refinancing of mortgage loans.” Thus, the Bureau's authority is not limited to regulating specific contractual terms of mortgage loan agreements; it extends to regulating loan-related practices generally, within the standards set forth in the statute. The Bureau notes that TILA does not set forth a standard for what is unfair or deceptive, but those terms have settled meanings under other Federal and State consumer protection laws. The Conference Report for HOEPA indicates that, in determining whether a practice in connection with mortgage loans is unfair or deceptive, the Bureau should look to the standards employed for interpreting State unfair and deceptive trade practices statutes and the Federal Trade Commission Act, section 5(a), 15 U.S.C. 45(a). 18 18 H.R. Rep. 103-652, at 162 (1994) (Conf. Rep.). In addition, section 1433(e) of the Dodd-Frank Act created a new TILA section 129(u)(3), which authorizes the Bureau to implement pre-loan counseling requirements mandated by the Dodd-Frank Act for high-cost mortgages. Specifically, under TILA section 129(u)(3), the Bureau may prescribe regulations as the Bureau determines to be appropriate to implement TILA section 129(u)(1), which provides the Dodd-Frank Act's pre-loan counseling requirement for high-cost mortgages. C. The Dodd-Frank Act Section 1405(b) of the Dodd-Frank Act provides that, “[n]otwithstanding any other provision of [title XIV of the Dodd-Frank Act], in order to improve consumer awareness and understanding of transactions involving residential mortgage loans through the use of disclosures, the [Bureau] may, by rule, exempt from or modify disclosure requirements, in whole or in part, for any class of residential mortgage loans if the [Bureau] determines that such exemption or modification is in the interest of consumers and in the public interest.” 15 U.S.C. 1601 note. Section 1401 of the Dodd-Frank Act, which amended TILA section 103(cc), 15 U.S.C. 1602(cc), generally defines residential mortgage loan as any consumer credit transaction that is secured by a mortgage on a dwelling or on residential real property that includes a dwelling other than an open-end credit plan or an extension of credit secured by a consumer's interest in a timeshare plan. Notably, the authority granted by section 1405(b) applies to “disclosure requirements” generally, and is not limited to a specific statute or statutes. Accordingly, Dodd-Frank Act section 1405(b) is a broad source of authority to modify the disclosure requirements of TILA and RESPA. 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). Section 1022(b)(2) of the Dodd-Frank Act prescribes certain standards for rulemaking that the Bureau must follow in exercising its authority under section 1022(b)(1). 12 U.S.C. 5512(b)(2). As discussed above, TILA and RESPA are Federal consumer financial laws. Accordingly, the Bureau proposes to exercise its authority under Dodd-Frank Act section 1022(b) to prescribe rules under TILA and RESPA that carry out the purposes and prevent evasion of those laws. See part VI for a discussion of the Bureau's standards for rulemaking under Dodd-Frank Act section 1022(b)(2). For the reasons discussed below in the section-by-section analysis, the Bureau is proposing regulations pursuant to its authority under TILA, RESPA, and title X of the Dodd-Frank Act. IV. Compliance Issues A. Implementation Period The Bureau expects to issue a final rule implementing the Dodd-Frank Act amendments addressed in the Bureau's proposal by January 21, 2013. As discussed above, the Bureau is seeking comment on when a final rule should be effective. Under section 1400(c)(1) of the Dodd-Frank Act, regulations that are required to be issued to implement amendments under Title XIV by the Dodd-Frank Act take effect not later than one year from the date of the issuance of the final implementing regulations. The regulations proposed in this notice, while implementing amendments under Title XIV of the Dodd-Frank Act, are not regulations required to be issued by the Act. Therefore, the Dodd-Frank Act does not require the final regulation to be effective within one year from issuance of that final regulation. Title XIV amendments that are not required by the Dodd-Frank Act to be implemented by regulation take effect on the effective date established by the final regulations implementing the amendments. 19 19 See section 1400(c)(2) of the Dodd-Frank Act. Where regulations have not been issued by January 21, 2013 ( i.e., the date that is 18 months after the “designated transfer date”), the effective date of the Dodd-Frank Act amendments is generally January 21, 2013. See id. § 1400(c)(3). The Bureau recognizes the importance of the changes to be made by the Bureau's final rule for consumer protection, and the need to put these changes into place for consumers. For example, including within HOEPA's definition of “high-cost mortgage” high cost purchase money mortgages and HELOCs, will ensure that borrowers who obtain such high-cost mortgages will have the full benefit of the protections and enhanced remedies provided by HOEPA. In addition, for consumers applying for a high-cost mortgage, having the benefit of the advice of a homeownership counselor to assist them in understanding the terms of the mortgage, and how such a mortgage will fit in with their existing budget, will help consumers in fully assessing the possible consequences of such a mortgage. The Bureau believes consumers should have the benefit of the Dodd-Frank Act additional protections and requirements as soon as possible. The Bureau also recognizes, however, that lenders, brokers, and (where applicable) servicers will need time to make systems changes and to retrain their staff, in order to address the Dodd-Frank Act changes implemented through the Bureau's final rule. In addition, the Bureau recognizes that industry will need to make changes to address a number of other requirements relating to other Dodd-Frank Act provisions, some of which, unlike the Bureau's HOEPA rulemaking, are required by the Dodd-Frank Act to take effect within one year after issuance of final implementing rules. The Bureau believes that ensuring that industry has sufficient time to make the necessary changes will ultimately benefit consumers through better industry compliance. The Bureau therefore seeks public comment on the time period that should be provided to implement the changes that will be required by the final rule, taking into account the factors discussed above. As discussed in the section-by-section analysis to proposed § 1026.32(a)(1)(i) below, the Bureau also seeks comment on potential implementation periods relating to certain changes being proposed in the 2012 TILA-RESPA Proposal to the definition of finance charge under Regulation Z, and related mitigation measures that the Bureau is proposing in this rule to address the impacts on HOEPA coverage. B. Corrections and Unintentional Violations of HOEPA Section 1433(f) of the Dodd-Frank Act added new section 129(v) to TILA, 15 U.S.C. 1639(v), which allows a creditor or assignee of a high-cost mortgage in certain circumstances to correct a failure to comply, when acting in good faith, with HOEPA requirements. At this time the Bureau is not proposing to issue regulatory guidance concerning this provision. The Bureau solicits comment on the extent to which creditors or assignees are likely to invoke this provision, whether regulatory guidance would be useful, and if so what issues would be most important to address. V. Section-by-Section Analysis A. Regulation X Section 1024.20 List of Homeownership Counselors The Bureau is proposing a new § 1024.20 to implement an amendment made by section 1450 of the Dodd-Frank Act to section 5 of RESPA, 12 U.S.C. 2604. The amendment requires lenders to provide a list of homeownership counselors to potential borrowers of federally related mortgage loans. Specifically, the Dodd-Frank Act amended RESPA section 5(c) to require lenders to provide potential borrowers with a “reasonably complete or updated list of homeownership counselors who are certified pursuant to section 106(e) of the Housing and Urban Development Act of 1968 (12 U.S.C. 1701x(e)) and located in the area of the lender.” 20 20 Section 106(e) of the Housing and Urban Development Act of 1968 (12 U.S.C. 1701x(e)) requires that homeownership counseling provided under programs administered by the U.S. Department of Housing and Urban Development (HUD) can only be provided by organizations or individuals certified by HUD as competent to provide homeownership counseling. Section 106(e) also requires HUD to establish standards and procedures for testing and certifying counselors. The list of homeownership counselors is to be included with a “home buying information booklet” that the Bureau is directed to prepare “to help consumers applying for federally related mortgage loans to understand the nature and costs of real estate settlement services.” 21 The Dodd-Frank Act amended RESPA section 5(a) to direct the Bureau to distribute the booklet to all lenders that make federally related mortgage loans. The Dodd-Frank Act also amended section 5(a) to require the Bureau to distribute lists of homeownership counselors to such lenders. 