# Appraisals for Higher-Priced Mortgage Loans > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2013-01809 ## Record - **Collection:** Federal Register - **Document type:** Rule - **Published:** February 13, 2013 - **Citation:** 78 FR 10368 ## Text DEPARTMENT OF THE TREASURY Office of the Comptroller of the Currency 12 CFR Parts 34 and 164 [Docket No. OCC-2012-0013] RIN 1557-AD62 FEDERAL RESERVE SYSTEM 12 CFR Part 226 [Docket No. R-1443] RIN 7100-AD90 NATIONAL CREDIT UNION ADMINISTRATION 12 CFR Part 722 RIN 3133-AE04 BUREAU OF CONSUMER FINANCIAL PROTECTION 12 CFR Part 1026 [Docket No. CFPB-2012-0031] RIN 3170-AA11 FEDERAL HOUSING FINANCE AGENCY 12 CFR Part 1222 RIN 2590-AA58 Appraisals for Higher-Priced Mortgage Loans AGENCY: Board of Governors of the Federal Reserve System (Board); Bureau of Consumer Financial Protection (Bureau); Federal Deposit Insurance Corporation (FDIC); Federal Housing Finance Agency (FHFA); National Credit Union Administration (NCUA); and Office of the Comptroller of the Currency, Treasury (OCC). ACTION: Final rule; official staff commentary. SUMMARY: The Board, Bureau, FDIC, FHFA, NCUA, and OCC (collectively, the Agencies) are issuing a final rule to amend Regulation Z, which implements the Truth in Lending Act (TILA), and the official interpretation to the regulation. The revisions to Regulation Z implement a new provision requiring appraisals for “higher-risk mortgages” that was added to TILA by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act or Act). For mortgages with an annual percentage rate that exceeds the average prime offer rate by a specified percentage, the final rule requires creditors to obtain an appraisal or appraisals meeting certain specified standards, provide applicants with a notification regarding the use of the appraisals, and give applicants a copy of the written appraisals used. DATES: This final rule is effective on January 18, 2014. FOR FURTHER INFORMATION CONTACT: Board: Lorna Neill or Mandie Aubrey, Counsels, Division of Consumer and Community Affairs, at (202) 452-3667, or Carmen Holly, Supervisory Financial Analyst, Division of Banking Supervision and Regulation, at (202) 973-6122, Board of Governors of the Federal Reserve System, Washington, DC 20551. Bureau: Owen Bonheimer, Counsel, or William W. Matchneer, Senior Counsel, Division of Research, Markets, and Regulations, Bureau of Consumer Financial Protection, 1700 G Street, NW., Washington, DC 20552, at (202) 435-7000. FDIC: Beverlea S. Gardner, Senior Examination Specialist, Risk Management Section, at (202) 898-3640, Sumaya A. Muraywid, Examination Specialist, Risk Management Section, at (573) 875-6620, Glenn S. Gimble, Senior Policy Analyst, Division of Consumer Protection, at (202) 898-6865, Sandra S. Barker, Senior Policy Analyst, Division of Consumer Protection, at (202) 898-3615, Mark Mellon, Counsel, Legal Division, at (202) 898-3884, or Kimberly Stock, Counsel, Legal Division, at (202) 898-3815, or 550 17th St. NW., Washington, DC 20429. FHFA: Susan Cooper, Senior Policy Analyst, (202) 649-3121, Lori Bowes, Policy Analyst, Office of Housing and Regulatory Policy, (202) 649-3111, Ming-Yuen Meyer-Fong, Assistant General Counsel, Office of General Counsel, (202) 649-3078, or Sharron P.A. Levine, Associate General Counsel, Office of General Counsel, (202) 649-3496, Federal Housing Finance Agency, 400 Seventh Street SW., Washington, DC, 20024. NCUA: John Brolin and Pamela Yu, Staff Attorneys, or Frank Kressman, Associate General Counsel, Office of General Counsel, at (703) 518-6540, or Vincent Vieten, Program Officer, Office of Examination and Insurance, at (703) 518-6360, or 1775 Duke Street, Alexandria, Virginia, 22314. OCC: Robert L. Parson, Appraisal Policy Specialist, (202) 649-6423, G. Kevin Lawton, Appraiser (Real Estate Specialist), (202) 649-7152, Carolyn B. Engelhardt, Bank Examiner (Risk Specialist—Credit), (202) 649-6404, Charlotte M. Bahin, Senior Counsel or Mitchell Plave, Special Counsel, Legislative & Regulatory Activities Division, (202) 649-5490, Krista LaBelle, Special Counsel, Community and Consumer Law Division, (202) 649-6350, or 250 E Street SW., Washington DC 20219. SUPPLEMENTARY INFORMATION: I. Background In general, the Truth in Lending Act (TILA), 15 U.S.C. 1601 et seq., seeks to promote the informed use of consumer credit by requiring disclosures about its costs and terms. TILA requires additional disclosures for loans secured by consumers' homes and permits consumers to rescind certain transactions that involve their principal dwelling. For most types of creditors, TILA directs the Bureau to prescribe regulations to carry out the purposes of the law and specifically authorizes the Bureau to issue regulations that contain such classifications, differentiations, or other provisions, or that provide for such adjustments and exceptions for any class of transactions, that in the Bureau's judgment are necessary or proper to effectuate the purposes of TILA, or prevent circumvention or evasion of TILA. 1 15 U.S.C. 1604(a). For most types of creditors and most provisions of the statute, TILA is implemented by the Bureau's Regulation Z. See 12 CFR part 1026. Official Interpretations provide guidance to creditors in applying the rules to specific transactions and interpret the requirements of the regulation. See 12 CFR part 1026, Supp. I. However, as explained in the section-by-section analysis of this SUPPLEMENTARY INFORMATION, the new appraisal section of TILA addressed in this final rule (TILA section 129H, 15 U.S.C. 1639h) is implemented not only for all affected creditors by the Bureau's Regulation Z, but also, for creditors overseen by the OCC and the Board, respectively, by OCC regulations and the Board's Regulation Z. See 12 CFR parts 34 and 164 (OCC regulations) and part 226 (the Board's Regulation Z). The Bureau's, the OCC's and the Board's versions of the appraisal rules and corresponding official interpretations are substantively identical. The FDIC, NCUA, and FHFA are adopting the Bureau's version of the regulations under this final rule. 1 For motor vehicle dealers as defined in section 1029 of the Dodd-Frank Act, TILA directs the Board to prescribe regulations to carry out the purposes of TILA and authorizes the Board to issue regulations that contain such classifications, differentiations, or other provisions, or that provide for such adjustments and exceptions for any class of transactions, that in the Board's judgment are necessary or proper to effectuate the purposes of TILA, or prevent circumvention or evasion of TILA. 15 U.S.C. 5519; 15 U.S.C. 1604(a). The Dodd-Frank Act 2 was signed into law on July 21, 2010. Section 1471 of the Dodd-Frank Act's Title XIV, Subtitle F (Appraisal Activities), added a new TILA section 129H, 15 U.S.C. 1639h, which establishes appraisal requirements that apply to “higher-risk mortgages.” Specifically, new TILA section 129H prohibits a creditor from extending credit in the form of a higher-risk mortgage loan to any consumer without first: 2 Public Law 111-203, 124 Stat. 1376 (Dodd-Frank Act). • Obtaining a written appraisal performed by a certified or licensed appraiser who conducts a physical property visit of the interior of the property. • Obtaining an additional appraisal from a different certified or licensed appraiser if the higher-risk mortgage finances the purchase or acquisition of a property from a seller at a higher price than the seller paid, within 180 days of the seller's purchase or acquisition. The additional appraisal must include an analysis of the difference in sale prices, changes in market conditions, and any improvements made to the property between the date of the previous sale and the current sale. A creditor of a “higher-risk mortgage” must also: • Provide the applicant, at the time of the initial mortgage application, with a statement that any appraisal prepared for the mortgage is for the sole use of the creditor, and that the applicant may choose to have a separate appraisal conducted at the applicant's expense. • Provide the applicant with one copy of each appraisal conducted in accordance with TILA section 129H without charge, at least three (3) days prior to the transaction closing date. New TILA section 129H(f) defines a “higher-risk mortgage” with reference to the annual percentage rate (APR) for the transaction. A higher-risk mortgage is a “residential mortgage loan” 3 secured by a principal dwelling with an APR that exceeds the average prime offer rate (APOR) for a comparable transaction as of the date the interest rate is set— 3 See Dodd-Frank Act, § 1401; TILA section 103(cc)(5), 15 U.S.C. 1602(cc)(5) (defining “residential mortgage loan”). • By 1.5 or more percentage points, for a first lien residential mortgage loan with an original principal obligation amount that does not exceed the amount for the maximum limitation on the original principal obligation of a mortgage in effect for a residence of the applicable size, as of the date of the interest rate set, pursuant to the sixth sentence of section 305(a)(2) of the Federal Home Loan Mortgage Corporation Act (12 U.S.C. 1454); • By 2.5 or more percentage points, for a first lien residential mortgage loan having an original principal obligation amount that exceeds the amount for the maximum limitation on the original principal obligation of a mortgage in effect for a residence of the applicable size, as of the date of the interest rate set, pursuant to the sixth sentence of section 305(a)(2) of the Federal Home Loan Mortgage Corporation Act (12 U.S.C. 1454); or • By 3.5 or more percentage points, for a subordinate lien residential mortgage loan. The definition of “higher-risk mortgage” expressly excludes “qualified mortgages,” as defined in TILA section 129C, and “reverse mortgage loans that are qualified mortgages,” as defined in TILA section 129C. 15 U.S.C. 1639c. New TILA section 103(cc)(5) defines the term “residential mortgage loan” as any consumer credit transaction that is secured by a mortgage, deed of trust, or other equivalent consensual security interest on a dwelling or on residential real property that includes a dwelling, other than a consumer credit transaction under an open-end credit plan. 15 U.S.C. 1602(cc)(5). New TILA section 129H(b)(4)(A) requires the Agencies jointly to prescribe regulations to implement the property appraisal requirements for higher-risk mortgages. 15 U.S.C. 1639h(b)(4)(A). The Dodd-Frank Act requires that final regulations to implement these provisions be issued within 18 months of the transfer of functions to the Bureau pursuant to section 1062 of the Act, or January 21, 2013. 4 These regulations are to take effect 12 months after issuance. 5 4 See Dodd-Frank Act, section 1400(c)(1). 5 See id. The Agencies published proposed regulations on September 5, 2012, that would implement these higher-risk mortgage appraisal provisions. 77 FR 54722 (Sept. 5, 2012). The comment period closed on October 15, 2012. The Agencies received more than 200 comment letters regarding the proposal from banks, credit unions, other creditors, appraisers, appraisal management companies, industry trade associations, consumer groups, and others. II. Summary of the Final Rule Loans Covered To implement the statutory definition of “higher-risk mortgage,” the final rule uses the term “higher-priced mortgage loan” (HPML), a term already in use under the Bureau's Regulation Z with a meaning substantially similar to the meaning of “higher-risk mortgage” in the Dodd-Frank Act. In response to commenters, the Agencies are using the term HPML to refer generally to the loans that could be subject to this final rule because they are closed-end credit and meet the statutory rate triggers, but the Agencies are separately exempting several types of HPML transactions from the rule. The term “higher-risk mortgage” encompasses a closed-end consumer credit transaction secured by a principal dwelling with an APR exceeding certain statutory thresholds. These rate thresholds are substantially similar to rate triggers that have been in use under Regulation Z for HPMLs. 6 Specifically, consistent with TILA section 129H, a loan is a “higher-priced mortgage loan” under the final rule if the APR exceeds the APOR by 1.5 percent for first-lien conventional or conforming loans, 2.5 percent for first-lien jumbo loans, and 3.5 percent for subordinate-lien loans. 7 6 Added to Regulation Z by the Board pursuant to the Home Ownership and Equity Protection Act of 1994 (HOEPA), the HPML rules address unfair or deceptive practices in connection with subprime mortgages. See 73 FR 44522, July 30, 2008; 12 CFR 1026.35. 7 The existing HPML rules apply the 2.5 percent over APOR trigger for jumbo loans only with respect to a requirement to establish escrow accounts. See 12 CFR 1026.35(b)(3)(v). Consistent with the statute, the final rule exempts “qualified mortgages” from the requirements of the rule. Qualified mortgages are defined in § 1026.43(e) of the Bureau's final rule implementing the Dodd-Frank Act's ability-to-repay requirements in TILA section 129C (2013 ATR Final Rule). 8 15 U.S.C. 1639c. 8 The Bureau released the 2013 ATR Final Rule on January 10, 2013, under Docket No. CFPB-2011-0008, CFPB-2012-0022, RIN 3170-AA17, at http://consumerfinance.gov/Regulations . In addition, the final rule excludes the following classes of loans from coverage of the higher-risk mortgage appraisal rule: (1) Transactions secured by a new manufactured home; (2) transactions secured by a mobile home, boat, or trailer; (3) transactions to finance the initial construction of a dwelling; (4) loans with maturities of 12 months or less, if the purpose of the loan is a “bridge” loan connected with the acquisition of a dwelling intended to become the consumer's principal dwelling; and (5) reverse mortgage loans. For reasons discussed more fully in the section-by-section analysis of § 1026.35(a)(1), below, the proposal included a request for comments on an alternative method of determining coverage based on the “transaction coverage rate” or TCR, rather than the APR. Unlike the APR, the TCR would exclude all prepaid finance charges not retained by the creditor, a mortgage broker, or an affiliate of either. 9 This change was proposed to address a possible expansion of the definition of “finance charge” used to calculate the APR, proposed by the Bureau in its rulemaking to integrate mortgage disclosures (2012 TILA-RESPA Proposal 10 ). Accordingly, the proposal defined “higher-risk mortgage loan” (termed “higher-priced mortgage loan” in this final rule) in the alternative as calculated by either the TCR or APR, with comment sought on both approaches. 9 See 75 FR 58539, 58660-62 (Sept. 24, 2010); 76 FR 11598, 11609, 11620, 11626 (March 2, 2011). 