21 The Dodd-Frank Act also amends RESPA section 5(b) (12 U.S.C. 2604(b)) to require that the “home buying information booklet” (the RESPA “special information booklet,” prior to the Dodd-Frank Act), include “[i]nformation about homeownership counseling services made available pursuant to section 106(a)(4) of the Housing and Urban Development Act of 1968 (12 U.S.C. 1701x(a)(4)), a recommendation that the consumer use such services, and notification that a list of certified providers of homeownership counseling in the area, and their contact information, is available.” Under RESPA and its implementing regulations, a federally related mortgage loan includes purchase money mortgage loans, subordinate mortgages, refinancings, closed-end home-equity mortgage loans, home-equity lines of credit, and reverse mortgages. 22 Under RESPA section 5(b), as amended by the Dodd-Frank Act, the prescribed contents of the booklets include information specific to refinancings and home-equity lines of credit, as well as “the costs incident to a real estate settlement or a federally related mortgage loan.” 22 12 U.S.C. 2602(1), 12 CFR 1024.2. RESPA sections 5(a) and (b), as amended, indicate that Congress intended the booklet and list of counselors to be provided to all applicants for federally related mortgage loans. However, section 5(d) of RESPA, in language that was not amended by the Dodd-Frank Act, requires lenders to provide the home buying information booklet “to each person from whom [the lender] receives or for whom it prepares a written application to borrow money to finance the purchase of residential real estate.” The information booklet mandated by section 5 of RESPA before its amendment by the Dodd-Frank Act is only required by current Regulation X to be provided to applicants for purchase money mortgages. 23 23 Currently, under Regulation X, the “special information booklet” must only be provided to applicants for first-lien purchase money mortgages, and not to applicants for refinancings, closed-end subordinate and home-equity loans, reverse mortgages, or open-end lines of credit (as long as a brochure issued by the Bureau regarding home-equity lines of credit is provided to the borrower). 12 CFR 1024.2, 1024.6. For open-end credit plans, Regulation X provides that a lender or mortgage broker that provides the borrower with a copy of the brochure entitled “When Your Home is On the Line: What You Should Know About Home Equity Lines of Credit,” or a successor brochure issued by the Bureau, is deemed to be in compliance with the booklet requirement of Regulation X. See id. 1024.6(a)(2). Section 19(a) of RESPA provides the Bureau with the authority to “prescribe such rules and regulations, to make such interpretations, and to grant such reasonable exemptions for classes of transactions, as may be necessary to achieve the purposes of the [RESPA].” Based on its reading of section 5 as a whole, and its understanding of the purposes of that section, the Bureau is proposing that the list of homeownership counselors be provided to all applicants for federally related mortgage loans (except for applicants for Home Equity Conversion Mortgages (HECMs), as discussed further below). Section 5(a) as amended: (1) Specifically references helping consumers applying for federally related mortgage loans understand the nature and costs of real estate settlement services; and (2) directs the Bureau to distribute the booklet and the lists of housing counselors to lenders that make federally related mortgage loans. Moreover, the prescribed content of the booklet is not limited to information on purchase money mortgage loans. Additionally, the Bureau believes that a trained counselor can be useful to any consumer considering any type of mortgage loan. Mortgage transactions beyond purchase money transactions, such as refinancings and open-end home-secured credit transactions, can entail significant risks and costs for consumers—risks and costs that a trained homeownership counselor can assist consumers in fully understanding. Therefore, the Bureau's proposal would require the homeownership counselor list to be provided to applicants for refinancings and home-equity lines of credit, in addition to purchase money mortgages. The Bureau seeks comment from the public on the costs and benefits of the provision of the list of homeownership counselors to consumers who are applicants for refinances and home-equity lines of credit. The Bureau also solicits comment on the potential effect of the Bureau's proposal on access to homeownership counseling generally by consumers, and the effect of increased consumer demand for counseling on existing counseling resources. In particular, the Bureau solicits comment on the effect on counseling resources of providing the list beyond applicants for purchase money mortgages. Proposed § 1024.20(a) requires a lender to provide to an applicant for a federally related mortgage loan a clear and conspicuous written list of five homeownership counselors or counseling organizations. The list provided by the lender pursuant to this requirement must include only homeownership counselors or counseling organizations from either the most current list of homeownership counselors or counseling organizations made available by the Bureau for use by lenders in complying with § 1024.20, or the most current list maintained by HUD of homeownership counselors or counseling organizations certified by HUD, or otherwise approved by HUD. 24 24 The Bureau proposes to exercise its exemption authority under section 19(a) of RESPA and its modification authority under section 1405(b) of the Dodd-Frank Act to allow the list to include, in addition to HUD-certified homeownership counselors required by section 1450 of the Dodd-Frank Act, HUD-certified “counseling organizations” and counselors and counseling organizations “otherwise approved by HUD.” It is the Bureau's understanding that HUD, other than for its counseling program for HECMs, currently only approves housing counseling agencies and not individual counselors. However, the Bureau understands that HUD intends in the future to undertake a rulemaking to put requirements into place to certify individual counselors as competent to provide housing counseling in accordance with amendments to section 106 of the Housing and Urban Development Act of 1968 made by section 1445 of the Dodd-Frank Act. The Bureau is proposing to exercise its exemption or modification authority to provide flexibility in order to facilitate the availability of competent housing counselors for placement on the list. Permitting the list to include HUD-certified counseling organizations and homeownership counselors and counseling organizations “otherwise approved by HUD” may help facilitate the effective functioning of this new RESPA disclosure. It may also, therefore, help carry out the purposes of RESPA for more effective advance cost disclosure for consumers, by informing loan applicants of counseling resources available for assisting them in understanding their prospective mortgage loans and settlement costs. For the same reason, the Bureau believes this proposed modification of the types of counselors and organizations that may be included in the list is in the interests of consumers and the public. The Bureau intends to work closely with HUD to facilitate operational coordination and consistency between the counseling and certification requirements HUD puts into place and the Bureau's final rule. Proposed § 1024.20(a) provides that the required list include five homeownership counselors or counseling organizations located in the zip code of the loan applicant's current address, or, if there are not the requisite five counselors or counseling organizations in that zip code, then counselors or organizations within the zip code or zip codes closest to the loan applicant's current address. The Bureau invites comment on this requirement and whether there are alternative methods of listing homeownership counselors or counseling organizations available to consumers that would serve the purposes of the statutory requirement and RESPA, in general. To facilitate compliance with the proposed list requirement, the Bureau is expecting to develop a Web site portal that would allow lenders to type in the loan applicant's zip code to generate the requisite list, which could then be printed for distribution to the loan applicant. The Bureau believes that such an approach: (1) Could significantly mitigate any paperwork burden associated with requiring that the list be distributed to applicants for federally related mortgage loans; and (2) is consistent with the Dodd-Frank Act's amendment to section 5(a) of RESPA requiring the Bureau to distribute to lenders “lists, organized by location, of homeownership counselors certified under section 106(e) of the Housing and Urban Development Act of 1968 (12 U.S.C. 1701x(e)) for use in complying with the requirement under [section 5(c)].” The Bureau solicits comment on whether such a portal would be useful and whether there are other mechanisms through which the Bureau can help facilitate compliance and provide lists to lenders and consumers. The Bureau also solicits comment on whether “five” is the appropriate number of counselors or organizations to be included on the list. The Bureau is aware that several State laws that impose requirements on creditors to provide consumers lists of housing counselors specify a list of five. See, e.g., NY Real Property Actions and Proceedings Law § 1304(2); Arizona Revised Statute § 6-1703(A)(1). The Bureau is concerned that requiring a list of too few counselors or organizations would provide inadequate options to consumers and could increase the risk for steering by lenders to particular counselors. The Bureau is also concerned, however, that requiring a list of too many counselors or organizations could be overwhelming for consumers. In addition, the Bureau solicits comment on whether there should be a limitation on the number of listed counselors from the same counseling organization. Proposed § 1024.20(a) requires that the list include: (1) each counselor's or organization's name, business address, telephone number and, if available from the Bureau or HUD, other contact information; and (2) contact information for the Bureau and HUD. Proposed § 1024.20(a) requires the lender to provide the list no later than three business days after the lender, mortgage broker or dealer receives a loan application (or information sufficient to complete an application), but allows a mortgage broker or dealer to provide the list to those applicants from whom it receives or for whom it prepares applications. Where a mortgage broker or dealer provides the list, the lender is not required to provide an additional list but remains responsible for ensuring that the list has been provided to the loan applicant and satisfies the requirements of proposed § 1024.20. Proposed § 1024.20(a) sets out the requirements for providing the list to the loan applicant, i.e., in person, by mail, or by other means of delivery. The list may be provided to the loan applicant in electronic form, subject to the consumer consent and other applicable provisions of the Electronic Signatures in Global and National Commerce Act (ESIGN), 15 U.S.C. 7001 et seq. The lender is not required to provide the list if, before the end of the three business day period, the lender denies the loan application or the loan applicant withdraws the application. For applications for open-end home-secured lines of credit covered under TILA, the timing and methods of delivery set out in Regulation Z, 12 CFR 1026.40, for disclosures involving such loans may be used instead of the requirements in proposed § 1024.20. Proposed § 1024.20(a) also provides flexibility in the requirements for providing the list when there are multiple lenders and multiple applicants in a mortgage loan transaction. Proposed § 1024.20(c) would not require a lender to provide an applicant for a HECM, as that type of reverse mortgage is defined in 12 U.S.C. 1715z-20(b)(3), with the list required under proposed § 1024.20 if the lender is otherwise required by HUD to provide a list, and does provide a list, of HECM counselors or counseling agencies to the loan applicant. As discussed further in the section-by-section analysis below on the Bureau's proposed pre-loan counseling requirement for high-cost mortgages, Federal law currently requires homeowners to receive counseling before obtaining a HECM reverse mortgage insured by the Federal Housing Administration (FHA), 25 which is a part of HUD. HUD imposes various requirements related to HECM counseling, including requiring FHA-approved HECM mortgagees to provide prospective HECM borrowers with a list of HUD-approved HECM counseling agencies. The Bureau is concerned that a duplicative list requirement could cause confusion for consumers and unnecessary burden for lenders. Accordingly, the Bureau is proposing to exercise its exemption authority under RESPA section 19(a) to allow lenders that provide a list under HUD's HECM program to satisfy the requirements of proposed § 1024.20. 25 12 U.S.C. 1715z-20(d)(2)(B). In its 2012 TILA-RESPA Proposal, the Bureau proposes to adopt a new definition of “application” in 12 CFR 1026.2(a)(3). The 2012 TILA-RESPA Proposal would create a new Loan Estimate to replace the RESPA Good-Faith Estimate (GFE) and the initial Truth in Lending Act disclosure. Like those disclosures and the list of homeownership counselors or counseling organizations, the Loan Estimate would be provided three business days after the lender's receipt of an application. However, to encourage lenders to provide the loan term and cost information in the Loan Estimate earlier in the loan process, the 2012 TILA-RESPA Proposal would propose to adopt a definition of application that differs from the definition of application in § 1024.2(b) of Regulation X by removing “any other information deemed necessary by the loan originator” from the § 1024.2(b) list of application elements. Thus, a lender would no longer be able to delay providing the statutorily required estimates by waiting to collect “other information.” Because consumers could benefit from receiving the list of homeownership counselors or counseling organizations at the same time as the Loan Estimate, the Bureau requests comment on whether to tie provision of the list to the definition of application in proposed § 1026.2(a)(3) instead of the definition in § 1024.2(b). B. Regulation Z Section 1026.1 Authority, Purpose, Coverage, Organization, Enforcement, and Liability 1(d) Organization 1(d)(5) Section 1026.1(d)(5) describes the organization of Subpart E of Regulation Z, which contains special rules for mortgage transactions. The Bureau proposes to revise § 1026.1(d)(5) to reflect the proposed amendments to §§ 1026.32 and 1026.34, which are discussed in detail below. Specifically, the Bureau proposes to revise § 1026.1(d)(5) to include the term “open-end credit plan” and remove the term “closed-end” where appropriate. In addition, the Bureau proposes to include a reference to the new prepayment penalties trigger for high-cost mortgages added by the Dodd-Frank Act. Section 1026.31 General Rules 31(c) Timing of Disclosure Section 1026.31(c) provides additional disclosure requirements for high-cost mortgages. As discussed in detail below, the Dodd-Frank Act expanded the types of loans potentially subject to HOEPA coverage. Therefore, the Bureau proposes to revise § 1026.31(c) and related commentary for clarity and consistency. Specifically, the Bureau proposes to include the term “account opening” in addition to “consummation” to reflect the fact that the Dodd-Frank Act expanded the requirements for high-cost mortgages to open-end credit plans. Section 1026.32 Requirements for High-Cost Mortgages 32(a)(1) Coverage The Bureau proposes to revise § 1026.32(a)(1) to implement the definition of “high-cost mortgage” under TILA section 103(bb)(1), as amended by the Dodd-Frank Act. As discussed below, TILA section 103(bb)(1) generally provides that the term “high-cost mortgage” means a consumer credit transaction that is secured by the consumer's principal dwelling, other than a reverse mortgage transaction, if any of the prescribed thresholds are met. The Dodd-Frank Act amended existing TILA section 103(aa)(1) by removing the exclusion of a residential mortgage transaction and an open-end credit plan from HOEPA coverage. Under TILA section 103(bb)(1)(A), reverse mortgage transactions remain excluded from the definition of a high-cost mortgage. Previously, the statutory protections for HOEPA loans were generally limited to closed-end refinancings and home-equity mortgage loans. The proposal, among other things, extends the statutory protections for high-cost mortgages to residential mortgage transactions, such as purchase money mortgage loans, and to open-end credit plans secured by the consumer's principal dwelling, i.e., home-equity lines of credit. Accordingly, the Bureau proposes to reflect the revised scope of coverage and remaining statutory exclusion of reverse mortgage transactions in proposed § 1026.32(a)(1), to remove the list of exclusions provided in current § 1026.32(a)(2), and to amend § 1026.32(a)(2) for other purposes as discussed below. Accordingly, proposed § 1026.32(a)(1) defines “high-cost mortgage” to mean any consumer credit transaction, other than a reverse mortgage transaction as defined in § 1026.33(a), that is secured by the consumer's principal dwelling and in which any one of the prescribed thresholds is met. Proposed comment 32(a)(1)-1 clarifies that a high-cost mortgage includes both a closed-end mortgage loan and an open-end credit plan secured by the consumer's principal dwelling. In particular, the comment further clarifies that with regard to determining coverage under § 1026.32, an open-end transaction is the account opening of an open-end credit plan. Under the proposal, an individual advance of funds or a draw on the credit line under an open-end credit plan subsequent to account opening does not constitute a “transaction.” Because HELOCs are open-end (revolving) lines of credit and the rate applicable to any advance of funds may vary under the plan, the Bureau believes this clarification is appropriate to permit creditors to determine coverage of an open-end credit plan as a high-cost mortgage at account opening. Threshold Triggers Prior to enactment of the Dodd-Frank Act, HOEPA coverage was triggered when a loan's annual percentage rate (APR) or its points and fees exceeded certain thresholds as prescribed by current TILA section 103(aa), which is implemented by current § 1026.32(a)(1). The Dodd-Frank Act adjusted the two existing thresholds and added a third threshold based on the inclusion of certain prepayment penalties. Under TILA section 103(bb)(1)(A), the