10 See 77 FR 51116 (Aug. 23, 2012). As explained more fully in the section-by-section analysis of § 1026.35(a)(1), below, the final rule requires creditors to determine whether a loan is an HPML by comparing the APR to the APOR. The Agencies are not at this time adopting the proposed alternative of replacing the APR with the TCR and comparing the TCR to the APOR. The Agencies will consider the merits of any modifications to this approach and public comments on this matter if and when the Bureau adopts the more inclusive definition of finance charge proposed in the 2012 TILA-RESPA Proposal. Finally, based on public comments, the Agencies intend to publish a supplemental proposal to request comment on possible exemptions for “streamlined” refinance programs and small dollar loans, as well as to seek comment on whether application of the HPML appraisal rule to loans secured by certain other property types, such as existing manufactured homes, is appropriate. Requirements That Apply to All Appraisals Performed for Non-Exempt HPMLs Consistent with the statute, the final rule allows a creditor to originate an HPML that is not otherwise exempt from the appraisal rules only if the following conditions are met: • The creditor obtains a written appraisal; • The appraisal is performed by a certified or licensed appraiser; and • The appraiser conducts a physical property visit of the interior of the property. Also consistent with the statute, the following requirements also apply with respect to HPMLs subject to the final rule: • At application, the consumer must be provided with a statement regarding the purpose of the appraisal, that the creditor will provide the applicant a copy of any written appraisal, and that the applicant may choose to have a separate appraisal conducted for the applicant's own use at his or her own expense; and • The consumer must be provided with a free copy of any written appraisals obtained for the transaction at least three (3) business days before consummation. Requirement To Obtain an Additional Appraisal in Certain HPML Transactions In addition, the final rule implements the Act's requirement that the creditor of a “higher-risk mortgage” obtain an additional written appraisal, at no cost to the borrower, when the “higher-risk mortgage” will finance the purchase of the consumer's principal dwelling and there has been an increase in the purchase price from a prior sale that took place within 180 days of the current sale. TILA section 129H(b)(2)(A), 15 U.S.C. 1639(b)(2)(A). In the final rule, using their exemption authority, the Agencies are setting thresholds for the increase that will trigger an additional appraisal. An additional appraisal will be required for an HPML (that is not otherwise exempt) if either: • The seller is reselling the property within 90 days of acquiring it and the resale price exceeds the seller's acquisition price by more than 10 percent; or • The seller is reselling the property within 91 to 180 days of acquiring it and the resale price exceeds the seller's acquisition price by more than 20 percent. The additional written appraisal, from a different licensed or certified appraiser, generally must include the following information: an analysis of the difference in sale prices ( i.e., the sale price paid by the seller and the acquisition price of the property as set forth in the consumer's purchase agreement), changes in market conditions, and any improvements made to the property between the date of the previous sale and the current sale. III. Legal Authority As noted above, TILA section 129H(b)(4)(A), added by the Dodd-Frank Act, requires the Agencies jointly to prescribe regulations implementing section 129H. 15 U.S.C. 1639h(b)(4)(A). In addition, TILA section 129H(b)(4)(B) grants the Agencies the authority jointly to exempt, by rule, a class of loans from the requirements of TILA section 129H(a) or section 129H(b) if the Agencies determine that the exemption is in the public interest and promotes the safety and soundness of creditors. 15 U.S.C. 1639h(b)(4)(B). IV. Section-by-Section Analysis For ease of reference, unless otherwise noted, the SUPPLEMENTARY INFORMATION refers to the section numbers of the rules that will be published in the Bureau's Regulation Z at 12 CFR 1026.35(a) and (c). 11 As explained further in the section-by-section analysis of § 1026.35(c)(7), the rules are being published separately by the OCC, the Board, and the Bureau. No substantive difference among the three sets of rules is intended. The NCUA and FHFA adopt the rules as published in the Bureau's Regulation Z at 12 CFR 1026.35(a) and (c), by cross-referencing these rules in 12 CFR 722.3 and 12 CFR Part 1222, respectively. The FDIC adopts the rules as published in the Bureau's Regulation Z at 12 CFR 1026.35(a) and (c), but does not cross-reference the Bureau's Regulation Z. 11 The final rule was issued by the Bureau on January 18, 2013, in accordance with 12 CFR 1074.1. Section 1026.35 Prohibited Acts or Practices in Connection With Higher-Priced Mortgage Loans The final rule is incorporated into Regulation Z's existing section on prohibited acts or practices in connection with HPMLs, § 1026.35. As revised, § 1026.35 will consist of four subsections—(a) Definitions; (b) Escrows for higher-priced mortgage loans; (c) Appraisals for higher-priced mortgage loans; and (d) Evasion; open-end credit. As explained in more detail in the Bureau's final rule on escrow requirements for HPMLs (2013 Escrows Final Rule) 12 (finalizing the Board's proposal to implement the Act's escrow account requirements under TILA section 129D, 15 U.S.C. 1639d (2011 Escrows Proposal) 13 ), the subsections on repayment ability (existing § 1026.35(b)(1)) and prepayment penalties (existing § 1026.35(b)(2)) will be deleted because the Dodd-Frank Act addressed these matters in other ways. Accordingly, repayment ability and prepayment penalties are now addressed in the Bureau's final ability-to-repay rule (2013 ATR Final Rule) and high-cost mortgage rule (2013 HOEPA Final Rule). 14 See §§ 1026.32(d)(6) and 1026.43(c), (d), (f), and (g). 12 The Bureau released the 2013 Escrows Final Rule on January 10, 2013, under Docket No. CFPB-2013-0001, RIN 3170-AA16, at http://consumerfinance.gov/Regulations . 13 76 FR 11598, 11612 (March 2, 2011). 14 The Bureau released the 2013 HOEPA Final Rule on January 10, 2013, under Docket No. CFPB-2012-0029, RIN 3170-AA12, at http://consumerfinance.gov/Regulations . 35(a) Definitions 35(a)(1) Higher-priced mortgage loan TILA section 129H(f) defines a “higher-risk mortgage” as a residential mortgage loan secured by a principal dwelling with an APR that exceeds the APOR for a comparable transaction by a specified percentage as of the date the interest rate is set. 15 U.S.C. 1639(f). New TILA section 103(cc)(5) defines the term “residential mortgage loan” as “any consumer credit transaction that is secured by a mortgage, deed of trust, or other equivalent consensual security interest on a dwelling or on residential real property that includes a dwelling, other than a consumer credit transaction under an open-end credit plan.” 15 U.S.C. 1602(cc)(5). Consistent with TILA sections 129H(f) and 103(cc)(5), the proposal provided that a “higher-risk mortgage loan” is a closed-end consumer credit transaction secured by the consumer's principal dwelling with an APR that exceeds the APOR for a comparable transaction as of the date the interest rate is set by 1.5 percentage points for first-lien conventional mortgages, 2.5 percentage points for first-lien jumbo mortgages, and 3.5 percentage points for subordinate-lien mortgages. The Agencies noted in the proposal that the statutory definition of higher-risk mortgage, though similar to that of the regulatory term “higher-priced mortgage loan,” differs from the existing regulatory definition of higher-priced mortgage loan in some important respects. First, the statutory definition of higher-risk mortgage expressly excludes loans that meet the definition of a “qualified mortgage” under TILA section 129C. In addition, the statutory definition of higher-risk mortgage includes an additional 2.5 percentage point threshold for first-lien jumbo mortgage loans, while the definition of higher-priced mortgage loan has contained this threshold only for purposes of applying the requirement to establish escrow accounts for higher-priced mortgage loans. Compare TILA section 129H(f)(2), 15 U.S.C. 1639h(f)(2), with 12 CFR 1026.35(a)(1) and 1026.35(b)(3). The Agencies requested comment on whether the concurrent use of the defined terms “higher-risk mortgage loan” and “higher-priced mortgage loan” in different portions of Regulation Z may confuse industry or consumers and, if so, what alternative approach the Agencies could take to implementing the statutory definition of “higher-risk mortgage loan” consistent with the requirements of TILA section 129H. 15 U.S.C. 1639h. The final rule adopts the proposed definition, but replaces the term “higher-risk mortgage loan” with the term “higher-priced mortgage loan” or HPML. See existing § 1026.35(a)(1). The final rule also makes certain changes to the existing definition of HPML, discussed in detail below. Public Comments on the Proposal Several credit unions, banks, and an individual commenter believed that the definition of “higher-risk mortgage loan” did not adequately capture loans that were truly “high risk.” Several of these commenters stated that the definition should account not only for the cost of the loan, but also for other risk factors, such as debt to income ratio, loan amounts, and credit scores and other measures of a consumer's creditworthiness. A bank commenter believed that the interest rate thresholds in the definition were ambiguous and arbitrary and asserted that, for example, 1.5 percent was not an exceptionally high interest margin in comparison with interest margins for credit cards and other financing. A credit union commenter believed the rule would apply to consumers who were in fact a low credit risk. Most commenters on the definition expressly supported using the existing term HPML rather than the new term “higher-risk mortgage loan.” Commenters including, among others, a mortgage company, bank, credit union, financial holding company, credit union trade association, and banking trade association, asserted that the use of two terms with similar meanings would be confusing to the mortgage credit industry. Some asserted that consumers would be confused by this as well. Some of these commenters noted that Regulation Z also already used the term “high-cost mortgage” with different requirements and believed this third term would further compound consumer and industry confusion. Of commenters who expressed a preference for the term that should be used, most recommended using the term HPML because this term has been used by industry for some time. Some commenters on this issue also advocated making the rate triggers and overall definition the same for existing HPMLs and “higher-risk mortgages” regardless of the terms used. They argued that this would reduce compliance burdens and confusion and ease costs associated with developing and managing systems. One commenter believed that developing a single standard would also avoid creating unnecessary delay and additional cost for consumers in the origination process. A few commenters acknowledged key differences between the statutory meaning of “higher-risk mortgage” and the regulatory term HPML, and suggested ways of harmonizing the two definitions. For example, these commenters noted that “higher-risk mortgages” do not include qualified mortgages, whereas HPMLs do. To address this difference, one commenter suggested, for example, that the appraisal requirements should apply to HPMLs as currently defined, except for qualified mortgages. Other commenters suggested that the basic definition of HPML be understood to refer solely to the rate thresholds and suggested that the exemption for qualified mortgages from the appraisal rules be inserted as a separate provision. They did not discuss how to address additional variances in the types of transactions excluded from HPML and “higher-risk mortgage,” respectively, such as the exclusion from the meaning of HPML but not the statutory definition of “higher-risk mortgage” for construction-only and bridge loans. Other commenters also acknowledged that the current definition of HPML includes only two rate thresholds—one for first-lien mortgages (APR exceeds APOR by 1.5 percentage points) and the other for subordinate-lien mortgages (APR exceeds APOR by 3.5 percentage points). By contrast, the statutory definition of “higher-risk mortgage” has an additional rate tier for first-lien jumbo mortgages (APR exceeds APOR by 2.5 percentage points). The HPML requirements in Regulation Z apply a rate threshold of 2.5 percentage points above APOR to jumbo loans only for purposes of the requirement to escrow. The commenters who noted this distinction held the view that the “middle tier” threshold would not have a practical advantage for lenders or consumers. Instead, they recommended adopting a final rule with a single APR trigger of 1.5 percentage points above APOR for all first-lien loans. Discussion In the final rule, the Agencies use the term HPML rather than the proposed term “higher-risk mortgage loan” to refer generally to the loans covered by the appraisal rules. In a separate subsection of the final rule (§ 1026.35(c)(2), discussed in the section-by-section analysis below), the Agencies exempt several types of transactions from coverage of the HPML appraisal rules. On January 10, 2013, the Bureau published the 2013 Escrows Final Rule, its final rule to implement Dodd-Frank Act amendments to TILA regarding the requirement to escrow for certain consumer mortgages. 15 See TILA section 129D, 15 U.S.C. 1639d. These rules are to take effect in May 2013, before the effective date of this final rule (January 18, 2014). 15 The Bureau released the 2013 Escrows Final Rule on January 10, 2013, under Docket No. CFPB-2013-0001, RIN 3170-AA16, at http://consumerfinance.gov/Regulations . Thus, consistent with TILA sections 129H(f) and 103(cc)(5) and the proposal, the final rule in § 1026.35(a)(1) follows the Bureau's 2013 Escrows Final Rule in defining an HPML as a closed-end consumer credit transaction secured by the consumer's principal dwelling with an annual percentage rate that exceeds the average prime offer rate for a comparable transaction as of the date the interest rate is set: • By 1.5 or more percentage points, for a loan secured by a first lien with a principal obligation at consummation that does not exceed the limit in effect as of the date the transaction's interest rate is set for the maximum principal obligation eligible for purchase by Freddie Mac; • By 2.5 or more percentage points, for a loan secured by a first lien with a principal obligation at consummation that exceeds the limit in effect as of the date the transaction's interest rate is set for the maximum principal obligation eligible for purchase by Freddie Mac; and • By 3.5 or more percentage points, for a loan secured by a subordinate lien. The Agencies acknowledge that some commenters have concerns about the rate thresholds; however, these rate thresholds are prescribed by statute. See TILA section 129H(f)(2), 15 U.S.C. 1639h(f)(2); see also 15 U.S.C. 1602(cc)(5). The Bureau in the 2013 Escrows Final Rule adopted a definition of HPML that is consistent for both TILA's escrow requirement and TILA's appraisal requirements for “higher-risk mortgages.” TILA sections 129D and 129H, 15 U.S.C. 1639d and 1639h. This definition incorporates the APR thresholds for loans covered by these rules as prescribed by Dodd-Frank Act amendments to TILA and also reflects that both sets of rules apply only to closed-end mortgage transactions. TILA sections 129D(b)(3) and 129H(f), 15 U.S.C. 1639d(b)(3) and 1639h(f). Overall, the revised definition of HPML adopted in the 2013 Escrows Final Rule reflects only minor changes from the current definition of HPML in existing 12 CFR 1026.35(a). For clarity, the Agencies are re-publishing the definition published earlier in the 2013 Escrows Final Rule. 16 The incorporation by reference in § 1026.35(c) of the term HPML in § 1026.35(a) and the re-publishing of § 1026.35(a) in this final rule are not intended to subject § 1026.35(a) to the joint rulemaking authority of the Agencies under TILA section 129H. 16 In their respective publications of the final rule, the Board is publishing the definition of HPML at 12 CFR 226.43(a)(3) and the OCC is including a cross-reference to the definition of HPML at 12 CFR 34.202(b). Consistent with the proposal, the final rule uses the phrase “a closed-end consumer credit transaction secured by the consumer's principal dwelling” in place of the statutory term “residential mortgage loan” throughout § 1026.35(a)(1). As also proposed, the Agencies have elected to incorporate the substantive elements of the statutory definition of “residential mortgage loan” into the definition of HPML rather than using the term itself to avoid inadvertent confusion of the term “residential mortgage loan” with the term “residential mortgage transaction,” which is an established term used throughout Regulation Z and defined in § 1026.2(a)(24). Compare 15 U.S.C. 1602(cc)(5) (defining “residential mortgage loan”) with 12 CFR 1026.2(a)(24) (defining “residential mortgage transaction”). Accordingly, the final regulation text differs from the express statutory language, but with no intended substantive change to the scope of TILA section 129H. Annual Percentage Rate (APR) Versus Transaction Coverage Rate (TCR) The Agencies are not at this time adopting an alternative method of determining coverage based on the “transaction coverage rate” or TCR. The proposal included a request for comments on a proposed amendment to the method of calculating the APR that was proposed as part of other mortgage-related proposals issued for comment by the Bureau. In the Bureau's proposal to integrate mortgage disclosures (2012 TILA-RESPA Proposal), the Bureau proposed to adopt a more simple and inclusive finance charge calculation for closed-end credit secured by real property or a dwelling. 17 The more-inclusive finance charge definition would affect the APR calculation because the finance charge is integral to the APR calculation. The Bureau therefore also sought comment on whether replacing APR with an alternative metric might be warranted to determine whether a loan is a “high-cost mortgage” covered by the Bureau's proposal to implement the Dodd-Frank Act provision related to “high-cost mortgages” (2012 HOEPA Proposal), 18 as well as by the proposal to implement the Dodd-Frank Act's escrow requirements in TILA section 129D (2011 Escrows Proposal). 19 The alternative metric would have implications for the 2013 ATR Final Rule as well. One possible alternative metric discussed in those proposals is the “transaction coverage rate” (TCR), which would exclude all prepaid finance charges not retained by the creditor, a mortgage broker, or an affiliate of either. 20 17 See 2012 TILA-RESPA Proposal, 77 FR 51116, 51143-46, 51277-79, 51291-93, 51310-11 (Aug. 23, 2012). 18 See 2012 HOEPA Proposal, 77 FR 49090, 49100-07, 49133-35 (Aug. 15, 2012). 19 15 U.S.C. 1639d; 76 FR 11598 (March 2, 2011). 20 See 75 FR 58539, 58660-62 (Sept. 24, 2010); 76 FR 11598, 11609, 11620, 11626 (March 2, 2011). The new rate triggers for both “high-cost mortgages” and “higher-risk mortgages” under the Dodd-Frank Act are based on the percentage by which the APR exceeds APOR. Given this similarity, the Agencies sought comment in the higher-risk mortgage proposal on whether a modification should be considered for this final rule as well and, if so, what type of modification. Accordingly, the proposal defined “higher-risk mortgage loan” (termed HPML in this final rule) in the alternative as calculated by either the TCR or APR, with comment sought on both approaches. The Agencies relied on their exemption authority under section 1471 of the Dodd-Frank Act to propose this alternative definition of higher-risk mortgage. TILA section 129H(b)(4)(B), 15 U.S.C. 1639h(b)(4)(B). On September 6, 2012, the Bureau published notice in the Federal Register that the comment period for public comments on the more inclusive definition of “finance charge” in the 2012 TILA-RESPA Proposal and the use of the TCR in the 2012 HOEPA Proposal would be extended to November 6, 2012. 21 The Bureau explained that it believed that commenters needed additional time to evaluate the proposed more inclusive finance charge in light of the other proposals affected by the more inclusive finance charge proposal and the Bureau's request for data on the effects of a more inclusive finance charge. The Bureau stated that it did not expect to address any proposed changes to the definition of finance charge or methods of reconciling an expanded definition of finance charge with APR coverage tests until it finalizes the disclosures in the 2012 TILA-RESPA Proposal. A final TILA-RESPA disclosure rule is not expected to be issued until sometime after January of 2013. 21 77 FR 54843 (Sept. 6, 2012); 77 FR 54844 (Sept. 6, 2012). For this reason, this final rule requires creditors to determine whether a loan is an HPML by comparing the APR to the APOR and is not at this time finalizing the proposed alternative of replacing the APR with the TCR and comparing the TCR to the APOR. The Agencies will consider the merits of any modifications to this approach that might be necessary and public comments on this matter if and when the Bureau adopts the more inclusive definition of finance charge proposed in the 2012 TILA-RESPA Proposal. Existing Definition of HPML Versus New Definition of HPML The new definition of HPML differs from the definition of HPML in existing § 1026.35(a)(1) in several respects. First, the new definition of HPML incorporates an additional rate threshold for determining coverage for first-lien loans—an APR trigger of 2.5 percentage points above APOR for first-lien jumbo mortgage loans. The definition retains the APR triggers of 1.5 percentage points above APOR for first-lien conforming mortgages and 3.5 percentage points above APOR for subordinate-lien loans. By statute, this additional APR threshold of 2.5 percentage points above APOR applies in determining coverage of both the escrow requirements in revised § 1026.35(b) and the appraisal requirements in revised § 1026.35(c). See TILA section 129D(b)(3)(B), 15 U.S.C. 1639d(b)(3)(B) (escrow rules); TILA section 129H(f)(2)(B), 15 U.S.C. 1639h(f)(2)(B) (appraisal rules). The APR trigger for first-lien jumbo loans has applied to the requirement to establish escrow accounts for HPMLs under Regulation Z since April 1, 2011. See existing § 1026.35(b)(3)(i) and (v); 76 FR 11319 (March 2, 2011). Under the existing HPML rules in § 1026.35, the APR threshold of 2.5 percentage points above APOR applies only to the requirement to escrow HPMLs in § 1026.35(b)(3). See § 1026.35(b)(3)(v). Due to amendments to TILA mandated by the Dodd-Frank Act, however, existing HPML rules on repayment ability (§ 1026.35(b)(1)) and prepayment penalties (§ 1026.35(b)(2)) will be eliminated from the HPML rules in § 1026.35. New rules on repayment ability and prepayment penalties are incorporated into the Bureau's 2013 ATR Final Rule and final rules on “high-cost” mortgages. See § 1026.32(b)(6) and (d)(6), § 1026.43(b)(10), (c), (e). Thus, as revised, § 1026.35 will have only two sets of rules for HPMLs—the escrow requirements in revised § 1026.35(b) and the appraisal requirements in new § 1026.35(c). The APR test of 2.5 percentage points above APOR applies, as noted, to both sets of rules, so is now folded into the general definition of HPML in § 1026.35(a)(1). Accordingly, the definition of “jumbo” loans in preexisting § 1026.35(b)(3)(v) is being removed. A second change is that the revised HPML definition adds the qualification that an HPML is a “closed-end” consumer credit transaction. This change is not substantive; instead, it merely replaces text previously in § 1026.35(a)(3), that excludes from the definition of HPML “a home-equity line of credit subject to section 1026.5b.” Other exemptions from the current definition of HPML listed in existing § 1026.35(a)(3) are moved into the specific provisions setting forth exemptions for certain types of HPMLs from coverage of the escrow rules and appraisal rules, respectively. See section-by-section analysis of § 1026.35(c)(2). Thus, the final rule eliminates § 1026.35(a)(3), but with no substantive change intended. Third, with no substantive change intended, the language used to describe the HPML rate triggers has been revised from preexisting § 1026.35(a)(1) to conform to the language used in the proposed “higher-risk mortgage” appraisal rule, which in turn conforms more closely to the statutory language used to describe the rate triggers for “higher-risk mortgages” and similar statutory rate triggers for application of the escrow requirements. See TILA section 129D(B)(3), 15 U.S.C. 1639d(b)(3) (escrow rules); TILA section 129H(f)(2), 15 U.S.C. 1639h(f)(2) (appraisal rules). Finally, the Official Staff Interpretations are reorganized with no substantive change intended. Specifically, comments 35(a)(2)-1 and -3, clarifying the terms “comparable transaction” and “rate set,” respectively, are moved to comments 35(a)(1)-1 and 35(a)(1)-2. This modification reflects that the terms “comparable transaction” and “rate set” occur in the definition of “higher-priced mortgage loan” in § 1026.35(a)(1). Comparable Transaction As comment 35(a)(1)-1 indicates, the table of APORs published by the Bureau will provide guidance to creditors in determining how to use the table to identify which APOR is applicable to a particular mortgage transaction. The Bureau publishes on the internet, currently at http://www.ffiec.gov/ratespread/newcalc.aspx , in table form, APORs for a wide variety of mortgage transaction types based on available information. For example, the Bureau publishes a separate APOR for at least two types of variable rate transactions and at least two types of non-variable rate transactions. APORs are estimated APRs derived by the Bureau from average interest rates, points, and other loan pricing terms currently offered to consumers by a representative sample of creditors for mortgage transactions that have low-risk credit characteristics. Currently, the Bureau calculates APORs consistent with Regulation Z ( see 12 CFR 1026.22 and appendix J to part 1026), for each transaction type for which pricing terms are available from a survey, and estimates APORs for other types of transactions for which direct survey data are not available based on the loan pricing terms available in the survey and other information. However, data are not available for some types of mortgage transactions, including reverse mortgages. In addition, the Bureau publishes on the internet the methodology it uses to arrive at these estimates. Rate Set Comment 35(a)(1)-2 clarifies that a transaction's APR is compared to the APOR as of the date the transaction's interest rate is set (or “locked”) before consummation. The comment notes that sometimes a creditor sets the interest rate initially and then re-sets it at a different level before consummation. Accordingly, under the final rule, for purposes of § 1026.35(a)(1), the creditor should use the last date the interest rate for the mortgage is set before consummation. Average Prime Offer Rate The Agencies are not separately publishing the definition of the term “average prime offer rate” in § 1026.35(a)(2). The meaning of this term is determined by the Bureau and is published and explained in the Bureau's 2013 Escrows Final Rule. Consistent with the proposal, in the Board's publication of this final rule, the term APOR is defined to have the same meaning as in § 1026.35(a)(2). See 12 CFR 226.43(a)(3)(Board). The OCC's publication of this final rule cross-references the definition of HPML, which incorporates the term APOR as defined in § 1026.35(a)(2). See 12 CFR 34.202(b). The OCC's and the Board's versions of Official Staff Interpretations to the final rule cross-reference comments to § 1026.35(a)(2) that explain the meaning of average prime offer rate as described below. See 12 CFR 34.202, comment 1 (OCC); 12 CFR 226.43, comment 2. Comment 35(a)(2)-1 clarifies that APORs are APRs derived from average interest rates, points, and other loan pricing terms currently offered to consumers by a representative sample of creditors for mortgage transactions that have low-risk pricing characteristics. Other pricing terms include commonly used indices, margins, and initial fixed-rate periods for variable-rate transactions. Relevant pricing characteristics include a consumer's credit history and transaction characteristics such as the loan-to-value ratio, owner-occupant status, and purpose of the transaction. Currently, to obtain APORs, the Bureau uses a survey of creditors that both meets the criteria of § 1026.35(a)(2) and provides pricing terms for at least two types of variable rate transactions and at least two types of non-variable rate transactions. The Freddie Mac Primary Mortgage Market Survey® is an example of such a survey, and is the survey currently used to calculate APORs. Principal Dwelling As in the proposal, the final versions of the OCC's and the Board's publication of the definition of “higher-priced mortgage loan” rules cross-reference the Bureau's Regulation Z and Official Staff Interpretations for the meanings of “principal dwelling,” “average prime offer rate,” “comparable transaction,” and “rate set.” See 12 CFR 34.202, comments 1 (OCC); 12 CFR 226.43(a)(3), comments 1, 2, 3, and 4 (Board). The Regulation Z comments to which the OCC's and Board's rules cross-reference