revised thresholds generally provide that a consumer credit transaction is a high-cost mortgage if: • The annual percentage rate at consummation of the transaction exceeds the average prime offer rate (APOR) for a comparable transaction by (1) more than 6.5 percentage points for transactions secured by a first mortgage on the consumer's principal dwelling or 8.5 percentage points, if the dwelling is personal property and the total transaction amount is less than $50,000; or (2) 8.5 percentage points for transactions secured by a subordinate mortgage on the consumer's principal dwelling; • The total points and fees payable in connection with the transaction, other than bona fide third party charges not retained by the mortgage originator, creditor, or an affiliate of either, exceed: (1) In the case of a transaction for $20,000 or more, 5 percent of the total transaction amount; or (2) in the case of a loan for less than $20,000, the lesser of 8 percent of the total transaction amount or $1,000 (adjusted for inflation); or • The transaction provides for prepayment fees and penalties that (1) may be imposed more than 36 months after consummation or account opening or (2) exceed, in the aggregate, more than 2 percent of the amount prepaid. The Bureau proposes to revise the existing APR and points and fees thresholds in proposed § 1026.32(a)(1)(i) and (ii) and to add the new prepayment penalty threshold in proposed § 1026.32(a)(1)(iii). These amendments are discussed in detail below. 32(a)(1)(i) Implementation of Dodd-Frank Act Amendments Section 1431 of the Dodd-Frank Act amended the existing APR trigger in current TILA section 103(aa) by lowering the percentage point trigger and changing the APR benchmark. As noted above, amended TILA section 103(bb)(1)(A)(i) generally provides that a consumer credit transaction is a high-cost mortgage if the APR at consummation of the transaction exceeds the APOR for a comparable transaction by (1) more than 6.5 percentage points for transactions secured by a first mortgage on the consumer's principal dwelling or 8.5 percentage points, if the dwelling is personal property and the total loan amount is less than $50,000; or (2) 8.5 percentage points for transactions secured by a subordinate mortgage on the consumer's principal dwelling. In addition to adjusting the percentage point triggers, TILA section 103(bb)(1)(A), as added by section 1431 of Dodd-Frank, also amends the benchmark for the APR trigger. The existing APR benchmark is the yield on Treasury securities having comparable periods of maturity. Under TILA section 103(bb)(1)(A)(i), the APR benchmark is the “average prime offer rate,” as defined in TILA section 129C(b)(2)(B). This definition essentially codifies Regulation Z's existing definition of “average prime offer rate” in § 1026.35(a)(2), which would become § 1026.35(a)(2)(ii) in the Bureau's rules. The Bureau is proposing two alternatives in proposed § 1026.32(a)(1)(i) to implement the APR threshold for a high-cost mortgage under amended TILA section 103(bb)(1)(A)(i). Alternative 1 uses the APR as the rate to be compared to the APOR for determining HOEPA coverage for closed-end mortgage loans. Alternative 2 is substantially identical except that it would substitute a “transaction coverage rate” for the “annual percentage rate” as the rate to be compared to the APOR for closed-end mortgage loans. As discussed further below, the Bureau is proposing Alternative 2 in connection with its proposal to simplify and broaden the general definition of finance charge under Regulation Z. See 2012 TILA-RESPA Proposal. The Bureau would not adopt Alternative 2 if it does not change the definition of finance charge. As discussed below, the Bureau is seeking comment on whether to adopt Alternative 2 if it does expand the definition of finance charge. Because the proposal to broaden the definition of finance charge does not apply to open-end transactions, the Bureau proposes to retain the APR as the rate that will be compared to the APOR to determine whether an open-end credit plan is a high-cost mortgage under HOEPA. Both alternatives otherwise generally mirror the statutory language with some exceptions for clarity, organization, or consistency with existing Regulation Z and the Bureau's other mortgage rulemakings as mandated by the Dodd-Frank Act. For example, the proposal refers to a “first-lien” or “subordinate-lien” transaction, instead of a “first mortgage” or “subordinate or junior mortgage.” Further, for the reasons stated in the section-by-section analysis to proposed § 1026.32(a)(1)(ii) below, the proposal refers to “total loan amount” rather than “total transaction amount.” TILA section 103(bb)(2)(A) and (B) provides the Bureau with authority to adjust the percentage points referenced in the APR threshold if the Bureau determines that the increase or decrease is consistent with the statutory protections for high-cost mortgages and is warranted by the need for credit. The Bureau does not propose to make such a determination at this time, either in conjunction with general implementation of the Dodd-Frank Act or, as discussed further below, in conjunction with the proposed expansion of the definition of finance charge. Therefore, both alternatives retain the numeric triggers in the statute for both closed-end and open-end credit transactions. However, the Bureau seeks comment and data on whether any adjustments to the numeric triggers generally, and in particular for open-end credit transactions, would better protect consumers from the risks associated with high-cost mortgages or are warranted by the need for credit. In addition, the Bureau notes that the statute sets forth different threshold triggers for first-lien transactions depending on whether the transaction is secured by a dwelling that is personal property and the total loan amount is less than $50,000. The Bureau understands that first-lien transactions that are secured by a dwelling that is personal property, such as certain manufactured housing loans, often have higher APRs than other first-lien transactions secured by a dwelling that is not personal property. Accordingly, the Bureau also seeks comment or data specifically on the separate percentage point trigger for first-lien transactions that are secured by a dwelling that is personal property and for which the total loan amount is less than $50,000, and whether any adjustment to the percentage point or the total loan amount for such first-lien transactions would better protect consumers or is warranted by the need for credit. Potential Expansion of the Definition of Finance Charge Alternative 2 for proposed § 1026.32(a)(1)(i) would account for the changes in the calculation of the finance charge (and thus APR) that the Bureau is separately considering in the 2012 TILA-RESPA Proposal. Under that proposal, creditors would use a simpler, more inclusive definition of the finance charge for closed-end credit secured by real property or a dwelling, which is in turn used to compute the APR that is disclosed to consumers. As discussed in that proposal, the Bureau believes that the expanded definition could have significant benefits to consumers by making the APR a more useful and accurate tool for comparing the overall cost of credit. At the same time, the proposal could benefit creditors by reducing compliance burden and litigation risk because the finance charge calculation would be easier to perform. However, the Bureau recognizes that a more inclusive definition of the finance charge could expand the coverage of HOEPA because closed-end mortgage loans would have higher APRs, which would result in some additional loans being covered as high-cost mortgages. 26 The Bureau is therefore seeking comment in this proposal on whether, if it adopts the broader definition of finance charge in the TILA-RESPA rulemaking, it should compensate for that change to approximately offset the impact of a broader definition of finance charge on HOEPA coverage levels. 