regarding the meaning of “average prime offer rate,” “comparable transaction,” and “rate set” are described above. See 12 CFR 34.202, comment1 (OCC); 12 CFR 226.43(a)(3), comments 2, 3, and 4 (Board). A proposed comment cross-referencing the Bureau's Regulation Z for the meaning of the term “principal dwelling” is not adopted in the Bureau's version of the final rule because the meaning of “principal dwelling” in new § 1026.35(a)(1) is understood to be consistent within the Bureau's Regulation Z. The OCC's version of this final rule also does not include the proposed comment specifically cross-referencing the meaning of “principal dwelling” in the Bureau's Regulation Z because the OCC is adopting the Bureau's definition of HPML, which the Bureau's definition of “principal dwelling.” See 12 CFR 34.202(b); see also 12 CFR 34.202, comment 1. The proposed comment is, however, adopted in the Board's publication of the rule. See 12 CFR 226.43(a)(3), comment 1. Consistent with the proposal, in the final rule, the term “principal dwelling” has the same meaning as in § 1026.2(a)(24) and is further explained in existing comment 2(a)(24)-3. Consistent with comment 2(a)(24)-3, a vacation home or other second home would not be a principal dwelling. However, if a consumer buys or builds a new dwelling that will become the consumer's principal dwelling within a year or upon the completion of construction, the comment clarifies that the new dwelling is considered the principal dwelling. Threshold for “Jumbo” Loans Comment 35(a)(1)-3 explains that § 1026.35(a)(1)(ii) provides a separate threshold for determining whether a transaction is a higher-priced mortgage loan subject to § 1026.35 when the principal balance exceeds the limit in effect as of the date the transaction's rate is set for the maximum principal obligation eligible for purchase by Freddie Mac (a “jumbo” loan). The comment further explains that FHFA establishes and adjusts the maximum principal obligation pursuant to rules under 12 U.S.C. 1454(a)(2) and other provisions of Federal law. The comment clarifies that adjustments to the maximum principal obligation made by FHFA apply in determining whether a mortgage loan is a “jumbo” loan to which the separate coverage threshold in § 1026.35(a)(1)(ii) applies. The Board's publication of the definition of “higher-priced mortgage loan” rule in this final rule cross-references this comment in the Bureau's Official Staff Interpretations. See 12 CFR 226.43(a)(3), comment 3 (Board). The OCC's version of the final rule adopts this comment in 12 CFR 34.202, comment 1. 35(c) Appraisals for Higher-Priced Mortgage Loans New § 1026.35(c) implements the substantive appraisal requirements for “higher-risk mortgages” in TILA section 129H. 15 U.S.C. 1639h. The OCC's and the Board's versions of these rules are substantively identical to the rules in § 1026.35(c). See 12 CFR 34.201 et seq. (OCC) and 12 CFR 226.43 (Board); s ee also section-by-section analysis of § 1026.35(c)(7). 35(c)(1) Definitions As discussed above, revised § 1026.35(a) contains the definitions of HPML and APOR, which are used in both the HPML escrow rules in § 1026.35(b) and the HPML appraisal rules in new § 1026.35(c). Definitions specific to the substantive appraisal requirements of § 1026.35(c) are segregated in new § 1026.35(c)(1) and described below, along with applicable public comments. 35(c)(1)(i) Certified or Licensed Appraiser TILA section 129H(b)(3) defines “certified or licensed appraiser” as a person who “(A) is, at a minimum, certified or licensed by the State in which the property to be appraised is located; and (B) performs each appraisal in conformity with the Uniform Standards of Professional Appraisal Practice and title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, and the regulations prescribed under such title, as in effect on the date of the appraisal.” 15 U.S.C. 1639h(b)(3). Consistent with the statute, the Agencies proposed to define “certified or licensed appraiser” as a person who is certified or licensed by the State agency in the State in which the property that secures the transaction is located, and who performs the appraisal in conformity with the Uniform Standards of Professional Appraisal Practice (USPAP) and the requirements applicable to appraisers in title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, as amended (FIRREA title XI) (12 U.S.C. 3331 et seq. ), and any implementing regulations in effect at the time the appraiser signs the appraiser's certification. The proposed definition of “certified or licensed appraiser” generally mirrors the statutory language in TILA section 129H(b)(3) regarding State licensing and certification. However, the Agencies proposed to use the defined term “State agency” to clarify that the appraiser must be certified or licensed by a State agency that meets the standards of FIRREA title XI. The proposal defined the term “State agency” to mean a “State appraiser certifying and licensing agency” recognized in accordance with section 1118(b) of FIRREA title XI (12 U.S.C. 3347(b)) and any implementing regulations. 22 See section-by-section analysis of § 1026.35(c)(1)(iv), below. 22 If the Appraisal Subcommittee of the Federal Financial Institutions Examination Council issues certain written findings concerning, among other things, a State agency's failure to recognize and enforce FIRREA title XI standards, appraiser certifications and licenses issued by that State are not recognized for purposes of title XI and appraisals performed by appraisers certified or licensed by that State are not acceptable for federally-related transactions. 12 U.S.C. 3347(b). As discussed below, the Agencies are adopting the proposed definition of “certified or licensed appraiser” without change. Uniform Standards of Professional Appraisal Practice (USPAP). Consistent with the statutory definition of “certified or licensed appraiser,” the proposal incorporated into the proposed definition the requirement that, to be a “certified or licensed appraiser” under the appraisal rules, the appraiser has to perform the appraisal in conformity with the “Uniform Standards of Professional Appraisal Practice.” A comment was proposed to clarify that USPAP refers to the professional appraisal standards established by the Appraisal Standards Board of the “Appraisal Foundation,” as defined in FIRREA section 1121(9). 12 U.S.C. 3350(9). The Agencies believe that this terminology is appropriate for consistency with the existing definition in FIRREA title XI and adopt the definition and comment as proposed. See § 1026.35(c)(1)(i) and comment 35(c)(1)(i)-1. In addition, TILA section 129H(b)(3) requires that the appraisal be performed in conformity with USPAP “as in effect on the date of the appraisal.” 15 U.S.C. 1639h(b)(3). The Agencies proposed to incorporate this concept in the definition of “certified or licensed appraiser” and to include a comment clarifying that the “date of the appraisal” is the date on which the appraiser signs the appraiser's certification. Again, the Agencies adopt the definition and comment as proposed. See § 1026.35(c)(1)(i) and comment 35(c)(1)(i)-1. Thus, the relevant edition of USPAP is the one in effect at the time the appraiser signs the appraiser's certification. Appraiser's certification. The proposal also included a comment to clarify that the term “appraiser's certification” refers to the certification that must be signed by the appraiser for each appraisal assignment as specified in USPAP Standards Rule 2-3. 23 The final rule adopts this clarification without change. See comment 35(c)(1)(i)-2. 23 See Appraisal Standards Bd., Appraisal Fdn., Standards Rule 2-3, USPAP (2012-2013 ed.) at U-29, available at http://www.uspap.org . FIRREA title XI and implementing regulations. As noted, TILA section 129H(b)(3) defines “certified or licensed appraiser” as a person who is certified or licensed as an appraiser and “performs each appraisal in accordance with [USPAP] and title XI of [FIRREA], and the regulations prescribed under such title, as in effect on the date of the appraisal.” 15 U.S.C. 1639h(b)(3). Section 1110 of FIRREA directs each Federal financial institutions regulatory agency 24 to prescribe “appropriate standards for the performance of real estate appraisals in connection with federally related transactions under the jurisdiction of each such agency or instrumentality.” 12 U.S.C. 3339. These rules must require, at a minimum—(1) that real estate appraisals be performed in accordance with generally accepted appraisal standards as evidenced by the appraisal standards promulgated by the Appraisal Standards Board of the Appraisal Foundation; and (2) that such appraisals shall be written appraisals. 12 U.S.C. 3339(1) and (2). 24 The Federal financial institutions regulatory agencies are the Board, the FDIC, the OCC, and the NCUA. The Dodd-Frank Act added a third requirement—that real estate appraisals be subject to appropriate review for compliance with USPAP—for which the Federal financial institutions regulatory agencies must prescribe implementing regulations. FIRREA section 1110(3), 12 U.S.C. 3339(3). FIRREA section 1110 also provides that each Federal banking agency may require compliance with additional standards if the agency determines in writing that additional standards are required to properly carry out its statutory responsibilities. 12 U.S.C. 3339. Accordingly, the Federal financial institutions regulatory agencies have prescribed appraisal regulations implementing FIRREA title XI that set forth, among other requirements, minimum standards for the performance of real estate appraisals in connection with “federally related transactions,” which are defined as real estate-related financial transactions that a Federal banking agency engages in, contracts for, or regulates, and that require the services of an appraiser. 25 12 U.S.C. 3339, 3350(4). 25 See OCC: 12 CFR Part 34, Subpart C; Board: 12 CFR part 208, subpart E, and 12 CFR part 225, subpart G; FDIC: 12 CFR part 323; and NCUA: 12 CFR part 722. The Agencies' proposal provided that the relevant provisions of FIRREA title XI and its implementing regulations are those selected portions of FIRREA title XI requirements “applicable to appraisers,” in effect at the time the appraiser signs the appraiser's certification. While the Federal financial institutions regulatory agencies' requirements in FIRREA also apply to an institution's ordering and review of an appraisal, the Agencies proposed that the definition of “certified or licensed appraiser” incorporate only FIRREA title XI's minimum standards related to the appraiser's performance of the appraisal. Accordingly, a proposed comment clarified that the relevant standards “applicable to appraisers” are found in regulations prescribed under FIRREA section 1110 (12 U.S.C. 3339) “that relate to an appraiser's development and reporting of the appraisal,” and that paragraph (3) of FIRREA, which relates to the review of appraisals, is not relevant. The Agencies are adopting these proposals as § 1026.35(c)(1)(i) and comment 35(c)(1)(i)-3. The Agencies also noted that FIRREA title XI applies by its terms to “federally related transactions” involving a narrower category of loans and institutions than the group of loans and lenders that fall within TILA's definition of “creditor.” 26 For example, the FIRREA title XI regulations do not apply to transactions of $250,000 or less. 27 They also do not apply to non-depository institutions. 28 However, the Agencies believe that Congress, by including the higher-risk mortgage appraisal rules in TILA, which applies to all creditors, demonstrated its intention that all creditors that extend higher-risk mortgage loans, such as independent mortgage companies, should obtain appraisals from appraisers who conform to the standards in FIRREA related to the development and reporting of the appraisal. The Agencies also believe that, by placing this rule in TILA, Congress did not intend to limit its application to loans over $250,000. The Agencies adopt this broader interpretation in the final rule. 26 TILA section 103(g), 15 U.S.C. 1602(g) (implemented by § 1026.2(a)(17)). See also 12 U.S.C. 3350(4) and OCC: 12 CFR 34.42(f); Board: 12 CFR 225.62(f); FDIC: 12 CFR 323.2(f); and NCUA: 12 CFR 722.2(e) (defining “federally related transaction”). 27 See OCC: 12 CFR 34.43(a)(1); Board: 12 CFR 225.63(a)(1); FDIC: 12 CFR 323.3(a)(1); and NCUA: 12 CFR 722.3(a)(1). 28 See 12 U.S.C. 3339, 3350(4) (defining “federally related transaction,” (6) (defining “federal financial institutions regulatory agencies”) and (7) (defining “financial institution”). In the proposed rule, the Agencies did not identify specific FIRREA regulations that relate to the appraiser's development and reporting of the appraisal. The Agencies requested comment on whether the final rule should address any particular FIRREA requirements applicable to appraisers that related to the development and reporting of the appraisal. Consistent with the proposal, the final rule does not identify specific FIRREA regulations that relate to the appraiser's development and reporting of the appraisal. Public Comments on the Proposal Appraiser trade associations, a housing advocate, and a credit union commenter agreed that the rule should apply to all qualifying mortgage loans, and not only the subset of the higher-risk mortgage loans already covered by FIRREA, including those loans with a transaction value of $250,000 or less. The appraiser trade associations and the housing advocate commenters believed that all higher-risk mortgages must be included in the rule to ensure that consumers receive the protections offered by appraisals. The housing advocate commenter also believed that including all higher-risk mortgages would reduce risk to all parties involved in the financing and servicing of mortgages and would ensure equal access to credit. This commenter specifically requested that the Agencies at least require an interior appraisal by licensed appraisers for all residential mortgages above $50,000, regardless of whether they are originated or insured by the private sector, Fannie Mae, Freddie Mac, or the Federal Housing Administration (FHA). A banking trade association and a credit union commenter, however, believed that Congress intended the FIRREA requirements to apply only to a subset of higher-risk mortgages that are already covered by FIRREA. The banking trade association commenter believed the Agencies should not require the rule to apply to loans held in portfolio or loans with a value of $250,000 or less, because a bank holding a loan in portfolio has strong incentive to ensure that the property sale is legitimate and the property is properly valued. The commenter also believed the statute intended to apply the rules only to the subset of higher-risk mortgages with a value of over $250,000, as is provided in the Federal financial institutions regulatory agencies' regulations implementing FIRREA. The banking trade association and a bank commenter noted that many community banks, particularly in rural areas, limit costs to consumers by not requiring appraisals on mortgages held in portfolio of $250,000 or less as permitted under FIRREA title XI or by performing cheaper, in-house evaluations of property. On whether the final rule should identify specific FIRREA regulations that relate to the development and reporting of the appraisal, the Agencies received one comment letter from appraiser trade associations. These commenters requested that the Agencies specify that creditors must use certified rather than licensed appraisers. The comment is discussed in more detail in the discussion of the use of “certified” versus “licensed” appraisers, below. Discussion As discussed in the proposal, the Agencies believe that, by referencing FIRREA requirements in the context of defining “certified or licensed appraiser,” the statute intended to limit FIRREA's requirements to those that apply to the appraiser's development and reporting of performance of the appraisal, rather than the FIRREA requirements that apply to a creditor's ordering and review of the appraisal. TILA section 129H(b)(3), 15 U.S.C. 1639h(b)(3). The Agencies also did not propose to interpret “certified or licensed appraiser” to include requirements related to appraisal review under FIRREA section 1110(3) because these requirements relate to an institution's responsibilities after receiving the appraisal, rather than to how the certified or licensed appraiser performs the appraisal. Comment 35(c)(1)(i)-3 is consistent with the proposal in this regard. Accordingly, as proposed, the final rule includes a comment clarifying that the requirements of FIRREA section 1110(3) that relate to the “appropriate review” of appraisals are not relevant for purposes of whether an appraiser is a certified or licensed appraiser under the proposal. See comment 35(c)(1)(i)-3. At the same time and in light of public comments, the Agencies reviewed the relevant statutory provisions and confirmed their conclusion that applying the FIRREA requirements related to an appraiser's performance of an appraisal broadly—to transactions originated by creditors and transaction types not necessarily subject to FIRREA (such as loans of $250,000 or less)—is wholly consistent with the consumer protection purpose of title XIV of the Dodd-Frank Act, as well as specific language of the appraisal provisions. For example, the Agencies believe that if Congress intended to limit application of the FIRREA requirements to mortgage loans covered by FIRREA, such as loans of over $250,000 made by Federally-regulated depositories, Congress would have expressly done so. Instead, Congress placed the appraisal requirements, including the definition of “certified and licensed appraiser” referencing FIRREA, in TILA, which applies to loans made by all types of creditors. Moreover, limiting coverage of the Dodd-Frank Act higher-risk mortgage appraisal rules to loans of over $250,000 would eliminate protections for most higher-risk mortgage consumers. 29 From a practical standpoint, the Agencies believe that the most reasonable interpretation of the statute is that all mortgage loans meeting the definition of “higher-risk mortgage” are subject to a uniform set of rules, regardless of the type of creditor. This creates a level playing field and ensures the same protections for all consumers of “higher-risk mortgages.” For these reasons, consistent with the proposal, the final rule applies the FIRREA requirements to appraisals for all HPMLs that are not exempt from the regulation. See § 1026.35(c)(2). 29 According to HMDA data, mean loan size for purchase-money HPMLs in 2011 was $141,600 (median $109,000) and for refinance HPMLs in 2011, mean loans size was $141,600 (median $104,000). In 2010, mean loan size for purchase-money HPMLs was $140,400 (median $100,000) and for refinance HPMLs, mean loan size was $138,600 (median $95,000). See Robert B. Avery, Neil Bhutta, Kenneth B. Brevoort, and Glenn Canner, “The Mortgage Market in 2011: Highlights from the Data Reported under the Home Mortgage Disclosure Act,” FR Bulletin, Vol. 98, no. 6 (Dec. 2012) http://www.federalreserve.gov/pubs/bulletin/2012/PDF/2011_HMDA.pdf . “Certified” versus “licensed” appraiser. Neither TILA section 129H nor the proposed rule defined the individual terms “certified appraiser” and “licensed appraiser,” or specified when a certified appraiser or a licensed appraiser must be used. Instead, the proposed rule required that creditors obtain an appraisal performed by “a certified or licensed appraiser.” 15 U.S.C. 1639h(b)(1), (b)(2). The Agencies noted in the proposal that certified appraisers generally differ from licensed appraisers based on the examination, education, and experience requirements necessary to obtain each credential. The proposal also stated that existing State and Federal law and regulations require the use of a certified appraiser rather than a licensed appraiser for certain types of transactions. The Agencies requested comment on whether the final rule should address the issue of when a creditor must use a certified appraiser rather than a licensed appraiser. Consistent with the proposal, the final rule does not separately define “certified” appraiser or “licensed” appraiser, or specify when a creditor should use a “certified” rather than a “licensed” appraiser. Public Comments on the Proposal Several national and State credit union trade associations believed that the Agencies should not specify when a creditor must use a certified appraiser rather than a licensed appraiser and requested that the Agencies provide creditors with flexibility to make that determination. Some of these commenters noted that State requirements for certified or licensed appraisers may vary significantly; some states may not issue licenses for appraisers, and some may issue different certified appraiser credentials based on the type of property. A financial holding company commenter, on the other hand, requested that the Agencies clarify circumstances under which a lender must use a certified or a licensed appraiser to facilitate compliance. On the other hand, appraiser trade association commenters believed that creditors should be required to use only certified appraisers, because the certification is more rigorous than licensure. These commenters stated that the FHA requires newly-eligible appraisers to be certified, and noted that many states have phased out, or are in the process of phasing out, the licensing of appraisers rather than certification. The commenters further stated that when collateral property is complex, the Agencies should require a certified appraiser who is also credentialed by a recognized professional appraisal organization. Similarly, a realtor trade association commenter believed that using certified appraisers was preferable. The commenter believed that the rule should define appraisals for higher-risk mortgages as “complex,” thus requiring that only certified appraisers may perform the appraisals. Discussion As noted above, several commenters confirmed the Agencies' concerns that State requirements for certified or licensed appraisers may vary significantly and are evolving. Overall, the Agencies believe that imposing specific requirements in this rule about when a certified or licensed appraiser is required goes beyond the scope of the statutory “higher-risk mortgage” appraisal provisions in TILA section 129h. 15 U.S.C. 1639h. The Agencies do not believe that this rule is an appropriate vehicle for guidance on standards for use of a State certified or licensed appraiser that may change over time and vary by jurisdiction. Although the FIRREA appraisal regulations specifically require a “certified” appraiser for certain types of mortgage transactions, the Agencies do not believe that these FIRREA rules are incorporated into the higher-risk mortgage appraisal rules applicable to all creditors. See section-by-section analysis of § 1026.35(c)(1)(i) (defining “certified or licensed appraiser” to incorporate FIRREA requirements related to the development and reporting of the appraisal, not appraiser selection or review). Thus, the final rule need not clarify these rules for entities not subject to the FIRREA appraisal regulations; entities subject to the FIRREA appraisal regulations are familiar with them. Appraiser competency. In the proposed rule, the Agencies also noted that, in selecting an appraiser for a particular appraisal assignment, creditors typically consider an appraiser's experience, knowledge, and educational background to determine the individual's competency to appraise a particular property and in a particular market. The proposed rule did not specify competency standards, but the Agencies requested comment on whether the rule should address appraiser competency. In keeping with the proposal, the final rule does not specify competency standards for appraisers. Public Comments on the Proposal A realtor trade association commenter suggested that the rule incorporate guidance from the Interagency Appraisal and Evaluation Guidelines 30 regarding creditors' criteria for selecting, evaluating, and monitoring the performance of appraisers. However, a banking trade association, a financial holding company, appraiser trade association, and several national and State credit union trade association commenters stated that the Agencies should not require creditors to apply specific competency standards for appraisers. Several commenters asserted that competency standards would result in increased regulatory burden and cost, and a banking trade association expressed concern that requiring creditors to implement subjective competency standards could raise conflict of interest issues with respect to appraiser independence. 30 75 FR 77450, 77465-68 (Dec. 10, 2010). Appraiser trade association commenters suggested that instead of setting forth competency standards, the Agencies should require a creditor to ensure that the engagement letter properly lays out the required scope of work, that the appraiser is independent, and that the appraiser possesses the appropriate experience to perform the assignment including, when necessary, geographic competency. The financial holding company commenter suggested that the rule should reference FIRREA and require creditors to ensure that appraisers are in good standing. The banking trade association commenter believed that the Agencies should include a reference to USPAP to create a uniform competency standard. One State credit union association believed that the Agencies should permit creditors to rely on appraisers' representations regarding licensing and certification. Discussion The Agencies believe that the many aspects of appraiser competency are beyond the scope of TILA's “higher-risk mortgage” provisions defining “certified or licensed appraiser,” which do not mention competency. Appraiser competency is addressed in a number of regulations and guidelines for Federally-regulated depositories, which are expected to know and follow rules and guidance under FIRREA regarding appraiser competency. 31 31 See, e.g., id. at 77465-68 (Dec. 10, 2010). Appraiser competency is critical to the quality and accuracy of residential mortgage appraisals. As a commenter noted, the federal banking agencies provide guidance in the Interagency Appraisal and Evaluation Guidelines regarding creditors' criteria for selecting, evaluating, and monitoring the performance of appraisers. See id. 35(c)(1)(ii) Manufactured Home As discussed in in the section-by-section analysis of § 1026.35(c)(2)(ii), below, the final rule exempts a transaction secured by a new manufactured home from the appraisal requirements of § 1026.35(c). Accordingly, § 1026.35(c)(1)(ii) adds a definition of manufactured home, clarifying that, for the purposes of this section, the term manufactured home has the same meaning as in HUD regulation 24 CFR 3280.2. 35(c)(1)(iii) National Registry As discussed in § 1026.35(c)(3)(ii)(B) below, to qualify for the safe harbor provided in the final rule, a creditor must verify through the “National Registry” that the appraiser is a certified or licensed appraiser in the State in which the property is located as of the date the appraiser signs the appraiser's certification. Under FIRREA section 1109, the Appraisal Subcommittee of the FFIEC is required to maintain a registry of State certified and licensed appraisers eligible to perform appraisals in connection with federally related transactions. 12 U.S.C. 3338. For purposes of qualifying for the safe harbor, the final rule requires that a creditor must verify that the appraiser holds a valid appraisal license or certification through the registry maintained by the Appraisal Subcommittee. Thus, as proposed, § 1026.35(c)(1)(iii) in the final rule provides that the term “National Registry” means the database of information about State certified and licensed appraisers maintained by the Appraisal Subcommittee of the FFIEC. 35(c)(1)(iv) State Agency TILA section 129H(b)(3)(A) provides that, among other things, a certified or licensed appraiser means a person who is certified or licensed by the “State” in which the property to be appraised is located. 15 U.S.C. 1639h(b)(3)(A). As discussed above, a certified or licensed appraiser means a person certified or licensed by the “State agency” in the State in which the property that secures the transaction is located. Under FIRREA section 1118, the Appraisal Subcommittee of the FFIEC is responsible for recognizing each State's appraiser certifying and licensing agency for the purpose of determining whether the agency is in compliance with the appraiser certifying and licensing requirements of FIRREA title XI. 12 U.S.C. 3347. In addition, FIRREA section 1120(a) prohibits a financial institution from obtaining an appraisal from a person the financial institution knows is not a State certified or licensed appraiser in connection with a federally related transaction. 12 U.S.C. 3349(a). Accordingly, as proposed, § 1026.35(c)(1)(iv) in the final rule defines the term “State agency” as a “State appraiser certifying and licensing agency” recognized in accordance with section 1118(b) of FIRREA and any implementing regulations. 35(c)(2) Exemptions The Agencies proposed to exclude from the definition of “higher-risk mortgage loan,” and thus from coverage of TILA's “higher-risk mortgage” appraisal rules entirely, the following types of loans: (1) Qualified mortgage loans as defined in § 1026.43(e); (2) reverse-mortgage transactions subject to § 1026.33(a); and (3) loans secured solely by a residential structure. These exclusions were proposed consistent with the express language of TILA section 129H(f) and pursuant to the Agencies' exemption authority in TILA section 129H(b)(4)(B), which authorizes the Agencies to exempt from coverage of the appraisal rules a class of loans if the Agencies determine that the exemption is in the public interest and promotes the safety and soundness of creditors. 