26 The revised definition would also affect calculation of HOEPA's threshold based on points and fees. Those effects and potential accommodations are discussed further below. Currently, TILA and Regulation Z permit creditors to exclude several fees or charges from the finance charge, including most fees or charges imposed by third parties. Consumer groups, creditors, and government agencies have long been dissatisfied with the “some fees in, some fees out” approach to the finance charge. The Board therefore proposed expanding the definition of finance charge in its 2009 Closed-End Proposal, see 74 FR 43232, 43243-45 (Aug. 26, 2009), and the Bureau has after careful consideration decided to propose a similar change. Specifically, the 2012 TILA-RESPA Proposal would maintain TILA's definition of a finance charge as a fee or charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor. However, the proposal would require the finance charge to include additional creditor charges and most charges by third parties. The Bureau is proposing a revised definition of the finance charge pursuant to its authority under TILA sections 105(a) and (f), as well as other applicable statutory authority, because the Bureau believes that the simpler finance charge could effectuate the purposes of TILA and facilitate compliance by enhancing consumer understanding and reducing compliance costs. One effect of the expansion of the definition of finance charge, however, would be to expand the number of loans exceeding HOEPA's APR trigger and other statutory and regulatory provisions that incorporate an APR threshold for coverage. As discussed in detail in the Board's 2010 Mortgage Proposal, there are currently some differences between the APR and the APOR, which is the benchmark rate under the Dodd-Frank Act for determining HOEPA coverage. The APOR is generally calculated using data that includes only contract interest rate and points, but not other origination fees. See 75 FR 58539, 58660-62 (Sept. 24, 2010). The current APR includes not only discount points and origination fees but also other charges the creditor retains and certain third-party charges. The proposed simpler, more inclusive finance charge, which would also include most third-party charges, would widen the disparity between the APR and the APOR and expand coverage of HOEPA. The Bureau notes that, in response to the Board's 2009 Closed-End Proposal, most industry commenters raised significant concerns about loans being inappropriately covered by HOEPA and potential negative impacts on consumer access to credit. Consumer advocates and some other commenters, however, supported the more inclusive finance charge and the expanded coverage of HOEPA. They maintained that expanded HOEPA coverage was warranted because the more inclusive finance charge would be a more accurate measure of the cost of credit and, therefore, would render HOEPA coverage more accurate as well. During outreach conducted in conjunction with the Bureau's 2012 TILA-RESPA Proposal, similar concerns were expressed by both industry and consumer advocates. Participants in a Small Business Review Panel and other industry stakeholders expressed concerns that one unintended consequence of a more inclusive definition of finance charge could be that more loans would qualify as high-cost loans subject to additional requirements under TILA section 129 and under similar State laws. Industry stakeholders urged that the proposed revisions to the finance charge be viewed in the context of Dodd-Frank Act rulemakings revising the thresholds for HOEPA and other statutory regimes because of the relationship between the APR and those thresholds. Specifically, they noted that those thresholds are tied to the APR, such that any changes to the APR calculation could be costly to implement and should be done in conjunction with other related changes. Consumer advocates asserted that expanded HOEPA coverage is warranted because the more inclusive definition would provide a more accurate measure of the cost of credit. The Bureau does not currently have sufficient data to model the impact of the more expansive definition of finance charge on coverage under HOEPA or the impact of potential modifications that the Bureau could make to the triggers to more closely approximate existing coverage levels. As described in the Dodd-Frank Act section 1022 analysis below, the Bureau is working to secure data to assist in analyzing potential impacts. The Bureau seeks comment on its plans for data analysis as described below, as well as additional data and comment on the potential impacts of a broader finance charge definition on coverage under HOEPA and potential modifications to the triggers. In conjunction with its efforts to quantify the effect of an expanded definition of finance charge, the Bureau is carefully weighing whether modifications may be warranted to approximate coverage levels under the current definition. It is not clear from the legislative history of the Dodd-Frank Act whether Congress was aware of the Board's 2009 Closed-End Proposal to expand the current definition of finance charge or whether Congress considered the interplay between an expanded definition and coverage under the high-cost mortgage provision. In light of this fact and the concerns raised by commenters on the Board's 2009 Closed-End Proposal regarding effects on access to credit, the Bureau believes that it is appropriate to explore alternatives to implementation of the expanded finance charge definition for purposes of HOEPA coverage. As discussed below, the Bureau has considered two such modifications and is proposing one of them, the TCR, as Alternative 2 to proposed § 1026.32(a)(1)(i). The Bureau seeks comments and data on these and any other potential modifications to HOEPA's APR coverage thresholds. The Bureau also seeks comment on the timing of implementation for any change to the definition of finance charge and any related change to the HOEPA APR threshold, as discussed further below. Adjustment to numeric APR triggers. One method of modifying the triggers to maintain approximate current coverage would be to exercise the Bureau's authority under TILA section 103(bb)(2)(A) and (B) to adjust the percentage point triggers. As discussed above, TILA section 103(bb)(2)(A) and (B) permits certain adjustments to the percentage point triggers if the Bureau determines that the increase or decrease is consistent with the statutory protections for high-cost mortgages and is warranted by the need for credit. In determining whether to increase or decrease the number of percentage points in the high-cost mortgage trigger, the Bureau must consult with representatives of consumers, including low-income consumers, and lenders. Due to data limitations, however, the Bureau does not currently have sufficient information to propose a specific numeric adjustment to the percentage point triggers as a means of approximating current coverage levels in the event that the Bureau adopts the broader definition of finance charge. The Bureau also notes that the Board previously proposed and sought comment on use of the TCR, rather than adjustments to numeric thresholds. 27 The Bureau therefore seeks comment on the advisability and grounds for using the percentage point mechanism to adjust for the adoption of a broader definition of finance charge, particularly if different types of modifications were adopted for other mortgage rulemakings involving APR thresholds. 27 See, e.g., 75 FR 58660-62 and 76 FR 11609. Transaction coverage rate. As discussed above, another alternative method of compensating for the broader definition of finance charge would be to replace the APR benchmark for closed-end mortgage loans with the transaction coverage rate (TCR). The Bureau has proposed this as Alternative 2 for proposed § 1026.32(a)(1)(i), for substantially the same reasons that the Board proposed adopting the TCR to address the impact of the expanded definition of finance charge upon other regulatory triggers. 28 Specifically, the “transaction coverage rate” would be defined as the rate used to determine whether a closed-end mortgage loan is a high-cost mortgage subject to § 1026.32. (As discussed below, the Bureau does not propose to change the coverage metric for open-end credit plans.) As previously proposed by the Board in § 226.45(a)(2)(i) under the 2011 Escrow Proposal (which would become § 1026.35(a)(2)(i) in the Bureau's rules), the TCR would be determined in accordance with the applicable rules of Regulation Z for the calculation of the APR for a closed-end transaction, except that the prepaid finance charge would include only charges that will be retained by the creditor, a mortgage broker, or any affiliate of either. 29 28 The Board proposed the TCR in the 2010 Mortgage Proposal, see 75 FR 58660-62, and the 2011 Escrow Proposal, see 76 FR 11609. The Board's proposals would substitute the TCR for the APR for purposes of determining thresholds for higher-priced mortgage loans. 29 The wording of the Board's proposed definition of “transaction coverage rate” varied slightly between the 2010 Mortgage Proposal and the 2011 Escrow Proposal as to treatment of charges retained by mortgage broker affiliates. The Bureau proposes to use the 2011 Escrow Proposal version, which would apply to charges that will be retained by the creditor, a mortgage broker, or any affiliate of either. The Bureau believes that this approach is consistent with the rationale articulated by the Board in its earlier proposals and with certain other parts of the Dodd-Frank Act that distinguish between charges retained by the creditor, mortgage broker, or affiliates of either company. See, e.g., Dodd-Frank Act section 1403. The TCR would not reflect certain costs paid to third parties that would be disclosed to consumers as part of the finance charge under the current and proposed definitions. For example, the current finance charge reflects mandatory credit life insurance, and the proposed more inclusive finance charge would reflect such additional third-party charges as title insurance premiums. However, the TCR would not include either amount. See 75 FR 58539, 58661 (Sept. 24, 2010); 76 FR 11598, 11626 (Mar. 2, 2011). Thus, the TCR might result in some loans not being classified as high-cost mortgages that would otherwise qualify under an APR threshold. The Bureau is considering ways to supplement the data analysis described below to better assess this issue, and specifically seeks comment and data on the potential effect of the TCR relative to the APR calculated using both the current and proposed definitions of finance charge. While the Bureau is seeking data to assist it in evaluating alternatives, the Bureau expects that