15 U.S.C. 1639h(b)(4)(B) and (f). The Agencies requested comment on these proposed exemptions. In addition, the Agencies requested comment on whether the final rule should exempt the following types of loans: • Loans to finance new construction of a dwelling; • Temporary or “bridge” loans, typically used to purchase a new dwelling where the consumer plans to sell the consumer's current dwelling; and • Loans secured by properties in “rural” areas. For this last exemption, the Agencies requested comment on how to define “rural”; specifically, whether to define it as the Board did in its proposal to implement Dodd-Frank Act ability-to-repay requirements under TILA section 129C. See 15 U.S.C. 1639c; 76 FR 27390 (May 11, 2011) (2011 ATR Proposal) (and also in the 2011 Escrows Proposal), discussed in more detail below. Finally, the Agencies requested comment on whether commenters believed that any other types of loans should be exempt from the final rule. The final rule adopts two of the proposed exemptions: qualified mortgages and reverse mortgages. See § 1026.35(c)(2)(i) and (vi). The final rule also adopts exemptions for loans secured by new manufactured homes and by mobile homes, boats, or trailers, which replace the proposed exemption for loans secured solely by a residential structure. See § 1026.35(c)(2)(ii) (new manufactured homes) and (iii) (mobile homes, boats, or trailers). In addition, the final rule exempts the two types of loans on which the Agencies specifically requested comment: new construction loans and bridge loans. See § 1026.35(c)(2)(iv) (construction loans) and (v) (bridge loans). In addition, based on public comments, the Agencies intend to publish a supplemental proposal to request comment on possible exemptions for “streamlined” refinance programs and small dollar loans, as well as to seek comment on whether application of the HPML appraisal rule to loans secured by certain other property types, such as existing manufactured homes, is appropriate. Exemptions from the HPML appraisal rules of § 1026.35(c) are set out in new § 1026.35(c)(2). The structure of the final rule differs from that of the proposed rule. The proposed rule excluded certain loan types from the definition of “higher-risk mortgage loan” and thereby excluded these loan types from coverage of all of the “higher-risk mortgage” appraisal rules. By contrast, the final rule defines a general term—HPML—and incorporates exemptions from the appraisal rules in a separate subsection, § 1026.35(c)(2). As discussed, the general term HPML applies also to loans covered by the revised escrow rules in § 1026.35(b), with exemptions specific to those rules enumerated separately in § 1026.35(b)(2). Thus, exemptions that are the same in both the escrow rules in § 1026.35(b) and the appraisal rules in § 1026.35(c) are stated separately in the “exemptions” sections for each set of rules. See § 1026.35(b)(2) and (c)(2). The following exemptions are generally the same for both the HPML escrow rules and the HPML appraisal rules: new construction loans, bridge loans, and reverse mortgages. The intent of this structure is to make clear that the Agencies jointly have authority to exempt transactions from the appraisal rules, whereas only the Bureau has authority to exempt transactions from the escrow rules. These exemptions and related public comments are discussed in detail below. 35(c)(2)(i) Qualified Mortgages TILA section 129H(f) expressly excludes from the definition of higher-risk mortgage any loan that is a qualified mortgage as defined in TILA section 129C and a reverse mortgage loan that is a qualified mortgage as defined in TILA section 129C. 15 U.S.C. 1639(f). Rather than implement one exclusion for qualified mortgages and a separate exclusion for any reverse mortgage loans that may be defined by the Bureau as qualified mortgages, the Agencies proposed to provide a single exclusion for a qualified mortgage as that term would be defined in the Bureau's final rule implementing TILA section 129C. 15 U.S.C. 1639c. Before authority regarding TILA section 129C transferred to the Bureau under the Dodd-Frank Act, the Board issued the 2011 ATR Proposal, which, among other things, would have defined a “qualified mortgage” in a new subsection of Regulation Z. 12 CFR 226.43(e). See 76 FR 27390, 27484-85 (May 11, 2011). During the proposal period for the “higher-risk mortgage” rule, the Bureau had not yet issued final rules implementing TILA section 129C's definition of “qualified mortgage.” Since that time, the Bureau has issued rules defining “qualified mortgage.” See 2013 ATR Final Rule, § 1026.43(e). Consistent with the proposed definition of “qualified mortgage,” the Bureau's final rule defines “qualified mortgage” as generally including loans characterized by the absence of certain features considered risky, such as negative amortization and balloon payments. The Agencies adopt the exemption for “qualified mortgages” as proposed, with a cross-reference to the Bureau's final rules defining this class of loans in 12 CFR 1026.43(e). Public Comments on the Proposal All commenters—including national and State credit union trade associations, as well as national and State banking trade associations—supported this exemption. Some banking trade associations believed the exemption was appropriate because qualified mortgages, by definition, are safe and sound transactions. Other banking and credit union trade associations expressed concern that they could not comment specifically on the exemption, because the term was not yet defined by the Bureau. Discussion The final rule incorporates the exemption for “qualified mortgages” as proposed because the exemption is prescribed by statute and widely supported by commenters. The Agencies note that some commenters requested that the final rule also exempt “qualified residential mortgages,” which the Dodd-Frank Act exempts from the risk retention rules prescribed by the Act. See Dodd-Frank Act section 941, section 15G of the Securities Exchange Act of 1934, 15 U.S.C. 780-11(c)(1)(C)(iii). A qualified residential mortgage, however, is by statute to be defined by regulation as “no broader than” the definition of qualified mortgage prescribed by the Bureau in its 2013 ATR Final Rule. See id. at sec. 780-11(e)(4)(C). Therefore, the exemption for qualified mortgages will capture all qualified residential mortgages and a separate exemption is not necessary. 35(c)(2)(ii) Transactions Secured by a New Manufactured Home The Agencies proposed to exclude from coverage of the higher-risk mortgage appraisal rules any loan secured solely by a residential structure, such as a manufactured home. 32 The Agencies believed that requiring appraisals performed by certified or licensed appraisers was not appropriate, because such transactions typically more closely resemble titled vehicle loans. At the same time, based on outreach, the Agencies believed that for loans for residential structures, such as manufactured homes that are secured by both the home and the land to which the home is attached, appraisals performed by certified or licensed appraisers are feasible. Such transactions were therefore covered by the proposed rule. The Agencies believed the exemption for a loan secured solely by a residential structure was appropriate pursuant to the exemption authority under TILA section 129H(b)(4)(B). 15 U.S.C. 1026.35(b)(4)(B). 32 The Agencies proposed to exclude from the definition of “higher-risk mortgage loan” any loans secured solely by a “residential structure,” as that term is used in Regulation Z's definition of “dwelling.” See 12 CFR 1026.2(a)(19). The provision was intended to exclude loans that are not secured in whole or in part by land. Thus, for example, loans secured by manufactured homes that are not also secured by the land on which they are sited were proposed to be excluded from the definition of higher-risk mortgage loan, regardless of whether the manufactured home itself is deemed to be personal property or real property under applicable State law. The Agencies requested comment on whether the proposed exclusion was appropriate, and if not, reasonable methods by which creditors could comply with the requirements of this proposed rule when providing loans secured solely by a residential structure. The Agencies also requested comment on whether some alternative standards for valuing residential structures securing higher-risk mortgage loans might be feasible and appropriate to include as part of the final rule, in lieu of an appraisal performed by a certified or licensed appraiser. Public Comments on the Proposal Commenters, including national and State credit union trade associations, a manufactured housing industry consultant, manufactured housing trade associations, a realtor trade association, a lender specializing in manufactured housing financing, and national and State banking trade associations, submitted comments regarding the exemption for loans secured “solely by a residential structure,” but limited their comments to the exemption as applied to manufactured homes. The commenters supported exempting loans secured solely by manufactured homes. Banking trade association commenters believed that the statute was intended to apply only to loans secured at least in part by real property. A manufactured housing industry consultant, a manufactured housing lender, and manufactured housing trade association commenters concurred that traditional appraisals were not appropriate for these transactions for a variety of reasons, including: (1) A lack of qualified and trained appraisers to appraise such transactions, especially in rural areas; (2) a lack of comparable sales and limited sales volume; (3) the high expense of appraisals relative to the cost of the transaction; and (4) inaccurate valuations resulting from traditional appraisals. The manufactured housing industry consultant suggested that an exemption was necessary in part because these loans were unlikely to qualify for the qualified mortgage exemption due to their small size, which would in turn increase the likelihood that they would exceed the points and fees thresholds defining qualified mortgages. See § 1026.43(e)(3). Some of the commenters believed the Agencies should expand the exemption to include financing for both real estate and manufactured homes, known as “land home” financing. Manufactured housing trade association commenters argued that traditional appraisals are not appropriate for these transactions for many of the same reasons cited for excluding loans secured solely by a residential structure. One of these manufactured housing trade associations also expressed the view that appraisals are not appropriate because the cost of the home itself is readily known to consumers through other means. In addition, the commenter stated that in rural areas, the cost of the land is small compared to the overall value of the transaction. 33 This commenter recommended that if the Agencies did not exclude all land home transactions, the Agencies in the alternative should at least exclude those land home transactions that are under $125,000 or that are in a rural area. 33 Note, however, that another manufactured housing trade association commenter stated that the majority of manufactured homes are not considered an improvement or enhancement of the real property on which they are sited. One commenter also questioned the feasibility of appraisals for such transactions. A lender specializing in manufactured housing financing stated that, in land home transactions, the land on which manufactured homes will be located is often not identified until well after the time appraisals are typically ordered. Moreover, the commenter stated that manufactured homes are typically not available for an interior visit until after closing, regardless of whether the transaction is secured solely by the home itself or by land and home together. As an alternative, the commenter suggested different regulatory language for the exclusion, which would expand the exemption to land home transactions and would incorporate an existing definition of “manufactured home” to clearly eliminate site-built manufactured homes from the exemption. Discussion Public commenters generally confirmed Agencies' concerns regarding the application of the appraisal rules to loans secured by certain manufactured homes. Accordingly, the Agencies are excluding certain manufactured homes from coverage under the final rule. However, in the final rule, the Agencies are modifying the exemption. The proposed rule would have exempted loans “secured solely by a residential structure,” which was intended to exempt manufactured homes and other types of dwellings when the loan was not secured at least in part by land. The language in the final rule is tailored to exempt transactions secured by specific types of dwellings. Accordingly, the final rule exempts transactions secured by a new manufactured home, regardless of whether the structure is attached to land or considered real property, and also exempts transactions secured by a mobile home, boat, or trailer. The Agencies believe that the manufactured home exemption should be based on whether the manufactured home securing the transaction is a new home, regardless of whether land also secures the transaction. Upon further consideration, the Agencies believe that TILA section 129H is intended to apply to certain transactions without regard to whether a transaction is secured by land. 34 Thus, the approach in the final rule is focused on the feasibility and utility of requiring certified or licensed appraisers to perform appraisals for particular manufactured home transactions. 