the margin of difference between the TCR and the current APR would be significantly smaller than the margin between the current APR and the APR calculated using the expanded finance charge definition. This expectation is due to the fact that the expanded finance charge definition would add in such large third-party charges as lender's title insurance, whereas relatively few third-party fees would be excluded by the TCR approach that are not already excluded under current rules; mandatory credit life and disability insurance premiums would be in this category, for example, but such insurance typically is offered as voluntary coverage, which is already excluded under current rules. The Bureau consequently expects that, relative to current rules, the TCR would remove from HOEPA coverage fewer overall transactions than the expanded finance charge would add. Thus, the Bureau believes that the TCR may maintain the primary benefits of HOEPA while also offering other significant benefits. First, the Bureau believes that the TCR would be easier to calculate than the current APR, and could therefore result in reduced compliance burden and litigation costs for creditors. Second, the TCR has been proposed in two prior proposals of the Board relating to higher-priced mortgage loans. Thus, the TCR could provide an efficacious way of achieving a common framework for application of various regulatory thresholds. At the same time, the Bureau also seeks comment on the potential advantages and disadvantages to both consumers and creditors of using different metrics for purposes of disclosures and for purposes of determining coverage of various regulatory regimes. As discussed above, the Bureau believes that the potential compliance burden is mitigated with regard to TCR because both TCR and APR under the expanded definition of finance charge would be easier to compute than the APR today using the current definition. However, the Bureau seeks comment on the issue generally and in particular on whether use of the TCR or other modifications should be optional, so that creditors could use the broader definition of finance charge to calculate the APR and points and fees triggers if they would prefer. The Board's 2010 Mortgage Proposal structured the TCR as a mandatory requirement out of concern that identical transactions extended by two different creditors could have inconsistent coverage under regulations governing higher-priced mortgage loans, but similarly sought comment on the issue. The Bureau has authority to modify the APR test in § 1026.32(a)(1)(i) under TILA section 105(a) to carry out the purposes of TILA. In its 2012 TILA-RESPA Proposal, the Bureau is proposing to amend the definition of finance charge to promote the informed use of credit and to facilitate creditors' compliance with disclosure requirements under TILA. Should the Bureau finalize that aspect of the proposal, adoption of the TCR may ensure that the special protections provided under HOEPA are not expanded in a manner that Congress may not have intended or that could impair access to credit. Furthermore, the Bureau has authority pursuant to TILA section 105(a) to provide additional requirements, classifications, differentiations, or other provisions, and to provide for such adjustments and exceptions for all or any class of transactions as are necessary, in the Bureau's judgment, to effectuate the purposes of TILA and facilitate compliance. 30 The Bureau understands that most lenders currently do not make HOEPA loans, and previous comments received on the Board's proposal suggest that some lenders may cease making loans that are defined as high-cost mortgages solely as a result of the proposed more inclusive finance charge. The Bureau is therefore evaluating whether the proposed use of the TCR could maintain the special protections for consumers of high-cost mortgages while ensuring that the effects of a more inclusive finance charge would not restrict the availability of credit. In addition, the Bureau believes that the proposal to use the TCR would facilitate compliance by substituting a simpler calculation for the finance charge for purposes of determining whether a transaction is a high-cost mortgage. Creditors would therefore have more certainty about the calculation for purposes of determining coverage of closed-end mortgage loans. Therefore, the Bureau believes that the proposed adjustment may effectuate the purposes of TILA, as amended by HOEPA, and facilitate compliance without undermining consumer protections against abusive practices, the availability of credit, or the interest of the borrowing public. 30 The Bureau's authority under section 105(a) does not extend to the substantive protections contained in TILA section 129 that apply to high-cost mortgages, but applies to all other provisions of TILA including the section that defines high-cost mortgages and APR. The Bureau is striving to develop a coverage framework across various rulemakings that is consistent with Congress' intent in identifying specific, limited categories of covered transactions that are subject to various substantive protections, including the protections for high-cost mortgages. Open-end transactions. The proposal for a more inclusive finance charge applies only to closed-end transactions. Therefore, for purposes of the coverage trigger in § 1026.32(a)(1)(i), the Bureau proposes to use the TCR for closed-end transactions only. The Bureau believes that an adjustment for open-end transactions would not be necessary or appropriate because the APR for open-end credit plans solely includes interest and not other fees or charges. Accordingly, the annual percentage rate would be used for open-end transactions. Effective dates. In addition to seeking comment on the issues raised above concerning potential modifications to the HOEPA APR triggers if the Bureau adopts a broader definition of finance charge, the Bureau seeks comment on the timing of implementation. As discussed above, the Bureau has proposed to expand the definition of finance charge as part of the 2012 TILA-RESPA Proposal, which has no statutory deadline for final rules. The Bureau expects that it may take some time to finalize the disclosures proposed in that rule, since it anticipates conducting quantitative testing of the forms. The Bureau does not necessarily have to wait until the disclosures are finalized to issue a final rule about whether to expand the definition of finance charge, and is specifically seeking comment in connection with that proposal about whether it should decide the finance charge issue (and finalize that aspect of the proposal) earlier in light of the potential impact on other rulemakings. The Bureau also seeks comment on effective dates as part of this rulemaking. The Bureau expects to issue a final rule regarding implementation of the Dodd-Frank Act amendments to HOEPA by January 21, 2013, since the statute will otherwise automatically take effect on that date. The Bureau also expects to issue several other final rules by January 21, 2013, to implement other provisions of title XIV of the Dodd-Frank Act that set similar thresholds for compliance based on mortgage loans' APRs or points and fees. The Bureau is seeking comment on an appropriate implementation period for the final rules. The Bureau believes that it would be preferable for any change to the definition of finance charge and any related changes to regulatory thresholds to take effect at the same time, in order to provide for consistency and efficient systems modification. The Bureau also believes that it may be advantageous to consumers and creditors for these changes to occur at the same time that creditors are implementing new title XIV requirements involving APR and points and fees thresholds, rather than waiting until the Bureau finalizes other aspects of the 2012 TILA-RESPA final rule relating to disclosures. If the Bureau expands the definition of finance charge, this approach would likely provide the benefits to consumers of the final rule at an earlier date as well as avoid requiring creditors to make two sets of systems and procedures changes focused on determining which loans trigger particular regulatory requirements ( e.g., one set of changes to implement amendments to the HOEPA triggers generally and another set of changes associated with any modifications related to the more inclusive finance charge). However, given that implementation of the disclosure-related elements of the 2012 TILA-RESPA Proposal will also require systems and procedures changes, there may be advantages to delaying any change in the definition of finance charge and related adjustments to regulatory triggers until those changes occur. The Bureau therefore seeks comment on the benefits and costs to both consumers and industry of both approaches. Related commentary. Under Alternative 2, as discussed above, proposed comment 32(a)(1)(i)-1 clarifies the determination of the TCR for closed-end mortgage loans. For consistency within Regulation Z regarding the determination of the TCR, the proposal cross-references guidance proposed under § 226.45(a)(2)(i) in the 2011 Escrow Proposal, which would be renumbered as § 1026.35(a)(2)(i) for organizational purposes. Under Alternative 1, the Bureau notes that this proposed comment would be removed and proposed comments 32(a)(1)(i)-2 and -3 below would be renumbered as comments 32(a)(1)(i)-1 and -2. Proposed comment 32(a)(1)(i)-2 clarifies the determination of the average prime offer rate for closed-end mortgage loans. For consistency within Regulation Z regarding the determination of the average prime offer rate for closed-end credit, the proposal cross-references the guidance in current comments 35(a)(2)-1 through -4, which would be renumbered as comments 35(a)(2)(ii)-1 through -4 for organizational purposes. Proposed comment 32(a)(1)(i)-3 provides guidance on the determination of the average prime offer rate for open-end credit plans by clarifying that creditors use the average prime offer rate for the most closely comparable closed-end mortgage loan based on applicable loan characteristics and other loan pricing terms. The proposal also provides illustrative examples to facilitate compliance. The Bureau believes this approach is consistent with TILA section 103(bb)(1)(A)(i), which requires a comparison of mortgage transactions' APRs to the average prime offer rate without distinguishing between closed-end and open-end credit. The APOR is currently calculated only for closed-end mortgage products, and the Bureau is unaware of any publicly-available surveys of pricing data for open-end credit plans on which to calculate a separate APOR for open-end credit. 31 31 The methodology for deriving the APOR is based on Freddie Mac's Primary Mortgage Market Survey, which does not provide any data on open-end mortgage products, such as home-equity lines of credit. More detailed discussions of the determination of the APOR are provided in the Board's 2008 HOEPA Final Rule, see 73 FR at 44533-44536, and other publicly-available sources, see, e.g., http://www.ffiec.gov/ratespread/default.aspx. Home-equity lines of credit with a variable rate feature reference an index to determine the interest rate, such as the average prime rate from a consensus of certain lenders as published by the Wall Street Journal (the “prime rate”). Based on historical data, the Bureau understands that the average prime offer rate for one-year adjustable rate mortgages and the prime rate generally have been comparable. The Bureau further understands that many lenders use the prime rate as a reference index. Therefore, the Bureau believes that reliance on the APOR for the most closely comparable closed-end mortgage loan will provide a reasonable benchmark and facilitate compliance, since the tables for average prime offer rates are readily available and any rate spread calculators developed for closed-end mortgages may be adapted to open-end transactions as well. However, the Bureau solicits data or comment on any aspect of determining the average prime offer rate for open-end credit plans. In particular, the Bureau solicits comment on whether an alternative reference rate would better meet the objectives of the APR trigger for open-end credit and would facilitate compliance. As noted above, proposed § 1026.32(a)(1)(i)(B) provides that the annual percentage rate threshold trigger is 8.5 percentage points over average prime offer rate for first-lien mortgages if the dwelling is personal property and the total loan amount is less than $50,000. Proposed comment 32(a)(1)(i)- 4 clarifies that the guidance for total loan amount under proposed § 1026.32(a)(1)(i)(B) is consistent with the guidance addressing total loan amount that is provided in proposed § 1026.32(b)(6) and comment 32(b)(6)-1. 32(a)(1)(ii) Existing TILA section 103(aa)(1)(B) provides that a mortgage is subject to the restrictions and requirements of HOEPA if the total points and fees payable by the consumer at or before loan closing exceed the greater of eight percent of the total loan amount or $400. See 15 U.S.C. 1602(aa)(1)(B); § 1026.32(a)(1)(ii). Prior to the transfer date under the Dodd-Frank Act, the Board adjusted the $400 figure annually for inflation since 1996. TILA section 103(aa)(3), 15 U.S.C. 1602(aa)(3). For 2012, the Board adjusted the $400 figure to $611 from $592, where it had been set for 2011. See 76 FR 35723, 35723-24 (June 20, 2011); comment 32(a)(1)(ii)-2.xvii. Section 1431(a) of the Dodd-Frank Act amended TILA section 103(aa)(1)(B) to provide that a mortgage is a high-cost mortgage subject to HOEPA if the total points and fees payable in connection with the transaction exceed either five percent or eight percent of the total transaction amount, depending on the transaction. Specifically, under TILA section 103(bb)(1)(A)(ii)(I), a transaction with a total transaction amount of $20,000 or more is a high-cost mortgage if the total points and fees payable in connection with the transaction exceed five percent of the total transaction amount. Under TILA section 103(bb)(1)(A)(ii)(II), a transaction with a total transaction amount of less than $20,000 is a high-cost mortgage if the total points and fees payable in connection with the transaction exceed eight percent of the total transaction amount or $1,000, whichever is less. The proposal implements the Dodd-Frank Act's amendments to TILA's points and fees trigger for high-cost mortgages in proposed § 1026.32(a)(1)(ii)(A)-(B). Payable in Connection With the Transaction Section 1431(a) of the Dodd-Frank Act amended the high-cost mortgage points and fees trigger in TILA section 103(aa)(1)(B), 15 U.S.C. 1602(aa)(1)(B), by providing for the inclusion in points and fees of “the total points and fees payable in connection with the transaction, ” as opposed to “the total points and fees payable by the consumer at or before closing” (emphases added). The proposal implements this statutory change in proposed § 1026.32(a)(1)(ii). The Bureau notes that the practical result of this change is that any item listed in the points and fees definition under proposed § 1026.32(b)(1) and (3) must, unless otherwise specified, be counted toward the points and fees threshold for high-cost mortgages even if it is payable after consummation or account opening. 32 See the section-by-section analysis to proposed § 1026.32(b)(1) and (3), below, for further details concerning the definition of points and fees for high-cost mortgages. 32 The Bureau's proposed inclusion in points and fees for high-cost mortgages of “the total points and fees payable in connection with the transaction” is consistent with the proposed inclusion in points and fees for qualified mortgages of “the total points and fees * * * payable in connection with the loan” in the Board's 2011 ATR Proposal. See 76 FR 27390, 27456 (May 11, 2011) (implementing TILA section 129C(b)(2)(A)(vii)). Total Transaction Amount Section 1431(a) of the Dodd-Frank Act amended TILA section 103(aa)(1)(B), 15 U.S.C. 1602(aa)(1)(B), to provide that a mortgage is a high-cost mortgage if its total points and fees exceed a certain percentage of the “total transaction amount,” rather than the “total loan amount.” TILA section 103(bb)(1)(A)(ii). The Dodd-Frank Act did not define the term “total transaction amount.” However, the Bureau believes that the phrase reflects the fact that HOEPA, as amended, applies to both closed- and open-end credit transactions secured by a consumer's principal dwelling. 33 Notwithstanding the statutory change, for consistency with existing Regulation Z terminology, proposed § 1026.32(a)(1)(ii) provides that a high-cost mortgage is one for which the total points and fees exceed a certain percentage of the “total loan amount.” For organizational purposes, the Bureau proposes to move the definition of “total loan amount” in existing comment 32(a)(1)(ii)-1 into proposed § 1026.32(b)(6) and comment 32(b)(6)(i)-1. As discussed below in the section-by-section analysis to proposed § 1026.32(b)(6), the Bureau also proposes to amend the definition of “total loan amount” for closed-end mortgage loans and to clarify the meaning of “total loan amount” for open-end credit plans. 33 In this regard, the Bureau notes that section 1412 of the Dodd-Frank Act retained the phrase “total loan amount” for purposes of determining whether a closed-end mortgage complies with the points and fees restrictions applicable to qualified mortgages. See TILA section 129C(b)(2)(A)(vii). Annual Adjustment of $1,000 Amount The Bureau proposes to re-number existing comment 32(a)(1)(ii)-2 as proposed comment 32(a)(1)(ii)-1 for organizational purposes, as well as to revise it in several respects to reflect proposed revisions to § 1026.32(a)(1)(ii). First, proposed comment 32(a)(1)(ii)-1 replaces references to the pre-Dodd-Frank statutory figure of $400 with references to the new statutory figure of $1,000. 34 In addition, consistent with the Dodd-Frank Act's transfer of rulemaking authority for HOEPA from the Board to the Bureau, proposed comment 32(a)(1)(ii)-1 states that the Bureau will publish and incorporate into commentary the required annual adjustments to the $1,000 figure after the June figures become available each year. Finally, the proposal retains in proposed comment 32(a)(1)(ii)-2 the paragraphs in existing comment 32(a)(1)(ii)-2 enumerating the $400 figure as adjusted for inflation from 1996 through 2012. The Bureau believes that it is useful to retain the list of historical adjustments to the $400 figure for reference, notwithstanding that TILA section 103(bb)(1)(A)(ii)(II) increases the dollar figure from $400 to $1,000. 