34 The Agencies note that the definition of “higher-risk mortgage loan” in TILA section 129H incorporates the definition of “residential mortgage loan.” TILA section 129H(f). A residential mortgage loan is defined, in part, to include loans involving certain types of dwellings that are non-real estate residences. TILA section 103(cc)(5). For example, cooperatives are specifically described as dwellings under TILA section 103(w). Moreover, although TILA section 129H requires appraisals that conform to FIRREA title XI, the Agencies do not believe that TILA section 129H is limited to transactions subject to FIRREA title XI or other Federal regulations. Thus, the Agencies believe the statute intended to apply the appraisal requirements to some loans that are not secured by land. The Agencies believe that an exemption for new manufactured homes regardless of whether the loan for such a home is also secured by land more precisely excludes from the rule those transactions that should not be subject to the new appraisal requirements. Based on further outreach, the Agencies understand that for loans secured by both new manufactured homes and land, a valuation is often performed by combining the manufactured home invoice price with the value of the land, rather than by a traditional appraisal that is based on the collective value of the structure and the land on which it is sited. The Agencies believe that requiring traditional appraisals with interior inspections for transactions secured by a new manufactured home would add very little value to the consumer beyond existing valuation methods. Moreover, because it may be difficult or impossible to retain qualified appraisers to perform such appraisals, the rule could result in some creditors declining to extend loans for manufactured homes. Exempting new manufactured homes from the rule is, therefore, in the public interest. The Agencies believe that such an exemption also promotes the safety and soundness of creditors, because creditors will be able to continue relying on standardized valuations that are more conducive to pricing new manufactured homes than are appraisals performed by a certified or licensed appraiser. Accordingly, in § 1026.35(c)(2)(ii), the Agencies are exempting from the appraisal requirements of § 1026.35(c) a transaction secured by a new manufactured home. Comment 35(c)(2)(ii)-1 in the final rule clarifies that a transaction secured by a new manufactured home, regardless of whether the transaction is also secured by the land on which it is sited, is not a “higher-priced mortgage loan” subject to the appraisal requirements of § 1026.35(c). 35(c)(2)(iii) Transaction Secured by Mobile Home, Boat, or Trailer Section 1026.35(c)(2)(iii) of the final rule also specifically exempts transactions secured by a mobile home, boat, or trailer. This is consistent with the proposal, which would have exempted these transactions because they are secured “solely by a residential structure.” The Agencies note that this exemption applies even if the transaction is also secured by land. Comment 35(c)(2)(iii)-1 clarifies that, for purposes of the exemption in § 1026.35(c)(2)(iii), a mobile home does not include a manufactured home, as defined in § 1026.35(c)(1)(ii). The Agencies believe the exemption is in the public interest, because requiring an appraisal with an interior property visit for these transactions would offer limited value due to existing pricing tools, such as new product invoices and publicly-available pricing guides. The Agencies further believe, for purposes of safety and soundness, that creditors would be better served by using other valuation methods geared specifically for mobile homes, boats, and trailers. 35(c)(2)(iv) Construction Loans In the proposal, the Agencies asked for comment on whether to exempt from the higher-risk mortgage appraisal rules transactions that finance the construction of a new home. The Agencies recognized that for loans that finance the construction of a new home, an interior visit of the property securing the loan is generally not feasible because the homes are proposed to be built or are in the process of being built. At the same time, the Agencies recognized that construction loans that meet the pricing thresholds for higher-risk mortgage loans could pose many of the same risks to consumers as other types of loans meeting those thresholds. The Agencies therefore requested comment on whether to exclude construction loans from the definition of higher-risk mortgage loan. The Agencies also sought comment on whether, if an exemption for initial construction loans were not adopted in the final rule, creditors needed any additional compliance guidance for applying TILA's “higher-risk mortgage” appraisal rules to construction loans. Alternatively, the Agencies requested comment on whether construction loans should be exempt only from the requirement to conduct an interior visit of the property, and be subject to all other appraisal requirements under the proposed rule. The final rule adopts an exemption from all of the HPML appraisal requirements for a “transaction that finances the initial construction of a dwelling.” This exemption mirrors an existing exemption from the current HPML rules. See existing § 1026.35(a)(3), also retained in the 2013 Escrows Final Rule, § 1026.35(b)(2)(i)(B). Public Comments on the Proposal Appraiser trade association commenters believed that new construction loans should not be exempted because consumers needed the protection of the appraisal rules. However, all other commenters—including national and State credit union trade associations, national and State banking trade associations, banks, a mortgage company, a financial holding company, a home builder trade association, and a loan origination software company—supported the proposed exemption. Commenters that supported an exemption for new construction loans had varying views on the risks associated with these loans, all supporting the commenters' request for an exemption for such loans. A loan origination software company and a bank commenter asserted that new construction loan interest rates and fees are often high because the loans, which are short-term, have inherently greater risk. Thus, the appraisal rules would be over-inclusive because they would apply even when extended to prime borrowers. Similarly, a banking association commenter argued that new construction loans are not those that Congress intended to target in the appraisal rules, which the commenter viewed as loans priced higher due to the relative credit risk of the borrower. The home builder trade association, however, supported an exemption because the commenter believed that new construction loans are not as risky as the loans targeted by Congress in the “higher-risk mortgage” appraisal rules because these loans require close coordination between a bank, home builder, and consumer. The financial holding company, mortgage company, banking association, and loan origination software company commenters supported an exemption for new construction loans because they are temporary. One of these commenters noted that most mortgage-related regulations, such as those in Regulation X and Z, make accommodations for temporary loans. Others noted that the property securing the new construction loan ultimately will be subject to an appraisal under TILA's “higher-risk mortgage” appraisal rules if the permanent financing replacing the new construction loan is a “higher-risk mortgage.” Several commenters supporting an exemption cited concerns about the feasibility and utility of performing interior inspection appraisals during the construction phase. A bank commenter stated that an exemption was needed because a home under construction is not available for a physical inspection. Similarly, credit union association and banking association commenters stated that an interior visit would not be feasible during the construction phase. Moreover, the commenter believed an appraisal was unlikely to yield sufficient information about the condition of the property to justify the expense to the consumer. A banking association commenter further asserted that the usual value of a new construction loan is the value “at completion,” so an appraisal performed during construction would not assess the value of a completed home. A State banking association commenter asserted that failing to exempt new construction loans from the final rule would result in operational difficulties and that an interior inspection appraisal would be of little value to consumers in these circumstances. A bank commenter requested guidance on how to comply with the rules for these loans, if the Agencies did not exempt them from the rule. Discussion In § 1026.35(c)(2)(iv), the Agencies are using their exemption authority to exempt from the final rule a “transaction to finance the initial construction of a dwelling.” Unlike the exemption for “bridge” loans that the Agencies are also adopting ( see section-by-section analysis of § 1026.35(c)(2)(v), below), the exemption for new construction loans is not limited to loans of twelve months or less. This is because the Agencies recognize that new construction might take longer than twelve months and that therefore new construction loans might be for terms of longer than twelve months. This aspect of the exemption adopted in the final rule also reflects the existing exemption for new construction loans from the current HPML rules. See § 1026.35(a)(3). The Agencies' decision to exempt these types of transactions is consistent with wide support for this exemption received from commenters, which largely confirmed the Agencies' concerns about the drawbacks of subjecting these transactions to the new HPML appraisal requirements, particularly the requirement for an interior inspection, USPAP-compliant appraisal. The Agencies also believe that this exemption is important to ensure consistency across mortgage rules, and thus to facilitate compliance. In addition to noting the existing exemption for new construction loans from the current HPML requirements, the Agencies also note the exemption for these loans from the new Dodd-Frank Act ability-to-repay and “high-cost” mortgage rules issued by the Bureau. See 2013 ATR Final Rule, § 1026.43(a)(3)(ii), and 2013 HOEPA Final Rule, § 1026.32(a)(2)(ii). 35 35 Moreover, the existing “high-cost” mortgage rules contain a longstanding exemption for construction loans from the limitation on balloon payments. See existing § 1026.32(d)(1)(i). Due to their temporary nature and for other reasons, these loans tend to have higher rates and thus more of them would be subject to the HPML appraisal rules without an exemption. Applying the HPML appraisal rules to these products might subject them to rules with which creditors might not in fact be able to comply. The Agencies therefore believe that this exemption will help ensure that a useful credit vehicle for consumers remains available to build and revitalize communities. The Agencies also recognize that new construction loans can be an important product for many creditors, enabling them to strengthen and diversify their lending portfolios. The Agencies are also not aware of, and commenters did not offer, evidence of widespread valuation abuses in loans to finance new construction. Thus, the Agencies find that the exemption is both in the public interest and promotes the safety and soundness of creditors. See TILA section 129H(b)(4)(B), 15 U.S.C. 1639h(b)(4)(B). The Agencies also wished to clarify in the final rule the treatment of “construction to permanent” loans, consisting of a single loan that transforms into permanent financing at the end of the construction phase. For this reason, the commentary of the final rule includes guidance on the application of various rules in Regulation Z to these loans that parallels guidance provided in commentary for the new “high-cost” mortgage rules. See 2013 HOEPA Final Rule, comment 32(a)(2)(ii)-1. Specifically, comment 35(c)(2)(iv)-1 clarifies that the exclusion for loans to finance the initial construction of a dwelling applies to a construction-only loan as well as to the construction phase of a construction-to-permanent loan. The comment further clarifies that the HPML appraisal rules in § 1026.35(c) do apply if the permanent financing qualifies as an HPML under § 1026.35(a)(1) and is not otherwise exempt from the rules under § 1026.35(c)(2). The comment also provides guidance on the application of Regulation Z's general closed-end mortgage loan disclosure requirements to construction-to-permanent loans. To this end, the comment states that, when a construction loan may be permanently financed by the same creditor, the general disclosure requirements for closed-end credit (§ 1026.17) provide that the creditor may give either one combined disclosure for both the construction financing and the permanent financing, or a separate set of disclosures for each of the two phases as though they were two separate transactions. See § 1026.17(c)(6)(ii) and comment 17(c)(6)-2. The comment explains that § 1026.17(c)(6)(ii) addresses only how a creditor may elect to disclose a construction-to-permanent transaction, and that which disclosure option a creditor elects under § 1026.17(c)(6)(ii) does not affect whether the permanent phase of the transaction is subject to § 1026.35(c). The comment further explains that, when the creditor discloses the two phases as separate transactions, the annual percentage rate for the permanent phase must be compared to the average prime offer rate for a transaction that is comparable to the permanent financing to determine coverage under § 1026.35(c). The comment also explains that, when the creditor discloses the two phases as a single transaction, a single annual percentage rate, reflecting the appropriate charges from both phases, must be calculated for the transaction in accordance with § 1026.35 and appendix D to part 1026. The comment also clarifies that the APR must be compared to the APOR for a transaction that is comparable to the permanent financing to determine coverage under § 1026.35(c). If the transaction is determined to be an HPML that is not otherwise exempt under § 1026.35(c)(2), only the permanent phase is subject to the HPML appraisal requirements of § 1026.35(c). 35(c)(2)(v) Bridge Loans In the proposal, the Agencies also requested comment on whether the appraisal rules of TILA section 129H should apply to temporary or “bridge” loans with a term of 12 months or less. 15 U.S.C. 1639h. If such an exemption were not adopted, the Agencies sought comment on whether any additional compliance guidance would be needed for applying the new appraisal rules to bridge loans. The Agencies stated concerns about the burden to both creditors and consumers of imposing the rule's requirements on such loans and questioned whether such requirements would be useful for many consumers. As explained in the proposal, bridge loans are short-term loans typically used when a consumer is buying a new home before selling the consumer's existing home. Usually secured by the existing home, a bridge loan provides financing for the new home (often in the form of the down payment) or mortgage payment assistance until the consumer can sell the existing home and secure permanent financing. Bridge loans normally carry higher interest rates, points and fees than conventional mortgages, regardless of the consumer's creditworthiness. In § 1026.35(c)(2)(v), the final rule adopts an exemption from the new HPML appraisal rules for a “loan with a maturity of 12 months or less, if the purpose of the loan is a `bridge' loan connected with the acquisition of a dwelling intended to become the consumer's principal dwelling.” Public Comments on the Proposal Almost all commenters—including national and State banking associations, national and State credit union associations, a mortgage company, a financial holding company, a loan origination software company, a home builder trade association, and a bank—supported an exemption for bridge loans for many of the same reasons that commenters supported exempting construction loans. Several commenters emphasized that these loans are temporary, and some further pointed out that imposing appraisal requirements was unnecessary because bridge loans are ultimately converted to permanent financing that will be subject to the appraisal rules. Other commenters argued that the protections of the appraisal rules were not needed because bridge loans' higher rates are generally unrelated to a consumer's creditworthiness; they argued that TILA's new “higher-risk mortgage” appraisal rules were intended for loans made to more vulnerable, less creditworthy consumers without other credit options. Some commenters asserted that failing to exempt these loans would result in operational difficulties and would be of little value to consumers. In this regard, one commenter discussed the difficulties of comparing an APR to a “comparable” APOR for these loans. One credit union association commenter believed that without an exemption, consumers' access to bridge loans would be reduced. Some commenters requested that the Agencies exempt all types of temporary loans. Appraiser trade association commenters believed that the Agencies should not allow an exemption unless there was a compelling policy reason to do so. Discussion The Agencies are adopting an exemption for “bridge” loans of 12 months or less that are connected with the acquisition of a dwelling intended to become the consumer's principal dwelling for several reasons. First, the Agencies believe that with this exemption, the consumer would still be afforded the protection of the appraisal rules. This is because bridge loans used in connection with the acquisition of a new home are typically secured by the consumer's existing home to facilitate the purchase of a new home. Thus, the consumer would be afforded the protections of the appraisal rules on the permanent financing secured by the new home. This would include the protections of § 1026.35(c)(4)(i) regarding properties that are potentially fraudulent flips. Second, commenters generally confirmed the Agencies' concerns expressed in the proposal about the burden to both creditors and consumers of imposing TILA section 129H's heightened appraisal requirements on short-term financing of this nature. As noted in the proposal, the Agencies recognize that rates on short-term bridge loans are often higher than on long-term home mortgages, so these loans may be more likely to meet the “higher-risk mortgage loan” triggers. As also noted in the proposal and echoed by commenters, “higher-risk mortgages” under TILA section 129H would generally be a credit option for less creditworthy consumers, who may be more vulnerable than others and in need of enhanced consumer protections, such as TILA section 129H's special appraisal requirements. However, a bridge loan consumer could be subject to rates that would exceed the higher-risk mortgage loan thresholds even if the consumer would qualify for a non-higher-risk mortgage loan when seeking permanent financing. The Agencies do not believe that Congress intended TILA section 129H to apply to loans simply because they have higher rates, regardless of the consumer's creditworthiness or the purpose of the loan. Further, the Agencies recognize that the exemption can help facilitate compliance by generally ensuring consistency across residential mortgage rules. Such consistency can reduce compliance-related burdens and risks, thereby promoting the safety and soundness of creditors. The Agencies also believe that consistency across the rules can reduce operational risk and support a creditor's ability to offer these loans, which can enable creditors to strengthen and diversify their lending portfolios. In particular, the Agencies note the current exemption for “temporary or `bridge' loans of twelve months or less from the existing HPML rules (retained in the 2013 Escrows Final Rule, § 1026.35(b)(2)(i)(C)), but also a similar exemption from TILA's new ability-to-repay requirements. See existing § 1026.35(a)(3). See TILA section 129C(a)(8), 15 U.S.C. 1639c(a)(8); 2013 ATR Final Rule, § 1026.43(a)(3)(ii). 36 In addition, longstanding HOEPA rules have included an exception from the balloon payment prohibition for “loans with maturities of less than one year, if the purpose of the loan is a `bridge' loan connected with the acquisition or construction of a dwelling intended to become the consumer's principal dwelling.” § 1026.32(d)(1)(ii). The final HOEPA rules adopted by the Bureau contain the same exception with minor changes for conformity across mortgage rules. See 2013 HOEPA Final Rule, § 1026.32(d)(1)(ii)(B) (revising the exception to cover bridge loans of 12 months or less, rather than less than one year). 36 The exemption for “temporary or `bridge' loans of twelve months or less” in TILA's ability-to-repay rules codifies an exemption from the current “high-cost” and HPML repayment ability requirements. See existing §§ 1026.34(a)(4)(v), 1026.35(a)(3) and (b)(1). Like the HOEPA exception from the balloon payment prohibition, the final HPML appraisal rule does not exempt all loans with terms of 12 months or less. Only bridge loans of 12 months or less that are made in connection with the acquisition of a consumer's principal dwelling are exempted. (Construction loans are separately exempted under § 1026.35(c)(2)(iv), discussed in the corresponding section-by-section analysis above.) The Agencies believe that the HPML appraisal rule might be appropriately applied to other types of temporary financing, particularly temporary financing that does not result in the consumer ultimately obtaining permanent financing covered by the appraisal rule. Finally, as with new construction loans, the Agencies are not aware of, and commenters did not offer, evidence of widespread valuation abuses in bridge loans of twelve months or less used in connection with the acquisition of a consumer's principal dwelling. For all these reasons, the Agencies find that the exemption is both in the public interest and promotes the safety and soundness of creditors. See TILA section 129H(b)(4)(B), 15 U.S.C. 1639h(b)(4)(B). 35(c)(2)(vi) Reverse Mortgage Transactions The Agencies proposed to exempt reverse mortgage transactions subject to § 1026.33(a) from the definition of “higher-risk mortgage loan.” The Agencies proposed this exemption in part because the proprietary (private) reverse mortgage market is effectively nonexistent, thus the vast majority of reverse mortgage transactions made in the United States today are insured by FHA as part of the U.S. Department of Housing and Urban Development's (HUD) Home Equity Conversion Mortgage (HECM) Program. 37 The Agencies stated that TILA's new “higher-risk mortgage” appraisal rules are arguably unnecessary because HECM creditors must adhere to specific standards designed to protect both the creditor and the consumer, including robust appraisal rules. 38 In addition, a methodology for determining APORs for reverse mortgage transactions does not currently exist, so creditors would be unable to determine whether the APR of a given reverse mortgage transaction exceeded the rate thresholds defining a “higher-risk mortgage loan” (HPML in the final rule). 37 See Bureau, Reverse Mortgages: Report to Congress 14, 70-99 (June 28, 2012), available at http://www.consumerfinance.gov/reports/reverse-mortgages-report (Bureau Reverse Mortgage Report). 38 See HUD Handbook 4235.1, ch. 3. At the same time, the Agencies expressed concern that providing a permanent exemption for all reverse mortgage transactions, both private and HECM products, could deny key protections to consumers who rely on reverse mortgages. However, the Agencies proposed the exemption on at least a temporary basis, asserting that avoiding any potential disruption of this segment of the mortgage market in the near term would be in the public interest and promote the safety and soundness of creditors. The Agencies requested comment on the appropriateness of this exemption. The Agencies also sought comment on whether available indices exist that track the APR for reverse mortgages and could be used by the Bureau to develop and publish an APOR for these transactions, or whether such an index could be developed, noting, for example, information published by HUD on HECMs, including the contract rate. 39 39 See http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/rmra/oe/rpts/hecm/hecmmenu (“Home Equity Conversion Mortgage Characteristics”). As discussed further below, in § 1026.35(c)(2)(vi) of the final rule, the Agencies are adopting the proposed exemption for a “reverse-mortgage transaction subject to § 1026.33(a).” Public Comments on the Proposal National and State credit union trade associations, as well as a State banking trade association, supported the proposed exemption. However, appraiser trade association commenters generally believed that excluding appraisal protections would harm consumers, particularly senior citizens, and is contrary to public policy. Appraiser trade association, realtor trade association, and reverse mortgage lending trade association commenters suggested that any exemption should be limited to reverse mortgages under the FHA HECM program and not extended to proprietary products, because HECM consumers are afforded a comprehensive and mandatory set of appraisal protections. The reverse mortgage lending trade association also suggested circumstances under which reverse mortgages should be deemed qualified mortgages and, thus, qualify for an exemption on that basis. See section-by-section analysis of § 1026.35(c)(2)(i). No commenters offered suggestions on an appropriate approach for developing an APOR for reverse mortgages. Appraiser trade associations, who only supported an exemption for HECMs, believed that the rules should apply to reverse mortgages even though indices do not currently exist. A reverse mortgage lending trade association believed that benchmark indices for reverse mortgages could be developed, but, supporting the proposed exemption, questioned whether one should be. Discussion The Agencies are adopting the proposed exemption for a “reverse-mortgage transaction subject to § 1026.33” for the same basic reasons discussed in the proposal, which were affirmed by most commenters. The Agencies share concerns expressed by some commenters about the risks to consumers of reverse mortgages generally, and of proprietary reverse mortgage loans in particular. Proprietary reverse mortgage loans are not insured by FHA or any other government entity, so payments are not guaranteed by the U.S. government to either consumers or creditors. By contrast, HECMs are insured by FHA and subject to a number of rules and restrictions designed to reduce risk to both consumers and creditors, including appraisal rules. See TILA section 129H(b)(4)(B), 15 U.S.C. 1639h(b)(4)(B). As noted in the proposal, however, there is little to no market for proprietary reverse mortgages, and prospects for the reemergence of this market in the near-term are remote. 40 HECMs comprise virtually the entire reverse mortgage market and are subject to FHA's extensive HECM rules, which include appraisal requirements. 41 In addition, the Agencies believe that unwarranted creditor liability and operational risk could arise if the rule were applied to loans that a creditor cannot definitively determine are in fact subject to the rule, as is the case here, where no rate benchmark exists for measuring whether a reverse mortgage loan is an HPML. Thus, without an exemption for reverse mortgages, creditors would be susceptible to risks that could negatively affect their safety and soundness. 40 Bureau Reverse Mortgage Report at 137-38. 41 See HUD Handbook 4235.1, ch. 3. In reevaluating the proposed exemption, the Agencies also focused more attention on the fact that TILA's “higher-risk mortgage” appraisal rules apply only to closed-end products. Many (and historically most) reverse mortgages are open-end products. The Agencies are concerned about creating anomalies in the market and compliance confusion among creditors by applying one set of rules to closed-end reverse mortgages and another to open-end reverse mortgages. The Agencies note that compliance confusion among creditors can create burden and operational risk that can have a negative impact on the safety and soundness of the creditors. The Agencies are concerned that this bifurcation of the rule's application could also hinder creditors from offering a range of reverse mortgage product choices that support the creditors' loan portfolios while also benefitting consumers. In short, questions remain for the Agencies about whether this rule is the appropriate vehicle for addressing appraisal issues in the reverse mortgage market. The Agencies remain concerned about the potential for abuse related to appraisals even with HECMs, which are subject to appraisal rules. Indeed, evidence exists that problems of property value inflation and fraudulent flipping occur even in the HECM market. 42 The Agencies plan to continue monitoring the reverse mortgage market closely and address appraisal issues as needed, including through consultations with the Bureau regarding any initiatives to revisit previously-issued reverse mortgage proposals (76 FR 58539, 53638-58659 (Sept. 24, 2012)). 42 Bureau Reverse Mortgage Report at 154, 157. For all these reasons, the Agencies have concluded that an exemption for all reverse mortgages at this time from this rule is in the public interest and promotes the safety and soundness of creditors. 43 43 By statute, the term “higher-risk mortgage” excludes any “qualified mortgage” and any “reverse mortgage loan that is a qualified mortgage.” 15 U.S.C. 1639h(f). The Bureau was authorized by the Dodd-Frank Act to define the term “qualified mortgage” and has done so in its 2013 ATR Final Rule. However, the 2013 ATR Final Rule does not define the types of reverse mortgage loans that should be considered “qualified mortgages” because, by statute, TILA's ability-to-repay rules do not apply to reverse mortgages. See TILA section 129C(a)(8), 15 U.S.C. 1639c(a)(8). Thus the Agencies are not able to implement the precise statutory exemption for “reverse mortgage loans that are qualified mortgages.” Instead, the exemption for reverse mortgages is based on the Agencies' express authority to exempt from TILA's “higher-risk mortgage” appraisal rules “a class of loans,” if the exemption “is in the public interest [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%3A2013-01809. Public record. Not legal advice.