34 The Dodd-Frank Act renumbered TILA section 103(aa)(1)(B)(i)-(ii) concerning points and fees for high-cost mortgages as 103(bb)(1)(A)(ii)(I)-(II). However, the Dodd-Frank Act did not amend TILA section 103(aa)(3) (the provision that directs the points and fees dollar figure to be adjusted annually for inflation) to reflect this new numbering. To give meaning to the statute as amended, the Bureau interprets the authority provided to it in amended TILA section 103(bb)(3) as authority to adjust annually for inflation the dollar figure prescribed in amended TILA section 103(bb)(1)(A)(ii)(II). 32(a)(1)(iii) Existing TILA section 103(aa)(1), 15 U.S.C. 1602(aa)(1), provides that a mortgage is a high-cost mortgage if either its APR or its total points and fees exceed certain statutorily prescribed thresholds. Section 1431(a) of the Dodd-Frank Act amended TILA to add that a transaction is also a high-cost mortgage if the credit transaction documents permit the creditor to charge or collect prepayment fees or penalties more than 36 months after the transaction closing, or if such fees or penalties exceed, in the aggregate, more than two percent of the amount prepaid. TILA section 103(bb)(1)(A)(iii). Proposed § 1026.32(a)(1)(iii) implements TILA section 103(bb)(1)(A)(iii) with several minor clarifications. First, proposed § 1026.32(a)(1)(iii) provides that the determination as to whether the creditor can charge the specified prepayment penalty is to be made under the “terms of the loan contract or open-end credit agreement,” rather than under the “credit transaction documents.” This phrasing is proposed to reflect the application of proposed § 1026.32(a)(1)(iii) to both closed- and open-end transactions, and for consistency with Regulation Z. Proposed § 1026.32(a)(1)(iii) also cross-references the definition of prepayment penalty in proposed § 1026.32(b)(8). Finally, proposed § 1026.32(a)(1)(iii) clarifies that the creditor must include any prepayment penalty that is permitted to be charged more than 36 months “after consummation or account opening,” rather than after “transaction closing.” For consistency and clarity, the Bureau proposes using the terms “consummation” and “account opening” instead of “transaction closing” for closed- and open-end transactions, respectively. Proposed comment 32(a)(1)(iii)-1 explains how the prepayment penalty trigger for high-cost mortgages in proposed § 1026.32(a)(1)(iii) interacts with the ban on prepayment penalties for high-cost mortgages in amended TILA section 129(c), 15 U.S.C. 1639(c), which the Bureau proposes to implement in § 1026.32(d)(6). Specifically, proposed comment 32(a)(1)(iii)-1 explains that § 1026.32 implicates prepayment penalties in two main ways. First, under proposed § 1026.32(a)(1)(iii), a closed- or open-end transaction is a high-cost mortgage if, under the terms of the loan contract or credit agreement, a creditor can charge either (i) a prepayment penalty more than 36 months after consummation or account opening, or (ii) total prepayment penalties that exceed two percent of any amount prepaid. Second, if a transaction is a high-cost mortgage by operation of any of the triggers in proposed § 1026.32(a)(1) ( i.e., the APR, points and fees, or prepayment penalty triggers), then under proposed § 1026.32(d)(6), the transaction may not include a prepayment penalty. Proposed comment 32(a)(1)(iii)-1 clarifies that proposed § 1026.32(a)(1)(iii) thus effectively establishes a maximum period during which a prepayment penalty may be imposed, and a maximum prepayment penalty amount that may be imposed, on a transaction that may be subject to HOEPA coverage ( i.e., a closed- or open-end transaction secured by a consumer's principal dwelling, other than a reverse mortgage transaction). Proposed comment 32(a)(1)(iii)-1 also cross-references proposed § 1026.43(g) (proposed § 226.43(g) in the Board's 2011 ATR Proposal), which proposes to implement new TILA section 129C(c) by (1) prohibiting prepayment penalties for most closed-end mortgages unless the transaction is a fixed-rate, qualified mortgage with an annual percentage rate that meets certain statutorily prescribed thresholds, and (2) restricting prepayment penalties even for such qualified mortgages to three percent, two percent and one percent of the amount prepaid during the first, second, and third years following consummation, respectively. See 76 FR 27390, 27472-78 (May 11, 2011). As discussed further below in the section-by-section analysis to proposed § 1026.32(b)(8), the Bureau believes that the cumulative effect of the Dodd-Frank Act's amendments to TILA concerning prepayment penalties may be to limit the amount of prepayment penalties that may be charged in connection with most closed-end mortgage loans to amounts that would be unlikely to reach the high-cost mortgage prepayment penalty trigger. 35 The Bureau nonetheless requests comment on whether additional guidance concerning the calculation of prepayment penalties for purposes of proposed § 1026.32(b)(1)(iii) is needed. 35 The Dodd-Frank Act's amendments include adding a prepayment penalty trigger for high-cost mortgages and prohibiting prepayment penalties for such mortgages (TILA sections 103(bb)(1)(A)(iii) and 129(c)), restricting or prohibiting prepayment penalties for most closed-end mortgage loans (TILA section 129C(c)), and including prepayment penalties in the points and fees calculations for high-cost mortgages and qualified mortgages (TILA sections 103(bb)(4) and 129C(b)(2)(C), respectively). See also the section-by-section analysis to proposed § 1026.32(b)(1) and (3) and proposed § 1026.32(b)(8), below. Proposed comment 32(a)(1)(iii)-2 illustrates how to apply proposed § 1026.32(a)(1)(iii) in the case of an open-end credit plan. To begin, proposed comment 32(a)(1)(iii)-2 clarifies that, if the terms of an open-end credit agreement allow for a prepayment penalty that exceeds two percent of the initial credit limit for the plan, the agreement will be deemed to permit a creditor to charge a prepayment penalty that exceeds two percent of the “amount prepaid” within the meaning of proposed § 1026.32(a)(1)(iii). The comment provides three examples to illustrate the rule. Proposed comment 32(a)(1)(iii)-2.i explains that a home-equity line of credit with an initial credit limit of $10,000 is a high-cost mortgage under proposed § 1026.32(a)(1)(iii) if the terms of the plan permit the creditor to charge the consumer a flat fee of $500 if the consumer terminates the plan sooner than three years after opening the account. The $500 flat fee is a prepayment penalty ( see proposed § 1026.32(b)(8)(ii), below) that exceeds two percent of the total amount of the initial credit limit of $10,000, which is $200. Proposed comment 32(a)(1)(iii)-3.ii sets forth a second example. This example assumes a home-equity line of credit with an initial credit limit of $10,000 and a ten-year term. The terms of the plan permit the creditor to charge the consumer a $200 fee if the consumer terminates the plan prior to the expiration of the ten-year term. Even though the $200 prepayment penalty is less than two percent of the initial $10,000 credit limit, the home-equity line of credit is a high-cost mortgage under proposed § 1026.32(a)(1)(iii) because the terms of the plan permit the creditor to charge the penalty longer than three years after the consumer opens the account. Finally, proposed comment 32(a)(1)(iii)-3.iii assumes that the terms of an open-end credit plan with an initial credit limit of $150,000 permit the creditor to charge the consumer for any closing costs paid by the creditor if the consumer terminates the plan less than 36 months after account opening. In the example, the creditor pays $1,000 in closing costs. Of the $1,000, the creditor pays $800 to cover bona fide third-party charges and $200 to cover origination costs incurred by the creditor or its affiliates. Under proposed § 1026.32(b)(8)(ii), the ability to charge the consumer $800 upon early termination to cover bona fide third-party charges is not a prepayment penalty, but the ability to charge $200 for the creditor's or its affiliate's origination costs is a prepayment penalty. The total prepayment penalty of $200 is less than two percent of the plan's initial $150,000 credit limit, and under the terms of the plan the penalty does not apply if the consumer terminates the plan more than 36 months after account opening. Thus, the plan is not a high-cost mortgage under § 1026.32(a)(1)(iii). 32(a)(2) Determination of Transaction Coverage Rate or Annual Percentage Rate TILA section 103(bb)(1)(B) specifies the interest rate used to determine the annual percentage rate for purposes of the APR threshold under TILA section 103(bb)(1)(A)(i). TILA section 103(bb)(1)(B) requires that: (1) In connection with a fixed-rate transaction, the annual percentage rate must be based on the interest rate in effect on the date of consummation; (2) in connection with a transaction with a rate that varies solely in accordance with an index, the annual percentage rate must be based on the interest rate determined by adding the maximum margin permitted at any time during the loan agreement to the index rate in effect on the date of consummation; and (3) in connection with any other transaction in which the rate may vary at any time during the term of the loan [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2012-17059. Public record. Not legal advice.